PG&E Corporation (PCG) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the PG&E Corporation First Quarter Earnings 2012 Conference Call. [Operator Instructions] At this time, I would like to introduce your host, Mr. Gabe Togneri, with PG&E Corporation. Thank you, and enjoy your conference. You may proceed, Mr. Togneri.

Thanks, Monique, and hello, everyone. We appreciate you joining us for our call. This morning, you'll hear from Tony Earley, Chris Johns and Kent Harvey, who will be providing our remarks, and other members of the team are also here and will participate in the Q&A. Our discussion, of course, will include forward-looking statements based on assumptions and expectations reflecting information currently available to management. Some of the important factors that could affect the company's results are described in Exhibit 1 located in the Appendix of today's slides. We encourage you to review those and also to review the discussion of risk factors that appears in our 2011 annual report and in the form 10-Q that will be filed with the SEC later today. And with that, I'll hand it over to Tony.

Thank you, Gabe, and good morning, everyone. Thanks for joining us. On our last earnings call, we outlined our top priorities for 2012. But I'd like to start today by reviewing these priorities again, because I think they provide a good context for the discussion of our actions and results from the last quarter as well as set the context for our plans for the rest of the year. So if you look at Slide 2, our key objectives for the year are, first, we want to resolve as many of the gas-related issues as we can in 2012. Second, we want to position the company for a long-term success. And third, we want to work very hard at rebuilding relationships with stakeholders. So let me start with the gas issues. We're continuing to work to the various regulatory and legal proceedings. We'd like to resolve the regulatory proceedings as soon as possible, because the sooner we get clarity on these issues, the better it is for everyone from the utility to regulators to our customers. There's no way to predict whether settlement discussions will go forward or be successful, but we do support this approach as a way to accelerate the process. If and when there's any further news to report on this, we'll share it at the appropriate time. On the legal front, we also continue our efforts to settle the various individual claims related to the tragedy in San Bruno. Our goal is to provide victims with fair compensation. Just as with the regulatory issues, we'd like to do that as soon as possible, and we're making progress towards that goal. Separately, we were pleased in this quarter to reach a critical agreement with the city of San Bruno by making a contribution to benefit the citizens of the community. This was an important milestone for us in that it helps the city move forward in the healing process. And it's important for us, because it's another step on the road towards resolution of all of these issues. Let me shift to the steps we're taking to position the company for long-term success starting with the gas business. We're maintaining the momentum that we established last year with safety improvement efforts in gas operations, and Chris is going to provide you with lots more detail on what's planned for 2012. We've also now essentially completed the restructuring of the gas business, which has significantly improved accountability and the expertise in the organization. Recently, several highly experienced gas industry veterans have come onboard, filling our remaining vacancies for vice presidents overseeing key areas in gas operations. By the end of this quarter, we hope to complete the last of our high-level hires and have the team completely in place. We're also continuing to add new talent in other areas of the company. This includes officers with excellent credentials in customer care and information technology, which clearly are areas that where we can benefit from their deep expertise. And then most recently, we announced the hiring of Ed Halpin from the South Texas Project as the Senior Vice President and Chief Nuclear Officer. Ed's full-time presence at Diablo Canyon builds even greater depth into an already strong nuclear program that we've got. All of these additions to the team give me greater confidence that we're making the changes necessary to achieve a new level of performance and operations in customer service. Everyone on the team is focused on safety compliance and continuous improvement and working to close the gaps between where we are today and where we need to go to deliver outstanding service to our customers. So last, let me touch on rebuilding relationships. Chris and I and many of our other senior leaders continue to meet as often as possible with customers, policymakers, business partners and others. It's become clear to me from the conversations that we have that our stakeholders do want us to be successful, and broadly speaking, we're getting positive feedback on the direction that we're moving. In that vein, a few recent successes are worth noting, because I think they demonstrate we're doing a better job of listening to our customers. So for example, for that segment of customers who do not want to participate in our SmartMeter program, we now have an opt-out alternative. Another example is the economic development rate that we've proposed to the CPUC. In these difficult economic times, this is a way to bring electric rate relief to businesses that need it to preserve or create jobs at our service area. And finally, for our residential customers, we're working to further modify the current multi-tiered rate structure to streamline and simplify it and improve the affordability of our service. Rebuilding relationships will be a long-term effort, but these are steps in the right direction, and we'll continue to look for these kinds of opportunities going forward. Ultimately though, we know that the key is for us to continue to deliver what we say we're going to deliver. Importantly, we did that last year when we completed our aggressive hydrostatic testing commitment and our operating pressure validation in our high-consequence gas transmission pipelines. So with that introduction, let me turn the mic over to Chris. Chris?

