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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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IRS Employer
Commission Exact Name of Registrant State of Identification
File Number as specified in its charter Incorporation Number
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1-12609 PG&E CORPORATION California 94-3234914
1-2348 PACIFIC GAS AND ELECTRIC COMPANY California 94-0742640
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Pacific Gas and Electric Company PG&E Corporation
77 Beale Street One Market, Spear Tower
P.O. Box 770000 Suite 2400
San Francisco, California San Francisco, California
(Address of principal executive (Address of principal executive
offices) offices)
94177 94105
(Zip Code) (Zip Code)
(415) 973-7000 (415) 267-7000
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange on
Title of Each Class Which Registered
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PG&E Corporation
Common Stock, no par value New York Stock Exchange and
Pacific Exchange
Pacific Gas and Electric Company
First Preferred Stock, cumulative, American Stock Exchange and
par value $25 per share: Pacific Exchange
Redeemable: 7.04%, 5% Series A, 5%, 4.80%,
4.50%, 4.36%
Mandatorily Redeemable: 6.57%, 6.30%
Nonredeemable: 6%, 5.50%, 5%
7.90% Cumulative Quarterly Income Preferred American Stock Exchange and
Securities, Series A (liquidation preference Pacific Exchange
$25), issued by PG&E Capital I and guaranteed by
Pacific Gas and Electric Company
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 22, 2000:
PG&E Corporation Common Stock $8,095 million
Pacific Gas and Electric Company First Preferred Stock $331 million
Common Stock outstanding as of February 22, 2000:
PG&E Corporation: 384,825,799
Pacific Gas and Electric Company: Wholly owned by PG&E Corporation
The market values of certain series of First Preferred Stock, for which
market prices as of a date within 60 days prior to the date of filing were not
available, were derived by dividing the annual dividend rate of each such
series of stock by the average yield of all of Pacific Gas and Electric
Company's Preferred Stock outstanding for which market prices were available.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the documents listed below have been incorporated by reference
into the indicated parts of this report, as specified in the responses to the
item numbers involved.
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(1) Designated portions of the combined Annual Report to
Shareholders for the year ended December 31, 1999..... Part I (Item 1), Part II (Items 5, 6, 7, 7A, and 8)
Part IV (Item 14)
(2) Designated portions of the Joint Proxy Statement
relating to the 2000 Annual Meetings of Shareholders.. Part III (Items 10, 11, 12, and 13)
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TABLE OF CONTENTS
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Page
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Glossary of Terms.............................................. iii
PART I
Item 1. Business....................................................... 1
GENERAL........................................................ 1
Corporate Structure and Business............................... 1
Competition and the Changing Regulatory Environment............ 2
Regulation of PG&E Corporation................................. 3
Regulation of Pacific Gas and Electric Company................. 4
State Regulation............................................. 4
Federal Regulation........................................... 4
Licenses and Permits......................................... 4
Regulation of the National Energy Group........................ 4
Risk Management Programs....................................... 5
UTILITY OPERATIONS............................................. 7
Ratemaking Mechanisms.......................................... 7
Electric Ratemaking.......................................... 8
Gas Ratemaking............................................... 11
Electric Utility Operations.................................... 12
California Electric Industry Restructuring................... 12
The California Independent System Operator and the
California Power Exchange................................. 12
Voluntary Generation Asset Divestiture..................... 13
Recovery of Transition Costs............................... 14
Retail Direct Access....................................... 14
Rate Levels and Rate Reduction Bonds....................... 15
Public Purpose Programs.................................... 15
Distributed Generation and Electric Distribution
Competition............................................... 15
Electric Operating Statistics.................................. 16
Electric Generating Capacity................................... 17
Diablo Canyon.................................................. 18
Diablo Canyon Operations..................................... 18
Diablo Canyon Ratemaking..................................... 19
Nuclear Fuel Supply and Disposal............................. 19
Insurance.................................................... 20
Decommissioning.............................................. 20
Other Electric Resources....................................... 21
QF Generation and Other Power Purchase Contracts............. 21
Electric Transmission and Distribution......................... 22
Gas Utility Operations......................................... 23
Gas Operating Statistics....................................... 24
Natural Gas Supplies........................................... 25
Gas Regulatory Framework....................................... 25
Transportation Commitments..................................... 26
Core Procurement Incentive Mechanism........................... 27
NATIONAL ENERGY GROUP.......................................... 28
Gas Transmission Operations.................................... 28
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TABLE OF CONTENTS--(Continued)
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PG&E Gas Transmission, Texas................................ 28
PG&E GT-Northwest........................................... 29
Independent Power Generation.................................. 30
New England Operations...................................... 30
Portfolio of Operating Generating Plants...................... 31
Generation Development Projects............................. 32
Energy Trading................................................ 32
Energy Services............................................... 33
ENVIRONMENTAL MATTERS......................................... 34
Environmental Matters......................................... 34
Environmental Protection Measures........................... 34
Air Quality................................................. 34
Water Quality............................................... 35
Hazardous Waste Compliance and Remediation.................. 36
Potential Recovery of Hazardous Waste Compliance and
Remediation Costs.......................................... 37
Compressor Station Litigation............................... 38
Electric and Magnetic Fields................................ 38
Low Emission Vehicle Programs............................... 38
Item 2. Properties.................................................... 39
Item 3. Legal Proceedings............................................. 39
Compressor Station Chromium Litigation........................ 39
Texas Franchise Fee Litigation................................ 40
Item 4. Submission of Matters to a Vote of Security Holders........... 42
EXECUTIVE OFFICERS OF THE REGISTRANTS......................... 43
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 46
Item 6. Selected Financial Data....................................... 46
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 46
Item 8. Financial Statements and Supplementary Data................... 46
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 47
PART III
Item 10. Directors and Executive Officers of the Registrant............ 47
Item 11. Executive Compensation........................................ 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 47
Item 13. Certain Relationships and Related Transactions................ 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 48
Signatures.................................................... 52
Independent Auditors' Report (Deloitte & Touche LLP).......... 53
Independent Auditors' Report (Arthur Andersen LLP)............ 54
Report of Independent Public Accountants (Arthur Andersen
LLP)......................................................... 55
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GLOSSARY OF TERMS
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AB 1890.................... Assembly Bill 1890, the California electric industry restructuring legislation
AEAP....................... Annual Earnings Assessment Proceeding
ATCP....................... Annual Transition Cost Proceeding
BCAP....................... Biennial Cost Allocation Proceeding
bcf........................ billion cubic feet
BRPU....................... Biennial Resource Plan Update
BTA........................ best technology available
Btu........................ British thermal unit
CARE....................... California Alternate Rates for Energy
CCAA....................... California Clean Air Act
CEC........................ California Energy Commission
CEMA....................... Catastrophic Event Memorandum Account
Central Coast Board........ Central Coast Regional Water Quality Control Board
CERCLA..................... Comprehensive Environmental Response, Compensation, and Liability Act
core customers............. residential and smaller commercial gas customers
core subscription
customers................. noncore customers who choose bundled service
CPIM....................... core procurement incentive mechanism
CPUC....................... California Public Utilities Commission
CTC........................ competition transition charge
Diablo Canyon.............. Diablo Canyon Nuclear Power Plant
DOE........................ United States Department of Energy
DSM........................ demand side management
EDRA....................... Electric Deferred Refund Account
El Paso.................... El Paso Natural Gas Company
EMF........................ electric and magnetic fields
EPA........................ United States Environmental Protection Agency
ERCA....................... Electric Restructuring Costs Account
FERC....................... Federal Energy Regulatory Commission
Gas Accord................. Gas Accord Settlement
Geysers.................... The Geysers Power Plant
GRC........................ General Rate Case
Holding Company Act........ Public Utility Holding Company Act of 1935
Humboldt................... Humboldt Bay Power Plant
HWRC....................... hazardous waste remediation costs
ICIP....................... Incremental Cost Incentive Price
IPP........................ Independent power producer
ISO........................ Independent System Operator
kV......................... kilovolts
kVa........................ kilovolt-amperes
kW......................... kilowatts
kWh........................ kilowatt-hour
LEV........................ low emission vehicle
Mcf........................ thousand cubic feet
MDt........................ thousand decatherms
MMcf....................... million cubic feet
MMcf/d..................... million cubic feet per day
MW......................... megawatts
MWh........................ megawatt-hour
NEES....................... New England Electric System
NEIL....................... Nuclear Electric Insurance Limited
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iii
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GLOSSARY OF TERMS--(Continued)
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NGL........................ natural gas liquids
noncore customers.......... industrial and larger commercial gas customers
NOx........................ oxides of nitrogen
NRC........................ Nuclear Regulatory Commission
Nuclear Waste Act.......... Nuclear Waste Policy Act of 1982
ORA........................ Office of Ratepayer Advocates, a division of the California Public Utilities
Commission
PBR........................ performance-based ratemaking
PG&E Expansion............. the Pacific Gas and Electric Company portion of the Pipeline Expansion
PG&E ET.................... PG&E Corporation's energy commodities activities, PG&E Energy Trading
or PG&E ET
PG&E ES.................... PG&E Corporation's energy services operations, PG&E Energy Services or
PG&E ES
PG&E Gen................... PG&E Generating Company, LLC and its affiliates
PG&E GT.................... PG&E Corporation's gas transmission operations, PG&E Gas Transmission
or PG&E GT
PG&E GT-Northwest.......... PG&E Gas Transmission, Northwest Corporation formerly known as
Pacific Gas Transmission Company
PG&E GT NW Expansion....... PG&E Gas Transmission, Northwest Corporation's portion of the Pipeline
Expansion
PG&E GTT................... PG&E Gas Transmission, Texas Corporation
PG&E OSC................... PG&E Operating Services Company
Pipeline Expansion......... PG&E GT NW/PG&E Pipeline Expansion
PPPs....................... public purpose programs
PRP........................ potentially responsible party
PURPA...................... Public Utility Regulatory Policies Act of 1978
PX......................... California Power Exchange
QF......................... qualifying facility
RAP........................ Revenue Adjustment Proceeding
RRC........................ The Railroad Commission of Texas
SEC........................ Securities and Exchange Commission
SOS........................ Standard Offer Service
Teco....................... Teco Pipeline Company
TCBA....................... Transition Cost Balancing Account
TRA........................ Transition Revenue Account
Transwestern............... Transwestern Pipeline Company
USGenNE.................... US Gen New England, Inc.
Utility.................... Pacific Gas and Electric Company and it subsidiaries
Valero..................... Valero Energy Corporation
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PART I
ITEM 1. Business.
GENERAL
Corporate Structure and Business
PG&E Corporation is an energy-based holding company headquartered in San
Francisco, California. Effective January 1, 1997, Pacific Gas and Electric
Company (sometimes referred to herein as the "Utility") and its subsidiaries
became subsidiaries of PG&E Corporation, which was incorporated in 1995.
Pacific Gas and Electric Company, incorporated in California in 1905, is an
operating public utility engaged principally in the business of providing
electricity and natural gas distribution and transmission services throughout
most of Northern and Central California. The Utility is primarily regulated by
the California Public Utilities Commission (CPUC) and the Federal Energy
Regulatory Commission (FERC). In the holding company reorganization, Pacific
Gas and Electric Company's outstanding common stock was converted on a share-
for-share basis into PG&E Corporation common stock. Pacific Gas and Electric
Company's debt securities and preferred stock were unaffected and remain
securities of Pacific Gas and Electric Company.
The consolidated financial statements of PG&E Corporation incorporated
herein include the accounts of PG&E Corporation and its wholly owned and
controlled subsidiaries (collectively, PG&E Corporation). The consolidated
financial statements of Pacific Gas and Electric Company incorporated herein
include the accounts of Pacific Gas and Electric Company and its wholly owned
and controlled subsidiaries.
The principal executive offices of PG&E Corporation are located at One
Market, Spear Tower, Suite 2400, San Francisco, California 94105, and its
telephone number is (415) 267-7000. The principal executive offices of Pacific
Gas and Electric Company are located at 77 Beale Street, P.O. Box 770000, San
Francisco, California 94177, and its telephone number is (415) 973-7000.
In addition to the regulated utility business of Pacific Gas and Electric
Company, PG&E Corporation's National Energy Group provides energy products and
services throughout North America. The National Energy Group businesses
develop, construct, operate, own, and manage independent power generation
facilities that serve wholesale and industrial customers through PG&E
Generating Company, LLC (formerly U.S. Generating Company, LLC) and its
affiliates (collectively, PG&E Gen); own and operate natural gas pipelines,
natural gas storage facilities, and natural gas processing plants, primarily
in the Pacific Northwest and Texas, through various subsidiaries of PG&E
Corporation (collectively, PG&E Gas Transmission or PG&E GT); purchase and
sell energy commodities and provide risk management services to customers in
major North American markets, including the National Energy Group's non-
utility businesses, unaffiliated utilities, marketers, municipalities, and
large end-use customers through PG&E Energy Trading--Gas Corporation, PG&E
Energy Trading--Power, L.P., and their affiliates (collectively, PG&E Energy
Trading or PG&E ET); and provide competitively priced electricity, natural
gas, and related services to industrial, commercial, and institutional
customers through PG&E Energy Services Corporation (PG&E Energy Services or
PG&E ES). In the fourth quarter of 1999, PG&E Corporation's Board of Directors
approved a plan for the divestiture of PG&E Corporation's Texas natural gas
and natural gas liquids business. Also in the fourth quarter of 1999, PG&E
Corporation's Board of Directors approved a plan for the divestiture of PG&E
Corporation's retail energy services. See "National Energy Group--Gas
Transmission Operations" and "National Energy Group--Energy Services" below.
As of December 31, 1999, PG&E Corporation had $29.7 billion in assets. PG&E
Corporation generated $20.8 billion in operating revenues for 1999. As of
December 31, 1999, PG&E Corporation and its subsidiaries and affiliates had
22,433 employees. As of December 31, 1999, Pacific Gas and Electric Company
had $21.4 billion in assets. The Utility generated $9.2 billion in operating
revenues for 1999. As of December 31, 1999, the Utility had 18,935 employees.
The gas and electric utility operations of Pacific Gas and Electric Company
represent the largest component of PG&E Corporation's business, contributing
44% of PG&E Corporation's total revenues in 1999.
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PG&E Corporation has identified four reportable operating segments. The
Utility is one reportable operating segment and the other three are part of
PG&E Corporation's National Energy Group (PG&E Gen, PG&E GT, and PG&E ET).
Financial information about each reportable operating segment is provided in
"Management's Discussion and Analysis" in the 1999 Annual Report to
Shareholders and in Note 17 of the "Notes to Consolidated Financial
Statements" beginning on page 63 of PG&E Corporation's 1999 Annual Report to
Shareholders, portions of which are filed as Exhibit 13 to this report.
The following report includes forward-looking statements about the future
that involve a number of risks and uncertainties. These statements are based
on assumptions which management believes are reasonable and on information
currently available to management. These forward-looking statements are
identified by words such as "estimates," "expects," "anticipates," "plans,"
"believes," and other similar expressions. Actual results could differ
materially from those contemplated by the forward-looking statements. Although
PG&E Corporation and the Utility are not able to predict all the factors that
may affect future results, some of the factors that could cause future results
to differ materially from those expressed or implied by the forward-looking
statements include: the pace and extent of the ongoing restructuring of the
electric and natural gas industries across the United States; operational
changes related to industry restructuring, including changes to the Utility's
business processes and systems; the method and timing of disposition and
valuation of the Utility's hydroelectric generation assets; the timing of the
completion of the Utility's transition cost recovery and the consequent end of
the current electric rate freeze in California; any changes in the amount the
Utility is allowed to collect (recover) from its customers for certain costs
which prove to be uneconomic under the new competitive market (called
transition costs); future operating performance at the Utility's Diablo Canyon
Nuclear Power Plant (Diablo Canyon); the method adopted by the CPUC for
sharing the net benefits of operating Diablo Canyon with ratepayers and the
timing of the implementation of the adopted method; the extent of anticipated
growth of transmission and distribution services in the Utility's service
territory; future market prices for electricity; future fuel prices; the
success of management's strategies to maximize shareholder value in PG&E
Corporation's National Energy Group which may include acquisitions or
dispositions of assets or internal restructuring; the extent to which current
or planned generation development projects are completed and the pace and cost
of such completion; generating capacity expansion and retirements by others;
the successful integration and performance of acquired assets; the outcome of
the Utility's various regulatory proceedings, including the the proposal to
auction the Utility's hydroelectric generation assets, the electric
transmission rate case applications, and post-transition period ratemaking
proceedings; fluctuations in commodity gas, natural gas liquid, and
electricity prices and the ability to successfully manage such price
fluctuations; and the pace and extent of competition in the California
generation market and its impact on the Utility's costs and resulting
collection of transition costs. As the ultimate impact of these and other
factors is uncertain, these and other factors may cause future results to
differ materially from results or outcomes currently expected or sought by
PG&E Corporation.
Competition and the Changing Regulatory Environment
The electric and gas industries are continuing to undergo 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 ensure that these services were provided at fair prices.
In 1998, California became one of the first states in the country to
implement electric industry restructuring and establish a competitive market
framework for electric generation. Today, most Californians may continue to
purchase their electricity from investor-owned utilities (such as Pacific Gas
and Electric Company) or they may choose to purchase electricity from
alternative generation providers (such as unregulated power generators and
unregulated retail electricity suppliers such as marketers, brokers, and
aggregators). For those customers who have not chosen an alternative
generation provider, investor-owned utilities, such as Pacific Gas and
Electric Company, continue to be the generation providers. Investor-owned
utilities continue to provide distribution services to substantially all
customers within their service territories, including those customers who
choose an alternative generation provider. The framework for electric industry
restructuring was established in Assembly
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Bill 1890 (AB 1890) passed by the California Legislature and signed by the
Governor in 1996. For information about California electric industry
restructuring, see "Utility Operations--Electric Utility Operations--
California Electric Industry Restructuring" below.
Although the initial stages of restructuring have focussed on competition
among suppliers of generation, the CPUC also is studying the effect of
distributed generation (where the electric energy source is located in close
proximity to electric demand) in the California generation market and possible
changes in the electric distribution function of traditional utilities. See
"Utility Operations--Electric Utility Operations--California Electric Industry
Restructuring--Distributed Generation and Electric Distribution Competition"
below.
Restructuring of the natural gas industry on both the national and the
state level has given choices to California utility customers to meet their
gas supply needs. In August 1997, the CPUC approved the Gas Accord settlement
agreement (Gas Accord) which restructured the Utility's gas services and its
role in the gas market. Among other matters, the Gas Accord separated, or
"unbundled," the rates for the Utility's gas transmission services from its
distribution services. As a result, the Utility's customers may buy gas
directly from competing suppliers and purchase transmission-only and
distribution-only services from the Utility. Most of the Utility's industrial
and larger commercial customers (noncore customers) now purchase their gas
from marketers and brokers. Substantially all residential and smaller
commercial customers (core customers) buy gas as well as transmission and
distribution services from the Utility as a bundled service. For more
information about the Gas Accord and regulatory changes affecting the
California natural gas industry, see "Utility Operations--Gas Utility
Operations--Gas Regulatory Framework " below.
Additional information concerning competition and the changing regulatory
environment is provided in "Management's Discussion and Analysis" in the 1999
Annual Report to Shareholders, beginning on page 5, and in Note 2 of the
"Notes to Consolidated Financial Statements" beginning on page 40 of the 1999
Annual Report to Shareholders, which information is hereby incorporated by
reference.
Regulation of PG&E Corporation
PG&E Corporation and its subsidiaries are exempt from all provisions,
except Section 9(a)(2), of the Public Utility Holding Company Act of 1935
(Holding Company Act). At present, PG&E Corporation has no expectation of
becoming a registered holding company under the Holding Company Act.
PG&E Corporation is not a public utility under the laws of California and
is not subject to regulation as such by the CPUC. However, the CPUC approval
authorizing Pacific Gas and Electric Company to form a holding company was
granted subject to various conditions related to finance, human resources,
records and bookkeeping, and the transfer of customer information. The
financial conditions provide that the Utility is precluded from guaranteeing
any obligations of PG&E Corporation without prior written consent from the
CPUC, the Utility's dividend policy shall continue to be established by the
Utility's Board of Directors as though Pacific Gas and Electric Company were a
stand-alone utility company, and the capital requirements of the Utility, as
determined to be necessary to meet the Utility's service obligations, shall be
given first priority by the Boards of Directors of PG&E Corporation and
Pacific Gas and Electric Company. The conditions also provide that the Utility
shall maintain on average its CPUC-authorized utility capital structure,
although it shall have an opportunity to request a waiver of this condition if
an adverse financial event reduces the Utility's equity ratio by 1% or more.
The CPUC also has adopted complex and detailed rules governing transactions
between California's natural gas local distribution and electric utility
companies and their non-regulated affiliates. The rules permit non-regulated
affiliates of regulated utilities (such as PG&E Energy Services, the non-
regulated energy marketing subsidiary of PG&E Corporation) to compete in the
affiliated utility's service territory, and also to use the name and logo of
their affiliated utility, provided that in California the affiliate includes
certain designated disclaimer language which emphasizes the separateness of
the entities and that the affiliate is not regulated by the CPUC. The rules
also address the separation of regulated utilities and their non-regulated
affiliates and information
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exchange among the affiliates. The rules prohibit the utilities from engaging
in certain practices, which would discriminate against energy service
providers that compete with the utility's non-regulated affiliates.
The CPUC has also established specific penalties and enforcement procedures
for affiliate rules violations. Utilities are required to self-report
affiliate rules violations.
Regulation of Pacific Gas and Electric Company
State Regulation
The CPUC has jurisdiction to regulate the following utility functions
within California: electric distribution service, gas distribution service,
and gas transmission service. The CPUC regulates Pacific Gas and Electric
Company's rates and conditions of service, sales of securities, dispositions
of utility property, rates of return, rates of depreciation, and long-term
resource procurement. The CPUC also conducts various reviews of utility
performance and conducts investigations into various matters, such as
deregulation, competition, and the environment, in order to determine its
future policies. The CPUC consists of five members appointed by the Governor
and confirmed by the State Senate for six-year terms.
The California Energy Commission (CEC) has the responsibility to make
electric-demand forecasts for the state and for specific service territories.
Based upon these forecasts, the CEC determines the need for additional energy
sources and for conservation programs. The CEC sponsors alternative-energy
research and development projects, promotes energy conservation programs, and
maintains a statewide plan of action in case of energy shortages. In addition,
the CEC certifies power plant sites and related facilities within California.
The CEC also administers funding for public purpose research and development,
and renewable technologies programs.
Federal Regulation
The FERC regulates electric transmission rates and access, operation of the
California Independent System Operator (ISO) and the California Power Exchange
(PX), uniform systems of accounts, and electric contracts involving sales of
electricity for resale. The FERC also has jurisdiction over the Utility's
electric transmission revenue requirements and rates. The FERC also regulates
the interstate transportation of natural gas. Further, most of the Utility's
hydroelectric facilities are subject to licenses issued by the FERC.
The Nuclear Regulatory Commission (NRC) oversees the licensing,
construction, operation, and decommissioning of nuclear facilities, including
Diablo Canyon and the nuclear generating unit at Humboldt Bay Power Plant
(Unit 3). NRC regulations require extensive monitoring and review of the
safety, radiological, and environmental aspects of these facilities.
Licenses and Permits
Pacific Gas and Electric Company obtains a number of permits,
authorizations, and licenses in connection with the construction and operation
of its generating plants, transmission lines, and gas compressor station
facilities. Discharge permits, various Air Pollution Control District permits,
United States Department of Agriculture--Forest Service permits, FERC
hydroelectric facility and transmission line licenses, and NRC licenses are
the most significant examples. Some licenses and permits may be revoked or
modified by the granting agency if facts develop or events occur that differ
significantly from the facts and projections assumed in granting the approval.
Furthermore, discharge permits and other approvals and licenses are granted
for a term less than the expected life of the associated facility. Licenses
and permits may require periodic renewal, which may result in additional
requirements being imposed by the granting agency. Pacific Gas and Electric
Company currently has ten hydroelectric projects and one transmission line
project undergoing FERC license renewal.
Regulation of the National Energy Group
In addition to Pacific Gas and Electric Company, certain of PG&E
Corporation's other subsidiaries that conduct interstate gas transmission and
storage and electric wholesale power marketing operations are subject to
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FERC jurisdiction. The FERC also has authority to regulate rates for natural
gas transportation and storage in interstate commerce. The FERC also regulates
certain transportation and storage transactions on the intrastate pipelines
pursuant to Section 311 of the Natural Gas Policy Act of 1978.
The Railroad Commission of Texas (RRC) regulates gas utilities, including
those owned by PG&E Corporation through PG&E Gas Transmission, Texas
Corporation (PG&E GTT), PG&E Gas Transmission Teco, Inc., and other affiliates
operating in Texas. The RRC's gas proration rules govern the wellhead
production and purchase of gas. Intrastate pipelines can provide intrastate
gas transportation at negotiated rates that are presumed just and reasonable.
If the criteria for negotiated rates cannot be met, the RRC may assess a cost-
of-service-based rate. The RRC also may regulate certain sales of gas.
Currently, the price of natural gas sold under a majority of PG&E GTT's gas
sales contracts is not regulated by the RRC. All transportation and gathering
of gas is subject to the RRC Code of Conduct which prohibits undue
discrimination among similarly situated shippers. Further, all transportation
of gas, processing of gas, and transportation of natural gas liquids is
subject to safety regulations enforced by the RRC and the Texas Natural
Resource Conservation Commission.
In addition, the power generation projects that PG&E Gen develops, manages,
or owns are subject to differing types of federal regulation depending on the
regulatory status of the particular project. Some of these projects are exempt
wholesale generators (EWG) under the National Energy Policy Act of 1992, which
status exempts the project from regulation under the Holding Company Act. EWG
status is granted by the FERC upon application by the project. Some projects
have received authority from the FERC to charge market-based rates for the
power they sell, rather than traditional cost-based rates. Many of PG&E Gen's
affiliated projects are qualifying facilities (QFs) under the Public Utility
Regulatory Policies Act of 1978 (PURPA). QF status exempts the project from
regulation under various federal and state laws concerning the electric
industry. PG&E Gen's projects are also subject to various federal, state, and
local regulations concerning siting and environmental matters.
PG&E Corporation's indirect subsidiary USGen New England, Inc. (USGenNE)
acquired the electric generating facilities of the New England Electric System
(NEES) in September 1998. USGenNE also is subject to numerous federal, state,
and local statutes and regulations. USGenNE sells at wholesale all of the
electricity it generates, as well as electricity it purchases from third
parties under existing power sales agreements. Under the Federal Power Act
(FPA), the FERC regulates these wholesale sales. The FERC has approved
USGenNE's rate schedule as a market-based schedule and, accordingly, the FERC
granted USGenNE waivers of certain other requirements that otherwise are
imposed on utilities with cost-based rate schedules. In addition, USGenNE owns
and operates a number of hydroelectric and pumped storage projects that are
licensed by the FERC. These licenses expire periodically and the projects must
be relicensed at that time. USGenNE's licenses for these hydroelectric
projects expire over a period from 2001 to 2020. Before expiration of any one
of the hydroelectric licenses, there is an opportunity for the existing
licensee (as well as others interested in owning and operating the project) to
apply for, and obtain, a new license.
USGenNE also is subject to limited regulation by certain state public
utility commissions located in states where USGenNE owns and operates electric
generating facilities. This regulation does not extend to its rates, which are
regulated exclusively by the FERC, and the scope of this regulation has been
substantially limited by various legislative initiatives.
Other regulatory matters are described throughout this report.
Risk Management Programs
PG&E Corporation has an officer-level Risk Management Committee and has
adopted a Risk Management Policy, approved by the Board of Directors of PG&E
Corporation, for trading and risk management activities. The Risk Management
Committee oversees implementation of the policy, approves the trading and risk
management policies of subsidiaries, and monitors compliance with the policy.
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The Risk Management Policy allows derivatives to be used for both hedging
and non-hedging purposes. (A derivative is a contract whose value is dependent
on or derived from the value of some underlying asset.) PG&E Corporation uses
derivatives for hedging purposes primarily to offset underlying commodity
price risks. PG&E Corporation also participates in markets using derivatives
to gather market intelligence, create liquidity, maintain a market presence,
and take a market view. Such derivatives include forward contracts, futures,
swaps, and options. The Risk Management Policy and the trading and risk
management policies of PG&E Corporation's subsidiaries prohibit the use of
derivatives whose payment formula includes a multiple of some underlying
asset. The Risk Management Committee also monitors the trading and risk
management of PG&E ET, consistent with PG&E Corporation's Risk Management
Policy. See "National Energy Group--Energy Trading."
The CPUC has authorized Pacific Gas and Electric Company to trade natural
gas-based financial instruments to manage price and revenue risks associated
with its natural gas transmission and storage assets, subject to certain
conditions. The CPUC also has authorized the Utility to trade natural gas-
based financial instruments to hedge the gas commodity price swings in serving
core gas customers. In May 1999, the PX obtained FERC approval to operate the
"block forward market" which offers parties the ability to buy and sell
contracts to purchase electricity in the future at prices set in the
contracts. The Utility sought and obtained CPUC authority to participate in
the PX block forward market for contracts that call for delivery of the
purchased electricity by October 31, 2000, as well as to recover costs (such
as gain/losses and transaction fees) associated with its participation in this
market.
Additional information concerning risk management activities and the
financial impact of risk management activities on PG&E Corporation and Pacific
Gas and Electric Company is provided in "Management's Discussion and Analysis"
in the 1999 Annual Report to Shareholders, beginning on page 5 and in Notes 1,
3, and 4 of the "Notes to Consolidated Financial Statements" beginning on pages
36, 45, and 47, respectively, of the 1999 Annual Report to Shareholders, which
information is hereby incorporated by reference.
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UTILITY OPERATIONS
Pacific Gas and Electric Company provides regulated electric and gas
distribution and transmission services in Northern and Central California. The
Utility's service territory covers 70,000 square miles with an estimated
population of approximately 13 million and includes all or portions of 48 of
California's 58 counties. The area's diverse economy includes aerospace,
electronics, financial services, food processing, petroleum refining,
agriculture, and tourism.
Ratemaking Mechanisms
The ratemaking mechanisms affecting both electricity and gas distribution
operations are discussed below.
General Rate Case. The CPUC authorizes an amount, known as "base revenues,"
to be collected from ratepayers to recover Pacific Gas and Electric Company's
basic business and operational costs for its gas and electric distribution
operations. Base revenues, which include non-fuel-related operating and
maintenance costs, depreciation, taxes, and a return on invested capital,
currently are authorized by the CPUC in General Rate Case (GRC) proceedings.
During the GRC, which occurs every three years, the CPUC examines the
Utility's costs and operations to determine the amount of base revenue
requirement the Utility is authorized to collect from customers through base
revenues. The revenue requirement is forecasted on the basis of a specified
test year. (The return component of the Utility's revenue requirement is
computed using the overall cost of capital authorized in other proceedings.)
Following the revenue requirement phase of a GRC, the CPUC conducts a rate
design phase, which allocates revenue requirements and establishes rate levels
for the different classes of customers. On February 17, 2000, the CPUC issued
a decision in the Utility's GRC for the period 1999-2001, further discussed
below. The decision also orders that the Utility file a 2002 GRC, so that the
revenue requirements established in the 2002 GRC will be the starting point
for a future performance based ratemaking (PBR) mechanism (discussed below)
that is intended to eventually replace the GRC mechanism and cost of capital
proceedings.
Cost of Capital. Each year, the Utility files an application with the CPUC
to determine the authorized rate of return that the Utility may earn on its
electric and gas distribution assets and recover from ratepayers. In November
1999, the Utility filed its 2000 cost of capital application. To reflect
increasing interest rates, the Utility has requested a return on equity (ROE)
of 12.5% and an overall rate of return of 9.76% as compared to its 1999
authorized rates of 10.6% ROE and 8.75% overall rate of return. The Utility
has not requested any change in its current authorized capital structure of
46.2% long-term debt, 5.8% preferred stock, and 48% common equity. If granted,
the requested ROE would increase electric distribution revenues by
approximately $36.6 million and natural gas distribution revenues by
approximately $127.8 million based upon the rate base authorized in the 1999
GRC. The Utility requested that a final CPUC decision be issued in June 2000.
On February 17, 2000, the CPUC issued a decision to allow the final CPUC
decision, when it is adopted, to be effective retroactively to February 17,
2000. The return on the Utility's electric transmission-related assets will be
determined by the FERC in 2000. The return on the Utility's natural gas
transmission and storage business was incorporated in rates established in the
Gas Accord settlement. See "Gas Ratemaking--Gas Accord" below. The authorized
ROE for the Utility's remaining generation assets, including Diablo Canyon, is
6.77% throughout the transition period.
Electric and Gas Distribution Performance-Based Ratemaking. In November
1998, the Utility filed an application with the CPUC to establish performance-
based ratemaking (PBR) for electric and gas distribution services. The
proposed distribution PBR would establish electric and gas distribution
revenue requirements for the year in which PBR is approved to 2004 taking the
place of the GRC and cost of capital proceedings for these years. The Utility
proposed that the revenue requirement for the year 2000 be determined by
applying a formula, based principally on inflation and productivity factors,
to the 1999 GRC authorized revenue requirement. In subsequent years, the
formula would be applied to the previous year's authorized revenue
requirement. The proposed PBR also includes a sharing mechanism for earnings
that are significantly above or below the authorized cost of capital, and a
framework for rewards and penalties based upon the achievement of various
performance measures.
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The final decision in the GRC requires the Utility to go forward with the
performance rewards/penalties framework of its PBR proposal, but it requires a
2002 GRC before implementing the PBR mechanism that determines future revenue
requirements based principally on inflation and productivity factors. The
starting point for the PBR mechanism will be the revenue requirements
established in the required 2002 GRC. In any event, after the transition
period, the Utility's earnings from its electric distribution operations will
be subject to volatility as a result of sales fluctuations.
Annual Earnings Assessment Proceeding. The Annual Earnings Assessment
Proceeding (AEAP) determines shareholder incentives to be earned for Pacific
Gas and Electric Company's demand side management (DSM) programs. The Utility
was authorized to collect $15.9 million in incentive payments during 1999. The
Utility has filed an application seeking $28.7 million in incentive payments
relating to 1998 energy efficiency and low-income assistance programs, and DSM
programs from other years to be paid in 2000. After consolidating the adjusted
incentive payment installments from prior years, the net revenue change in
2000 from DSM shareholder incentives should be an electric increase of
approximately $2.47 million and a gas decrease of approximately $0.75 million
assuming the Utility's incentive claims are approved. The 1999 AEAP decision
is expected in the second quarter of 2000.
Catastrophic Event Memorandum Account. The Catastrophic Event Memorandum
Account (CEMA) allows Pacific Gas and Electric Company to track costs incurred
in connection with catastrophic events. On January 7, 1999, the Utility filed
an application with the CPUC in its first CEMA proceeding requesting increases
in electric and gas revenue requirements of $60.1 million and $15.8 million,
respectively, for costs incurred for several emergencies, including the 1991
Oakland Hills Fire and 1998 storms. In September 1999, the Utility entered
into a settlement agreement providing for a $59 million increase in electric
distribution revenue requirement and a $11 million increase in gas
distribution revenue requirement effective January 1, 2000. A CPUC decision is
expected in early 2000.
Electric Ratemaking
The California electric industry restructuring legislation provided for a
transition period during which electric customer rates remain frozen. Any
change in the Utility's electric revenue requirements resulting from the items
discussed below will not change electric customer rates. Under the electric
rate freeze, the portion of total actual revenue that exceeds authorized base
revenues and certain other authorized revenue requirements and costs is
available to recover transition costs during the transition period. Transition
costs are certain generation-related costs that prove to be uneconomic under
the new competitive generation market. (See "Electric Utility Operations--
California Electric Industry Restructuring--Recovery of Transition Costs.")
Therefore, increases in base revenues would reduce the amount of revenue
available to recover transition costs. Conversely, decreases in base revenues
would increase revenue available from frozen rates for recovery of transition
costs. The transition period will end the earlier of December 31, 2001, or
when the Utility has recovered its eligible transition costs. The electric
rate freeze will end the earlier of March 31, 2002, or when the Utility has
recovered its eligible transition costs.
General Rate Case. On February 17, 2000, the CPUC issued a decision in the
Utility's GRC for the period 1999-2001. The decision is retroactive to January
1, 1999. The CPUC authorized increases in base revenues for the Utility's
electric distribution function of $377 million over base revenues authorized
in 1996.
Revenue Adjustment Proceeding. On January 1, 1998, the Transition Revenue
Account (TRA) was established. The TRA is credited with total revenue
collected from ratepayers through frozen rates. From this total revenue the
following items are subtracted: (1) revenues collected for transmission
services and for the payment of rate reduction bond debt service, (2) the
authorized revenue requirement for distribution services, public purpose
programs, and nuclear decommissioning costs, and (3) electric industry
restructuring implementation costs, energy procurement costs, and other costs.
Remaining revenues, if any, are transferred to the Transition Cost Balancing
Account (TCBA) to offset transition costs. The CPUC established a separate
annual proceeding, the Revenue Adjustment Proceeding (RAP), to review and
verify the amounts recorded in
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the TRA, and to verify each electric utility's authorized revenue
requirements, including any necessary adjustments to reflect the revenue
requirements which are approved in other proceedings. The RAP also establishes
revenue allocation and rate design, and identifies all electric balancing and
memorandum accounts for continued retention or elimination. In June 1999, the
CPUC issued a decision in the Utility's first RAP that, among other things,
adopted an agreement between the Utility and the CPUC's Office of Ratepayer
Advocates (ORA) that resolved several rate allocation and rate design issues,
eliminated certain balancing and memorandum accounts, and allows the recovery
of entries made into the TRA from January 1 through May 31, 1998 and certain
other balancing accounts, subject to CPUC audit. On August 9, 1999, the
Utility filed its application in the 1999 RAP addressing revenues and costs
recorded in the TRA from June 1, 1998 through June 30, 1999. A CPUC decision
on this application is expected in late 2000.
Annual Transition Cost Proceeding. The Annual Transition Cost Proceeding
(ATCP), applicable to all California investor owned electric utilities, was
established to verify the accounting and recording of costs and revenues in
the TCBA and ensure that only eligible transition costs have been entered. The
TCBA tracks the revenues available to offset transition costs, including the
accelerated recovery of plant balances, and other generation-related assets
and obligations. Transition costs will receive a limited "reasonableness"
review. On September 1, 1998, the Utility filed its application in the 1998
ATCP requesting that $1.8 billion of costs recorded in the TCBA from January 1
through June 30, 1998 be approved as eligible for recovery as transition
costs. In July 1999, PG&E and ORA filed a joint motion with the CPUC for
approval of a settlement that recommends that the CPUC approve substantially
all costs requested by the Utility. On February 17, 2000, the CPUC issued a
decision which accepts the settlement in its entirety, and decides most of the
other issues in the case in the Utility's favor. Under the final decision, on
a prospective basis, the utilities are required to assess the estimated market
value of their remaining non-nuclear generating assets, including the land
associated with those assets, on an aggregate basis at a value not less than
the net book value of those assets and to credit the TCBA with the estimated
value. The decision encourages the utilities to base such estimates on
realistic assessments of the market value of the assets. The final decision
did not adopt a recommendation contained in a previously issued proposed
decision to establish a new regulatory asset account that would allow a true-
up when the estimated market value is greater than actual market value.
However, the decision states that crediting the TCBA with the aggregate net
book value of the remaining non-nuclear generating assets is a conservative
approach and remedies any concerns regarding the lack of a true-up. The
decision provides that if the estimated market valuation is less than book
value for any individual asset, accelerated amortization of the associated
transition costs will continue until final market valuation of the asset
occurs through sale, appraisal, or other divestiture. If the final value of
the assets, determined through sale, appraisal or other divestiture, is higher
than the estimate, the excess amount would be used to pay remaining transition
costs, if any. The utilities are required to file the adjusted entries to
their respective TCBA based on the estimated market values with the CPUC by
March 9, 2000. The filing will become effective after appropriate review by
the CPUC's Energy Division and the TCBA entries are subject to review in the
next ATCP. On September 1, 1999, the Utility filed its 1999 ATCP application
requesting that $2.6 billion recorded in the TCBA from July 1, 1998, through
June 30, 1999, be approved as eligible for recovery as transition costs.
Electric Industry Restructuring Implementation Costs. Under AB 1890,
certain electric industry restructuring implementation costs found reasonable
by the CPUC may be recovered from electric customers. In May 1999, the CPUC
approved a multi-party settlement agreement that, among other things, permits
the Utility to recover 1997 and 1998 restructuring implementation costs of
$41.3 million (reflecting a reduction of $10 million from the Utility's
requested revenue requirement). In addition, the Utility is authorized to
recover in its TRA costs related to the Consumer Education Program and the
Electric Education Trust funded by the Utility and FERC-approved ISO and PX
development and start-up costs. At the end of the transition period, if
recovery of these restructuring implementation costs recorded in the TRA
displaces recovery of transition costs recorded in the TCBA, the Utility may
recover up to $95 million of such displaced transition costs after the
transition period.
As part of the settlement agreement, the CPUC also authorized the Utility
to establish the Electric Restructuring Costs Account (ERCA) to record the
restructuring implementation costs that were removed from its 1999 GRC revenue
requirement request, any unanticipated restructuring costs incurred as a
result of directives
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from the CPUC or the FERC, and certain other costs. The reasonableness of the
entries made in the ERCA and the recovery of these costs will be made through
a separate application by the Utility in 2000.
Revenues from Must-Run Contracts. The ISO has designated certain units at
electric generation facilities as necessary to remain available to maintain
the reliability of the electric transmission system. These units are called
"must-run" units. In general, the ISO dispatches these units under cost-based
contracts regulated by the FERC that allow the owners to recover a portion of
fixed and operating costs of the must-run units. The owners of must-run units
choose among two different forms of must-run contract, both of which cover
operating costs. One form provides payments of a percentage of the unit's
fixed cost revenue requirement and does not limit market participation. The
other form provides 100% fixed cost recovery but allows only very restricted
market participation. The Utility's two remaining fossil-fueled power plants
(Hunters Point and Humboldt Bay) and three of its hydroelectric generation
facilities are under must-run contracts. The form of must-run contract chosen
for all of these facilities (except Hunters Point) is the one that does not
limit market participation. The Utility currently receives approximately $100
million per year as payments under these must-run contracts, plus fuel costs.
In addition, the Utility has the opportunity to earn market revenues for all
of these plants except Hunters Point when the ISO has not dispatched the
plant. The Utility has filed an application with the CPUC to determine the
market value of its hydroelectric generation facilities and related assets
through an open competitive auction.
FERC Transmission Owner Rate Case. The ISO controls most of the state's
electric transmission facilities. The Utility serves as the scheduling
coordinator to schedule transmission with the ISO to facilitate continuing
service under wholesale transmission contracts that the Utility entered into
before the ISO was established. The ISO bills the Utility for providing
certain services associated with these contracts. These ISO charges are
referred to as the "scheduling coordinator costs." As part of the Utility's
Transmission Owner rate case filed at the FERC, the Utility established a
balancing account, the Transmission Revenue Balancing Account (TRBA), to
record these scheduling coordinator costs in order to recover these costs
through transmission rates. Certain transmission-related revenues collected by
the ISO and paid to the Utility are also recorded in the TRBA. Through
December 31, 1999, the Utility has recorded approximately $39 million of these
scheduling coordinator costs in the TRBA. (The Utility has also disputed
approximately $22.5 million of these costs as incorrectly billed by the ISO.
Any refunds that ultimately may be made by the ISO would be credited to the
TRBA.). On September 1, 1999, a proposed decision was issued denying recovery
of these scheduling coordinator costs. The proposed decision is subject to
change by the FERC in its final decision. The FERC is expected to issue a
final decision sometime in 2000. On January 11, 2000, the FERC accepted a
proposal by the Utility to establish the Scheduled Coordinator Services (SCS)
Tariff which would act as a back-up mechanism for recovery of the scheduling
coordinator costs if the FERC ultimately decides that these costs may not be
recovered in the TRBA. The FERC also conditionally granted the Utility's
request that the SCS Tariff be effective retroactive to March 31, 1998, but
the FERC suspended the procedural schedule until the final decision is issued
regarding the inclusion of scheduling coordinator costs in the TRBA.
AB 1890 Electric Base Revenue Increase. AB 1890 provided for an increase in
the Utility's electric base revenues for 1997 and 1998, for enhancement of
transmission and distribution system safety and reliability. The CPUC
authorized a 1997 base revenue increase of $164 million. For 1998, the CPUC
authorized an additional base revenue increase of $77 million. The CPUC will
determine how much of the authorized increases were actually spent on system
safety and reliability during 1997 and 1998, and adjust the amounts downward
if necessary. The Utility claims that it overspent the 1997 authorized revenue
requirement by approximately $11.8 million and that the Utility underspent
1998 incremental revenues by approximately $6.5 million. The Utility has
proposed that the underspent amount be credited to TRA revenues. The CPUC's
Office of Ratepayer Advocate (ORA) has recommended that $88.4 million in
expenditures for 1997 and 1998 be disallowed. The Utility Reform Network
(TURN) has recommended an additional $14 million disallowance for a total
recommended disallowance for 1997 and 1998 expenditures of $102.4 million. The
Utility opposed the recommended disallowances and hearings were held in
October 1999. A proposed decision is not expected until the first quarter of
2000. Any proposed decision would be subject to comment by the parties and
change by the CPUC before a final decision is issued.
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Electric Transmission Revenues. Since April 1998, all electric transmission
revenues are authorized by the FERC. During 1998 and 1999, the FERC issued
orders that put into effect various rates to recover electric transmission
costs from the Utility's former bundled rate transmission customers. All 1998
and 1999 rates are subject to refund, pending final decisions. In April 1999,
the Utility filed a settlement with the FERC which, if approved, would allow
the Utility to recover $345 million for the period of April 1998 through May
1999. In May 1999, the FERC accepted, subject to refund, the Utility's March
1999 request to begin recovering, as of May 31, 1999, $324 million annually.
In October 1999, the FERC accepted, subject to refund, the Utility's September
1999 request to increase revenues to $370 million annually beginning in April
2000.
Electric Deferred Refund Account (EDRA). In December 1996, the CPUC issued
a decision establishing an EDRA. The CPUC ordered the Utility to place into
the EDRA credits for CPUC-ordered electric disallowances, the utility electric
generation share of gas disallowances ordered by the CPUC or the FERC, and
amounts resulting from reasonableness disputes or fuel-related cost refunds
made to the Utility based on regulatory agency decisions, plus interest
charges. In February 2000, the Utility refunded approximately $25 million of
EDRA refunds to customers, which included a refund of unspent research,
development, and demonstration funds.
Post-Transition Period Ratemaking Proceeding. In October 1999, the CPUC
issued a decision in the Utility's post-transition period ratemaking
proceeding. Among other matters, the CPUC decision addresses the mechanisms
for ending the current electric rate freeze and for establishing post-
transition period accounting mechanisms and rates. The decision prohibits the
Utility from collecting after the rate freeze any electric costs incurred
during the rate freeze but not recovered during the rate freeze, including
costs that are not transition costs and not related to generation assets such
as under-collected accounting balances relating to power purchases. The
decision also requires the discontinuance of Diablo Canyon's performance-based
ratemaking, the incremental cost incentive price (ICIP) mechanism, at the end
of the transition period. Instead, after the transition period, Diablo Canyon
generation must be sold at the prevailing market price for power. The Utility
has filed an application for rehearing of the CPUC's decision.
In the decision, the CPUC also established the Purchased Electric Commodity
Account (PECA) for the Utility to track energy costs after the rate freeze and
transition period end. The CPUC intends to explore other ratemaking issues,
including whether dollar-for-dollar recovery of energy costs is appropriate,
in the second phase of the post-transition electric ratemaking proceeding.
There are three primary options for the future regulatory framework for
utility electric energy procurement cost recovery after the rate freeze: (1) a
CPUC-defined procurement practice, that if followed by the Utility, would pass
through costs without the need for reasonableness reviews, (2) a pass through
of costs subject to after-the-fact reasonableness reviews, or (3) a
procurement incentive mechanisms with rewards and penalties determined based
on the Utility's energy purchasing performance compared to a benchmark. The
Utility proposed adoption of either a defined procurement practice or a
procurement incentive mechanism, neither of which would involve reasonableness
reviews. The volatility of earnings and risk exposure of the Utility related
to post-transition period purchases of electricity is dependent on which of
these options, or some other approach, is adopted.
A decision in the second phase of the proceeding is expected in the first
quarter 2000, addressing certain other post-transition period ratemaking
issues including, among others, incentive mechanisms for commodity purchases
and the allocation of certain transition costs that are recoverable after the
transition period.
Additional information about the financial impact of the end of the rate
freeze and the end of the transition period on the Utility and PG&E
Corporation is provided in "Management's Discussion and Analysis" in the 1999
Annual Report to Shareholders, beginning on page 5.
Gas Ratemaking
Gas Accord. The Gas Accord separated or "unbundled" the Utility's gas
transmission services from its distribution services, changed the terms of
service and rate structure for gas transportation, increased the opportunity
for core customers to purchase gas from competing suppliers, established a
form of incentive
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mechanism to measure the reasonableness of core procurement costs, and
established gas transmission and storage rates through 2002. Additional
information about the Gas Accord is provided below in "Utility Operations--Gas
Utility Operations" and in "Management's Discussion and Analysis" in the 1999
Annual Report to Shareholders, beginning on page 5.
General Rate Case. On February 17, 2000, the CPUC issued a decision in the
Utility's GRC for the period 1999-2001. The decision is retroactive to January
1, 1999. The CPUC authorized increases in base revenues for the Utility's gas
distribution function of approximately $93 million over base revenues
authorized in 1996.
The Biennial Cost Allocation Proceeding (BCAP). The BCAP remains the
proceeding in which distribution costs and balancing account balances are
allocated to customers. The BCAP normally occurs every two years and is
updated in the interim year for purposes of amortizing any accumulation in the
balancing accounts. Balancing accounts for natural gas costs accumulate
differences between the actual recovery of gas costs and the revenues designed
for recovery of such costs. Balancing accounts for sales volumes accumulate
differences between authorized and actual base revenues. In June 1998, the
CPUC adopted a decision in the 1998 BCAP granting an annual $97.8 million
revenue requirement decrease effective September 1, 1998, compared to revenues
established by the Gas Accord on March 1, 1998. The overall annual revenue
requirement for the two-year BCAP period (September 1, 1998, through August
31, 2000) is approximately $1.5 billion, of which an annual average of
approximately $102 million is allocated for the collection of balancing
accounts. The Utility plans to file its 2000 BCAP application in the first
half of 2000.
Electric Utility Operations
California Electric Industry Restructuring
As a result of California electric industry restructuring, the electric
generation function of traditional utilities has been opened up to
competition, giving electric customers of investor-owned utilities (such as
Pacific Gas and Electric Company) the choice of continuing to purchase
electricity from investor-owned utilities or purchasing electricity from
alternative providers (including unregulated power generators and unregulated
retail electricity providers such as marketers, brokers, and aggregators).
Purchasing electricity from an alternative generation provider is called
"direct access." For those customers who have not chosen an alternative
generation provider, investor-owned utilities continue to be the generation
provider. Investor-owned utilities continue to provide distribution services
to substantially all customers within their service territories, including
those customers who choose direct access.
The California Independent System Operator and the California Power
Exchange. To create a competitive generation market, the PX and the ISO were
established and began operating on March 31, 1998. The FERC has jurisdiction
over both the ISO and the PX.
The ISO operates and controls most of the state's electric transmission
facilities (which continue to be owned and maintained by the California
utilities) and provides comparable open access to electric transmission
service. The ISO accepts balanced supply and load schedules from market
participants and manages the availability of electric transmission on a
statewide basis for these transactions. The ISO also purchases necessary
generation and ancillary services to maintain grid reliability. The ISO is
required to ensure reliable transmission services consistent with planning and
operating reserve criteria no less stringent than those established by the
Western Systems Coordinating Council and the North American Electric
Reliability Council. Oversight of utility distribution systems remains with
the CPUC.
The PX provides a competitive auction process to establish transparent
market clearing prices for electricity in the markets operated by the PX.
During the transition period, the Utility is required to sell into the PX all
of its generated electric power. "Must-take" generation resources, such as
nuclear generation from Diablo Canyon, electric power generated by QFs and
electricity that the Utility is required to purchase under existing
contractual commitments, also are scheduled through the PX. During the
transition period, the Utility must purchase all
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electric power for its retail customers through the PX. Customers who buy
power directly from non-regulated suppliers pay for that generation based upon
negotiated contracts. The PX sets a market-clearing price for electricity by
matching all demand load bids with supply bids ranked from lowest to highest.
The highest-accepted generation supply bid used to serve load sets the PX
market-clearing price for electricity.
After the transition period, the Utility may continue to schedule its must-
take generation resources into the PX. It is unsettled whether the Utility
will be required to continue purchasing its electric power for its retail
customers through the PX after the transition period. The Utility expects that
the CPUC will address the issue of whether the purchase obligation will
continue through December 31, 2001, if the Utility's rate freeze ends before
that date, in the second phase of the Utility's post-transition period
ratemaking proceeding in the first quarter of 2000. Some parties have argued
that the utilities' purchase obligation may need to continue beyond
December 31, 2001, depending on market conditions. See "Ratemaking
Mechanisms--Electric Ratemaking--Post-Transition Period Ratemaking Proceeding"
above.
The ISO and PX are California public benefit non-profit corporations. Each
has a Governing Board that includes representatives of investor-owned utility
transmission systems, publicly owned utility transmission systems, non-utility
electricity sellers, public buyers and sellers, private buyers and sellers,
industrial end-users, commercial end-users, residential end-users,
agricultural end-users, public interest groups, and non-market participant
representatives. The ISO and PX currently are overseen by a five-member
Electricity Oversight Board (EOB) that appoints the members of the ISO and PX
Governing Boards. However, this appointment power was rejected by the FERC.
Subsequently the California Legislature passed, and the Governor signed,
Senate Bill (SB) 96 which redefined the relationship between the EOB and the
ISO and PX. SB 96 limits the EOB's appointment power to representatives of
those classes that represent California consumers' interests. The ISO or PX
Governing Boards confirm all other appointments. SB 96 has been accepted in
principle by the FERC. Bylaw amendments implementing SB 96 are pending before
the FERC for the PX and the ISO currently is circulating draft bylaw
amendments among its stakeholders.
Voluntary Generation Asset Divestiture. California utilities, including
Pacific Gas and Electric Company, have voluntarily begun divesting some of
their generation assets. In 1998, the Utility sold three of its fossil-fueled
electric generating plants located at Morro Bay, Moss Landing, and Oakland,
California. In 1999, the Utility also sold three fossil-fueled generating
facilities (the Pittsburg and Contra Costa power plants located in Contra
Costa County, and the Potrero power plant in San Francisco) and its geothermal
generating facilities (The Geysers Power Plant located in Lake and Sonoma
Counties). The Utility has retained liability for required environmental
remediation of any pre-closing soil or groundwater contamination at these
plants.
In September 1999, the Utility filed an application with the CPUC to
determine the market value of the Utility's hydroelectric generation
facilities and related assets through an open competitive auction. The Utility
proposes to use an auction process similar to the one previously used in the
sale of the Utility's fossil fueled and geothermal plants. Under the process
proposed in the application. PG&E Gen would be permitted to participate in the
auction on the same basis as other bidders. The sale of the hydroelectric
facilities would be subject to certain conditions, including the transfer or
re-issuance of various permits and licenses by the FERC and other agencies. On
January 13, 2000, the CPUC issued a ruling which separates the proceeding into
two concurrent phases: one to review the potential environmental impacts of
the proposed auction under the California Environmental Quality Act (CEQA) and
a second to determine whether the Utility's auction proposal, or some other
alternative to the proposal, is in the public interest. The ruling sets a
procedural schedule which calls for a final CPUC decision on the Utility's
auction proposal by October 19, 2000, and a final environmental impact report
published in November 2000. The schedule calls for the auction, if approved,
to begin in early November 2000 and end in early January 2001. The schedule
anticipates that the divestiture process would be closed by June 1, 2001.
Finally, the ruling prohibits the Utility from withdrawing its application
without express CPUC authority. It is uncertain whether the CPUC will
ultimately approve the Utility's auction proposal. Additional information
about the potential financial impact of the proposed auction on the Utility
and PG&E Corporation is provided in "Management's Discussion and Analysis" in
the 1999 Annual Report to Shareholders, beginning on page 5.
13
<PAGE>
As required by AB 1890, Utility employees, under two-year operations and
maintenance agreements with the new owners, will continue to operate and
maintain the power plants that have been sold. To the extent that payments to
the Utility under these agreements exceed the Utility's cost of operating the
plants, the additional revenue would be given to ratepayers. Conversely, to
the extent the Utility's operating costs exceed the revenues from these
agreements, the Utility absorbs these losses in earnings.
Recovery of Transition Costs. As market-based revenues may not be
sufficient to recover certain of the Utility's generation costs, AB 1890
provides the investor-owned utilities the opportunity to recover such
uneconomic generation costs (called transition costs) for a certain period of
time (the transition period). Some transition costs may be recovered after the
transition period. Costs eligible for recovery as transition costs, as
determined by the CPUC, include (1) above-market sunk costs (i.e., costs
associated with utility generating facilities that are fixed and unavoidable
and that were included in customer rates on December 20, 1995) and future sunk
costs, such as costs related to plant removal, (2) costs associated with long-
term contracts to purchase power at above-market prices from QFs and other
power suppliers, and (3) generation-related regulatory assets and obligations.
(In general, regulatory assets are expenses deferred in the current or prior
periods to be included in rates in subsequent periods.) Transition costs are
eligible for recovery from all customers (with certain exceptions) through a
nonbypassable competition transition charge, or CTC, included as part of
rates. Transition costs that are disallowed by the CPUC for collection from
customers will be written off.
As a prerequisite to any consumer obtaining direct access services, the
consumer must agree to pay its applicable nonbypassable CTC. Most transition
costs must be recovered by December 31, 2001, although certain transition
costs may be recovered after December 31, 2001. These costs include (1)
certain employee-related transition costs, (2) above-market payments under
existing long-term contracts to purchase power, (3) up to $95 million of
transition costs to the extent that the recovery of such costs during the
transition period was displaced by the recovery of electric industry
restructuring implementation costs, and (4) transition costs financed by the
issuance of rate reduction bonds. In addition, nuclear decommissioning costs
are being recovered through a CPUC-authorized charge, which will extend until
sufficient funds exist to decommission the nuclear facility.
The total amount of sunk costs to be included as transition costs will be
based on the aggregate of above-market and below-market values of utility-
owned generation assets and obligations. Under AB 1890, valuation of
generation-related assets through appraisal, sale, or other divestiture must
be completed by December 31, 2001. The value of seven of the Utility's power
plants was established when these facilities were sold to third parties. In
October 1998, the CPUC ruled that the market value of the Hunters Point power
plant is zero. In September 1999, the Utility filed an application with the
CPUC to determine the market value of the Utility's hydroelectric generating
facilities and related costs through an open competitive auction.
Retail Direct Access. Customers participating in direct access may purchase
their electric power directly either through (1) competing non-utility retail
electric providers such as brokers, marketers, aggregators, or other
retailers, or (2) direct negotiated contracts with electric generators. All
customers (with limited exceptions), whether they choose direct access or not,
must pay the nonbypassable CTC, which will be collected by their distribution
utility in connection with recovery of the utilities' transition costs.
Utilities began accepting requests for direct access in November 1997 to
become effective after direct access began. As of February 17, 2000, Pacific
Gas and Electric Company had transferred 94,454 customers to direct access.
The CPUC requires that electric customers with an electricity demand, or load,
of 50 kilowatts (kW) or more must have meters that are capable of providing
hourly data in order to participate in direct access. Those customers with a
load less than 50 kW may participate in direct access either through "load
profiling" or by installing an hourly meter. (Load profiling approximates the
pattern of electricity usage for a given customer class and provides the
equivalent of hourly meter reads.) The customer is responsible for the cost of
the meter and the meter installation.
Energy service providers supplying the direct access market may choose one
of three billing options: (1) consolidated energy supplier billing, under
which the utility bills the energy supplier for the services provided directly
by the utility to the customer, and the supplier, in turn, provides a
consolidated bill to the customer, (2) consolidated distribution company
billing, under which the utility places the supplier's energy charge on a
14
<PAGE>
distribution bill, or (3) dual billing, under which the energy supplier and
the utility bill separately for their own services. Since January 1, 1999,
energy service providers may provide metering to all of their customers.
During 1999, the Utility continued its efforts to develop and implement
changes to its business processes and systems, including customer information
and billing systems, to accommodate direct access. To the extent the Utility
is unable to successfully and timely develop and implement such changes, there
could be an adverse impact on PG&E Corporation's and the Utility's future
results of operations.
Rate Levels and Rate Reduction Bonds. As required by AB 1890, electric
rates for all customers have been frozen at the level in effect on June 10,
1996, and, beginning January 1, 1998, rates for residential and small
commercial customers were reduced by 10% from 1996 levels. The electric rate
freeze and electric rate reduction will continue throughout the transition
period. In 1997, the Utility refinanced the expected 10% rate reduction with
the proceeds from rate reduction bonds. On December 8, 1997, a special purpose
entity established by the California Infrastructure and Economic Development
Bank issued $2.9 billion (the expected revenue reduction from the rate
decrease) of rate reduction bonds on behalf of a wholly owned subsidiary of
the Utility. The bonds were issued in eight classes with maturities ranging
from 10 months to 10 years, and bearing interest at rates ranging from 5.94%
to 6.48%. The Utility is collecting from residential and small commercial
customers a separate nonbypassable charge on behalf of the bondholders to
recover principal, interest, and related costs over the life of the bonds. The
bond proceeds were used by the wholly owned subsidiary to purchase from the
Utility the right to be paid the revenues from this separate charge. The bonds
are secured by the future revenue from the separate charge and not by the
Utility's assets. While the bonds are reflected as long-term debt on the
Utility's balance sheet, the Utility's creditors do not have any recourse to
the revenues from the separate charge. The bonds allow for the rate reduction
by lowering the carrying cost on a portion of the transition costs and by
deferring recovery of a portion of these transition costs until after the
transition period. During the rate freeze, the rate reduction bond debt
service will not increase the Utility customers' electric rates. If the
transition period ends before December 31, 2001, the Utility may be obligated
to return a portion of the economic benefits of the transaction to customers.
The timing of any such return and the exact amount of such portion, if any,
have not yet been determined.
Public Purpose Programs. Under AB 1890, the Utility is authorized to
collect not less than $198 million in a separate nonbypassable charge included
in frozen electric rates to fund Utility and other entities' investments in
four public purpose programs: (1) cost-effective energy efficiency and energy
conservation programs, (2), research, development and demonstration programs,
(3), renewable energy resources programs, and (4) low-income electricity
programs including targeted energy efficiency services and rate discounts.
Low-income energy efficiency programs are funded at the level of need, but are
not to be funded at less than the 1996 level of expenditures. Under this
provision of AB 1890, the Utility is obligated to fund through electric rates
energy efficiency and conservation programs in an amount not less than $106
million per year, public interest research and development programs at not
less than $30 million per year, renewable energy technologies at not less than
$48 million per year, and low-income energy efficiency programs at not less
than $14 million per year. The Utility also collects funds for the California
Alternate Rates for Energy (CARE) low-income discount rate, a rate subsidy
paid for by the Utility's other customers, which is currently about $31
million per year.
Under the oversight of the CPUC, the Utility administers both the cost-
effective energy efficiency and low-income energy efficiency programs. These
two programs are reviewed annually in the Annual Earnings Assessment
Proceeding. In March 1999, the CPUC determined that these programs should
continue to be administered by investor-owned utilities, subject to CPUC
oversight, through 2001. Effective January 1, 2000, Section 327 of the
California Public Utilities Code requires utilities to continue to administer
low-income energy efficiency programs. In accordance with AB 1890, the
California Energy Resources Conservation and Development Commission, (also
called the California Energy Commission (CEC)) administers both the public
interest research and development program and the renewable energy program on
a statewide basis. The Utility transfers $78 million per year to the CEC for
these two programs.
Distributed Generation and Electric Distribution Competition. In October
1999, the CPUC issued a decision outlining how the CPUC, in cooperation with
other regulatory agencies and the California Legislature,
15
<PAGE>
plans to address the issues surrounding distributed generation, electric
distribution competition, and the role of the utility distribution companies
(such as Pacific Gas and Electric Company) in the competitive retail
electricity market. Distributed generation enables siting of electric
generation technologies in close proximity to the electric demand (referred to
as "load"). The CPUC decision opened a new rulemaking proceeding to examine
various issues concerning distributed generation, including interconnection
issues, who can own and operate distributed generation, environmental impacts,
the role of utility distribution companies, and the rate design and cost
allocation issues associated with the deployment of distributed generation
facilities. With respect to electric distribution competition, the CPUC
directed its staff to deliver a report by April 21, 2000 on the different
policy options that the CPUC, in cooperation with the California Legislature,
can pursue. Following the issuance of the report, the CPUC expects to open one
or more new proceedings to address electric distribution competition and
competition in the retail electric market.
Electric Operating Statistics
At December 31, 1999, Pacific Gas and Electric Company served approximately
4.6 million electric distribution customers.
During the transition period, the Utility is required to buy from the PX
all electricity needed to provide service to retail customers that continue to
choose the Utility as their electricity supplier. The following table shows
the Utility's operating statistics (excluding subsidiaries) for electric
energy, including the classification of sales and revenues by type of service.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Customers (average for
the year):
Residential............ 4,017,428 3,962,318 3,915,370 3,874,223 3,825,413
Commercial............. 474,710 469,136 465,461 459,001 454,718
Industrial............. 1,151 1,093 1,121 1,248 1,253
Agricultural........... 85,131 85,429 86,359 87,250 88,546
Public street and
highway lighting...... 20,806 18,351 17,955 17,583 17,089
Other electric
utilities............. 0 14 47 28 35
---------- ---------- ---------- ---------- ----------
Total................ 4,599,226 4,536,341 4,486,313 4,439,333 4,387,054
========== ========== ========== ========== ==========
Sales-kWh (in millions):
Residential............ 27,739 26,846 25,946 25,458 24,391
Commercial............. 30,426 28,839 28,887 27,868 27,014
Industrial(1).......... 16,722 16,327 16,876 15,786 16,879
Agricultural(1)........ 3,739 3,069 3,932 3,631 3,478
Public street and
highway lighting...... 437 445 446 438 425
Other electric
utilities............. 167 2,358 3,291 1,213 3,172
---------- ---------- ---------- ---------- ----------
Total energy
delivered........... 79,230 77,884 79,378 74,394 75,359
========== ========== ========== ========== ==========
Revenues (in thousands):
Residential............ $2,961,788 $2,891,424 $3,082,013 $3,033,613 $2,979,590
Commercial............. 2,837,111 2,793,336 2,932,560 2,840,101 2,964,568
Industrial............. 863,951 933,316 1,028,378 1,005,694 1,160,938
Agricultural........... 391,876 350,445 413,711 396,469 395,531
Public street and
highway lighting...... 49,209 51,195 53,183 55,372 56,154
Other electric
utilities............. 16,501 50,166 118,781 81,855 133,566
Revenues from energy
deliveries.......... 7,120,436 7,069,882 7,628,626 7,413,104 7,690,347
Miscellaneous.......... 162,105 161,156 (9,439) 112,303 92,538
Regulatory balancing
accounts.............. (50,780) (40,408) 71,441 (365,192) (396,578)
---------- ---------- ---------- ---------- ----------
Operating revenues... $7,231,761 $7,190,630 $7,690,628 $7,160,215 $7,386,307
========== ========== ========== ========== ==========
</TABLE>
16
<PAGE>
The following table shows certain customer information:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
Selected Statistics: ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Average annual residential usage (kWh)........... 6,905 6,776 6,627 6,571 6,377
Average billed revenues per kWh (cents per kWh):
Residential..................................... 10.68 10.77 11.88 11.92 12.22
Commercial...................................... 9.32 9.69 10.15 10.19 10.97
Industrial(1)................................... 5.17 5.72 6.09 6.37 6.88
Agricultural(1)................................. 10.48 11.42 10.52 10.92 11.37
Net plant investment per customer ($)............ 2,388 2,705 3,027 3,198 3,228
</TABLE>
- --------
(1) Beginning April 1998, the sales-kWh and average billed revenues per kWh
include electricity provided to direct access customers where the Utility
does not earn commodity charges.
Electric Generating Capacity
At the beginning of 1999, the Utility's electric generation facilities
included five primarily natural gas-fueled steam power plants with 15 units,
four combustion turbines, two nuclear power reactor units at Diablo Canyon, 67
hydroelectric powerhouses with 107 units, and the Helms hydroelectric pumped
storage plant (Helms) with three units. In 1998, the Utility sold three of its
fossil-fueled power plants. In April and May 1999, the Utility sold three of
its five remaining fossil-fueled power plants, which include 10 steam units
and three combustion turbines, and its geothermal energy complex of 14 units.
Together, the seven divested power plants represented 91% of the Utility's
fossil-fueled generating capacity and all of its geothermal generating
capacity. The facilities generated approximately 31% of the Utility's total
electric energy production.
The Utility is committed under long-term contracts to purchase power
produced by other generating entities that use a wide array of resources and
technologies, including hydroelectric, wind, solar, biomass, geothermal, and
cogeneration. In addition, the Utility is interconnected with electric power
systems in 14 western states and British Columbia, Canada, for the purposes of
buying, selling, and transmitting power.
During the transition period, the Utility is required to bid or schedule
into the PX and ISO markets all of the electricity generated by its power
plants and electricity acquired under contractual agreements with unregulated
generators.
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<PAGE>
Except as otherwise noted below, as of December 31, 1999, Pacific Gas and
Electric Company owned and operated the following generating plants, all
located in California, listed by energy source:
<TABLE>
<CAPTION>
Number
of Net Operating
Generation Type County Location Units Capacity kW
--------------- --------------- ------ -------------
<S> <C> <C> <C>
Hydroelectric:
Conventional Plants(1)....... 16 counties in Northern and
Central California 107 2,684,100
Helms Pumped Storage
Plant(1).................... Fresno 3 1,212,000
--- ---------
Hydroelectric Subtotal..... 110 3,896,100
--- ---------
Steam Plants:
Humboldt Bay................. Humboldt 2 105,000
Hunters Point(2)............. San Francisco 3 377,000
--- ---------
Steam Subtotal............. 5 482,000
--- ---------
Combustion Turbines:
Hunters Point(2)............. San Francisco 1 52,000
Mobile Turbines(3)........... Humboldt and Mendocino 3 45,000
--- ---------
Combustion Turbines
Subtotal.................. 4 97,000
--- ---------
Nuclear:
Diablo Canyon................ San Luis Obispo 2 2,160,000
--- ---------
Total...................... 121 6,635,100
=== =========
</TABLE>
- --------
(1) In September 1999, the Utility filed an application with the CPUC to
determine the market value of the Utility's hydroelectric generating
facilities and related assets through an open competitive auction. (See
"Utility Operations--Electric Utility Operations--California Electric
Industry Restructuring" above.)
(2) In July 1998, the Utility reached an agreement with the City and County of
San Francisco regarding the Hunters Point fossil-fueled power plant, which
the ISO has designated as a "must run" facility. The agreement expresses
the Utility's intention to retire the plant when it is no longer needed by
the ISO.
(3) Listed to show capability; subject to relocation within the system as
required.
Diablo Canyon
Diablo Canyon Operations
Diablo Canyon consists of two nuclear power reactor units, each capable of
generating up to approximately 26 million kilowatt-hours (kWh) of electricity
per day. Diablo Canyon Units 1 and 2 began commercial operation in May 1985
and March 1986, respectively. The operating license expiration dates for
Diablo Canyon Units 1 and 2 are September 2021 and April 2025, respectively.
As of December 31, 1999, Diablo Canyon Units 1 and 2 had achieved lifetime
capacity factors of 82% and 83%, respectively.
The table below outlines Diablo Canyon's refueling schedule for the next
five years. Diablo Canyon refueling outages typically are scheduled every 19
to 21 months. The schedule below assumes that a refueling outage for a unit
will last approximately thirty days, depending on the scope of the work
required for a particular outage. The schedule is subject to change in the
event of unscheduled plant outages.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit 1
Refueling..................... October May February
Startup....................... November June March
Unit 2
Refueling..................... May February October
Startup....................... June March November
</TABLE>
18
<PAGE>
Diablo Canyon Ratemaking
Since January 1, 1997, the Utility's sunk costs in Diablo Canyon are
recovered from ratepayers through a sunk cost revenue requirement, at a
reduced return on common equity equal to 6.77% that will remain in effect
through the end of the transition period. (Sunk costs are costs associated
with the facility that are fixed and unavoidable.) The Diablo Canyon sunk
costs revenue requirement is being recovered as a transition cost through the
TCBA. In connection with the new ratemaking, the CPUC ordered that a financial
verification audit of Diablo Canyon plant accounts be performed by an
independent accounting firm, and that the CPUC hold a proceeding to review the
results of the audit, including any proposed adjustments to Diablo Canyon
accounts, following the completion of the audit. On August 31, 1998, an
independent accounting firm retained by the CPUC completed its financial
verification audit of the December 31, 1996 Diablo Canyon plant accounts. The
audit resulted in the issuance of an unqualified opinion. The audit verified
that Diablo Canyon sunk costs at December 31, 1996, were $3.3 billion of the
total $7.1 billion construction costs. The independent accounting firm also
issued an agreed-upon special procedures report, requested by the CPUC, which
questioned $200 million of the $3.3 billion sunk costs. The CPUC will review
the results of the audit and may seek to make adjustments to Diablo Canyon
sunk costs subject to transition cost recovery. At this time, what action the
CPUC may take regarding the audit, if any, cannot be predicted.
Also since January 1, 1997, a performance-based Incremental Cost Incentive
Price (ICIP) mechanism has been used to recover Diablo Canyon's operating
costs and the cost of capital additions incurred after December 31, 1996. The
ICIP mechanism establishes a rate per kWh generated by the facility for the
period 1997 through 2001. The CPUC-authorized ICIP prices and revenue
requirement for Diablo Canyon for 2000 and 2001 are shown below. The ICIP
revenues are based on an assumed capacity factor of 83.6%.
<TABLE>
<CAPTION>
Estimated Total
Revenue Requirement
-------------------
2000 2001
--------- ---------
<S> <C> <C>
ICIP (cents per kWh).................................. 3.43 3.49
Sunk Cost Recovery ($ in millions).................... $ 1,197 $ 1,135
ICIP Revenues ($ in millions)......................... 542 552
--------- ---------
Total Revenue Requirement ($ in millions)............. $ 1,739 $ 1,687
========= =========
</TABLE>
Any variance between ICIP revenues and related costs is reflected in
earnings. In October 1999, the CPUC issued a decision that will discontinue
the ICIP mechanism after the transition period. After the transition period,
Diablo Canyon generation must be sold at the prevailing market price for
power. The Utility has filed an application for rehearing of this decision.
Further, pursuant to the 1997 CPUC decision establishing the ICIP, the Utility
is required to begin sharing 50% of the net benefits of operating Diablo
Canyon with ratepayers beginning January 1, 2002. The CPUC may interpret a
more recent CPUC decision to require sharing to begin at the end of the
transition period. The Utility is required to file an application with the
CPUC in July 2000 with its proposal for the methods to be used in the
valuation of the benefits associated with the operation of Diablo Canyon and
the mechanism to be used to share these benefits with ratepayers. (See
"Utility Operations--Ratemaking Mechanisms--Electric Ratemaking--Post-
Transition Period Ratemaking Mechanisms" above.)
Additional information concerning the financial impact of Diablo Canyon
ratemaking is included in "Management's Discussion and Analysis" in the 1999
Annual Report to Shareholders, beginning on page 5, and in Note 2 of the
"Notes to Consolidated Financial Statements" beginning on page 40 of the 1999
Annual Report to Shareholders.
Nuclear Fuel Supply and Disposal
Pacific Gas and Electric Company has purchase contracts for, and
inventories of, uranium concentrates, uranium hexaflouride, and enriched
uranium, as well as one contract for fuel fabrication. Based on current Diablo
Canyon operations forecasts and a combination of existing contracts and
inventories, the requirement for uranium
19
<PAGE>
supply will be met through 2004, the requirement for the conversion of uranium
to uranium hexaflouride will be met through 2001, and the requirement for the
enrichment of the uranium hexaflouride to enriched uranium will be met through
2002. The fuel fabrication contract for the two units will supply their
requirements for the next seven operating cycles of each unit. These contracts
are intended to ensure long-term fuel supply, but permit the Utility the
flexibility to take advantage of short-term supply opportunities. In most
cases, the Utility's nuclear fuel contracts are requirements-based, with the
Utility's obligations linked to the continued operation of Diablo Canyon.
Under the Nuclear Waste Policy Act of 1982 (Nuclear Waste Act), the U.S.
Department of Energy (DOE) is responsible for the transportation and ultimate
long-term disposal of spent nuclear fuel and high-level radioactive waste.
Under the Nuclear Waste Act, utilities are required to provide interim storage
facilities until permanent storage facilities are provided by the federal
government. The Nuclear Waste Act mandates that one or more such permanent
disposal sites be in operation by 1998. Consistent with the law, Pacific Gas
and Electric Company signed a contract with the DOE providing for the disposal
of the spent nuclear fuel and high-level radioactive waste from the Utility's
nuclear power facilities beginning not later than January 1998. However, due
to delays in identifying a storage site, the DOE has been unable to meet its
contract commitment to begin accepting spent fuel by January 1998. Further,
under the DOE's current estimated acceptance schedule for spent fuel, Diablo
Canyon's spent fuel may not be accepted by the DOE for interim or permanent
storage before 2010, at the earliest. At the projected level of operation for
Diablo Canyon, the Utility's facilities are sufficient to store on-site all
spent fuel produced through approximately 2006 while maintaining the
capability for a full-core off-load. It is likely that an interim or permanent
DOE storage facility will not be available for Diablo Canyon's spent fuel by
2006. The Utility is examining options for providing additional temporary
spent fuel storage at Diablo Canyon or other facilities, pending disposal or
storage at a DOE facility.
In July 1988, the NRC gave final approval to the Utility to store
radioactive waste from the nuclear generating unit (Unit 3) at Humboldt Bay
Power Plant (Humboldt) at Humboldt before ultimately decommissioning the unit.
The Utility has agreed to remove all spent fuel when the federal disposal site
is available.
Insurance
Pacific Gas and Electric Company has insurance coverage for property damage
and business interruption losses as a member of Nuclear Electric Insurance
Limited (NEIL). NEIL, which is owned by utilities with nuclear generating
facilities, provides insurance coverage against property damage,
decontamination, decommissioning, and business interruption and/or extra
expenses during prolonged accidental outages for reactor units in commercial
operation. Under these insurance policies, if the nuclear generating facility
of a member utility suffers a loss due to a prolonged accidental outage, the
Utility may be subject to maximum retrospective premium assessments of $15
million (property damage) and $4 million (business interruption), in each case
per one-year policy period, if losses exceed the resources of NEIL.
The Utility has purchased primary insurance of $200 million for public
liability claims resulting from a nuclear incident. An additional $9.3 billion
of coverage is provided by secondary financial protection required by federal
law 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, the Utility may be assessed up to $176
million per incident, with payments in each year limited to a maximum of $20
million per incident.
Decommissioning
Pacific Gas and Electric Company's estimated total obligation to
decommission and dismantle its nuclear power facilities is $1.6 billion in
1999 dollars ($5.1 billion in future dollars). This estimate, which includes
labor, materials, waste disposal charges, and other costs, is based on a 1997
decommissioning cost study. A contingency to capture engineering, regulatory,
and business environment changes is included in the total estimated
obligation. Actual decommissioning costs are expected to vary from this
estimate because of changes in the assumed dates of decommissioning,
regulatory requirements, and technology, as well as differences in the
20
<PAGE>
amount of labor, materials, and equipment needed to complete decommissioning.
The estimated total obligation needed to complete decommissioning is
recognized proportionately over the license term of each facility.
Nuclear decommissioning costs recovered in rates are placed in external
trust funds. These funds, along with accumulated earnings, will be used
exclusively for decommissioning and dismantling the nuclear facilities. The
trust funds maintain substantially all of their investments in debt and equity
securities. All earnings on the trust fund, net of authorized disbursements
from the trusts and management and administrative fees, are reinvested. Monies
may not be released from the external trust funds until authorized by the
CPUC. In December 1997, the CPUC granted the Utility's request for authority
to disburse up to $15.7 million from the Humboldt Bay Power Plant
decommissioning trust funds to finance three partial nuclear decommissioning
projects at Humboldt Bay Power Plant Unit 3. Accordingly, as of December 31,
1999, $9.3 million (net of taxes) has been disbursed from the Humboldt Bay
Power Plant Unit 3 non-tax-qualified trust to reimburse the Utility for
nuclear decommissioning expenses associated with the partial decommissioning
projects. The remaining $6.4 million of the approved expenses is expected to
be funded with associated tax savings.
In its 1999 GRC, Pacific Gas and Electric Company sought approval from the
CPUC to use the tax savings resulting from the payment of tax-deductible
nuclear decommissioning expenses from the Humboldt Bay Power Plant Unit 3 non-
tax-qualified trust to fund nuclear decommissioning work. The CPUC found that
the Utility's recommended approach of using the tax benefit to fund
decommissioning activity was reasonable and approved the Utility's request.
As of December 31, 1999, the Utility had accumulated external trust funds
with an estimated fair value of $1.3 billion, based on quoted market prices
and net of deferred taxes on unrealized gains, to be used for the
decommissioning of the Utility's nuclear facilities.
The amount recovered in rates for nuclear decommissioning costs is
authorized by the CPUC as part of the GRC. The CPUC considers the trusts'
asset levels, together with revised earnings and decommissioning cost
assumptions, to determine the amount of decommissioning costs it will
authorize in rates for contribution to the trusts. The monies contributed to
the decommissioning trusts, together with existing trust fund balances and
projected earnings, are intended to satisfy the estimated future obligation
for decommissioning costs. For the year ended December 31, 1999, annual
nuclear decommissioning trust contributions collected in rates were
$26.47 million.
Since January 1, 1998, nuclear decommissioning costs, which are not
transition costs, have been recovered through a nonbypassable charge that will
continue until those costs are fully recovered. Recovery of decommissioning
costs may be accelerated to the extent possible under the rate freeze. The
CPUC has established a Nuclear Decommissioning Costs Triennial Proceeding to
determine the decommissioning costs and to establish the annual revenue
requirement and attrition factors over subsequent three-year periods when and
if GRCs are discontinued.
Other Electric Resources
QF Generation and Other Power Purchase Contracts
By federal law, Pacific Gas and Electric Company is required to purchase
electric energy and capacity provided by independent power producers that are
qualifying facilities (QFs) under the Public Utility Regulatory Policies Act
of 1978 (PURPA). The CPUC established a series of QF long-term power purchase
contracts and set the applicable terms, conditions, price options, and
eligibility requirements. Under these contracts, the Utility is required to
make payments only when energy is supplied (an "energy payment") or when
capacity commitments are met (a "capacity payment"). Costs associated with
these contracts to purchase power are eligible for recovery by the Utility as
transition costs through the collection of the nonbypassable CTC. The
Utility's contracts with these power producers expire on various dates through
2028. Deliveries from these power producers account for approximately 23% of
the Utility's 1999 electric energy requirements and no single contract
accounted for more than 5% of the Utility's energy needs.
21
<PAGE>
The Utility has negotiated with several QFs for early termination of their
power purchase contracts. For other contracts, the Utility has negotiated with
QFs to refrain from producing energy during the remaining term of the higher
fixed energy price period under their contract (a "buy-down") or to curtail
energy production for shorter periods of time (a "curtailment"). At December
31, 1999, the total discounted future payments due under the renegotiated
contracts that are subject to early termination, buy-down or curtailment, was
$16 million. Of the $16 million, the Utility has recovered $6.6 million in
rates and expects to recover the remaining $9.4 million in future rates.
As of December 31, 1999, the Utility had commitments to purchase
approximately 5,200 MW of capacity under CPUC-mandated power purchase
agreements. Of the 5,200 MW, approximately 4,500 MW are operational.
Development of the majority of the balance is uncertain and it is estimated
that very few of the remaining contracts will become operational. The 4,500 MW
of operational capacity consists of 2,800 MW from co-generation projects, 700
MW from wind projects, and 1,000 MW from other projects, including biomass,
waste-to-energy, geothermal, solar, and hydroelectric.
The Utility also has contracts with various irrigation districts and water
agencies to purchase hydroelectric power. Under these contracts, the Utility
must make specified semi-annual minimum payments whether or not any energy is
supplied (subject to the supplier's retention of the FERC's authorization) and
variable payments for operation and maintenance costs incurred by the
suppliers. These contracts expire on various dates from 2004 to 2031. Costs
associated with these contracts to purchase power are eligible for recovery by
the Utility as transition costs through the collection of the nonbypassable
CTC. At December 31, 1999, the undiscounted future minimum payments under
these contracts are approximately $32.7 million for each of the years 2000
through 2004 and a total of $280 million for periods thereafter. Irrigation
district and water agency deliveries in the aggregate account for
approximately 5.8% of the Utility's 1999 electric energy requirements.
The amount of energy received and the total payments made under all these
power purchase contracts were:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(in millions)
<S> <C> <C> <C>
Kilowatt-hours received.............................. 25,910 25,994 24,389
Energy payments...................................... $ 837 $ 943 $1,157
Capacity payments.................................... $ 539 $ 529 $ 538
Irrigation district and water agency payments........ $ 60 $ 53 $ 56
</TABLE>
Electric Transmission and Distribution
To transport energy to load centers, Pacific Gas and Electric Company as of
December 31, 1999, owned approximately 18,624 circuit miles of interconnected
transmission lines of 60 kilovolts (kV) to 500 kV and transmission substations
having a capacity of approximately 42,106,600 kilovolt-amperes (kVa),
including spares, excluding power plant interconnection facilities. Energy is
distributed to customers through approximately 113,289 circuit miles of
distribution system and distribution substations having a capacity of
approximately 23,773,000 kVa.
In 1998, the utilities relinquished control, but not ownership, of their
transmission facilities to the ISO. The ISO commenced operations on March 31,
1998. The ISO, regulated by the FERC, controls the operation of the
transmission system and provides open access transmission service on a
nondiscriminatory basis. In 1998, the FERC approved the various forms of
agreements for must-run facilities that have been entered into between the
utilities and the ISO to ensure grid reliability.
The FERC also has approved a proposal from Pacific Gas and Electric Company
and the other California utilities that distinguishes between local
distribution facilities and transmission facilities. The FERC will have
jurisdiction over the transmission facilities as defined in the order and over
the transmission aspects of direct access. Most of the Utility's distribution
services remain subject to CPUC jurisdiction.
22
<PAGE>
The CPUC is considering whether it should pursue further reforms in the
structure and regulatory framework governing electricity distribution service.
See "Utility Operations--Electric Utility Operations--California Electric
Industry Restructuring" above.
During 1999, the Utility and various other parties, including the ISO and
the CPUC, issued reports on their investigation into the power outage that
occurred on December 8, 1998, in the San Francisco Bay area. In March 1999,
the ISO issued its report on the outage that concluded that the Utility's
system was designed in accordance with industry standards and responded as
expected under the circumstances. The ISO's report identified a number of
measures for the Utility to undertake to minimize the likelihood of a similar
event occurring in the future. Reports by other parties, including the CPUC,
have also recommended corrective measures. Since the outage, the Utility has
revised its grounding and switching procedures as preventive measures to
minimize the risk that the type of initiating event that caused the outage
could occur in the future. On October 20, 1999, the Utility submitted a report
to the CPUC describing how its corrective actions implements the ISO's
recommendations, and responds to the other parties' recommendations. The CPUC
is currently holding workshops to address the issues in the proceeding. After
the conclusion of the workshops, the CPUC plans to convene another prehearing
conference to discuss how to address any remaining issues.
Gas Utility Operations
Pacific Gas and Electric Company owns and operates an integrated gas
transmission, storage, and distribution system in California. The Utility
served approximately 3.8 million gas customers at December 31, 1999. Most of
these customers continue to obtain gas supplies from the Utility under
regulated tariff rates.
At December 31, 1999, the Utility's system, including the PG&E Expansion
(Line 401), consisted of approximately 6,225 miles of transmission pipelines,
three gas storage facilities, and approximately 37,487 miles of gas
distribution lines. The PG&E Expansion is the Utility's portion of an
expansion of the interconnected natural gas transmission systems of the
Utility and PG&E Gas Transmission, Northwest Corporation (PG&E GT-Northwest)
which extends from the Canadian border into California (Pipeline Expansion).
Including the portion owned by PG&E GT-Northwest (PG&E GT-NW Expansion), the
840-mile combined Pipeline Expansion provides an additional 148 million cubic
feet per day (MMcf/d) of firm capacity to the Pacific Northwest and an
additional 851 MMcf/d of capacity to Northern and Southern California. The Gas
Accord resolved various issues concerning the PG&E Expansion and also
established certain rules for ratemaking and terms of service applicable to
the PG&E Expansion.
The Utility's peak day send-out of gas on its integrated system in
California during the year ended December 31, 1999, was 3,503 million cubic
feet (MMcf). The total volume of gas throughput during 1999 was approximately
840,000 MMcf, of which 309,000 MMcf was sold to direct end-use or resale
customers, 47,000 MMcf was used by the Utility primarily for its fossil-fueled
electric generating plants, and 484,000 MMcf was transported as customer-owned
gas.
The California Gas Report, which presents the outlook for natural gas
requirements and supplies for California over a long-term planning horizon, is
prepared annually by the California electric and gas utilities as a result of
a CPUC order. A comprehensive biennial report is prepared in even-numbered
years with a supplemental report in intervening odd-numbered years updating
recorded data for the previous year.
The 1998 California Gas Report updates the Utility's annual gas
requirements forecast (excluding bypass volumes) for the years 1999 through
2015, forecasting average annual growth in gas throughput served by the
Utility of approximately 1.5%. The gas requirements forecast is subject to
many uncertainties and there are many factors that can influence the demand
for natural gas, including weather conditions, level of utility electric
generation, fuel switching, and new technology. In addition, some large
customers, mostly in the industrial and enhanced oil recovery sectors, may
have the ability to use unregulated private pipelines or interstate pipelines,
bypassing the Utility's system entirely.
23
<PAGE>
Gas Operating Statistics
The following table shows Pacific Gas and Electric Company's operating
statistics (excluding subsidiaries) for gas, including the classification of
sales and revenues by type of service.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Customers (average for
the year):
Residential............ 3,593,355 3,536,089 3,491,963 3,455,086 3,417,556
Commercial............. 203,342 200,620 198,453 198,071 197,939
Industrial............. 1,625 1,610 1,650 1,500 1,500
Other gas utilities.... 4 5 3 2 2
---------- ---------- ---------- ---------- ----------
Total.............. 3,798,326 3,738,324 3,692,069 3,654,659 3,616,997
========== ========== ========== ========== ==========
Gas supply--thousand
cubic feet (Mcf) (in
thousands):
Purchased from
suppliers in:
Canada............... 230,808 298,125 280,084 253,209 261,800
California........... 18,956 17,724 10,655 28,130 31,158
Other states......... 107,226 122,342 131,074 110,604 117,538
---------- ---------- ---------- ---------- ----------
Total purchased.... 356,990 438,191 421,813 391,943 410,496
Net (to storage) from
storage............... (980) (14,468) 14,160 6,871 (10,921)
---------- ---------- ---------- ---------- ----------
Total.............. 356,010 423,723 435,973 398,814 399,575
Pacific Gas and
Electric Company use,
losses, etc.(1)....... 47,152 129,305 173,789 134,375 129,671
---------- ---------- ---------- ---------- ----------
Net gas for sales.. 308,858 294,418 262,184 264,439 269,904
========== ========== ========== ========== ==========
Bundled gas sales and
transportation
service--Mcf (in
thousands):
Residential............ 233,482 223,706 191,327 190,246 191,724
Commercial............. 70,093 66,082 60,803 62,178 64,135
Industrial............. 5,255 4,616 10,054 12,015 14,045
Other gas utilities.... 28 14 0 0 0
---------- ---------- ---------- ---------- ----------
Total.............. 308,858 294,418 262,184 264,439 269,904
========== ========== ========== ========== ==========
Transportation service
only--Mcf (in
thousands):
Vintage system
(Substantially all
Industrial)(2)........ 447,867 319,099 218,660 189,695 143,921
PG&E Expansion (Line
401).................. 36,351 77,773 233,269 237,776 240,506
---------- ---------- ---------- ---------- ----------
Total.............. 484,218 396,872 451,929 427,471 384,427
========== ========== ========== ========== ==========
Revenues (in thousands):
Bundled gas sales and
transportation
service:
Residential.......... $1,542,705 $1,414,313 $1,170,135 $1,109,463 $1,205,223
Commercial........... 448,655 426,299 374,084 362,819 421,397
Industrial........... 24,638 24,634 46,592 42,520 42,106
Other gas utilities.. 77 1,072 3,701 510 0
---------- ---------- ---------- ---------- ----------
Bundled gas
revenues.......... 2,016,075 1,866,318 1,594,512 1,515,312 1,668,726
Transportation only
revenue:
Vintage system
(Substantially all
Industrial)......... 267,544 232,038 207,160 180,197 167,325
PG&E Expansion (Line
401)................ 19,091 42,194 90,180 85,144 82,904
---------- ---------- ---------- ---------- ----------
Transportation service
only revenue.......... 286,635 274,232 297,340 265,341 250,229
Miscellaneous.......... (47,311) 41,364 50,295 (9,271) (18,018)
Regulatory balancing
accounts.............. (259,648) (448,351) (137,787) 57,864 (43,771)
---------- ---------- ---------- ---------- ----------
Operating
revenues.......... $1,995,751 $1,733,563 $1,804,360 $1,829,246 $1,856,499
========== ========== ========== ========== ==========
</TABLE>
- --------
(1) Primarily includes fuel for Pacific Gas and Electric Company's fossil-
fueled generating plants.
(2) Does not include on-system transportation volumes transported on the PG&E
Expansion of 1,251 MMcf, 34,169 MMcf, 72,958 MMcf, 78,552 MMcf, and
100,207 MMcf for 1999, 1998, 1997, 1996, and 1995, respectively.
24
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected Statistics:
Average annual residential usage (Mcf)...................... 65 63 55 55 56
Heating temperature--% of normal (1)........................ 108.5 93.0 71.7 75.7 75.3
Average billed bundled gas sales revenues per Mcf:
Residential................................................ $ 6.61 $ 6.32 $ 6.12 $ 5.83 $ 6.29
Commercial................................................. 6.40 6.45 6.15 5.84 6.57
Industrial................................................. 4.69 5.36 4.63 3.54 3.00
Average billed transportation only revenue per Mcf:
Vintage system............................................. 0.66 0.66 0.71 0.67 0.69
PG&E Expansion (Line 401).................................. 0.53 0.54 0.39 0.36 0.34
Net plant investment per customer (2)...................... $1,011 $1,040 $1,031 $1,061 $1,025
</TABLE>
- --------
(1) Over 100% indicates colder than normal.
Natural Gas Supplies
The objective of Pacific Gas and Electric Company's Gas Procurement
Department is to maintain a balanced supply portfolio that provides supply
reliability and contract flexibility, minimizes costs, and fosters competition
among the Utility's gas suppliers. To ensure a diverse and competitive mix of
natural gas supplies to serve the Utility's customers, the Utility purchases
gas directly from producers and marketers in both Canada and the United States.
Under current CPUC regulations, the Utility purchases natural gas from its
various suppliers based on economic considerations, consistent with regulatory,
contractual, and operational constraints. During the year ended December 31,
1999, approximately 65% of the Utility's total purchases of natural gas
consisted of Canadian-sourced gas transported by Canadian pipeline companies
and PG&E GT-Northwest and Rocky Mountain-sourced gas transported by PG&E GT-
Northwest, approximately 5% was purchased in California, approximately 22% was
purchased in the U.S. Southwest and was transported primarily by the El Paso
Natural Gas Company and Transwestern Pipeline Company pipelines, and
approximately 8% was purchased in the Rocky Mountains and transported by Kern
River Gas Transmission Company. California purchases include supplies from
various California producers and supplies transported into California by
others. The following table shows the total volume and average price of gas in
dollars per thousand cubic feet (Mcf) purchased by the Utility from these
sources during each of the last five years.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ------------------
Thousands Avg. Thousands Avg. Thousands Avg. Thousands Avg. Thousands Avg.
of Mcf Price(1) of Mcf Price(1) of Mcf Price(1) of Mcf Price(1) of Mcf Price(1)
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Canada................. 230,808 $2.50 298,125 $2.00 280,084 $1.77 253,209 $1.57 261,800 $1.34
California............. 18,956 2.45 17,724 2.44 10,655 2.12 28,130 1.90 31,158 1.32
Other states
(substantially all
U.S. Southwest)....... 107,227 2.42 122,342 2.62 131,074 3.75 110,604 3.72 117,538 2.64
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total/Weighted
Average............... 356,991 $2.47 438,191 $2.19 421,813 $2.39 391,943 $2.21 410,496 $1.71
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- --------
(1) The average prices for Canadian and U.S. Southwest gas include the
commodity gas prices, interstate pipeline demand or reservation charges,
transportation charges, and other pipeline assessments, including direct
bills allocated over the quantities received at the California border.
Beginning March 1, 1998, the average price for gas also includes intrastate
pipeline demand and reservation charges. These costs previously were
bundled in gas rates.
Gas Regulatory Framework
In August 1997, the CPUC approved the Gas Accord, which restructured Pacific
Gas and Electric Company's gas services and its role in the gas market. Among
other matters, the Gas Accord separates, or "unbundles," the rates for the
Utility's gas transmission services from its distribution services. As a result
of
25
<PAGE>
the Gas Accord, the Utility's customers may buy gas directly from competing
suppliers and purchase transmission-only and distribution-only services from
the Utility. Most of the Utility's industrial and larger commercial customers
(noncore customers) now purchase their gas from marketers and brokers.
Substantially all residential and smaller commercial customers (core
customers) buy gas as well as transmission and distribution services from the
Utility as a bundled service. Customer rates for gas are updated on a monthly
basis to reflect changes in the Utility's gas procurement costs. The Gas
Accord established an incentive mechanism (the core procurement incentive
mechanism or CPIM) for recovery of the Utility's core gas procurement costs as
described below.
The Gas Accord also established gas transmission and storage rates for the
period from March 1998 through December 31, 2002. Rates for gas distribution
service continue to be set by the CPUC in BCAP proceedings, and are designed
to provide the Utility an opportunity to recover its costs of service and
include a return on investment. See "Utility Operations--California Ratemaking
Mechanisms--Gas Ratemaking--The Biennial Cost Allocation Proceeding (BCAP)."
The CPUC is considering further changes in California's natural gas
industry. Additional information concerning gas industry restructuring, and
the financial impact of these changes on PG&E Corporation, is provided in
"Management's Discussion and Analysis" in the 1999 Annual Report to
Shareholders, beginning on page 5.
Transportation Commitments
Pacific Gas and Electric Company has gas transportation service agreements
with various Canadian and interstate pipeline companies. These agreements
include provisions for payment of fixed demand charges for reserving firm
capacity on the pipelines. The total demand charges that the Utility will pay
each year may change due to changes in tariff rates. The total demand and
volumetric transportation charges paid by the Utility under these agreements
were approximately $97 million in 1999. This amount includes payments made to
PG&E GT-Northwest of approximately $47 million in 1999, which are eliminated
in the consolidated financial statements of PG&E Corporation.
As a result of regulatory changes, the Utility no longer procures gas for
most of its noncore customers, resulting in a decrease in the Utility's need
for firm transportation capacity for its gas purchases. The Utility continues
to procure gas for almost all of its core customers and those noncore
customers who choose bundled service (core subscription customers). The
Utility is continuing its efforts to broker or assign any of its remaining
contracted-for but unused interstate and Canadian transportation capacity,
including unused capacity held for its core and core-subscription customers.
Under a firm transportation agreement with PG&E GT-Northwest that runs
through October 31, 2005, the Utility currently retains capacity of
approximately 600 MMcf/d on the PG&E GT-Northwest system to support its core
and core-subscription customers. The Utility has been able to broker its
unused capacity on PG&E GT-Northwest's system, when not needed for core and
core-subscription customers.
In 1992, the Utility entered into a firm transportation agreement with
Transwestern Pipeline Company (Transwestern), which expires in 2007, to hold
capacity to meet core gas sales demands and electric generation needs. Since
the Utility has sold most of its fossil-fueled generating plants in connection
with electric industry restructuring and no longer needs natural gas for
electric generation, the Utility permanently released 50 MMcf/d of firm
capacity under this contract. As a result, the demand charges associated with
the entire Transwestern capacity currently approximate $22 million per year.
The Utility may recover demand charges through the CPIM and through brokering
activities.
26
<PAGE>
Core Procurement Incentive Mechanism
The Utility's core gas procurement costs through 2002 are recoverable in
rates under the CPIM, which provides the Utility with a direct financial
incentive to procure gas and transportation services at the lowest reasonable
costs. Under the CPIM, all Utility procurement costs are compared to an
aggregate market-based benchmark. If costs fall within a range (tolerance
band) around the benchmark, costs are deemed reasonable and fully recoverable
from ratepayers. If procurement costs fall outside the tolerance band, the
Utility's ratepayers and shareholders share savings or costs, respectively.
Under the Gas Accord and CPIM mechanism, all Utility procurement costs from
June 1, 1994 to October 31, 1998, were approved by the CPUC as reasonable. For
the period from December 1, 1997 to October 31, 1998, the CPUC, with ORA
support, has recognized savings outside of the tolerance band, and for that
period has awarded approximately $2 million of the savings to shareholders. In
January 2000, the Utility filed a CPIM performance report for the period of
November 1, 1998, through October 31, 1999. The report determined that all gas
commodity and transportation costs for the period were within the tolerance
band, and therefore should be deemed reasonable and recoverable in full from
ratepayers.
27
<PAGE>
NATIONAL ENERGY GROUP
PG&E Corporation's National Energy Group has been formed to pursue
opportunities created by the gradual deregulation of the energy industry
across the nation. The National Energy Group integrates PG&E Corporation's
national power generation, gas transmission, and energy trading and services
businesses. The National Energy Group contemplates increasing PG&E
Corporation's national market presence through a balanced program of
acquisition and development of energy assets and businesses, while at the same
time undertaking ongoing portfolio management of its assets and businesses.
PG&E Corporation's ability to anticipate and capture profitable business
opportunities created by deregulation will have a significant impact on PG&E
Corporation's future operating results.
Gas Transmission Operations
PG&E Corporation participates in the "midstream" portion of the gas
business through PG&E GT. PG&E GT consists of three principal entities: PG&E
Gas Transmission, Texas Corporation, PG&E Gas Transmission Teco, Inc., and
PG&E GT-Northwest. PG&E Gas Transmission, Texas Corporation and PG&E Gas
Transmission Teco, Inc. are referred to collectively as PG&E Gas Transmission,
Texas (PG&E GTT). The "midstream" gas business includes (1) gas gathering,
processing, storage, and transportation of natural gas and natural gas liquids
(NGLs), and (2) the marketing of natural gas and NGLs. PG&E GT's gas
transmission facilities are operated through offices in various cities,
including Houston and San Antonio, Texas and Portland, Oregon.
PG&E GT competes with, among others, major interstate and intrastate
pipeline companies in the transportation of natural gas and NGLs. The
principal elements of competition among pipeline companies are rates, terms of
service, flexibility, and reliability of service. Natural gas competes with
other forms of energy available to PG&E GT's customers and end-users,
including electricity, coal, and fuel oils. A significant competitive factor
is price. Changes in the availability or price of natural gas and other forms
of energy, the level of business activity, conservation, legislation, and
governmental regulations, the capability to convert to alternative fuels, and
other factors, including weather, affect the demand for natural gas.
PG&E GT also competes with, among others, major integrated energy
companies, the marketing affiliates of the major interstate and intrastate
pipelines, national and local gas gatherers, brokers, marketers, and
distributors for natural gas supplies, in gathering and processing natural gas
and in marketing natural gas and NGLs. Competition for natural gas supplies is
based on a number of factors, including flexibility in contract terms and
conditions, reliability, availability of transportation, and price for the
natural gas and NGLs. Competition for sales customers is based upon, among
other factors, flexibility of contract terms and conditions, reliability and
price of delivered natural gas and NGLs.
PG&E Gas Transmission, Texas
PG&E GTT owns and operates gas gathering, transportation, and processing
facilities, and NGL pipelines. The NGL business includes the gathering of
natural gas, the extraction of NGLs from natural gas, the fractionation of
mixed NGLs into component products (e.g., ethane, propane, butane, and natural
gasoline), and the transportation and marketing of NGLs. The Texas operations
include approximately 6,700 miles of natural gas pipelines and joint ownership
or leasehold interests in approximately 1,300 miles of pipelines, including
pipelines from Waha in west Texas to the Katy area near Houston, Texas. These
pipeline systems have the capacity to transport more than 3 billion cubic feet
(bcf) of gas per day. The Texas assets also include approximately 536 miles of
NGL pipelines and nine natural gas processing plants with a combined capacity
of approximately 1.6 bcf per day of gas throughput, capable of producing
approximately 100,000 barrels per day of NGLs, and a long-term lease of 7.2
bcf of storage capacity. PG&E GTT participates in all areas of the midstream
portion of the gas business. PG&E GTT markets gas to gas distribution
companies, electric utilities, municipalities, marketers, independent power
producers, and end-use customers. It also transports natural gas for these
customers, producers, and other pipelines, and markets and transports NGLs to
various customers, including end-use customers.
28
<PAGE>
On January 27, 2000, PG&E Corporation's National Energy Group signed a
definitive agreement with El Paso Field Services Company providing for the
sale to El Paso Field Services Company, a subsidiary of El Paso Energy
Corporation, of the stock of PG&E Gas Transmission, Texas Corporation and PG&E
Gas Transmission Teco, Inc. (collectively PG&E GTT). Closing of the sale,
which is expected near the end of the first half of 2000, is subject to
approval under the Hart Scott Rodino Act.
