<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
<TABLE>
<CAPTION>
Exact Name of
Commission Registrant State or other IRS Employer
File as specified Jurisdiction of Identification
Number in its charter Incorporation Number
- -----------------------------------------------------------------
<S> <C> <C> <C>
1-12609 PG&E Corporation California 94-3234914
1-2348 Pacific Gas and California 94-0742640
Electric Company
</TABLE>
77 Beale Street, P.O. Box 770000, San Francisco, California 94177
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (415) 973-7000
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding April 30, 1997:
PG&E Corporation 408,852,050 shares
Pacific Gas and Electric Company Wholly owned by PG&E Corporation
<PAGE>
PG&E CORPORATION AND
PACIFIC GAS AND ELECTRIC COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PG&E CORPORATION
STATEMENT OF CONSOLIDATED INCOME........................1
BALANCE SHEET...........................................2
STATEMENT OF CASH FLOWS ................................3
PACIFIC GAS AND ELECTRIC COMPANY
STATEMENT OF CONSOLIDATED INCOME........................4
BALANCE SHEET...........................................5
STATEMENT OF CASH FLOWS.................................6
NOTE 1: GENERAL...........................................7
NOTE 2: ELECTRIC INDUSTRY RESTRUCTURING...................8
NOTE 3: NATURAL GAS MATTERS..............................12
NOTE 4: PG&E OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF TRUST HOLDING
SOLELY PG&E SUBORDINATED DEBENTURES..............13
NOTE 5: COMMITMENTS AND CONTINGENCIES....................14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................16
COMPETITION AND CHANGING REGULATORY ENVIRONMENT...........17
ELECTRIC INDUSTRY RESTRUCTURING...........................17
Transition Cost Recovery...............................18
Competitive Market Framework...........................20
Accounting for the Effects of Regulation...............21
GAS INDUSTRY RESTRUCTURING................................23
ACQUISITIONS AND SALES....................................25
RESULTS OF OPERATIONS.....................................25
Common Stock Dividend..................................25
Earnings Per Common Share..............................26
Utility................................................26
Gas Holdings...........................................26
LIQUIDITY AND CAPITAL RESOURCES
Sources of Capital.....................................26
Cost of Capital Application............................27
Environmental Matters..................................27
Legal Matters..........................................28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.........................................29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......30
ITEM 5. OTHER INFORMATION.........................................33
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................34
SIGNATURE..........................................................36
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PG&E CORPORATION
STATEMENT OF CONSOLIDATED INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES
Electric and gas utility $2,273,978 $2,164,771
Gas transmission and marketing 1,048,883 52,642
Other 42,633 31,355
----------- -----------
TOTAL OPERATING REVENUES 3,365,494 2,248,768
OPERATING EXPENSES
Cost of electric energy 534,828 466,994
Cost of gas 1,205,354 188,137
Maintenance and other operating 452,487 456,474
Depreciation and decommissioning 459,117 302,947
Administrative and general 172,959 179,379
Property and other taxes 82,361 81,443
----------- -----------
TOTAL OPERATING EXPENSES 2,907,106 1,675,374
----------- -----------
OPERATING INCOME 458,388 573,394
Interest income 12,931 24,343
Interest expense (157,898) (169,560)
Other income 18,065 4,071
Preferred dividend requirement and redemption premium (8,278) (8,278)
----------- -----------
PRETAX INCOME 323,208 423,970
Income Taxes 150,704 171,544
----------- -----------
EARNINGS AVAILABLE FOR COMMON STOCK $ 172,504 $ 252,426
=========== ===========
Weighted Average Common Shares Outstanding 408,526 414,351
EARNINGS PER COMMON SHARE $.42 $.61
Dividends Declared Per Common Share $.30 $.49
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
1
<PAGE>
PG&E CORPORATION
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
PLANT IN SERVICE
Electric $24,943,934 $24,757,479
Gas 6,671,501 6,558,413
Gas transmission 1,829,803 1,579,693
------------ ------------
TOTAL PLANT IN SERVICE (AT ORIGINAL COST) 33,445,238 32,895,585
Accumulated depreciation and decommissioning (14,745,345) (14,301,934)
------------ ------------
NET PLANT IN SERVICE 18,699,893 18,593,651
CONSTRUCTION WORK IN PROGRESS 433,905 414,229
OTHER NONCURRENT ASSETS
Nuclear decommissioning funds 898,954 882,929
Investment in nonregulated projects 819,925 817,259
Other assets 307,542 134,271
------------ ------------
TOTAL OTHER NONCURRENT ASSETS 2,026,421 1,834,459
CURRENT ASSETS
Cash and cash equivalents 120,334 143,402
Accounts receivable, net 1,511,427 1,539,186
Regulatory balancing accounts receivable 635,427 444,156
Inventories 490,762 530,085
Prepayments 58,107 54,116
------------ ------------
TOTAL CURRENT ASSETS 2,816,057 2,710,945
DEFERRED CHARGES
Income tax-related deferred charges 1,096,446 1,133,043
Other deferred charges 1,563,898 1,550,789
------------ ------------
TOTAL DEFERRED CHARGES 2,660,344 2,683,832
------------ ------------
TOTAL ASSETS $26,636,620 $26,237,116
============ ============
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity $ 8,420,791 $ 8,363,301
Preferred stock without mandatory redemption provisions 390,591 402,056
Preferred stock with mandatory redemption provisions 137,500 137,500
Company obligated mandatorily redeemable preferred
securities of trust holding solely PG&E subordinated
debentures 300,000 300,000
Long-term debt 7,715,826 7,770,067
------------ ------------
TOTAL CAPITALIZATION 16,964,708 16,972,924
CURRENT LIABILITIES
Short-term borrowings 802,935 680,900
Current portion of long-term debt 12,643 209,867
Accounts payable
Trade creditors 776,225 873,655
Other 515,329 365,499
Accrued taxes 529,779 310,271
Amounts due customers 302,046 186,899
Deferred income taxes 193,888 157,064
Interest payable 144,435 63,193
Dividends payable 133,470 123,310
Other 266,444 309,104
------------ ------------
TOTAL CURRENT LIABILITIES 3,677,194 3,279,762
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES
Deferred income taxes 3,896,407 3,941,435
Deferred tax credits 369,919 379,563
Noncurrent balancing account liabilities 138,167 120,858
Other 1,590,225 1,542,574
------------ ------------
TOTAL DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES 5,994,718 5,984,430
COMMITMENTS AND CONTINGENCIES (NOTES 2, 3, AND 5) -- --
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $26,636,620 $26,237,116
============ ============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
2
<PAGE>
PG&E CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $172,504 $252,426
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and decommissioning 459,117 302,947
Amortization 33,720 24,204
Deferred income taxes and tax credits-net (43,905) (16,606)
Other deferred charges (39,559) 79,424
Other noncurrent liabilities (23,570) (7,698)
Noncurrent balancing account liabilities and
other deferred credits 92,725 (48,919)
Net effect of changes in operating assets
and liabilities:
Accounts receivable 107,129 299,289
Regulatory balancing accounts receivable (51,497) (142,412)
Inventories 27,067 42,448
Accounts payable (33,764) (68,235)
Accrued taxes 219,508 191,978
Other working capital 9,000 4,702
Other-net 40,880 23,801
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 969,355 937,349
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (328,240) (218,437)
Diversified operations (31,352) (38,339)
Acquisition of Teco Pipeline Company (40,668) --
Other-net (15,771) (20,189)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (416,031) (276,965)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued 13,544 57,657
Common stock repurchased (320,249) (39,364)
Long-term debt matured, redeemed, or repurchased (257,486) (137,343)
Short-term debt issued (redeemed)-net 122,035 (66,643)
Dividends paid (130,737) (211,576)
Other-net (3,499) (7,884)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (576,392) (405,153)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (23,068) 255,231
CASH AND CASH EQUIVALENTS AT JANUARY 1 143,402 734,295
--------- ---------
CASH AND CASH EQUIVALENTS AT MARCH 31 $120,334 $989,526
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest (net of amounts capitalized) 67,448 67,477
Income taxes 26,010 45,638
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
3
<PAGE>
PACIFIC GAS AND ELECTRIC COMPANY
STATEMENT OF CONSOLIDATED INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES
Electric $1,722,005 $1,648,602
Gas 551,973 516,169
Other -- 83,997
----------- -----------
TOTAL OPERATING REVENUES 2,273,978 2,248,768
OPERATING EXPENSES
Cost of electric energy 510,118 466,994
Cost of gas 214,455 188,137
Maintenance and other operating 445,207 456,474
Depreciation and decommissioning 442,525 302,947
Administrative and general 137,400 179,379
Property and other taxes 79,029 81,443
----------- -----------
TOTAL OPERATING EXPENSES 1,828,734 1,675,374
----------- -----------
OPERATING INCOME 445,244 573,394
Interest income 10,404 24,343
Interest expense (144,042) (169,560)
Other income and (expense) (1,068) 4,071
----------- -----------
PRETAX INCOME 310,538 432,248
Income Taxes 137,959 171,544
----------- -----------
NET INCOME 172,579 260,704
Preferred dividend requirement and redemption premium (8,278) (8,278)
----------- -----------
EARNINGS AVAILABLE FOR COMMON STOCK $ 164,301 $ 252,426
=========== ===========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
4
<PAGE>
PACIFIC GAS AND ELECTRIC COMPANY
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
PLANT IN SERVICE
Electric $24,931,831 $24,757,479
Gas 6,663,845 8,138,106
------------ ------------
TOTAL PLANT IN SERVICE (AT ORIGINAL COST) 31,595,676 32,895,585
Accumulated depreciation and decommissioning (14,312,236) (14,301,934)
------------ ------------
NET PLANT IN SERVICE 17,283,440 18,593,651
CONSTRUCTION WORK IN PROGRESS 417,738 414,229
OTHER NONCURRENT ASSETS
Nuclear decommissioning funds 898,954 882,929
Investment in nonregulated projects -- 817,259
Other assets 106,368 134,271
------------ ------------
TOTAL OTHER NONCURRENT ASSETS 1,005,322 1,834,459
CURRENT ASSETS
Cash and cash equivalents 39,879 143,402
Accounts receivable, net 1,013,045 1,539,186
Regulatory balancing accounts receivable 635,427 444,156
Inventories 476,901 530,085
Prepayments 25,068 54,116
------------ ------------
TOTAL CURRENT ASSETS 2,190,320 2,710,945
DEFERRED CHARGES
Income tax-related deferred charges 1,070,661 1,133,043
Other deferred charges 1,488,315 1,550,789
------------ ------------
TOTAL DEFERRED CHARGES 2,558,976 2,683,832
------------ ------------
TOTAL ASSETS $23,455,796 $26,237,116
============ ============
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity $ 7,148,657 $ 8,363,301
Preferred stock without mandatory redemption provisions 402,056 402,056
Preferred stock with mandatory redemption provisions 137,500 137,500
Company obligated mandatorily redeemable preferred
securities of trust holding solely PG&E subordinated
debentures 300,000 300,000
Long-term debt 7,046,722 7,770,067
------------ ------------
TOTAL CAPITALIZATION 15,034,935 16,972,924
CURRENT LIABILITIES
Short-term borrowings 606,708 680,900
Current portion of long-term debt 9,587 209,867
Accounts payable
Trade creditors 619,967 873,655
Other 420,834 365,499
Accrued taxes 509,331 310,271
Amounts due customers 302,046 186,899
Deferred income taxes 193,888 157,064
Interest payable 131,633 63,193
Dividends payable 8,318 123,310
Other 205,527 309,104
------------ ------------
TOTAL CURRENT LIABILITIES 3,007,839 3,279,762
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES
Deferred income taxes 3,444,397 3,941,435
Deferred tax credits 369,579 379,563
Noncurrent balancing account liabilities 138,167 120,858
Other 1,460,879 1,542,574
------------ ------------
TOTAL DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES 5,413,022 5,984,430
COMMITMENTS AND CONTINGENCIES (NOTES 2, 3, AND 5) -- --
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $23,455,796 $26,237,116
============ ============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
5
<PAGE>
PACIFIC GAS AND ELECTRIC COMPANY
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 172,579 $260,704
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and decommissioning 442,525 302,947
Amortization 33,060 24,204
Deferred income taxes and tax credits-net (61,602) (16,606)
Other deferred charges (27,923) 79,424
Other noncurrent liabilities (16,371) (7,698)
Noncurrent balancing account liabilities and
other deferred credits 99,158 (48,919)
Net effect of changes in operating assets and
liabilities:
Accounts receivable 68,016 299,289
Regulatory balancing accounts receivable (51,497) (142,412)
Inventories 27,723 42,448
Accounts payable (144,757) (68,235)
Accrued taxes 217,613 191,978
Other working capital (15,883) 4,702
Other-net 6,996 15,523
----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 749,637 937,349
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (321,259) (218,437)
Diversified operations -- (38,339)
Other-net (97,468) (20,189)
----------- ---------
NET CASH USED BY INVESTING ACTIVITIES (418,727) (276,965)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt matured, redeemed, or repurchased (222,719) (137,343)
Short-term debt redeemed-net (74,192) (66,643)
Dividends paid (130,889) (211,576)
Other-net (6,633) 10,409
----------- ---------
NET CASH USED BY FINANCING ACTIVITIES (434,433) (405,153)
----------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (103,523) 255,231
CASH AND CASH EQUIVALENTS AT JANUARY 1 143,402 734,295
----------- ---------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 39,879 $989,526
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net assets of affiliates transferred
to PG&E Corporation $1,142,294 --
Cash paid for:
Interest (net of amounts capitalized) 65,388 67,477
Income taxes 25,957 45,638
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
6
<PAGE>
PG&E CORPORATION AND PACIFIC GAS AND ELECTRIC COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
Holding Company Formation:
- -------------------------
Effective January 1, 1997, Pacific Gas and Electric Company (PG&E) became a
subsidiary of its new parent holding company, PG&E Corporation. PG&E's ownership
interest in Pacific Gas Transmission Company (PGT) and PG&E Enterprises
(Enterprises) was transferred to PG&E Corporation. PG&E's outstanding common
stock was converted on a share-for-share basis into PG&E Corporation's
outstanding common stock. PG&E's debt securities and preferred stock were
unaffected and remain securities of PG&E.
Basis of Presentation:
- ---------------------
This Quarterly Report on Form 10-Q is a combined report of PG&E Corporation and
PG&E. PG&E Corporation's consolidated financial statements include the accounts
of PG&E Corporation; PG&E; PGT; Enterprises; PG&E Gas Transmission, Texas
Corporation (formerly known as Teco Pipeline Company); and PG&E Energy Trading
(formerly known as Energy Source), as well as the accounts of their wholly owned
and controlled subsidiaries (collectively, the Corporation). PG&E's consolidated
financial statements include the accounts of PG&E and its wholly owned and
controlled subsidiaries. Because PGT and Enterprises were wholly owned and
controlled subsidiaries of PG&E during 1996, they are included in PG&E's 1996
consolidated financial statements.
The "Notes to Consolidated Financial Statements" herein pertain to the
Corporation and PG&E. Currently, PG&E's financial position and results of
operations are the principal factors affecting the Corporation's consolidated
financial position and results of operations. This quarterly report should be
read in conjunction with the Corporation's and PG&E's Consolidated Financial
Statements and Notes to Consolidated Financial Statements incorporated by
reference in their combined 1996 Annual Report on Form 10-K.
In the opinion of management, the accompanying statements reflect all
adjustments that are necessary to present a fair statement of the consolidated
financial position and results of operations for the interim periods. All
material adjustments are of a normal recurring nature unless otherwise disclosed
in this Form 10-Q. Certain amounts in the prior year's consolidated financial
statements have been reclassified to conform to the 1997 presentation. Results
of operations for interim periods are not necessarily indicative of results to
be expected for a full year.
Acquisitions and Sales:
- ----------------------
In December 1996, PGT acquired Energy Source (now a part of PG&E Energy Trading)
for approximately $23 million. PG&E Energy Trading, a gas marketing operation,
has averaged $300 million in revenues each month since its acquisition. These
revenues were offset by a corresponding increase in the cost of gas.
In January 1997, PG&E Corporation acquired Teco Pipeline Company (now known
as PG&E Gas Transmission, Texas Corporation) for approximately $380 million,
consisting of $319 million of PG&E Corporation common stock and the purchase of
a note payable of $61 million. PG&E Gas Transmission, Texas Corporation, a gas
transmission and energy trading operation, has averaged $40 million in revenues
each month since its acquisition. These revenues were primarily offset by an
increase in the cost of gas. In April 1997, PG&E Corporation announced that it
will consolidate certain energy trading and support operations of Teco Pipeline
Company into PG&E Energy Trading.
7
<PAGE>
On April 2, 1997, Bechtel Enterprises, Inc. (Bechtel) acquired Enterprises'
interest in International Generating Company, Ltd., a joint venture between
Enterprises and Bechtel. The sale resulted in an after-tax gain of approximately
$110 million, which will be recorded in the second quarter of 1997.
NOTE 2: ELECTRIC INDUSTRY RESTRUCTURING
In 1995, the California Public Utilities Commission (CPUC) issued a decision
that provides a plan to restructure California's electric utility industry. The
decision acknowledges that much of utilities' current costs and commitments
result from past CPUC decisions and that, in a competitive generation market,
utilities would not recover some of these costs through market-based revenues.
To assure the continued financial integrity of California utilities, the CPUC
authorized recovery of these above-market costs, called "transition costs."
In 1996, California legislation (restructuring legislation) was passed that
adopts the basic tenets of the CPUC's restructuring decision, including recovery
of transition costs. In addition, the restructuring legislation provides a 10
percent electric rate reduction for residential and small commercial customers
by January 1, 1998, freezes electric customer rates for all other customers, and
requires the accelerated recovery of transition costs associated with owned
electric generation facilities. The restructuring legislation also establishes
the operating framework for a competitive electric generation market.
The rate freeze, mandated by the restructuring legislation, will continue
until the earlier of March 31, 2002, or until PG&E has recovered its transition
costs (the transition period). The freeze will hold rates at 1996 levels for all
customers except those receiving the 10 percent rate reduction. The rate freeze
will hold the rates for these customers at the reduced level.
To achieve the 10 percent rate reduction, the restructuring legislation
authorizes utilities to finance a portion of their transition costs with "rate
reduction bonds." The maturity period of the bonds is expected to extend beyond
the transition period. Also, the interest cost of the bonds is expected to be
lower than PG&E's current cost of capital. Once this portion of transition costs
is financed, PG&E would collect a separate tariff to recover principal,
interest, and issuance costs over the life of the bonds from residential and
small commercial customers. The combination of the longer maturity period and
the reduced interest costs is expected to lower the amounts paid by these
customers each year during the transition period, thereby achieving the 10
percent reduction in rates.
