DCL-97-045, Pacific Gas & Electric Co 1996 Annual Rept
| ML20137H446 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon, Humboldt Bay |
| Issue date: | 12/31/1996 |
| From: | Angus M, Glynn R, Skinner S PACIFIC GAS & ELECTRIC CO. |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| References | |
| DCL-97-045, DCL-97-45, HBL-97-005, HBL-97-5, NUDOCS 9704020235 | |
| Download: ML20137H446 (50) | |
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' Pacific Gas and Electric Company 333 Market Street, Room 1411-A10E MichaelJ. Angus San Francisco, CA 94105 Manager unoa., Regulatcry and Design Services MailCode A10E P.O. Box 770000 San francisco, CA 94177 415/972-5497 Fax 415/973-8683 March 26,1997 PG&E Letter DCL-97-045 HBL-97-005 U.S. Nuclear Regulatory Commission ATTN: Document Control Desk Washington, D.C. 20555 Docket No. 50-275, OL-DPR-80 Docket No. 50-323, OL-DPR-82 Diablo Canyon Units 1 and 2
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Docket No. 50-133, OP-DPR-7 1 Humboldt Bay Unit 3 1996 Annual Financial Report
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Dear Commissioners and Staff:
Pursuant to 10 CFR 50.71(b) and 10 CFR 140.15(b)(1), enclosed are 15 copies of PG&E's Annual Report and Financial Information for the calendar year 1996.
Sincerely, Mi ael J. ngus l Enclosure !
cc: Steven D. Bloom Ira P. Dinitz !
Anthony W. Markley Ellis W. Merschoff j Kenneth E. Perkins l Michael D. Tschiltz !
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lh lDO 020057 :
GRC/2013 )
970402o235 961231 wmum PDR ADOCK O g3 1
1996 Annual Report ll PG&E Corporation A New Beginning
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c. The strngth of a liviig thirg CaH ht YCC0fH lC in itS CHNHYaHCC... 2 Contents Letter to Shareholders 2 Financial Information 8 Directors 45 Officers 46 I l Shareholder information 47
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1 i i ) i ! Letter to Shareholders t e ! I l l: #A J Welcome to the first annual report of PG&E Corporation, the To help customers manage their needs in this new marketplace,
- holding company which our shareholders approved at the an energy services industry is now developing and will continue annual meeting last April. PG&E Corporation was officially to expand and prosper. PG&E Corporation intends to be an #-
- created onJanuary 1,1997. active participant in all elements of this new gas and electric !
t i
! Under the new structure, Pacific Gas and Electric Company services business. j j (PG&E), Pacific Gas Transmission (PGT) and PG&E Enterprises are During the transition to a restructured energy marketplace, j 3 now subsidiaries of PG&E Corporation. as we continue to take the steps needed to make components of !
4 e i But the holding company is more than just a new name and our business more competitive, earnings will b lower than in the ; f redefined corporate structure. It is a new beginning. recent past. ! , We are confident that it will significantly increase our In particular, we will accelerate the depreciation of our 4 flexibility, will add to our ability to respond to competitive Diablo Canyon nuclear power plant between now and the end of 2001 ! j- changes in the utility industry and to new opportunities in energy in order to price the electricity it generates at competitive levels. ;
' services businesses, and will help us to meet our goal as we This means revenues will be offset by greater depreciation.
l l
- approach the millennium
- to be a recognized leader in the energy lowering the earnings available for dividends.
s _l j industry, here in the U.S. and around the globe. Recognizing this fact, the company in October reduced the ) The name of the holding company is, of course, familiar. common stock dividend appmximately 39 percent to an annualized
-l 1 it reflects the experience, strength and success of Pacific Gas level of $1.20 per share. This level is one that we believe can be j j and Electric Company, which has provided energy to sustained and, over time, increased with the strong performance !
a p i millions of customers in Northern and Central California for we expect from our various businesses. As anticipated, earnings 1 i almost a century. per share for 1996 were $1.75, down from the $2.99 per share we But while its heritage is rooted in the past, PG&E Corporation reported in 1995. l is focused squarely on the ample opportunities for profitable These results are the product of steps-hard but a j growth it sees in the future. necessary steps - we are taking to achieve the competitive. j A new day has dawned in the energy hdustry, bringing with successful future we are confident lies ahead for your company. l t i it new complexities and new opportunities in domestic and As we work to achieve that future, we remain fully aware of j l foreign markets. our responsibility to increase the value of your investment in j in the co.npetitive and dynamic business environment now PG&E Corporation. i i emerging, successful companies will be those with the skills, BuiIding On Firm Footings ) t i
- resources and agility to keep up with change, recognize new We believe there is good reason for optimism that earnings, )
i possibilities, market the range of energy services customers want the dividend and stock price will rise over time and that PG&E ! and do it all profitably. Corporation will grow, because we are building that success on That is the kind of organization we are building with firm footings and a focused strategic vision. The foundation upon ) PG&E Corporation, which our new corporation stands is a utility business which we Neeessary 5teps are continuing to strengthen.
.We know what PG&E Corporation must do to achieve We undertook major programs in 1996 to upgrade the
[ its objectives. We also know that in the short run it won't always be systems and facilities of our core electric distribution business. I an easy task. These programs will improve customer service, increase !- Over the next five years, a significant portion of our reliability and safety, and hone PG&E's competitiveness in the
' business will be transformed from a monopoly to a competitive more deregulated energy market to come.
3 enterprise. The various component parts of the business that in 1996, California enacted Assembly Bill 1890. This law , j traditionally have been bundled together in vertically integrated provides a clear legislative roaa map for achieving electric
] utilities now will be unbundled - to give custome's choice in the restructuring in California. it also reduces the financial uncertainties j- services they receive. surrounding the restructuring by providing legislative assurance
- Some components, such as distribution, wil remain that the state's utilities will have a fair opportunity to recover
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. regulated. Others, such as electric generation, will be largely significant costs associated with the transition to a competitive deregulated and fully competitive, electric marketplace, j
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Our gas and electric utility business continued to provide It also will market power quality services for customers whose strong cash flow in 1996, which enabled us to repurchase manufacturing processes require uninterrupted power supplies. 7 a net of $236 million worth of PG&E common stock and retire Through energy services we will market our decades of experience a net of $384 million of long-term debt during the year. in managing electric and gas facilities by contracting with Over the next several years of transition to a restructured utilities to help operate their distribution systems. electric industry, we believe cash flow will remain strong as Distribution: The business of delivering gas and electricity PG&E recovers its investments in utility generation. This will to customers will remain a regulated function. Even if customers give the corporation substantial flexibility to invest in new choose to purchase their electricity from other generators, the business opportunities and continue to retire debt and buy back power will be delivered to their homes and businesses by the local common stock. distribution company. However, over time, there will be pressure And in our gas business, we continued over the year to to allow competitive suppliers to perform some functions that expand into domestic and foreign markets through acquisitions traditionally have been part of the distribution business. of companies that operate in Texas, the Midwest and Eastern U.S., Generation: While the amount of PG&E-owned electric Austraha and Canada. generation will decline in the company's traditional service area, The Furure we will retain the Diablo Canyon nuclear power plant in California ; in the energy world that is evolving, customers will be able and will continue to develop, own and operate independent power to c. hoose from an array of products and services provided by plants in North America and possibly other selected regions of numerous competitive suppliers. Many customers will exercise the world. their ability to choose. But as they do, many will not want the in 1995, the California Public Utikties Commission urged hassle of obtaining individual services from a wide variety of utilities to divest 50 percent of their fossil-fueled generation. In individual providers. response to this request, PG&E in 1996 announced its intention Like consumers who favor the convenience afforded by one- to sell four of its fossil-fueled plants. These four plants represent stop shopping at a supermarket, many customers will seck " energy half of PG&E's total fossil-fueled generating capacity. supermarkets"-organizations that can integrate options into U.S. Generating Company (USGen), our unregulated joint custom-tailored packages and "one-stop" total energy solutions. venture with Bechtel Enterprises, Inc., is a leading competitive PG&E corporation's strategy is based on satisfying customers' power supplier. USGen and its affiliates have ownership desires for both choice and convenience. We intend to leverage interests and management responsibilities in 17 electric the skill, experience and knowledge we have attained over a generation plants, which represent nearly 3,400 megawatts century of success in the electric and gas business to take full of generating capacity. The management success of these plants advantage of profitable opportunities as competitive markets reflects USGen's leadership in clean generating technologies, open up. as well as innovative operations, maintenance and environmental Our plan is to pursue four hnes of business. management techniques. Energy Services: This will be the major conduit between the USGen is making substantial progress toward achieving its customer and the energy choices PG&E Corporation and others in goals of continued long-term growth and profitability. By 2000, - 1 the market will offer. This unregulated business will help provide through development, acquisitions and concentrated marketing products and services from both the corporation's various gas and to meet its customers' needs USGen intends to more than electric units and from competitive suppliers, packaging them in double the megawatts controlled in its current power plant whatever combinations best meet individual customers' needs. portfolio. With effective management and efficient operation, j The energy services business will create value for customers by USGen is confident it can continue to be a pace-setter in the ! acting as their agent, helping them to make intelligent choices in a evolving competitive marketplace. , crowded and confusing marketplace of competing options. Gas: We are pursuing the " midstream" portion of the gas it will be able to put together a wide range of energy market. This includes gas gathering, processing, storage, trans-services, obtaining gas and electricity from competitive producers, portation and commodity marketing. This line of business pre. - arranging for distribution and transmission service, providing sents attractive growth opportunities. customized energy bilhng and analysis, and offering energy retrofits, We estimate that $i10 billion worth of new gas pipeline energy efficiency products and services, and facility improvements. projects and facilities will be built worldwide between now and 2010. 4
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STANLEY T. S K I N N E R Customers will include utilities, electric generators, large industrial gas marketing operations in the nation, with average daily sales companies and local distribution organizations. volumes of 3.6 billion cubic feet per day in 1996. The corporation took a significant step forward in the midstream We are optimistic about our ability to succeed in these lines gas line of business in April of last year with the acquisition of the of business. We have capable employees, abundant skills and a Queensland State Gas Pipeline in Australia. We see significant clear direction. ) additional opportunities in Australia fo, this line of business. Our holding company is a new beginning, a new opportunity in late 1996 and early 1997, we purchased Energy Source, to build on our long record of outstanding performance in the Inc. (EST) and Teco Pipeline Company. ESI markets natural gas energy industry. supplies in the Midwest and Eastern U.S. and Canada. Teco Pipeline For all of these reasons, we strongly believe that PG&E operates more than 1,000 miles of transmission and gas-gathering Corporation's prospects are promising and that we will continue pipelines in Texas with a capacity of 1.5 billion cubic feet per day. to provide excellent value to our shareholders, our customers On January 31, 1997, we agreed to acquire the natural gas and the many communities we serve. services business of Valero Energy Corporation, Valero Natural Gas Company, which operates a 7,500-mile natural gas pipeline system and eight natural gas processing plants in Texas. Valero's
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pipeline system has a capacity of more than 3 billion cubic feet of gas per day. Based in San Antonio, Texas, Valero's operations Stanley T. Skinner Robert D. Glynn, Jr. include the gathering, transporting, marketing and storage of Chairman of the Board and President and Chief natural gas; the p-ocessing, transporting and marketing of natural Chief Executive Officer Operating Officer ; gas liquids: and the marketing of electricity. Together, Valero, Teco and ESI will create one of the top ten February 10,1997 i F. '.}ly W . f f -
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PG AE Corporation . Selected Financial Data (in thousands, except per share amounts) 1996 1995 1994 1993 1992 For the Year g Operating revenues 5 9,609,972 $9,621,765 $10,350,230 . $10,550,002 $ 10.315,713 l Operating income 1,895,585 2.762,985 2,423,786 2,560,235 2,699,824 f Net income 755,209 1,338,885 1,007,450 1,065,495 1,170,581 j
~ Earnings per common share 1.75 2.99 2.21. 2.33 2.58 !
i Dividends declared per common share 1.77 1.96 1.96 1.88 1.76 . At Year End Book value per common share $ 20.73 $ 20.77 $ ~ 20.07 $ 19.77 5 19.41 Common stock price per share '21.00 28.38 24.38 35.13 33.13 Total assets 26,129.925 26,850,290 27,708,564 .27,145,899 24,188,159 .i Long-term debt and preferred stock and securities with mandatory -j redemption provisions (excluding , current portions) 8,207,567 8,486,046 8,812,591 9,367,100 8,525,948 Matters relating to certain data above are discussed in Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition and in l Notes to the Consolidated Financial Statements. l t I s l i n i L b t I i s a !