Additional information concerning the sale of PG&E GTT is provided in
"Management's Discussion and Analysis" in the 1999 Annual Report to
Shareholders, beginning on page 5, and in Note 5 of the "Notes to Consolidated
Financial Statements" beginning on page 47 of the 1999 Annual Report to
Shareholders.
PG&E GT-Northwest
PG&E GT-Northwest owns and operates gas transmission pipelines and
associated facilities which extend over 612 miles from the Canada-U.S. border
to the Oregon-California border. PG&E GT-Northwest participates in the
midstream portion of the gas business by providing firm and interruptible
transportation services to third party shippers on an open access,
nondiscriminatory basis. Its customers are principally retail gas distribution
utilities, electric utilities that use natural gas to generate electricity,
natural gas marketing companies, natural gas producers, and industrial
companies. PG&E GT-Northwest's largest customer in 1999 was Pacific Gas and
Electric Company, accounting for approximately $49 million, or 23.5% of its
transportation revenues.
PG&E GT-Northwest's mainline system is composed of two parallel pipelines
with 12 compressor stations totaling approximately 408,660 International
Standards Organization (ISO) installed horsepower and ancillary facilities,
including metering, regulating facilities, and a communications system. The
dual pipeline system consists of approximately 639 miles of 36-inch diameter
gas transmission line (612 miles of single 36-inch diameter pipe and 27 miles
of 36-inch diameter pipeline looping) and approximately 590 miles of 42-inch
diameter pipe. In addition, in 1995, PG&E GT-Northwest constructed two lateral
pipeline extensions, adding approximately 84 miles of 12-inch diameter pipe,
and 22 miles of 16-inch diameter pipe to serve its customers on those
laterals.
PG&E GT-Northwest's total transportation quantities for 1995 through 1999
are set forth in the following table.
<TABLE>
<CAPTION>
Quantities
(in thousand
decatherms
Year (MDt))
---- ------------
<S> <C>
1995.......................................................... 885,186
1996.......................................................... 934,029
1997.......................................................... 969,257
1998.......................................................... 1,003,266
1999.......................................................... 839,778
</TABLE>
PG&E GT-Northwest's current rates were set in a rate settlement approved by
the FERC in September 1996. In 1998, petitions filed by various parties for
rehearing of the FERC order approving the settlement were denied. Three
parties have appealed the FERC's denial of these rehearing petitions to the
U.S. Court of Appeals for the District of Columbia Circuit. On February 1,
2000, the appellate court denied the petitions for review and reaffirmed the
FERC settlement.
Additional information concerning PG&E Corporation's gas transmission
operations is provided in "Management's Discussion and Analysis" in the 1999
Annual Report to Shareholders, beginning on page 5, and in Note 17 of the "Notes
to Consolidated Financial Statements" beginning on page 63 of the 1999 Annual
Report to Shareholders.
29
<PAGE>
Independent Power Generation
Through PG&E Gen and its affiliates, PG&E Corporation participates in the
development, construction, operation, ownership, and management of non-utility
electric generating facilities that compete in the United States power
generation market. PG&E Gen is headquartered in Bethesda, Maryland.
As of December 31, 1999, PG&E Gen affiliates had ownership interests in 30
operating plants in 10 states. The total generating capacity of these 30
plants is approximately 6,560 MW. Ten of these plants operate as QFs with a
combined capacity of 2,128 MW which is sold at fixed prices under long-term
power purchase agreements. The remaining plants with a combined capacity of
4,435 MW are operated as merchant power plants that sell their power directly
to wholesale customers (including other PG&E Corporation affiliates) at
prevailing market prices. PG&E Corporation's combined net equity ownership and
leased interest in these plants as of December 31, 1999, represented
approximately 5,200 MW. The plants were financed largely with a combination of
non-recourse debt and equity or equity commitments from the project sponsors.
PG&E Gen, through its affiliate, PG&E Operating Services Company (PG&E OSC),
provides contract operations and maintenance services to many of these
facilities. PG&E Gen also manages power purchase agreements with an aggregate
of 789 MW of capacity. PG&E Gen and its affiliated or managed facilities sold
29,187,905 megawatt-hours (MWh) of electricity in 1999. PG&E Gen also is
engaged in the "greenfield" development of new merchant power plants, as
discussed below.
PG&E Gen competes with unaffiliated utilities and other independent power
producers.
New England Operations
In 1998, PG&E Corporation, through its indirect subsidiary, USGenNE,
purchased from the New England Electric System (NEES) a portfolio of electric
generating assets with a combined generating capacity of about 4,000 MW. In
addition, USGenNE assumed NEES' obligations to purchase power from various
independent power producers (IPPs). As of December 31, 1999 these power
purchase obligations represented an additional 470 MW of production capacity.
NEES is required to make annual support payments to USGenNE through early 2008
to offset the cost of power associated with these above-market contracts.
Finally, in connection with the NEES acquisition, USGenNE obtained the right
to purchase NEES's nuclear generated electric energy, capacity, and associated
products at market prices up to the entire amount available. In December 1999,
USGenNE sold these nuclear entitlements.
Three of the four states in which USGenNE operates generation facilities
(Massachusetts, Rhode Island, and New Hampshire) were, like California, among
the first states in the country to introduce retail competition. As part of
electric industry restructuring in these New England states, local utility
companies were required to offer standard offer service (SOS) to their retail
customers. Retail customers may select alternate suppliers at any time. The
SOS is intended to provide customers with a price benefit (the commodity
electric price offered to the retail customer under SOS is expected to be less
than the market price for the first several years), followed by a price
disincentive that is intended to stimulate the retail market. Connecticut also
has passed retail competition legislation.
The New England assets are located within the New England Power Pool
(NEPOOL). The wholesale electricity market in New England features a bid-
based, real-time pricing structure. Traditionally, NEPOOL has operated as a
"tight power pool," one in which the utilities within the pool dedicate their
generation resources to be centrally dispatched. Dispatch starts with the
lowest-cost generation and ends with the highest-cost generation. An
independent system operator for the New England states (ISO-NE) provides
central dispatch service and operates the power pool as a competitive
wholesale marketplace. The duties of the ISO-NE include scheduling the
operations of the regional transmission systems and, importantly, operating a
power exchange for seven generation products (the "Interchange"). These
products are energy, installed (monthly) capacity and operable (hourly)
capacity, three types of reserves, and automatic generation control
(adjustment of generators to meet the second-to-second changes in electric
load).
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Additional information concerning the New England electricity market and
the Corporation's New England operations is provided in "Management's
Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning
on page 5.
Portfolio of Operating Generating Plants
The following table sets forth information regarding the operating
generating plants in which PG&E Gen affiliates have an ownership or leasehold
interest. Except as otherwise noted, PG&E Gen affiliates also manage or
operate, or both manage and operate, power plant operations.
<TABLE>
<CAPTION>
Date Placed in
Commercial
Plant MWs Fuel Location Service
----- --- ---- -------- --------------
<C> <C> <C> <C> <S>
Bear Swamp Facility(1),(2)
Pumped Storage 2 Units.......... 588 Hydro Massachusetts 1974
Fife Brook...................... 10 Hydro 1974
Brayton Point Station(2)
Unit Nos. 1, 2, and 3........... 1,130 Coal Massachusetts 1963, '64, '69
Unit No. 4...................... 446 Oil/Gas 1974
Diesel Generators.................. 10 Diesel Oil N/A
Carneys Point...................... 260 Coal New Jersey 1994
Cedar Bay.......................... 250 Coal Florida 1994
Connecticut River(2)
Hydroelectric 26 Units.......... 484 Hydro New Hampshire/Vermont 1909-1957
Deerfield River(2)
Hydroelectric 15 Units.......... 84 Hydro Massachusetts/Vermont 1912-1927
Hermiston.......................... 474 Natural Gas Oregon 1996
Indiantown......................... 330 Coal Florida 1995
Logan.............................. 225 Coal New Jersey 1995
Manchester St. Station(2)
3 Combined Cycle Units.......... 495 Natural Gas Rhode Island 1995
MASSPOWER.......................... 240 Natural Gas Massachusetts 1993
Northampton........................ 110 Waste Coal Pennsylvania 1995
Pittsfield(1)...................... 165 Natural Gas Massachusetts 1990
Salem Harbor Station(2)
Unit Nos. 1, 2, and 3........... 314 Coal Massachusetts 1952, '52, '58
Unit No. 4...................... 400 Oil 1972
Scrubgrass......................... 83 Waste Coal Pennsylvania 1993
Selkirk............................ 345 Natural Gas New York 1992, '94
-----
Total MWs/Operating Plants.. 6,443
PG&E Gen Affiliate Investments:
Colstrip(3)........................ 37 Waste Coal Montana 1990
Panther Creek(3)................... 83 Waste Coal Pennsylvania 1992
-----
Total MWs from Investments.. 120
-----
Total MWs in Operation(4)... 6,563
=====
</TABLE>
- --------
(1) Unlike other operating facilities in which PG&E Gen affiliates have
ownership and management interests, the Bear Swamp Facility and the
Pittsfield plant are owned by third parties through a single-investor
lease arrangement. PG&E Gen maintains full management and operating
responsibility for the facilities and is entitled to the output.
(2) Acquired from NEES on September 1, 1998.
(3) PG&E Gen affiliates have an ownership or leasehold interest in these
plants, but do not manage power plant operations.
(4) Of the total of 6,563 megawatts in operation, PG&E Gen's net equity
ownership and leased percentage interest in the total is 5,225 megawatts.
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<PAGE>
Generation Development Projects
Nationwide, PG&E Gen's greenfield power plant development activities exceed
10,000 MW in 9 states. The table below lists PG&E Gen's development projects.
The Millennium Project in Charlton, Massachusetts (360 MW) and the Lake Road
Project in Killingly, Connecticut (792 MW) are under construction. The La
Paloma Project in McKittrick, California (1,048 MW) has been approved by PG&E
Corporation's Board of Directors and the California Energy Commission. The
other development projects listed below are in the early stages of the
development process. The completion of these planned projects is subject to
many factors, including but not limited to various regulatory and
environmental approvals, adequate financing on satisfactory terms, competitive
conditions including the expansion and retirement plans of others, market
prices for electricity, and future fuel prices.
<TABLE>
<CAPTION>
Estimated
start of
commercial
Plant MW Fuel Location service
----- -- ---- -------- ----------
<S> <C> <C> <C> <C>
Millennium.................... 360 Natural gas Massachusetts 4Q 2000
Lake Road..................... 792 Natural gas Connecticut 2Q 2001
La Paloma..................... 1,048 Natural gas California 1Q 2002
Madison....................... 12 Wind New York 3Q 2000
Brayton V..................... 800 Natural gas Massachusetts 4Q 2002
Athens........................ 1,080 Natural gas New York 1Q 2002
Covert........................ 1,022 Natural gas Michigan 3Q 2002
Badger........................ 1,022 Natural gas Wisconsin 3Q 2002
Liberty....................... 1,048 Natural gas New Jersey 3Q 2002
Mantua Creek.................. 800 Natural gas New Jersey 1Q 2002
Otay Mesa..................... 510 Natural gas California 3Q 2002
Harquahala.................... 1,000 Natural gas Arizona 3Q 2003
Okeechobee.................... 550 Natural gas Florida 2Q 2004
</TABLE>
Energy Trading
PG&E Energy Trading-Gas Corporation and PG&E Energy Trading-Power, L.P.
(also collectively referred to as PG&E ET), headquartered in Houston, Texas,
purchase electric power from PG&E Corporation affiliates and the wholesale
market and natural gas from producers, marketers, and other parties. PG&E ET
then schedules, transports, and resells these commodities, either to third
parties or to other PG&E Corporation affiliates (except the Utility). PG&E ET
also provides risk management services to PG&E Corporation's other businesses
(except the Utiltiy) and to unaffiliated wholesale customers. For more
information, see "General--Risk Management Programs" above.
PG&E ET competes with, among others, major integrated energy companies,
marketing affiliates of major interstate pipelines, brokers, gas marketers,
and gas distributors for natural gas supplies and/or in marketing natural gas.
In addition, PG&E ET competes with unaffiliated electric utilities, marketers,
and other entities in purchasing and selling electric power and other energy
commodities. Competition in the energy marketing business is driven by various
factors, including the price of commodities and services delivered along with
quality and reliability of services delivered.
Additional information concerning the wholesale operations of PG&E
Corporation's affiliates is provided in "Management's Discussion and Analysis"
in the 1999 Annual Report to Shareholders, beginning on page 5, and in Note 17
of the "Notes to Consolidated Financial Statements" beginning on page 63 of
the 1999 Annual Report to Shareholders.
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<PAGE>
Energy Services
PG&E Energy Services (PG&E ES), headquartered in San Francisco, California,
provides retail gas and electric commodities nationwide, where permitted under
applicable laws, and provides energy-related value-added services, including
billing and information management services, energy efficiency and other
energy management services, regulatory and rate analysis, and power quality
solutions. PG&E ES targets primarily industrial, commercial, and institutional
customers, offering comprehensive energy management solutions to reduce their
energy costs and improve their productivity. PG&E ES has 20 offices nationwide
to support its sales activities. PG&E ES currently competes with other non-
utility electric retailers in California for direct access customers. See
"Utility Operations--Electric Utility Operations--California Electric Industry
Restructuring" above.
In December 1999, PG&E Corporation's Board of Directors approved a plan to
dispose of PG&E ES, its wholly owned subsidiary, through a sale. The intended
disposal has been accounted for as a discontinued operation in PG&E
Corporation's 1999 financial statements. While there is no definitive sales
agreement, it is expected that the disposition will be completed by June 2000.
Additional information concerning PG&E ES is provided in "Management's
Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning
on page 5, and in Notes 5 and 17 of the "Notes to Consolidated Financial
Statements" beginning on pages 47 and 63, respectively, of the 1999 Annual
Report to Shareholders.
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<PAGE>
ENVIRONMENTAL MATTERS
Environmental Matters
The following discussion includes certain forward-looking information
relating to estimated expenditures for environmental protection measures and
the possible future impact of environmental compliance. This information below
reflects current estimates, which are periodically evaluated and revised.
Future estimates and actual results may differ materially from those indicated
below. These estimates are subject to a number of assumptions and
uncertainties, including changing laws and regulations, the ultimate outcome
of complex factual investigations, evolving technologies, selection of
compliance alternatives, the nature and extent of required remediation, the
extent of the facility owner's responsibility, and the availability of
recoveries or contributions from third parties.
PG&E Corporation, the Utility, PG&E Gen and its affiliates (including
USGenNE), and other PG&E Corporation subsidiaries and affiliates are subject
to a number of federal, state, and local laws and regulations designed to
protect human health and the environment by imposing stringent controls with
regard to planning and construction activities, land use, air and water
pollution, and treatment, storage, and disposal of hazardous or toxic
materials. These laws and regulations affect future planning and existing
operations, including environmental protection and remediation activities. The
Utility has undertaken compliance efforts with specific emphasis on its
purchase, use, and disposal of hazardous materials, the cleanup or mitigation
of historic waste spill and disposal activities, and the upgrading or
replacement of the Utility's bulk waste handling and storage facilities. The
costs of compliance with environmental laws and regulations generally have
been recovered in rates.
Although the Utility has sold most of its fossil-fueled power plants and
its geothermal generation facilities in connection with electric industry
restructuring, the Utility has retained liability for certain required
environmental remediation of pre-closing soil or groundwater contamination for
fossil and geothermal generation facilities that have been sold. See "Utility
Operations--Electric Utility Operations--California Electric Industry
Restructuring--Voluntary Generation Asset Divestiture" above.
Environmental Protection Measures
The estimated expenditures of PG&E Corporation's subsidiaries for
environmental protection are subject to periodic review and revision to
reflect changing technology and evolving regulatory requirements. It is likely
that the stringency of environmental regulations will increase in the future.
As a result of the Utility's divestiture of most of its fossil-fueled power
plants and its geothermal generation facilities, the Utility's oxides of
nitrogen (NOx) emission reduction compliance costs have been reduced
significantly.
Air Quality
Pacific Gas and Electric Company's thermal electric generating plants are
subject to numerous air pollution control laws, including the California Clean
Air Act (CCAA) with respect to emissions. Pursuant to the CCAA and the Federal
Clean Air Act, two of the local air districts in which the Utility owns and
operates fossil-fueled generating plants have adopted final rules that require
a reduction in NOx emissions from the power plants of approximately 90% by
2004 (with numerous interim compliance deadlines).
The Gas Accord authorizes $42 million to be included in rates through 2002,
for gas NOx retrofit projects related to natural gas compressor stations on
Pacific Gas and Electric Company's Line 300, which delivers gas from the
Southwest. Other air districts are considering NOx rules that would apply to
the Utility's other natural gas compressor stations in California. Eventually
the rules are likely to require NOx reductions of up to 80% at many of these
natural gas compressor stations. The Utility currently estimates that the
total cost of complying with these various NOx rules will be up to $51 million
over three years. Substantially all of these costs will be capital costs.
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<PAGE>
PG&E Gen's compliance with certain future regulatory requirements limiting
the total amount of NOx emissions from its fossil-fueled power plants is
expected to be achieved through installation of additional controls, fuel
switching, and purchase of NOx allowances. USGenNE has agreed to be bound by a
number of state and regional initiatives that will require it to achieve
significant reductions of sulfur dioxide (SO\\2\\) and NOx emissions by the
time its older fossil-fueled power plants have been in operation for 40 years
or by 2010, whichever comes first. It is expected that USGenNE can meet these
requirements through utilization of allowances it currently owns, installation
of additional controls, or purchase of additional allowances. (SO\\2\\
allowances are emission credits that are traded in a national market under the
United States Environmental Protection Agency's (EPA) Acid Rain Program. NOx
allowances are emission credits that are traded in a regional market
consisting of seven Northeast states known as the Ozone Transport Region.) It
is estimated that USGenNE's total cost of complying with these requirements
will be up to $4 million through the year 2001.
Water Quality
Pacific Gas and Electric Company's existing power plants, including Diablo
Canyon, are subject to federal and state water quality standards with respect
to discharge constituents and thermal effluents. The Utility's fossil-fueled
power plants comply in all material respects with the discharge constituents
standards and either comply in all material respects with or are exempt from
the thermal standards. A thermal effects study at Diablo Canyon was completed
in May 1988, and was reviewed by the Central Coast Regional Water Quality
Control Board (Central Coast Board). The Central Coast Board did not make a
final decision on the report and requested that the Utility continue its
thermal effects monitoring program. In 1995, the Central Coast Board requested
that the Utility prepare an updated comprehensive assessment of Diablo
Canyon's thermal effects and approved a reduced environmental monitoring
program. A comprehensive statistical analysis of Diablo Canyon's thermal
effects was submitted to the Central Coast Board in December 1997 and a
regulatory assessment was submitted in November 1998. If the Central Coast
Board finds that Diablo Canyon's existing thermal limits are not protective of
beneficial uses of the marine waters, major modifications (e.g., cooling
towers) resulting in additional construction expenditures, or reduced power
operation, could be required.
Pursuant to the federal Clean Water Act, the Utility is required to
demonstrate that the location, design, construction, and capacity of power
plant cooling water intake structures reflect the best technology available
(BTA) for minimizing adverse environmental impacts at its existing water-
cooled thermal plants. The Utility has submitted detailed studies of each
power plant's intake structure to various governmental agencies. Each plant's
existing water intake structure was found to meet the BTA requirements. The
Utility currently is completing a new study for Diablo Canyon. The study is
scheduled to be submitted to the Central Coast Board for review in 2000. If
the Central Coast Board finds that Diablo Canyon's cooling water intake
structure does not meet the BTA requirements, additional expenses for
construction or mitigation could be required. In addition, the promulgation or
modification of statutes, regulations, or water quality control plans at the
federal, state, or regional level may impose increasingly stringent cooling
water discharge requirements on the Utility's remaining power plants in the
future. Costs to comply with renewed permit conditions required to meet any
more stringent requirements that might be imposed cannot be estimated at the
present time.
In December 1999, the Utility was notified by the purchaser of its former
Moss Landing power plant that that it had identified a cleaning procedure used
at the plant that released heated water from the intake, and that this
procedure is not specified in the plant's National Pollutant Discharge
Elimination System (NPDES) permit issued by the Central Coast Board. The
purchaser notified the Central Coast Board of its findings and the Central
Coast Board requested additional information from the purchaser. The Utility
has initiated an investigation of these activities during the time it owned
the plant. The Central Coast Board has been notified of the investigation and
the results will be presented to the Central Coast Board when the
investigation is complete. If the identified procedure was performed during
the Utility's ownership and was beyond the scope of the relevant NPDES
permits, the Central Coast Board may choose to initiate an enforcement action.
If so, the Utility could be subject to significant penalties. Until the
investigation is complete and the results discussed with the Central Coast
Board, it is not possible to determine whether the Utility will suffer a loss
in connection with this matter or to provide a more detailed estimate of such
liability.
35
<PAGE>
PG&E Gen's existing power plants, including USGenNE facilities, are subject
to federal and state water quality standards with respect to discharge
constituents and thermal effluents. Three of the fossil-fueled plants owned
and operated by USGenNE are operating in compliance with NPDES permits that
have expired. As to the facilities for which the NPDES permit has expired, new
permit applications are pending, and it is anticipated that all three
facilities will be able to continue to operate under existing terms and
conditions until new permits are issued. USGenNE has submitted a permit
renewal application and is negotiating with EPA on ongoing studies and permit
conditions. It is estimated that USGenNE's cost to comply with these
conditions could be as much as $5 million through the year 2001.
Hazardous Waste Compliance and Remediation
PG&E Corporation subsidiaries assess, on an ongoing basis, measures that
may need to be taken to comply with laws and regulations related to hazardous
materials and hazardous waste compliance and remediation activities. The
Utility has a comprehensive program to comply with many hazardous waste
storage, handling, and disposal requirements promulgated by the EPA under the
Resource Conservation and Recovery Act (RCRA) and the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA), along with
other state hazardous waste laws and other environmental requirements.
One part of this program is aimed at assessing whether and to what extent
remedial action may be necessary to mitigate potential hazards posed by
certain disposal sites and retired manufactured gas plant sites. During their
operation, manufactured gas plants produced lampblack and tar residues,
byproducts of a process that Pacific Gas and Electric Company, its predecessor
companies, and other utilities used as early as the 1850s to manufacture gas
from coal and oil. As natural gas became widely available (beginning about
1930), the Utility's manufactured gas plants were removed from service. The
residues that may remain at some sites contain chemical compounds that now are
classified as hazardous. The Utility has identified and reported to federal
and California environmental agencies 96 manufactured gas plant sites that
operated in the Utility's service territory. The Utility owns all or a portion
of 29 of these manufactured gas plant sites. The Utility has a program, in
cooperation with environmental agencies, to evaluate and take appropriate
action to mitigate any potential health or environmental hazards at sites that
the Utility owns. It is estimated that the Utility's program may result in
expenditures of approximately $5 million in 2000. The full long-term costs of
the program cannot be determined accurately until a closer study of each site
has been completed. It is expected that expenses will increase as remedial
actions related to these sites are approved by regulatory agencies or if the
Utility is found to be responsible for cleanup at sites it currently does not
own.
In addition to the manufactured gas plant sites, the Utility may be
required to take remedial action at certain other disposal sites if they are
determined to present a significant threat to human health and the environment
because of an actual or potential release of hazardous substances. The Utility
has been designated as a potentially responsible party (PRP) under CERCLA (the
federal Superfund law) with respect to the PRC Patterson site in Patterson,
California, and the Industrial Waste Processing site near Fresno, California.
With respect to the Casmalia site near Santa Maria, California, the Utility
and several other generators of waste sent to the site have entered into a
court-approved agreement with the EPA that requires these generators to
perform certain site investigation and mitigation measures, and provides a
release from liability for certain other site cleanup obligations. Although
the Utility has not been formally designated a PRP with respect to the
Geothermal Incorporated site in Lake County, California, the Central Valley
Regional Water Quality Control Board and the California Attorney General's
office have directed the Utility and other parties to initiate measures with
respect to the study and remediation of that site.
In addition, Pacific Gas and Electric Company has been named as a defendant
in several civil lawsuits in which plaintiffs allege that the Utility is
responsible for performing or paying for remedial action at sites the Utility
no longer owns or never owned.
The cost of hazardous substance remediation ultimately undertaken by
Pacific Gas and Electric Company is difficult to estimate. It is reasonably
possible that a change in the estimate may occur in the near term due to
36
<PAGE>
uncertainty concerning the Utility's responsibility, the complexity of
environmental laws and regulations, and the selection of compliance
alternatives. At December 31, 1999, the Utility expects to spend $300 million
for hazardous waste remediation costs at identified sites, including divested
fossil-fueled power plants, where such costs are probable and quantifiable.
(Although the Utility has sold most of its fossil-fueled power plants, the
Utility has retained pre-closing environmental liability with respect to these
plants.) The Utility had an accrued liability of $271 million at December 31,
1999, representing the discounted value of these costs. Environmental
remediation at identified sites may be as much as $486 million if, among other
things, other PRPs 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 Utility is
responsible. The Utility estimated the upper limit of the range of costs using
assumptions least favorable to the Utility based upon a range of reasonably
possible outcomes. Costs may be higher if the Utility is found to be
responsible for cleanup costs at additional sites or identifiable possible
outcomes change.
PG&E Gen acquired the onsite environmental liability associated with
USGenNE's acquisition of electric generating facilities from NEES, but did not
acquire any offsite liability associated with the past disposal practices at
the acquired facilities. PG&E Gen has obtained pollution liability and
environmental remediation insurance coverage to limit the financial risk
associated with the onsite pollution liability at all of its facilities.
Potential Recovery of Hazardous Waste Compliance and Remediation Costs
In 1994, the CPUC established a ratemaking mechanism for hazardous waste
remediation costs (HWRC). That mechanism assigns 90% of the includable
hazardous substance cleanup costs to utility ratepayers and 10% to utility
shareholders, without a reasonableness review of such costs or of underlying
activities. Under the HWRC mechanism, 70% of the ratepayer portion of Pacific
Gas and Electric Company's cleanup costs is attributed to its gas department
and 30% is attributed to its electric department. Insurance recoveries are
assigned 70% to shareholders and 30% to ratepayers until both are reimbursed
for the costs of pursuing insurance recoveries. The balance of insurance
recoveries are allocated 90% to shareholders and 10% to ratepayers until
shareholders are reimbursed for their 10% share of cleanup costs. Any
unallocated funds remaining are held for five years and then distributed 60%
to ratepayers and 40% to shareholders over the next five years. The Utility
can seek to recover hazardous substance cleanup costs under the HWRC in the
rate proceeding it deems most appropriate. In connection with electric
industry restructuring, the HWRC mechanism may no longer be used to recover
electric generation-related cleanup costs for contamination caused by events
occurring after January 1, 1998.
For each divested generation facility where the Utility retained
environmental remediation liabilities, the plant's decommissioning cost
estimate was adjusted by the Utility's estimated forecast of environmental
remediation costs. (The buyers assumed the non-environmental decommissioning
liability for these plants.) The CPUC ordered that excess recoveries of
environmental and non-environmental decommissioning accruals related to the
divested plants be used to offset other transition costs. As of December 31,
1999, the Utility has recovered from ratepayers approximately $114 million for
environmental decommissioning accrual related to the divested plants. This
amount will earn interest at 3% per year that will be used to meet the future
environmental remediation costs for the divested plants. The net
decommissioning accruals recovered from ratepayers attributable to the non-
environmental liability for the divested plants was approximately $53 million.
Because the Utility no longer has this non-environmental decommissioning
liability, it has used this excess recovery amount to reduce other transition
costs.
Of the $271 million accrued liability, discussed above, the Utility has
recovered $148 million through rates, including $34 million through
depreciation, and expects to recover $95 million in future rates.
Additionally, the Utility is mitigating its costs by seeking recovery of its
costs from insurance carriers and from other third parties as appropriate.
In 1992, Pacific Gas and Electric Company filed a complaint in San
Francisco County Superior Court against more than 100 of its domestic and
foreign insurers, seeking damages and declaratory relief for remediation and
other costs associated with hazardous waste mitigation. The Utility previously
had notified its insurance carriers
37
<PAGE>
that it seeks coverage under its comprehensive general liability policies to
recover costs incurred at certain specified sites. In general, the Utility's
carriers neither admitted nor denied coverage, but requested additional
information from the Utility. Although the Utility has received some amounts
in settlements with certain of its insurers (approximately $71 million through
December 31, 1999), the ultimate amount of recovery from insurance coverage,
either in the aggregate or with respect to a particular site, cannot be
quantified at this time.
Compressor Station Litigation
Several cases have been brought against Pacific Gas and Electric Company
seeking damages from alleged chromium contamination at the Utility's Hinkley,
Topock, and Kettleman Compressor Stations. See Item 3, "Legal Proceedings--
Compressor Station Chromium Litigation" below, for a description of the
pending litigation.
Electric and Magnetic Fields
In January 1991, the CPUC opened an investigation into potential interim
policy actions to address increasing public concern, especially with respect
to schools, regarding potential health risks that may be associated with
electric and magnetic fields (EMF) from utility facilities. In its order
instituting the investigation, the CPUC acknowledged that the scientific
community has not reached consensus on the nature of any health impacts from
contact with EMF, but went on to state that a body of evidence has been
compiled that raises the question of whether adverse health impacts might
exist.
In November 1993, the CPUC adopted an interim EMF policy for California
energy utilities that, among other things, requires California energy
utilities to take no-cost and low-cost steps to reduce EMF from new and
upgraded utility facilities. California energy utilities are required to fund
a $1.5 million EMF education program and a $5.6 million EMF research program
managed by the California Department of Health Services. It is expected that
the CPUC and the California Department of Health Services will complete its
EMF research program by December 2001.
As part of its effort to educate the public about EMF, Pacific Gas and
Electric Company provides interested customers with information regarding the
EMF exposure issue. The Utility also provides a free field measurement service
to inform customers about EMF levels at different locations in and around
their residences or commercial buildings.
The Utility currently is not involved in third party litigation concerning
EMF. In August 1996, the California Supreme Court held that homeowners are
barred from suing utilities for alleged property value losses caused by fear
of EMF from power lines. The Court expressly limited its holding to property
value issues, leaving open the question as to whether lawsuits for alleged
personal injury resulting from exposure to EMF are similarly barred. The
Utility was a defendant in civil litigation in which plaintiffs alleged
personal injuries resulting from exposure to EMF. In January 1998, the appeals
court in this matter held that the CPUC has exclusive jurisdiction over
personal injury and wrongful death claims arising from allegations of harmful
exposure to EMF and barred plaintiffs' personal injury claims. Plaintiffs
filed an appeal of this decision with the California Supreme Court. The
California Supreme Court declined to hear the case.
If the scientific community reaches a consensus that EMF presents a health
hazard and further determines that the impact of utility-related EMF exposures
can be isolated from other exposures, the Utility may be required to take
mitigation measures at its facilities. The costs of such mitigation measures
cannot be estimated with any certainty at this time. However, such costs could
be significant, depending on the particular mitigation measures undertaken,
especially if relocation of existing power lines ultimately is required.
Low Emission Vehicle Programs
In December 1995, the CPUC issued its decision in the Low Emission Vehicle
(LEV) proceeding, which approved approximately $42 million in funding for
Pacific Gas and Electric Company's LEV program for the
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<PAGE>
six-year period beginning in 1996. The CPUC's decision on electric industry
restructuring found that the costs of utility LEV programs should continue to
be collected by the utility for the duration of the six-year period. The
Utility continues to run its LEV program as funded.
ITEM 2. Properties.
Information concerning Pacific Gas and Electric Company's electric
generation units, electric and gas transmission facilities, and electric and
gas distribution facilities is included in response to Item 1. All of the
Utility's real properties and substantially all of the Utility's personal
properties are subject to the lien of an indenture that provides security to
the holders of the Utility's First and Refunding Mortgage Bonds.
Information concerning properties and facilities owned by other PG&E
Corporation subsidiaries is included in the discussion under the heading of
this report entitled "National Energy Group."
ITEM 3. Legal Proceedings.
See Item 1, Business, for other proceedings pending before governmental and
administrative bodies. In addition to the following legal proceedings, PG&E
Corporation and Pacific Gas and Electric Company are subject to routine
litigation incidental to their business.
Compressor Station Chromium Litigation
Pacific Gas and Electric Company is currently a defendant in three civil
actions pending in California courts. These cases are (1) Aguayo v. Pacific
Gas and Electric Company, filed March 15, 1995, in Los Angeles County Superior
Court, (2) Aguilar v. Pacific Gas and Electric Company, filed October 4, 1996,
in Los Angeles County Superior Court, and (3) Acosta, et al. v. Betz
Laboratories, Inc., Pacific Gas and Electric Company, et al., filed November
27, 1996, in Los Angeles County Superior Court. These cases are collectively
referred to as the "Aguayo Litigation." There are approximately 900 plaintiffs
in the Aguayo Litigation.
Each of the complaints in the Aguayo Litigation alleges personal injuries
and seeks compensatory and punitive damages in an unspecified amount arising
out of alleged exposure to chromium contamination in the vicinity of the
Utility's gas compressor stations at Kettleman, Hinkley, and Topock,
California. The plaintiffs in the Aguayo Litigation include current and former
Utility employees, relatives of current and former employees, residents in the
vicinity of the compressor stations, and persons who visited the gas
compressor stations. The plaintiffs also include spouses or children of these
plaintiffs who claim loss of consortium or wrongful death.
All discovery and discovery motion practice in the Aguayo Litigation have
been referred by the judge to a discovery referee. The discovery referee has
set the procedures for selecting 18 trial test plaintiffs and two alternates
in the Aguayo Litigation. Ten of these trial test plaintiffs were selected by
plaintiffs, seven trial test plaintiffs were selected by defendants, and one
trial test plaintiff and two alternates were selected at random. The trial
date has been set for November 17, 2000 in Los Angeles Superior Court.
The Utility is responding to the complaints and asserting affirmative
defenses. The Utility 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. At this stage of the
proceedings, there is substantial uncertainty concerning the claims alleged.
The Utility is attempting to gather information concerning the alleged type
and duration of exposure, the nature of injuries alleged by individual
plaintiffs, and the additional facts necessary to support its legal defenses,
in order to better evaluate and defend this litigation.
PG&E Corporation believes that the ultimate outcome of this matter will not
have a material adverse impact on its or Pacific Gas and Electric Company's
financial position or results of operations.
39
<PAGE>
Texas Franchise Fee Litigation
On July 31, 1997, PG&E Corporation acquired Valero Energy Corporation
(Valero), now known as PG&E Gas Transmission, Texas Corporation. PG&E Gas
Transmission, Texas Corporation and its affiliates (PG&E GTT) succeeded to the
cases described below, which were pending at the time of the acquisition
against Valero and its affiliates. A lawsuit was also pending at such time
that had been filed by the City of Pharr, but no PG&E GTT entity has been
served in this case. These cases are collectively referred to as the "Texas
Franchise Fees Litigation." These actions were brought by various cities in
Texas arising out of several Texas statutes and city ordinances involving the
following: (a) what rights, if any, Texas cities may have to require companies
engaged in the gathering, production, distribution, transmission, and/or sale
of natural gas to obtain consent from, and pay fees to, the cities within
which such activities are being conducted, (b) what form any such consent, if
required, must take, (c) what constitutes "use" of city property, and (d) what
types of charges, if any, a Texas city properly can assess against gas
pipeline and marketing companies for use of that city's property.
There were seven cases pending against Valero entities at the time of the
acquisition: (1) City of Edinburg v. Rio Grande Valley Gas Co. (RGVG), Valero
Energy Corporation (now known as PG&E GTT), Valero Transmission Company (now
known as PG&E Texas Pipeline Company), Valero Natural Gas Company (now known
as PG&E Texas Natural Gas Company), Reata Industrial Gas Company a/k/a Valero
Gas Marketing Company (now known as PG&E Energy Trading Holdings Corporation),
Valero Transmission, L.P. (now known as PG&E Texas Pipeline, L.P.), and Reata
Industrial Gas, L.P. (now known as PG&E Reata Energy, L.P.), Southern Union
Company and its unincorporated division, Southern Union Gas Co. (Southern
Union), and Mercado Gas Services, Inc., filed August 31, 1995, in the 92nd
State District Court, Hidalgo County, Texas, (2) Cities of San Benito,
Primera, and Port Isabel v. RGVG, Valero Energy Corporation (now known as PG&E
GTT), Southern Union, et al., filed December 31, 1996, in the 107th State
District Court, Cameron County, Texas, (3) City of Mercedes v. Reata
Industrial Gas, L.P. (now known as PG&E Reata Energy, L.P.), and Valero Gas
Marketing Company (now known as PG&E Energy Trading Holdings Corporation),
filed April 16, 1997, in the 92nd State District Court in Hidalgo County,
Texas, (4) Cities of Alton and Donna v. RGVG, Valero Energy Corporation (now
known as PG&E Gas Transmission, Texas Corporation), Valero Transmission
Company (now known as PG&E Texas Pipeline Company), Valero Natural Gas Company
(now known as PG&E Texas Natural Gas Company), Reata Industrial Gas Company
(now known as PG&E Energy Trading Holdings Corporation), Valero Transmission,
L.P. (now known as PG&E Texas Pipeline, L.P.), and Reata Industrial Gas, L.P.
(now known as PG&E Reata Energy, L.P.), Southern Union Gas Co., and Mercado
Gas Services, Inc., filed July 18, 1996, in the 92nd State District Court,
Hidalgo County, Texas, (5) City of La Joya v. RGVG, Valero Energy Corporation
(now known as PG&E GTT), Southern Union Company, et al., filed December 27,
1996, in the 92nd State District Court, Hidalgo County, Texas, (6) Cities of
San Juan, La Villa, Penitas, Edcouch, and Palmview v. RGVG, Valero Energy
Corporation (now known as PG&E Gas Transmission, Texas Corporation), Southern
Union Company, et al., filed December 27, 1996, in the 93rd State District
Court, Hidalgo County, Texas, and (7) City of Weslaco v. Valero Natural Gas
Company (now known as PG&E Texas Natural Gas Company), Valero Gas Marketing
Co. (now known as PG&E Energy Trading Holdings Corporation), and Reata
Industrial Gas, L.P. (now known as PG&E Reata Energy L.P.) filed April 17,
1997, in the 92nd State District Court, Hidalgo County, Texas. The lawsuits
involving the City of La Joya (item number 5 above) and the Cities of San
Juan, La Villa, Penitas, Edcouch, and Palmview (item number 6 above) were
voluntarily dismissed on July 13, 1999, and February 23, 2000, respectively.
However, all of these cities are class members in the San Benito class action
(item number 5 above) as are the Cities of Alton and Donna.
The trial in the City of Edinburg case began on June 15, 1998. On August
14, 1998, a jury returned a verdict in favor of the City of Edinburg, and
awarded damages in the approximate aggregate amount of $9.8 million, plus
attorneys' fees of approximately $3.5 million, against PG&E GTT, Southern
Union and various affiliates of PG&E GTT and Southern Union. The jury refused
to award punitive damages against the PG&E GTT defendants. On December 1,
1998, based on the jury verdict, the court entered a judgment in the City's
favor, and awarded damages of $5.3 million, attorneys' fees of up to $3.5
million (to the extent that the City is successful on appeal), prejudgment
interest of $1.6 million, and post-judgment interest at the rate of 10% per
year, compounded annually, from December 1, 1998. The court found that various
PG&E GTT and Southern
40
<PAGE>
Union defendants were jointly and severally liable for $3.3 million of the
damages, prejudgment interest in the amount of $1.1 million, and all the
attorneys' fees. Certain PG&E GTT subsidiaries were found solely liable for
$1.4 million of the damages and prejudgment interest of $440,000. The court
did not clearly indicate the extent to which the PG&E GTT defendants could be
found liable for the remaining damages. The judgment also decreed that (1)
certain pipelines owned by PG&E Texas Pipeline, L.P. (formerly known as Valero
Transmission, L.P.) encroached on the City's property without the City's
consent and (2) based on certain jury findings, PG&E GTT was vicariously
liable for certain conduct of the local distribution company, RGVG, from
October 1, 1985, to September 30, 1993 (the date Valero, PG&E GTT's
predecessor, sold RGVG to Southern Union). The PG&E GTT defendants are
appealing the judgment.
On November 4, 1997, the lawsuit filed in Cameron County, Texas, by the
cities of San Benito, Primera, and Port Isabel was amended to name as
defendants PG&E GTT and all of its subsidiaries (excluding its Canadian gas
trading and power trading subsidiaries), PG&E Gas Transmission Teco, Inc. and
its subsidiaries, and PG&E Energy Trading Corporation (now known as PG&E
Energy Trading--Gas Corporation) (collectively these defendants are referred
to as the "PG&E Corporation Texas defendants"). In November 1997, the court
ordered a state-wide class certified and granted plaintiffs' request to
dismiss RGVG and the Southern Union defendants. In connection with the
certification of a class in this case, the court ordered notice to be sent to
all potential class members and setting an opt-out deadline of December 31,
1997. Notices were mailed to approximately 159 Texas cities. Fewer than 20
cities opted out by the deadline. Some of the cities opting out include
Austin, Brownsville, Houston, and San Antonio. The city of Los Indios has been
severed from the class and its claims separately docketed in Cameron County,
Texas. On November 22, 1999, the court signed an order dismissing from the
class 42 cities because it determined there was no pipeline presence and no
past or present sales activity in such cities, leaving 106 cities in the
class. The parties are negotiating the terms of a final settlement agreement.
The settlement proposal contemplates, among other things, that the PG&E
Corporation Texas defendants would pay a total of not more than $12.2 million
to the settling class cities, inclusive of attorney fees and expenses, which
amount may be reduced by amounts attributable to certain opt-out cities. The
defendants retain the right to reject the settlement if the settlement
proposal is not approved by certain key cities and by 80% of the overall
plaintiff class. Although a significant number of the 106 cities in the
plaintiff class already have either approved the settlement by enacting the
consent ordinance or have adopted resolutions to pass the ordinance, certain
key cities have not yet approved the settlement. The settlement is also
subject to final court approval. On January 27, 2000, the court approved the
settlement proposal and established a 14-day period for the cities to decide
whether to accept the negotiated settlement terms or opt out of the
settlement. The court also stated that if the City of Corpus Christi does not
accept the settlement proposal, it will be placed in a single city sub-class
and its claims will not be finalized as part of the settlement approval.
Corpus Christi has the right to opt out of this subclass. Although the 14-day
period expired on February 11, 2000, certain cities have requested and
received additional time to decide whether to opt out.
In July 1996, the lawsuits originally filed by the cities of Alton and
Donna as intervening actions in the City of Edinburg case were severed from
the Edinburg lawsuit. The claims asserted by the cities of Alton and Donna are
substantially similar to the San Benito litigation claims, except that no
class claims are asserted. Damages are not quantified. Defendants' motion to
transfer venue of both cases to Bexar County, Texas, is currently pending. The
Cities of Alton and Donna are also members of the San Benito class, and will
be required to dismiss their claims against PG&E GTT in this separate lawsuit
if they agree to accept the settlement of the San Benito class action.
On September 4, 1997, the City of Mercedes amended its petition to include
class action claims and requested to be named as class representative for a
statewide class consisting of all Texas municipal corporations,
municipalities, towns, and villages, excluding the cities of Edinburg and
Weslaco (both of which have filed separate actions), in which any of the
defendants have sold or supplied gas, or used public rights-of-way to
transport gas. The City of Mercedes has requested a damage award, but has not
specified an amount. On November 26, 1997, defendants' motion to recuse the
presiding judge was granted. Plaintiffs' request for class certification is
still pending.
41
<PAGE>
The causes of action alleged in the case brought by the City of Weslaco are
identical to those alleged in the City of Mercedes case, except that no class
claims are asserted. Damages are not quantified. A motion similar to the
motion filed in Mercedes, seeking to recuse the judge of the 92nd State
District Court, was filed but not ruled upon. On May 12, 1999, this case was
transferred to the 370th State District Court of Hidalgo County, Texas.
Defendants' motion to transfer venue to Bexar County, Texas, is currently
pending.
In addition to the cases described above, during May 1996, a petition in
intervention was filed in the Edinburg case by the City of Pharr. On June 24,
1996, the court severed Pharr from the Edinburg case, certified the severed
case as a class action against Southern Union Company and RGVG, and named
Pharr as class representative for a class consisting of those Texas cities,
excluding Edinburg and McAllen, that have or had natural gas franchise
agreements with RGVG or Southern Union. The Pharr class was certified as to
two claims: breach of contract and declaratory relief dealing with the rights,
status, and legal relationship between plaintiff, the class members, and the
local distribution company regarding payment of franchise fees and use of
granted easements. Plaintiffs' original petition also sought injunctive
relief, but the class order does not include injunctive relief. Plaintiffs
seek actual damages, exemplary damages, attorneys' fees, costs, and pre- and
post-judgment interest, but have not specified any amounts. On January 26,
1998, the court added the Cities of Mercedes and Weslaco as class
representatives. None of the PG&E Corporation Texas entities have ever been
served in the Pharr litigation. On December 30, 1997, in affirming the Pharr
class certification, the appellate court specifically found that the PG&E GTT
entities were not parties to the Pharr class action. However, the same 29 PG&E
Corporation Texas entities that are class defendants in the San Benito
litigation have subsequently been named and served as defendants in two
ancillary suits brought during 1998 by the Pharr class plaintiffs. These
ancillary suits seek only injunctive relief, for the stated purpose of
"protecting" the Pharr class from alleged interference by the San Benito
class.
PG&E Corporation believes that the ultimate outcome of this matter will not
have a material adverse impact on its financial position or results of
operations. As discussed above under "Item 1--National Energy Group-- Gas
Transmission Operations," in January 2000, PG&E Corporation's National Energy
Group signed a definitive agreement to sell the stock of PG&E Gas
Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc., the
National Energy Group subsidiaries which conduct gas transmission operations
in Texas. The buyer will assume all liabilities associated with the cases
described above.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
42
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANTS
"Executive officers," as defined by Rule 3b-7 of the General Rules and
Regulations under the Securities and Exchange Act of 1934, of PG&E Corporation
are as follows:
<TABLE>
<CAPTION>
Age at
December 31,
Name 1999 Position
---- ------------ --------
<C> <C> <S>
R. D. Glynn, Jr. ....... 57 Chairman of the Board, Chief Executive
Officer, and President
T. G. Boren............. 50 Executive Vice President; President
and Chief Executive Officer, PG&E
National Energy Group, Inc.
P. A. Darbee............ 47 Senior Vice President, Chief Financial
Officer, and Treasurer
S. W. Gebhardt.......... 48 Senior Vice President; President and
Chief Executive Officer, PG&E Energy
Services Corporation
T. W. High.............. 52 Senior Vice President, Administration
and External Relations
P. C. Iribe............. 49 Senior Vice President; President and
Chief Operating Officer, PG&E
Generating Company
T. B. King.............. 38 Senior Vice President; President and
Chief Operating Officer, PG&E Gas
Transmission Corporation
L. E. Maddox............ 44 Senior Vice President; President and
Chief Executive Officer, PG&E Energy
Trading Corporation
G. R. Smith............. 51 Senior Vice President; President and
Chief Executive Officer, Pacific Gas
and Electric Company
G. B. Stanley........... 53 Senior Vice President, Human Resources
B. R. Worthington....... 50 Senior Vice President and General
Counsel
</TABLE>
All officers of PG&E Corporation serve at the pleasure of the Board of
Directors. During the past five years, the executive officers of PG&E
Corporation had the following business experience. Except as otherwise noted,
all positions have been held at PG&E Corporation.
<TABLE>
<CAPTION>
Name Position Period Held Office
---- -------- ------------------
<C> <S> <C>
R. D. Glynn, Jr. ....... Chairman of the Board, Chief January 1, 1998, to present
Executive Officer, and
President
Chairman of the Board of January 1, 1998, to present
Directors, Pacific Gas and
Electric Company
President and Chief Executive June 1, 1997, to present
Officer
President and Chief Operating December 18, 1996, to May 31, 1997
Officer
President and Chief Operating June 1, 1995, to May 31, 1997
Officer, Pacific Gas and
Electric Company
Executive Vice President, July 1, 1994, to May 31, 1995
Pacific Gas and Electric
Company
T. G. Boren............. Executive Vice President August 1, 1999, to present
President and Chief Executive August 1, 1999, to present
Officer, PG&E National Energy
Group, Inc.
President and Chief Executive February 18, 1992, to July 31, 1999
Officer, Southern Energy,
Inc.
Executive Vice President, June 1, 1999, to July 31, 1999
Southern Company
Senior Vice President, February 16, 1998, to May 31, 1999
Southern Company
Vice President, Southern July 17, 1995, to February 15, 1998
Company
P. A. Darbee............ Senior Vice President, Chief September 20, 1999, to present
Financial Officer, and
Treasurer
Vice President and Chief June 30, 1997, to September 19, 1999
Financial Officer, Advance
Fibre Communications, Inc.
Vice President, Chief January 10, 1994, to June 30, 1997
Financial Officer, and
Controller, Pacific Bell
S. W. Gebhardt.......... Senior Vice President April 1, 1997, to present
President and Chief Executive April 1, 1997, to present
Officer, PG&E Energy Services
Corporation
Executive Vice President, April 1, 1996, to March 28, 1997
PennUnion Energy Services
Vice President, Enron Capital January 1, 1993, to December 31, 1995
& Trade Resources
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Name Position Period Held Office
---- -------- ------------------
<C> <S> <C>
T. W. High.............. Senior Vice President, June 1, 1997, to present
Administration and External
Relations
Senior Vice President, June 1, 1995, to May 31, 1997
Corporate Services, Pacific
Gas and Electric Company
Vice President and Assistant July 1, 1994, to May 31, 1995
to the Chief Executive
Officer, Pacific Gas and
Electric Company
P. C. Iribe............. Senior Vice President January 1, 1999, to present
President and Chief November 1, 1998, to present
Operating Officer, PG&E
Generating Company
(formerly known as U.S.
Generating Company)
Executive Vice President and September 1, 1997, to October 31, 1998
Chief Operating Officer,
U.S. Generating Company
Executive Vice President, May 17, 1994, to September 1, 1997
Marketing, Development, and
Asset Management, U.S.
Generating Company
T. B. King.............. Senior Vice President January 1, 1999, to present
President and Chief November 23, 1998, to present
Operating Officer, PG&E Gas
Transmission Corporation
President and Chief February 14, 1997, to November 22, 1998
Operating Officer, Kinder
Morgan Energy Partners,
L.P.
Vice President, Commercial July 1, 1995, to February 14, 1997
Operations--Midwest Region,
Enron Liquid Services
Corporation
Vice President, Gathering July 1994, to July 1, 1995
Services, Northern Natural
Gas Company and
Transwestern Pipeline
Company
L. E. Maddox............ Senior Vice President June 1, 1997, to present
President and Chief May 12, 1997, to present
Executive Officer, PG&E
Energy Trading Corporation
President, PennUnion Energys May 1995 to May 1997
Services, L.L.C.
President, Brooklyn January 1993 to May 1995
Interstate Natural Gas
Corp.
G. R. Smith............. Senior Vice President January 1, 1999, to present
(Please refer to
description of business
experience for executive
officers of Pacific Gas and
Electric Company below.)
G. B. Stanley........... Senior Vice President, Human January 1, 1998, to present
Resources
Vice President, Human June 1, 1997, to December 31, 1997
Resources
Vice President, Human July 1, 1996, to May 31, 1997
Resources, Pacific Gas and
Electric Company
Self-employed (human January 1995, to June 1996
resources consultant)
B. R. Worthington....... Senior Vice President and June 1, 1997, to present
General Counsel
General Counsel December 18, 1996, to May 31, 1997
Senior Vice President and June 1, 1995, to June 30, 1997
General Counsel, Pacific
Gas and Electric Company
Vice President and General December 21, 1994, to May 31, 1995
Counsel, Pacific Gas and
Electric Company
</TABLE>
44
<PAGE>
"Executive officers," as defined by Rule 3b-7 of the General Rules and
Regulations under the Securities and Exchange Act of 1934, of Pacific Gas and
Electric Company are as follows:
<TABLE>
<CAPTION>
Age at
December 31,
Name 1999 Position
---- ------------ --------
<C> <C> <S>
G. R. Smith............. 51 President and Chief Executive Officer
K. M. Harvey............ 41 Senior Vice President, Chief Financial
Officer, Controller, and Treasurer
R. J. Peters............ 45 Senior Vice President and General
Counsel
J. K. Randolph.......... 55 Senior Vice President and General
Manager, Transmission, Distribution
and Customer Service Business Unit
D. D. Richard, Jr....... 49 Senior Vice President, Governmental
and Regulatory Relations
G. M. Rueger............ 49 Senior Vice President and General
Manager, Nuclear Power Generation
Business Unit
</TABLE>
All officers of Pacific Gas and Electric Company serve at the pleasure of
the Board of Directors. During the past five years, the executive officers of
Pacific Gas and Electric Company had the following business experience. Except
as otherwise noted, all positions have been held at Pacific Gas and Electric
Company.
<TABLE>
<CAPTION>
Name Position Period Held Office
---- -------- ------------------
<C> <S> <C>
G. R. Smith............. President and Chief June 1, 1997, to present
Executive Officer
Chief Financial Officer, December 18, 1996, to May 31, 1997
PG&E Corporation
Senior Vice President and June 1, 1995, to May 31, 1997
Chief Financial Officer
Vice President and Chief November 1, 1991, to May 31, 1995
Financial Officer
K. M. Harvey............ Senior Vice President, Chief January 1, 2000, to present
Financial Officer,
Controller, and Treasurer
Senior Vice President, Chief July 1, 1997, to December 31, 1999
Financial Officer, and
Treasurer
Vice President and Treasurer June 1, 1995, to June 30, 1997
Treasurer August 1, 1993, to May 31, 1995
R. J. Peters............ Senior Vice President and January 1, 1999, to present
General Counsel
Vice President and General July 1, 1997, to December 31, 1998
Counsel
Chief Counsel, Regulatory January 1, 1993, to June 30, 1997
J. K. Randolph.......... Senior Vice President and July 1, 1997, to present
General Manager,
Transmission, Distribution
and Customer Service
Business Unit
Vice President and General January 1, 1997, to June 30, 1997
Manager, Power Generation,
Business Unit
Vice President, Power November 1, 1991, to December 31, 1996
Generation
D. D. Richard, Jr....... Senior Vice President, July 1, 1997, to present
Governmental and Regulatory
Relations
Vice President, Governmental July 1, 1997, to present
Relations, PG&E Corporation
Vice President, Governmental January 1, 1997, to June 30, 1997
Relations
Executive Vice President and January 1993, to December 1996
Principal, Morse, Richard,
Weisenmiller & Assoc., Inc.
(energy, project finance,
and environmental
consulting)
G. M. Rueger............ Senior Vice President and November 1, 1991, to present
General Manager, Nuclear
Power Generation Business
Unit
</TABLE>
45
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Information responding to part of Item 5, for each of PG&E Corporation and
Pacific Gas and Electric Company, is set forth on page 67 under the heading
"Quarterly Consolidated Financial Data (Unaudited)" in the 1999 Annual Report
to Shareholders, which information is hereby incorporated by reference and
filed as part of Exhibit 13 to this report. As of February 22, 2000, there
were 149,708 holders of record of PG&E Corporation common stock. PG&E
Corporation common stock is listed on the New York, Pacific, and Swiss stock
exchanges. The discussion of dividends with respect to PG&E Corporation's
common stock is hereby incorporated by reference from "Management's Discussion
and Analysis--Dividends" on page 20 of the 1999 Annual Report to Shareholders.
Neither Pacific Gas and Electric Company nor PG&E Corporation made any
sales of unregistered equity securities during 1999, the period covered by
this report.
ITEM 6. Selected Financial Data.
A summary of selected financial information for each of PG&E Corporation
and Pacific Gas and Electric Company for each of the last five fiscal years is
set forth on page 4 under the heading "Selected Financial Data" in the 1999
Annual Report to Shareholders, which information is hereby incorporated by
reference and filed as part of Exhibit 13 to this report.
Pacific Gas and Electric Company's ratio of earnings to fixed charges for
the year ended December 31, 1999, was 3.25. Pacific Gas and Electric Company's
ratio of earnings to combined fixed charges and preferred stock dividends for
the year ended December 31, 1999, was 3.08. 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 Pacific
Gas and Electric Company's various classes of debt and first preferred stock
outstanding.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
A discussion of PG&E Corporation's and Pacific Gas and Electric Company's
consolidated results of operations and financial condition is set forth on
pages 5 through 25 under the heading "Management's Discussion and Analysis"
in the 1999 Annual Report to Shareholders, which discussion is hereby
incorporated by reference and filed as part of Exhibit 13 to this report.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information responding to Item 7A appears in the 1999 Annual Report to
Shareholders on page 23 under the heading "Management's Discussion and
Analysis--Debt Obligations and Rate Reduction Bonds," on pages 24 and 25 under
the heading "Management's Discussion and Analysis--Price Risk Management
Activities," and on pages 37, 38, 45, and 47 under Notes 1, 3, and 4 of the
"Notes to Consolidated Financial Statements" of the 1999 Annual Report to
Shareholders, which information is hereby incorporated by reference and filed
as part of Exhibit 13 to this report.
ITEM 8. Financial Statements and Supplementary Data.
Information responding to Item 8 appears on pages 26 through 69 of the 1999
Annual Report to Shareholders under the following headings for PG&E
Corporation: "Statement of Consolidated Income," "Consolidated Balance Sheet,"
"Statement of Consolidated Cash Flows," and "Statement of Consolidated Common
Stock Equity;" under the following headings for Pacific Gas and Electric
Company: "Statement of Consolidated Income," "Consolidated Balance Sheet,"
"Statement of Consolidated Cash Flows," and
46
<PAGE>
"Statement of Consolidated Stockholders' Equity;" and under the following
headings for PG&E Corporation and Pacific Gas and Electric Company jointly:
"Notes to Consolidated Financial Statements," "Quarterly Consolidated Financial
Data (Unaudited)," "Report of Independent Public Accountants," and
"Responsibility for Consolidated Financial Statements," which information is
hereby incorporated by reference and filed as part of Exhibit 13 to this report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Information responding to Item 9 has been previously reported by PG&E
Corporation and Pacific Gas and Electric Company in a current report on Form
8-K dated February 17, 1999, and filed on February 23, 1999, as amended by a
Current Report on Form 8-K/A filed on June 11, 1999.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Information regarding executive officers of PG&E Corporation and Pacific
Gas and Electric Company is included in a separate item captioned "Executive
Officers of the Registrant" contained on pages 43 through 45 in Part I of this
report. Other information responding to Item 10 is included on pages 3 through
6 under the heading "Item No. 1: Election of Directors of PG&E Corporation and
Pacific Gas and Electric Company" and page 38 under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance" in the 2000 Joint Proxy Statement
relating to the 2000 Annual Meetings of Shareholders, which information is
hereby incorporated by reference.
ITEM 11. Executive Compensation.
Information responding to Item 11, for each of PG&E Corporation and Pacific
Gas and Electric Company, is included on pages 9 and 10 under the heading
"Compensation of Directors" and on pages 30 through 35 under the headings
"Summary Compensation Table," "Option/SAR Grants in 1999," "Aggregated
Option/SAR Exercises in 1999 and Year-End Option/SAR Values," "Long-Term
Incentive Plan--Awards in 1999," "Retirement Benefits," and "Termination of
Employment and Change In Control Provisions" in the 2000 Joint Proxy Statement
relating to the 2000 Annual Meetings of Shareholders, which information is
hereby incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Information responding to Item 12, for each of PG&E Corporation and Pacific
Gas and Electric Company, is included on pages 11 and 12 under the heading
"Security Ownership of Management" and on page 38 under the heading "Principal
Shareholders" in the 2000 Joint Proxy Statement relating to the 2000 Annual
Meetings of Shareholders, which information is hereby incorporated by
reference.
ITEM 13. Certain Relationships and Related Transactions.
Information responding to Item 13, for each of PG&E Corporation and Pacific
Gas and Electric Company, is included on page 10 under the heading "Certain
Relationships and Related Transactions" in the 2000 Joint Proxy Statement
relating to the 2000 Annual Meetings of Shareholders, which information is
hereby incorporated by reference.
47
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. The following consolidated financial statements, supplemental
information, and report of independent public accountants contained
in the 1999 Annual Report to Shareholders, which have been
incorporated by reference in this report:
Statements of Consolidated Income for the Years Ended December
31, 1999, 1998, and 1997, for each of PG&E Corporation and
Pacific Gas and Electric Company.
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997, for each of PG&E Corporation
and Pacific Gas and Electric Company.
Consolidated Balance Sheets at December 31, 1999, and 1998 for
each of PG&E Corporation and Pacific Gas and Electric Company.
Statement of Consolidated Common Stock Equity for the Years
Ended December 31, 1999, 1998, and 1997, for PG&E Corporation.
Statement of Consolidated Stockholders' Equity for the Years
Ended December 31, 1999, 1998, and 1997, for Pacific Gas and
Electric Company.
Notes to Consolidated Financial Statements.
Quarterly Consolidated Financial Data (Unaudited).
Independent Auditors' Report (Deloitte & Touche LLP).
2. Independent Auditors' Report (Deloitte & Touche LLP) included at
page 53 of this Form 10-K.
3. Report of Independent Public Accountants (Arthur Andersen LLP)
included at page 54 of this Form 10-K.
4. Report of Independent Public Accountants (Arthur Andersen LLP)
included at page 55 of this Form 10-K.
5. Financial statement schedules:
I--Condensed Financial Information of Parent for the Years Ended
December 31, 1999 and 1998.
II--Consolidated Valuation and Qualifying Accounts for each of
PG&E Corporation and Pacific Gas and Electric Company for the
Years Ended December 31, 1999, 1998 and 1997.
Schedules not included are omitted because of the absence of conditions
under which they are required or because the required information is provided
in the consolidated financial statements including the notes thereto.
6. Exhibits required to be filed by Item 601 of Regulation S-K:
<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation of PG&E Corporation effective as
of December 19, 1996 (PG&E Corporation's Form 8-B (File No. 1-
12609), Exhibit 3.1).
3.2 By-Laws of PG&E Corporation amended as of February 16, 2000.
3.3 Restated Articles of Incorporation of Pacific Gas and Electric
Company effective as of May 6, 1998 (Pacific Gas and Electric
Company's Form 10-Q for the quarter ended March 31, 1998 (File No.
1-2348), Exhibit 3.1).
3.4 By-Laws of Pacific Gas and Electric Company amended as of February
16, 2000.
4. First and Refunding Mortgage of Pacific Gas and Electric Company
dated December 1, 1920, and supplements thereto dated April 23,
1925, October 1, 1931, March 1, 1941, September 1, 1947, May 15,
1950, May 1, 1954, May 21, 1958, November 1, 1964, July 1, 1965,
July 1, 1969, January 1, 1975, June 1, 1979, August 1, 1983, and
</TABLE>
48
<PAGE>
<TABLE>
<C> <S>
December 1, 1988 (Registration No. 2-1324, Exhibits B-1, B-2, B-
3; Registration No. 2-4676, Exhibit B-22; Registration No. 2-
7203, Exhibit B-23; Registration
No. 2-8475, Exhibit B-24; Registration No. 2-10874, Exhibit 4B;
Registration
No. 2-14144, Exhibit 4B; Registration No. 2-22910, Exhibit 2B;
Registration
No. 2-23759, Exhibit 2B; Registration No. 2-35106, Exhibit 2B;
Registration
No. 2-54302, Exhibit 2C; Registration No. 2-64313, Exhibit 2C;
Registration
No. 2-86849, Exhibit 4.3; Pacific Gas and Electric Company's Form
8-K dated January 18, 1989 (File No. 1-2348), Exhibit 4.2).
10. The Gas Accord Settlement Agreement, together with accompanying
tables, adopted by the California Public Utilities Commission on
August 1, 1997, in Decision 97-08-055. (PG&E Corporation and
Pacific Gas and Electric Company's Form 10-K for the year ended
December 31, 1997 (File No. 1-12609 and File No. 1-2348), Exhibit
No. 10.2).
10.1 Stock Purchase Agreement By and Between PG&E National Energy
Group, Inc. and El Paso Field Services Company, dated as of
January 27, 2000.
*10.2 PG&E Corporation Supplemental Retirement Savings Plan dated as of
January 1, 2000.
*10.3 Description of Compensation Arrangement between PG&E Corporation
and Thomas G. Boren. (PG&E Corporation's Form 10-Q for the
quarter ended September 30, 1999 (File No. 1-12609), Exhibit
10.2).
*10.4 Description of Compensation Arrangement between PG&E Corporation
and Peter Darbee. (PG&E Corporation's Form 10-Q for the quarter
ended September 30, 1999 (File No. 1-12609), Exhibit 10.3).
*10.5 PG&E Corporation Deferred Compensation Plan for Non-Employee
Directors, as amended and restated effective as of July 22, 1998.
(PG&E Corporation's Form 10-Q for the quarter ended September 30,
1998 (File No. 1-12609), Exhibit 10.2).
*10.6 Description of Short-Term Incentive Plan for Officers of PG&E
Corporation and its subsidiaries, effective January 1, 1999.
(PG&E Corporation's Form 10-K for the year ended December 31,
1998 (File No. 1-12609), Exhibit 10.6).
*10.7 Description of Short-Term Incentive Plan for Officers of PG&E
Corporation and its subsidiaries, effective January 1, 2000.
*10.8 Supplemental Executive Retirement Plan of the Pacific Gas and
Electric Company, effective January 1, 1998 (PG&E Corporation's
Form 10-K for the year ended December 31, 1998 (File No. 1-
12609), Exhibit 10.7).
*10.9 Pacific Gas and Electric Company Relocation Assistance Program
for Officers (Pacific Gas and Electric Company's Form 10-K for
fiscal year 1989 (File No. 1-2348), Exhibit 10.16).
*10.10 Postretirement Life Insurance Plan of the Pacific Gas and
Electric Company (Pacific Gas and Electric Company's Form 10-K
for fiscal year 1991 (File No. 1-2348), Exhibit 10.16).
*10.11 PG&E Corporation Retirement Plan for Non-Employee Directors, as
amended and terminated January 1, 1998. (PG&E Corporation Form
10-K for the year ended December 31, 1997, (File No. 1-12609),
Exhibit No. 10.13).
*10.12 PG&E Corporation Long-Term Incentive Program, as amended February
16, 2000, including the PG&E Corporation Stock Option Plan,
Performance Unit Plan, and Non-Employee Director Stock Incentive
Plan.
</TABLE>
49
<PAGE>
<TABLE>
<C> <S>
*10.13 PG&E Corporation Executive Stock Ownership Program, amended as of
February 16, 2000.
*10.14 PG&E Corporation Officer Severance Policy, amended as of July 21,
1999. (PG&E Corporation's Form 10-Q for the quarter ended
September 30, 1999 (File No. 1-12609), Exhibit 10.1).
*10.15 PG&E Corporation Director Grantor Trust Agreement dated April 1,
1998 (PG&E Corporation's Form 10-Q for the quarter ended March
31, 1998 (File No. 1-12609), Exhibit 10.1).
*10.16 PG&E Corporation Officer Grantor Trust Agreement dated April 1,
1998 (PG&E Corporation's Form 10-Q for the quarter ended March
31, 1998 (File No. 1-12609), Exhibit 10.2).
11. Computation of Earnings Per Common Share.
12.1 Computation of Ratios of Earnings to Fixed Charges for Pacific
Gas and Electric Company.
12.2 Computation of Ratios of Earnings to Combined Fixed Charges and
Preferred Stock Dividends for Pacific Gas and Electric Company.
13. 1999 Annual Report to Shareholders of PG&E Corporation and
Pacific Gas and Electric Company--portions of the 1999 Annual
Report to Shareholders under the headings "Selected Financial
Data," "Management's Discussion and Analysis," "Independent
Auditors' Report," "Responsibility for Consolidated Financial
Statements," financial statements of PG&E Corporation entitled
"Statement of Consolidated Income," "Consolidated Balance Sheet,"
"Statement of Consolidated Cash Flows," "Statement of
Consolidated Common Stock Equity," financial statements of
Pacific Gas and Electric Company entitled "Statement of
Consolidated Income," "Consolidated Balance Sheet," "Statement of
Consolidated Cash Flows," "Statement of Consolidated
Stockholders' Equity," "Notes to Consolidated Financial
Statements" and "Quarterly Consolidated Financial Data
(Unaudited)" are included only. (Except for those portions that
are expressly incorporated herein by reference, such 1999 Annual
Report to Shareholders is furnished for the information of the
Commission and is not deemed to be "filed" herein.)
18. Letter re change in Accounting Principles.
21. Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
24.1 Resolutions of the Boards of Directors of PG&E Corporation and
Pacific Gas and Electric Company authorizing the execution of the
Form 10-K.
24.2 Powers of Attorney.
27.1 Financial Data Schedule for the year ended December 31, 1999, for
PG&E Corporation.
27.2 Financial Data Schedule for the year ended December 31, 1999, for
Pacific Gas and Electric Company.
</TABLE>
- --------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
50
<PAGE>
The exhibits filed herewith are attached hereto (except as noted) and those
indicated above which are not filed herewith were previously filed with the
Commission and are hereby incorporated by reference. All exhibits filed
herewith or incorporated by reference are filed with respect to both PG&E
Corporation (File No. 1-12609) and Pacific Gas and Electric Company (File No.
1-2348), unless otherwise noted. Exhibits will be furnished to security
holders of PG&E Corporation or Pacific Gas and Electric Company upon written
request and payment of a fee of $0.30 per page, which fee covers only the
registrants' reasonable expenses in furnishing such exhibits. The registrants
agree to furnish to the Commission upon request a copy of any instrument
defining the rights of long-term debt holders not otherwise required to be
filed hereunder.
(b) Reports on Form 8-K
Reports on Form 8-K(/1/) during the quarter ended December 31, 1999, and
through the date hereof:
1. October 1, 1999
Item 5. Other Events--Reporting the filing of an application relating to
the proposed auction of Pacific Gas and Electric Company's hydroelectric
generation assets
2. October 20, 1999
Item 5. Other Events--Proposed decision in Pacific Gas and Electric
Company's General Rate Case
3. October 21, 1999--Filed by PG&E Corporation only
Item 5. Other Events--
A. Share Repurchase
B. Proposed amendments to Articles of Incorporation and Bylaw
Amendments
4. November 5, 1999
Item 5. Other Events--
A. Pacific Gas and Electric Company's Post-transition Period
Ratemaking Proceeding
B. Pacific Gas and Electric Company's 2000 Cost of Capital
Proceeding
5. December 1, 1999
Item 5. Other Events--Performance Goals and Implementation Strategy
6. January 21, 2000
Item 5. Other Events--
A. Pacific Gas and Electric Company's General Rate Case Proceeding
B. Proposed Auction of Pacific Gas and Electric Company's
Hydroelectric Generating Assets
C. 1998 Annual Transition Cost Proceeding
7. January 31, 2000
Item 5. Other Events--Sale of Texas Gas Transmission Companies
8. February 23, 2000
Item 5. Other Events--
A. Pacific Gas and Electric Company's General Rate Case Proceeding
B. 1998 Annual Transition Cost Proceeding
C. Disposition of PG&E Energy Services Corporation
- --------
(1) Unless otherwise noted, all reports were filed under Commission File
Number 1-2348 (Pacific Gas and Electric Company) and Commission File
Number 1-12609 (PG&E Corporation)
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City and
County of San Francisco, on the 6th day of March, 2000.
PG&E CORPORATION PACIFIC GAS AND ELECTRIC COMPANY
(Registrant) (Registrant)
By /s/ Gary P. Encinas By /s/ Gary P. Encinas
--------------------------------- ---------------------------------
(Gary P. Encinas, Attorney-in-Fact) (Gary P. Encinas, Attorney-in-Fact)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
A. Principal Executive Officers
*ROBERT D. GLYNN, JR. Chairman of the Board, Chief March 6, 2000
Executive Officer, and President
(PG&E Corporation)
*GORDON R. SMITH President and Chief Executive March 6, 2000
Officer
(Pacific Gas and Electric Company)
B. Principal Financial Officers
*PETER A. DARBEE Senior Vice President, Chief March 6, 2000
Financial Officer, and Treasurer
(PG&E Corporation)
*KENT M. HARVEY Senior Vice President, Chief March 6, 2000
Financial Officer, Controller, and
Treasurer
(Pacific Gas and Electric Company)
C. Principal Accounting Officers
*CHRISTOPHER P. JOHNS Vice President and Controller March 6, 2000
(PG&E Corporation)
*KENT M. HARVEY Senior Vice President, Chief March 6, 2000
Financial Officer, Controller, and
Treasurer
(Pacific Gas and Electric Company)
D. Directors
*RICHARD A. CLARKE
*HARRY M. CONGER
*DAVID A. COULTER
*C. LEE COX
*WILLIAM S. DAVILA
*ROBERT D. GLYNN, JR. Directors of PG&E Corporation and
*DAVID M. LAWRENCE, M.D. Pacific Gas and Electric Company, March 6, 2000
*MARY S. METZ except as noted
*CARL E. REICHARDT
*JOHN C. SAWHILL
*GORDON R. SMITH
(Director of Pacific Gas and
Electric Company, only)
*BARRY LAWSON WILLIAMS
</TABLE>
*By /s/ Gary P. Encinas
----------------------------
(Gary P. Encinas, Attorney-in-Fact)
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Boards of Directors of
PG&E Corporation and Pacific Gas and Electric Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements as of and for the year ended December
31, 1999 included in the PG&E Corporation and Pacific Gas and Electric Company
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated March 3, 2000. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedules listed in Part IV, Item 14. (a)(5) in this Form 10-K are the
responsibility of the management of PG&E Corporation and of Pacific Gas and
Electric Company and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the
consolidated financial statements taken as a whole.
Deloitte & Touche LLP
San Francisco, California
March 3, 2000
53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
PG&E Corporation and Pacific Gas and Electric Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements as of December 31, 1998, and for each of
the two years in the period ended December 31, 1998 included in the PG&E
Corporation and Pacific Gas and Electric Company Annual Report to Shareholders
incorporated by reference in this Form 10-K, and have issued our report
thereon dated February 8, 1999. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The Condensed Financial Information of Parent for the Year Ended
December 31, 1998 and the Consolidated Valuation and Qualifying Accounts for
each of PG&E Corporation and Pacific Gas and Electric Company for the Years
Ended December 31, 1998 and 1997, are the responsibility of the management of
PG&E Corporation and of Pacific Gas and Electric Company. These schedules are
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Francisco, California
February 8, 1999
54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of PG&E Corporation and Pacific
Gas and Electric Company:
We have audited the accompanying consolidated balance sheets of PG&E
Corporation (a California corporation) and subsidiaries and Pacific Gas and
Electric Company (a California corporation) and subsidiaries as of December
31, 1998, and the related statements of consolidated income, cash flows, and
common stock equity of PG&E Corporation and subsidiaries and the related
statements of consolidated income, cash flows and stockholders' equity of
Pacific Gas and Electric Company and subsidiaries for each of the two years in
the period ended December 31, 1998. These financial statements are the
responsibility of the management of PG&E Corporation and Pacific Gas and
Electric Company. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial positions of PG&E Corporation and
subsidiaries, and of Pacific Gas and Electric Company and subsidiaries, as of
December 31, 1998, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
February 8, 1999
55
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF PARENT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
(in millions)
<S> <C> <C>
Assets:
Cash and cash equivalents.................................... $ 155 $ 9
Advances to affiliates....................................... 299 448
Other current assets......................................... -- 2
------ ------
Total current assets..................................... 454 459
Equipment.................................................... 16 8
Accumulated depreciation..................................... (3) (1)
------ ------
Net equipment................................................ 13 7
Investments in subsidiaries.................................. 7,621 8,780
Other investments............................................ 52 41
Deferred income taxes........................................ 396 --
Other deferred charges....................................... -- 1
------ ------
Total Assets............................................. $8,536 $9,288
====== ======
Liabilities and Stockholders' Equity:
Current Liabilities
Short-term borrowings...................................... $526 $ 683
Accounts payable - related parties......................... 76 221
Accounts payable - trade................................... 10 9
Accrued taxes.............................................. 117 155
Dividends payable.......................................... 110 115
Other...................................................... 112 16
------ ------
Total current liabilities................................ 951 1,199
Noncurrent Liabilities
Deferred income taxes...................................... -- 19
Other...................................................... 5 4
------ ------
Total noncurrent liabilities............................. 5 23
Stockholders' Equity
Common stock............................................... 5,906 5,862
Reinvested earnings........................................ 1,674 2,204
------ ------
Total stockholders' equity............................... 7,580 8,066
------ ------
Total Liabilities and Stockholders' Equity............... $8,536 $9,288
====== ======
</TABLE>
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION FOR PARENT--(Continued)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
(in millions, except
per share amounts)
<S> <C> <C> <C>
Equity in earnings of subsidiaries............. $ 853 $ 736 $ 772
Operating expenses............................. (4) 1 (21)
Loss on assets held for sale................... (1,275) -- --
Interest expense............................... (30) (52) (23)
Other income................................... 16 5 --
------- ------- --------
Income Before Income Taxes..................... (440) 690 728
Less: Income taxes............................. (447) (83) (17)
------- ------- --------
Income from continuing operations.............. $ 7 $ 773 $ 716
Discontinued operations........................ (98) (52) (29)
Cumulative effect of a change in an accounting
principle..................................... 12 -- --
------- ------- --------
Net income (loss) before intercompany
elimination................................... $ (79) $ 721 $ 716
Elimination of intercompany (profit) loss...... 6 (2) --
------- ------- --------
Net income (loss).............................. $ (73) $ 719 $ 716
======= ======= ========
Weighted Average Common Shares Outstanding..... 368 382 410
======= ======= ========
Earnings Per Common Share, Basic and Diluted... $ (.20) $ 1.88 $ 1.75
======= ======= ========
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
------- ------- --------
(in millions)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss).............................. $ (73) $ 721 $ 716
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiaries........... (853) (736) (772)
Deferred taxes............................... (415) 19 --
Loss on assets held for sale................. 1,275 -- --
Dividends received from consolidated
subsidiaries................................ 527 445 763
Other--net................................... 77 (574) (605)
------- ------- --------
Net cash provided (used) by operating
activities.................................... $ 538 $ (125) $ 1,312
Cash Flows From Investing Activities
Capital expenditures......................... (8) (8) --
Investments in subsidiaries.................. (722) (575) (150)
Return of capital by Utility (share
repurchases)................................ 926 1,600 --
Other--net................................... (12) -- --
------- ------- --------
Net cash provided by investing activities...... $ 184 $ 1,017 $ (150)
Cash Flows From Financing Activities
Common stock issued.......................... 54 63 --
Common stock repurchased..................... (3) (1,158) (804)
Short-term debt issued (redeemed)--net....... (157) 683 --
Dividends paid............................... (465) (470) (367)
Other--net................................... (5) (2) 10
------- ------- --------
Net cash used by financing activities.......... $ (576) $ (884) $ (1,161)
Net Change in Cash and Cash Equivalents........ 146 8 1
Cash and Cash Equivalents at January 1......... 9 1 --
------- ------- --------
Cash and Cash Equivalents at December 31....... $ 155 $ 9 $ 1
======= ======= ========
</TABLE>
<PAGE>
PG&E CORPORATION
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
---------------------
Balance
Balance at Charged Charged at End
Beginning to Costs to Other of
Description of Period and Expenses Accounts Deductions Period
----------- ---------- ------------ -------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Valuation and qualifying
accounts deducted from
assets:
1999:
Allowance for
uncollectible accounts
(2)................... $58,577 $25,243 $ (183) $18,509(1) $65,128
======= ======= ======= ======= =======
1998:
Allowance for
uncollectible accounts
(2)................... $72,912 $10,978 $(2,893) $22,420(1) $58,577
======= ======= ======= ======= =======
1997:
Allowance for
uncollectible accounts
(2)................... $57,904 $42,500 $ -- $27,492(1) $72,912
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Deductions consist principally of write-offs, net of collections of
receivables previously written off.
(2) Allowance for uncollectible accounts are deducted from "Accounts
receivable--Customers, net" and "Accounts receivable--Energy Marketing."
<PAGE>
PACIFIC GAS AND ELECTRIC COMPANY
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
---------------------
Balance
Balance at Charged Charged at End
Beginning to Costs to Other of
Description of Period and Expenses Accounts Deductions Period
----------- ---------- ------------ -------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Valuation and qualifying
accounts deducted from
assets:
1999:
Allowance for
uncollectible accounts
(2)................... $47,347 $17,011 $ 44 $17,981(1) $46,421
======= ======= ======= ======= =======
1998:
Allowance for
uncollectible accounts
(2)................... $59,608 $10,007 $ 152 $22,420(1) $47,347
======= ======= ======= ======= =======
1997:
Allowance for
uncollectible accounts
(2)................... $57,904 $30,718 $(1,836) $27,178(1) $59,608
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Deductions consist principally of write-offs, net of collections of
receivables previously written off.
(2) Allowance for uncollectible accounts are deducted from "Accounts
receivable--Customers, net."
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<C> <S> <C>
3.1 Restated Articles of Incorporation of PG&E Corporation
effective as of December 19, 1996 (PG&E Corporation's Form
8-B (File No. 1-12609), Exhibit 3.1)......................
3.2 By-Laws of PG&E Corporation amended as of February 16,
2000......................................................
3.3 Restated Articles of Incorporation of Pacific Gas and
Electric Company effective as of May 6, 1998 (Pacific Gas
and Electric Company's Form 10-Q for the quarter ended
March 31, 1998 (File No. 1-2348), Exhibit 3.1)............
3.4 By-Laws of Pacific Gas and Electric Company amended as of
February 16, 2000.........................................
4. First and Refunding Mortgage of Pacific Gas and Electric
Company dated December 1, 1920, and supplements thereto
dated April 23, 1925, October 1, 1931, March 1, 1941,
September 1, 1947, May 15, 1950, May 1, 1954, May 21,
1958, November 1, 1964, July 1, 1965, July 1, 1969,
January 1, 1975, June 1, 1979, August 1, 1983, and
December 1, 1988 (Registration No. 2-1324, Exhibits B-1,
B-2, B-3; Registration No. 2-4676, Exhibit B-22;
Registration No. 2-7203, Exhibit B-23; Registration No. 2-
8475, Exhibit B-24; Registration No. 2-10874, Exhibit 4B;
Registration No. 2-14144, Exhibit 4B; Registration No. 2-
22910, Exhibit 2B; Registration No. 2-23759, Exhibit 2B;
Registration No. 2-35106, Exhibit 2B; Registration No. 2-
54302, Exhibit 2C; Registration No. 2-64313, Exhibit 2C;
Registration No. 2-86849, Exhibit 4.3; Pacific Gas and
Electric Company's Form 8-K dated January 18, 1989 (File
No. 1-2348), Exhibit 4.2).................................
10. The Gas Accord Settlement Agreement, together with
accompanying tables, adopted by the California Public
Utilities Commission on August 1, 1997, in Decision 97-08-
055. (PG&E Corporation and Pacific Gas and Electric
Company's Form 10-K for the year ended December 31, 1997
(File No. 1-12609 and File No. 1-2348), Exhibit No.
10.2).....................................................
10.1 Stock Purchase Agreement By and Between PG&E National
Energy Group, Inc. and El Paso Field Services Company,
dated as of January 27, 2000..............................
*10.2 PG&E Corporation Supplemental Retirement Savings Plan
dated as of January 1, 2000...............................
*10.3 Description of Compensation Arrangement between PG&E
Corporation and Thomas G. Boren. (PG&E Corporation's Form
10-Q for the quarter ended September 30, 1999 (File No. 1-
12609), Exhibit 10.2).....................................
*10.4 Description of Compensation Arrangement between PG&E
Corporation and Peter Darbee. (PG&E Corporation's Form 10-
Q for the quarter ended September 30, 1999 (File No. 1-
12609), Exhibit 10.3).....................................
*10.5 PG&E Corporation Deferred Compensation Plan for Non-
Employee Directors, as amended and restated effective as
of July 22, 1998. (PG&E Corporation's Form 10-Q for the
quarter ended September 30, 1998 (File No. 1-12609),
Exhibit 10.2).............................................
*10.6 Description of Short-Term Incentive Plan for Officers of
PG&E Corporation and its subsidiaries, effective January
1, 1999. (PG&E Corporation's Form 10-K for the year ended
December 31, 1998 (File No. 1-12609), Exhibit 10.6).......
*10.7 Description of Short-Term Incentive Plan for Officers of
PG&E Corporation and its subsidiaries, effective January
1, 2000...................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<C> <S> <C>
*10.8 Supplemental Executive Retirement Plan of the Pacific Gas
and Electric Company, effective January 1, 1998 (PG&E
Corporation's Form 10-K for the year ended December 31,
1998 (File No. 1-12609), Exhibit 10.7)....................
*10.9 Pacific Gas and Electric Company Relocation Assistance
Program for Officers (Pacific Gas and Electric Company's
Form 10-K for fiscal year 1989 (File No. 1-2348),
Exhibit 10.16)............................................
*10.10 Postretirement Life Insurance Plan of the Pacific Gas and
Electric Company (Pacific Gas and Electric Company's Form
10-K for fiscal year 1991 (File No. 1-2348),
Exhibit 10.16)............................................
*10.11 PG&E Corporation Retirement Plan for Non-Employee
Directors, as amended and terminated January 1, 1998.
(PG&E Corporation Form 10-K for the year ended December
31, 1997, (File No. 1-12609), Exhibit No. 10.13)..........
*10.12 PG&E Corporation Long-Term Incentive Program, as amended
February 16, 2000, including the PG&E Corporation Stock
Option Plan, Performance Unit Plan, and Non-Employee
Director Stock Incentive Plan.............................
*10.13 PG&E Corporation Executive Stock Ownership Program,
amended as of February 16, 2000...........................
*10.14 PG&E Corporation Officer Severance Policy, amended as of
July 21, 1999. (PG&E Corporation's Form 10-Q for the
quarter ended September 30, 1999 (File No. 1-12609),
Exhibit 10.1).............................................
*10.15 PG&E Corporation Director Grantor Trust Agreement dated
April 1, 1998 (PG&E Corporation's Form 10-Q for the
quarter ended March 31, 1998 (File No. 1-12609), Exhibit
10.1).....................................................
*10.16 PG&E Corporation Officer Grantor Trust Agreement dated
April 1, 1998 (PG&E Corporation's Form 10-Q for the
quarter ended March 31, 1998 (File No. 1-12609), Exhibit
10.2).....................................................
11. Computation of Earnings Per Common Share..................
12.1 Computation of Ratios of Earnings to Fixed Charges for
Pacific Gas and Electric Company..........................
12.2 Computation of Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividends for Pacific Gas and
Electric Company..........................................
13. 1999 Annual Report to Shareholders of PG&E Corporation and
Pacific Gas and Electric Company--portions of the 1999
Annual Report to Shareholders under the headings "Selected
Financial Data," "Management's Discussion and Analysis,"
"Report of Independent Public Accountants,"
"Responsibility for Consolidated Financial Statements,"
financial statements of PG&E Corporation entitled
"Statement of Consolidated Income," "Consolidated Balance
Sheet," "Statement of Consolidated Cash Flows," "Statement
of Consolidated Common Stock Equity," financial statements
of Pacific Gas and Electric Company entitled "Statement of
Consolidated Income," "Consolidated Balance Sheet,"
"Statement of Consolidated Cash Flows," "Statement of
Consolidated Stockholders' Equity," "Notes to Consolidated
Financial Statements" and "Quarterly Consolidated
Financial Data (Unaudited)" are included only. (Except for
those portions that are expressly incorporated herein by
reference, such 1999 Annual Report to Shareholders is
furnished for the information of the Commission and is not
deemed to be "filed" herein.).............................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<C> <S> <C>
18. Letter re change in Accounting Principles....................
21. Subsidiaries of the Registrant...............................
23.1 Consent of Deloitte & Touche LLP.............................
23.2 Consent of Arthur Andersen LLP...............................
24.1 Resolutions of the Boards of Directors of PG&E Corporation
and Pacific Gas and Electric Company authorizing the
execution of the Form 10-K...................................
24.2 Powers of Attorney...........................................
27.1 Financial Data Schedule for the year ended December 31, 1999,
for PG&E Corporation.........................................
27.2 Financial Data Schedule for the year ended December 31, 1999,
for Pacific Gas and Electric Company.........................
</TABLE>
- --------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
The exhibits filed herewith are attached hereto (except as noted) and those
indicated above which are not filed herewith were previously filed with the
Commission and are hereby incorporated by reference. All exhibits filed
herewith or incorporated by reference are filed with respect to both PG&E
Corporation (File No. 1-12609) and Pacific Gas and Electric Company (File No.
1-2348), unless otherwise noted. Exhibits will be furnished to security holders
of PG&E Corporation or Pacific Gas and Electric Company upon written request
and payment of a fee of $0.30 per page, which fee covers only the registrants'
reasonable expenses in furnishing such exhibits. The registrants agree to
furnish to the Commission upon request a copy of any instrument defining the
rights of long-term debt holders not otherwise required to be filed hereunder.
<PAGE>
EXHIBIT 3.2
Bylaws
of
PG&E Corporation
amended as of February 16, 2000
-------------------------------
Article I.
SHAREHOLDERS.
1. Place of Meeting. All meetings of the shareholders shall be held at
the office of the Corporation in the City and County of San Francisco, State of
California, or at such other place, within or without the State of California,
as may be designated by the Board of Directors.
2. Annual Meetings. The annual meeting of shareholders shall be held
each year on a date and at a time designated by the Board of Directors.
Written notice of the annual meeting shall be given not less than ten (or,
if sent by third-class mail, thirty) nor more than sixty days prior to the date
of the meeting to each shareholder entitled to vote thereat. The notice shall
state the place, day, and hour of such meeting, and those matters which the
Board, at the time of mailing, intends to present for action by the
shareholders.
Notice of any meeting of the shareholders shall be given by mail or
telegraphic or other written communication, postage prepaid, to each holder of
record of the stock entitled to vote thereat, at his address, as it appears on
the books of the Corporation.
At an annual meeting of shareholders, only such business shall be conducted
as shall have been properly brought before the annual meeting. To be properly
brought before an annual meeting, business must be (i) specified in the notice
of the annual meeting (or any supplement thereto) given by or at the direction
of the Board, or (ii) otherwise properly brought before the annual meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, including the nomination of any person (other than a person
nominated by or at the direction of the Board) for election to the Board, the
shareholder must have given timely and proper written notice to the Corporate
Secretary of the Corporation. To be timely, the shareholder's written notice
must be received at the principal executive office of the Corporation not less
than forty-five days before the date corresponding to the mailing date of the
notice and proxy materials for the prior year's annual meeting of shareholders;
provided, however, that if the annual meeting to which the shareholder's written
notice relates is to be held on a date that differs by more than thirty days
from the date of the last annual meeting of shareholders, the shareholder's
written notice to
<PAGE>
be timely must be so received not later than the close of business on the tenth
day following the date on which public disclosure of the date of the annual
meeting is made or given to shareholders. To be proper, the shareholder's
written notice must set forth as to each matter the shareholder proposes to
bring before the annual meeting (a) a brief description of the business desired
to be brought before the annual meeting, (b) the name and address of the
shareholder as they appear on the Corporation's books, (c) the class and number
of shares of the Corporation that are beneficially owned by the shareholder, and
(d) any material interest of the shareholder in such business. In addition, if
the shareholder's written notice relates to the nomination at the annual meeting
of any person for election to the Board, such notice to be proper must also set
forth (a) the name, age, business address, and residence address of each person
to be so nominated, (b) the principal occupation or employment of each such
person, (c) the number of shares of capital stock of the Corporation
beneficially owned by each such person, and (d) such other information
concerning each such person as would be required under the rules of the
Securities and Exchange Commission in a proxy statement soliciting proxies for
the election of such person as a Director, and must be accompanied by a consent,
signed by each such person, to serve as a Director of the Corporation if
elected. Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section.
3. Special Meetings. Special meetings of the shareholders shall be
called by the Corporate Secretary or an Assistant Corporate Secretary at any
time on order of the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the Chairman of the Executive Committee, or the
President. Special meetings of the shareholders shall also be called by the
Corporate Secretary or an Assistant Corporate Secretary upon the written request
of holders of shares entitled to cast not less than ten percent of the votes at
the meeting. Such request shall state the purposes of the meeting, and shall be
delivered to the Chairman of the Board, the Vice Chairman of the Board, the
Chairman of the Executive Committee, the President, or the Corporate Secretary.
A special meeting so requested shall be held on the date requested, but not
less than thirty-five nor more than sixty days after the date of the original
request. Written notice of each special meeting of shareholders, stating the
place, day, and hour of such meeting and the business proposed to be transacted
thereat, shall be given in the manner stipulated in Article I, Section 2,
Paragraph 3 of these Bylaws within twenty days after receipt of the written
request.
4. Attendance at Meetings. At any meeting of the shareholders, each
holder of record of stock entitled to vote thereat may attend in person or may
designate an agent or a reasonable number of agents, not to exceed three to
attend the meeting and cast votes for his or her shares. The authority of agents
must be evidenced by a written proxy signed by the shareholder designating the
agents authorized to attend the meeting and be delivered to the Corporate
Secretary of the Corporation prior to the commencement of the meeting.
2
<PAGE>
5. Shareholder Action by Written Consent. Subject to Section 603 of the
California Corporations Code, any action which, under any provision of the
California Corporations Code, may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
Any party seeking to solicit written consent from shareholders to take
corporate action must deliver a notice to the Corporate Secretary of the
Corporation which requests the Board of Directors to set a record date for
determining shareholders entitled to give such consent. Such written request
must set forth as to each matter the party proposes for shareholder action by
written consents (a) a brief description of the matter and (b) the class and
number of shares of the Corporation that are beneficially owned by the
requesting party. Within ten days of receiving the request in the proper form,
the Board shall set a record date for the taking of such action by written
consent in accordance with California Corporations Code Section 701 and Article
IV, Section 1 of these Bylaws. If the Board fails to set a record date within
such ten-day period, the record date for determining shareholders entitled to
give the written consent for the matters specified in the notice shall be the
day on which the first written consent is given in accordance with California
Corporations Code Section 701.
Each written consent delivered to the Corporation must set forth (a) the
action sought to be taken, (b) the name and address of the shareholder as they
appear on the Corporation's books, (c) the class and number of shares of the
Corporation that are beneficially owned by the shareholder, (d) the name and
address of the proxyholder authorized by the shareholder to give such written
consent, if applicable, and (d) any material interest of the shareholder or
proxyholder in the action sought to be taken.
Consents to corporate action shall be valid for a maximum of sixty days
after the date of the earliest dated consent delivered to the Corporation.
Consents may be revoked by written notice (i) to the Corporation, (ii) to the
shareholder or shareholders soliciting consents or soliciting revocations in
opposition to action by consent proposed by the Corporation (the "Soliciting
Shareholders"), or (iii) to a proxy solicitor or other agent designated by the
Corporation or the Soliciting Shareholders.
Within three business days after receipt of the earliest dated consent
solicited by the Soliciting Shareholders and delivered to the Corporation in the
manner provided in California Corporations Code Section 603 or the determination
by the Board of Directors of the Corporation that the Corporation should seek
corporate action by written consent, as the case may be, the Corporate Secretary
shall engage nationally recognized independent inspectors of elections for the
purpose of performing a ministerial review of the validity of the consents and
revocations. The cost of retaining inspectors of election shall be borne by the
Corporation.
3
<PAGE>
Consents and revocations shall be delivered to the inspectors upon receipt
by the Corporation, the Soliciting Shareholders or their proxy solicitors, or
other designated agents. As soon as consents and revocations are received, the
inspectors shall review the consents and revocations and shall maintain a count
of the number of valid and unrevoked consents. The inspectors shall keep such
count confidential and shall not reveal the count to the Corporation, the
Soliciting Shareholder or their representatives, or any other entity. As soon as
practicable after the earlier of (i) sixty days after the date of the earliest
dated consent delivered to the Corporation in the manner provided in California
Corporations Code Section 603, or (ii) a written request therefor by the
Corporation or the Soliciting Shareholders (whichever is soliciting consents),
notice of which request shall be given to the party opposing the solicitation of
consents, if any, which request shall state that the Corporation or Soliciting
Shareholders, as the case may be, have a good faith belief that the requisite
number of valid and unrevoked consents to authorize or take the action specified
in the consents has been received in accordance with these Bylaws, the
inspectors shall issue a preliminary report to the Corporation and the
Soliciting Shareholders stating: (a) the number of valid consents, (b) the
number of valid revocations, (c) the number of valid and unrevoked consents, (d)
the number of invalid consents, (e) the number of invalid revocations, and (f)
whether, based on their preliminary count, the requisite number of valid and
unrevoked consents has been obtained to authorize or take the action specified
in the consents.
Unless the Corporation and the Soliciting Shareholders shall agree to a
shorter or longer period, the Corporation and the Soliciting Shareholders shall
have forty-eight hours to review the consents and revocations and to advise the
inspectors and the opposing party in writing as to whether they intend to
challenge the preliminary report of the inspectors. If no written notice of an
intention to challenge the preliminary report is received within forty-eight
hours after the inspectors' issuance of the preliminary report, the inspectors
shall issue to the Corporation and the Soliciting Shareholders their final
report containing the information from the inspectors' determination with
respect to whether the requisite number of valid and unrevoked consents was
obtained to authorize and take the action specified in the consents. If the
Corporation or the Soliciting Shareholders issue written notice of an intention
to challenge the inspectors' preliminary report within forty-eight hours after
the issuance of that report, a challenge session shall be scheduled by the
inspectors as promptly as practicable. A transcript of the challenge session
shall be recorded by a certified court reporter. Following completion of the
challenge session, the inspectors shall as promptly as practicable issue their
final report to the Soliciting Shareholders and the Corporation, which report
shall contain the information included in the preliminary report, plus all
changes in the vote totals as a result of the challenge and a certification of
whether the requisite number of valid and unrevoked consents was obtained to
authorize or take the action specified in the consents. A copy of the final
report of the inspectors shall be included in the book in which the proceedings
of meetings of shareholders are recorded.
Unless the consent of all shareholders entitled to vote have been solicited
in writing, the Corporation shall give prompt notice to the shareholders in
accordance with
4
<PAGE>
California Corporations Code Section 603 of the results of any consent
solicitation or the taking of the corporate action without a meeting and by less
than unanimous written consent.
Article II.
DIRECTORS.
1. Number. As stated in Section I of Article Third of this Corporation's
Articles of Incorporation, the authorized number of directors of this
Corporation can be no less than nine (9) nor more than seventeen (17), with the
exact number within the range determined by this Corporation's Board of
Directors. The exact number of directors within the range shall be eleven (11),
unless and until the Board of Directors fixes a different number within the
range through amendment of these Bylaws which amendment may be adopted solely by
the Board of Directors.
2. Powers. The Board of Directors shall exercise all the powers of the
Corporation except those which are by law, or by the Articles of Incorporation
of this Corporation, or by the Bylaws conferred upon or reserved to the
shareholders.
3. Executive Committee. There shall be an Executive Committee of the
Board of Directors consisting of the Chairman of the Committee, the Chairman of
the Board, if these offices be filled, the President, and four Directors who are
not officers of the Corporation. The members of the Committee shall be elected,
and may at any time be removed, by a two-thirds vote of the whole Board.
The Executive Committee, subject to the provisions of law, may exercise any
of the powers and perform any of the duties of the Board of Directors; but the
Board may by an affirmative vote of a majority of its members withdraw or limit
any of the powers of the Executive Committee.
The Executive Committee, by a vote of a majority of its members, shall fix
its own time and place of meeting, and shall prescribe its own rules of
procedure. A quorum of the Committee for the transaction of business shall
consist of three members.
4. Time and Place of Directors' Meetings. Regular meetings of the Board
of Directors shall be held on such days and at such times and at such locations
as shall be fixed by resolution of the Board, or designated by the Chairman of
the Board or, in his absence, the Vice Chairman of the Board, or the President
of the Corporation and contained in the notice of any such meeting. Notice of
meetings shall be delivered personally or sent by mail or telegram at least
seven days in advance.
5. Special Meetings. The Chairman of the Board, the Vice Chairman of the
Board, the Chairman of the Executive Committee, the President, or any five
directors
5
<PAGE>
may call a special meeting of the Board of Directors at any time. Notice of the
time and place of special meetings shall be given to each Director by the
Corporate Secretary. Such notice shall be delivered personally or by telephone
to each Director at least four hours in advance of such meeting, or sent by
first-class mail or telegram, postage prepaid, at least two days in advance of
such meeting.
6. Quorum. A quorum for the transaction of business at any meeting of
the Board of Directors shall consist of six members.
7. Action by Consent. Any action required or permitted to be taken by
the Board of Directors may be taken without a meeting if all Directors
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Directors.
8. Meetings by Conference Telephone. Any meeting, regular or special, of
the Board of Directors or of any committee of the Board of Directors, may be
held by conference telephone or similar communication equipment, provided that
all Directors participating in the meeting can hear one another.
Article III.
OFFICERS.
1. Officers. The officers of the Corporation shall be a Chairman of the
Board, a Vice Chairman of the Board, a Chairman of the Executive Committee
(whenever the Board of Directors in its discretion fills these offices), a
President, a Chief Financial Officer, a General Counsel, one or more Vice
Presidents, a Corporate Secretary and one or more Assistant Corporate
Secretaries, a Treasurer and one or more Assistant Treasurers, and a Controller,
all of whom shall be elected by the Board of Directors. The Chairman of the
Board, the Vice Chairman of the Board, the Chairman of the Executive Committee,
and the President shall be members of the Board of Directors.
2. Chairman of the Board. The Chairman of the Board, if that office be
filled, shall preside at all meetings of the shareholders and of the Directors,
and shall preside at all meetings of the Executive Committee in the absence of
the Chairman of that Committee. He shall be the chief executive officer of the
Corporation if so designated by the Board of Directors. He shall have such
duties and responsibilities as may be prescribed by the Board of Directors or
the Bylaws. The Chairman of the Board shall have authority to sign on behalf of
the Corporation agreements and instruments of every character, and, in the
absence or disability of the President, shall exercise the President's duties
and responsibilities.
3. Vice Chairman of the Board. The Vice Chairman of the Board, if that
office be filled, shall have such duties and responsibilities as may be
prescribed by the
6
<PAGE>
Board of Directors, the Chairman of the Board, or the Bylaws. He shall be the
chief executive officer of the Corporation if so designated by the Board of
Directors. In the absence of the Chairman of the Board, he shall preside at all
meetings of the Board of Directors and of the shareholders; and, in the absence
of the Chairman of the Executive Committee and the Chairman of the Board, he
shall preside at all meetings of the Executive Committee. The Vice Chairman of
the Board shall have authority to sign on behalf of the Corporation agreements
and instruments of every character.
4. Chairman of the Executive Committee. The Chairman of the Executive
Committee, if that office be filled, shall preside at all meetings of the
Executive Committee. He shall aid and assist the other officers in the
performance of their duties and shall have such other duties as may be
prescribed by the Board of Directors or the Bylaws.
5. President. The President shall have such duties and responsibilities
as may be prescribed by the Board of Directors, the Chairman of the Board, or
the Bylaws. He shall be the chief executive officer of the Corporation if so
designated by the Board of Directors. If there be no Chairman of the Board, the
President shall also exercise the duties and responsibilities of that office.
The President shall have authority to sign on behalf of the Corporation
agreements and instruments of every character.
6. Chief Financial Officer. The Chief Financial Officer shall be
responsible for the overall management of the financial affairs of the
Corporation. He shall render a statement of the Corporation's financial
condition and an account of all transactions whenever requested by the Board of
Directors, the Chairman of the Board, the Vice Chairman of the Board, or the
President.
The Chief Financial Officer shall have such other duties as may from time
to time be prescribed by the Board of Directors, the Chairman of the Board, the
Vice Chairman of the Board, the President, or the Bylaws.
7. General Counsel. The General Counsel shall be responsible for
handling on behalf of the Corporation all proceedings and matters of a legal
nature. He shall render advice and legal counsel to the Board of Directors,
officers, and employees of the Corporation, as necessary to the proper conduct
of the business. He shall keep the management of the Corporation informed of
all significant developments of a legal nature affecting the interests of the
Corporation.
The General Counsel shall have such other duties as may from time to time
be prescribed by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, or the Bylaws.
8. Vice Presidents. Each Vice President, if those offices are filled,
shall have such duties and responsibilities as may be prescribed by the Board of
Directors, the Chairman of the Board, the Vice Chairman of the Board, the
President, or the Bylaws. Each Vice President's authority to sign agreements
and instruments on behalf
7
<PAGE>
of the Corporation shall be as prescribed by the Board of Directors. The Board
of Directors, the Chairman of the Board, the Vice Chairman of the Board, or the
President may confer a special title upon any Vice President.
9. Corporate Secretary. The Corporate Secretary shall attend all
meetings of the Board of Directors and the Executive Committee, and all meetings
of the shareholders, and he shall record the minutes of all proceedings in books
to be kept for that purpose. He shall be responsible for maintaining a proper
share register and stock transfer books for all classes of shares issued by the
Corporation. He shall give, or cause to be given, all notices required either
by law or the Bylaws. He shall keep the seal of the Corporation in safe
custody, and shall affix the seal of the Corporation to any instrument requiring
it and shall attest the same by his signature.
The Corporate Secretary shall have such other duties as may be prescribed
by the Board of Directors, the Chairman of the Board, the Vice Chairman of the
Board, the President, or the Bylaws.
The Assistant Corporate Secretaries shall perform such duties as may be
assigned from time to time by the Board of Directors, the Chairman of the Board,
the Vice Chairman of the Board, the President, or the Corporate Secretary. In
the absence or disability of the Corporate Secretary, his duties shall be
performed by an Assistant Corporate Secretary.
10. Treasurer. The Treasurer shall have custody of all moneys and funds
of the Corporation, and shall cause to be kept full and accurate records of
receipts and disbursements of the Corporation. He shall deposit all moneys and
other valuables of the Corporation in the name and to the credit of the
Corporation in such depositaries as may be designated by the Board of Directors
or any employee of the Corporation designated by the Board of Directors. He
shall disburse such funds of the Corporation as have been duly approved for
disbursement.