Thanks, Tony. Good morning, everyone. So this morning, I'm going to provide the regulatory and operational updates that are described briefly on Slide 3. Starting with the regulatory side, procedural schedules have now been set for all 3 of the gas investigations with hearing dates scheduled for the fall. The CPUC staff has filed its findings and reports in 2 out of the 3 of those investigations, and they are going to provide the report on the third one at the end of this month. These are all important milestones in each of the cases on our path forward towards resolution. In our Pipeline Safety Enhancement Plan, the administrative law judge held 2 weeks of hearings at the end of March. A key issue covered in the testimony of the various parties was the categorization of work proposed in the company's safety plan. We believe that most of the work is needed to comply with the new standards, while other parties argued that much of it should have been done to comply with existing standards. We expect that final resolution will deal with both the scope of the gas work required through 2014 and the allocation of cost between shareholders and customers. We continue to feel our proposal for this split is appropriate. And that is that PG&E shareholders will continue to pay the cost necessary to comply with existing regulations, but work that we undertake to meet new standards set by the CPUC is appropriate to recover from our customers. The final decision in the safety plan is expected in September. In other regulatory news, on April 20, we filed our cost of capital case as did the other California utilities. And we proposed a reduction in our return on equity to 11%, and that's from our current level of 11.35%. We did not propose any changes to our common equity ratio of 52% nor to the current multiyear adjustment mechanism. That mechanism would continue to link ROE to the performance of the Moody's bond yield index. We expect hearings to occur this fall and proposed and final decisions by the end of the year. The new levels in mechanism would go into affect in January of 2013. And finally, this summer, we'll file the notice of intent for our next General Rate Case. We'll provide you details of our expense and capital requests at that time. And as a reminder, the GRC addresses electric and gas distribution and electric generation, and it will go into effect in 2014. Our next Gas Transmission & Storage case is a year later. Now moving over to operations. Obviously, we continue to perform important gas work this year. Building up the extraordinary work completed in 2011, this quarter, the gas team continued to deliver impressive results. Even with the limitations of working on the system during the winter, when gas demand is much higher, we completed several miles of hydrostatic tests in the first quarter, and that's on our way to the planned performance of hydrostatic tests on another 160 miles during the remainder of this year. We also made significant progress on our efforts to validate and document the Maximum Allowable Operating Pressure of our pipelines. We completed about 900 miles in Q1 out of 3,600 miles planned for the entire year. In addition, as we performed fieldwork and identify emerging issues, we will continue to shift the pipeline work plan to ensure that the work of the -- at the highest safety priority is completed. In the area of nuclear operations, Diablo Canyon Unit 1 began its regularly scheduled refueling outage about 2 weeks ago, and the outage is progressing as scheduled. Now although we don't -- we have not experienced similar issues at Diablo Canyon, we do recognize there is currently a lot of focus on the steam generators at San Onofre, so I'll offer some comments pertaining to our Diablo Canyon plan. As you may recall, we replaced the steam generators and all the associated tubing several years ago. They have since then passed the rigorous one-year inspection, demonstrating very strong performance. In addition, our steam generators are of a different design and were sourced from a different manufacturer. Nonetheless, we continue to monitor them and with the next more detailed inspection of the steam generator tubing scheduled for 2014 and 2015 for the 2 units. Obviously, both San Onofre and Diablo Canyon are important resources for California, and we'll continue to monitor Edison's findings and apply any lessons learned from San Onofre to Diablo Canyon. Shifting gears, we recently reached a milestone in our long-term commitment to resolve the chromium exposure in the groundwater at Hinkley. We were supplying residents in the area with bottled water, and we've established a program that offers eligible residents a set of alternatives, including a whole house water replacement system or the choice to sell us their property. Primarily as a result of this program, we took a charge for $71 million for environmental-related cost this quarter. We have not changed the overall estimate of cost related to the ultimate resolution of all the chromium-related issues previously provided. Resolving the whole house water issue addresses a significant component of our obligations to the community of Hinkley. The most notable remaining issue, which is the final remediation plan, is expected to be resolved late this year or early next year. Moving on to overall performance. We continue to focus on our highest priorities of safe, reliable, affordable, customer-focused electric and gas service. You'll see our high-level operational performance focus areas described in Exhibit 7 in the Appendix. We place greater emphasis than ever before on safety in operational performance, specifically adopting measures that tie to public safety, employee safety, customer service and financial performance. For each of these measures, we have developed quarterly and annual targets based on improving our performance and ultimately, over the years, providing first quartile utility service. In some areas, such as nuclear operations, we already meet first quartile benchmarks, and the year-end goal is to maintain that level of performance. In other areas, the year-end goal is to improve performance by a specified percentage as part of a multiyear plan to provide exceptional levels of service. Our first quarter results show we're exceeding year-to-date performance targets in nuclear operations, gas leak performance and emergency response. We're meeting performance targets in gas reliability, and we need to improve our performance to achieve our targets for employee safety, customer satisfaction, electrical liability and the outages caused by downed wires. As 2012 progresses, our goal is to show improvement in each one of these areas. With that, I'll turn it over to Kent.

