Janet C. Loduca - Vice President-Investor Relations Anthony F. Earley Jr. - Chairman, President & Chief Executive Officer Christopher P. Johns - President, Pacific Gas & Electric Co. Kent M. Harvey - Chief Financial Officer & Senior Vice President Hyun Park - Senior Vice President & General Counsel Dinyar B. Mistry - Vice President & Controller.

Steven Isaac Fleishman - Wolfe Research LLC Dan L. Eggers - Credit Suisse Securities (USA) LLC (Broker) Greg Gordon - Evercore ISI Anthony C. Crowdell - Jefferies LLC Michael Goldenberg - Luminus Management LLC Michael J. Lapides - Goldman Sachs & Co. Hugh de Neufville Wynne - Sanford C. Bernstein & Co. LLC Michael Weinstein - UBS Securities LLC Brian J.

Chin - Merrill Lynch, Pierce, Fenner & Smith, Inc. Travis Miller - Morningstar Research John Apgar - Balyasny Asset Management, L.P. (U.S.).

Good morning, and welcome to the PG&E Corporation Q1 2015 Earnings Call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would like to introduce your hostess, Ms. Janet Loduca. You may proceed..

Thank you, Monica. Good morning, everyone, and thanks for joining us.

Before you hear from Tony Earley, Chris Johns and Kent Harvey, I'll remind you that our discussion today will include forward-looking statements about our outlook for future financial results based on assumptions, forecasts, expectations and information currently available to management.

Some of the important factors that could affect the company's actual financial results are described on the second page of today's slide deck. We also encourage you to review the Form 10-Q that will be filed with the SEC later today and the discussion of risk factors that appears there and in the 2014 Annual Report.

With that, I'll turn it over to Tony..

Thanks, Janet, and good morning, everyone. I'm going to start with some opening remarks, and then turn it over to Chris and Kent to provide more detail on both operational and financial issues. As you know, we received a final penalty decision in the gas transmission pipeline investigations earlier this month, which is a significant milestone.

Following the San Bruno accident, we worked hard to do the right thing for the victims, their families and the community of San Bruno. We've dedicated ourselves to becoming the safest and most reliable utility in the country.

We've been working to build a culture across the company that supports this mission, and we've completed an unprecedented level of work to improve the safety of our systems, much of it funded by our shareholders.

So although the final penalty assessed by the Commission is the largest in state history and certainly one of the largest in the country, we've decided not to appeal. We just don't feel that prolonging the proceeding is in anyone's interest. As we move forward, I can assure you that the lessons from San Bruno will continue to guide us.

The San Bruno accident has changed the way we look at everything, from the way we plan what work we do to the way we execute and document work in the field. Safety starts at the top. It also requires the unequivocal commitment of every employee.

My management team, our employees and the unions who represent them have all made that commitment, and safety has been at the heart of our decisions and actions over the last several years. I want to acknowledge that we still have a number of proceedings outstanding.

On the legal front, a trial date in the federal criminal case has been set for March 8, 2016. As you know, state and federal prosecutors have been investigating potential ex parte communications with the CPUC as well.

There are also still several investigations at the Commission, including a new investigation of our safety culture that President Picker announced at the last Commission meeting. And in fact, we welcome a conversation about safety at PG&E.

We're proud of the work we've done to date and we know we still have a lot of work to do to re-earn the trust of our customers and the Commission. Over the past several years, we've hired some of the best experts in the country to help guide our efforts.

Adding to that list, this spring, we announced that we've hired Julie Kane as our new Chief Ethics and Compliance Officer, reporting directly to me.

Julie has deep compliance experience, largely in the highly regulated pharmaceutical industry, and her mandate is to work with our Board of Directors and our leadership team to build a best-in-class compliance program. As Chris will discuss, we had another solid quarter in our operations.

We're in the third year of a rigorous risk assessment program that we used to develop our five-year operational plan. And I've been really pleased to see that these plans become more robust every year. And we continue to see strong opportunities for growth as we work to build a better California.

In both gas and electric operations, we'll continue to upgrade the system with a focus on reducing risk and enhancing safety and reliability through physical improvements like replacing pipes and wires and using technology to respond to our customers' changing needs.

We're also working on an integrated clean energy plan, which we believe will offer strong support for Governor Brown's vision for reducing carbon emissions. In the coming years, we expect to see continued investment opportunities to support the interactive Grid of Things.

This will facilitate the state's increasing reliance on intermittent renewables, electric vehicles, demand-side management tools and energy storage. We have a number of proceedings pending at the Commission to address these changes to the electric grid, and you can expect to see more about this in the future.

So with that, let me turn it over to Chris..

Thanks, Tony, and good morning, everyone. I'll begin my remarks with an update on our operations, and then touch on some additional regulatory developments. I'm going to start with safety, which is fundamental to the work that our crews do every day.

Over the past few years, we've worked to create an environment where all employees feel comfortable speaking up when something doesn't look right or they identify a potential safety risk. We were gratified to see that this was one of the areas where we received the most positive feedback in our employee survey last year.

By encouraging this "find it and fix it" mindset and recognizing employees who do speak up or stop jobs when safety is a concern, we're identifying and addressing issues early. We measure ourselves on a set of safety metrics associated with both public and employee safety, and you can see several of those in our appendix in the slide deck.