The Treasurer shall perform such other duties as may from time to time be
prescribed by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, the Chief Financial Officer, or the
Bylaws.
The Assistant Treasurers shall perform such duties as may be assigned from
time to time by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, the Chief Financial Officer, or the
Treasurer. In the absence or disability of the Treasurer, his duties shall be
performed by an Assistant Treasurer.
11. Controller. The Controller shall be responsible for maintaining the
accounting records of the Corporation and for preparing necessary financial
reports and statements, and he shall properly account for all moneys and
obligations due the Corporation and all properties, assets, and liabilities of
the Corporation. He shall render to the officers such periodic reports covering
the result of operations of the Corporation as may be required by them or any
one of them.
8
<PAGE>
The Controller shall have such other duties as may from time to time be
prescribed by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, the Chief Financial Officer, or the
Bylaws. He shall be the principal accounting officer of the Corporation, unless
another individual shall be so designated by the Board of Directors.
Article IV.
MISCELLANEOUS.
1. Record Date. The Board of Directors may fix a time in the future as a
record date for the determination of the shareholders entitled to notice of and
to vote at any meeting of shareholders, or entitled to receive any dividend or
distribution, or allotment of rights, or to exercise rights in respect to any
change, conversion, or exchange of shares. The record date so fixed shall be
not more than sixty nor less than ten days prior to the date of such meeting nor
more than sixty days prior to any other action for the purposes for which it is
so fixed. When a record date is so fixed, only shareholders of record on that
date are entitled to notice of and to vote at the meeting, or entitled to
receive any dividend or distribution, or allotment of rights, or to exercise the
rights, as the case may be.
2. Transfers of Stock. Upon surrender to the Corporate Secretary or
Transfer Agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment, or authority to
transfer, and payment of transfer taxes, the Corporation shall issue a new
certificate to the person entitled thereto, cancel the old certificate, and
record the transaction upon its books. Subject to the foregoing, the Board of
Directors shall have power and authority to make such rules and regulations as
it shall deem necessary or appropriate concerning the issue, transfer, and
registration of certificates for shares of stock of the Corporation, and to
appoint and remove Transfer Agents and Registrars of transfers.
3. Lost Certificates. Any person claiming a certificate of stock to be
lost, stolen, mislaid, or destroyed shall make an affidavit or affirmation of
that fact and verify the same in such manner as the Board of Directors may
require, and shall, if the Board of Directors so requires, give the Corporation,
its Transfer Agents, Registrars, and/or other agents a bond of indemnity in form
approved by counsel, and in amount and with such sureties as may be satisfactory
to the Corporate Secretary of the Corporation, before a new certificate may be
issued of the same tenor and for the same number of shares as the one alleged to
have been lost, stolen, mislaid, or destroyed.
9
<PAGE>
Article V.
AMENDMENTS.
1. Amendment by Shareholders. Except as otherwise provided by law, these
Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by the
affirmative vote of a majority of the outstanding shares entitled to vote at any
regular or special meeting of the shareholders.
2. Amendment by Directors. To the extent provided by law, these Bylaws,
or any of them, may be amended or repealed or new Bylaws adopted by resolution
adopted by a majority of the members of the Board of Directors.
10
<PAGE>
EXHIBIT 3.4
Bylaws
of
Pacific Gas and Electric Company
amended as of February 16, 2000
-------------------------------
Article I.
SHAREHOLDERS.
1. Place of Meeting. All meetings of the shareholders shall be held at
the office of the Corporation in the City and County of San Francisco, State of
California, or at such other place, within or without the State of California,
as may be designated by the Board of Directors.
2. Annual Meetings. The annual meeting of shareholders shall be held
each year on a date and at a time designated by the Board of Directors.
Written notice of the annual meeting shall be given not less than ten (or,
if sent by third-class mail, thirty) nor more than sixty days prior to the date
of the meeting to each shareholder entitled to vote thereat. The notice shall
state the place, day, and hour of such meeting, and those matters which the
Board, at the time of mailing, intends to present for action by the
shareholders.
Notice of any meeting of the shareholders shall be given by mail or
telegraphic or other written communication, postage prepaid, to each holder of
record of the stock entitled to vote thereat, at his address, as it appears on
the books of the Corporation.
3. Special Meetings. Special meetings of the shareholders shall be
called by the Secretary or an Assistant Secretary at any time on order of the
Board of Directors, the Chairman of the Board, the Vice Chairman of the Board,
the Chairman of the Executive Committee, or the President. Special meetings of
the shareholders shall also be called by the Secretary or an Assistant Secretary
upon the written request of holders of shares entitled to cast not less than ten
percent of the votes at the meeting. Such request shall state the purposes of
the meeting, and shall be delivered to the Chairman of the Board, the Vice
Chairman of the Board, the Chairman of the Executive Committee, the President or
the Secretary.
A special meeting so requested shall be held on the date requested, but not
less than thirty-five nor more than sixty days after the date of the original
request. Written notice of each special meeting of shareholders, stating the
place, day, and hour of such meeting and the business proposed to be transacted
thereat, shall be given in the
<PAGE>
manner stipulated in Article I, Section 2, Paragraph 3 of these Bylaws within
twenty days after receipt of the written request.
4. Attendance at Meetings. At any meeting of the shareholders, each
holder of record of stock entitled to vote thereat may attend in person or may
designate an agent or a reasonable number of agents, not to exceed three to
attend the meeting and cast votes for his shares. The authority of agents must
be evidenced by a written proxy signed by the shareholder designating the agents
authorized to attend the meeting and be delivered to the Secretary of the
Corporation prior to the commencement of the meeting.
5. No Cumulative Voting. No shareholder of the Corporation shall be
entitled to cumulate his or her voting power.
Article II.
DIRECTORS.
1. Number. The Board of Directors of this corporation shall consist of
such number of directors, not less than nine (9) nor more than seventeen (17),
and the exact number of directors shall be twelve (12) until changed, within the
limits specified above, by an amendment to this Bylaw duly adopted by the Board
of Directors or the shareholders.
2. Powers. The Board of Directors shall exercise all the powers of the
Corporation except those which are by law, or by the Articles of Incorporation
of this Corporation, or by the Bylaws conferred upon or reserved to the
shareholders.
3. Executive Committee. There shall be an Executive Committee of the
Board of Directors consisting of the Chairman of the Committee, the Chairman of
the Board, if these offices be filled, the President, and four Directors who are
not officers of the Corporation. The members of the Committee shall be elected,
and may at any time be removed, by a two-thirds vote of the whole Board.
The Executive Committee, subject to the provisions of law, may exercise any
of the powers and perform any of the duties of the Board of Directors; but the
Board may by an affirmative vote of a majority of its members withdraw or limit
any of the powers of the Executive Committee.
The Executive Committee, by a vote of a majority of its members, shall fix
its own time and place of meeting, and shall prescribe its own rules of
procedure. A quorum of the Committee for the transaction of business shall
consist of three members.
4. Time and Place of Directors' Meetings. Regular meetings of the Board
of Directors shall be held on such days and at such times and at such locations
as shall be fixed by resolution of the Board, or designated by the Chairman of
the Board or, in
2
<PAGE>
his absence, the Vice Chairman of the Board, or the President of the Corporation
and contained in the notice of any such meeting. Notice of meetings shall be
delivered personally or sent by mail or telegram at least seven days in advance.
5. Special Meetings. The Chairman of the Board, the Vice Chairman of the
Board, the Chairman of the Executive Committee, the President, or any five
directors may call a special meeting of the Board of Directors at any time.
Notice of the time and place of special meetings shall be given to each Director
by the Secretary. Such notice shall be delivered personally or by telephone to
each Director at least four hours in advance of such meeting, or sent by first-
class mail or telegram, postage prepaid, at least two days in advance of such
meeting.
6. Quorum. A quorum for the transaction of business at any meeting of
the Board of Directors shall consist of six members.
7. Action by Consent. Any action required or permitted to be taken by
the Board of Directors may be taken without a meeting if all Directors
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Directors.
8. Meetings by Conference Telephone. Any meeting, regular or special, of
the Board of Directors or of any committee of the Board of Directors, may be
held by conference telephone or similar communication equipment, provided that
all Directors participating in the meeting can hear one another.
Article III.
OFFICERS.
1. Officers. The officers of the Corporation shall be a Chairman of the
Board, a Vice Chairman of the Board, a Chairman of the Executive Committee
(whenever the Board of Directors in its discretion fills these offices), a
President, one or more Vice Presidents, a Secretary and one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers, a General
Counsel, a General Attorney (whenever the Board of Directors in its discretion
fills this office), and a Controller, all of whom shall be elected by the Board
of Directors. The Chairman of the Board, the Vice Chairman of the Board, the
Chairman of the Executive Committee, and the President shall be members of the
Board of Directors.
2. Chairman of the Board. The Chairman of the Board, if that office be
filled, shall preside at all meetings of the shareholders, of the Directors, and
of the Executive Committee in the absence of the Chairman of that Committee. He
shall be the chief executive officer of the Corporation if so designated by the
Board of Directors. He shall have such duties and responsibilities as may be
prescribed by the Board of Directors or the Bylaws. The Chairman of the Board
shall have authority to sign on behalf of the
3
<PAGE>
Corporation agreements and instruments of every character, and in the absence or
disability of the President, shall exercise his duties and responsibilities.
3. Vice Chairman of the Board. The Vice Chairman of the Board, if that
office be filled, shall have such duties and responsibilities as may be
prescribed by the Board of Directors, the Chairman of the Board, or the Bylaws.
He shall be the chief executive officer of the Corporation if so designated by
the Board of Directors. In the absence of the Chairman of the Board, he shall
preside at all meetings of the Board of Directors and of the shareholders; and,
in the absence of the Chairman of the Executive Committee and the Chairman of
the Board, he shall preside at all meetings of the Executive Committee. The Vice
Chairman of the Board shall have authority to sign on behalf of the Corporation
agreements and instruments of every character.
4. Chairman of the Executive Committee. The Chairman of the Executive
Committee, if that office be filled, shall preside at all meetings of the
Executive Committee. He shall aid and assist the other officers in the
performance of their duties and shall have such other duties as may be
prescribed by the Board of Directors or the Bylaws.
5. President. The President shall have such duties and responsibilities
as may be prescribed by the Board of Directors, the Chairman of the Board, or
the Bylaws. He shall be the chief executive officer of the Corporation if so
designated by the Board of Directors. If there be no Chairman of the Board, the
President shall also exercise the duties and responsibilities of that office.
The President shall have authority to sign on behalf of the Corporation
agreements and instruments of every character.
6. Vice Presidents. Each Vice President shall have such duties and
responsibilities as may be prescribed by the Board of Directors, the Chairman of
the Board, the Vice Chairman of the Board, the President, or the Bylaws. Each
Vice President's authority to sign agreements and instruments on behalf of the
Corporation shall be as prescribed by the Board of Directors. The Board of
Directors, the Chairman of the Board, the Vice Chairman of the Board, or the
President may confer a special title upon any Vice President.
7. Secretary. The Secretary shall attend all meetings of the Board of
Directors and the Executive Committee, and all meetings of the shareholders, and
he shall record the minutes of all proceedings in books to be kept for that
purpose. He shall be responsible for maintaining a proper share register and
stock transfer books for all classes of shares issued by the Corporation. He
shall give, or cause to be given, all notices required either by law or the
Bylaws. He shall keep the seal of the Corporation in safe custody, and shall
affix the seal of the Corporation to any instrument requiring it and shall
attest the same by his signature.
The Secretary shall have such other duties as may be prescribed by the
Board of Directors, the Chairman of the Board, the Vice Chairman of the Board,
the President, or the Bylaws.
4
<PAGE>
The Assistant Secretaries shall perform such duties as may be assigned from
time to time by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, or the Secretary. In the absence or
disability of the Secretary, his duties shall be performed by an Assistant
Secretary.
8. Treasurer. The Treasurer shall have custody of all moneys and funds
of the Corporation, and shall cause to be kept full and accurate records of
receipts and disbursements of the Corporation. He shall deposit all moneys and
other valuables of the Corporation in the name and to the credit of the
Corporation in such depositaries as may be designated by the Board of Directors
or any employee of the Corporation designated by the Board of Directors. He
shall disburse such funds of the Corporation as have been duly approved for
disbursement.
The Treasurer shall perform such other duties as may from time to time be
prescribed by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, or the Bylaws.
The Assistant Treasurer shall perform such duties as may be assigned from
time to time by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, or the Treasurer. In the absence or
disability of the Treasurer, his duties shall be performed by an Assistant
Treasurer.
9. General Counsel. The General Counsel shall be responsible for
handling on behalf of the Corporation all proceedings and matters of a legal
nature. He shall render advice and legal counsel to the Board of Directors,
officers, and employees of the Corporation, as necessary to the proper conduct
of the business. He shall keep the management of the Corporation informed of all
significant developments of a legal nature affecting the interests of the
Corporation.
The General Counsel shall have such other duties as may from time to time
be prescribed by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, or the Bylaws.
10. Controller. The Controller shall be responsible for maintaining the
accounting records of the Corporation and for preparing necessary financial
reports and statements, and he shall properly account for all moneys and
obligations due the Corporation and all properties, assets, and liabilities of
the Corporation. He shall render to the officers such periodic reports covering
the result of operations of the Corporation as may be required by them or any
one of them.
The Controller shall have such other duties as may from time to time be
prescribed by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, the President, or the Bylaws. He shall be the principal
accounting officer of the Corporation, unless another individual shall be so
designated by the Board of Directors.
5
<PAGE>
Article IV.
MISCELLANEOUS.
1. Record Date. The Board of Directors may fix a time in the future as a
record date for the determination of the shareholders entitled to notice of and
to vote at any meeting of shareholders, or entitled to receive any dividend or
distribution, or allotment of rights, or to exercise rights in respect to any
change, conversion, or exchange of shares. The record date so fixed shall be not
more than sixty nor less than ten days prior to the date of such meeting nor
more than sixty days prior to any other action for the purposes for which it is
so fixed. When a record date is so fixed, only shareholders of record on that
date are entitled to notice of and to vote at the meeting, or entitled to
receive any dividend or distribution, or allotment of rights, or to exercise the
rights, as the case may be.
2. Transfers of Stock. Upon surrender to the Secretary or Transfer Agent
of the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment, or authority to transfer, and payment
of transfer taxes, the Corporation shall issue a new certificate to the person
entitled thereto, cancel the old certificate, and record the transaction upon
its books. Subject to the foregoing, the Board of Directors shall have power and
authority to make such rules and regulations as it shall deem necessary or
appropriate concerning the issue, transfer, and registration of certificates for
shares of stock of the Corporation, and to appoint and remove Transfer Agents
and Registrars of transfers.
3. Lost Certificates. Any person claiming a certificate of stock to be
lost, stolen, mislaid, or destroyed shall make an affidavit or affirmation of
that fact and verify the same in such manner as the Board of Directors may
require, and shall, if the Board of Directors so requires, give the Corporation,
its Transfer Agents, Registrars, and/or other agents a bond of indemnity in form
approved by counsel, and in amount and with such sureties as may be satisfactory
to the Secretary of the Corporation, before a new certificate may be issued of
the same tenor and for the same number of shares as the one alleged to have been
lost, stolen, mislaid, or destroyed.
Article V.
AMENDMENTS.
1. Amendment by Shareholders. Except as otherwise provided by law, these
Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by the
affirmative vote of a majority of the outstanding shares entitled to vote at any
regular or special meeting of the shareholders.
2. Amendment by Directors. To the extent provided by law, these Bylaws,
or any of them, may be amended or repealed or new Bylaws adopted by resolution
adopted by a majority of the members of the Board of Directors.
6
<PAGE>
EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
by and between
PG&E NATIONAL ENERGY GROUP, INC.,
as Seller
and
EL PASO FIELD SERVICES COMPANY,
as Buyer
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1.................................................................................................... 1
1.1 Certain Defined Terms...................................................................... 1
---------------------
1.2 Construction............................................................................... 9
------------
ARTICLE 2.................................................................................................... 10
2.1 Agreement to Sell and to Purchase the Shares............................................... 10
--------------------------------------------
2.2 Purchase Price and Payment................................................................. 10
--------------------------
2.3 [Intentionally Omitted].................................................................... 10
-----------------------
2.4 Calculation of Closing Consideration....................................................... 10
------------------------------------
2.5 Calculation and Payment of Adjustment Amount............................................... 10
--------------------------------------------
2.6 Assumed Obligations........................................................................ 13
-------------------
ARTICLE 3.................................................................................................... 13
3.1 Closing.................................................................................... 13
-------
3.2 Deliveries by Seller....................................................................... 13
--------------------
3.3 Deliveries by Buyer........................................................................ 14
-------------------
ARTICLE 4.................................................................................................... 15
4.1 Corporate Organization..................................................................... 15
----------------------
4.2 Acquired Companies......................................................................... 15
------------------
4.3 Charter and Bylaws......................................................................... 16
------------------
4.4 Authority Relative to this Agreement....................................................... 16
------------------------------------
4.5 No Conflict................................................................................ 16
-----------
4.6 Consents, Approvals, and Licenses.......................................................... 17
---------------------------------
4.7 Financial Statements....................................................................... 17
--------------------
4.8 Absence of Material Changes................................................................ 18
---------------------------
4.9 Tax Matters................................................................................ 18
-----------
4.10 Compliance With Laws....................................................................... 19
--------------------
4.11 Legal Proceedings.......................................................................... 19
-----------------
4.12 Title to Properties........................................................................ 19
-------------------
4.13 Acquired Company Agreements................................................................ 20
---------------------------
4.14 Employee Plans and Labor Matters........................................................... 21
--------------------------------
4.15 Environmental Matters...................................................................... 22
---------------------
4.16 Insurance.................................................................................. 23
---------
4.17 Absence of Undisclosed Liabilities......................................................... 23
----------------------------------
4.18 Bank Accounts.............................................................................. 23
-------------
4.19 Brokerage Fees............................................................................. 23
--------------
4.20 Assets and Properties...................................................................... 23
---------------------
4.21 Intellectual Property Rights............................................................... 24
----------------------------
4.22 Year 2000 Compliance....................................................................... 24
--------------------
4.23 Copies of Indenture Supplement............................................................. 24
------------------------------
4.24 Condition of Assets........................................................................ 24
-------------------
4.25 No Other Representations................................................................... 24
------------------------
4.26 Certain Limitations........................................................................ 24
-------------------
ARTICLE 5.................................................................................................... 25
5.1 Corporate Organization..................................................................... 25
----------------------
5.2 Authority Relative to This Agreement....................................................... 25
------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
5.3 No Conflict................................................................................. 25
-----------
5.4 Consents, Approvals, and Licenses........................................................... 26
---------------------------------
5.5 Financing................................................................................... 26
---------
5.6 Investment Intent; Investment Experience; Restricted Securities............................. 26
---------------------------------------------------------------
5.7 Legal Proceedings........................................................................... 26
-----------------
5.8 Brokerage Fees.............................................................................. 276
--------------
5.9 Independent Investigation................................................................... 276
-------------------------
ARTICLE 6..................................................................................................... 27
6.1 Conduct and Preservation of the Acquired Companies.......................................... 27
--------------------------------------------------
6.2 Restrictions on Certain Actions............................................................. 287
-------------------------------
6.3 Indebtedness................................................................................ 29
ARTICLE 7..................................................................................................... 29
7.1 Access to Information and Confidentiality................................................... 930
-----------------------------------------
7.2 Regulatory and Other Authorizations and Consents............................................ 321
------------------------------------------------
7.3 Employees and Parent Employee Plans......................................................... 33
-----------------------------------
7.4 Public Announcements........................................................................ 365
--------------------
7.5 Amendment of Schedules...................................................................... 365
----------------------
7.6 Fees and Expenses........................................................................... 36
-----------------
7.7 Transfer Taxes.............................................................................. 36
--------------
7.8 Action Regarding Indemnities................................................................ 36
----------------------------
7.9 [Intentionally Omitted] .................................................................... 36
7.10 Excluded Assets............................................................................. 376
---------------
7.11 Transition Services......................................................................... 376
-------------------
7.12 Guarantees; Wilson Storage Capacity; and Other Affiliate Contracts.......................... 37
------------------------------------------------------------------
7.13 Use of PG&E Marks........................................................................... 387
-----------------
7.14 Insurance................................................................................... 387
---------
7.15 Disclaimer of Warranties.................................................................... 38
------------------------
ARTICLE 8..................................................................................................... 398
8.1 Representations and Warranties True......................................................... 398
-----------------------------------
8.2 Covenants and Agreements Performed.......................................................... 39
----------------------------------
8.3 HSR Act and Consents........................................................................ 39
--------------------
8.4 Legal Proceedings........................................................................... 39
-----------------
ARTICLE 9..................................................................................................... 39
9.1 Representations and Warranties True......................................................... 940
-----------------------------------
9.2 Covenants and Agreements Performed.......................................................... 940
----------------------------------
9.3 HSR Act and Consents........................................................................ 940
--------------------
9.4 Legal Proceedings........................................................................... 40
-----------------
9.5 Repayment of Short-Term Debt of the Acquired Companies...................................... 40
------------------------------------------------------
9.6 Consents.................................................................................... 40
--------
ARTICLE 10.................................................................................................... 410
10.1 Termination................................................................................. 410
-----------
10.2 Effect of Termination....................................................................... 410
---------------------
10.3 Amendment................................................................................... 410
---------
10.4 Waiver...................................................................................... 41
------
ARTICLE 11.................................................................................................... 421
11.1 Tax Sharing Agreements...................................................................... 421
----------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
11.2 Tax Return Preparation.................................................................... 421
----------------------
11.3 Straddle Period Tax Allocation............................................................ 432
------------------------------
11.4 Straddle Returns.......................................................................... 432
----------------
11.5 Use of Consistent Tax Practices........................................................... 43
-------------------------------
11.6 Refunds or Credits........................................................................ 443
------------------
11.7 Filing of Amended Returns................................................................. 443
-------------------------
11.8 Assistance and Cooperation................................................................ 454
--------------------------
11.9 Reimbursement for Net Tax Carrybacks...................................................... 454
------------------------------------
11.10 Tax Deductions for Stock Option Exercises................................................. 454
-----------------------------------------
11.11 Buyer's Indemnity for Post Closing Transactions........................................... 45
-----------------------------------------------
11.12 Reporting of Post-Closing Transactions.................................................... 465
--------------------------------------
11.13 Closing Tax Certificate................................................................... 465
-----------------------
11.14 Tax Allocation - Seller's Obligations..................................................... 465
-------------------------------------
11.15 Taxes of Other Persons.................................................................... 465
----------------------
11.16 Tax Allocation - Buyer's Obligations...................................................... 465
------------------------------------
11.17 Tax Claim Notices......................................................................... 465
-----------------
11.18 Pre-Closing Tax Period Tax Claims......................................................... 476
---------------------------------
11.19 Straddle Period Tax Claims................................................................ 476
--------------------------
11.20 Payments for Tax Benefits................................................................. 476
-------------------------
11.21 Treatment of Tax Indemnity Payments....................................................... 487
-----------------------------------
11.22 Liability for Existing Franchise Tax Claims............................................... 487
-------------------------------------------
11.23 Survival and Time Limitation.............................................................. 487
----------------------------
11.24 Sole and Exclusive Remedy................................................................. 487
-------------------------
11.25 Purchase Price Allocation................................................................. 47
-------------------------
ARTICLE 12.................................................................................................. 487
12.1. Indemnification........................................................................... 47
---------------
12.2 Defense of Claims......................................................................... 510
-----------------
12.3 Additional Provisions Relating to Environmental Indemnification........................... 521
---------------------------------------------------------------
12.4 Procedures for Remedial Actions........................................................... 532
-------------------------------
12.5 Tax Treatment of Indemnity Payments....................................................... 543
-----------------------------------
ARTICLE 13.................................................................................................. 543
13.1 Notices................................................................................... 543
-------
13.2 Entire Agreement.......................................................................... 554
----------------
13.3 Binding Effect; Assignment; No Third Party Benefit........................................ 564
--------------------------------------------------
13.4 Severability.............................................................................. 565
------------
13.5 Governing Law............................................................................. 565
-------------
13.6 Further Assurances........................................................................ 565
------------------
13.7 Counterparts.............................................................................. 565
------------
13.8 Disclosure................................................................................ 565
----------
13.9 Consent to Jurisdiction................................................................... 575
-----------------------
13.10 Bulk Sales or Transfer Laws............................................................... 576
---------------------------
</TABLE>
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of January 27,
2000, between PG&E National Energy Group, Inc., a Delaware corporation
("Seller"), and El Paso Field Services Company, a Delaware corporation
("Buyer"). Seller and Buyer are referred to herein sometimes individually as a
"Party" and collectively as the "Parties."
Recitals:
A. PG&E Gas Transmission, Texas Corporation, a Delaware corporation
("GTT") and PG&E Gas Transmission Teco, Inc., a Delaware corporation ("TECO" and
collectively with GTT, the "Companies") are each wholly owned subsidiaries of
Seller.
B. Seller desires to sell to Buyer, and Buyer desires to purchase from
Seller, the Shares (as defined in Section 1.1) of the Companies, upon the terms
-----------
and subject to the conditions in this Agreement.
NOW, THEREFORE, Seller and Buyer agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Certain Defined Terms. As used in this Agreement, each of the
---------------------
following terms has the meaning given to it below:
"Acquired Companies" means the Companies and the Company Subsidiaries.
"Acquired Company" means any of the Acquired Companies.
"Acquired Company Insurance Policies" means those material policies of
insurance which Seller, PG&E, or any of the Acquired Companies maintains for the
Acquired Companies or the Related Companies with respect to their assets and
operations, all of which are listed on Schedule 4.16.
-------------
"Adjusted Working Capital" has the meaning assigned to such term in Section
-------
2.5(f).
- ------
"Adjustment Amount" has the meaning assigned to such term in Section
-------
2.5(a).
- ------
"Adjustment Statement" has the meaning assigned to such term in Section
-------
2.5(b).
- ------
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person. For the purposes
of this definition, "control" means, when used with respect to any Person, the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract, or otherwise, and the terms
"controlling" and "controlled" have correlative meanings.
Stock Purchase Agreement
Page 1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S) 1504(a) or any similar group defined under a similar provision of state,
local or foreign laws.
"Applicable Environmental Laws" means any and all Applicable Laws in effect
as of the date of this Agreement pertaining to protection of health, safety, and
the environment in effect in any and all jurisdictions in which any Acquired
Company has conducted operations, including the Clean Air Act, as amended,
CERCLA, the Federal Water Pollution Control Act, as amended, the Resource
Conservation and Recovery Act of 1976, as amended, the Safe Drinking Water Act,
as amended, the Toxic Substances Control Act, as amended, the Superfund
Amendments and Reauthorization Act of 1986, as amended, and the Hazardous
Materials Transportation Act, as amended.
"Applicable Law" means any statute, law, rule, or regulation, or any
judgment, order, ordinance, writ, injunction, or decree of, any Governmental
Entity to which a specified Person or property is subject, excluding any
statute, law, rule, regulation, judgment, order, ordinance, writ, injunction or
decree that is the subject of the Existing Franchise Tax Claims, including any
Losses with respect thereto, or that arises out of claims that are substantially
similar to those asserted in the Existing Franchise Tax Claims, including any
Losses with respect thereto.
"Assumed Liabilities" has the meaning assigned to such term in Section 2.6.
-----------
"Assumed Litigation" means all Proceedings (including those listed on
Schedule 4.11) to which the Acquired Companies or their properties are or may
- -------------
become subject, whether known or unknown, contingent or liquidated, and whether
arising or relating to facts existing before, on, or after the Closing Date.
"Balance Sheet Date" means December 31, 1999.
"Base Purchase Price" means a purchase price of $278,500,000.
"Buyer Indemnitees" means, collectively, Buyer and its Affiliates and its
and their officers, directors, employees, agents, and representatives.
"CERCLA" means the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended.
"Closing" means the closing of the transactions contemplated hereby.
"Closing Date" means the date on which the Closing occurs
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Financial Statements" has the meaning assigned to such term in
Section 4.7.
- -----------
Stock Purchase Agreement
Page 2
<PAGE>
"Commercial Contracts" means the contracts and agreements listed in
Schedule 4.13 in accordance with clause (vi) and (vii) of Section 4.13.
- ------------- ------------
"commercially reasonable efforts" means efforts in accordance with
reasonable commercial practice and without the incurrence of unreasonable
expense.
"Company Employee Plans" means those Employee Plans established by or
contributed to by the Acquired Companies as of the Date of this Agreement, or
pursuant to which the Acquired Companies could have any liability (contingent or
otherwise), excluding any Parent Employee Plan.
"Company Subsidiaries" means the wholly owned subsidiaries of the Companies
listed in Schedule 1.1(a).
---------------
"Confidentiality Agreement" means that certain confidentiality letter
agreement dated December 2, 1999, between Buyer and PG&E.
"Deductible Amount" means an amount equal to $10,000,000.
"Direct Claim" means any claim by an Indemnitee on account of a Loss which
does not result from a Third Party Claim.
"Disclosure Letter" means the letter, of even date herewith, of the Seller
or the Buyer in which such party's Schedules are set forth, as same may be
amended or supplemented in accordance with Section 7.5.
-----------
"Dispute Deadline Date" has the meaning assigned to such term in Section
-------
2.5(c).
- ------
"Effective Date Financial Statements" has the meaning assigned to such term
in Section 2.5(b).
--------------
"Employee Plan" means any stock purchase, stock option, pension, profit
sharing, bonus, deferred compensation, incentive compensation, severance or
termination pay, hospitalization or other medical or dental, life or other
insurance, supplemental unemployment benefits plan or agreement or policy or
other arrangement providing employment-related compensation or benefits,
including, without limitation, "employee benefit plans," as defined in Section
3(3) of ERISA.
"Effective Date" means the close of business on the last day of the month
preceding the Closing Date.
"Encumbrances" means liens, charges, pledges, options, mortgages, deeds of
trust, security interests, claims, restrictions (whether on voting, sale,
transfer, disposition, or otherwise), easements, and other encumbrances of every
type and description, whether imposed by law, agreement, understanding, or
otherwise.
Stock Purchase Agreement
Page 3
<PAGE>
"EPE" means El Paso Energy Corporation, a Delaware corporation.
"EPE Guaranty" means the guaranty of EPE to Seller, dated as of January 27,
2000, executed and delivered concurrently with the execution and delivery of
this Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plans" means, collectively, any of the Company Employee Plans which
is an "employee benefit plan" as defined in Section 3(2) of ERISA.
"Estimated Adjustment Amount" means Seller's estimate of the Adjustment
Amount.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exhibits" means the exhibits attached to this Agreement.
"Existing Franchise Tax Claims" means the litigation matters described in
Section No. 1 of Schedule 4.11.
- ------------- -------------
"FERC" means the Federal Energy Regulatory Commission.
"First Mortgage Debt" means the indebtedness outstanding as of the date of
determination under the Mortgage Indenture.
"Government Antitrust Authority" means any Governmental Entity with
jurisdiction over the enforcement of any applicable antitrust laws.
"Governmental Approvals" means all material consents and approvals of
Governmental Entities, including those required under the HSR Act or from the
FERC, the Securities and Exchange Commission, and the RRC that reasonably may be
deemed necessary so that the consummation of the transactions contemplated
hereby will be in compliance with Applicable Law and the failure to comply with
which would have a Material Adverse Effect.
"Governmental Entity" means any court or tribunal in any jurisdiction
(domestic or foreign) or any federal, state, municipal or local government or
other governmental body, agency, authority, department, commission, board,
bureau, instrumentality, arbitrator or arbitral body (domestic or foreign).
"Guarantees" means any and all obligations relating to the guarantees,
letters of credit, bonds and other credit assurances of a comparable nature of
Seller or any of its Affiliates (other than the Acquired Companies and the
Related Companies) for the benefit of any Acquired Company or any Related
Company and listed or described on Schedule 7.12.
-------------
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
Stock Purchase Agreement
Page 4
<PAGE>
"Indemnifying Party" means a Party required to provide indemnification
under Section 12.1.
------------
"Indemnitee" means a Party entitled to receive indemnification under
Section 12.1.
- ------------
"Interest Adjustment" means interest (calculated based on the actual number
of days elapsed, assuming a 360-day year) on the sum of the Base Purchase Price,
plus the Estimated Adjustment Amount at the Prime Rate from (and including) the
Effective Date to (but excluding) the Closing Date.
"IRS" means the Internal Revenue Service.
"knowledge" means, when used with respect to Seller, that which is actually
known, after reasonable inquiry, by the officers of the Acquired Companies
listed on Schedule 1.1(c), in their respective areas of responsibility, and when
---------------
used with respect to Buyer, that which is actually known, after reasonable
inquiry, by the officers of the Buyer listed on Schedule 1.1(d), in their
---------------
respective areas of responsibility.
"Losses" means, collectively, any and all claims, liabilities, losses,
causes of action, fines, penalties, litigation, lawsuits, administrative
proceedings, administrative investigations, costs, and expenses, including
reasonable attorneys' fees, court costs, and other costs of suit.
"Long-Term Debt" means the outstanding principal amount as of the date of
the determination under the (i) MTN Program and (ii) First Mortgage Debt.
"Material Adverse Effect" means, with respect to any Person, any adverse
change or adverse condition in or relating to the financial condition, assets,
liabilities, results of operations, or business of such Person and its
Affiliates that is or is reasonably likely to be material to such Person and its
Affiliates taken as a whole or that impedes the ability of such Person to
consummate the transactions contemplated hereby, other than any change or
changes in the prices of oil, gas, natural gas liquids, or other hydrocarbon
products, general economic conditions, or local, regional, national, or
international industry conditions.
"Mortgage Indenture" means the Indenture of Mortgage and Deed of Trust and
Security Agreement, dated as of March 25, 1987, from Valero Management
Partnership, L.P. (now PG&E Texas Management Partnership, LP) to Bank of New
England, N.A. (now State Street Bank and Trust Company, as successor corporate
trustee) and Brian J. Curtis, as Trustees, as amended and supplemented to the
date hereof.
"Notice" means any notice, request, demand or other communications required
or permitted to be given or made under this Agreement by either Party.
"MTN Program" means the debt program of GTT pursuant to which from time to
time GTT issued debt pursuant to that certain Indenture, dated as of March 30,
1992, between GTT (formerly known as Valero Energy Corporation) and Bankers
Trust Company, as Trustee, as supplemented by the First Supplemental Indenture,
dated as of March 13, 1995.
Stock Purchase Agreement
Page 5
<PAGE>
"Parent Employee Plan" means any Employee Plan established by PG&E or any
of its Affiliates (other than the Acquired Companies).
"Parent Group" means the affiliated group of corporations within the
meaning of Code Section 1504(a) for federal income Tax purposes of which Seller
------------
or PG&E is the common parent.
"Pending FERC and RRC Proceedings" means (i) the Petition for Approval of
Section 311 Contract Storage Rates, filed by PG&E Texas Pipeline, L.P., with the
FERC on December 20, 1999 (Docket No. PROO-8-00); (ii) the Petition for Approval
---------
of Section 311 Transportation Rates, filed by PG&E Texas Pipeline, L.P., with
the FERC on December 20, 1999 (Docket No. PRO-9-000); (iii) the PG&E West Texas
---------
Pipeline, L.P., Statement of Operating Conditions filed, with the FERC on
December 21, 1999 (Docket No. PROO-4-000) and (iv) the filing of PG&E Texas
Pipeline, L.P. with the RRC for a determination that its transportation rates
are cost based (Docket No. 8945).
"Permits" means licenses, permits, franchises, consents, approvals,
variances, exemptions, and other authorizations of or from Governmental
Entities, excluding licenses, permits, franchises, consents, approvals,
variances, exemptions and other authorizations of or from Governmental Entities
that are the subject of the Existing Franchise Tax Claims, including any Losses
with respect thereto, or that arise out of claims that are substantially similar
to the Existing Franchise Tax Claims, including any Losses with respect thereto.
"Permitted Encumbrances" means (i) Encumbrances created by Buyer, or its
successors and assigns, (ii) liens for Taxes not yet due and payable, (iii)
statutory liens (including materialmen's, mechanic's, repairmen's, landlord's,
and other similar liens) arising in connection with the ordinary course of
business securing payments not yet due and payable, (iv) Encumbrances arising
under the Mortgage Indenture, (v) Encumbrances of record that do not materially
impair or interfere with the use or operation of the burdened property, and (vi)
such defects, imperfections or irregularities of title, if any, as are not
material in character, amount, or extent.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, enterprise,
unincorporated organization, or Governmental Entity.
"PG&E" means PG&E Corporation, a California corporation and the parent
corporation of Seller.
"PG&E Guaranty" means the guaranty of PG&E to Buyer, dated as of January
27, 2000, executed and delivered concurrently with the execution and delivery of
this Agreement.
"PG&E Marks" means the name "PG&E" and other trademarks, service marks, and
trade names owned by Seller, PG&E and their respective Affiliates.
Stock Purchase Agreement
Page 6
<PAGE>
"Post-Closing Tax Period" means any Tax period beginning after the Closing
Date.
"Post-Closing Tax Return" means any Tax Return that is required to be filed
by any of the Acquired Companies with respect to a Post-Closing Tax Period;
provided, however, it shall not include any Straddle Return.
"Pre-Closing Tax Period" means any Tax periods or portions thereof ending
on or before the Closing Date.
"Pre-Closing Tax Return" means any Tax Return that is required to be filed
with respect to any of the Acquired Companies with respect to a Pre-Closing Tax
Period; provided, however, it shall not include any Straddle Return.
"Prime Rate" means the prime interest rate reported in the Wall Street
Journal on the Effective Date.
"Purchase Price" means the aggregate purchase price consisting of the Base
Purchase Price, plus the Interest Adjustment, as such sum is adjusted by the
Adjustment Amount.
"Proceedings" means all proceedings, actions, claims, suits,
investigations, and inquiries by or before any arbitrator or Governmental
Entity.
"Related Agreements" means the Termination and Assignment Agreement
attached as Exhibit 3.2(e).
--------------
"Related Companies" has the meaning assigned to such term in Section
-------
4.2(a).
- ------
"Retained E-Mail" means all electronic mail and other computer based
communications stored on any electronic, digital, or other storage or back up
media and retained in the ordinary course of PG&E's or Seller's or any of their
respective Affiliates' or any of the Acquired Companies' business.
"RRC" means the Texas Railroad Commission.
"Scheduled Contracts" means any of the agreements, contracts, arrangements,
or understandings listed on Schedule 4.13, other than the contracts and
-------------
agreements listed in Schedule 4.13 in accordance with clauses (v) and (ix) of
-------------
Section 4.13(a).
- ---------------
"Schedules" means the schedules attached to the Disclosure Letter of the
Seller or the Buyer, as the case may be.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller Indemnitees" means, collectively, the Seller and its Affiliates
(other than the Acquired Companies) and its and their officers, directors,
employees, agents, and representatives.
Stock Purchase Agreement
Page 7
<PAGE>
"Settlement Amount" has the meaning assigned to such term in Section 4(b)
------------
of the Termination and Assignment Agreement attached as Exhibit 3.2(e).
--------------
"Shares" means all the issued and outstanding capital stock of the
Companies.
"Straddle Period" means a Tax period or year commencing before and ending
after the Closing Date.
"Straddle Return" means a Tax Return for a Straddle Period.
"Taxes" means any federal, state, local or foreign income, gross receipts,
license, payroll, parking, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Sec. 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated tax or other tax of any kind whatsoever, including any interest,
penalty or addition thereto, whether disputed or not, including such item for
which a liability arises as a transferee or successor-in-interest, but the term
Taxes does not include any of the foregoing items arising in respect of the
Existing Franchise Tax Claims, including any Losses with respect thereto, or any
such items that arise out of claims that are substantially similar to those
asserted in the Existing Franchise Tax Claims, including any Losses with respect
thereto.
"Taxing Authority" means any Governmental Entity responsible for the
imposition or collection of any Tax.
"Tax Benefit" means any decreases in Tax actually realized.
"Tax Return" means any return or report, declaration, report, claim for
refund, information return, or statement relating to Taxes, including any
related schedules, attachments, or other supporting information, with respect to
Taxes, and including any amendment thereto.
"TECO Margin Loan" means the outstanding obligations under the Credit
Agreement, dated as of June 15, 1998, between PG&E Gas Transmission TECO, Inc.
and Chase Bank of Texas, National Association.
"Third Party Claim" means any claim or the commencement of any claim,
action or proceeding made or brought by a Third Party.
"Third Party" means any Person other than (i) Seller or any of its
Affiliates (including the Acquired Companies) or (ii) Buyer and its Affiliates.
"Total Purchase Price" means the sum of (i) the Purchase Price plus (ii)
the principal amount of Long-Term Debt outstanding as of the Closing.
"Transferred Employees" has the meaning assigned to such term in Section
-------
7.3(a).
- ------
Stock Purchase Agreement
Page 8
<PAGE>
"Treasury Regulations" means one or more treasury regulations promulgated
under the Code by the Treasury Department of the United States.
"U.S. GAAP" means generally accepted accounting principles in the United
States of America from time to time, with such exceptions to such generally
accepted accounting principles as may be noted or otherwise referred to on any
individual financial statement or schedule.
"Year 2000 Problems" shall mean the inability of any hardware, software or
process to recognize and correctly calculate dates or the failure of computer
systems, products or services to perform any of their intended functions in a
proper manner in connection with data containing any date.
1.2 Construction. In construing this Agreement, the following
------------
principles shall be followed:
(i) the terms "herein," "hereof," "hereby," and "hereunder," or other
similar terms, refer to this Agreement as a whole and not only to the particular
Article, Section, or other subdivision in which any such terms may be employed;
(ii) references to Articles, Sections, and other subdivisions refer to
the Articles, Sections, and other subdivisions of this Agreement;
(iii) a reference to any Person shall include such Person's predecessors
and successors;
(iv) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with U.S. GAAP;
(v) no consideration shall be given to the captions of the articles,
sections, subsections, or clauses, which are inserted for convenience in
locating the provisions of this Agreement and not as an aid in its construction;
(vi) examples shall not be construed to limit, expressly or by
implication, the matter they illustrate;
(vii) the word "includes" and its syntactical variants mean "includes,
but is not limited to" and corresponding syntactical variant expressions;
(viii) a defined term has its defined meaning throughout this Agreement,
regardless of whether it appears before or after the place in this Agreement
where it is defined;
(ix) the plural shall be deemed to include the singular, and vice versa;
and
Stock Purchase Agreement
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<PAGE>
(x) each exhibit, attachment, and schedule to this Agreement is a part of
this Agreement, but if there is any conflict or inconsistency between the main
body of this Agreement and any exhibit, attachment, or schedule, the provisions
of the main body of this Agreement shall prevail.
ARTICLE 2
TERMS OF THE TRANSACTION
2.1 Agreement to Sell and to Purchase the Shares. At the Closing, and
--------------------------------------------
on the terms and subject to the conditions in this Agreement, Seller shall sell,
assign, transfer, deliver, and convey to Buyer, and Buyer shall purchase and
accept from Seller, the Shares of the Companies free and clear of all
Encumbrances.
2.2 Purchase Price and Payment. In consideration of the sale of the
--------------------------
Shares to Buyer, Buyer shall pay to Seller at the Closing, in immediately
available funds, an amount equal to the sum of the Base Purchase Price, plus the
Interest Adjustment, plus the Estimated Adjustment Amount. Such payment shall
be made by confirmed wire transfer to a bank account or accounts to be
designated by Seller in the amount shown in Seller's statement delivered to
Buyer in accordance with Section 2.4 below.
-----------
2.3 [Intentionally Omitted].
---------------------
2.4 Calculation of Closing Consideration. Not later than 5 days prior
------------------------------------
to the date of Closing, Seller shall deliver to Buyer a written statement
setting forth (i) the Base Purchase Price, (ii) the Interest Adjustment, and
(iii) the Estimated Adjustment Amount (including an estimate of the Settlement
Amount), with Seller's calculation of the Interest Adjustment and the Estimated
Adjustment Amount in reasonable detail, based on information then available to
Seller. If the Estimated Adjustment Amount is positive, the sum of the Base
Purchase Price and the Interest Adjustment shall be increased by the Estimated
Adjustment Amount, and if the Estimated Adjustment Amount is negative, the sum
of the Base Purchase Price and the Interest Adjustment shall be reduced by the
Estimated Adjustment Amount.
2.5 Calculation and Payment of Adjustment Amount.
--------------------------------------------
(a) Adjustment Amount. The "Adjustment Amount" equals the net increase
-----------------
to, or net decrease from, the Adjusted Working Capital (as defined herein)
between the Balance Sheet Date and the Effective Date. For purposes of clarity,
an increase in Adjusted Working Capital shall be represented by a positive
number and a decrease in Adjusted Working Capital shall be represented by a
negative number.
(b) Effective Date Financial Statements and Adjustment Amount. As
---------------------------------------------------------
promptly as practicable after the Closing Date, and in any event not later than
60 days after the Closing Date, Buyer shall deliver to Seller (i) a combined
balance sheet, statement of income, and statement of cash flow of the Companies
as of the Effective Date (the "Effective Date Financial Statements") prepared on
substantially the same basis as the Combined Financial Statements have been
prepared (except that the Effective Date Financial Statements shall be prepared
using actual volumes and revenues as would be available at least 30 days after
the Effective Date and based
Stock Purchase Agreement
Page 10
<PAGE>
on other best available information through the period ending upon the date same
is delivered to Seller), and (ii) a statement of Buyer (the "Adjustment
Statement") showing in reasonable detail its calculation of the Adjustment
Amount (using as the Settlement Amount the amount stipulated in Section 4(b) of
------------
the Termination and Assignment Agreement). Seller agrees, at no cost to Buyer,
to give Buyer and its authorized representatives reasonable access to such
employees, offices, and other facilities and such books and records of the
Seller as are reasonably necessary to allow Buyer and its authorized
representatives to prepare the Effective Date Financial Statements and the
Adjustment Amount in compliance with this Section 2.5. Buyer, at no cost to
-----------
Seller, shall give representatives of Seller reasonable access to its premises,
employees and other facilities and to its and the Acquired Companies' books and
records as are reasonably necessary for purposes of reviewing, verifying, and
auditing the Effective Date Financial Statements and the Adjustment Amount.
(c) Dispute Resolution. The Adjustment Statement shall become final and
------------------
binding on Seller and Buyer as to the Adjustment Amount on the 60th day
following the date the Adjustment Statement is received by Seller (the "Dispute
Deadline Date"), unless prior to the Dispute Deadline Date Seller delivers
Notice to Buyer of its disagreement. Seller's Notice shall set forth all of
Seller's disputed items together with Seller's proposed changes thereto,
including an explanation in reasonable detail of the basis on which Seller
proposes such changes. If Seller has delivered a timely Notice of disagreement,
then Buyer and Seller shall use their good faith efforts to reach written
agreement on the disputed items to determine the Adjustment Amount, which in no
event shall be more favorable to Buyer than reflected on the Adjustment
Statement prepared by Buyer nor more favorable to Seller than shown in the
proposed changes delivered by Seller pursuant to its Notice of disagreement. If
all of Seller's disputed items have not been resolved by Buyer and Seller by the
90th day following Seller's receipt of the Adjustment Statement, then Seller's
disputed items shall be submitted to binding arbitration by an independent
nationally recognized accounting firm without any material financial
relationship to either Buyer or Seller, as mutually selected by Buyer and Seller
within five (5) business days after the end of the foregoing 90-day period (or
in the absence of agreement between Buyer and Seller by the close of business on
such 5th business day as selected by the president of the American Arbitration
Association or his designee). The fees and expenses of such arbitration shall be
borne 50% by Seller and 50% by Buyer. The determination of the Adjustment Amount
by such arbitration shall be final and binding upon Buyer and Seller as to the
Adjustment Amount.
(d) Final Date. The Adjustment Amount shall be deemed to be finally
----------
determined in the amount set forth in the Adjustment Statement on the Dispute
Deadline Date unless a dispute Notice is given in accordance with
Section 2.5(c) with respect to the calculation thereof. If such a dispute Notice
- -------------
is given, the Adjustment Amount shall be deemed finally determined on the date
that the selected accounting firm gives Notice to Buyer and Seller of its
determination with respect to all disputes regarding the calculation thereof,
or, if earlier, the date on which Seller and Buyer agree in writing on the
amount thereof, in which case the Adjustment Amount shall be calculated in
accordance with such determination or agreement, as the case may be.
(e) Payments. If the Adjustment Amount, as finally determined, exceeds
--------
the Estimated Adjustment Amount, then Buyer shall pay to Seller the amount of
such excess, plus interest on the amount of such excess from (and including) the
Closing Date to (but excluding)
Stock Purchase Agreement
Page 11
<PAGE>
the date of payment at the Prime Rate. If the Adjustment Amount is less than the
Estimated Adjustment Amount, then Seller shall pay to Buyer the amount of such
deficiency, plus interest on the amount of such deficiency from (and including)
the Closing Date to (but excluding) the date of payment at the Prime Rate. Any
payment shall be made within 10 business days of the date the Adjustment Amount
is deemed to be finally determined pursuant to Section 2.5(d).
--------------
(f) Definition. The "Adjusted Working Capital" as of the Balance Sheet
----------
Date shall be as set forth in Section 2.5(g). The "Adjusted Working Capital" as
--------------
of the Effective Date shall be calculated using the Effective Date Financial
Statements and shall be equal to (w) the sum of (i) an amount equal to the
portion of the assets of the Acquired Companies which constitute current assets,
plus (ii) the sum of any amounts expended by any of the Acquired Companies since
the Balance Sheet Date and on or prior to the Effective Date (A) to pay for
capital expenditures that are permitted by Section 6.2(h) or (B) to the extent
--------------
permitted in Section 6.2(l) and Schedule 6.2(l), plus (iii) the amount of any
-------------- ---------------
reduction in the outstanding principal balance of Long-Term Debt as of the
Effective Date below the $561.5 million aggregate principal balance of Long-Term
Debt outstanding as of the Balance Sheet Date, plus (iv) an amount (if positive)
or less an amount (if negative) equal to the fair value (or so-called mark-to-
market value) determined as of the Effective Date of the net contract position
of the Acquired Companies under the contracts described in Part I of
------
Exhibit A of the Termination and Assignment Agreement, and plus (v) an amount
- ---------
(if positive) or less an amount (if negative) equal to the Settlement Amount,
less (x) an amount equal to the portion of the liabilities of the Acquired
Companies which constitutes current liabilities, as such current assets and
current liabilities are included in the Effective Date Financial Statements,
less (y) the amount of any increase in the amount of Long-Term Debt outstanding
as of the Balance Sheet Date, and less (z) any amounts refunded to the Seller or
any of its Affiliates (other than the Acquired Companies) in respect of prepaid
insurance of the Acquired Companies cancelled on or prior to the Closing to the
extent reflected as a current asset for the purposes of calculating Adjusted
Working Capital. Notwithstanding the foregoing sentence, for the purpose of
calculating Adjusted Working Capital, (i) none of the following shall be
included in either current assets or current liabilities: (A) assets or
liabilities of the Acquired Companies relating to Taxes (including any deferred
Tax assets or liabilities); (B) any asset or liability of any of the Acquired
Companies relating to pensions or other employee post-retirement
benefits or any of the liabilities associated with the obligations in
Section 7.3(c) through Section 7.3(h); (C) the current portion of any principal
- -------------- --------------
payment obligation with respect to Long-Term Debt and the outstanding principal
balance of indebtedness for borrowed money to be repaid by the Acquired
Companies in accordance with Section 9.5; (D) cash or cash equivalents on
-----------
hand or accounts receivable constituting the proceeds of insurance received or
receivable by any of the Acquired Companies in respect of a casualty loss
experienced by an Acquired Company after the Balance Sheet Date, which casualty
loss involves an asset reflected as a non-current asset as of the Balance Sheet
Date; (E) except as contemplated in clause (w)(ii)(B) of the preceding sentence,
any liabilities and accounts payable associated with Proceedings described in
Section 6.2(l); and (F) except as contemplated in clauses (w)(iv) and (w)(v) of
- --------------
the preceding sentence, any amounts in respect of the contracts and agreements
listed in Part I and Part II of Exhibit A to the Termination and Assignment
------ ------- ---------
Agreement and (ii) the valuation of the inventories of the Acquired Companies as
of the Effective Date shall be in the same manner as the valuation of such
inventories as of the Balance Sheet Date. Except to the extent contemplated
above, the Adjusted Working Capital as of the Balance Sheet Date has
Stock Purchase Agreement
Page 12
<PAGE>
been calculated in a manner substantially consistent with the method for
calculating Adjusted Working Capital as of the Effective Date.
(g) Adjusted Working Capital Amount. Buyer and Seller each acknowledges
-------------------------------
and agrees that the Adjusted Working Capital as of the Balance Sheet Date is set
forth in Schedule 2.5(g) hereto, which also sets forth the calculation of the
---------------
Adjusted Working Capital as of the Balance Sheet Date.
2.6 Assumed Obligations. Buyer acknowledges and agrees that, following
-------------------
the Closing, the Acquired Companies shall remain obligated for their liabilities
and obligations, including the Assumed Litigation and the Long-Term Debt
outstanding as of the Closing (the "Assumed Liabilities"), and the Acquired
Companies shall pay, perform, and discharge the Assumed Liabilities from and
after the Closing.
ARTICLE 3
CLOSING
3.1 Closing. Subject to fulfillment or waiver of the conditions in this
-------
Agreement, the Closing shall take place on the Closing Date. The Closing shall
take place at the offices of Andrews & Kurth L.L.P., 4200 Chase Tower, Houston,
Texas 77002 or such other place as the Parties may agree, at 10:00 a.m.,
Houston, Texas time, on the fifth business day following the receipt of all
Government Approvals and the satisfaction or waiver of the other conditions to
Closing in Articles 8 and 9 or at such other time as the Parties may agree.
---------- -
Unless otherwise agreed, all Closing transactions shall be deemed to have
occurred simultaneously.
3.2 Deliveries by Seller. At the Closing, Seller will deliver the
--------------------
following documents to Buyer:
(a) A certificate executed on behalf of Seller by the president, senior
vice president, or vice president of Seller, dated the Closing Date,
representing and certifying, in such detail as Buyer may reasonably request,
that the conditions set forth in Sections 9.1 and 9.2 have been fulfilled.
------------ ---
(b) An opinion of counsel to Seller, dated the Closing Date, in the
forms of Exhibit 3.2(b)(i) and 3.2(b)(ii).
----------------- ----------
(c) The certificates, instruments, and documents listed below:
(i) The stock certificates representing the Shares duly endorsed in
blank, or accompanied by stock powers duly executed in blank, and otherwise
in form acceptable for transfer of the Shares to Buyer free and clear of
all Encumbrances.
(ii) The minute books, stock records, and corporate seal (if any) of
each Acquired Company.
Stock Purchase Agreement
Page 13
<PAGE>
(iii) The written resignations of the directors and officers of each
Acquired Company, such resignations to be effective concurrently with the
Closing on the Closing Date.
(iv) Evidence of the Governmental Approvals of Seller.
(v) Evidence that the revolving credit facilities of any of the
Acquired Companies, the TECO Margin Loan and any indebtedness (other than
accounts payable) of any of the Acquired Companies for borrowed money owed
to the Seller or PG&E or any of their Affiliates (other than the Acquired
Companies) have been, or concurrently with Closing are being, repaid in
full.
(vi) Such other certificates, instruments of conveyance, and
documents as may be reasonably requested by Buyer prior to the Closing Date
to carry out the intent and purposes of this Agreement.
(d) [Intentionally Omitted].
(e) A Termination and Assignment Agreement substantially in the form of
Exhibit 3.2(e) duly executed by Seller.
- --------------
3.3 Deliveries by Buyer. At the Closing, Buyer will deliver the
-------------------
following documents to Seller:
(a) A certificate executed by the president, senior vice president, or
vice president of Buyer, dated the Closing Date, representing and certifying, in
such detail as Seller may reasonably request, that the conditions set forth in
Sections 8.1 and 8.2 have been fulfilled.
- ------------ ---
(b) An opinion of counsel to Buyer, dated the Closing Date, in the form of
Exhibit 3.3(b).
- --------------
(c) [Intentionally Omitted].
(d) A Termination and Assignment Agreement substantially in the form of
Exhibit 3.2(e) duly executed by Buyer.
- -------------
(e) All releases, replacements, and substitutions required by
Section 8.5 with respect to the Guarantee listed in Part 1 of Part B of
- ------------ ------ ------
Schedule 7.12, in form and substance satisfactory to Seller.
- -------------
(f) Evidence of the Governmental Approvals of Buyer.
(g) Such other certificates, instruments, and documents as may be
reasonably requested by Seller prior to the Closing Date to carry out the intent
and purposes of this Agreement.
Stock Purchase Agreement
Page 14
<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLER
Subject to the provisions of Article 12, Seller represents and warrants to
----------
Buyer as of the date hereof and, subject to Section 7.5, as of the Closing Date
-----------
as follows:
4.1 Corporate Organization. Seller is a corporation duly organized,
----------------------
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation.
4.2 Acquired Companies.
------------------
(a) List of Acquired Companies. Except as set forth on Schedule 4.2, the
-------------------------- ------------
Companies do not own, directly or indirectly, any capital stock or other equity
securities of any corporation or have any direct or indirect equity or ownership
interest in any other Person. Schedule 4.2 lists (i) each Acquired Company, the
------------
jurisdiction of incorporation or formation of each Acquired Company, and the
authorized (in the case of capital stock) and outstanding capital stock or other
equity interests of each Acquired Company and (ii) each of the other entities
(the "Related Companies") in which the Acquired Companies own any capital stock
or other equity securities, the jurisdiction of incorporation or formation, and
the capital stock or other equity interests of each such Related Company that
are owned by any Acquired Company. Each corporate Acquired Company is a
corporation duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation, and each other Acquired Company
is duly formed and validly existing under the laws of the jurisdiction of its
formation. Each Acquired Company has all requisite corporate or other power and
authority, as applicable, to own, lease, and operate its properties and to carry
on its business as now being conducted. No actions or proceedings to dissolve
any Acquired Company are pending.
(b) No Encumbrances. Except as otherwise indicated on Schedule 4.2, all
--------------- ------------
of the outstanding capital stock or other equity interests of each Acquired
Company is owned directly or indirectly by Seller free and clear of all
Encumbrances, other than (i) restrictions on transfer that may be imposed by
federal or state securities laws, (ii) those that arise by virtue of any actions
taken by or on behalf of Buyer or its Affiliates, or (iii) those that arise
under the Mortgage Indenture. All outstanding shares of capital stock of each
corporate Acquired Company have been validly issued and are fully paid and
nonassessable. All equity interests of each other Acquired Company have been
validly issued and are fully paid (to the extent required at such time). No
shares of capital stock or other equity interests of any Acquired Company are
subject to, nor have any been issued in violation of, preemptive or similar
rights.
(c) No Options. Except as set forth on Schedule 4.2, there are
---------- ------------
outstanding (i) no shares of capital stock or other voting securities of any
Acquired Company, (ii) no securities of any Acquired Company convertible into or
exchangeable for shares of capital stock or other voting securities of any
Acquired Company, (iii) no options or other rights to acquire from Seller or any
Acquired Company, and no obligation of Seller or any Acquired Company to issue
or sell, any shares of capital stock or other voting securities of any Acquired
Company or any securities convertible into or exchangeable for such capital
stock or voting securities, and (iv) no equity equivalents, interests in the
ownership or earnings, or other similar rights of or with respect to any
Acquired Company. There are no outstanding obligations of Seller or any Acquired
Stock Purchase Agreement
Page 15
<PAGE>
Company to repurchase, redeem, or otherwise acquire any of the foregoing shares,
securities, options, equity equivalents, interests or rights.
(d) Qualification. Each of the Acquired Companies is duly qualified or
-------------
licensed to do business as a corporation, foreign corporation, limited
partnership, or limited liability company, as applicable, and each of the
Acquired Companies is in good standing in each of the jurisdictions set forth
opposite its name on Schedule 4.2, which are all the jurisdictions in which
------------
the property owned, leased, or operated by it or the conduct of its business
requires such qualification or licensing, except jurisdictions in which the
failure to be so qualified or licensed would not, individually or in the
aggregate, have a Material Adverse Effect.
4.3 Charter and Bylaws. Seller has made available to Buyer accurate and
------------------
complete copies of each Acquired Company's certificate of incorporation and
bylaws (or equivalent organizational documents) as currently in effect and stock
records of the Acquired Companies.
4.4 Authority Relative to this Agreement. Seller has full corporate
------------------------------------
power and corporate authority to execute, deliver, and perform this Agreement
and the Related Agreements to which it is a party, and PG&E has full corporate
power and corporate authority to execute, deliver and perform the PG&E Guaranty.
The execution, delivery, and performance by Seller of this Agreement and the
Related Agreements, and the consummation by it of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary corporate action
of Seller. The execution, delivery, and performance by PG&E of the PG&E
Guaranty, and the consummation by it of the transactions contemplated thereby,
have been duly authorized by all necessary corporate action of PG&E. This
Agreement has been duly executed and delivered by Seller and constitutes, and
each Related Agreement executed or to be executed by Seller has been, or when
executed will be, duly executed and delivered by Seller and constitutes, or when
executed and delivered will constitute, a valid and legally binding obligation
of Seller, enforceable against Seller in accordance with its terms, except that
such enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium, and similar laws affecting creditors' rights
generally and (ii) equitable principles which may limit the availability of
certain equitable remedies (such as specific performance) in certain instances.
The PG&E Guaranty has been duly executed and delivered by PG&E and constitutes a
valid and legally binding obligation of PG&E, enforceable against PG&E in
accordance with its terms, except that such enforceability may be limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws
affecting creditors' rights generally and (ii) equitable principles which may
limit the availability of certain equitable remedies (such as specific
performance) in certain instances.
4.5 No Conflict. Assuming all consents, approvals, authorizations, and
-----------
other actions described in Section 4.6 have been obtained and all filings and
-----------
notifications listed on Schedule 4.6 have been made, and except (a) for the
------------
matters that are the subject of the Existing Franchise Tax Claims or that arise
out of claims that are substantially similar to the Existing Franchise Tax
Claims, or (b) as may result from any facts or circumstances relating solely to
Buyer or its Affiliates or as described on Schedule 4.5, the execution,
------------
delivery, and performance of this Agreement and the Related Agreements by Seller
and of the PG&E Guaranty by PG&E and the consummation by each of them of the
transactions contemplated hereby or thereby do not and will not (x) violate or
breach the certificate of incorporation or by-laws (or equivalent
Stock Purchase Agreement
Page 16
<PAGE>
organizational documents) of Seller or any Acquired Company or, in the case of
the PG&E Guaranty, of PG&E, (y) violate or breach any Applicable Law binding
upon Seller or any Acquired Company or PG&E or any of their respective assets or
properties, except as would not have, individually or in the aggregate, a
Material Adverse Effect, (z) result in any breach of, or constitute a default
(or event which with the giving of notice or lapse of time, or both, would
become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of any Encumbrance on
any of the assets or properties of any Acquired Company pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument relating to such assets or properties to which any
Acquired Company is a party or by which any of such assets or properties is
bound or affected, except as would not have, individually or in the aggregate, a
Material Adverse Effect.
4.6 Consents, Approvals, and Licenses. No consent, approval,
---------------------------------
authorization, license, order or permit of, or declaration, filing or
registration with, or notification to, any Governmental Entity, or any other
Person, is required to be made or obtained by Seller or any Acquired Company or
PG&E in connection with the execution, delivery and performance of this
Agreement, the Related Agreements and the PG&E Guaranty and the consummation of
the transactions contemplated hereby or thereby, except: (a) as set forth on
Schedule 4.6; (b) applicable requirements of the HSR Act; (c) for the matters
- ------------
that are the subject of the Existing Franchise Tax Claims or that arise out of
claims that are substantially similar to the Existing Franchise Tax Claims; (d)
where the failure to obtain such consents, approvals, authorizations, licenses,
orders or permits of, or to make such declarations, filings, or registrations or
notifications, would not have, individually or in the aggregate a Material
Adverse Effect, and (e) as may be necessary as a result of any facts or
circumstances relating solely to Buyer. To the knowledge of Seller, the Acquired
Companies hold all Permits necessary or required for the conduct of the business
of the Acquired Companies, except for Permits the absence of which would not
have, individually or in the aggregate, a Material Adverse Effect. All of such
Permits are in full force and effect and each Acquired Company is in
compliance with each such Permit, except as would not have, individually or in
the aggregate, a Material Adverse Effect. Except as disclosed in Schedule 4.6,
------------
no notice has been received by Seller or any Acquired Company and no Proceeding
is pending or, to the knowledge of Seller, threatened with respect to any
alleged failure by any Acquired Company to have any such Permit or not to be in
compliance therewith, except as would not have, individually or in the
aggregate, a Material Adverse Effect. No event has occurred and is continuing
which permits, or after notice or lapse of time or both would permit, any
modification or termination of any such Permit held by any Acquired Company,
except as would not have, individually or in the aggregate, a Material Adverse
Effect.
4.7 Financial Statements. Schedule 4.7 contains (i) an unaudited
-------------------- ------------
combined balance sheet of TECO and GTT as of December 31, 1999 and the notes
thereto, (ii) an unaudited statement of income for the 12-month period ending
December 31, 1999, and (iii) an unaudited statement of cash flow for the 12-
month period ending December 31, 1999 (collectively, the "Combined Financial
Statements"). The Combined Financial Statements have been prepared in accordance
with U.S. GAAP, assuming that as of such date GTT and TECO are eligible for
consolidation and subject to the other assumptions and limitations set forth
therein. The Combined Financial Statements are consistent with the books and
records of the Companies and
Stock Purchase Agreement
Page 17
<PAGE>
fairly present, in all material respects, the financial position, results of
operations, and cash flows of the Companies as of the date and for the period
indicated.
4.8 Absence of Material Changes. Except as disclosed on Schedule 4.8
--------------------------- ------------
and other than any change in the accounting books and records of GTT or TECO
resulting from any gain, loss or impairment realized or realizable by the Seller
or any Acquired Company in accordance with U.S. GAAP solely as a result of the
transactions contemplated hereby or by virtue of the application of the
accounting standards related to impairment analysis under U.S. GAAP (other than
such an impairment analysis for any of the events described in clauses (i)
through (iv) of this Section 4.8), since the Balance Sheet Date, (i) there has
-----------
not been any adverse change in the assets, liabilities, business, results of
operation, or financial condition of the Acquired Companies that would have,
individually or in the aggregate, a Material Adverse Effect, (ii) the businesses
of the Acquired Companies have been conducted only in the ordinary course
consistent with past practice, (iii) no Acquired Company has incurred any
material liability or entered into any material agreement, in each case, outside
the ordinary course of business consistent with past practice, and (iv) no
Acquired Company has suffered any material loss, damage, destruction, or other
casualty to any of its property, plant, equipment or inventories (whether or not
covered by insurance).
4.9 Tax Matters. Except as disclosed on Schedule 4.9:
----------- ------------
(a) each Acquired Company has filed, or has had filed on its behalf, in a
timely manner (within any applicable extension periods) with the appropriate
Taxing Authority all Tax Returns with respect to Taxes of each of the Acquired
Companies other than those Tax Returns on which an immaterial amount of Taxes
would properly be shown and each such return was correct and complete in all
material respects when filed;
(b) each Affiliated Group has filed in a timely manner (within any
applicable extension periods) with the appropriate Taxing Authority all Tax
Returns that it was required to file for each taxable period during which any of
the Acquired Companies was a member of the group, other than those Tax Returns
on which an immaterial amount of Taxes would be properly shown, and each such
Tax Return was correct and complete in all material respects when filed;
(c) all Taxes due and payable (whether or not shown as due) on all filed
Tax Returns of or with respect to the Acquired Companies have been paid in full
or adequate reserves (determined in accordance with GAAP) have been provided for
on the Combined Financial Statements;
(d) there are no outstanding agreements or waivers extending the statutory
period of limitations applicable to any federal, state, local or foreign income
or other material Tax Returns required to be filed by or with respect to any of
the Acquired Companies;
(e) none of the Tax Returns of or with respect to any of the Acquired
Companies is currently being audited or examined by any Taxing Authority;
Stock Purchase Agreement
Page 18
<PAGE>
(f) no material deficiency for any income Taxes has been assessed with
respect to any of the Acquired Companies that has not been abated, paid in full
or adequately provided for on the Combined Financial Statements;
(g) there is no dispute or claim concerning any Tax liability of any
Acquired Company either (i) claimed or raised by any Taxing Authority in writing
or (ii) as to which the Seller has knowledge;
(h) the Combined Financial Statements and the Effective Date Financial
Statements accurately reflect unpaid Taxes of the Acquired Companies for the
periods covered by each;
(i) each partnership with respect to which an Acquired Company owns an
interest, directly or indirectly, is a partnership for Tax purposes;
(j) none of the Acquired Companies has been notified by the IRS or any
Governmental Authority that it is required to pay for the Taxes of any Person
(other than any of the Acquired Companies) under Treasury Regulations Section
1.1502-6 (or any similar provision of state, local, or foreign law), as a
transferee or successor, by contract or otherwise;
(k) all Taxes that any Acquired Company is or was required to withhold or
collect have been duly withheld or collected, and to the extent required, have
been paid to the proper Taxing Authority or other Person;
(l) no payments are due or will become due by any Acquired Company
pursuant to any tax indemnification agreement; and
(m) none of the property of the Acquired Companies is subject to a safe-
harbor lease (pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954
as in effect after the Economic Recovery Tax Act of 1981 and before the Tax
Reform Act of 1986) or is "tax-exempt use property" (within the meaning of
Section 168(h) of the Code) or "tax-exempt bond financed property" (within the
meaning of Section 168(g)(5) of the Code).
4.10 Compliance With Laws. The Acquired Companies are in compliance in
--------------------
all material respects with all Applicable Laws (other than Applicable
Environmental Laws, as to which Seller's sole representations and warranties are
set forth in Section 4.15, and Taxes, as to which Seller's sole representations
------------
and warranties are set forth in Section 4.9), except (i) as disclosed on
-----------
Schedule 4.10 or (ii) for noncompliance with such Applicable Laws which would
- -------------
not have, individually or in the aggregate, a Material Adverse Effect.
4.11 Legal Proceedings. Except as disclosed on Schedule 4.11, there are
----------------- -------------
no Proceedings pending, or to the knowledge of Seller, threatened against or
involving any Acquired Company or any properties of any Acquired Company which
would have, individually or in the aggregate, a Material Adverse Effect. Except
as disclosed on Schedule 4.11, no Acquired Company is subject to any judgment,
-------------
order, writ, injunction, or decree of any Governmental Entity which has had,
individually or in the aggregate, a Material Adverse Effect.
4.12 Title to Properties. Except (i) as disclosed on Schedule 4.12,
------------------- -------------
(ii) for the Permitted Encumbrances, and (iii) for such matters which would not
have, individually or in the aggregate,
Stock Purchase Agreement
Page 19
<PAGE>
a Material Adverse Effect, each of the Acquired Companies has good and
defensible title to those material properties (real, personal, and mixed,
tangible and intangible) reflected in its books and records and in the Combined
Financial Statements, other than those disposed of after the Balance Sheet Date
in the ordinary course of business consistent with past practice.
4.13 Acquired Company Agreements.
---------------------------
(a) List of Agreements. Set forth on Schedule 4.13 is a list of the
------------------ -------------
following agreements and contracts to which any Acquired Company is a party or
by which any Acquired Company or any of their respective properties is
otherwise bound:
(i) any commitment, agreement, note, loan, evidence of
indebtedness, purchase order, letter of credit or guarantee of the
indebtedness of others that Seller reasonably anticipates will, in
accordance with its terms, involve aggregate payments by any Acquired
Company of more than $1,000,000 within the remaining term of such
agreement;
(ii) any lease under which a Acquired Company is the lessor or
lessee of real or personal property, which lease (A) cannot be terminated
by any Acquired Company without penalty upon not more than 180 calendar
days' notice and (B) involves an annual base rental during year 2000 or
thereafter in excess of $1,000,000;
(iii) any contracts or agreements containing covenants limiting the
freedom of any Acquired Company to engage in any line of business or
compete with any Person;
(iv) any employment or consulting agreements having a primary term
extending not less than six months after the date of this Agreement and
involving annual payments during year 2000 or thereafter by any Acquired
Company in excess of $250,000;
(v) any pending sale or lease of real or personal property of any
Acquired Company (other than sales of natural gas, natural gas liquids, or
other terms of inventory in the ordinary course of business) in excess of
$1,000,000;
(vi) the gas purchase contracts, gas sales contracts, and gas
transportation agreements representing in the aggregate approximately 80%
of the revenue or expense of the Acquired Companies in calendar year 1999
under each such contract category;
(vii) the gas processing agreements and natural gas liquids contracts
representing in the aggregate approximately 80% of the contract volumes in
calendar year 1999 under each such contract category;
(viii) any contract requiring a capital expenditure or a commitment
for a capital expenditure in excess of $500,000, other than any contracts
solely related to the matters described in Schedule 6.2(h); or
---------------
Stock Purchase Agreement
Page 20
<PAGE>
(ix) any obligation to make future payments, contingent or otherwise,
arising out of or relating to the acquisition or disposition of any
business, assets, or stock of other companies by any Acquired Company.
(b) No Violations. During calendar year 1999, one or more of the Acquired
-------------
Companies effected a transaction under the terms of each of the Scheduled
Contracts that were listed in Schedule 4.13 in accordance with clauses (ii),
------------- ----
(vi), or (vii) of Section 4.13(a) with the counterparty or counterparties to
- ---- ----- ---------------
such Scheduled Contract. Except as disclosed in Schedule 4.13, no Acquired
-------------
Company is in breach or violation of, or default under, any of the Scheduled
Contracts, except where such breaches or violations or defaults would not have,
individually or in the aggregate, a Material Adverse Effect. Each Scheduled
Contract is a valid agreement, arrangement or commitment of the Acquired Company
which is a party thereto, enforceable against the Acquired Company in accordance
with its terms and, to the knowledge of Seller, is a valid agreement,
arrangement or commitment of each other party thereto, enforceable against such
party in accordance with its terms, except in each case where enforceability may
be limited by bankruptcy, insolvency or other similar laws affecting creditors'
rights generally and except where enforceability is subject to the application
of equitable principles or remedies or as would not have, individually or in the
aggregate, a Material Adverse Effect. True and complete copies of the written
Scheduled Contracts were in the data room of Seller or otherwise have heretofore
been made available to Buyer, except as where noted in the Schedules.
4.14 Employee Plans and Labor Matters.
--------------------------------
(a) Disclosure. Seller has heretofore provided or made available to
----------
Buyer (i) a true and complete copy of each material Company Employee Plan (each
of which is listed on Schedule 4.14), (ii) each trust agreement relating to
-------------
such Company Employee Plan, (iii) the most recent IRS Form 5500 for such Company
Employee Plans, and (iv) the most recent determination letter issued by the IRS
with respect to any Company Employee Plan intended to be qualified under Section
401(a) of the Code.
(b) ERISA. (i) None of the ERISA Plans, is a "multiemployer pension
-----
plan," as described in Section 3(37) of ERISA, or a "multiple employer pension
plan," as defined in Section 4063 of ERISA, and (ii) no material liability under
Title IV of ERISA has been incurred by the Acquired Companies or any ERISA Plan
that has not been satisfied in full, other than liability for premiums that are
not yet due and payable to the Pension Benefit Guaranty Corporation, and there
exist no facts or circumstances which could be expected to result in such
liability. No plan has an "accumulated funding deficiency" (within the meaning
of Section 302 of ERISA and Section 412 of the Code). Full payment has been
made, or will be made in accordance with Section 404(a)(6) of the Code, of all
amounts which any Acquired Company is required to pay under the terms of each of
the Company Employee Plans and Section 412 of the Code, and all such amounts
properly accrued through the date of this Agreement with respect to the current
plan year thereof will be paid by the Acquired Companies on or prior to the date
of this Agreement or have been properly recorded on the Combined Financial
Statements.
(c) Qualification. Except with respect to the PG&E Corporation Retirement
-------------
Savings Plan (as to which an application has been filed, but the IRS has not yet
issued its favorable determination letter), each Company Employee Plan intended
to be qualified under
Stock Purchase Agreement
Page 21
<PAGE>
Section 401(a) of the Code has received a favorable determination letter from
the IRS to the effect that it is so qualified, and to the Seller's knowledge,
nothing has occurred since the date of such letter to adversely affect the
qualified status of each such plan. Except as set forth on Schedule 4.14, none
-------------
of the Company Employee Plans or any other plan, program, or arrangement of the
Acquired Companies would result, separately or in the aggregate, in the payment
of any "excess parachute payment" within the meaning of Section 280G of the
Code. Each Company Employee Plan has been operated in all material aspects in
accordance with its terms and the requirements of Applicable Law. To the
knowledge of Seller, there have been no non-exempt "prohibited transactions"
within the meaning of Section 4975 of the Code or Section 406 of ERISA with
respect to any Company Employee Plan to which either of those sections may
apply. All contributions required to have been made with respect to any Company
Employee Plan have been timely made.
(d) Deferred Benefits. Except as set forth in Schedule 4.14, no Company
----------------- -------------
Employee Plan provides benefits, including death, medical or health benefits
(whether or not insured), after an employee's termination of employment, other
than (i) continuation coverage required pursuant to Section 4980B of the Code
and Part 6 of Title I of ERISA, and the regulation thereunder, and any other
applicable law, (ii) death benefits or retirement benefits under any employee
pension benefit plan, (iii) life insurance and medical benefits under retiree
life insurance and medical plans, (iv) deferred compensation benefits, reflected
as liabilities on the books of an Acquired Company, or (v) benefits the full
cost of which is borne by the current or former employee (or his beneficiary).
(e) No Vesting. Except as set forth in Schedule 4.14, the consummation
---------- -------------
of the transactions contemplated by this Agreement will not (whether alone or
upon the occurrence of any other event) (i) entitle any current or former
employee of any Acquired Company to any payment or forgiveness or indebtedness,
(ii) accelerate the time of payment or vesting, result in the funding or
increase the amount of any benefit, award or compensation due any such employee,
or (iii) result in a restriction on the right of the Buyer to cause any Company
Employee Plan to be amended or terminated.
(f) Claims. There are no pending, or to the knowledge of Seller,
------
threatened or anticipated Proceedings against any of the Company Employee Plans
or any of the Acquired Companies involving any such Company Employee Plan (other
than routine claims for benefits).
(g) Labor Matters. Except as set forth in Schedule 4.14, the Acquired
------------- -------------
Companies are not (i) a party to, or bound by, any collective bargaining
agreement with a labor union or labor organization, or (ii) the subject of any
formal proceeding asserting that any Acquired Company has committed an unfair
labor practice or is seeking to compel it to bargain with any labor organization
as to wages or conditions of employment.
(h) No Parent Company Plan Liability. The Acquired Companies will not
--------------------------------
have any liability under any Parent Employee Plan after the Closing except for
liabilities that have been properly accrued for periods through the Closing and
properly recorded on the Combined Financial Statements.
Stock Purchase Agreement
Page 22
<PAGE>
4.15 Environmental Matters.
---------------------
(a) Compliance and Remedial Obligations. Except as set forth on Schedule
----------------------------------- --------
4.15 and except for such matters as would not have, individually or in the
- ----
aggregate, a Material Adverse Effect, (i) the Acquired Companies are and have
been in compliance with all Applicable Environmental Laws, (ii) no condition
exists on any property currently owned or leased by the Acquired Companies which
would subject any Acquired Company or such property to any remedial obligations
or other liabilities under any Applicable Environmental Laws, and (iii) neither
the Seller nor the Acquired Companies have received any written notice of any
liability or violation by any Person (other than a Governmental Entity) under
any Applicable Environmental Laws.
(b) CERCLA Notice. Except as set forth on Schedule 4.15, (i) neither the
------------- --------------
Seller nor the Acquired Companies have received any written claim or notice that
any Acquired Company is or may be a potentially responsible person or otherwise
liable under CERCLA or any analogous state law and (ii) since January 1, 1998,
neither the Seller nor the Acquired Companies have received any written notice
of liability or violation by any Governmental Entity under any Applicable
Environmental Law, other than such notices that have been resolved with the
applicable Governmental Entity.
4.16 Insurance. Set forth on Schedule 4.16 is a list of all Acquired
--------- -------------
Company Insurance Policies. All premiums due and payable with respect to the
Acquired Company Insurance Policies have been timely paid. No notice of
cancellation of, or indication of an intention not to renew, any Acquired
Company Insurance Policy has been received by Seller or any Acquired Company.
4.17 Absence of Undisclosed Liabilities. No Acquired Company has any
----------------------------------
liability or obligation, except (i) liabilities reflected on the Combined
Financial Statements, (ii) liabilities which have arisen since the Balance Sheet
Date in the ordinary course of business, (iii) liabilities arising under
executory contracts entered into in the ordinary course of business, including
liabilities relating to hedging arrangements, forward sales contracts and
derivative arrangements of the Acquired Companies, (iv) liabilities specifically
reflected on Schedule 4.17, (v) other liabilities which, in the aggregate, are
-------------
not material to the Acquired Companies considered as a whole and (vi) the
Assumed Litigation. Notwithstanding anything else to the contrary set forth in
this Agreement, no representation is made by the Seller in this Agreement with
respect to the accuracy or adequacy of the reserves included in the Combined
Financial Statements for pending or threatened Proceedings.
4.18 Bank Accounts. Set forth on Schedule 4.18 are the names of each bank
------------- -------------
or other financial institution with which any Acquired Company has an account
and a description of such account.
4.19 Brokerage Fees. Except as set forth on Schedule 4.19, neither Seller
-------------- -------------
nor any of its Affiliates has retained any financial advisor, broker, agent, or
finder or paid or agreed to pay any financial advisor, broker, agent, or finder
on account of this Agreement or the transactions
Stock Purchase Agreement
Page 23
<PAGE>
contemplated hereby for which Buyer or any Acquired Company shall have any
responsibility or liability.
4.20 Assets and Properties. Except for the assets described in Section
--------------------- -------
7.10 or listed on Schedule 7.10, the assets owned or leased by the Acquired
- ---- -------------
Companies constitute all the assets used in or necessary to conduct the
businesses of the Acquired Companies as currently conducted. All such assets
will continue to be owned or leased by the Acquired Companies after the Closing.
Except for the assets described in Section 7.10 or listed on Schedule 7.10,
------------ -------------
neither the Seller nor any of its Affiliates (other than the Acquired Companies)
owns any of the assets used in or necessary to conduct the business of the
Acquired Companies.
4.21 Intellectual Property Rights. Except (i) for the assets described in
----------------------------
Section 7.10 or listed on Schedule 7.10, and (ii) for such matters which would
not have, individually or in the aggregate, a Material Adverse Effect, (x) the
Acquired Companies own or have the right to use pursuant to license, sublicense,
other agreement all intellectual property necessary for the operation of the
Acquired Companies in the ordinary course of business, (y) each item of
intellectual property owned or used by the Acquired Companies immediately prior
to the Closing will be owned or available for use by the Acquired Companies on
identical terms and conditions immediately subsequent to the Closing, and (z)
the Acquired Companies have not received any written notice, claim, or demand
alleging any misappropriation or infringement of any intellectual property
rights of third parties.
4.22 Year 2000 Compliance. The Acquired Companies have implemented a plan
--------------------
for addressing the Year 2000 Problems. Except as would not have, individually or
in the aggregate, a Material Adverse Effect, none of the assets of the Acquired
Companies failed to perform because of, or due in any way to, a Year 2000
Problems.
4.23 Copies of Indenture Supplement. Seller has furnished to Buyer or its
------------------------------
agents a true and correct copy of the executed version of the Fourteenth
Supplemental Indenture, dated as of January 18, 2000, to the Mortgage Indenture,
which Fourteenth Supplemental Indenture has not been amended or supplemented.
4.24 Condition of Assets. All material equipment that is currently in
-------------------
service and operated by any Acquired Company is in good operating condition and
repair, except for (i) ordinary wear and tear and (ii) matters that would not
have, individually or in the aggregate, a Material Adverse Effect.
4.25 No Other Representations. Except as and to the extent set forth in
------------------------
this Article 4, Seller makes no representations or warranties whatsoever to
---------
Buyer and hereby disclaims all liability and responsibility for any
representation, warranty, statement, or information made, communicated, or
furnished (orally or in writing) to Buyer or its representatives (including any
opinion, information, projection, or advice that may have been or may be
provided to Buyer by any director, officer, employee, agent, consultant, or
representative of Seller or any Affiliate thereof). Seller makes no
representations or warranties to Buyer regarding the probable success or
profitability of the business of the Acquired Companies.
Stock Purchase Agreement
Page 24
<PAGE>
4.26 Certain Limitations. If any fact or circumstance that arose prior to
-------------------
July 31, 1997 results in a breach of a representation or warranty of Seller
contained in this Agreement or in any certificate, instrument or document
delivered pursuant hereto or in connection herewith, there shall be deemed to be
no breach of the applicable representation or warranty, unless, and only to the
extent that, Seller has knowledge of such fact or circumstance.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
Subject to the provisions of Article 12, Buyer represents and warrants to
----------
Seller as of the date hereof and, subject to Section 7.5, as of the Closing Date
-----------
as follows:
5.1 Corporate Organization. Buyer is a corporation duly organized,
----------------------
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation.
5.2 Authority Relative to This Agreement. Buyer has full corporate power
------------------------------------
and corporate authority to execute, deliver, and perform this Agreement and any
Related Agreements to which it is a party, and EPE has full corporate power and
corporate authority to execute, deliver, and perform the EPE Guaranty. The
execution, delivery, and performance by Buyer of this Agreement and such Related
Agreements and the consummation by it of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action of
Buyer. The execution, delivery, and performance by EPE of the EPE Guaranty and
the consummation by it of the transactions contemplated thereby have been duly
authorized by all necessary corporate action of EPE. This Agreement has been
duly executed and delivered by Buyer and constitutes, and each such Related
Agreement executed or to be executed by Buyer has been, or when executed will
be, duly executed and delivered by Buyer and constitutes, or when executed and
delivered will constitute, a valid and legally binding obligation of Buyer,
enforceable against Buyer in accordance with their terms, except that such
enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium, and similar laws affecting creditors' rights
generally and (ii) equitable principles which may limit the availability of
certain equitable remedies (such as specific performance) in certain instances.
The EPE Guaranty has been duly executed and delivered by EPE and constitutes a
valid and legally binding obligation of EPE, enforceable against EPE in
accordance with its terms, except that such enforceability may be limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws
affecting creditors' rights generally and (ii) equitable principles which may
limit the availability of certain equitable remedies (such as specific
performance) in certain instances.
5.3 No Conflict. Assuming all consents, approvals, authorizations, and
-----------
other actions described in Section 5.4 have been obtained and all filings and
-----------
notifications listed in Section 5.4 have been made, and except as may result
-----------
from any facts or circumstances relating solely to Seller or its Affiliates, the
execution, delivery and performance of this Agreement and the Related Agreements
by Buyer and of the EPE Guaranty by EPE and the consummation by each of them of
the transactions contemplated hereby or thereby do not and will not (a) violate
or breach the certificate of incorporation or by-laws of Buyer or, in the case
of the EPE Guaranty, of EPE, (b) violate or breach any Applicable Law binding
upon Buyer or EPE, except as would
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<PAGE>
not have, individually and in the aggregate, a Material Adverse Effect or (c)
result in any breach of, or constitute a default (or event which with the giving
of notice or lapse of time, or both, would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of, or
result in the creation of any Encumbrance on any of the assets or properties of
Buyer pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument relating to such assets or
properties to which Buyer is a party or by which any of such assets or
properties is bound or affected, except as would not have, individually or in
the aggregate, a Material Adverse Effect.
5.4 Consents, Approvals, and Licenses. No consent, approval,
---------------------------------
authorization, license, order, or permit of, or declaration, filing, or
registration with, or notification to, any Governmental Entity, or any other
Person, is required to be made or obtained by EPE or Buyer or any of its
Affiliates in connection with the execution, delivery, and performance of this
Agreement, the Related Agreements and the EPE Guaranty and the consummation of
the transactions contemplated hereby or thereby, except (a) applicable
requirements of the HSR Act, (b) where failure to obtain such consent, approval,
authorization, or action, or to make such filing or notification, would not
have, individually or in the aggregate, a Material Adverse Effect and (c) as set
forth on Schedule 5.4.
------------
5.5 Financing. Buyer has, and at the Closing will have, sufficient
---------
cash, available lines of credit, or other sources of immediately available funds
to enable it to pay the full Purchase Price to Seller when required hereunder.
5.6 Investment Intent; Investment Experience; Restricted Securities.
---------------------------------------------------------------
Buyer is acquiring the Shares for its own account for investment and not with a
view to, or for sale or other disposition in connection with, any distribution
of all or any part thereof. In acquiring the Shares, Buyer is not offering or
selling, and will not offer or sell, for Seller in connection with any
distribution of the Shares, and Buyer does not have a participation and will not
participate in any such undertaking or in any underwriting of such an
undertaking except in compliance with applicable federal and state securities
laws. Buyer acknowledges that it is able to fend for itself, can bear the
economic risk of its investment in the Shares, and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of an investment in the Shares. Buyer is an "accredited
investor" as such term is defined in Regulation D under the Securities Act.
Buyer understands that the Shares will not have been registered pursuant to the
Securities Act or any applicable state securities laws, that the Shares will be
characterized as "restricted securities" under federal securities laws and that
under such laws and applicable regulations the Shares cannot be sold or
otherwise disposed of without registration under the Securities Act or an
exemption therefrom.
5.7 Legal Proceedings. There are no Proceedings pending against Buyer
-----------------
or its Affiliates or, to the knowledge of Buyer, threatened against Buyer or its
Affiliates seeking to restrain, prohibit, or obtain damages or other relief in
connection with this Agreement or the transactions contemplated hereby.
5.8 Brokerage Fees. Neither Buyer nor any of its Affiliates has
--------------
retained any financial advisor, broker, agent, or finder or paid or agreed to
pay any financial advisor, broker, agent, or
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<PAGE>
finder on account of this Agreement or the transactions contemplated hereby for
which Seller or its Affiliates will have any responsibility or liability.
5.9 Independent Investigation. Buyer hereby acknowledges and affirms
-------------------------
that it has completed its own independent investigation, analysis and evaluation
of the Acquired Companies, that it has made all such reviews and inspections of
the business, assets, results of operations, condition (financial or otherwise)
and prospects of the Acquired Companies as it has deemed necessary or
appropriate, and that in making its decision to enter into this Agreement and to
consummate the transactions contemplated hereby it has relied solely on its own
independent investigation, analysis, and evaluation of the Acquired Companies.
Without limitation of the foregoing, Buyer acknowledges that it (i) is capable
of, and has, evaluated the Proceedings based upon the information with respect
thereto made available to the Buyer by the Seller (which information Buyer
acknowledges has excluded information that, if it were disclosed by Seller or
any of the Acquired Companies to Buyer, Seller has concluded may jeopardize any
privilege available to Seller or any of the Acquired Companies), (ii) has made
its own conclusion as to the amount or range of amounts of Losses, if any, which
the Acquired Companies may incur in respect of such Proceedings and (iii) in
making its conclusions referred to in clause (ii) of this sentence, the Buyer
has not relied on the reserves, if any, reflected therefor in the Combined
Financial Statements, as the case may be.
ARTICLE 6
CONDUCT OF ACQUIRED COMPANIES PENDING CLOSING
Seller hereby covenants and agrees with Buyer as follows:
6.1 Conduct and Preservation of the Acquired Companies. Except as
--------------------------------------------------
provided in this Agreement, during the period from the date hereof to the
Closing, Seller shall cause each Acquired Company to conduct its operations
according to its ordinary course of business consistent with past practice and
in compliance with all Applicable Laws and shall use commercially reasonable
efforts to preserve, maintain, and protect its assets, rights, and properties,
except that (i) Seller and the Acquired Companies shall not be required to make
any payments or enter into or amend any contractual agreements, arrangements, or
understandings to satisfy the foregoing obligation unless such payment or other
action is required or consistent with past practice, (ii) Seller and the
Acquired Companies may create, amend, or terminate any of the contracts
described in Parts II and III of Exhibit A of the Termination and Assignment
--------- --- ---------
Agreement or, on or prior to the Closing Date, any other intercompany financial
arrangement between one of the Acquired Companies, on the one hand, and Seller
or its Affiliates (other than the Acquired Companies), on the other hand, and
(iii) the Acquired Companies may assign to Seller or its Affiliates (other than
the Acquired Companies) the contracts described in Exhibit B of the Termination
---------
and Assignment Agreement. Seller agrees to use its commercially reasonable
efforts to keep the Acquired Company Insurance Policies in force through
Closing.
6.2 Restrictions on Certain Actions. Without limiting the generality of
-------------------------------
Section 6.1, and except as otherwise expressly provided in this Agreement, prior
- -----------
to the Closing, Seller shall not permit any Acquired Company, without the prior
written consent of Buyer, to:
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<PAGE>
(a) amend its charter or bylaws or other governing instruments;
(b) (i) issue, sell, or deliver (whether through the issuance or granting
of options, warrants, commitments, subscriptions, rights to purchase, or
otherwise) any shares of its capital stock of any class or any other securities
or equity equivalents; or (ii) amend any of the terms of any such securities
outstanding as of the date hereof;
(c) (i) split, combine, or reclassify any shares of its capital stock;
(ii) declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its capital
stock; (iii) repurchase, redeem or otherwise acquire any of its securities; or
(iv) adopt a plan of complete or partial liquidation or resolutions providing
for or authorizing a liquidation, dissolution, merger, consolidation,
restructuring, recapitalization, or other reorganization of any Acquired
Company;
(d) (i) except in the ordinary course of business consistent with past
practice, for obligations of another Acquired Company, and for any indebtedness
to be repaid prior to Closing in accordance with Section 6.3, create, incur,
-----------
guarantee, or assume any indebtedness for borrowed money or otherwise become
liable or responsible for the obligations of any other Person; (ii) make any
loans, advances, or capital contributions to, or investments in, any other
Person (other than to wholly owned subsidiaries or to another Acquired Company
and customary loans or advances to employees in amounts not material to the
maker of such loan or advance); or (iii) mortgage, or pledge any of its material
assets, tangible or intangible, or create or suffer to exist any material lien
thereupon;
(e) (i) except as may be required by Applicable Law or except to the
extent consistent with amendments or modifications made to similar plans or
arrangements of Seller or its corporate parent, enter into, adopt or make any
material amendments to or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase, pension, retirement,
deferred compensation, employment, severance or other employee benefit
agreement, trust, plan, fund or other arrangement for the benefit or welfare of
any director, officer or employee; (ii) except for normal increases in the
ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to the Acquired Companies, taken as a whole, increase the benefits or
compensation to any director, officer, or employee; or (iii) pay to any
director, officer, or employee any benefit not permitted by any employee benefit
agreement, trust, plan, fund, or other arrangement as in effect on the date
hereof;
(f) acquire, sell, lease, transfer, or otherwise dispose of, directly or
indirectly, any assets outside the ordinary course of business consistent with
past practice or any assets that in the aggregate are material to the Acquired
Companies considered as a whole;
(g) acquire (by merger, consolidation, or acquisition of stock or assets
or otherwise) any corporation, partnership, or other business organization or
division thereof;
(h) make any capital expenditure or expenditures, which, individually, is
in excess of $500,000 or, in the aggregate, are in excess of $2,500,000, except
(i) for any capital expenditure
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<PAGE>
made for the items described in Schedule 6.2(h), and (ii) reasonable
---------------
expenditures made by any Acquired Company in connection with any emergency or
other force majeure events affecting such Acquired Company;
(i) pay, discharge, or satisfy any material claims, liabilities or
obligations (whether accrued, absolute, contingent, unliquidated or otherwise,
and whether asserted or unasserted), other than (i) the payment, discharge or
satisfaction in the ordinary course of business consistent with past practice,
or in accordance with their terms, of liabilities reflected or reserved against
in the Combined Financial Statements or incurred since the Balance Sheet Date in
the ordinary course of business consistent with past practice, (ii) the
settlement of any Proceeding to the extent contemplated in Section 6.2(l), and
--------------
(iii) the Acquired Companies may continue to pursue and prosecute the Pending
FERC and RRC Proceedings;
(j) amend, modify, or change in any material respect (i) any Commercial
Contract that had revenues of $5,000,000 or more in calendar year 1999 and that
as of December 31, 1999 had a remaining term of 1 year or greater or (ii) any
contract or agreement listed in Schedule 4.13 in accordance with clause (ix) of
-------------
Section 4.13;
- ------------
(k) change in any material respect any of the accounting principles or
practices used by it, except for any change required by reason of a concurrent
change in generally accepted accounting principles; and
(l) settle or resolve any pending or threatened litigation constituting a
Proceeding including those listed on Schedule 4.11 or Proceeding pending
-------------
before FERC, except for the matters described in Schedule 6.2(l) and subject to
---------------
the limitation set forth therein.
6.3 Indebtedness. Seller shall cause (i) the principal amount of long-
------------
term indebtedness for borrowed money of the Acquired Companies outstanding
immediately prior to the Closing not to exceed the principal amount of the Long-
Term Debt outstanding as of the date of this Agreement and (ii) any additional
indebtedness for borrowed money incurred since the date of this Agreement to be
repaid in full prior to Closing as contemplated in accordance with Section
-------
3.2(c)(v).
- ---------
ARTICLE 7
ADDITIONAL AGREEMENTS
7.1 Access to Information and Confidentiality.
-----------------------------------------
(a) Access. Between the date hereof and the Closing, Seller (i) shall
------
give Buyer and its authorized representatives reasonable access, during regular
business hours and upon reasonable advance Notice, to such employees, plants,
pipelines, and other facilities, and such books and records, of the Acquired
Companies, as are reasonably necessary to allow Buyer and its authorized
representatives to make such inspections as they may reasonably require to
verify the accuracy of any representation or warranty contained in Article 4 and
---------
(ii) shall cause officers of the Acquired Companies to furnish Buyer and its
authorized representatives with such financial and operating data and other
information with respect to the Acquired Companies and the Related Companies as
Buyer may from time to time reasonably request and with respect to
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<PAGE>
the Related Companies, as Seller or any Acquired Company then has on hand.
Seller shall have the right to have a representative present at all times of any
such inspections, interviews, and examinations conducted at or on the offices or
other facilities or properties of Seller or the Acquired Companies.
Additionally, Buyer shall hold in confidence all such information on the terms
and subject to the conditions contained in the Confidentiality Agreement. Buyer
shall have no right of access to, and Seller shall have no obligation to provide
to Buyer, (1) bids received from others in connection with the transactions
contemplated by this Agreement and information and analysis (including financial
analysis) relating to such bids, (2) any information the disclosure of which
Seller has concluded may jeopardize any privilege available to any Acquired
Company, any Related Company or Seller relating to such information or would
cause Seller or any Acquired Company to breach a confidentiality obligation or
(3) except to the extent contemplated in Section 7.1(d), Retained E-Mail. Buyer
--------------
agrees that if Buyer or its authorized representatives receive, or if the
information (whether in electronic mail format, on computer hard drives or
otherwise) held by any of the Acquired Companies or any of the Related Companies
as of the Closing includes information that relates to the business operations
or other strategic matters of the Seller, PG&E or any of their Affiliates (other
than the Acquired Companies) such information shall be held in confidence on the
terms and subject to the conditions contained in the Confidentiality Agreement,
but the term of the restriction on the disclosure and use of such information
shall continue in effect as to such information for a period of two years from
the Closing. Buyer further agrees that if Seller or an Acquired Company
inadvertently furnishes to Buyer copies of or access to information that is
subject to clause (2) of the second preceding sentence, Buyer will, upon
Seller's request promptly return same to Seller or such Acquired Company
together with any and all extracts therefrom or notes pertaining thereto
(whether in electronic or other format). Buyer shall indemnify, defend, and hold
harmless Seller and its Affiliates from and against any Losses asserted against
or suffered by the Seller Indemnitees relating to, resulting from, or arising
out of, examinations or inspections made by Buyer or its authorized
representatives pursuant to this Section 7.1(a).
--------------
(b) Retention by Seller. Buyer agrees that Seller may retain (i) a copy of
-------------------
all materials included in the Data Room, together with a copy of all documents
referred to in such materials, (ii) all books and records prepared in connection
with the transactions contemplated by this Agreement, including bids received
from others and information relating to such bids, (iii) copies of any books and
records which may be relevant in connection with the defense of (A) the matters
referred to in Article 12 or (B) disputes arising hereunder, (iv) all
----------
consolidating and consolidated financial information and all other accounting
books and records prepared or used in connection with the preparation of
financial statements of Seller or PG&E, and (v) all Retained E-Mail.
(c) Record Preservation by Buyer. Buyer agrees that it shall preserve and
----------------------------
keep all books and records relating to the business or operations of the
Acquired Companies or the Related Companies on or before the Closing Date in
Buyer's possession for a period of at least 6 years from the Closing Date. After
such 6-year period, before Buyer may dispose of any of such books and records,
at least 90 calendar days' prior Notice to such effect shall be given by Buyer
to Seller, and Seller shall be given an opportunity, at its cost and expense, to
remove and retain all or any part of such books and records that Buyer elects to
dispose of. Notwithstanding the foregoing, Buyer agrees that it shall preserve
and keep all books and records of the Acquired Companies relating to any
investigation instituted by a Governmental Entity or any litigation
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<PAGE>
(whether or not existing on the Closing Date) if it is reasonably likely that
such investigation or litigation may relate to matters occurring prior to the
Closing, without regard to the 6-year period set forth in this Section 7.1(c).
--------------
(d) Cooperation. Each Party agrees that it will cooperate with and make
-----------
available to the other Party during normal business hours, all books and
records, information, and employees (without substantial disruption of
employment) retained and remaining in existence after the Closing Date which are
necessary or useful in connection with (i) any Tax inquiry, audit,
investigation, or dispute, (ii) any litigation or investigation, or (iii) any
other matter requiring any such books and records, information, or employees for
any reasonable business purpose, provided that (a) with respect to providing
Buyer access to Retained E-Mail, Seller shall provide access to Buyer upon
Buyer's request, and shall furnish Buyer with copies of, only those portions of
the Retained E-Mail that pertain or relate to any of the Acquired Companies or
its business or assets and (b) Seller shall not be required by this Section
-------
7.1(d) to make available to Buyer any information referred to in clause (1) of
- ------
the fourth sentence of Section 7.1(a) or clause (ii) of Section 7.1(b), or any
-------------- --------------
of the items referred to in Section 7.10. The Party requesting any such books
------------
and records, information, or employees shall bear all of the out-of-pocket costs
and expenses (including attorneys' fees and reimbursement for the reasonable
salaries and employee benefits for those employees who are made available)
reasonably incurred in connection with providing such books and records,
information, or employees. Seller may require certain financial information
relating to the Acquired Companies' businesses for periods prior to the Closing
Date for the purpose of filing federal, state, local, and foreign Tax Returns
and other governmental reports, and Buyer agrees to furnish such information to
Seller at Seller's request and expense.
Stock Purchase Agreement
Page 31
<PAGE>
7.2 Regulatory and Other Authorizations and Consents.
------------------------------------------------
(a) Filings. Each Party shall use all commercially reasonable efforts to
-------
obtain all authorizations, consents, orders, and approvals of, and to give all
notices to and make all filings with, all Governmental Entities (including those
pertaining to the Governmental Approvals) and other Third Parties that may be or
become necessary for its execution and delivery of, and the performance of its
obligations under this Agreement and will cooperate fully with the other Party
in promptly seeking to obtain all such authorizations, consents, orders, and
approvals, giving such notices, and making such filings. To the extent required
by the HSR Act, each Party shall (i) file or cause to be filed, as promptly as
practicable but in no event later than the fifth business day after the
execution and delivery of this Agreement, with the Federal Trade Commission and
the United States Department of Justice, all reports and other documents
required to be filed by such Party under the HSR Act concerning the transactions
contemplated hereby and (ii) promptly comply with or cause to be complied with
any requests by the Federal Trade Commission or the United States Department of
Justice for additional information concerning such transactions, in each case so
that the waiting period applicable to this Agreement and the transactions
contemplated hereby under the HSR Act shall expire as soon as practicable after
the execution and delivery of this Agreement. Each Party agrees to request, and
to cooperate with the other Party in requesting, early termination of any
applicable waiting period under the HSR Act. Buyer shall pay the filing fees
payable in connection with the filings by the Parties required by the HSR Act.
In addition, prior to the Closing the Buyer and the Seller agree that Seller may
continue to pursue and prosecute in good faith the Pending FERC and RRC
Proceedings.
(b) Additional Undertakings of Buyer. Without limiting the generality of
--------------------------------
Buyer's undertakings pursuant to Section 7.2(a), Buyer shall:
--------------
(i) take promptly any or all of the following actions to the extent
necessary to eliminate any concerns on the part of any Government Antitrust
Authority regarding the legality under any antitrust law of Buyer's
acquisition of the Shares: entering into negotiations, providing
information, making proposals, entering into and performing agreements to
dispose of assets or properties, holding separate (through the
establishment of a trust or otherwise) particular assets or categories of
assets, or businesses, of the Acquired Companies, or agreeing to dispose of
one or more assets or properties (whether owned by Buyer or its Affiliates
or the Acquired Companies) following the Closing; provided, however, that
-------- -------
nothing in this Agreement shall require the Buyer, its Affiliates, or the
Acquired Companies to dispose of or sell assets or properties, hold
separate particular assets or categories of assets, or businesses, or agree
to dispose of or hold separate one or more assets or properties or take any
other action that could have an adverse impact on the Buyer, its
Affiliates, or the Acquired Companies, except that the Buyer, its
Affiliates, or the Acquired Companies shall, if required, agree to dispose
of or sell assets or properties with an aggregate fair market value of
$400,000,000 or less and to agree to such reasonable undertakings necessary
to consummate such disposition(s) or sale(s) (provided that such
undertakings do not expand Buyer's obligations under this Section
7.2(b)(i)), as a condition to eliminate a Government Antitrust Authority's
concerns regarding the legality under any antitrust law of Buyer's
acquisition of the Shares; and
Stock Purchase Agreement
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<PAGE>
(ii) use commercially reasonable efforts (including taking the steps
contemplated by Section 7.2(b)(i)) to prevent the entry in a judicial or
-----------------
administrative proceeding brought under any antitrust law by any Government
Antitrust Authority or any other party for a permanent or preliminary
injunction or other order that would make consummation of the transactions
contemplated by this Agreement unlawful or that would prevent or delay such
consummation; and
(iii) take promptly, in the event that such an injunction or order has
been issued in such a proceeding, any and all commercially reasonable
steps, including the appeal thereof, the posting of a bond or the steps
contemplated by Section 7.2(b)(i), necessary to vacate, modify, or suspend
-----------------
such injunction or order so as to permit such consummation on a schedule as
close as possible to that contemplated by this Agreement.