Thanks, Chris, and good morning, everybody. I'm going to walk you through the results for the first quarter, and then I'll cover our outlook for the rest of 2012. Our Q1 results are summarized on Slide 4, and earnings from operations for the quarter were $372 million or $0.89 per diluted common share. GAAP results for the quarter were $233 million or $0.56 per share. The difference between earnings from operations and GAAP reflects the items impacting comparability for natural gas matters and for environmental-related costs at Hinkley. The item related to natural gas matters totaled $0.23 per share for the quarter, and the components of that are delineated in the table at the bottom. First is the pipeline-related costs, which totaled $104 million pretax during Q1. So this includes the strength testing and the pipeline validation work as well as our legal costs incurred during the quarter. And most of this work was generally on plan for the quarter, although legal costs exceeded plan due to an upswing in activity. Below that, you see that there were no additional accruals during the quarter related to potential penalties stemming from the various gas matters. And you remember in Q4 of last year, we accrued $200 million for potential penalties, which represented the low end of a range of possible outcomes. Of course, we'll continue to assess the accrual in future quarters until the issues are resolved. The next component is the $70 million pretax charge we took during the quarter for the contribution we made to the city of San Bruno, and Tony mentioned in his remarks the importance of reaching this agreement with the city. Next, you can see there also were no additional accruals during the quarter for third-party liability claims, and to date, we've accrued the total of $375 million for third-party liability related to the accident. And then finally, we booked insurance recoveries of $11 million in Q1, and that brings us to $110 million of insurance recovery since the accident. We'll continue to wait until we've resolved claims with each carrier before booking future recoveries. In the table at the top, you can see that in addition to the item impacting comparability for natural gas matters, we also took a charge for environmental-related costs at Hinkley totaling $0.10 per share. This accrual represents the expected costs associated providing the whole house water option that Chris described, and is in line with our original guidance range of 0 to $0.14 for the year. Now Slide 5 has the quarter-over-quarter comparison for earnings from operations, and the $0.89 that we earned in the first quarter, which is shown on the far right, represents a $0.31 increase compared to Q1 of 2011. Most of that increase is due to unusual items in the first quarter of last year rather than activity in the most recent quarter. So for example, in Q1 last year, we were still waiting for final approval of the General Rate Case and the Gas Transmission & Storage case. So $0.14 of this quarter's increase is because we weren't able to book the associated revenues in Q1 last year. As a reminder, because we booked the catch-up revenues in Q2 of last year, you should expect to see a similar item but in reverse when we discuss our second quarter results a few months from now. Next, $0.07 of the increase is due to lower outage restoration cost in comparison to last year, when we had an unusually severe winter storm season. And $0.05 cents relates to lower litigation and regulatory cost compared to last year, in large part because the prior period included an accrual for the Rancho Cordova accident. We had a $0.05 increase due to higher authorized rate base investments this year compared to last year. We also picked up $0.02 in gas transmission revenues and $0.07 in miscellaneous, most of which includes a number of small items that we expect will reverse by the end of the year. These