SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: October 16, 1997
Exact Name of
Commission Registrant State or other IRS Employer
File as specified Jurisdiction of Identification
Number in its charter Incorporation Number
- ----------- -------------- --------------- --------------
1-12609 PG&E Corporation California 94-3234914
1-2348 Pacific Gas and California 94-0742640
Electric Company
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
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Item 5. Other Events
The following information includes forward-looking statements
that involve a number of risks, uncertainties and assumptions. A
number of factors which could cause actual results to differ
materially from those indicated in the forward-looking statements
are described in more detail below. Words such as "expects,"
"intends," "plans," and similar expressions identify those
statements which are forward-looking.
A. Performance Incentive Plan - Year-to-Date Financial Results
The Performance Incentive Plan (Plan) is an annual incentive
compensation plan applicable to all regular, nonbargaining unit
employees of Pacific Gas and Electric Company (PG&E), a
subsidiary of PG&E Corporation. The Plan provides for
awards based on (1) PG&E Corporation's success in meeting overall
corporate financial performance objectives, based on PG&E
Corporation earnings per share, taking into account financial
results from PG&E Corporation's principal business lines:
Utility (consisting of PG&E, including Diablo Canyon Nuclear
Power Plant (Diablo Canyon) operations), PG&E Gas Transmission
(consisting of Pacific Gas Transmission Company (PGT), PG&E Gas
Transmission, Australia (formerly PGT Australia), PG&E Gas
Transmission, Texas Corporation's natural gas liquids, gas
pipeline and on-system gas marketing segments, and PG&E Gas
Transmission, Teco's pipeline and on-system gas marketing
segments), and Other (consisting primarily of PG&E Energy Trading
Corporation, which includes PG&E Gas Transmission, Teco's off-
system gas marketing segment and the off-system gas marketing
segment of PG&E Gas Transmission, Texas Corporation, PG&E Energy
Services Corporation, US Generating Company (USGen), and PG&E
Enterprises) and (2) the performance of the employee's
organizational unit in meeting its specific unit, team or
individual objectives. The organization objectives may include
such measures as cost control, quality and reliability of service
to customers, public and employee safety, financial performance
and operational efficiency.
Under the Plan, the Nominating and Compensation Committee of the
PG&E Corporation Board of Directors (Committee) makes the final
determination of awards for officers based upon achievement of
the Plan objectives. The Committee has the discretion to modify
or eliminate awards for officers. The final determination of non-
officer awards is made by the chief executive officer of PG&E,
who also has the discretion to modify or eliminate non-officer
awards.
The performance measurement target for the 1997 Plan year was
disclosed in a Report on Form 8-K dated December 20, 1996, and
was based on the corporate operating and capital budgets prepared
for 1997, as approved by the PG&E Corporation Board of Directors
in December 1996, which result in a budgeted corporate earnings
per common share of $1.87.
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The 1997 corporate budget represents the first year of a
transition period as PG&E moves from a traditional utility
business profile to one more reflective of the restructuring of
California's electric and gas utility industries. The 1997
budget reflects reduced earnings from utility operations, based
in part on the assumption that Diablo Canyon ratemaking would be
modified substantially consistent with an application filed with
the California Public Utilities Commission (CPUC) by PG&E in
March 1996. PG&E proposed that current ratemaking be replaced
with a ratemaking methodology that includes (i) recovery of sunk
costs through a sunk cost revenue requirement recovered primarily
without regard to performance and based on a reduced return on
equity of 6.77 percent, and accelerated recovery of depreciation
over a five-year period, and (ii) a performance-based Incremental
Cost Incentive Price (ICIP) for recovery of variable costs and
future capital additions. Based on this proposal, the 1997
budget reflects reduced earnings from Diablo Canyon as a result
of increased depreciation expense and a reduced return on equity
for Diablo Canyon under the new ratemaking methodology relative
to the current ratemaking, beginning in 1997. The 1997 budget
assumes that Diablo Canyon will contribute less than a quarter of
PG&E Corporation's earnings in 1997, a reduction from the 40
percent contribution to budgeted earnings represented by Diablo
Canyon's budgeted earnings in recent years.
The 1997 budget also reflects continuation of PG&E's major
programs to improve electric and gas system maintenance and
customer service. PG&E's utility capital budget for 1997 is
approximately $1.7 billion, which is $.4 billion more than
budgeted in 1996, primarily reflecting investments in electric
distribution system reliability and customer information system
improvements.
Due in part to the planned levels of utility expenditures, and to
an expected increase in the effective tax rate for utility
operations, the return on equity on California utility operations
(excluding Diablo Canyon) is budgeted at 6.5 percent in 1997,
significantly below the return on equity of 11.6 percent
authorized by the CPUC. This higher level of utility spending is
expected to continue for at least two years. Utility return on
equity would improve if these spending levels are incorporated
into PG&E's authorized revenues in its next general rate case in
1999.
With respect to operations at PG&E Corporation's other business
lines, the 1997 budgeted earnings per common share assumes
contribution to earnings of $0.12 per common share from PG&E Gas
Transmission, and $0.02 per common share from Other.
The 1997 budgeted earnings per common share amounts assume that
the average number of shares of common stock outstanding during
1997 is 392 million. The budgeted earnings per common share
amounts assume no significant gain or loss on the sale of assets,
nor does the 1997 budget include any major acquisitions, other
than the acquisition of Teco Pipeline Company, which occurred in
January 1997.