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I i ! ecas core.r.ti . } M a n age m e n t's Disc u s sion a n d An alysis of l Consolidated Results of Operations and Financial Condition Effective January 1,1997 Pacific Gas and Electric Company (Teco) in Texas. Teco owns a natural gas pipeline system in (PGAE) became a subsidiary of its new parent holding company, Texas, investments in gas gathering and processing facilities, ' PGAE Corporation. PG&E's ownership interest in Pacific Gas and a gas marketing company in Houston. Also in January I Transmission Company (PGT) and PG&E Enterprises 1997. PG&E Corporation agreed to acquire Valero Natural Gas (Enterprises) was transferred to PG&E Corporation. PGAE's Company (Valero) (see Acquisitions and Sales below). outstanding common stock was converted on a share-for- l Erterprises, through its subsidiaries and affiliates, develops, share basis into PG&E Corporation common stock. PGAE's debt owns, nrd operates unregulated electric and gas projects in securities and preferred stock were unaffected and remain the U.S. and around the world. Vantus Energy Corporation , securities of PGAE. (Vantus), a subsidiary of Enterprises, markets gas and electric-l This holding company structure is intended to improve PG&E ity commodities and provides energy services. ( Corporation's ability to respond to new business opportunities The following discussion of consolidated results of and changes in the utility industry. It will enhance the finan- operations and financial condition includes forward looking cial separation of the California utility business from PG&E { statements that involve risks and uncertainties.Words such i Corporation's other businesses and will provide greater as" estimates,"" expects"" anticipates,"" plans," and similar [ financing flexibility. expressions identify forward-looking statements involving risks I The consolidated financial statements in this annual report and uncertainties. include the accounts of PGAE and its wholly-owned and con- These risks and uncertainties include but are not limited to trolled subsidiaries (collectively, the Company) and, therefore, the ongoing restructuring of the electric and gas industries and also represent the accounts of PG&E Corporation and its sub- the outcome of regulatory proceedings related to that restruc-sidiaries. PGAE provides gerieration, procurement, transmission, turing. The ultimate impacts of both increased competition and and distribution of electricity and natural gas to customers the changing regulatory environment on future results are throughout most of Northern and Central California. PG&E is uncertain, but both are expected to fundamentally change how regulated by the California Public Utilities Commission (CPUc), the Company conducts its business.The outcome of these the Federal Energy Regulatory Commission (FERc), and the changes and other matters discussed below may cause future Nuclear Regulatory Commission, among others. results to differ materially from historic results, or from results PGT and Enterprises, previously wholly-owned by PG&E, are or outcomes currently expected or sought by the Company. now wholly-owned subsidiaries of PG&E Corporation.Through these subsidiaries, the Company is expanding its presence in Competition and Changing Regulaeory the" midstream" portion of the gas business, the independent E nviro n m e n t: The electric and gas industnes are power generation business, and the energy services business. undergoing sigrdicant change. Under traditional regulation. The midstream portion of the gas business includes gas utilities wero provided the opportunity to earn a fair return on gathering, processing, storage, and transportation. The energy their invested capital in exchange for a commitment to serve szrvices business includes obtaining gas and electricity from all customers within a designated service territory.The objec-competitive producers, arranging for distribution and transmis- tive of this regulatory policy was to provide universal access to sion service, and providing customized energy billieg and analy- safe and reliable utility services. Regulation was designed in sis, power quality assessments, energy efficiency products and part to take the place of competition and ensure that these szrvices, and facility improvements, services were provided at fair prices. PGT transports gas from the Canadian border to the % day, competitive pressures and emerging market forces California border and the Pacific Northwest and is regulated are exerting an increasing influence over the structure of the by the FERC. In 1996 PCT acquired PGT Queensland Gas gas and electric industries. Other companies are challenging Pipeline in Australia and Energy Source,the North American the utilities' exclusive relationship with customers and are , gas operations of Edisto Resources Corporation.Injanuary seeking to replace certain utility functions with their own. !
= 1997 PG&E Corporation acquired Teco Pipeline Company Cmomers, too, are asking for choice in their energy provider.
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PG AL Corporation M a n a g e m e n t's Dis c u s sio n and Analysis of Consolidated Results of Operations and Financial Condition These pressures are causing a move from the existing regula- customers at the reduced level. tory framework to a framework under which competition To achieve the 10 percent rate reduction, the legislation authorizes utilities to finance a portion of their transition costs .* would be allowed in certain segments of the gas and electric industries. with" rate reduction bonds."The maturity period of the bonds For several years, PG&E has been working with its regulators is expected to extend beyond the transition period. Also, the to achieve an crderly transition to competition and to ensure interest cost of the bonds is expected to be lower than PGFE's that PG&E has an opportun;g to recover investments made current cost of capital. Once this portion of transition costs under the traditional regulatory policies. In addition, PG&E has is financed, PG&E would collect a separate tariff to recover proposed alternative forms of regulation for those services for principal, interest, and issuance costs over the life of the bonds which prices and terms will not be determined by competition. from residential and small commercial customers. The combi-These alternative forms include performance-based ratemaking en of the longer maturity period and the reduced interest costs , vill lower the amounts paid by these customers each (esR) and other incentive-based alternatives. Over the next five years, a significant portion of PG&E's business will be trans- year during the transition period thereby achieving the 10 per-formed from the current utility monopoly to a competitive cent reduction in rates. operation. This change will impact PG&E's financial results and During 1997, differences between authorized and actual base may result in greater earnings volatility. During the transition revenues and differences between the actual cost of electric period, PG&E expects the return on Diablo Canyon Nuclear generation and the revenue designated for recovery of such Power Plant (Diablo Canyon) and certain other generation revenues or costs will be recorded in balancing accounts. Any assets to be significantly lower than historical levels. residual balance will be available for transition cost recovery. During 1997, amounts recorded in balancing accounts will be Eleetric industry Restructuring: In 1995, the subject to a reasonableness review by the cPUC. CPUC issued a decision that provides a plan to restructure Absent the rate freeze, PG&E's rates would be expected California's electric utility industry. The decision acknowledges to decline under existing cost-based ratemaking method-that much of utilities' current costs and commitments ;oult ologies. The most significant reasons for the decrease in imm past cPUc decisions and that,in a competitive generation cost-based rates are the declining cost of power committed market, utilities would not recover some of these costs under certain purchase power contracts, the reduction in the through market-based revenues.To assure the continued finan- Diablo Canyon price for power under the existing cPUC-cial integrity of California utilities, the CPUC authorized recov- approved settlement, and the decline in uncollected electric ery of these above-market costs, called" transition costs." balancir.g mmnts. in 1996. California legislation was passed that adopts the basic tenets of the CPUC's restructuring decision, including Transition Cost Recovery:The legislation authorizes the recovery of transition costs. In addition, the legislation pro- cPUc to determine the costs eligible for recovery as transition vides a 10 percent rate reduction for residential and small costs. The amount of costs will be based on the aggregate of commercial customers by January 1,1998, freezes electric above-market and below-market values of utility-owned gener-customer rates for all other customers, ud requires the accel- atic,n assets and obligations. PG&E has proposed that costs eligi-erated recovery of transition costs associaad with owned ble for transition cost recovery include:(l) above-market sunk generation facilities.The legislation also estaV mes the operat- costs (costs associated with utility generating facilities that are ing framework for a competitive generation market. fixed and v.:. voidable and currently collected through rates) The rate freeze will continue until the earlier of March 31, and future costs, such as costs related to plant removal,(2) 2002, or until Pc&E has recovered its transition costs (the above-market costs associated with purchase power obliga- , transition period).The freeze will hold rates at 1996 levels tions with Qualifying Facilities (ors) and other Power Purchase for all customers except those receiving the 10 percent Agreements, and (3) generation-related regulatory assets and rate reduction.The rate freeze will hold the rates for these obligations. PG&E cannot determine the exact amount of sunk - 10
costs that will be above market and recover.ble as transition to 90 percent of PG&E's long-term cost of debt. PG&E's autho-costs until a market valuation process (appraisal or sale) is rized long-term cost of debt was 7.52 percent in 1996.The completed for each generation facility This process will be reduced rate of return combined with a shorter recovery j completed during the transition period, period would result in an estimated $4 billion decrease in the In compliance with the cPUC's restructuring decision and the net present value of PG8E's future revenues from Diablo restructuring legislation, PG&E has filed numerous regulatory Canyon operations. If the proposed cost recovery plan for applications and proposals that detail its trandtion cost recov- Diablo Canyon were adopted during 1996 Diablo Canyon's try plah. PG&E's recovery plan includes:(l) separation or 1996 reported net income would have been reduced by $350 unbundling of its previously approved cost-of-service revenue million ($0;85 per share), requirement for its electric operations into distribution, trans- Most transition costs must be recovered by March 1,2002. mission, public purpose programs (PPPs), and generation,(2) However, the legislation authorizes recovery of certain transi-accelerated recovery of transition costs, and (3) development tion costs after that time. These costs include:(l) certain of a ratemaking mechanism to track and match revenues and employee-related transition costs,(2) payments under existing cost recovery during the transition period. or and power purchase contracts, and (3) unrecovered imple. The unbundling of PG&E's revenue requirement enables it to mentation costs. Excluding these exceptions, any transition separate revenue provided by frozen rates into transmission, costs not recovered during the transition period will be distribution, PPPs, and generation. As proposed, revenues col- absorbed by PG&E. Nuclear decommissioning costs, which are lected under frozen rates would be assigned to transmission, not considered transition costs, will be recovered through a distribution, and PPPs based upon their respective cost of cPUC authorized charge. During th,e transition period, this i service. Revenue would also be provided for other costs, charge will be incorporated into the frozen rates. After the l including nuclear decommissioning, rate-reduction-bond debt transition period, customers will be assessed a surcharge until service, the on-going cost of generation, and transition cost the nuc! ear decommissioning costs are fully recovered. recovery.The combination of a rate freeze and decreasing PG&E's ability to recover its transition costs during the costs, based upon existing ratemaking and cost recovery transition period will be dependent on several factors.These periods, provides an adequate amount of revenue available factors include:(1) the extent to which application of the cur-for full transition cost recovery. I rent regulatory framework established by the restructuring ' PG&E has proposed to accelerate recovery for certain legislation will continue to be applied (2) the amount of transi-transition costs related to generation facilities, including Diablo tion costs approved by the cPUc,(3) the market value of PGAE's Canyon. Additionally, PGAE would receive a reduced return on generation plants, (4) future sales levels, (5) fuel and operating j common equity associated with generation plant assets for costs,(6) the market price of electricity, and (7) the ratemak- j which recovery is accelerated. The lower return reflects the ing methodology adopted for Diablo Canyon. Considering its reduced risk associated with the shorter amortization period current evaluation of these factors, PG&E believes it will recover i and increased certainty of recovery. its transition costs and that its owned generation plants are j in applying its cost recovery plan to Diablo Canyon, PG&E has not impaired. However, a change in these factors could affect proposed to replace the existing settlement prices with:(1) a the probability of recovery of transition costs and result in sunk cost revenue requirement to recover fixed costs,includ- a material loss. ing a return on these costs, and (2) a PBR mechanism to recover PG&E has proposed to implement portions of its transition I the facility's variable costs and capital addition costs. As pro- cost recovery plan in 1997.The cPUC decision on PG&E'S 1997 ) posed, the sunk cost revenue requirement would accelerate Energy Cost Adjustment Clause (ECAC) application would recovery of Diablo Canyon sunk costs from a twenty-year decrease PG&E's 1997 revenue requirement by $720 million. period ending in 2016 to a five-year period beginning in 1997 This decrease would be partially offset by a $160 million rev-and ending in 2001.The related return on common equity enue requirement increase, provided by the legislation, for
- associated with Diablo Canyon sunk costs would be reduced purposes of enhancing transmission and distribution system ii
-~ - - - ..c ,-, - . . . - . , n. --_ .-_ a . . .. - . ~ - - - - _ . t PG AE Corporation M a n a g e m e n t's Discussion and Analysis of Consolidated Results of Operations and Financial Condition safety and reliability. This increase was approved by the CPUC approximately 10 percent of PG&E's total electric sales. PG&E , as part of PG&E's transition cost recovery plan. proposes to recover any shortfall in proceeds from divesti-Given the electric customer rate freeze, the $560 million ture of these plants as a transition cost. Accordingly, the { net revenue requirement decrease resulting from the con- Company does not expect any adverse impact on its results solidation of the ECAC decision and the revenue requirement of operations from the sale of these plants. increase contemplated in the cost recovery plan would be In addition to the CPUC's electric industry restructurir;; available for transition cost recovery.The proposed acceler- discussed above, the FERC has required utilities to provide ated recovery of Diablo Canyon would absorb an estimated wholesale open access to electric transmission systems on !
$400 million of this available revenue requirement.The remain- terms that are comparable to the way utilities use their own ing revenue requirement would be available to recover other systems. PG&E's open access tariff, filed in July 1996, provides transition costs. access to any eligible party interested in wholesale transmis.