increases were partially offset by a reduction of $0.06 related to the planned incremental spending we've undertaken to improve our operational performance and $0.03 dilution for higher shares outstanding. And by the way, you should expect a larger impact from dilution in future quarters. And this is in part because we issued $250 million of equity late in Q1, so it's full effect wasn't felt in the quarter. Now our guidance for the year is summarized on the next slide, and you can see at the top that there's no change in our guidance range for earnings from operations. That remains at $3.10 to $3.30 per share. Some of the key assumptions that underlie our 2012 guidance, such as authorized rate base, capital expenditure levels, the incremental expenses we expect to incur and our authorized ROE and cap structure, those are all provided in Exhibit 3 in the appendix. The guidance range for the item impacting comparability for natural gas matters has been updated basically to reflect the accrual made in Q1 for the contribution to the city of San Bruno and the proceeds we received from insurance providers during the quarter. So moving to the bottom part of the slide, you can see in the table that we're maintaining the range of $450 million to $550 million for pipeline-related cost for the year, although we are trending towards the upper end of that range. And while our fieldwork is generally on track fairly early in the year, our legal costs have risen significantly as the pace and scope of discovery and other activities have picked up more rapidly than we expected. So we'll continue to monitor this trend, and we'll provide an update on our next call. The range for third-party liability claims remains unchanged at 0 to $225 million. And this range, again, just reflects the difference between what we've already accrued to date, $375 million and then the upper end of our estimate for third-party liability, which is $600 million. As in past quarters, we're not providing guidance for additional penalties beyond what we've already accrued or for future insurance recoveries. Back to the table at the top, you can see our guidance for the item impacting comparability for environmental-related costs. The upper end of the range is unchanged at $0.14. The lower end of the range reflects the $71 million pretax charge we took in Q1 associated with the whole house water replacement program. So I'll finish up with our updated plans for equity issuance in 2012, and that's on Slide 7. On our last call, I indicated based on various guidance assumptions, we expected to issue roughly $600 million of equity this year, and that estimate is shown on the left. Next to that, you can see that we've increased our expectation for equity issuance this year by about $100 million. So our new estimate is roughly $700 million based on our guidance assumptions. The primary driver for the increase is the contribution we made to the city of San Bruno during the quarter as well as the trend towards the higher end of the range of our pipeline-related cost. Moving to the right in the chart, you'll see that we actually issued a significant portion of that, almost $400 million, in the first quarter. This includes about $60 million to our internal programs, our DRIP and 401(k); about $80 million to our Dribble Program; and then about $250 million through the block equity offering we undertook in March. That allowed us to prefinance some of our equity needs for the year and provides us more flexibility pending resolution of the various gas issues. Our remaining need based on our guidance assumption is roughly $300 million, which is shown on the right. Obviously, our actual issuance during the year will depend on the resolution of the gas matters as well as other factors. So with that, we're going to open up the lines for your questions, and then Tony will provide some closing remarks following Q&A.