During 1997, differences between authorized and actual base revenues
(revenues to recover PG&E's non-energy costs and return on investment) and
differences between the actual electric energy costs and the revenue designated
for recovery of such costs are being recorded in balancing accounts. Any
residual balance would be available for recovery of transition costs. Amounts
recorded in balancing accounts will be subject to a reasonableness review by the
CPUC.
Transition Cost Recovery:
- ------------------------
The restructuring legislation authorizes the CPUC to determine the costs
eligible for recovery as transition costs. The amount of costs will be based on
the aggregate of above-market and below-market values of utility-owned
generation assets and obligations. PG&E has proposed that costs eligible for
transition cost recovery include: (1) above-market sunk costs (costs associated
with utility generating facilities that are fixed and unavoidable and currently
collected through rates) and future costs, such as costs related to plant
removal, (2) costs associated with long-term contracts to purchase
8
<PAGE>
power at above-market prices from Qualifying Facilities (QFs) and other power
suppliers, and (3) generation-related regulatory assets and obligations. PG&E
cannot determine the exact amount of sunk costs that will be above market and
recoverable as transition costs until a market valuation process (appraisal or
sale) is completed for each generation facility. This process will be completed
during the transition period.
In compliance with the CPUC's restructuring decision and the restructuring
legislation, PG&E has filed numerous regulatory applications and proposals that
detail its transition cost recovery plan. PG&E's recovery plan includes: (1)
separation or unbundling of its previously approved cost-of-service revenues for
its electric operations into distribution, transmission, public purpose
programs, and generation, (2) development of a ratemaking mechanism to track and
match revenues and cost recovery during the transition period, and (3)
accelerated recovery of transition costs.
Under the proposed recovery plan, PG&E would receive a reduced return on
common equity for certain transition costs related to generation facilities for
which recovery is accelerated. The lower return reflects the reduced risk
associated with the shorter amortization period and increased certainty of
recovery.
In applying its recovery plan to Diablo Canyon Nuclear Power Plant (Diablo
Canyon), PG&E filed in 1996 a proposal for pricing Diablo Canyon generation at
market prices and completing recovery of the investment in Diablo Canyon by the
end of 2001. If this proposal is adopted, there would be a significant change to
the manner in which Diablo Canyon earns revenues.
Under its proposal, PG&E would replace the existing Diablo Canyon
performance-based ratemaking (PBR) mechanism with: (1) a sunk cost revenue
requirement to recover net investment in plant, including a return on this net
investment, and (2) a PBR mechanism to recover the facility's variable and other
operating costs and capital addition costs. As proposed by PG&E, the sunk cost
revenue requirement would be set to accelerate recovery of Diablo Canyon sunk
costs from a twenty-year period ending in 2016 to a five-year period beginning
in 1997 and ending in 2001. The related return on common equity associated with
Diablo Canyon sunk costs would be reduced to 90 percent of PG&E's long-term cost
of debt. PG&E's authorized long-term cost of debt was 7.52 percent in 1996.
PG&E's proposed PBR mechanism would establish a rate per kilowatt-hour (kWh)
generated by the facility. This rate would be based upon a fixed forecast of
on-going costs, capital additions, and capacity factors for the entire
transition period.
The reduced rate of return combined with a shorter recovery period is
expected to result in an estimated $4 billion decrease in the net present value
of PG&E's future revenues from Diablo Canyon operations. If the proposed cost
recovery plan for Diablo Canyon had been adopted during 1996, PG&E's 1996
reported net income would have been reduced by $350 million ($0.85 per share),
assuming that PG&E recovered no more than its actual variable costs under the
PBR mechanism.
In April 1997, an administrative law judge (ALJ) of the CPUC issued a
Proposed Decision (ALJ PD) regarding PG&E's cost recovery plan for Diablo
Canyon. The ALJ PD, which supersedes a previous proposed decision issued in
February 1997, generally would adopt the overall ratemaking structure proposed
by PG&E. However, the ALJ PD would exclude several items totaling $160 million
from the sunk cost revenue requirement, including out-of-core fuel inventory,
materials and supplies inventory, and prepaid insurance expenses. The ALJ PD
requires that these costs be recovered through the PBR mechanism. The ALJ PD
finds that PG&E's ratemaking proposal is subject to a requirement for a prudence
review of the plant's original costs, and adopts a prudence disallowance which
excludes approximately $70 million of Diablo Canyon construction costs from the
sunk cost revenue requirement.
In May 1997, a CPUC Commissioner issued an alternate proposed decision
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(alternate PD) for the CPUC's consideration. Similar to the ALJ PD, the
alternate PD would adopt the overall ratemaking structure proposed by PG&E.
However, the alternate PD finds that a prudence review is not required and would
include, in the sunk cost revenue requirement, the disallowed construction costs
in the ALJ PD. The alternate PD also would include the above-market components
of out-of-core nuclear fuel inventory, and materials and supplies inventory.
Both the ALJ PD and the alternate PD would adopt the PBR mechanism that PG&E
had proposed to recover Diablo Canyon's on-going costs and capital additions.
However, both adopt PBR rates per kWh generated by Diablo Canyon which are
different from those proposed by PG&E. Variances in these rates result
principally from different assumptions used in the forecasts of Diablo Canyon
capacity factors, operation and maintenance costs, and cost escalation factors.
PG&E has proposed PBR rates for the years 1997 through 2001 of 3.59 cents, 3.71
cents, 3.86 cents, 4.04 cents, and 4.32 cents, respectively. The ALJ PD would
set PBR rates for the years 1997 through 2001 of 3.26 cents, 3.31 cents, 3.37
cents, 3.43 cents, and 3.49 cents, respectively. The PBR rates set by the
alternate PD are not fixed in advance but are subject to an escalation formula
based on the previous year's consumer price index (CPI) less a 0.5 percent
productivity factor. Based on a 3.1 percent annual CPI estimate, the alternate
PD would set PBR rates for the years 1997 through 2001 of 3.54 cents, 3.62
cents, 3.71 cents, 3.80 cents, and 3.90 cents, respectively.
If either the ALJ PD or the alternate PD is adopted, its effective date would
be January 1, 1997. Both the ALJ PD and the alternate PD would terminate, rather
than modify as proposed by PG&E, the existing Diablo Canyon ratemaking
settlement on the date a final decision is adopted by the CPUC. PG&E has sought
clarification from the CPUC that the termination of the settlement would not
affect Diablo Canyon's "must take" status during the transition period.
Neither the ALJ PD or the alternate PD is a final decision of the CPUC, and
both are subject to change prior to final action by the CPUC. The PDs are
currently scheduled for consideration by the full CPUC during the second quarter
of 1997.
Based upon PG&E's evaluation of the proposed decisions, the restructuring
legislation, the CPUC's restructuring decision, and existing PG&E applications
and proposals which would take effect in 1997, PG&E will depreciate Diablo
Canyon over a five-year period ending in 2001. This five-year depreciation is
consistent with PG&E's cost recovery plan which would provide sunk cost revenues
over the same period. The change in depreciable life increased Diablo Canyon's
first quarter depreciation expense by $144 million as compared to the same
period in prior year.
Most transition costs must be recovered by March 31, 2002. However, the
restructuring legislation authorizes recovery of certain transition costs after
that time. These costs include: (1) certain employee-related transition costs,
(2) payments under existing QF and power purchase contracts, and (3) unrecovered
implementation costs. In addition, transition costs financed by the issuance of
rate reduction bonds are expected to be recovered over the term of the bonds.
Excluding these exceptions, any transition costs not recovered during the
transition period would be absorbed by PG&E. Nuclear decommissioning costs,
which are not considered transition costs, will be recovered through a
CPUC-authorized charge. During the transition period, this charge will be
incorporated into the frozen electric rates. After the transition period, PG&E
expects to assess an electric customer surcharge until the nuclear
decommissioning costs are fully recovered.
PG&E's ability to recover its transition costs during the transition period
will be dependent on several factors. These factors include: (1) the extent to
which application of the regulatory framework established by the restructuring
legislation will continue to be applied, (2) the amount of
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transition costs approved by the CPUC, (3) the market value of PG&E's generation
plants, (4) future sales levels, (5) future fuel and operating costs, (6) the
market price of electricity, and (7) the ratemaking methodology adopted for
Diablo Canyon. Given its current evaluation of these factors, PG&E believes it
will recover its transition costs and that its utility-owned generation plants
are not impaired. However, a change in these factors could affect the
probability of recovery of transition costs and result in a material loss.
Accounting for the Effects of Regulation:
- ----------------------------------------
PG&E accounts for the financial effect of regulation in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation." This statement allows PG&E to record
certain regulatory assets and liabilities which would be included in future
rates and would not be recorded under generally accepted accounting principles
for nonregulated entities. In addition, SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that regulatory assets be written off when they are no longer probable
of recovery and that impairment losses be recorded for long-lived assets when
related future cash flows are less than the carrying value of the assets.
In applying the provisions of SFAS No. 71, PG&E has accumulated approximately
$1.6 billion of regulatory assets attributable to electric generation at March
31, 1997. The net investments in Diablo Canyon and the other generation assets,
including allocation of common plant, were $4.3 billion and $2.7 billion,
respectively, at March 31, 1997. The net present value of above-market QF power
purchase obligations is estimated to be $5.3 billion at January 1, 1998, at an
assumed market price of $0.025 per kWh beginning in 1997 and escalating at 3.2
percent per year.
PG&E believes that the restructuring legislation establishes a definitive
transition to market-based pricing for electric generation that includes
cost-of-service based ratemaking. In addition, under this framework, PG&E's
generation-related transition costs will be collected through a nonbypassable
charge. Based on this structure, PG&E believes its electric generation business
will continue to meet the requirements of SFAS No. 71 as it relates to the
transition costs throughout the transition period.
At the conclusion of the transition period, PG&E believes it will be at risk
to recover its generation costs through market-based revenues. At that time,
PG&E expects to discontinue the application of SFAS No. 71 for the electric
generation portion of its business. Since PG&E anticipates it will have
recovered all transition costs required to be recovered during the transition
period, including generation-related regulatory assets and above-market
investments in net plant, the Corporation does not expect a material adverse
impact on its or PG&E's financial position or results of operations from
discontinuing the application at that time.
As a result of California's electric industry restructuring and related
legislation, the staff of the Securities and Exchange Commission (SEC) began
discussions with PG&E and other California utilities regarding the
appropriateness of the continued application of SFAS No. 71 for the generation
portion of the electric utilities' businesses as of January 1, 1997. PG&E
participated in discussions with the SEC staff and provided them with
information in support of PG&E's position that it currently meets and will
continue to meet the requirements to apply SFAS No. 71 throughout the transition
period. Because of the importance of this issue to the electric utility industry
in the United States, the SEC referred the issue to the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board. The EITF will provide
the national forum needed to establish the uniform financial reporting and
accounting standards necessary for determining if and when utilities should no
longer be subject to SFAS No. 71 during a transition to market-based pricing
within an industry restructuring. The SEC has
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notified PG&E that it will no longer pursue the issue with PG&E unless the EITF
cannot reach a consensus prior to the end of the year.
The EITF will first meet to discuss this issue on May 22, 1997, with a
decision expected this year. Once a standard is established by the EITF, PG&E
will reevaluate the financial impact of electric industry restructuring in light
of the new standard. If PG&E cannot meet the new standard established by the
EITF and retain the accounting guidance provided by SFAS No. 71, PG&E would have
a material write-off of its generation-related regulatory assets. In accordance
with PG&E's cost recovery plan, approved by the CPUC in 1996, generation-related
regulatory assets would continue to be recovered as part of the transition
charge during the transition period.
Given the current regulatory environment, PG&E's electric transmission
business and most areas of the distribution business are expected to remain
regulated and, as a result, PG&E will continue to apply the provisions of SFAS
No. 71. However, in May 1997, the CPUC issued decisions that allow customers to
choose their electricity provider beginning January 1, 1998. The decisions also
allow the electricity provider to provide their customers with billing and
metering services and indicate that electricity providers may be allowed to
provide other distribution services (such as customer inquiries and
uncollectibles) in the future. Any discontinuance of SFAS No. 71 for these
portions of PG&E's electric distribution business is not expected to have a
material adverse impact on PG&E's or the Corporation's financial position or
results of operations.
NOTE 3: NATURAL GAS MATTERS
In an effort to promote competition and to give all residential and smaller
commercial (core) customers the same options that exist for industrial and
larger commercial (noncore) customers, PG&E submitted the Gas Accord Settlement
(Accord) to the CPUC for approval in 1996. In addition to offering increased
customer choice, the Accord would establish gas transmission rates for the
period July 1997 through December 2002 and resolve various pending regulatory
issues.
The major outstanding gas regulatory issues that the Accord would resolve
include (1) the CPUC-ordered disallowances in connection with PG&E's 1988
through 1992 gas reasonableness proceedings and potential disallowances in
connection with PG&E's 1993 through 1995 gas reasonableness proceedings; (2) the
recovery of certain capital costs associated with PG&E's recently constructed
California segment of the PG&E/PGT pipeline that extends from the Canadian
border to Kern River Station in Southern California (the PG&E Pipeline
Expansion); (3) the recovery of costs through 2002 related to PG&E's commitments
to purchase capacity from Transwestern Pipeline Company; and (4) the recovery,
through an interstate transition cost surcharge (ITCS), of fixed demand charges
paid to El Paso Natural Gas Company and PGT for firm capacity held by PG&E on
those pipelines. (ITCS costs are the difference between demand charges PG&E pays
to El Paso Natural Gas Company and PGT for the reservation of interstate
pipeline capacity that PG&E no longer uses to serve noncore customers, and the
revenues PG&E obtains from brokering that capacity.)
On March 24, 1997, an ALJ of the CPUC issued a PD rejecting the Accord. The
major provisions of the Accord PD follow:
(1) Under the Accord PD, the core procurement incentive mechanisms which had
been proposed in the Accord to replace the traditional reasonableness review
proceedings of PG&E's gas procurement costs for the periods 1994 through 1997
and 1998 through 2002 are not adopted. Therefore, the recovery of the cost of
gas, as well as demand charges for gas transportation contracts used to procure
gas, would be decided in various ongoing or future proceedings. (Demand charges
are incurred by PG&E under gas transportation contracts with various Canadian
and interstate pipeline companies for reserving pipeline capacity.) Further,
under the Accord, PG&E agreed to forgo
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recovery of $90 million of gas costs that the CPUC had disallowed in a 1988-90
reasonableness decision, irrespective of the results of PG&E's pending
litigation in federal court challenging that decision. If the Accord is rejected
by the CPUC, PG&E would consider whether to continue to pursue that challenge.
(2) The Accord PD confirms the CPUC's 1994 finding that PG&E's decision to
construct the PG&E Pipeline Expansion was reasonable based on the knowledge PG&E
management had at the time. However, the Accord PD would reverse the CPUC's
original order which found that PG&E would not be responsible for stranded costs
caused by the PG&E Pipeline Expansion. The Accord PD defines stranded costs
caused by the PG&E Pipeline Expansion to include ITCS costs and costs of unused
original system transmission facilities on PG&E's two other major intrastate
pipelines. The Accord PD states that PG&E should absorb these stranded costs to
maintain incremental ratemaking and to avoid imposing the costs and risks of the
PG&E Pipeline Expansion on the customers of the original transmission system. If
the Accord PD were adopted without change by the CPUC, PG&E would be required to
offer three separate unbundled pipeline services on its major intrastate
transmission pipelines (the PG&E Pipeline Expansion and two others) and would be
at risk for recovery of the cost of all such service, with no balancing account
protection.
(3) The Accord PD would disallow recovery of 25 percent of ITCS costs for
1993 and 1994, with reasonableness reviews to determine the amount of ITCS costs
that could be recovered in subsequent years. In the Accord PD, the ALJ indicates
that he supports a similar 25 percent disallowance for subsequent periods.
However, the Accord PD also would suspend PG&E's authority to record ITCS costs
for future recovery subsequent to the date of the final CPUC decision. The
Accord PD would suspend such authority until PG&E could demonstrate that the
conflict of interest the ALJ perceives to exist between ratepayer and
shareholder interests causes ratepayers no harm due to lost revenues from
brokering PG&E's unused interstate pipeline capacity. Under the Accord, in
contrast, PG&E would forgo recovery of 100 percent and 50 percent of the ITCS
amounts allocated for collection from its core and noncore customers,
respectively.
(4) The Accord PD would set for further hearing the pipeline expansion
project reasonableness (PEPR) proceeding to determine the capital costs and
revenue requirements of the PG&E Pipeline Expansion, rejecting the resolution of
those issues which had been proposed in the Accord. In the Accord, PG&E had
agreed to set rates for the PG&E Pipeline Expansion based on total capital costs
of $736 million. However, in the PEPR proceeding, PG&E had sought $810 million
in capital costs. The CPUC's Office of Ratepayer Advocates had recommended a
$100 million disallowance of capital costs and other parties had recommended a
disallowance of $237 million.
As of March 31, 1997, the Corporation has reserved approximately $529 million
relating to various gas regulatory issues and capacity commitments, the majority
of which are addressed by the Accord. As a result, the Corporation believes the
ultimate resolution of these matters, whether through approval of the Accord or
otherwise, will not have a material impact on its or PG&E's financial position
or future results of operations.
NOTE 4: PG&E OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST
HOLDING SOLELY PG&E SUBORDINATED DEBENTURES
PG&E, through its wholly owned subsidiary, PG&E Capital I (Trust), has
outstanding $12 million shares of 7.90% cumulative quarterly income preferred
securities (QUIPS), with an aggregate liquidation value of $300 million.
Concurrent with the issuance of the QUIPS, the Trust issued to PG&E 371,135
shares of common securities with an aggregate liquidation value of approximately
$9 million. The only assets of the Trust are deferrable interest subordinated
debentures issued by PG&E with a face value of
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approximately $309 million, an interest rate of 7.90%, and a maturity date of
2025.
NOTE 5: COMMITMENTS AND CONTINGENCIES
Nuclear Insurance:
- -----------------
PG&E has insurance coverage for property damage and business interruption losses
as a member of Nuclear Mutual Limited (NML) and Nuclear Electric Insurance
Limited (NEIL). Under these policies, if a nuclear generating facility suffers a
loss due to a prolonged accidental outage, PG&E may be subject to maximum
assessments of $28 million (property damage) and $8 million (business
interruption), in each case per policy period, in the event losses exceed the
resources of NML or NEIL.