(c) Transfer. If the transfer of any instrument, contract, license, lease,
--------
permit, or other document to Buyer hereunder shall require the consent of any
party thereto other than Seller, then this Agreement shall not constitute an
agreement to assign the same, and such item shall not be assigned to or assumed
by Buyer, if an actual or attempted assignment thereof would constitute a breach
thereof or default thereunder. In such case, Seller and Buyer shall cooperate
and each shall use commercially reasonable efforts to obtain such consents to
the extent required of such other parties and, if and when any such consents are
obtained, to transfer the applicable instrument, contract, license, lease,
permit, or other document. If any such consent cannot be obtained, Seller shall
cooperate in any reasonable arrangement designed to obtain for Buyer all
benefits, privileges, obligations and privileges of the applicable instrument,
contract, license, lease, permit, or document, including possession, use, risk
of loss, potential for gain and dominion, control and demand. Buyer agrees that
if any of the assets referred to in Section 7.10 require the consent of any
------------
party thereto other than an Acquired Company, the Seller or any of its
Affiliates and such consent is not received prior to Closing, Seller and Buyer
shall cooperate and each shall use commercially reasonable efforts to obtain
such consents to the extent required of such other parties and, if and when any
such consents are obtained, to transfer the applicable instrument, contract,
license, lease, permit, or other document, and (b) if any such consent cannot be
obtained, Buyer shall cooperate in any reasonable arrangement designed to obtain
for Seller all benefits, privileges, obligations and privileges of the
applicable instrument, contract, license, lease, permit, or document, including
possession, use, risk of loss, potential for gain and dominion, control and
demand.
(d) Third Party Consents. Buyer will use its commercially reasonable
--------------------
efforts to assist Seller in obtaining any consents of Third Parties necessary or
advisable in connection with the transactions contemplated by this Agreement,
including providing to such Third Parties such financial statements and other
publicly available financial information with respect to Buyer as such Third
Parties may reasonably request.
7.3 Employees and Parent Employee Plans.
-----------------------------------
(a) Transfer of Employees. On or prior to the Closing, the employees
---------------------
listed on Schedule 7.3(a) shall be transferred to and become, or otherwise
---------------
remain, employees of Seller or one of its Affiliates (other than the Acquired
Companies)(the "Transferred Employees").
Stock Purchase Agreement
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<PAGE>
(b) Withdrawal from Parent Employee Plans. As of the Closing, the
-------------------------------------
Acquired Companies shall cease to participate in any Parent Employee Plan.
(c) Severance Benefits. For a period of not less than 12 months
------------------
following the Closing Date Buyer agrees to provide, or cause an Affiliate of
Buyer to provide, to those individuals who are employees of the Acquired
Companies on the Closing (other than Transferred Employees) with severance pay
and continued medical (if any) and out-placement (if any) benefits that are not
less than the severance benefits such employees would be entitled to receive
under the Acquired Companies' severance programs or, if applicable, the
Officer's Severance Policy of PG&E as in effect for any such employee
immediately prior to the Closing.
(d) Service Credit. Buyer shall, and shall cause the Acquired Companies
--------------
to, grant all individuals who are employees of the Acquired Companies on the
Closing Date credit under the plans and benefit programs of Buyer and its
Affiliates for all service with the Acquired Companies prior to the Closing for
all purposes for which such service was recognized by the Acquired Companies
(other than benefit accrual under any defined benefit pension plan of Buyer or
any of its Affiliates). Credit for service with the Acquired Companies shall
include the cash balance pay credits, the Extended Illness Bank, Paid Time off,
and employee recognition awards, so long as such crediting would not violate
ERISA or the Code. In addition, Buyer shall, and shall cause the Acquired
Companies to, waive any pre-existing condition exclusions and actively-at-work
requirements and provide that any expenses incurred on or before the Closing
Date by any such individuals or their covered dependents shall be taken into
account for purposes of satisfying applicable deductible, coinsurance and
maximum out-of-pocket provisions under health plans covering such individuals
after the Closing in the plan year in which the Closing occurs.
(e) Indemnity. Buyer shall indemnify Seller and hold it harmless from and
---------
against any damages, liabilities, costs or expenses which may be incurred or
suffered by Seller or any of its Affiliates (other than the Acquired Companies)
by reason of Buyer's failure to comply with any of the provisions of this
Section 7.3, and Seller shall indemnify the Buyer and its Affiliates (including
- -----------
the Acquired Companies after the Closing) and hold each of them harmless from
and against any damages, liabilities, costs or expenses which may be incurred or
suffered by any of them by reason of Seller's failure to comply with any of the
provisions of this Section 7.3.
-----------
(f) [Intentionally Omitted].
(g) [Intentionally Omitted].
(h) Stay-on Bonus. Buyer shall, or shall cause an Affiliate to, pay the
-------------
stay-on bonuses to the eligible employees of the Acquired Companies as provided
in Schedule 7.3(h).
---------------
(i) Solicitation. For a period of 12 months after the date hereof, Buyer
------------
and its subsidiaries shall not, without the prior written consent of Seller,
directly or indirectly, solicit (other than pursuant to general solicitations of
employees not directed specifically at an employee of Seller or its Affiliates),
encourage, induce, or permit any of the Transferred Employees or any other
employee of Seller or its Affiliates (other than the Acquired Companies) to
become an employee, contractor, or consultant of the Buyer or its Affiliates.
For a period of
Stock Purchase Agreement
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<PAGE>
12 months after the date hereof, Seller and its subsidiaries shall not, without
the prior written consent of Buyer, directly or indirectly, solicit (other than
pursuant to general solicitations of employees not directed specifically at any
employee of the Acquired Companies), encourage, induce, or permit any employee
of any of the Acquired Companies (other than the Transferred Employees) to
become an employee, contractor, or consultant of the Seller or its Affiliates.
(j) Vesting. Prior to the Closing, Seller shall take all action necessary
-------
such that, immediately prior to the Closing, all employees of the Acquired
Companies (other than the Transferred Employees) who participate in the PG&E
Corporation Retirement Savings Plan (the "Savings Plan") shall (i) become fully
------------
vested in any unvested portion their accounts under the Savings Plan, and (ii)
be entitled to a lump sum distribution from the Savings Plan within the meaning
of Code Section 401(k)(10)(B) as soon as practicable after the Closing.
(k) Transfer. Seller shall cause the trustee of any master trust in which
--------
any of the Company Employee Plans participates (each, a "Master Trust"), as of
------------
the Master Trust's valuation date on or next following the Closing (the
"Valuation Date"), to value, in a manner consistent with its prior practice,
--------------
each such Company Employee Plan's allocable share of the assets of the Master
Trust (each such allocable share, a "Plan Asset Value"). With respect to each
----------------
such Company Employee Plan, as soon as practicable after the determination of
the Plan Asset Value, Seller shall cause the trustee of the Master Trust to
transfer to a successor tax-qualified trust designated by Buyer an amount in
cash equal to the Plan Asset Value (i) increased by interest during the period
from the Valuation Date to the date of transfer (the "Interim Period") at an
--------------
interest rate equal to the interest rate credited on short-term investments held
in the Master Trust (the "Short-Term Rate") and (ii) reduced by benefit payments
---------------
to employees or their beneficiaries made in accordance with the provisions of
such Company Employee Plan during the Interim Period plus interest on such
benefit payments at the Short-Term Rate from the date of payment until the
transfer date.
(l) Participation. Seller shall, or shall cause the Acquired Companies
-------------
to, take all action necessary such that, as of the Closing, the Acquired
Companies shall be the only employers that participate in the PG&E Gas
Transmission - Texas Corporation Retirement Plan.
(m) Indemnity. Except for liabilities and obligations expressly assumed
---------
by Buyer pursuant to this Agreement, Seller shall indemnify and hold harmless
the Buyer Indemnitees against any and all Losses incurred or suffered by any of
the Buyer Indemnitees arising out of or relating to the funding, operation,
administration, amendment, termination of, or withdrawal from, any employee
benefit plan, program or arrangement established, maintained or contributed to
by Seller or any of its Affiliates, other than a Company Employee Plan, whether
arising out of or relating to any event or state of facts occurring or existing
before, on or after the Closing, and including Losses arising under Title IV of
ERISA, Section 302 of ERISA and Sections 412 and 4971 of the Code. Except for
any breach of a representation or warranty of Seller in Section 4.14, Buyer
------------
shall indemnify and hold harmless the Seller Indemnitees from and against any
Losses incurred by any of the Seller Indemnitees relating to or arising out of
the funding, operation, amendment, termination of, or withdrawal from, any
Company Employee Plan or employee plan of Buyer or any Affiliate of Buyer,
whether arising out of or relating to any event or state of facts occurring or
existing before or after the Closing, and including Losses arising under Title
IV of ERISA, Section 302 of ERISA, and Sections 412 and 4971 of the Code.
Stock Purchase Agreement
Page 35
<PAGE>
7.4 Public Announcements. The initial press release or releases to be
--------------------
issued in connection with the execution of this Agreement shall be mutually
agreed upon by the Parties prior to the issuance thereof. Prior to the fifth
business day after the Closing, Buyer and Seller shall consult with each other
before they or any of their Affiliates issue any other press release or
otherwise make any other public statement with respect to this Agreement or the
transactions contemplated hereby. For a 15 day period after any termination of
the Agreement, Buyer and Seller shall consult with each other before they or any
of their Affiliates issue any other press release or otherwise make any other
public statement with respect to such termination. Buyer and Seller and their
Affiliates shall not issue any such other press release or make any such other
public statement prior to any such consultation (but no approval thereof shall
be required), except as may be required by Applicable Law.
7.5 Amendment of Schedules. Each Party agrees that, with respect to the
----------------------
representations and warranties of such Party contained in this Agreement, such
Party shall have the continuing obligation until the Closing to supplement or
amend promptly the Schedules to such Party's Disclosure Letter with respect to
any matter hereafter arising or discovered which, if existing or known at the
date of this Agreement, would have been required to be set forth or described in
the Schedules. For all purposes of this Agreement, including for purposes of
determining whether the conditions set forth in Articles 8 and 9 have been
---------- -
fulfilled, the Schedules to a Party's Disclosure Letter shall be deemed to
include only that information contained therein on the date of this Agreement
and shall be deemed to exclude all information contained in any supplement or
amendment thereto, but if the Closing shall occur, then all matters disclosed
pursuant to any such supplement or amendment at or prior to the Closing shall be
waived and no Party shall be entitled to make a claim thereon pursuant to the
terms of this Agreement.
7.6 Fees and Expenses. Except as otherwise expressly provided in this
-----------------
Agreement, all fees and expenses, including fees and expenses of counsel,
financial advisors, and accountants, incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the Party incurring
such fee or expense, whether or not the Closing shall have occurred. Buyer
shall be obligated to pay any and all costs of any audit of the Acquired
Companies as may be required to enable Buyer to complete and file any filing by
Buyer or an affiliate of Buyer with the Securities and Exchange Commission.
7.7 Transfer Taxes. All sales, transfer, filing, recordation,
--------------
registration and similar Taxes and fees arising from or associated with the
transactions contemplated hereunder, whether levied on Buyer or Seller, shall be
borne by Buyer, and Buyer shall file all necessary documentation with respect
to, and make all payments of, such Taxes and fees on a timely basis and if
required by Applicable Law, Seller shall and shall cause its Affiliates to join
the execution of any such documentation.
7.8 Action Regarding Indemnities. Buyer and Seller shall each use
----------------------------
commercially reasonable efforts to not take any action after the Closing that
would limit, reduce or extinguish any indemnity or right of contribution from a
Third Party which may be available to Seller, Buyer, or the Acquired Companies,
and will use commercially reasonable efforts to take all necessary action, of
which it has actual knowledge, to preserve claims under any such indemnity.
Stock Purchase Agreement
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<PAGE>
7.9 [Intentionally omitted].
---------------------
7.10 Excluded Assets. Notwithstanding Article 6 hereof, the
--------------- ---------
transactions contemplated by this Agreement exclude, and prior to the Closing
Date Seller may cause an Acquired Company to transfer to Seller or any of its
Affiliates (other than the Acquired Companies and the Related Companies) the
following:
(a) the assets listed or described on Schedule 7.10;
-------------
(b) except to the extent contemplated in Section 7.14, all insurance
------------
policies and rights under any insurance policies in respect to any and all
claims made under such policies whether such claims are asserted before or after
the Closing Date and all rights to any proceeds payable under any such policy,
other than claims made, and proceeds with respect to periods, prior to the
Closing Date;
(c) the information described in the fourth sentence of Section 7.1(a);
--------------
(d) the PG&E Marks.
Notwithstanding anything to the contrary provided elsewhere in this
Agreement, Seller's representations and warranties in Article 4 shall not apply
---------
to any of the items described in clauses (a) through (d) of the immediately
preceding sentence.
7.11 Transition Services. Between the date hereof and the Closing, Buyer
-------------------
and Seller shall each cooperate to develop and negotiate the terms of a
Transition Services Agreement under which Seller or its Affiliates will perform
transition activities reasonably requested by Buyer as to the businesses of the
Acquired Companies for a period not to exceed 6 months.
7.12 Guarantees; Wilson Storage Capacity; and Other Affiliate Contracts.
------------------------------------------------------------------
Buyer and Seller shall cooperate and use commercially reasonable efforts to
cause as of the Closing Date, (i) the Guarantees and any liabilities related
thereto to be released as to Seller or such Affiliate and (ii) substitute
arrangements, if required, of Buyer or its Affiliates to be in effect. Unless
otherwise agreed to by the Buyer, prior to or contemporaneous with the Closing
the firm storage contract between PG&E Energy Trading Gas Corporation and PG&E
Texas Pipeline, L.P. relating to the Wilson Storage Facility will be terminated.
Prior to or contemporaneously with the Closing, all other agreements between any
of the Acquired Companies and the Seller or any of its Affiliates (other than
the Acquired Companies and the Related Companies) shall be canceled or
terminated, other than the First Amended and Restated Remittance Agreement,
dated as of January 27, 2000, between PG&E and GTT which shall continue in
effect after the Closing in accordance with its terms.
7.13 Use of PG&E Marks. PG&E Marks will appear on some of the assets of
-----------------
the Acquired Companies, including on signage throughout the real property of the
Acquired Companies, and on supplies, materials, stationery, brochures,
advertising materials, manuals and similar consumable items of the Acquired
Companies. Buyer acknowledges and agrees that it obtains no right, title,
interest, license or any other right whatsoever to use the PG&E Marks. In
Stock Purchase Agreement
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<PAGE>
furtherance thereof, Buyer shall, (a) within 180 days after the Closing Date,
remove the PG&E Marks from the assets of the Acquired Companies, including
signage on the real and personal property of the Acquired Companies, and, if
required by Seller in writing, provide written verification thereof to Seller
promptly after completing such removal and (b) within two weeks after the
Closing Date, return or destroy (with proof of destruction) all other assets of
the Acquired Companies that contain any PG&E Marks that are not removable.
Buyer agrees never to challenge Seller's (or its Affiliates') ownership of the
PG&E Marks or any application for registration thereof or any registration
thereof or any rights of Seller or its Affiliates therein as a result, directly
or indirectly, of its ownership of the Acquired Companies. Buyer will not do
any business or offer any goods or services under the PG&E Marks. Buyer will
not send, or cause to be sent, any correspondence or other materials to any
Person on any stationery that contains any PG&E Marks or otherwise operate the
Acquired Companies in any manner which would or might confuse any Person into
believing that Buyer has any right, title, interest, or license to use the PG&E
Marks.
7.14 Insurance. Buyer acknowledges and agrees that, following the
---------
Closing, the Acquired Company Insurance Policies shall be terminated or modified
to exclude coverage of all or any portion of the Acquired Companies by Seller or
PG&E (but no such termination shall adversely affect any claims of the Acquired
Companies existing at the Closing), and, as a result, Buyer shall be obligated
at or before Closing to obtain at its sole cost and expense replacement
insurance, including insurance required by any third party to be maintained by
any of the Acquired Companies. Buyer further acknowledges and agrees that Buyer
will need to provide to certain Governmental Entities and third parties evidence
of such replacement or substitute insurance coverage for the continued
operations of the businesses of the Acquired Companies following the Closing.
Notwithstanding Section 7.10(b), if any claims are made or losses occur prior to
---------------
the Closing Date that relate solely to the business activities of the Acquired
Companies and such claims, or the claims associated with such losses, may be
made against the policies retained by Seller or its Affiliates pursuant to
Section 7.10 or under policies otherwise retained by Seller or its Affiliates
- ------------
after the Closing, then Seller shall use its reasonable commercial efforts so
that the Acquired Companies can file, notice, and otherwise continue to pursue
these claims pursuant to the terms of such policies.
7.15 Disclaimer of Warranties. Notwithstanding anything contained in
------------------------
this Agreement, it is the explicit intent of each Party that Seller is not
making any representations or warranties whatsoever, express or implied, beyond
those expressly given in Article 4 of this Agreement, and it is understood that,
---------
except for the representations and warranties contained herein, Buyer takes the
Shares and the business and assets of the Acquired Companies "as is" and "where
is." Without limiting the generality of the immediately foregoing, except for
the representations and warranties contained in Article 4, the Seller hereby
---------
expressly disclaims and negates any representation or warranty, expressed or
implied, at common law, by statute, or otherwise, relating to (a) the condition
of the assets of the Acquired Companies (including any implied or expressed
warranty of merchantability or fitness for a particular purpose, or of
conformity to models or samples of materials) or (b) any infringement by Seller
or any of its Affiliates (including the Acquired Companies and the Related
Companies) of any patent or proprietary right of any Third Party; it being the
intention of Seller and Buyer that the business and assets of
Stock Purchase Agreement
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<PAGE>
the Acquired Companies are to be accepted by Buyer in their present condition
and state of repair. It is understood that any cost estimates, projections, or
other predictions contained or referred to in the offering materials that have
been provided to Buyer are not and shall not be deemed to be representations or
warranties of Seller or any of its Affiliates or the Acquired Companies.
ARTICLE 8
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment on or prior to the Closing
Date of each of the following conditions:
8.1 Representations and Warranties True. All the representations and
-----------------------------------
warranties of Buyer contained in this Agreement, and in any agreement,
instrument, or document delivered pursuant hereto or in connection herewith on
or prior to the Closing Date that are qualified as to materiality shall be true
and correct on and as of the date hereof and on and as of the Closing Date as if
made on such date, and each of the representations and warranties of Buyer
herein and therein that is not so qualified as to materiality shall be true and
correct in all material respects on and as of the date hereof and on and as of
Closing Date as if made on and as of such date, in each such case except as
affected by transactions permitted by this Agreement and except to the extent
that any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct as
set forth above as of such specified date.
8.2 Covenants and Agreements Performed. Buyer shall have performed and
----------------------------------
complied with in all material respects all covenants and agreements required by
this Agreement to be performed or complied with by it on or prior to the Closing
Date, and all deliveries contemplated by Section 3.3 shall have been made.
-----------
8.3 HSR Act and Consents. All waiting periods (and any extensions
--------------------
thereof) applicable to this Agreement and the transactions contemplated hereby
under the HSR Act shall have expired or been terminated, and there shall have
been obtained any and all other Governmental Approvals specified on Schedules
---------
4.6 and 5.4.
- --- ---
8.4 Legal Proceedings. No preliminary or permanent injunction or other
-----------------
order, decree, or ruling issued by a Governmental Entity, and no statute, rule,
regulation, or executive order promulgated or enacted by a Governmental Entity,
shall be in effect which restrains, enjoins, prohibits, or otherwise makes
illegal the consummation of the transactions contemplated hereby.
Stock Purchase Agreement
Page 39
<PAGE>
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment on or prior to the Closing
Date of each of the following conditions:
9.1 Representations and Warranties True. All the representations and
-----------------------------------
warranties of Seller contained in this Agreement, and in any agreement,
instrument, or document delivered pursuant hereto or in connection herewith on
or prior to the Closing Date that are qualified as to materiality shall be true
and correct on and as of the date hereof and on and as of the Closing Date as if
made on such date, and each of the representations and warranties of Seller
herein and therein that is not so qualified as to materiality shall be true and
correct in all material respects on and as of the date hereof and on and as of
the Closing Date as if made on and as of such date, in each such case except as
affected by transactions permitted by this Agreement and except to the extent
that any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct as
set forth above as of such specified date.
9.2 Covenants and Agreements Performed. Seller shall have performed and
----------------------------------
complied with in all material respects all covenants and agreements required by
this Agreement to be performed or complied with by it on or prior to the Closing
Date, and all deliveries contemplated by Section 3.2 shall have been made.
-----------
9.3 HSR Act and Consents. All waiting periods (and any extensions
--------------------
thereof) applicable to this Agreement and the transactions contemplated hereby
under the HSR Act shall have expired or been terminated, and there shall have
been obtained any and all other Governmental Approvals specified on Schedules
---------
4.6 and 5.4.
- --- ---
9.4 Legal Proceedings. No preliminary or permanent injunction or other
-----------------
order, decree or ruling issued by a Governmental Entity, and no statute, rule,
regulation or executive order promulgated or enacted by a Governmental Entity,
shall be in effect which restrains, enjoins, prohibits, or otherwise makes
illegal the consummation of the transactions contemplated hereby.
9.5 Repayment of Short-Term Debt of the Acquired Companies. Prior to or
------------------------------------------------------
concurrently with the Closing, all revolving credit facilities of any of the
Acquired Companies, the TECO Margin Loan and any indebtedness of any of the
Acquired Companies for borrowed money owed to the Seller or its corporate parent
will be repaid in full.
9.6 Consents. All of the consents and approvals from third parties
--------
referred to in items 1 and 2 of Schedule 4.6 shall have been obtained.
------------
Stock Purchase Agreement
Page 40
<PAGE>
ARTICLE 10
TERMINATION, AMENDMENT, AND WAIVER
10.1 Termination. This Agreement may be terminated and the transactions
-----------
contemplated hereby abandoned at any time prior to the Closing in the following
manner:
(a) by mutual written consent of Seller and Buyer;
(b) subject to the obligations of Buyer set forth in Section 7.2(b), by
--------------
either Seller or Buyer, if any Governmental Entity with jurisdiction over such
matters shall have issued an order or injunction restraining, enjoining, or
otherwise prohibiting the sale of the Shares hereunder and such order, decree,
ruling, or other action shall have become final and unappealable; or
(c) by either Seller or Buyer, if the Closing shall not have occurred on
or before 180 days after the date of this Agreement, but the right to terminate
this Agreement under this Section 10.1(c) shall not be available to a Party
---------------
whose failure to fulfill any obligation under this Agreement shall have been the
cause of, or shall have resulted in, the failure of the Closing to occur prior
to such date.
10.2 Effect of Termination. If a Party terminates this Agreement under
---------------------
Section 10.1, then such Party shall promptly give Notice to the other Party
specifying the provision hereof pursuant to which such termination is made, and
this Agreement shall become void and have no effect, except that the agreements
contained in this Article 10 and in Article 13 and Sections 7.1(a), 7.3(i), 7.4,
---------- ---------- --------------- ------ ---
and 7.6 shall survive the termination hereof. Nothing contained in this Section
--- -------
10.2 shall relieve either Party from liability for damages actually incurred as
- ----
a result of any breach of this Agreement. No termination of this Agreement
shall affect the obligations of the Parties pursuant to the Confidentiality
Agreement, except to the extent specified in such letter agreement.
10.3 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed by or on behalf of both Parties.
10.4 Waiver. Either Party may (i) waive any inaccuracies in the
------
representations and warranties of the other contained herein or in any document,
certificate, or writing delivered pursuant hereto or (ii) waive compliance by
the other Party with any of the other Party agreements or fulfillment of any
conditions to its own obligations contained herein. Any agreement on the part
of a Party to any such waiver shall be valid only if set forth in an instrument
in writing signed by or on behalf of such Party. No failure or delay by a Party
in exercising any right, power, or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power, or
privilege.
ARTICLE 11
TAX MATTERS
11.1 Tax Sharing Agreements. Except for the Tax Sharing Agreement dated
----------------------
as of July 31, 1997 between Valero Energy Corporation (now known as GTT), Valero
Refining and
Stock Purchase Agreement
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<PAGE>
Marketing Company (now known as Valero Energy Corporation) and PG&E Corporation
(the "Valero Tax Agreement"), and the agreements with respect to Taxes set forth
in Article VIII of the Agreement and Plan of Merger, dated as of November 18,
------------
1996, between TECO Pipeline Company, et al and Pacific Gas Transmission Company
(the "TECO Tax Agreement" and, together with the Valero Tax Agreement, the
"Retained Tax Agreements"), all Tax allocation or Tax sharing agreements or
arrangements between either Company or any of the other Acquired Companies and
any other Person, including Seller or PG&E, hereby are terminated as of the
Effective Date, and no cash amounts shall be paid in respect of any amounts
owing under such agreements as of such date and all rights and obligations of
either Company and the other Acquired Companies with respect to Taxes shall be
as provided herein. Seller shall assume all obligations relating to Taxes and
rights of the Acquired Companies under the Valero Tax Agreement and under the
TECO Tax Agreement with respect to any Pre-Closing Tax Period. Seller shall be
responsible for and shall pay all Losses relating to Taxes with respect to any
Pre-Closing Tax Period under the Retained Tax Agreements, shall be entitled to
represent the interests of the Acquired Companies with respect to such matters
and shall be entitled to any payments to which any of the Acquired Companies may
be entitled thereunder. Each Acquired Company shall pay over (or cause the
recipient of any such payment to pay over) to Seller any such payments received
with respect to the Acquired Company within 10 business days after receipt
thereof. Any payments not made within such 10 business day period shall bear
interest from the date received by the Buyer or an Acquired Company at the Prime
Rate.
11.2 Tax Return Preparation. Each Pre-Closing Tax Return shall be
----------------------
prepared and filed by (or shall be the responsibility of) Seller. All such Pre-
Closing Tax Returns shall be filed on a basis consistent with prior Tax Returns
filed by Seller or PG&E with respect to the Acquired Companies. Seller shall
timely pay or cause to be paid all Taxes shown on such Pre-Closing Tax Returns.
Except as provided in Section 11.12 and subject to Section 11.11, Seller or PG&E
------------- -------------
will include the income of the Acquired Companies (including any deferred income
triggered into income by Treasury Regulations Sections 1.1502-13 and 1.1502-14,
and any excess loss accounts taken into income under Treasury Regulation Section
1.1502-19) on the Seller or PG&E consolidated federal income Tax Returns for all
periods through the Closing and pay any federal income Taxes attributable to
such income. Buyer shall cause the Acquired Companies to furnish Tax information
to Seller or PG&E for inclusion in the federal and state consolidated or
combined income or franchise Tax returns in accordance with the past custom and
practice of the Acquired Companies. All Tax Returns which (i) are a Post-
Closing Tax Return, or (ii) are required to be filed by or with respect to any
Acquired Company for a Tax period ending after the Closing Date, including any
Straddle Return, shall be prepared and filed by Buyer, subject to the rights to
payment under Sections 11.14 and 11.16. Buyer shall timely pay or cause to be
-------------- -----
paid all Taxes shown on such Tax Returns.
11.3 Straddle Period Tax Allocation. With respect to any Straddle
------------------------------
Period, to the extent permitted by Applicable Law, Seller or Buyer shall elect
to treat the Closing Date as the last day of the Tax period. If Applicable Law
will not permit the Closing Date to be the last day of a period, the Tax
attributable to the operations of the Acquired Companies for the portion of the
period up to and including the Closing Date shall be (i) in the case of real or
personal property Taxes, Taxes imposed by the State of Texas and based on income
or capital, or a flat minimum dollar amount tax, the total amount of such Taxes
multiplied by a fraction, the numerator of
Stock Purchase Agreement
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<PAGE>
which is the number of days in the partial period through and including the
Closing Date and the denominator of which is the total number of days in such
Straddle Period, (ii) in the case of all other Taxes based on or in respect of
income, the Tax computed on the basis of the taxable income or loss of the
Acquired Companies for such partial period as determined from its books and
records, and (iii) in the case of all other Taxes, on the basis of the actual
activities or attributes of the Acquired Companies for such partial period as
determined from its books and records.
11.4 Straddle Returns. With respect to any Straddle Return, Buyer shall
----------------
deliver, at least 45 days prior to the due date for filing such Straddle Return
(including any extension) to Seller a statement setting forth the amount of Tax
that Seller owes pursuant to Section 11.14, including the allocation of taxable
-------------
income and Taxes under Section 11.3, and copies of such Straddle Return,
------------
including copies of any partnership returns, together with workpapers supporting
the allocation of partnership income, with respect to any partnerships in which
an Acquired Company owns an interest, with respect to the partnership Tax period
(or portion thereof) through the Closing Date. Seller shall have the right to
review such Straddle Returns and the allocation of taxable income and liability
for Taxes and to suggest to Buyer any reasonable changes to such Straddle
Returns no later than 15 days prior to the date for the filing of such Straddle
Returns. Seller and Buyer agree to consult and to attempt to resolve in good
faith any issue arising as a result of the review of such Straddle Returns and
allocation of taxable income and liability for Taxes and mutually to consent to
the filing as promptly as possible of such Straddle Returns. Not later than 5
days before the due date for the payment of Taxes with respect to such Straddle
Returns, Seller shall pay to Buyer an amount equal to the Taxes as agreed to by
Buyer and Seller as being owed by Seller pursuant to Section 11.14. If Buyer
-------------
and Seller cannot agree on the amount of Taxes owed by Seller with respect to a
Straddle Return, Seller shall pay to Buyer the amount of Taxes reasonably
determined by Buyer to be owed by Seller pursuant to Section 11.14. Within 10
-------------
days after such payment, Seller and Buyer shall refer the matter to an
independent "Big-Five" accounting firm agreed to by Buyer and Seller to
arbitrate the dispute. Seller and Buyer shall equally share the fees and
expenses of such accounting firm and its determination as to the amount owing by
Seller pursuant to Section 11.14 with respect to a Straddle Return shall be
-------------
binding on both Parties. Within five days after the determination by such
accounting firm, if necessary, the appropriate Party shall pay the other Party
any amount which is determined by such accounting firm to be owed. Seller shall
be entitled to reduce its obligation to pay Taxes with respect to a Straddle
Return by the amount of any estimated Taxes paid with respect to such Taxes by
or on behalf of the Acquired Companies on or before the Closing Date.
11.5 Use of Consistent Tax Practices. Any Tax Return which includes or
-------------------------------
is based on the operations, ownership, assets or activities of any of the
Acquired Companies for any Pre-Closing Period, and any Tax Return which includes
or is based on the operations, ownership, assets or activities of either Company
for any Post-Closing Tax Period to the extent the items reported on such Tax
Return might reasonably be expected to increase any Tax liability of Seller or
PG&E for any Pre-Closing Tax Period or any Straddle Period, shall be prepared in
accordance with past Tax accounting practices used by the Acquired Companies,
Seller or PG&E with respect to the Tax Returns in question (unless such past
practices are no longer permissible under applicable Tax law), and to the extent
any items are not covered by past practices (or in the event
Stock Purchase Agreement
Page 43
<PAGE>
such past practices are no longer permissible under applicable Tax law), in
accordance with reasonable Tax accounting practices selected by the Party
responsible for filing such Tax Return hereunder with the consent, not to be
unreasonably withheld or delayed, of the other Party.
11.6 Refunds or Credits. Except as otherwise set forth in this Agreement,
------------------
(i) to the extent any refunds or credits with respect to Taxes paid by the
Acquired Companies are attributable to a Pre-Closing Tax Period, such refunds or
credits shall be for the account of Seller, and (ii) to the extent that any
refunds or credits with respect to Taxes paid by the Acquired Companies are
attributable to a Post-Closing Tax Period, such refunds or credits shall be for
the account of Buyer. To the extent any refunds or credits with respect to Taxes
paid by the Acquired Companies are attributable to a Straddle Period, such
refund or credit with respect to Taxes shall be apportioned between Buyer and
Seller based on the appropriate allocation method set forth in clauses (i), (ii)
or (iii) of Section 11.3. Buyer shall cause the Acquired Companies to forward to
------------
to Seller or to reimburse Seller for any such refunds or credits for the account
of Seller within 10 business days from receipt thereof by any of Buyer, any of
its Affiliates or the Acquired Companies. Seller shall forward to Buyer or
reimburse Buyer for any refunds or credits for the account of Buyer within 10
business days from receipt thereof by Seller. Any refunds or reimbursements not
made within the 10 business day period specified above shall bear interest from
the date received by the refunding or reimbursing Party at the Prime Rate.
11.7 Filing of Amended Returns. Any amended Tax Return or claim for Tax
-------------------------
refund for any Pre-Closing Tax Period shall be filed, or caused to be filed,
only by Seller or PG&E. Seller shall not, without the prior written consent of
Buyer, make or cause to be made, any such filing, to the extent such filing, if
accepted, reasonably might be expected to increase by more than an immaterial
amount the Tax liability of Buyer for any Tax period. An amended Tax Return or
claim for Tax refund for any Straddle Period hereunder shall be filed, or caused
to be filed, by the Party responsible for filing the original Tax Return for
such Tax period hereunder, if either Buyer or Seller so requests, except that
such filing shall not be done without the consent, which shall not be
unreasonably withheld or delayed, of Seller (if the request is made by Buyer) or
of Buyer (if the request is made by Seller). Any amended Tax Return or claim
for Tax refund for any Post-Closing Tax Period shall be filed, or caused to be
filed, only by Buyer. Buyer shall not, without the prior written consent of
Seller, file, or cause to be filed, any amended Tax Return or claim for Tax
refund for any Post-Closing Tax Period to the extent that such filing, if
accepted, reasonably might be expected to increase by more than an immaterial
amount the Tax liability of PG&E, Seller, or any Affiliate for any Pre-Closing
Tax Period.
11.8 Assistance and Cooperation. Seller, Buyer, their respective
--------------------------
Affiliates, and the Acquired Companies shall cooperate (and cause their
Affiliates to cooperate) with each other and with each other's agents, including
accounting firms and legal counsel, in connection with Tax matters relating to
the Acquired Companies, including (i) preparation and filing of Tax Returns,
(ii) determining the liability and amount of any Taxes due, the right to and
amount of any refund of Taxes, and the liability and amount of any Tax Benefit
payments, (iii) examinations of Tax Returns, and (iv) any administrative or
judicial proceeding in respect of Taxes assessed or proposed to be assessed.
Each Party shall (i) retain all Tax Returns, schedules and work papers, and all
material records and other documents relating thereto, until the expiration of
the
Stock Purchase Agreement
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<PAGE>
applicable statute of limitations (including, to the extent notified by any
Party, any extensions thereof) of the Tax period to which such Tax Returns and
other documents and information relate or until the final determination of any
controversy with respect to such Tax period and until the final determination of
any payments that may be required with respect to such Tax period under this
Agreement or the Retained Tax Agreements, and (ii) give the other Party
reasonable written notice prior to transferring, destroying or discarding any
such Tax Returns, records and documents and, if the other Party so requests, the
Buyer or the Seller, as the case may be, shall allow the other Party to take
possession of such Tax Returns, records and documents. Each of the Parties shall
also make available to the other Parties, as reasonably requested and available,
personnel (including officers, directors, employees and agents) responsible for
preparing, maintaining, and interpreting information and providing information
or documents in connection with any administrative or judicial proceedings
relating to Taxes.
11.9 Reimbursement for Net Tax Carrybacks. If, after the Closing Date,
------------------------------------
Seller or any of its Affiliates receives or is credited with a refund of any Tax
attributable to the utilization or carryback of any Tax attribute (for example,
net operating losses and Tax credits) of any of the Acquired Companies arising
after the Closing Date, Seller shall pay to Buyer within 10 days of receipt an
amount equal to the amount of such refund together with any interest received
from or credited thereon by the applicable Taxing Authority, net of any Taxes
imposed upon Seller or such Affiliate by reason of the receipt of such refund or
credit. Seller and PG&E will not elect to retain any net operating loss
carryovers or capital loss carryovers of the Acquired Companies under Treasury
Regulation Section 1.1502-20(g).
11.10 Tax Deductions for Stock Option Exercises. Buyer and Seller agree
-----------------------------------------
that, to the maximum extent allowed by law, Seller shall be entitled to any Tax
deductions for compensation expense attributable to the exercise of options to
purchase stock in Seller or PG&E by employees (or former employees) of any of
the entities acquired by Buyer hereunder. To the extent Seller determines that
Seller or PG&E may not be entitled to claim such deductions, Buyer agrees that,
upon Seller's request, Buyer will cause such deductions to be claimed on the
appropriate Tax Returns identified by Seller and to remit to Seller any
resulting Tax Benefit thereby derived.
11.11 Buyer's Indemnity for Post Closing Transactions. Buyer agrees to
-----------------------------------------------
indemnify Seller for any additional Tax owed by PG&E, Seller, or any Affiliate
(including Tax owed by PG&E, Seller, or any Affiliate due to this
indemnification payment) resulting from any transaction not in the ordinary
course of business occurring on the Closing Date after Buyer's purchase of the
Shares.
11.12 Reporting of Post-Closing Transactions. Buyer and Seller agree to
--------------------------------------
report all transactions not in the ordinary course of business occurring on the
Closing Date after Buyer's purchase of the Shares on Buyer's federal income Tax
Return to the extent permitted by Treasury Regulation Section 1.1502-
76(b)(1)(ii)(B).
11.13 Closing Tax Certificate. At the Closing, Seller shall deliver to
-----------------------
Buyer a certificate signed under penalties of perjury (i) stating that it is not
a foreign corporation, foreign partnership, foreign trust or foreign estate,
(ii) providing its U.S. Employer Identification Number and (iii) providing its
address, all pursuant to Section 1445 of the Code.
Stock Purchase Agreement
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<PAGE>
11.14 Tax Allocation - Seller's Obligations. Seller shall be solely
-------------------------------------
liable for, shall pay, and shall indemnify the Buyer Indemnitees against, all
Taxes of the Acquired Companies and all Losses arising therefrom, relating to
(i) any Pre-Closing Tax Period and (ii) the portion of the Taxes for any
Straddle Period allocable to the period up to and including the Closing Date
under Section 11.3. Seller shall be entitled to reduce its obligation to pay
------------
Taxes for which it is liable pursuant to this Section 11.14 by the amount of
-------------
such Taxes paid by or on behalf of the Acquired Companies (i) on or before the
Effective Date or (ii) on or before the Closing Date with respect to Taxes
(other than Taxes based on net income) attributable to the period between the
Effective Date and the Closing Date, but only to the extent not previously
credited or otherwise taken into account.
11.15 Taxes of Other Persons. Seller agrees to indemnify the Buyer from
----------------------
and against the liability of any of the Acquired Companies (i) under Treasury
Regulation Section 1.1502-6 (or any similar provision of state, local or foreign
law) by reason of an Acquired Company's having been a member of any
consolidated, combined, or unitary group at any time on or prior to the Closing,
or (ii) with respect to any Pre-Closing Tax Period, as a transferee or
successor.
11.16 Tax Allocation - Buyer's Obligations. Buyer shall be solely
------------------------------------
liable for, shall pay, and shall indemnify the Seller Indemnitees against, all
Taxes of the Acquired Companies and all Losses arising therefrom, relating to
(i) any Post-Closing Tax Period or (ii) the portion of the Taxes for any
Straddle Period which are allocable to the period after the Closing Date under
Section 11.3.
- ------------
11.17 Tax Claim Notices. Each Party shall promptly notify the other
-----------------
Party of (i) the commencement of any demand, claim, audit, examination, action
or other proposed change or adjustment by any Taxing Authority concerning any
Tax and (ii) any other adjustment or claim which could give rise to a liability
for Taxes of the other Party or other payment pursuant to this Article 11
----------
(including pursuant to the Retained Tax Agreements) or Section 7.7, as the case
-----------
may be (each a "Tax Claim"). Such notice shall contain factual information
describing the asserted Tax Claim in reasonable detail and shall include copies
of any notice or other document received from any Taxing Authority or other
Person in respect of any such asserted Tax Claim.
11.18 Pre-Closing Tax Period Tax Claims. Seller, or an Affiliate of
---------------------------------
Seller, at its own expense, shall have the sole right to represent the Acquired
Companies' interests in any Tax Claim relating to any Pre-Closing Tax Period and
to employ counsel of its choice. Buyer shall have the right to participate in
such Tax Claim at its own expense. None of Seller or its Affiliates shall
consent to any settlement of issues relating to the Acquired Companies that
reasonably would be expected to have an adverse effect on the Taxes of any of
the Acquired Companies in any period after the Closing Date without Buyer's
consent, which consent shall not be unreasonably withheld. If Seller elects to
control the defense, compromise or settlement of any Tax Claim, Seller shall
keep Buyer informed of the progress and disposition of such Tax Claim. Buyer
shall handle any Tax Claim relating to any Tax period of the Acquired Companies
included in a Pre-Closing Tax Period which Seller elects in writing not to
control, and Buyer shall be entitled to defend, compromise or settle such Tax
Claim in its sole discretion.
Stock Purchase Agreement
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<PAGE>
11.19 Straddle Period Tax Claims. With respect to any Straddle Period,
--------------------------
Buyer shall control, and Seller, or an Affiliate of Seller, at its own expense,
shall have the right to participate in, the defense and settlement of any Tax
Claim and each Party shall cooperate with the other Party and there shall be no
settlement or closing or other agreement with respect thereto without the
consent of the other Party, which consent shall not be unreasonably withheld;
provided, however, that if either Party shall refuse (the "Refusing Party") to
consent to any settlement, closing or other agreement agreed to by the relevant
Taxing Authority with respect to any such Tax Claim that the other Party (the
"Accepting Party") proposed to accept (a "Proposed Settlement"), then (i) the
Accepting Party's liability with respect to the subject matter of the Proposed
Settlement shall be limited to the amount that such liability would have been if
the Proposed Settlement had been accepted, and (ii) the Refusing Party shall be
responsible for all liabilities and expenses incurred or imposed thereafter in
connection with the contest of such Tax Claim to the extent that the final
settlement is more than the Proposed Settlement.
11.20 Payments for Tax Benefits. Buyer shall pay Seller the amount of
-------------------------
any Tax Benefit resulting from any Tax deduction taken into account on or after
the Closing Date relating to any current liability that was taken into account
in computing Adjusted Working Capital as of the Effective Date. Seller shall
pay Buyer the amount of any actual increase in Tax resulting from any taxable
income or gain taken into account by an Acquired Company after the Closing Date
with respect to the difference between the amount of an asset taken into account
in computing Adjusted Working Capital as of the Effective Date and the adjusted
tax basis of such asset for federal income tax purposes as of such date. Any
Tax Benefit or Tax cost to be reflected on a 2000 Tax Return shall be estimated
and paid at the same time that the Adjustment Amount is settled pursuant to
Section 2.5(e). Any difference between the estimated and actual Tax Benefit or
- --------------
Tax cost shall be settled within 30 days after the filing of any Tax Return
reflecting such Tax Benefit or Tax cost.
11.21 Treatment of Tax Indemnity Payments. Buyer and Seller, their
-----------------------------------
respective Affiliates, and the Acquired Companies shall, to the extent permitted
by Applicable Law, treat any payments made pursuant to this Article 11 as
----------
adjustments to the Purchase Price. To the extent that any such payment is not
permitted to be treated as an adjustment to the Purchase Price, the amount of
such payment shall be increased by the amount of any actual additional Tax cost
incurred as a result of the receipt of such payment. Any Tax Benefit actually
received by the recipient of such payment or any of its Affiliates as a result
of its payment of the Tax to which such indemnity payment relates shall either
reduce the amount of such indemnity payment or otherwise be paid by the
recipient to the payor of such indemnity.
11.22 Liability for Existing Franchise Tax Claims. Nothing in this
-------------------------------------------
Article 11 shall impose upon Seller, PG&E, or any Affiliate of PG&E, directly or
- ----------
indirectly (including pursuant to the Retained Tax Agreements), any liability or
responsibility for any Losses that arise out of claims that are substantially
similar to those asserted in the Existing Franchise Tax Claims.
11.23 Survival and Time Limitation. All of the covenants, obligations
----------------------------
and agreements of the Parties set forth in this Article 11 shall survive the
----------
Closing. Notwithstanding the foregoing sentence, after Closing, any assertion
by Buyer or any Buyer Indemnitee that Seller is liable to Buyer or any Buyer
Indemnitee, or any assertion by Seller or any Seller Indemnitee that
Stock Purchase Agreement
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<PAGE>
Buyer is liable to Seller or any Seller Indemnitee, under this Article 11 must
----------
be made in writing and must be given to the indemnifying party on or prior to
the date that is 90 days after the date on which the applicable statute of
limitations expires with respect to such matters (or not at all).
11.24 Sole and Exclusive Remedy. Except as otherwise provided in
-------------------------
Sections 2.5(f), 4.14, 7.3, 7.7, 12.2(d), 12.5 and clause (ii) of Section
- --------------- ---- --- --- ------- ---- -------
12.1(i), from and after the Closing, the provisions of this Article 11 shall be
- ------- ----------
the exclusive agreement among the Parties (including the Seller Indemnitees and
the Buyer Indemnitees) with respect to Tax matters, including indemnification
for Tax matters.
11.25 Purchase Price Allocation. The Base Purchase Price shall be
-------------------------
allocated as set forth on Schedule 11.25 which shall be used in the filing of
--------------
any Tax Returns. To the extent that interest accrues or an Adjustment Amount
occurs, Buyer and Seller shall promptly make appropriate adjustments to such
allocations, and such changed allocations shall then be the allocations that
each Party to this Agreement uses.
ARTICLE 12
SURVIVAL AND INDEMNIFICATION
12.1. Indemnification.
---------------
(a) Seller's Indemnity. From and after the Closing, subject to the other
------------------
terms and limitations in this Article 12, Seller shall indemnify, defend,
----------
reimburse, and hold harmless the Buyer Indemnitees from and against any and all
Losses actually incurred by any of the Buyer Indemnitees or asserted by a Third
Party against any of the Buyer Indemnitees (i) for any breach of Seller's
representations or warranties made, as of the Closing Date, in this Agreement or
the Related Agreements, (ii) in respect of the Excluded Assets, (iii) for any
events occurring after the Closing Date under the agreements and arrangements
assigned pursuant to Section 5 of the Termination and Assignment Agreement, or
---------
(iv) for or arising out of any breach of the covenants or obligations of Seller
and its Affiliates under this Agreement (other than a breach of any covenant or
obligation in Article 11) or the Related Agreements.
----------
(b) Buyer's Indemnity. From and after the Closing, subject to the other
-----------------
terms and limitations in this Article 12, Buyer shall indemnify, defend,
----------
reimburse, and hold harmless the Seller Indemnitees from and against any and all
Losses actually incurred by any of the Seller Indemnitees or asserted by a Third
Party against any of the Seller Indemnitees (i) for any breach of Buyer's
representations or warranties made, as of the Closing Date, in this Agreement,
(ii) for or arising out of any breach of the covenants or obligations of Buyer
and its Affiliates under this Agreement (other than a breach of any covenant or
obligation in Article 11) or the Related Agreements, (iii) in respect of the
----------
Assumed Liabilities, (iv) that relate to any of the Guarantees to the extent
such Guarantee has not been released or replaced on or as of the Closing with a
guarantee of Buyer or its Affiliates, (v) that relate to or arise out of the
actions taken under Section 3 of the Termination and Assignment Agreement with
---------
respect to Item 8 of Part 3 of Exhibit A thereto, or (vi) that relate to or
------ ------ ---------
arise out of the businesses or operations of the Acquired Companies or that
otherwise relate to or arise out of the Acquired Companies (whether
Stock Purchase Agreement
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<PAGE>
relating to periods prior to or after the Closing Date) to the extent such
Losses are not properly asserted by Buyer under the provisions of Section
-------
12.1(a) (subject to the limitations set forth in Section 12.1(e)) by the date
- ------- ----------------
specified in Section 12.1(g). Buyer acknowledges and agrees that the Losses
---------------
described in clauses (iii), (v), and (vi) of the preceding sentence shall
be retained by and transfer with the Acquired Companies and shall continue to be
the responsibility of the Acquired Companies.
(c) Seller's Waiver. Notwithstanding anything to the contrary in this
---------------
Agreement or the Related Agreements, Buyer shall not be liable to the Seller
Indemnitees for any exemplary, punitive, special, indirect, consequential,
remote, or speculative damages, except to the extent any such damages are
included in any action by a Third Party against a Seller Indemnitee for which
such Seller Indemnitee is entitled to indemnification under this Agreement.
(d) Buyer's Waiver. Notwithstanding anything to the contrary in this
--------------
Agreement or the Related Agreements, Seller shall not be liable to the Buyer
Indemnitees for any exemplary, punitive, special, indirect, consequential,
remote or speculative damages, except to the extent any such damages are
included in any action by a Third Party against a Buyer Indemnitee for which
such Buyer Indemnitee is entitled to indemnification under this Agreement.
(e) Limitations on Indemnity. None of the Buyer Indemnitees shall be
------------------------
entitled to assert any right to indemnification under Section 12.1(a)(i) until
------------------
the aggregate amount of all the Losses actually suffered by the Buyer
Indemnitees exceeds the Deductible Amount, and then only to the extent such
Losses exceed, in the aggregate, the Deductible Amount. Except as provided in
the immediately following sentence, Losses taken into account under Section
-------
12.1(f) shall not be taken into account under this Section 12.1(e). In no event
- ------- ---------------
shall Seller ever be required to indemnify the Buyer Indemnitees for Losses
under Section 12.1(a)(i) and Section 12.1(f) and to make any payment to Buyer,
------------------ ---------------
pursuant to the second sentence of Section 12.5 in any amount exceeding, in the
------------
aggregate, $150,000,000.
(f) Seller's Small Claim Indemnity. From and after the Closing, subject to
------------------------------
the other terms and limitations in this Article 12, Seller shall indemnify,
----------
defend, reimburse, and hold harmless the Buyer Indemnitees from and against any
and all Losses actually incurred by any of the Buyer Indemnitees or asserted by
a Third Party against any of the Buyer Indemnitees for any breach of Seller's
representations or warranties made, as of the Closing Date, pursuant to Article
-------
4 determined solely for purposes of this Section 12.1(f) without regard to any
- - ---------------
qualification contained in such representation or warranty of "Material Adverse
Effect." Notwithstanding the preceding sentence, none of the Buyer Indemnitees
shall be entitled to assert any right to indemnification for any Loss under this
Section 12.1(f) unless the amount of that Loss (determined individually and not
- ---------------
on an aggregate basis with other Losses) exceeds $8,500,000, and then only to
the extent that all such Losses eligible for recovery in accordance with this
Section 12.1(f) exceed $8,500,000. In no event shall Seller ever be required to
- ---------------
indemnify the Buyer Indemnitees for Losses under this Section 12.1(f) and to
---------------
make any payment to Buyer, pursuant to the second sentence of Section 12.5 in
------------
any amount exceeding, in the aggregate, $22,500,000.
Stock Purchase Agreement
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<PAGE>
(g) Survival and Time Limitation. All of the representations,
----------------------------
warranties, covenants, obligations and agreements of the Parties set forth in
this Agreement and the Related Agreements, including those obligations set forth
in this Article 12, shall survive the Closing. Notwithstanding the foregoing
----------
sentence, except as provided in Section 11.23, after Closing, any assertion by
-------------
Buyer or any Buyer Indemnitee that Seller is liable to Buyer or any Buyer
Indemnitee for indemnification under the terms of this Agreement, the Related
Agreements, or for any other reason in connection with the transactions
contemplated in this Agreement must be made in writing and must be given to
Seller on or prior to the date that is 18 months after the Closing Date (or not
at all), provided that an assertion by (i) Buyer or any Buyer Indemnitee with
respect to any breach of Sections 4.2(a), 4.2(b), or 4.2(c) or (ii) any Party
--------------- ------ ------
with respect to a breach of Sections 7.3(e) or 7.3(m) shall survive the Closing
--------------- ------
without limitation.
(h) Compliance with Express Negligence Rule. All releases, disclaimers,
---------------------------------------
limitations on liability, and indemnities in this Agreement, including those in
this Section 12.1, shall apply even in the event of the sole, joint, and/or
------------
concurrent negligence, strict liability, or other fault of the Party whose
liability is released, disclaimed, limited, or indemnified.
(i) Further Indemnity Limitations. The amount of any Loss shall be
-----------------------------
reduced (i) to the extent any Person entitled to receive indemnification under
this Agreement receives any insurance proceeds with respect to a Loss, (ii) to
take into account any Tax Benefit arising from the recognition of the Loss, and
(iii) to take into account any payment or payments actually received by a Person
entitled to receive indemnification under this Article 12 with respect to a
----------
Loss.
(j) Sole and Exclusive Remedy. From and after the Closing, except as
-------------------------
provided in Section 11.24, the indemnification provisions of this Article 12
------------- ----------
shall be the sole and exclusive remedy of each Party (including the Seller
Indemnitees and the Buyer Indemnitees) (i) for any breach of the other Party's
representations, warranties, covenants, or agreements contained in this
Agreement or the Related Agreements or (ii) otherwise with respect to this
Agreement or the Related Agreements and the transactions contemplated hereby or
thereby (including the Acquired Companies).
12.2 Defense of Claims.
-----------------
(a) Notice. If an Indemnitee receives notice of the assertion of any
------
claim or of the commencement of any Third Party Claim with respect to which
indemnification is to be sought from the Indemnifying Party, the Indemnitee will
give such Indemnifying Party reasonable prompt Notice thereof, but in any event
not later than 7 calendar days after the Indemnitee's receipt of notice of such
Third Party Claim, but the failure to give timely Notice will not affect the
rights or obligations of the Indemnifying Party except and only to the extent
that, as a result of such failure, the Indemnifying Party was substantially
disadvantaged. Such Notice shall describe the nature of the Third Party Claim in
reasonable detail and will indicate the estimated amount, if practicable, of the
Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party
will have the right to participate in or, by giving Notice to the Indemnitee, to
elect to assume the defense of, any Third Party Claim at such Indemnifying
Party's own expense
Stock Purchase Agreement
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<PAGE>
and by such Indemnifying Party's own counsel, and the Indemnitee will cooperate
in good faith in such defense at such Indemnitee's own expense.
(b) Defense. If within 10 calendar days after an Indemnitee provides
-------
Notice to the Indemnifying Party of any Third Party Claim, the Indemnitee
receives Notice from the Indemnifying Party that such Indemnifying Party has
elected to assume the defense of such Third Party Claim, the Indemnifying Party
will not be liable for any legal expenses subsequently incurred by the
Indemnitee in connection with the defense thereof. The Indemnitee shall be
entitled to participate in the defense of such Third Party Claim and to employ
counsel for such purpose at the sole cost and expense of Indemnitee. Without the
prior written consent of the Indemnitee, the Indemnifying Party will not enter
into any settlement of any Third Party Claim which would lead to liability or
create any financial or other obligation on the part of the Indemnitee for which
the Indemnitee is not entitled to indemnification hereunder, or which would
impose any injunctive or other equitable remedy on the Indemnitee. If a firm
offer is made to settle a Third Party Claim without leading to liability or the
creation of a financial or other obligation on the part of the Indemnitee for
which the Indemnitee is not entitled to indemnification hereunder (or which
would not impose any injunctive or other equitable remedy on the Indemnitee) and
the Indemnifying Party desires to accept and agree to such offer, the
Indemnifying Party will give Notice to the Indemnitee to that effect. If the
Indemnitee fails to consent to such firm offer within 10 calendar days after its
receipt of such Notice, the Indemnitee may continue to contest or defend such
Third Party Claim and, in such event, the maximum liability of the Indemnifying
Party to such Third Party Claim will be the amount of such settlement offer,
plus reasonable costs and expenses paid or incurred by the Indemnitee up to the
date of such notice.
(c) Direct Claim. Any Direct Claim will be asserted by giving the
------------
Indemnifying Party reasonably prompt written notice thereof, stating the nature
of such claim in reasonable detail and indicating the estimated amount, if
practicable, but in any event not later than 20 calendar days after the
Indemnitee becomes aware of such Direct Claim (but the obligations of the
Indemnifying Party and the rights of the Indemnitee shall not be affected by the
failure to give such notice, except and only to the extent that, as a result of
such failure, the Indemnifying Party is substantially disadvantaged). The
Indemnifying Party will have a period of 30 calendar days within which to
respond to such Direct Claim. If the Indemnifying Party does not respond within
such 30-day period, the Indemnifying Party will be deemed to have accepted such
Direct Claim. If the Indemnifying Party rejects such Direct Claim, the
Indemnitee will be free to seek enforcement of its rights to indemnification
under this Agreement.
(d) Subrogation. If the amount of any Loss, at any time subsequent to the
-----------
making of an indemnity payment in respect thereof, is reduced by recovery,
settlement, or otherwise under or pursuant to any insurance coverage or Tax
Benefit, or pursuant to any claim, recovery, settlement or payment by or against
any other entity, the amount of such reduction, less any costs, expenses, or
premiums incurred in connection therewith, will promptly be repaid by the
Indemnitee to the Indemnifying Party. Upon making any indemnity payment, the
Indemnifying Party will, to the extent of such indemnity payment, be subrogated
to all rights of the Indemnitee against any Third Party in respect of the Loss
to which the indemnity payment relates; provided, however, that (i) the
Indemnifying Party is in compliance with its obligations under this Agreement in
respect of such Loss, (ii) until the Indemnitee recovers full payment of its
Loss,
Stock Purchase Agreement
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<PAGE>
any and all claims of the Indemnifying Party against any such Third Party on
account of said indemnity payment are hereby made expressly subordinated and
subjected in right of payment to the Indemnitee's rights against such Third
Party, and (iii) under no circumstance shall Buyer or its Affiliates (including
the Acquired Companies) have any rights to pursue recovery under the Acquired
Company Insurance Policies. Without limiting the generality or effect of any
other provision hereof, each such Indemnitee and Indemnifying Party will execute
upon request all instruments reasonably necessary to evidence and perfect the
above-described subrogation and subordination rights. Nothing in this Section
-------
12.2(d) shall be construed to require a Party to obtain or maintain any
- -------
insurance coverage.
12.3 Additional Provisions Relating to Environmental Indemnification.
---------------------------------------------------------------
In addition to the limitations set forth elsewhere in this Article 12, Seller's
----------
obligation to indemnify the Buyer pursuant to Section 12.1(a) with respect to
---------------
environmental matters shall be further qualified as specified below:
(a) Hazardous Materials. If Buyer has a Loss pursuant to Section 12.1(a)
------------------- ---------------
of this Agreement that relates to the presence of a hazardous material that has
been released to the soils, groundwater, sediments, or otherwise to the
environment, Seller shall only be required to defend, indemnify, and hold
harmless Buyer to the extent that: (i) the facts that form a basis for such loss
constitute a breach by Seller of one or more of its representations or
warranties contained in this Agreement; (ii) investigation or remediation of the
hazardous material is required pursuant to an Applicable Environmental Law that
is in effect as of and is enforceable as of the Closing Date; (iii) such
investigation or remediation is conducted using the most cost effective methods
for investigation, remediation, or containment consistent with Applicable
Environmental Laws. To the extent that the Losses incurred in connection with an
investigation or remediation are in excess of the Losses that would be incurred
for an investigation or remediation meeting the conditions set forth in this
Section 12.3(a), Seller shall have no obligation to indemnify Buyer for such
- ---------------
excess Losses.
(b) Increased Costs. If the costs of an investigation or remediation
---------------
that is subject to an indemnity by Seller under Section 12.1(a) or Section
--------------- -------
12.1(f) are increased due to an act or omission (occurring after the Closing
- -------
Date) by a Person other than Seller or an agent, representative, or contractor
of Seller, Seller shall not be responsible for any such increase in costs
incurred. Additionally, Seller shall not be responsible for any increased Losses
that are due to (i) the closure of operations at any of the affected assets,
other than a closure resulting from a breach by Seller of its representations
and warranties set forth in Section 4.15, or (ii) a change in use of the
------------
affected assets from the use of such assets as of the Closing Date.
(c) Buyer's Costs. Seller shall not be responsible for the costs
-------------
associated with Buyer's oversight of Seller's performance of its defense and
indemnity obligations under this Agreement, including the cost of Buyer's
oversight of Seller's legal counsel, consultants, or employees.
(d) Claims. Claims that require investigation and remediation of
------
hazardous materials shall also be subject to the procedures of Section 12.4.
------------
Stock Purchase Agreement
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<PAGE>
(e) Sharing of Losses. Seller shall only be required to bear and pay 50%
-----------------
of Losses owing by Seller to Buyer or the Buyer Indemnitees under Section
-------
12.1(a)(i) or Section 12.1(f) for a breach by Seller of its representations and
- ---------- ---------------
warranties set forth in Section 4.15.
------------
12.4 Procedures for Remedial Actions.
-------------------------------
(a) Control by Seller. Seller shall have the right, but not the
-----------------
obligation, to control the management of an environmental investigation or
remediation that is subject to indemnification pursuant to Section 12.1(a)
---------------
(except for on-site investigation or remediation, the management of which shall
be controlled by Buyer). Seller shall notify Buyer, within 20 calendar days of
receipt of notice of Buyer's claim for indemnification for such matter, either
that (i) it intends to undertake such responsibility, (ii) it does not intend to
undertake such responsibility, or (iii) that more information is needed from
Buyer before Seller can reasonably determine that Buyer's claim is subject to
indemnification pursuant to this Agreement. Buyer shall promptly respond to such
requests for information (to the extent such information is reasonably available
to Buyer) and, within 30 days of receipt of such information, Seller shall
notify Buyer as to whether it shall undertake the investigation and remediation.
(b) Seller's Investigation. If Seller undertakes the responsibility
----------------------
for off-site investigation or remediation, Seller shall promptly provide copies
to Buyer of all notices, correspondence, draft reports, submissions, work plans,
and final reports and shall give Buyer a reasonable opportunity (at Buyer's own
expense) to comment on any such submissions Seller intends to deliver or submit
to the appropriate Governmental Entity prior to such submission. Buyer may, at
its own expense, hire its own consultants, attorneys, or other professionals to
monitor the investigation or remediation, including any field work undertaken by
Seller, and Seller shall provide Buyer with the results of all such field work.
Notwithstanding the above, Buyer shall not take any actions that shall
unreasonably interfere with Seller's performance of the investigation and
remediation. Seller shall undertake any such work required herein in a manner
designed to minimize any disruption, to the greatest extent possible, in the
conduct of operations at the affected assets. Buyer shall allow Seller
reasonable access to conduct any of the work contemplated herein and shall fully
cooperate with Seller in the performance of the investigation and remediation,
including providing Seller with reasonable access to employees and documents as
necessary.
(c) Buyer's Investigation. For all on-site investigation and
---------------------
remediation, or if Seller declines to undertake the performance of an off-site
investigation and remediation hereunder, Buyer shall be entitled to undertake
the investigation and remediation. Buyer shall promptly provide copies to Seller
of all notices, correspondence, draft reports, submissions, work plans and final
reports and shall give Seller a reasonable opportunity (at Seller's own expense)
to comment on any submissions Buyer intends to deliver or submit to the
appropriate Governmental Entity prior to said submission. Seller may, at its own
expense, hire its own consultants, attorneys or other professionals to monitor
the investigation and remediation, including any field work undertaken by Buyer,
and Buyer shall provide Seller with the results of all such field work.
Notwithstanding the above, Seller shall not take any action that shall
unreasonably interfere with Buyer's performance of investigation and
remediation.
Stock Purchase Agreement
Page 53
<PAGE>
12.5 Tax Treatment of Indemnity Payments. Each Party, to the extent
-----------------------------------
permitted by Applicable Law, agrees to treat any payments made pursuant to this
Article 12 as adjustments to the Purchase Price for all federal and state income
- ----------
and franchise Tax purposes. To the extent that any such payment is not
permitted to be treated as an adjustment to the Purchase Price, the amount of
such payment shall be increased by the amount of any actual additional Tax cost
incurred as a result of the receipt of such payment.
ARTICLE 13
OTHER PROVISIONS
13.1 Notices. All notices, requests, demands, and other communications
-------
required or permitted to be given or made hereunder by either Party (each a
"Notice") shall be in writing and shall be deemed to have been duly given or
made if (i) delivered personally, (ii) transmitted by first class registered or
certified mail, postage prepaid, return receipt requested, (iii) delivered by
prepaid overnight courier service, or (iv) delivered by confirmed telecopy or
facsimile transmission to the Parties at the following addresses (or at such
other addresses as shall be specified by the Parties by similar notice):
If to Buyer:
El Paso Field Services Company
1001 Louisiana Street
Houston, Texas 77002
Attention: Mark Leland
Fax: (713) 420-2087
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004-1980
Attention: Gary Cooperstein
Fax: (212) 859-4000
If to Seller:
PG&E National Energy Group, Inc.
1100 Louisiana Street
Suite No. 1000
Houston, Texas 77002
Attention: Thomas B. King
Fax: (713) 371-6787
Stock Purchase Agreement
Page 54
<PAGE>
with a copy to:
Andrews & Kurth L.L.P.
4200 Chase Tower
600 Travis Street
Houston, Texas 77002
Attention: G. Michael O'Leary or Hal V. Haltom
Fax: (713) 220-4285
Notices shall be effective (i) if delivered personally or sent by courier
service, upon actual receipt by the intended recipient, (ii) if mailed, upon the
earlier of five days after deposit in the mail or the date of delivery as shown
by the return receipt therefor, or (iii) if sent by telecopy or facsimile
transmission, when the answer back is received.
13.2 Entire Agreement. This Agreement, together with the Schedules, the
----------------
Exhibits, and the Related Agreements, including the Confidentiality Agreement,
constitute the entire agreement between the Parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, between the Parties with respect to the subject matter hereof.
There are no restrictions, promises, representations, warranties, covenants or
undertakings between the Parties, other than those expressly set forth or
referred to herein or therein.
13.3 Binding Effect; Assignment; No Third Party Benefit. Subject to the
--------------------------------------------------
following sentence, this Agreement shall be binding upon and inure to the
benefit of the Parties and their successors and assigns. Neither this Agreement
nor any of the rights, interests, or obligations hereunder shall be assigned or
delegated by either Party, other than to an Affiliate (provided that if either
Party so assigns or delegates to an Affiliate, such Party shall not be released
from its obligations hereunder as a result of such assignment), without the
prior written consent of the other Party. Except as provided herein, nothing in
this Agreement is intended to or shall confer upon any Person other than the
Parties, and their successors and assigns, any rights, benefits, or remedies of
any nature whatsoever under or by reason of this Agreement.
13.4 Severability. If any provision of this Agreement is held to be
------------
unenforceable, this Agreement shall be considered divisible and such provision
shall be deemed inoperative to the extent it is deemed unenforceable, and in all
other respects this Agreement shall remain in full force and effect.
13.5 Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Texas, without regard
to its conflict of laws rules or principles.
13.6 Further Assurances. From time to time following the Closing, at the
------------------
request of either Party and without further consideration, the other Party shall
execute and deliver to such requesting Party such instruments and documents and
take such other action (but without incurring any material financial obligation)
as such requesting Party may reasonably request to consummate more fully and
effectively the transactions contemplated hereby.
Stock Purchase Agreement
Page 55
<PAGE>
13.7 Counterparts. This Agreement may be executed by the Parties in any
------------
number of counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same agreement.
13.8 Disclosure. Certain information set forth in the Schedules is
----------
included solely for informational purposes, is not an admission of liability
with respect to the matters covered by the information, and may not be required
to be disclosed pursuant to this Agreement. The specification of any dollar
amount in the representations and warranties contained in this Agreement or the
inclusion of any specific item in the Schedules is not intended to imply that
such amounts (or higher or lower amounts) are or are not material, and no Party
shall use the fact of the setting of such amounts or the fact of the inclusion
of any such item in the Schedules in any dispute or controversy between the
Parties as to whether any obligation, item, or matter not described herein or
included in a Schedule is or is not material for purposes of this Agreement.
13.9 Consent to Jurisdiction. The Parties hereby irrevocably submit to
-----------------------
the jurisdiction of the courts of the State of Texas and the federal courts of
the United States of America located in Harris County, Texas over any dispute
arising out of or relating to this Agreement or any of the transactions
contemplated hereby, and each Party irrevocably agrees that all claims in
respect of such dispute or proceeding shall be heard and determined in such
courts. The Parties hereby irrevocably waive, to the fullest extent permitted by
Applicable Law, any objection which they may now or hereafter have to the venue
of any dispute arising out of or relating to this Agreement or any of the
transactions contemplated hereby brought in such court or any defense of
inconvenient forum for the maintenance of such dispute. Each Party agrees that a
judgment in any such dispute may be enforced in other jurisdictions by suit on
the judgment or in any other manner provided by Applicable Law.
13.10 Bulk Sales or Transfer Laws. The Buyer hereby waives compliance by
---------------------------
the Seller with the provisions of the bulk sales or transfer laws of all
applicable jurisdictions.
Stock Purchase Agreement
Page 56
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement, or caused
this Agreement to be executed by their duly authorized representatives, all as
of the day and year first above written.
PG&E NATIONAL ENERGY GROUP, INC.
(Seller)
By: /s/ Thomas B. King
---------------------------------
Thomas B. King
Designated Agent
EL PASO FIELD SERVICES COMPANY
(Buyer)
By: /s/ Robert G. Phillips
---------------------------------
Robert G. Phillips
President
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
List of Schedules
Schedule 1.1(a) - List of Company Subsidiaries
Schedule 1.1(c) - List of Seller Personnel
Schedule 1.1(d) - List of Buyer Personnel
Schedule 2.5(g) - Adjusted Working Capital
Schedule 2.7 - Purchase Price Allocation
Schedule 4.2 - Acquired Companies
Schedule 4.5 - No Conflict
Schedule 4.6 - Required Consents and Approvals
Schedule 4.7 - Financial Statements
Schedule 4.8 - Absence of Material Changes
Schedule 4.9 - Taxes
Schedule 4.10 - Compliance with Laws
Schedule 4.11 - Litigation
Schedule 4.12 - Title Defects
Schedule 4.13 - Scheduled Contracts
Schedule 4.14 - Employee Matters
Schedule 4.15 - Environmental Matters
Schedule 4.16 - Insurance
Schedule 4.17 - Undisclosed Liabilities
Schedule 4.18 - Bank Accounts
Schedule 4.19 - Brokerage Fees
Schedule 5.4 - Consents and Approvals
Schedule 6.2(h) - Capital Expenditures
Schedule 6.2(l) - Litigation Matters
Schedule 7.3(a) - Transferred Employees
Schedule 7.3(h) - Stay On Bonus
Schedule 7.10 - Excluded Assets
Schedule 7.12 - Guarantees
Schedule 11.25 - Purchase Price Allocation
List of Exhibits
Exhibit 3.2(b)(i) - Form of Opinion of Counsel to Seller
Exhibit 3.2(b)(ii) - Form of Opinion of Andrews & Kurth L.L.P.
Exhibit 3.2(e) - Termination and Assignment Agreement
Exhibit 3.3(b) - Form of Opinion of Counsel to Buyer
Stock Purchase Agreement
Page 58
<PAGE>
EXHIBITS TO
STOCK PURCHASE AGREEMENT
<PAGE>
Exhibit 3.2(b)
to Stock Purchase Agreement
Opinion of Counsel to Seller
_______, 2000
El Paso Field Services Company
1001 Louisiana Street
Houston, Texas 77002
Ladies and Gentlemen:
I am Senior Vice President and General Counsel of PG&E Corporation, the
corporate parent of PG&E National Energy Group, Inc. ("Seller"). In such
capacity, I, or the attorneys working under my supervision, have acted as
counsel for Seller and reviewed (i) the Stock Purchase Agreement, dated as of
January 27, 2000 (the "Purchase Agreement"), between Seller and El Paso Field
Services Company ("Buyer"), providing for, among other things, the sale to Buyer
by Seller of all of the issued and outstanding shares of capital stock of PG&E
Gas Transmission, Texas Corporation, a Delaware corporation and PG&E Gas
Transmission Teco, Inc., a Delaware corporation (ii) the Transition Services
Agreement and the Termination and Assignment Agreement entered into by Seller
and Buyer in connection with the transactions contemplated by the Purchase
Agreement (the "Related Agreements"), (iii) the PG&E Guaranty, and (iv) the EPE
Guaranty, and such certificates of public officials, organizational documents,
and other records of the Seller and other certificates and instruments as I, or
they, have deemed necessary for the purpose of the opinions herein expressed.
This opinion is rendered pursuant to Section 3.3(b)(i) of the Purchase
Agreement. Unless otherwise defined in this opinion, terms used herein that are
defined in the Purchase Agreement shall have the meanings given to them in the
Purchase Agreement.
In rendering the opinions expressed below, I have assumed that (i) each of
Buyer and PG&E is duly formed, validly existing, and in good standing under the
laws of its jurisdiction of existence, (ii) Buyer has full power and authority
to execute the Purchase Agreement and the Related Agreements to which Buyer is a
Party and to consummate the transactions contemplated thereby, (iii) EPE has
full power and authority to execute the EPE Guaranty, (iv) Buyer has taken all
necessary action to authorize execution of the Purchase Agreement and the
Related Agreements to which Buyer is a Party on its behalf by the person
executing the same, (v) EPE has taken all necessary action to authorize
execution of the EPE Guaranty, (vi) Buyer has properly executed and delivered
the Purchase Agreement and the Related Agreements to which Buyer is a Party,
(vii) EPE has properly executed and delivered the EPE Guaranty, and (viii) the
Purchase Agreement and the Related Agreements to which Buyer is a Party, and the
EPE Guaranty, are each enforceable against Buyer and, in the case of the EPE
Guaranty, EPE in accordance with its terms, subject to (A) the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium, or fraudulent
transfer laws, or any other laws or judicial decisions affecting creditors'
rights and remedies generally, and (B) the effect of the general principles of
equity (regardless of whether enforcement is considered in a proceeding at law
or in equity).
Page 2
<PAGE>
In rendering the opinions expressed below, I have assumed the genuineness
of all signatures, the legal capacity, and the authority of all natural persons
signing the Purchase Agreement, the Related Agreements and the EPE Guaranty on
behalf of the parties thereto (other than the officers of the Seller), the
authenticity of all documents submitted to me as certified, conformed, or
photostatic copies, the authenticity of the originals of such copies, and the
absence of evidence extrinsic to the provisions of the Purchase Agreement, the
Related Agreements, the EPE Guaranty, and the PG&E Guaranty.
I am a member of the Bar of the State of California, and I do not herein
express any opinion as to the law of any state other than the State of
California, except for the General Corporation Law of the State of Delaware, and
the federal laws of the United States of America.
Based on the foregoing and subject to the qualifications set forth below, I
am of the opinion that:
1. The Seller is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware. PG&E is a corporation duly
organized, validly existing and in good standing under the laws of the State
of California.
2. The Seller has the corporate power and authority to execute, deliver, and
perform its obligations under the Purchase Agreement and the Related
Agreements. PG&E has the corporate power and authority to execute, deliver,
and perform its obligations under the PG&E Guaranty.
3. The execution and delivery of the Purchase Agreement and the Related
Agreements by the Seller and the performance of the Seller's obligations
under the Purchase Agreement and the Related Agreements have been duly
authorized by all requisite action of the Seller, and the Purchase Agreement
and the Related Agreements has been duly executed and delivered by the
Seller.
4. The execution and delivery of the PG&E Guaranty by PG&E and the performance
of the obligations under the PG&E Guaranty have been duly authorized by all
requisite action of PG&E, and the PG&E Guaranty has been duly executed and
delivered by PG&E.
5. The execution and delivery by the Seller of the Purchase Agreement and the
Related Agreements does not, and the performance by the Seller of its
obligations thereunder will not contravene, conflict with or result in any
breach of any of the provisions of, or constitute a default under, (i) the
certificate of incorporation or by-laws of the Seller; (ii) any law, rule,
regulation, or ordinance applicable to the Seller; or (iii) to my actual
knowledge (A) any material agreement, contract, or instrument to which the
Seller is a party or by which the Seller or any of its properties is bound,
or (B) any writ, judgment, injunction, decree, determination, or award of any
court or other governmental authority by which the Seller or any of its
properties is bound.
6. The execution and delivery by PG&E of the PG&E Guaranty does not, and the
performance
Page 3
<PAGE>
by PG&E of its obligations thereunder will not, contravene, conflict with or
result in any breach of any of the provisions of, or constitute a default
under, (i) the certificate of incorporation or by-laws of PG&E; (ii) any law,
rule, regulation, or ordinance applicable to PG&E; or (iii) to my actual
knowledge (A) any material agreement, contract, or instrument to which PG&E
is a party or by which PG&E or any of its properties is bound, or (B) any
writ, judgment, injunction, decree, determination, or award of any court or
other governmental authority by which PG&E or any of its properties is bound.
7. No consent, order, authorization, waiver, approval, or any other action by,
or registration, declaration or filing with, any governmental authority is
required for the Seller to enter into the Purchase Agreement and the Related
Agreements or for the Seller to perform and to be legally bound to perform
its obligations thereunder.
8. No consent, order, authorization, waiver, approval, or any other action by,
or registration, declaration or filing with, any governmental authority is
required for PG&E to enter into the PG&E Guaranty or for PG&E to perform and
to be legally bound to perform its obligations thereunder.
9. There is no action, suit, legal or arbitral proceeding or investigation at
law or in equity or by or before any court or administrative agency pending
or to my actual knowledge threatened against the Seller which may have a
material adverse effect on the Seller's ability to perform its obligations
under the Purchase Agreement and the Related Agreements.
10.There is no action, suit, legal or arbitral proceeding or investigation at
law or in equity or by or before any court or administrative agency pending
or to my actual knowledge threatened against PG&E which may have a material
adverse effect on the PG&E's ability to perform its obligations under the
PG&E Guaranty.
As counsel to the Seller, I am furnishing this letter to you at your
request and solely for the benefit of the named addressees hereof in connection
with the transactions contemplated by the Purchase Agreement, the Related
Agreements and the PG&E Guaranty. This letter is not to be quoted or relied upon
by any other person or firm, or used for any other purpose, without my express
written consent.
This opinion is rendered as of the date first set forth above, and I
expressly disclaim any obligation to update this opinion from and after the date
hereof.
Very truly yours,
Bruce R. Worthington
BRW:gj
Page 4
<PAGE>
Exhibit 3.2(b)(ii)
to Stock Purchase Agreement
[ Letterhead of Andrews & Kurth, L.L.P. ]
____________, 2000
El Paso Field Services Company
1001 Louisiana Street
Houston, Texas 77002
Ladies and Gentlemen:
We have acted as counsel for PG&E National Energy Group Inc., a
Delaware corporation ("Seller"), in connection with the preparation, execution
and delivery of (i) the Stock Purchase Agreement, dated January 27, 2000 (the
"Purchase Agreement"), between the Seller and El Paso Field Services Company, a
Delaware corporation ("Buyer"), (ii) the Transition Services Agreement and the
Termination and Assignment Agreement entered into by Seller and Buyer in
connection with the transactions contemplated by the Purchase Agreement (the
"Related Agreements"). This opinion is rendered pursuant to Section 3.3(b)(ii)
of the Purchase Agreement. Capitalized terms not otherwise defined herein shall
have the meanings given to them in the Purchase Agreement.
For purposes of this opinion, we have also examined the following documents
and records:
1. The Certificate of Incorporation, as amended, of Seller,
certified as of a recent date by the Secretary of State of
Delaware to be true and correct;
2. A copy of the Bylaws of Seller, certified as of a recent
date by the Secretary of Seller to be true and correct;
3. An executed copy or counterpart of the Purchase Agreement,
the Related Agreements, the PG&E Guaranty, and the EPE Guaranty;
and
4. Such other documents and agreements as we have deemed
necessary for purposes of this opinion.
<PAGE>
For purposes of this opinion, we have examined such statutes,
regulations and such other corporate records and documents and certificates of
corporate and public officials as we have deemed necessary for the purposes of
this opinion. We have also examined the original, certified, conformed or
photostatic copies of such other documents, records, agreements and certificates
as we have considered relevant hereto. In all such examinations, we have assumed
the authenticity of all documents submitted to us as originals, and the
conformity to original documents of all copies submitted to us as certified,
conformed or photostatic copies, which facts we have not verified independently.
As to certificates of public officials, we have assumed the same to have been
properly given and to be accurate. We have relied, as to the matters set forth
therein, on certificates and telegrams of public officials and the
representations and warranties of Seller and Buyer contained in the Purchase
Agreement. As to matters of fact to which this opinion pertains, we have relied
upon (i) certificates of certain officers of the Seller, and (ii) the
representations and warranties of Seller contained in the Purchase Agreement. We
have also assumed that the Purchase Agreement and each of the Related Agreements
have been duly authorized, executed and delivered by each party of Seller and
Buyer, and constitute the legal, valid and binding obligations of Buyer,
enforceable against Buyer in accordance with their terms subject to (A) the
effect of any applicable bankruptcy, insolvency, reorganization, moratorium, or
fraudulent transfer laws, or any other laws or judicial decisions affecting
creditors' rights and remedies generally and (B) the effect of general
principles of equity (regardless of whether enforcement is considered in a
proceeding at law or in equity).
Based upon the foregoing, and having due regard for such legal
considerations as we have deemed relevant, we are of the opinion that the
Purchase Agreement and the Related Agreements constitute legal, valid and
binding obligations of the Seller, enforceable against the Seller in accordance
with their terms.
The foregoing opinion regarding the enforceability of the Purchase
Agreement and the Related Agreements is subject to the following qualifications:
(a) The enforceability of the Purchase Agreement and the
Related Agreements may be limited or adversely affected by (i)
bankruptcy, insolvency, reorganization, moratorium, liquidation,
rearrangement, fraudulent transfer, fraudulent conveyance and
other similar laws (including court decisions) now or hereafter
in effect and affecting the rights and remedies of creditors
generally or providing for the relief of debtors generally, (ii)
the refusal of a particular court to grant equitable remedies,
including but without limiting the generality of the foregoing,
specific performance and injunctive relief, and (iii) general
principles of equity (regardless of whether such remedies are
sought in a proceeding in equity or at law).
(b) In rendering the foregoing opinions, we express no
opinion as to the enforceability of provisions of the Purchase
Agreement and the Related
<PAGE>
Agreements (i) restricting access of Seller or Buyer to courts or
to legal or equitable remedies, (ii) purporting to waive or
affect rights, claims, defenses or other benefits bestowed by law
to the extent that any of the same cannot be waived or so
affected, (iii) relating to indemnities to the extent prohibited
by public policy or to the extent indemnification is required for
losses or expenses caused by gross negligence, willful
misconduct, fraud, or illegal action on the part of an
indemnified party, or for negligence on the part of an
indemnified party unless such indemnification for negligence is
expressly and conspicuously provided for in the Purchase
Agreement or the Related Agreements, or (iv) purporting to waive
or to otherwise affect the rights of third parties.
Notwithstanding the limitations set forth above in this
paragraph, the Purchase Agreement and the Related Agreements each
contain adequate provisions for the practical realization of the
principal legal benefits afforded thereby except for the economic
consequences resulting from any delay or procedure imposed by
applicable law.
The foregoing opinion is expressly limited to the laws of the State
of Texas, the General Corporation Law of the State of Delaware, and the Federal
laws of the United States of America.
The opinion expressed herein is solely for the benefit of and may only
be relied upon by, the named addressee hereof in connection with the
transactions contemplated by the Purchase Agreement and the Related Agreements.
This opinion may not be relied upon by any other person without our prior
written consent. The opinion expressed herein is limited to the date hereof, and
we make no undertaking to amend or supplement such opinion as facts and
circumstances come to our attention or changes in law occur which could affect
such opinion.
Very truly yours,
<PAGE>
Exhibit 3.2(e)
to Stock Purchase Agreement
TERMINATION AND ASSIGNMENT AGREEMENT
------------------------------------
THIS TERMINATION AND ASSIGNMENT AGREEMENT (this "Agreement"), dated
__________, 2000, is by and among PG&E Corporation, a California corporation
("PG&E"), PG&E National Energy Group, Inc., a Delaware corporation ("Seller"),
PG&E Gas Transmission, Texas Corporation, a Delaware corporation ("GTT"), PG&E
Gas Transmission Teco, Inc., a Delaware corporation ( "TECO"), and El Paso Field
Services Company, a Delaware corporation ("Buyer"). PG&E, Seller, GTT, TECO, and
Buyer are sometimes referred to herein individually as a "Party" and
collectively as the "Parties."
Recitals:
A. Under the Stock Purchase Agreement (the "Stock Purchase Agreement"),
dated as of January ______, 2000, by and between Seller and Buyer, Seller has
agreed to sell and transfer all of the Shares of GTT and TECO to Buyer.
B. The contracts, agreements, understandings, and arrangements listed or
provisions referenced (i) in Part I of Exhibit A (collectively, the "Continuing
----- ---------
Contracts") are between or among (a) one or more of the Acquired Companies and
(b) one or more unaffiliated Persons, (ii) in Parts II and III of Exhibit A
-------- --- ---------
(collectively, the "Terminated Contracts") are between or among (a) one or more
of the Acquired Companies and (b) Seller or one of its affiliates, excluding the
Acquired Companies (individually, a "PG&E Company" and, collectively, the "PG&E
Companies") and (iii) in Exhibit B (collectively, the "Assigned Contracts") are
---------
between or among one or more of the Acquired Companies and one or more
unaffiliated Persons.
C. The Continuing Contracts will continue in full force and effect after
the Closing, and each of the Acquired Companies that is a party to any of the
Continuing Contracts shall remain entitled to all rights and benefits, and shall
remain subject to the liabilities and obligations, to which it is entitled
thereunder.
D. At or prior to the Closing, Buyer and Seller desire (i) to terminate,
or cause to be terminated, all of the Terminated Contracts as between the
Acquired Companies and each PG&E Company that is a party thereto, and (ii) to
cause the Acquired Companies to assign to the PG&E Companies all rights,
interests and obligations of the Acquired Companies arising after the Closing
under the Assigned Contracts.
E. Capitalized terms used herein but not defined in this Agreement have
the meanings given to them in the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of and subject to the mutual agreements,
terms and conditions contained in this Agreement, the parties agree, contingent
upon the occurrence of Closing, as follows:
1. List of Swaps and Derivative Contracts. Part I of Exhibit A contains
-------------------------------------- ------ ---------
a list of all swaps, derivatives, hedges and similar contracts or arrangements
to which any of the Acquired
Page 5
<PAGE>
Companies and one or more unaffiliated Persons are the contracting parties, and
Part II of Exhibit A contains a list of all master ISDA or other swap,
- ------- ---------
derivative, hedge or similar contracts to which any of the Acquired Companies
and a PG&E Company are the contracting parties. The contracts listed in Parts I
-------
and II of Exhibit A had one or more transactions that remained opened,
-- ---------
unsettled, or otherwise uncompleted after the Effective Date.
2. Continuing Contracts. The Parties hereby agree that the Continuing
--------------------
Contracts shall continue in full force and effect, as between the applicable
Acquired Company and the unaffiliated Person(s) that are parties thereto, after
the date hereof in accordance with their terms. The Parties further agree that
any changes occurring after the Effective Date in the net contract position (or
the fair value of such position) of the Acquired Companies under any of the
Continuing Contracts shall be for the account of the Acquired Companies.
3. Terminated Contracts. Seller and Buyer hereby acknowledge and agree
--------------------
that all of the Terminated Contracts have been, or will be, terminated, as
between the applicable Acquired Company, on the one hand, and the applicable
PG&E Company, on the other hand. Such Terminated Contracts shall continue in
full force and effect, however, insofar as they create or evidence any contract,
agreement, understanding, or arrangement between one PG&E Company and another
PG&E Company. Such terminations of the Terminated Contracts have been effected
prior to, or will be effective at, the Closing.
4. Post Closing Performance.
------------------------
(a) Post Closing Settlement. Seller shall (and shall cause the PG&E
-----------------------
Companies to) and Buyer shall (and shall cause the Acquired Companies to) pay
any amounts that remain to be paid by such Person under any of the Terminated
Contracts for services performed or goods received prior to the Closing Date
under such Terminated Contract.
(b) True Up for Certain Terminated Contracts; Working Capital Adjustment.
--------------------------------------------------------------------
Attached as Exhibit C hereto is a statement setting forth the payments to be
---------
made to, and the payments to be made by, the Acquired Companies after the
Effective Date in respect of the termination and cancellation of the Terminated
Contracts listed in Part II of Exhibit A in accordance with Section 3 hereof.
------- --------- ---------
The net sum (the "Settlement Amount"), if positive, of the amounts set forth in
Exhibit C constitutes the net total amount to be paid to, and such Settlement
- ---------
Amount, if negative, constitutes the net total amount to be paid by, the
Acquired Companies in respect of such termination and cancellation of the
Terminated Contracts listed in Part II of Exhibit A. The Settlement Amount
------- ---------
shall be included in Adjusted Working Capital pursuant to clause (w)(v) of the
-------------
second sentence of Section 2.5(f) of the Stock Purchase Agreement.
--------------
5. Assigned Contracts. Seller and Buyer hereby agree that effective
------------------
immediately prior to the Closing each Acquired Company that is a party to an
Assigned Contract has assigned, and hereby does assign, to the PG&E Companies
all of its rights, interests and obligations under such Assigned Contract, which
rights, interests and obligations arise or otherwise relate to the period after
the Closing.
Page 6
<PAGE>
6. Joinder by PG&E Companies. To the extent that any PG&E Company or
-------------------------
Acquired Company is not or may not be bound by this Agreement, Seller and Buyer
agree that, to the extent they lawfully may do so, they shall make reasonable
efforts to cause each such PG&E Company or Acquired Company, as the case may be,
to ratify this Agreement.
7. Other Provisions.
----------------
(a) Assignment. None of the Parties may assign, in whole or in part, any
----------
of the rights, obligations or benefits arising under this Agreement without the
prior written consent of the other Party (which consent may be withheld in the
sole discretion of such other Party), except that any Party may assign or
delegate its rights, obligations and benefits hereunder to an Affiliate.
Subject to the preceding sentence, this Agreement shall be binding upon and
inure to the benefit of the Parties hereto and their successors and assigns.
(b) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ITS CONFLICT
OF LAWS RULES OR PRINCIPLES.
(c) Notices. Any notice, request, consent, payment, demand or other
-------
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed to have been duly given on the date of service if
served personally on the party or parties to whom notice is given, on the date
of confirmation of receipt if sent by facsimile or on the third day after
mailing if mailed to the party or parties to whom notice is given by certified
mail, return receipt requested, postage prepaid and properly addressed as
follows:
If to Seller or any of the other PG&E Companies:
PG&E National Energy Group, Inc.
c/o PG&E Energy Trading
1100 Louisiana, Suite 1000
Houston, Texas 77002
Attention: General Counsel
Telecopy Number: 713-371-6797
Telephone Number: 713-371-6777
If to Buyer:
El Paso Field Services Company
1001 Louisiana Street
Houston, Texas 77002
Attention: Mark Leland
Telecopy Number: (713) 420-2087
Telephone Number: (713) 420-4282
Page 7
<PAGE>
Either Party may change its address by giving the other Parties hereto written
notice of the new address in the manner set forth above.
(d) Severability. If any portion of this Agreement shall be found by a
------------
court of competent jurisdiction to be illegal, unenforceable, or invalid, that
portion of this Agreement will be null and void and the remainder of this
Agreement will be binding on the parties as if the illegal, unenforceable or
invalid provisions had never been contained therein.
(e) Waiver. No waiver by either Party of any term or any breach of this
------
Agreement shall be construed as a waiver of any other term or breach hereof, or
of the same or a similar term or breach on any other occasion.
(f) Amendment. No modification or amendment of this Agreement shall be
---------
binding upon either party unless in writing and signed by the Parties hereto.
(g) Third-Party Beneficiaries. There are no third-party beneficiaries to
-------------------------
this Agreement. Nothing in this Agreement, express or implied, is intended to
confer upon any person, other than the Parties hereto and their successors and
assigns any right, remedy, or benefit.
(h) Rights and Remedies Cumulative. The rights and remedies of each Party
------------------------------
under this Agreement shall be cumulative and nonexclusive of any other rights or
remedies which each such Party may have under any other agreement or instrument,
by operation of law, or otherwise.
(i) Conflicts. In the event of any conflict between the terms of this
---------
Agreement and the Purchase Agreement, the terms of the Purchase Agreement shall
control.
(j) Entire Agreement. This Agreement and the Stock Purchase Agreement
----------------
constitute the entire agreement between the parties hereto pertaining to the
subject matter hereof, and supersedes all prior agreements, understandings,
negotiations and discussions, whether oral or written, of the Parties hereto
regarding the subject matter hereof.
(k) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same agreement.
Page 8
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement effective as
of the date and year first above written.
PG&E:
PG&E CORPORATION
By:___________________________
Name:_________________________
Title:________________________
Seller:
PG&E NATIONAL ENERGY GROUP, INC.
By:___________________________
Name:_________________________
Title:________________________
GTT:
PG&E GAS TRANSMISSION,
TEXAS CORPORATION
By:___________________________
Name:_________________________
Title:________________________
TECO:
PG&E GAS TRANSMISSION TECO, INC.
By:___________________________
Name:_________________________
Title:________________________
Page 9
<PAGE>
BUYER:
______________________________
By:___________________________
Name:_________________________
Title:________________________
Page 10
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
Exhibit A
CONTINUING AND TERMINATED CONTRACTS
Part I
See Annex I attached hereto
Part II
1. ISDA Master Agreement by and between PG&E Energy Trading-Gas Corporation
and PG&E Texas Industrial Energy, L.P. dated November 1, 1997.
2. ISDA Master Agreement by and between PG&E Energy Trading-Gas Corporation
and PG&E NGL Marketing, L.P. dated November 1, 1997.
Part III
1. Master Firm Purchase/Sale Agreement by and between PG&E Energy Trading-Gas
Corporation and PG&E Texas Pipeline, L.P. dated August 1, 1999.
2. Amendatory Agreement to Gas Transportation Agreement 5201-839 by and among
PG&E Texas Pipeline, L.P., PG&E Reata Energy, L.P. and PG&E Energy Trading-
Gas Corporation dated August 1, 1999.
3. Amendatory Agreement to Gas Transportation Agreement 5202-134 by and among
PG&E Texas Pipeline, L.P., PG&E Texas Industrial Energy, L.P. and PG&E
Energy Trading-Gas Corporation dated August 1, 1999.
4. Amendatory Agreement to Gas Transportation Agreement 5201-904 by and among
PG&E Texas Industrial Energy, L.P., PG&E Texas Pipeline, L.P. and PG&E
Energy Trading-Gas Corporation dated August 1, 1999.
5. Service Agreement for NGPA Section 311 Storage Service, Storage Contract
No. SE99-001 by and between PG&E Texas Pipeline, L.P. and PG&E Energy
Trading-Gas Corporation dated August 4, 1999.
6. Service Agreement for Intrastate Storage Service, Storage Contract No.
SA99-001 by and between PG&E Texas Pipeline, L.P. and PG&E Energy Trading-
Gas Corporation dated July 30, 1999.
7. Service Agreement for Intrastate Storage Service, Storage Contract No.
SA00-002 by and between PG&E Texas Pipeline, L.P. and PG&E Energy Trading-
Gas Corporation dated July 30, 1999.
Exhibits to Stock Purchase Agreement
Page 11
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
8. The undertaking set forth in Section 6.2(c) of that certain Agreement and
--------------
Plan of Merger, dated as of January 31, 1997, between Valero Energy
Corporation, PG&E and PG&E Acquisition Corporation.
9. Base Contract for Short-Term Sale and Purchase of Natural Gas by and
between PG&E Energy Trading-Gas Corporation and PG&E Texas Pipeline, L.P.
dated November 1, 1999.
10. Base Contract for Short-Term Sale and Purchase of Natural Gas by and
between PG&E Energy Trading Corporation and PG&E Texas Industrial Energy,
L.P. dated November 1, 1997.
11. Technical Services Agreement, dated as of January 1, 1998, between U.S.
Generating Company and PG&E Gas Transmission Texas Corporation.
12. Restated Continuing Services Agreement, dated as of October 15, 1999
between Pacific Gas and Electric Company and PG&E Gas Transmission Texas
Corporation.
Exhibits to Stock Purchase Agreement
Page 12
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
EXHIBIT B
ASSIGNED CONTRACTS
1. Lease Agreement #0514422002 by and between PG&E Texas Management Company
and Pitney Bowes Credit Corporation, dated July 30, 1998.
2. Lease Agreement 63954-00 by and between PG&E Texas Management Company and
Xerox dated November 1998.
3. Lease Agreement #2698133001 by and between PG&E Gas Transmission, Texas
Corporation and Pitney Bowes Credit Corporation dated July 31, 1997.
4. Office Space Lease Agreement by and between Capital Guidance Associates
IV., L.P., as Landlord and PG&E Gas Transmission, Texas Corporation, as
Tenant dated June 10, 1997, as amended.
5. Sublease Agreement by and between PG&E Gas Transmission, Texas Corporation
and Trione & Gordon, Inc. dated June 5, 1998.
6. Service Agreement by and between PG&E Gas Transmission, Texas Corporation
and Adelman Travel Systems, Inc. d/b/a Adelman Travel Group dated April 26,
1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Assumption: The software listed below will be transferred in whole or in part from PGE GTT to PGE ET.
- ------------------------------------------------------------------------------------------------------------------------------------
Est. Lics
Product Name Vendor Version Transfer Method Xferred
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hyena Disk Report Tool Adkins Resources Transfer up to 3 licenses to ET 3
- ------------------------------------------------------------------------------------------------------------------------------------
Acrobat-Author Adobe Systems Inc. 4 Transfer all but 2 licenses to ET 4
- ------------------------------------------------------------------------------------------------------------------------------------
TransEnergy ALTRA/TransEnergy Mgt Systems 4.1p Transfer 175 licenses to ET 175
- ------------------------------------------------------------------------------------------------------------------------------------
CAST Workbench Developer toolkit Cast Software 3.6. Transfer all but 15 licenses to ET
- ------------------------------------------------------------------------------------------------------------------------------------
CAST Workbench Repository Cast Software 3.6. Transfer all but 1 licenses to ET 5
- ------------------------------------------------------------------------------------------------------------------------------------
PIX Firewall Cisco Systems, Inc. 4.1.3. Transfer all licenses to ET 1
- ------------------------------------------------------------------------------------------------------------------------------------
Impromptu - Unlimited Site License Cognos Corp. 5.00. Transfer 40 licenses to ET 40
- ------------------------------------------------------------------------------------------------------------------------------------
PowerPlay - Unlimited Site License Cognos Corp. 5.00. Transfer 5 licenses to ET 5
- ------------------------------------------------------------------------------------------------------------------------------------
Advanced Helpdesk (AHD) Computer Assoc. Transfer licenses to ET proportional to users.
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Management (AMO) Computer Assoc. 9902 Transfer licenses to ET proportional to users.
- ------------------------------------------------------------------------------------------------------------------------------------
Remote Control Computer Assoc. Transfer licenses to ET proportional to users.
- ------------------------------------------------------------------------------------------------------------------------------------
Software Delivery Computer Assoc. Transfer licenses to ET proportional to users.
- ------------------------------------------------------------------------------------------------------------------------------------
Workload Computer Assoc. Transfer licenses to ET proportional to users.
- ------------------------------------------------------------------------------------------------------------------------------------
DTN Data service DTN Transfer all but 8 licenses to ET 57
- ------------------------------------------------------------------------------------------------------------------------------------
D&B Ram Dunn and Bradstreet 4 Transfer all but 5 licenses to ET 1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibits to Stock Purchase Agreement
Page 13
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Assumption: The software listed below will be transferred in whole or in part from PGE GTT to PGE ET.
- ---------------------------------------------------------------------------------------------------------------------------------
Est. Lics
Product Name Vendor Version Transfer Method Xterred
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DBArtisan-Oracle Embarcadero Technologies, Inc. 4.02 Transfer 2 licenses to ET 2
- ---------------------------------------------------------------------------------------------------------------------------------
DBArtisan-Sybase Embarcadero Technologies, Inc. 4.02 Transfer 2 licenses to ET 2
- ---------------------------------------------------------------------------------------------------------------------------------
Rapid SQL-Oracle Embarcadero Technologies, Inc. 5.2. Transfer 10 licenses to ET 10
- ---------------------------------------------------------------------------------------------------------------------------------
Rapid SQL-Sybase Embarcadero Technologies, Inc. 5.2. Transfer 10 licenses to ET 10
- ---------------------------------------------------------------------------------------------------------------------------------
RapidSQL Pro-Oracle Embarcadero Technologies, Inc. 5.2. Transfer 10 licenses to ET 10
- ---------------------------------------------------------------------------------------------------------------------------------
RapidSQL Pro-Sybase Embarcadero Technologies, Inc. 5.2. Transfer 10 licenses to ET 10
- ---------------------------------------------------------------------------------------------------------------------------------
Symmetrix Manager for Open Systems EMC Corp. 3.03. Split licenses as needed with ET
- ---------------------------------------------------------------------------------------------------------------------------------
Prophet-X FIMI 1.13. Transfer all but 8 licenses to ET 57
- ---------------------------------------------------------------------------------------------------------------------------------
100 Base T EISA Input/Output Driver Hewlett Packard Corp. B.10.20.01 Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
100 Base T9000 Lan Driver Hewlett Packard Corp. B.11.00.01 Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
100 Base T9000 Lan Driver Hewlett Packard Corp. B.10.20.03 Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
100 Base T9000 Lan Driver Hewlett Packard Corp. B.10.20.02 Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
GlancePlus M/M (All) PN B3693AJ Hewlett Packard Corp. 11.00.26. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
GlancePlus M/M (All) PN B3693AJ Hewlett Packard Corp. 10.20.95. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
GlancePlus M/M (All) PN B3693AJ Hewlett Packard Corp. 10.20.72. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
GlancePlus M/M (All) PN B3693AJ Hewlett Packard Corp. 10.20.140. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
GlancePlus Pak (Workstation) PN Hewlett Packard Corp. 11.00.26. Transfer licenses to ET proportional
B3691AA to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
HP-UX Hewlett Packard Corp. 11.0. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
HP-UX Hewlett Packard Corp. 10.20. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
HSC FDDI Hewlett Packard Corp. 10.20. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
MC/ServiceGuard (Server) Hewlett Packard Corp. 11.00. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
MC/ServiceGuard (Server) Hewlett Packard Corp. 10.06. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
Measureware software/UX Hewlett Packard Corp. B.10.20.89 Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
Measureware software/UX Hewlett Packard Corp. 11.00.26. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
MirrorDisk/UX (Workstation) Hewlett Packard Corp. 11.00. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
MirrorDisk/UX (Workstation) Hewlett Packard Corp. 10.20. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
ONLINEJFS (Server) Hewlett Packard Corp. B.11.00.01 Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
ONLINEJFS (Server) Hewlett Packard Corp. B.10.20. Transfer licenses to ET proportional
to ET servers
- ---------------------------------------------------------------------------------------------------------------------------------
PerfView Analizer (Server) Hewlett Packard Corp. B.10.20.95 Split licenses as needed with ET
- ---------------------------------------------------------------------------------------------------------------------------------
AIX-OS (RS-6000 Unix) IBM Corp. 4.1.0. Transfer 2 licenses to ET 2
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibits to Stock Purchase Agreement
Page 14
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Assumption: The software listed below will be transferred in whole or in part from PGE GTT to PGE ET.
- ------------------------------------------------------------------------------------------------------------------------------------
Est. Lics
Product Name Vendor Version Transfer Method Xferred
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WS-FTP IpSwitch 1 Transfer 1 license to ET 1
- ------------------------------------------------------------------------------------------------------------------------------------
Tree Size Pro JAM Transfer up to 3 licenses to ET 3
- ------------------------------------------------------------------------------------------------------------------------------------
NetWorker for Windows NT Legato Systems, Inc. 5.0. Transfer 1 license to ET 1
- ------------------------------------------------------------------------------------------------------------------------------------
Definity G3RV3 Lucent Technologies V.6.2. Transfer 1 license to ET 1
- ------------------------------------------------------------------------------------------------------------------------------------
TERRANOVA ECS Lucent Technologies 5.0. Transfer 2 license to ET 2
- ------------------------------------------------------------------------------------------------------------------------------------
MS-Messenger Microsoft Corp. Split licenses as needed with ET
- ------------------------------------------------------------------------------------------------------------------------------------
WinZip File Compressor- 1000 user Nico Mak Computing, Inc. 6.3. Transfer up to 500 licenses to ET 500
pack
- ------------------------------------------------------------------------------------------------------------------------------------
Peoplesoft Software Peoplesoft, Inc. 7.00. Transfer licenses to ET proportional to users.
- ------------------------------------------------------------------------------------------------------------------------------------
QIP QIP V3. Transfer all licenses to ET 1
- ------------------------------------------------------------------------------------------------------------------------------------
Quota Advisor Quinn 1
- ------------------------------------------------------------------------------------------------------------------------------------
Reuters Terminal Reuters America, Inc. 3.63 Transfer all but 3 licenses to ET 35
- ------------------------------------------------------------------------------------------------------------------------------------
RightFax Client RightFax Inc. 6.5 Transfer up to 50 licenses to ET 50
- ------------------------------------------------------------------------------------------------------------------------------------
RightFax Server RightFax Inc. 6.5 Transfer up to 1 license to ET 1
- ------------------------------------------------------------------------------------------------------------------------------------
Crystal Reports Seagate Software 4.5. Transfer licenses to ET proportional to
ET PeopleSoft users.
- ------------------------------------------------------------------------------------------------------------------------------------
Telnet Seattle Labs Transfer licenses to ET proportional to 47
ET NT servers (47)
- ------------------------------------------------------------------------------------------------------------------------------------
Image Expert Sierra Imaging 1.6 Transfer licenses to ET proportional to
users.