For example, we target responding to emergency gas calls within 21 minutes. During the first quarter, we had responders on site within an average of less than 20 minutes. That's a level of performance toward the very top of the industry. On the electric side, we target improvement every year in the number of sustained outages caused by downed wires.

In the first quarter of this year, our results showed a nearly 25% improvement. Over the past five years, safety metrics have been an increasing component of our variable compensation plan. In gas operations, we continue to do significant work on our pipeline system, testing, replacing and automating components.

For several years, we have been diligently addressing the recommendations made by the NTSB following the San Bruno accident. The NTSB has closed 9 of the 12 recommendations.

The remaining three recommendations, which involve strength testing, valve installation and control room procedures, are longer-term multi-year efforts, and they continue to be on track. In electric operations, we continue to see strong reliability performance, with our customers experiencing fewer and shorter outages.

And the California ISO awarded us two of the three competitive transmission projects we submitted bids for last year, both of which are in our service territory.

As California enters its fourth year of drought, we're working hard to help the state meet this challenge by reducing water usage at our own facilities, encouraging customers to conserve by offering rebates for more efficient washers and agricultural pumps.

We're stepping up our vegetation management activities to mitigate wildfire risk and improve access for firefighters, and we're managing water in our own hydro system to help meet the peak load this summer.

Shifting to regulatory matters, as Tony mentioned, the Commission issued a $1.6 billion final penalty decision in the gas transmission pipeline investigation, and Kent will take you through the specific components of that in a minute. The Commission also announced two new investigations, one on regulatory communications and one on our safety culture.

The work we've undertaken to improve our safety culture over the past 4.5 years has been informed by significant benchmarking and input from experts from the outside, and we look forward to the opportunity to share our progress with the Commission. Moving to the Gas Transmission and Storage rate case, we completed hearings in March.

PG&E presented a strong case informed by a detailed risk assessment of the assets across our system. The next steps are opening briefs, which will be filed today, and then reply briefs on May 20. The current schedule calls for a final decision in the rate case in August of 2015, with revenues retroactive to January 1.

It's unclear at this point how the final penalty decision will impact this schedule. Last week, we received a proposed decision in the Residential Rate Reform proceeding at the Commission. The proposed decision acknowledges the need for fundamental rate reform and recommends reducing residential tiers from four to two over the next few years.

However, we were disappointed that it failed in the near-term to adopt monthly charges to recover fixed costs. Fixed charges are a common element of many utilities' rates, and we continue to believe they can be implemented with minimal impact to customers and that the time is right to adopt them in California.

We'll be filing comments on the proposed decision in May. And finally, as we look forward, in September of this year we'll be filing our next General Rate Case, which will set forth our plans for gas and electric distribution and generation from 2017 through 2019. So with that, I'll turn it over to Kent..

Thanks, and good morning. Today I plan to cover our quarterly results, including the impact of the final penalty decision in the gas transmission pipeline investigation. I'll walk you through all of that, and then I'll spend some time on our outlook for 2015. First, our quarterly results, which are summarized on slide five.

Earnings from operations came in at $0.87 for the quarter. GAAP earnings including our items impacting comparability came in at $0.06. Obviously, our items impacting comparability drove much of the story for the quarter, so let me go through those.

Our pipeline related expenses came in at $17 million pre-tax, or $10 million after tax, as shown in the table. And here we've included our costs to remediate encroachments on our pipeline rights of way and some remaining expense work for our Pipeline Safety Enhancement Plan.

Our legal and regulatory expenses were $14 million pre-tax, or $8 million after tax, in the table. These include costs incurred in connection with litigation and enforcement activities related to natural gas matters and regulatory communication. Fines and penalties for the quarter totaled $553 million, as shown in the table below.

I'll walk you through the components of that. First, the $300 million fine payable to the state resulted in a $100 million accrual in Q1. This is because we previously took a $200 million charge in 2011. Second, the $400 million customer bill credit was fully accrued in Q1.

This reflects our obligation now to provide a credit to customers in February 2016. Third, the Q1 impact of the shareholder-funded safety improvements was a $53 million charge for disallowed capital, and I'm going to take a moment to explain that figure.

As you know, the final penalty decision calls for shareholders to fund $850 million of safety improvements to be determined in our 2015 Gas Transmission and Storage rate case. This will consist of about $160 million of expense work and about $690 million of capital work.

We expect to the CPUC to reduce the authorized revenues in the gas transmission rate case for these disallowed costs. In Q1, you see nothing here for disallowed expense work. This is because the item impacting comparability for the expense work will occur as the revenue is disallowed, not as the expenses are incurred.

When we receive the final decision in the gas transmission rate case, we expect to book revenues retroactive to January 1, and the impact of the revenue disallowance will be reflected as an item impacting comparability at that time. What you do see here is a $53 million charge for disallowed capital work.

The item impacting comparability for capital occurs as the capital is incurred and written off. I know that's complicated, so I'll reiterate it. Disallowed expense work will show up as an item impacting comparability when the revenues are disallowed in the gas transmission rate case.