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On a quarterly basis, PG&E Corporation discloses year-to-date
financial performance relating to its principal business lines.
For the nine months ended September 30, 1997, selected financial
information is shown below:
Nine Months Ended September 30, 1997
=================================================================
Actual (1) Budget
(unaudited)
Earnings (Loss) Per
Common Share:
PG&E (Utility) $ 1.35 $ 1.36
PG&E Gas Transmission 0.06 0.09
Other 0.12(2) 0.02
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PG&E Corporation $ 1.53 $ 1.47
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(1) In the opinion of management, the unaudited "actual"
financial information presented above reflects all adjustments to
date which are necessary to present a fair statement of earnings
per common share for the period. All material adjustments are of
a normal recurring nature, except as noted below. This
information should be read in conjunction with the 1996
Consolidated Financial Statements and Notes to Consolidated
Financial Statements incorporated by reference in the Annual
Report on Form 10-K for PG&E Corporation and PG&E, and the PG&E
Corporation Consolidated Financial Statements, PG&E Consolidated
Financial Statements and Notes to Consolidated Financial
Statements included in the Quarterly Reports on Form 10-Q for the
periods ended June 30, 1997 and March 31, 1997 for PG&E
Corporation and PG&E.
(2) Includes a gain on the sale of International Generating
Company, Ltd. (some of which was recognized in the third quarter)
of $0.30 per share, offset in part by write-offs of certain USGen
projects of $.13 per share (including an additional immaterial
write-off made in the third quarter).
Although budgeted corporate earnings per common share is a
performance target and is not a forecast of actual performance
that will be realized by PG&E Corporation, it does constitute a
forward-looking statement which is subject to various risks and
uncertainties. Actual performance during the year may differ
materially from the budgeted amount. In particular, the budgeted
amount does not reflect the final decision issued by the CPUC in
May 1997 on PG&E's proposal to modify Diablo Canyon ratemaking.
As discussed in more detail in PG&E Corporation and PG&E's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, the final decision issued by the CPUC generally adopts the
overall ratemaking structure proposed by PG&E, but with
significant exceptions. Among other things, the CPUC decision
substantially reduces the level of PG&E's proposed ICIP pricing,
imposes a disallowance of about $70 million, and excludes certain
inventory items from the sunk cost revenue requirement. To the
extent
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that the capacity factor, expenses and/or sunk cost
amounts assumed in deriving the 1997 budget were different from
those ultimately adopted by the CPUC in their decision, actual
earnings have and will continue to differ from budgeted earnings.
In addition, the budgeted amount does not reflect the resolution
of various regulatory uncertainties or other contingencies,
including those disclosed in the Notes to PG&E Corporation and
PG&E's Consolidated Financial Statements or in PG&E Corporation
and PG&E's Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q, which could materially affect the performance of PG&E
Corporation or its subsidiaries during the year. The factors and
uncertainties which could, or are currently expected to, cause
actual results to differ materially from budgeted amounts include
the following:
- The continued effect of the CPUC's May 1997 final
decision regarding Diablo Canyon ratemaking, discussed above.
Based on the terms of the final CPUC decision, earnings from
Diablo Canyon in 1997 would be lower than budget by $.07 per
share. The ultimate variance will depend on any differences
between budgeted and actual capacity factor and expenses during
1997.
- PG&E's ability to maintain utility maintenance and
operation expenses at budgeted levels through the year.
- PG&E Corporation's ability to achieve budgeted levels of
stock repurchases in 1997. The level of stock repurchases may be
lower if major acquisitions occur or other business investment
opportunities arise during the year, or if cash flow is lower
than expected. The 1997 budget does not include the impact of
the acquisition of Valero Energy Corporation which was completed
on July 31, 1997, as a result of which PG&E Corporation issued
approximately 31 million shares.
- The outcome of the California electric industry
restructuring and the transition to a competitive environment.
PG&E's ability to recover its transition costs during the
transition period which began in 1997 will be dependent on
several factors, including among other things, continued
application of the regulatory framework established by the
restructuring legislation adopted in California in 1996, the
amount of transition costs approved by the CPUC, the market value
of PG&E's generation plants, future sales levels, fuel and
operating costs, the market price of electricity, and whether the
rate reduction bonds (which are intended to finance PG&E's costs
of providing the ten percent rate reduction for residential and
small commercial customers mandated by the restructuring
legislation and currently scheduled to begin on January 1, 1998)
are issued and if such bonds are not issued whether an
alternative mechanism to sufficiently finance the costs of
providing the rate reduction can be timely implemented. A change
in these factors could affect the probability of recovery of
transition costs and result in a material loss.
- Higher than expected business development and start up
costs associated with PG&E Corporation's unregulated businesses.
In this
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regard, PG&E Corporation has announced plans which
include spending $100 million during the next two years to
support the proposed expansion efforts of its retail energy
marketing subsidiary, PG&E Energy Services. Of the amount
allocable to 1997, approximately $35 million was not included in
the 1997 budget.
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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
CHRISTOPHER P. JOHNS
By ________________________________
CHRISTOPHER P. JOHNS
Vice President and Controller
(PG&E Corporation)
Vice President and Controller
(Pacific Gas and Electric Company)
Dated: October 16, 1997
