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: April 18, 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
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.
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 wholly
owned 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 three principal business lines:
Utility (consisting of PG&E, including Diablo Canyon Nuclear
Power Plant (Diablo Canyon) operations); Gas Holdings (consisting
of Pacific Gas Transmission Company (PGT), PG&E Gas Transmission,
Texas Corporation (formerly known as Teco Pipeline Company), PG&E
Energy Trading (formerly known as Energy Source, Inc.) and PGT
Australia Pty Limited); and Enterprises (consisting of PG&E
Enterprises' electric generation and energy services operations)
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 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, who also
has the discretion to modify or eliminate non-officer awards.
The performance measurement target for the 1997 Plan year was
disclosed on 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.
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, based in part on the assumption
that the Diablo Canyon Rate Case Settlement (Diablo Settlement)
will be modified substantially consistent with an application
filed with the California Public Utilities Commission (CPUC) by
PG&E in March 1996. PG&E's Diablo Settlement modification
proposal would replace the current performance-based ratemaking
for Diablo Canyon, which based revenues primarily on the amount
of electricity generated by the plant. The current ratemaking
would 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. 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 replacement of the customer
information system.
Due in part to the planned levels of expenditures on maintenance
of and investment in upgrading the utility infrastructure, and
also due 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 other subsidiaries of PG&E
Corporation, the 1997 budgeted earnings per common share assumes
contribution to earnings of $.13 per common share from Gas
Holdings and $.01 per common share from Enterprises.
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.
On a quarterly basis, PG&E Corporation discloses year-to-date
financial performance relating to its principal business lines.
For the three months ended March 31, 1997, selected financial
information is shown below:
Three Months Ended March 31, 1997
=================================================================
Actual (1) Budget
(unaudited)
Earnings (Loss) Per
Common Share:
Utility $ 0.40 $ 0.33 (2)
Gas Holdings 0.02 0.03
Enterprises 0.00 0.00
----------- -----------
PG&E Corporation $ 0.42 $ 0.36
=========== ===========
(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.
(2) Budgeted positive earnings arising under the ICIP for first
quarter operations have been deferred to the second quarter,
pending CPUC action on the proposed modification to Diablo Canyon
ratemaking.
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. The budgeted amount does
not reflect the resolution of various regulatory uncertainties or
other contingencies, including those disclosed in the Notes to
PG&E's and PG&E Corporation's Consolidated Financial Statements
or in PG&E's and PG&E Corporation'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 cause actual
results to differ materially from budgeted amounts include the
following:
- The final decision issued by the CPUC on PG&E's Diablo
Settlement modification proposal. That decision will address the
amount of Diablo Canyon sunk costs that may be recovered. In
addition, PG&E's recovery of revenue based on the performance-
based ICIP will depend on the capacity factor and cost
assumptions adopted by the CPUC in implementing PG&E's Diablo
Canyon pricing proposal. To the extent that the capacity factor,
expenses or sunk cost amounts assumed in deriving the 1997 budget
are different than those ultimately adopted by the CPUC in
setting Diablo Canyon rates and/or from actual results, earnings
would differ. In February 1997, a CPUC administrative law judge
(ALJ) issued a proposed decision which adopts the overall
ratemaking structure proposed by PG&E, but with substantial
alterations to the ICIP and exclusion of certain items from the
sunk cost revenue requirement.
- The possibility of accelerated depreciation of non-
nuclear generating assets at a reduced return on equity. In its
Diablo Settlement modification proposal, PG&E is seeking the
discretion to accelerate depreciation of its non-nuclear
generating assets at a reduced return tied to the embedded cost
of debt, beginning in 1997, should it choose to do so. The 1997
budget does not assume any accelerated depreciation for non-
nuclear generating assets at the reduced return.
- 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.
- 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 begins 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 ratemaking
methodology adopted for Diablo Canyon. A change in these factors
could affect the probability of recovery of PG&E's generation-
related regulatory assets and the determination of plant
impairment and could result in a material loss.