Disallowed capital work will show up as an item impacting comparability when the capital is spent. One more thing to keep in mind; the CPUC has not yet determined which costs will count towards the $850 million of shareholder-funded safety work, so we've estimated which capital expenditures incurred during the quarter we think will qualify.

Once eligibility is determined in the gas transmission rate case, we'll true up any differences as necessary. Slide 6 shows our quarter-over-quarter comparison for earnings from operations. As you can see, we're going from $0.54 in Q1 last year to $0.87 in Q1 this year, and there are a number of factors.

The largest impact, $0.21, is due to the 2014 General Rate Case decision, which we didn't receive until August last year. The impact includes both higher cost recovery as well as the tax benefits associated with repairs.

In addition, $0.05 of the Q1 increase was due to growth in rate base earnings, and another $0.05 because we had a nuclear refueling outage in Q1 of last year, but not this year. There were $0.04 associated with tax timing. We expect that to net to zero by year end.

You also see $0.03 for the disposition of the remaining SolarCity shares, and miscellaneous of about $0.05. These positive factors were partially offset by $0.08 of lower cost recovery due to the timing of the Gas Transmission rate case.

The case covers costs for work we previously included as items impacting comparability, such as hydrostatic testing and integrity management. Until we are authorized revenues in the Gas Transmission rate case, this work will now reduce earnings from operations.

When we receive a final decision in the case, the revenue increase will be retroactive to January 1. And then finally, we had $0.02 for higher shares during the quarter. That completes my summary of the Q1 results, and I'd now like to move on to our outlook going forward.

The final penalty decision resolved a significant uncertainty for the company, particularly with respect to the fines and penalties to be borne by shareholders and our associated financing needs. Therefore, today we are providing guidance for 2015 earnings from operations of $3.50 to $3.70 per share.

I want to spend some time going through the key assumptions underlying our guidance, which are shown on slide 7, and this should look familiar to you. Starting in the upper left, you see that we're still assuming capital expenditures of roughly $5.5 billion this year, consistent with our last call.

In the upper right, you see that our estimate of weighted average authorized rate base is still about $31 billion. We've actually adjusted the gas transmission range down by about $200 million to reflect the estimated 2015 impact of the capital disallowance in the final penalty decision.

Remember, this is average rate base for the year, so you only see about half of the full year impact of the disallowance. In the lower left, you see there are no changes to our assumptions regarding authorized return on equity and equity ratio. At the bottom right of the slide, we list factors we believe will affect 2015 earnings from operations.

Our objective continues to be to earn our authorized return on rate base for the enterprise as a whole plus the net impact of the factors listed here.

The first bullet under the Gas Transmission and Storage rate case highlights a key assumption underlying our guidance; namely, that we receive a reasonable decision in the case, and that it is issued before the end of the year.

The current schedule calls for a final decision in August, but the judge has yet to determine how to address the shareholder-funded safety improvements mandated in the final penalty decision, and we don't know how that could impact the schedule.

If we do not receive a final decision in the Gas Transmission rate case before year end, we would not record the incremental revenue for 2015 until next year. If that were to occur, we estimate that it would reduce this year's earnings from operations by roughly $0.60 per share.

The second bullet under the rate case is the reminder that we've not sought recovery of certain corrosion and strength testing work in 2015 and beyond, and we previously indicated that these expenses should average roughly $50 million annually over the three-year period, although the amount may vary year to year.

Next is the tax benefits associated with the federal repairs deduction. Last year, the net impact from this item was $0.24, and we expect it to be a similar order of magnitude this year.

After that are the incentive revenues for things like our customer energy efficiency program, and the impact of monetizing the remaining SolarCity shares, which occurred in Q1.

And finally, like last year, we expect earnings on construction work in progress to be roughly offset by below-the-line costs such as advertising, charitable contributions, environmental costs and so forth. Slide 8 summarizes our overall guidance. At the top, you see our 2015 guidance for earnings from operations of $3.50 to $3.70 per share.

Guidance for our items impacting comparability is shown below that, and is broken down into the three categories. We've got more detail on these on slide 9, so let's go there now, and I'll start at the top. You can see that we're reaffirming the estimated range for pipeline-related expenses of $100 to $150 million.

We're also reaffirming the estimated range for legal and regulatory-related expenses of $25 to $75 million. Next, we're establishing an estimate of roughly $1 billion in 2015 for fines and penalties associated with the final decision in the gas transmission pipeline investigations. You can see the key components in the table below.

The first two, the fine payable to the State and the customer bill credit, were accrued in the first quarter. We estimate that charges for disallowed capital work will come to about $350 million for the year, roughly half of the total disallowed capital.

We also believe we'll see the full $160 million of disallowed revenues for expense work in 2015, assuming we receive a final decision in the Gas Transmission rate case before year-end.

This estimate does not include potential fines and penalties in the future, such as any revenues disallowed in the Gas Transmission rate case as a penalty for ex parte communications. Slide 10 shows you how to get from this $1 billion estimate for 2015 to the total $1.6 billion of fines and penalties coming out of the gas investigations.

Going from left to right, you see the costs incurred prior to this year, the estimated impact for 2015, and then finally, the costs we expect to incur in future periods. The future items consist of charges for the disallowed capital next year as well as remedies specified in the final decision – final penalty decision.

