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: July 22, 1997
Exact Name of
Commission Registrant State or other IRS Employer
File as specified Jurisdiction of Identification
Number in its charter Incorporation Number
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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.
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 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), PGT
Australia, and PG&E Gas Transmission, Texas Corporation's
pipeline and on-system marketing segments), and Other (consisting
primarily of Energy Trading, which includes PG&E Gas
Transmission, Texas Corporation's off-system marketing segment
and PG&E Energy Trading), PG&E Energy Services, 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 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.
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
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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
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 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 six months ended June 30, 1997, selected financial
information is shown below:
Six Months Ended June 30, 1997
=================================================================
Actual (1) Budget
(unaudited)
Earnings (Loss) Per
Common Share:
Utility $ 0.71 $ 0.71
PG&E Gas Transmission 0.04 0.06
Other 0.16 (2) 0.01
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PG&E Corporation $ 0.91 $ 0.78
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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 Report on Form 10-Q for the
period ended March 31, 1997 for PG&E Corporation and PG&E.
(2) Includes a gain on the sale of International Generating
Company, Ltd. ($0.28 per share), which was offset in part by a
write-off of certain USGen projects ($0.10 per share).
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
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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 final decision issued by the CPUC on PG&E's proposal
to modify Diablo Canyon ratemaking. As discussed in more detail
in PG&E Corporation's and PG&E's Current Report on Form 8-K dated
May 22, 1997, the final decision issued by the CPUC in May 1997
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 that the capacity factor, expenses
and/or sunk cost amounts assumed in deriving the 1997 budget were
different than those ultimately adopted by the CPUC in their
decision, actual earnings will differ from budgeted earnings.
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.
- 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. The Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board is
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currently considering the appropriateness of the continued
application of SFAS No. 71 for the generation portion of electric
utilities' businesses, and is expected to issue a new standard
addressing this issue this year. If PG&E does not meet the
requirements of the new standard and retain the accounting
guidance provided by SFAS No. 71, PG&E would have a material
write-off of its generation-related regulatory assets. The 1997
budget assumes continued application of SFAS No. 71.
- Higher than expected business development and start up
costs associated with PG&E Corporation's unregulated businesses.
In this regard, PG&E Corporation recently 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: July 22, 1997