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

Can you give us any incremental -- 2 questions. One, can you give us any incremental sort of guidance on how you -- on whether you feel you'll be able to bring the majority of the pipeline legal matters to a close this year through settlement, or whether you feel like you're going to have to litigate through the -- these sort of 3 to 4 separate paths? And the second question is, when we look at the Slide 7, with the $300 million of remaining equity needs, is that inclusive of equity that you need to issue in the course of normal operations to fund capital spending? Or is that exclusive of equity you need to fund ongoing operations?

Greg, this is Tony. Let me take the first part of the question. I'll let Kent handle the second. So what we know is that some of the parties have indicated both directly and indirectly through other people that they are interested in settlement of these regulatory proceedings. And we've said very clearly we're interested in settling those regulatory proceedings, because we think that's the fastest path to closure. But I do want to be clear that we have not had substantive discussions at this point, and obviously, those discussions, if and when they do begin, are sensitive. So we won't be able to comment on them until we finish with those discussions. So I think that's kind of the status that I can provide you.

And Greg, this is Kent. In terms of the $300 million of remaining equity need, that is what we expect to need for the end of the year based on our various guidance assumptions. So it is inclusive of needs that are driven by our CapEx program as well as our gas expenditures. And you should remember that for the $300 million remaining need, a good portion of that will be met through our normal internal programs, our (401)k and DRIP.

Right. And when I think about 2013 -- and I know you haven't given guidance on any financial matters for '13. But should we presume that when we think about costs that roll over into '13, we should think about a similar funding profile? That -- to the extent you have pipeline-related matters, the O&M expenses that you expect to incur, that you would also need to fund them pro rata with equity in addition to your ongoing capital spending?

Well, Greg, yes. I mean the same factors potentially could influence us next year as influence us this year. So obviously, our CapEx program, which is significant this year, that is one driver of our equity needs, and I would expect that we'd continue to have the healthy CapEx program next year. I would also say we are incurring a lot of unfunded gas expenditures right now, and to the extent we continue to have unfunded gas expenditures next year, that would be a driver of equity needs. And I would say one significant issue next year compared to this year is just that obviously, there's been bonus depreciation both last year and this year, and it's not clear that that's going to be the case next year. So that will be another driver that you should keep in mind.

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

Two questions. One, balance sheet you'll put out later today when you file the Q, but could you just give high level in terms of where you sit right now in terms of cash balances and in terms of equity ratios Holdco and Opco?

Michael, this is Kent. In terms of our equity ratio, of course, what we focus on equity ratio-wise is the way it's measured for regulatory purposes. So that excludes our short-term debt, and I would expect that we would be very close to our 52% common equity overall. And our cash balances are down somewhat from the end of the year and comparable to the year before at this time. I think they're a little bit over $1 billion in terms of short-term borrowings, which is what we'd normally expect.

Meaning short-term borrowings is around $1 billion. And how much was the cash balance?

Yes. I don't know that there's a significant -- I think about $600 million of the cash balance in short-term borrowings and normally in that range, so a little over $1 billion.

Got it. And Tony, when you think about the issues in resolving the various pipeline dockets, is there one particular -- of the 3 or 4 dockets outstanding, is there one particular docket you think will be the most challenging to reach settlements on? And if so, what are the 2 or 3 biggest reasons why?

No, I think while they all focus on different issues, if we can get into settlement discussions, which we've said we'd want to, I don't think it's -- we're going to be able to distinguish where one is going to be harder than another. What we would like to do is have a comprehensive settlement. So I don't see that one could be singled out as harder than the other. I think it will be hard. As I said, the spirit is willing on trying to get settlement discussions, but whether we actually can get there and get it all wrapped up, we'll see over the next couple of months.

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

One question I had on the sixth sense that you called out as being the incremental work, should we think about that as lining up quite cleanly with the $200 million annual numbers that you've been guiding to?

Yes, Jonathan. It's essentially the first quarter component of the $200 million.

So it's obviously looking like it's not quite 1/8 or I guess 1/4 of $200 million?

Yes. But it's the first quarter of the year, and there are some seasonal dimensions to our work plan.

So can you give us a flavor of what the seasonality might be as we look in the next -- is it going to be more weighted to the middle of the year, more weighted to the end?

I don't think there'll be dramatic differences among the quarters.

Okay. And as you progressed with this, are you still confident that this is $200 million of items that won't recur beyond 2013? Or is -- are you getting your arms around the workflow more?