- Changes in accounting due to changes in the regulatory
or competitive environment in the electric or gas industries,
including the possible discontinued application of Statement of
Financial Accounting Standards No. 71. See Item B. below.
- Whether the CPUC approves the Gas Accord Settlement in
the form submitted by PG&E. The Gas Accord would restructure
PG&E's gas services and its role in the gas market and establish
gas transmission rates for the period July 1997 through December
2002. In March 1997, an ALJ issued a proposed decision rejecting
the Gas Accord. See Item C. below.
B. Application of SFAS 71.
As a result of California's electric industry restructuring and
related legislation, the staff of the Securities and Exchange
Commission (SEC) has begun discussions with PG&E and other
California utilities regarding the appropriateness of the
continued application of Statement of Financial Accounting
Standards No. 71 "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71), for the generation portion of the electric
utilities' businesses as of January 1, 1997. PG&E believes it
currently meets and will continue to meet the requirements to
apply SFAS 71 during the electric industry restructuring
transition period. PG&E has held discussions with the SEC staff
and provided them with information in support of its position.
The SEC staff, however, has continued to express concern
regarding PG&E's conclusion and in March 1997, requested further
information. PG&E has provided the additional information in
support of its position and anticipates continued meetings with
the SEC staff to resolve their concerns. In addition, PG&E has
recommended that the SEC permit the Emerging Issues Task Force
(EITF) of the Financial Accounting Standards Board to address the
issue. PG&E believes that these issues are of national
importance and that the EITF would provide the framework needed
to establish the accounting standard for application of SFAS 71
to transition cost recovery plans. PG&E believes this standard is
necessary to achieve uniform financial reporting for utilities
undergoing electric industry restructuring.
In applying SFAS 71, PG&E has accumulated approximately $1.6
billion of regulatory assets attributable to the electric
generation portion of its business at March 31, 1997. In the
event that the SEC ultimately concludes that the current
regulatory and legal framework in California no longer meets the
requirements to apply SFAS 71 to the generation portion of its
business, PG&E would reevaluate the financial impact of electric
industry restructuring and a material write-off of all or a part
of these assets could occur in 1997. 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.
C. Gas Accord
On March 24, 1997, a CPUC ALJ issued a Proposed Decision (PD)
rejecting the Gas Accord, a comprehensive proposed settlement
which was submitted in 1996 for CPUC approval. The PD is not a
final decision of the CPUC and is subject to change prior to a
vote of the full CPUC. Comments to the PD are due by the end of
April, 1997. It is expected that the CPUC will issue a final
decision in mid-1997.
The Gas Accord was supported by a broad coalition of customer
groups and industry participants. The PD acknowledges that the
Gas Accord has a number of positive features, including its broad
support and the proposed unbundling of PG&E's gas transmission
system, i.e., the separation of PG&E's gas transmission and
storage services from its distribution services which would give
customers the opportunity to select from different services
offered by PG&E and to pay only for the services they use.
Nevertheless, the PD rejects the Gas Accord primarily because (i)
it does not resolve what the ALJ perceives as a conflict of
interest between shareholder and ratepayer interests regarding
the use of PG&E's transportation system in Northern California;
(ii) it is inconsistent with incremental ratemaking principles
under which the rates for gas transportation service to shippers
using Line 401 (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)), are calculated based solely on the incremental cost
of Line 401; (iii) it does not provide sufficient benefits to
PG&E's core ratepayers; and (iv) it settles some issues unfairly,
including the issue of whether PG&E misled the CPUC in connection
with a proceeding before the CPUC, as discussed below.
Specific provisions of the PD include the following:
- - Under the PD, the core procurement incentive mechanisms (CPIM)
which had been proposed in the Gas Accord to replace the
traditional reasonableness review proceedings of PG&E's gas
procurement costs for the periods 1994-97 and 1998-2002, 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 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 Gas Accord,
PG&E agreed not to pursue its challenge in federal court of the
CPUC's 1988-90 reasonableness decision in which the CPUC had not
allowed rate recovery of $90 million of gas costs. If the PD is
adopted without change by the CPUC, PG&E would consider whether
to continue to pursue that challenge.