PG&E has purchased primary insurance of $200 million for public liability
claims resulting from a nuclear incident. An additional $8.7 billion of coverage
is provided by secondary financial protection which is mandated by federal
legislation and provides for loss sharing among utilities owning nuclear
generating facilities if a costly incident occurs. If a nuclear incident results
in claims in excess of $200 million, PG&E may be assessed up to $159 million per
incident, with payments in each year limited to a maximum of $20 million per
incident.
Environmental Remediation:
- -------------------------
The Corporation may be required to pay for environmental remediation at sites
where the Corporation has been or may be a potentially responsible party under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) or the California Hazardous Substance Account Act. These sites include
former manufactured gas plant sites and sites used by the Corporation for the
storage or disposal of materials which may be determined to present a
significant threat to human health or the environment because of an actual or
potential release of hazardous substances. Under CERCLA, the Corporation's
financial responsibilities may include remediation of hazardous substances, even
if the Corporation did not deposit those substances on the site.
The Corporation records a liability when site assessments indicate
remediation is probable and a range of reasonably likely cleanup costs can be
estimated. The Corporation reviews its sites and measures the liability
quarterly, by assessing a range of reasonably likely costs for each identified
site using currently available information, including existing technology,
presently enacted laws and regulations, experience gained at similar sites, and
the probable level of involvement and financial condition of other potentially
responsible parties. These estimates include costs for site investigations,
remediation, operations and maintenance, monitoring, and site closure. Unless
there is a better estimate within this range of possible costs, the Corporation
records the lower end of this range (classified as other noncurrent
liabilities).
The cost of the hazardous substance remediation ultimately undertaken by the
Corporation is difficult to estimate. It is reasonably possible that a change in
the estimate will occur in the near term due to uncertainty concerning the
Corporation's responsibility, the complexity of environmental laws and
regulations, and the selection of compliance alternatives. The Corporation had
an accrued liability at March 31, 1997, of $171 million for hazardous waste
remediation costs at those sites where such costs are probable and quantifiable.
Environmental remediation at identified sites may be as much as $400 million if,
among other things, other potentially responsible parties are not financially
able to contribute to these costs or further investigation indicates that the
extent of contamination or necessary remediation is greater than anticipated at
sites for which the Corporation is responsible. This upper limit of the range of
costs was estimated using
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assumptions least favorable to the Corporation, based upon a range of reasonably
possible outcomes. Costs may be higher if the Corporation is found to be
responsible for cleanup costs at additional sites or identifiable possible
outcomes change.
PG&E will seek recovery of prudently incurred hazardous substance remediation
costs through ratemaking procedures approved by the CPUC. PG&E has recorded a
regulatory asset at March 31, 1997, of $142 million for recovery of these costs
in future rates. Additionally, the Corporation will seek recovery of costs from
insurance carriers and from other third parties. The Corporation believes the
ultimate outcome of these matters will not have a material adverse impact on its
financial position or results of operations.
Helms Pumped Storage Plant (Helms):
- ----------------------------------
Helms is a three-unit hydroelectric combined generating and pumped storage
plant. At March 31, 1997, PG&E's net investment was $710 million. This net
investment is comprised of the pumped storage facility (including regulatory
assets of $51 million), common plant, and dedicated transmission plant. As part
of the 1996 General Rate Case decision in December 1995, the CPUC directed PG&E
to perform a cost-effectiveness study of Helms. In July 1996, PG&E submitted its
study, which concluded that the continued operation of Helms is cost effective.
As a result of the study, PG&E recommended that the CPUC take no action and
address Helms along with other generating plants in the context of electric
industry restructuring.
PG&E is currently unable to predict whether there will be a change in rate
recovery resulting from the study. As with its other hydroelectric generating
plants, PG&E expects to seek recovery of its net investment in Helms through PBR
and transition cost recovery. PG&E believes that the ultimate outcome of this
matter will not have a material adverse impact on its or the Corporation's
financial position or results of operations.
Legal Matters:
- -------------
Cities Franchise Fees Litigation: In 1994, the City of Santa Cruz filed a class
action suit in a state superior court (Court) against PG&E on behalf of itself
and 106 other cities in PG&E's service area. The complaint alleges that PG&E has
underpaid electric franchise fees to the cities by calculating those fees at
different rates from other cities not included in the complaint.
In September 1995, the Court certified the class of 107 cities in this suit
and approved the City of Santa Cruz as the class representative. In January and
March 1996, the Court made two rulings against certain cities effectively
eliminating a major portion of the suit. The Court's rulings do not resolve the
suit completely. The cities appealed both rulings. The trial has been postponed
pending the cities' appeal.
Should the cities prevail on the issue of franchise fee calculation
methodology, PG&E's annual systemwide city electric franchise fees could
increase by approximately $16 million and damages for alleged underpayments for
the years 1987 to 1996 could be as much as $147 million (exclusive of interest,
estimated to be $42 million at March 31, 1997). If the Court's January and March
1996 rulings become final, PG&E's annual systemwide city electric franchise fees
for the remaining class member cities not subject to the Court's rulings could
increase by approximately $5 million and damages for alleged underpayments for
the years 1987 to 1996 could be as much as $40 million (exclusive of interest,
estimated to be $11 million at March 31, 1997).
The Corporation believes that the ultimate outcome of this matter will not
have a material adverse impact on its or PG&E's financial position or results of
operations.
Chromium Litigation: In 1994 through 1997, several civil complaints were
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filed against PG&E on behalf of more than 2,500 individuals. The complaints seek
an unspecified amount of compensatory and punitive damages for alleged personal
injuries resulting from alleged exposure to chromium in the vicinity of PG&E's
gas compressor stations at Hinkley, Kettleman, and Topock.
PG&E is responding to the complaints and asserting affirmative defenses. PG&E
will pursue appropriate legal defenses, including statute of limitations or
exclusivity of workers' compensation laws, and factual defenses including lack
of exposure to chromium and the inability of chromium to cause certain of the
illnesses alleged.
The Corporation believes that the ultimate outcome of this matter will not
have a material adverse impact on its or PG&E's financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion And Analysis Of Financial Condition And Results Of
Operations" herein pertain to Pacific Gas and Electric Company (PG&E) and its
new parent holding company, PG&E Corporation, of which PG&E became a subsidiary
effective January 1, 1997. PG&E Corporation's consolidated financial statements
include the accounts of PG&E Corporation; PG&E; Pacific Gas Transmission Company
(PGT); PG&E Enterprises (Enterprises); PG&E Gas Transmission, Texas Corporation
(formerly known as Teco Pipeline Company); and PG&E Energy Trading (formerly
known as Energy Source), as well as the accounts of their wholly owned and
controlled subsidiaries (collectively, the Corporation). It should be noted that
the discussion and analysis of PG&E's financial condition and results of
operations also apply to the Corporation since PG&E's financial condition and
results of operations are currently the principal factors affecting the
Corporation's consolidated financial position and results of operations. This
quarterly report should be read in conjunction with the Corporation's and PG&E's
Consolidated Financial Statements and Notes to Consolidated Financial Statements
incorporated by reference in their combined 1996 Annual Report on Form 10-K.
The following discussion of consolidated results of operations and financial
condition contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include discussion of the
financial impacts of gas and electric industry restructuring. Words such as
"estimates," "expects," "anticipates," "plans," "believes," and similar
expressions also identify forward-looking statements involving risks and
uncertainties.
These risks and uncertainties include, but are not limited to, the ongoing
restructuring of the electric and gas industries, the outcome of the regulatory
proceedings related to that restructuring, the continued appropriateness and
timing of the application of Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation," to the
generation portion of the electric utility business, PG&E's ability to collect
revenues sufficient to recover transition costs in accordance with its cost
recovery plan, the final decision on the proposal for pricing generation from
the Diablo Canyon Nuclear Power Plant (Diablo Canyon) at market prices, and the
final decision regarding the Gas Accord Settlement (Accord). The ultimate
impacts on future results of increased competition, the changing regulatory
environment, and the Corporation's expansion into new businesses and markets are
uncertain, but all are expected to fundamentally change how the Corporation
conducts its business. The outcome of these changes and other matters discussed
below may cause future results to differ materially from historic results, or
from results or outcomes currently expected or sought by the Corporation and
PG&E.
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COMPETITION AND CHANGING REGULATORY ENVIRONMENT:
The electric and gas industries are undergoing significant change. Under
traditional regulation, utilities were provided the opportunity to earn a fair
return on their invested capital in exchange for a commitment to serve all
customers within a designated service territory. The objective of this
regulatory policy was to provide universal access to safe and reliable utility
services. Regulation was designed in part to take the place of competition and
to ensure that these services were provided at fair prices.
Today, competitive pressures and emerging market forces are exerting an
increasing influence over the structure of the gas and electric industries.
Other companies are challenging the utilities' exclusive relationship with
customers and are seeking to replace certain utility functions with their own.
Customers, too, are asking for choice in their energy provider. These pressures
are causing a move from the existing regulatory framework to a framework under
which competition would be allowed in certain segments of the gas and electric
industries.
For several years, PG&E has been working with its regulators to achieve an
orderly transition to competition and to ensure that PG&E has an opportunity to
recover investments made under the traditional regulatory policies. In addition,
PG&E has proposed alternative forms of regulation for those services for which
prices and terms will not be determined by competition. These alternative forms
include performance-based ratemaking (PBR) and other incentive-based
alternatives. Over the next five years, a significant portion of PG&E's business
will be transformed from the current utility monopoly to a competitive
operation. This change will impact PG&E's financial results and may result in
greater earnings volatility. During the transition period, PG&E expects the
return on Diablo Canyon and certain other generation assets to be significantly
lower than historical levels.
ELECTRIC INDUSTRY RESTRUCTURING:
In 1995, the California Public Utilities Commission (CPUC) issued a decision
that provides a plan to restructure California's electric utility industry. The
decision acknowledges that much of utilities' current costs and commitments
result from past CPUC decisions and that, in a competitive generation market,
utilities would not recover some of these costs through market-based revenues.
To assure the continued financial integrity of California utilities, the CPUC
authorized recovery of these above-market costs, called "transition costs."
In 1996, California legislation (restructuring legislation) was passed that
adopts the basic tenets of the CPUC's restructuring decision, including recovery
of transition costs. In addition, the restructuring legislation provides a 10
percent electric rate reduction for residential and small commercial customers
by January 1, 1998, freezes electric customer rates for all other customers, and
requires the accelerated recovery of transition costs associated with owned
electric generation facilities. The restructuring legislation also establishes
the operating framework for a competitive electric generation market.
The rate freeze, mandated by the restructuring legislation, would continue
until the earlier of March 31, 2002, or until PG&E has recovered its transition
costs (the transition period). The freeze will hold rates at 1996 levels for all
customers except those receiving the 10 percent rate reduction. The rate freeze
will hold the rates for these customers at the reduced level.
To achieve the 10 percent rate reduction, the restructuring legislation
authorizes utilities to finance a portion of their transition costs with "rate
reduction bonds." The maturity period of the bonds is expected to extend
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beyond the transition period. Also, the interest cost of the bonds is expected
to be lower than PG&E's current cost of capital. Once this portion of transition
costs is financed, PG&E would collect a separate tariff to recover principal,
interest, and issuance costs over the life of the bonds from residential and
small commercial customers. The combination of the longer maturity period and
the reduced interest costs is expected to lower the amounts paid by these
customers each year during the transition period, thereby achieving the 10
percent reduction in rates.
During 1997, differences between authorized and actual base revenues
(revenues to recover PG&E's non-energy costs and return on investment) and
differences between the actual electric energy costs and the revenue designated
for recovery of such costs are being recorded in balancing accounts. Any
residual balance would be available for recovery of transition costs. Amounts
recorded in balancing accounts will be subject to a reasonableness review by the
CPUC.
Absent the rate freeze, PG&E's rates would be expected to decline under
existing cost-based ratemaking methodologies. The most significant reasons for
the decrease in cost-based rates would be the declining cost of power committed
under certain purchased power contracts, the reduction in the Diablo Canyon
price for power under the existing CPUC-approved settlement (see below), and the
decline in uncollected electric balancing accounts.
Transition Cost Recovery:
- ------------------------
The restructuring legislation authorizes the CPUC to determine the costs
eligible for recovery as transition costs. The amount of costs will be based on
the aggregate of above-market and below-market values of utility-owned
generation assets and obligations. PG&E has proposed that costs eligible for
transition cost recovery include: (1) above-market sunk costs (costs associated
with utility generating facilities that are fixed and unavoidable and currently
collected through rates) and future costs, such as costs related to plant
removal, (2) costs associated with long-term contracts to purchase power at
above-market prices from Qualifying Facilities (QFs) and other power suppliers,
and (3) generation-related regulatory assets and obligations. PG&E cannot
determine the exact amount of sunk costs that will be above market and
recoverable as transition costs until a market valuation process (appraisal or
sale) is completed for each generation facility. This process will be completed
during the transition period.
In compliance with the CPUC's restructuring decision and the restructuring
legislation, PG&E has filed numerous regulatory applications and proposals that
detail its transition cost recovery plan. PG&E's recovery plan includes: (1)
separation or unbundling of its previously approved cost-of-service revenues for
its electric operations into distribution, transmission, public purpose programs
(PPPs), and generation, (2) development of a ratemaking mechanism to track and
match revenues and cost recovery during the transition period, and (3)
accelerated recovery of transition costs.
The unbundling of PG&E's revenue requirement would enable it to separate
revenue provided by frozen rates into transmission, distribution, PPPs, and
generation. As proposed, revenues collected under frozen rates would be assigned
to transmission, distribution, and PPPs based upon their respective cost of
service. Revenue would also be provided for other costs, including nuclear
decommissioning, rate-reduction-bond debt service, the on-going cost of
generation, and transition cost recovery. PG&E expects that the combination of a
rate freeze and decreasing costs, based upon existing ratemaking and cost
recovery periods, would provide an adequate amount of revenue available for full
transition cost recovery.
Under the proposed recovery plan, PG&E would receive a reduced return on
common equity for certain transition costs related to generation facilities for
which recovery is accelerated. The lower return reflects the reduced risk
associated with the shorter amortization period and increased certainty of
18
<PAGE>
recovery.
In applying its recovery plan to Diablo Canyon, PG&E filed in 1996 a proposal
for pricing Diablo Canyon generation at market prices and completing recovery of
the investment in Diablo Canyon by the end of 2001. If this proposal is adopted,
there would be a significant change to the manner in which Diablo Canyon earns
revenues.
Under its proposal, PG&E would replace the existing Diablo Canyon PBR
mechanism with: (1) a sunk cost revenue requirement to recover net investment in
plant, including a return on this net investment, and (2) a PBR mechanism to
recover the facility's variable and other operating costs and capital addition
costs. As proposed by PG&E, the sunk cost revenue requirement would be set to
accelerate recovery of Diablo Canyon sunk costs from a twenty-year period ending
in 2016 to a five-year period beginning in 1997 and ending in 2001. The related
return on common equity associated with Diablo Canyon sunk costs would be
reduced to 90 percent of PG&E's long-term cost of debt. PG&E's authorized
long-term cost of debt was 7.52 percent in 1996. PG&E's proposed PBR mechanism
would establish a rate per kilowatt-hour (kWh) generated by the facility. This
rate would be based upon a fixed forecast of on-going costs, capital additions,
and capacity factors for the entire transition period.
The reduced rate of return combined with a shorter recovery period is
expected to result in an estimated $4 billion decrease in the net present value
of PG&E's future revenues from Diablo Canyon operations. If the proposed cost
recovery plan for Diablo Canyon had been adopted during 1996, PG&E's 1996
reported net income would have been reduced by $350 million ($0.85 per share),
assuming that PG&E recovered no more than its actual variable costs under the
PBR mechanism.
In April 1997, an administrative law judge (ALJ) of the CPUC issued a
Proposed Decision (ALJ PD) regarding PG&E's cost recovery plan for Diablo
Canyon. The ALJ PD, which supersedes a previous proposed decision issued in
February 1997, generally would adopt the overall ratemaking structure proposed
by PG&E. However, the ALJ PD would exclude several items totaling $160 million
from the sunk cost revenue requirement, including out-of-core fuel inventory,
materials and supplies inventory, and prepaid insurance expenses. The ALJ PD
requires that these costs be recovered through the PBR mechanism. The ALJ PD
finds that PG&E's ratemaking proposal is subject to a requirement for a prudence
review of the plant's original costs, and adopts a prudence disallowance which
excludes approximately $70 million of Diablo Canyon construction costs from the
sunk cost revenue requirement.
In May 1997, a CPUC Commissioner issued an alternate proposed decision
(alternate PD) for the CPUC's consideration. Similar to the ALJ PD, the
alternate PD would adopt the overall ratemaking structure proposed by PG&E.
However, the alternate PD finds that a prudence review is not required and would
include in the sunk cost revenue requirement the disallowed construction costs
in the ALJ PD. The alternate PD also would include the above-market components
of out-of-core nuclear fuel inventory, and materials and supplies inventory.
Both the ALJ PD and the alternate PD would adopt the PBR mechanism that PG&E
had proposed to recover Diablo Canyon's on-going costs and capital additions.
However, both adopt PBR rates per kWh generated by Diablo Canyon which are
different from those proposed by PG&E. Variances in these rates result
principally from different assumptions used in the forecasts of Diablo Canyon
capacity factors, operation and maintenance costs, and cost escalation factors.
PG&E has proposed PBR rates for the years 1997 through 2001 of 3.59 cents, 3.71
cents, 3.86 cents, 4.04 cents, and 4.32 cents, respectively. The ALJ PD would
set PBR rates for the years 1997 through 2001 of 3.26 cents, 3.31 cents, 3.37
cents, 3.43 cents, and 3.49 cents, respectively. The PBR rates set by the
alternate PD are not fixed in advance but are subject to an escalation formula
based on the previous year's consumer price index (CPI) less a 0.5 percent
productivity factor. Based on a 3.1 percent annual CPI
19
<PAGE>
estimate, the alternate PD would set PBR rates for the years 1997 through 2001
of 3.54 cents, 3.62 cents, 3.71 cents, 3.80 cents, and 3.90 cents, respectively.