sion service over PG&E's transmission system.The FERC also Competitive Market Framework:In addition to transition reaffirmed its intention to permit utilities to recover any legiti-cost recovery, the legislation estabhshes the operating frame- mate, verifiable, and prudently incurred costs stranded as a work for the competitive generation market in California. This result of customers taking advantage of wholesale open access framework will consist of a power exchange (PX) and an inde- orders to meet their power needs from other sources. pendent system operator (rso). The PX, open to all electricity Further, the FERC asserted that it has jurisdiction over the ; providers, will conduct a competitive auction to establish the transmission component of retail direct access. r price of electricity. The eso vyill ensure system reliability and By developing the PX and the ISO and by implementing ! provide all electricity generators with open and comparable direct access to generation and open access to transmission, l access to transmission and distribution services, regulators have established the operating framework of j Although the PX will be available to all customers, the the competitive generation and wholesale transmission mar- l legislation allows customers to bypass the PX by entering into kets. Although this framework will fundamentally change the f direct access contracts with other electricity providers, subject way PG&E does business, the Company does not believe that ! i to a nonbypassable transition charge.This direct access will be the changes will have a material adverse impact on its ability to ; available to certain customers byJanuary 1,1998, and will be recover transition costs. i phased in for all remaining customers through December 31. 1 2001. During the transition period PG&E will bill direct access Accounting for the Effects of Regulation:PG&E accounts customers based upon fully bundled frozen rates. Direct for the financial effects of regulation in accordance with access customers' bills from PG&E would then be reduced by Statement of Financial Accounting Standards (sFAs) No. 71, an amount based on the Px price and the customers' electric " Accounting for the Effects of Certain Types of Regulation." , usage. These customers can be billed for their usage directly This statement allows the Company to record certain regula-by their chosen supplier, or the supplier may contract with tory assets and liabilities that would not be recorded under PG&E to perform this billing. During the transition period, these generally accepted accounting principles for nonregulated customers' overall electric rates will vary only to the extent entities. In addition, sFAs No.121," Accounting for the Impair-that their direct access contract price differs from the PX price. ment of Long-Lived Assets and for Long-Lived Assets to Be To prevent undue influence on the PX price by any Disposed Of" requires that regulatory assets be written off participant in the competitive framework, PG&E has indicated it when they are no longer probable of recovery and that impair-is willing to proceed with divestiture of at least 50 percent of ment losses be recorded for long-lived assets when related its fossil-fueled power plants as directed by the CPUC. PG&E has future cash flows are less than the carrying value of the asset. ,' filed an application seeking approval from the CPUC to sell four As a result of applying the provisions of SFAS No. 71, PG&E plants before the end of 1997.The book value for these plants has accumulated approximately $1.6 billion of regulatory assets is approximate!y $400 million, and together they generate attributable to electric generation at December 31,1996. 12
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The net investments in Diablo Canyon and the other genera. Gas Industry Restrueturing: Restructuring of the tion assets were $4.5 billion and $2.7 billion, respectively, at natural gas industry on both the national and the state level December 31,1996. The net present value of above-market has given customers greater options in meeting their gas sup-QF power purchase obligations is estimated to be $5.3 billion ply needs. PG&E's customers may buy commodity gas directly at January 1,1998, at an assumed Px price of $0.025 per from competing suppliers and purchase transmission- and dis-kilowatt-hour (kWh) beginning in 1997 and escalating at tribution-only services from PG&E. Transmission and distribu-3.2 percent per year, tion services have remained " bundled," or sold together at a PG&E believes that the restructuring legislation establishes a combined rate, within the state. PGT, as an interstate pipeline, definitive transition to market-based pricing for electric gener- has provided nondiscriminatory transmission-only service ation. Incorporating the effects of the PX and direct access this since 1993 and no longer sells commodity gas. transition includes cost-of-service based ratemaking. In addi- Most of PG&E's industrial and larger commercial (noncore) tion, PG&E's generation-related transition costs will be collected customers purchase their commodity gas from marketers and through a nonbypassable charge. Based on this structure, PG&E brokers. Substantially all residential and smaller commercial believes it will continue to meet the requirements of sFAs No. (core) customers continue to buy commodity gas as well as 71 throughout the transition period transmission and distribution from PG&E as a bundled service. At the conclusion of the transition period. PG&E believes it in 1995 and 1996.PG&E actively pursued changes in the will be at risk to recover its generation costs through market. California gas industry in an effort to promote competi-based revenues. At that time, PG&E expects to discontinue the tion and increase options for all customers, as well as to posi-application of sFAs No. 71 for the electric generation portion tion itself for the competitive marketplace. In 1996 PG&E sub-of its business. Since PG&E anticipates it will have recovered all mitted to the CPUC the Gas Accord Settlement (Accord).The transition costs required to be recovered during the transition Accord is the result of an extensive negotiation process, begun period, including generation-related regulatory assets and in 1995, among a broad coalition of customer groups and above-market investments in net plant, PG&E does not expect industry participants.The Accord must be approved by the a material adverse impact on its financial position or results of CPUC before it Can be implemented. A CPUC decision is operations from discontinuing the application at that time. expected in 1997. As a result of the CPUC's restructuring decision and The Accord consists of three broad initiatives: California's electric industry restructuring legislation, the (1) The Accord would separate, or"unbundle," PG&E's gas Securities and Exchange Commission (sEC) has begun inquiries transmission and storage services from its distribution services regarding the appropriateness of the continued application of and would change the terms of service and rate structure for sFAs No. 71 by California utilities to their electric generation gas transportation. Unbundling would give customers the businesses. As discussed above. PG&E believes it currently opportunity to select from a menu of services offered by PG&E meets and will continue to meet the requirements to apply and would enable them to pay only for the services they use. srAs No. 71 during the transition period. In the event that the PG&E would be at risk for variations in revenues resulting SEC concludes that the current regulatory and legal framework from differences between actual and forecasted transmission in California no longer meets the requirements to apply sFAs throughput. PG&E would also continue to provide cost-of-No. 71 to the generation business, the Company would reeval- service based distribution service, much as it does today. uate the financial impact of electric industry restructuring and (2) The Accord would increase opportunities for PGAE's core a material write-off could occur. customers to purchase gas from competing suppliers and, Given the current regulatory environment PG&E's electric therefore, could reduce PG&E's role in procuring gas for such
- transmission and distribution businesses are expected to customers. However, PG&E would continue to procure gas as a remain regulated and, as a result, will continue application of regulated utility supplier for those customers who request it.
the provisions of sFAs No. 71. The Accord also would establish principles for continuing negotiations between PG&E and California gas producers for 13
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PG48 Corporation M a nage m e nt's Disc u s sion a n d A n alysis of Consolidated Results of Operations and Financial Condition - i the mutual release of supply contracts and the sale of gas gath- whether through approval of the Accord or otherwise, will not l tring facilities. Also related to PG&E's procurement activities, have a material adverse impact on its financial position or ,, PG&E has proposed that traditional reasonableness reviews of future results of operations. i its core gas costs be replaced with a core procurement incen-tive mechanism (CPIM) for the period June 1,1994, through Aequisitions and Sales: The Company has 2002. Under the CPtM, PGAE Would be able to recover its gas developed strategies to focus on the unregulated independent commodity and interstate transportation costs and would power generation market, the unregulated energy services receive benefits or be penalized depending on whether its . market, and the regulated and unregulated" midstream" l actual core procurement costs were within, below, or above a portions of the gas market. As a result of this focus, the i " tolerance band" constructed around market benchmarks. Company has been acquiring related businesses and disposing Actual core procurement costs measured for the period June of unrelated businesses. ! I,1994, through December 31,1996, have generally been Enterprises participates in multiple domestic and interna- { within the CPIM " tolerance band." The CPlM proposal also tional energy businesses.The majority of Enterprises' domestic j requests authorization to use derivative financial instruments investments are in enregulated energy projects through U.s. l to reduce the risk of gas price and foreign currency fluctua- Generating Company (usGen), a joint venture with Bechtel tions. Gains, losses, and transaction costs associated with the Enterprises, Inc. (Bechtel). UsGen and its affiliates develop, own, j use of derivative financial instruments would be included in the and operate power plants in the United States. I purchased gas account and the measurement against the Enterprises' entry into the international market was also ; benchmarks. made in partnership with Bechtel. Enterprises and Bechtel l (3) The Accord would resolve various regulatory issues (see formed International Generating Company, Ltd., (InterGen) { further discussion in Note 3 to the Consolidated Financial which develops, owns, and operates international electric gen- j Statements) including: eration projects. However, in November 1996, Enterprises l
- the disallowances ordered by the CPUC in connection with and Bechtel reached an agreement for Bechtel to acquire .
I PG&E's 1988 through 1995 gas reasonableness proceedings; Enterprises' interest in InterGen. The Company expects to l
- the recovery of certain capital costs associated with the PG&E complete the sale in the first quarter of 1997 and realize an portion of the PGT/PG&E Pipeline Expansion; after-tax gain. Enterprises has refined its international strategy ,
- the recovery of costs related to PG&E's capacity commitments to focus on select countries and to concentrate on end-use j with Transwestern Pipeline Company through 2002;and energy customers. :
1
- the recovery, through PG&E's interstate transition cost sur- In 1995, Enterprises formed Vantus, a retail energy services '
charge, of fixed demand charges paid to El Paso Natural Gas provider, to assist customers in locating the most cost-effective l Company and PGT for firm capacity held by PG&E on behalf of - electric and gas products and services.Vantus' energy services its customers. include power marketing for industrial and large commercial As of December 31,1996, PG&E has reserved approximately businesses nationwide. In 1996, Vantus opened new offices in
$527 million, including $182 million reserved during 1996, the western United States to establish a presence and market relating to its gas regulatory issues and gas capacity commit- its services in emerging energy markets.
ments, the majority of which are addressed by the Accord. Also in 1995. Enterprises sold DREN Corporation (DREN). PG&E believes the ultimate resolution of these matters, The sales price was $455 million, including $340 million cash and the assumption of $115 million of existing debt.The sale resulted in an after-tax gain of approximately $13 million. 9 14
1 s I '4 The Company is pursuing gas-related opportunities as the oi.ine ow.nin.4 j 4 s gas industry continues to evolve. In July 1996, the Company, # "'*"* "" " **' On mdhans, except per share through its subsidiary PGT, purchased PGT Queensland State e,noiento Gas Pipeline, a 389 mile natural gas transportation system in 1996 i the Australian state of Queensland. The final purchase price Operating revenues $ 7,411 $1,789 $ 410 $ 9,610 Operating expenses 6,465 791 -458 7,714 was $136 million. In December 1996, PGT entered the unregulated gas Puating inconw Con) marketing arena with the purchase of Energy Source (ESl), the before income taxes $ 946 $ 998 $ (48) $ l.896 North American gas marketing operations of Edisto Resources NCnc nw 0 n) $ 292 $ 497 $(34)$ $ 755 I Corporation for approximately $23 million.The purchase Earnings per included most of ESI's existing contracts for the purchase, sale, c mm n share $ .65 $ l.18 $ (.08) $ l.75 and transportation of natural gas and natural gas futures, in Total assets at year end $19,283 $5A13 $1,434 $26,130 1996, ESI generated over $ 1.1 billion in gas marketing revenues, 1995 of which $283 million was earned in December 1996. Operating revenues $ 7,601 $1.845 $ 176 $ 9.622 Operating expenses 5,820 816 223 6,859 In January 1997, PG&E Corporation acquired Teco and its subsidiaries for approximately $380 million.Teco is an owner O Perating income (loss) before inconw taxes $ 1,781 $1,029 $ (47) $ 2,763 of a 500-mile natural gas pipeline system in Texas. Teco also has investments in gas gathering and processing facilities and Net income $ 820 $ 507 $ 12* $ 1,339 owns a gas marketing company in Houston. Earnings per Also in january 1997, PG&E Corporation agreed to acquire common share $ l.80 $ l.16 $ .03 $ 2.99 Valero. Valero's operations include the gathering, transporta- Total essets at year end $20.090 $5,717 $ 1,043 $26.850 , i tion, marketing, and storage of natural gas, the processing, i,94 j transportation, and marketing of natural gas liquids, and the Operating revenues $ 8,232 $1,870 $ 248 $10.350 l marketing of electric power.Valero operates approximately Operating expenses 6.732 914 280 7,926 7,500 miles of natural gas pipeline and also owns and operates Operating income (loss) 536 miles of natural gas liquid pipeline and eight natural gas before income taxes $ 1,500 $ 956 $ (32) $ 2A24 processing plants in Texas. PG&E Corporation will acquire Net income $ 539 5 461 $ 7* $ 1,007 Valero for approximately $1.5 billion, comprised of approxi- Earnings per mately $720 million in PG&E Corporation common stock and common share $ l.15 $ l.04 5 .02 $ 2.21 the assumption of debt and liabilities.The acquisition is Total assets a: year end $20,295 $5,978 $ 1.436 $27.709 cxpected to be completed by mid 1997 and is subject to applicable regulatory and shareholder approvals.
- See Note 4 to the Consolidated Financial Statemenu for discussion All of the above acquisitions have been or will be accounted *(c$s perating income resulting from property saies, partnership for using the purchase method of accounting. earnings, and investment income.
R e s u l t s o f O p e r a t i o n s : The Company's results Earnings Per Common Share: Earnings per common of operations were derived from three business lines: utility share were $1.75, $2.99, and $2.21 for 1996,1995, and 1994, (excQ Diablo Canyon and including PGT's gas pipeline oper- respectively. Utility earnings in 1996 were lower than 1995, l ations), Diablo Canyon, and diversified operations (principally, reflecting revenue recuctions ordered in the 1996 General )- Enterprises and ESi).The results of operations and total assets Rate Case (GRc) and other related rate proceedings and ! for 1996,1995, and 1994 are reflected in the following table reflecting several one-time charges.The revenue reductions i and discussed below. resulted from a lower cost of capital, lower capital expendi-7 tures, and reductions in authorized expense levels. Actual maintenance and other operating expenses for distribution ; 15
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PGat Corporauen M a n age m e nt's Dis c u s sio n a nd A nalysis of Consolidated Results of Operations and Financial Condition ) , l and customer-related services increased in 1996 and exceeded Operating Revenues: Operating revenues in 1996 levels authorized in the 1996 GRc. These increases were pri- decreased slightly from 1995. The decreases in utility revenues marily attributable to several projects related to transmission as ordered in the 1996 GRC, discussed above, and in Diablo and distribution system reliability, and improved customer. Canyon revenues were offset by increased revenues from related services. Additionally, PG&E recorded a charge of $.26 diversified operations. Revenues from Diablo Canyon per common share for contingencies related to gas transporta- decreased due to a decline in the generation price, as provided tion commitments and recorded a charge of 5.19 per common in the Diablo Canyon rate case settlement as modified in 1995 share for settlement of litigation. (See Operating Expenses (Diablo Settlement) (see Note 4 to the Consolidated Financial below and Notes 3 and 13 to the Consolidated Financial Statements). This decline was partially offset by higher net gen- J Statements.) Finally, the Company recorded a charge of eration, which was a result of fewer scheduled refuelings in ,
$.09 per common share for write-downs of nonregulated 1996 compared to 1995. Revenues from diversified operations l investments. Increased primarily due to the purchase of ESI in December Earnings per common share for 1995 were higher than 1994 1996.This purchase created 5283 million of revenue but was due to fewer one-time charges against earnings than in 1994 partially offset by a decline in revenue due to the sale of DALEN (see Operating Expenses below). In addition, there were in 1995. (See Acquisit;ons ed Sales above.) l fewer scheduled refueling outages at Diablo Canyon in 1995, Operating revenues for 1995 decreased $728 million from compared with 1994. 1994.The decrease in utility revenues was primarily due On a consolidated basis, the Company earned 8.5,14.6, and to a decrease in electric energy costs caused by favorable i 1.1 percent returns on average common stock equity for the hydroelectric conditions and lower natural gas prices. Diablo years ended December 31,1996,1995, and 1994, respectively. Canyon operating revenues decreased due to a decrease in the ;
PG&E has received a cPUc decision which authorizes, for 1997, generation price as provided in the modified Diablo Settlement a return on common equity of I l.6 percent and an overall rate (see Note 4 to the Consolidated Financial Statements for fur-of return of 9.45 percent. However, PG&E has filed a proposal ther discussion).This decrease was partially offset by favorable with the CPUC to accelerate recovery of certain transition operating revenues from Diablo Canyon resulting from fewer costs related to generation facilities, including Diablo Canyon. refueling days in 1995. Revenues from diversified operations ; Additionally, PG&E would receive a reduced return on common decreased $72 million in 1995 compared to 1994 primarily l squity associated with generation plant assets for which recov- due to the sale of DALEN in June 1995. [' ery is accelerated. This return would equal 90 percent of PG&E's long-term cost of debt. PG&E's authorized long-term cost Operating Expenses: Operating expenses increased of debt was 7.52 percent in 1996. (See Electric Industry $855 million in 1996 compared to 1995, primarily due to:(l) a Restructuring above.) charge of $182 million for contingencies related to gas trans-portation commitments. (2) increases in the cost of gas due to ! Common Stock Dividend: The Company's common price increases, (3) increases in purchased power prices and f stock dividend is based on a number of financial considera- volumes, (4) increases in maintenance and other operating tions, including sustainability, financial flexibility, and competi- expenses for transmission and distribution system reliability i tiveness with investment opportunities of similar risk.The a nd for improved customer-related services, (5) increases in Company's current quarterly common stock dividend is $.30 litigation costs, and (6) an increase in the cost of gas for resale { per common share which corresponds to an annualized divi- due to the purchase of ESI in December 1996.The cost of dend of $1.20 per common share.This represents a decrease gas increase from the purchase of ESI was offset by revenues as ; from the previous annualized dividend of $1.96 per common discussed above. - share.The Company has identified a dividend payout ratio Operating expenses decreased $1,067 million in 1995 com-objective (dividends declared divided by earnings available for pared to 1994 primarily due to decreased electric costs caused ,{ common stock) of between 50 and 65 percent (based on by favorable hydroelectric conditions, decreased natural gas , i carnings exclusive of nonrecurring adjustments). l 16
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,a prices, and no workforce reduction charges in 1995. (See Note and $796 million, respectively, of commercial paper outstand-10 to the Consolidated Financial Statements.) ing. PG&E maintains a $1 billion revolving Credit facility which
- e.