Moving on to slide 11, we are now estimating our total equity needs for 2015 to be between $700 and $800 million. This range is consistent with the guidance and assumptions I've walked you through this morning.

It compares with our prior estimate of $400 to $600 million, which of course did not include the impact of the fines and penalties coming out of the gas investigation. As the slide indicates, the fines and penalties clearly drive up our equity needs for the year.

Going in the other direction though, our overall cash flows are a bit stronger due to items such as balancing account activity and timing of expenditures during the year. This has mitigated some of our equity need for 2015.

Keep in mind that we typically issue about $300 million annually using our internal programs – our 401(k) and dividend reinvestment programs. In addition, we issued $75 million in the first quarter using our continuous equity offering, or dribble program.

That would leave our remaining equity needs for the year at roughly $300 million to $400 million, and we're currently evaluating options for that. By the way, we've updated the equity factors slide in the appendix to align with the components of the final penalty decision.

Slides 12 and 13 summarize our assumptions for CapEx and rate base through 2016. The CapEx numbers are the same you've seen before, and you can see that we expect 2016 to look fairly similar to 2015, depending primarily on the outcome of the Gas Transmission rate case.

The authorized rate base numbers have been adjusted to reflect the capital disallowance resulting from the final penalty decision. The impact on 2016 average rate base is a reduction of about $500 million.

Our average rate base is expected to grow to right around $33 billion in 2016, and the adjustment for the final penalty decision results in an 8% CAGR over 2014 as compared to 9% previously. We plan to provide you with CapEx and rate base numbers beyond 2016 once we file our 2017 General Rate Case this fall.

With that, I'll stop here, and we'll now open the lines for your questions..

Certainly. Our first question comes from the line of Steve Fleishman with Wolfe Research. You may proceed..

Yeah. Hi. Good morning..

Morning, Steve..

Hey, I guess this is for Kent.

So, on the equity issuance needs and specifically these cash flows from balancing accounts and timing, is there any way to kind of give us a sense of how much that lowered the equity need? And do those essentially kind of normalize back in future years so that – thus there's kind of like an equity need for it later on?.

Yeah, Steve, and let me get to that. Let me just make sure everybody's got the overall picture clearly, which is that the range is higher than we previously said because of the impact of the final penalty decision, but these other factors, mainly cash flows, have somewhat mitigated the overall increase.

And our cash flows have improved somewhat, and those do reduce our financing requirements. And really, a key factor is within our balancing account activities, and in particular, our energy procurement costs, which are lower primarily due to lower gas prices. They've stayed very low this year, lower than was reflected in previous expectations.

And then the other thing is really kind of timing of our CapEx and our other expenditures. And together, those have really improved the cash flow forecast and reduced our requirement.

Those will essentially normalize over time and play out over what is usually a several year period, particularly balancing account stuff gets trued up usually over a several year period..

Okay.

Maybe kind of asking the question then a different way, is there a way to get a sense of, if you look at the totality of the $1.6 billion and didn't focus on the exact timing of the equity needs, but just at overall what the equity need would be to fund the $1.6 billion?.

Yeah, the key thing I would rely on is slide 20 that has our equity factors. I think you'll be able to essentially take the components in the final penalty decision and translate them into financing requirements.

And I'll just say, we haven't provided guidance for equity issuance beyond this year, and I don't plan to today, but I'll kind of – I can give you some observations about it overall.

I think you know our equity needs are a function of a lot of variables in any one period, but two key ones are our capital expenditure levels and then our unrecovered costs and penalties, and that latter one can affect both our capital structure and our cash flow.

And so it can trigger equity needs at different times, and that's really what this slide 20 helps you sort through. In terms of those two factors, I'll just make the observation on the CapEx front we expect 2016 to be pretty comparable to 2015, and you have those numbers.

In terms of the penalties, we estimate that about two-thirds of our equity needs associated with the final penalty decision will be addressed this year as compared to next year, and you should be able to derive that using the equity factors that we've put in slide 20.

The only other thing I'll say, I'll just remind you that all of this depends on how the disallowed safety-related expenditures end up being treated in the Gas Transmission rate case, and we just won't know that for a while yet..

Okay. One other question, I guess maybe more for Tony. Just the – there was a lot of commentary when the final San Bruno order came out about issues with management and whether the company should stay as one company; should the gas business be split.

Anything – takeaways that you might have from that? And also, I'd just like any comments on just clarifying what happened with this – the fire that occurred in Fresno, and just clarifying whether you're seeing anything within your operations that concern you about that..

Yeah, let me take the first piece, and I'll let Chris talk about the Fresno event. So with respect to the first issue, the commentary around the issuance of the OII, clearly it tells us we have a lot of work to do to build trust and a relationship at the Commission.

And we've had restrictions placed on us, but it's our intent to have the maximum amount of communications with the Commission at all levels that are appropriate, consistent with all of the restrictions. And that's one of the things we know we need to work on.

We're proud of the work we've done, and we think we need to spend more time sharing some of the things that we've done, and time will tell whether we're able to develop that sort of trusting relationship. With that, let me ask Chris to comment on the incident that occurred in Fresno..