- - The PD confirms the CPUC's 1994 finding that PG&E's decision to
construct Line 401 was reasonable based on the knowledge PG&E
management had at the time. However, the PD would reverse the
CPUC's original order which found that PG&E would not be
responsible for "stranded costs" caused by Line 401. The PD
defines "stranded costs" caused by Line 401 to include interstate
transition cost surcharge (ITCS) costs (described below), and
costs of unused original system transmission facilities, (i.e.,
Lines 300 and 400, PG&E's major intrastate pipelines other than
Line 401). The PD states that PG&E should absorb these stranded
costs to maintain incremental ratemaking and to avoid imposing
the costs and risks of Line 401 on the customers of the original
transmission system. If the 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, Lines 300, 400 and 401, and PG&E would be at risk for
recovery of the cost of all such service, with no balancing
account protection.
- - The PD would also 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.
(ITCS costs are the difference between demand charges PG&E pays
to interstate pipelines companies 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.) In the PD, the ALJ indicates that he supports a
similar disallowance for subsequent periods. However, the PD
would go further by suspending PG&E's authority to record ITCS
costs for future recovery subsequent to the date of the final
CPUC decision. The 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 Gas Accord, in
contrast, PG&E would forgo recovery of 100 percent and 50 percent
of the ITCS amounts allocated for collection from its core
(residential and small commercial) and noncore (industrial and
large commercial) customers, respectively.
- - The PD would set for further hearing the pipeline expansion
project reasonableness (PEPR) proceeding to determine the capital
costs and revenue requirements of Line 401, rejecting the
resolution of those issues which had been proposed in the Gas
Accord. In the Gas 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.
- - The PD would order an investigation into whether PG&E's conduct
in responding to certain discovery requests made in the
proceeding to determine whether the decision to construct Line
401 was reasonable, misled the CPUC in violation of Rule 1, the
CPUC's Code of Ethics. The CPUC may impose fines and penalties
if it finds that such a violation occurred.
As of March 31, 1997, approximately $529 million had been
reserved relating to these gas regulatory issues and capacity
commitments. As a result, PG&E Corporation believes that if the
PD were adopted by the CPUC without change, it would not have a
material impact on PG&E Corporation's financial position or
results of operations.
D. Common Stock Repurchase Program
In May 1995, the Board of Directors of PG&E authorized PG&E to
purchase up to $1 billion of PG&E common stock under its
repurchase program through June 1998. In December 1996, the
Board of Directors of PG&E rescinded the PG&E stock repurchase
program to be effective on the date of the holding company
reorganization, and the Board of Directors of PG&E Corporation
authorized the repurchase of PG&E Corporation common stock in an
aggregate amount up to the authorization remaining under the PG&E
repurchase program as of the date of the holding company
reorganization. On March 19, 1997, the Board of Directors of
PG&E Corporation authorized PG&E Corporation to repurchase an
additional $1 billion of common stock under its repurchase
program through June 1999. Shares will be repurchased to manage
the overall balance of common stock in PG&E Corporation's capital
structure.
E. Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends
PG&E Corporation and subsidiaries' earnings to fixed charges
ratio for the year ended December 31, 1996 was 2.92. PG&E
Corporation and subsidiaries' earnings to combined fixed charges
and preferred stock dividends ratio for the year ended December
31, 1996 was 2.72.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
(c) Exhibits:
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
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
Controller
(PG&E Corporation)
Vice President and Controller
(Pacific Gas and Electric Company)
Dated: April 18, 1997
EXHIBIT INDEX
Exhibit
Number Exhibit
12.1 Computation of Ratio of Earnings to Fixed Charges
(Incorporated by reference to Exhibit 12.1 to PG&E
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1996.)
12.2 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends (Incorporated by
reference to Exhibit 12.2 to PG&E Corporation's Annual
Report on Form 10-K for the year ended December 31,
1996.)