If either the ALJ PD or the alternate PD is adopted, its effective date would
be January 1, 1997. Both the ALJ PD and the alternate PD would terminate, rather
than modify as proposed by PG&E, the existing Diablo Canyon ratemaking
settlement on the date a final decision is adopted by the CPUC. PG&E has sought
clarification from the CPUC that the termination of the settlement would not
affect Diablo Canyon's "must take" status during the transition period.
Neither the ALJ PD or the alternate PD is a final decision of the CPUC, and
both are subject to change prior to final action by the CPUC. The PDs are
currently scheduled for consideration by the full CPUC during the second quarter
of 1997.
Based upon PG&E's evaluation of the proposed decisions, the restructuring
legislation, the CPUC's restructuring decision, and existing PG&E applications
and proposals which would take effect in 1997, PG&E will depreciate Diablo
Canyon over a five-year period ending in 2001. This five-year depreciation is
consistent with PG&E's cost recovery plan which would provide sunk cost revenues
over the same period. The change in depreciable life increased Diablo Canyon's
first quarter depreciation expense by $144 million as compared to the same
period in the prior year.
Most transition costs must be recovered by March 31, 2002. However, the
restructuring legislation authorizes recovery of certain transition costs after
that time. These costs include: (1) certain employee-related transition costs,
(2) payments under existing QF and power purchase contracts, and (3) unrecovered
implementation costs. In addition, transition costs financed by the issuance of
rate reduction bonds are expected to be recovered over the term of the bonds.
Excluding these exceptions, any transition costs not recovered during the
transition period would be absorbed by PG&E. Nuclear decommissioning costs,
which are not considered transition costs, will be recovered through a CPUC
authorized charge. During the transition period, this charge will be
incorporated into the frozen electric rates. After the transition period, PG&E
expects to assess an electric customer surcharge until the nuclear
decommissioning costs are fully recovered.
PG&E's ability to recover its transition costs during the transition period
will be dependent on several factors. These factors include: (1) the extent to
which application of the regulatory framework established by the restructuring
legislation will continue to be applied, (2) the amount of transition costs
approved by the CPUC, (3) the market value of PG&E's generation plants, (4)
future sales levels, (5) future fuel and operating costs, (6) the market price
of electricity, and (7) the ratemaking methodology adopted for Diablo Canyon.
Given its current evaluation of these factors, PG&E believes it will recover its
transition costs and that its utility-owned generation plants are not impaired.
However, a change in these factors could affect the probability of recovery of
transition costs and result in a material loss.
Competitive Market Framework:
- ----------------------------
In addition to transition cost recovery, the restructuring legislation
establishes the operating framework for the competitive generation market in
California. This framework will consist of a power exchange (PX) and an
independent system operator (ISO). The PX, open to all electricity providers,
will conduct a competitive auction to establish the price of electricity. The
ISO is expected to ensure system reliability and provide all electricity
generators with open and comparable access to transmission and distribution
services.
Although the PX will be available to all customers through their local
20
<PAGE>
utility, the restructuring legislation allows customers to bypass the PX and
purchase electricity directly from electricity providers. Customers electing to
bypass the PX are referred to as direct access customers. In May 1997, the CPUC
issued two decisions related to direct access: the direct access decision and
the revenue cycle services decision.
Under the direct access decision, beginning January 1, 1998, all electric
customers may choose their electricity provider. Customers may choose to
purchase their electricity (1) from the PX through PG&E, (2) from retail
electricity providers (for example, marketers, brokers, and aggregators ) or (3)
directly from power generators. Regardless of the customer's choice, PG&E will
continue to provide electricity transmission and distribution services to all
customers within its service territory. During the transition period, all
customers will be billed for electricity used, for transmission and distribution
services, and for recovery of competition transition costs (CTCs). (The method
of billing the customers for these services is discussed below.) As a result,
during the transition period, the overall electric rates of direct access
customers would vary from customers who choose PG&E bundled services primarily
to the extent that their direct access electricity price differs from the PX
price. Because the CTC is nonbypassable (all customers will pay the CTC
regardless of whether they select direct access or not), PG&E does not believe
that direct access will have a material impact on the Corporation's ability to
recover transition costs.
The revenue cycle services decision allows electricity providers to choose
the method of billing their customers and to choose whether to provide their
customers with metering services. As related to the billing of direct access
customers, the customer's electricity provider can choose one of the following
three billing options. (1) The electricity provider would bill the customer for
the electricity provided and PG&E would separately bill the customer for
transmission and distribution services, including CTC. (2) PG&E could provide
the customer with one consolidated bill for transmission and distribution
services, including CTC, and for the electricity supplied by the electricity
provider. (3) The electricity provider could provide the customer with one
consolidated bill for the electricity provided and for transmission and
distribution services, including CTC, provided by PG&E.
Further, beginning in 1998, electricity providers may choose to provide
metering services to their large electricity customers (customers with
electricity demand of 20 kilowatts or more). And, beginning in 1999, these
providers may choose to provide metering services to all of their customers
regardless of size. The revenue cycle decision requires PG&E to separately
identify cost savings that would result when billing, metering, and related
services within PG&E's service territory are provided by another entity. Once
these cost savings, or credits, are approved by the CPUC, they would be
reflected on the customer's bill to the extent the customer's energy supplier is
providing billing and metering services. To the extent that these credits equate
to PG&E's actual cost savings from reduced billing, metering, and related
services, PG&E does not expect a material adverse impact on its financial
positions or results of operations.
Accounting for the Effects of Regulation:
- ----------------------------------------
PG&E accounts for the financial effects of regulation in accordance with SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." This
statement allows PG&E to record certain regulatory assets and liabilities which
would be included in future rates and would not be recorded under generally
accepted accounting principles for nonregulated entities. In addition, SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," requires that regulatory assets be written off when
they are no longer probable of recovery and that impairment losses be recorded
for long-lived assets when related future cash flows are less than the carrying
value of the assets.
In applying the provisions of SFAS No. 71, PG&E has accumulated approximately
$1.6 billion of regulatory assets attributable to electric
21
<PAGE>
generation at March 31, 1997. The net investments in Diablo Canyon and the other
generation assets, including allocations of common plant, were $4.3 billion and
$2.7 billion, respectively, at March 31, 1997. The net present value of
above-market QF power purchase obligations is estimated to be $5.3 billion at
January 1, 1998, at an assumed market price of $0.025 per kWh beginning in 1997
and escalating at 3.2 percent per year.
PG&E believes that the restructuring legislation establishes a definitive
transition to market-based pricing for electric generation that includes
cost-of-service based ratemaking. In addition, under this framework, PG&E's
generation-related transition costs will be collected through a nonbypassable
charge. Based on this structure, PG&E believes its electric generation business
will continue to meet the requirements of SFAS No. 71 as it relates to the
transition costs throughout the transition period.
At the conclusion of the transition period, PG&E believes it will be at risk
to recover its generation costs through market-based revenues. At that time,
PG&E expects to discontinue the application of SFAS No. 71 for the electric
generation portion of its business. Since PG&E anticipates it will have
recovered all transition costs required to be recovered during the transition
period, including generation-related regulatory assets and above-market
investments in net plant, the Corporation does not expect a material adverse
impact on its or PG&E's financial position or results of operations from
discontinuing the application at that time.
As a result of California's electric industry restructuring and related
legislation, the staff of the Securities and Exchange Commission (SEC) began
discussions with PG&E and other California utilities regarding the
appropriateness of the continued application of SFAS No. 71 for the generation
portion of the electric utilities' businesses as of January 1, 1997. PG&E
participated in discussions with the SEC staff and provided them with
information in support of PG&E's position that it currently meets and will
continue to meet the requirements to apply SFAS No. 71 throughout the transition
period. Because of the importance of this issue to the electric utility industry
in the United States, the SEC referred the issue to the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board. The EITF will provide
the national forum needed to establish the uniform financial reporting and
accounting standards necessary for determining if and when utilities should no
longer be subject to SFAS No. 71 during a transition to market-based pricing
within an industry restructuring. The SEC has notified PG&E that it will no
longer pursue the issue with PG&E unless the EITF cannot reach a consensus prior
to the end of the year.
The EITF will first meet to discuss this issue on May 22, 1997, with a
decision expected this year. Once a standard is established by the EITF, PG&E
will reevaluate the financial impact of electric industry restructuring in light
of the new standard. If PG&E cannot meet the new standard established by the
EITF and retain the accounting guidance provided by SFAS No. 71, PG&E would have
a material write-off of its generation-related regulatory assets. In accordance
with PG&E's cost recovery plan, approved by the CPUC in 1996, generation-related
regulatory assets would continue to be recovered as part of the transition
charge during the transition period.
Given the current regulatory environment, PG&E's electric transmission
business and most areas of the distribution business are expected to remain
regulated and, as a result, PG&E will continue to apply the provisions of SFAS
No. 71. However, the CPUC's revenue cycle decision discussed above allows
electricity providers to provide their customers with billing and metering
services and indicate that electricity providers may be allowed to provide other
distribution services (such as customer inquiries and uncollectibles) in the
future. Any discontinuance of SFAS No. 71 for these portions of PG&E's electric
distribution business is not expected to have a material adverse impact on
PG&E's or the Corporation's financial position or results of operations.
22
<PAGE>
GAS INDUSTRY RESTRUCTURING:
Restructuring of the natural gas industry at both the national and the state
levels has given customers greater options in meeting their gas supply needs.
PG&E's customers may buy commodity gas directly from competing suppliers, while
buying only in-state transmission and distribution services (sold together at a
combined rate) from PG&E. PGT, as an interstate pipeline, has provided
nondiscriminatory transmission-only service since 1993 and no longer sells
commodity gas.
Most of PG&E's industrial and larger commercial (noncore) customers purchase
their commodity gas from marketers and brokers. Substantially all residential
and smaller commercial (core) customers continue to buy commodity gas as well as
transmission and distribution from PG&E as a bundled service.
Since 1995, PG&E has actively pursued changes in the California gas industry
in an effort to promote competition and increase options for all customers, as
well as to position itself for the competitive marketplace. In 1996, PG&E
submitted to the CPUC the Accord. The Accord is the result of an extensive
negotiation process, begun in 1995, among a broad coalition of customer groups
and industry participants.
The Accord consists of three broad initiatives:
(1) The Accord would separate, or "unbundle," PG&E's gas transmission and
storage services from its distribution services and would change the terms of
service and rate structure for gas transportation. Unbundling would give
customers the opportunity to select from a menu of services offered by PG&E and
would enable them to pay only for the services they use. PG&E would be at risk
for variations in revenues resulting from differences between actual and
forecasted transmission throughput. PG&E would also continue to provide
cost-of-service based distribution service, much as it does today.
(2) The Accord would increase opportunities for PG&E's core customers to
purchase gas from competing suppliers and, therefore, could reduce PG&E's role
in procuring gas for such customers. However, PG&E would continue to procure gas
as a regulated utility supplier for those core customers who request it. The
Accord also would establish principles for continuing negotiations between PG&E
and California gas producers for the mutual release of supply contracts and the
sale of gas gathering facilities. Also related to PG&E's procurement activities,
PG&E has proposed that traditional reasonableness reviews of costs incurred to
procure gas for core customers be replaced with a core procurement incentive
mechanism (CPIM) for the period June 1, 1994, through 2002. Under the CPIM, PG&E
would be able to recover its gas commodity and interstate transportation costs
and would receive benefits or be penalized depending on whether its actual core
procurement costs were within, below, or above a "tolerance band" constructed
around market benchmarks. The CPIM proposal also requests authorization to use
derivative financial instruments to reduce the risk of gas price and foreign
currency fluctuations. Gains, losses, and transaction costs associated with the
use of derivative financial instruments would be included in the purchased gas
account and the measurement against the benchmarks.
(3) The Accord would resolve various regulatory issues including:
. the CPUC-ordered disallowances in connection with PG&E's 1988 through 1992 gas
reasonableness proceedings and potential disallowances in connection with PG&E's
1993 through 1995 gas reasonableness proceedings;
. the recovery of certain capital costs associated with PG&E's recently
constructed California segment of the PG&E/PGT pipeline that extends from the
Canadian border to Kern River Station in Southern California (PG&E Pipeline
Expansion);
. the recovery of costs through 2002 related to PG&E's commitments to purchase
capacity from Transwestern Pipeline Company; and
23
<PAGE>
. the recovery, through an interstate
transition cost surcharge (ITCS), of fixed demand charges paid to El Paso
Natural Gas Company and PGT for firm capacity held by PG&E on those pipelines.
(ITCS costs are the difference between demand charges PG&E pays to El Paso and
PGT for the reservation of interstate pipeline capacity that PG&E no longer uses
to serve noncore customers and the revenues PG&E obtains from brokering that
capacity.)
On March 24, 1997, an ALJ of the CPUC issued a PD rejecting the Accord. The
major provisions of the Accord PD follow:
(1) Under the Accord PD, the core procurement incentive mechanism (CPIM) is
not adopted. Therefore, the recovery of the cost of gas, as well as demand
charges for gas transportation contracts used to procure gas, would be decided
in various ongoing or future proceedings. (Demand charges are incurred by PG&E
under gas transportation contracts with various Canadian and interstate pipeline
companies for reserving pipeline capacity.) Further, under the Accord, PG&E
agreed to forgo recovery of $90 million of gas costs that the CPUC had
disallowed in a 1988-90 reasonableness decision, irrespective of the results of
PG&E's pending litigation in federal court challenging that decision. If the
Accord is rejected by the CPUC, PG&E would consider whether to continue to
pursue that challenge.
(2) The Accord PD confirms the CPUC's 1994 finding that PG&E's decision to
construct the PG&E Pipeline Expansion was reasonable based on the knowledge PG&E
management had at the time. However, the Accord PD would reverse the CPUC's
original order which found that PG&E would not be responsible for stranded costs
caused by the PG&E Pipeline Expansion. The Accord PD defines stranded costs
caused by the PG&E Pipeline Expansion to include ITCS costs and costs of unused
original system transmission facilities on PG&E's two other major intrastate
pipelines. The Accord PD states that PG&E should absorb these stranded costs to
maintain incremental ratemaking and to avoid imposing the costs and risks of the
PG&E Pipeline Expansion on the customers of the original transmission system. If
the Accord PD were adopted without change by the CPUC, PG&E would be required to
offer three separate unbundled pipeline services on its major intrastate
transmission pipelines (the PG&E Pipeline Expansion and two others) and would be
at risk for recovery of the cost of all such service, with no balancing account
protection.
(3) The Accord PD would disallow recovery of 25 percent of ITCS costs for
1993 and 1994, with reasonableness reviews to determine the amount of ITCS costs
that could be recovered in subsequent years. In the Accord PD, the ALJ indicates
that he supports a similar 25 percent disallowance for subsequent periods.
However, the Accord PD also would suspend PG&E's authority to record ITCS costs
for future recovery subsequent to the date of the final CPUC decision. The
Accord PD would suspend such authority until PG&E could demonstrate that the
conflict of interest the ALJ perceives to exist between ratepayer and
shareholder interests causes ratepayers no harm due to lost revenues from
brokering PG&E's unused interstate pipeline capacity. Under the Accord, in
contrast, PG&E would forgo recovery of 100 percent and 50 percent of the ITCS
amounts allocated for collection from its core and noncore customers,
respectively.
(4) The Accord PD would set for further hearing the pipeline expansion
project reasonableness (PEPR) proceeding to determine the capital costs and
revenue requirements of the PG&E Pipeline Expansion, rejecting the resolution of
those issues which had been proposed in the Accord. In the Accord, PG&E had
agreed to set rates for the PG&E Pipeline Expansion based on total capital costs
of $736 million. However, in the PEPR proceeding, PG&E had sought $810 million
in capital costs. The CPUC's Office of Ratepayer Advocates had recommended a
$100 million disallowance and other parties had recommended a disallowance of
$237 million.
As of March 31, 1997, the Corporation has reserved approximately $529 million
relating to various gas regulatory issues and capacity commitments,
24
<PAGE>
the majority of which are addressed by the Accord. As a result, the Corporation
believes the ultimate resolution of these matters, whether through approval of
the Accord or otherwise, will not have a material impact on its or PG&E's
financial position or future results of operations.
ACQUISITIONS AND SALES:
In January 1997, PG&E Corporation agreed to acquire Valero Energy Company
(Valero), including its natural gas and natural gas liquids business but
excluding its refining operations. Valero will be acquired for approximately
$1.5 billion, consisting of approximately $720 million of PG&E Corporation
common stock and the assumption of debt and liabilities. The acquisition of
Valero, which is subject to the approval of Valero shareholders among other
conditions, is expected to be completed in the third quarter of 1997.
RESULTS OF OPERATIONS:
The Corporation's results of operations were derived primarily from three
business lines: utility (consisting of PG&E, including Diablo Canyon), Gas
Holdings (consisting of PGT; PG&E Gas Transmission, Texas Corporation; and PG&E
Energy Trading), and Enterprises (consisting of PG&E Enterprises' electric
generation and energy services operations). The results of operations for the
parent company, PG&E Corporation, alone are not material for separate disclosure
as a business line and have been allocated among the three business lines based
on their percentage of operating revenues. The results of operations and total
assets for the three months ended March 31, 1997 and 1996, are reflected in the
following table and discussed below:
PG&E CORPORATION
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GAS
UTILITY HOLDINGS ENTERPRISES TOTAL
-------- ------------ ----------- --------
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED
MARCH 31,
1997
Operating revenues (1) $ 2,274 $1,049 $ 42 $ 3,365
Operating expenses 1,830 1,020 57 2,907
-------- ------- ------- --------
Operating income (loss)
before income taxes 444 29 (15) 458
Net income 163 9 1 173
Earnings per common share .40 .02 .00 .42
Total assets at March 31 $23,456 $2,232 $ 949 $26,637
1996
Operating revenues $ 2,165 $ 53 $ 31 $ 2,249
Operating expenses 1,612 31 33 1,676
-------- ------- ------- --------
Operating income (loss)
before income taxes 553 22 (2) 573
Net income 231 17 4 252
Earnings per common share .56 .04 .01 .61
Total assets at March 31 $24,455 $1,177 $1,032 $26,664
</TABLE>
(1) Gas Holdings revenues equal gas transmission and marketing revenues reported
on PG&E Corporation's Statement of Consolidated Income. Enterprises revenues
equal other revenues reported on PG&E Corporation's Statement of
Consolidated Income.
Common Stock Dividend:
- ---------------------
PG&E Corporation's common stock dividend is based on a number of financial
considerations, including sustainability, financial flexibility, and
competitiveness with investment opportunities of similar risk. PG&E
Corporation's current quarterly common stock dividend is $.30 per common share,
which corresponds to an annualized dividend of $1.20 per common share.