primarily provides support for PG&E's commercial paper j Other income and (Expense): Otherincome and issuance. At maturity, commercial paper can be either reissued 1 , expense changed in 1996 compared to 1995 primarily due to or replaced with borrowings from this cred,t facility.The facil-write-downs of certain nonregulated investments. [ ity can also be used for general corporate purposes.There - were no borrowings under this facility in 1996,1995, or 1994. j i Liquidity and Capitai Resources: ' In January 1997 PGAE Corporation established a $500 mil-The Company's capital requirements are funded from cash lion revolving credit facility in order to provide for corporate i provided from operations and, to the extent necessary, exter- short-term liquidity needs and other purposes. j nal financing.The Company's policy is to finance its assets with As discussed in electric industry restructuring above, to , a capital structure that minimizes financing costs, maintains achieve the 10 percent rate reduction for residential and small j financial flexibility, and complies with regulatory guidelines. commercial customers, the electric industry restructuring Based on cash provided from operations and its capital legislation authorizes utilities to finance a portion of the $ requirements, the Company may repurchase equity and long- transition costs with" rate reduction bonds." PGAE expects to term debt in order to manage the overall balance of its capital work with state authorities to coordinate the issuance of up to ! l structure. $2.5 billion of these bonds by a special purpose entity. Once issued, PGAE would collect, on behalf of the special purpose [ Debt:In 1996,1995, and 1994, the Company redeemed or entity, a separate tariff to recover principal, interest, and ] ;
- repurchased $ 1,113, $758, and $202 million, respectively, of issuance costs over the life of the bonds from residential
, long-term debt to manage the overall balance of the Com- and small commercial customeri. PG&E does not expect to I
- pany's capital structure. Long-term debt maturing during 1996, secure the bonds with the Company's assets or unrelated I 1995, and 1994 was not refinanced.
{ future revenues. l Included in the 1996 repurchases is $988 million of variable
- and fixed interest rate pollution control mortgage bonds and Equity
- In 1996,1995, and 1994, PG&E received $220, $140, loan agreements which were replaced with variable interest and $274 million, respectively, in proceeds from the sale of
- rate pollution control loan agreements. Also in 1996, the common stock under the employee Savings Fund Plan, the l Company entered into additional loan agreements of $92 mii. Dividend Reinvestment Plan, and the employee Long-term ;
{ lion to finance the PGT acquisition of PGT Queensland State incentive Program. Gas Pipeline. In addition, the Company used its cash balances Since 1993, the Board has authorized the Company to , to reduce short-term borrowings by $115 million in 1996. repurchase up to $2 billion of its common stock on the open in 1995, PGT issued $400 million of bonds and $70 million of ' market or in nego&ted transactions.These repurchases are ! medium-term notes. In addition PGT issued commercial paper funded by internally generated funds and are used to manage { which is classified as long-term debt. This classification is based the overall balance of common stock in the Company's capital f upon the availability of committed credit facilities expiring in structure.Through December 31,1996, the Company had 2000 and management's intent to maintain such amounts in repurchased approximately $1.5 billion of its common stock ! j excess of one year.The commercial paper outstanding was under this program. Repurchases for 1996,1995,and 1994
$108 and $109 million at December 31,1996, and 1995, were $455, $601, and $ l82 million, respectively. !' . respectively. Substantially all of the proceeds of PGT's debt in 1996, PG&E did not redeem or repurchase any preferred issued in 1995 were used to refinance outstanding debt. stock, in 1995 and 1994, PG&E redeemed or repurchased o-
- PG&E issues short-term debt (principally commercial paper) $331 and $75 million, respectively, ofits higher-cost preferred to fund fuel oil, nuclear fuel, and gas inventories, unrecovered stock. In 1994. PG&E issued $62 million of preferred stock.
h balances in balancing accounts, and cyclical fluctuations in daily PG&E is limited as to the amount of dividends that it may
; cash flows. At December 31,1996, and 1995, PG&E had $681 pay to PG&E Corporation based on PG&E's regulatory capital I
i i
, 17
PG&E Corporation M an agemen t's Dis cus sion a n d A n alysis of Consolidated Results of Operations and Financial Condition structure authorized by the CPUC PG&E's equity shall be Risk Management: Due to the changing business environ- , retained such that, on average, the capital structure authorized ment, the Company's exposure to risks associated with by the cruC is maintained. This restriction is not expected to changes in energy commodity prices, interest rates, and foreign - .. affect PGSE Corporation's ability to meet its cash obligations. currencies is increasing.To manage these risks, the Company , has adopted a price risk management policy and established an
' Other Capital: in 1995, PG&E through its wholly-owned officer-level price risk management committee.The Company's subsidiary, PG&E Capital I, issued $300 million of cumulative price risk management committee oversees implementation quarterly income preferred securities. Net proceeds were of the policy, approves each price risk management program, used to redeem and repurchase higher-cost preferred stock. and monitors compliance with the policy. l The Company's price risk management policy and proce- ,
Investing Activieles: The Company's estimated capital dures adopted by the committee establish guidelines for imple- ; requirements for the next three years are shown below: mentation of price risk management programs. Such programs [ may include the use of energy and financial derivatives. (A ' v.., . 4 on. 6., s i, i ,,7 i,,e i,,,
, g pn mdhons)
I Utility (including ecT) 51,773 51,825 51,705 derived from the value of some underlying asset.) Additionally, Diablo Canyon 38 39 41 the Company's policy allows derivatives to be used for hedging Diversified operations 2ti 80 172 and non-hedging purposes. (Hedging is the process of protect-Total capital expenditures 2,022 1,944 1,918 ing one transaction by means of another to reduce price risk.) ; Maturing debt and sinking funds 210 660 270 Both hedging and non-hedging activities are limited to those Total capital requirements 52,232 52.604 52,188 specifically approved by the committee only after appropriate controls and procedures are put in place to measure, monitor, ( and control the risk of such activities.The Company's policy ; Utility and Diablo Canyon expenditures will be primarily for ' Prohibits the use of derivatives whose payment formula improvements to the Company's facilities to enhance their effi. includes a multiple of some underiying asset. ciency and reliability, to extend their useful lives, and to comply with environmental laws and regulations. I" I990' the Company approved and implemented interest rate and foreign exchange risk management programs, applied j Expenditures for diversified operations (consisting primarily of Enterprises) include capital contributions for Enterprises. f r regulatory approval to use energy derivatives to manage I c mm dity price risk in its utility business, and acquired equity share of generating facility projects. Ongoing capital expenditures for Teco are included in diversified operations in cenain natural gas marketing operations which engage in ! both hedging and non-hedging derivative transactions. Gains the above estimated capital requirements. in addition to the above, the Company,in January 1997, and ines associated with price risk management activities ; during 1996 were immaterial. has acquired Teco for approximately $380 million, consisting of a note payable of $61 million and $319 million of PG&E l Corporation's common stock. Further, the Company, in January Environmeneal Matters: The Company's projected , 1997, agreed to acquire Valero for approximately $1.5 billion, expenditures for environmental protection are subject to consisting of approximately $720 million of PG&E Corporation's Periodic review and revision to reflect changing technology L common stock and the assumption of debt and liabilities. The and ev lying regulat ry requirements. Capital expenditures Company has other commitments as discussed in Notes 3 and i r envir nmental rotection P are currently estimated to be
' 12 to the Consolidated Financial Statements.
aPProximately $36, $50, and $72 million for 1997,1998, and { in December 1995, the Company had a balance of $734 mil- , respectively. Expenditures during these years will be pri-
, {
lion of cash and cash equivalents due to the sale of DALEN and marily for nitrogen oxide (NOx) emission reduction projects the retention of cash for potential investments. at the Company's fossil fuel generating plants and natural gas compressor stations. Pursuant to federal and state legislation, e j i i I 18 t
- - ._. D
local air districts have adopted rules that require reductions in Accounting for Decommissioning Expense: NOx emissions. These rules are subject to continued review in 1996, the Financial Accounting Standards Board issued an I o and modification by the local air districts in which PGM oper- exposure draft on a proposed SFAs entitled" Accounting for I ates.The Company currently estimates that compliance Certain Liabilities Related to Closure or Removal of Long- I with NOx rules could require capita! expenditures of up to Lived Assets."If this exposure draft is adopted:(1) annual
$360 million over the next ten years. expense for power plant decommissioning could increase, and On an ongoing basis, the Company assesses compliance (2) the estimated total cost for power plant decommissioning with laws and regulations related to hazardous substance could be recorded as a liability, with recognition of an increase remediation.The Company has an accrued liability at in the cost of the related power plant, rather than accrued December 31,1996, of $170 million for remediation costs at over time as accumulated depreciation.The Company does sites where such costs are probable and quantifiable.The costs not believe that this change,if implemented as proposed, at identified sites may be as much as $400 million if, among would have a material adverse impact on its results of other things, other potentially responsible parties are not operations due to its current and future ability to recover financially able to contribute to these costs, or identifiable pos- decommissioning costs through rates. (See Note 2 to the sible outcomes change.The Company will seek recovery of Consolidated Financial Statements for discussion of electric prudently incurred compliance costs through ratemaking pro- industry restructuring.)
cedures approved by the CPUc.The Company has recorded a regulatory asset at December 31,1996, of $146 million inflation: The Company's rates are designed to recover for recovery of these costs in future rates. Additionally, operating and historical plant investment costs. Financial the Company will seek recc" cry of costs from insurance statements, which are prepared in accordance with carriers and from other third parties. (See Note 13 to the generally accepted accounting principles, report operating Consolidated Financial Statements.) results in terms of historic costs and do not evaluate the Effective January 1,1997, the Company will adopt the impact of inflation. provisions of the American Institute of Certified Public Inflation affects the Company's construction costs, operating Accountants
- Statement of Position (SOP) 96-l. Environmental expenses, and interest charges. Due to the Company's five-Remediation Liabilities.This sop provides authoritative guid- year electric rate freeze, electric revenues will not reflect the !