Jonathan, when we identified this incremental spend of about $200 million to this year and next year, I think we indicated that about 1/3 of the work is essentially work that we wanted to accelerate from multiyear plans to a shorter time frame, this year or next year. And so you would expect that that component, we would try to complete during the 2-year time frame, but the remainder is work that we wanted to take to another level, that we anticipate is a higher level of operations.

So therefore would continue beyond '13?

Yes.

And then on another -- could -- Tony, you'd mentioned you had some progress on civil cases. Could you be a bit more specific about how many cases have been settled, how many outstanding or any other color you can give us there?

Yes. We have not been providing specific numbers. I will tell you we have settled some cases in the last quarter. Kent gave you the insurance numbers on them, but as we work through these individual cases, we'd prefer not to give specific numbers right now.

Okay. And if I may, I have just one other item. I noticed that you'd been -- you're supporting this bill in the Senate, Bill 971, that would exclude large-scale hydro from the sales denominator on the 33% renewables. Can you talk a little bit about your views on the prospects for that legislation? And secondly, how impactful would it be to your investment plans?

The reason why I think it's important is to give people an understanding of the high quality portfolio that we have on the generation side. I mean, one of the things that struck me coming to California, I kept hearing, "Well, PG&E is at 20% renewables." We're actually over 40% renewables, and if you take into account our nuclear, over 50% of our generation is from non-emitting sources. And I think we and the policymakers need to understand how much progress we've made. So I think by eliminating the large hydro, which are excluded from the formula for the renewables mandate -- and I understand why it was excluded, because at the time, we wanted to stimulate new investment in renewables, but it is renewable nonetheless. The irony is that we're expanding some of our large hydro plants, and incremental megawatts count, the base megawatts don't. So I mean it illustrates that it's kind of artificial. In terms of the prospects, I don't know. I think we've -- it's been received well. People understand what we're trying to do. We're not trying to change the renewables mandate. We just want to have more clarity over how much progress we've made.

And if it was to pass, would it -- how -- what would it mean for the CapEx plan?

Oh, it wouldn't have any impact on the CapEx plan. It doesn't change, I think, where we're going.

Our next question comes from the line of Dan Eggers with Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Just on the insurance front, you have still slow collections. Is there a view of when that could can pick up as far as reversing cash? And can you remind how that might affect the equity ratio that you guys have laid out so far?

Well, Dan, what happens, obviously, is we resolve issues eventually with our insurance providers once we've actually settled a lot of the claims, and so it will follow the third-party liability claims resolution. And it's hard to tell exactly what that pace is going to be. I think there is a fair amount of potential activity in the coming quarter in terms of the legal process, and the degree of success we have there will be one key driver about when insurance will follow. But it isn't unusual to see a significant lag between insurance recovery and settlement of the third-party liability claims. Dan Eggers - Crédit Suisse AG, Research Division: And you guys are funding those third-party claims effectively with the equity raised this year with the assumption of not getting recovery. So when the money does come in, it will help mitigate some future equity needs?

That's correct. It's an interim issue for us. Dan Eggers - Crédit Suisse AG, Research Division: Okay. Good. And I guess just a couple of, actually, operational questions, as crazy as that may sound. With the SONGS issues kind of facing Southern California, how do you guys see that affecting your system this summer? And is there any concern about reliability concerns creeping up your direction?

Yes. This is Chris Johns. Dan, it's a good question in that that's a significant and vital resource for California in general. But most of it, from what we've seen, is going to be more localized effects in Southern California. We don't see any impacts on us as far as reliability or resources in Northern California. Obviously, we're following it pretty closely, but from a supply and reliability aspect, we believe in our service territory, we ought to be fine. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And I guess, Chris, if you look at kind of balancing out the proposed lower ROE, the drop in natural gas fuel costs against higher renewable expenses, where do you guys see electricity rates going next year or the year after from those inputs you can look at right now?