- ------------------------------------------------------------------------------------------------------------------------------------
Adaptive Server Enterprise -Client Sybase/Powersoft, Inc. 11.0.3.2. Transfer 175 licenses to ET 175
- ------------------------------------------------------------------------------------------------------------------------------------
Adaptive Server Enterprise -Server Sybase/Powersoft, Inc. 11.0.3.2. Transfer all but 4 licenses to ET 2
- ------------------------------------------------------------------------------------------------------------------------------------
Open Client/C Developers Lib Sybase/Powersoft, Inc. 11.1.1 Transfer all but 4 licenses to ET
HP9000/800
- ------------------------------------------------------------------------------------------------------------------------------------
Open Client/C Developers Lib Win 95/98 Sybase/Powersoft, Inc. 11.1.1 Transfer 175 licenses to ET 175
- ------------------------------------------------------------------------------------------------------------------------------------
Open Client/C Developers Lib Win NT Sybase/Powersoft, Inc. 11.1.1 Transfer 175 licenses to ET 175
- ------------------------------------------------------------------------------------------------------------------------------------
Ghost - Unlimited Site License Symantec Corp. Transfer licenses to ET proportional to 500
users.
- ------------------------------------------------------------------------------------------------------------------------------------
Norton Antivirus - Unlimited Site Symantec Corp. 5 Transfer licenses to ET proportional to 500
License users.
- ------------------------------------------------------------------------------------------------------------------------------------
PC Anywhere Symantec Corp. Transfer all but 4 licenses to ET
- ------------------------------------------------------------------------------------------------------------------------------------
Procomm Symantec Corp. Transfer all but 20 licenses to ET
- ------------------------------------------------------------------------------------------------------------------------------------
Snagit TechSmith Corp. 32.00. Transfer licenses to ET proportional to
users.
- ------------------------------------------------------------------------------------------------------------------------------------
Visio Professional Visio Corp. 5.0. Transfer licenses to ET proportional to
users.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[More detail to come.]
Exhibit to Stock Purchase Agreement
Page 15
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
EXHIBIT C
SETTLEMENT AMOUNT
[To come -- Settlement Amount of Terminated Contracts listed in Part II of
-------
Exhibit A.]
- ---------
Exhibits to Stock Purchase Agreement
Page 16
<PAGE>
Exhibit 3.3(b)
to Stock Purchase Agreement
Opinion of Counsel to Buyer
PG&E National Energy Group, Inc.
c/o PG&E Energy Trading
1100 Louisiana Street
Suite No. 1000
Houston, Texas 77002
Gentlemen:
We have acted as counsel for El Paso Energy Corporation, a Delaware
corporation ("EPE"), and El Paso Field Services Company, a Delaware corporation
("Buyer"), in connection with the negotiation and execution (i) the Stock
Purchase Agreement, dated as of January 27, 2000 (the "Purchase Agreement"),
between Buyer and PG&E National Energy Group, Inc., a Delaware corporation
("Seller"), providing for, among other things, the purchase by Buyer from Seller
of all of the issued and outstanding shares of capital stock of PG&E Gas
Transmission, Texas Corporation, a Delaware corporation and PG&E Gas
Transmission Teco, Inc., a Delaware corporation, (ii) the Transition Services
Agreement and Termination and Assignment Agreement entered into by Buyer in
connection with the transactions contemplated by the Purchase Agreement (the
"Related Agreements"), (iii) the PG&E Guaranty, and (iv) the EPE Guaranty.
Unless otherwise defined in this opinion, terms used herein that are defined in
the Purchase Agreement shall have the meanings given to them in the Purchase
Agreement. This opinion is being delivered pursuant to Section 3.3(b) of the
Purchase Agreement.
In connection with the opinions expressed below, we have examined the
following:
(a) a copy, certified by the Secretary of State of the State of
Delaware to be a true copy, of the Certificate of Incorporation of the Buyer;
(b) a copy, certified by the Secretary of the Buyer to be a true
copy, of the Bylaws of the Buyer;
(c) copies of letters, certificates or telegrams received by us from
public officials in the State of Delaware as to the due incorporation, valid
existence and good standing of the Buyer;
(d) copies, certified by the Secretary of the Company to be true
copies, of minutes of certain resolutions duly adopted by the Board of Directors
of the Buyer on ____________, 2000;
Exhibits to Stock Purchase Agreement
Page 17
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
(e) an executed original or counterpart of the Purchase Agreement,
the Related Agreements, the PG&E Guaranty, and the EPE Guaranty;
(f) such other documents as we have deemed appropriate for purposes
of the opinions expressed below.
In addition, we have examined all statutes, corporate records, and
other instruments that we have deemed necessary to examine for the purpose of
this opinion.
In rendering the opinions herein set forth, we assumed that (i) Seller
is duly formed, validly existing, and in good standing under the laws of its
jurisdiction of organization, (ii) Seller has full power and authority to
execute the Purchase Agreement and the Related Agreements and to consummate the
transactions contemplated thereby, (iii) Seller has taken all necessary action
to authorize execution of the Purchase Agreement and the Related Agreements on
its behalf by the person executing the same, (iv) Seller has properly executed
and delivered the Purchase Agreement and the Related Agreements, and (v) the
Purchase Agreement and the Related Agreements are each enforceable against
Seller in accordance with their terms subject to (A) the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium, or fraudulent
transfer laws, or any other laws or judicial decisions affecting creditors'
rights and remedies generally and (B) the effect of general principles of equity
(regardless of whether enforcement is considered in a proceeding at law or in
equity).
Based upon the foregoing and subject to the qualifications set forth
below, we are of the opinion that:
1. Each of Buyer and EPE is a corporation duly incorporated and
validly existing and in good standing under the laws of its
jurisdiction of organization.
2. Buyer has the requisite corporate power and authority to execute
and deliver the Purchase Agreement and the Related Agreements and
to perform the transactions contemplated thereby. EPE has the
requisite corporate power and authority to execute and deliver
the EPE Guaranty and to perform the transactions contemplated
thereby.
3. The execution, delivery, and performance by Buyer of the Purchase
Agreement and the Related Agreements have been duly authorized by
all necessary corporate action on the part of Buyer.
4. The execution, delivery, and performance by EPE of the EPE
Guaranty has been duly authorized by all necessary corporate
action on the part of EPE.
5. The execution and delivery of the Purchase Agreement by Buyer and
the Related Agreements does not, and the consummation by Buyer of
the transactions contemplated thereby will not, conflict with or
result in a
Exhibits to Stock Purchase Agreement
Page 18
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
breach of any of the provisions of, or constitute a default
under, (i) the Certificate of Incorporation or Bylaws of Buyer,
(ii) any law, rule, regulation or ordinance applicable to Buyer
or any of its properties or require Buyer to obtain any approval,
consent, or waiver of, or to make any filing with, any
governmental or regulatory agency or administrative body, in each
case that has not been obtained or made, or (iii) any material
agreement, contract or instrument to which the Buyer is a party
or by which the Buyer or any of its properties is bound or any
writ, judgment, injunction, decree, determination, or award of
any court or other governmental authority by which the Buyer or
any of its properties is bound.
6. The execution and delivery of the EPE Guaranty by EPE does not,
and the consummation by EPE of the transactions contemplated
thereby will not, conflict with or result in a breach of any of
the provisions of, or constitute a default under, (i) the
Certificate of Incorporation or Bylaws of EPE, (ii) any law,
rule, regulation or ordinance applicable to EPE or any of its
properties or require EPE to obtain any approval, consent, or
waiver of, or to make any filing with, any governmental or
regulatory agency or administrative body, in each case that has
not been obtained or made, or (iii) any material agreement,
contract or instrument to which EPE is a party or by which EPE or
any of its properties is bound or any writ, judgment, injunction,
decree, determination, or award of any court or other
governmental authority by which the EPE or any of its properties
is bound.
7. No consent, order, authorization, waiver, approval, or any other
action by, or registration, declaration or filing with, any
governmental authority is required for the Buyer to enter into
the Purchase Agreement and the Related Agreements, for EPE to
enter into the Guaranty Agreement, or for Buyer or EPE, as the
case may be, to perform and to be legally bound to perform its
obligations thereunder.
8. There is no action, suit, legal or arbitral proceeding or
investigation at law or in equity or by or before any court or
administrative agency pending or, to our actual knowledge,
threatened against the Buyer or EPE which may have a material
adverse effect on (i) the Seller's ability to perform its
obligations under the Purchase Agreement and the Related
Agreements or (ii) EPE's ability to perform its obligations under
the EPE Guaranty.
9. The Purchase Agreement and Related Agreements each constitute the
legal, valid, and binding obligation of Buyer enforceable against
Buyer in accordance with their terms.
10. The EPE Guaranty constitutes the legal, valid, and binding
obligation of EPE enforceable against EPE in accordance with
their terms.
Exhibits to Stock Purchase Agreement
Page 19
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
The foregoing opinions regarding the enforceability of the Purchase Agreement
and the Related Agreements are subject to the following qualifications:
(a) The enforceability of the Purchase Agreement, the Related
Agreements and the EPE Guaranty may be limited or adversely affected
by (i) bankruptcy, insolvency, reorganization, moratorium,
liquidation, rearrangement, fraudulent transfer, fraudulent conveyance
and other similar laws (including court decisions) now or hereafter in
effect and affecting the rights and remedies of creditors generally or
providing for the relief of debtors generally, (ii) the refusal of a
particular court to grant equitable remedies, including but without
limiting the generality of the foregoing, specific performance and
injunctive relief, and (iii) general principles of equity (regardless
of whether such remedies are sought in a proceeding in equity or at
law).
(b) In rendering the foregoing opinions, we express no opinion
as to the enforceability of provisions of the Purchase Agreement, the
Related Agreements, and the EPE Guaranty (i) restricting access of
Seller or Buyer or, in the case of the EPE Guaranty, EPE to courts or
to legal or equitable remedies, (ii) purporting to waive or affect
rights, claims, defenses or other benefits bestowed by law to the
extent that any of the same cannot be waived or so affected, (iii)
relating to indemnities to the extent prohibited by public policy or
to the extent indemnification is required for losses or expenses
caused by gross negligence, willful misconduct, fraud, or illegal
action on the part of an indemnified party, or for negligence on the
part of an indemnified party unless such indemnification for
negligence is expressly and conspicuously provided for in the Purchase
Agreement, the Related Agreements or the EPE Guaranty, or (iv)
purporting to waive or to otherwise affect the rights of third
parties. Notwithstanding the limitations set forth above in this
paragraph, the Purchase Agreement, the Related Agreements and the EPE
Guaranty each contain adequate provisions for the practical
realization of the principal legal benefits afforded thereby except
for the economic consequences resulting from any delay or procedure
imposed by applicable law.
In rendering the opinions expressed in paragraph 1 above, we have
relied exclusively upon certificates obtained from public officials of the
jurisdiction in which Buyer is organized.
We have assumed the genuineness of all signatures, the authenticity of
all documents submitted to me as originals, and the conformity to the originals
of all documents submitted to me as copies, which facts we have not verified
independently.
The foregoing opinions are expressly limited to the laws of the State
of Texas, the General Corporation Law of the State of Delaware, and the Federal
law of the United States.
Exhibits to Stock Purchase Agreement
Page 20
<PAGE>
Exhibit 3.3(e)
to Stock Purchase Agreement
The opinions expressed herein are solely for the benefit of and may
only be relied upon by, the named addressees hereof in connection with the
transactions contemplated by the Purchase Agreement, the Related Agreements and
the EPE Guaranty. This opinion may not be relied upon by any other person
without the prior written consent of the undersigned. The opinions expressed
herein are limited to the date hereof, and I make no undertaking to amend or
supplement such opinions as facts and circumstances come to my attention or
changes in law occur which could affect such opinions.
Very truly yours,
Exhibits to Stock Purchase Agreement
Page 21
<PAGE>
EXHIBIT 10.2
PG&E CORPORATION
SUPPLEMENTAL RETIREMENT SAVINGS PLAN
This is the controlling and definitive statement of the PG&E CORPORATION
("PG&E CORP") Supplemental Retirement Savings Plan (the "Plan"). Except as
provided herein, the Plan is effective as of January 1, 2000, with respect to
all individuals who were Eligible Employees as of such date. The Plan takes the
place of and assumes existing benefits under the PG&E Corporation Deferred
Compensation Plan for Officers, the PG&E Corporation Supplemental Executive
Retirement Plan, the Savings Fund Plan Excess Benefit Arrangement of Pacific Gas
and Electric Company, and any other non-qualified defined contribution
retirement plan excess benefit plans, programs or practices maintained by any
Participating Subsidiary of PG&E CORP. The Plan is effective January 1, 2000,
for Eligible Employees of Pacific Gas and Electric Company and for Grandfathered
Eligible Employees of PG&E CORP; it is effective January 1, 1999, for Eligible
Employees of PG&E Generating Company; and it is effective January 1, 1997, for
all other Eligible Employees of PG&E CORP.
1. Purpose of the Plan
-------------------
The Plan is established and is maintained for the benefit of a select group
of management and highly compensated employees of PG&E CORP and its
Participating Subsidiaries in order to provide such employees with certain
deferred compensation benefits. The Plan is an unfunded deferred
compensation plan that is intended to qualify for the exemptions provided
in Sections 201, 301, and 401 of ERISA.
2. Definitions
-----------
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
(a) "Basic Employer Contributions" shall mean the amounts credited to
----------------------------
Eligible Employees' Accounts under the Plan by the Employers, in
accordance with Section 3(c).
(b) "Board of Directors" shall mean the Board of Directors of PG&E CORP,
------------------
as from time to time constituted.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code shall include such
section, any valid regulation promulgated thereunder, and any
comparable provision of any future legislation amending,
supplementing, or superseding such section.
(d) "Committee" shall mean the Nominating and Compensation Committee of
---------
the Board, as it may be constituted from time to time.
<PAGE>
(e) "Eligible Employee" shall mean an Employee who:
-----------------
(1) Is an officer of PG&E CORP or any Participating Subsidiary and
who is in Officer Band 5 or above; or
(2) Is a key employee of PG&E CORP or any Participating Subsidiary
and who is designated by the Plan Administrator as eligible to
participate in the Plan.
(f) "Eligible Employee's Account" or "Account" shall mean as to any
--------------------------- -------
Eligible Employee, the separate account maintained on the books of the
Employer in accordance with Section 6(a) in order to reflect his or
her interest under the Plan. Accounts shall be centrally administered
by the Plan Administrator or its designee.
(g) "Employee" shall mean an individual who is treated in the records of
--------
an Employer as an employee of the Employer, who is not on an unpaid
leave of absence, and/or who is not covered by a collective bargaining
agreement; provided, however, such term shall not mean an individual
who is a "leased employee" or who has entered into a written contract
or agreement with an Employer which explicitly excludes such
individual from participation in an Employer's benefit plans. The
provisions of this definition shall govern, whether or not it is
determined that an individual otherwise meets the definition of
"common law" employee.
(h) "Employers" shall mean PG&E CORP and the Participating Subsidiaries
---------
designated by the Employee Benefit Committee of PG&E CORP. An initial
list of the Participating Subsidiaries is contained in Appendix A to
this Plan.
(i) "ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended. Reference to a specific section of ERISA shall
include such section, any valid regulation promulgated thereunder, and
any comparable provision of any future legislation amending,
supplementing, or superseding such section.
(j) "Grandfathered" shall mean an individual who was an Employee of
-------------
Pacific Gas and Electric Company and who has become an Employee of
PG&E CORP by reason of a transfer prior to January 1, 2000.
(k) "Investment Funds" shall mean (i) the PG&E CORP Phantom Stock Fund,
----------------
(ii) the AA Utility Bond Fund, and (iii) the S&P 500 Index Fund. The
Investment Funds shall be used for tracking phantom investment results
under the Plan.
(l) "Matching Employer Contributions" shall mean the amounts credited to
-------------------------------
Eligible Employees' Accounts under the Plan by the Employers, in
accordance with Section 3(b).
(m) "Participating Subsidiary" shall mean a United States-based subsidiary
------------------------
of PG&E CORP, which has been designated by the Employee Benefit
Committee of PG&E CORP as a Participating Subsidiary under this Plan.
At such times and under such conditions as the Committee may direct,
one or more other subsidiaries of PG&E CORP may become Participating
-2-
<PAGE>
Subsidiaries or a Participating Subsidiary may be withdrawn from the
Plan. An initial list of the Participating Subsidiaries is contained
in Appendix A to this Plan.
(n) "PG&E CORP" shall mean PG&E Corporation, a California corporation.
---------
(o) "Plan" shall mean the PG&E Corporation Supplemental Retirement Savings
----
Plan, as set forth in this instrument and as heretofore and hereafter
amended from time to time.
(p) "Plan Year" shall mean the calendar year.
---------
(q) "Retirement" or "Retire" shall mean an Eligible Employee's "separation
---------- ------
from service" within the meaning of Section 401(k) of the Code,
provided that the Eligible Employee is at least 55 years of age and
has been employed by an Employer for at least five years.
(r) "RSP" shall mean, with respect to any Eligible Employee, the PG&E
---
Corporation Retirement Savings Plan or any predecessor qualified
retirement plan sponsored by PG&E CORP or any of its subsidiary
companies.
(s) "Valuation Date" shall mean:
--------------
(1) For purposes of valuing Plan assets and Eligible Employees'
Accounts for periodic reports and statements, the date as of
which such reports or statements are made; and
(2) For purposes of determining the amount of assets actually
distributed to the Eligible Employee, his or her beneficiary, or
an Alternate Payee (or available for withdrawal), a date that
shall not be more than seven business days prior to the date the
check is issued to the Eligible Employee.
In any other case, the Valuation Date shall be the date designated by
the Plan Administrator (in its discretion) or the date otherwise set
forth in this Plan. In all cases, the Plan Administrator (in its
discretion) may change the Valuation Date, on a uniform and
nondiscriminatory basis, as is necessary or appropriate.
Notwithstanding the foregoing, the Valuation Date shall occur at least
annually.
3. Employer Contributions
----------------------
(a) Matching Employer Contributions. Subject to the provisions of Section
-------------------------------
13, the Eligible Employee's Account shall be credited for each Plan
Year with a Matching Employer Contribution, calculated in the manner
provided in Sections 3(a) (1), (2), and (3) below:
-3-
<PAGE>
(1) First, an amount shall be calculated equal to the maximum
matching contribution that would be made under the terms of the
RSP, taking into account for such Plan Year the amount of pre-tax
deferrals and after-tax contributions the Eligible Employee
elected under the RSP. For purposes of this calculation, any
amounts deferred under Subsection 4(a) of this Plan shall be
treated as pre-tax deferrals under the RSP.
(2) The calculation made in accordance with this Section 3(a) (1)
above shall be made without regard to any limitation on such
amounts under the RSP resulting from the application of any of
the limitations under Code Sections 401(m), 401(a)(17), or 415.
(3) The Employer Matching Contribution to be credited to the Account
of an Eligible Employee for any Plan Year shall equal the amount
calculated in accordance with Sections 3(a) (1) and (2) above,
reduced by the amount of matching contribution made to such
Eligible Employee's account for such Plan Year under the RSP.
(b) Crediting of Matching Employer Contributions. Matching Employer
--------------------------------------------
Contributions shall be calculated and credited to the Eligible
Employee's Account as of the first business day of the calendar year
following the Plan Year and shall be credited only if the Eligible
Employee is an Employee on the last day of Plan Year for which the
amounts are credited.
(c) Basic Employer Contributions. Subject to the provisions of Section
----------------------------
13, the Account of each Eligible Employee shall be credited for each
Plan Year with a Basic Employer Contribution, calculated in the manner
provided in Sections 3(c) (1), (2), and (3) below:
(1) First, an amount shall be calculated equal to the Basic Employer
Contribution that would be made under the terms of the RSP,
taking into account for such Plan Year the Eligible Employee's
Covered Compensation under the RSP, before any deductions for
compensation deferrals elected by such Eligible Employee under
Subsection 4(a) of this Plan. For Eligible Employees as defined
by Section 2(e)(1) of this Plan, compensation shall also reflect
such Eligible Employee's Short Term Incentive Plan awards.
(2) The calculation made in accordance with this Section 3(c)(1)
above shall be made without regard to any limitation on such
amounts under the RSP resulting from the application of any of
the limitations under Code Sections 401(a)(4), 401(a)(17), or
415.
(3) The Employer Contribution to be credited to the Account of an
Eligible Employee for any Plan Year shall equal the amount
calculated in accordance with Sections 3(c)(1) and (2) above,
reduced by the amount of Basic Employer Contributions made to
such Eligible Employee's account for such Plan Year under the
RSP.
-4-
<PAGE>
(d) Crediting of Basic Employer Contributions. The Employer Contribution
-----------------------------------------
attributable to an Eligible Employee's Short Term Incentive Plan award
shall be credited to an Eligible Employee's Account as of the first
business day of the month following the date on which the Short Term
Incentive Plan award is paid. All other Employer Contributions made in
respect of an Eligible Employee shall be credited to the Eligible
Employee's Account as of the first business day of the calendar year
following the Plan Year and shall be credited only if the Eligible
Employee is an Employee on the last day of the Plan Year for which the
amounts are credited.
(e) FICA Taxes. All amounts credited to an Eligible Employee's Account
----------
under Section 3 shall be net of FICA taxes withheld on behalf of such
Eligible Employee.
4. Eligible Employee Deferrals
---------------------------
(a) Amount of Deferral. An Eligible Employee may defer (i) 5 percent to
------------------
50 percent of his or her annual salary; and (ii) all or part of his or
her Short Term Incentive Plan awards, Long Term Incentive Plan awards
(other than stock options), Perquisite Allowances, and any other
special payments, awards, or bonuses as authorized by the Plan
Administrator.
(b) Credits to Accounts. Salary deferrals shall be credited to an
-------------------
Eligible Employee's Account as of each payroll period. All other
deferrals attributable to allowances, awards, bonuses, and other
payments shall be credited as of the date that they otherwise would
have been paid.
(c) Deferral Election. An Eligible Employee must file an election form
-----------------
with the Plan Administrator which indicates the percentage of salary
and applicable pay periods, and the amount of any awards, allowances,
payments, and bonuses to be deferred under the Plan. Notwithstanding
the foregoing, upon first becoming an Eligible Employee, an election
to defer shall be effective for the month following the filing of a
Deferral Election Form, provided said Form is filed within 60 days
following the date when the employee first becomes an Eligible
Employee.
(d) Deferral of Special Incentive Stock Ownership Premiums. All of an
------------------------------------------------------
Eligible Employee's Special Incentive Stock Ownership Premiums are
automatically deferred to the Plan immediately upon grant and
converted into units in the PG&E CORP Phantom Stock Fund. The units
attributable to Special Incentive Stock Ownership Premiums and any
additional units resulting from the conversion of dividend equivalents
thereon remain unvested until the earlier of the third anniversary of
the date on which the Special Incentive Stock Ownership Premiums are
credited to an Eligible Employee's account (provided the Eligible
Employee continues to be employed on such date), death, disability, or
retirement of the participant, or upon a Change in Control as defined
in the PG&E Corporation Long-Term Incentive Program (LTIP). (The term
"disability" shall, for purposes of the Plan, have the same meaning as
in Section 22(e)(3) of the Internal Revenue Code.) Unvested units
attributable to Special Incentive Stock Ownership Premiums and any
additional units resulting from the conversion of dividend equivalents
thereon shall be forfeited upon termination of the Eligible Employee's
employment unless otherwise provided in the PG&E Corporation Officer
Severance Policy, or if an Eligible Employee's stock ownership falls
below the levels set forth in the Executive Stock Ownership Program.
-5-
<PAGE>
5. Investment Funds
----------------
(a) Although no assets will be segregated or otherwise set aside with
respect to an Eligible Employee's Account, the amount that is
ultimately payable to the Eligible Employee with respect to such
Account shall be determined as if such Account had been invested in
some or all of the Investment Funds. The Plan Administrator, in its
sole discretion, shall adopt (and modify from time to time) such rules
and procedures as it deems necessary or appropriate to implement the
deemed investment of the Eligible Employees' Accounts. Such procedures
generally shall provide that an Eligible Employee's Account shall be
deemed to be invested among the three Investment Funds in the manner
elected by the Eligible Employee in such percentages and manner as
prescribed by the Plan Administrator. In the event no election has
been made by the Eligible Employee, such Account will be deemed to be
invested in the AA Utility Bond Fund. Eligible Employees shall be able
to reallocate their Accounts between the Investment Funds and
reallocate amounts newly credited to their Accounts at such time and
in such manner as the Plan Administrator shall prescribe. Anything to
the contrary herein notwithstanding, an Eligible Employee may not
reallocate Account balances between Investment Funds if such
reallocation would result in a non-exempt Discretionary Transaction as
defined in Rule 16b-3 of the Securities Exchange Act of 1934, as
amended, or any successor to Rule 16b-3, as in effect when the
reallocation is requested.
(1) AA Utility Bond Fund. On the first business day of each calendar
quarter, interest shall be credited on the amounts invested in
the AA Utility Bond Fund as of the last business day of the
immediately preceding calendar quarter and prorated based on the
number of days in the quarter that the balance was allocated to
the AAA Utility Bond Fund. Such interest shall be at a rate equal
to the AA Utility Bond Yield reported in Moody's Public Utility,
----------------------
published in the issue of Moody's Investors Service immediately
-------------------------
preceding the first day of the calendar quarter in which the
interest is to be credited. Such interest shall become a part of
the Eligible Employee's Account and shall be paid at the same
time or times as the balance of the Eligible Employee's Account.
Notwithstanding the above, if before the end of the quarter an
Eligible Employee has requested that his or her Account balance
be reallocated to another Investment Fund(s) or the Eligible
Employee's Account balance has been paid to the Eligible Employee
or to the Eligible Employee's beneficiary, prorated interest on
the Eligible Employee's Account balance shall be calculated at a
rate equal to the AA Utility Bond Yield reported in Moody's
-------
Public Utility, published in the issue of Moody's Investors
-------------- -----------------
Service immediately preceding the date of such reallocation or
-------
payment and shall be credited to the Eligible Employee's Account
in such other Investment Fund(s) on the date of reallocation or
paid directly to the Eligible Employee or the Eligible Employee's
beneficiary, whichever is applicable.
(2) PG&E CORP Phantom Stock Fund. Amounts credited to the PG&E CORP
Phantom Stock Fund shall be converted into units (including
fractions computed to three decimal places) each representing a
share of PG&E CORP common stock. The value of a unit for purposes
of determining the number of units to credit upon initial
allocation or upon reallocation from another Investment Fund, and
for determining the dollar value of the aggregate number of units
to be reallocated from the PG&E CORP Phantom Stock Fund to
another Investment Fund and for
-6-
<PAGE>
distributions from the Plan, shall be the average of the daily
high and low price of a share of PG&E CORP common stock as traded
on the New York Stock Exchange for the 30 trading days preceding
the date that (i) amounts are credited to an Eligible Employee's
Account in the PG&E CORP Phantom Stock Fund, or (ii) the Plan
Administrator receives a reallocation request, in the case of
reallocations. Thereafter, the value of a unit shall fluctuate in
accordance with the closing price of PG&E CORP common stock on
the New York Stock Exchange. Each time that PG&E CORP pays a
dividend on its common stock, an amount equal to such dividend
payable with respect to each share of PG&E CORP common stock,
multiplied by the number of units credited to an Eligible
Employee's Account, shall be credited to the Eligible Employee's
Account and converted into additional units. The number of
additional units shall be calculated by dividing the aggregate
amount of credited dividends, i.e. the dividend multiplied by the
number of units credited to the Eligible Employee's Account as of
the dividend record date, by the closing price of a share of PG&E
CORP common stock on the New York Stock Exchange on the dividend
payment date. If, after the record date but before the dividend
payment date, an Eligible Employee's balance in the PG&E CORP
Phantom Stock Fund has been reallocated to another Investment
Fund(s) or has been paid to the Eligible Employee or to the
Eligible Employee's beneficiary, then an amount equal to the
aggregated dividend shall be credited to the Eligible Employee's
Account in such other Investment Fund(s) or paid directly to the
Eligible Employee or the Eligible Employee's beneficiary,
whichever is applicable.
(3) S&P 500 Index Fund. Amounts credited to the S&P 500 Index Fund
shall be converted into units each representing a LCSF unit held
in the RSP on the date of allocation. Thereafter, the value of a
unit held in the S&P Index Fund shall be determined in the same
manner as the value of a LCSF unit under Section 18 of the RSP.
6. Accounting
----------
(a) Eligible Employees' Accounts. At the direction of the Plan
----------------------------
Administrator, there shall be established and maintained on the books
of the Employer, a separate account for each Eligible Employee in
order to reflect his or her interest under the Plan.
(b) Investment Earnings. Each Eligible Employee's Account shall initially
-------------------
reflect the value of his or her Account's interest in each of the
Investment Funds, deemed acquired with the amounts credited thereto.
Each Eligible Employee's Account shall also be credited (or debited)
as of the end of each day with the net appreciation (or depreciation),
earnings and gains (or losses) with respect to the investments deemed
made by his or her Account. Any such net earnings or gains deemed
realized with respect to any investment of any Eligible Employee's
Account shall be deemed reinvested in additional amounts of the same
investment and credited to the Eligible Employee's Account.
-7-
<PAGE>
(c) Accounting Methods. The accounting methods or formulae to be used
------------------
under the Plan for the purpose of maintaining the Eligible Employees'
Accounts shall be determined by the Plan Administrator. The accounting
methods or formulae selected by the Plan Administrator may be revised
from time to time but shall conform to the extent practicable with the
accounting methods used under the Applicable Plan.
(d) Valuations and Reports. The fair market value of each Eligible
----------------------
Employee's Account shall be determined as of each Valuation Date. In
making such determinations and in crediting net deemed earnings and
gains (or losses) in the Investment Funds to the Eligible Employees'
Accounts, the Plan Administrator (in its discretion) may employ such
accounting methods as the Plan Administrator (in its discretion) may
deem appropriate in order to fairly reflect the fair market values of
the Investment Funds and each Eligible Employee's Account. For this
purpose, the Plan Administrator may rely upon information provided by
the Plan Administrator or other persons believed by the Plan
Administrator to be competent.
(e) Statements of Eligible Employee's Accounts. Each Eligible Employee
------------------------------------------
shall be furnished with periodic statements of his or her interest in
the Plan, at least annually.
7. Distributions
-------------
(a) Distribution of Account Balances. Unless the Eligible Employee has
--------------------------------
elected otherwise under this Section 7, distribution of the balance
credited to an Eligible Employee's Account shall be made in a single
sum in the January of the year following Retirement or termination of
service:
(1) In the case of an Alternate Payee (as defined in Section 9(a)),
distribution shall be made as directed in a domestic relations
order which the Plan Administrator determines is a QDRO (as
defined in Section 9(a)), but only as to the portion of the
Eligible Employee's Account which the QDRO states is payable to
the Alternate Payee.
(2) Any provisions of the Plan notwithstanding distribution of
account balances must commence no later than in the January
following the year which the Eligible Employee reaches age 72.
(b) Installment Distributions. In lieu of a single sum payment, an
-------------------------
Eligible Employee may elect in writing and file with the Plan
Administrator an election that payment of amounts credited to the
Eligible Employee's Account be made in a specified number of
approximately equal annual installments (not in excess of 10).
(c) Early Distributions. By filing an election with the Plan
-------------------
Administrator, an Eligible Employee may elect to commence distribution
at any time other than Retirement or termination or may alter a
previously filed election, provided that:
-8-
<PAGE>
(1) such election or alteration is made at least one year prior to
the earliest date that (i) Retirement or termination of the
Eligible Employee, or (ii) the date selected for distribution to
begin under a previously filed election; and
(2) such election or alteration does not provide for the receipt of
such amounts earlier than one year from the date of the election
or alteration.
(d) Death Distributions. If an Eligible Employee dies before the entire
-------------------
balance of his or her Account has been distributed (whether or not the
Eligible Employee had previously terminated employment and whether or
not installment payments had previously commenced), the remaining
balance of the Eligible Employee's Account shall be distributed to the
beneficiary designated or otherwise determined in accordance with
Section 7(g), as soon as practicable after the date of death.
(e) Special Incentive Stock Ownership Premiums. Distributions
------------------------------------------
attributable to Special Incentive Stock Ownership Premiums shall only
be made in January following the year in which an Eligible Employee
terminates employment, Retires, or dies, and shall only be made in the
form of one or more certificates for the number of vested Special
Incentive Stock Ownership Premium units, rounded down to the nearest
whole share.
(f) Effect of Change in Eligible Employee Status. If an Eligible Employee
--------------------------------------------
ceases to be an Eligible Employee, the balance credited to his or her
Account shall continue to be credited (or debited) with appreciation,
depreciation, earnings, gains or losses under the terms of the Plan
and shall be distributed to him or her at the time and in the manner
set forth in this Section 7; provided, however, that if an Eligible
Employee terminates employment with an Employer other than by reason
of Retirement, the entire balance credited to his or her Account shall
be distributed in a lump sum cash payment in January of the year
following the year of termination of employment. Anything to the
contrary notwithstanding, the Plan Administrator, in its sole
discretion, may authorize an accelerated distribution of the balance
credited to his or her Account in the form of a lump sum cash payment
as of any earlier date.
(g) Payments to Incompetents. If any individual to whom a benefit is
------------------------
payable under the Plan is a minor or if the Plan Administrator
determines that any individual to whom a benefit is payable under the
Plan is incompetent to receive such payment or to give a valid release
therefor, payment shall be made to the guardian, committee, or other
representative of the estate of such individual which has been duly
appointed by a court of competent jurisdiction. If no guardian,
committee, or other representative has been appointed, payment may be
made to any person as custodian for such individual under the
California Uniform Transfers to Minors Act (or similar law of another
state) or may be made to or applied to or for the benefit of the minor
or incompetent, the incompetent's spouse, children or other
dependents, the institution or persons maintaining the minor or
incompetent, or any of them, in such proportions as the Plan
Administrator from time to time shall determine; and the release of
the person or institution receiving the payment shall be a valid and
complete discharge of any liability of PG&E CORP with respect to any
benefit so paid.
-9-
<PAGE>
(h) Beneficiary Designations. Each Eligible Employee may designate, in a
------------------------
signed writing delivered to the Plan Administrator, on such form as it
may prescribe, one or more beneficiaries to receive any distribution
which may become payable under the Plan as the result of the Eligible
Employee's death. An Eligible Employee may designate different
beneficiaries at any time by delivering a new designation in like
manner. Any designation shall become effective only upon its receipt
by the Plan Administrator, and the last effective designation received
by the Plan Administrator shall supersede all prior designations. If
an Eligible Employee dies without having designated a beneficiary or
if no beneficiary survives the Eligible Employee, the Eligible
Employee's Account shall be payable to the beneficiary or
beneficiaries designated or otherwise determined under the RSP.
(i) Undistributable Accounts. Each Eligible Employee and (in the event of
------------------------
death) his or her beneficiary shall keep the Plan Administrator
advised of his or her current address. If the Plan Administrator is
unable to locate the Eligible Employee or beneficiary to whom an
Eligible Employee's Account is payable under this Section 7, the
Eligible Employee's Account shall be frozen as of the date on which
distribution would have been completed in accordance with this Section
7, and no further appreciation, depreciation, earnings, gains or
losses shall be credited (or debited) thereto. PG&E CORP shall have
the right to assign or transfer the liability for payment of any
undistributable Account to the Eligible Employee's former Employer (or
any successor thereto).
(j) Plan Administrator Discretion. Within the specific time periods
-----------------------------
described in this Section 7, the Plan Administrator shall have sole
discretion to determine the specific timing of the payment of any
Account balance under the Plan.
8. Distribution Due to Unforeseeable Emergency
-------------------------------------------
A participant may request a distribution due to an unforseeable emergency
by submitting a written request to the Plan Administrator. The Plan
Administrator shall have the authority to require such evidence as it deems
necessary to determine if a distribution is warranted. If an application
for a hardship distribution due to an unforeseeable emergency is approved,
the distribution shall be payable in a method determined by the Plan
Administrator as soon as possible after approval of such distribution. A
participant who has commenced receiving installment payments under the Plan
may request acceleration of such payments in the event of an unforeseeable
emergency. The Administrator may permit accelerated payments to the extent
such accelerated payment does not exceed the amount necessary to meet the
emergency.
9. Domestic Relations Orders
-------------------------
(a) Qualified Domestic Relations Orders. The Plan Administrator shall
-----------------------------------
establish written procedures for determining whether a domestic
relations order purporting to dispose of any portion of an Eligible
Employee's Account is a qualified domestic relations order (within the
meaning of Section 414(p) of the Code) (a "QDRO").
----
-10-
<PAGE>
(1) No Payment Unless a QDRO. No payment shall be made to any person
designated in a domestic relations order (an "Alternate Payee")
---------------
until the Plan Administrator (or a court of competent
jurisdiction reversing an initial adverse determination by the
Plan Administrator) determines that the order is a QDRO. Payment
shall be made to each Alternate Payee as specified in the QDRO.
(2) Time of Payment. Payment may be made to an Alternate Payee in
the form of a lump sum, at the time specified in the QDRO, but no
earlier than as soon as practicable following the date the QDRO
determination is made.
(3) Hold Procedures. Notwithstanding any contrary Plan provision,
prior to the receipt of a domestic relations order, the Plan
Administrator may, in its sole discretion, place a hold upon all
or a portion of an Eligible Employee's Account for a reasonable
period of time (as determined by the Plan Administrator) if the
Plan Administrator receives notice that (a) a domestic relations
order is being sought by the Eligible Employee, his or her
spouse, former spouse, child or other dependent, and (b) the
Eligible Employee's Account is a source of the payment under such
domestic relations order. For purposes of this Section 9(a)(3), a
"hold" means that no withdrawals, distributions, or investment
----
transfers may be made with respect to an Eligible Employee's
Account. If the Plan Administrator places a hold upon an Eligible
Employee's Account pursuant to this Section 9(a)(3), it shall
inform the Eligible Employee of such fact.
10. Vesting
-------
Except as provided in Section 4(d), an Eligible Employee's interest in his
or her Account at all times shall be 100 percent vested and nonforfeitable.
11. Administration of the Plan
--------------------------
(a) Plan Administrator. The Employee Benefit Committee of PG&E CORP is
------------------
hereby designated as the administrator of the Plan (within the meaning
of Section 3(16)(A) of ERISA). The Plan Administrator delegates to the
Senior Human Resource Officer for PG&E CORP, or his or her designee,
the authority to carry out all duties and responsibilities of the Plan
Administrator under the Plan. The Plan Administrator shall have the
authority to control and manage the operation and administration of
the Plan.
(b) Powers of Plan Administrator. The Plan Administrator shall have all
----------------------------
discretion and powers necessary to supervise the administration of the
Plan and to control its operation in accordance with its terms,
including, but not by way of limitation, the power to interpret the
provisions of the Plan and to determine, in its sole discretion, any
question arising under, or in connection with the administration or
operation of, the Plan.
-11-
<PAGE>
(c) Decisions of Plan Administrator. All decisions of the Plan
-------------------------------
Administrator and any action taken by it in respect of the Plan and
within the powers granted to it under the Plan shall be conclusive and
binding on all persons and shall be given the maximum deference
permitted by law.
12. Funding
-------
All amounts credited to an Eligible Employee's Account under the Plan shall
continue for all purposes to be a part of the general assets of PG&E CORP.
The interest of the Eligible Employee in his or her Account, including his
or her right to distribution thereof, shall be an unsecured claim against
the general assets of PG&E CORP. While PG&E CORP may choose to invest a
portion of its general assets in investments identical or similar to those
selected by Eligible Employees for purposes of determining the amounts to
be credited (or debited) to their Accounts, nothing contained in the Plan
shall give any Eligible Employee or beneficiary any interest in or claim
against any specific assets of PG&E CORP.
13. Modification or Termination of Plan
-----------------------------------
(a) Employers' Obligations Limited. The Plan is voluntary on the part of
------------------------------
the Employers, and the Employers do not guarantee to continue the
Plan. PG&E CORP at any time may, by appropriate amendment of the Plan,
suspend Matching Employer Contributions and/or Basic Employer
Contributions or may discontinue Matching Employer Contributions
and/or Basic Employer Contributions, with or without cause.
(b) Right to Amend or Terminate. The Board of Directors, acting through
---------------------------
its Nominating and Compensation Committee, reserves the right to
alter, amend, or terminate the Plan, or any part thereof, in such
manner as it may determine, for any reason whatsoever.
(1) Limitations. Any alteration, amendment, or termination shall
take effect upon the date indicated in the document embodying
such alteration, amendment, or termination, provided that no such
alteration or amendment shall divest any portion of an Account
that is then vested under the Plan.
(c) Effect of Termination. If the Plan is terminated, the balances
---------------------
credited to the Accounts of the Eligible Employees affected by such
termination shall be distributed to them at the time and in the manner
set forth in Section 7; provided, however, that the Plan
Administrator, in its sole discretion, may authorize accelerated
distribution of Eligible Employees' Accounts as of any earlier date.
14. General Provisions
------------------
(a) Inalienability. Except to the extent otherwise directed by a domestic
--------------
relations order which the Plan Administrator determines is a QDRO (as
defined in Section 9(a) or mandated by applicable law, in no event may
either an Eligible Employee, a former Eligible Employee or his or her
spouse, beneficiary or estate sell, transfer, anticipate, assign,
hypothecate, or otherwise dispose of any right or interest under the
Plan; and such rights and interests shall not at any time be subject
to the claims of creditors nor be liable to attachment, execution, or
other legal process.
-12-
<PAGE>
(b) Rights and Duties. Neither the Employers nor the Plan Administrator
-----------------
shall be subject to any liability or duty under the Plan except as
expressly provided in the Plan, or for any action taken, omitted, or
suffered in good faith.
(c) No Enlargement of Employment Rights. Neither the establishment or
-----------------------------------
maintenance of the Plan, the making of any Matching Employer
Contributions, nor any action of any Employer or Plan Administrator,
shall be held or construed to confer upon any individual any right to
be continued as an Employee nor, upon dismissal, any right or interest
in any specific assets of the Employers other than as provided in the
Plan. Each Employer expressly reserves the right to discharge any
Employee at any time, with or without cause or advance notice.
(d) Apportionment of Costs and Duties. All acts required of the Employers
---------------------------------
under the Plan may be performed by PG&E CORP for itself and its
Participating Subsidiaries, and the costs of the Plan may be equitably
apportioned by the Plan Administrator among PG&E CORP and the other
Employers. Whenever an Employer is permitted or required under the
terms of the Plan to do or perform any act, matter or thing, it shall
be done and performed by any officer or employee of the Employer who
is thereunto duly authorized by the board of directors of the
Employer.
(e) Applicable Law. The provisions of the Plan shall be construed,
--------------
administered, and enforced in accordance with the laws of the State of
California and, to the extent applicable, ERISA.
(f) Severability. If any provision of the Plan is held invalid or
------------
unenforceable, its invalidity or unenforceability shall not affect any
other provisions of the Plan, and the Plan shall be construed and
enforced as if such provision had not been included.
(g) Captions. The captions contained in and the table of contents
--------
prefixed to the Plan are inserted only as a matter of convenience and
for reference and in no way define, limit, enlarge, or describe the
scope or intent of the Plan nor in any way shall affect the
construction of any provision of the Plan.
Execution
---------
IN WITNESS WHEREOF, PG&E CORP, by its duly authorized officer, has executed
this Plan on the date indicated below.
PG&E CORPORATION
Dated: _______________ By: ________________________________________
Title: _____________________________________
-13-
<PAGE>
APPENDIX A
PARTICIPATING SUBSIDIARIES
Participating Subsidiaries as of January 1, 1997
------------------------------------------------
- PG&E Gas Transmission Corporation
- PG&E Gas Transmission, Texas Corporation
- PG&E Gas Transmission TECO, Inc.
- PG&E Energy Trading-Gas Corporation
- PG&E Energy Services Corporation
- And the U.S. subsidiaries of each of the above-named corporations.
Additional Participating Subsidiaries as of January 1, 1998
-----------------------------------------------------------
- PG&E Corporation
- Pacific Gas and Electric Company
- PG&E Generating Company
- PG&E Corporation Support Services, Inc.
- And the U.S. subsidiaries of each of the above-named corporations.
-14-
<PAGE>
EXHIBIT 10.7
CONFIDENTIAL
--------------------------------------------
2000 OFFICER SHORT-TERM
INCENTIVE PLAN FINANCIAL
PERFORMANCE MEASURE
--------------------------------------------
NOMINATING AND COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS
MARCH 2, 2000
[LOGO of PG&E Corporation]
<PAGE>
2000 OFFICER STIP FINANCIAL PERFORMANCE MEASURE
- --------------------------------------------------------------------------------
BACKGROUND
SHORT-TERM INCENTIVE PLAN STRUCTURE
- -----------------------------------
- - At its meeting on September 15, 1999, the Nominating and Compensation
Committee reviewed and approved the 2000 Short-Term Incentive Plan (STIP)
structure for officers of the Corporation and each subsidiary. The structure
established the weighting of corporate earnings per share (EPS), subsidiary
EPS, and other performance factors for officers. The structure requires and
implementing methodology to link the EPS performance levels to threshold,
minimum, and maximum incentive payout levels, which is contained in this
document.
<PAGE>
2000 0FFICER STIP FINANCIAL PERFORMANCE MEASURE
- --------------------------------------------------------------------------------
2000 SHORT-TERM INCENTIVE PLAN STRUCTURE
<TABLE>
<CAPTION>
OFFICER GROUP AWARD COMPONENT WEIGHT PERFORMANCE MEASURE
------------- --------------- ------ -------------------
<S> <C> <C> <C>
PGE&E Corporation Corporate Financial Performance 100% Corporate EPS from operations
President & CEO, PG&E Corporate Financial Performance 25% Corporate EPS from operations
National Energy Group Subsidiary Performance 75% Average STIP rating of respective
President & CEO, subsidiary(ies)
Pacific Gas and Electric
Company
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific Gas and Electric Subsidiary Financial Performance 75% Subsidiary contribution to corporate EPS
Company from operations
Subsidiary Operational 25% Financial, operating, and service
Performance measures determined by subsidiary
CEO
- ------------------------------------------------------------------------------------------------------------------------------------
PG&E Gas Transmission PG&E National Energy Group 50 - 100% National Energy Group contribution to
PG&E Energy Trading Financial Performance corporate EPS from operations
PG&E Energy Service
PG&E Generating Corporate Financial Performance 0 - 25% Corporate EPS from operations
Subsidiary Operational/Financial 0 - 50% Financial, operating, and service
Performance measures determined by President &
CEO, PG&E National Energy Group
</TABLE>
1
<PAGE>
EXHIBIT 10.12
PG&E CORPORATION
LONG-TERM INCENTIVE PROGRAM
(As amended effective as of February 16, 2000)
1. Purpose of the Program
----------------------
This is the controlling and definitive statement of the PG&E Corporation
Long-Term Incentive Program, as amended and restated herein (hereinafter
called the PROGRAM/1/). The purpose of the PROGRAM is to advance the
interests of the CORPORATION by providing ELIGIBLE PARTICIPANTS with
financial incentives to promote the success of its long-term (five to ten
years) business objectives, and to increase their proprietary interest in
the success of the CORPORATION. It is the intent of the CORPORATION to
reward those ELIGIBLE PARTICIPANTS who have a significant impact on
improved long-term corporate achievements. Inasmuch as the PROGRAM is
designed to encourage financial performance and to improve the value of
shareholders' investment in PG&E CORPORATION, the costs of the PROGRAM will
be funded from corporate earnings.
2. Program Administration
----------------------
The PROGRAM shall be administered by the COMMITTEE, except that the BOARD
OF DIRECTORS shall administer the PROGRAM with respect to grants of
INCENTIVE AWARDS TO NON-EMPLOYEE DIRECTORS. The BOARD OF DIRECTORS may at
any time revest authority to administer the PROGRAM in all respects in the
BOARD OF DIRECTORS. Subject to the provisions of the PROGRAM, the
COMMITTEE or the BOARD OF DIRECTORS, as the case may be, shall have full
and final authority, in its sole discretion:
(a) to determine the ELIGIBLE PARTICIPANTS to whom INCENTIVE AWARDS shall
be granted and the number of shares of COMMON STOCK to be awarded
under each INCENTIVE AWARD, based on the recommendation of the CHIEF
EXECUTIVE OFFICER (except that awards to the CHIEF EXECUTIVE OFFICER
shall be based on the recommendation of the BOARD OF DIRECTORS and
awards to NON-EMPLOYEE DIRECTORS shall be based on the recommendation
of the COMMITTEE);
(b) to determine the time or times at which INCENTIVE AWARDS shall be
granted;
(c) to designate the types of INCENTIVE AWARD being granted;
_______________
/1/ Capitalized words are defined in Section 20 hereof.
<PAGE>
(d) to vary the OPTION vesting schedule described in the STOCK OPTION
PLAN;
(e) to determine the terms and conditions, not inconsistent with the terms
of the PROGRAM, of any INCENTIVE AWARD granted hereunder (including,
but not limited to, the consideration and method of payment for shares
purchased upon the exercise of an INCENTIVE AWARD, and any vesting
acceleration or exercisability provisions in the event of a CHANGE IN
CONTROL or TERMINATION), based in each case on such factors as the
COMMITTEE or BOARD OF DIRECTORS shall deem appropriate;
(f) to approve forms of agreement for use under the PROGRAM;
(g) to construe and interpret the PROGRAM and any related INCENTIVE AWARD
agreement and to define the terms employed herein and therein;
(h) except as provided in Section 18 hereof, to modify or amend any
INCENTIVE AWARD or to waive any restrictions or conditions applicable
to any INCENTIVE AWARD or the exercise or realization thereof;
(i) except as provided in Section 18 hereof, to prescribe, amend and
rescind rules, regulations and policies relating to the administration
of the PROGRAM;
(j) except as provided in Section 18 hereof, to suspend, terminate, modify
or amend the PROGRAM;
(k) to delegate to one or more agents such administrative duties as the
COMMITTEE or BOARD OF DIRECTORS may deem advisable, to the extent
permitted by applicable law; and
(l) to make all other determinations and take such other action with
respect to the PROGRAM and any INCENTIVE AWARD granted hereunder as
the COMMITTEE may deem advisable, to the extent permitted by
applicable law.
Notwithstanding the provisions contained in the foregoing paragraph, the
CHIEF EXECUTIVE OFFICER shall have the authority, in his sole discretion:
(a) to grant INCENTIVE AWARDS to any ELIGIBLE PARTICIPANT who, at the time
of the INCENTIVE AWARD grant, (i) is not an officer of the CORPORATION or a
DIRECTOR, and (ii) if such ELIGIBLE PARTICIPANT is an EMPLOYEE, is
receiving an annual salary which is below the level which requires approval
by the COMMITTEE; (b) to determine the time or times at which INCENTIVE
AWARDS shall be granted to such ELIGIBLE PARTICIPANTS; (c) to designate the
types of INCENTIVE AWARD being granted to such ELIGIBLE
2
<PAGE>
PARTICIPANTS; and (d) to vary the OPTION vesting schedule described in the
STOCK OPTION PLAN for the OPTIONS granted to such ELIGIBLE PARTICIPANTS;
provided, however, that all grants of INCENTIVE AWARDS by the CHIEF
EXECUTIVE OFFICER shall conform to the guidelines previously approved by
the COMMITTEE.
3. Shares of Stock Subject to the Program
--------------------------------------
There shall be reserved for use under the PROGRAM (subject to the
provisions of Section 13 hereof) a total of 34,389,230 shares of COMMON
STOCK, which shares may be authorized but unissued shares of COMMON STOCK
or issued shares of COMMON STOCK which shall have been reacquired by PG&E
CORPORATION. Such shares consist of (i) 13,000,000 shares of COMMON STOCK
originally reserved for use under the PROGRAM at the time it first became
effective on January 1, 1992, (ii) 389,230 shares of COMMON STOCK remaining
under the 1986 OPTION PLAN and carried over to the PROGRAM, (iii)
10,000,000 shares of COMMON STOCK added to the PROGRAM effective as of
January 1, 1996, and (iv) 11,000,000 shares of COMMON STOCK added to the
PROGRAM effective as of April 21, 1999.
If (i) any INCENTIVE AWARD expires or terminates for any reason without
having been exercised or purchased in full, (ii) an INCENTIVE AWARD is
surrendered in exchange for one or more other INCENTIVE AWARDS, or (iii)
any RESTRICTED STOCK is forfeited, then, in each such case, any
unexercised, unpurchased, surrendered or forfeited shares which were
subject to such INCENTIVE AWARD (except shares as to which a related TANDEM
SAR has been exercised) shall again be available for the future grant of
INCENTIVE AWARDS under the PROGRAM (unless the PROGRAM has terminated). In
addition, shares may be reused or added back to the PROGRAM to the extent
permitted by applicable law.
4. Eligibility
-----------
INCENTIVE AWARDS will be granted only to ELIGIBLE PARTICIPANTS. ISOS will
be granted only to EMPLOYEES. The COMMITTEE, in its sole discretion, may
grant INCENTIVE AWARDS to an ELIGIBLE PARTICIPANT who is a resident or
citizen of a foreign country, with such modifications as the COMMITTEE may
deem advisable to reflect the laws, tax policy or customs of such foreign
country.
The PROGRAM shall not confer upon any RECIPIENT any right to continuation
of employment, service as a DIRECTOR or consulting relationship with the
CORPORATION; nor shall it interfere in any way with the right of the
RECIPIENT or the CORPORATION to terminate such employment, service as a
DIRECTOR or consulting relationship at any time, with or without cause.
3
<PAGE>
5. Designation of Incentive Awards
-------------------------------
At the time of the grant of each INCENTIVE AWARD under the Program, the
COMMITTEE (or the CHIEF EXECUTIVE OFFICER, in the case of INCENTIVE AWARDS
granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS
pursuant to Section 2 hereof, or the BOARD OF DIRECTORS, in the case of
INCENTIVE AWARDS granted by the BOARD OF DIRECTORS to NON-EMPLOYEE
DIRECTORS) shall determine whether such INCENTIVE AWARD is to be designated
as an ISO, NON-QUALIFIED STOCK OPTION, SAR, DIVIDEND EQUIVALENT,
PERFORMANCE UNIT, stock grant, RESTRICTED STOCK, LSAR, PHANTOM STOCK or
other STOCK-BASED AWARD; provided, however, that ISOS may be granted only
to EMPLOYEES.
Notwithstanding such designation, to the extent that the aggregate FAIR
MARKET VALUE (determined for each share as of the date of grant of the
OPTION covering each share) of the shares with respect to which OPTIONS
designated as ISOS become exercisable for the first time by any RECIPIENT
during any calendar year exceeds $100,000, such OPTIONS shall be treated as
NON-QUALIFIED STOCK OPTIONS.
Any INCENTIVE AWARD may be granted alone, contingent upon, in addition to
or in TANDEM with one or more other INCENTIVE AWARDS granted under the
PROGRAM. In addition, except as provided in Section 12 hereof, any
INCENTIVE AWARD may be granted in exchange for one or more other INCENTIVE
AWARDS.
6. Stock Options, Tandem Stock Appreciation Rights and Tandem Dividend
-------------------------------------------------------------------
Equivalents
-----------
Except as provided in Section 9 below (relating to grants of INCENTIVE
AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion,
may grant ISOS, NON-QUALIFIED STOCK OPTIONS, TANDEM SARS and TANDEM
DIVIDEND EQUIVALENTS to ELIGIBLE PARTICIPANTS, subject to the terms and
conditions set forth in the STOCK OPTION PLAN attached hereto as Exhibit A.
7. Performance Units
-----------------
Except as provided in Section 9 below (relating to grants of INCENTIVE
AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion,
may grant PERFORMANCE UNITS to ELIGIBLE PARTICIPANTS, subject to the terms
and conditions set forth in the PERFORMANCE UNIT PLAN attached hereto as
Exhibit B.
8. Other Incentive Awards
----------------------
4
<PAGE>
Except as provided in Section 9 below (relating to grants of INCENTIVE
AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion,
may grant other INCENTIVE AWARDS (including, but not limited to, SARS
granted without OPTIONS, DIVIDEND EQUIVALENTS granted without OPTIONS,
stock grants, RESTRICTED STOCK, LSARS, PHANTOM STOCK or other STOCK-BASED
AWARDS) to ELIGIBLE PARTICIPANTS, subject to such terms and conditions as
the COMMITTEE shall deem appropriate.
9. Grants of Incentive Awards to Non-Employee Directors
----------------------------------------------------
NON-EMPLOYEE DIRECTORS will only be eligible to be granted DIRECTOR
RESTRICTED STOCK, PHANTOM STOCK and NON-QUALIFIED STOCK OPTIONS in
accordance with, and subject to the terms and conditions contained in, the
NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN RULES attached hereto as Exhibit
C.
10. Termination of Employment or Relationship with the CORPORATION
--------------------------------------------------------------
The COMMITTEE may, in its sole discretion, establish terms and conditions
pertaining to the effect of TERMINATION on INCENTIVE AWARDS granted to a
RECIPIENT prior to TERMINATION, to the extent permitted by applicable law.
11. Tax Withholding
---------------
When a RECIPIENT incurs tax liability in connection with the exercise of an
INCENTIVE AWARD or the receipt of shares of COMMON STOCK pursuant to an
INCENTIVE AWARD, which tax liability is subject to tax withholding under
applicable tax laws, and the RECIPIENT is obligated to pay the CORPORATION
an amount required to be withheld under applicable tax laws, the RECIPIENT
may satisfy the withholding tax obligation by (i) electing to have the
CORPORATION withhold such amount from his or her current compensation
through payroll deductions, or (ii) making a direct payment to the
CORPORATION in cash or by check.
The COMMITTEE may, in its sole discretion, permit a RECIPIENT to satisfy
all or part of his or her withholding tax obligations by having the
CORPORATION withhold from the shares to be issued to the RECIPIENT that
number of shares having a FAIR MARKET VALUE equal to the amount required to
be withheld determined on the date when taxes otherwise would be withheld
in cash. The payment of withholding taxes in this manner, if permitted by
the COMMITTEE, shall be subject to such restrictions as the COMMITTEE may
impose, including any restrictions required by rules of the Securities and
Exchange Commission.
5
<PAGE>
12. Replacement of Grants
---------------------
The COMMITTEE may, in its sole discretion, offer a RECIPIENT (other than
NON-EMPLOYEE DIRECTORS) the option of surrendering an unexercised OPTION or
other INCENTIVE AWARD in exchange for another INCENTIVE AWARD of the same
type or for a different type of INCENTIVE AWARD; provided, however, that no
OPTION or INCENTIVE AWARD may be exchanged for a new OPTION or INCENTIVE
AWARD having an OPTION PRICE or purchase price that is lower than the
OPTION PRICE or purchase price of the original OPTION or INCENTIVE AWARD.
13. Deferral of Payments
--------------------
The COMMITTEE may, in its sole discretion, approve a RECIPIENT'S deferral
of any cash payments which may become due under the PROGRAM. Such
deferrals shall be subject to any conditions, restrictions or requirements
as the COMMITTEE may determine.
14. Adjustments Upon Changes in Number or Value of Shares of Common Stock
---------------------------------------------------------------------
If there are any changes in the number or value of shares of COMMON STOCK
by reason of stock dividends, stock splits, reverse stock splits,
recapitalizations, mergers, consolidations or other events that materially
increase or decrease the number or value of issued and outstanding shares
of COMMON STOCK, the COMMITTEE may make such adjustments as it shall deem
appropriate, in order to prevent dilution or enlargement of rights.
15. Non-Transferability of Incentive Awards
---------------------------------------
An INCENTIVE AWARD shall not be transferable by the RECIPIENT otherwise
than by will or the laws of descent and distribution, or pursuant to a
qualified domestic relations order as defined by the CODE, Title I of ERISA
or the rules thereunder. During the lifetime of the RECIPIENT, an
INCENTIVE AWARD may be exercised only by the RECIPIENT or by an alternate
payee under a qualified domestic relations order.
16. Change in Control
-----------------
Upon the occurrence of a CHANGE IN CONTROL (as defined below):
(a) Any time periods relating to the exercise or realization of any
INCENTIVE AWARD granted hereunder shall be accelerated so that such
INCENTIVE AWARD may be immediately exercised or realized in full;
(b) All shares of RESTRICTED STOCK granted hereunder shall immediately
cease to be forfeitable; and
6
<PAGE>
(c) All conditions relating to the realization of any STOCK-BASED AWARD
granted hereunder shall immediately terminate.
A "CHANGE IN CONTROL" shall be deemed to have occurred if:
(a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any
trustee, agent or other fiduciary for any such plan acting in such
person's capacity as such fiduciary), directly or indirectly, becomes
the beneficial owner of securities of the CORPORATION representing
twenty percent (20%) or more of the combined voting power of the
CORPORATION's then outstanding securities;
(b) during any two consecutive years, individuals who at the beginning of
such a period constitute the BOARD OF DIRECTORS cease for any reason
to constitute at least a majority of the BOARD OF DIRECTORS, unless
the election, or the nomination for election by the shareholders of
the CORPORATION, of each new DIRECTOR was approved by a vote of at
least two-thirds (2/3) of the DIRECTORS then still in office who were
DIRECTORS at the beginning of the period; or
(c) the shareholders of the CORPORATION shall have approved (i) any
consolidation or merger of the CORPORATION other than a merger or
consolidation which would result in the voting securities of the
CORPORATION outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent of such
surviving entity) at least 70 percent of the Combined Voting Power of
the CORPORATION, such surviving entity or the parent of such surviving
entity outstanding immediately after the merger or consolidation; (ii)
any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the
assets of the CORPORATION, or (iii) any plan or proposal for the
liquidation or dissolution of the CORPORATION. For purposes of this
paragraph, the term Combined Voting Power shall mean the combined
voting power of the CORPORATION's or other relevant entity's then
outstanding voting securities.
17. Listing and Registration of Shares
----------------------------------
Each INCENTIVE AWARD shall be subject to the requirement that if at any
time the COMMITTEE shall determine, in its discretion, that the listing,
registration or qualification of the shares covered thereby under any
securities exchange or under any state or federal law or the consent or
approval of any governmental regulatory body, including the California
Public Utilities Commission, is necessary or desirable as a condition of,
or in connection with, the granting of such
7
<PAGE>
INCENTIVE AWARD or the issue or purchase of shares thereunder, such
INCENTIVE AWARD may not be exercised in whole or in part unless and until
such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the
COMMITTEE.
18. Amendment and Termination of the Program and Incentive Awards
-------------------------------------------------------------
The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate,
modify or amend the PROGRAM in any respect; provided, however, that to the
extent necessary and desirable to comply with Section 422 of the CODE (or
any other applicable law or regulation, including the requirements of any
stock exchange on which the COMMON STOCK is listed or quoted), shareholder
approval of any PROGRAM amendment shall be obtained in such a manner and to
such a degree as is required by the applicable law or regulation.
No suspension, termination, modification or amendment of the PROGRAM may,
without the consent of the RECIPIENT, adversely affect his or her rights
under INCENTIVE AWARDS theretofore granted to such RECIPIENT. In the event
of amendments to the CODE or applicable rules or regulations relating to
ISOS subsequent to the date hereof, the CORPORATION may amend the PROGRAM,
and the CORPORATION and RECIPIENTS holding OPTION agreements may agree to
amend outstanding OPTION agreements, to conform to such amendments.
The BOARD OF DIRECTORS or COMMITTEE may make such amendments or
modifications in the terms and conditions of any INCENTIVE AWARD as it may
deem advisable, or cancel or annul any grant of an INCENTIVE AWARD;
provided, however, that no such amendment, modification, cancellation or
annulment may, without the consent of the RECIPIENT, adversely affect his
or her rights under such INCENTIVE AWARD; and provided further the BOARD OF
DIRECTORS or COMMITTEE may not reduce the OPTION PRICE or purchase price of
any OPTION or INCENTIVE AWARD below the original OPTION PRICE or purchase
price.
Notwithstanding the foregoing, the BOARD OF DIRECTORS or COMMITTEE reserves
the right, in its sole discretion, to (i) convert any outstanding ISOS to
NON-QUALIFIED STOCK OPTIONS, (ii) to require a RECIPIENT to forfeit any
unexercised or unpurchased INCENTIVE AWARDS, any shares received or
purchased pursuant to an INCENTIVE AWARD, or any gains realized by virtue
of the receipt of an INCENTIVE AWARD in the event that such RECIPIENT
competes against the CORPORATION, and (iii) to cancel or annul any grant of
an INCENTIVE AWARD in the event of a RECIPIENT'S TERMINATION FOR CAUSE.
For purposes of the PROGRAM, "TERMINATION FOR CAUSE" shall include, but not
be limited to, termination because of dishonesty, criminal offense or
violation of a work rule, and shall be determined by, and in the sole
discretion of, the BOARD OF DIRECTORS or COMMITTEE.
8
<PAGE>
19. Effective Date of the Program and Duration
------------------------------------------
The Program first became effective as of January 1, 1992. The first
amendment and restatement of the PROGRAM as of January 1, 1996, was
approved by the shareholders of Pacific Gas and Electric Company at its
Annual Meeting on April 17, 1996. Effective January 1, 1997, the PROGRAM
was assumed by PG&E CORPORATION. At its meeting on December 17, 1997, the
BOARD OF DIRECTORS amended and restated the PROGRAM effective January 1,
1998, to (i) reflect the adoption of new RULE 16B-3 which became effective
November 1, 1996, and (ii) provide automatic formula awards of NON-
QUALIFIED STOCK OPTIONS and PHANTOM STOCK to NON-EMPLOYEE DIRECTORS within
the limits of the PROGRAM as previously approved by shareholders in 1996.
The PROGRAM was subsequently amended on October 21, 1998, April 21, 1999,
and February 16, 2000. Unless terminated sooner pursuant to Section 16
hereof, the PROGRAM shall terminate on December 31, 2005.
20. Definitions
-----------
(a) BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION.
------------------
(b) CHANGE IN CONTROL has the meaning set forth in Section 16 hereof.
-----------------
(c) CHIEF EXECUTIVE OFFICER means the Chief Executive Officer of PG&E
-----------------------
CORPORATION.
(d) CODE means the Internal Revenue Code of 1986, as amended from time to
----
time.
(e) COMMITTEE means the Nominating and Compensation Committee of the BOARD
---------
OF DIRECTORS or any successor to such committee.
(f) COMMON STOCK means common shares of PG&E CORPORATION with no par value
------------
and any class of common shares into which such common shares hereafter
may be converted.
(g) CONSULTANT means any person, including an advisor, who is engaged by
----------
the CORPORATION to render services.
(h) CORPORATION means PG&E CORPORATION, and any parent corporation (as
-----------
defined in Section 424(e) of the CODE) or subsidiary corporation (as
defined in Section 424(f) of the CODE).
(i) DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or
--------
the Board of Directors of any parent corporation (as defined in
Section 424(e) of the CODE) which may hereafter be established,
including an advisory, emeritus or honorary director.
9
<PAGE>
(j) DIRECTOR RESTRICTED STOCK means RESTRICTED STOCK granted to a NON-
-------------------------
EMPLOYEE DIRECTOR under the NON-EMPLOYEE DIRECTOR STOCK INCENTIVE
PLAN.
(k) DIVIDEND EQUIVALENT means a right that entitles the RECIPIENT to
-------------------
receive cash or COMMON STOCK based on the dividends declared on the
COMMON STOCK covered by such right.
(l) ELIGIBLE PARTICIPANT means any KEY EMPLOYEE. It also means, if so
--------------------
identified by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the
case of INCENTIVE AWARDS granted by the CHIEF EXECUTIVE OFFICER to
certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof), other
EMPLOYEES, DIRECTORS, CONSULTANTS, employees or consultants of any
affiliates of PG&E CORPORATION, and other persons whose participation
in the PROGRAM is deemed by the COMMITTEE (or by the CHIEF EXECUTIVE
OFFICER, in the case of INCENTIVE AWARDS granted by the CHIEF
EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section
2 hereof) to be in the best interests of the CORPORATION.
(m) EMPLOYEE means any person who is employed by the CORPORATION. The
--------
payment of a director's fee or consulting fee by the CORPORATION shall
not be sufficient to constitute "employment" by the CORPORATION.
(n) ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended.
(o) EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
------------
(p) FAIR MARKET VALUE means the closing price of the COMMON STOCK reported
-----------------
on the New York Stock Exchange Composite Transactions for the date
specified for determining such value.
(q) INCENTIVE AWARD means any ISO, NON-QUALIFIED STOCK OPTION, SAR,
---------------
DIVIDEND EQUIVALENT, PERFORMANCE UNIT or other STOCK-BASED AWARD
granted under the PROGRAM.
(r) ISO means an OPTION intended to qualify as an incentive stock option
---
under Section 422 of the CODE.
(s) KEY EMPLOYEE means the Corporate Secretary, Treasurer, Vice Presidents
------------
and other executive officers of PG&E CORPORATION above the rank of
Vice President. It also means, if so identified by the COMMITTEE (or
by the CHIEF EXECUTIVE OFFICER, in the case of
10
<PAGE>
INCENTIVE AWARDS granted by the CHIEF EXECUTIVE OFFICER to
certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof),
executive officers of wholly-owned subsidiaries of PG&E
CORPORATION (including subsidiaries which become such after
adoption of the PROGRAM) and any other key management employee of
PG&E CORPORATION or any wholly-owned subsidiary of PG&E
CORPORATION.
(t) LSAR means a limited stock appreciation right which is
----
exercisable only in the event of a CHANGE IN CONTROL.
(u) 1986 OPTION PLAN means the Pacific Gas and Electric Company 1986
----------------
Stock Option Plan, as amended to date.
(v) NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE.
---------------------
(w) NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN RULES means the Non-
------------------------------------------------
Employee Director Stock Incentive Plan attached hereto as Exhibit
C or any successor rules which the BOARD OF DIRECTORS may adopt
from time to time with respect to the grant of INCENTIVE AWARDS
to NON-EMPLOYEE DIRECTORS under the PROGRAM.
(x) NON-QUALIFIED STOCK OPTION means any OPTION which is not an ISO.
--------------------------
(y) OPTION means an option to purchase shares of COMMON STOCK granted
------
under the STOCK OPTION PLAN.
(z) OPTION PRICE means the purchase price for the COMMON STOCK upon
------------
exercise of an OPTION.
(aa) PERFORMANCE UNIT means a performance unit granted under the
----------------
PERFORMANCE UNIT PLAN.
(bb) PERFORMANCE UNIT PLAN means the Performance Unit Plan Rules
---------------------
attached hereto as Exhibit B or any successor rules which the
COMMITTEE may adopt from time to time with respect to the grant
of PERFORMANCE UNITS under the PROGRAM.
(cc) PG&E CORPORATION means PG&E CORPORATION, a California
----------------
corporation.
(dd) PHANTOM STOCK means allocated hypothetical shares of COMMON STOCK
-------------
that can be converted at a future date into cash or stock.
11
<PAGE>
(ee) PROGRAM means the PG&E Corporation Long-Term Incentive Program
-------
set forth herein and as may be amended from time to time.
(ff) RECIPIENT means the ELIGIBLE PARTICIPANT receiving the INCENTIVE
---------
AWARD, or his or her legal representative, legatees, distributees
or alternate payees, as the case may be.
(gg) RESTRICTED STOCK means COMMON STOCK that is subject to forfeiture
----------------
by the RECIPIENT to the CORPORATION under such circumstances as
may be specified by the COMMITTEE in its sole discretion.
(hh) RETIREMENT means termination of employment with the CORPORATION
----------
at age 55 or later, provided that the ELIGIBLE PARTICIPANT was
employed by the CORPORATION for at least five consecutive years
prior to the date of termination.
(ii) RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any
----------
successor to Rule 16b-3, as in effect when discretion is being
exercised with respect to the Plan.
(jj) SAR means a stock appreciation right whose value is based on the
---
increase in the FAIR MARKET VALUE of the COMMON STOCK covered by
such right.
(kk) SECTION 16 OFFICER means any person who is designated by the
------------------
BOARD OF DIRECTORS as an executive officer of PG&E CORPORATION
and any other person who is designated as an officer of PG&E
CORPORATION for purposes of Section 16 of the EXCHANGE ACT.
(ll) STOCK-BASED AWARD means any award that is valued in whole or in
-----------------
part by reference to, or is otherwise based on, the COMMON STOCK,
including, but not limited to, stock grants, RESTRICTED STOCK,
LSARS and PHANTOM STOCK.
(mm) STOCK OPTION PLAN means the Stock Option Plan Rules attached
-----------------
hereto as Exhibit A or any successor rules which the COMMITTEE
may adopt from time to time with respect to the grant of OPTIONS
under the PROGRAM.
(nn) TANDEM refers to an INCENTIVE AWARD granted in conjunction with
------
another INCENTIVE AWARD.
(oo) TERMINATION occurs when an EMPLOYEE ceases to be employed by the
-----------
CORPORATION as a common law employee, when a DIRECTOR ceases to
be a member of the BOARD OF DIRECTORS or the Board of
12
<PAGE>
Directors of any parent corporation which may hereafter be
established (as the case may be), or when the relationship
between the CORPORATION and a CONSULTANT or other ELIGIBLE
PARTICIPANT terminates, as the case may be.
(pp) TERMINATION FOR CAUSE has the meaning set forth in Section 18
---------------------
hereof.
13
<PAGE>
EXHIBIT A
PG&E CORPORATION
STOCK OPTION PLAN
(As amended effective as of February 16, 2000)
1. Purpose of the Plan
-------------------
This is the controlling and definitive statement of the PG&E Corporation
Stock Option Plan set forth herein and as may be amended from time to time
(hereinafter called the PLAN/2/). The purpose of the PLAN is to advance the
interests of the CORPORATION by providing ELIGIBLE PARTICIPANTS with
financial incentives to promote the success of its long-term (five to ten
years) business objectives, and to increase their proprietary interest in
the success of the CORPORATION. It is the intent of the CORPORATION to
reward those ELIGIBLE PARTICIPANTS who have a significant impact on
improved long-term corporate achievements. Inasmuch as the PLAN is designed
to encourage financial performance and to improve the value of
shareholders' investment in PG&E CORPORATION, the costs of the PLAN will be
funded from corporate earnings.
2. Plan Administration
-------------------
The PLAN shall be administered by the COMMITTEE, which shall be constituted
in such a manner as to comply with the rules governing a plan intended to
qualify as a discretionary plan under RULE 16b-3.
Subject to the provisions of the PLAN, the COMMITTEE shall have full and
final authority, in its sole discretion:
(a) to determine the ELIGIBLE PARTICIPANTS to whom OPTIONS shall be
granted and the number of shares of COMMON STOCK to be awarded under
each OPTION, based on the recommendation of the CHIEF EXECUTIVE
OFFICER (except that awards to the CHIEF EXECUTIVE OFFICER shall be
shall be based on the recommendation of the BOARD OF DIRECTORS);
provided, however, that the number of shares of COMMON STOCK to be
awarded under each OPTION shall be subject to the limitations
specified in Section 5 hereof;
(b) to determine the time or times at which OPTIONS shall be granted;
_____________
/2/ Capitalized words are defined in Section 20 hereof.
14
<PAGE>
(c) to designate the OPTIONS being granted as ISOS or NON-QUALIFIED STOCK
OPTIONS;
(d) to vary the OPTION vesting schedule described in Section 11 hereof;
(e) to determine the terms and conditions, not inconsistent with the terms
of the PLAN, of any OPTION granted hereunder (including, but not
limited to, the consideration and method of payment for shares
purchased upon the exercise of an OPTION, and any vesting acceleration
or exercisability provisions in the event of a CHANGE IN CONTROL or
TERMINATION), based in each case on such factors as the COMMITTEE
shall deem appropriate;
(f) to approve forms of agreement for use under the PLAN;
(g) to construe and interpret the PLAN and any related OPTION agreement
and to define the terms employed herein and therein;
(h) except as provided in Section 18 hereof, to modify or amend any OPTION
or to waive any restrictions or conditions applicable to any OPTION or
the exercise thereof;
(i) except as provided in Section 18 hereof, to prescribe, amend and
rescind rules, regulations and policies relating to the administration
of the PLAN;
(j) except as provided in Section 18 hereof, to suspend, terminate, modify
or amend the PLAN;
(k) to delegate to one or more agents such administrative duties as the
COMMITTEE may deem advisable, to the extent permitted by applicable
law; and
(l) to make all other determinations and take such other action with
respect to the PLAN and any OPTION granted hereunder as the COMMITTEE
may deem advisable, to the extent permitted by applicable law.
Notwithstanding the provisions contained in the foregoing paragraph, the
CHIEF EXECUTIVE OFFICER shall have the authority, in his sole discretion:
(a) to grant OPTIONS to any ELIGIBLE PARTICIPANT who, at the time of the
OPTION grant, (i) is not an officer of the CORPORATION or a DIRECTOR, and
(ii) if such ELIGIBLE PARTICIPANT is an EMPLOYEE, is receiving an annual
salary which is below the level which requires approval by the COMMITTEE;
(b) to determine the time or times at which OPTIONS shall be granted to
such ELIGIBLE PARTICIPANTS; (c) to designate the OPTIONS being granted to
such ELIGIBLE PARTICIPANTS as ISOS or NON-QUALIFIED STOCK
15
<PAGE>
OPTIONS; and (d) to vary the OPTION vesting schedule described in Section
11 hereof for the OPTIONS granted to such ELIGIBLE PARTICIPANTS; provided,
however, that (x) all grants of OPTIONS by the CHIEF EXECUTIVE OFFICER
shall conform to the guidelines previously approved by the COMMITTEE, and
(y) the number of shares of COMMON STOCK to be awarded under each OPTION
shall be subject to the limitations specified in Section 5 hereof.
3. Shares of Stock Subject to the Plan
-----------------------------------
There shall be reserved for use under the PLAN and for the grant of any
other incentive awards pursuant to the PROGRAM (subject to the provisions
of Section 14 hereof) a total of 34,389,230 shares of COMMON STOCK, which
shares may be authorized but unissued shares of COMMON STOCK or issued
shares of COMMON STOCK which shall have been reacquired by PG&E
CORPORATION.
If any OPTION expires or terminates for any reason without having been
exercised in full, then any unexercised, shares which were subject to such
OPTION (except shares as to which a related TANDEM SAR has been exercised)
shall again be available for the future grant of OPTIONS under the PLAN
(unless the PLAN has terminated). In addition, shares may be reused or
added back to the PLAN to the extent permitted by applicable law.
4. Eligibility
-----------
OPTIONS will be granted only to ELIGIBLE PARTICIPANTS. ISOS will be
granted only to EMPLOYEES. The COMMITTEE, in its sole discretion, may
grant OPTIONS to an ELIGIBLE PARTICIPANT who is a resident or citizen of a
foreign country, with such modifications as the COMMITTEE may deem
advisable to reflect the laws, tax policy or customs of such foreign
country.
The PLAN shall not confer upon any OPTIONEE any right to continuation of
employment, service as a DIRECTOR or consulting relationship with the
CORPORATION; nor shall it interfere in any way with the right of the
OPTIONEE or the CORPORATION to terminate such employment, service as a
DIRECTOR or consulting relationship at any time, with or without cause.
5. Limitation on Options and SARs Awarded to Any Eligible Participant
------------------------------------------------------------------
The aggregate number of shares of COMMON STOCK with respect to which any
ELIGIBLE PARTICIPANT may be granted OPTIONS and SARS under the PLAN during
any calendar year shall in no event exceed two percent (2%) of the total
number of shares reserved for use under the PLAN.
16
<PAGE>
6. Designation of Options
----------------------
At the time of the grant of each OPTION under the PLAN, the COMMITTEE (or
the CHIEF EXECUTIVE OFFICER, in the case of OPTIONS granted by the CHIEF
EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2
hereof) shall determine whether such OPTION is to be designated as an ISO
or a NON-QUALIFIED STOCK OPTION; provided, however, that ISOS may be
granted only to EMPLOYEES.
Notwithstanding such designation, to the extent that the aggregate FAIR
MARKET VALUE (determined for each share as of the date of grant of the
OPTION covering each share) of the shares with respect to which OPTIONS
designated as ISOS become exercisable for the first time by any OPTIONEE
during any calendar year exceeds $100,000, such OPTIONS shall be treated as
NON-QUALIFIED STOCK OPTIONS.
7. Option Price
------------
The OPTION PRICE of the COMMON STOCK under each OPTION issued shall be the
FAIR MARKET VALUE of the COMMON STOCK on the date of grant.
8. Stock Appreciation Rights
-------------------------
At the discretion of the COMMITTEE, an OPTION may be granted with or
without a TANDEM SAR which permits the OPTIONEE to surrender unexercised an
OPTION or portion thereof and to receive in exchange a payment having a
value equal to the difference between (x) the FAIR MARKET VALUE of the
COMMON STOCK covered by the surrendered portion of the OPTION on the date
the SAR is exercised and (y) the OPTION PRICE for such COMMON STOCK. The
SAR is subject to the same terms and conditions as the related OPTION,
except that (i) the SAR may be exercised only when there is a positive
spread (i.e., when the FAIR MARKET VALUE of the COMMON STOCK subject to the
OPTION exceeds the OPTION PRICE), (ii) in accordance with Section 9 hereof,
payment of the DEA (if any) to the OPTIONEE may be restricted, and (iii) if
the OPTIONEE is a SECTION 16 OFFICER, DIRECTOR or other person whose
transactions in the COMMON STOCK are subject to Section 16(b) of the
EXCHANGE ACT, the SAR may be exercised only during the period beginning on
the third (3rd) business day following the date of release of the
CORPORATION's quarterly or annual statement of earnings and ending on the
twelfth (12th) business day following such date. Upon the exercise of a
SAR, the number of shares subject to exercise under the related OPTION
shall be automatically reduced by the number of shares represented by the
OPTION or portion thereof surrendered. No payment will be required from
the OPTIONEE upon the exercise of a SAR, except that any amount necessary
to satisfy applicable federal, state or local tax requirements shall be
withheld.
17
<PAGE>
9. Dividend Equivalent Account
---------------------------
At the discretion of the COMMITTEE, an OPTION may be granted with or
without TANDEM DIVIDEND EQUIVALENTS. When an OPTION is granted with TANDEM
DIVIDEND EQUIVALENTS, a Dividend Equivalent Account ("DEA") shall be
established for the OPTIONEE. This DEA shall be credited quarterly on each
dividend record date with dividends which would have been paid on the
COMMON STOCK subject to the unexercised portion of the OPTION (including
any portion which has not yet vested on the record date), if such portion
had been exercised. Except as provided in Section 12(d) hereof, at the
time the OPTION or any related SAR is exercised, the OPTIONEE shall receive
all funds which have accumulated in the DEA with respect to the shares of
COMMON STOCK for which the OPTION or SAR is being exercised; provided,
however, that if the OPTIONEE exercises a SAR, such DEA funds shall only be
paid to the OPTIONEE if (i) the percentage increase in the FAIR MARKET
VALUE of the COMMON STOCK over the OPTION PRICE averages at least five
percent (5%) per year for the first five (5) years after the grant, or (ii)
in the case of OPTIONS held for longer than five (5) years from the date of
grant, such FAIR MARKET VALUE has increased by at least twenty-five percent
(25%) over the OPTION PRICE.
10. Terms of Options
----------------
The term of each ISO shall be for ten (10) years from the date of grant,
subject to earlier termination as provided in Section 12 hereof. The term
of each NON-QUALIFIED STOCK OPTION shall be ten (10) years and one (1) day
from the date of grant, subject to earlier termination as provided in
Section 12 hereof. Any provision of the PROGRAM to the contrary
notwithstanding, no OPTION shall be exercised after the time limitations
stated in this Section 10.
11. Limitations on Exercise
-----------------------
(a) Each OPTION granted under the PROGRAM shall become exercisable and
vested only to the following extent: (i) up to one-third (1/3) of the
OPTIONS granted may be exercised on or after the second (2nd)
anniversary of the date of grant; (ii) up to two-thirds (2/3) of the
OPTIONS granted may be exercised on or after the third (3rd)
anniversary of the date of grant; and (iii) up to one hundred percent
(100%) of the OPTIONS granted may be exercised on or after the fourth
(4th) anniversary of the date of grant.
(b) No OPTION under the PROGRAM designated by the COMMITTEE as an ISO and
granted before January 1, 1987 may be exercised while there is
outstanding in the hands of the OPTIONEE any ISO which was granted
18
<PAGE>
before the granting of the ISO hereunder sought to be exercised. For
this purpose an ISO shall be treated as outstanding until such OPTION
is (i) exercised in full, (ii) surrendered in full by exercising SARS
pursuant to Section 8 hereof, or (iii) rendered void by reason of
lapse of time.
12. Termination of Employment or Relationship with the CORPORATION
--------------------------------------------------------------
(a) In the event of a TERMINATION by reason of a discharge or TERMINATION
FOR CAUSE, any unexercised OPTIONS theretofore granted to an OPTIONEE
under the PROGRAM shall forthwith terminate.
(b) In the event of a TERMINATION by reason of RETIREMENT, all OPTIONS
held by the OPTIONEE, to the extent that such OPTIONS have not
previously expired or been exercised, shall become fully exercisable
and vested, notwithstanding the provisions of Section 11(a) hereof,
and the OPTIONEE shall have the right to exercise such OPTIONS in full
at any time within their respective terms or within five (5) years
after such RETIREMENT, whichever is shorter. This five-year period
shall be extended if an OPTIONEE remains on the BOARD OF DIRECTORS
after RETIREMENT. In such case, the OPTIONS may be exercised as long
as the OPTIONEE remains a DIRECTOR and for a period of six (6) months
thereafter, or within five (5) years after RETIREMENT, whichever is
longer; provided, however, that no OPTION may be exercised after the
expiration of its term. To the extent any ISO held by the OPTIONEE is
exercised after the expiration of three (3) months after such
TERMINATION, the exercise will be deemed to involve the exercise of a
NON-QUALIFIED STOCK OPTION.
(c) In the event of a TERMINATION by reason of disability or death, all
OPTIONS held by the OPTIONEE, to the extent that such OPTIONS have not
previously expired or been exercised, shall become fully exercisable
and vested, notwithstanding the provisions of Section 11(a) hereof,
and the OPTIONEE (or the OPTIONEE'S estate or a person who acquired
the right to exercise such OPTIONS by bequest or inheritance) shall
have the right to exercise such OPTIONS at any time within their
respective terms or within one (1) year after the date of such
TERMINATION, whichever is shorter. The term "disability" shall, for
the purposes of the PLAN, be defined in Section 22(e)(3) of the CODE.
(d) In the event of a TERMINATION by reason of a divestiture or change in
control of a subsidiary of PG&E CORPORATION, which divestiture or
change in control results in such subsidiary no longer qualifying as a
subsidiary corporation under Section 424(f) of the CODE, all OPTIONS
held by the OPTIONEE, to the extent that such OPTIONS have not
previously expired or been exercised, shall become fully exercisable
and
19
<PAGE>
vested, notwithstanding the provisions of Section 11(a) hereof, and
the OPTIONEE shall have the right to exercise such OPTIONS in full at
any time within their respective terms or within three (3) years after
such TERMINATION, whichever is shorter. This three-year period shall
be extended if an OPTIONEE remains on the BOARD OF DIRECTORS after
such TERMINATION. In such case, the OPTIONS may be exercised as long
as the OPTIONEE remains a DIRECTOR and for a period of six (6) months
thereafter, or within three (3) years after such TERMINATION,
whichever is longer; provided, however, that no OPTION may be
exercised after the expiration of its term. To the extent any ISO held
by the OPTIONEE is exercised after the expiration of three (3) months
after such TERMINATION, the exercise will be deemed to involve the
exercise of a NON-QUALIFIED STOCK OPTION.
(e) In the event of a TERMINATION within one year after a CHANGE IN
CONTROL of the CORPORATION (other than a TERMINATION covered by
clauses (a), (b), or (c) above), OPTIONEE shall have the right to
exercise OPTIONS which OPTIONEE then holds (which OPTIONS will have
been accelerated previously in accordance with Section 16 below), to
the extent that such OPTIONS have not previously expired or been
exercised, in full at any time within their respective terms or within
three (3) years after such TERMINATION, whichever is shorter. This
three-year period shall be extended if an OPTIONEE remains on the
BOARD OF DIRECTORS after such TERMINATION. In such case, the OPTIONS
may be exercised as long as the OPTIONEE remains a DIRECTOR and for a
period of six (6) months thereafter, or within three (3) years after
such TERMINATION, whichever is longer; provided, however, that no
OPTION may be exercised after the expiration of its term. To the
extent any ISO held by the OPTIONEE is exercised after the expiration
of three (3) months after such TERMINATION, the exercise will be
deemed to involve the exercise of a NON-QUALIFIED STOCK OPTION.
(f) In the event of a TERMINATION for any reason other than those
specified in subparagraphs (a) through (e) above, (i) any unexercised
OPTION or OPTIONS granted under the PROGRAM shall be deemed canceled
and terminated forthwith, except that the OPTIONEE may exercise any
unexercised OPTIONS theretofore granted which are otherwise
exercisable and vested within the provisions of Section 11(a) hereof,
during the balance of their respective terms or within thirty (30)
days of such TERMINATION, whichever is shorter, and (ii) the DEA (if
any) shall not be credited with any dividends paid after the date of
such TERMINATION.
20
<PAGE>
(g) Notwithstanding the provisions of subparagraphs (a) through (f) above,
the COMMITTEE may, in its sole discretion, establish different terms
and conditions pertaining to the effect of TERMINATION, to the extent
permitted by applicable federal and state law.
13. Payment for Shares Upon Exercise of Options
-------------------------------------------
The exercise of any OPTION shall be contingent upon receipt by the
CORPORATION of (i) cash (including any DEA funds payable to the OPTIONEE in
connection with the exercise of such OPTION), (ii) check, (iii) shares of
COMMON STOCK, (iv) an executed exercise notice together with irrevocable
instructions to a broker to either sell the shares subject to the OPTION or
hold such shares as collateral for a margin loan and to promptly deliver to
the CORPORATION the amount of sale or loan proceeds required to pay the
OPTION PRICE, (v) any combination of the foregoing in an amount equal to
the full OPTION PRICE of the shares being purchased, or (vi) such other
consideration and method of payment, other than a note from the OPTIONEE,
as the COMMITTEE, in its sole discretion, may allow (which, in the case of
an ISO shall be determined at the time of grant), to the extent permitted
by applicable law. For purposes of this paragraph, shares of COMMON STOCK
that are delivered in payment of the OPTION PRICE must have been previously
owned by the OPTIONEE for a minimum of one year, and shall be valued at
their FAIR MARKET VALUE as of the date of the exercise of the OPTION. The
CORPORATION shall not make loans to any OPTIONEE for the purpose of
exercising OPTIONS.
14. Adjustments Upon Changes in Number or Value of Shares of Common Stock
---------------------------------------------------------------------
If there are any changes in the number or value of shares of COMMON STOCK
by reason of stock dividends, stock splits, reverse stock splits,
recapitalizations, mergers, consolidations or other events that materially
increase or decrease the number or value of issued and outstanding shares
of COMMON STOCK, the COMMITTEE may make such adjustments as it shall deem
appropriate, in order to prevent dilution or enlargement of rights.
15. Non-Transferability of Options
------------------------------
An OPTION shall not be transferable by the OPTIONEE otherwise than by will
or the laws of descent and distribution, or pursuant to a qualified
domestic relations order as defined by the CODE, Title I of ERISA or the
rules thereunder. During the lifetime of the OPTIONEE, an OPTION may be
exercised only by the OPTIONEE or by an alternate payee under a qualified
domestic relations order.
16. Change in Control
-----------------
21
<PAGE>
Upon the occurrence of a CHANGE IN CONTROL (as defined below), any time
periods relating to the exercise of any OPTION granted hereunder shall be
accelerated so that such OPTION may be immediately exercised in full.
A "CHANGE IN CONTROL" shall be deemed to have occurred if:
(a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any
trustee, agent or other fiduciary for any such plan acting in such
person's capacity as such fiduciary), directly or indirectly, becomes
the beneficial owner of securities of PG&E CORPORATION representing
twenty percent (20%) or more of the combined voting power of the
CORPORATION's then outstanding securities;
(b) during any two consecutive years, individuals who at the beginning of
such a period constitute the BOARD OF DIRECTORS cease for any reason
to constitute at least a majority of the BOARD OF DIRECTORS, unless
the election, or the nomination for election by the shareholders of
the CORPORATION, of each new DIRECTOR was approved by a vote of at
least two-thirds (2/3) of the DIRECTORS then still in office who were
DIRECTORS at the beginning of the period; or
(c) the shareholders of the CORPORATION shall have approved (i) any
consolidation or merger of the CORPORATION other than a merger or
consolidation which would result in the voting securities of the
CORPORATION outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent of such
surviving entity) at least 70 percent of the Combined Voting Power of
the CORPORATION, such surviving entity or the parent of such surviving
entity outstanding immediately after the merger or consolidation; (ii)
any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the
assets of the CORPORATION, or (iii) any plan or proposal for the
liquidation or dissolution of the CORPORATION. For purposes of this
paragraph, the term Combined Voting Power shall mean the combined
voting power of the CORPORATION's or other relevant entity's then
outstanding voting securities.
22
<PAGE>
17. Listing and Registration of Shares
----------------------------------
Each OPTION shall be subject to the requirement that if at any time the
COMMITTEE shall determine, in its discretion, that the listing,
registration or qualification of the shares covered thereby under any
securities exchange or under any state or federal law or the consent or
approval of any governmental regulatory body, including the California
Public Utilities Commission, is necessary or desirable as a condition of,
or in connection with, the granting of such OPTION or the issue or purchase
of shares thereunder, such OPTION may not be exercised in whole or in part
unless and until such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the COMMITTEE.
18. Amendment and Termination of the Plan and Options
-------------------------------------------------
The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate,
modify or amend the PLAN in any respect; provided, however, that, to the
extent necessary and desirable to comply with Section 422 of the CODE (or
any other applicable law or regulation, including the requirements of any
stock exchange on which the COMMON STOCK is listed or quoted), shareholder
approval of any PLAN amendment shall be obtained in such a manner and to
such a degree as is required by the applicable law or regulation.
No suspension, termination, modification or amendment of the PLAN may,
without the consent of the OPTIONEE, adversely affect his or her rights
under OPTIONS theretofore granted to such OPTIONEE. In the event of
amendments to the CODE or applicable rules or regulations relating to ISOS
subsequent to the date hereof, the CORPORATION may amend the PLAN, and the
CORPORATION and OPTIONEES holding OPTION agreements may agree to amend
outstanding OPTION agreements, to conform to such amendments.
The COMMITTEE may make such amendments or modifications in the terms and
conditions of any OPTION as it may deem advisable, or cancel or annul any
grant of an OPTION; provided, however, that no such amendment,
modification, cancellation or annulment may, without the consent of the
OPTIONEE, adversely affect his or her rights under such OPTION; and
provided further the COMMITTEE may not reduce the OPTION PRICE or purchase
price of any OPTION or OPTION below the original OPTION PRICE or purchase
price.
Notwithstanding the foregoing, the COMMITTEE reserves the right, in its
sole discretion, to (i) convert any outstanding ISOS to NON-QUALIFIED STOCK
OPTIONS, (ii) to require a OPTIONEE to forfeit any unexercised or
unpurchased OPTIONS, any shares received or purchased pursuant to an
OPTION, or any gains realized by virtue of the receipt of an OPTION in the
event that such OPTIONEE competes against the CORPORATION, and (iii) to
cancel or annul any grant of an
23
<PAGE>
OPTION in the event of a OPTIONEE'S TERMINATION FOR CAUSE. For purposes of
the PROGRAM, "TERMINATION FOR CAUSE" shall include, but not be limited to,
termination because of dishonesty, criminal offense or violation of a work
rule, and shall be determined by, and in the sole discretion of, the
COMMITTEE.
19. Effective Date of the Plan and Duration
---------------------------------------
The PLAN first became effective as of January 1, 1992. It has since been
amended and restated. The amended and restated PLAN became effective as of
January 1, 1996, upon approval by the shareholders of Pacific Gas and
Electric Company at its Annual Meeting on April 17, 1996. Effective
January 1, 1997, the PLAN was assumed by PG&E CORPORATION. The PLAN was
subsequently amended on October 21, 1998, April 21, 1999, and February 16,
2000. Unless terminated sooner pursuant to Section 18 hereof, the PLAN
shall terminate on December 31, 2005.
20. Definitions
-----------
(a) BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION.
------------------
(b) CHANGE IN CONTROL has the meaning set forth in Section 16 hereof.
-----------------
(c) CHIEF EXECUTIVE OFFICER means the Chief Executive Officer of PG&E
-----------------------
CORPORATION.
(d) CODE means the Internal Revenue Code of 1986, as amended from time to
----
time.
(e) COMMITTEE means the Nominating and Compensation Committee of the BOARD
---------
OF DIRECTORS or any successor to such committee.
(f) COMMON STOCK means common shares of PG&E CORPORATION with no par value
------------
and any class of common shares into which such common shares hereafter
may be converted.
(g) CONSULTANT means any person, including an advisor, who is engaged by
----------
the CORPORATION to render services.
(h) CORPORATION means PG&E CORPORATION, and any parent corporation (as
-----------
defined in Section 424(e) of the CODE) or subsidiary corporation (as
defined in Section 424(f) of the CODE).
(i) DEA means a Dividend Equivalent Account described in Section 9 hereof.
---
24
<PAGE>
(j) DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or
--------
the Board of Directors of any parent corporation (as defined in
Section 424(e) of the CODE) which may hereafter be established,
including an advisory, emeritus or honorary director.
(k) DIVIDEND EQUIVALENT means a right that entitles the OPTIONEE to
-------------------
receive cash or COMMON STOCK based on the dividends declared on the
COMMON STOCK covered by such right.
(l) ELIGIBLE PARTICIPANT means any KEY EMPLOYEE. It also means, if so
--------------------
identified by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the
case of OPTIONS granted by the CHIEF EXECUTIVE OFFICER to certain
ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof), other EMPLOYEES,
DIRECTORS, CONSULTANTS, employees or consultants of any affiliates of
PG&E CORPORATION, and other persons whose participation in the PROGRAM
is deemed by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the
case of OPTIONS granted by the CHIEF EXECUTIVE OFFICER to certain
ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof) to be in the best
interests of the CORPORATION; provided, however, that DIRECTORS who
are not EMPLOYEES shall not be ELIGIBLE PARTICIPANTS for purposes of
the PLAN.
(m) EMPLOYEE means any person who is employed by the CORPORATION. The
--------
payment of a director's fee or consulting fee by the CORPORATION shall
not be sufficient to constitute "employment" by the CORPORATION.
(n) ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended.
(o) EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
------------
(p) FAIR MARKET VALUE means the closing price of the COMMON STOCK reported
-----------------
on the New York Stock Exchange Composite Transactions for the date
specified for determining such value.
(q) ISO means an OPTION intended to qualify as an incentive stock option
---
under Section 422 of the CODE.
(r) KEY EMPLOYEE means the Corporate Secretary, Treasurer, Vice Presidents
------------
and other executive officers of PG&E CORPORATION above the rank of
Vice President. It also means, if so identified by the
25
<PAGE>
COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the case of OPTIONS
granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE
PARTICIPANTS pursuant to Section 2 hereof), executive officers of
wholly-owned subsidiaries of PG&E CORPORATION (including subsidiaries
which become such after adoption of the PROGRAM) and any other key
management employee of PG&E CORPORATION or any wholly-owned subsidiary
of PG&E CORPORATION.
(s) NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE.
---------------------
(t) NON-QUALIFIED STOCK OPTION means any OPTION which is not an ISO.
--------------------------
(u) OPTION means an option to purchase shares of COMMON STOCK granted
------
under the PLAN.
(v) OPTIONEE means the ELIGIBLE PARTICIPANT receiving the OPTION, or his
--------
or her legal representative, legatees, distributees or alternate
payees, as the case may be.
(w) OPTION PRICE means the purchase price for the COMMON STOCK upon
------------
exercise of an OPTION.
(x) PG&E CORPORATION means PG&E CORPORATION, a California corporation.
----------------
(y) PLAN means this Stock Option Plan as amended and restated herein and
----
as may be amended from time to time, or any successor plan which the
COMMITTEE may adopt from time to time with respect to the grant of
OPTIONS under the PROGRAM.
(z) PROGRAM means the PG&E Corporation Long-Term Incentive Program, as
-------
amended effective as of April 21, 1999, and as may be amended from
time to time, pursuant to which the PLAN is adopted.
(aa) RETIREMENT means termination of employment with the CORPORATION at age
----------
55 or later, provided that the ELIGIBLE PARTICIPANT was employed by
the CORPORATION for at least five consecutive years prior to the date
of termination.
(bb) RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any successor to
----------
Rule 16b-3, as in effect when discretion is being exercised with
respect to the PLAN.
26
<PAGE>
(cc) SAR means a stock appreciation right whose value is based on the
---
increase in the FAIR MARKET VALUE of the COMMON STOCK covered by such
right.
(dd) SECTION 16 OFFICER means any person who is designated by the BOARD OF
------------------
DIRECTORS as an executive officer of PG&E CORPORATION and any other
person who is designated as an officer of PG&E CORPORATION for
purposes of Section 16 of the EXCHANGE ACT.
(ee) TANDEM refers to a DIVIDEND EQUIVALENT or SAR (as the case may be)
------
granted in conjunction with an OPTION.
(ff) TERMINATION occurs when an EMPLOYEE ceases to be employed by the
-----------
CORPORATION as a common law employee, when a DIRECTOR ceases to be a
member of the BOARD OF DIRECTORS or the Board of Directors of any
parent corporation which may hereafter be established (as the case may
be), or when the relationship between the CORPORATION and a CONSULTANT
or other ELIGIBLE PARTICIPANT terminates, as the case may be.
(gg) TERMINATION FOR CAUSE has the meaning set forth in Section 12 hereof.
---------------------
27
<PAGE>
EXHIBIT B
PG&E CORPORATION
PERFORMANCE UNIT PLAN
This is the controlling and definitive statement of the Performance
Unit Plan ("PLAN"/3/) for ELIGIBLE EMPLOYEES of PG&E CORPORATION ("CORPORATION")
and such other companies, affiliates, subsidiaries, or associations as the BOARD
OF DIRECTORS may designate from time to time. The PLAN was first adopted by the
BOARD in 1989 and was effective January 1, 1990. It has since been amended from
time to time, most recently on February 16, 2000.
ARTICLE I
DEFINITIONS
-----------
1.01 Board of Directors or Board shall mean the BOARD OF DIRECTORS of
------------------
the CORPORATION or, when appropriate, any committee of the BOARD which has been
delegated the authority to take action with respect to the PLAN.
1.02 Committee shall mean the Nominating and Compensation Committee
---------
of the BOARD OF DIRECTORS.
1.03 Corporation shall mean PG&E CORPORATION, a California
-----------
corporation.
1.04 Eligible Employee shall mean employees of the CORPORATION who
-----------------
are officers at the vice presidential level or above, the corporate secretary,
the controller, and the treasurer of the CORPORATION, and such other employees
of the CORPORATION, other companies, affiliates, subsidiaries, or associations
as may be designated by the COMMITTEE.
1.05 Performance Targets shall mean the annual CORPORATION financial
-------------------
and operational goals adopted by the COMMITTEE to be used in determining awards
under the PLAN.
1.06 Plan shall mean the Performance Unit Plan ("PUP") as set forth
----
herein and as may be amended from time to time.
1.07 Plan Administrator shall mean the COMMITTEE or such individual
------------------
or individuals as that COMMITTEE may appoint to handle the day-to-day affairs of
the PLAN.
____________________________________
/3/ Words in all capitals are defined in Article I.
28
<PAGE>
1.08 Price shall mean the average market price of STOCK for the last
-----
30-day period of the YEAR preceding the YEAR in which UNITS are payable.
1.09 PUP Units shall mean the units granted to ELIGIBLE EMPLOYEES who
---------
participate in the PLAN. A PUP UNIT has the equivalent value of the current
market price of a share of STOCK at the time of grant.
1.10 Retirement means termination of employment with the CORPORATION
----------
at age 55 or later, provided that the ELIGIBLE EMPLOYEE was employed by the
CORPORATION for at least five consecutive years prior to the date of
termination.
1.11 Stock shall mean the common stock of the CORPORATION and any
-----
class of common shares into which such STOCK hereafter may be converted.
1.12 Vesting Period shall mean the three calendar YEARS commencing
--------------
with the YEAR in which PUP UNITS are granted.
1.13 Year shall mean a calendar year.
----
ARTICLE II
2.01 Prior to the beginning of each YEAR, the COMMITTEE shall
determine whether PUP UNITS will be granted for such YEAR, the ELIGIBLE
EMPLOYEES to whom PUP UNITS will be granted, and the number of PUP UNITS to be
granted to each ELIGIBLE EMPLOYEE. Employees who become ELIGIBLE EMPLOYEES after
the beginning of a YEAR shall be entitled to a prorata grant of PUP UNITS.
2.02 At the same time that the COMMITTEE makes its determination as
to the granting of PUP UNITS, it shall also establish PERFORMANCE TARGETS.
Although it is intended that PERFORMANCE TARGETS will not change in the course
of the YEAR, the COMMITTEE reserves the right to modify or adjust a previously
set PERFORMANCE TARGET if, in its sole discretion, extraordinary events warrant
such modification or adjustment; provided, however, that no such modification or
adjustment shall increase the amount of any payment that would otherwise be due
based upon performance as measured against the original PERFORMANCE TARGET.
2.03 Each grant of PUP UNITS shall have its own VESTING PERIOD.
Subject to modification as measured against a given YEAR's applicable
PERFORMANCE TARGET, each grant of PUP UNITS shall be payable as follows:
a. One-third after the end of the first YEAR of the VESTING PERIOD;
29
<PAGE>
b. One-third after the end of the second YEAR of the VESTING PERIOD;
and
c. One-third after the end of the third YEAR of the VESTING PERIOD.
2.04 To determine the number of PUP UNITS earned, the applicable
PERFORMANCE TARGET shall be the PERFORMANCE TARGET for the YEAR in which the PUP
UNITS vest. Performance as measured against the applicable PERFORMANCE TARGET
for a YEAR shall modify all PUP UNITS that vest at the end of such YEAR. The
PERFORMANCE TARGETS established by the COMMITTEE may modify the number of UNITS
earned from 0% to 200% of the number of vested UNITS.