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PG&E Corporation has identified a dividend payout ratio objective (dividends
declared divided by earnings available for common stock) of between 50 and 65
percent (based on earnings exclusive of nonrecurring adjustments).
PG&E's formation of a holding company was approved by the CPUC subject to a
number of conditions, including the requirement that, on average, PG&E must
maintain its CPUC-authorized capital structure. In the event that PG&E fails to
maintain, on average, the CPUC-authorized capital structure, PG&E's ability to
pay dividends to PG&E Corporation may be limited. However, PG&E shall request a
waiver of this condition in the event that an adverse financial event reduces
the utility's equity ratio by one percent or more.
Earnings Per Common Share:
- -------------------------
Earnings per common share for the three-month period ended March 31, 1997,
decreased as compared with the same period in 1996 due primarily to a $144
million ($.21 per common share) increase in depreciation expense for Diablo
Canyon assets.
Utility:
- -------
Utility operating revenues for the three-month period ended March 31, 1997, as
compared with the same period in 1996 increased primarily due to an increase in
energy cost revenues to recover energy cost increases in both natural gas prices
and purchased electricity prices and volumes. Under energy cost recovery
mechanisms, energy cost revenues generally equal energy cost expense, and thus,
do not affect operating income. Utility operating expenses increased due to a
$144 million increase in depreciation expense for Diablo Canyon.
Gas Holdings:
- ------------
Gas Holdings operating revenues for the three-month period ended March 31, 1997,
as compared with the same period in 1996 increased $978 million primarily due to
the operations of PG&E Energy Trading (formerly known as Energy Source). PG&E
Energy Trading was acquired in December 1996 and has averaged $300 million in
revenues each month since its acquisition. These revenues were offset by a
corresponding increase in the cost of gas.
LIQUIDITY AND CAPITAL RESOURCES:
Sources of Capital:
- ------------------
The Corporation's capital requirements are funded from cash provided by
operations and, to the extent necessary, external financing. The Corporation's
policy is to finance its assets with a capital structure that minimizes
financing costs, maintains financial flexibility, and, with regard to PG&E,
complies with regulatory guidelines. Based on cash provided from operations and
its capital requirements, the Corporation may repurchase equity and long-term
debt in order to manage the overall balance of its capital structure.
During the three-month period ended March 31, 1997, PG&E Corporation issued
$331 million of common stock. Of this common stock, $319 million was issued in
connection with the acquisition of Teco Pipeline Company and its subsidiaries
(now known as PG&E Gas Transmission, Texas Corporation). The remaining $14
million was issued through the Dividend Reinvestment Plan and Stock Option Plan.
Also during the three-month period ended March 31, 1997, PG&E Corporation
repurchased $320 million of its common stock on the open market.
In the first quarter of 1997, long-term debt matured, redeemed, or
repurchased amounted to $257 million, of which $58 million related to PG&E's
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<PAGE>
redemption of its 12% Eurobond debentures and $167 million related to PG&E's
repurchase of its mortgage bonds.
PG&E intends to refinance $45 million of fixed-rate pollution control bonds
in the second quarter of 1997.
As discussed above in "Electric Industry Restructuring", to achieve the 10
percent rate reduction for residential and small commercial customers, the
electric industry restructuring legislation authorizes utilities to finance a
portion of the transition costs with "rate reduction bonds." In May 1997, PG&E
filed an application with the CPUC for the issuance of an estimated $3.1 billion
of these bonds by means of a special purpose entity. A CPUC decision is expected
in September 1997, and if the decision is approved, PG&E expects these bonds
would be issued in the fourth quarter of 1997. The special purpose entity will
acquire from PG&E the right to be paid the revenues from a separate tariff to
recover principal, interest, and issuance costs over the life of the bonds from
residential and small commercial customers. The bonds will be nonrecourse to any
other assets of the Corporation.
Cost of Capital Application:
- ---------------------------
In May 1997, PG&E filed an application with the CPUC requesting the following
cost of capital for 1998:
Capital Weighted
Ratio Cost/Return Cost/Return
------- ----------- -----------
Long-term debt 46.20% 7.37% 3.40%
Preferred stock 5.80 6.65 0.39
Common equity 48.00 12.25 5.88
-----------
Total return on
average utility base 9.67%
===========
The proposed cost of common equity is 0.65 percentage points higher than the
11.6 percent adopted for 1997. This increase reflects the level of business and
regulatory risks PG&E now faces. If adopted, the proposed cost of capital would
increase PG&E's 1998 gas revenue requirement by $13 million. Consistent with the
electric rate freeze, PG&E's proposed cost of capital would not change electric
rates.
Environmental Matters:
- ---------------------
The Corporation assesses, on an ongoing basis, compliance with laws and
regulations related to hazardous substance remediation. At March 31, 1997, the
Corporation had an accrued liability of $171 million for remediation costs at
sites where such costs are probable and quantifiable. The costs at identified
sites may be as much as $400 million if, among other things, other potentially
responsible parties are not financially able to contribute to these costs or
identifiable possible outcomes change. PG&E will seek recovery of prudently
incurred compliance costs through ratemaking procedures approved by the CPUC.
PG&E had recorded a regulatory asset at March 31, 1997, of $142 million for
recovery of these costs in future rates. Additionally, the Corporation will seek
recovery of costs from insurance carriers and from other third parties. (See
Note 5 of Notes to Consolidated Financial Statements.)
Effective January 1, 1997, the Corporation adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position (SOP)
96-1, "Environmental Remediation Liabilities." The adoption of SOP 96-1 did not
have a material adverse impact on the Corporation's financial position or
results of operations.
27
<PAGE>
Legal Matters:
- -------------
In the normal course of business, both PG&E and the Corporation are named as
parties in a number of claims and lawsuits. Substantially all of these have been
litigated or settled with no material adverse impact on PG&E's or the
Corporation's results of operations or financial position. In addition, both
PG&E and the Corporation believe that the litigation or settlement of pending
claims and lawsuits will not have a material adverse impact on their results of
operations or financial position. See Note 5 to the Consolidated Financial
Statements for further discussion of significant pending legal matters.
28
<PAGE>
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
A. Compressor Station Chromium Litigation
As previously disclosed in PG&E Corporation's and PG&E's Form 10-K for the
fiscal year ended December 31, 1996, PG&E has been named as a defendant in
several civil actions filed in southern California courts on behalf of more than
1,500 plaintiffs. Three additional civil actions have been filed in which PG&E
has been named as a defendant. On November 27, 1996, a complaint was filed in
Los Angeles Superior Court against PG&E and other defendants (Acosta v. Betz
Laboratories, Inc.) on behalf of approximately 1,400 plaintiffs. PG&E was
served with the complaint on April 1, 1997. As in the previously-filed
complaints, plaintiffs are seeking unspecified compensatory and punitive damages
for alleged personal injuries arising out of alleged exposure to chromium
contamination in the vicinity of PG&E's gas compressor stations located in
Hinkley, Kettleman and Topock, California.
On February 14, 1997, a complaint was filed in San Francisco Superior Court
against PG&E and other defendants (Riep v. PG&E). In this case, approximately
40 plaintiffs are seeking unspecified compensatory and punitive damages for
alleged personal injuries arising out of alleged exposure to chromium
contamination in the vicinity of PG&E's gas compressor station located in
Hinkley, California.
Also, on May 6, 1997, a complaint was filed in Los Angeles Superior Court
against PG&E and other defendants (Petitt v. PG&E) on behalf of several
plaintiffs. Plaintiffs are seeking unspecified compensatory and punitive
damages for alleged personal injuries arising out of alleged exposure to
chromium contamination in the vicinity of PG&E's gas compressor stations located
in Hinkley, Kettleman and Topock, California.
These cases, together with the cases listed under this item in Item 3 of PG&E
Corporation's and PG&E's Form 10-K, are referred to collectively as the "Aguayo
Litigation."
The Corporation believes the ultimate outcome of the Aguayo Litigation will not
have a material adverse impact on its financial position or results of
operation.
29
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
PG&E Corporation:
On April 16, 1997, PG&E Corporation held its annual meeting of shareholders. At
that meeting, the following matters were voted as indicated:
1. Election of the following directors to serve until the next annual meeting
of shareholders or until their successors shall be elected and qualified:
<TABLE>
<CAPTION>
For Withheld
----------- ----------
<S> <C> <C>
Richard A. Clarke 299,085,133 12,428,978
Harry M. Conger 299,967,660 11,546,451
David A. Coulter 300,103,595 11,410,516
C. Lee Cox 300,426,072 11,088,039
William S. Davila 300,068,203 11,445,908
Robert D. Glynn, Jr. 300,281,567 11,232,544
David M. Lawrence, MD 299,775,438 11,738,673
Richard B. Madden 299,951,026 11,563,085
Mary S. Metz 299,878,110 11,636,001
Rebecca Q. Morgan 300,272,834 11,241,277
Samuel T. Reeves 300,257,575 11,256,536
Carl E. Reichardt 299,883,095 11,631,016
John C. Sawhill 300,097,997 11,416,114
Alan Seelenfreund 299,934,261 11,579,850
Stanley T. Skinner 299,511,391 12,002,720
Barry Lawson Williams 300,033,749 11,480,362
</TABLE>
Simon Levine was duly nominated and received 65,007 votes. The vote for Mr.
Levine did not constitute a plurality of votes cast and he was therefore not
elected a director.
30
<PAGE>
2. Ratification of the appointment of Arthur Andersen LLP as independent
public accountants for the year 1997:
For: 304,865,472
Against: 3,364,935
Abstain: 3,283,704
Broker non-votes(1): 0
3. Consideration of a shareholder proposal to appoint an independent Lead
Director and Vice Chairman of the Board of Directors:
For: 57,872,107
Against: 199,418,793
Abstain: 10,493,152
Broker non-votes:(1) 43,730,059
4. Consideration of a shareholder proposal to require a minimum of 90%
attendance by directors at Board and committee meetings:
For: 27,250,826
Against: 230,598,659
Abstain: 9,934,567
Broker non-votes:(1) 43,730,059
5. Consideration of a shareholder proposal to revoke the Restricted Stock Plan
for Non-Employee Directors:
For: 31,971,280
Against: 226,486,345
Abstain: 9,326,427
Broker non-votes:(1) 43,730,059
6. Consideration of a shareholder proposal to change the method of tabulating
proxies:
For: 31,563,299
Against: 214,834,996
Abstain: 21,385,757
Broker non-votes:(1) 43,730,059
- --------------------
(1) A non-vote occurs when a broker or other nominee holding shares for a
beneficial owner votes on one proposal, but does not vote on another proposal
because the broker or other nominee does not have discretionary voting power and
has not received instructions from the beneficial owner.
31
<PAGE>
7. Consideration of a shareholder proposal to provide that directors'
compensation shall consist solely of common stock:
For: 30,648,742
Against: 227,631,156
Abstain: 9,504,154
Broker non-votes:(1) 43,730,059
8. Consideration of a shareholder proposal taking exception to PG&E's action
opposing Proposition 209:
For: 24,833,836
Against: 226,949,420
Abstain 16,000,796
Broker non-votes:(1) 43,730,059
PG&E:
On April 16, 1997, PG&E held its annual meeting of shareholders. Shares of
capital stock of PG&E consist of shares of common stock, all of which are owned
by PG&E Corporation, and shares of first preferred stock. At the annual
meeting, the following matters were voted as indicated:
1. Election of the following directors to serve until the next annual meeting
of shareholders or until their successors shall be elected and qualified:
<TABLE>
<CAPTION>
For (2) Withheld
------------ --------
<S> <C> <C>
Richard A. Clarke 425,779,575 259,979
Harry M. Conger 425,783,946 255,608
David A. Coulter 425,781,433 258,121
C. Lee Cox 425,788,627 250,927
William S. Davila 425,784,262 255,292
Robert D. Glynn, Jr. 425,790,273 249,281
David M. Lawrence, MD 425,775,515 264,039
Richard B. Madden 425,782,861 256,693
Mary S. Metz 425,784,790 254,764
Rebecca Q. Morgan 425,784,247 255,307
Samuel T. Reeves 425,788,758 250,796
</TABLE>
- --------------------
(2) All 409,120,387 shares of common stock, which are owned by PG&E
Corporation, were voted for the nominees. The balance consists of the votes of
shares of first preferred stock.
32
<PAGE>
<TABLE>
<S> <C> <C>
Carl E. Reichardt 425,781,791 257,763
John C. Sawhill 425,779,329 260,225
Alan Seelenfreund 425,780,480 259,074
Stanley T. Skinner 425,784,681 254,873
Barry Lawson Williams 425,782,267 257,287
</TABLE>
2. Ratification of the appointment of Arthur Andersen LLP as independent
public accountants for the year 1997:
For: 425,687,188 (3)
Against: 171,101
Abstain: 181,265
Broker non-votes(1): 0
Item 5. Other Information
-----------------
A. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
PG&E's earnings to fixed charges ratio for the three months ended March 31, 1997
was 3.01. PG&E's earnings to combined fixed charges and preferred stock
dividends ratio for the three months ended March 31, 1997 was 2.79. The
statement of the foregoing ratios, together with the statements of the
computation of the foregoing ratios filed as Exhibits 12.1 and 12.2 hereto, are
included herein for the purpose of incorporating such information and exhibits
into Registration Statement Nos. 33-62488, 33-64136, 33-50707 and 33-61959,
relating to PG&E's various classes of debt and first preferred stock
outstanding.
- --------------------
(3) Includes all 409,120,387 shares of common stock.
33
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 3 Restated Articles of Incorporation of Pacific Gas and
Electric Company effective as of April 28, 1997
Exhibit 11 Computation of Earnings Per Common Share
Exhibit 12.1 Computation of Ratios of Earnings to Fixed Charges
Exhibit 12.2 Computation of Ratios of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
Exhibit 27.1 Financial Data Schedule for the quarter ended
March 31, 1997 for PG&E Corporation
Exhibit 27.2 Financial Data Schedule for the quarter ended
March 31, 1997 for PG&E
(b) Reports on Form 8-K during the first quarter of 1997 and
through the date hereof (4):
1. January 2, 1997
Item 5. Other Events
A. Holding Company Formation
2. January 7, 1997
Item 5. Other Events
A. Electric Industry Restructuring
B. 1997 ECAC
3. January 16, 1997
Item 5. Other Events
A. Performance Incentive Plan - Year-to-Date Financial
Results
B. 1996 Consolidated Earnings (unaudited)
- --------------------
(4) Unless otherwise noted, all Reports on Form 8-K were filed under both
Commission File Number 1-12609 (PG&E Corporation) and Commission File Number
1-2348 (PG&E)
34
<PAGE>
4. January 31, 1997
Item 5. Other Events
A. Acquisition of Valero Energy Corporation
B. Acquisition of TECO Pipeline Company
C. Electric Industry Restructuring Cost Recovery Plan
5. February 19, 1997
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
A. 1996 Financial Statements
6. March 3, 1997
Item 5. Other Events
A. Proposed Decision on Diablo Canyon Ratemaking Proposal
7. April 18, 1997
Item 5. Other Events
A. Performance Incentive Plan -- Year-to-Date Financial
Results
B. Application of SFAS 71
C. Gas Accord
D. Common Stock Repurchase Program
E. Ratio of Earnings to Fixed Charges and Ratio of Earnings
to Combined Fixed Charges and Preferred Stock Dividends
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
(c) Exhibits
12.1 Computation of Ratio of Earnings to Fixed Charges
(12/31/96)
12.2 Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
(12/31/96)
8. May 9, 1997
Item 5. Other Events
A. Electric Industry Restructuring
35
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
PG&E CORPORATION
and
PACIFIC GAS AND ELECTRIC COMPANY
May 15, 1997 By CHRISTOPHER P. JOHNS
------------------------------
CHRISTOPHER P. JOHNS
Controller
(PG&E Corporation)
Vice President and Controller
(Pacific Gas and Electric Company)
36
<PAGE>
Exhibit 3
[Filed CA Secretary of
State April 28, 1997]
RESTATED ARTICLES OF INCORPORATION OF
PACIFIC GAS AND ELECTRIC COMPANY
STANLEY T. SKINNER and LESLIE H. EVERETT certify that:
1. They are the Chairman of the Board and Chief Executive Officer, and
the Vice President and Corporate Secretary, respectively, of Pacific
Gas and Electric Company, a California corporation (the "Company").
2. The Articles of Incorporation of the corporation, as amended to the
date of the filing of this certificate, including the amendments set
forth herein but not separately filed (and with the omissions required
by Section 910 of the Corporations Code) are amended and restated as
follows:
FIRST: That the name of said corporation shall be
PACIFIC GAS AND ELECTRIC COMPANY.
SECOND: The purpose of the corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust company
business or the practice of a profession permitted to be incorporated by the
California Corporations Code.
The right is reserved to this corporation to amend the whole or any
part of these Articles of Incorporation in any respect not prohibited by law.
THIRD: That this corporation shall have perpetual existence.
FOURTH: The corporation elects to be governed by all of the
provisions of the General Corporation Law (as added to the California
Corporations Code effective January 1, 1977, and as
<PAGE>
subsequently amended) not otherwise applicable to this corporation under Chapter
23 of said General Corporation Law.
FIFTH: That the Board of Directors of this corporation shall consist
of such number of directors, not less than fourteen (14) nor more than seventeen
(17), as shall be prescribed in the Bylaws.
The Board of Directors by a vote of two-thirds of the whole Board may
appoint from the Directors an Executive Committee, which Committee may exercise
such powers as may lawfully be conferred upon it by the Bylaws of the
Corporation. Such Committee may prescribe rules for its own government and its
meetings may be held at such places within or without California as said
Committee may determine or authorize.
SIXTH: The liability of the directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
SEVENTH: The corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through
bylaws, resolutions, agreements with agents, vote of shareholders or
disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California Corporations Code, subject
only to the applicable limits set forth in Section 204 of the California
Corporations Code.
EIGHTH: The total number of shares which this corporation is
authorized to issue is eight hundred eighty-five million (885,000,000) of the
aggregate par value of six billion eight hundred seventy-five million dollars
($6,875,000,000). All of these shares shall have full voting rights.
Said eight hundred eighty-five million (885,000,000) shares shall be
divided into three classes, designated as common stock, first preferred stock
and $100 first preferred stock. Eight hundred million (800,000,000) of said
shares shall be common stock, of the par value of $5 per share, seventy-five
million (75,000,000) of said shares shall be first preferred
2
<PAGE>
stock, of the par value of $25 per share, and ten million (10,000,000) of said
shares shall be $100 first preferred stock, of the par value of $100 per share.