Yeah, hi, Steve. First of all, our hearts are out for the victims – or the folks that were injured there, and we always are concerned about making sure that we're doing what we can to increase our public safety.

Obviously, we did not have anybody that was on-site when the accident occurred, and so we don't know exactly what happened, but we do know some things. First of all, we do know that there was no 811 call made for that area where work was being done. We do know that there were a couple pipeline markers in place right around where the accident occurred.

We do know that there was earth-moving construction equipment that was present at the time of the incident. Also, we know that we've surveyed that area several times over the last several months.

We do it about every two weeks, both with walking by and flying over, and in fact, we had photos from the day before when we had last surveyed that, and did not see any construction going on at that time.

So we've been – worked with the CPUC, who is the lead regulatory agency on this item and on the investigation as to what happened, and they've authorized us to hire Exponent, who is a third party, to perform a thorough analysis of the damaged pipe so that we can determine exactly what did happen there, and that'll be available in the next month or so.

So that's where we're at with that..

Great. Thank you..

Thank you. Our next question comes from the line of Daniel Eggers with Credit Suisse. You may proceed..

Morning, guys.

Just following up on Steve's equity questions, but if we – obviously, timing will have an effect on this in the balancing accounts and that sort of thing, but should we assume that you're going to target something like a 52%, or close to a 52% equity ratio at corporate over time?.

Dan, this is Kent. Yeah, that is our requirement is a 52% minimum equity, common equity ratio at the utility. And there isn't a whole lot at the corporate level, so I think that's an appropriate assumption..

So calibrating that way will probably help us get to the answer. Okay. Thank you. And then, I guess just with the....

Dan, just one other thing. Just remember, when you do the calculations, you exclude short-term debt. That's not included as part of the authorized capital structure..

Right. Thank you. I guess, next question, I guess now that San Bruno is resolved, the dividend hasn't been addressed in an awfully long time.

Tony, how are you going to plan to have that conversation with the Board, and what kind of advice are you going to give them as you go into that next meeting?.

Well, we obviously recognize the dividend is an important piece of how shareholders value us, and it's my intention to start having those discussions with our Board. And as I said in the past, my focus is to get our payout ratio in line with those of our peers.

Obviously, we'll have to talk about the timing with our Board, but we're going to be starting those discussions. It will take some time to take all the variables into account, but we understand that's very important..

Okay. So does that mean it – I guess you have a May Board meeting.

Does that conversation now start now that this is behind you?.

Yeah, I'm not going to go into the details of our agenda for our Board meetings, but I think it's fair to say this will be one of our priorities to discuss..

Okay. And I guess just one last question.

When you guys file the GRC, the next GRC, how will you guys incorporate the Grid of Things-type of spending priorities in that budget? Will they be included in at that point in time, or do you think you need to see more clarity after the July 1 filing before you start to put them into a formal capital program?.

Dan, this is Chris. We will start that process. We are doing our annual planning process which is a look out for five years, and so there's some beginning of that spend during that five year plan on the Grid of Things, and that will feed into what we'll have in the GRC.

I don't think in this GRC we see some huge explosion of investments there, but you'll start to see some investments in some of the ideas.

Don't forget, we've already made huge investments in our Grid of Things with our SmartMeter program and with a lot of the switches, the Cornerstone program, a lot of that has already laid out the foundation for where we're going to go with it..

Got it. Thank you, guys..

Thank you. Our next question comes from the line of Greg Gordon with Evercore. You may proceed..

Thanks. Good morning.

So, just reviewing your commentary earlier on how we think about equity, if I look at page 10, I look at the different line items, what's been previously incurred versus estimated for 2015 versus estimated for future periods, and then I look at page – I believe it was page 20, and I use the equity factors, that should get me to what the equity needs are in estimated 2015 and beyond, correct?.

Yeah, Greg, this is Kent. I think that's the best way to go..

Okay.

So when I do that, I get the difference between what you're issuing in equity on the margin today versus your prior disclosure is smaller than that number, so presumably, the rest of that cash flow is coming in from the reversal and balancing accounts and other cash flows, correct?.

Those are the two primary drivers that I've articulated on the call, so I could see how you come to that conclusion..

Okay. I just wanted to make sure my algebra was right and there wasn't some other factor to consider. Thank you..

Thank you. Our next question comes from the line of Anthony Crowdell with Jefferies. You may proceed..

Hey, good morning. Just – I feel bad not asking an equity question. If I just look at what your CapEx forecast, I think that's the biggest driver in your equity needs, the CapEx forecasts for 2015 and 2016 are near identical.

Is it reasonable to assume the range that you gave not including the San Bruno fine is a reasonable gauge of what your equity needs would be, you know, a $5.5 billion CapEx in 2016?.

Anthony, this is Kent. I don't want to get into providing guidance for 2016, and so I'm a little tentative about how to respond to that. But I indicated before on one of the earlier questions that the CapEx profile is the same, so that basic underlying driver will look very comparable.

And then what you'll want to do is look at differences in some of the other variables that affect our equity needs, one of which obviously is unrecovered costs or fines and penalties. And I think we've laid out the data for you to do that pretty well today..

Okay, great. And just lastly, I think on Monday – and I may have this wrong – the company had filed a response in the federal indictment.