2.05 ELIGIBLE EMPLOYEES shall receive a cash payment as soon as
practicable following the YEAR PUP UNITS vest pursuant to the schedule set forth
in Section 2.03. The amount of the payment shall be equal to the product of the
number of PUP UNITS earned multiplied by the PRICE of STOCK.
2.06 Each time that the CORPORATION declares a dividend on its STOCK,
an amount equal to the dividend multiplied by an ELIGIBLE EMPLOYEE's
outstanding, but unearned PUP UNITS, shall be accrued on behalf of each ELIGIBLE
EMPLOYEE. As soon as practicable following the end of each YEAR, ELIGIBLE
EMPLOYEES shall receive a cash payment of the dividends accrued for that YEAR,
modified by performance for that YEAR as measured under Section 2.04.
2.07 An ELIGIBLE EMPLOYEE may elect to defer the payment of PUP UNITS
and/or dividends paid on PUP UNITS by making a timely election under the
Deferred Compensation Plan. Deferrals of benefits payable under this Plan shall
be subject to the rules contained in the Deferred Compensation Plan governing
elections to defer and receipt of deferred amounts.
ARTICLE III
3.01 Retirement. Upon RETIREMENT, all outstanding PUP UNITS continue
----------
to be payable according to the terms of the PLAN. Thus, the number of UNITS
eventually earned by a retired employee is still subject to modification
depending on the extent to which applicable PERFORMANCE TARGETS are met during
the YEAR preceding the January in which UNITS become payable under the schedule
of Section 2.03. A retired employee is not entitled to receive grants of PUP
UNITS after RETIREMENT.
3.02 Disability. If an ELIGIBLE EMPLOYEE is both disabled and
----------
entitled to receive benefits under Pacific Gas and Electric Company's Long Term
30
<PAGE>
Disability Plan, UNITS granted prior to the date of disability shall continue to
be payable according to the terms of this PLAN. An ELIGIBLE EMPLOYEE is not
entitled to receive grants of PUP UNITS after the date of disability as
determined under the provisions of the Long Term Disability Plan. If an
ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE because of disability and is
not entitled to receive benefits under Pacific Gas and Electric Company's Long
Term Disability Plan, all outstanding grants of PUP UNITS become vested and
payable as soon as practicable in the YEAR following the YEAR in which the
ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE. All of the UNITS payable
shall be subject to modification based upon performance as measured against the
PERFORMANCE TARGET for the YEAR in which the ELIGIBLE EMPLOYEE ceases to be an
ELIGIBLE EMPLOYEE.
3.03 Death. In the event of the death of an ELIGIBLE EMPLOYEE, all
-----
outstanding grants of PUP UNITS held by the ELIGIBLE EMPLOYEE at the date of
death shall become vested and payable as soon as practicable in the YEAR
following the YEAR of death. All of the UNITS payable after an ELIGIBLE
EMPLOYEE's death shall be subject to modification based upon performance as
measured against the PERFORMANCE TARGET for the YEAR in which the death of the
ELIGIBLE EMPLOYEE occurs.
3.04 Termination. If an ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE
-----------
EMPLOYEE for any reason other than RETIREMENT, disability, or death, all
outstanding grants of PUP UNITS shall be canceled as of the date that the
ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE unless otherwise provided in
the PG&E Corporation Officer Severance Policy.
3.05 Change in Control. Upon a Change in Control as defined in the
-----------------
PG&E Corporation Long Term Incentive Program (Program), all PUP UNITS shall
become vested and payable as soon as practicable in the YEAR following the
Change in Control in accordance with Section 16 of the Program.
ARTICLE IV
ADMINISTRATIVE PROVISIONS
-------------------------
4.01 Administration. The PLAN shall be administered by the PLAN
--------------
ADMINISTRATOR who shall have the authority to interpret the PLAN and make such
rules as it deems appropriate. The PLAN ADMINISTRATOR shall have the duty and
responsibility of maintaining records, making the requisite calculations, and
disbursing payments hereunder. The PLAN ADMINISTRATOR's interpretations,
determinations, rules, and calculations shall be final and binding on all
persons and parties concerned.
4.02 Amendment and Termination. The CORPORATION may amend or
-------------------------
terminate the PLAN at any time, provided, however, that no such amendment or
31
<PAGE>
termination shall adversely affect PUP UNITS which an ELIGIBLE EMPLOYEE has
earned prior to the date of such amendment or termination. PUP UNITS outstanding
but unearned at the date of any such amendment or termination may, in the sole
discretion of the CORPORATION, be canceled, and the CORPORATION shall have no
obligation to provide a substitute benefit of lesser, equal, or greater value.
4.03 Nonassignability of Benefits. The benefits payable under this
----------------------------
PLAN or the right to receive future benefits under this PLAN may not be
anticipated, alienated, pledged, encumbered, or subject to any charge or legal
process, and if any attempt is made to do so, or a person eligible for any
benefits becomes bankrupt, the interest under the PLAN of the person affected
may be terminated by the PLAN ADMINISTRATOR which, in its sole discretion, may
cause the same to be held if applied for the benefit of one or more of the
dependents of such person or make any other disposition of such benefits that it
deems appropriate.
4.04 No Guarantee of Employment. Nothing contained in this PLAN
--------------------------
shall be construed as a contract of employment between the CORPORATION or the
ELIGIBLE EMPLOYEE, or as a right of the ELIGIBLE EMPLOYEE to be continued in the
employ of the CORPORATION, to remain as an officer of the CORPORATION, or as a
limitation on the right of the CORPORATION to discharge any of its employees,
with or without cause.
4.05 Benefits Unfunded and Unsecured. The benefits under this PLAN
-------------------------------
are unfunded, and the interest under this PLAN of any ELIGIBLE EMPLOYEE and such
ELIGIBLE EMPLOYEE's right to receive a distribution of benefits under this PLAN
shall be an unsecured claim against the general assets of the CORPORATION.
4.06 Applicable Law. All questions pertaining to the construction,
--------------
validity, and effect of the PLAN shall be determined in accordance with the laws
of the United States, and to the extent not preempted by such laws, by the laws
of the State of California.
32
<PAGE>
EXHIBIT C
PG&E CORPORATION
NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
(As amended effective as of April 21, 1999)
1. Purpose of the Plan
-------------------
This is the controlling and definitive statement of the PG&E Corporation
Non-Employee Director Stock Incentive Plan (hereinafter called the
PLAN/4/). The purpose of the PLAN is to advance the interests of the
CORPORATION by providing NON-EMPLOYEE DIRECTORS with financial incentives
to promote the success of its long-term (five to ten years) business
objectives, and to increase their proprietary interest in the success of
the CORPORATION. Inasmuch as the PLAN is designed to encourage financial
performance and to improve the value of shareholders' investment in PG&E
CORPORATION, the costs of the PLAN will be funded from corporate earnings.
2. Formula Awards of Director Restricted Stock, Non-Qualified Stock Options
------------------------------------------------------------------------
and Phantom Stock to Non-Employee Directors
-------------------------------------------
All awards of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS and
PHANTOM STOCK under the PLAN shall be automatic and non-discretionary, and
shall be made strictly in accordance with the provisions contained herein.
No person shall have any discretion to select which NON-EMPLOYEE DIRECTORS
shall be granted DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or
PHANTOM STOCK. Further, no person shall have any discretion to determine
the number of shares of DIRECTOR RESTRICTED STOCK awarded to a NON-EMPLOYEE
DIRECTOR, and, except as otherwise provided in Section 4 with respect to a
NON-EMPLOYEE DIRECTOR'S election to allocate formula awards between NON-
QUALIFIED STOCK OPTIONS and PHANTOM STOCK, no person shall have any
discretion to determine the number of shares underlying NON-QUALIFIED STOCK
OPTIONS and PHANTOM STOCK awarded to a NON-EMPLOYEE DIRECTOR.
3. Awards of Director Restricted Stock
-----------------------------------
(a) On the first business day of each calendar year beginning on
January 1, 1998, during the duration of the PLAN, each person who is a
NON-EMPLOYEE DIRECTOR on the first business day of the applicable
calendar year shall receive a grant of DIRECTOR RESTRICTED STOCK in an
amount to be determined in accordance with the formula set forth in
this Section 3(a). The number of shares of DIRECTOR RESTRICTED
- -----------------------------
/4/Capitalized words are defined in Section 15 hereof.
33
<PAGE>
STOCK to be granted to each NON-EMPLOYEE DIRECTOR each calendar year
shall be determined by (i) dividing ten thousand dollars ($10,000) by
the FAIR MARKET VALUE of the COMMON STOCK on the first business day of
the applicable calendar year, and (ii) rounding the resulting number
down to the nearest whole share. No person shall receive more than one
(1) grant of DIRECTOR RESTRICTED STOCK during any calendar year.
(b) Shares of DIRECTOR RESTRICTED STOCK shall vest cumulatively as
follows: (i) twenty percent (20%) of such shares on the first
anniversary of the date of grant; (ii) forty percent (40%) of such
shares on the second anniversary of the date of grant; (iii) sixty
percent (60%) of such shares on the third anniversary of the date of
grant; (iv) eighty percent (80%) of such shares on the fourth
anniversary of the date of grant; and (v) one hundred percent (100%)
of such shares on the fifth anniversary of the date of grant. Shares
of DIRECTOR RESTRICTED STOCK may not be resold or otherwise
transferred by a GRANTEE until such shares are vested in accordance
with the provisions of this Section 3(b).
4. Annual Election to Receive Non-Qualified Stock Options and Phantom Stock
------------------------------------------------------------------------
By June 30 of each calendar year during the term of the Plan, each person
who is then a NON-EMPLOYEE DIRECTOR shall deliver to the Corporate
Secretary a written election to receive either NON-QUALIFIED STOCK OPTIONS
or PHANTOM STOCK, or both, with an aggregate value of $20,000, on the first
business day of the following calendar year, provided the person continues
to be a NON-EMPLOYEE DIRECTOR on the date the award would otherwise be
made. A NON-EMPLOYEE DIRECTOR may allocate between NON-QUALIFIED STOCK
OPTIONS and PHANTOM STOCK in minimum increments with a value equal to
$5,000, as determined in accordance with Section 5 below with respect to
NON-QUALIFIED STOCK OPTIONS, and Section 6 below, with respect to PHANTOM
STOCK. All awards of NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK made to
NON-EMPLOYEE DIRECTORS shall comply with Section 5 and Section 6 below,
respectively. A NON-EMPLOYEE DIRECTOR who has failed to make a timely
election or who became a NON-EMPLOYEE DIRECTOR after June 30 shall be
awarded NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK, each with a value of
$10,000 as determined in accordance with Section 5 and Section 6,
respectively, provided that the NON-EMPLOYEE DIRECTOR continues to be a
NON-EMPLOYEE DIRECTOR on the on the first business day of the following
calendar year. Notwithstanding the foregoing, elections for calendar year
1998 must be received by December 31, 1997, to be effective on the first
business day of calendar year 1998.
34
<PAGE>
5. Grant of Non-Qualified Stock Options to Non-Employee Directors
--------------------------------------------------------------
(a) On the first business day of each calendar year beginning on January
1, 1998, during the duration of the PLAN, each person who is then a
NON-EMPLOYEE DIRECTOR and who has elected to receive an award of NON-
QUALIFIED STOCK OPTIONS in accordance with Section 4, shall receive a
grant of NON-QUALIFIED STOCK OPTIONS with an aggregate value equal to
$5,000, $10,000, $15,000, or $20,000, as previously elected by the
NON-EMPLOYEE DIRECTOR (or $10,000 in the case of a NON-EMPLOYEE
DIRECTOR who has failed to make a timely election in accordance with
Section 4 or who became a NON-EMPLOYEE DIRECTOR after June 30) (the
"Elected Option Value"). The number of shares subject to the NON-
QUALIFIED STOCK OPTIONS shall be determined by dividing the Elected
Option Value by the value of a NON-QUALIFIED STOCK OPTION to purchase
a single share of PG&E Corporation common stock as of the first
business day of the applicable calendar year. The per stock option
value shall be calculated in accordance with the Black-Scholes stock
option valuation method using the average preceding November closing
price of PG&E Corporation stock and reducing the per option value so
calculated by twenty percent. The resulting number of NON-QUALIFIED
STOCK OPTIONS shall be rounded down to the nearest whole share. No
person shall receive more than one grant of NON-QUALIFIED STOCK
OPTIONS during any calendar year.
(b) The OPTION PRICE of the COMMON STOCK subject under each NON-QUALIFIED
STOCK OPTION shall be the FAIR MARKET VALUE of the COMMON STOCK on the
date of grant. The exercise of any NON-QUALIFIED STOCK OPTION shall be
contingent upon receipt by the CORPORATION of (i) cash, (ii) check,
(iii) shares of COMMON STOCK, (iv) an executed exercise notice
together with irrevocable instructions to a broker to either sell the
shares subject to the NON-QUALIFIED STOCK OPTION or hold such shares
as collateral for a margin loan and to promptly deliver to the
CORPORATION the amount of sale or loan proceeds required to pay the
OPTION PRICE, or (v) any combination of the foregoing in an amount
equal to the full OPTION PRICE of the shares being purchased. For
purposes of this paragraph, shares of COMMON STOCK that are delivered
in payment of the OPTION PRICE must have been previously owned by the
GRANTEE for a minimum of one year, and shall be valued at their FAIR
MARKET VALUE as of the date of the exercise of the NON-QUALIFIED STOCK
OPTION. The CORPORATION shall not make loans to any GRANTEE for the
purpose of exercising NON-QUALIFIED STOCK OPTIONS.
(c) Each NON-QUALIFIED STOCK OPTION granted under the Plan shall become
exercisable and vested cumulatively as follows: (i) up to thirty-
35
<PAGE>
three percent (33%) of the NON-QUALIFIED STOCK OPTION may be exercised
on or after the second anniversary of the date of grant; (ii) up to
sixty-six percent (66%) of the NON-QUALIFIED STOCK OPTION may be
exercised on or after the third anniversary of the date of grant; and
(iii) up to one hundred percent (100%) of the NON-QUALIFIED STOCK
OPTION may be exercised on or after the fourth anniversary of the date
of grant.
(d) The term of each NON-QUALIFIED STOCK OPTION shall be ten years and one
day from the date of grant, subject to earlier termination as provided
in Section 9 hereof. Any provision of the PLAN to the contrary
notwithstanding, no NON-QUALIFIED STOCK OPTION shall be exercised
after the time limitations stated in this Section 5(d).
6. Awards of Phantom Stock to Non-Employee Directors
-------------------------------------------------
(a) On the first business day of each calendar year beginning on January
1, 1998, during the duration of the PLAN, each person who is then a
NON-EMPLOYEE DIRECTOR and who has elected to receive an award of
PHANTOM STOCK in accordance with Section 4, shall be credited with an
amount of PHANTOM STOCK with a value (as determined by the FAIR MARKET
VALUE of the COMMON STOCK on the first business day of the applicable
calendar year) equal to $5,000, $10,000, $15,000, or $20,000, as
previously elected by the NON-EMPLOYEE DIRECTOR (the "Elected Phantom
Stock Value"). The number of shares of PHANTOM STOCK (including
fractions computed to three decimal places) to be granted to each NON-
EMPLOYEE DIRECTOR each calendar year shall be determined by dividing
the Elected Phantom Stock Value (or $10,000 in the case of a NON-
EMPLOYEE DIRECTOR who has failed to make a timely election in
accordance with Section 4 or who became a NON-EMPLOYEE DIRECTOR after
June 30) by the FAIR MARKET VALUE of the COMMON STOCK on the first
business day of the applicable calendar year. No person shall receive
more than one grant of PHANTOM STOCK during any calendar year. The
shares of PHANTOM STOCK awarded to a NON-EMPLOYEE DIRECTOR shall be
credited to a newly established PHANTOM STOCK account for the NON-
EMPLOYEE DIRECTOR. Each share of PHANTOM STOCK shall be deemed to be
equal to one share (or fraction thereof) of COMMON STOCK on the date
of grant, and shall thereafter fluctuate in value in accordance with
the FAIR MARKET VALUE of the COMMON STOCK.
(b) Each NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall be credited
quarterly on each dividend payment date with additional shares of
PHANTOM STOCK (including fractions computed to three decimal places)
determined by dividing (i) the aggregate amount of dividends, i.e,.
the dividend multiplied by the number of shares of
36
<PAGE>
PHANTOM STOCK credited to the participant's account as of the dividend
record date, by (ii) by the FAIR MARKET VALUE of the COMMON STOCK on
the dividend payment date.
(c) Payment of the shares of PHANTOM STOCK credited to a NON-EMPLOYEE
DIRECTOR'S PHANTOM STOCK account shall only be made after the NON-
EMPLOYEE DIRECTOR'S RETIREMENT or MANDATORY RETIREMENT from the BOARD
OF DIRECTORS. Payment shall be made only in the form of shares of
COMMON STOCK equal to the number of shares of PHANTOM STOCK credited
to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account on the date of
distribution, rounded down to the nearest whole share. The NON-
EMPLOYEE DIRECTOR may elect to receive the number of shares of COMMON
STOCK to which he is entitled in a lump sum distribution of the entire
amount or in a series of ten or less approximately equal annual
installments, provided that distribution shall commence no later than
January of the year following the year in which the NON-EMPLOYEE
DIRECTOR'S RETIREMENT or MANDATORY RETIREMENT occurred.
7. Shares of Stock Subject to the Plan
-----------------------------------
There shall be reserved for use under the PLAN and for the grant of any
other INCENTIVE AWARDS pursuant to the PROGRAM (subject to the provisions
of Section 10 hereof) a total of 34,389,230 shares of COMMON STOCK, which
shares may be authorized but unissued shares of COMMON STOCK or issued
shares of COMMON STOCK which shall have been reacquired by PG&E
CORPORATION.
8. Dividend, Voting and Other Shareholder Rights
---------------------------------------------
Except as otherwise provided in the PLAN, each GRANTEE shall have all of
the rights of a shareholder of PG&E CORPORATION with respect to all
outstanding shares of DIRECTOR RESTRICTED STOCK registered in his or her
name, whether or not such shares are vested, including the right to receive
dividends and other distributions paid or made with respect to such shares
and the right to vote such shares. No GRANTEE shall have any of the rights
of a shareholder of PG&E CORPORATION with respect to a NON-QUALIFIED STOCK
OPTION until the shares acquired upon exercise of such NON-QUALIFIED STOCK
OPTION have been issued and registered in his or her name. No GRANTEE shall
have any of the rights of a shareholder of PG&E CORPORATION with respect to
PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account
under the Plan.
9. Termination of Status as a Non-Employee Director
------------------------------------------------
37
<PAGE>
(a) In the event of a TERMINATION by reason of disability or death, (i)
all shares of DIRECTOR RESTRICTED STOCK held by the GRANTEE shall
become fully vested, notwithstanding the provisions of Section 3(b)
hereof, and the GRANTEE (or the GRANTEE'S estate or a person who
acquired the shares of DIRECTOR RESTRICTED STOCK by bequest or
inheritance) shall have the right to resell or transfer such shares at
any time, (ii) all NON-QUALIFIED STOCK OPTIONS held by the GRANTEE, to
the extent that such NON-QUALIFIED STOCK OPTIONS have not previously
expired or been exercised, shall become fully vested and exercisable,
notwithstanding the provisions of Section 5(c) hereof, and the GRANTEE
(or the GRANTEE'S estate or a person who acquired the right to
exercise the NON-QUALIFIED STOCK OPTION by bequest or inheritance)
shall have the right to exercise the NON-QUALIFIED STOCK OPTIONS at
any time within their respective terms or within one (1) year after
the date of the GRANTEE'S death or disability, whichever is shorter,
and (iii) all shares of PHANTOM STOCK credited to the NON-EMPLOYEE
DIRECTOR'S PHANTOM STOCK account shall immediately become payable to
the GRANTEE (or the GRANTEE'S estate or a person who acquired the
shares of PHANTOM STOCK by bequest or inheritance) in the form of a
number of shares of COMMON STOCK equal to the number of shares of
PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK
account, rounded down to the nearest whole share. The term
"disability" shall, for the purposes of the PLAN, be defined in
Section 22(e)(3) of the CODE.
(b) In the event of a TERMINATION by reason of MANDATORY RETIREMENT, (i)
all shares of DIRECTOR RESTRICTED STOCK held by the GRANTEE shall
become fully vested, notwithstanding the provisions of Section 3(b)
hereof, and the GRANTEE shall have the right to resell or transfer
such shares at any time, (ii) the NON-QUALIFIED STOCK OPTIONS then
held by the GRANTEE, to the extent that such NON-QUALIFIED STOCK
OPTIONS have not previously expired or been exercised, shall become
fully vested and exercisable, notwithstanding the provisions of
Section 5(c) hereof, and the GRANTEE shall have the right to exercise
the NON-QUALIFIED STOCK OPTIONS at any time within their respective
terms or within five (5) years after such MANDATORY RETIREMENT,
whichever is shorter; and (iii) all shares of PHANTOM STOCK credited
to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall become
payable to the GRANTEE in accordance with Section 6(c) hereof.
(c) In the event of a TERMINATION for any reason other than those
specified in subparagraphs (a) and (b) above, (i) any unvested shares
of DIRECTOR RESTRICTED STOCK granted hereunder shall be forfeited and
the GRANTEE shall return to the CORPORATION for cancellation any stock
certificates representing such forfeited shares which forfeited shares
shall
38
<PAGE>
be deemed to be canceled and no longer outstanding as of the date of
TERMINATION; and from and after the date of TERMINATION, the GRANTEE
shall cease to be a shareholder with respect to such forfeited shares
and shall have no dividend, voting or other rights with respect
thereto, (ii) any NON-QUALIFIED STOCK OPTIONS granted hereunder that
have not yet vested and become exercisable shall terminate, (iii) the
GRANTEE shall have the right to exercise NON-QUALIFIED STOCK OPTIONS,
to the extent that such NON-QUALIFIED STOCK OPTIONS have vested and
become exercisable as of the date of TERMINATION, at any time within
their respective terms or within three months after such TERMINATION,
whichever is shorter, after which the NON-QUALIFIED STOCK OPTIONS
shall terminate, and (iv) all shares of PHANTOM STOCK credited to the
NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall be forfeited on
the date of TERMINATION; provided, however, that if the TERMINATION
results from the NON-EMPLOYEE DIRECTOR'S RETIREMENT, then the PHANTOM
STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account
shall become payable in accordance with Section 6(c) hereof.
(d) Notwithstanding the provisions of subparagraphs (a) through (c) above,
the BOARD OF DIRECTORS may, in its sole discretion, establish
different terms and conditions pertaining to the effect of
TERMINATION, to the extent permitted by applicable federal and state
law.
10. Adjustments Upon Changes in Number or Value of Shares of Common Stock
---------------------------------------------------------------------
If there are any changes in the number or value of shares of COMMON STOCK
by reason of stock dividends, stock splits, reverse stock splits,
recapitalizations, mergers, consolidations or other events that materially
increase or decrease the number or value of issued and outstanding shares
of COMMON STOCK, the BOARD OF DIRECTORS or COMMITTEE may make such
adjustments as it shall deem appropriate, in order to prevent dilution or
enlargement of rights.
11. Non-Transferability
-------------------
NON-QUALIFIED STOCK OPTIONS, PHANTOM STOCK, and shares of DIRECTOR
RESTRICTED STOCK that have not vested in accordance with the provisions of
Section 3(b) hereof, shall not be transferable by the GRANTEE otherwise
than by will or the laws of descent and distribution, or pursuant to a
qualified domestic relations order as defined by the CODE, Title I of ERISA
or the rules thereunder.
12. Change in Control
-----------------
39
<PAGE>
Upon the occurrence of a CHANGE IN CONTROL (as defined below), (i) any time
periods relating to the vesting of any shares of DIRECTOR RESTRICTED STOCK
granted hereunder shall be accelerated so that all such shares immediately
become fully vested, (ii) any time periods relating to the vesting of NON-
QUALIFIED STOCK OPTIONS granted hereunder shall be accelerated so that all
such NON-QUALIFIED STOCK OPTIONS immediately become fully vested and
exercisable for the remainder of their terms, and (iii) all shares of
PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTORS' PHANTOM STOCK
accounts shall become payable in accordance with Section 6(c) hereof as if
the CHANGE IN CONTROL constituted a RETIREMENT.
A "CHANGE IN CONTROL" shall be deemed to have occurred if:
(a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any
trustee, agent or other fiduciary for any such plan acting in such
person's capacity as such fiduciary), directly or indirectly, becomes
the beneficial owner of securities of PG&E CORPORATION representing
twenty percent (20%) or more of the combined voting power of PG&E
CORPORATION's then outstanding securities;
(b) during any two consecutive years, individuals who at the beginning of
such a period constitute the BOARD OF DIRECTORS cease for any reason
to constitute at least a majority of the BOARD OF DIRECTORS, unless
the election, or the nomination for election by the shareholders of
PG&E CORPORATION, of each new DIRECTOR was approved by a vote of at
least two-thirds (2/3) of the DIRECTORS then still in office who were
DIRECTORS at the beginning of the period; or
the shareholders of the CORPORATION shall have approved (i) any
consolidation or merger of the CORPORATION other than a merger or
consolidation which would result in the voting securities of the
CORPORATION outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent of such surviving entity)
at least 70 percent of the Combined Voting Power of the CORPORATION, such
surviving entity or the parent of such surviving entity outstanding
immediately after the merger or consolidation; (ii) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the CORPORATION,
or (iii) any plan or proposal for the liquidation or dissolution of the
CORPORATION. For purposes of this paragraph, the term Combined Voting
Power shall mean the combined voting power of the CORPORATION's or other
relevant entity's then outstanding voting securities.
13. Amendment and Termination of the Plan
-------------------------------------
40
<PAGE>
The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate,
modify or amend the PLAN in any respect; provided, however, that, to the
extent necessary and desirable to comply with the CODE (or any other
applicable law or regulation, including the requirements of any stock
exchange on which the COMMON STOCK is listed or quoted), shareholder
approval of any PLAN amendment shall be obtained in such a manner and to
such a degree as is required by the applicable law or regulation.
No suspension, termination, modification or amendment of the PLAN may,
without the consent of the GRANTEE, adversely affect his or her rights with
respect to DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or
PHANTOM STOCK theretofore granted to such GRANTEE.
Except as provided in Section 2 hereof, the BOARD OF DIRECTORS or COMMITTEE
may make such amendments or modifications in the terms and conditions of
any grant of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or
PHANTOM STOCK as it may deem advisable, or cancel or annul any grant of
DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or PHANTOM STOCK;
provided, however, that no such amendment, modification, cancellation or
annulment may, without the consent of the GRANTEE, adversely affect his or
her rights with respect to such grant.
14. Effective Date of the Plan and Duration
---------------------------------------
This PLAN became effective as of January 1, 1996, upon approval by the
shareholders of Pacific Gas and Electric Company at its Annual Meeting on
April 17, 1996. Effective January 1, 1997, the PLAN was assumed by PG&E
CORPORATION. At its meeting on December 17, 1997, the BOARD OF DIRECTORS
amended and restated the PLAN effective January 1, 1998, to (i) reflect the
adoption of new RULE 16B-3 which became effective November 1, 1996, and
(ii) provide automatic formula awards of NON-QUALIFIED STOCK OPTIONS and
PHANTOM STOCK to NON-EMPLOYEE DIRECTORS within the limits of the PROGRAM as
previously approved by shareholders in 1996. The COMMITTEE made various
amendments to the PLAN effective October 21, 1998. Effective April 21,
1999, the PLAN, and the PROGRAM of which the PLAN is a part, were amended
to add 11,000,000 shares of COMMON STOCK to the total number of shares of
COMMON STOCK reserved for use under the PLAN and the PROGRAM. Unless
terminated sooner pursuant to Section 13 hereof, the PLAN shall terminate
on December 31, 2005.
15. Definitions
-----------
(a) BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION.
------------------
41
<PAGE>
(b) CHANGE IN CONTROL has the meaning set forth in Section 12 hereof.
-----------------
(c) CODE means the Internal Revenue Code of 1986, as amended from time to
----
time.
(d) COMMITTEE means the Nominating and Compensation Committee of the BOARD
---------
OF DIRECTORS or any successor to such committee.
(e) COMMON STOCK means common shares of PG&E CORPORATION with no par value
------------
and any class of common shares into which such common shares hereafter
may be converted.
(f) CORPORATION means PG&E CORPORATION, and any parent corporation (as
-----------
defined in Section 424(e) of the CODE) or subsidiary corporation (as
defined in Section 424(f) of the CODE).
(g) DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or
--------
the Board of Directors of any parent corporation (as defined in
Section 424(e) of the CODE) which may hereafter be established,
including an advisory, emeritus or honorary director.
(h) DIRECTOR RESTRICTED STOCK means RESTRICTED STOCK granted to a NON-
-------------------------
EMPLOYEE DIRECTOR under the PLAN.
(i) EMPLOYEE means any person who is employed by the CORPORATION. The
--------
payment of a director's fee or consulting fee by the CORPORATION shall
not be sufficient to constitute "employment" by the CORPORATION.
(j) ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended.
(k) EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
------------
(l) FAIR MARKET VALUE means the closing price of the COMMON STOCK reported
-----------------
on the New York Stock Exchange Composite Transactions for the date
specified for determining such value.
(m) GRANTEE means the NON-EMPLOYEE DIRECTOR receiving the DIRECTOR
-------
RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK or his
or her legal representative, legatees, distributees or alternate
payees, as the case may be.
(n) MANDATORY RETIREMENT means retirement as a DIRECTOR at age 70 or at
--------------------
such other age as may be specified in the retirement policy for the
BOARD OF DIRECTORS or the Board of Directors of any parent
42
<PAGE>
corporation which may hereafter be established (as the case may be),
as in effect at the time of a NON-EMPLOYEE DIRECTOR'S TERMINATION.
(o) NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE.
---------------------
(p) NON-QUALIFIED STOCK OPTION means a option to purchase shares of COMMON
--------------------------
STOCK which is not intended to qualify as an incentive stock option
under Section 422 of the CODE.
(q) PG&E CORPORATION means PG&E CORPORATION, a California corporation.
----------------
(r) PHANTOM STOCK means allocated hypothetical shares of COMMON STOCK that
-------------
can be converted at a future date into stock.
(s) PLAN means this Non-Employee Director Stock Incentive Plan, as may be
----
amended from time to time, or any successor plan which the COMMITTEE
or BOARD OF DIRECTORS may adopt from time to time with respect to the
grant of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS,
PHANTOM STOCK or other stock-based incentive awards under the PROGRAM.
(t) PROGRAM means the PG&E Corporation Long-Term Incentive Program, as
-------
amended effective April 21, 1999, and as may be amended from time to
time, pursuant to which this PLAN is adopted.
(u) RESTRICTED STOCK means COMMON STOCK that is subject to forfeiture by
----------------
the GRANTEE to the CORPORATION under such circumstances as may be
specified by the COMMITTEE.
(v) RETIREMENT means TERMINATION of service on the BOARD OF DIRECTORS
----------
after serving continuously for five consecutive years.
(w) RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any successor to
----------
Rule 16b-3, as in effect when discretion is being exercised with
respect to the PLAN.
(x) TERMINATION occurs when a NON-EMPLOYEE DIRECTOR ceases to be a member
-----------
of the BOARD OF DIRECTORS or the Board of Directors of any parent
corporation which may hereafter be established (as the case may be).
43
<PAGE>
EXHIBIT 10.13
PG&E CORPORATION
EXECUTIVE STOCK OWNERSHIP PROGRAM
Administrative Guidelines
-------------------------
(As amended February 16, 2000)
1. Description. The Executive Stock Ownership Program ("Program") was approved
-----------
by the Nominating and Compensation Committee of the Board of Directors on
October 15, 1997. The Program is an important element of the Committee's
compensation policy of aligning executive interests with those of the
Corporation's shareholders. As an integral part of the Program, the
Committee also authorized the use of Special Incentive Stock Ownership
Premiums ("SISOPs") which are designed to provide incentives to Eligible
Executives to assist in achieving minimum stock ownership targets
established by the Committee. These Guidelines were originally adopted by
the Committee on November 19, 1997, amended by the Committee on July 22,
1998, October 21, 1998, and February 16, 2000. These amended Guidelines,
along with the written materials provided to the Committee on October 15,
1997, describe the Program which became effective on January 1, 1998. The
Program is administered by the Corporation's Senior Human Resources
Officer.
2. Eligible Executives. The Chief Executive Officer shall designate the
-------------------
officers of the Corporation and its affiliates who shall be Eligible
Executives covered by the Program. Initially, the officers covered by the
Guidelines and the applicable stock ownership Target are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Officer Band Position Stock Ownership Target
- ------------------------------------------------------------------------------
<C> <S> <C>
1 CEO 3 x base salary
- ------------------------------------------------------------------------------
2 Heads of Business Lines, 2 x base salary
CFO, & General Counsel
- ------------------------------------------------------------------------------
3 SVPs of Corp. 1.5 x base salary
- ------------------------------------------------------------------------------
</TABLE>
3. Annual Milestones. Under the Guidelines, stock ownership levels are
-----------------
designed to be achieved by the end of the fifth calendar year following the
calendar year in which an officer first becomes an Eligible Executive
("Target Date"). Annual Milestones have been established as a means of
measuring progress towards achieving Targets and of providing incentives
for Eligible Executives to expeditiously meet their Targets. The Annual
Milestone at the end of the first full calendar year is 20 percent of the
Target, and the Annual Milestone for each succeeding year is an additional
20 percent of the Target. Annual Milestones shall be adjusted to reflect
changes in base salary; provided, however, that in each instance any such
modification shall be amortized over the remaining original five-year term.
Following the Target Date, annual Targets also shall be modified to reflect
changes in base salary.
<PAGE>
4. Calculation of Stock Ownership Levels. Stock ownership level is the dollar
-------------------------------------
value of stock and stock equivalents owned by an Eligible Executive and
calculated as of the last day of the calendar year ("Measurement Date").
The purpose of this calculation is to determine the value of the stock or
stock equivalents owned by the Eligible Executive as compared with the
Annual Milestone or Target for that executive. For purposes of this
calculation, the value per share of stock or stock equivalent ("Measurement
Value") is the average closing price of PG&E Corporation common stock as
traded on the New York Stock Exchange for the last thirty (30) trading days
of the year.
a) The value of stock beneficially owned by the Eligible Executive is
determined by multiplying the number of shares owned beneficially on
the Measurement Date times the Measurement Value.
b) The value of PG&E Corporation phantom stock units credited to the
Eligible Executive's account in the PG&E Corporation Deferred
Compensation Plan for Officers ("DCP") is determined by multiplying
the number of phantom stock units credited to the Eligible Executive's
DCP account on the Measurement Date times the Measurement Value.
c) The value of stock held in the PG&E Corporation stock fund of any
defined contribution plan maintained by PG&E Corporation or any of its
subsidiaries is the value of the Eligible Executive's PG&E Corporation
stock fund on the Measurement Date.
d) The value of vested stock options is the difference between the number
of options multiplied by the Measurement Value minus the number of
options multiplied by the option exercise price (for purposes of this
calculation, any value attributable to dividend equivalents is
excluded).
5. Award of SISOPs. SISOPs are awarded to Eligible Executives who achieve and
---------------
maintain stock ownership levels prior to the end of the third year
following the year in which an officer first became an Eligible Executive.
For purposes of determining awards, the total stock ownership level is
calculated as set forth under paragraph 4, on the Measurement Date. The
amount of a SISOP award shall be equal to:
a) For the first year, 20 percent of the amount of the Eligible
Executive's stock ownership level at the end of the year, up to the
Annual Milestone, plus an additional 30 percent of the amount by which
the stock ownership level exceeds the Annual Milestone up to the
target; and
b) For each of the second and third years, 20 percent of the amount up to
the Annual Milestone by which the end of the year stock ownership
level exceeds the beginning of the year stock ownership level, plus an
additional 30 percent of the amount by which the end of the year
balance exceeds the Annual Milestone, up to the Target.
Each time a SISOP award calculation is made, a second calculation also is
made to determine the minimum number of shares which must be retained by
the Eligible Executive to avoid forfeiture of the SISOP award ("Minimum
Ownership Level") as discussed below in paragraph 8. This calculation
converts the dollar value of the stock ownership level used as the basis
for qualifying for SISOPs into a number of shares of stock. It is
calculated by dividing the stock ownership level by the Measurement Value.
2
<PAGE>
Thus, for example, if an Eligible Executive's stock ownership level was
$250,000 and the Measurement Value was $25 per share, then the Minimum
Ownership Level would be 10,000 shares.
For purposes of this calculation, the maximum share ownership level used is
the Eligible Executive's Target. If an Eligible Executive has a share
ownership level higher than his/her Target, the increment over the Target
is not included. Thus, for example, if an Eligible Executive has a Target
of $750,000 and his/her share ownership level is $900,000, then only
$750,000 is used to calculate the Minimum Ownership Level.
6. SISOPs Credited to the Deferred Compensation Plan. Upon award, SISOPs are
-------------------------------------------------
credited to the Eligible Executive's DCP account and converted into units
of phantom stock each equal in value to a share of PG&E Corporation common
stock ("SISOP units") as determined in accordance with paragraph 6 of the
DCP. The SISOP units constitute "incentive awards" authorized to be awarded
by the Committee to Eligible Executives under the PG&E Corporation Long-
Term Incentive Program ("LTIP"). Upon credit of SISOP units to an Eligible
Executive's DCP account, an equal number of shares of PG&E Corporation
common stock shall be reserved for issuance from the pool of shares
authorized for issuance under the LTIP. Once a SISOP unit is credited to
the Eligible Executive's DCP account, it shall be subject to all of the
terms and conditions specifically applicable to SISOP units under the DCP.
Once vested in accordance with paragraph 7 below, SISOP units are
distributed in the form of an equal number of shares of PG&E Corporation
common stock as provided in the DCP.
7. Vesting. SISOPs vest only upon the expiration of three years after the date
-------
of award (provided the Eligible Executive continues to be employed on such
date), or, if earlier, upon an Eligible Executive's death, disability,
Retirement, or upon a Change in Control, as defined in the LTIP. An
Eligible Executive's unvested SISOPs will be forfeited upon termination of
employment unless otherwise provided in the PG&E Corporation Officer
Severance Policy.
8. Forfeiture of SISOP Units. So long as SISOP units remain unvested, such
-------------------------
units are subject to forfeiture if, on each Measurement Date, the Eligible
Executive's stock ownership is less than the Minimum Ownership Level
established when the SISOPs were granted (see paragraph 5). To determine
forfeiture, the following steps are followed on each Measurement Date:
a) The number of shares and PG&E Corporation phantom stock units credited
to the Eligible Executive's DCP account is determined.
b) The share-equivalent of the value of the vested "in the money" stock
options is determined by dividing the value of such options (computed
in the manner described in 4(d)) by the current Measurement Value
(e.g., if the value of the vested "in the money" options is $100,000
and the current Measurement Value is $25 per share, then the share
equivalent is 4,000 shares).
c) The number of shares, PG&E Corporation phantom stock units, and share-
equivalents of vested "in the money" options is added together. This
total ("Current Holdings") is compared with the Minimum Ownership
Level determined when the SISOPs were granted. If the Current Holdings
are equal to or greater than the Minimum Ownership Level, then no
unvested SISOP units are forfeited. If the Current Holdings are less
than the
3
<PAGE>
Minimum Ownership Level, then the unvested SISOP units are forfeited
in the same proportion as the Current Holdings are less than Minimum
Ownership Level (for example, if the Current Holdings are 20 percent
less than the Minimum Ownership Level, then 20 percent of the SISOP
units are forfeited).
9. Failure to Achieve or Maintain Target. Failure to achieve stock ownership
-------------------------------------
levels at Target on the Target Date, or to maintain stock ownership levels
at Target on any Measurement Date thereafter, will result in the deferral
into the PG&E Corporation Phantom Stock Fund of the DCP of annual awards
from the Performance Unit Plan ("PUP") and the Short Term Incentive Plan
("STIP"). As of any Measurement Date, to the extent that stock ownership
levels are below Target, PUP awards shall be converted into PG&E
Corporation Phantom Stock Units and held in the PG&E Corporation Phantom
Stock Fund of the DCP. If, with the addition of the phantom stock units
attributable to the PUP award, the stock ownership level is still below
Target for any Measurement Date, any STIP award above target STIP also
shall be converted into phantom stock units, to the extent necessary to
achieve the Target stock ownership level. Such conversion of PUP and STIP
awards shall continue for successive Measurement Dates, if necessary, until
Target is met. Phantom stock units attributable to PUP and STIP awards
described in this paragraph 9 will be paid from the DCP in a lump sum in
January of the year following the year in which the Eligible Executive's
employment terminates, or upon such earlier date as may have been elected
by the Eligible Executive within thirty days after the date of mandatory
deferral of PUP and/or STIP awards which date shall not be earlier than
three (3) years after the date of mandatory deferral.
4
<PAGE>
EXHIBIT 11
PG&E CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
------------------- ---------------------
(in millions, except per share amounts) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE (EPS)/1/
Earnings available for common stock $ (611) $ 196 $ (73) $ 719
======== ========= ======== ========
Average common shares outstanding/2/ 366 383 368 382
======== ========= ======== ========
Basic EPS $ (1.67) $ 0.51 $ (0.20) $ 1.88
======== ========= ======== ========
DILUTED EARNINGS PER SHARE (EPS)/1/
Earnings available for common stock $ (611) $ 196 $ (73) $ 719
======== ========= ======== ========
Average common shares outstanding 366 383 368 382
Add: outstanding options, reduced by the
number of shares that could be
repurchased with the proceeds from
such exercise (at average market price) - 1 1 1
-------- --------- -------- --------
Average common shares outstanding as
adjusted 366 384 369 383
======== ========= ======== ========
Diluted EPS $ (1.67) $ 0.51 $ (0.20) $ 1.88
======== ========= ======== ========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
1 This presentation is submitted in accordance with Item 601(b)(11) of
Regulation S-K and Statement of Financial Accounting Standards No. 128.
2 Average common shares outstanding exclude shares held by a subsidiary of
PG&E Corporation (23,815,000 shares at December 31, 1999) and shares held
by the Company to secure deferred compensation obligations (281,985 shares
at December 31, 1999).
<PAGE>
EXHIBIT 12.1
PACIFIC GAS AND ELECTRIC COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- -----------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------
(dollars in millions) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------
Earnings: $ 788 $ 729 $ 768 $ 755 $1,339
Net income
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 - - - 3 4
Income tax expenses 648 629 609 555 895
Net fixed charges 637 673 628 683 716
------ ------ ------ ------ ------
Total Earnings $2,073 $2,031 $2,005 $1,996 $2,954
====== ====== ====== ====== ======
Fixed Charges:
Interest on long-
term debt, net $ 523 $ 585 $ 485 $ 574 $ 616
Interest on short-
term borrowings 81 50 101 75 83
Interest on capital leases 3 2 2 3 3
AFUDC debt 7 12 17 8 11
Earnings required to
cover the preferred stock
dividend and preferred
security distribution
requirements of majority
owned trust 24 24 24 24 3
------ ------ ------ ------ ------
Total Fixed Charges $ 638 $ 673 $ 629 $ 684 $ 716
====== ====== ====== ====== ======
Ratios of Earnings to
Fixed Charges 3.25 3.02 3.19 2.92 4.13
- -----------------------------------------------------------------------------
Note: For the purpose of computing Pacific Gas and Electric Company's ratios
of earnings to fixed charges, "earnings" represent net income adjusted
for the minority interest in losses of less than 100% owned
affiliates, cash distributions from and equity in undistributed income
or loss of Pacific Gas and Electric Company's 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
of subordinated debentures held by trust, interest in capital leases,
and earnings required to cover the preferred stock dividend
requirements.
<PAGE>
EXHIBIT 12.2
PACIFIC GAS AND ELECTRIC COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
- --------------------------------------------------------------------------------
Year ended December 31,
------------------------------------------------
(dollars in millions) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Earning68
Net income $ 788 $ 729 $ 768 $ 755 $1,339
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 - - - 3 4
Income tax expense 648 629 609 555 895
Net fixed charges 637 673 628 683 716
------ ------ ------ ------ ------
Total Earnings $2,073 $2,031 $2,005 $1,996 $2,954
====== ====== ====== ====== ======
Fixed Charges:
Interest on long-
term debt, net $ 523 $ 585 $ 485 $ 574 $ 616
Interest on short
term borrowings 81 50 101 75 83
Interest on capital leases 3 2 2 3 3
AFUDC debt 7 12 17 8 11
Earnings required to
cover the preferred stock
dividend and preferred
security distribution
requirements of majority
owned trust 24 24 24 24 3
------ ------ ------ ------ ------
Total Fixed Charges $ 638 $ 673 $ 629 $ 684 $ 716
------ ------ ------ ------ ------
Preferred Stock Dividends:
Tax Deductible dividends $ 9 $ 9 $ 10 $ 10 $ 11
Pretax earnings required
to cover non-tax
deductible preferred
stock dividend
requirements $ 27 $ 31 $ 39 $ 39 $ 100
------ ------ ------ ------ ------
Total Preferred
Stock Dividends $ 36 $ 40 $ 49 $ 49 $ 111
------ ------ ------ ------ ------
Total Combined Fixed
Charges and Preferred
Stock Dividends $ 674 $ 713 $ 678 $ 733 $ 827
====== ====== ====== ====== ======
Ratios of Earnings to
Combined Fixed Charges and
Preferred Stock Dividends 3.08 2.85 2.96 2.72 $ 3.57
- -------------------------------------------------------------------------------
Note: For the purpose of computing Pacific Gas and Electric Company's ratios
of earning 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, cash distributions from and
equity in undistributed income or loss of Pacific Gas and Electric
Company's 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, interest of
subordinated debentures held by trust, 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.
<PAGE>
EXHIBIT 13
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PG&E CORPORATION(1)
FOR THE YEAR
Operating revenues $20,820 $19,577 $15,255 $ 9,610 $ 9,622
Operating income 878 2,098 1,762 1,896 2,763
Income from continuing operations 13 771 745 722 1,269
Earnings per common share from continuing operations,
basic and diluted 0.04 2.02 1.82 1.75 2.99
Dividends declared per common share 1.20 1.20 1.20 1.77 1.96
AT YEAR-END
Book value per common share $ 19.13 $ 21.08 $ 21.30 $ 20.73 $ 20.77
Common stock price per share 20.50 31.50 30.31 21.00 28.38
Total assets 29,715 33,234 31,115 26,237 26,871
Long-term debt (excluding current portions) 6,673 7,422 7,659 7,770 8,049
Rate reduction bonds (excluding current portions) 2,031 2,321 2,611 -- --
Redeemable preferred stock and securities of subsidiaries
(excluding current portions) 635 635 750 694 694
PACIFIC GAS AND ELECTRIC COMPANY
FOR THE YEAR
Operating revenues $ 9,228 $ 8,924 $ 9,495 $ 9,610 $ 9,622
Operating income 1,993 1,876 1,820 1,896 2,763
Income available for common stock 763 702 735 722 1,269
AT YEAR-END
Total assets $21,470 $22,950 $25,147 $26,237 $26,871
Long-term debt (excluding current portions) 4,877 5,444 6,218 7,770 8,049
Rate reduction bonds (excluding current portions) 2,031 2,321 2,611 -- --
Redeemable preferred stock and securities (excluding
current portions) 586 586 694 694 694
</TABLE>
(1) PG&E Corporation became the holding company for Pacific Gas and Electric
Company on January 1, 1997. The Selected Financial Data of PG&E Corporation
and Pacific Gas and Electric Company (the Utility) for the years 1995 and
1996 are identical because they reflect the accounts of the Utility as the
predecessor of PG&E Corporation. Matters relating to certain data above,
including discontinued operations and the cumulative effect of a change in
an accounting principle are discussed in Management's Discussion and
Analysis and in the Notes to Consolidated Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
PG&E Corporation is an energy-based holding company headquartered in San
Francisco, California. PG&E Corporation's Northern and Central California energy
utility subsidiary, Pacific Gas and Electric Company (the Utility), provides
natural gas and electric service to one of every 20 Americans. PG&E
Corporation's National Energy Group provides energy products and services
throughout North America.
The National Energy Group businesses develop, construct, operate, own, and
manage independent power generation facilities that serve wholesale and
industrial customers through PG&E Generating Company, LLC (formerly U.S.
Generating Company, LLC) and its affiliates (collectively, PG&E Gen); own and
operate natural gas pipelines, natural gas storage facilities, and natural gas
processing plants, primarily in the Pacific Northwest and in Texas, through
various subsidiaries of PG&E Corporation (collectively, PG&E Gas Transmission or
PG&E GT); purchase and sell energy commodities and provide risk management
services to customers in major North American markets, including the other
National Energy Group non-utility businesses, unaffiliated utilities, marketers,
municipalities, and large end-use customers through PG&E Energy Trading--Gas
Corporation, PG&E Energy Trading--Power, L.P., and their affiliates
(collectively, PG&E Energy Trading or PG&E ET); and provide competitively priced
electricity, natural gas, and related services to industrial, commercial, and
institutional customers through PG&E Energy Services Corporation (PG&E Energy
Services or PG&E ES). In the fourth quarter of 1999, PG&E Corporation's Board of
Directors approved a plan for the divestiture of PG&E Corporation's Texas
natural gas and natural gas liquids business. Also in the fourth quarter of
1999, PG&E Corporation's Board of Directors approved a plan for the divestiture
of PG&E Corporation's retail energy services.
This is a combined annual report of PG&E Corporation and Pacific Gas and
Electric Company. It includes separate consolidated financial statements for
each entity. The consolidated financial statements of PG&E Corporation reflect
the accounts of PG&E Corporation, the Utility, and PG&E Corporation's wholly
owned and controlled subsidiaries. The consolidated financial statements of the
Utility reflect the accounts of the Utility and its wholly owned and controlled
subsidiaries. This Management's Discussion and Analysis (MD&A) should be read in
conjunction with the consolidated financial statements included herein.
This combined annual report, including our Letter to Shareholders and this
MD&A, contains forward-looking statements about the future that are necessarily
subject to various risks and uncertainties. These statements are based on
assumptions which management believes are reasonable and on information
currently available to management. These forward-looking statements are
identified by words such as "estimates," "expects," "anticipates," "plans,"
"believes," and other similar expressions. Actual results could differ
materially from those contemplated by the forward-looking statements.
Factors that could cause future results to differ materially from those
expressed in or implied by the forward-looking statements or historical results
include:
- the pace and extent of the ongoing restructuring of the electric and
natural gas industries across the United States;
- operational changes related to industry restructuring, including changes
in the Utility's business processes and systems;
- the method and timing of disposition and valuation of the Utility's
hydroelectric generation assets;
- the timing of the completion of the Utility's transition cost recovery and
the consequent end of the current electric rate freeze in California;
- any changes in the amount the Utility is allowed to collect (recover) from
its customers for certain costs that prove to be uneconomic under the new
competitive market (called transition costs);
- future operating performance at the Diablo Canyon Nuclear Power Plant
(Diablo Canyon);
- the method adopted by the California Public Utilities Commission (CPUC)
for sharing the net benefits of operating Diablo Canyon with ratepayers
and the timing of the implementation of the adopted method;
- the extent of anticipated growth of transmission and distribution services
in the Utility's service territory;
- future market prices for electricity;
- future fuel prices;
5
<PAGE>
- the success of management's strategies to maximize shareholder value in
PG&E Corporation's National Energy Group, which may include acquisitions
or dispositions of assets, or internal restructuring;
- the extent to which our current or planned generation development projects
are completed and the pace and cost of such completion;
- generating capacity expansion and retirements by others;
- the successful integration and performance of acquired assets;
- the outcome of the Utility's various regulatory proceedings, including the
proposal to auction the Utility's hydroelectric generation assets, the
electric transmission rate case applications, and post-transition period
ratemaking proceedings;
- fluctuations in commodity gas, natural gas liquids, and electric prices
and our ability to successfully manage such price fluctuations; and
- the pace and extent of competition in the California generation market and
its impact on the Utility's costs and resulting collection of transition
costs.
As the ultimate impact of these and other factors is uncertain, these and
other factors may cause future earnings to differ materially from results or
outcomes we currently seek or expect. Each of these factors is discussed in
greater detail in this MD&A.
In this MD&A, we first discuss our competitive and regulatory environment.
We then discuss earnings and changes in our results of operations for 1999,
1998, and 1997. Finally, we discuss liquidity and financial resources, various
uncertainties that could affect future earnings, and our risk management
activities. Our MD&A applies to both PG&E Corporation and the Utility.
COMPETITIVE AND REGULATORY ENVIRONMENT
This section provides a discussion of the competitive environment in the
evolving energy industry, the California electric industry, the California
natural gas business, the National Energy Group, and regulatory matters.
THE COMPETITIVE ENVIRONMENT IN THE EVOLVING ENERGY INDUSTRY
Historically, energy utilities operated as regulated monopolies within
specific service territories where they were essentially the sole suppliers of
natural gas and electricity services. Under this model, the energy utilities
owned and operated all of the businesses necessary to procure, generate,
transport, and distribute energy. These services were priced on a combined
(bundled) basis, with rates charged by the energy companies designed to include
all of the costs of providing these services. Now, energy utilities face
intensifying pressures to "unbundle," or price separately, those activities that
are no longer considered natural monopoly services. The most significant of
these services are electricity generation and natural gas supply.
The driving forces behind these competitive pressures are customers who
believe they can obtain energy at lower unit prices and competitors who want
access to those customers. Regulators and legislators are responding to those
customers and competitors by providing for more competition in the energy
industry. Regulators and legislators are requiring utilities to "unbundle" rates
(separate their various energy services and the prices of those services). This
allows customers to compare unit prices of the Utility and other providers when
selecting their energy service provider.
In the natural gas industry, Federal Energy Regulatory Commission (FERC)
Order 636 required interstate pipeline companies to divide their services into
separate gas commodity sales, transportation, and storage services. Under Order
636, interstate gas pipelines must provide transportation service regardless of
whether the customer (often a local gas distribution company) buys the gas
commodity from the pipeline.
In the electric industry, the Public Utilities Regulatory Policies Act of
1978 (PURPA) specifically provided that unregulated companies could become
wholesale generators of electricity and that utilities were required to purchase
and use power generated by these unregulated companies in meeting their
customers' needs. The National Energy Policies Act of 1992 was designed and
implemented through FERC Orders 888 and 889 to increase competition in the
wholesale unregulated generation market by requiring access to electric utility
transmission systems by all wholesale unregulated generators, sellers, and
buyers of electricity. Now, an increasing number of states throughout the
country either have implemented plans or are considering proposals to separate
the generation from the transmission and distribution of electricity through
some form of electric industry restructuring.
6
<PAGE>
To date, the states, not the federal government, have taken the initiative
on electric industry restructuring at the retail level. While many bills
mandating restructuring of the electric industry have been introduced in
Congress, none have passed. As a result, the pace, extent, and methods for
restructuring the electric industry vary widely throughout the country. For
instance, as of December 31, 1999, 21 states had enacted electric industry
restructuring legislation, including California, Texas, Illinois, Pennsylvania,
New Jersey, Massachusetts, Rhode Island, New Hampshire, and Connecticut. There
also are some states that have passed legislation precluding or significantly
slowing down restructuring. Differences in how individual states view electric
industry restructuring often relate to the existing unit cost of energy supplies
within each state. Generally, states having higher energy unit costs are moving
more quickly to deregulate energy supply markets.
Implementation of our national energy strategy depends, in part, upon the
opening of energy markets to provide customer choice of supplier. Undue delays
by states or federal legislation to deregulate the electric generation and
natural gas supply business could impact the pace of growth of our National
Energy Group.
THE CALIFORNIA ELECTRIC INDUSTRY
In 1998, California became one of the first states in the country to
implement electric industry restructuring and establish a competitive market
framework for electric generation. Today, most Californians may continue to
purchase their electricity from investor-owned utilities such as Pacific Gas and
Electric Company, or they may choose to purchase electricity from alternative
generation providers (such as unregulated power generators and unregulated
retail electricity suppliers such as marketers, brokers, and aggregators). For
those customers who have not chosen an alternative generation provider,
investor-owned utilities, such as the Utility, continue to be the generation
providers. Investor-owned utilities continue to provide distribution services to
substantially all customers within their service territories, including
customers who choose an alternative generation provider.
COMPETITIVE MARKET FRAMEWORK:
To create a competitive generation market, a Power Exchange (PX) and an
Independent System Operator (ISO) began operating on March 31, 1998. The PX
provides a competitive auction process to establish market clearing prices for
electricity in the markets operated by the PX. The ISO schedules delivery of
electricity for all market participants. The Utility continues to own and
maintain a portion of the transmission system, but the ISO controls the
operation of the system. Unless or until the CPUC determines otherwise, the
Utility is required to bid or schedule into the PX and ISO markets all of the
electricity generated by its power plants and electricity acquired under
contractual agreements with unregulated generators. Also, the Utility is
required to buy from the PX all electricity needed to provide service to retail
customers that continue to choose the Utility as their electricity supplier.
In November 1999, the FERC approved the extension of the ISO's authority to
establish price limitations through 2000. The ISO Board increased the applicable
price limitation to $750 per megawatt-hour (MWh) on October 1, 1999, but has the
option to decrease it to $500 per MWh or make other changes, in view of the
FERC's decision. This limits the amount of volatility that occurs in the
California electricity market. However, the ISO will review the appropriate
level for any price limitations for the summer of 2000 in light of market
redesign efforts now being considered, including changes to reduce uninstructed
deviations from ISO dispatch orders and changes to permit loads to participate
by submitting bids for price-responsive demand in energy or ancillary services
markets.
The Utility is continuing its efforts to develop and implement changes to
its business processes and systems, including the customer information and
billing system, to accommodate electric industry restructuring. To the extent
that the Utility is unable to develop and implement such changes in a successful
and timely manner, there could be an adverse impact on the Utility's or PG&E
Corporation's future results of operations.
TRANSITION PERIOD, RATE FREEZE, AND RATE REDUCTION:
California's electric industry restructuring established a transition period
during which electric rates remain frozen at 1996 levels (with the exception
that, on January 1, 1998, rates for small commercial and residential customers
were reduced by 10 percent and remain frozen at this reduced level) and
investor-owned utilities may recover their transition costs. Transition costs
are generation-related costs that prove to be uneconomic under the new
competitive structure. The transition period ends the earlier of December 31,
2001, or when the particular utility has recovered its eligible transition
costs.
7
<PAGE>
Revenues from frozen electric rates provide for the recovery of authorized
Utility costs, including transmission and distribution service, public purpose
programs, nuclear decommissioning, and rate reduction bond debt service. To the
extent the revenues from frozen rates exceed authorized Utility costs, the
remaining revenues constitute the competitive transition charge (CTC), which
recovers the transition costs. These CTC revenues are being recovered from all
Utility distribution customers and are subject to seasonal fluctuations in the
Utility's sales volumes and certain other factors. As the CTC is collected
regardless of the customer's choice of electricity supplier (i.e., the CTC is
non-bypassable), the Utility believes that the availability of choice to its
customers will not have a material impact on its ability to recover transition
costs.
To pay for the 10 percent rate reduction, the Utility refinanced
$2.9 billion (the expected revenue reduction from the rate decrease) of its
transition costs with the proceeds from the rate reduction bonds. The bonds
allow for the rate reduction by lowering the carrying cost on a portion of the
transition costs and by deferring recovery of a portion of these transition
costs until after the transition period. During the rate freeze, the rate
reduction bond debt service will not increase Utility customers' electric rates.
If the transition period ends before December 31, 2001, the Utility may be
obligated to return a portion of the economic benefits of the transaction to
customers. The timing of any such return and the exact amount of such portion,
if any, have not yet been determined.
TRANSITION COST RECOVERY:
Although most transition costs must be recovered during the transition
period, certain transition costs can be recovered after the transition period.
Except for certain transition costs discussed below, at the conclusion of the
transition period, the Utility will be at risk to recover any of its remaining
generation costs through market-based revenues.
Transition costs consist of (1) above-market sunk costs (costs associated
with utility generating facilities that are fixed and unavoidable and that were
included in customers' rates on December 20, 1995) and future sunk 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 (QF) and
other power suppliers, and (3) generation-related regulatory assets and
obligations. (In general, regulatory assets are expenses deferred in the current
or prior periods, to be included in rates in subsequent periods.)
Above-market sunk costs result when the book value of a facility exceeds its
market value. Conversely, below-market sunk costs result when the market value
of a facility exceeds its book value. The total amount of generation facility
costs to be included as transition costs is based on the aggregate of
above-market and below-market values. The above-market portion of these costs is
eligible for recovery as a transition cost. The below-market portion of these
costs will reduce other unrecovered transition costs. These above- and
below-market sunk costs are related to generating facilities that are classified
as either non-nuclear or nuclear sunk costs.
The Utility cannot determine the exact amount of above-market non-nuclear
sunk costs that will be recoverable as transition costs until the valuation of
the Utility's remaining non-nuclear generating assets, primarily its
hydroelectric generating assets, is completed. The valuation, through appraisal,
sale, or other divestiture, must be completed by December 31, 2001. The value of
seven of the Utility's other non-nuclear generating facilities was determined
when these facilities were sold to third parties. The portion of the sales
proceeds that exceeded the book value of these facilities was used to reduce
other transition costs. On September 30, 1999, the Utility filed an application
with the CPUC to determine the market value of its hydroelectric generating
facilities and related assets through an open, competitive auction. (See
"Generation Divestiture" below.) The Utility plans to use an auction process
similar to the one previously approved by the CPUC and successfully used in the
sale of the Utility's fossil and geothermal plants. If the market value of the
Utility's hydroelectric facilities is determined based upon any method other
than a sale of the facilities to a third party, a material charge to Utility
earnings could result. Any excess of market value over book value would be used
to reduce other transition costs. (See "Generation Divestiture" below.)
For nuclear transition costs, revenues provided for transition cost recovery
are based on the accelerated recovery of the investment in Diablo Canyon over a
five-year period ending December 31, 2001. The amount of nuclear generation sunk
costs was determined separately through a CPUC proceeding and was subject to a
final verification audit that was completed in August 1998. The audit of the
Utility's Diablo Canyon accounts at December 31, 1996, resulted in the issuance
of an unqualified opinion. The audit verified that Diablo Canyon sunk costs at
December 31, 1996, were $3.3 billion of the total $7.1 billion construction
costs. The independent accounting firm also issued an agreed-upon special
procedures report, requested by the CPUC, that questioned
8
<PAGE>
$200 million of the $3.3 billion sunk costs. The CPUC will review the results of
the audit and may seek to make adjustments to Diablo Canyon's sunk costs subject
to transition cost recovery. At this time, the Utility cannot predict what
actions, if any, the CPUC may take regarding the audit report.
Costs associated with the Utility's long-term contracts to purchase electric
power are included as transition costs. Regulation required the Utility to enter
into such long-term agreements with non-utility generators. Prices fixed under
these contracts are now typically above prices for power in wholesale markets.
(See Note 14 of Notes to Consolidated Financial Statements.) Over the remaining
life of these contracts, the Utility estimates that it will purchase
299 million MWh of electric power. To the extent that the individual contract
prices are above the market price, the Utility is collecting the difference
between the contract price and the market price from customers, as a transition
cost, over the term of the contract. The contracts expire at various dates
through 2028.
The total costs under long-term contracts are based on several variables,
including the capacity factors of the related generating facilities and future
market prices for electricity. During 1999, the average price paid under the
Utility's long-term contracts for electricity was 6.3 cents per kilowatt-hour
(kWh). The average cost of electricity purchased at market rates from the PX for
the year ended December 31, 1999, was 3.7 cents per kWh. The average cost of
electricity purchased at market rates from the PX for the period from March 31,
1998, the PX's establishment date, to December 31, 1998, was 3.2 cents per kWh.
Generation-related regulatory assets and obligations (net generation-related
regulatory assets) are included as transition costs. At December 31, 1999 and
1998, the Utility's generation-related net regulatory assets totaled $4 billion
and $5.4 billion, respectively.
Certain transition costs can be recovered through a non-bypassable charge to
distribution customers after the transition period. These costs include
(1) certain employee-related transition costs, (2) above-market payments under
existing long-term contracts to purchase power, discussed above, (3) up to
$95 million of transition costs to the extent that the recovery of such costs
during the transition period was displaced by the recovery of electric industry
restructuring implementation costs, and (4) transition costs financed by the
rate reduction bonds. Transition costs financed by the issuance of rate
reduction bonds will be recovered over the term of the bonds. In addition, the
Utility's nuclear decommissioning costs are being recovered through a
CPUC-authorized charge, which will extend until sufficient funds exist to
decommission the nuclear facility. During the rate freeze, the charge for these
costs will not increase Utility customers' electric rates. Excluding these
exceptions, the Utility will write off any transition costs not recovered during
the transition period.
The Utility is amortizing its transition costs, including most
generation-related regulatory assets, over the transition period in conjunction
with the available CTC revenues. During the transition period, a reduced rate of
return on common equity of 6.77 percent applies to all generation assets,
including those generation assets reclassified to regulatory assets. Effective
January 1, 1998, the Utility started collecting these eligible transition costs
through the non-bypassable CTC and generation divestiture. For the years ended
December 31, 1999 and 1998, regulatory assets related to electric industry
restructuring decreased by $1,359 million and $609 million, respectively, which
reflects the recovery of eligible transition costs.
During the transition period, the CPUC reviews the Utility's compliance with
accounting methods established in the CPUC's decisions governing transition cost
recovery and the amount of transition costs requested for recovery. The CPUC is
currently reviewing non-nuclear transition costs amortized during 1998 and the
first six months of 1999.
GENERATION DIVESTITURE:
In 1998, the Utility sold three fossil-fueled generation plants for
$501 million. These three fossil-fueled plants had a combined book value at the
time of the sale of $346 million and had a combined capacity of 2,645 megawatts
(MW).
On April 16, 1999, the Utility sold three other fossil-fueled generation
plants for $801 million. At the time of sale, these three fossil-fueled plants
had a combined book value of $256 million and had a combined capacity of 3,065
MW.
On May 7, 1999, the Utility sold its complex of geothermal generation
facilities for $213 million. At the time of sale, these facilities had a
combined book value of $244 million and had a combined capacity of 1,224 MW.
9
<PAGE>
The gains from the sale of the fossil-fueled generation plants were used to
offset other transition costs. Likewise, the loss from the sale of the complex
of geothermal generation facilities is being recovered as a transition cost.
The Utility has retained a liability for required environmental remediation
related to any pre-closing soil or groundwater contamination at the plants it
has sold.
On September 30, 1999, the Utility filed an application with the CPUC to
determine the market value of its hydroelectric generating facilities and
related assets through an open, competitive auction. The Utility proposes to use
an auction process similar to the one previously approved by the CPUC and
successfully used in the sale of the Utility's fossil and geothermal plants.
Under the process proposed in the application, another subsidiary of PG&E
Corporation, PG&E Gen, would be permitted to participate in the auction on the
same basis as other bidders.
The sale of the hydroelectric facilities would be subject to certain
conditions, including the transfer or re-issuance of various permits and
licenses by the FERC and other agencies. In addition, the FERC must approve
assignment of the Utility's Reliability Must Run Contract with the ISO for any
facility subject to such contract. Under the proposed purchase and sale
agreement, the CPUC's approval of the proposed sale on terms acceptable to the
Utility in the Utility's sole discretion is also a condition precedent to the
closing of any sale.
On January 13, 2000, a scoping memo and ruling was issued that separates the
proceeding into two concurrent phases: one to review the potential environmental
impacts of the proposed auction under the California Environmental Quality Act
and a second to determine whether the Utility's auction proposal, or some other
alternative to the proposal, is in the public interest. The ruling notes that
the divestiture and valuation issues can best be considered after the
environmental impacts of a change in ownership have been reviewed. Potential
bidders will also be able to incorporate the costs of any mitigation measures
that may be required into their bids. The ruling sets a procedural schedule
which calls for a final decision on the Utility's auction proposal by
October 19, 2000, and a final environmental impact report published in
November 2000. The ruling also anticipates that a final CPUC decision approving
the sale would be issued by May 15, 2001. Finally, the ruling prohibits the
Utility from withdrawing its application without express CPUC authority. It is
uncertain whether the CPUC will ultimately approve the Utility's auction
proposal.
At December 31, 1999, the book value of the Utility's net investment in
hydroelectric generation assets was approximately $0.7 billion, excluding
approximately $0.5 billion of net investment reclassified as regulatory assets.
Any excess of market value over the $0.7 billion book value would be used to
reduce transition costs, including the remaining $0.5 billion of regulatory
assets related to the hydroelectric generation assets. If the market value of
the hydroelectric generation assets is determined by any method other than a
sale of the assets to a third party, or if the winning bidder for any of the
auctioned assets is PG&E Gen, a material charge to Utility earnings could
result. The timing and nature of any such charge is dependent upon the valuation
method and procedure adopted, and the method of implementation. As discussed
below, it is possible that the CPUC will require an interim valuation through an
estimate of market value of the assets prior to transfer, sale, or other
divestiture, which could also result in a material charge. While transfer or
sale to an affiliated entity such as PG&E Gen would result in a material charge
to income, neither PG&E Corporation nor the Utility believes that the sale of
any generation facilities to a third party will have a material impact on its
results of operations.
The Utility's ability to continue recovering its transition costs depends on
several factors, including (1) the continued application of the regulatory
framework established by the CPUC and state legislation, (2) the amount of
transition costs ultimately approved for recovery by the CPUC, (3) the
determined value of the Utility's hydroelectric generation facilities,
(4) future Utility sales levels, (5) future Utility fuel and operating costs,
and (6) the market price of electricity. Given the current evaluation of these
factors, PG&E Corporation believes that the Utility will recover its transition
costs. However, a change in one or more of these factors could affect the
probability of recovery of transition costs and result in a material charge.
POST-TRANSITION PERIOD:
In October 1999, the CPUC issued a decision in the Utility's post-transition
period ratemaking proceeding. Among other matters, the CPUC's decision addresses
the mechanisms for ending the current electric rate freeze and for establishing
post-transition period accounting mechanisms and rates. The decision requires
Diablo Canyon generation to be priced at prevailing market rates after the
transition period. This portion of the decision is further discussed below under
"Regulatory Matters - Post-Transition Period Ratemaking Proceeding."
10
<PAGE>
The CPUC decision requires the Utility to provide quarterly forecasts of
when the Utility's rate freeze (i.e., transition period) may end based on
various assumptions regarding energy prices and the book value of the Utility's
remaining generation assets. The Utility is required to notify the CPUC three
months before the earliest forecasted end of its rate freeze and provide draft
tariff language and sample calculations of the rates that would go into effect
when the rate freeze ends. After the Utility completes its transition cost
recovery, it must implement its post-rate-freeze rates.
The timing of the end of the rate freeze and corresponding transition period
will, in part, depend on the timing of the valuation of the Utility's
hydroelectric generating assets and the ultimate determined value of such assets
since any excess of market value over the assets' book value would be used to
reduce transition costs. If the value of the Utility's hydroelectric generation
assets is significantly higher than the related book value, the transition
period and the rate freeze could end before December 31, 2001, and potentially
could end during 2000. The CPUC is considering the Utility's proposal to auction
its hydroelectric assets, although the CPUC could also require the Utility to
implement an interim valuation of the assets. In another proceeding (the 1998
Annual Transition Cost Proceeding (ATCP)), a CPUC administrative law judge
issued a proposed decision on January 7, 2000, which contained a proposed change
to the rules previously in place for the amortization of transition costs. Under
the final decision, issued on February 17, 2000, on a prospective basis the
utilities are required to assess the estimated market value of their remaining
non-nuclear generating assets, including the land associated with those assets,
on an aggregate basis at a value not less than the net book value of those
assets and to credit the Transition Cost Balancing Account (TCBA) with the
estimated value. The decision encourages the utilities to base such estimates on
realistic assessments of the market value of the assets. The final decision did
not adopt the proposed decision's recommendation to establish a new regulatory
asset account that would allow a true-up when the estimated market value is
greater than actual market value. However, the decision states that crediting
the TCBA with the aggregate net book value of the remaining non-nuclear
generating assets is a conservative approach and remedies any concerns regarding
the lack of a true-up. The decision provides that if the estimated market
valuation is less than book value for any individual asset, accelerated
amortization of the associated transition costs will continue until final market
valuation of the asset occurs through sale, appraisal, or other divestiture. If
the final value of the assets, determined through sale, appraisal, or other
divestiture, is higher than the estimate, the excess amount would be used to pay
remaining transition costs, if any. The utilities are required to file the
adjusted entries to their respective TCBA based on the estimated market values
with the CPUC by March 9, 2000. The filing will become effective after
appropriate review by the CPUC's Energy Division and the TCBA entries are
subject to review in the next ATCP. If an estimate of the market value of the
non-nuclear generating assets is adopted that exceeds the aggregate net book
value of those assets, a charge to earnings would result.
After the rate freeze and transition periods end, the Utility must refund to
electric customers any over-collected transition costs (plus interest at the
Utility's authorized rate of return) within one year after the end of the rate
freeze. The Utility also will be prohibited from collecting after the rate
freeze any electric costs incurred during the rate freeze but not recovered
during the rate freeze, including costs that are not classified as transition
costs. Through the end of its rate freeze, the Utility will continue to incur
certain non-transition costs and place those costs into balancing and memorandum
accounts for future recovery. There is a risk that the Utility will be unable to
collect certain non-transition costs that, due to lags in the regulatory cost
approval process, have not been approved for recovery nor collected when the
rate freeze ends. The Utility is unable to predict the amount of such potential
unrecoverable costs.
The CPUC also has established the Purchased Electric Commodity Account for
the Utility to track energy costs after the rate freeze and transition period
end. The CPUC intends to explore other ratemaking issues, including whether
dollar-for-dollar recovery of energy costs is appropriate, in the second phase
of the post-transition electric ratemaking proceeding. There are three primary
options for the future regulatory framework for utility electric energy
procurement cost recovery after the rate freeze: (1) a CPUC-defined procurement
practice, that if followed by the Utility, would pass through costs without the
need for reasonableness reviews, (2) a pass-through of costs subject to
after-the-fact reasonableness reviews, or (3) a procurement incentive mechanism
with rewards and penalties determined based on the Utility's energy purchasing
performance compared to a benchmark. The Utility proposed adoption of either a
defined procurement practice or a procurement incentive mechanism, neither of
which would involve reasonableness reviews. The volatility of earnings and risk
exposure of the Utility related to post-transition period purchases of
electricity is dependent on which of these options, or some other approach, is
adopted.
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<PAGE>
After the transition period, the Utility's future earnings from its electric
distribution will be subject to volatility as a result of sales fluctuations.
DISTRIBUTED GENERATION AND ELECTRIC DISTRIBUTION COMPETITION:
In October 1999, the CPUC issued a decision outlining how the CPUC, in
cooperation with other regulatory agencies and the California Legislature, plans
to address the issues surrounding distributed generation, electric distribution
competition, and the role of the utility distribution companies (such as Pacific
Gas and Electric Company) in the competitive retail electric market. Distributed
generation enables siting of electric generation technologies in close proximity
to the electric demand (referred to as "load"). The CPUC decision opened a new
rulemaking proceeding to examine various issues concerning distributed
generation, including interconnection issues, who can own and operate
distributed generation, environmental impacts, the role of utility distribution
companies, and the rate design and cost allocation issues associated with the
deployment of distributed generation facilities. With respect to electric
distribution competition, the CPUC directed its staff to deliver a report by
April 21, 2000, on the different policy options that the CPUC, in cooperation
with the California Legislature, can pursue. Following the issuance of the
report, the CPUC expects to open one or more new proceedings to address electric
distribution competition and competition in the retail electric market.
THE CALIFORNIA NATURAL GAS BUSINESS
Restructuring of the natural gas industry on both the national and the state
levels has given choices to California utility customers to meet their gas
supply needs. The Utility offers transmission, distribution, and storage
services as separate and distinct services to its industrial and larger
commercial gas (noncore) customers. Customers have the opportunity to select
from a menu of services offered by the Utility and they pay only for the
services that they use. Access to the transmission system is possible for all
gas marketers and shippers, as well as noncore end users.
The Utility's residential and smaller commercial gas (core) customers can
select the commodity gas supplier of their choice. However, the Utility
continues to purchase gas as a regulated supplier for those core customers who
request it, serving 3.8 million core customers in its service territory.
The Utility's costs of purchasing gas for core customers through 2002 are
regulated by the core procurement incentive mechanism, a form of incentive
ratemaking that provides the Utility a direct financial incentive to procure gas
and transportation services at the lowest reasonable costs by comparing all
procurement costs to an aggregate market-based benchmark. If costs fall within a
range (referred to as "tolerance band") around the benchmark, costs are
considered reasonable and fully recoverable from ratepayers. If procurement
costs fall outside the tolerance band, ratepayers and shareholders share savings
or costs, respectively.
The Gas Accord settlement agreement, approved by the CPUC in 1997,
established gas transmission rates within California for the period from
March 1998 through December 2002 for the Utility's core and noncore customers
and eliminated regulatory protection against variations in noncore transmission
revenues. As a result, the Utility is at risk for variations between actual and
forecasted transmission throughput volumes.
Rates for gas distribution services continue to be set by the CPUC and are
designed to provide the Utility an opportunity to recover its costs of service
and include a return on its investment. The regulatory mechanisms for setting
gas distribution rates are discussed below under "Regulatory Matters."
NATIONAL ENERGY GROUP
PG&E Corporation's National Energy Group has been formed to pursue
opportunities created by the gradual restructuring of the energy industry across
the nation. The National Energy Group integrates our national power generation,
gas transmission, and energy trading and services businesses. The National
Energy Group contemplates increasing PG&E Corporation's national market presence
through a balanced program of acquisition and development of energy assets and
businesses, while at the same time undertaking ongoing portfolio management of
its assets and businesses. PG&E Corporation's ability to anticipate and capture
profitable business opportunities created by restructuring will have a
significant impact on PG&E Corporation's future operating results.
Certain New England states where our National Energy Group operates electric
generation facilities were, like California, among the first states in the
country to introduce electric industry restructuring. As a result of this
restructuring and certain other regulatory initiatives, the wholesale
unregulated electricity market in New England features a bid-based market and an
ISO.
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<PAGE>
INDEPENDENT POWER GENERATION:
Through PG&E Gen and its affiliates, we participate in the development,
construction, operation, ownership, and management of non-utility electric
generating facilities that compete in the United States power generation market.
In September 1998, PG&E Corporation, through its indirect subsidiary USGen New
England, Inc. (USGenNE), completed the acquisition of a portfolio of electric
generation assets and power supply contracts from the New England Electric
System (NEES). The purchased assets include hydroelectric, coal, oil, and
natural gas generation facilities with a combined generating capacity of about
4,000 MW.
Including fuel and other inventories and transaction costs, the financing
requirements for this transaction were approximately $1.8 billion, funded
through an aggregate of $1.3 billion of PG&E Gen and USGenNE debt and a
$425 million equity contribution from PG&E Corporation. The net purchase price
has been allocated as follows: (1) electric generating assets of $2.3 billion,
(2) receivable for support payments of $0.8 billion, and (3) above-market
contractual obligations of $1.3 billion, relating to acquired power purchase
agreements, gas agreements, and standard offer agreements.
As part of the New England electric industry restructuring, the local
utility companies were required to offer Standard Offer Service (SOS) to their
retail customers. Retail customers may select alternative suppliers at any time.
The SOS is intended to provide customers with a price benefit (the commodity
electric price offered to the retail customer is expected to be less than the
market price) for the first several years, followed by a price disincentive that
is intended to stimulate the retail market.
Retail customers may continue to receive SOS through June 30, 2002, in New
Hampshire (subject to early termination on December 31, 2000, at the discretion
of the New Hampshire Public Service Commission), through December 31, 2004, in
Massachusetts, and through December 31, 2009, in Rhode Island. However, if
customers choose an alternate supplier, they are precluded from going back to
the SOS.
In connection with the purchase of the generation assets, USGenNE entered
into wholesale agreements with certain of the retail companies of NEES to supply
at specified prices the electric capacity and energy requirements necessary for
their retail companies to meet their SOS obligations. These companies are
responsible for passing on to us the revenues generated from the SOS. USGenNE
currently is indirectly serving a large portion of the SOS electric capacity and
energy requirements for these companies, except in New Hampshire. For the year
ended December 31, 1999, the SOS price paid to generators was $0.035 per Kwh for
generation. On March 1, 1999, Constellation Power Source, Inc. (Constellation)
won the New Hampshire component of the SOS through a competitive bidding
solicitation. On January 7, 2000, USGenNE paid approximately $15 million to a
third party for this third party's assumption of 10 percent of the Massachusetts
Electric Company/Nantucket Electric Company SOS and 40 percent of the
Narragansett SOS.
Like other utilities, New England utilities previously entered into
agreements with unregulated companies (e.g., qualifying facilities under PURPA)
to provide energy and capacity at prices that are anticipated to be in excess of
market prices. We assumed NEES' contractual rights and duties under several of
these power purchase agreements. At December 31, 1999, these agreements provided
for an aggregate 470 MW of capacity. However, NEES will make support payments to
us toward the cost of these agreements. The support payments by NEES total
$0.9 billion in the aggregate (undiscounted) and are due in monthly installments
from September 1998 through January 2008. In certain circumstances, with our
consent, NEES may make a full or partial lump-sum accelerated payment.
Initially, approximately 90 percent of the acquired operating capacity,
including capacity and energy generated by other companies and provided to us
under power purchase agreements, is dedicated to servicing SOS customers. To the
extent that customers eligible to receive SOS choose alternate suppliers, or as
these obligations are sold to other parties, this percentage will decrease. As
customers choose alternate suppliers, or the SOS obligations are sold, a greater
proportion of the output of the acquired operating capacity will be subject to
market prices.
GAS TRANSMISSION OPERATIONS:
PG&E Corporation participates in the "midstream" portion of the gas business
through PG&E GT NW. PG&E GT NW owns and operates gas transmission pipelines and
associated facilities which extend over 612 miles from the Canada-U.S. border to
the Oregon-California border. PG&E GT NW provides firm and interruptible
transportation services to third party shippers on an open-access basis. Its
customers are principally retail gas
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distribution utilities, electric utilities that use natural gas to generate
electricity, natural gas marketing companies, natural gas producers, and
industrial consumers.
On January 27, 2000, PG&E Corporation's National Energy Group signed a
definitive agreement with El Paso Field Services Company (El Paso) providing for
the sale to El Paso, a subsidiary of El Paso Energy Corporation, of the stock of
PG&E Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc.
(collectively, PG&E GTT). The consideration to be received by the National
Energy Group includes $279 million in cash subject to a working capital
adjustment, the assumption by El Paso of debt having a book value of
$624 million, and other liabilities associated with PG&E GTT.
In 1999, PG&E Corporation recognized a charge against earnings of $890
million after tax, or $2.42 per share, to reflect PG&E GTT's assets at their
fair market value. The composition of the pre-tax charge is as follows: (1) an
$819 million write-down of net property, plant, and equipment, (2) the
elimination of the unamortized portion of goodwill, in the amount of $446
million, and (3) an accrual of $10 million representing selling costs.
Proceeds from the sale will be used to retire short-term debt associated
with PG&E GTT's operations and for other corporate purposes. Closing of the
sale, which is expected in the first half of 2000, is subject to approval under
the Hart Scott Rodino Act.
ENERGY TRADING:
Through PG&E ET, we purchase bulk volumes of power and natural gas from PG&E
Corporation affiliates and the wholesale market. We then schedule, transport,
and resell these commodities, either directly to third parties or to other PG&E
Corporation affiliates. PG&E ET also provides risk management services to PG&E
Corporation's other businesses (except the Utility) and to wholesale customers.
(See "Price Risk Management Activities" below; and Note 3 of the Notes to
Consolidated Financial Statements.)
ENERGY SERVICES:
In December 1999, PG&E Corporation's Board of Directors approved a plan to
dispose of PG&E ES, its wholly owned subsidiary, through a sale. As of December
31, 1999, the intended disposal has been accounted for as a discontinued
operation. In connection with this transaction, PG&E Corporation's investment in
PG&E ES was written down to its estimated net realizable value. In addition,
PG&E Corporation provided a reserve for anticipated losses through the date of
sale. The total provision for discontinued operations was $58 million, net of
income taxes of $36 million. While there is no definite sales agreement, it is
expected that the disposition will be completed in 2000. The amounts that PG&E
Corporation will ultimately realize from this disposal could be materially
different from the amounts assumed in arriving at the estimated loss on disposal
of the discontinued operations. The PG&E ES business segment generated net
losses of $40 million (or $0.11 per share), $52 million (or $0.14 per share),
and $29 million (or $0.07 per share), for the years ended December 31, 1999,
1998, and 1997, respectively.
REGULATORY MATTERS
A significant portion of PG&E Corporation's operations are regulated by
federal and state regulatory commissions. These commissions oversee service
levels and, in certain cases, PG&E Corporation's pricing for its regulated
services. Following are the percentages of 1999 revenues that fell under the
jurisdiction of these various regulatory agencies:
<TABLE>
<CAPTION>
UTILITY CONSOLIDATED
<S> <C> <C>
Cost of service-based 96.8% 42.3%
Market 3.2% 57.7%
</TABLE>
The Utility is the only subsidiary with significant regulatory proceedings
at this time. Some of the items that affected reported 1999 results, and will
affect future Utility authorized revenues, include the 1999 General Rate Case,
the year 2000 cost of capital proceeding, the post-transition period ratemaking
proceeding, the FERC transmission rate cases, the catastrophic event memorandum
account proceeding, the CPUC's gas strategy investigation-Phase 2, and the 1997
and 1998 electric base revenue increase proceeding. These items are discussed
below. Any requested change in authorized electric revenues resulting from any
of the electric proceedings would not impact the Utility's customer electric
rates through the transition period because these rates are frozen in accordance
with the electric transition plan. However, the amount of remaining revenues
providing for the
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recovery of transition costs would be affected. Any change in authorized gas
revenues resulting from gas proceedings would increase or decrease the Utility's
customer gas rates.
THE 1999 GENERAL RATE CASE (GRC):
In December 1997, the Utility filed its 1999 GRC application with the CPUC.
During the GRC process, the CPUC examines the Utility's costs to determine the
amount the Utility may charge customers for base revenues (non-fuel related
costs). The Utility requested distribution revenue increases to maintain and
improve natural gas and electric distribution reliability, safety, and customer
service. The requested revenues, as updated, included an increase of
$445 million in electric base revenues and an increase of $377 million in
natural gas base revenues over the 1998 authorized revenues.
The Utility received a final decision on its 1999 GRC application on
February 17, 2000. This final decision increased electric distribution revenues
by $163 million and gas distribution revenues by $93 million, as compared to
revenues authorized for 1998. This revenue increase is retroactive to
January 1, 1999. The impact of these increases resulted in an increase in
earnings of $153 million, or $0.42 per share, and was reflected in the fourth
quarter of 1999.
The Utility's GRC application also contained a proposal for an Attrition
Rate Adjustment (ARA) to adjust revenues in 2000 and 2001 if a performance-based
ratemaking (PBR) mechanism is not adopted for 2000 or 2001. The final decision
denies the Utility's request for an ARA to adjust revenues in 2000, but adopts
an ARA for 2001. The final decision orders that the CPUC oversee an audit of the
Utility's 1999 distribution capital spending, and that the 2001 ARA be subject
to modification to take into account the results of the audit. The 2001 ARA will
also be subject to modification to recognize amounts recorded in a new balancing
account that the final decision requires be established for vegetation
management expenses.
THE YEAR 2000 COST OF CAPITAL PROCEEDING:
In November 1999, the Utility filed its 2000 cost of capital application
with the CPUC to establish its authorized rates of return on an unbundled basis
for electric and natural gas distribution operations. To reflect increasing
interest rates, the Utility has requested a return on equity (ROE) of
12.5 percent and an overall rate of return of 9.76 percent as compared to its
1999 authorized rates of 10.6 percent ROE and 8.75 percent overall rate of
return. The Utility has not requested any change in its authorized capital
structure for 2000. The Utility's current authorized capital structure is
46.2 percent long-term debt, 5.8 percent preferred stock, and 48 percent common
equity.
If granted, the requested ROE would increase electric distribution revenues
by approximately $127.8 million and natural gas distribution revenues by
approximately $36.6 million, based on the rate base authorized in the Utility's
1999 GRC. The Utility requested that a final CPUC decision be issued in
June 2000. On February 17, 2000, the CPUC issued a decision to allow the final
CPUC decision, when it is adopted, to be effective retroactively to
February 17, 2000.
Consistent with the rate freeze, there will be no change in electric rates
in 2000. Also, the return on the Utility's electric transmission-related assets
will be determined by the FERC in 2000. Finally, the return on the Utility's
natural gas transmission and storage business was incorporated in rates
established in the Gas Accord.
POST-TRANSITION PERIOD RATEMAKING PROCEEDING:
In October 1999, the CPUC issued a decision in the Utility's post-transition
period ratemaking proceeding. Among other matters, the CPUC's decision addresses
the mechanisms for ending the current electric rate freeze and for establishing
post-transition period accounting mechanisms and rates.
The decision prohibits the Utility from continuing to price electric
generation from Diablo Canyon based on the incremental cost incentive price
(ICIP) after the transition period has ended. The ICIP, which has been in place
since January 1, 1997, is a performance-based mechanism that establishes a rate
per kWh generated by the facility. The ICIP prices for 1999, 2000, and 2001 are
3.37 cents per kWh, 3.43 cents per kWh, and 3.49 cents per kWh, respectively.
The average price for base load electric energy (the price received for a
constant level of electric generation for all hours of electric demand) sold at
market rates to the California PX for the 12-month period ended December 31,
1999, was 3.7 cents per kWh. The average price for base load electric energy
sold at market rates to the PX from March 31, 1998, the PX's establishment date,
to December 31, 1998, was 3.2 cents per kWh.
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Future market prices may be higher or lower. Under the CPUC's decision, after
the transition period, the Utility must price Diablo Canyon generation at the
prevailing market price for power.
Further, pursuant to the 1997 CPUC decision establishing the ICIP, the
Utility is required to begin sharing 50 percent of the net benefits of operating
Diablo Canyon with ratepayers commencing January 1, 2002. The CPUC may interpret
a more recent decision to commence the benefit-sharing at the end of the
transition period. The Utility is required to file an application by July 2000
with its proposal for the methods to be used in the valuation of the benefits
associated with the operation of Diablo Canyon, and the mechanism to be used to
share these benefits with ratepayers. The Utility and PG&E Corporation are
unable to predict what type of valuation and sharing mechanism will be adopted
and what the ultimate financial impact of the sharing mechanism will have on
results of operation or financial position.
The CPUC's decision also prohibits the Utility from collecting after the
rate freeze any electric costs incurred but not recovered during the rate
freeze, including costs that are not transition costs and are not related to
generation assets such as under-collected accounting balances relating to power
purchases.
See the discussion above under "Competitive and Regulatory Environment --
The California Electric Industry Post-Transition Period."
In November 1999, the Utility filed an application for rehearing the CPUC's
decision.
The ultimate financial impact of the provisions of the CPUC's decision
described above will depend on the date the Utility's transition cost recovery
is completed and the rate freeze ends, future costs including Diablo Canyon
operating costs, future market prices for electricity, the amount of any
electric non-transition costs that have been incurred but not recovered as of
the end of the rate freeze, the timing of various regulatory proceedings in
which the Utility seeks approval for rate recovery of various costs incurred
during the rate freeze, and other variables that PG&E Corporation and the
Utility are unable to predict.
FERC TRANSMISSION RATE CASES:
Since April 1998, all electric transmission revenues are authorized by the
FERC. During 1998 and 1999, the FERC issued orders that put into effect various
rates to recover electric transmission costs from the Utility's former bundled
rate transmission customers. All 1998 and 1999 rates currently are subject to
refund, pending final decisions in the transmission cases. In April 1999, the
Utility filed a settlement with the FERC that, if approved, would allow the
Utility to recover $345 million for the period of April 1998 through May 1999.
In May 1999, the FERC accepted, subject to refund, the Utility's March 1999
request to begin recovering, as of May 31, 1999, $324 million annually. In
October 1999, the FERC accepted, subject to refund, the Utility's request to
increase revenues to $370 million annually, beginning in April 2000. The Utility
does not expect a material impact on its financial position or results of
operations resulting from these matters.
CATASTROPHIC EVENT MEMORANDUM ACCOUNT PROCEEDING:
In September 1999, the Utility entered into a Settlement Agreement with the
CPUC's Office of Ratepayer Advocates (ORA), and other parties, in a proceeding
addressing the Catastrophic Events Memorandum Account. The settlement provides
for a $59 million increase in electric distribution revenue requirement and an
$11 million increase in gas distribution revenue requirement effective
January 1, 2000. The increase compensates the Utility for service restoration
following several events, beginning with the Oakland Hills fire of 1991 and
ending with the storms of February 1998. A CPUC decision is expected in early
2000.
THE CPUC'S GAS STRATEGY INVESTIGATION, PHASE 2:
In January 1998, the CPUC opened a rulemaking proceeding to explore changes
in the natural gas industry in California. In July 1999, the CPUC issued a
decision identifying promising options for restructuring the natural gas
industry. In the decision, the CPUC reaffirmed the basic structure of the Gas
Accord. The CPUC further stated that it seeks to explore a market structure that
maintains the utilities' traditional role of providing fully integrated default
service while removing obstacles to competitive unbundled services. The CPUC
opened a new investigative proceeding to explore in more detail the anticipated
costs and benefits associated with the different market structure options it has
identified. On January 28, 2000, PG&E Corporation and a broad-based coalition of
shippers, consumer groups, marketers, and others filed a settlement with the
CPUC which would reaffirm the basic structure of the Gas Accord and continue the
Gas Accord through its original term of December 31, 2002.
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<PAGE>
ELECTRIC BASE REVENUE INCREASE PROCEEDING:
Section 368(e) of the California Public Utilities Code was adopted as part
of the California electric industry restructuring legislation. It provided for
an increase in the Utility's electric base revenues for 1997 and 1998, for
enhancement of transmission and distribution system safety and reliability. In
accordance with Section 368(e), the CPUC authorized a 1997 base revenue increase
of $164 million. For 1998, the CPUC authorized an additional base revenue
increase of $77 million. Section 368(e) expenditures are subject to review by
the CPUC.
In July 1999, the ORA filed reports on the Utility's Section 368(e)
expenditures recommending a disallowance of $88.4 million in expenditures for
1997 and 1998. In August 1999, The Utility Reform Network (TURN) recommended an
additional $14 million disallowance for a total recommended disallowance for
1997 and 1998 expenditures of $102.4 million. The Utility opposed the
recommended disallowances and hearings were held in October 1999. A proposed
decision is not expected until the first quarter of 2000. Any proposed decision
would be subject to comment by the parties and change by the CPUC before a final
decision is issued. The Utility does not expect a material impact on its
financial position or results of operations resulting from these matters.
RESULTS OF OPERATIONS
In this section, we present the components of our results of operations for
1999, 1998, and 1997. The Utility received a final decision on its 1999 GRC
application on February 17, 2000. As discussed further in "Regulatory Matters"
above, the final decision did not increase electric revenues, although it
increased the deferral of electric transition costs by $163 million over the
amount that would have been deferred under the 1998 revenue requirement. This
revenue increase was retroactive to January 1, 1999. The impact of the 1999 GRC
resulted in an increase in earnings of $153 million, or $0.42 per share, and was
reflected in the fourth quarter of 1999.
The table below shows for 1999, 1998, and 1997, certain items from our
Statement of Consolidated Income detailed by Utility and National Energy Group
operations of PG&E Corporation. (In the "Total" column, the table shows the
combined results of operations for these groups.) The information for PG&E
Corporation (the "Total" column) excludes transactions between its subsidiaries
(such as the purchase of natural gas by the Utility from the unregulated
business operations). Following this table we discuss earnings and explain why
the components of our results of operations varied from the year before for 1999
and 1998.
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<PAGE>
<TABLE>
<CAPTION>
UTILITY NATIONAL ENERGY GROUP
-------- ----------------------------------------------------------
PG&E GT ELIMINATIONS &
(IN MILLIONS) PG&E GEN NW TEXAS PG&E ET OTHER(1) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Operating revenues $9,228 $1,122 $224 $ 1,148 $10,521 $(1,423) $20,820
Operating expenses 7,235 1,007 104 2,446 10,582 (1,432) 19,942
Operating income 878
Other income, net 155
Interest expense, net (772)
Income taxes 248
Income from continuing operations 13
Net loss $ (73)
EBITDA(2) $3,523 $ 203 $181 $(1,178) $ (53) $ 19 $ 2,695
1998
Operating revenues $8,924 $ 649 $237 $ 1,941 $ 8,509 $ (683) $19,577
Operating expenses 7,048 489 101 1,996 8,528 (683) 17,479
Operating income 2,098
Other income, net 65
Interest expense, net (781)
Income taxes 611
Income from continuing operations 771
Net income $ 719
EBITDA(2) $3,294 $ 200 $177 $ 15 $ (15) $ (7) $ 3,664
1997
Operating revenues $9,495 $ 148 $233 $ 1,004 $ 4,808 $ (433) $15,255
Operating expenses 7,675 176 127 1,023 4,840 (348) 13,493
Operating income 1,762
Other income, net 212
Interest expense, net (664)
Income taxes 565
Income from continuing operations 745
Net income $ 716
EBITDA(2) $3,606 $ (40) $144 $ 16 $ (29) $ 57 $ 3,754
</TABLE>
(1) Net income on intercompany positions recognized by segments using
mark-to-market accounting is eliminated. Intercompany transactions are also
eliminated.
(2) EBITDA measures earnings (after preferred dividends) before interest expense
(net of interest income), income taxes, depreciation, and amortization.
OVERALL RESULTS
PG&E Corporation had a net loss in 1999 of $73 million, or $0.20 per share.
In 1998 PG&E Corporation had net income of $719 million, or $1.88 per share. The
decrease is principally due to the write-down to fair value of our natural gas
business in Texas and the accrual for the discontinuance of operations of our
Energy Services segment. The PG&E GTT write-down was approximately $890 million
after taxes, and the PG&E ES discontinued operations generated a charge of
$58 million after tax. Partially offsetting these charges were increases in
Utility income, primarily as a result of the 1999 GRC, and an adjustment of a
litigation reserve associated with a court-approved settlement proposal. In
addition, PG&E Gen changed its method of accounting for major maintenance and
overhauls at its generating facilities. Effective January 1, 1999, PG&E Gen
adopted a method that accounts for expenditures associated with major
maintenance and overhauls as incurred. Previously, PG&E Gen estimated the cost
of major maintenance and overhauls and accrued such costs in advance in a
systematic and rational manner over the period between major maintenance and
overhauls. The cumulative effect of the accounting change resulted in
recognition of approximately $12 million of income, net of tax.
The Utility's net income available for common stock increased to $763
million in 1999 as compared to 1998 net income of $702 million, primarily
because of the impacts of the 1999 GRC. However, the increases from the
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<PAGE>
GRC were partially offset by a reduction in the Utility's authorized cost of
capital and a lower return on its assets due to the sale of a significant
portion of its generating assets and recovery of transition costs (see Note 2 of
the Notes to Consolidated Financial Statements).
Net income for the Utility decreased $33 million in 1998 as compared to 1997
due to the reduced rate of return on generation assets and increased interest
expense associated with the rate reduction bonds.
OPERATING INCOME
Operating income for PG&E Corporation in 1999 was $878 million, which
includes the charge to write down the investment in PG&E GTT to its net
realizable value. Operating income for the Utility was $1,993 million in 1999 as
compared to $1,876 million in 1998. This increase is primarily because of the
impacts of the 1999 GRC. However, the increases from the GRC were partially
offset by a reduction in the Utility's authorized cost of capital and a lower
return on its assets due to the sale of a significant portion of its generating
assets and recovery of transition costs (see Note 2 of the Notes to Consolidated
Financial Statements).
Operating income of the National Energy Group decreased $62 million in 1999
as compared to 1998, excluding the charge to write PG&E GTT down to its net
realizable value. The decline resulted from mild weather in the Northeast, lower
interruptible sales in the Pacific Northwest, less portfolio management
activity, and trading losses in the U.S. gas portfolio. This decline was
partially offset by cost containment efforts across the organization and an
increase in the differential between natural gas liquids prices and the cost of
natural gas.
The operating income increase in 1998 as compared to 1997 was primarily due
to the growth of the National Energy Group, which contributed $195 million of
the increase. The 1998 income from continuing operations also includes a loss on
the sale of our Australian energy holdings.
OPERATING REVENUES
UTILITY:
Utility operating revenues increased $304 million in 1999 as compared to
1998. This increase is primarily due to: (1) a $147 million increase in gas
revenues from residential and commercial gas customers due to higher usage, (2)
a $93 million increase in gas revenues as a result of the GRC, (3) a $43 million
increase in revenues from small and medium electric customers due to increased
customers, and (4) a $16 million increase in revenues from an increase in gas
transportation volumes.
Utility operating revenues decreased $571 million in 1998 as compared to
1997. This decrease is primarily due to: (1) a $410 million decrease for the 10
percent electric rate reduction provided to residential and small commercial
customers, which was partially offset by $108 million of higher revenues due to
increased consumption of electricity by these customers, (2) a $151 million
decrease in revenues from medium and large electric customers, many of whom are
now purchasing their electricity directly from unregulated power generators,
(3) a $63 million decrease in sales to commercial and agricultural electric
customers resulting from their lower demand for irrigation water pumping as a
result of heavier rainfall in 1998, and (4) a $100 million decrease for the
termination of the volumetric (ERAM) and energy cost (ECAC) revenue balancing
accounts. The ERAM and ECAC accounts were replaced with the TCBA, which affects
expenses, rather than revenues.
NATIONAL ENERGY GROUP:
The National Energy Group's 1999 operating revenues increased $939 million
as compared to 1998 operating revenues, principally due to: (1) the PG&E Gen
business segment receiving a full year of revenue from the New England assets
acquired in September 1998, and (2) increases in trading revenues at PG&E ET
reflecting the further maturation of its business. The 1999 operating revenues
also reflect revenue increases resulting from an improved differential between
the natural gas liquids prices and the incoming natural gas. These revenue
increases were partially offset by (1) a decline in interruptible revenues in
the Northwest due to the lower natural gas prices in the Southwest as compared
to Canadian prices, and (2) lower transportation revenue on the Texas
transmission system. In addition, effective July 1999, certain gas trading
activities conducted by PG&E GTT were transferred to PG&E ET, thus contributing
to the decline in PG&E GTT revenues.
Operating revenues associated with the National Energy Group increased
$4,893 million in 1998 as compared to 1997. This was primarily due to revenue
increases from energy trading volumes, 12 months of revenue from the
19
<PAGE>
Texas acquisitions versus seven months in 1997, portfolio management activity by
PG&E Gen, and the acquisition of the New England generating assets in
September 1998.
OPERATING EXPENSES
UTILITY:
The Utility's operating expenses increased $187 million in 1999 as compared
to 1998. This increase reflects the increased cost of gas due to higher usage
and the increased amortization of electric transition costs.
Utility operating expenses in 1998 decreased $627 million as compared to
1997. This decrease reflects a reduction in the amount of amortization of
transition costs, primarily due to lower revenues from residential and small
commercial customers discussed above in "Operating Revenues--Utility". Also
contributing to the decrease in operating expenses was a reduction in gas
transportation demand charges of $134 million, due to the expiration of
contracted pipeline capacity.
NATIONAL ENERGY GROUP:
The National Energy Group's operating expenses increased $2,276 million in
1999 as compared to 1998, due to the charge associated with the disposition of
PG&E GTT, having a full year of operating expenses associated with the
generation facilities in New England, and growth of PG&E ET operations.
Operating expenses for the National Energy Group increased $4,613 million in
1998 as compared to 1997. This increase reflects the increase in the volumes of
energy commodities purchased, operating costs associated with the New England
assets acquired in September 1998 and the gas transportation assets acquired in
1997.
INCOME TAXES
PG&E Corporation has recorded income tax expense of $248 million for 1999.
The effective tax rate primarily results from two factors: (1) electric industry
restructuring has resulted in the reversal of temporary differences whose tax
benefits were originally flowed through to customers causing an increase in
income tax expense independent of pre-tax income, and (2) the disposition of
PG&E GTT resulted in a capital loss for tax purposes, which could not be fully
recognized.
Income taxes in 1998 increased $46 million as compared to 1997. The overall
effective tax rate increased 1.1 percent in 1998 largely due to accelerated book
depreciation and amortization related to electric industry restructuring. These
increases were partially offset by a lowered effective state tax rate resulting
from our expanded business operations.
DIVIDENDS
We base our common stock dividend on a number of financial considerations,
including sustainability, financial flexibility, and competitiveness with
investment opportunities of similar risk. Our current quarterly common stock
dividend is $.30 per common share, which corresponds to an annualized dividend
of $1.20 per common share. We continually review the level of our common stock
dividend, taking into consideration the impact of the changing regulatory
environment throughout the nation, the resolution of asset dispositions, the
operating performance of our business units, and our capital and financial
resources in general.
The CPUC requires the Utility to maintain its CPUC-authorized capital
structure, potentially limiting the amount of dividends the Utility may pay PG&E
Corporation. During 1999, the Utility has been in compliance with its
CPUC-authorized capital structure. PG&E Corporation and the Utility believe that
this requirement will not affect PG&E Corporation's ability to pay common stock
dividends. However, depending on the timing and outcome of the valuation of the
Utility's hydroelectric facilities discussed in "Generation Divestiture" above,
certain valuation methods could necessitate a waiver of the CPUC's authorized
capital structure in order to permit PG&E Corporation or the Utility to continue
paying common stock dividends at the current level.
20
<PAGE>
LIQUIDITY AND FINANCIAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by PG&E Corporation's operating activities totaled
$2,287 million, $2,283 million, and $2,618 million in 1999, 1998, and 1997,
respectively. Net cash provided by the Utility's operating activities totaled
$2,200 million, $2,610 million, and $1,768 million in 1999, 1998, and 1997,
respectively.