FIRST PREFERRED STOCK
AND $100 FIRST PREFERRED STOCK
The first preferred stock and $100 first preferred stock each shall be
divided into series. The first series of first preferred stock shall consist of
four million two hundred eleven thousand six hundred sixty-two (4,211,662)
shares and be designated as Six Per Cent First Preferred Stock. The second
series of first preferred stock shall consist of one million one hundred
seventy-three thousand one hundred sixty-three (1,173,163) shares and be
designated as Five and One-Half Per Cent First Preferred Stock. The third
series of first preferred stock shall consist of four hundred thousand (400,000)
shares and be designated as Five Per Cent First Preferred Stock. The remainder
of said first preferred stock, viz., 69,215,175 shares, and all of the $100
first preferred stock may be issued in one or more additional series, as
determined from time to time by the Board of Directors. Except as provided
herein, the Board of Directors is hereby authorized to determine and alter the
rights, preferences, privileges and restrictions granted to or imposed upon the
first preferred stock or $100 first preferred stock or any series thereof with
respect to any wholly unissued series of first preferred stock or $100 first
preferred stock, and to fix the number of shares of any series of first
preferred stock or $100 first preferred stock and the designation of any such
series of first preferred stock or $100 first preferred stock. The Board of
Directors, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series, may increase or decrease (but not below the number of
shares of such series then outstanding) the number of shares of any series
subsequent to the issue of shares of that series.
The owners and holders of shares of said first preferred stock and
$100 first preferred stock, when issued as fully paid, are and shall be entitled
to receive, from the date of issue of such shares, out of funds legally
available therefor, cumulative preferential dividends, when and as declared by
the Board of Directors, at the following rates upon the par value of
3
<PAGE>
their respective shares, and not more, viz.: Six per cent (6%) per year upon Six
Per Cent First Preferred Stock; five and one-half per cent (5-l/2%) per year
upon Five and One-Half Per Cent First Preferred Stock; five per cent (5%) per
year upon Five Per Cent First Preferred Stock; and upon the shares of each
additional series of said first preferred stock and of each series of $100 first
preferred stock the dividend rate fixed therefor; and such dividends on both
classes of first preferred stock and $100 first preferred stock shall be
declared and shall be either paid or set apart for payment before any dividend
upon the shares of common stock shall be either declared or paid.
Upon the liquidation or dissolution of this corporation at any time
and in any manner, the owners and holders of shares of said first preferred
stock and $100 first preferred stock issued as fully paid will be entitled to
receive an amount equal to the par value of such shares plus an amount equal to
all accumulated and unpaid dividends thereon to and including the date fixed for
such distribution or payment before any amount shall be paid to the holders of
said common stock.
If any share or shares of first preferred stock and $100 first
preferred stock shall at any time be issued as only partly paid, the owners and
holders of such partly paid share or shares shall have the right to receive
dividends and to share in the assets of this corporation upon its liquidation or
dissolution in all respects like the owners and holders of fully paid shares of
first preferred stock and $100 first preferred stock, except that such right
shall be only in proportion to the amount paid on account of the subscription
price for which such partly paid share or shares shall have been issued.
The unissued shares of said first preferred stock and $100 first
preferred stock may be offered for subscription or sale or in exchange for
property and be issued from time to time upon such terms and conditions as said
Board of Directors shall prescribe.
The first three series of said first preferred stock, namely, the Six
Per Cent First Preferred Stock, the Five and One-Half Per Cent First Preferred
Stock, and the Five Per Cent First Preferred Stock, are not subject to
redemption.
4
<PAGE>
Any or all shares of each series of said first preferred stock and
$100 first preferred stock other than said first three series of first preferred
stock may be redeemed at the option of this corporation, at any time or from
time to time, at the redemption price fixed for such series together with
accumulated and unpaid dividends at the rate fixed therefor to and including the
date fixed for redemption. If less than all the outstanding shares of any such
series are to be redeemed, the shares to be redeemed shall be determined pro
rata or by lot in such manner as the Board of Directors may determine.
Unless the certificate of determination for any series of the first
preferred stock or the $100 first preferred stock shall otherwise provide,
notice of every such redemption shall be published in a newspaper of general
circulation in the City and County of San Francisco, State of California, and in
a newspaper of general circulation in the Borough of Manhattan, City and State
of New York, at least once in each of two (2) successive weeks, commencing not
earlier than sixty (60) nor later than thirty (30) days before the date fixed
for redemption; successive publications need not be made in the same newspaper.
A copy of such notice shall be mailed within the same period of time to each
holder of record, as of the record date, of the shares to be redeemed, but the
failure to mail such notice to any shareholder shall not invalidate the
redemption of such shares.
From and after the date fixed for redemption, unless default be made
by this corporation in paying the amount due upon redemption, dividends on the
shares called for redemption shall cease to accrue, and such shares shall be
deemed to be redeemed and shall be no longer outstanding, and the holders
thereof shall cease to be shareholders with respect to such shares and shall
have no rights with respect thereto except the right to receive from this
corporation upon surrender of their certificates the amount payable upon
redemption without interest. Or, if this corporation shall deposit, on or prior
to the date fixed for redemption, with any bank or trust company in the City and
County of San Francisco, having capital, surplus and undivided profits
aggregating at least five million dollars ($5,000,000), as a trust fund, a sum
sufficient to redeem the shares called for redemption, with irrevocable
instructions and authority to such
5
<PAGE>
bank or trust company to publish or complete the publication of the notice of
redemption (if this corporation shall not have theretofore completed publication
of such notice), and to pay, on and after the date fixed for redemption, or on
and after such earlier date as the Board of Directors may determine, the amount
payable upon redemption of such shares, then from and after the date of such
deposit (although prior to the date fixed for redemption) such shares shall be
deemed to be redeemed; and dividends on such shares shall cease to accrue after
the date fixed for redemption. The said deposit shall be deemed to constitute
full payment of the shares to their respective holders and from and after the
date of such deposit the shares shall be no longer outstanding, and the holders
thereof shall cease to be shareholders with respect to such shares and shall
have no rights with respect thereto except the right to receive from said bank
or trust company the amount payable upon redemption of such shares, without
interest, upon surrender of their certificates therefor, and except, also, any
right which such shareholders may then have to exchange or convert such shares
prior to the date fixed for redemption. Any part of the funds so deposited
which shall not be required for redemption payments because of such exchange or
conversion shall be repaid to this corporation forthwith. The balance, if any,
of the funds so deposited which shall be unclaimed at the end of six (6) years
from the date fixed for redemption shall be repaid to this corporation together
with any interest which shall have been allowed thereon; and thereafter the
unpaid holders of shares so called for redemption shall have no claim for
payment except as against this corporation.
All shares of the first preferred stock and $100 first preferred stock
shall rank equally with regard to preference in dividend and liquidation rights,
except that shares of different classes or different series thereof may differ
as to the amounts of dividends or liquidation payments to which they are
entitled, as herein set forth.
6
<PAGE>
COMMON STOCK
When all accrued dividends upon all of the issued and outstanding
shares of the first preferred stock and $100 first preferred stock of this
corporation shall have been declared and shall have been paid or set apart for
payment, but not before, dividends may be declared and paid, out of funds
legally available therefor, upon all of the issued and outstanding shares of
said common stock.
Upon the liquidation or dissolution of this corporation, after the
owners and holders of such first preferred stock and $100 first preferred stock
shall have been paid the full amount to which they shall have been entitled
under the provisions of these Articles of Incorporation, the owners and holders
of such common stock shall be entitled to receive and to have paid to them the
entire residue of the assets of this corporation in proportion to the number of
shares of said common stock held by them respectively.
If any share or shares of common stock shall at any time be issued as
only partly paid, the owners and holders of such partly paid share or shares
shall have the right to receive dividends and to share in the assets of this
corporation upon its liquidation or dissolution in all respects like the owners
and holders of fully paid shares of common stock, except that such right shall
be only in proportion to the amount paid on account of the subscription price
for which such partly paid share or shares shall have been issued.
The unissued shares of said common stock may be offered for
subscription or sale or in exchange for property and be issued from time to time
upon such terms and conditions as said Board of Directors may prescribe.
PROHIBITION AGAINST ASSESSMENTS
Shares of such stock, whether first preferred, $100 first preferred
stock or common stock, the subscription price of which shall have been paid in
full, whether such price be par or more or less than par, shall be issued as
fully paid shares and shall never be subject to any call or assessment for any
purpose
7
<PAGE>
whatever. Shares of such stock, whether first preferred, $100 first preferred
stock or common stock, a part only of the subscription price of which shall have
been paid, shall be subject to calls for the unpaid balance of the subscription
price thereof. But no call made on partly paid first preferred stock, partly
paid $100 first preferred stock or partly paid common stock shall be recoverable
by action or be enforceable otherwise than by sale or forfeiture of delinquent
stock in accordance with the applicable provisions of the Corporations Code of
California.
If at any time, whether by virtue of any amendment of these Articles
of Incorporation or any amendment or change of the law of the State of
California relating to corporations or otherwise, any assessment shall, in any
event whatever, be levied and collected on any subscribed and issued shares of
said first preferred stock or $100 first preferred stock after the subscription
price thereof shall have been paid in full, the rights of the owners and holders
thereof to receive dividends and their rights to share in the assets upon the
liquidation or dissolution of this corporation shall, immediately upon the
payment of such assessment and by virtue thereof, be increased in the same ratio
as the total amount of the assessment or assessments so levied and collected
shall bear to the par value of such shares of first preferred stock or $100
first preferred stock.
RESERVES
The Board of Directors of this corporation shall, notwithstanding the
foregoing provisions of these Articles of Incorporation, have authority from
time to time to set aside, out of the profits arising from the business of this
corporation, such reasonable sums as may in their judgment be necessary and
proper for working capital and for usual reserves and surplus.
NINTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 5%
REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 5% Redeemable First Preferred Stock which is attached hereto
as Exhibit 1 is hereby incorporated by reference as Article NINTH of these
Articles of Incorporation.
8
<PAGE>
TENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 5%
REDEEMABLE FIRST PREFERRED STOCK, SERIES A: The Certificate of Determination of
Preferences of the 5% Redeemable First Preferred Stock, Series A, which is
attached hereto as Exhibit 2 is hereby incorporated by reference as Article
TENTH of these Articles of Incorporation.
ELEVENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 4.80%
REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 4.80% Redeemable First Preferred Stock which is attached
hereto as Exhibit 3 is hereby incorporated by reference as Article ELEVENTH of
these Articles of Incorporation.
TWELFTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 4.50%
REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 4.50% Redeemable First Preferred Stock which is attached
hereto as Exhibit 4 is hereby incorporated by reference as Article TWELFTH of
these Articles of Incorporation.
THIRTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 4.36%
REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 4.36% Redeemable First Preferred Stock which is attached
hereto as Exhibit 5 is hereby incorporated by reference as Article THIRTEENTH of
these Articles of Incorporation.
FOURTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 7.44%
REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 7.44% Redeemable First Preferred Stock which is attached
hereto as Exhibit 6 is hereby incorporated by reference as Article FOURTEENTH of
these Articles of Incorporation.
FIFTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 6.57%
REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 6.57% Redeemable First Preferred Stock which is attached
hereto as Exhibit 7 is hereby incorporated by reference as Article FIFTEENTH of
these Articles of Incorporation.
9
<PAGE>
SIXTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 7.04%
REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 7.04% Redeemable First Preferred Stock which is attached
hereto as Exhibit 8 is hereby incorporated by reference as Article SIXTEENTH of
these Articles of Incorporation.
SEVENTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 6-7/8%
REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 6-7/8% Redeemable First Preferred Stock which is attached
hereto as Exhibit 9 is hereby incorporated by reference as Article SEVENTEENTH
of these Articles of Incorporation.
EIGHTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE
6.30% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of
Preferences of the 6.30% Redeemable First Preferred Stock which is attached
hereto as Exhibit 10 is hereby incorporated by reference as Article EIGHTEENTH
of these Articles of Incorporation.
3. The foregoing amendments and restatement of the Articles of
Incorporation of this corporation have been duly approved by the Board
of Directors.
4. The foregoing amendments and restatement of the Articles of
Incorporation were adopted (i) to eliminate Article Ninth which was
deleted upon the filing on January 1, 1997, of the Agreement of Merger
made as of December 19, 1996, by and among this corporation, PG&E
Merger Company, and PG&E Corporation, (ii) to eliminate Articles
Fifteenth, Sixteenth, and Seventeenth, which previously set forth the
Certificates of Determination of Preferences of the 7.84% Redeemable
First Preferred Stock, the 8% Redeemable First Preferred Stock, and
the 8.20% Redeemable First Preferred Stock, respectively, to reflect
the reduction in the authorized number of shares of each of those
series to zero which occurred upon filing the Certificate of Decrease
with respect to such series immediately preceding the filing of these
10
<PAGE>
Restated Articles, pursuant to California Corporations Code Section
401(c)and the elimination of each of those
series as an authorized series of the corporation pursuant to
California Corporations Code Section 401(f); and (iii) to renumber the
remaining Articles to reflect the deletion of Articles Ninth,
Fifteenth, Sixteenth, and Seventeenth.
5. Pursuant to California Corporations Code Sections 202(e)(3), 203.5(b),
401(c) and 401(f), amendments to the Articles of Incorporation for the
foregoing purposes need not be approved by the affirmative vote of the
majority of the outstanding shares; accordingly, the foregoing
amendments and restatement may be adopted with approval of the Board
of Directors alone.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Date: April 23, 1997
--
/s/ Stanley T. Skinner
______________________________
STANLEY T. SKINNER
Chairman of the Board and
Chief Executive Officer
/s/ Leslie H. Everett
______________________________
LESLIE H. EVERETT
Vice President and
Corporate Secretary
11
<PAGE>
EXHIBIT 1
PACIFIC GAS AND ELECTRIC COMPANY
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 5% REDEEMABLE FIRST PREFERRED STOCK
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 5%
Redeemable First Preferred Stock, $25 par value (herein called the "5% Series");
and
WHEREAS, this corporation has elected to redeem, purchase, or otherwise
acquire 1,082,805 shares of the 5% Series from time to time; and
WHEREAS, pursuant to California Corporations Code Section 401(c), this
corporation filed a Certificate of Decrease in Number of Shares of Certain
Series of First Preferred Stock on March 23, 1994, which amended the Articles of
Incorporation to decrease the number of shares constituting the 5% Series from
2,860,977 to 1,778,172 shares; and
WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the
1,082,805 shares constituting the decrease in the 5% Series resumed the status
of authorized and unissued shares of First Preferred Stock, $25 par value; and
WHEREAS, it is in the best interest of this corporation to restate the four
existing Certificates of Determination of Preferences of the 5% Series to (i)
reflect the reduction in the authorized number of shares of the 5% Series, (ii)
consolidate such existing Certificates of Determination of Preferences into a
single Certificate of Determination of Preferences of the 5% Series, and (iii)
eliminate the portions of the officers' certificates and verifications which do
not set forth any of the rights, preferences, privileges, or restrictions of the
5% Series.
1-1
<PAGE>
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificates of Determination of Preferences of the 5% Series is hereby
approved; and
BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences
of the 5% Series is hereby approved and adopted as restated in its entirety as
follows:
1,778,172 shares of this corporation's unissued redeemable First
Preferred Stock shall constitute a series designated "5% Redeemable First
Preferred Stock"; the dividend rate of such shares shall be five per cent
per year; such shares shall have no conversion rights; and the redemption
price of such shares shall be
$28.25 per share if redeemed on or before July 31, 1953,
$27.75 per share if redeemed thereafter and on or before July 31,
1958,
$27.25 per share if redeemed thereafter and on or before July 31,
1963, and
$26.75 per share if redeemed thereafter.
1-2
<PAGE>
EXHIBIT 2
PACIFIC GAS AND ELECTRIC COMPANY
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 5% REDEEMABLE FIRST PREFERRED STOCK,
SERIES A
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 5%
Redeemable First Preferred Stock, Series A, $25 par value (herein called the "5%
Series A"); and
WHEREAS, this corporation has elected to redeem, purchase, or otherwise
acquire 815,678 shares of the 5% Series A from time to time; and
WHEREAS, pursuant to California Corporations Code Section 401(c), this
corporation filed a Certificate of Decrease in Number of Shares of Certain
Series of First Preferred Stock on March 23, 1994, which amended the Articles of
Incorporation to decrease the number of shares constituting the 5% Series A from
1,750,000 to 934,322 shares; and
WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the
815,678 shares constituting the decrease in the 5% Series A resumed the status
of authorized and unissued shares of First Preferred Stock, $25 par value; and
WHEREAS, it is in the best interest of this corporation to restate the two
existing Certificates of Determination of Preferences of the 5% Series A to (i)
reflect the reduction in the authorized number of shares of the 5% Series A,
(ii) consolidate such existing Certificates of Determination of Preferences into
a single Certificate of Determination of Preferences of the 5% Series A, and
(iii) eliminate the portions of the officers' certificates and verifications
which do not set forth any of the rights, preferences, privileges, or
restrictions of the 5% Series A.
2-1
<PAGE>
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificates of Determination of Preferences of the 5% Series A is hereby
approved; and
BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences
of the 5% Series A is hereby approved and adopted as restated in its entirety as
follows:
934,322 shares of this corporation's unissued redeemable First
Preferred Stock shall constitute a series designated "5% Redeemable First
Preferred Stock, Series A"; the dividend rate of such shares shall be five
per cent per year; such shares shall have no conversion rights; and the
redemption price of such shares shall be
$28.25 per share if redeemed on or before July 31, 1953,
$27.75 per share if redeemed thereafter and on or before July 31,
1958,
$27.25 per share if redeemed thereafter and on or before July 31,
1963, and
$26.75 per share if redeemed thereafter.