Yes. When we look out over the next couple of years, we still feel pretty good around maintaining rates around the level of inflation growth on a year-to-year basis. I think that we still are focused a few years down the road on the impact of some of the renewables as they start to come online and the -- and what they'll do to our rates, and that's something that we're working through with both regulators and policymakers on how do we really make sure that the rate system is set up for the best for our customers. But over the next couple of years, you mentioned some of the good things that put downward pressure on rates, but obviously, we still have a lot of investment in the infrastructure of the system that we need to make, and we do need to get in compliance with the renewables as they come online. So it should balance out over the next couple of years to keep us right around the inflationary rate. Dan Eggers - Crédit Suisse AG, Research Division: Does the step-up in rates kind of coincide with the next GRC? Is that the timing we should be thinking about comping [ph] the renewables impacts more?

It's -- yes. I mean, that time frame is probably not bad. It's a couple of years out when a lot of the renewables come on in bigger chunks, and that probably is right around the same time as when our General Rate Case will kick in.

Our next question comes from the line of Hugh Wynne with Sanford Bernstein & Company. Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division: My question is around the PSEP CapEx and the OIR. If I understood correctly, you don't expect the OIR to be resolved until September, and you won't know, consequently, until then whether the full PSEP CapEx will be included in rate base or whether some portion will be disallowed. And my question in this are on the financing and the accounting for the PSEP CapEx. I assume until the OIR is decided that you're funding that as if it were included in rate base with the normal equity ratio. If that assumption turns out to be too optimistic and some portion of the CapEx is disallowed, you would then write off that CapEx and issue incremental equity that cover the write-down. Is that right or wrong?

Hugh, this is Kent. I think, generally, that's directionally right. In other words, we are essentially financing that CapEx, which really is just beginning, because we've been in the winter months, but we are financing that with the weighted cost of -- weighted capital structure. And then we do -- in our guidance, we assume that essentially, the annual costs associated with that capital, the carrying costs essentially is part of our earnings guidance for the $450 million to $550 million. It's a small component of the overall expense.

Our next question comes from the line of Brian Chin with Citigroup.

Any quick thoughts or reactions on the citation decision? I mean, we got the board's recent decision, and thoughts on how the company should best proceed with that program going forward.

Well, I think we were disappointed in that decision, because the principle of assigning maximum penalties for self-identified violations just is not consistent with regulatory practices in many agencies. But that said, we'll continue our discussions with the CPUC on how we might modify that approach, but that one particular proceeding, it's behind us right now.

And then on a separate issue, just going back to the bonus depreciation question, any sort of quick stab on the year-over-year effect of that? Trying to quantify that somehow, Kent?

Well, I think we indicated for this year that the bonus depreciation allows us to do some incremental CapEx given that our rates were fixed in our last General Rate Case, and that incremental amount for the year was roughly about $600 million. So you can essentially see the headroom that was created through bonus depreciation. And you'll remember in our case, the PUC allowed us to set up a memorandum account in order to try to utilize that headroom for the benefits of customers with incremental infrastructure investment.

Our next question comes from the line of Angie Storozynski, Macquarie Group.

You mentioned the high-profile hires for your gas business. How should we think about it from a cost perspective? Is it going to be covered under your GRC that you're supposed to issue notice for this summer? Or is that already the Gas Transmission Rate Case, which will be filed on the following year?

Yes. I mean, I think the incremental cost of our hires in the overall scheme of things is in the rounding. Some of the positions were positions where we're backfilling. Some of them were new positions as part of the reorganization, but I don't think it has any bottom line impact in the long term.

Okay. And secondly, about the reset of allowed ROEs and the equity ratio. You mentioned that currently, you have about a 52% equity ratio. What happens if the -- if there's a reduction in that equity ratio and you have already issued equity? So you're basically -- in a way, you are starting from a higher level of the equity ratio than the allowed one.