CASH FLOWS FROM FINANCING ACTIVITIES
PG&E CORPORATION:
We fund investing activities from cash provided by operations after capital
requirements and, to the extent necessary, external financing. Our policy is to
finance our investments with a capital structure that minimizes financing costs,
maintains financial flexibility, and, with regard to the Utility, complies with
regulatory guidelines. Based on cash provided from operations and our investing
and disposition activities, we may repurchase equity and long-term debt in order
to manage the overall size and balance of our capital structure.
During 1999, 1998, and 1997, we issued $54 million, $63 million, and
$54 million of common stock, respectively, primarily through the Dividend
Reinvestment Plan and the stock option plan component of the Long-Term Incentive
Program. During 1997, we also issued $1.1 billion of common stock to acquire the
natural gas assets in Texas. During 1999, 1998, and 1997, we declared dividends
on our common stock of $460 million, $466 million, and $485 million,
respectively.
During 1999, 1998, and 1997, we repurchased $693 million, $1,158 million,
and $804 million of our common stock, respectively. The repurchases made in 1998
and through September 1999 were executed through separate, accelerated share
repurchase programs. As of December 31, 1997, the Board of Directors had
authorized the repurchase of up to $1.7 billion of PG&E Corporation's common
stock on the open market or in negotiated transactions. As part of this
authorization, in January 1998, we repurchased in a specific transaction
37 million shares of common stock. As of December 31, 1998, approximately
$570 million remained available under this repurchase authorization. In
February 1999, we used this remaining authorization to purchase 16.6 million
shares at a cost of $502 million. In connection with this transaction, we
entered into a forward contract with an investment institution. We settled the
forward contract and its additional obligation of $29 million in
September 1999. We used a subsidiary of PG&E Corporation to make this
repurchase, along with subsequent stock repurchases. The stock held by the
subsidiary is treated as treasury stock and reflected as Stock Held by
Subsidiary on the Consolidated Balance Sheet of PG&E Corporation.
In October 1999, the Board of Directors of PG&E Corporation authorized an
additional $500 million for the purpose of repurchasing shares of the
Corporation's common stock on the open market. This authorization supplements
the approximately $40 million remaining from the amount previously authorized by
the Board of Directors on December 17, 1997. The authorization for share
repurchase extends through September 30, 2001. As of December 31, 1999, through
our wholly owned subsidiary, we repurchased 7.2 million shares, at a cost of
$159 million under this authorization. Any open market purchases will be made by
the wholly owned subsidiary of PG&E Corporation.
During 1999, our National Energy Group retired $128 million of long-term
debt. This amount includes PG&E GTT's June 1999 redemption of the outstanding
balance of $69 million of its senior notes, which resulted in a gain on
redemption of approximately $1.7 million. In 1998, our National Energy Group
retired $75 million of long-term debt and retired the notes used in the
acquisition of our Australian energy holdings. In 1997, our National Energy
Group issued $30 million and retired $109 million of long-term debt. Also in
1997, we assumed $780 million of long-term debt in connection with the
acquisition of our natural gas assets in Texas.
We maintain a number of credit facilities to support commercial paper
programs, letters of credit, and other short-term liquidity requirements. PG&E
Corporation maintains two $500 million revolving credit facilities, one of which
expires in November 2000 and the other in 2002. These credit facilities are used
to support the commercial paper program and other liquidity needs. The facility
expiring in 2000 may be extended annually for additional one-year periods upon
agreement with the lending institutions. There was $450 million of commercial
paper outstanding at December 31, 1999. PG&E Corporation introduced a
$200 million Extendible Commercial Note (ECN) program during the third quarter
of 1999. The ECN program supplements our short-term borrowing capability. There
was $76 million of extendible commercial notes outstanding at December 31, 1999,
which are not supported by the credit facilities.
21
<PAGE>
PG&E Gen maintains two $550 million revolving credit facilities. One
facility expires in August 2000 and the other expires in 2003. The total amount
outstanding at December 31, 1999, backed by the facilities, was $898 million in
commercial paper. Of these loans, $550 million is classified as noncurrent in
the Consolidated Balance Sheet of PG&E Corporation.
In 1998, USGenNE, a subsidiary of PG&E Gen, established a $100 million
revolving credit facility that expires in 2003. As of December 31, 1999, there
is no outstanding balance on this facility.
PG&E GT NW maintains a $100 million revolving credit facility that expires
in 2002, but has an annual renewal option allowing the facility to maintain a
three-year duration. PG&E GT NW also maintains a $50 million 364-day credit
facility that expires in 2000, but can be extended for successive 364-day
periods. At December 31, 1999, PG&E GT NW had an outstanding commercial paper
balance of $99 million, which is classified as noncurrent in the Consolidated
Balance Sheet of PG&E Corporation.
PG&E GTT maintains four separate credit facilities that total $250 million
and are guaranteed by PG&E Corporation. At December 31, 1999, PG&E GTT had
$176 million of outstanding short-term bank borrowings related to these credit
facilities. These lines may be cancelled upon demand and bear interest at each
respective bank's quoted money market rate. The borrowings are unsecured and
unrestricted as to use.
UTILITY:
In December 1999, 7.6 million shares of the Utility's common stock, with an
aggregate purchase price of $200 million, was purchased by a subsidiary of the
Utility. This purchase is reflected as stock held by subsidiary in the
Consolidated Balance Sheet of Pacific Gas and Electric Company. Earlier in 1999,
the Utility repurchased and cancelled 20 million shares of its common stock from
PG&E Corporation for an aggregate purchase price of $726 million to maintain its
authorized capital structure. In 1999, 1998, and 1997, the Utility declared
dividends on its common stock of $415 million, $300 million, and $699 million,
respectively.
The Utility's long-term debt that either matured, was redeemed, or was
repurchased during 1999 totaled $654 million. Of this amount, (1) $290 million
related to the Utility's rate reduction bonds maturing, (2) $135 million related
to the Utility's repurchase of mortgage and various other bonds,
(3) $147 million related to maturity of various utility mortgage bonds, and
(4) $82 million related to the maturities and redemption of various of the
Utility's medium-term notes and other debt.
The Utility's long-term debt that either matured, was redeemed, or was
repurchased during 1998 totaled $1.4 billion. Of this amount, (1) $249 million
related to the Utility's redemption of its 8% mortgage bonds due October 1,
2025, (2) $252 million related to the Utility's repurchase of various other
mortgage bonds, (3) $397 million related to the maturity of the Utility's 5 3/8%
mortgage bonds, (4) $204 million related to the other scheduled maturities of
long-term debt, and (5) $290 million related to rate reduction bonds maturing.
In 1997, the Utility redeemed or repurchased $225 million of long-term debt
to manage the overall balance of its capital structure. Also in 1997, the
Utility replaced $360 million of fixed interest rate pollution control bonds
with the same amount of variable interest rate pollution control bonds.
During 1999 and 1997, the Utility did not redeem or repurchase any of its
preferred stock. In 1998, the Utility redeemed its Series 7.44% preferred stock
with a face value of $65 million and its Series 6 7/8% preferred stock with a
face value of $43 million.
In December 1997, a subsidiary of the Utility issued $2.9 billion of rate
reduction bonds through a special-purpose entity established by the California
Infrastructure and Economic Development Bank. The proceeds were used by the
Utility to retire debt and reduce equity. (See Note 9 of Notes to Consolidated
Financial Statements.)
The Utility maintains a $1 billion revolving credit facility, which expires
in 2002. The Utility may extend the facility annually for additional one-year
periods upon agreement with the banks. This facility is used to support the
Utility's commercial paper program and other liquidity requirements. The total
amount outstanding at December 31, 1999, backed by this facility, was
$449 million in commercial paper. There were no bank notes outstanding at
December 31, 1999.
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<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES
UTILITY:
The primary uses of cash for investing activities are additions to property,
plant, and equipment, unregulated investments in partnerships, and acquisitions.
The Utility's estimated capital spending for 2000 is approximately $1.3
billion, excluding capital expenditures for divested fossil and geothermal power
plants. The Utility's capital expenditures were $1,181 million, $1,382 million,
and $1,522 million for the years ended December 31, 1999, 1998, and 1997,
respectively.
During 1999, the Utility sold three fossil-fueled generation facilities and
its geothermal generation facilities. These sales closed in April and May 1999,
respectively, and generated proceeds of $1,014 million. In 1998, the Utility had
proceeds of $501 million from the sale of three fossil-fueled generation plants.
NATIONAL ENERGY GROUP:
PG&E Gen is associated with the construction of two natural gas-fueled
combined-cycle power plants, and plans to begin construction on a third plant in
early 2000. These power plants, referred to as "merchant power plants," will
sell power as a commodity in the competitive marketplace. The electricity
generated by these plants will be sold on a wholesale basis to local utilities
and power marketers, including PG&E ET, which, in turn, will sell it to
industrial, commercial, and other electricity customers.
Millennium Power, a 360-MW power plant located in Massachusetts, is
scheduled to begin commercial service in the fourth quarter of 2000. Lake Road
Generating Plant (Lake Road), an approximately 790-MW power plant located in
Connecticut, is scheduled to begin commercial service in 2001. Lake Road is
being financed through a synthetic lease with a third party owner. PG&E Gen will
operate the plant under an operating lease (See Note 14 of Notes to Consolidated
Financial Statements). La Paloma Generating Plant, an approximately 1,050-MW
power plant, is located in California, and is scheduled to begin commercial
service in 2002. The estimated cost to construct these plants is approximately
$1.4 billion.
In 1998, PG&E Corporation sold its Australian energy holdings for proceeds
of approximately $126 million. In 1997, PG&E Corporation sold its interest in
International Generating Company, Ltd., resulting in an after-tax gain of
approximately $120 million.
DEBT OBLIGATIONS AND RATE REDUCTION BONDS
The table below provides information about our debt obligations and rate
reduction bonds at December 31, 1999:
<TABLE>
<CAPTION>
THERE-
EXPECTED MATURITY DATE 2000 2001 2002 2003 2004 AFTER
<S> <C> <C> <C> <C> <C> <C>
(dollars in millions)
Utility:
Long-term debt
Variable rate obligations........ $200 $100 $738 $310 $ -- $ --
Fixed rate obligations........... $265 $274 $379 $354 $392 $2,330
Average interest rate............ 6.6% 8.0% 7.8% 6.3% 6.4% 7.1%
Rate reduction bonds............... $290 $290 $290 $290 $290 $ 871
Average interest rate............ 6.2% 6.2% 6.3% 6.4% 6.4% 6.5%
National Energy Group:
Long-term debt
Variable rate obligations........ $ 44 $ 11 $109 $560 $ 9 $ 87
Fixed rate obligations........... $ 83 $ 95 $137 $ 47 $ 69 $ 672
Average interest rate............ 8.5% 9.1% 8.6% 9.8% 9.8% 8.2%
<CAPTION>
FAIR
VALUE AT
DEC. 31,
EXPECTED MATURITY DATE TOTAL 1999
<S> <C> <C>
(dollars in millions)
Utility:
Long-term debt
Variable rate obligations........ $1,348 $1,348
Fixed rate obligations........... $3,994 $3,869
Average interest rate............ 7.1%
Rate reduction bonds............... $2,321 $2,265
Average interest rate............ 6.3%
National Energy Group:
Long-term debt
Variable rate obligations........ $ 820 $ 820
Fixed rate obligations........... $1,103 $1,058
Average interest rate............ 8.5%
</TABLE>
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<PAGE>
ENVIRONMENTAL MATTERS
We are subject to laws and regulations established to both maintain and
improve the quality of the environment. Where our properties contain hazardous
substances, these laws and regulations require us to remove those substances or
remedy effects on the environment.
At December 31, 1999, the Utility has accrued $271 million ($300 million on
an undiscounted basis) for clean-up costs at identified sites. If other
responsible parties fail to pay or expected outcomes change, then these costs
may be as much as $486 million. Of the $271 million, the Utility has recovered
$148 million through rates, including $34 million through depreciation and
expects to recover another $95 million in future rates. Additionally, the
Utility mitigates its cost by seeking recovery from insurance carriers and other
third parties. (See Note 15 of Notes to Consolidated Financial Statements.)
The cost of the hazardous substance remediation ultimately undertaken by the
Utility is difficult to estimate. A change in the estimate may occur in the near
term due to uncertainty concerning the Utility's responsibility, the complexity
of environmental laws and regulations, and the selection of compliance
alternatives. The Utility estimates the upper limit of the range using
assumptions least favorable to the Utility, based upon a range of reasonably
possible outcomes. Costs may be higher if the Utility is found to be responsible
for clean-up costs at additional sites or expected outcomes change.
In December 1999, the Utility was notified by the purchaser of its former
Moss Landing power plant that it had identified a cleaning procedure used at the
plant that released heated water from the intake, and that this procedure is not
specified in the plant's National Pollutant Discharge Elimination System (NPDES)
permit issued by the Central Coast Regional Water Quality Control Board (Central
Coast Board). The purchaser notified the Central Coast Board of its findings and
the Central Coast Board requested additional information from the purchaser. The
Utility has initiated an investigation of these activities during the time it
owned the plant. The Central Coast Board has been notified of the investigation
and the results will be presented to the Central Coast Board when the
investigation is complete. If the identified procedure was performed during the
Utility's ownership and was beyond the scope of the relevant NPDES permits, the
Central Coast Board may choose to initiate an enforcement action. If so, the
Utility could be subject to significant penalties. Until the investigation is
complete and the results discussed with the Central Coast Board, it is not
possible to determine whether the Utility will suffer a loss in connection with
this matter or to provide a more detailed estimate of such liability.
YEAR 2000 (Y2K)
PG&E Corporation successfully transitioned into the Year 2000 without any
Y2K-related service disruptions. There is, however, a risk that some
computer-related problems might not manifest themselves for a period of time and
that supplier or business partner Y2K problems may materialize and have an
adverse impact on our operations.
As of December 31, 1999, expenditures to address potential Y2K problems
totaled $185 million, of which $93 million is attributed to the Utility.
Included are systems replaced or enhanced for general business purposes and for
which implementation schedules were critical to our Y2K readiness.
INFLATION
Financial statements, which are prepared in accordance with generally
accepted accounting principles, report operating results in terms of historical
costs and do not evaluate the impact of inflation. Inflation affects our
construction costs, operating expenses, and interest charges. In addition, the
Utility's electric revenues will not reflect the impact of inflation due to the
current electric rate freeze. However, inflation at current levels is not
expected to have a material adverse impact on the Utility's or our financial
position or results of operations.
PRICE RISK MANAGEMENT ACTIVITIES
We have established a risk management policy that allows derivatives to be
used for both hedging and non-hedging purposes (a derivative is a contract whose
value is dependent on or derived from the value of some underlying asset). We
use derivatives for hedging purposes primarily to offset underlying commodity
price risks. We also participate in markets using derivatives to gather market
intelligence, create liquidity, and maintain a market presence. Such derivatives
include forward contracts, futures, swaps, and options. Net open positions often
exist or are established due to PG&E Corporation's assessment of its response to
changing market conditions. To
24
<PAGE>
the extent that PG&E Corporation has an open position, it is exposed to the risk
that fluctuating market prices may adversely impact its financial results. Our
risk management policy and the trading and risk management policies of our
subsidiaries prohibit the use of derivatives whose payment formula includes a
multiple of some underlying asset.
We prepare a daily assessment of our portfolio market risk exposure using
value-at-risk and other methodologies that simulate future price movements in
the energy markets to estimate the size and probability of future potential
losses. The quantification of market risk using value-at-risk provides a
consistent measure of risk across diverse energy markets and products. The use
of this methodology requires a number of important assumptions, including the
selection of a confidence level for losses, volatility of prices, market
liquidity, and a holding period.
We utilize historical data for calculating the price volatility of our
positions and how likely the prices of those positions will move together. The
model includes all derivative and commodity investments in our non-hedging
portfolio and only derivative commodity investments for our hedging portfolio
(but not the related underlying hedged position). We express value-at-risk as a
dollar amount of the potential loss in the fair value of our portfolio based on
a 95 percent confidence level using a one-day liquidation period. Therefore,
there is a 5 percent probability that our portfolio will incur a loss in one day
greater than our value-at-risk. The value-at-risk is aggregated for PG&E
Corporation as a whole by correlating the daily returns of the portfolios for
natural gas, natural gas liquids, and power for the previous 22 trading days.
Our daily value-at-risk for commodity price-sensitive derivative instruments as
of December 31, 1999 and 1998, for non-hedging activities was $4.4 million and
$6.2 million, respectively. Our daily value-at-risk for commodity
price-sensitive derivative instruments as of December 31, 1999 and 1998, for
hedging activities was $30,000 and $210,000, respectively. For the year ended
December 31, 1999, the average, high, and low value-at-risk amounts for
non-hedging activities were $4.3 million, $6.2 million, and $1.3 million,
respectively. The average, high, and low value-at-risk amounts over the same
reporting period for hedging activities were $0.6 million, $1.7 million, and
$0.0 million, respectively. The average, high and low amounts for the reporting
period were computed using the value-at-risk amounts at the beginning of the
reporting period and the four quarter-end amounts.
Value-at-risk has several limitations as a measure of portfolio risk,
including, but not limited to, underestimation of the risk of a portfolio with
significant options exposure, inadequate indication of the exposure of a
portfolio to extreme price movements, and the inability to address the risk
resulting from intra-day trading activities.
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which delayed the implementation of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," by one year to
require adoption in years beginning after June 15, 2000. The Statement permits
early adoption as of the beginning of any fiscal quarter.
PG&E Corporation expects to adopt SFAS No. 133 no later than January 1,
2001. The Statement will require us to recognize all derivatives, as defined in
the Statement, on the balance sheet at fair value. Derivatives, or any portion
thereof, that are not effective hedges must be adjusted to fair value through
income. If derivatives are effective hedges, depending on the nature of the
hedges, changes in the fair value of derivatives either will be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or will be recognized in other comprehensive income until the
hedged items are recognized in earnings. We currently are evaluating what the
effect of SFAS No. 133 will be on the earnings and financial position of PG&E
Corporation. However, we already use the mark-to-market method of accounting for
our commodity non-hedging and price risk management activities.
LEGAL MATTERS
In the normal course of business, both the Utility and PG&E Corporation are
named as parties in a number of claims and lawsuits. (See Note 15 of Notes to
Consolidated Financial Statements for further discussion of significant pending
legal matters.)
25
<PAGE>
- --------------------------------------------------------------------------------
PG&E Corporation
STATEMENT OF CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
<S> <C> <C> <C>
OPERATING REVENUES
Utility $ 9,228 $ 8,924 $ 9,495
Energy commodities and services 11,592 10,653 5,760
------- ------- -------
TOTAL OPERATING REVENUES 20,820 19,577 15,255
------- ------- -------
OPERATING EXPENSES
Cost of energy for utility 3,149 2,942 3,208
Cost of energy commodities and services 10,587 9,852 5,368
Operating and maintenance, net 3,151 3,083 3,066
Depreciation, amortization, and decommissioning 1,780 1,602 1,851
Loss on assets held for sale 1,275 -- --
------- ------- -------
TOTAL OPERATING EXPENSES 19,942 17,479 13,493
------- ------- -------
OPERATING INCOME 878 2,098 1,762
Interest expense, net (772) (781) (664)
Other income, net 155 65 212
------- ------- -------
INCOME BEFORE INCOME TAXES 261 1,382 1,310
Income taxes 248 611 565
------- ------- -------
INCOME FROM CONTINUING OPERATIONS 13 771 745
DISCONTINUED OPERATIONS (NOTE 5)
Loss from operations of PG&E Energy Services (net of
applicable income taxes of $35 million, $41 million, and
$17 million, respectively) (40) (52) (29)
Loss on disposal of PG&E Energy Services (net of
applicable income taxes of $36 million) (58) -- --
------- ------- -------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NOTE 1) (85) 719 716
CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE
(NET OF APPLICABLE INCOME TAXES OF $8 MILLION) 12 -- --
------- ------- -------
NET INCOME (LOSS) $ (73) $ 719 $ 716
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 368 382 410
EARNINGS (LOSS) PER COMMON SHARE, BASIC AND DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.04 $ 2.02 $ 1.82
DISCONTINUED OPERATIONS (0.27) (0.14) (0.07)
CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE 0.03 -- --
------- ------- -------
NET INCOME (LOSS) $ (0.20) $ 1.88 $ 1.75
DIVIDENDS DECLARED PER COMMON SHARE $ 1.20 $ 1.20 $ 1.20
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
26
<PAGE>
- --------------------------------------------------------------------------------
PG&E Corporation
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
-------------------
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 281 $ 286
Short-term investments 187 55
Accounts receivable
Customers, net 1,486 1,856
Energy marketing 532 507
Price risk management 607 1,416
Inventories and prepayments 598 671
Deferred income taxes 133 --
-------- --------
TOTAL CURRENT ASSETS 3,824 4,791
PROPERTY, PLANT, AND EQUIPMENT
Utility 23,001 24,160
Non-utility
Electric generation 1,905 1,967
Gas transmission 2,541 3,347
Construction work in progress 436 407
Other 184 127
-------- --------
TOTAL PROPERTY, PLANT, AND EQUIPMENT (AT ORIGINAL COST) 28,067 30,008
Accumulated depreciation and decommissioning (11,291) (12,026)
-------- --------
NET PROPERTY, PLANT, AND EQUIPMENT 16,776 17,982
OTHER NONCURRENT ASSETS
Regulatory assets 4,957 6,347
Nuclear decommissioning funds 1,264 1,172
Other 2,894 2,942
-------- --------
TOTAL NONCURRENT ASSETS 9,115 10,461
-------- --------
TOTAL ASSETS $ 29,715 $ 33,234
======== ========
</TABLE>
27
<PAGE>
- --------------------------------------------------------------------------------
PG&E Corporation
CONSOLIDATED BALANCE SHEET (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
-------------------
1999 1998
<S> <C> <C>
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 1,499 $ 1,644
Current portion of long-term debt 592 338
Current portion of rate reduction bonds 290 290
Accounts payable
Trade creditors 708 1,001
Other 559 443
Regulatory balancing accounts 384 79
Energy marketing 480 381
Accrued taxes 211 103
Price risk management 575 1,412
Other 1,033 1,064
------- -------
TOTAL CURRENT LIABILITIES 6,331 6,755
NONCURRENT LIABILITIES
Long-term debt 6,673 7,422
Rate reduction bonds 2,031 2,321
Deferred income taxes 3,147 3,861
Deferred tax credits 231 283
Other 3,636 3,746
------- -------
TOTAL NONCURRENT LIABILITIES 15,718 17,633
PREFERRED STOCK OF SUBSIDIARIES 480 480
UTILITY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF TRUST HOLDING SOLELY UTILITY SUBORDINATED
DEBENTURES 300 300
COMMON STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 800,000,000 shares,
issued, 384,406,113 and 382,603,564 shares, respectively 5,906 5,862
Common stock held by subsidiary, at cost, 23,815,500
shares (690) --
Reinvested earnings 1,670 2,204
------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY 6,886 8,066
------- -------
Commitments and Contingencies (Notes 1, 2, 3, 4, 5, 14, and
15) -- --
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,715 $33,234
======= =======
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
28
<PAGE>
- --------------------------------------------------------------------------------
PG&E Corporation
STATEMENT OF CONSOLIDATED CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (73) $ 719 $ 716
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation, amortization, and decommissioning 1,780 1,602 1,851
Deferred income taxes and tax credits--net (754) (107) (160)
Other deferred charges and noncurrent liabilities 102 18 121
Loss (gain) on sale of assets -- 23 (120)
Loss on assets held for sale 1,275 -- --
Loss from discontinued operations 98 52 29
Cumulative effect of change in accounting principle (12) -- --
Net effect of changes in operating assets and liabilities:
Accounts receivable--trade 370 (342) (242)
Inventories and prepayments 73 (179) (4)
Price risk management assets and liabilities, net (28) (16) 12
Accounts payable--trade (293) 247 210
Regulatory balancing accounts payable 305 537 126
Accrued taxes 108 (123) (54)
Other working capital 159 199 (85)
Other--net (824) (347) 218
Cash provided in discontinued operations 1 -- --
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,287 2,283 2,618
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,584) (1,619) (1,822)
Acquisitions and investments in unregulated projects -- (1,779) (116)
Proceeds from sale of assets 1,014 1,106 146
Other--net 453 66 21
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES (117) (2,226) (1,771)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities (145) 2,115 (587)
Long-term debt issued -- -- 386
Long-term debt matured, redeemed, or repurchased (798) (1,552) (961)
Proceeds from issuance of rate reduction bonds -- -- 2,881
Preferred stock redeemed or repurchased -- (108) --
Common stock issued 54 63 54
Common stock repurchased (693) (1,158) (804)
Dividends paid (465) (470) (524)
Other--net 4 (3) (39)
------- ------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,043) (1,113) 406
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 127 (1,056) 1,253
CASH AND CASH EQUIVALENTS AT JANUARY 1 341 1,397 144
------- ------- -------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 468 $ 341 $ 1,397
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest (net of amounts capitalized) $ 727 $ 774 $ 624
Income taxes (net of refunds) 723 770 801
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
29
<PAGE>
- --------------------------------------------------------------------------------
PG&E Corporation
STATEMENT OF CONSOLIDATED COMMON STOCK EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON TOTAL
ADDITIONAL STOCK COMMON
COMMON PAID-IN HELD BY REINVESTED STOCK
STOCK CAPITAL SUBSIDIARY EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 $2,018 $ 3,710 $ -- $2,636 $ 8,364
Net income 716 716
Holding company formation 3,710 (3,710) --
Common stock issued (2,302,544 shares) 54 54
Acquisitions (45,683,005 shares) 1,069 1,069
Common stock repurchased (33,823,950 shares) (496) (308) (804)
Cash dividends declared on common stock (485) (485)
Other 11 (28) (17)
BALANCE DECEMBER 31, 1997 6,366 -- -- 2,531 8,897
Net income 719 719
Common stock issued (2,028,303 shares) 63 63
Common stock repurchased (37,090,630 shares) (565) (593) (1,158)
Cash dividends declared on common stock (466) (466)
Other (2) 13 11
BALANCE DECEMBER 31, 1998 5,862 -- -- 2,204 8,066
Net loss (73) (73)
Common stock issued (1,879,474 shares) 54 54
Common stock repurchased (23,892,425 shares) (2) (690) (1) (693)
Cash dividends declared on common stock (460) (460)
Other (8) (8)
BALANCE DECEMBER 31, 1999 $5,906 $ -- $(690) $1,670 $ 6,886
====== ======= ===== ====== =======
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
30
<PAGE>
- --------------------------------------------------------------------------------
Pacific Gas and Electric Company
STATEMENT OF CONSOLIDATED INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
<S> <C> <C> <C>
OPERATING REVENUES
Electric $7,232 $7,191 $7,691
Gas 1,996 1,733 1,804
------ ------ ------
TOTAL OPERATING REVENUES 9,228 8,924 9,495
------ ------ ------
OPERATING EXPENSES
Cost of electric energy 2,411 2,321 2,501
Cost of gas 738 621 707
Operating and maintenance, net 2,522 2,668 2,719
Depreciation, amortization, and decommissioning 1,564 1,438 1,748
------ ------ ------
TOTAL OPERATING EXPENSES 7,235 7,048 7,675
------ ------ ------
OPERATING INCOME 1,993 1,876 1,820
Interest expense, net (593) (621) (570)
Other income, net 36 103 127
------ ------ ------
INCOME BEFORE INCOME TAXES 1,436 1,358 1,377
Income taxes 648 629 609
------ ------ ------
NET INCOME 788 729 768
Preferred dividend requirement 25 27 33
------ ------ ------
INCOME AVAILABLE FOR COMMON STOCK $ 763 $ 702 $ 735
====== ====== ======
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
31
<PAGE>
- --------------------------------------------------------------------------------
Pacific Gas and Electric Company
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
-------------------
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 80 $ 73
Short-term investments 21 17
Accounts receivable
Customers, net 1,201 1,383
Related parties 9 14
Inventories
Fuel oil 2 23
Gas stored underground 137 130
Materials and supplies 155 159
Prepayments 34 50
Deferred income taxes 119 --
-------- --------
TOTAL CURRENT ASSETS 1,758 1,849
PROPERTY, PLANT, AND EQUIPMENT
Electric 15,762 17,088
Gas 7,239 7,072
Construction work in progress 214 273
-------- --------
TOTAL PROPERTY, PLANT, AND EQUIPMENT (AT ORIGINAL COST) 23,215 24,433
Accumulated depreciation and decommissioning (10,497) (11,397)
-------- --------
NET PROPERTY, PLANT, AND EQUIPMENT 12,718 13,036
OTHER NONCURRENT ASSETS
Regulatory assets 4,895 6,288
Nuclear decommissioning funds 1,264 1,172
Other 835 605
-------- --------
TOTAL NONCURRENT ASSETS 6,994 8,065
-------- --------
TOTAL ASSETS $ 21,470 $ 22,950
======== ========
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
Pacific Gas and Electric Company
CONSOLIDATED BALANCE SHEET (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
-------------------
1999 1998
<S> <C> <C>
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 449 $ 668
Current portion of long-term debt 465 260
Current portion of rate reduction bonds 290 290
Accounts payable
Trade creditors 577 718
Related parties 216 60
Regulatory balancing accounts 384 79
Other 333 374
Accrued taxes 118 2
Other 529 561
------- -------
TOTAL CURRENT LIABILITIES 3,361 3,012
NONCURRENT LIABILITIES
Long-term debt 4,877 5,444
Rate reduction bonds 2,031 2,321
Deferred income taxes 2,510 3,060
Deferred tax credits 231 283
Other 2,252 2,045
------- -------
TOTAL NONCURRENT LIABILITIES 11,901 13,153
PREFERRED STOCK WITH MANDATORY REDEMPTION PROVISIONS
6.30% and 6.57%, outstanding 5,500,000 shares, due
2002-2009 137 137
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF TRUST HOLDING SOLELY UTILITY SUBORDINATED
DEBENTURES
7.90%, 12,000,000 shares due 2025 300 300
STOCKHOLDERS' EQUITY
Preferred stock without mandatory redemption provisions
Nonredeemable--5% to 6%, outstanding 5,784,825 shares 145 145
Redeemable--4.36% to 7.04%, outstanding 5,973,456 shares 149 149
Common stock, $5 par value, authorized 800,000,000 shares,
issued 321,314,760 and 341,353,455 shares, respectively 1,606 1,707
Common stock held by subsidiary, at cost, 7,627,765 shares (200) --
Additional paid in capital 1,964 2,087
Reinvested earnings 2,107 2,260
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,771 6,348
Commitments and Contingencies (Notes 2, 6, 14, and 15) -- --
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,470 $22,950
======= =======
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
33
<PAGE>
- --------------------------------------------------------------------------------
Pacific Gas and Electric Company
STATEMENT OF CONSOLIDATED CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 788 $ 729 $ 768
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization, and decommissioning 1,564 1,438 1,748
Deferred income taxes and tax credits--net (485) (257) (182)
Other deferred charges and noncurrent liabilities 101 31 133
Net effect of changes in operating assets and liabilities:
Accounts receivable--trade 187 266 (582)
Inventories and prepayments 34 (21) 12
Accounts payable--trade 15 203 (80)
Regulatory balancing accounts payable 305 537 126
Accrued taxes 116 (227) (62)
Other working capital (73) (50) (128)
Other--net (352) (39) 15
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,200 2,610 1,768
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,181) (1,382) (1,522)
Proceeds from sale of assets 1,014 501 --
Other--net 234 40 (117)
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES 67 (841) (1,639)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities (219) 668 (681)
Long-term debt issued -- -- 355
Long-term debt matured, redeemed, or repurchased (672) (1,413) (852)
Proceeds from issuance of rate reduction bonds -- -- 2,881
Preferred stock redeemed or repurchased -- (108) --
Common stock repurchased (926) (1,600) --
Dividends paid (440) (444) (739)
Other--net 1 (5) (14)
------- ------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,256) (2,902) 950
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 11 (1,133) 1,079
CASH AND CASH EQUIVALENTS AT JANUARY 1 90 1,223 144
------- ------- -------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 101 $ 90 $ 1,223
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest (net of amounts capitalized) $ 531 $ 600 $ 547
Income taxes (net of refunds) 1,001 1,115 841
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
34
<PAGE>
- --------------------------------------------------------------------------------
Pacific Gas and Electric Company
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED
STOCK
COMMON TOTAL WITHOUT
ADDITIONAL STOCK COMMON MANDATORY
COMMON PAID-IN HELD BY REINVESTED STOCK REDEMPTION
(IN MILLIONS) STOCK CAPITAL SUBSIDIARY EARNINGS EQUITY PROVISIONS
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 $2,018 $ 3,710 -- $2,636 $ 8,364 $ 402
Net income 768 768
Holding company formation (1,146) (1,146)
Cash dividends declared
Preferred stock (33) (33)
Common stock (699) (699)
Other (1) (1)
BALANCE DECEMBER 31, 1997 $2,018 $ 2,564 -- $2,671 $ 7,253 $ 402
Net income 729 729
Common stock repurchased
(62,150,837 shares) (311) (481) (808) (1,600)
Preferred stock redeemed
(4,323,948 shares) (7) (3) (10) (98)
Cash dividends declared
Preferred stock (28) (28)
Common stock (300) (300)
Other 11 (1) 10 (10)
BALANCE DECEMBER 31, 1998 $1,707 $ 2,087 -- $2,260 $ 6,054 $ 294
Net income 788 788
Common stock repurchased
(27,666,460 shares) (101) (123) (200) (502) (926)
Cash dividends declared
Preferred stock (25) (25)
Common stock (415) (415)
Other 1 1
BALANCE DECEMBER 31, 1999 $1,606 $ 1,964 $(200) $2,107 $ 5,477 $ 294
====== ======= ===== ====== ======= =====
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
35
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 1: GENERAL
BASIS OF PRESENTATION
PG&E Corporation became the holding company of Pacific Gas and Electric
Company (the Utility) on January 1, 1997. Prior to that time, the Utility was
the predecessor of PG&E Corporation. Effective with PG&E Corporation's
formation, the Utility's interests in its unregulated subsidiaries were
transferred to PG&E Corporation.
This is a combined annual report of PG&E Corporation and the Utility.
Therefore, the Notes to Consolidated Financial Statements apply to both PG&E
Corporation and the Utility. PG&E Corporation's consolidated financial
statements include the accounts of PG&E Corporation, the Utility, and PG&E
Corporation's wholly owned and controlled subsidiaries. The Utility's
consolidated financial statements include its accounts as well as those of its
wholly owned and controlled subsidiaries. All significant intercompany
transactions have been eliminated from the consolidated financial statements.
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the 1999 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
revenues, expenses, assets, and liabilities and the disclosure of contingencies.
Actual results could differ from these estimates.
Accounting principles used include those necessary for rate-regulated
enterprises, which reflect the ratemaking policies of the California Public
Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).
OPERATIONS
PG&E Corporation is an energy-based holding company headquartered in San
Francisco, California. Its businesses provide energy services throughout North
America. PG&E Corporation's Northern and Central California utility subsidiary,
Pacific Gas and Electric Company, provides natural gas and electric service to
one of every 20 Americans.
PG&E Corporation's National Energy Group provides energy products and
services throughout North America. The National Energy Group businesses develop,
construct, operate, own, and manage independent power generation facilities that
serve wholesale and industrial customers through PG&E Generating Company, LLC
(formerly U.S. Generating Company, LLC) and its affiliates (collectively, PG&E
Gen); own and operate natural gas pipelines, natural gas storage facilities, and
natural gas processing plants, primarily in the Pacific Northwest and in Texas,
through various subsidiaries of PG&E Corporation (collectively, PG&E Gas
Transmission or PG&E GT); purchase and sell energy commodities and provide risk
management services to customers in major North American markets, including the
other National Energy Group non-utility businesses, unaffiliated utilities,
marketers, municipalities, and large end-use customers through PG&E Energy
Trading--Gas Corporation, PG&E Energy Trading--Power, L.P., and their affiliates
(collectively, PG&E Energy Trading or PG&E ET); and provide competitively priced
electricity, natural gas, and related services to industrial, commercial, and
institutional customers through PG&E Energy Services Corporation (PG&E Energy
Services or PG&E ES). In the fourth quarter of 1999, PG&E Corporation's Board of
Directors approved a plan for the divestiture of PG&E Corporation's Texas
natural gas and natural gas liquids business. Also in the fourth quarter of
1999, PG&E Corporation's Board of Directors approved a plan for the divestiture
of PG&E Corporation's retail energy services.
REGULATION AND STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 71
The Utility is regulated by the CPUC, the FERC, and the Nuclear Regulatory
Commission, among others. The gas transmission business in the Pacific Northwest
is regulated by the FERC. The gas transmission business in Texas is regulated by
the Texas Railroad Commission.
PG&E Corporation and the Utility account for the financial effects 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 for the deferral as a regulatory asset costs that otherwise
would have been expensed if it is
36
<PAGE>
probable that the costs will be recovered in future regulated revenues. In
addition, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," requires PG&E Corporation and the
Utility to write off regulatory assets when they are no longer probable of
recovery. On an ongoing basis, PG&E Corporation and the Utility review their
regulatory assets and liabilities for the continued applicability of SFAS
No. 71 and the effect of SFAS No. 121.
Regulatory assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
-------------------
(IN MILLIONS) 1999 1998
<S> <C> <C>
Utility:
Generation-related transition costs(1) $3,996 $5,355
Unamortized loss, net of gain, on reacquired debt 288 289
Regulatory assets for deferred income tax 295 293
Other, net 316 351
------ ------
Total Utility $4,895 $6,288
National Energy Group 62 59
------ ------
Regulatory assets $4,957 $6,347
====== ======
Regulatory liabilities $ 771 $ 526
====== ======
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements for further
discussion.
Regulatory assets and liabilities are amortized over the period that the
costs are reflected in regulated revenues. The majority of the Utility's
regulatory assets are included in generation-related transition costs. The
Utility is amortizing its eligible transition costs, including
generation-related regulatory assets, over the transition period in conjunction
with the available competitive transition charge (CTC) revenues. During 1999,
regulatory assets related to electric industry restructuring decreased by $1,359
million. This decrease reflects the recovery of eligible transition costs of
$806 million through amortization and $553 million through the gain on the sale
of generating plants.
REVENUES AND REGULATORY BALANCING ACCOUNTS
In connection with electric industry restructuring, use of the Utility's
sales and energy cost balancing accounts for electric utility revenues was
discontinued in 1998. These balancing accounts have been replaced with
regulatory adjustment mechanisms that impact expenses instead of revenues. (See
Note 2.) For gas utility revenues, sales balancing accounts accumulate
differences between authorized and actual base revenues. Further, gas cost
balancing accounts accumulate differences between the actual cost of gas and the
revenues designated for recovery of such costs. The regulatory balancing
accounts accumulate balances until they are refunded to or received from Utility
customers through authorized rate adjustments. Utility revenues included amounts
for services rendered but unbilled at the end of each year.
ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES
PG&E Corporation, primarily through its subsidiaries, engages in price risk
management activities for both non-hedging and hedging purposes. PG&E
Corporation conducts non-hedging activities principally through its unregulated
subsidiary, PG&E ET. Derivative and other financial instruments associated with
our electric power, natural gas, natural gas liquids, and related non-hedging
activities are accounted for using the mark-to-market method of accounting.
Under mark-to-market accounting, PG&E Corporation's non-hedging contracts,
including both physical contracts and financial instruments, are recorded at
market value, which approximates fair value. The market prices used to value
these transactions reflect management's best estimates considering various
factors including market quotes, time value, and volatility factors of the
underlying commitments. The values are adjusted to reflect the potential impact
of liquidating a position in an orderly manner over a reasonable period of time
under present market conditions.
Changes in the market value of these contract portfolios, resulting
primarily from newly originated transactions and the impact of commodity price
and interest rate movements, are recognized in operating revenues in the
37
<PAGE>
period of change. Unrealized gains and losses of these contract portfolios are
recorded as assets and liabilities, respectively, from price risk management.
In addition to the non-hedging activities discussed above, PG&E Corporation
may engage in hedging activities using futures, forward contracts, options, and
swaps to hedge the impact of market fluctuations on energy commodity prices,
interest rates, and foreign currencies when there is a high degree of
correlation between price movements in the derivative and the item designated as
being hedged. PG&E Corporation accounts for hedge transactions under the
deferral method. Initially, PG&E Corporation defers unrealized gains and losses
on these transactions and classifies them as assets or liabilities. When the
hedged transaction occurs, PG&E Corporation recognizes the gain or loss in
operating expense. In instances where the anticipated correlation of price
movements does not occur, hedge accounting is terminated and future changes in
the value of the derivative are recognized as gains or losses. If the hedged
item is sold, the value of the associated derivative is recognized in income.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which delayed the implementation of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," by one year to
require adoption in years beginning after June 15, 2000. The Statement permits
early adoption as of the beginning of any fiscal quarter.
PG&E Corporation expects to adopt SFAS No. 133 no later than January 1,
2001. The Statement will require PG&E Corporation to recognize all derivatives,
as defined in the Statement, on the balance sheet at fair value. Derivatives, or
any portion thereof, that are not effective hedges must be adjusted to fair
value through income. If derivatives are effective hedges, depending on the
nature of the hedges, changes in the fair value of derivatives either will be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings, or will be recognized in other comprehensive
income until the hedged items are recognized in earnings. We currently are
evaluating what effect of SFAS No. 133 will be on the earnings and financial
position of PG&E Corporation. However, we already use the mark-to-market method
of accounting for our commodity non-hedging and price risk management
activities.
In compliance with regulatory requirements, the Utility manages price risk
independently from the activities in PG&E Corporation's unregulated business.
During 1998, the CPUC authorized Pacific Gas and Electric Company to trade
natural gas-based financial instruments to manage price and revenue risks
associated with its natural gas transmission and storage assets, subject to
certain conditions. Also in 1998, the CPUC authorized the Utility to trade
natural gas-based financial instruments to hedge the gas commodity price swings
in serving core gas customers. In May 1999, the Power Exchange (PX) obtained
FERC approval to operate the "block forward market" which offers parties the
ability to buy and sell contracts to purchase electricity in the future at
prices set in the contracts. The Utility sought and obtained CPUC authority to
participate in the PX block forward market for contracts that call for delivery
of the purchased electricity by October 31, 2000, as well as to recover costs
(such as gains/losses and transaction fees) associated with its participation in
this market.
PROPERTY, PLANT, AND EQUIPMENT
Plant additions and replacements are capitalized. The capitalized costs
include labor, materials, construction overhead, and capitalized interest or an
allowance for funds used during construction (AFUDC). AFUDC is the estimated
cost of debt and equity funds used to finance regulated plant additions. The
Utility recovers AFUDC in rates through depreciation expense over the useful
life of the related asset. Nuclear fuel inventories are included in property,
plant, and equipment. Stored nuclear fuel inventory is stated at lower of
average cost or market. Nuclear fuel in the reactor is amortized based on the
amount of energy output.
The original cost of retired plant and removal costs less salvage value is
charged to accumulated depreciation upon retirement of plant in service for the
Utility and the National Energy Group businesses that apply SFAS No. 71. For the
remainder of our National Energy Group business operations, the cost and
accumulated depreciation of property, plant, and equipment retired or otherwise
disposed of are removed from related accounts and included in the determination
of the gain or loss on disposition.
Property, plant, and equipment is depreciated using a straight-line
remaining-life method. PG&E Corporation's composite depreciation rates were
3.60 percent, 3.89 percent, and 3.45 percent for the years ended December 31,
1999, 1998, and 1997, respectively. The Utility's composite depreciation rates
were 3.41 percent, 3.88 percent, and 3.26 percent for the years ended
December 31, 1999, 1998, and 1997, respectively.
38
<PAGE>
GAINS AND LOSSES ON REACQUIRED DEBT
Any gains and losses on reacquired debt associated with regulated operations
that are subject to the provisions of SFAS No. 71 are deferred and amortized
over the remaining original lives of the debt reacquired, consistent with
ratemaking principles. Gains and losses on reacquired debt associated with
unregulated operations are recognized in earnings at the time such debt is
reacquired.
INVENTORIES
Inventories include material and supplies, gas stored underground, coal, and
fuel oil. Materials and supplies, coal, and gas stored underground are valued at
average cost. Fuel oil is valued by the last-in first-out method.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents (stated at cost, which approximates market) include working
funds and consist primarily of Eurodollar time deposits, bankers acceptances,
and some commercial paper with original maturities of three months or less.
INCOME TAXES
PG&E Corporation uses the liability method of accounting for income taxes.
Income tax expense includes current and deferred income taxes resulting from
operations during the year. Tax credits are amortized over the life of the
related property.
PG&E Corporation files a consolidated federal income tax return that
includes domestic subsidiaries in which its ownership is 80 percent or more. The
Utility and various other subsidiaries are parties to a tax-sharing arrangement
with PG&E Corporation. PG&E Corporation files consolidated state income tax
returns when applicable. The Utility reports taxes on a stand-alone basis.
RELATED PARTY AGREEMENTS
In accordance with various agreements, the Utility and other subsidiaries
provide and receive various services from their parent, PG&E Corporation.
Services include the Utility's provision of general and administrative services.
The Utility and other subsidiaries receive general and administrative services
and financing from PG&E Corporation. Corporate costs, such as administrative
costs, interest, and income taxes, are allocated to subsidiaries using a variety
of factors, including their share of employees, operating expenses, assets, and
other cost causal methods. Also, the Utility purchases gas commodity and
transmission services from PG&E ET and transmission services from PG&E GT NW.
Intercompany transactions are eliminated in consolidation and no profit results
from these transactions. At December 31, 1999, the Utility has a net
intercompany payable to affiliates of $207 million, of which $163 million
relates to short-term borrowings, including interest. For the years ended
December 31, 1999 and 1998, the Utility's significant related party transactions
are provided in the table below.
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998
<S> <C> <C>
Utility revenues from:
Administrative services provided to PG&E Corporation $ 23 $17
Transportation and distribution services provided to PG&E ES 134 --
Gas reservation services provided to PG&E ET 7 1
Other 3 4
Utility expenses from:
Administrative services received from PG&E Corporation 66 58
Gas commodity and transmission services received from PG&E
ET 30 1
Transmission services received from PG&E GT NW 47 49
</TABLE>
39
<PAGE>
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD
Effective January 1, 1999, PG&E Corporation changed its method of accounting
for major maintenance and overhauls at the National Energy Group. Beginning
January 1, 1999, the cost of major maintenance and overhauls, principally at the
PG&E Gen business segment, were accounted for as incurred. Previously, the
estimated cost of major maintenance and overhauls was accrued in advance in a
systematic and rational manner over the period between major maintenance and
overhauls. The change resulted in PG&E Corporation recording income of $12
million net of income tax ($0.03 per share), reflecting the cumulative effect of
the change in accounting principle. The effect on current year results of
operations was immaterial. Accordingly, the unaudited quarterly consolidated
information has been restated. (See "Quarterly Consolidated Financial Data
(Unaudited)" below.)
The Utility has consistently accounted for major maintenance and overhauls
as incurred.
NOTE 2: THE CALIFORNIA ELECTRIC INDUSTRY
In 1998, California became one of the first states in the country to
implement electric industry restructuring and establish a competitive market
framework for electric generation. Today, most Californians may continue to
purchase their electricity from investor-owned utilities such as Pacific Gas and
Electric Company, or they may choose to purchase electricity from alternative
generation providers (such as unregulated power generators and unregulated
retail electricity suppliers such as marketers, brokers, and aggregators). For
those customers who have not chosen an alternative generation provider,
investor-owned utilities, such as the Utility, continue to be the generation
providers. Investor-owned utilities continue to provide distribution services to
substantially all customers within their service territories, including
customers who choose an alternative generation provider.
COMPETITIVE MARKET FRAMEWORK
To create a competitive generation market, a PX and an Independent System
Operator (ISO) began operating on March 31, 1998. The PX provides a competitive
auction process to establish market clearing prices for electricity in the
markets operated by the PX. The ISO schedules delivery of electricity for all
market participants. The Utility continues to own and maintain a portion of the
transmission system, but the ISO controls the operation of the system. Unless or
until the CPUC determines otherwise, the Utility is required to bid or schedule
into the PX and ISO markets all of the electricity generated by its power plants
and electricity acquired under contractual agreements with unregulated
generators. Also, the Utility is required to buy from the PX all electricity
needed to provide service to retail customers that continue to choose the
Utility as their electricity supplier.
In November 1999, the FERC approved the extension of the ISO's authority to
establish price limitations through 2000. The ISO Board increased the applicable
price limitation to $750 per megawatt-hour (MWh) on October 1, 1999, but has the
option to decrease it to $500 per MWh or make other changes, in view of the
FERC's decision. This limits the amount of volatility that occurs in the
California electricity market. However, the ISO will review the appropriate
level for any price limitations for the summer of 2000 in light of market
redesign efforts now being considered, including changes to reduce uninstructed
deviations from ISO dispatch orders and changes to permit loads to participate
by submitting bids for price responsive demand in energy or ancillary services
markets.
For the year ended December 31, 1999, and for the period of March 31, 1998
(the PX's establishment date) to December 31, 1998, the cost of electric energy
for the Utility, reflected on the Statement of Consolidated Income, is comprised
of the cost of PX purchases, ancillary services purchased from the ISO, cost of
transmission, and the cost of Utility generation, net of sales to the PX as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
(IN MILLIONS) 1999 1998
<S> <C> <C>
Cost of fuel for electric generation and qualifying
facilities (QF) purchases $1,489 $ 2,030
Cost of purchases from the PX 1,114 723
Cost of ancillary services 630 617
Proceeds from sales to the PX (822) (1,049)
------ -------
Cost of electric energy $2,411 $ 2,321
====== =======
</TABLE>
40
<PAGE>
TRANSITION PERIOD, RATE FREEZE, AND RATE REDUCTION
California's electric industry restructuring established a transition period
during which electric rates remain frozen at 1996 levels (with the exception
that, on January 1, 1998, rates for small commercial and residential customers
were reduced by 10 percent and remain frozen at this reduced level) and
investor-owned utilities may recover their transition costs. Transition costs
are generation-related costs that prove to be uneconomic under the new
competitive structure. The transition period ends the earlier of December 31,
2001, or when the particular utility has recovered its eligible transition
costs.
Revenues from frozen electric rates provide for the recovery of authorized
Utility costs, including transmission and distribution service, public purpose
programs, nuclear decommissioning, and rate reduction bond debt service. To the
extent the revenues from frozen rates exceed authorized Utility costs, the
remaining revenues constitute the CTC, which recovers the transition costs.
These CTC revenues are being recovered from all Utility distribution customers
and are subject to seasonal fluctuations in the Utility's sales volumes and
certain other factors. As the CTC is collected regardless of the customer's
choice of electricity supplier (i.e., the CTC is non-bypassable), the Utility
believes that the availability of choice to its customers will not have a
material impact on its ability to recover transition costs.
To pay for the 10 percent rate reduction, the Utility refinanced
$2.9 billion (the expected revenue reduction from the rate decrease) of its
transition costs with the proceeds from the rate reduction bonds. The bonds
allow for the rate reduction by lowering the carrying cost on a portion of the
transition costs and by deferring recovery of a portion of these transition
costs until after the transition period. During the rate freeze, the rate
reduction bond debt service will not increase Utility customers' electric rates.
If the transition period ends before December 31, 2001, the Utility may be
obligated to return a portion of the economic benefits of the transaction to
customers. The timing of any such return and the exact amount of such portion,
if any, have not yet been determined.
TRANSITION COST RECOVERY
Although most transition costs must be recovered during the transition
period, certain transition costs can be recovered after the transition period.
Except for certain transition costs discussed below, at the conclusion of the
transition period, the Utility will be at risk to recover any of its remaining
generation costs through market-based revenues.
Transition costs consist of (1) above-market sunk costs (costs associated
with utility generating facilities that are fixed and unavoidable and that were
included in customers' rates on December 20, 1995) and future sunk 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 and other
power suppliers, and (3) generation-related regulatory assets and obligations.
(In general, regulatory assets are expenses deferred in the current or prior
periods, to be included in rates in subsequent periods.)
Above-market sunk costs result when the book value of a facility exceeds its
market value. Conversely, below-market sunk costs result when the market value
of a facility exceeds its book value. The total amount of generation facility
costs to be included as transition costs is based on the aggregate of
above-market and below-market values. The above-market portion of these costs is
eligible for recovery as a transition cost. The below-market portion of these
costs will reduce other unrecovered transition costs. These above- and
below-market sunk costs are related to generating facilities that are classified
as either non-nuclear or nuclear sunk costs.
The Utility cannot determine the exact amount of above-market non-nuclear
sunk costs that will be recoverable as transition costs until the valuation of
the Utility's remaining non-nuclear generating assets, primarily its
hydroelectric generating assets, is completed. The valuation, through appraisal,
sale, or other divestiture, must be completed by December 31, 2001. The value of
seven of the Utility's other non-nuclear generating facilities was determined
when these facilities were sold to third parties. The portion of the sales
proceeds that exceeded the book value of these facilities was used to reduce
other transition costs. On September 30, 1999, the Utility filed an application
with the CPUC to determine the market value of its hydroelectric generating
facilities and related assets through an open, competitive auction. (See
"Generation Divestiture" below.) The Utility plans to use an auction process
similar to the one previously approved by the CPUC and successfully used in the
sale of the Utility's fossil and geothermal plants. If the market value of the
Utility's hydroelectric facilities is determined based upon any method other
than a sale of the facilities to a third party, a material charge to Utility
earnings could result. Any
41
<PAGE>
excess of market value over book value would be used to reduce other transition
costs. (See "Generation Divestiture" below.)
For nuclear transition costs, revenues provided for transition cost recovery
are based on the accelerated recovery of the investment in Diablo Canyon Nuclear
Power Plant (Diablo Canyon) over a five-year period ending December 31, 2001.
The amount of nuclear generation sunk costs was determined separately through a
CPUC proceeding and was subject to a final verification audit that was completed
in August 1998. The audit of the Utility's Diablo Canyon accounts at
December 31, 1996, resulted in the issuance of an unqualified opinion. The audit
verified that Diablo Canyon sunk costs at December 31, 1996, were $3.3 billion
of the total $7.1 billion construction costs. The independent accounting firm
also issued an agreed-upon special procedures report, requested by the CPUC,
that questioned $200 million of the $3.3 billion sunk costs. The CPUC will
review the results of the audit and may seek to make adjustments to Diablo
Canyon's sunk costs subject to transition cost recovery. At this time, the
Utility cannot predict what actions, if any, the CPUC may take regarding the
audit report.
Costs associated with the Utility's long-term contracts to purchase electric
power are included as transition costs. Regulation required the Utility to enter
into such long-term agreements with non-utility generators. Prices fixed under
these contracts are now typically above prices for power in wholesale markets
(See Note 14). Over the remaining life of these contracts, the Utility estimates
that it will purchase 299 million MWh of electric power. To the extent that the
individual contract prices are above the market price, the Utility is collecting
the difference between the contract price and the market price from customers,
as a transition cost, over the term of the contract. The contracts expire at
various dates through 2028.
The total costs under long-term contracts are based on several variables,
including the capacity factors of the related generating facilities and future
market prices for electricity. During 1999, the average price paid under the
Utility's long-term contracts for electricity was 6.3 cents per kilowatt-hour
(kWh). The average cost of electricity purchased at market rates from the PX for
the year ended December 31, 1999, was 3.7 cents per kWh. The average cost of
electricity purchased at market rates from the PX for the period from March 31,
1998, the PX's establishment date, to December 31, 1998, was 3.2 cents per kWh.
Generation-related regulatory assets and obligations (net generation-related
regulatory assets) are included as transition costs. At December 31, 1999 and
1998, the Utility's generation-related net regulatory assets totaled $4 billion
and $5.4 billion, respectively.
Certain transition costs can be recovered through a non-bypassable charge to
distribution customers after the transition period. These costs include
(1) certain employee-related transition costs, (2) above-market payments under
existing long-term contracts to purchase power, discussed above, (3) up to
$95 million of transition costs to the extent that the recovery of such costs
during the transition period was displaced by the recovery of electric industry
restructuring implementation costs, and (4) transition costs financed by the
rate reduction bonds. Transition costs financed by the issuance of rate
reduction bonds will be recovered over the term of the bonds. In addition, the
Utility's nuclear decommissioning costs are being recovered through a
CPUC-authorized charge, which will extend until sufficient funds exist to
decommission the nuclear facility. During the rate freeze, the charge for these
costs will not increase Utility customers' electric rates. Excluding these
exceptions, the Utility will write off any transition costs not recovered during
the transition period.
The Utility is amortizing its transition costs, including most
generation-related regulatory assets, over the transition period in conjunction
with the available CTC revenues. During the transition period, a reduced rate of
return on common equity of 6.77 percent applies to all generation assets,
including those generation assets reclassified to regulatory assets. Effective
January 1, 1998, the Utility started collecting these eligible transition costs
through the non-bypassable CTC and generation divestiture. For the years ended
December 31, 1999 and 1998, regulatory assets related to electric industry
restructuring decreased by $1,359 million and $609 million, respectively, which
reflects the recovery of eligible transition costs.
During the transition period, the CPUC reviews the Utility's compliance with
accounting methods established in the CPUC's decisions governing transition cost
recovery and the amount of transition costs requested for recovery. The CPUC is
currently reviewing non-nuclear transition costs amortized during 1998 and the
first six months of 1999.
42
<PAGE>
GENERATION DIVESTITURE
In 1998, the Utility sold three fossil-fueled generation plants for
$501 million. These three fossil-fueled plants had a combined book value at the
time of the sale of $346 million and had a combined capacity of 2,645 megawatts
(MW).
On April 16, 1999, the Utility sold three other fossil-fueled generation
plants for $801 million. At the time of sale, these three fossil-fueled plants
had a combined book value of $256 million and had a combined capacity of 3,065
MW.
On May 7, 1999, the Utility sold its complex of geothermal generation
facilities for $213 million. At the time of sale, these facilities had a
combined book value of $244 million and had a combined capacity of 1,224 MW.
The gains from the sale of the fossil-fueled generation plants were used to
offset other transition costs. Likewise, the loss from the sale of the complex
of geothermal generation facilities is being recovered as a transition cost.
The Utility has retained a liability for required environmental remediation
related to any pre-closing soil or groundwater contamination at the plants it
has sold.
On September 30, 1999, the Utility filed an application with the CPUC to
determine the market value of its hydroelectric generating facilities and
related assets through an open, competitive auction. The Utility proposes to use
an auction process similar to the one previously approved by the CPUC and
successfully used in the sale of the Utility's fossil and geothermal plants.
Under the process proposed in the application, another subsidiary of PG&E
Corporation, PG&E Gen, would be permitted to participate in the auction on the
same basis as other bidders.
The sale of the hydroelectric facilities would be subject to certain
conditions, including the transfer or re-issuance of various permits and
licenses by the FERC and other agencies. In addition, the FERC must approve
assignment of the Utility's Reliability Must Run Contract with the ISO for any
facility subject to such contract. Under the proposed purchase and sale
agreement, the CPUC's approval of the proposed sale on terms acceptable to the
Utility in the Utility's sole discretion is also a condition precedent to the
closing of any sale.
On January 13, 2000, a scoping memo and ruling was issued that separates the
proceeding into two concurrent phases: one to review the potential environmental
impacts of the proposed auction under the California Environmental Quality Act
and a second to determine whether the Utility's auction proposal, or some other
alternative to the proposal, is in the public interest. The ruling notes that
the divestiture and valuation issues can best be considered after the
environmental impacts of a change in ownership have been reviewed. Potential
bidders will also be able to incorporate the costs of any mitigation measures
that may be required into their bids. The ruling sets a procedural schedule
which calls for a final decision on the Utility's auction proposal by
October 19, 2000, and a final environmental impact report published in
November 2000. The ruling also anticipates that a final CPUC decision approving
the sale would be issued by May 15, 2001. Finally, the ruling prohibits the
Utility from withdrawing its application without express CPUC authority. It is
uncertain whether the CPUC will ultimately approve the Utility's auction
proposal.
At December 31, 1999, the book value of the Utility's net investment in
hydroelectric generation assets was approximately $0.7 billion, excluding
approximately $0.5 billion of net investment reclassified as regulatory assets.
Any excess of market value over the $0.7 billion book value would be used to
reduce transition costs, including the remaining $0.5 billion of regulatory
assets related to the hydroelectric generation assets. If the market value of
the hydroelectric generation assets is determined by any method other than a
sale of the assets to a third party, or if the winning bidder for any of the
auctioned assets is PG&E Gen, a material charge to Utility earnings could
result. The timing and nature of any such charge is dependent upon the valuation
method and procedure adopted, and the method of implementation. As discussed
below, it is possible that the CPUC will require an interim valuation through an
estimate of market value of the assets prior to transfer, sale or other
divestiture, which could also result in a material charge. While transfer or
sale to an affiliated entity such as PG&E Gen would result in a material charge
to income, neither PG&E Corporation nor the Utility believes that the sale of
any generation facilities to a third party will have a material impact on its
results of operations.
The Utility's ability to continue recovering its transition costs depends on
several factors, including (1) the continued application of the regulatory
framework established by the CPUC and state legislation, (2) the amount of
transition costs ultimately approved for recovery by the CPUC, (3) the
determined value of the Utility's hydroelectric generation facilities,
(4) future Utility sales levels, (5) future Utility fuel and operating costs,
and
43
<PAGE>
(6) the market price of electricity. Given the current evaluation of these
factors, PG&E Corporation believes that the Utility will recover its transition
costs. However, a change in one or more of these factors could affect the
probability of recovery of transition costs and result in a material charge.
POST-TRANSITION PERIOD
In October 1999, the CPUC issued a decision in the Utility's post-transition
period ratemaking proceeding. Among other matters, the CPUC's decision addresses
the mechanisms for ending the current electric rate freeze and for establishing
post-transition period accounting mechanisms and rates. The decision requires
Diablo Canyon generation to be priced at prevailing market rates after the
transition period.
The CPUC decision requires the Utility to provide quarterly forecasts of
when the Utility's rate freeze (i.e., transition period) may end based on
various assumptions regarding energy prices and the book value of the Utility's
remaining generation assets. The Utility is required to notify the CPUC three
months before the earliest forecasted end of its rate freeze and provide draft
tariff language and sample calculations of the rates that would go into effect
when the rate freeze ends. After the Utility completes its transition cost
recovery, it must implement its post-rate-freeze rates.
The timing of the end of the rate freeze and corresponding transition period
will, in part, depend on the timing of the valuation of the Utility's
hydroelectric generating assets and the ultimate determined value of such assets
since any excess of market value over the assets' book value would be used to
reduce transition costs. If the value of the Utility's hydroelectric generation
assets is significantly higher than the related book value, the transition
period and the rate freeze could end before December 31, 2001, and potentially
could end during 2000. The CPUC is considering the Utility's proposal to auction
its hydroelectric assets, although the CPUC could also
require the Utility to implement an interim valuation of the assets. In another
proceeding (the 1998 Annual Transition Cost Proceeding (ATCP)), a CPUC
administrative law judge issued a proposed decision on January 7, 2000, which
contained a proposed change to the rules previously in place for the
amortization of transition costs. Under the final decision, issued on
February 17, 2000, on a prospective basis the utilities are required to assess
the estimated market value of their remaining non-nuclear generating assets,
including the land associated with those assets, on an aggregate basis at a
value not less than the net book value of those assets and to credit the
Transition Cost Balancing Account (TCBA) with the estimated value. The decision
encourages the utilities to base such estimates on realistic assessments of the
market value of the assets. The final decision did not adopt the proposed
decision's recommendation to establish a new regulatory asset account that would
allow a true-up when the estimated market value is greater than actual market
value. However, the decision states that crediting the TCBA with the aggregate
net book value of the remaining non-nuclear generating assets is a conservative
approach and remedies any concerns regarding the lack of a true-up. The decision
provides that if the estimated market valuation is less than book value for any
individual asset, accelerated amortization of the associated transition costs
will continue until final market valuation of the asset occurs through sale,
appraisal, or other divestiture. If the final value of the assets, determined
through sale, appraisal, or other divestiture, is higher than the estimate, the
excess amount would be used to pay remaining transition costs, if any. The
utilities are required to file the adjusted entries to their respective TCBA
based on the estimated market values with the CPUC by March 9, 2000. The filing
will become effective after appropriate review by the CPUC's Energy Division and
the TCBA entries are subject to review in the next ATCP. If an estimate of the
market value of the non-nuclear generating assets is adopted that exceeds the
aggregate net book value of those assets, a charge to earnings would result.
After the rate freeze and transition periods end, the Utility must refund to
electric customers any over-collected transition costs (plus interest at the
Utility's authorized rate of return) within one year after the end of the rate
freeze. The Utility also will be prohibited from collecting after the rate
freeze any electric costs incurred during the rate freeze but not recovered
during the rate freeze, including costs that are not classified as transition
costs. Through the end of its rate freeze, the Utility will continue to incur
certain non-transition costs and place those costs into balancing and memorandum
accounts for future recovery. There is a risk that the Utility will be unable to
collect certain non-transition costs that, due to lags in the regulatory cost
approval process, have not been approved for recovery nor collected when the
rate freeze ends. The Utility is unable to predict the amount of such potential
unrecoverable costs.
44
<PAGE>
The CPUC also has established the Purchased Electric Commodity Account for
the Utility to track energy costs after the rate freeze and transition period
end. The CPUC intends to explore other ratemaking issues, including whether
dollar-for-dollar recovery of energy costs is appropriate, in the second phase
of the post-transition electric ratemaking proceeding. There are three primary
options for the future regulatory framework for utility electric energy
procurement cost recovery after the rate freeze: (1) a CPUC-defined procurement
practice, that if followed by the Utility, would pass through costs without the
need for reasonableness reviews, (2) a pass-through of costs subject to
after-the-fact reasonableness reviews, or (3) a procurement incentive mechanism
with rewards and penalties determined based on the Utility's energy purchasing
performance compared to a benchmark. The Utility proposed adoption of either a
defined procurement practice or a procurement incentive mechanism, neither of
which would involve reasonableness reviews. The volatility of earnings and risk
exposure of the Utility related to post-transition period purchases of
electricity is dependent on which of these options, or some other approach, is
adopted.
After the transition period, the Utility's future earnings from its electric
distribution will be subject to volatility as a result of sales fluctuations.
NOTE 3: PRICE RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
The following table is a summary of the contract or notional amounts and
maturities of PG&E Corporation's contracts used for non-hedging activities
related to commodity price risk management as of December 31, 1999 and 1998.
Short and long positions pertaining to derivative contracts used for hedging
activities as of December 31, 1999 and 1998, are immaterial.
<TABLE>
<CAPTION>
MAXIMUM
NATURAL GAS, ELECTRICITY, PURCHASE SALE TERM IN
AND NATURAL GAS LIQUIDS CONTRACTS (LONG) (SHORT) YEARS
(BILLIONS OF MMBTU EQUIVALENTS(1))
<S> <C> <C> <C>
Non-Hedging Activities--December 31, 1999
Swaps 2.28 2.20 7
Options 0.93 0.85 8
Futures 0.19 0.18 2
Forward contracts 1.47 1.42 12
Non-Hedging Activities--December 31, 1998
Swaps 6.21 6.06 8
Options 1.50 1.28 5
Futures 0.58 0.61 4
Forward contracts 3.70 3.55 5
</TABLE>
(1) One MMBtu is equal to one million British thermal units. PG&E Corporation's
electric power contracts, measured in megawatts, were converted to MMBtu
equivalents using a conversion factor of 10 MMBtu's per 1 megawatt-hour.
PG&E Corporation's natural gas liquids contracts were converted to MMBtu
equivalents using an appropriate conversion factor for each type of natural
gas liquids product.
Volumes shown for swaps, futures, and options represent notional volumes
that are used to calculate amounts due under the agreements and do not
necessarily represent volumes exchanged. Moreover, notional amounts are
indicative only of the volume of activity and are not a measure of market risk.
PG&E Corporation's net gains (losses) on swaps, options, futures, and
forward contracts held during the years ended December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
(IN MILLIONS) 1999 1998
<S> <C> <C>
Swaps $ 15 $ 69
Options (41) (49)
Futures (36) (63)
Forward contracts 98 101
---- ----
Net gain (loss) $ 36 $ 58
==== ====
</TABLE>
45
<PAGE>
The following table discloses the estimated fair values of price risk
management assets and liabilities as of December 31, 1999 and 1998. The ending
and average fair values and associated carrying amounts of derivative contracts
used for hedging purposes are not material as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
AVERAGE ENDING
(IN MILLIONS) FAIR VALUE FAIR VALUE
<S> <C> <C>
Non-Hedging Activities--December 31, 1999
Assets:
Swaps $ 643 $ 244
Options 106 92
Futures 175 47
Forward contracts 667 596
------ ------
Total $1,591 $ 979
------ ------
Noncurrent portion $ 372
Current portion $ 607
Liabilities:
Swaps $ 592 $ 218
Options 109 81
Futures 201 67
Forward contracts 561 456
------ ------
Total $1,463 $ 822
------ ------
Noncurrent portion $ 247
Current portion $ 575
Non-Hedging Activities--December 31, 1998
Assets:
Swaps $ 494 $ 947
Options 121 154
Futures 115 150
Forward contracts 342 499
------ ------
Total $1,072 $1,750
------ ------
Noncurrent portion $ 334
Current portion $1,416
Liabilities:
Swaps $ 476 $ 908
Options 147 201
Futures 111 186
Forward contracts 282 398
------ ------
Total $1,016 $1,693
------ ------
Noncurrent portion $ 281
Current portion $1,412
</TABLE>
PG&E Corporation, primarily through its subsidiaries, engages in price risk
management activities for both non-hedging and hedging purposes. Non-hedging
activities are conducted principally through its unregulated subsidiary, PG&E
ET. In compliance with regulatory requirements, the Utility manages price risk
independently from the activities in PG&E Corporation's unregulated businesses
(see Note 1 for further discussion). The Utility primarily engages in hedging
activities which, noted above, were immaterial for the years ended December 31,
1999 and 1998.
In valuing its electric power, natural gas, and natural gas liquids
portfolios, PG&E Corporation considers a number of market risks and estimated
costs and continuously monitors the valuation of identified risks and adjusts
them based on present market conditions. Considerable judgment is required to
develop the estimates of fair value; thus, the estimates provided herein are not
necessarily indicative of the amounts that PG&E Corporation could realize in the
current market.
Generally, exchange-traded futures contracts require deposit of margin cash,
the amount of which is subject to change based on market movement and in
accordance with exchange rules. Margin cash requirements for over-the-counter
financial instruments are specified by the particular instrument and often do
not require margin
46
<PAGE>
cash and are settled monthly. Both exchange-traded and over-the-counter options
contracts require payment/ receipt of an option premium at the inception of the
contract. Margin cash for commodities futures and cash on deposit with
counterparties was immaterial at December 31, 1999.
NOTE 4: CONCENTRATIONS OF MARKET AND CREDIT RISK
MARKET RISK
Market risk is the risk that changes in market prices will adversely affect
earnings and cash flows. PG&E Corporation is primarily exposed to the market
risk associated with energy commodities such as electric power, natural gas, and
natural gas liquids. Therefore, PG&E Corporation's price risk management
activities primarily involve buying and selling fixed-price commodity
commitments into the future. Net open positions often exist or are established
due to PG&E Corporation's assessment of and response to changing market
conditions. To the extent that PG&E Corporation has an open position, it is
exposed to the risk that fluctuating market prices may adversely impact its
financial results.
CREDIT RISK
The use of financial instruments to manage the risks associated with changes
in energy commodity prices creates exposure resulting from the possibility of
nonperformance by counterparties pursuant to the terms of their contractual
obligation. The counterparties in PG&E Corporation's portfolio consist primarily
of investor-owned and municipal utilities, energy trading companies, financial
institutions, and oil and gas production companies. PG&E Corporation minimizes
credit risk by dealing primarily with creditworthy counterparties in accordance
with established credit approval practices and limits. PG&E Corporation
routinely assesses the financial strength of its counterparties and may require
letters of credit or parental guarantees when the financial strength of a
counterparty is not considered sufficient. PG&E Corporation has experienced no
material losses due to the nonperformance of counterparties in 1999. The credit
exposure of the five largest counterparties comprised approximately
$250 million of the total credit exposure associated with financial instruments
used to manage price risk. Counterparties considered to be investment grade or
higher comprise 70 percent of the total credit exposure.
NOTE 5: ACQUISITIONS AND SALES
In January 1997, PG&E Corporation acquired Teco Pipeline Company for
$378 million, consisting of $317 million of PG&E Corporation common stock and
the purchase of a $61 million note.
In April 1997, through one of its wholly owned subsidiaries, PG&E
Corporation sold its interest in International Generating Company, Ltd., which
resulted in an after-tax gain of approximately $120 million.
In July 1997, PG&E Corporation completed its acquisition of Valero Energy
Corporation's natural gas business and a gas marketing business located in
Texas. PG&E Corporation issued approximately 31 million shares of its common
stock to acquire Valero along with the assumption of $780 million in long-term
debt, equating to a purchase price of approximately $1.5 billion. The
acquisition was accounted for as a purchase and accordingly, the purchase price
has been allocated to the assets acquired and the liabilities assumed based on
estimated fair values.
In September 1997, PG&E Corporation became the sole owner of PG&E Gen, an
independent power developer, owner, and manager; PG&E Operating Services
Company, PG&E Gen's operations and maintenance affiliate; and USGen Power
Services, L.P., PG&E Gen's power marketing affiliate. Additionally, PG&E
Corporation has acquired all or part of interest in several power projects that
are affiliated with PG&E Gen.
In July 1998, PG&E Corporation sold its Australian energy holdings. The sale
represents a premium on the price in local currency of PG&E Corporation's 1996
investment in the assets. However, the transaction resulted in a charge of $.06
per share in the second quarter of 1998. This charge was primarily due to the
22 percent currency devaluation of the Australian dollar against the U.S. dollar
during 1998 and 1997.
In September 1998, PG&E Corporation, through its indirect subsidiary USGen
New England, Inc. (USGenNE), completed the acquisition of a portfolio of
electric generating assets and power supply contracts from the New England
Electric System (NEES). The acquisition has been accounted for using the
purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets purchased and the liabilities assumed based upon an
assessment of the fair values at the date of acquisition.
47
<PAGE>
Including fuel and other inventories and transaction costs, PG&E
Corporation's financing requirements for this acquisition were approximately
$1.8 billion, funded through an aggregate of $1.3 billion PG&E Gen and USGenNE
debt and a $425 million equity contribution from PG&E Corporation. The net
purchase price has been allocated as follows: (1) electric generating assets of
$2.3 billion classified as property, plant, and equipment, (2) receivable for
support payments of $0.8 billion, and (3) contractual obligations of
$1.3 billion classified as current liabilities and other noncurrent liabilities.
The assets include hydroelectric, coal, oil, and natural gas generation
facilities with a combined generating capacity of 4,000 MW. In addition, USGenNE
assumed 23 multi-year power purchase agreements representing an additional 800
MW of production capacity. USGenNE entered into agreements with NEES as part of
the acquisition, which (1) provide that NEES shall make support payments over
the next 9 years to USGenNE for the purchase power agreements, and (2) require
that USGenNE provide electricity to certain of NEES affiliates under contracts
that expire over the next 3 to 10 years.
In December 1999, PG&E Corporation's Board of Directors approved a plan to
dispose of PG&E ES, its wholly owned subsidiary, through a sale. As of December
31, 1999, the intended disposal has been accounted for as a discontinued
operation. In connection with this transaction, PG&E Corporation's investment in
PG&E ES was written down to its estimated net realizable value. In addition,
PG&E Corporation provided a reserve for anticipated losses through the date of
sale. The total provision for discontinued operations was $58 million, net of
income taxes of $36 million. While there is no definite sales agreement, it is
expected that the disposition will be completed in 2000. The amounts that PG&E
Corporation will ultimately realize from this disposal could be materially
different from the amounts assumed in arriving at the estimated loss on disposal
of the discontinued operations. The PG&E ES business segment generated net
losses of $40 million (or $0.11 per share), $52 million (or $0.14 per share),
and $29 million (or $0.07 per share), for the years ended December 31, 1999,
1998 and 1997, respectively.
The total assets and liabilities, including the charge noted above, of PG&E
ES included in the PG&E Corporation Consolidated Balance Sheet at December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
----------------------
(IN MILLIONS) 1999 1998
<S> <C> <C>
ASSETS
Current assets $114 $148
Noncurrent assets 83 54
---- ----
Total Assets $197 $202
LIABILITIES
Current liabilities $ 61 $ 72
Noncurrent liabilities 10 9
---- ----
Total liabilities 71 81
---- ----
NET ASSETS 126 121
==== ====
</TABLE>
On January 27, 2000, PG&E Corporation's National Energy Group signed a
definitive agreement with El Paso Field Services Company (El Paso) providing for
the sale to El Paso, a subsidiary of El Paso Energy Corporation, of the stock of
PG&E Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc.
(collectively, PG&E GTT). The consideration to be received by the National
Energy Group includes $279 million in cash subject to a working capital
adjustment, the assumption by El Paso of debt having a book value of $624
million, and other liabilities associated with PG&E GTT.
In 1999, PG&E Corporation recognized a charge against earnings of $890
million after-tax, or $2.42 per share, to reflect PG&E GTT's assets at their
fair market value. The composition of the pre-tax charge is as follows: (1) an
$819 million write down of net property, plant, and equipment, (2) the
elimination of the unamortized portion of goodwill, in the amount of $446
million, and (3) an accrual of $10 million representing selling costs.
Proceeds from the sale will be used to retire short-term debt associated
with PG&E GTT's operations and for other corporate purposes. Closing of the
sale, which is expected in the first half of 2000, is subject to approval under
the Hart Scott Rodino Act.
48
<PAGE>
The sale of PG&E GTT represents disposal of the PG&E GTT business segment
and a portion of the PG&E ET business segment. PG&E GTT's total assets and
liabilities, including the charge noted above, included in the PG&E Corporation
Consolidated Balance Sheet at December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
-------------------
(IN MILLIONS) 1999 1998
<S> <C> <C>
ASSETS
Current assets $ 229 $ 366
Noncurrent assets 988 2,346
------ ------
Total Assets $1,217 $2,712
LIABILITIES
Current liabilities $ 448 $ 486
Noncurrent liabilities 624 1,174
------ ------
Total liabilities 1,072 1,660
------ ------
NET ASSETS 145 1,052
====== ======
</TABLE>
NOTE 6: COMMON STOCK
PG&E CORPORATION
PG&E Corporation has authorized 800 million shares of no-par common stock of
which 384 million and 383 million shares were issued as of December 31, 1999 and
1998, respectively.
During the years ended December 31, 1999 and 1998, PG&E Corporation
repurchased $693 million and $1,158 million of its common stock, respectively.
The repurchases in 1998 and through September 1999 were executed through
separate, accelerated share repurchase programs. Under the 1999 agreement, PG&E
Corporation repurchased in a specific transaction 16.6 million shares of its
common stock at a cost of $502 million. In connection with this transaction,
PG&E Corporation entered into a forward contract with an investment institution.
PG&E Corporation settled the forward contract and its additional obligation of
$29 million in September 1999. A wholly owned subsidiary of PG&E Corporation
made this repurchase, along with subsequent stock repurchases. The stock held by
the subsidiary is treated as treasury stock and reflected as stock held by
subsidiary on the Consolidated Balance Sheet of PG&E Corporation.
In October 1999, the Board of Directors of PG&E Corporation authorized an
additional $500 million for the purpose of repurchasing shares of the
Corporation's common stock on the open market. This authorization supplements
the approximately $40 million remaining from the amount previously authorized by
the Board of Directors on December 17, 1997. The authorization for share
repurchase extends through September 30, 2001. As of December 31, 1999, a
subsidiary of PG&E Corporation has repurchased 7.2 million shares at a cost of
$159 million under this authorization.
UTILITY
All of the Utility's outstanding common stock is held by PG&E Corporation
and a subsidiary of the Utility. In connection with the formation of the holding
company, all of the Utility's then-outstanding common stock was converted on a
share-for-share basis to PG&E Corporation common stock.
The Utility has authorized 800 million shares of $5 par value common stock
of which 321 million and 341 million shares were issued as of December 31, 1999
and 1998, respectively.
Prior to December 1999, the Utility repurchased 20 million shares of its
common stock from PG&E Corporation for an aggregate purchase price of
$726 million to maintain its authorized capital structure. In December 1999,
7.6 million shares of the Utility's common stock, with an aggregate purchase
price of $200 million, was purchased by a subsidiary of the Utility. This
purchase is reflected as stock held by subsidiary in the Consolidated Balance
Sheet of Pacific Gas and Electric Company.
The CPUC requires the Utility to maintain its CPUC-authorized capital
structure, potentially limiting the amount of dividends the Utility may pay PG&E
Corporation. In 1999, the Utility was in compliance with its CPUC-authorized
capital structure.
49
<PAGE>
NOTE 7: PREFERRED STOCK AND UTILITY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF TRUST HOLDING SOLELY UTILITY SUBORDINATED DEBENTURES
PREFERRED STOCK OF UTILITY
The Utility has authorized 75 million shares of $25 par value preferred
stock which may be issued as redeemable or nonredeemable preferred stock. At
December 31, 1999 and 1998, the Utility had issued and outstanding 5,784,825
shares of nonredeemable preferred stock.
At December 31, 1999 and 1998, the Utility had issued and outstanding
5,973,456 shares of redeemable preferred stock. The Utility's redeemable
preferred stock is subject to redemption at the Utility's option, in whole or in
part, if the Utility pays the specified redemption price plus accumulated and
unpaid dividends through the redemption date. Annual dividends and redemption
prices per share at December 31, 1999, range from $1.09 to $1.76 and from $25.75
to $27.25, respectively. In 1998, the Utility redeemed its Series 7.44%
preferred stock with a face value of $65 million. Also in 1998, the Utility
redeemed its Series 6 7/8% preferred stock with a face value of $43 million.
The Utility's redeemable preferred stock with mandatory redemption
provisions consists of 3 million shares of the 6.57% series and 2.5 million
shares of the 6.30% series at December 31, 1999. The 6.57% series and 6.30%
series may be redeemed at the Utility's option beginning in 2002 and 2004,
respectively, at par value plus accumulated and unpaid dividends through the
redemption date. These series of preferred stock are subject to mandatory
redemption provisions entitling them to sinking funds providing for the
retirement of stock outstanding.
Holders of the Utility's nonredeemable preferred stock 5%, 5.5%, and 6%
series have rights to annual dividends per share ranging from $1.25 to $1.50.
Dividends on all preferred stock are cumulative. All shares of preferred
stock have voting rights and equal preference in dividend and liquidation
rights. Upon liquidation or dissolution of the Utility, holders of preferred
stock would be entitled to the par value of such shares plus all accumulated and
unpaid dividends, as specified for the class and series.
PREFERRED STOCK OF THE NATIONAL ENERGY GROUP
Preferred stock of the National Energy Group consists of $57 million of
preferred stock issued by a subsidiary of PG&E Gen. The preferred stock, with
$100 par value, has a stated dividend of $3.35 per share, per quarter, and is
redeemable when there is an excess of available cash. There were 549,594 shares
outstanding at December 31, 1999 and 1998.
UTILITY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST HOLDING
SOLELY UTILITY SUBORDINATED DEBENTURES
The Utility, 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 the Utility
371,135 shares of common securities with an aggregate liquidation value of
$9 million. The Trust in turn used the net proceeds from the QUIPS offering and
issuance of the common stock securities to purchase subordinated debentures
issued by the Utility with a face value of $309 million, an interest rate of
7.9%, and a maturity date of 2025. These subordinated debentures are the only
assets of the Trust. Proceeds from the sale of the subordinated debentures were
used to redeem and repurchase higher-cost preferred stock.
The Utility's guarantee of the QUIPS, considered together with the other
obligations of the Utility with respect to the QUIPS, constitutes a full and
unconditional guarantee by the Utility of the Trust's contractual obligations
under the QUIPS issued by the Trust. The subordinated debentures may be redeemed
at the Utility's option beginning in 2000 at par value plus accrued interest
through the redemption date. The proceeds of any redemption will be used by the
Trust to redeem QUIPS in accordance with their terms.
Upon liquidation or dissolution of the Utility, holders of these QUIPS would
be entitled to the liquidation preference of $25 per share plus all accrued and
unpaid dividends thereon to the date of payment.
50
<PAGE>
NOTE 8: LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
-------------------
(IN MILLIONS) 1999 1998
<S> <C> <C> <C> <C>
Utility long-term debt
First and refunding mortgage bonds
Maturity Interest rates
2000-2003 6.25% to 8.75% $ 816 $ 969
2004-2008 5.875% to 6.25% 600 615
2009-2021 6.35% to 7.59% 160 160
2022-2026 5.85% to 8.80% 2,004 2,117
------ ------
Principal amounts outstanding 3,580 3,861
Unamortized discount net of premium (29) (32)
------ ------
Total mortgage bonds 3,551 3,829
Pollution control loan agreements, variable rates, due 2010-2026 1,348 1,348
Unsecured medium-term notes, 5.56% to 8.45%, Due 2000-2014 418 498
Other Utility long-term debt 25 29
------ ------
Total Utility long-term debt 5,342 5,704
Current portion of long-term debt 465 260
------ ------
Total Utility long-term debt, net of current portion 4,877 5,444
------ ------
National Energy Group long-term debt
First mortgage notes, 10.02% to 11.50%, due 2000-2009 333 370
Senior notes
Maturity Interest rates
1999 10.58% -- 69
2005 7.10% 250 250
Medium-term notes, 6.61% to 9.25%, due 2000-2012 299 298
Senior debentures, 7.80%, due 2025 150 150
Amounts outstanding under credit facilities (See Note 10) 649 654
Other long-term debt 242 265
------ ------
Total National Energy Group long-term debt 1,923 2,056
Current portion of long-term debt 127 78
------ ------
Total National Energy Group long-term debt, net of current portion 1,796 1,978
------ ------
Total long-term debt $6,673 $7,422
====== ======
</TABLE>
UTILITY
FIRST AND REFUNDING MORTGAGE BONDS:
First and refunding mortgage bonds are issued in series and bear annual
interest rates ranging from 5.85 percent to 8.80 percent. All real properties
and substantially all personal properties of the Utility are subject to the lien
of the bonds, and the Utility is required to make semi-annual sinking fund
payments for the retirement of the bonds. Additional bonds may be issued subject
to CPUC approval, up to a maximum total amount outstanding of $10 billion,
assuming compliance with indenture covenants for earnings coverage and available
property balances as security.
The Utility redeemed or repurchased $281 million and $501 million of the
bonds in 1999 and 1998, respectively, with interest rates ranging from
6.25 percent to 8.80 percent. These bonds were to mature from 2002 to 2026.
Included in the total of outstanding bonds at December 31, 1999 and 1998,
are $345 million of bonds held in trust for the California Pollution Control
Financing Authority (CPCFA) with interest rates ranging from 5.85 percent
51
<PAGE>
to 6.625 percent and maturity dates ranging from 2009 to 2023. In addition to
these bonds, the Utility holds long-term pollution control loan agreements with
the CPCFA as described below.
POLLUTION CONTROL LOAN AGREEMENTS:
Pollution control loan agreements from the CPCFA totaled $1,348 million at
December 31, 1999 and 1998. Interest rates on the loans vary with average annual
interest rates. For 1999 the interest rates ranged from 2.36 percent to
3.39 percent. These loans are subject to redemption by the holder under certain
circumstances. These loans are secured primarily by irrevocable letters of
credit which mature in 2000 through 2003.
NATIONAL ENERGY GROUP
Long-term debt of the National Energy Group consists of first mortgage bonds
and other secured and unsecured obligations.
The first mortgage notes are comprised of three series due annually through
2009, and are secured by mortgages and security interests in the natural gas
transmission and natural gas processing facilities and other real and personal
property of PG&E GTT. The mortgage indenture requires semi-annual payments with
one-half of each interest payment and one-fourth of each annual principal
payment escrowed quarterly in advance. The mortgage indenture also contains
covenants that restrict the ability of PG&E GTT to incur additional indebtedness
and precludes cash distributions if certain cash flow coverages are not met. In
January 2000, PG&E GTT obtained an amendment that provides PG&E GTT the ability
to redeem in whole or in part, its Mortgage Notes, including the premium set
forth in the Mortgage Note Indenture, anytime after January 1, 2000. These notes
will be assumed by the buyer of PG&E GTT (see Note 5).
Other long-term debt consists of project financing associated with
unregulated generation facilities, premiums, and other loans.
REPAYMENT SCHEDULE
At December 31, 1999, PG&E Corporation's combined aggregate amounts of
maturing long-term debt and sinking fund requirements, for the years 2000
through 2004, are $592 million, $480 million, $1,363 million, $1,271 million,
and $470 million, respectively. The Utility's share of those maturities and
sinking fund requirements is $465 million, $374 million, $1,117 million,
$664 million, and $392 million, respectively.
NOTE 9: RATE REDUCTION BONDS
In December 1997, PG&E Funding LLC (SPE), a special-purpose entity wholly
owned by the Utility, issued $2.9 billion of rate reduction bonds to the
California Infrastructure and Economic Development Bank Special Purpose Trust
PG&E-1 (Trust), a special-purpose entity. The terms of the bonds generally
mirror the terms of the pass-through certificates issued by the Trust. The
proceeds of the rate reduction bonds were used by the SPE to purchase from the
Utility the right, known as "transition property," to be paid a specified amount
from a non-bypassable tariff levied on residential and small commercial
customers which was authorized by the CPUC pursuant to state legislation.
The rate reduction bonds have maturities ranging from 6 months to 8 years,
and bear interest at rates ranging from 6.15 percent to 6.48 percent. The bonds
are secured solely by the transition property and there is no recourse to the
Utility or PG&E Corporation.
At December 31, 1999, $2.3 billion of rate reduction bonds were outstanding.
The combined expected principal payments on the rate reduction bonds for the
years 2000 through 2004 are $290 million for each year.
While the SPE is consolidated with the Utility for purposes of these
financial statements, the SPE is legally separate from the Utility. The assets
of the SPE are not available to creditors of the Utility or PG&E Corporation,
and the transition property is not legally an asset of the Utility or PG&E
Corporation.
NOTE 10: CREDIT FACILITIES
PG&E CORPORATION
At December 31, 1999 and 1998, PG&E Corporation had borrowed $2,148 million
and $2,298 million, respectively, under various credit facilities discussed
below. $649 million and $654 million of these borrowings at December 31, 1999
and 1998, respectively, are classified as long-term debt. (See Note 8.) The
weighted average interest rate on the short-term borrowings was 5.4 percent and
5.6 percent for 1999 and 1998, respectively.
52
<PAGE>
PG&E Corporation maintains two $500 million revolving credit facilities, one
of which expires in November 2000 and the other in 2002. These credit facilities
are used to support the commercial paper program and other liquidity needs. The
facility expiring in 2000 may be extended annually for additional one-year
periods upon agreement with the lending institutions. There was $450 million and
$683 million of commercial paper outstanding at December 31, 1999 and 1998,
respectively. PG&E Corporation introduced a $200 million Extendible Commercial
Note (ECN) program during the third quarter of 1999. The ECN program supplements
our short-term borrowing capability. There was $76 million of ECNs outstanding
at December 31, 1999, which are not supported by the credit facilities.
UTILITY
The Utility maintains a $1 billion revolving credit facility which expires
in 2002. The facility may be extended annually for additional one-year periods
upon agreement with the banks. This facility is used to support the Utility's
commercial paper program and other liquidity requirements. The total amount
outstanding at December 31, 1999, backed by this facility, was $449 million in
commercial paper. The total amount outstanding at December 31, 1998, backed by
this facility was $567 million in commercial paper and $101 million of bank
notes.
NATIONAL ENERGY GROUP
PG&E Gen maintains two $550 million revolving credit facilities. One
facility expires in August 2000 and the other expires in 2003. The amount
outstanding at December 31, 1999 and 1998, backed by the facilities, was
$898 million and $233 million, respectively in commercial paper. Also
outstanding at December 31, 1998, was a $540 million eurodollar loan drawn on
one of the revolving credit facilities, which was subsequently paid off in 1999.
At December 31, 1999 and 1998, $550 million of these loans is classified as
noncurrent in the consolidated balance sheet.
In 1998, USGenNE, a subsidiary of PG&E Gen, established a $100 million
revolving credit facility that expires in 2003. No amounts were outstanding at
December 31, 1999.
PG&E GT NW maintains a $100 million revolving credit facility that expires
in 2002, but has an annual renewal option allowing the facility to maintain a
three-year duration. PG&E GT NW also maintains a $50 million 364-day credit
facility which expires in 2000, but may be extended for successive 364-day
periods. No amounts were outstanding under either of these credit facilities at
December 31, 1999. At December 31, 1999 and 1998, PG&E GT NW had an outstanding
commercial paper balance of $99 million and $104 million, respectively, which is
classified as noncurrent in the Consolidated Balance Sheet of PG&E Corporation.
PG&E GTT maintains four separate credit facilities that total $250 million
and are guaranteed by PG&E Corporation. At December 31, 1999, PG&E GTT had
$176 million of outstanding short-term bank borrowings related to these credit
facilities. At December 31, 1998, PG&E GTT had $70 million of outstanding
short-term bank borrowings related to two credit facilities. These lines may be
cancelled upon demand and bear interest at each respective bank's quoted money
market rate. The borrowings are unsecured and unrestricted as to use.
NOTE 11: NUCLEAR DECOMMISSIONING
Decommissioning of the Utility's nuclear power plants is scheduled to begin
for ratemaking purposes in 2015 with scheduled completion in 2034. Nuclear
decommissioning means to safely remove nuclear facilities from service and
reduce residual radioactivity to a level that permits termination of the Nuclear
Regulatory Commission license and release of the property for unrestricted use.
The estimated total obligation for nuclear decommissioning costs, based on a
1997 site study, is $1.6 billion in 1999 dollars (or $5.1 billion in future
dollars). This estimate assumes after-tax earnings on the tax-qualified and
non-tax-qualified decommissioning funds of 6.34 percent and 5.39 percent,
respectively, as well as a future annual escalation rate of 5.5 percent for
decommissioning costs. The decommissioning cost estimates are based on the plant
location and cost characteristics for the Utility's nuclear plants. Actual
decommissioning costs are expected to vary from this estimate because of changes
in assumed dates of decommissioning, regulatory requirements, technology, and
costs of labor, materials, and equipment. The estimated total obligation is
being recognized proportionately over the license term of each facility.
For the year ended December 31, 1999, nuclear decommissioning costs
recovered in rates were $26.5 million. For the years ended December 31, 1998 and
1997, nuclear decommissioning costs recovered in rates were $33 million per
year, respectively. The CPUC has established a Nuclear Decommissioning Cost
Triennial
53
<PAGE>
Proceeding to review, every three years, updated decommissioning cost estimates
and to establish the annual trust contribution, absent general rate cases.
At December 31, 1999, the total nuclear decommissioning obligation accrued
was $1.3 billion and is included in the balance sheet classification of
accumulated depreciation and decommissioning. Decommissioning costs recovered in
rates are placed in external trust funds. These funds along with accumulated
earnings will be used exclusively for decommissioning and cannot be released
from the trust funds until authorized by the CPUC.
The following table provides a summary of fair value, based on quoted market
prices, of these nuclear decommissioning funds:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
MATURITY
(IN MILLIONS) DATES 1999 1998
<S> <C> <C> <C>
U.S. government and agency issues 2000-2030 $ 380 $ 379
Equity securities -- 223 246
Municipal bonds and other 2000-2031 201 164
Gross unrealized holding gains 474 394
Gross unrealized holding losses (14) (11)
------ ------
Fair value (net of tax) $1,264 $1,172
====== ======
</TABLE>
The proceeds received from sales of securities were $1.7 billion in 1999,
and $1.4 billion in 1998 and 1997. The gross realized gains on sales of
securities held as available-for-sale were $59 million, $52 million, and
$40 million in 1999, 1998, and 1997, respectively. The gross realized losses on
sales of securities held as available-for-sale were $60 million, $39 million,
and $24 million in 1999, 1998, and 1997, respectively. The cost of debt and
equity securities sold is determined by specific identification.
Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE)
is responsible for the permanent storage and disposal of spent nuclear fuel. The
Utility has signed a contract with the DOE to provide for the disposal of spent
nuclear fuel and high-level radioactive waste from the Utility's nuclear power
facilities. The DOE's current estimate for an available site to begin accepting
physical possession of the spent nuclear fuel is 2010. At the projected level of
operation for Diablo Canyon, the Utility's facilities are sufficient to store
on-site all spent fuel produced through approximately 2006. It is likely that an
interim or permanent DOE storage facility will not be available for Diablo
Canyon's spent fuel by 2006. The Utility is examining options for providing
additional temporary spent fuel storage at Diablo Canyon or other facilities,
pending disposal or storage at a DOE facility.
NOTE 12: EMPLOYEE BENEFIT PLANS
Several of PG&E Corporation's subsidiaries provide noncontributory defined
benefit pension plans for their employees and retirees. In addition, these
subsidiaries provide contributory defined benefit medical plans for certain
retired employees and their eligible dependents and noncontributory defined
benefit life insurance plans for certain retired employees (referred to
collectively as other benefits). For both pension and other benefit plans, the
Utility's plan represents substantially all of the plan assets and the benefit
obligation. Therefore, all descriptions and assumptions are based on the
Utility's plans. The schedules below aggregate all of the plans employed by PG&E
Corporation's subsidiaries.
54
<PAGE>
The following schedule reconciles the plans' funded status (the difference
between fair value of plan assets and the benefit obligation) to the prepaid or
accrued benefit cost recorded on the consolidated balance sheet as of and for
the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
(IN MILLIONS) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $(4,977) $(4,457) $ (949) $(907)
Service cost for benefits earned (121) (108) (19) (19)
Interest cost (347) (333) (69) (64)
Actuarial gain (loss) 372 (321) (19) (36)
Adopted plan benefits -- -- (4) --
Participant paid benefits -- -- (14) --
Benefits and expenses paid 266 242 104 77
------- ------- ------ -----
Benefit obligation at December 31 (4,807) (4,977) (970) (949)
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 7,104 6,419 951 823
Actual return on plan assets 1,331 919 240 173
Company contributions 4 27 15 18
Participant paid benefits -- -- 14 13
Benefits and expenses paid (286) (261) (103) (76)
------- ------- ------ -----
FAIR VALUE OF PLAN ASSETS AT DECEMBER 31 8,153 7,104 1,117 951
PLAN ASSETS IN EXCESS OF BENEFIT OBLIGATION 3,346 2,127 147 2
(BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS)
Unrecognized prior service cost 93 104 17 19
Unrecognized net loss (gain) (2,963) (2,025) (546) (430)
Unrecognized net transition obligation 65 79 339 366
------- ------- ------ -----
PREPAID (ACCRUED) BENEFIT COST $ 541 $ 285 $ (43) $ (43)
======= ======= ====== =====
</TABLE>
The Utility's share of the plans' assets in excess of the benefit obligation
for pensions in 1999 and 1998 was $3,344 million and $2,134 million,
respectively. The Utility's share of the prepaid benefit cost for the pensions
in 1999 and 1998 was $556 million and $301 million, respectively.
The plan assets of the Utility exceeded its share of the benefit obligation
for other benefits by $167 million and $24 million in 1999 and 1998,
respectively. The Utility's share of the accrued benefit liability for other
benefits in 1999 and 1998 was $22 million and $26 million, respectively.
Unrecognized prior service costs and the net gains are amortized on a
straight-line basis over the average remaining service period of active plan
participants. The transition obligations for pension benefits and other benefits
are being amortized over 17.5 years from 1987.
Net benefit income (cost) was as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
DECEMBER 31, 1999 1998 1997 1999 1998 1997
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits earned $(121) $(108) $(102) $(19) $(19) $(21)
Interest cost (347) (333) (316) (69) (64) (64)
Expected return on assets 634 567 486 83 73 60
Amortized prior service and transition cost (25) (26) (22) (27) (28) (28)
Actuarial gain recognized 111 114 74 20 22 13
----- ----- ----- ---- ---- ----
Benefit income (cost) $ 252 $ 214 $ 120 $(12) $(16) $(40)
===== ===== ===== ==== ==== ====
</TABLE>
The Utility's share of the net benefit income for pensions in 1999, 1998,
and 1997 was $253 million, $215 million, and $123 million, respectively.
55
<PAGE>
The Utility's share of the net benefit cost for other benefits in 1999,
1998, and 1997 was $9 million, $12 million, and $38 million, respectively.
Net benefit income (cost) is calculated using an expected long-term rate of
return on plan assets of 9.0 percent. The difference between actual and expected
long-term rate of return on plan assets is included in net amortization and
deferral and is considered in the determination of future net benefit income
(cost). In 1999, 1998, and 1997, actual return on plan assets exceeded expected
return.
In conformity with SFAS No. 71, regulatory adjustments have been recorded in
the income statement and balance sheet of the Utility which reflect the
difference between Utility pension income determined for accounting purposes and
Utility pension income determined for ratemaking, which is based on a funding
approach.
The CPUC also has authorized the Utility to recover the costs associated
with its other benefit plans for 1993 and beyond. Recovery is based on the
lesser of the annual accounting costs or the annual contributions on a
tax-deductible basis to the appropriate trusts.
The following actuarial assumptions were used in determining the plans'
funded status and net benefit income (cost). Year-end assumptions are used to
compute funded status, while prior year-end assumptions are used to compute net
benefit income (cost).
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
DECEMBER 31, 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.5% 7.0% 7.5% 7.5% 7.0% 7.5%
Average expected rate of future
compensation increases 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Expected long-term rate of return on plan assets 8.5% 9.0% 9.0% 9.0% 9.0% 9.0%
</TABLE>
The assumed health care cost trend rate for 2000 is approximately
8.5 percent, grading down to an ultimate rate in 2006 of approximately
6.0 percent. The assumed health care cost trend rate can have a significant
effect on the amounts reported for health care plans. A one percentage point
change would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
(IN MILLIONS) POINT INCREASE POINT DECREASE
<S> <C> <C>
Effect on total service and interest cost components $ 6 $ (6)
Effect on postretirement benefit obligation $62 $(57)
</TABLE>
LONG-TERM INCENTIVE PROGRAM
PG&E Corporation maintains a Long-term Incentive Program (Program) that
provides for grants of stock options to eligible participants with or without
associated stock appreciation rights and dividend equivalents. As of
December 31, 1999, 34,389,230 shares of PG&E Corporation common stock have been
authorized for award with 15,779,821 shares still available under this program.
Shares granted in 1999, 1998 and 1997, had approximate values of $23 million,
$27 million, and $12 million, respectively, using the Black-Scholes valuation
method. In addition, PG&E Corporation granted 9,712,900 shares on January 3,
2000 at an option price of $19.8125 and 18,000 shares on February 1, 2000 at an
option price of $22.1875, the then-current market prices.
Outstanding stock options become exercisable on a cumulative basis at
one-third each year commencing two years from the date of grant and expire ten
years and one day after the date of grant. Shares outstanding at December 31,
1999, had option prices ranging from $16.75 to $34.25 and a weighted-average
remaining contractual life of 7.8 years. As permitted under SFAS No. 123
"Accounting for Stock-Based Compensation," PG&E Corporation applies Accounting
Board Opinion No. 25 in accounting for the program. As the exercise price of all
stock options are equal to their fair market value at the time the options are
granted, PG&E Corporation
does not recognize any compensation expense related to the program using the
intrinsic value based method. Had compensation expense been recognized using the
fair value based method under SFAS No. 123, PG&E Corporation's consolidated
earnings would have been reduced by $16 million, $10 million and $4 million in
1999, 1998, and 1997, respectively.
56
<PAGE>
The following table summarizes the program's activity as of and for the year
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION
(SHARES IN MILLIONS) SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding--
beginning of year 11.1 $28.35 6.2 $26.21 3.5 $29.56
Granted during year 7.0 $30.94 6.4 $30.53 3.0 $22.55
Exercised during year (0.5) $25.86 (0.7) $29.63 (0.2) $27.36
Cancellations during year (1.2) $29.82 (0.8) $28.16 (0.1) $27.82
Outstanding-end of year 16.4 $29.43 11.1 $28.35 6.2 $26.21
Exercisable-end of year 3.0 $29.08 2.4 $29.06 1.9 $30.84
</TABLE>
NOTE 13: INCOME TAXES
The significant components of income tax expense for continuing operations
were:
<TABLE>
<CAPTION>
PG&E CORPORATION UTILITY
------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997 1999 1998 1997
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Current $1,002 $718 $ 725 $1,133 $ 886 $ 791
Deferred (702) (51) (119) (433) (201) (142)
Tax credits, net (52) (56) (41) (52) (56) (40)
------ ---- ----- ------ ----- -----
INCOME TAX EXPENSE $ 248 $611 $ 565 $ 648 $ 629 $ 609
====== ==== ===== ====== ===== =====
</TABLE>
In 1999, the income tax expense of PG&E Corporation was allocated to
continuing operations ($248 million), discontinued operations ($71 million tax
benefit), and cumulative effect of a change in an accounting principle
($8 million).