2-2
<PAGE>
EXHIBIT 3
PACIFIC GAS AND ELECTRIC COMPANY
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 4.80% REDEEMABLE FIRST PREFERRED STOCK
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 4.80%
Redeemable First Preferred Stock, $25 par value (herein called the "4.80%
Series"); and
WHEREAS, this corporation has elected to redeem, purchase, or otherwise
acquire 724,344 shares of the 4.80% Series from time to time; and
WHEREAS, pursuant to California Corporations Code Section 401(c), this
corporation filed a Certificate of Decrease in Number of Shares of Certain
Series of First Preferred Stock on March 23, 1994, which amended the Articles of
Incorporation to decrease the number of shares constituting the 4.80% Series
from 1,517,375 to 793,031 shares; and
WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the
724,344 shares constituting the decrease in the 4.80% Series resumed the status
of authorized and unissued shares of First Preferred Stock, $25 par value; and
WHEREAS, it is in the best interest of this corporation to restate the two
existing Certificates of Determination of Preferences of the 4.80% Series to (i)
reflect the reduction in the authorized number of shares of the 4.80% Series,
(ii) consolidate such existing Certificates of Determination of Preferences into
a single Certificate of Determination of Preferences of the 4.80% Series, and
(iii) eliminate the portions of the officers' certificates and verifications
which do not set forth any of the rights, preferences, privileges, or
restrictions of the 4.80% Series.
3-1
<PAGE>
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificates of Determination of Preferences of the 4.80% Series is hereby
approved; and
BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences
of the 4.80% Series is hereby approved and adopted as restated in its entirety
as follows:
793,031 shares of this corporation's unissued
redeemable First Preferred Stock shall constitute a series designated
"4.80% Redeemable First Preferred Stock"; the dividend rate of such
shares shall be 4.80% per year; such shares shall have no conversion
rights; and the redemption price for such shares shall be
$28.75 per share if redeemed on or before January 31, 1955;
$28.25 per share if redeemed thereafter and on or before
January 31,1960;
$27.75 per share if redeemed thereafter and on or before
January 31, 1965; and
$27.25 per share if redeemed thereafter.
3-2
<PAGE>
EXHIBIT 4
PACIFIC GAS AND ELECTRIC COMPANY
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 4.50% REDEEMABLE FIRST PREFERRED STOCK
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 4.50%
Redeemable First Preferred Stock, $25 par value (herein called the "4.50%
Series"); and
WHEREAS, this corporation has elected to redeem, purchase, or otherwise
acquire 516,284 shares of the 4.50% Series from time to time; and
WHEREAS, pursuant to California Corporations Code Section 401(c), this
corporation filed a Certificate of Decrease in Number of Shares of Certain
Series of First Preferred Stock on March 23, 1994, which amended the Articles of
Incorporation to decrease the number of shares constituting the 4.50% Series
from 1,127,426 to 611,142 shares; and
WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the
516,284 shares constituting the decrease in the 4.50% Series resumed the status
of authorized and unissued shares of First Preferred Stock, $25 par value; and
WHEREAS, it is in the best interest of this corporation to restate the two
existing Certificates of Determination of Preferences of the 4.50% Series to (i)
reflect the reduction in the authorized number of shares of the 4.50% Series,
(ii) consolidate such existing Certificates of Determination of Preferences into
a single Certificate of Determination of Preferences of the 4.50% Series, and
(iii) eliminate the portions of the officers' certificates and verifications
which do not set forth any of the rights, preferences, privileges, or
restrictions of the 4.50% Series.
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificates of Determination of Preferences of the 4.50% Series is hereby
approved; and
4-1
<PAGE>
BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences
of the 4.50% Series is hereby approved and adopted as restated in its entirety
as follows:
611,142 shares of this corporation's unissued redeemable first
preferred stock shall constitute a series designated "4.50% Redeemable
First Preferred Stock"; the dividend rate of such shares shall be
4.50% per year; such shares shall have no conversion rights; and the
redemption price of such shares shall be
$27.25 per share if redeemed on or before July 31, 1959;
$26.75 per share if redeemed thereafter and on or before
July 31, 1964;
$26.25 per share if redeemed thereafter and on or before
July 31, 1969; and
$26.00 per share if redeemed thereafter.
4-2
<PAGE>
EXHIBIT 5
PACIFIC GAS AND ELECTRIC COMPANY
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 4.36% REDEEMABLE FIRST PREFERRED STOCK
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 4.36%
Redeemable First Preferred Stock, $25 par value (herein called the "4.36%
Series"); and
WHEREAS, this corporation has elected to redeem, purchase or otherwise
acquire 581,709 shares of the 4.36% Series from time to time; and
WHEREAS, pursuant to California Corporations Code Section 401(c), this
corporation filed a Certificate of Decrease in Number of Shares of Certain
Series of First Preferred Stock on March 23, 1994, which amended the Articles of
Incorporation to decrease the number of shares constituting the 4.36% Series
from 1,000,000 to 418,291 shares; and
WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the
581,709 shares constituting the decrease in the 4.36% Series resumed the status
of authorized and unissued shares of First Preferred Stock, $25 par value; and
WHEREAS, it is in the best interest of this corporation to restate the
Certificate of Determination of Preferences of the 4.36% Series to (i) reflect
the reduction in the authorized number of shares of the 4.36% Series and (ii)
eliminate the portions of the officers' certificate and verification which do
not set forth any of the rights, preferences, privileges, or restrictions of the
4.36% Series.
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificate of Determination of Preferences of the 4.36% Series is hereby
approved; and
5-1
<PAGE>
BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences
of the 4.36% Series is hereby approved and adopted as restated in its entirety
as follows:
418,291 shares of this corporation's unissued
Redeemable First Preferred Stock shall constitute a series designated
"4.36% Redeemable First Preferred Stock"; the dividend rate of such
shares shall be 4.36% per year; such shares shall have no conversion
rights; and the redemption price of such shares shall be
$26.75 per share if redeemed on or before October 31, 1960;
$26.50 per share if redeemed thereafter and on or before
October 31, 1965;
$26.25 per share if redeemed thereafter and on or before
October 31, 1970;
$26.00 per share if redeemed thereafter and on or before
October 31, 1975; and
$25.75 per share if redeemed thereafter.
5-2
<PAGE>
EXHIBIT 6
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 7.44% REDEEMABLE FIRST PREFERRED STOCK OF
PACIFIC GAS AND ELECTRIC COMPANY
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 7.44%
Redeemable First Preferred Stock, $25 par value (herein called the "7.44%
Series"); and
WHEREAS, it is in the best interest of this corporation to restate the
Certificate of Determination of Preferences of the 7.44% Series to eliminate the
portions of the officers' certificate and verification which do not set forth
any of the rights, preferences, privileges, or restrictions of the 7.44% Series.
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificate of Determination of Preferences of the 7.44% Series is hereby
approved; and
BE IT FURTHER RESOLVED, that the Certificate of Determination of
Preferences of the 7.44% Series is hereby approved and adopted as restated in
its entirety as follows:
5,000,000 shares of this corporation's unissued First
Preferred Stock, $25 par value, shall constitute a series designated
"7.44% Redeemable First Preferred Stock"; the dividend rate of such
shares shall be 7.44% of the par value per year; such shares shall
have no conversion rights; and the redemption price of such shares
shall be $25.00, provided that none of such shares shall be redeemed
prior to August 1, 1997, for any purpose.
6-1
<PAGE>
EXHIBIT 7
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 6.57% REDEEMABLE FIRST PREFERRED STOCK OF
PACIFIC GAS AND ELECTRIC COMPANY
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 6.57%
Redeemable First Preferred Stock, $25 par value (herein called the "6.57%
Series"); and
WHEREAS, it is in the best interest of this corporation to restate the
Certificate of Determination of Preferences of the 6.57% Series to eliminate the
portions of the officers' certificate and verification which do not set forth
any of the rights, preferences, privileges, or restrictions of the 6.57% Series.
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificate of Determination of Preferences of the 6.57% Series is hereby
approved; and
BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences
of the 6.57% Series is hereby approved and adopted as restated in its entirety
as follows:
3,000,000 shares of this corporation's unissued First
Preferred Stock, $25 par value, shall constitute a series designated
"6.57% Redeemable First Preferred Stock" (hereinafter referred to as
the "6.57% Series").
The terms of the 6.57% Series are hereby fixed as follows:
(a) The holders of shares of the 6.57% Series shall be entitled
to receive, when and as declared by the Board of Directors,
dividends at the rate of 6.57 percent of par value thereof
per annum, and no more. Such dividends shall be cumulative
with respect to each share from the date of issuance thereof.
(b) No dividend shall be declared or paid on any shares of
the 6.57% Series or on any shares of any other series
7-1
<PAGE>
or class of preferred stock unless a ratable dividend on the
6.57% Series and such other series or class of preferred
stock, in proportion to the full preferential amounts to
which each series or class is entitled, is declared and is
paid or set apart for payment. As used herein, the term
"preferred stock" shall mean all series of the first
preferred stock, $25 par value per share, and first preferred
stock, $100 par value per share, and any other class of stock
ranking equally with the preferred stock as to preference in
dividends and liquidation rights, notwithstanding that shares
of such series and classes may differ as to the amounts of
dividends or liquidation payments to which they are entitled.
(c) No junior shares or shares of preferred stock shall be
purchased, redeemed or otherwise acquired by the corporation,
and no moneys shall be paid to or set aside or made available
for a sinking fund for the purchase or redemption of junior
shares or shares of preferred stock, unless full cumulative
dividends upon all series and classes of preferred stock then
outstanding to the end of the dividend period next preceding
the date fixed for such redemption (and for the current
dividend period if the date fixed for such redemption is a
dividend payment date) shall have been declared and shall
have been paid or set aside for payment. As used herein, the
term "junior shares" shall mean common shares or any other
shares ranking junior to the preferred stock either as to
dividends or upon liquidation, dissolution, or winding up.
(d) The shares of the 6.57% Series shall not be subject to
redemption by this corporation prior to July 31, 2002. On or
after July 31, 2002, the redemption price shall be $25.00 per
share, together with an amount equal to all accumulated and
unpaid dividends thereon to and including the date of
redemption.
(e) Shares of the 6.57% Series shall also be subject to
redemption through the operation of a sinking fund (herein
called the "Sinking Fund") at the redemption price (the
"Sinking Fund Redemption Price") of $25.00 per share plus an
amount equal to the accumulated and unpaid dividends thereon
to and including the redemption date, whether or not earned
or declared. For the
7-2
<PAGE>
purposes of the Sinking Fund, out of any funds of the
corporation legally available therefor remaining after full
cumulative dividends upon all series and classes of preferred
stock then outstanding to the end of the dividend period next
preceding the date fixed for such redemption (and for the
current dividend period if the date fixed for such redemption
is a dividend payment date) shall have been declared and
shall have been paid or set apart for payment, the
corporation shall redeem 150,000 shares of the 6.57% Series
annually on each July 31, from 2002 through 2006, inclusive,
and 2,250,000 shares on July 31, 2007, at the Sinking Fund
Redemption Price. The Sinking Fund shall be cumulative so
that if on any such July 31 the funds of the corporation
legally available therefor shall be insufficient to permit
the required redemption in full, or if for any other reason
such redemption shall not have been made in full, the
remaining shares of the 6.57% Series so required to be
redeemed shall be redeemed before any cash dividend shall be
paid or declared, or any distribution made, on any junior
shares or before any junior shares or any shares of preferred
stock shall be purchased, redeemed or otherwise acquired by
the corporation, or any monies shall be paid to or set aside
or made available for a sinking fund for the purchase or
redemption or any junior shares or any shares of preferred
stock; provided, however, that, notwithstanding the existence
of any such deficiency, the corporation may make any required
sinking fund redemption on any other series or class of
preferred stock if the number of shares of such other series
or class of preferred stock being so redeemed bears (as
nearly as practicable) the same ratio to the aggregate number
of shares of such other series or class then due to be
redeemed as the number of shares of the 6.57% Series being
redeemed bears to the aggregate number of shares of the 6.57%
Series then due to be redeemed.
(f) Shares of the 6.57% Series redeemed otherwise than as
required by section (e) or purchased or otherwise acquired by
the corporation may, at the option of the corporation, be
applied as a credit against any Sinking Fund redemption
required by section (e). Moneys available for the Sinking
Fund shall be applied on each such July 31 to the redemption
of shares of the 6.57% Series.
7-3
<PAGE>
(g) Any shares of the 6.57% Series which have been redeemed,
purchased, or otherwise acquired by the corporation shall
become authorized and unissued shares of the First Preferred
Stock, $25 par value, but shall not be reissued as shares of
the 6.57% Series.
(h) Upon liquidation, dissolution, or winding up of the
corporation, the holders of shares of the 6.57% Series shall
be entitled to receive the liquidation value per share, which
is hereby fixed at $25.00 per share, plus an amount equal to
all accumulated and unpaid dividends thereon at such time,
whether or not earned or declared.
(i) Dividends shall be computed on a basis of a 360-day year
of twelve 30-day months.
(j) If the date for payment of any dividend or the date fixed
for redemption of any share of the 6.57% Series shall not be
on a business day, then payment of the dividend or applicable
redemption price need not be made on such date, but may be
made on the next succeeding business day with the same force
and effect as if made on the date for payment of such
dividend or date fixed for redemption.
7-4
<PAGE>
EXHIBIT 8
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 7.04% REDEEMABLE FIRST PREFERRED STOCK OF
PACIFIC GAS AND ELECTRIC COMPANY
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 7.04%
Redeemable First Preferred Stock, $25 par value (herein called the "7.04%
Series"); and
WHEREAS, it is in the best interest of this corporation to restate the
Certificate of Determination of Preferences of the 7.04% Series to eliminate the
portions of the officers' certificate and verification which do not set forth
any of the rights, preferences, privileges, or restrictions of the 7.04% Series.
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificate of Determination of Preferences of the 7.04% Series is hereby
approved; and
BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences
of the 7.04% Series is hereby approved and adopted as restated in its entirety
as follows:
3,000,000 shares of this corporation's unissued First
Preferred Stock, $25 par value, shall constitute a series designated
"7.04% Redeemable First Preferred Stock" (hereinafter referred to as
the "7.04% Series").
The terms of the 7.04% Series are hereby fixed as follows:
(a) The holders of shares of the 7.04% Series shall be
entitled to receive, when and as declared by the Board of
Directors, dividends at the rate of 7.04 percent of par value
thereof per annum, and no more. Such dividends shall be
cumulative with respect to each share from the date of
issuance thereof.
(b) No dividend shall be declared or paid on any shares of the
7.04% Series or on any shares of any other series
8-1
<PAGE>
or class of preferred stock unless a ratable dividend on the
7.04% Series and such other series or class of preferred
stock, in proportion to the full preferential amounts to
which each series or class is entitled, is declared and is
paid or set apart for payment. As used herein, the term
"preferred stock" shall mean all series of the first
preferred stock, $25 par value per share, and first preferred
stock, $100 par value per share, and any other class of stock
ranking equally with the preferred stock as to preference in
dividends and liquidation rights, notwithstanding that shares
of such series and classes may differ as to amounts of
dividends or liquidation payments to which they are entitled.
(c) No junior shares or shares of preferred stock shall be
purchased, redeemed, or otherwise acquired by the
corporation, and no moneys shall be paid to or set aside or
made available for a sinking fund for the purchase or
redemption of junior shares or shares of preferred stock,
unless full cumulative dividends upon all series and classes
of preferred stock then outstanding to the end of the
dividend period next preceding the date fixed for such
redemption (and for the current dividend period if the date
fixed for such redemption is a dividend payment date) shall
have been declared and shall have been paid or set aside for
payment. As used herein, the term "junior shares" shall mean
common shares or any other shares ranking junior to the
preferred stock either as to dividends or upon liquidation,
dissolution, or winding up.
(d) The shares of the 7.04% Series shall not be subject to
redemption by this corporation prior to January 31, 2003. On
and after January 31, 2003, the redemption price shall be as
follows:
If redeemed during the 12 months' period beginning January 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2003 $25.88 2008 $25.44
2004 $25.79 2009 $25.35
2005 $25.70 2010 $25.26
2006 $25.62 2011 $25.18
2007 $25.53 2012 $25.09
</TABLE>
8-2
<PAGE>
and at $25.00 per share on and after January 31, 2013,
together in each case with an amount equal to all accumulated
and unpaid dividends thereon to and including the date of
redemption. For the purpose of redeeming any shares of the
7.04% Series, payment of the redemption price shall be out of
any funds of the corporation legally available therefor
remaining after: (i) full cumulative dividends upon all
series and classes of preferred stock then outstanding to the
end of the dividend period next preceding the date fixed for
such redemption (and for the current dividend period if the
date fixed for such redemption is a dividend payment date)
shall have been declared and shall have been paid or set
apart for payment, and (ii) all money shall have been paid to
or set aside or made available for any sinking fund for the
purchase or redemption of all series of and classes of
preferred stock as may be required by the terms of such
preferred stock.
(e) Any shares of the 7.04% Series which have been redeemed,
purchased, or otherwise acquired by the corporation shall
become authorized and unissued shares of the First Preferred
Stock, $25 par value, but shall not be reissued as shares of
the 7.04% Series.
(f) Upon liquidation, dissolution, or winding up of the
corporation, the holders of shares of the 7.04% Series shall
be entitled to receive the liquidation value per share, which
is hereby fixed at $25.00 per share, plus an amount equal to
all accumulated and unpaid dividends thereon at such time,
whether or not earned or declared.
(g) Dividends shall be computed on a basis of a 360-day year
of twelve 30-day months.
(h) If the date for payment of any dividend or the date fixed
for redemption of any share of the 7.04% Series shall not be
a business day, then payment of the dividend or applicable
redemption price need not be made on such date, but may be
made on the next succeeding business day with the same force
and effect as if made on the date for payment of such
dividend or date fixed for redemption.
8-3
<PAGE>
EXHIBIT 9
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 6-7/8% REDEEMABLE FIRST PREFERRED STOCK OF
PACIFIC GAS AND ELECTRIC COMPANY
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the
6-7/8% Redeemable First Preferred Stock, $25 par value (herein called the
"6-7/8% Series"); and
WHEREAS, it is in the best interest of this corporation to restate the
Certificate of Determination of Preferences of the 6-7/8% Series to eliminate
the portions of the officers' certificate and verification which do not set
forth any of the rights, preferences, privileges, or restrictions of the 6-7/8%
Series.
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificate of Determination of Preferences of the 6-7/8% Series is hereby
approved; and
BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences
of the 6-7/8% Series is hereby approved and adopted as restated in its entirety
as follows:
5,000,000 shares of this corporation's unissued
Redeemable First Preferred Stock, $25 par value, shall constitute a
series designated "6-7/8% Redeemable First Preferred Stock"
(hereinafter referred to as the "6-7/8% Series").
The terms of the 6-7/8% Series are hereby fixed as follows:
(a) The holders of shares of the 6-7/8% Series shall be
entitled to receive, when and as declared by the Board of
Directors, dividends at the rate of 6-7/8 percent of par
value thereof per annum, and no more. Such dividends shall be
cumulative with respect to each share from the date of
issuance thereof.