ance for recognition, measurement, display, and disc losure of impact of inflation. However, inflation at the levels currently environmental remediation liabilities in financial statements. being experienced is not expected to have a material adverse The adoption of SOP 96-1 is not expected to have a material impact on the Company's future results of operations. adverse impact on the Company's financial position or results of operations. Legal Matters: In the normal course of business, the Company is named as a party in a number of claims and law-suits. Substantially all of these have been litigated or settled with no material adverse impact on either the Company's j results of operations or financial position. In addition, the Company believes that the litigation or settlement of pending claims and 8" suits will not have a material adverse impact on its result- ~ uperations or financial position. See Note 13 to the Consolidated Financial Statements for further discussion of significant pending legal matters. b 19
PGSE Corporation
. Statement of Consolidated income Year ended December 31, 1996 1995 1994 On thousands, except per share amounts)
Operating Revenues Electric utility $7,160,215 $7,386,307 $ 8,021,547 ,, Gas utility ' 939,802 2,059,117 2,081,% 2 Diversified operations 409,955 176,34l 247,621 Total operating revenues 609,972 9,621,765 10,350,230 Operating Expenses Cost of electric energy 2,303,488 2,116,840 2,570,723 Cost of gas - 761,837 333,280 583,356 Maintenance and other operating 2,118,174 1,799,781 1,855,585 Depreciation and decommissioning 1,221,952 1,360,118 1,397.470
. Administrative and general I,016,439 971,576 973,302 Workforce reduction costs -
(18,195) 249,097 ' Property and other taxes 292.497 295,380 296,91i Total operating expenses 7,714,387 6,858,780 7,926,444 Operating income 1,895,585 2,762,985 2,423,786 Intes est income 72,900 72,524 79,643 Interest expense (639,823) (688,408) (729,207) Other income and (expense) (18,459) 87,073 69.995 Pretax income 1,310,203 2,234,174 1,844,217 income Taxes 554,994 895,289 836,767 Net income 755,209 1,338,885 1,007,450 Preferred dividend requirement and redemption premium 33,113 70,288 57,603 Earnings Available for Common Stock $ 722,096 $1,268,597 $ 949,847 Weighted Average Common Shares Outstanding 412.542 423,692 429,846 Earnings Per Common Share $ 1,75 5 2.99 $ 2.21 Dividends Declared Per Common Share $ l.77 $ l.96 $ l.96 The accompanymg Notes to the Consolidated hnancial Statements are an 6ntegral part of this sutament. 20
PG&E Corporation Statement of Consolidated Cash Flows Year ended December 31 1996 1995 1994 e (in thousands) Cash Flows From Operating Activities
.. Net income $ 755,209 $1,338,885 $1,007,450 Adjustments to reconcile net income to net cash provided by
- operating activities Depreciation and decommissioning 1,221,952 1,360,118 1,397,470 ,
Amortization 93.948 89,353 95,331 : Deferred income taxes and tax credits-net (149,990) (116.069) 15.312 Other deferred charges 94,475 61,700 32.740 l Other noncurrei.. 'iabilities 113,244 (17,218) 181,902 , Noncurrent balancing account liabilities and other deferred credits (185,390) (69,787) 316,920 Net effect of changes in operating assets and liabilities Accounts receivable (46.368) 212,515 (116,936) Regulatory balancing accounts receivable 302,188 498,756 (269,250) Inventories 32,043 32,409 66,783 Accounts payable 193,012 49,702 (l10,033) Accrued taxes 36,014 (162.374) 132,892 Other working capital (6,234) 8.304 5,821 l' Other-net 156,773 50,423 191,285 Net cash provided by operating activities 2,610,876 3,336,717 2,947,687 ; Cash Flows From investing Activities ; Capital expenditures (1,230,33l} (944,618) *l.126,904) Diversified operations (99,532) (178,874) (308,810) Acquisition of PCT Queensland Gas Pipeline (136,227) - - Acquisition of Energy Source (23,270) - - Proceeds from sale of cauN - 340,000 - Other-net (119,923) (122,913) (29,914) ; Net cash used by investing activities (1,609,283) (906,405) (1,465.628) i Cash Flows From Financing Activities ; i Common stock issued 219,726 139,595 274,269 Common stock repurchased (455.278) (601,360) (181,558) ;
- - 62,312 Preferred stock issued Preferred stock redeemed or repurchased -
(358,212) (82,875)
- Company obligated mandatority redeemable preferred securities issued - 300,000 -
Long-term debt issued 1,087.732 591,160 60,907 1.ong-term debt matured, redeemed, or repurchased (1,471.390) (1,296,549) (436,673) ; (115,243) 305,262 (239,478) ; Short-term debt issued (redeemed)--net L Dividends paid (843,997) (891,270) (891,850) ; (14,036) (21,543) 28,721
- Other-net Net cash used by financing activities (1,592,486) (1,832,917) (1,406,225)
(590,893) 597.395 75,834 Net Change in Cash and Cash Equivalents 734,295 136,900 61,066 Cash and Cash Equivalents at January I Cash and Cash Equivalents at December 31 5 143,402 $ 734,295 $ 136,900 Supplemental disclosures of cash flow information Cash paid for
$ 598,394 5 644,978 $ 674,758
- Interest (net of amounts capitalized) 639,813 1,125,635 712.777 income taxes The accompanymg Notes to the Consolidated Financial Statements are an integral part of this statement 21
PGAE Corporation Consolidated Balance Sheet December 31, 1996 1995 e ' (in thousands) Assets Plant in Service - ** Electric Nonnuclear - $18,099,342 517,530,446 Diablo Canyon 6,658,137 6,646,853 Gas 8,138,106 7,732,681 Total plant in service (at original cost) 32,895,585 31,909,980 Accumulated depreciation and decommissioning (14,301,934) (13,311,500) Net plant in service 18,593.651 18.598,480
. Construction Work in Progress 414,229 333.263 Other Noncurrent Assets Nuclear decommissioning funds 882,929 769,829 investment in nonregulated projects 817,259 855,962 Other assets 134,271 130,128 Total other noncurrent assets 1,834,459 1,755,919 Current Assets Cash and cash equivalents 143,402 734,295
' Accounts receivable, net 1,499,674 1,268,936 Regulatory balancing accounts receivable 444,156 746,344 Inventories Materials and supplies 185,771 181,763 Gas stored underground 130,229 146,499 Fuel oit 23,433 40,756 Nuclear fuel 190,652 175,957 Prepayments 54,116 . 47,025 Total current assets 2,671,433 3,341,575 Deferred Charges . Income tax-related deferred charges 1,133,043 1,079,673 Other deferred charges 1,483,110 1,741,380 Total deferred charges 2,616,153 2,821,053 Total A: sets $26,129,925 526,850,290 The accompanying Notes to the Consolidated Financial Statements are an 6ntegral part of this staterrent. i i 22
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PG&E corporation Consolidated Balance Sheet December 31, 1996 1995 (in thousands) Capitalization and Liabilities
- w. . Capitalization Common stock equity 5 8,363,301 5 8,599,133 Preferred stock without mandatory redemption provisions 402,056 402,056 Preferred stock with mandatory redemption provisions 137,500 137,500 Company obligated mandatorily redeemable preferred securities of trust holding solely PGAE subordinated debentures 300,000 300,000 Long-term debt 7,770,067 8,048,546 Total capitalization 16,972,924 17,487,235 Current Liabilities
- Short-term borrowings 680,900 829,947 l Current portion of long-term debt 209,867 304,204
~l Accounts payable
- Trade creditors 834,143 413,972 Other 365,499 387,747 i Accrued taxes 310,271 274,093 Amounts due customers 186,899 49,175 l l
Deferred income taxes 157,064 227,782 Interest payable 63,193 70,179 Dividends payable 123,310 205,467 l Other 309,104 455,798 l Total current liabilities 3.240,250 3,218,364 Deferred Credits and Other Noncurrent Liabilities
. Deferred income taxes 3,941,435 3,933,765 l
Deferred tax credits 379,563 393,255 Noncurrent balancing account liabilities 120,858 185,647 Other 1,474,895 1,632,024
- Total deferred credits and orb- noncurrent liabilities 5,916,751 6,144,691 Commitments and Contingencies (Notes I,2,3,12,and 13) - -
Total Capitalization and Liabilities $26,129,925 $26.850,290 l c t , l ! L ! L f f 23 l
PG&E Corporation Statement of Consolidated Common Stock Equity, Preferred Stock, and Preferred Securities Preferred Preferred Stock Stock Total Without With Additional Common Mandatory Mandatory Common Paid in Remvested Stock Redemption Redemption (dollars in thousands) Stock Capital Earnings Equity Provisions Provisions BaIance December 3i, I993 $2,136,095 $3,666,455 $2.643,487 $8,446,037 $ 807,995 $ 75,000 Net income 1,007,450 1,007,450 Common stock issued (10,508,483 shares) _ 52,543 221,726 274,269 Common stock repurchased (7,485,001 shares) (37,425) (66,334) (77,799) (181,558) Preferred stock issued (2,500,000 shares) (188) (188) 62,500 Preferred stock redeemed (3,000,000 shares) (5,331) (2,544) (7.875) (75,000) Cash dividends declared Preferred stock (58,203) (58,203) Common stock (840,627) (840,627) Other (9,820) 5,540 (4,280) Balance December 3i, I994 2,151,213 3,806,508 2,677,304 8,635,025 732,995 i37,500 Net income 1,338,885 1,338,885 Common stock issued (5,316,876 shares) 26,584 l 13,01 I 139,595 Common stock repurchased (21,533,977 shares) (107,669) (195,383) (298,308) (601,360) Preferred securities issued * (12,000,000 shares) 300,000 Preferred stock redeemed or repurchased (13,237,554 shares) (7,814) (19,459) (27,273) (330,939) Cash dividends declared
~
Preferred stock (56,006) (56,006) Common stock (829,828) (829,828) Other 95 95 Balance December 31,1995 2,070,128 3,716,322 2,812,683 8,599,133 402,056 437,500 Net income 755,209 755,209 Common stock issued (9,290,102 shares) 46,448 173,278 219,726 j Common stock repurchased -l (19,811,396 shares) (99,055) (181,088) (174,135) (455.278) 1 Cash dividends declared I Preferred stock (33,113) (33,113) ] Common stock (728,727) (728,727) l Other 2,381 3,970 6,351 ! Balance December 31,1996 $ 2,017,521 $3,709,893 $2,635,887 $8,363,301 $ 402,056 $437,500 { k
- Relates to company obhgated mandatorily redeemable preferred securities of trust holding solely acas subordmated debentures. .e The accompanymg Notes to the Consolidated Financial Statements are an integral part of this statement.
24
PGaf Corporation Statement of Consolidated Capitalization l December 31, 1996 1995 (dollars in thousands, except per share amounts) Common Stock Equity ,, Common stock, par value $5 per share (authorized 800,000,000 shares, issued and outstanding 403,504,292 and 414,025,856) $ 2,017,52l $ 2,070,128 Additional paid-in capital 3,709,893 3,716,322 Reinvested earnings 2,635,887 2,812,683 Common stock equity 8,363,301 8,599,133 Preferred Stock and Preferred Securities Preferred stock without mandatory redemption provisions Par value $25 per share"' Nonredeemable 5% to 6%-5,784,825 shares outstanding 144,621 144,621 Redeemable 4.36% to 7.44%--10,297,404 shares outstanding 257,435 257,435 Total preferred stock without mandatory redemption provisions 402,056 402.056 Preferred stock with mandatory redemption provisions Par value $25 per share"' 6.30% and 6.57%-5,500,000 shares outstanding, due 2002-2009 137,500 137,500 Preferred stock 539,556 539,556 Company obligated mandatorily redeemable preferred securities of trust holding solely PG&E subordinated debentures 7.90%--12,000,000 shares outstanding, due 2025 300,000 300,000 Long-Term Debe PGAE long-term debt First and refunding mortgage bonds Maturity Interest rates 1996-2001 4.50% to 8.75% 880,450 915,249 2002-2006 5.875% to 7.875% I,392,135 1,450,000 2007-2012 6.25% to 8.875% 475,000 477,870 2013-2019 7.5% to 8.2% 45,000 105,000 2020-2026 5.85% to 8.875% 2,627,736 2,749,651 Principal amounts outstanding 1 5,420,321 5,697,770 Unamortized discount net of premium (49,923) (55,802) Total mortgage bonds 5.370,398 5,641,968 Debentures,12%, due 2000 57,539 57,539 Pollution control loan agreements, variable rates, due 20l6-2026 987,870 925,000 Unsecured medium-term notes,4.93% to 9.9%, due 1997-2014 828,900 I,096,400 Unamortized discount related to unsecured medium-term notes (1,IB7) Other long-term debt (1,652) 32,800 20,298 Total PG&E long-term debt 7,276,320 7,739,553 Long-term debt of PGT and Enterprises 703.6I4 613,197 Total long-term debc 4 _ 7,979,934 8.352,750 Less current portion 209,867 304,204 Long-term debt, excluding current portion 7,770,067 8,048,546 Total capi:atization _
$ l6,972,924 $17,487,235 '" Authorized 75.000.000 shares in total (both with and without mandatory redemption provisions).
The accompanying Notes to the Consohdated Fmancial Statements are an integral part of this statement. 25
.]
l l PG&E Corporation Statement of Consolidated Segment Information
)
Electric Gas Diversif,ed Intersegment i Utility Utility Operations
- Elimmations Total (in thousands) 1996 Operating revenues $ 7,160 015 $2,039,802 $ 409.955 $ - $ 9,609,972 - ;
intersegment revenues
- 12,156 69,645 -
(81,801) - l Total operating revenues ~ $ 7,172,371 $2.109,447 $ 409,955 $(8l,801) $ 9,609,972 l Depreciation and decommissioning $ 919,958 $ 288,994 $ 13,000 $ - $ 1,221,952 ;
"Jperating income before j income taxes
- 1,757,611 liH,506 (47,921) 1,389 1,895,585 Capital expenditures
- 921,425 4 9,074 23,270 - 1,403,769 identifiable assets * $ 18,005,105 $6,'e 15.028 $1,434,216 $ - $25,654,349 i Corporate assets 475,576 Total assets at year end $26,129,925 ,
r 1995 ; Operating revenues $ 7,386,307 $2,059,117 $ 176,341 $ - $ 9,621,765 l Intersegment revenues
- 12.678 85,356 - (98,034) -
l Total operating revenues $ 7,398.965 . $. 2,144,473 $ 176,341 $(98.034) $ 9,621,765 i Depreciation and decommissioning $ 1,007,467 $ 306,717 $ 45,934 $ - $ 1,360,118 l Operating income before r income taxes
- 2,267,193 540,378 (46,618) 2,032 2,762,985 Capital expenditures
- 679,866 282,724 2,067 - 964,657 Identifiable assets * $18,610,610 $6,064.596 $1,042,764 $ - $25,717,970 5 Corporate assets 1,132,320 Total assets at year end $26,850,290 1994 Operating revenues 5 8,021,547 $2,081,062 $ 247,621 $ - $10.350,230 Intersegment revenues
- 12,852 85,34l - (98,193) -
Total operating revenues $ 8,034,399 $2,166,403 $ 247,621 $(98,193) 510,350,230 Depreciation and decommissioning $ 982,859 $ 295,979 $ I18,632 $' - $ 1,397,470 Operating income before income taxes
- 2,187,569 271,537 (32,093) (3,227) 2,423,786 Capital expenditures
- 834,494 292,000 19,456 - 1,145,950 identifiable assets * $19,637,222 $6,167,314 $1,436,128 $ - $27,240,664 Corporate assets - 467,900
$27,708,564 <
Total assets at year end
- Intersegment electric and gas revenues are accountad for at tariff rates prescribed by the cruc.
- General corporate expenses are allocated in accordance with FERC Uniform System of Accounts and requirements of the CPUC. (
- Includes an allocanon of commim plant M service and allowance for funds used during construction. .
- Represents the nonregulated operations of wholly-owned subsidiaries including Enterprmes, Miss6on Trail insurance Ltd. (hability insurance). and Energy Sourte
-- (gas marketing).
The accompanymg Notes to the Consohdated Fmancel statements are an integral part of this schedule.