Is there any color you could give on that filing that you made on Monday?.

Sure. This is Hyun Park. So we made four motions for discovery of various materials. So for example, the government is obligated to provide us with what's called Brady materials. Those are evidence that are favorable to the company, and so we've asked for discovery of those materials, as well as certain portions of the grand jury transcript.

And we've also asked for witness interview notes, as well as recordings of interviews. And we've also asked them to specify what other acts or incidents that they intend to introduce at trial. And so, all of this will get heard according to the current schedule on June 1 at the federal court..

Great. Thanks for taking my question, guys..

Thank you. Our next question comes from the line of Michael Goldenberg with Luminus Management. You may proceed..

Good morning..

Morning, Michael..

I have questions on the $1.6 billion chart; trying to understand exactly what's included and what's not included.

Is rights of way in there? Is any of corrosion or hydro-strength testing is in there, or is any of the costs of GT&S delayed the five months? Are any of those things in the $1.6 billion?.

the impact of the rights of way work as well as there's some remaining PSEP work.

And then I also indicated in the guidance for earnings from operations the assumptions there that the additional gas-related costs that we've not sought recovery for, which are certain corrosion work as well as certain hydrostatic testing work, that we expected that to average about $50 million a year for each of the three years, that that would be embedded in our earnings from operations..

Right, right, right. I agree with all of those, I just wanted to be crystal clear that that's not included.

So is there any way you can put a number holistically if we – you keep referring us to slide 20, but I guess two things that I didn't appreciate, that $200 of the $300 million fine, that will not need equity issuance, right? Because that was already – since you already took a hit for that, you don't need equity issuance, that's number one.

And number two, so is there any way to put the amount of dollars for this cash flow benefit from balancing accounts?.

So let me parse through those two. In the first comment you made, which was your conclusion that we don't need equity needs associated with the first $200 million that we accrued a while back, that's actually not quite the case.

And when you look at the equity factors, because to date that's been a non-cash accrual, roughly half of that essentially has been financed and....

Okay..

...the remaining half gets financed at the time we actually pay the fine. So there is some remaining need that comes from that fine payable, the original $200 million..

Okay, that makes sense. Okay..

Okay.

Second – what was the second part of your question again?.

The second part was...

is there any – a way to predict the dollar amount on this cash flow benefit from regulatory from balancing?.

Well, what I would suggest you think about is go to our old guidance for equity, look at – which did not include any of the equity needs associated with the final penalty decision, use the equity factors on slide 20 to estimate what the incremental equity needs are.

And there'll be a difference between that and the guidance that we're currently giving you for our overall equity needs, and one of the key drivers of that will be those factors related to cash flows..

Okay. Okay, thank you..

Thank you. Our next question comes from the line of Michael Lapides with Goldman Sachs. You may proceed..

Yeah, hey, guys. One question about 2015 guidance. If you just, like, back of the envelope rate base math, I'll use Greg Gordon's algebra for an example here. If I do $31 billion at a 52% equity ratio and at a 10.4% authorized ROE using your current share count, I get a number that's actually below your guidance range.

So can you just walk me through what the delta there is? And then, does that delta, does that difference, do you expect that to continue multiple years going forward, or is that something that's a 2015 event only?.

Yeah, so this is Kent. I'd suggest you focus on slide 7. And on slide 7, essentially the math you just went through is for all intents and purposes the upper part of the chart and the lower left part of the chart, you did the math on it.

The other part though is the lower right part of the chart, the other factors affecting our earnings from operations. And I sort of gave commentary on each of those factors. The biggest driver is related to the net benefits of the repairs, the tax benefit.

And we've indicated that we would expect it this year to have an impact that's comparable, same order of magnitude to last year when it was $0.24 a share..

Okay.

And then beyond this year, meaning that stops after the – in 2016, or does that carry forward into 2016 and beyond?.

That item relates to our 2014 General Rate Case, so we would expect it to be in place through 2016..

At a comparable level, meaning at that $0.24 level?.

Similar order of magnitude..

Got it. Thank you, Kent. Much appreciated..

Thank you. Our next question comes from the line of Hugh Wynne with AllianceBernstein. You may proceed..

Hi. I was hoping to get some clarity on the pending investigations and cases that may result in future fines and perhaps get your view on the maximum amount of those fines.

Is it correct to say that we have the federal case, the ex parte withholding of GT&S revenue, the OII into the safety records on the gas distribution side, and then the investigation into the – the OII into the safety culture of PG&E, or are there other investigations and cases that we need to be aware of in addition to those four?.

Yeah, Hugh, I think that covers the list that we're aware of. I'm looking at Hyun Park, our General Counsel. I think he's accurately covered the list..

Hugh, and Tony mentioned earlier that the State AG as well as the federal prosecutors are looking at ex parte issues, so that investigation is still ongoing..

Okay. And then just kind of a, is it bigger than a breadbox type of estimates here. The maximum penalty in the federal case, I think the federal attorney said that she was seeking up to $1.1 billion.

Is that correct? Is there any color you can give us on that?.

Yes, so it's $1.13 billion is what they've alleged, and the color is that we disagree with that..