The significant components of net deferred income tax liabilities were:
<TABLE>
<CAPTION>
PG&E
CORPORATION UTILITY
------------------- -------------------
DECEMBER 31, 1999 1998 1999 1998
(IN MILLIONS)
<S> <C> <C> <C> <C>
DEFERRED INCOME TAX ASSETS:
Customer advances for construction $ 109 $ 68 $ 109 $ 68
Unamortized investment tax credits 118 127 118 127
Provision for injuries and damages 185 220 185 171
Deferred contract costs 182 242 -- --
Other 544 562 442 477
------ ------ ------ ------
TOTAL DEFERRED INCOME TAX ASSETS $1,138 $1,219 $ 854 $ 843
------ ------ ------ ------
DEFERRED INCOME TAX LIABILITIES:
Regulatory balancing accounts (47) 43 (47) 40
Plant in service 2,827 3,722 2,428 2,930
Income tax regulatory asset 297 391 287 381
Other 1,075 968 577 555
------ ------ ------ ------
TOTAL DEFERRED INCOME TAX LIABILITIES 4,152 5,124 3,245 3,906
------ ------ ------ ------
TOTAL NET DEFERRED INCOME TAXES $3,014 $3,905 $2,391 $3,063
====== ====== ====== ======
CLASSIFICATION OF NET DEFERRED INCOME TAXES:
Included in current (assets) liabilities $ (133) $ 44 $ (119) $ 3
Included in noncurrent liabilities 3,147 3,861 2,510 3,060
------ ------ ------ ------
TOTAL NET DEFERRED INCOME TAXES $3,014 $3,905 $2,391 $3,063
====== ====== ====== ======
</TABLE>
57
<PAGE>
The differences between income taxes and amounts determined by applying the
federal statutory rate to income before income tax expense for continuing
operations were:
<TABLE>
<CAPTION>
PG&E CORPORATION UTILITY
------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Increase (decrease) in income tax rate resulting from:
State income tax (net of federal benefit) 10.1 3.2 5.2 6.2 6.6 4.6
Effect of regulatory treatment of depreciation differences 51.7 9.7 7.9 9.4 9.8 7.5
Tax credits--net (19.9) (4.0) (3.1) (3.6) (4.1) (2.9)
Effect of foreign earnings at different tax rates (1.3) 0.6 (2.1) -- -- --
Stock sale differences (6.8) -- -- -- -- --
Stock sale valuation allowance 30.2 -- -- -- -- --
Other--net (4.0) (0.3) 0.2 (1.9) (1.0) --
----- ---- ---- ---- ---- ----
EFFECTIVE TAX RATE 95.0% 44.2% 43.1% 45.1% 46.3% 44.2%
===== ==== ==== ==== ==== ====
</TABLE>
Historically, the benefits of certain temporary differences have been
utilized to reduce the Utility's customers rates. Accordingly, a regulatory
asset has been recorded reflecting the pre-tax amount that will be recovered
from customers as the temporary difference reverses. In connection with the
California electric restructuring plan, the Utility is collecting the regulatory
asset over four years.
During 1999, PG&E Corporation generated a capital loss carryforward of
approximately $225 million, which will expire in 2005. A valuation allowance of
approximately $75 million has been recorded reflecting the estimated net
realizable value of this capital loss carryforward.
NOTE 14: COMMITMENTS
UTILITY
LETTERS OF CREDIT AND SURETY BONDS:
The Utility uses $409 million in standby letters of credit and surety bonds
to secure future workers' compensation liabilities.
RESTRUCTURING TRUST GUARANTEES:
Tax-exempt restructuring trusts were established to oversee the development
of the operating framework for the competitive generation market in California.
(See Note 2.) The CPUC has authorized California utilities to guarantee bank
loans of up to $85 million to be used by the trusts for this purpose. Under the
CPUC authorization, the Utility's remaining guarantee is for up to a maximum of
$38 million of the loan. The remaining bank loan will be repaid and the
guarantee removed when the trust obtains proceeds from permanent financing or
rate recovery.
POWER PURCHASE CONTRACTS:
By federal law, the Utility is required to purchase electric energy and
capacity provided by independent power producers that are qualifying facilities
(QFs) under the Public Utilities Regulatory Policies Act of 1978 (PURPA). The
CPUC established a series of QF long-term power purchase contracts and set the
applicable terms, conditions, price options, and eligibility requirements.
Under these contracts, the Utility is required to make payments only when
energy is supplied or when capacity commitments are met. Costs associated with
these contracts are eligible for recovery by the Utility as transition costs
through the collection of the nonbypassable CTC. The Utility's contracts with
these power producers expire on various dates through 2028. Deliveries from
these power producers account for approximately 23 percent of the Utility's 1999
electric energy requirements, and no single contract accounted for more than
five percent of the Utility's energy needs.
The Utility has negotiated with several QFs for early termination of their
power purchase contracts. For other contracts, the Utility has negotiated with
QFs to refrain from producing energy during the remaining term of the higher
fixed energy price period under their contract (a "buy-down") or to curtail
energy production for shorter periods of time (a "curtailment"). At
December 31, 1999, the total discounted future payments due under the
renegotiated contracts that are subject to early termination, buy-down, or
curtailment was $16 million, of which
58
<PAGE>
$6.6 million has been recovered in rates and the Utility expects to recover the
remaining $9.4 million in future rates.
The Utility also has contracts with various irrigation districts and water
agencies to purchase hydroelectric power. Under these contracts, the Utility
must make specified semi-annual minimum payments whether or not any energy is
supplied (subject to the supplier's retention of the FERC's authorization) and
variable payments for operation and maintenance costs incurred by the suppliers.
These contracts expire on various dates from 2004 to 2031. Costs associated with
these contracts to purchase power are eligible for recovery by the Utility as
transition costs through the collection of the nonbypassable CTC. At
December 31, 1999, the undiscounted future minimum payments under these
contracts were $32.7 million for each of the years 2000 through 2004 and a total
of $247 million for periods thereafter. Irrigation district and water agency
deliveries in the aggregate account for approximately 5.8 percent of the
Utility's 1999 electric energy requirements.
The amount of energy received and the total payments made under all of these
power purchase contracts were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
(IN MILLIONS)
<S> <C> <C> <C>
Kilowatt-hours received 25,910 25,994 24,389
Energy payments $837 $943 $1,157
Capacity payments $539 $529 $ 538
Irrigation district and water agency payments $ 60 $ 53 $ 56
</TABLE>
NATURAL GAS TRANSPORTATION COMMITMENTS:
The Utility has long-term gas transportation service contracts with various
Canadian and interstate pipeline companies. These agreements include provisions
for payment of fixed demand charges for reserving firm capacity on the
pipelines. The total demand charges that the Utility will pay each year may
change due to changes in tariff rates. The total demand and volumetric
transportation charges the Utility paid under these agreements were
$97 million, $113 million, and $255 million in 1999, 1998, and 1997,
respectively. These amounts include payments made by the Utility to PG&E GT NW
of $47 million, $49 million, and $49 million in 1999, 1998, and 1997,
respectively, which are eliminated in the consolidated financial statements of
PG&E Corporation.
The Utility's obligations related to capacity held pursuant to long-term
contracts on various pipelines are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
2000 $100
2001 97
2002 78
2003 78
2004 78
Thereafter 98
----
Total $529
====
</TABLE>
As a result of regulatory changes, the Utility no longer procures gas for
most of its industrial and larger commercial (noncore) customers, resulting in a
decrease in the Utility's need for capacity on these pipelines. Despite these
changes, the Utility continues to procure gas for substantially all of its
residential and smaller commercial (core) customers and its noncore customers
who choose bundled service. To the extent that the Utility's current capacity
holdings exceed demand for gas transportation by its customers, the Utility will
continue its efforts to broker such excess capacity.
NATIONAL ENERGY GROUP
POWER PURCHASE CONTRACTS:
As a part of the acquisition of a portfolio of electric generating assets
and power supply contracts from NEES (see Note 5), NEES transferred to PG&E Gen
contractual rights and duties under several power purchase contracts with
third-party independent power producers. At December 31, 1999, these agreements
provided for an aggregate
59
<PAGE>
of 470 MW of capacity. Under the transfer agreement, PG&E Gen is required to pay
to NEES amounts due to the third-party power producers under the power purchase
contracts. PG&E Gen's payment obligations to NEES are reduced by NEES's monthly
payment obligation, payable in monthly installments from September 1998 through
January 2008. In certain circumstances, NEES, with the consent of PG&E Gen, will
make a full or partial lump-sum accelerated payment of the monthly payment
obligation to such party as PG&E Gen may direct. The approximate dollar amounts
under these agreements are as follows:
<TABLE>
<CAPTION>
POWER
PURCHASE SUPPORT
(IN MILLIONS) CONTRACT PAYMENTS
<S> <C> <C>
2000 $ 233 $119
2001 228 120
2002 215 121
2003 217 112
2004 220 108
Thereafter 1,804 334
------ ----
Total $2,917 $914
====== ====
</TABLE>
GAS SUPPLY AND TRANSPORTATION AGREEMENTS:
PG&E Gen is obligated to purchase and fuel suppliers are required to supply
all the fuel needed at PG&E Gen's facilities. Fuel requirements include the
quality and estimated quantity of fuel needed to operate each facility. The
price of fuel escalates annually for the term of each contract. In addition,
PG&E Gen has transportation contracts with various entities to deliver the fuel
to each facility. The approximate dollar obligations under these gas supply and
transportation agreements are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
2000 $ 103
2001 101
2002 101
2003 102
2004 11
Thereafter 848
------
Total $1,266
======
</TABLE>
STANDARD OFFER AGREEMENTS:
As a part of the acquisition of a portfolio of electric generating assets
and power supply contracts from NEES (see Note 5), PG&E Gen entered into
agreements to supply the electric capacity and energy necessary for certain of
NEES affiliates to meet their obligations to provide standard offer service. The
agreements to provide standard offer service range in length from 3 to 10 years.
The price per MWh is standard for all agreements. For the year ended
December 31, 1999, the standard offer service price paid generators was $0.035
per Kwh for generation.
OPERATING LEASES:
PG&E Corporation and the National Energy Group have entered into various
long-term lease commitments.
PG&E Gen has an agreement to lease Lake Road under a five-year operating
lease agreement which is extendible. The lease term will commence upon the
completion of the construction of a gas-fired generating facility, which is
anticipated to be mid-2001. The minimum obligations under this lease cannot be
determined until the commencement of the lease because the minimum rent payments
are based on the final cost to complete the facility. The approximate
obligations below are based on the current estimated total cost of the facility.
USGenNE entered into a $479 million sale-and-leaseback transaction whereby
USGenNE sold and leased back its Bear Swamp facility to a third party. The
related lease is being accounted for as an operating lease. The rental expense
under this lease in 1999 was $2 million.
PG&E Gen leases the Pittsfield facility from General Electric Credit
Corporation. The rental expense for this facility in 1999 was $28 million.
60
<PAGE>
PG&E GTT has an operating lease commitment in connection with gas storage.
The term of the gas storage facility lease and related arrangements run through
January 2008 and subject to certain conditions, has one or more optional renewal
periods of five years each at fair market value. The rental expense for this gas
storage facility in 1999 was approximately $10 million.
PG&E Corporation and our National Energy Group have leases for office space
primarily located in California, Maryland, Oregon, Massachusetts, and Texas. For
the year ended December 31, 1999, rent expense for these facilities amounted to
$27 million.
The approximate obligations under these operating lease agreements are as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
2000 $ 96
2001 110
2002 116
2003 109
2004 124
Thereafter 1,266
------
Total $1,821
======
</TABLE>
NOTE 15: CONTINGENCIES
NUCLEAR INSURANCE
The Utility has insurance coverage for property damage and business
interruption losses as a member of Nuclear Electric Insurance Limited (NEIL).
Under this insurance, if a nuclear generating facility suffers a loss due to a
prolonged accidental outage, the Utility may be subject to maximum retrospective
assessments of $15 million (property damage) and $4 million (business
interruption), in each case per policy period, in the event losses exceed the
resources of NEIL.
The Utility has purchased primary insurance of $200 million for public
liability claims resulting from a nuclear incident. The Utility has secondary
financial protection which provides an additional $9.3 billion in coverage,
which is mandated by federal legislation. It 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, then the Utility
may be assessed up to $176 million per incident, with payments in each year
limited to a maximum of $20 million per incident.
ENVIRONMENTAL REMEDIATION
The Utility may be required to pay for environmental remediation at sites
where it has been or may be a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act and similar
state environmental laws. These sites include former manufactured gas plant
sites, power plant sites, and sites used by it for the storage or disposal of
potentially hazardous materials. Under federal and California laws, it may be
responsible for remediation of hazardous substances, even if it did not deposit
those substances on the site.
The Utility records a liability when site assessments indicate remediation
is probable and a range of reasonably likely clean-up costs can be estimated.
The Utility reviews its remediation liability quarterly for each identified
site. The liability is an estimate of costs for site investigations,
remediation, operations and maintenance, monitoring, and site closure. The
remediation costs also reflect (1) current technology, (2) enacted laws and
regulations, (3) experience gained at similar sites, and (4) the probable level
of involvement and financial condition of other potentially responsible parties.
Unless there is a better estimate within this range of possible costs, the
Utility records the lower end of this range.
The cost of the hazardous substance remediation ultimately undertaken by the
Utility is difficult to estimate. A change in estimate may occur in the near
term due to uncertainty concerning the Utility's responsibility, the complexity
of environmental laws and regulations, and the selection of compliance
alternatives. At December 31, 1999, the Utility expects to spend $300 million
for hazardous waste remediation costs at identified sites, including
61
<PAGE>
divested fossil-fueled power plants. The Utility had an accrued liability of
$271 million and $296 million at December 31, 1999 and 1998, respectively,
representing the discounted value of these costs.
Of the $271 million accrued liability discussed above, the Utility has
recovered $148 million through rates, including $34 million through
depreciation, and expects to recover another $95 million in future rates.
Additionally, the Utility is mitigating its costs by obtaining recovery of its
costs from insurance carriers and from other third parties as appropriate.
Environmental remediation at identified sites may be as much as
$486 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. The Utility estimated this upper limit of the range of costs
using assumptions least favorable to the Utility, based upon a range of
reasonably possible outcomes. Costs may be higher if the Utility is found to be
responsible for clean-up costs at additional sites or outcomes change.
Further, as discussed in "Generation Divestiture" above, the Utility will
retain the pre-closing remediation liability associated with divested generation
facilities.
PG&E Corporation believes the ultimate outcome of these matters will not
have a material impact on its or the Utility's financial position or results of
operations.
LEGAL MATTERS
CHROMIUM LITIGATION:
Several civil suits are pending against the Utility in California state
court. The suits seek an unspecified amount of compensatory and punitive damages
for alleged personal injuries resulting from alleged exposure to chromium in the
vicinity of the Utility's gas compressor stations at Hinkley, Kettleman, and
Topock, California. Currently, there are claims pending on behalf of
approximately 900 individuals.
The Utility is responding to the suits and asserting affirmative defenses.
The Utility 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.
PG&E Corporation believes that the ultimate outcome of these matters will
not have a material adverse impact on its or the Utility's financial position or
results of operations.
TEXAS FRANCHISE FEE LITIGATION:
In connection with PG&E Corporation's acquisition of Valero Energy
Corporation, now known as PG&E Gas Transmission Texas (PG&E GTT), PG&E GTT
succeeded to the litigation described below.
PG&E GTT and various of its affiliates are defendants in at least two class
action suits and five separate suits filed by various Texas cities. Generally,
these cities allege, among other things, that (1) owners or operators of
pipelines occupied city property and conducted pipeline operations without the
cities' consent and without compensating the cities, and (2) the gas marketers
failed to pay the cities for accessing and utilizing the pipelines located in
the cities to flow gas under city streets. Plaintiffs also allege various other
claims against the defendants for failure to secure the cities' consent. Damages
are not quantified.
In 1998, a jury trial was held in the separate suit brought by the City of
Edinburg (the City). This suit involved, among other things, a particular
franchise agreement entered into by a former subsidiary of PG&E GTT (now owned
by Southern Union Gas Company (SU)) and the City and certain conduct of the
defendants. On December 1, 1998, based on the jury verdict, the court entered a
judgment in the City's favor, and awarded damages of $5.3 million, and
attorneys' fees of up to $3.5 million plus interest. The court found that
various PG&E GTT and SU defendants were jointly and severally liable for
$3.3 million of the damages and all the attorneys' fees. Certain PG&E GTT
subsidiaries were found solely liable for $1.4 million of the damages. The court
did not clearly indicate the extent to which the PG&E GTT defendants could be
found liable for the remaining damages. The PG&E GTT defendants are in the
process of appealing the judgment.
In connection with the certification of a class in one of the class actions,
the court ordered notice to be sent to all potential class members and setting
an opt-out deadline of December 31, 1997. Notices were mailed to approximately
159 Texas cities. Fewer than 20 cities opted out by the deadline. In
November 1999, the court signed an order dismissing from the class 42 cities
because it determined there was no pipeline presence and no
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past or present sales activity, leaving 106 cities in the class. The parties in
this class action are negotiating the terms of a settlement agreement. The
settlement proposal contemplates, among other things, that the PG&E Corporation
defendants would pay $12.2 million to the class cities, inclusive of attorney
fees, reduced by amounts attributable to opt-out cities. The defendants retain
the right to reject the settlement if the settlement proposal is not approved by
certain key cities and by 80% of the plaintiff class. Although a significant
number of the 106 cities in the plaintiff class already have either approved the
settlement or adopted resolutions to pass the ordinance, certain key cities have
not yet approved the settlement. The settlement is also subject to court
approval. On January 27, 2000, the court approved the settlement proposal and
established a 14-day period whether to accept the negotiated settlement terms or
opt out of the settlement. The Court also stated that if Corpus Christi does not
accept the settlement proposal, it will be placed in a sub-class, whose claims
will not be finalized as part of the settlement approval. Corpus Christi has the
right to opt out of this subclass.
PG&E Corporation believes that the ultimate outcome of these matters will
not have a material adverse impact on its financial position or its results of
operations. As discussed above in Note 5, in January 2000, PG&E Corporation's
National Energy Group signed a definitive agreement to sell the stock of PG&E
Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc. The
buyer will assume all liabilities associated with the cases described above.
RECORDED LIABILITY FOR LEGAL MATTERS:
In accordance with SFAS No. 5, PG&E Corporation makes a provision for a
liability when both it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. These provisions are reviewed
quarterly and adjusted to reflect the impacts of negotiations, settlements,
rulings, advice of legal counsel, and other information and events pertaining to
a particular case. In the fourth quarter of 1999, PG&E Corporation reduced the
amount of the recorded liability for legal matters associated with a court
approved settlement proposal and other settlement discussions of certain matters
described above. Approximately $55 million of the adjustments, arising from a
pre-acquisition contingency related to a purchased business, are reflected in
"Other income, net" in PG&E Corporation's Statement of Consolidated Income. The
following table reflects the current year's activity to the recorded liability
for legal matters:
<TABLE>
<CAPTION>
PG&E
CORPORATION UTILITY
(IN MILLIONS) ----------- --------
<S> <C> <C>
Beginning Balance, January 1, 1999 $175 $ 52
Provisions for liabilities 16 14
Payments (41) (29)
Adjustments (44) 13
---- ----
Ending Balance, December 31, 1999: $106 $ 50
==== ====
</TABLE>
NOTE 16: GENERAL RATE CASE
In December 1997, the Utility filed its 1999 application with the CPUC
During the GRC process, the CPUC examines the Utility's costs to determine the
amount the Utility may charge customers for base revenues (non-fuel related
costs). The Utility requested distribution revenue increases to maintain and
improve natural gas and electric distribution reliability, safety, and customer
service. The requested revenues, as updated, included an increase of $445
million in electric base revenues and an increase of $377 million in natural gas
base revenues over the 1998 authorized revenues.
The Utility received a final decision on its 1999 GRC application on
February 17, 2000. This final decision increased electric distribution revenues
by $163 million and gas distribution revenues by $93 million, as compared to
revenues authorized for 1998. This revenue increase is retroactive to
January 1, 1999. The impact of these increases resulted in an increase in
earnings of $153 million, or $0.42 per share, and was reflected in the fourth
quarter of 1999.
NOTE 17: SEGMENT INFORMATION
PG&E Corporation has identified four reportable operating segments. The
Utility is one reportable operating segment and the other three are part of PG&E
Corporation's National Energy Group. These four reportable operating segments
provide different products and services and are subject to different forms of
regulation or jurisdictions. PG&E Corporation's reportable segments are
described below.
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UTILITY:
PG&E Corporation's Northern and Central California energy utility
subsidiary, Pacific Gas and Electric Company, provides natural gas and electric
service to one of every 20 Americans.
NATIONAL ENERGY GROUP:
The National Energy Group businesses develop, construct, operate, own, and
manage independent power generation facilities that serve wholesale and
industrial customers through PG&E Generating Company, LLC (formerly U.S.
Generating Company, LLC) and its affiliates (collectively, PG&E Gen); own and
operate natural gas pipelines, natural gas storage facilities, and natural gas
processing plants, primarily in the Pacific Northwest and in Texas, through
various subsidiaries of PG&E Corporation (collectively, PG&E Gas Transmission or
PG&E GT); and purchase and sell energy commodities and provide risk management
services to customers in major North American markets, including the other
National Energy Group non-utility businesses, unaffiliated utilities, marketers,
municipalities, and large end-use customers through PG&E Energy Trading--Gas
Corporation, PG&E Energy Trading--Power, L.P., and their affiliates
(collectively, PG&E Energy Trading or PG&E ET). In the fourth quarter of 1999,
PG&E Corporation's Board of Directors approved a plan for the divestiture of
PG&E Corporation's Texas natural gas and natural gas liquids business. Also in
the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a
plan for the divestiture of PG&E Corporation's retail energy services, conducted
through PG&E ES. PG&E ES had total assets of $197 million, $202 million, and
$60 million, as of December 31, 1999, 1998, and 1997, respectively.
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<PAGE>
Segment information for the years 1999, 1998, and 1997 was as follows:
<TABLE>
<CAPTION>
UTILITY NATIONAL ENERGY GROUP
-------- ----------------------------------------------------------
PG&E GT ELIMINATIONS &
(IN MILLIONS) PG&E GEN NW TEXAS PG&E ET OTHER TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Operating revenues $ 9,084 $1,116 $ 172 $1,034 $9,404 $ 10 $20,820
Intersegment revenues(1) 144 6 52 114 1,117 (1,433) --
------- ------ ------ ------ ------ ------- -------
Total operating revenues 9,228 1,122 224 1,148 10,521 (1,423) 20,820
Depreciation, amortization and
decommissioning 1,564 89 41 75 9 2 1,780
Interest expense(2) (593) (63) (41) (59) (12) (4) (772)
Other income (expense) 11 61 21 53 3 6 155
Income taxes(3) 648 16 32 (407) (36) (5) 248
Income from continuing operations 763 97 68 (897) (34) 16 13
Capital expenditures 1,181 323 30 19 14 -- 1,567
Total assets at year-end(4) $21,470 $3,852 $1,160 $1,217 $1,876 $ (57) $29,518
1998
Operating revenues $ 8,919 $ 645 $ 185 $1,640 $8,183 $ 5 $19,577
Intersegment revenues(1) 5 4 52 301 326 (688) --
------- ------ ------ ------ ------ ------- -------
Total operating revenues 8,924 649 237 1,941 8,509 (683) 19,577
Depreciation, amortization and
decommissioning 1,438 52 39 65 5 3 1,602
Interest expense(2) (621) (43) (43) (77) (7) 10 (781)
Other income (expense) 76 18 3 13 5 (50) 65
Income taxes(3) 629 28 31 (47) (17) (13) 611
Income (loss) from continuing operations 702 106 65 (71) (6) (25) 771
Capital expenditures 1,396 98 49 39 12 1 1,595
Total assets at year-end(4) $22,950 $3,844 $1,169 $2,655 $2,555 $ (141) $33,032
1997
Operating revenues $ 9,495 $ 148 $ 186 $ 800 $4,613 $ 13 $15,255
Intersegment revenues(1) -- -- 47 204 195 (446) --
------- ------ ------ ------ ------ ------- -------
Total operating revenues 9,495 148 233 1,004 4,808 (433) 15,255
Depreciation, amortization and
decommissioning 1,748 19 38 33 3 10 1,851
Interest expense(2) (570) (5) (41) (26) (2) (20) (664)
Other income (expense) 94 (25) 1 13 3 126 212
Income taxes(3) 609 (17) 26 (8) (12) (33) 565
Income (loss) from continuing operations 735 (41) 40 (24) (19) 54 745
Capital expenditures 1,529 23 34 45 5 50 1,686
Total assets at year-end(4) $25,147 $ 989 $1,208 $2,800 $1,452 $ (541) $31,055
</TABLE>
(1) Intersegment electric and gas revenues are recorded at market prices, which
for the Utility and PG&E GT NW are tariffed rates prescribed by the CPUC and
FERC, respectively.
(2) Net interest expense incurred by PG&E Corporation is allocated to the
segments using specific identification.
(3) Income tax expense for the Utility is computed on a stand-alone basis. The
balance of the consolidated income tax provision is allocated among the
National Energy Group.
(4) Assets of PG&E Corporation are included in "Eliminations & Other" column
exclusive of investment in its subsidiaries.
(5) Income from equity-method investees for 1999, 1998, and 1997 was
$61 million, $113 million, and $41 million, respectively, for PG&E Gen, and
none, $3 million, and $2 million, respectively, for PG&E GTT.
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NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS
PG&E Corporation estimates fair value of its financial instruments based on
quoted market prices, where available. Fair value of the Utility's rate
reduction bonds, and Utility obligated manditorily redeemable preferred
securities of trust holding solely Utility subordinated debentures are all
determined based on quoted market prices. Fair value of the Utility's preferred
stock with mandatory provisions is based on indicative market prices. Where
quoted or indicative market prices are not available, the estimated fair value
is determined using other valuation techniques (for example, the present value
of future cash flows). Most of PG&E Corporation's and the Utility's debt is
determined using quoted market prices, but the fair value of a small portion of
Utility debt is determined using the present value of future cash flows. The
carrying value of PG&E Corporation's short-term borrowings approximates fair
value.
At December 31, 1999 and 1998, PG&E Corporation's carrying amount and ending
fair value of its financial instruments are:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
PG&E Corporation:
Current price risk management assets (see Note 3) $ 607 $ 607 $1,416 $1,416
Noncurrent price risk management assets (see Note 3) 372 372 334 334
Current price risk management liabilities (see Note 3) 575 575 1,412 1,412
Noncurrent price risk management liabilities (see Note 3) 247 247 281 281
Total long-term debt(1) (see Note 8) 7,265 7,095 7,760 8,079
Utility:
Nuclear decommissioning funds noncurrent asset (see Note 11) 1,264 1,264 1,172 1,172
Total long-term debt(1) (see Note 8) 5,342 5,217 5,704 6,008
Rate reduction bonds(2) (see Note 9) 2,321 2,265 2,611 2,676
Preferred stock with mandatory redemption provisions (see
Note 7) 137 140 137 143
Utility obligated mandatorily redeemable preferred
securities of trust holding solely Utility subordinated
debentures (see Note 7) 300 267 300 303
</TABLE>
(1) Total long-term debt includes current portion of long-term debt.
(2) Rate reduction bonds include current portion of rate reduction bonds.
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<PAGE>
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
<S> <C> <C> <C> <C>
1999
PG&E CORPORATION
Operating revenues $4,795 $6,217 $4,682 $5,126
Operating income (loss)(1)(2)(3) (579) 516 480 461
Income (loss) from continuing operations (547) 197 196 167
Net income (loss)(1)(2)(3) (611) 185 182 171
Earnings (loss) per common share from continuing
operations, basic (1.49) 0.54 0.53 0.45
Earnings (loss) per common share from continuing
operations, diluted (1.49) 0.54 0.50 0.39
Dividends declared per common share 0.30 0.30 0.30 0.30
Common stock price per share
High 26.69 33.25 34.00 33.69
Low 20.25 25.00 30.56 29.50
UTILITY
Operating revenues $2,323 $2,587 $2,233 $2,085
Operating income(3) 633 486 452 422
Net income(3) 272 185 178 153
Income available for common stock 265 179 172 147
1998
PG&E CORPORATION
Operating revenues $5,364 $5,208 $4,695 $4,310
Operating income(1) 485 554 579 480
Income from continuing operations 208 225 188 150
Net income(1) 196 210 174 139
Earnings per common share from continuing
operations, basic and diluted 0.54 0.59 0.49 0.39
Dividends declared per common share 0.30 0.30 0.30 0.30
Common stock price per share
High 35.06 33.44 33.19 33.56
Low 30.38 29.88 30.06 29.06
UTILITY
Operating revenues $2,218 $2,563 $2,117 $2,026
Operating income 446 512 494 424
Net income 176 205 193 155
Income available for common stock 169 199 186 148
</TABLE>
(1) In the fourth quarter 1999, the National Energy Group adopted a plan to
dispose of the PG&E ES segment. This planned transaction has been accounted
for as a discontinued operation. Results of operations of PG&E ES have been
excluded from continuing operations for all periods presented. The operating
loss and net loss of PG&E ES for the quarters ending March 31, June 30, and
September 30, 1999, were $15 million and $8 million, $23 million and
$14 million, and $20 million and $12 million, respectively. The operating
loss and net loss for PG&E ES for the quarters ending March 31, June 30, and
September 30, 1998, were $17 million and $11 million, $22 million and
$14 million, and $27 million and $15 million, respectively.
(2) Amounts have been restated to reflect the change in accounting for major
maintenance and overhauls at the National Energy Group (see Note 1 of the
Notes to Consolidated Financial Statements), and reclassification of PG&E ES
operating results to discontinued operations (see above). The accounting
change resulted in a cumulative effect being recorded as of January 1, 1999,
of $12 million ($0.03 per share), net of income taxes of $8 million.
Operating income previously reported for 1999 was $442 million,
$454 million, and $492 million for each of the first three quarters,
respectively. Net income previously reported for 1999 was $156 million
($0.42 per share), $180 million ($0.49 per share), and $183 million ($0.50
per share) for the same periods.
(3) In the fourth quarter 1999, the Utility recorded the effects of the outcome
of the GRC. This resulted in an increase of $256 million in operating income
and an increase of $153 million in net income. Additionally, the National
Energy Group recorded an after-tax charge of $890 million reflecting PG&E
GTT's assets at their fair market value. (See Notes 5 and 16 of the Notes to
Consolidated Financial Statements.)
67
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- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Boards of Directors and Shareholders of
PG&E Corporation and Pacific Gas and Electric Company
We have audited the accompanying consolidated balance sheets of PG&E
Corporation and subsidiaries and of Pacific Gas and Electric Company and
subsidiaries as of December 31, 1999, and the related statements of consolidated
income, cash flows, and common stock equity of PG&E Corporation and the related
statements of consolidated income, cash flows, and stockholders' equity of
Pacific Gas and Electric Company for the year then ended. These financial
statements are the responsibility of management of PG&E Corporation and of
Pacific Gas and Electric Company. Our responsibility is to express an opinion on
these financial statements based on our audits. The consolidated financial
statements for the years ended December 31, 1998 and 1997 were audited by other
auditors whose report, dated February 8, 1999, expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1999 financial statements present fairly, in all
material respects, the consolidated financial position of PG&E Corporation and
Pacific Gas and Electric Company as of December 31, 1999, and the results of
their consolidated operations and cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 of the Notes to Consolidated Financial Statements, in
1999 PG&E Corporation changed its method of accounting for major maintenance and
overhauls.
DELOITTE & TOUCHE LLP
San Francisco, California
March 3, 2000
68
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- --------------------------------------------------------------------------------
RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
At both PG&E Corporation and Pacific Gas and Electric Company (the Utility)
management is responsible for the integrity of the accompanying consolidated
financial statements. These statements have been prepared in accordance with
generally accepted accounting principles. Management considers materiality and
uses its best judgment to ensure that such statements reflect fairly the
financial position, results of operations, and cash flows of PG&E Corporation
and the Utility.
PG&E Corporation and the Utility maintain systems of internal controls
supported by formal policies and procedures which are communicated throughout
PG&E Corporation and the Utility. These controls are adequate to provide
reasonable assurance that assets are safeguarded from material loss or
unauthorized use and that necessary records are produced for the preparation of
consolidated financial statements. There are limits inherent in all systems of
internal controls, based on recognition that the costs of such systems should
not exceed the benefits to be derived. PG&E Corporation and the Utility believe
that their systems of internal control provide this appropriate balance. PG&E
Corporation management also maintains a staff of internal auditors who evaluate
the adequacy of, and assess the adherence to, these controls, policies, and
procedures for all of PG&E Corporation, including the Utility.
Both PG&E Corporation's and the Utility's 1999 consolidated financial
statements have been audited by Deloitte & Touche LLP, PG&E Corporation's
independent auditors. The audit includes consideration of internal accounting
controls and performance of tests necessary to support an opinion. The auditors'
report contains an independent informed judgment as to the fairness, in all
material respects, of reported results of operations and financial position.
The Audit Committee of the Board of Directors for PG&E Corporation meets
regularly with management, internal auditors, and Deloitte & Touche, jointly and
separately, to review internal accounting controls and auditing and financial
reporting matters. The internal auditors and Deloitte & Touche LLP have free
access to the Audit Committee, which consists of five outside directors. The
Audit Committee has reviewed the financial data contained in this report.
PG&E Corporation and the Utility are committed to full compliance with all
laws and regulations and to conducting business in accordance with high
standards of ethical conduct. Management has taken the steps necessary to ensure
that all employees and other agents understand and support this commitment.
Guidance for corporate compliance and ethics is provided by an officers' Ethics
Committee and by a Legal Compliance and Business Ethics organization. PG&E
Corporation and the Utility believe that these efforts provide reasonable
assurance that each of their operations is conducted in conformity with
applicable laws and with their commitment to ethical conduct.
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<PAGE>
EXHIBIT 18
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
March 3, 2000
PG&E Corporation
One Market Street
Spear Tower, Suite 2400
San Francisco, CA 94105
Dear Sirs/Madams:
We have audited the consolidated financial statements of PG&E Corporation as of
December 31, 1999 and for the year then ended, included in your Annual Report on
Form 10-K to the Securities and Exchange Commission, and have issued our report
thereon dated March 3, 2000. Note 1 to such financial statements contains a
description of your change during the year ended December 31, 1999 to account
for major maintenance and overhauls expenditures at power production facilities
as incurred. In our judgment, such change is to an alternative accounting
principle that is preferable under the circumstances.
Yours truly,
/s/ DELOITTE & TOUCHE LLP
<PAGE>
EXHIBIT 21
Subsidiaries of PG&E Corporation and Pacific Gas and Electric Company
_____________________________________________________________________
1. Name, State of organization, location and nature of business of
registrants and every subsidiary thereof,
1.1. PG&E Corporation
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E Corporation, incorporated under the laws of the State
of California, is a holding company formed by Pacific Gas
and Electric Company, a public utility. On January 1, 1997
PG&E Corporation became the parent of Pacific Gas and
Electric Company pursuant to a corporate reorganization
plan. PG&E Corporation is also the parent of nonutility
subsidiaries formerly owned by Pacific Gas and Electric
Company.
1.2. Subsidiaries
1.2.1. Elm Power Corporation
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
Elm Power Corporation, incorporated under the laws of the
State of Delaware, is a wholly subsidiary of PG&E
Corporation.
1.2.2. Pacific Gas and Electric Company
77 Beale Street
P.O. Box 770000
San Francisco, CA 94177
Pacific Gas and Electric Company, incorporated under the
laws of the State of California, is a wholly owned
subsidiary of PG&E Corporation. Pacific Gas and Electric
Company is an operating public utility engaged principally
in the business of supplying electric and natural gas
service throughout most of Northern and Central California.
1.2.2.1. Alberta and Southern Gas Co., Ltd.
1500 Bankers Hall
855 Second Street., SW
Calgary, Alberta T2P 4J7
Alberta and Southern Gas Co. Ltd., incorporated under
the laws of Alberta, is a wholly owned Canadian
subsidiary of Pacific Gas and Electric Company. Alberta
and Southern Gas Co. Ltd. formerly purchased natural gas
in Canada for the California market.
1.2.2.1.1. Alberta and Southern Gas Marketing, Inc.
1500 Bankers Hall
855 Second Street., SW
Calgary, Alberta T2P 4J7
Alberta and Southern Gas Marketing, Inc., incorporated
under the laws of Alberta, is a wholly owned subsidiary
of Alberta and Southern Gas Co. Ltd. Alberta and
Southern Gas Marketing, Inc. formerly marketed natural
gas in non-California markets.
1.2.2.2. Natural Gas Corporation of California
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
1
<PAGE>
Natural Gas Corporation of California, incorporated
under the laws of the State of California, is a wholly
owned subsidiary of Pacific Gas and Electric Company.
Natural Gas Corporation of California acts as the
vehicle for the amortization of certain regulatory
assets.
1.2.2.2.1. NGC Production Company
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
NGC Production Company, incorporated under the laws of
the State of California, is a wholly owned subsidiary
of Natural Gas Corporation of California. NGC
Production Company facilitates project financing for
Natural Gas Corporation of California's capital
requirements.
1.2.2.2.2. Alaska Gas Exploration Associates
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Alaska Gas Exploration Associates, incorporated under
the laws of the State of California, is 50% owned by
Natural Gas Corporation of California.
1.2.2.3. Pacific Conservation Services Company
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Pacific Conservation Services Company, incorporated
under the laws of the State of California, is a wholly
owned subsidiary of Pacific Gas and Electric Company.
Pacific Conservation Services Company engages in
borrowing and lending operations required to fund
Pacific Gas and Electric Company conservation loan
programs.
1.2.2.4. Calaska Energy Company
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Calaska Energy Company, incorporated under the laws of
the State of California, is a wholly owned subsidiary of
Pacific Gas and Electric Company. Calaska Energy
Company was Pacific Gas and Electric Company's
representative in the Alaska Highway Pipeline Project,
which was formed to bring Prudhoe Bay natural gas to the
lower 48 states.
1.2.2.5. Eureka Energy Company
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Eureka Energy Company, incorporated under the laws of
the State of California, is a wholly owned subsidiary of
Pacific Gas and Electric Company. Eureka Energy Company
owns land in San Luis Obispo County.
1.2.2.6. Standard Pacific Gas Line, Inc.
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Standard Pacific Gas Line, Inc., incorporated under the
laws of the State of California, is a subsidiary of
Pacific Gas and Electric Company. Standard Pacific Gas
Line, Inc. transports natural gas in California.
Pacific Gas and Electric Company owns a 85.71% interest,
and Chevron Pipe Line Company owns the remaining 14.29%
interest.
2
<PAGE>
1.2.2.7. Pacific California Gas System, Inc.
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Pacific California Gas System, Inc., incorporated under the
laws of the State of California, is a wholly owned subsidiary
of Pacific Gas and Electric Company. Pacific California Gas
System, Inc. was created to hold intrastate gas pipeline
operations.
1.2.2.8. Pacific Energy Fuels Company
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Pacific Energy Fuels Company, incorporated under the laws of
the State of California, is a wholly owned subsidiary of
Pacific Gas and Electric Company. Pacific Energy Fuels
Company owns and finances nuclear fuel inventory.
1.2.2.9. Pacific Gas Properties Company
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Pacific Gas Properties Company, incorporated under the laws
of the State of California, is a wholly owned subsidiary of
Pacific Gas and Electric Company. Pacific Gas Properties
Company owns California property.
1.2.2.9.1. Pacific Properties
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
Pacific Properties, incorporated under the laws of
the State of California, is 50% owned by Pacific Gas
Properties Company. Pacific Properties owns
California property.
1.2.2.10. Chico Commons, L.P.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
Chico Commons, L.P., a California partnership, is 41% owned
by Pacific Gas and Electric Company as a limited partner.
Chico Commons, L.P. was created to construct and own low
income housing.
1.2.2.11. PG&E Capital I
P.O. Box 770000
77 Beale Street, 32nd Floor
San Francisco, CA 94177
PG&E Capital I, a business trust, is 3% owned by Pacific Gas
and Electric Company. PG&E Capital I was formed as a special
purpose financing vehicle for the purpose of issuing
deferrable income securities.
1.2.2.12. PG&E Funding, LLC
245 Market Street, Suite 424
San Francisco, CA 94105
PG&E Funding, LLC, incorporated under the laws of the State
of Delaware, is a wholly owned subsidiary of Pacific Gas and
Electric Company. PG&E Funding, LLC is a special purpose
financing vehicle formed for the ownership of transition
property and issuance of securities.
1.2.2.13. 201 Turk Street, L.P.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
3
<PAGE>
201 Turk Street, L.P., a California partnership, is
32.4% owned by Pacific Gas and Electric Company as a
limited partner. 201 Turk Street, L.P. was created to
construct and own a low income housing project.
1.2.2.14. 1989 Oakland Housing Partnership Associates, L.P.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
1989 Oakland Housing Partnership Associates, L.P., a
California partnership, is owned 40% by Pacific Gas and
Electric Company as a limited partner. 1989 Oakland
Housing Partnership Associates, L.P. was created to
construct and own low income housing.
1.2.2.15. 1992 Oakland Regional Housing Partnership Associates,
L.P.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
1992 Oakland Regional Housing Partnership Associates,
L.P., a California partnership, is owned 17% by Pacific
Gas and Electric Company as a limited partner. 1992
Oakland Housing Partnership Associates, L.P. was
created to construct and own low income housing.
1.2.2.16. 1994 Oakland Regional Housing Partnership Associates,
L.P.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
1994 Oakland Regional Housing Partnership Associates,
L.P., a California partnership, is owned 12% by Pacific
Gas and Electric Company as a limited partner. 1994
Oakland Regional Housing Partnership Associates, L.P.
was created to construct and own low income housing.
1.2.2.17. Pacific Gas and Electric Housing Fund Partnership, L.P.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
Pacific Gas and Electric Housing Fund Partnership,
L.P., a California partnership, is owned 99.9% by
Pacific Gas and Electric Company as a limited partner.
Pacific Gas and Electric Housing Fund Partnership,
L.P., invests in projects that construct and own low
income housing.
1.2.2.18. Merritt Community Capital Fund V, L.P.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
Merritt Community Capital Fund V, L.P., a California
partnership, is owned 2.2% by Pacific Gas and Electric
Company as a limited partner. Merritt Community
Capital Fund V, L.P., was created to construct and own
low income housing.
1.2.2.19. Schoolhouse Lane Apartments, L.P.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
Schoolhouse Lane Apartments, L.P., a California
partnership, is owned 99% by Pacific Gas and Electric
Company as a limited partner. Schoolhouse Lane
Apartments, L.P., was created to construct and own low
income housing.
1.2.2.20. PG&E Holdings, LLC
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E Holdings, LLC, incorporated under the laws of the
State of Delaware, is a wholly owned subsidiary of
Pacific Gas and Electric Company. PG&E Holdings, LLC
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was formed as a holding company for repurchased shares.
1.2.3. PG&E National Energy Group, Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E National Energy Group, Inc. (formerly PG&E
Diversified Investments, Inc.), incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Corporation. PG&E Diversified
Investments, Inc. was formed for the purpose of
holding ownership of PG&E Corporation's unregulated
subsidiaries, both direct and indirect.
1.2.3.1. PG&E Capital, LLC
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E Capital, LLC, incorporated under the laws of the
State of Delaware, is a wholly-owned subsidiary of PG&E
National Energy Group, Inc., formed for financing and
other transactions related to the energy industry.
1.2.3.2. PG&E Corporation Support Services, Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E Corporation Support Services, Inc., incorporated
under the laws of the State of Delaware, is a wholly-
owned subsidiary of PG&E National Energy Group, Inc.
that provides general corporate support services to the
family outside the State of California.
1.2.3.3. PG&E Energy Trading - Gas Corporation
1100 Louisiana, Suite 1000
Houston, Texas 77002
PG&E Energy Trading - Gas Corporation, incorporated
under the laws of the State of California, is a wholly
owned subsidiary of PG&E National Energy Group, Inc.
PG&E Energy Trading - Gas Corporation purchases and
resells energy commodities and related financial
instruments.
1.2.3.3.1. PG&E Energy Trading, Canada Corporation
335 Eighth Avenue, S.W. Suite 1740
Calgary, Alberta T2P 1CP
Canada
PG&E Energy Trading, Canada Corporation, incorporated
in the province of Alberta, Canada, is a wholly owned
subsidiary of PG&E Energy Trading - Gas Corporation.
PG&E Energy Trading, Canada Corporation markets and
trades natural gas in Canada.
1.2.3.3.1.1. CEG Energy Options Inc.
2366 Avenue C North, Suite 101
Saskatoon, Saskatchewan S7L 5X5
Canada
CEG Energy Options Inc., incorporated in the
province of Saskatchewan, Canada, is a wholly owned
subsidiary of PG&E Energy Trading, Canada
Corporation. CEG Energy Options Inc. markets natural
gas in Canada.
1.2.3.4. PG&E Enterprises
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E Enterprises, incorporated under the laws of the
State of California, is a wholly owned subsidiary of
PG&E National Energy Group, Inc. PG&E Enterprises was
formed as a holding company for oil and gas, real
estate, electric generation, and technology investments.
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1.2.3.4.1. PG&E Shareholdings, Inc.
(formerly PG&E Generating Company)
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E Shareholdings, Inc.(formerly PG&E Generating
Company), incorporated under the laws
of the State of California, is a wholly owned non-
regulated subsidiary of PG&E Enterprises. Through its
subsidiaries, PG&E Shareholdings, Inc. develops real
estate in Pacific Gas and Electric Company's service
territory. In addition, some subsidiaries of PG&E
Shareholdings, Inc. have made fuel-related investments
and a limited number of non-energy related
investments.
1.2.3.4.1.1. Gilia Enterprises
California Corporation
100% owned by PG&E Shareholdings, Inc.
4615 Cowell Blvd.
Davis, CA 95616
A wholly owned, non-regulated indirect subsidiary of
PG&E Enterprises through its ownership of PG&E
Generating Company. Formed to hold interest in real
estate investment
1.2.3.4.1.1.1. Marengo Ranch Joint Venture
California Partnership
3% owned by PG&E Shareholdings, Inc. as limited
partner, 1.3% owned by Gilia Enterprises as
general partner
4615 Cowell Blvd.
Davis, CA 95616
Land development in Sacramento County
1.2.3.4.1.1.2. Oat Creek Associates Joint Venture
California Partnership
50% owned by PG&E Shareholdings, Inc. as limited
partner
50% owned by Gilia Enterprises as general partner
4615 Cowell Blvd.
Davis, CA 95616
Land development in Yolo County
1.2.3.4.1.2. Rancho Murieta Joint Venture
California Partnership
45% owned by PG&E Shareholdings, Inc. as limited
partner
4615 Cowell Blvd.
Davis, CA 95616
Real estate development.
1.2.3.4.1.3. 1701 Oak Partnership
California Partnership
50% owned by PG&E Shareholdings, Inc. as limited
partner
4615 Cowell Blvd.
Davis, CA 95616
Real estate development.
1.2.3.4.1.4. 1801 Oak Partnership
California Partnership
50% owned by PG&E Shareholdings, Inc. as limited
partner
4615 Cowell Blvd.
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Davis, CA 95616
Real estate development.
1.2.3.4.1.5. BPS I, Inc.
California Corporation
100% owned by PG&E Shareholdings, Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
A wholly-owned, non-regulated real estate
development subsidiary of PG&E Enterprises through
its ownership of PG&E Shareholdings, Inc.
1.2.3.4.1.5.1. Solano Business Park Associates, L.P.
California Partnership
50% owed by BPS I, Inc. as general partner
4615 Cowell Blvd.
Davis, CA 95616
1.2.3.4.1.5.2. Alhambra Pacific (Joint Venture)
California Partnership
80% owned by PG&E Shareholdings, Inc. as general
partner
20% owned by BPS I, Inc. as limited partner
4615 Cowell Blvd.
Davis, CA 95616
Ownership of property in Yolo County.
1.2.3.4.1.6. The Conaway Ranch Company
California Corporation
100% owned by PG&E Shareholdings, Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
A wholly-owned, non-regulated indirect subsidiary of
PG&E Enterprises through its ownership of PG&E
Shareholdings, Inc., in partnership with the Conaway
Conservancy Group, an existing California general
partnership owning the Conaway Ranch.
1.2.3.4.1.6.1. Conaway Conservancy Group Joint Venture
California partnership
70% by PG&E Shareholdings, Inc
30% by Conaway Ranch Company
4615 Cowell Blvd.
Davis, CA 95616
Ownership of property in Yolo County.
1.2.3.4.1.7. DPR, Inc.
California corporation
100% owned by PG&E Shareholdings, Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
A wholly-owned, non-regulated indirect subsidiary of
PG&E Enterprises through its ownership of PG&E
Shareholdings, Inc.; general partner in a real
estate partnership.
1.2.3.4.1.8. McSweeney Ranch Joint Venture
California partnership
50% owned by PG&E Shareholdings, Inc.
4615 Cowell Blvd.
Davis, CA 95616
1.2.3.4.1.9. PG&E Energy Trading - Power Holdings Corporation
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California corporation
100% owned by PG&E Generating Company
7500 Old Georgetown Rd., Suite 1300
Bethesda, MD 20814
This corporation serves as the 2% sole general
partner of PG&E Energy Trading - Power, L.P.
1.2.3.4.1.9.1. PG&E ET Investments Corporation
Delaware corporation
100% owned by PG&E Energy Trading - Power Holdings
Corporation
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
This investment corporation owns the 98% limited
partner interest in PG&E Energy Trading - Power,
L.P.
1.2.3.4.1.9.1.1. PG&E Energy Trading-Power, L.P.
Delaware limited partnership
98% owned by PG&E ET Investments Corporation
2% owned by PG&E Energy Trading - Power Holdings
Corporation
7500 Old Georgetown Rd., Suite 1300
Bethesda, MD 20814
This limited partnership is engaged in electric
power marketing and trading.
1.2.3.4.1.10. PG&E International Inc.
(formerly "PG&E Generating International Company")
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E International Inc., incorporated under the
laws of the State of California, is a wholly owned
subsidiary of PG&E Shareholdings, Inc. PG&E
International Inc. is a holding company for
overseas project companies.
1.2.3.4.1.10.1. PG&E International Development Holdings, LLC
Delaware corporation
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
A wholly-owned subsidiary of PG&E International,
Inc., incorporated under the laws of the State of
Delaware, formed to own and sell an Australian
pipeline development company.
1.2.3.4.1.10.2. Gannet Power Corporation
California corporation
100% owned by PG&E International Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
1.2.3.4.1.10.3. PG&E Overseas Holdings I, LTD.
Cayman Islands Company
100% owned by PG&E International Inc.
P.O. Box 309, George Town
Grand Cayman, Cayman Islands, BWI
A wholly-owned, non-regulated indirect subsidiary
of PG&E Enterprises through its ownership of PG&E
Shareholdings, Inc. and PG&E International, Inc.
Holding Company for PG&E Overseas Holdings II,
Ltd.
1.2.3.4.1.10.3.1. PG&E Overseas Holdings II, Ltd.
Labuan Company
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Unit Level 9(A2), Main Office Tower
Financial Park Labuan, Jalan Merdeka
87000 W.P. Labuan
Malaysia
100% owned by PG&E Overseas Holdings I, LTD.
A wholly-owned, non-regulated indirect
subsidiary of PG&E Enterprises through its
ownership of PG&E Shareholdings, Inc., PG&E
International, Inc., and PG&E Overseas Holdings
I, Ltd.
1.2.3.4.1.10.3.1.1. PG&E Corporation Australian Holdings Pty,
Ltd.(formerly PGT Nominees Pty Ltd)
Level 33, Waterfront Place
One Eagle Street
Brisbane, Queensland 4000
Australia
PG&E Corporation Australian Holdings Pty,
Ltd., incorporated under the laws of
Australia, is a wholly owned subsidiary of
PG&E Overseas Holdings II, Ltd. PG&E
Corporation Australian Holdings Pty, Ltd. was
created in anticipation of the expansion of
business operations in Australia.
1.2.3.4.1.10.3.1.1.1. PG&E Gas Transmission Australia Pty Ltd.
(formerly PGT Australia Pty Ltd.)
Level 33, Waterfront Place
One Eagle Street
Brisbane, Queensland 4000
Australia
PG&E Gas Transmission Australia Pty Ltd.,
incorporated under the laws of Australia,
is a wholly owned subsidiary of PG&E
Corporation Australian Holdings Pty, Ltd.
PG&E Gas Transmission Australia Pty Ltd.
was formed to pursue new business
development opportunities in Australia.
1.2.3.4.1.10.3.1.1.2. PG&E Gas Transmission Queensland Pty Ltd
(formerly PGT Queensland Pty Ltd) (GTQ)
Level 33, Waterfront Place
One Eagle Street
Brisbane, Queensland 4000
Australia
GTQ, incorporated under the laws of
Australia, is a wholly owned subsidiary of
PG&E Corporation Australian Holdings Pty,
Ltd. GTQ operated a natural gas pipeline
and associated facilities in Australia
capable of transporting natural gas within
the State of Queensland.
1.2.3.4.1.10.3.1.1.3. PG&E Gas Transmission Unit Holdings Pty Ltd
(formerly PGT Victoria Pty Ltd.) (GTUH)
Level 33, Waterfront Place
One Eagle Street
Brisbane, Queensland 4000
Australia
GTUH, incorporated under the laws of
Australia, is a wholly owned subsidiary of
PG&E Corporation Australian Holdings Pty,
Ltd. GTUH was created in anticipation of
the expansion of business operations in
Australia.
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1.2.3.4.1.10.3.1.1.4. PG&E Energy Trading Australia Pty Ltd
Level 33, Waterfront Place
One Eagle Street
Brisbane, Queensland 4000
Australia
PG&E Energy Trading Australia Pty Ltd,
incorporated under the laws of Australia,
is a wholly owned subsidiary of PG&E
Corporation Australian Holdings Pty, Ltd.
PG&E Energy Trading Australia Pty Ltd sells
natural gas and provides energy services.
1.2.3.4.1.10.3.1.1.5. PG&E Corporation Australia Pty Ltd.
(formerly PGT Australia Pty Ltd.)
Level 33, Waterfront Place
One Eagle Street
Brisbane, Queensland 4000
Australia
PG&E Corporation Australia Pty Ltd.,
incorporated under the laws of Australia,
is a wholly owned subsidiary of PG&E
Corporation Australian Holdings Pty, Ltd.
PG&E Corporation Australia Pty Ltd.
provides corporate services.
1.2.3.4.1.10.4. PG&E Gas Transmission Bundaberg Pty Ltd.
Level 33, Waterfront Place One Eagle
Street Brisbane, Queensland 4000 Australia
PG&E Gas Transmission Bundaberg Pty Ltd,
incorporated under the laws of Australia,
is a wholly owned subsidiary of PG&E
International Inc. and was created to
develop projects.
1.2.3.4.1.10.5. Rocksavage Services I, Inc.
100% owned by PG&E International Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
1.2.3.4.1.11. PG&E Generating Company, LLC
Delaware Limited Liability Company
100% owned by PG&E Shareholdings, Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1. PG&E Generating Energy Group, LLC
Delaware Limited Liability Company
100% owned by PG&E Generating Company, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.1. Badger Power Corporation
Delaware Corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.1.1. Badger Generating Company, LLC
Delaware Limited Liability Company
99% owned by Badger Power Corporation
1% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.2. BLACK HAWK POWER CORPORATION
California Corporation
100% owned by PG&E Generating Energy Group, LLC
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100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.1.2.1. ATHENS GENERATING COMPANY, L.P.
Delaware Limited Partnership
51% owned by Black Hawk Power Corporation
49% owned by Peach I Power Corporation
7500 Old Georgetown Rd., 13TH Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.3. BLACK HAWK III POWER CORPORATION
California Corporation
100% owned by PG&E Generating Energy Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.1.3.1. Lake Road Generating Company, L.P.
Delaware Limited Partnership
51% owned by Black Hawk III Power Corporation
49% owned by Peach IV Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.3.2. Lake Road Power I, LLC
Delaware Limited Liability Company
100% owned by Black Hawk III Power
Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.4. HARLAN POWER CORPORATION
California Corporation
100% owned by PG&E Generating Energy Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.1.4.1. UMATILLA GENERATING COMPANY, L.P.
Delaware Limited Partnership
51% owned by Harlan Power Corporation
49% owned by Juniper Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.5. PEACH I POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.5.1. Athens Generating Company, L.P.
Delaware Limited Partnership
51% owned by Black Hawk Power Corporation
49% owned by Peach I Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.6. PEACH IV POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.6.1. Lake Road Generating Company, L.P.
Delaware Limited Partnership
51% owned by Black Hawk III Power Corporation
49% owned by Peach IV Power Corporation
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7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.6.2. Lake Road Power II, LLC
Delaware Limited Liability Corporation
100% owned by Peach IV Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.7. JUNIPER POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.7.1. Umatilla Generating Company, L.P.
Delaware Limited Partnership
51% owned by Black Harlan Power Corporation
49% owned by Juniper Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.8. PLOVER POWER CORPORATION
California Corporation
100% owned by PG&E Energy Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.1.8.1. MANTUA CREEK GENERATING COMPANY, L.P.
Delaware Limited Partnership
51% owned by Plover Power Corporation
49% owned by Beech Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.8.2. Mantua Creek Urban Renewal, L.P.
Delaware Limited Partnership
51% owned by Plover Power Corporation
49% owned by Beech Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.9. BEECH POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.9.1. Mantua Creek Generating Company, L.P.
Delaware Limited Partnership
51% owned by Plover Power Corporation
49% owned by Beech Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.9.2. Mantua Creek Urban Renewal, L.P.
Delaware Limited Partnership
51% owned by Plover Power Corporation
49% owned by Beech Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.10. BLACK HAWK II POWER CORPORATION
California Corporation
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100% owned by PG&E Generating Energy Group,
LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.1.10.1. MILLENNIUM POWER PARTNERS, L.P.
Delaware Limited Partnership
51% owned by Black Hawk II Power Corporation
49% owned by Peach III Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.10.2. Millennium Power I, LLC
Delaware Limited Liability Company
100% owned by Black Hawk II Power
Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.11. PEACH III POWER CORPORATION
Delaware corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.11.1. Millennium Power Partners, L.P.
Delaware Limited Partnership
51% owned by Black Hawk II Power Corporation
49% owned by Peach III Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.11.2. Millennium Power II, LLC
Delaware Limited Liability Company
100% owned by Peach III Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.12. USGen NEW ENGLAND, INC.
Delaware Corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13t Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.12.1. USGen Services Company, LLC
Delaware Limited Liability Company
100% owned by USGen New England, Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.13. KENNERDELL POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.13.1. KENNERDELL GENERATING COMPANY, LLC
Delaware Limited Liability Company
99% owned by Kennerdell Power Corporation
1% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.14. LA PALOMA POWER CORPORATION
Delaware corporation
100% owned by PG&E Generating Energy Group, LLC
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7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.14.1. LA PALOMA GENERATING COMPANY, LLC
Delaware Limited Liability Company
99% owned by La Paloma Power Corporation
1% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.15. LIBERTY GENERATING CORPORATION
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.15.1. LIBERTY GENERATING COMPANY, LLC
Delaware Limited Liability Company
99% owned by Liberty Generating Corporation
1% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.16. OTAY MESA POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.16.1. OTAY MESA GENERATING COMPANY, LLC
Delaware Limited Liability Company
99% owned by Otay Mesa Power Corporation
1% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.17. Bluebonnet Power Corporation
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.17.1. Bluebonnet Generating Company, LLC
Delaware Limited Liability Company
99% owned by Bluebonnet Power Corporation
1% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.18. First Arizona Land Corporation
Delaware Corporation
100% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.19. Harquahala Power Corporation
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.19.1. Harquahala Generating Company, LLC
Delaware Limited Liability Company
99% owned by Harquahala Power Corporation
1% owned by PG&E Generating Energy Group,LLC
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1.2.3.4.1.11.1.20. Madison Wind Power Corporation
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.20.1 Madison Windpower, LLC
Delaware Limited Liability Company
99% owned by Madison Wind Power Corporation
1% owned by PG&E Generating Energy Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.21. Okeechobee Power Corporation
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.21.1. Okeechobee Generating Company, LLC
Delaware Limited Liability Company
99& owned by Okeechobee Power Corporation
1% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.22. PG&E Generating New England, Inc.
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.22.1. PG&E Generating New England, LLC
Delaware Limited Liability Company
100% owned by PG&E Generating New England, Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.23. PG&E Dispersed Power Corporation
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.23.1. PG&E Dispersed Generating Company, LLC
Delaware Limited Liability Company
99% owned by PG&E Dispersed Power
Corporation
1% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.24. Covert Power Corporation
Delaware Corporation
100% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.1.24.1. Covert Generating Company, LLC
Delaware Limited Liability Company
99% owned by Covert Power Corporation
1% owned by PG&E Generating Energy Group,LLC
7500 Old Georgetown Rd., 13th Floor
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Bethesda, MD 20814
1.2.3.4.1.11.2. PG&E Generating Power Group, LLC
Delaware Limited Liability Company
100% owned by PG&E Generating Company, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.1. Aplomado Power Corporation
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.2. Beale Generating Company
(formerly J. Makowski Company, Inc.)
Delaware corporation
89% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.2.1. Indian Orchard Generating Company, Inc.
Delaware Corporation
100% owned by Beale Generating Company
7500 Old Georgetown Road
Bethesda, MD 20814
1.2.3.4.1.11.2.2.1.1. MASSPOWER, LLC
(formerly Masspower, Inc.)
Delaware Limited Liability Company
49% owned by Indian Orchard Generating
Company, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.1.1.1. MASSPOWER
Massachusetts general partnership
30% owned by MASSPOWER, L.L.C.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.2. JMC Altresco, Inc.
Colorado corporation
100% owned by Beale Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.2.1. Altresco, Inc.
Colorado corporation
100% owned by JMC Altresco, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.2.1.1. Pittsfield Generating Company, L.P.
(formerly Altresco Pittsfield, L.P.)
Delaware partnership
99% owned by Altresco, Inc.
1% owned by Pittsfield Partners, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.2.2. Berkshire Pittsfield, Inc.
Colorado corporation
100% owned by JMC Altresco, Inc.
One Bowdoin Square
Boston, MA 02114
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1.2.3.4.1.11.2.2.2.2.1. Berkshire Feedline Acquisition Limited
Partnership
Massachusetts partnership
1% owned by Berkshire Pittsfield, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.2.3. Pittsfield Partners, Inc.
Colorado corporation
100% owned by JMC Altresco, Inc.
One Bowdoin Square
Boston, MA 02114
Pittsfield Partners, Inc. holds a 1% LP
Interest in Pittsfield Generating Company, L.P.
1.2.3.4.1.11.2.2.2.3. Pittsfield Generating Company, L.P.
(formerly Altresco Pittsfield, L.P.)
Delaware partnership
99% owned by Altresco, Inc.
1% owned by Pittsfield Partners, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.3. JMC Iroquois, Inc.
Delaware corporation
100% owned by Beale Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.3.1. Iroquois Gas Transmission System
Delaware partnership
4.93% owned by JMC Iroquois, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4. JMC Selkirk Holdings, Inc.
Delaware corporation
100% owned by Beale Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.1. JMC Selkirk, Inc.
Delaware corporation
100% owned by JMC Selkirk Holdings, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.1.1. PentaGen Investors, L.P.
(formerly JMCS I INVESTORS, L.P.)
Delaware partnership
46.57%owned by JMC Selkirk, Inc.
3.43% owned by JMCS I Holdings, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.1.1.1. Selkirk Cogen Partners, L.P.
Delaware partnership
5.2502% owned by Pentagen Investors, L.P.
2.0417% directly owned by JMC Selkirk, Inc.
One Bowdoin Square
Boston, MA 02114
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1.2.3.4.1.11.2.2.4.1.1.1.1. Selkirk Cogen Funding Corporation
Delaware corporation
100% owned by Selkirk Cogen Partners, L.P.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.1.2. Selkirk Cogen Partners,L.P.
Delaware partnership
5.2502% owned by Pentagen Investors, L.P.
2.0417% directly owned by JMC Selkirk, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.1.2.1. Selkirk Cogen Funding Corporation
Delaware corporation
100% owned by Selkirk Cogen Partners, L.P.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.2. JMCS I Holdings, Inc.
Delaware corporation
100% owned by JMC Selkirk Holdings, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.2.1. PentaGen Investors, L.P.
(formerly JMCS I INVESTORS, L.P.)
Delaware partnership
46.57%owned by JMC Selkirk, Inc.
3.43% owned by JMCS I Holdings, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.2.1.1. Selkirk Cogen Partners, L.P.
Delaware partnership
5.2502% owned by Pentagen Investors, Inc.
2.0417% owned by JMC Selkirk, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.4.2.1.1.1. Selkirk Cogen Funding Corporation
Delaware corporation
100% owned by Selkirk Cogen Partners, L.P.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.2.5. Orchard Gas Corporation
Delaware corporation
100% owned by Beale Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.3. Mason Generating Company
Delaware corporation
89% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.3.1. Bowdoin Storage Services, Inc.
Delaware corporation
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100% owned by Mason Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.3.2. J. Makowski Associates, Inc.
Massachusetts corporation
100% owned by Mason Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.3.3. JMC Avoca, Inc.
Delaware corporation
100% owned by Mason Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.3.3.1. Avoca Natural Gas Storage
New York general partnership
46.88% owned by JMC Avoca, Inc.
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.3.4. JMC Cayuta, Inc.
Delaware Corporation
100% owned by Mason Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.3.5. JMC Steuben, Inc.
Delaware Corporation
100% owned by Mason Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.3.6. Steuben Pipeline Services, Inc.
Delaware Corporation
100% owned by Mason Generating Company
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.2.4. BLACK HAWK I POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.5. PEACH II POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.6. BRODIA ENTERPRISES
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.6.1. WALLKILL GENERATING COMPANY, L.P.
Delaware Limited Partnership
51% owned by Brodia Enterprises
49% owned by Dogwood Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
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1.2.3.4.1.11.2.7. DOGWOOD POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.7.1. WALLKILL GENERATING COMPANY, L.P.
Delaware Limited Partnership
51% owned by Brodia Enterprises
49% owned by Dogwood Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.8. Eagle Power Corporation
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.8.1. Granite Generating Company, L.P.
Delaware Limited Partnership
50% owned by Eagle Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.8.1.1. Granite Water Supply Company, Inc.
Delaware Corporation
100% owned by Granite Generating Company,
L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.8.2. Keystone Cogeneration Company, L.P.
Delaware Limited Partnership
50% owned by Eagle Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.8.2.1. Keystone Urban Renewal Limited Partnership
Delaware Limited Partnership
99% owned by Keystone Cogeneration
Company, L.P.
1% owned by Granite Generating
Company, L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.8.3. Logan Generating Company, L.P.
Delaware Limited Partnership
50% owned by Eagle Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.9. Larkspur Power Corporation
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.9.1. Hermiston Generating Company, L.P.
Delaware Limited Partnership
80% owned by Larkspur Power Corporation
20% owned by Buckeye Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
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1.2.3.4.1.11.2.10. Buckeye Power Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.10.1. Hermiston Generating Company, L.P.
Delaware Limited Partnership
80% owned by Larkspur Power Corporation
20% owned by Buckeye Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.11. RAPTOR HOLDINGS COMPANY
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.11.1. GRAY HAWK POWER CORPORATION
Delaware Corporation
100% owned by Raptor Holdings Company
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.11.1.1. CEDAR BAY COGENERATION, INC.
Delaware Corporation
100% owned by Gray Hawk Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.11.1.1.1. CEDAR BAY GENERATING COMPANY,
Limited Partnership
Delaware Limited Partnership
80% owned by Cedar Bay Cogeneration,
Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.11.2. PG&E MANAGEMENT SERVICES COMPANY
California Corporation
100% owned by Raptor Holdings Company
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.12. RED TAIL POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.13. TOYAN ENTERPRISES
California Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.13.1. INDIANTOWN COGENERATION, L.P.
Delaware Limited Partnership
30.05% owned by Toyan Enterprises
24.817% of 19.95% owned by Indiantown Project
Investment Partnership, L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.13.2. INDIANTOWN PROJECT INVESTMENT PARTNERSHIP,
L.P.
21
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Delaware Limited Partnership
24.817% owned by Toyan Enterprises
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.13.2.1. INDIANTOWN COGENERATION, L.P.
Delaware Limited Partnership
30.06% owned by Toyan Enterprises
19.95% owned by Indiantown Project
Investment Partnership, L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.13.2.1.1. INDIANTOWN COGENERATION FUNDING
CORPORATION
Delaware Corporation
100% owned by Indiantown Cogeneration,
L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.14. SPRUCE POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.14.1. Spruce Limited Partnership
Delaware Limited Partnership
34% owned by Spruce Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.14.2. COLSTRIP ENERGY, LIMITED PARTNERSHIP
Montana Limited Partnership
37.5% owned by Harrier Power Corporation
37.5% owned by Spruce Limited Partnership
314 N. Last Chance Gulch
Helena, MT 59624
1.2.3.4.1.11.2.15. SYCAMORE POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.16. WILLOW POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group,LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.16.1. ROTTERDAM GENERATING COMPANY, L.P.
Delaware Limited Partnership
49% owned by Cormorant Power Corporation
49% owned by Willow Power Corporation
2% owned by PG&E Shareholdings, Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.17. MERLIN POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
22
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1.2.3.4.1.11.2.17.1. FELLOWS GENERATING COMPANY, L.P.
Delaware Limited Partnership
51% owned by Merlin Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.18. OSPREY POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.18.1. EAST SYRACUSE GENERATING COMPANY, L.P.
Delaware Limited Partnership
50% owned by Osprey Power Corporation
50% owned by Magnolia Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.18.2. MAGNOLIA POWER CORPORATION
Delaware Corporation
100% owned by Osprey Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.18.2.1. EAST SYRACUSE GENERATING COMPANY, L.P.
Delaware Limited Partnership
50% owned by Osprey Power Corporation
50% owned by Magnolia Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.19. PACIFIC ENERGY SERVICES COMPANY
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.20. PELICAN POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.20.1. OKEELANTA POWER LIMITED PARTNERSHIP
Delaware Limited Partnership
37.54% owned by Pelican Power Corporation
316 Royal Poinciana Plaza
Palm Beach, FL 33480
1.2.3.4.1.11.2.21. PEREGRINE POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.21.1. CHAMBERS COGENERATION, LIMITED
PARTNERSHIP
Delaware Limited Partnership
50% owned by Peregrine Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.22. HARRIER POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
23
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100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.22.1. COLSTRIP ENERGY, LIMITED PARTNERSHIP
Montana Limited Partnership
37.5% owned by Harrier Power Corporation
37.5% owned by Spruce Limited Partnership
314 N. Last Chance Gulch
Helena, MT 59624
1.2.3.4.1.11.2.23. HERON POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.23.1. GATOR GENERATING COMPANY, L.P.
Delaware Limited Partnership
79.2% owned by Heron Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.24. JAEGER POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.24.1. NORTHAMPTON GENERATING COMPANY, L.P.
Delaware Limited Partnership
50% owned by Jaeger Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.24.1.1. NORTHAMPTON FUEL SUPPLY COMPANY, INC.
Delaware Corporation
100% owned by Northampton Generating
Company, L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.24.1.2. NORTHAMPTON WATER SUPPLY, INC.
Delaware Corporation
100% owned by Northampton Generating
Company, L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.25. KESTREL POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.26. GOSHAWK POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.27. FALCON POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
24
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1.2.3.4.1.11.2.27.1. SCRUBGRASS GENERATING COMPANY, L.P.
Delaware Limited Partnership
25.13% owned by Falcon Power Corporation
24.87% owned by Scrubgrass Power Corp.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.27.2. SCRUBGRASS POWER CORP.
Pennsylvania Corporation
100% owned by Falcon Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.27.2.1. SCRUBGRASS GENERATING COMPANY, L.P.
Delaware Limited Partnership
25.13% owned by Falcon Power Corporation
24.87% owned by Scrubgrass Power Corp.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.27.2.1.1. CLEARFIELD PROPERTIES, INC.
Delaware Corporation
100% owned by Scrubgrass Generating
Company, L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.27.2.1.2. LEECHBURG PROPERTIES, INC.
Delaware Corporation
100% owned by Scrubgrass Generating
Company, L.P.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.28. DOGWOOD I POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.28.1. WALLKILL TRANSPORT COMPANY, L.P.
Delaware Limited Partnership
51% owned by Brodia I Enterprises
49% owned by Dogwood I Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.29. EUCALYPTUS POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.29.1. CITRUS GENERATING COMPANY, L.P.
Delaware Limited Partnership
49% owned by Cooper's Hawk Power Corporation
49% owned by Eucalyptus Power Corporation
2% owned by PG&E Shareholdings, Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.30. WHITE TAIL POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
25
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San Francisco, CA 94111
1.2.3.4.1.11.2.31. JACARANDA POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.32. IBIS POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.33. BRODIA I ENTERPRISES
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.33.1. WALLKILL TRANSPORT COMPANY, L.P.
Delaware Limited Partnership
51% owned by Brodia I Enterprises
49% owned by Dogwood I Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.34. CARACARA POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.35. COOPER'S HAWK POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.35.1. CITRUS GENERATING COMPANY, L.P.
Delaware Limited Partnership
49% owned by Cooper's Hawk Power Corporation
49% owned by Eucalyptus Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
The 2% interest is held by PG&E Generating
Company
1.2.3.4.1.11.2.36. CORMORANT POWER CORPORATION
California Corporation
100% owned by PG&E Generating Power Group, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.2.36.1. ROTTERDAM GENERATING COMPANY, L.P.
Delaware Limited Partnership
49% owned by Cormorant Power Corporation
49% owned by Willow Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
2% interest is held by PG&E Generating
Company
1.2.3.4.1.11.2.37. LARCH POWER CORPORATION
Delaware Corporation
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100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.2.38. LOON POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Power Group, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3. PG&E Generating Services, LLC
Delaware Limited Liability Company
100% owned by PG&E Generating Company, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.1. J. MAKOWSKI PITTSFIELD, INC.
Delaware Corporation
100% owned by PG&E Generating Services, LLC
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.3.2. J. MAKOWSKI SERVICES, INC.
Delaware Corporation
100% owned by PG&E Generating Services, LLC
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.3.3. JMCS I MANAGEMENT, INC.
Delaware Corporation
100% owned by PG&E Generating Services, LLC
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.3.4. USGen FUEL SERVICES, INC.
(formerly JMC Fuel Services, Inc.)
Delaware Corporation
100% owned by PG&E Generating Services, LLC
One Bowdoin Square
Boston, MA 02114
1.2.3.4.1.11.3.5. PG&E Operating Services Holdings, Inc.
(formerly PG&E Operating Services Company)
California Corporation
100% owned by PG&E Generating Services, LLC
100 Pine Street, 20th Floor
San Francisco, CA 94111
1.2.3.4.1.11.3.5.1. USOSC HOLDINGS, INC.
Delaware Corporation
100% owned by PG&E Operating Services
Holdings, Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.5.1.1. PG&E Operating Services Company
(formerly U.S. Operating Services Company)
California General Partnership
98% owned by PG&E Operating Services
Holdings, Inc.
2% owned by USOSC Holdings, Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.6. USGEN HOLDINGS, INC.
Delaware Corporation
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100% Owned by PG&E Generating Services, LLC
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.6.1. PG&E Generating Company
(formerly U.S. Generating Company)
California General Partnership
98% owned by PG&E Operating Services, LLC
2% owned by USGen Holdings, Inc.
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.6.1.1. FIRST OREGON LAND CORPORATION
Delaware Corporation
100% owned by PG&E Generating Company
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.6.1.2. TOPAZ POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Company
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.6.1.2.1. CARNEYS POINT GENERATING COMPANY
Delaware General Partnership
50% owned by Topaz Power Corporation
50% owned by Garnet Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.6.1.3. GARNET POWER CORPORATION
Delaware Corporation
100% owned by PG&E Generating Company
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.11.3.6.1.3.1. CARNEYS POINT GENERATING COMPANY
Delaware Partnership
50% owned by Topaz Power Corporation
50% owned by Garnet Power Corporation
7500 Old Georgetown Rd., 13th Floor
Bethesda, MD 20814
1.2.3.4.1.12. Valley Real Estate, Inc.
California Corporation
100% owned by PG&E Shareholdings, Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
Real estate development.
1.2.3.4.2. PG&E Overseas, Inc.
California corporation
100% owned by PG&E Enterprises
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
A wholly-owned, non-regulated subsidiary of PG&E
Enterprises; U.S. shareholder of PG&E Overseas,
Ltd. and PG&E Overseas II, Ltd.
1.2.3.4.2.1. PG&E Australia
California corporation
100% owned by PG&E Overseas, Inc.
One Market, Spear Tower, Suite 2400
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San Francisco, CA 94105
A wholly-owned, non-regulated indirect subsidiary of
PG&E Enterprises through its ownership of PG&E
Overseas, Inc. for business development in
Australia.
1.2.3.4.2.2. PG&E Overseas, Ltd.
Cayman Islands company
Maples & Calder
P.O. Box 309
George Town, Grand Cayman
Cayman Islands, B.W.I.
A wholly-owned, indirect subsidiary of PG&E
Enterprises through its ownership of PG&E Overseas,
Inc.; holding company for PG&E Pacific I, Ltd. and
PG&E Pacific II, Ltd.
1.2.3.4.2.2.1. PG&E Pacific I, Ltd.
Cayman Islands company
Maples & Calder
P.O. Box 309
George Town, Grand Cayman
Cayman Islands, B.W.I.
A non-regulated indirect subsidiary of PG&E
Enterprises through its ownership of PG&E Overseas
Inc.; an overseas distribution company of PG&E
Overseas, Ltd.
1.2.3.4.2.2.2. PG&E Pacific II, Ltd.
Cayman Islands company
Maples & Calder
P.O. Box 309
George Town, Grand Cayman
Cayman Islands, B.W.I.
A non-regulated indirect subsidiary of PG&E
Enterprises through its ownership of PG&E Overseas
Inc.; an overseas distribution company of PG&E
Overseas, Ltd.
1.2.3.4.3. Quantum Ventures
California corporation
100% owned by PG&E Enterprises
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
A wholly-owned, non-regulated subsidiary of PG&E
Enterprises; holding company for PG&E Energy Services
Corporation.
1.2.3.4.3.1. PG&E Energy Services Corporation
(formerly Vantus Energy Corporation)
California corporation
100% owned by Quantum Ventures
345 California Street, Suite 2600
San Francisco, CA 94104
1.2.3.4.3.1.1. Barakat & Chamberlin, Inc.
California Corporation
100% owned by PG&E Energy Services Corporation
345 California Street, Suite 2600
San Francisco, CA 94104
1.2.3.4.3.1.2. Creston Financial
California Corporation
100% owned by PG&E Energy Services Corporation
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345 California Street, Suite 2600
San Francisco, CA 94104
1.2.3.4.3.1.3. PGCH, Inc.
Delaware Corporation
50% owned by PG&E Energy Services Corporation
c/o The Corporation Trust Company
3 Hutton Centre Drive
Santa Ana, CA 92707
1.2.3.4.3.1.4. Real Estate Energy Solutions, LLC
Delaware limited liability company
50% owned by PG&E Energy Services Corporation
50% owned by Jones Lang LaSalle Management
Services, Inc.
888 S.W. Fifth Avenue, Suite 1050
Portland, OR 97204
1.2.3.5. PG&E Gas Transmission Corporation
formerly PG&E Gas Holdings (Gas Transmission)
2100 SW River Parkway
Portland, OR 97201
Gas Transmission, incorporated under the laws of the
State of California, is a gas holding company and is a
wholly owned subsidiary of PG&E National Energy Group,
Inc. (formerly PG&E Diversified Investments, Inc.)
1.2.3.5.1. PG&E Gas Transmission, Northeast Corporation
2100 SW River Parkway
Portland, Oregon 97201
PG&E Gas Transmission, Northeast Corporation,
incorporated under the laws of the State of
California, is a wholly owned subsidiary of Gas
Transmission. PG&E Gas Transmission, Northeast
Corporation was created to pursue business
opportunities in the Northeast United States.
1.2.3.5.2. PG&E Gas Transmission, Northwest Corporation (formerly
Pacific Gas Transmission Company) 2100 SW River Parkway
Portland, Oregon 97201
PG&E Gas Transmission, Northwest Corporation,
incorporated under the laws of the State of
California, is a wholly owned subsidiary of Gas
Transmission. PG&E Gas Transmission, Northwest
Corporation owns and operates gas transmission
pipelines and associated facilities capable of
transporting natural gas from the Canadian-U.S. border
to the Oregon-California border.
1.2.3.5.2.1. Pacific Gas Transmission International, Inc.
2100 SW River Parkway
Portland, Oregon 97201
Pacific Gas Transmission International, Inc.
incorporated under the laws of the State of
California, is a wholly owned subsidiary of PG&E Gas
Transmission, Northwest Corporation. Pacific Gas
Transmission International, Inc. previously owned
99% of the beneficial interest of PGT Queensland
Unit Trust.
1.2.3.5.2.2. Pacific Gas Transmission Company
2100 SW River Parkway
Portland, Oregon 97201
Pacific Gas Transmission Company, incorporated under
the laws of the State of California, is a wholly
owned subsidiary of PG&E Gas Transmission, Northwest
Corporation. Pacific Gas Transmission Company was
created to pursue business opportunities in the
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natural gas business in the United States.
1.2.3.6. PG&E Gas Transmission, Texas Corporation (GTT)
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
GTT, incorporated under the laws of the State of
Delaware, is a wholly owned subsidiary of PG&E
National Energy Group, Inc. GTT is a holding company
for businesses owning Texas natural gas pipelines,
natural gas storage facilities, and natural gas
processing plants.
1.2.3.6.1. PG&E Texas Natural Gas Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Natural Gas Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of GTT. PG&E Texas Natural Gas Company is
a holding company and serves as a general partner of
PG&E Texas Gas Partners, L.P., PG&E Texas Management
Partnership, L.P., and PG&E-Tex, L.P.
1.2.3.6.1.1. PG&E Texas Pipeline Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Pipeline Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Texas Natural Gas Company. PG&E
Texas Pipeline Company serves as a general partner
of PG&E Texas Pipeline, L.P. and PG&E Texas LDC,
L.P.
1.2.3.6.1.1.1. VT Company
1201 North Market Street
Wilmington, DE 19899
VT Company, incorporated under the laws of the
State of Delaware, is a wholly owned subsidiary of
PG&E Texas Pipeline Company. VT Company owns a
limited partnership interest in PG&E Texas Gas
Partners, L.P.
1.2.3.6.1.1.2. PG&E Texas Gas Partners, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Gas Partners, L.P., formed under the
laws of the State of Delaware, is owned 49.3% by
PG&E Texas Pipeline Company, 46.7% by VT Company,
2.7% by PG&E Hydrocarbons Company, 0.3% by PG&E
Texas Energy Company, and 1% by PG&E Texas Natural
Gas Company. PG&E Texas Gas Partners, L.P. is a
natural gas holding company.
1.2.3.6.1.1.2.1. PG&E-Tex, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E-Tex, L.P., formed under the laws of the
State of Delaware, is owned 99% by PG&E Texas
Gas Partners, L.P., and 1% by PG&E Texas Natural
Gas Company. PG&E-Tex, L.P. owns, operates, and
leases gas-related facilities.
1.2.3.6.1.1.2.2. PG&E Texas Management Partnership, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Management Partnership, L.P., formed
under the laws of the State of Delaware, is
owned 99% by PG&E Texas Gas Partners, L.P., and
1% by PG&E Texas Natural Gas Company. PG&E
Texas Management Partnership, L.P. serves as a
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limited partner of PG&E Hydrocarbons, L.P., PG&E
NGL Marketing, L.P., PG&E Texas Pipeline, L.P.,
PG&E Texas LDC, L.P., PG&E Reata Energy, L.P.,
PG&E Rivercity Energy, L.P., PG&E Texas VGM,
L.P., and PG&E Texas Industrial Energy, L.P.
1.2.3.6.1.1.2.2.1. PG&E Hydrocarbons, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Hydrocarbons, L.P., formed under the laws
of the State of Delaware, is owned 99% by PG&E
Texas Management Partnership, L.P. and 1% by
PG&E Hydrocarbons Company. PG&E Hydrocarbons,
L.P. processes natural gas.
1.2.3.6.1.1.2.2.2. PG&E NGL Marketing, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E NGL Marketing, L.P., formed under the
laws of the State of Delaware, is owned 99% by
PG&E Texas Management Partnership, L.P. and 1%
by PG&E Hydrocarbons Company. PG&E NGL
Marketing, L.P. owns natural gas pipelines and
markets natural gas liquids.
1.2.3.6.1.1.2.2.3. PG&E Texas Pipeline, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Pipeline, L.P., formed under the
laws of the State of Delaware, is owned 99% by
PG&E Texas Management Partnership, L.P. and 1%
by PG&E Texas Pipeline Company. PG&E Texas
Pipeline, L.P. owns and operates natural gas
pipelines and related assets.
1.2.3.6.1.1.2.2.3.1. PG&E West Texas Pipeline Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E West Texas Pipeline Company, a Texas
joint venture, is 50% owned by PG&E Texas
Pipeline, L.P., and 50% owned by PG&E Gas
Transmission Teco, Inc. PG&E West Texas
Pipeline Company operates natural gas
pipelines.
1.2.3.6.1.1.2.2.4. PG&E Texas LDC, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas LDC, L.P., formed under the laws of
the State of Delaware, is owned 99% by PG&E
Texas Management Partnership, L.P. and 1% by
PG&E Texas Pipeline Company.
PG&E Texas LDC, L.P. is engaged in natural gas
intrastate transmission.
1.2.3.6.1.1.2.2.5. PG&E Reata Energy, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Reata Energy, L.P., formed under the laws
of the State of Delaware, is owned 99% by PG&E
Texas Management Partnership, L.P. and 1% by
PG&E Texas Energy Company. PG&E Reata Energy,
L.P. markets gas.
1.2.3.6.1.1.2.2.6. PG&E Rivercity Energy, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Rivercity Energy, L.P., formed under the
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laws of the State of Delaware, is owned 99% by
PG&E Texas Management Partnership, L.P. and 1%
by PG&E Texas Energy Company. PG&E Rivercity
Energy, L.P. markets gas.
1.2.3.6.1.1.2.2.7. PG&E Texas VGM, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas VGM, L.P., formed under the laws of
the State of Delaware, is owned 99% by PG&E
Texas Management Partnership, L.P. and 1% by
PG&E Energy Trading Holdings Corporation.
PG&E Texas VGM, L.P. markets gas.
1.2.3.6.1.1.2.2.8. PG&E Texas Industrial Energy, L.P.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Industrial Energy, L.P., formed
under the laws of the State of Delaware, is
owned 99% by PG&E Texas Management
Partnership, L.P. and 1% by PG&E Texas Energy
Company. PG&E Texas Industrial Energy, L.P.
markets gas.
1.2.3.6.1.2. PG&E Hydrocarbons Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Hydrocarbons Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Texas Natural Gas Company. PG&E
Hydrocarbons Company serves as a general partner of
PG&E Hydrocarbons, L.P. and PG&E NGL Marketing, L.P.
1.2.3.6.1.3. PG&E Texas Field Services Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Field Services Company, incorporated
under the laws of the State of Delaware, is a wholly
owned subsidiary of PG&E Texas Natural Gas Company.
PG&E Texas Field Services Company is engaged in gas
gathering and related services.
1.2.3.6.1.4. PG&E Texas Gas Storage Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Gas Storage Company, incorporated under
the laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Texas Natural Gas Company. PG&E
Texas Gas Storage Company leases a gas storage
cavern.
1.2.3.6.1.5. PG&E Texas Hub Services Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Hub Services Company, incorporated under
the laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Texas Natural Gas Company. PG&E
Texas Hub Services Company provides title transfer
tracking service for the Kansas City Board of Trade.
1.2.3.6.1.6. PG&E Energy Trading Holdings Corporation
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Energy Trading Holdings Corporation,
incorporated under the laws of the State of
Delaware, is a wholly owned subsidiary of PG&E Texas
Natural Gas Company. PG&E Energy Trading Holdings
Corporation serves as a general partner of PG&E
Texas VGM, L.P.
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1.2.3.6.1.6.1. PG&E Texas Energy Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Energy Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Energy Trading Holdings
Corporation. PG&E Texas Energy Company serves as
a general partner of PG&E Reata Energy, L.P., PG&E
Rivercity Energy, L.P., and PG&E Texas Industrial
Energy, L.P.
1.2.3.6.2. PG&E Texas Management Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Texas Management Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of GTT. PG&E Texas Management Company
provides administrative services.
1.2.3.7. PG&E Gas Transmission Teco, Inc.
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E Gas Transmission Teco, Inc., incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E National Energy Group, Inc. PG&E
Gas Transmission Teco, Inc. has investments in natural
gas pipelines, and gas gathering and processing
facilities.
1.2.3.7.1. Teco Gas Gathering Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
Teco Gas Gathering Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Gas Transmission Teco, Inc. and is
in the gas gathering business.
1.2.3.7.2. Teco Gas Marketing Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
Teco Gas Marketing Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Gas Transmission Teco, Inc. Teco
Gas Marketing Company markets gas.
1.2.3.7.3. Teco Gas Processing Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
Teco Gas Processing Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Gas Transmission Teco, Inc. and
processes gas.
1.2.3.7.4. Teco Gas Services Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
Teco Gas Services Company, incorporated under the laws
of the State of Delaware, is a wholly owned subsidiary
of PG&E Gas Transmission Teco, Inc. Teco Gas Services
Company markets gas.
1.2.3.7.4.1. San Jacinto Industrial Gas Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
San Jacinto Industrial Gas Company, a Texas general
partnership, is owned 50% by Teco Gas Services
Company and 50% by PanEnergy Marketing Company
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(not affiliated with Claimant). San Jacinto
Industrial Gas Company is engaged in natural gas
marketing.
1.2.3.7.5. Teco Industrial Gas Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
Teco Industrial Gas Company, incorporated under the
laws of the State of Delaware, is a wholly owned
subsidiary of PG&E Gas Transmission Teco, Inc. Teco
Industrial Gas Company serves as a 50% general partner
in San Jacinto Gas Transmission Company.
1.2.3.7.5.1. San Jacinto Gas Transmission Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
San Jacinto Gas Transmission Company, a Texas
general partnership, is owned 50% by Teco Industrial
Gas Company and 50% by Centana Intrastate Pipeline
Company (not affiliated with Claimant) and it owns
an intrastate pipeline.
1.2.3.7.6. MidTexas Pipeline Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
MidTexas Pipeline Company, a Texas general
partnership, is owned 50% by PG&E Gas Transmission
Teco, Inc. and 50% by Houston Pipe Line Company (not
affiliated with Claimant). MidTexas Pipeline Company
owns an intrastate natural gas pipeline.
1.2.3.7.7. Jackson County Pipeline System
[also known as "Toro Grande" and "Edna (Campeon)
System"]
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
Jackson County Pipeline System, a Texas joint venture,
is owned 50% by PG&E Gas Transmission Teco, Inc. and
50% by Gateway Energy Corporation (not affiliated with
Claimant). Jackson County Pipeline System owns an
intrastate natural gas pipeline and gathering system.
1.2.3.7.8. PG&E West Texas Pipeline Company
7330 San Pedro Avenue, Suite 400
San Antonio, TX 78216-6236
PG&E West Texas Pipeline Company, a Texas joint
venture, is 50% owned by PG&E Texas Pipeline, L.P. and
50% owned by PG&E Gas Transmission Teco, Inc. PG&E
West Texas Pipeline Company operates natural gas
pipelines.
1.2.4. PG&E Strategic Capital, Inc.
One Market, Spear Tower, Suite 2400
San Francisco, CA 94105
PG&E Strategic Capital, Inc., incorporated under the laws
of Delaware, is a wholly-owned subsidiary of PG&E
Corporation. PG&E Strategic Capital, Inc. was formed for
general business purposes.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No. 333-
16255 and 333-25685 on Form S-3 and 33-50601, 33-23692, 333-16253, 333-68155,
333-69437, 333-77145, 333-77149, and 333-27015 on Form S-8 of PG&E Corporation
and Registration Statements No. 33-62488, 33-61959, 33-64136 and 33-62488 on
Form S-3 of Pacific Gas and Electric Company of our reports dated March 3, 2000,
appearing in and incorporated by reference in this Annual Report on Form 10-K of
PG&E Corporation and Pacific Gas and Electric Company for the year ended
December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 6, 2000
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 8,1999, incorporated by reference in this Form 10-K, into
the Company's previously filed registration statements as follows: (1) PG&E
Corporation's Form S-3 Registration Statement File No. 333-16255 (relating to
PG&E Corporation's Dividend Reinvestment Plan); (2) Pacific Gas and Electric
Company's Form S-3 Registration Statement File No. 33-64136 (relating to
$2,000,000,000 aggregate principal amount of Pacific Gas and Electric Company's
First and Refunding Mortgage Bonds and Medium-Term Notes); (3) Pacific Gas and
Electric Company's Form S-3 Registration Statement File No. 33-50707 (relating
to $1,500,000,000 aggregate principal amount of Pacific Gas and Electric
Company's First and Refunding Mortgage Bonds); (4) PG&E Corporation's Form S-8
Registration Statement No. 33-50601 (relating to Pacific Gas and Electric
Company Savings Fund Plan for Employees (for union-represented employees); (5)
PG&E Corporation's Form S-8 Registration Statement File No. 33-23692 (relating
to PG&E Corporation's 1986 Stock Option Plan); (6) Pacific Gas and Electric
Company's Form S-3 Registration Statement File No. 33-62488 (relating to
10,000,000 shares of Pacific Gas and Electric Company's Redeemable First
Preferred Stock); (7) Form S-3 Registration Statement File No. 33-61959
(relating to $335,000,000 aggregate liquidation value of Cumulative Quarterly
Income Preferred Securities); (8) PG&E Corporation's Form S-8 Registration
Statement File No. 333-16253 (relating to PG&E Corporation's Long-Term Incentive
Program); (9) PG&E Corporation's Form S-3 Registration Statement File No. 333-
25685 (relating to the resale of PG&E Corporation shares held by certain
shareholders); (10) PG&E Corporation's Post-Effective Amendment on Form S-8 to
Form S-4 Registration Statement File No. 333-27015 (relating to Valero Energy
Corporation Stock Option Plan No. 4, Valero Energy Corporation Stock Option Plan
No. 5, and Valero Energy Corporation Executive Stock Incentive Plan); (11) PG&E
Corporation's Form S-8 Registration Statement File No. 333-68155 (relating to
PG&E Gas Transmission, Northwest Corporation Savings Fund Plan for Non-
Management Employees); and (12) PG&E Corporation's Form S-8 Registration
Statement File No. 333-69437 (relating to U.S. Generating Company 401(k) Profit-
Sharing Plan for Bargaining Unit Employees); (13) PG&E Corporation's Form S-8
Registration Statement File No. 333-77145 (relating to the PG&E Corporation
Retirement Savings Plan); and (14) PG&E Corporation's Form S-8 Registration
Statement File No. 333-77149 (relating to PG&E Corporation's Long-Term Incentive
Program).
/s/ ARTHUR ANDERSEN LLP
San Francisco, California
March 3, 2000
<PAGE>
EXHIBIT 24.1
RESOLUTION OF THE
-----------------
BOARD OF DIRECTORS OF
---------------------
PG&E CORPORATION
----------------
February 28, 2000
-----------------
BE IT RESOLVED that each of LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC
MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES is hereby
authorized to sign on behalf of this corporation and as attorneys in fact for
the Chairman of the Board, President, and Chief Executive Officer, the Senior
Vice President, Chief Financial Officer, and Treasurer, and the Vice President
and Controller of this corporation the Form 10-K Annual Report for the year
ended December 31, 1999, required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 and all amendments and other filings or documents related
thereto to be filed with the Securities and Exchange Commission, and to do any
and all acts necessary to satisfy the requirements of the Securities Exchange
Act of 1934 and the regulations of the Securities and Exchange Commission
adopted thereunder with regard to said Form 10-K Annual Report
<PAGE>
I, LINDA Y.H. CHENG, do hereby certify that I am an Assistant Corporate
Secretary of PG&E CORPORATION, a corporation organized and existing under the
laws of the State of California; that the above and foregoing is a full, true,
and correct copy of a resolution which was duly adopted by the Board of
Directors of said corporation by unanimous written consent of the directors of
said Board on February 28, 2000; and that this resolution has never been
amended, revoked, or repealed, but is still in full force and effect.
WITNESS my hand and the seal of said corporation hereunto affixed this
1st day of March, 2000.
/s/ Linda Y.H. Cheng
-------------------------------
Linda Y.H. Cheng
Assistant Corporate Secretary
PG&E CORPORATION
C O R P O R A T E
S E A L
<PAGE>
RESOLUTION OF THE
-----------------
BOARD OF DIRECTORS OF
---------------------
PACIFIC GAS AND ELECTRIC COMPANY
--------------------------------
February 28, 2000
-----------------
BE IT RESOLVED that each of LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC
MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES is hereby
authorized to sign on behalf of this company and as attorneys in fact for the
President and Chief Executive Officer and the Senior Vice President - Chief
Financial Officer, Controller, and Treasurer of this company the Form 10-K
Annual Report for the year ended December 31, 1999, required by Section 13 or
15(d) of the Securities Exchange Act of 1934 and all amendments and other
filings or documents related thereto to be filed with the Securities and
Exchange Commission, and to do any and all acts necessary to satisfy the
requirements of the Securities Exchange Act of 1934 and the regulations of the
Securities and Exchange Commission adopted thereunder with regard to said Form
10-K Annual Report.
<PAGE>
I, LINDA Y.H. CHENG, do hereby certify that I am Senior Assistant Corporate
Secretary of PACIFIC GAS AND ELECTRIC COMPANY, a corporation organized and
existing under the laws of the State of California; that the above and foregoing
is a full, true, and correct copy of a resolution which was duly adopted by the
Board of Directors of said corporation by unanimous written consent of the
directors of said Board on February 28, 2000; and that this resolution has never
been amended, revoked, or repealed, but is still in full force and effect.
WITNESS my hand and the seal of said corporation hereunto affixed this 1st
day of March, 2000.
/s/ Linda Y.H. Cheng
-------------------------------
Linda Y.H. Cheng
Senior Assistant Corporate Secretary
PACIFIC GAS AND ELECTRIC COMPANY
C O R P O R A T E
S E A L
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
Each of the undersigned Directors of PG&E Corporation hereby constitutes
and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R.
MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his or her
attorneys in fact with full power of substitution to sign and file with the
Securities and Exchange Commission in his or her capacity as such Director of
said corporation the Form 10-K Annual Report for the year ended December 31,
1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and
any and all amendments and other filings or documents related thereto, and
hereby ratifies all that said attorneys in fact or any of them may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, we have signed these presents this 28th day of
February, 2000.
/s/ Richard A. Clarke /s/ David M. Lawrence
- ---------------------------- ----------------------------
Richard A. Clarke David M. Lawrence, MD
/s/ Harry M. Conger /s/ Mary S. Metz
- ---------------------------- ----------------------------
Harry M. Conger Mary S. Metz
/s/ David A. Coulter /s/ Carl E. Reichardt
- ---------------------------- ----------------------------
David A. Coulter Carl E. Reichardt
/s/ C. Lee Cox /s/ John C. Sawhill
- ---------------------------- ----------------------------
C. Lee Cox John C. Sawhill
/s/ William S. Davila /s/ Barry Lawson Williams
- ---------------------------- ----------------------------
William S. Davila Barry Lawson Williams
/s/ Robert D. Glynn, Jr.
- ----------------------------
Robert D. Glynn, Jr.
<PAGE>
POWER OF ATTORNEY
ROBERT D. GLYNN, JR., the undersigned, Chairman of the Board, Chief
Executive Officer, and President of PG&E Corporation, hereby constitutes and
appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R.
MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his
attorneys in fact with full power of substitution to sign and file with the
Securities and Exchange Commission in his capacity as Chairman of the Board and
Chief Executive Officer (principal executive officer) of said corporation the
Form 10-K Annual Report for the year ended December 31, 1999, required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all
amendments and other filings or documents related thereto, and hereby ratifies
all that said attorneys in fact or any of them may do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have signed these presents this 28th day of February,
2000.
/s/ Robert D. Glynn, Jr.
----------------------------------
Robert D. Glynn, Jr.
<PAGE>
POWER OF ATTORNEY
PETER A. DARBEE, the undersigned, Senior Vice President, Chief Financial
Officer, and Treasurer of PG&E Corporation, hereby constitutes and appoints
LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY
P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with
full power of substitution to sign and file with the Securities and Exchange
Commission in his capacity as Senior Vice President, Chief Financial Officer,
and Treasurer (principal financial officer) of said corporation the Form 10-K
Annual Report for the year ended December 31, 1999, required by Section 13 or
15(d) of the Securities Exchange Act of 1934 and any and all amendments and
other filings or documents related thereto, and hereby ratifies all that said
attorneys in fact or any of them may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have signed these presents this 28th day of February,
2000.
/s/ Peter A. Darbee
-----------------------------
Peter A. Darbee
<PAGE>
POWER OF ATTORNEY
CHRISTOPHER P. JOHNS, the undersigned, Vice President and Controller of
PG&E Corporation, hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H.
CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN
HAYES, and each of them, as his attorneys in fact with full power of
substitution to sign and file with the Securities and Exchange Commission in his
capacity as Vice President and Controller (principal accounting officer) of said
corporation the Form 10 K Annual Report for the year ended December 31, 1998,
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any
and all amendments and other filings or documents related thereto, and hereby
ratifies all that said attorneys in fact or any of them may do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, I have signed these presents this 28th day of February,
2000.
/s/ Christopher P. Johns
----------------------------------
Christopher P. Johns
<PAGE>
POWER OF ATTORNEY
Each of the undersigned Directors of Pacific Gas and Electric Company
hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC
MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each
of them, as his or her attorneys in fact with full power of substitution to sign
and file with the Securities and Exchange Commission in his or her capacity as
such Director of said corporation the Form 10-K Annual Report for the year ended
December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange
Act of 1934 and any and all amendments and other filings or documents related
thereto, and hereby ratifies all that said attorneys in fact or any of them may
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, we have signed these presents this 28th day of
February, 2000.
/s/ Richard A. Clarke /s/ David M. Lawrence, MD
- ---------------------------- ------------------------------
Richard A. Clarke David M. Lawrence, MD
/s/ Harry M. Conger /s/ Mary S. Metz
- ---------------------------- ------------------------------
Harry M. Conger Mary S. Metz
/s/ David A. Coulter /s/ Carl E. Reichardt
- ---------------------------- ------------------------------
David A. Coulter Carl E. Reichardt
/s/ C. Lee Cox /s/ John C. Sawhill
- ---------------------------- ------------------------------
C. Lee Cox John C. Sawhill
/s/ William S. Davila /s/ Gordon R. Smith
- ---------------------------- ------------------------------
William S. Davila Gordon R. Smith
/s/ Robert D. Glynn, Jr. /s/ Barry Lawson Williams
- ---------------------------- ------------------------------
Robert D. Glynn, Jr. Barry Lawson Williams
<PAGE>
POWER OF ATTORNEY
GORDON R. SMITH, the undersigned, President and Chief Executive Officer of
Pacific Gas and Electric Company, hereby constitutes and appoints LESLIE H.
EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P.
ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with
full power of substitution to sign and file with the Securities and Exchange
Commission in his capacity as President and Chief Executive Officer (principal
executive officer) of said corporation the Form 10-K Annual Report for the year
ended December 31, 1999, required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 and any and all amendments and other filings or documents
related thereto, and hereby ratifies all that said attorneys in fact or any of
them may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have signed these presents this 28th day of February,
2000.
/s/ Gordon R. Smith
-----------------------------
Gordon R. Smith
<PAGE>
POWER OF ATTORNEY
KENT M. HARVEY, the undersigned, Senior Vice President - Chief Financial
Officer, Controller, and Treasurer of Pacific Gas and Electric Company, hereby
constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT,
DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his
attorneys in fact with full power of substitution to sign and file with the
Securities and Exchange Commission in his capacity as Senior Vice President -
Chief Financial Officer, Controller, and Treasurer (principal financial officer
and principal accounting officer) of said corporation the Form 10-K Annual
Report for the year ended December 31, 1999, required by Section 13 or 15(d) of
the Securities Exchange Act of 1934 and any and all amendments and other filings
or documents related thereto, and hereby ratifies all that said attorneys in
fact or any of them may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have signed these presents this 28th day of February,
2000.
/s/ Kent M. Harvey
----------------------------
Kent M. Harvey
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PG&E
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 16,776
<OTHER-PROPERTY-AND-INVEST> 1,879
<TOTAL-CURRENT-ASSETS> 3,824
<TOTAL-DEFERRED-CHARGES> 3,259
<OTHER-ASSETS> 3,977
<TOTAL-ASSETS> 29,715
<COMMON> 5,216
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 1,670
<TOTAL-COMMON-STOCKHOLDERS-EQ> 6,886
780
0
<LONG-TERM-DEBT-NET> 6,673
<SHORT-TERM-NOTES> 1,499
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 592
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 13,285
<TOT-CAPITALIZATION-AND-LIAB> 29,715
<GROSS-OPERATING-REVENUE> 20,820
<INCOME-TAX-EXPENSE> 248
<OTHER-OPERATING-EXPENSES> 19,942
<TOTAL-OPERATING-EXPENSES> 19,942
<OPERATING-INCOME-LOSS> 878
<OTHER-INCOME-NET> 69
<INCOME-BEFORE-INTEREST-EXPEN> 947
<TOTAL-INTEREST-EXPENSE> 772
<NET-INCOME> (73)
0
<EARNINGS-AVAILABLE-FOR-COMM> (73)
<COMMON-STOCK-DIVIDENDS> 460
<TOTAL-INTEREST-ON-BONDS> 336
<CASH-FLOW-OPERATIONS> 2,287
<EPS-BASIC> ($0.20)
<EPS-DILUTED> ($0.20)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC GAS
AND ELECTRIC COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<TOTAL-NET-UTILITY-PLANT> 12,718
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<TOTAL-CURRENT-ASSETS> 1,758
<TOTAL-DEFERRED-CHARGES> 3,079
<OTHER-ASSETS> 3,915
<TOTAL-ASSETS> 21,470
<COMMON> 1,406
<CAPITAL-SURPLUS-PAID-IN> 1,964
<RETAINED-EARNINGS> 2,107
<TOTAL-COMMON-STOCKHOLDERS-EQ> 5,477
437
294
<LONG-TERM-DEBT-NET> 4,877
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 449
<LONG-TERM-DEBT-CURRENT-PORT> 465
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<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 9,471
<TOT-CAPITALIZATION-AND-LIAB> 21,470
<GROSS-OPERATING-REVENUE> 9,228
<INCOME-TAX-EXPENSE> 648
<OTHER-OPERATING-EXPENSES> 7,235
<TOTAL-OPERATING-EXPENSES> 7,235
<OPERATING-INCOME-LOSS> 1,993
<OTHER-INCOME-NET> 36
<INCOME-BEFORE-INTEREST-EXPEN> 2,029
<TOTAL-INTEREST-EXPENSE> 593
<NET-INCOME> 788
25
<EARNINGS-AVAILABLE-FOR-COMM> 763
<COMMON-STOCK-DIVIDENDS> 415
<TOTAL-INTEREST-ON-BONDS> 336
<CASH-FLOW-OPERATIONS> 2,200
<EPS-BASIC> $0.00
<EPS-DILUTED> $0.00
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