- 26
~ ' ~ ~
ross corporassen Notes to Consolidated Financial Statements Note 1: Significant Accounting Policies Accounting Standards (srAs) No. 71," Accounting for the Corporate Restr ucturing: Effective January I,1997, Effects of Certain Types of Regulation." This scatement allows Pacific Gas and Electric Company (PG&E) became a subsidiary the Company to record certain regulatory assets and liabilities of its new parent holding company, PG&E Corporation. PG&E's which would be included in future rates and would not be ownership interest in Pacific Gas Transmission Company (PGT) recorded under generally accepted accounting principles for and PG&E Enterprises (Enterprises) was transferred to PG&E nonregulated entities. Corporation. PG&E's outstanding common stock was converted Effective January 1,1996, the Company adopted srAs No. on a share-for-share basis into PGAE Corporation's outstanding 121," Accounting for the Impairment of Long-Lived Assets and common stock. PG&E's debt securities and preferred stock for Long-Lived Assets to Be Disposed Of." srAs No.121 pre-ware unaffected and remain securities of PG&E. The members scribes general standards for the recognition and measurement of PG&E's current Board of Directors became directors of ofimpairment losses. In addition, it requires that regulatory PG&E Corporation. assets continue to be probable of recovery in rates, rather than only at the time the regulatory asset is recorded. Basis of Presentation: The consolidated financial Regulatory assets currently recorded would be written off if statements include the accounts of PG&E and its wholly-owned recovery is no longer probable. Adoption of this standard had and controlled subsidiaries (collectively, the Company) and, no material impact on the Company's financial position or therefore, also represent the accounts of PG&E Corporation results of operations, and its subsidiaries. All significant intercompany transactions On an ongoing basis, PG&E reviews its regulatory assets and have been eliminated. Certain amounts in the prior years' liabilities for the continued applicability of srAs No. 71 and the consolidated financial statements have been reclassified to conform to the 1996 presentation. effect of srAs No.121. (See Note 2 for further discussion.) Net regulatory assets and liabilities include the following: The preparation of financial statements in conformity with December 31, generally accepted accounting principles requires manage- 1996 199s (m mdhons) ment to make estimates and assumptions. These estimates Deferred income tax $1,133 $l,080 and assumptions affect the reported amounts of revenues. Unamortized loss net of gain on reacquired expenses, assets, and liabilities and disclosure of contingencies. debt 377 392 Actual results could differ from these estimates. Diablo Canyon pre-settlement costs 364 382 Workers' compensation and disability claims costs 288 297 Operations: The Company and its subsidiaries provide Regulatory balancing accounts (net) 323 561 dectric and natural gas services and retail energy services. Other deferred (net) 267 474 PG&E is a regulated public utility which provides generation,
$2.752 $3,186 procurement, transmission, and distribution of electricity and natural gas throughout most of Northern and Central Cahfornia. PGT transports gas from the Canadian border to Revenues and Regulatory Balancing Accounts:
the California border and the Pacific Northwest. PGT also Revenues are recorded primarily for delivery of gas and has operations in Australia and Texas. Enterprises, through electric energy to customers. Electric and gas utility revenues its subsidiaries and affiliates, develops, owns, and operates include amounts for services rendered but unbilled at the end ciectric and gas projects and provides energy services, of the year. Revenues also are recorded for changes in regula-tory balancing accounts established by the CPUC. Specifically, sales balancing accounts accumulate differences between " wegulation: PG&E is regulated by the Cahfornia Pubh. c Utilities Commission (CPUc), the Federal Energy Regulatory authorized and actual base revenues. Energy cost balancing Commission (FEnc), and the Nuclear Regulatory Commission, accounts accumulate differences between the actual cost of 3 among others. PG&E currently accounts for the economic gas and electric energy and the revenues designated for effects of regulation in accordance with Statement of Financial recovery of such costs. Recovery of gas and electric energy costs through energy cost balancing accounts is subject to 27
- . _.. m - _ __ _ _ _-._m . . _. 1 _ _ ,
i PGAE Corporation ) Notes to Consolidated Financial Statements s - reasonableness reviews by the cPUC.The regulatory balancing facilities is comprised of the total cost (including labor, materi-accounts accumulate balances until they are refunded to als, and other costs) of decommissioning and dismantling or received from utility customers through authorized plant systems and structures. In addition, a contingency rate adjustments. amount for possible changes in regulatory requirements and increases in waste disposal costs is included in the estimated DiyIdend Restriction 1 PGAE is limited as to the amount total obligation. of dividends that it may pay to PG&E Corporation based on The estimated total obligation for nuclear decommissioning PG&E's regulatory capital structure authorized by the CPUC. costs, based on a 1994 site study,is approximately $1.2 billion PG&E's equity shall be retained such that, on average, the capital in 1996 dollars (or $5.9 billion in future dollars). Actual structure authorized by the cPUc is maintained. This restric- decommissioning costs are expected to vary from this esti-tion is not expeced to affect PG&E Corporation's ability to mate because of changes in assumed dates of decommis-meet its cash obligations. sioning, regulatory requirements, technology, and costs of labor, materials, and equipment. The estimated total obliga. Financial Derivative instruments (Derivatives): tion is being recognized proportionately over the license The Company engages in price risk management activities to of each facility, manage risks associated with changes in energy commodity For the years ended December 31,1996,1995, and 1994, prices, interest rates, and foreign currencies. These price risk nuclear decommissioning costs recovered in rates through an management activities include the use of derivatives. annual allowance were $33, $54, and $54 million, respectively. Gains and losses on derivatives used for hedging purposes Based on the 1994 site study, the amount assumed to be are intended to offset losses and gains on the underlying recovered in rates in 1997 and annually up to the commence-hedged item. Under hedge accounting, changes in the market ment of decommissioning is $33 million. This amount will be value of these transactions are deferred and recognized as an reviewed in future rate proceedings. addition to the income or expense of the underlying instru- At December 31,1996, the total nuclear decommissioning ment upon completion of the underlying transaction. All 1996 obligation accrued was $889 million and was included in the transactions were accounted for,using hedge accounting. Gains balance sheet classification of Accumulated Depreciation and and losses associated with derivative transactions during 1996 Decommissioning. were immaterial. Decommissioning costs recovered in rates are placed in external trust funds. These funds along with accumulated earn-Plane in Service: The cost of plant additions and replace- ings will be used exclusively for decommissioning. (See Note 8 ments includes labor, materials, construction overhead, and an for further discussion of nuclear decommissioning funds.) allowance for funds used during construction (Arvoc) or capi- Decommissioning is scheduled to begin for Diablo Canyon talized interest. AFUoc is the estimated cost of debt and equity Nuclear Power Plant's (Diablo Canyon) Unit I and Unit 2 in funds used to finance regulated plant additions. Capitalized 2015 and 2016 respectively, with scheduled completion for interest is the interest incurred on borrowed funds used to both units in 2034.The decommissioning method selected for finance nonregulated plant additions. The original cost of Diablo Canyon anticipates that the facilities will be decontami-retired plant and removal costs less salvage value is charged to nated to a level that permits the property to be released for ( accumulated depreciation upon retirement of plant in service, unrestricted use. Plant in service is depreciated using a straight-line remain- Decommissioning for Humboldt Bay Power Plant is ing-life method. The Company's composite depreciation rates scheduled to begin in 2015.The decommissioning method c were 3.65,4.09, and 4.31 percent for the years ended selected consists of placing and maintaining the facility in . December 31,1996,1995, and 1994. protective storage until some future time when dismantling can be initiated. Nuclear Decomrnissioning Costs: The estimated PG&E, as required by federal law, has signed a contract total obligation for decommissioning PG&E's nuclear power with the U.s. Department of Energy (ooE) to provide for the i l 28 l
disposal of spent nuclear fuel and high-level radioactive waste in 1996. California legislation was passed that adopts the from PG&E's nuclear power facilities beginning not later than basic tenets of the cPUC's restructuring decision, including January 1998. However, due to delays in identifying a storage recovery of transition costs. In addition, the legislation pro-site, the DOE has officially acknowledged that it will not be able vides a 10 percent rate reduction for residential and small to meet its contract commitment. The DCE's cur' . t estimate commercial customers byJanuary 1,1998, freezes electric for an available site to begin accepting physical possession of customer rates for all other customers, and requires the the spent nuclear fuel is 2010. accelerated recovery of transition costs associated with At the projected level of operation for Diablo Canyon, owned generation facilities. The legislation also establ shes the PGAE's facilities are sufficient to store on-site all spent fuel operating framework for a competitive generation market. produced through approximately 2006. It is likely that an The rate freeze will continue until the earlier of March 31, interim or permanent ooE storage facility will not be available 2002, or until PG&E has recovered its transition costs (the tran-for Diablo Canyon's spent fuel by 2006. PG&E is examining sition period). The freeze will hold rates at 1996 levels for all options for providing additional temporary spent fuel storage customers except those receiving the 10 percent rate reduc-at Diablo Canyon or other facilities, pending disposal or stor-tion. The rate freeze will hold the rates for these customers at age at a DOE facility. the reduced level. To achieve the 10 percent rate reduction, the legislation Gains and Losses on Reacquired Debt: Gains and authorizes utilities to finance a portion of their transition costs losses on reacquired debt charged to operations subject to the with " rate reduction bonds." The maturity period of the bonds provisions of sFAs No. 71 are deferred and amortized over the is expected to extend beyond the transition period. Also, the remaining original lives of the debt reacquired, consistent with interest cost of the bonds is expected to be lower than PG&E's ratemaking principles. Gains and losses on reacquired debt current cost of capital. Once this portion of transition costs associated with other operations are recognized in earnings at is financed, PG&E would collect a bond service payment to the time such debt is reacquired. recover principal, interest, and istuance costs over the life of the bonds from residential and small commercial customers. Inven torie s: Stored nuclear fuel inventory is stated at The combination of the longer maturity period and the lower of average cost or market. Nuclear fuelin the reactor reduced interest costs will lower the amounts paid by these is amortized based on the amount of energy output. Other customers each year during the transition period thereby inventories are valued at average cost except for fuel oil, which achieving the 10 percent reduction in rates. is valued by the last-in-first-out method. Tax-exempt trusts have been established to oversee the development of the operating framework for the competitive Cash Equivalents: Cash equivalents (stated at cost, which generation market. The cPUc has authorized California utilities approximates market) include working funds and short-term to guarantee bank loans of up to $250 million to be used by investments with original matunties of three months or less. the trusts for this purpose. Under this authorization, PG&E will guarantee a maximum of $112.5 million of these loans. Note 2: Electric industry Restructuring in 1995, the cPUc issued a decision that provides a plan to Transition Cost Recovery: The legislation authorizes restructure California's electric utility industry. The decision the CPUC to determine the costs eligible for recovery as transi-acknowledges that much of utilities' current costs and commit-tion costs.The amount of costs will be based on the aggregate ments result from past CPUc decisions and that,in a competi- of above-market and below-market values of utility-owned tive generation market, utilities would not recover some of generation assets and obligations. PG&E has proposed that costs these costs through market-based revenues. To assure the eligible for transition cost recovery include:(1) above-market continued financialincegrity of California utilities, the CPUC sunk costs (Costs associated with utility generating facilities
)
authorized recovery of these above-market costs, called that are fixed and unavoidable and currently collected through
" transition costs."
rates) and future costs, such as costs related to plant removal, f 29
PGSE Corporation Notos to Consolidated Financial Statemonts (2) above-market costs associated with purchase power obliga- Given th. electric customer rate freeze, the $560 million tions with Qualifying Facilities (QFs) and other Power Purchase net revenue requirement decrease resulting from the consoli-Agreements, and (3) generation-related regulatory assets and dation of the ECAC decision and the revenue requirement " obligations. PG&E rannot determine the exact amount of sunk increase contemplated in the cost recovery plan would be costs that will be above market and recoverable as transition available for transition cost recovery.The proposed acceler-costs until a market valuation process (appraisal or sale) is ated recovery of Diablo Canyon would absorb an estimated completed for each generation facility.This process will be $400 million of this available revenue requirement.The remain-completed during the transition period. Ing revenue requirement would be available to recover other Most transition costs must be recovered by March 1,2002, transition costs. However, the legislation authorizes recovery of certain transi-tion costs after that time.These costs include:(1) certain Accounting for the Effects of Regulation: As a employee-related transition costs,(2) payments under existing result of applying the provisions of sFAs No. 71 (discussed in QF and power purchase contracts, and (3) unrecovered imple- Note I above), PG&E has accumulated approximately $1.6 bil-mentation costs. Excluding these exceptions, any trans:s lion of regulatory assets attributable to electric generation at costs not recovered during the transition period will be December 31,1996. The net investments in Diablo Canyon absorbed by PGAE, Nuclear decommissioning costs, which are and the other generation assets were $4.5 and $2.7 billion, not considered transition costs, will be recovered through a respectively, at December 31,1996. The net present value of CPUC authorized charge. During the transition period, this above-market or power purchase obligations is estimated to charge will be incorporated into the frozen rates. After the be $5.3 billion at January 1,1998, at an assumed market price transition period, customers will be assessed a surcharge until - of $0.025 per kilowatt-hour (kWh) beginning in 1997 and the nuclear decommissioning costs are fully recovered. escalating at 3.2 percent per year, PG&E's ability to recover its tranJition costs during the PG&E believes that the restructuring legislation establishes a transition period will be dependent on several factors.These definitive transition to market-based pricing for electric gener-factors include:(1) the extent to which application of the cur- ation. Incorporating the effects of the competitive auction pric. rent regulatory framework established by the restructuring ing of electricity and customer direct access, this transition legislation will continue to be applied,(2) the amount of transi- includes cost-of-service based ratemaking. In addition, PGAE's tion costs approved by the CPuC (3) the market value of its generation-related transition costs will be collected through a generation plants (4) future sales levels,(5) fuel and operating nonbypassable charge. Based on this structure, PGAE believes costs, (6) the market price of electricity, and (7) the ratemak- it will continue to meet the requirements of sFAs No. 71 ing methodology adopted for Diablo Canyon. Considering its throughout the transition period, current evaluation of these factors, PG&E believes it will recover At the conclusion of the transition period, PG&E believes it its transition costs and that its owned generation plants are will be at risk to recover its generation costs through market-not impaired. However, a change in these factors could affect based revenues. At that time PG&E expects to discontinue the the probability of recovery of transition costs and result in a application of sFAs No. 71 for the electric generation portion material loss. of its business. Since PG&E anticipates it will have recovered all PGAE has proposed to implement portions of its transition transition costs required to be recovered during the transition cost recovery plan in 1997.The CPUC decision on PG&E's 1997 period, including generation-related regulatory assets and Energy Cost Adjustment Clause (ECAC) application would above-market investments in net plant, PG&E does not expect a decrease PG&E's 1997 revenue requirement by $720 million. material adverse impact on its financial position or results of This decrease would be partially offset by a $160 million rev- operations from discontinuing the application at that time. f enue requirement increase, provided by the legislation, for As a result of the CPuC's restructuring decision and purposes of enhancing transmission and distribution system California's electric industry restructuring legislation, the safety and reliability.This increase was approved by the CPUC Securities and Exchange Commission (sEC) has begun inquiries a as part of PG&E's transition Cost recovery plan, regarding the appropriateness of the continued application of 30
srAs No. 71 by California utihties to their electric generation reasonableness proceedings are conducted by the cPUC on businesses. As discussed above, PG&E believes it currently a historic calendar year basis. o meets and will continue to meet the requirements to apply In 1994, the cPUc issued a decision which ordered a SFAs No. 71 during the transition period. In the event that the disallowance of approximately $90 million of gas costs plus SEC concludes that the current regulatory and legal framework accrued interest of approximately $25 million through 1993 in California no longer meets the requirements to apply sFAs for PG&E's Canadian gas procurement activities from 1988 No. 71 to the generation business, the Company would reeval- through 1990. PG&E has filed a lawsuit in a federal district court unte the financial impact of electric industry restructuring and challenging the cPUc's decision on Canadian gas costs. PG&E a material write-off could occur. expects this issue to be resolved as part of the Accord dis-Given the current regulatory environment, PG&E's electric cussed above. Under the Accord, PG&E would agree to forgo tr mmission and distribution businesses are expected to recovery of the $90 million disallowance ordered in the 1988 remain regulated arid, as a result, will continue application of through 1990 gas reasonableness proceeding, irrespective of the provisions of SFAs No. 71, the outcome of the lawsuit. A number of other reasonableness issues related to PG&t's Noee 3: Natural Gas Matters gas procurement practices, transportation capacity commit-The Gas Accord Settiement (Accord):In an effort ments, and supply operations for periods dating from 1988 to to promote competition and to give all residential and smaller 1994 were resolved when the CPUC accepted a settlement in commercial (core) customers the same options that exist for December 1996 between PG&E and the Office of Ratepayer industrial and larger commercial (noncore) customers, PG&E Advocates (onA) of the cruc. Under the terms of that submitted the Accord to the cPUC in 1996. In addition to offer- settlement, PG&E will return $67 million plus interest to ing increased customer choice, the Accord would establish gas ratepayers in 1997. PG&E has previously recorded reserves for transmission rates for the period July 1997 through December this settlement. 2002 and resolve various pending regulatory issues.The Accord must be approved by the CPUC before it can be imple- PGT/PG&E Pipeline Expansion: In November 1993, mented. A CPUC decision is expected in 1997. the Company expanded its natural gas transmission system The major outstanding gas regulatory issues that the Accord providing additional firm transportation capacity from the would resolve include the 1988 through 1995 gas reasonable- Canadian border to Northern and Southern California and ness proceedings, the initial capital costs for the PGAE Pipeline the Pacific Northwest, Expansion, the interstate transition cost surcharge (rrcs) PG&E has filed an application with the cPUC requesting recovery, and the PG&E pipeline transportation commitments, that capital costs of $810 million and ongoing operating costs all of which are discussed in further detail below. for the PGAE, or California, portion of the Pipeline Expansion As of December 31,1996, PG&E has reserved approximately be found reasonable. Revenues are currently being collected
$527 million, including $182 million reserved during 1996, under interim rates approved by the cPUc, subject to relating to its gas regulatory issues and gas capacity commit- adjustment.