And remember, the $1.13 billion is the alternative fine provision where you calculate either gain that we got or losses that were incurred. But of course, with respect to that, we settled all of the civil cases, so they're – arguably there are no losses left to cover. Certainly, there wasn't gain to the company.

I mean, look at the size of this penalty and you'd know that there was no gain to the company.

So if you go back to the fundamental provisions of the Pipeline Safety Act under which that case was brought, the fines I think are $500,000 a count, and there are 20-some counts, and so you can run the numbers that way, as what we believe would be a more likely – if in fact there is liability, which of course we contest fairly strongly..

Okay.

So you're basically pushing us in the direction of a nominal fine, maybe $1 million, because of the inability to apply the more onerous metrics for calculating a larger fine?.

So, Hugh, if you do the math under the more conventional fine method, it's $500,000 per count, 28 counts, so that adds up to I believe $14 million..

$14 million, okay..

Yeah. And then they've alleged the alternative fines, which Tony described. And by the way, some of this is discussed in some of the motions that we filed on Monday, so you can see some of the discussion on that..

On the ex parte communication, is it correct to say that the CPUC is still reserving the right to withhold approximately $230 million from the GT&S revenue, or is there some new benchmark there?.

Hugh, this is Kent. I think what they said that they would fine us up to 5 months of whatever the ultimate revenue increase coming out of the case is, and we don't know what that is yet..

Right. So that's still – the final determination there is still pending, but it could be 5 months of GT&S revenue increase as a result of the case..

That will be determined at the end of the case..

Okay.

On the distribution safety OII, are there any parameters we can use? Should we make reference to the OII into the transmission system, or is this going to be a different order of magnitude?.

Yeah, that's one – the case is just getting under way. We can't even give you an order of magnitude of what might come out of that, if in fact there is any liability at all..

And what about the OII into safety culture? That seems a very intangible OII to me, and I wonder, is it – do we expect penalties to be sought there, or is that a different type of investigation?.

And again, it's very early. I mean, the way I heard it, it sounds like a different type of investigation around what we've done with respect to our safety culture. And as I said before, that's an area we actually feel very good about.

We've spent a lot of effort on safety culture issues, starting with doing some very significant benchmarking of other companies to look at what they do, and I will tell you that we've learned a lot from that benchmark, but we also learned that we compare quite favorably to our peers with respect to what we're doing.

We hired a number of third-party experts to come in and look at safety culture, from a former head of the NTSB to Lloyd's Registry (sic) [Register] (48:24) in London who's done work under ISO 55000, and things like changing our discipline policy to encourage employees to identify safety issues, to a program to identify near-hits, as we call them, on safety.

That has greatly expanded our understanding of where the rifts are in the company. And a number of other things; training of all of our leaders on safety culture. So we've done a lot that hasn't shown up in specific proceedings, and we think this will be an opportunity at some point when the OII gets underway to talk about what we've done..

Okay. Thank you. And then just one final question.

Are you considering as a matter of strategy trying to settle these various cases and investigations so that the hit to equity can be known, or do you feel it's in the best interest of shareholders just to kind of fight these out to the bitter end and let the adversarial process take its course?.

You know, I think that what our recent decisions show is we want to aggressively defend the shareholders' interests, but at some point certainty is in the shareholders' interest. And that was kind of behind our decision not to appeal the San Bruno OIIs, even though there were some issues we thought might be appealable.

In the end, it was better to have certainty so we can continue to focus on improving the system. We're always open to settlements in these cases. We're not open to admitting to things that just didn't occur.

I think that's our position in the criminal case, that we don't see anyone who didn't – who made any intentional decisions to violate the Pipeline Safety Act. But we will continue to look for opportunities to get certainty by resolving some of these proceedings..

Great. Thank you very much for the color. I appreciate it..

Thank you. Our next question comes from the line of Michael Weinstein with UBS. You may proceed..

Hi, guys.

I was wondering if you could talk about what's the normalized tax rate that you expect to have in the next GRC, you know, once the repair benefits are absorbed?.

This is Dinyar Mistry, the Controller. We expect the repairs flow through rate making to continue in the next General Rate Case, and so it should have a similar order of magnitude on our effective tax rate.

What you have been seeing in this year, the $0.24 that Kent mentioned, is the difference between the repairs that was forecasted in the last General Rate Case and the repairs that we are experiencing as we file our tax returns, but that should be trued-up in the 2017 rate case..

Right.

And once it's trued-up, what will the normalized tax rate be?.

So the....

The 35%, or no?.

No. 35% is the statutory rate. If you go to our financial statements at the end of last year, you'll see that our effective rate was roughly 20%, and it should be probably similar. I don't know how it's going to shake out because it is a technical calculation.

But it does not mean that there's a benefit to the bottom line because there's an associated reduction on the revenue side..

I see.

So you will be effectively earning at the 35% rate, even if your GAAP rate is 20%?.

I think the better way to think about it is that there is no benefit or harm from the effective tax rate being different from the statutory tax rate. It's just a calculation..

Okay. We'll follow up offline on that.

The other question I had was about future CapEx growth profile after 2016? The Edison call, they discussed kind of having a flat profile for the next decade, at the $4 billion level, and that includes presumably the – well, it might exclude the benefits that might come from investing in the distribution resource plan that's coming out in July.