(b) No dividend shall be declared or paid on any shares of the
6-7/8% Series or on any shares of any other
9-1
<PAGE>
series or class of preferred stock unless a ratable dividend
on the 6-7/8% Series and such other series or class of
preferred stock, in proportion to the full preferential
amounts to which each series or class is entitled, is
declared and is paid or set apart for payment. As used
herein, the term "preferred stock" shall mean all series of
the first preferred stock, $25 par value per share, and first
preferred stock, $100 par value per share, and any other
class of stock ranking equally with the preferred stock as to
preference in dividends and liquidation rights,
notwithstanding that shares of such series and classes may
differ as to amounts of dividends or liquidation payments to
which they are entitled.
(c) No junior shares or shares of preferred stock shall be
purchased, redeemed, or otherwise acquired by the
corporation, and no moneys shall be paid to or set aside or
made available for a sinking fund for the purchase or
redemption of junior shares or shares of preferred stock,
unless full cumulative dividends upon all series and classes
of preferred stock then outstanding to the end of the
dividend period next preceding the date fixed for such
redemption (and for the current dividend period if the date
fixed for such redemption is a dividend payment date) shall
have been declared and shall have been paid or set aside for
payment. As used herein, the term "junior shares" shall mean
common shares or any other shares ranking junior to the
preferred stock either as to dividends or upon liquidation,
dissolution, or winding up.
(d) The shares of the 6-7/8% Series shall not be subject to
redemption by this corporation prior to July 31, 1998. On and
after July 31, 1998, the redemption price shall be $25.00 per
share, together with an amount equal to all accumulated and
unpaid dividends thereon to and including the date of
redemption. For the purpose of redeeming any shares of the
6-7/8% Series, payment of the redemption price shall be out
of any funds of the corporation legally available therefor
remaining after: (i) full cumulative dividends upon all
series and classes of preferred stock then outstanding to the
end of the dividend period next preceding the date fixed for
such redemption (and for the current dividend period if the
date fixed for such redemption is a dividend payment
9-2
<PAGE>
date) shall have been declared and shall have been paid or
set apart for payment, and (ii) all money shall have been
paid to or set aside or made available for any sinking fund
for the purchase or redemption of all series of and classes
of preferred stock as may be required by the terms of such
preferred stock.
(e) Any shares of the 6-7/8% Series which have been redeemed,
purchased, or otherwise acquired by the corporation shall
become authorized and unissued shares of the First Preferred
Stock, $25 par value, but shall not be reissued as shares of
the 6-7/8% Series.
(f) Upon liquidation, dissolution, or winding up of the
corporation, the holders of shares of the 6-7/8% Series shall
be entitled to receive the liquidation value per share, which
is hereby fixed at $25.00 per share, plus an amount equal to
all accumulated and unpaid dividends thereon at such time,
whether or not earned or declared.
(g) Dividends shall be computed on a basis of a 360-day year
of twelve 30-day months.
(h) If the date for payment of any dividend or the date fixed
for redemption of any share of the 6-7/8% Series shall not be
a business day, then payment of the dividend or applicable
redemption price need not be made on such date, but may be
made on the next succeeding business day with the same force
and effect as if made on the date for payment of such
dividend or date fixed for redemption.
9-3
<PAGE>
EXHIBIT 10
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF 6.30% REDEEMABLE FIRST PREFERRED STOCK OF
PACIFIC GAS AND ELECTRIC COMPANY
WHEREAS, the Articles of Incorporation of this corporation provide for a
class of stock known as First Preferred Stock, issuable from time to time in one
or more series, of which a series of such class of stock was issued as the 6.30%
Redeemable First Preferred Stock, $25 par value (herein called the "6.30%
Series"); and
WHEREAS, it is in the best interest of this corporation to restate the
Certificate of Determination of Preferences of the 6.30% Series to eliminate the
portions of the officers' certificate and verification which do not set forth
any of the rights, preferences, privileges, or restrictions of the 6.30% Series.
NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the
Certificate of Determination of Preferences of the 6.30% Series is hereby
approved; and
BE IT FURTHER RESOLVED, that the Certificate of Determination of
Preferences of the 6.30% Series is hereby approved and adopted as restated in
its entirety as follows:
2,500,000 shares of this corporation's unissued Redeemable First
Preferred Stock, $25 par value, shall constitute a series designated "6.30%
Redeemable First Preferred Stock" (hereinafter referred to as the "6.30%
Series").
The terms of the 6.30% Series are hereby fixed as follows:
(a) The holders of shares of the 6.30% Series shall be
entitled to receive, when and as declared by the Board of
Directors, dividends at the rate of 6.30 percent of par value
thereof per annum, and no more. Such dividends shall be
cumulative with respect to each share from the date of issuance
thereof.
10-1
<PAGE>
(b) No dividend shall be declared or paid on any shares of the
6.30% Series or on any shares of any other series or class of
preferred stock unless a ratable dividend on the 6.30% Series and
such other series or class of preferred stock, in proportion to
the full preferential amounts to which each series or class is
entitled, is declared and is paid or set apart for payment. As
used herein, the term "preferred stock" shall mean all series of
the first preferred stock, $25 par value per share, and first
preferred stock, $100 par value per share, and any other class of
stock ranking equally with the preferred stock as to preference
in dividends and liquidation rights, notwithstanding that shares
of such series and classes may differ as to amounts of dividends
or liquidation payments to which they are entitled.
(c) No junior shares or shares of preferred stock shall be
purchased, redeemed, or otherwise acquired by the corporation,
and no moneys shall be paid to or set aside or made available for
a sinking fund for the purchase or redemption of junior shares or
shares of preferred stock, unless full cumulative dividends upon
all series and classes of preferred stock then outstanding to the
end of the dividend period next preceding the date fixed for such
redemption (and for the current dividend period if the date fixed
for such redemption is a dividend payment date) shall have been
declared and shall have been paid or set aside for payment. As
used herein, the term "junior shares" shall mean common shares or
any other shares ranking junior to the preferred stock either as
to dividends or upon liquidation, dissolution, or winding up.
(d) The shares of the 6.30% Series shall not be subject to
redemption by this corporation prior to January 31, 2004. On and
after January 31, 2004, the redemption price shall be $25.00 per
share, together with an amount equal to all accumulated and
unpaid dividends thereon to and including the date of redemption.
For the purpose of redeeming any shares of the 6.30% Series,
payment of the redemption price shall be out of any funds of the
corporation legally available therefor remaining after: (i) full
cumulaticw dividends upon all series and classes of preferred
stock then outstanding to the end of the dividend period next
preceding the date fixed for such redemption (and for the current
dividend period if
10-2
<PAGE>
the date fixed for such redemption is a dividend payment date)
shall have been declared and shall have been paid or set apart for
payment, and (ii) all money shall have been paid to or set aside
or made available for any sinking fund for the purchase or
redemption of all series of and classes of preferred stock as may
be required by the terms of such preferred stock.
(e) Shares of the 6.30% Series shall also be subject to redemption
through the operation of a sinking fund (herein called the
"Sinking Fund") at the redemption price (the "Sinking Fund
Redemption Price") of $25.00 per share plus an amount equal to the
accumulated and unpaid dividends thereon to and including the
redemption date, whether or not earned or declared. For the
purposes of the Sinking Fund, out of any funds of the corporation
legally available therefor remaining after full cumulative
dividends upon all series and classes of preferred stock then
outstanding to the end of the dividend period next preceding the
date fixed for such redemption (and for the current dividend
period if the date fixed for such redemption is a dividend payment
date) shall have been declared and shall have been paid or set
apart for payment, the corporation shall redeem 125,000 shares of
the 6.30% Series annually on each January 31, from 2004 through
2008, inclusive, and 1,875,000 shares on January 31, 2009, at the
Sinking Fund Redemption Price. The Sinking Fund shall be
cumulative so that if on any such January 31 the funds of the
corporation legally available therefor shall be insufficient to
permit the required redemption in full, or if for any other reason
such redemption shall not have been made in full, the remaining
shares of the 6.30% Series so required to be redeemed shall be
redeemed before any cash dividend shall be paid or declared, or
any distribution made, on any junior shares or before any junior
shares or any shares of preferred stock shall be purchased,
redeemed or otherwise acquired by the corporation, or any moneys
shall be paid to or set aside or made available for a sinking fund
for the purchase or redemption of any junior shares or any shares
of preferred stock; provided, however, that, notwithstanding the
existence of any such deficiency, the corporation may make any
required sinking fund redemption on any other series or class of
preferred stock if the number of shares of such other series or
10-3
<PAGE>
class of preferred stock being so redeemed bears (as nearly as
practicable) the same ratio to the aggregate number of shares of
such other series or class then due to be redeemed as the number
of shares of the 6.30% Series being redeemed bears to the
aggregate number of shares of the 6.30% Series then due to be
redeemed.
(f) Shares of the 6.30% Series redeemed otherwise than as required
by section (e) or purchased or otherwise acquired by the
corporation may, at the option of the corporation, be applied as a
credit against any Sinking Fund redemption required by section
(e). Moneys available for the Sinking Fund shall be applied on
each such January 31 to the redemption of shares of the 6.30%
Series.
(g) Any shares of the 6.30% Series which have been redeemed,
purchased, or otherwise acquired by the corporation shall become
authorized and unissued shares of the First Preferred Stock, $25
par value, but shall not be reissued as shares of the 6.30%
Series.
(h) Upon liquidation, dissolution, or winding up of the
corporation, the holders of shares of the 6.30% Series shall be
entitled to receive the liquidation value per share, which is
hereby fixed at $25.00 per share, plus an amount equal to all
accumulated and unpaid dividends thereon at such time, whether or
not earned or declared.
(i) Dividends shall be computed on a basis of a 360-day year of
twelve 30-day months.
(j) If the date for payment of any dividend or the date fixed for
redemption of any share of the 6.30% Series shall not be a
business day, then payment of the dividend or applicable
redemption price need not be made on such date, but may be made on
the next succeeding business day with the same force and effect as
if made on the date for payment of such dividend or date fixed for
redemption.
10-4
<PAGE>
EXHIBIT 11
PG&E CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three months ended March 31,
----------------------------
(in thousands, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE (EPS) AS SHOWN
IN THE STATEMENT OF CONSOLIDATED INCOME
<S> <C> <C>
Net income for calculating EPS for
Statement of Consolidated Income $ 172,504 $ 252,426
========== ==========
Average common shares outstanding 408,526 414,351
========== ==========
EPS as shown in the Statement of
Consolidated Income $ 0.42 $ 0.61
========== ==========
PRIMARY EPS (1)
Net income for calculating primary EPS $ 172,504 $ 252,426
========== ==========
Average common shares outstanding 408,526 414,351
Add exercise of options, reduced by the
number of shares that could have been
purchased with the proceeds from
such exercise (at average market price) 84 83
---------- ----------
Average common shares outstanding as
adjusted 408,610 414,434
========== ==========
Primary EPS $ 0.42 $ 0.61
========== ==========
FULLY DILUTED EPS (1)
Net income for calculating fully diluted EPS $ 172,504 $ 252,426
========== ==========
Average common shares outstanding 408,526 414,351
Add exercise of options, reduced by the
number of shares that could have been
purchased with the proceeds from such
exercise (at the greater of average or
ending market price) 126 83
---------- ----------
Average common shares outstanding as
adjusted 408,652 414,434
========== ==========
Fully diluted EPS $ 0.42 $ 0.61
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(1) This presentation is submitted in accordance with Item 601(b)(11) of
Regulation S-K. This presentation is not required by APB Opinion No. 15,
because it results in dilution of less than 3%.
<PAGE>
EXHIBIT 12.1
PACIFIC GAS AND ELECTRIC COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three Months Year ended December 31,
Ended -----------------------------------------------------------
(dollars in thousands) 03/31/97 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net income $172,579 $ 755,209 $1,338,885 $1,007,450 $1,065,495 $1,170,581
Adjustments for minority
interests in losses of
less than 100% owned
affiliates and the
Companys equity in
undistributed losses
(income) of less than
50% owned affiliates - 2,488 3,820 (2,764) 6,895 (3,349)
Income tax expense 137,959 554,994 895,289 836,767 901,890 895,126
Net fixed charges 154,138 683,393 715,975 730,965 821,166 802,198
-------- ---------- ---------- ---------- ---------- ----------
Total Earnings $464,676 $1,996,084 $2,953,969 $2,572,418 $2,795,446 $2,864,556
======== ========== ========== ========== ========== ==========
Fixed Charges:
Interest on long-
term debt $123,267 $ 580,510 $ 627,375 $ 651,912 $ 731,610 $ 739,279
Interest on short-
term borrowings 24,461 75,310 83,024 77,295 87,819 61,182
Interest on capital
leases 485 3,508 2,735 1,758 1,737 1,737
Capitalized Interest 161 637 957 2,660 46,055 6,511
Earnings required to
cover the preferred stock
dividend and preferred
security distribution
requirements of majority
owned subsidiaries 5,925 24,319 3,306 - - -
-------- --------- ---------- ---------- -------- ----------
Total Fixed Charges $154,299 $ 684,284 $ 717,397 $ 733,625 $867,221 $ 808,709
======== ========= ========== ========== ======== ==========
Ratios of Earnings to
Fixed Charges 3.01 2.92 4.12 3.51 3.22 3.54
- --------------------------------------------------------------------------------
</TABLE>
Note: For the purpose of computing PG&E's ratios of earnings to fixed charges,
"earnings" represent net income adjusted for the minority interest in
losses of less than 100% owned affiliates, PG&E's equity in undistributed
income or loss of less than 50% owned affiliates, income taxes and fixed
charges (excluding capitalized interest). "Fixed charges" include
interest on long-term debt and short-term borrowings (including a
representative portion of rental expense), amortization of bond premium,
discount and expense, interest on capital leases, and earnings required
to cover the preferred stock dividend requirements of majority owned
subsidiaries.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.2
PACIFIC GAS AND ELECTRIC COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
- ---------------------------------------------------------------------------------------------------------
Three Months Year ended December 31,
ended ----------------------------------------------------------
(dollars in thousands) 03/31/97 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net income $ 172,579 $ 755,209 $1,338,885 $1,007,450 $1,065,495 $1,170,581
Adjustments for minority
interests in losses of
less than 100% owned
affiliates and the
Company's equity in
undistributed losses
(income) of less than
50% owned affiliates -- 2,488 3,820 (2,764) 6,895 (3,349)
Income tax expense 137,959 554,994 895,289 836,767 901,890 895,126
Net fixed charges 154,138 683,393 715,975 730,965 821,166 802,198
---------- ---------- ---------- ---------- ---------- ----------
Total Earnings $ 464,676 $1,996,084 $2,953,969 $2,572,418 $2,795,446 $2,864,556
========== ========== ========== ========== ========== ==========
Fixed Charges:
Interest on long-
term debt $ 123,267 $ 580,510 $ 627,375 $ 651,912 $ 731,610 $ 739,279
Interest on short-
term debt 24,461 75,310 83,024 77,295 87,819 61,182
Interest on capital
leases 485 3,508 2,735 1,758 1,737 1,737
Capitalized Interest 161 637 957 2,660 46,055 6,511
Earnings required to
cover the preferred stock
dividend and preferred
security distribution
requirements of majority
owned subsidiaries 5,925 24,319 3,306 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Fixed Charges $ 154,299 $ 684,284 $ 717,397 733,625 867,221 808,709
---------- ---------- ---------- ---------- ---------- ----------
Preferred Stock Dividends:
Tax deductible dividends 2,514 10,057 11,343 4,672 4,814 5,136
Pretax earnings required
to cover non-tax
deductible preferred
stock dividend
requirements 9,777 39,108 99,984 96,039 108,937 130,147
---------- ---------- ---------- ---------- ---------- ----------
Total Preferred
Stock Dividends 12,291 49,165 111,327 100,711 113,751 135,283
----------- ---------- ---------- ---------- ---------- ----------
Total Combined Fixed
Charges and Preferred
Stock Dividends $ 166,590 $ 733,449 $ 828,724 $ 834,336 $ 980,972 $ 943,992
=========== ========== ========== ========== ========== ==========
Ratios of Earnings to
Combined Fixed Charges and
Preferred Stock Dividends 2.79 2.72 3.56 3.08 2.85 3.03
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Note: For the purpose of computing PG&E's ratios of earnings to combined fixed
charges and preferred stock dividends, "earnings" represent net income
adjusted for the minority interest in losses of less than 100% owned
affiliates, PG&E's equity in undistributed income or loss of less than
50% owned affiliates, income taxes and fixed charges (excluding
capitalized interest). "Fixed charges" include interest on long-term debt
and short-term borrowings (including a representative portion of rental
expense), amortization of bond premium, discount and expense, interest on
capital leases, and earnings required to cover the preferred stock
dividend requirements of majority owned subsidiaries. "Preferred stock
dividends" represent pretax earnings which would be required to cover
such dividend requirements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PG&E
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 19,133,798
<OTHER-PROPERTY-AND-INVEST> 819,925
<TOTAL-CURRENT-ASSETS> 2,816,057
<TOTAL-DEFERRED-CHARGES> 2,660,344
<OTHER-ASSETS> 1,206,496
<TOTAL-ASSETS> 26,636,620
<COMMON> 5,867,370
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 2,553,421
<TOTAL-COMMON-STOCKHOLDERS-EQ> 8,420,791
437,500
390,591
<LONG-TERM-DEBT-NET> 7,715,826
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 606,708
<LONG-TERM-DEBT-CURRENT-PORT> 12,643
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 9,052,561
<TOT-CAPITALIZATION-AND-LIAB> 26,636,620
<GROSS-OPERATING-REVENUE> 3,365,494
<INCOME-TAX-EXPENSE> 150,704
<OTHER-OPERATING-EXPENSES> 2,907,106
<TOTAL-OPERATING-EXPENSES> 2,907,106
<OPERATING-INCOME-LOSS> 458,388
<OTHER-INCOME-NET> 30,996
<INCOME-BEFORE-INTEREST-EXPEN> 489,384
<TOTAL-INTEREST-EXPENSE> 157,898
<NET-INCOME> 172,504
8,278
<EARNINGS-AVAILABLE-FOR-COMM> 172,504
<COMMON-STOCK-DIVIDENDS> 124,341
<TOTAL-INTEREST-ON-BONDS> 102,409
<CASH-FLOW-OPERATIONS> 969,355
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