ments, the majority of which are addressed by the Accord.The In 1996, a CPUc Administrative Law judge (Ay) ordered Company believes the ultimcte resolution of these matters, consolidation -f the market impact phase of the PG&E Pipeline whether through approval of the Accord or otherwise, will not Expansion reasonableness proceeding and the ITcs proceeding have a material adverse impact on its financial position or discussed below. An Ay also ordered reopening of the 1993 i future results of operations. PG&E Pipeline Expansion Rate Case to allow reconsideration of issues regarding the decision to construct the PG&E Pipeline Gas Reasonableness Proceedings: Recovery of gas Expansion.Were the CPUC to reverse its previous decision, costs through PG&E's regulatory balancing account mechanisms which found that PG&E was reasonable in constructing the PG&E a is subject to a CPUc determination that such costs were rea. Pipeline Expansion, the ultimate outcome could have an sonable. Under the current regulatory framework, annual adverse impact on PG&E's abil ty to recover its cost for unused 31
PG&E Corporation N ote s to C o n solidate d Fin a n cial Statem e nts capacity on other pipelines as well as on its own intrastate Transwestern Pipeline Company (Transwestern) that will be facilities. PG&E expects these issues to be resolved as part of brokered or assigned. the Accord discussed above. Under the Accord, PG&E would Substantially all demand charges incurred by PG&E for ** agree to set rates for the PG&E Pipeline Expansion based on pipeline capacity are eligible for rate recovery, subject to a total capital costs of $736 million. reasonableness review. These demand charges include capacity that was formerly used to serve noncore customers but Transportation Commitments: PG&E has gas which at present cannot be brokered or which is brokered transportation service agreements with various Canadian and at a discount. However, certain groups, including the oPA interstate pipeline companies.These agreements include and intervenors, have challenged the recovery of these provisions for payment of fixed demand charges for reserving unrecovered demand charges. firm capacity on the pipelines.The total demand charges that In December 1995, the cPUC issued a decision on the rea-PG&E will pay each year may change due to changes in tariff sonableness of PG&E's 1992 operations, concluding that it was rates.The total demand and transportation charges paid by unreasonable for PG&E to commit to transportation capacity PG&E under these agreements (excluding agreements with PGT) with Transwestern. The decision orders that costs for the were approximately $212, $l75, and $225 million in 1996, capacity in subsequent years of the contract, which expires in 1995, and 1994, respectively. 2007, be disallowed unless PG&E can demonstrate that the The following table summarizes the approximate capacity benefits of the commitment outweigh the costs. held by PGAE on various pipelines (excluding PGT) and the The recovery of demand charges associated with capacity related annual demand charges at December 31,1996: which was formerly used to serve PG&E's noncore customers will be decided by the cPUc in the iTcs proceeding, unless oth-
,U erwise resolved as part of the Accord. Pending a final decision Capa t Deman Pepalma Held Charges Contract (subject to refund) in rates of approximately 50 percent of Company (macftd) (m millions) E m piration
- the demand charges for unbrokered or discounted El Paso El Paso 1,140 5163 Dec.1997 and PGT capacity which was formerly used to serve PG&E's Transwestern 200 5 29 Mar. 2007 NOVA 600 $ 20 Oct. 2001 noncore customers.
ANG 600 $ 13 Oct. 2005 Under the Accord, PG&E Would not recover costs through 1997 associated with Transwestern capacity originally sub-As a result of regulatory changes, PG&E no longer procures scribed to in order to serve core customers and would have gas for its noncore customers, resulting in a decrease in PG&E's limited recovery during the period 1998 through 2002. Also as need for firm transportation capacity for its gas purchases, part of the Accord, PG&E would forgo recovery of 100 percent PG&E continues to procure gas for almost all of its core and 50 percent of the iTcs amounts allocated to its core and customers and those nor. core customers who choose bundled noncore customers, respectively. service (core subscription customers), To serve these cus- The Company believes ultimate resolution ofits capacity comers, PG&E holds approximately 600 million cubic feet per commitments and the rrcs proceeding, either through approval day (MMcf/d) of firm capacity for its core and core subscription of the Accord or otherwise, will not have a material adverse customers on each of the pipelines owned by El Paso Natural impact on its financial position or future results of operations. Gas Company (El Paso), NOVA Corporation of Alberta (NOVA), Alberta Natural Gas Company Ltd (ANG), and PGT. Note 4: Diablo Canyon PG&E is continuing its efforts to broker or assign any The Diablo Canyon rate case settlement as adopted in 1988 remaining unused capacity, including unused capacity held for and modified in 1995 (Diablo Setttement) bases revenues pri-its core and core subscription customers. Due to relatively marily on the amount of electricity generated by Diablo low demand for Southwest pipeline capacity, PG&E cannot Canyon.The Diablo Settlement pmvides that Diablo Canyon
- predict the volume or price of the capacity on El Paso and costs and operations are not subject to CPUC reasonableness reviews. Only certain Diablo Canyon costs may be recovered 32 l
through base revenues over the term of the Diablo settlement, 1997 and ending in 2001. The related return on common including a full return on such costs. The revenues to recover equity associated with Diablo Canyon sunk costs would be all Diablo Canyon costs are included in Diablo Canyon oper. reduced to 90 percent of PG&E's long-term cost of debt. PG&E's ating revenues reported below. Other than for these and authorized long-term cost of debt was 7.52 percent in 1996. I decommissioning costs. Diablo Canyon discontinued the appli. The reduced rate of return combined with a shorter recovery cation of sFAs No. 71 in July 1988. period would result in an estimated $4 billion decrease in the Under the pricing provisions of the existing Diablo net present value of PG&E's future revenues from Diablo Settlement, the price for power produced by Diablo Canyon Canyon operations. If the proposed cost recovery plan for for 1997 is 10.0 cents per kWh effective January 1. PG&E has Diablo Canyon were adopted during 1996 Diablo Canyon's the right to reduce the price below the amount specified. 1996 reported net income would have been reduced by $350 Under the existing settlement, at full operating power, c' .n million ($0.85 per share). Diablo Canyon unit would contribute approximately $2.6 mil-lion in revenues per day in 1997.The prices per kWh of elec- Note 5: Preferred Stock and Company tricity generated by Diablo Canyon for 1996,1995, and 1994 Obligated Mandatorily Redeemable Preferred were 10.50, I l.00, and I l.89 cents per kWh, respectively. Securities of Trust Holding Solely Pc&E Selected financial information for Diablo Canyon is shown Subordinated Debentures l below: (See the Statement of Consolidated Capitalization for addi. tional information.) Year ended December 31. 1996 199s 1994 (m melhons) Operating revenues $ 1,789 $ 1.845 $ 1,870 Preferred Stock: PG&E's nonredremable preferred stock I Operating income before at December 31,1996, has rights to anw! dividends per share j income taxes 998 1,029 956 ranging from $1.25 to $1.50. ' Net income 497 507 461 PG&E's redeemable preferred stock without mandatory redemption provisions is subject to redemption at PG&E's in determining operating results of Diablo Canyon, option,in whole or in part,if PG&E pays the specified redemp-operating revenues and the majority of operating expenses tion price plus accumulated and unpaid dividends through the were specifically identified pursuant to the Diablo Settlement. redemption date. Annual dividends and redemption prices per Administrative and general expenses, principally labor share at December 31,1996, range from $1.09 to $1.86 and costs, are allocated based on a study of labor costs. Interest from $25.75 to $27.25, respectively. is charged to Diablo Canyon based on an allocation of PG&E's redeemable preferred stock with mandatory PG&E debt. redemption provisions consists of the 6.30% and 6.57% series in conjunction with electric industry restructuring, PG&E filed at December 31,1996.These series of preferred stock are in March 1996 a proposal for pricing Diablo Canyon genera- subject to mandatory redemption provisions entitling them to tion at market prices and completing recovery of the invest- s nking funds providing for the retirement of stock outstand-ment in Diablo Canyon by the end of 2001,if this proposalis ing.They may be redeemed at PG&E's option, beginning in 2004 adopted, there would be a significant change to the manner in and 2002, respectively, at par value plus accumulated and which Diablo Canyon earns revenues- unpaid dividends through the redemption date.The estimated Under its proposal, PG&E would replace the existing settle- fair value of PG&E's preferred stock with mandatory redemp-ment prices with:(1) a sunk cost revenue requirement t tion provisions at December 31,1996, and 1995, was approxi-r: cover fixed costs, including a return on these costs, and ( mately $135 and $139 million, respectively, based on quoted (2) a performance-based ratemaking (PBR) mechanism to market prices. recover the facihty's variable costs and capital addition costs. In 1995, PG&E redeemed all of its series 734%,8%, and 8.20% h As proposed, the sunk cost revenue requirement would accel- redeemable preferred stock. In addition, P i&E repurchased par-erate recovery of Diablo Canyon sunk costs from a twenty- tial amounts of its series 6%%,7.04%, and 7.44% redeemable year period ending in 20l6 to a five-year period beginning in 33
PG AE Corpersoon Notes to Consolidated Financial Statements preferred stock through a tender offer. The aggregate par value Noee 6: Long term Debt of these redemptions and repurchases was $331 million. (See the Statement of Consolidated Capitaliza6on for ,, Dividends on all preferred stock are cumulative. All shares additional information.) of preferred stock have voting rights and equal preference in div;dend and liquidation rights. Upon liquidation or dissolu- Mortgage Bonds: PG&E had 55.4 and $5.7 billion of tion of PG&E, holders of preferred stock would be entitled to mortgage bonds outstanding, at December 31,1996, and 1995, the par value of such shares plus all accumulated and t.npid respectively. Additional mortgage bonds may be issued, subject dividends, as specified for the class and series. to cPuc approval, up to a maximum total amount outstanding of $10 billion. All real properties and substantially all personal Company Obligated Mandatorily Redeemable properties of PG&E are subject to the lien of the mortgage, and Preferred Securities of Trust Holding Solely PG&E is required to make semi-annual sinking fund payments for Pcas Subordinated Debentures: During 1995.PG&E the retirement of the bonds. through its wholly-owned subsidiary, PG&E Capit:11 (Trust), PG&E redeemed or repurchased $182 and $114 million of completed a public offering of 12 million shares of 7.90% mortgage bonds in 1996 and 1995, respectively, with interest cumulative quarterly income preferred securities (ouiPs), with rates ranging from 5.375 to 12.75 percent. an aggregate liquidation value of $300 million. Concurrent i h included in the total of outstanding mortgage bonds at the issuance of the ouirs, the Trust issued to PG&E 371,135 December 31,1996, and 1995, are $705 and $768 million, shares of common securities with an aggregate liquidation respectively, of mortgage bonds held in trust for the California value of approximately $9 million.The Trust in turn used the Pollution Control Financing Authority (cPCFA) with interest net proceeds from the QUIPS offering and issuance of the rates ranging from 5.85 to 8.875 percent and maturity dates common securities to purchase subordinated debentures from 2007 to 2023. In addition to these mortgage bonds, issued by PG&E with a face value of approximately $309 million, PG&E holds long-term loan agreements with the CPCFA as an interest rate of 7.90 percent, and a maturity date of 2025. described below. These subordinated debentures are the only assets of the Trust. Proceeds to PG&E from the sale of the subordinated Pollution Control Loan Agreements: In 1996.PG&E debentures were used to redeem and repurchase higher-cost refinanced $925 million of variable interest rate pollution con-preferred stock. trol loan agreements with variable interest rate pollution con-PG&E's guarantee of the quips, considered together with trol loan agreements to extend certain maturities and achieve the other obligations of PG&E with respect to the QUIPS, consti- cost savings.These loan agreements from the cPcrA totaled tutes a full and unconditional guarantee by PG&E of the Trust's $988 and $925 million, respectively, at December 31,1996, obligations under the Quies issued by the Trust. The subordi- and 1995. Interest rates on ti e loans vary with average annual nated debentures may be redeemed at PG&E's option beginning interest rates for 1996 ranging from 3.24 to 3.54 percent. in 2000 at par plus accrued interest through the redemption These loans are subject to redemption by the holder under date.The proceeds of any redemption will be used by the certain circumstances.These loans are secured by irrevocable Trust to redeem QUIPS in accordance with their terms. letters of credit which mature as early as 1999. Upon liquidation or dissolution of PG&E, holders of these ovirs would be entitled to the liquidation preference of $25 Long-term Debe of pot: In 1996, PGT borrowed $92 per share plus all accrued and unpaid dividends thereon to million of long-term debt to finance the acquisition of PGT the date of payment.The estimated fair value of PG&E's QUIPS at Queensland Gas Pipeline. December 31,1996, and 1995, was approximately $291 and in 1995, PGT issued $470 million of long-term debt, the . $311 million, respectively, based on quoted market prices. proceeds of which were used to refinance $600 million of out. . standing PGT debt. 34
.=. - - .- ~~. - . - - - - - -. . .~ - - -- - - . - -_ -
i
. Additionally,!n 1995, PsT issued commercial paper classified Note 8:Invesements in Debt and ,, as long-term debt based upon the availability of committed Equity 5ecurities l credit facilities expiring in 2000 and management's intent to All of PG&E's investments in debt and equity securit es are maintain such smounts in excess of one year.The commercial held in external trust funds and are reported at fair value.