So I'm just wondering if you guys have a similar view of the next decade, especially considering the EV filing that you made, that your CapEx profile will be growing, or will it be kind of flattish over the next decade, or not?.

This is Kent. We will be providing you with numbers when we get to the fall. I would say our observations is that we are doing a lot of infrastructure investment, essentially hardening our system, replacing a lot of stuff that was put in post-World War II and so forth.

And we don't expect that program to finish by the time we're done with 2016, so we'll continue to see I think a healthy CapEx profile going forward. But we're not prepared to actually provide you numbers at this point until we finish up on our GRC filing..

All right. Thanks a lot..

Thank you. Our next question comes from the line of Brian Chin with Merrill Lynch. You may proceed..

Hi. Good morning..

Morning, Brian..

Is there an implied timing of the equity issuance embedded in the 2015 guidance that you can give a little more color on?.

No, there isn't. As I indicated before, we're still evaluating our options for the financing, and that's with respect to about the timing and the approach..

Okay. Great. The rest of my questions were asked and answered. Thank you..

Thanks..

Thank you. Our next question comes from the line of Travis Miller with Morningstar. You may proceed..

Good morning. Thank you. Obviously a lot of talk – plenty of talk about the equity side.

I was wondering if you could talk a little bit about the credit side and the timing there in terms of issues and needs?.

Well, Travis, this is Kent again. I think if you look last year, our net debt issuance was about $1.4 billion. That's net of maturities, and that's probably not far off from what we've done the last several years. So I would say similar order of magnitude, given similar CapEx program. We have a little bit higher CapEx this year.

So similar profile, but we're not going to be talking about timing until we're closer to actually starting a transaction..

Okay.

Remind me real quick, when do you need to have the capital structure in place for rate making purposes? What's the timing on that?.

Yeah, it's essentially over the period during which the capital structure is authorized. So for us, it's over this cost of capital period which has been – essentially will end up being a four-year period right now..

Okay. One other real quick one.

The talk about the tax deductions and debate there with the CPUC, if they were to disallow some of that tax write-off, how does that change that slide 20?.

So, this is Dinyar Mistry again, the Controller, and let's just go through the components of the penalty that you see on slide 20. And if you look at that, the fine payable to the State general fund is not tax deductible, but we continue to believe the other disallowances included in the Commission's final decision are tax deductible..

Okay. Thanks so much..

Thank you. Our next question comes from the line of Michael Goldenberg with Luminus Management. You may proceed..

Good morning again.

I just wanted to confirm when you guys talk about equity issuance, do you just talk about straight equity, or are you considering other options?.

Michael, this is Kent, and we are in general, as you know, for these unrecovered fines and penalties, we've been saying that primarily we're relying on equity issuance. And over the past couple years, I've had conversations with investors and certainly with you about options such as mandatory converts, for example.

But I will say at this point, I think that option is probably less likely now, just given the size of our remaining equity need for this year..

Hey, Monique, I think we have time for one more question..

Our next question will come from the line of John Apgar with Balyasny Asset Management. You may proceed..

Good morning. Michael asked my question, but I just wanted you to elaborate a bit more on the equity needs for 2015 and your options.

I mean, you have a $300 million DRIP, and can you remind us of the size of the ATM program that you have in place?.

So, yeah, the equity options that we have used in the past include our internal programs, which are both the DRIP and the 401(k) program. We typically have issued roughly $300 million a year from those programs.

We have had a continuous equity offering, and we have a program there for $500 million, and I believe in the first quarter, we did approximately $80 million of that through the dribble program. So those are the two components you are relying on – or you are referencing..

So between the continuous equity and the DRIP program, you have $800 million of total capacity? Is that the right way to look at it?.

That's correct. Of course, the continuous equity offering is not limited to $500 million, that's just our current program, and we've actually renewed that program several times over the last few years..

Okay. Fair enough.

And then, regarding the balancing accounts, can you quantify that at all as far as the cash impact?.

You know, I think I've had several folks take a run at me on that one on this call, and I think I pretty much laid out how you can get rough estimates of the various factors driving our equity previously on the Q&A, and I'll....

Well, it's ....

... sit tight with what I've already indicated..

Well, I was just looking at your net receivable balance off of the balancing accounts, and it's $1.2 billion in 2014, much higher than it was in 2013.

So is it right to look at it as a big cash outflow in 2014 and that is reversing in 2015? And then, once that net receivable goes to zero, it's not necessarily a net cash outflow next year, right? It just stays at zero? Is that the right way to look at it?.

There are a lot of factors and complexity in all of our various balancing accounts, so I think that actually if you're starting with those numbers on the balance sheet, you could spend a lot of time trying to figure out the timing during which different ones amortize, and I'm not sure they get you where you really need to be.

So I would suggest a simpler way is to go back to our prior estimates of equity, look at the new estimates of equity, and look at our equity factors for the fines and penalties, and you'll at least know how much the equity factors are driving the change from our prior estimate to our new estimate. And....

Okay..

...any difference you see there, I've indicated on the call a significant driver of that has been our cash flows forecast..

Okay. Thank you..

All right. Thank you, everyone, for joining us this morning, and have a safe day..