Well, in that scenario, obviously, we would need to true up our equity so that it matches the authorized ratios. In reality, of course, the proceeding is going to take place during this year, and I'm hopeful that we'll have some view whether or not that's truly a controversial issue at the commission or not. I continue to believe that the 52% makes a lot of sense for us. And while simplistically, some of our observers have noted that our common equity ratio was higher than the other utilities -- although frankly, I think Sempra is looking to raise their common equity ratio to look more like ours. But particularly with respect to Edison, that's more like 58%. It's important that people also recognize that Edison has a lot more preferred stock than we have. And as a result, we end up at the same place from a credit perspective overall, which is really the purpose of having the right balance for your capital structure. And we have looked at the alternatives of issuing a lot more preferred stock and having less common stock outstanding, and it is essentially equivalent from a cost perspective of our customers, given our credit ratings and our expected cost of issuance. So we think we have a capital structure that makes sense. And especially given the fact that S&P downgraded us in recent months, we don't think that increasing leverage makes sense for us right now.

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

I believe in February you had mentioned about $230 million that you expect to at least apply for recovery. I was wondering how comfortable you are with that and the pipeline costs number after the initial regulatory proceedings.

Travis, I think what you're referring to maybe was within the Pipeline Safety Enhancement Plan, the portion that was -- that we were seeking recovery for. Because you remember, in the overall program, there were some components, particularly for newer pipe, that we were not going to seek recovery of. We right now are challenged in terms of actually achieving that recovery this year just given the fact that the proceeding is still underway, and we're having -- we're beginning to incur those costs. So until that proceeding gets resolved, we won't have more confidence about actually achieving that level for this year. We do hope to seek recovery -- once the decision is made, we hope we do obtain recovery for all those costs that are associated with new requirements, and we're hopeful that the commission will move expeditiously to resolve the proceeding.

Okay. But you're still comfortable with that $230 million as of now?

Yes. I think the split -- we might have adjusted slightly, but it's not a dramatic difference.

And then remind me, you mentioned it, but how much of the $230 million has been spent to date?

It's fairly modest. And we have not broken out, out of our total pipeline-related costs, the specific amount that would be part of the PSEP.

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

Yes. My questions have been answered.

[Operator Instructions] Our next question comes from the line of Steve Fleishman with Bank of America.

A couple of questions. First, on the OIR case, the -- where do you stand on addressing the gas distribution side of the business?

Steve, this is Kent. The -- in the rule making, the gas distribution is not really a part of it. That's focused on the pipeline.

Okay. But I think it's been brought up in terms of addressing that as well at some point. Is that...

Yes. This is Chris, and right now, that would be addressed through our General Rate Case. We're still continuing to look and work with the CPUC to see if there is a different forum for addressing that. But as of right now, our plan would be to include that kind of a program in our filing this year on our General Rate Case.

Okay. And then on the remaining equity for this year, any sense on what -- how you are likely to do that and maybe related to how much is left on the dribble plan?

Yes. The dribble program, I can't remember the number right now. We do have some left on that, and that's, of course, easy for us to renew, which we have done in the past. So the dribble program can be very flexible for us and allow us to do it rateably as we go. But I indicated earlier of the $300 million, we'll get a chunk of that through our internal programs. And so the remainder we can handle through a dribble or any other alternatives that are out there, and we're really going to kind of see what make sense at the time given the situation.

Okay. And then one last question. I think during this quarter, you got a court ruling on the Oakley plant. Could you update us on that and kind of what's next?

Yes. This is Tom Bottorff from Regulatory Relations. We have refiled an application to seek approval of the Oakley plant. That was filed on March 30 of 2012. So we asked for expedited treatment. We hope we get a decision this year, but it may be delayed until the following year.

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

Well, this is Tony. Let me just wrap up the discussion this morning. The next several months are going to be very important and challenging for the company. As we work to bring to a close the various San Bruno regulatory proceedings, we're going to see a whole new round of public discussion about the tragedy that, quite honestly, will not put the company in a favorable light, because we'll review all of those issues. But I've told our team here that that's part of the closure process and that we can't let that distract us from moving forward with the plan. The good news is that we will be much closer to giving closure to the victims, to the public and to all of our constituents so that PG&E can focus on a bright future for the company. So I thank you all for joining us this morning, and I look forward to talking to you in the future. Thanks for joining us.

Ladies and gentlemen, thank you for attending today's PG&E Corporation First Quarter Earnings 2012 Conference Call. This will now conclude the conference. Please enjoy the rest of your day.