paper outstanding was $108 and $109 million at December 31, These investments. which are included in Nuclear ' 1996, and 1995, respectively. Decommissioning Funds, cannot be released from the trust i funds until authorized by the CPUC. l Repayment Schedule At December 31,1996,the The proceeds received during 1996 and 1995 from sales Company's combined aggregate amounts of maturing were approximately $1.5 billion in each year. During 1996 and long-term debt and sinking fund requirements, for the years 1995, the gross realized gains on sales of securities held as 1997 through 2001, are $210, $660, $270, $413, and $376 available-for-sale were $14 and $9 million, respectively, and million, respectively, the Eross realized losses on sales of securities held as available- ! for-sale were $20 and $22 million, respectively.The cost of , Fcir Value: The estimated fair value of the Company's total debt and equity securities sold is determined by specific ! 1:ng-term debt of $8.0 and $8.4 billion at December 31,1996, identification. and 1995, respecdvely, was approximately $8.0 and $8.7 billion, The following table provides a summary of amortized cost respectively. The estimated fair value of long-term debt was and fair value of these investments: d;termined based on quoted market prices, where available. Where quoted market prices were not available, the estimated (m thouseds) fair value was determined using other valuation techniques Amortized Cost: (3.g., the present value of future cash flows). U.S. government and agency issuts $374,93! $322.838 Equity securities 281,532 269.117 Note 7: Short term Borrowings Municipal bonds and other 32.952 63,06i Gross unreahred holding gains 198.875 117.673 Substantially all short-term borrowings consist of commercial Gross unreahred holding losses (5.361) (2.860) paper, having a maturity of one to ninety days. Commercial Fair value $882.929 $769.829 paper outstanding and the associated weighted average i interest rate at December 31,1996, and 1995, were $681 mil-lion and 5.86 percent and were $796 million and 5.92 percent, Note 9: Employee Benefit Plans r:spectively.The carrying amount of short-term borrowings Retirement Plan: The Company provides l approximates fair value, noncontributory defined benefit pension plans covenng sub-l PG&E maintains a $1 billion revolving credit facility which stantially all employees. Pension benefits are based on an cxpires in 200l;however,it may be extended annually for addi- employee's years of service and base salary. The Company's l l- tional one-year periods upon mutual agreement between PG&t Policy is to fund each year not more than the maximum j and the banks.This credit facility primarily provides support amount deductible for federal income tax purposes and not j for PG&E's commercial paper issuance. At maturity, commercial less than the minimum legal funding requirement. paper can be either reissued or replaced with borrowings from this credit facihty.There were no borrowings under this facility in 1996 or 1995. j in January 1997, PG&E Corporation established a $500 million j revolving credit facility in order to provide for corporate
. short-term liquidity needs and other purposes. l 3 !
I i ! 35 ! r l
PG&E Corporsuon Notes to Consolidated Financial Statements l The following schedule reconciles the plans' funded status The following actuarial assumptions were used in . to the pension liability recorded on the Consolidated Balance determining the plans' funded status and net pension income. ,,l Sheet: Year-end assumptions are used to compute funded status, while prior year-end assumptions are used to compute net Det.smber 31 i996 1995 (m thousands) Actuarial present value of benefit g , ,, ,,,, ,,,, , ,y obligations Vested benefits $(3,486,136) Discount rate 7.5% 7.25% 8%
$(3.464.782)
Nonvested benefits (177,782) (182,503) Rate of future compensation increases 5% 5% 5% Accumulated benefit obligation (3.663,918) (3,647,285) Expected long-term rate Effect of projected future of return on plan assets 9% 9% 9% compensation increases (529.045) (548,743) Projected benefit obligation (4,192.963) (4,196,028) Net pension income or cost is calculated using expected Plan assets at market value 5.526,247 4,935,267 return on plan assets.The difference between actual and expected return on plan assets is included in net amortization benef t obligat n 1,333,284 739,239 Unrecognized prior service cost 82,756 90,496 and deferral and is considered in the determination of future Unrecognized net gain (1,559,281) (1,074,347) net pension income or cost. In 1996 and 1995, actual return Unrecognized net transition on plan assets exceeded expected return. In 1994, the obligation 85.895 97,348 plan experienced a negative investment return due to weak Accrued pension liability $ (57.346) $ (147,264) performance in domestic equities and bonds. In conformity with srAS No. 71, regulatory adjustments have Plan assets consist primarily of common stocks and been recorded in the income statement and balance sheet for fixed-income securities: Unrecognized prior service costs and the difference between utility pension income or cost deter-net gains are amortized on a straight-line basis over the mined for accounting purposes and that for ratemaking, which average remaining service period of active plan participants. is based on a funding approach. The transition obligation is being amortized over 17.5 years from 1987. Postretirement Benefits Other Than Pensions: Using the projected unit credit actuarial cost method, net The Company provides contributory defined benefit medical pension income consisted of the following components: Pl ans for retired employees and their eligible dependents and noncontributory defined benefit life insurance plans for retired v.., .no.d o.c.mb., 3 i, i e,6 i,,s i ,'d g 5nShm Waughm MQawMw e 55 are eligible for these benefits.The medical benefits are pro-Service cost for benefits earned $ (99,946) $ (82,814) vided through plans administered by an insurance carrier or a
$(109.132) interest cost (301,631) (290.563) (272.932) health maintenance organization. Certain retirees are responsi-Actual return (loss) on ble for a portion of the cost based on past claims experience plan asseu 811,130 968,126 (20,358) of the Company's retirees.
deferra (353.195) 412.547
-(586.350)J for 1993 and beyond. Recovery is based on the lesser of the Net pension income $ 56,358 $ 8.399 l $ 10,125 annual accounting costs or annual contributions on a tax-deductible basis to appropriate trusts. The Company's policy -
is to fund each year an amount consistent with the basis for , rate recovery. , 36
9 The following schedule reconciles the medical and life The discount rate, rate of future compensatioa increases, insurance plans' funded status to the postretirement benefit and expected long-term rate of return on plan assets used
*^
liability recorded on the Consolidated Balance Sheet: in accounting for the postretirement benefit plans for 1996, 1995, and 1994 were the same as those used for the oa.mb.r 3 i. l996 199: , pension plan. Qn thousands) Accumulated postretirement benefit The assumed health care cost trend rate for 1997 is obligation approximately 10.0 percent, grading down to an ultimate rate Retirees $(444,782) $(528,367) in 2005 of approximately 6.0 percent The effect of a one-per. Other fully eligible participants (132,797) (123,615) centage-point incrc tse in the assumed health care cost trend Other active plan participants (343,864) _(309,405) rate for each future year would increase the a: cumulated T tal accumulated postretirement postretirement benefit obligation at December 31,1996, by benefit obligation (921,443) (961,387) Plan assets at market value 538,905 approximately $75 million and the 1996 aggregate service and 666.287 interest costs by approximately $8 million. Accumulated postretirement benefit obligation in excess of plan assets (255,156) (422,482) The decrease in net postretirement benefit cost in 1995 Unrecognized prior service cost 21,946 23,761 compared to 1994 was primarily due to a reduction in work. Unrecognized net gain (226,753) (104,167) force and an increase in discount rate. Unrecognized transition obligation 419,617 449,647 Net postretirement benefit cost is calculated using expected Accrued postretirement benefit liability ,$ (40.346) _$ (53,241) return on plan assets.The difference between actual and
)
expected return on plan assets is included in net amortization Plan assets consist primarily of common stocks and and deferral and is considered in the determination of future I fixed-income securities. Unrecognized prior service costs are Postretirement benefit cost. In 1996 and 1995, actual return amortized on a straight-!ine basis over the average remaining on P l an assets exceeded expected return. In 1994, actual ' years of service to full eligibility of active plan participants. return on plan assets was less than expected. Unrecognized net gains are amortized on a straight-line basis over the average remaining years of service of active plan par- Workforce Reductions: The effects of workforce ticipants. The transition obligation is being amortized ever reductions announced by PG&E in 1994 are reflected in the 20 years from 1993. Pension and postretirement benefits funded status tables above, and the costs are discussed in Note 10. Using the projected unit credit actuarial cost method, net postretirement medical and life insurance. cost consisted of the following components: Long-term Incentive Program: PG&E Corporation maintains a Long-term Incentive Program (Program) which n., .no.o o.c.md., s i. i,96 i99s '"4 provides for grants of stock options to eligible participants 0" **"""d" with or without associated stock appreciation rights and divi- ; Service cost for
$ 21,954 $ 17,004 $ 23,617 dend equivalents.The Program also grants performance-based benefits earned l Interest cost 65,629 64,776 64,872 units to eligible participants. As of December 31,1996,24.5 )
Actual return on million shares of common stock have been authorized for j plan assets (91,050) (108.932) (1,232) award under the program. At December 31.1996, stock
^*'***'"I ions on 3,461,733 shares, granted at option prices ranging i unrecognized prior l service cost 1,602 1,616 1,711 rom $16.75 to $34.25, were outstanding, of which I,655,450 ;
Amortization of were exercisable. In 1996,877,900 options were granted at l transition obligation 26,314 26,533 28,913 an option price of $28.25,which was the market price per l Net amortization share on the date of grant.
, and deferral 38.329 70.070 (29.804)
Outstanding stock options expire ten years and one day Net postretirement . after the date of grant and become exercisable on a cumulative benefic cost 5 62,778J $ 71.067 5 88,077 37
,n .. ..- . - - _ ~ - - - + >w --- a.---.-su+ - , - - - - - - - -
PG&E *erporation I Notes to. Consolidated Financial Statements J r - l c I l l basis at one-third each year commencing two years from the The significant components of net deferred income tax , l
~date of grant,in 1996,1995, and 1994, stock options on liabilities were: i 72,960,235,568, and 52,143 shares, respectively, were exer- ** 'r cised at option prices ranging from $16.75 to $33.13, $16.75 '"***'" ' '"'
(m thousands) i to $33.13, and $24.75 to $32.13, respectively. Deferred income tax assets $1,308,395' $ 1,203,981 ! ! Effective January 'i,1996, the Company adopted $FAS j No.123, Accounting for Stock-Based Compensation." sFAs
'f Regulatory balancing accounts $ 294,494 5 385.604 !
I No.123 requires the Company to disclose stock option costs Plant in service 3,623,544 3.552,974 based on the fair value of options granted. For the years income tax-related deferred charges"> 454,359 443,152 ended December 31,1996, and 1995, the fair value of options Other 1,034,497 983.798
'l4 granted was not material to the Company's results of i Total deferred income tax liabilities $5,406,894 $5,365,528 operations or earnings per share.
Total net deferred income taxes $4,098,499 $4,161,547 'l. Note 10: Workforce Reductions Classification of net deferred
- In 1994 PG&E expensed the total cost ofits planned 1994 1995 income taxes: r workforce reductions of $249 million and recorded a corre-
,nclu n def ec 3, 4 3,9 .7 spondmg liability for benefits to be funded or paid.This ?
Total net deferred income taxes $4,098,499 $4,16 f.547 ! amount consisted of $136 million for additional pension bene- : fits, $52 million for other postretirement benefits, and $61 m Represents the portion of the deferred income tax liability related to the
- million for estimated severance costs. PG&E did not seek rate revenues required to recover future income taxes. i recovery for the cost of the 1994-1995 workforce reductions.
In 1995, PGAE canceled approximately 800 of the 3,000 The differences between income taxes and amounts planned 1994-1995 reductions in response to the severity of determined by applying the federal statutory rate to income ; the daraage caused by the winter storms of 1995 and the iden. before income tax expense were: j tification of certain facilities that would benefit from a more ! Year ended cietember 31. 1996 1995 1994 extensive and accelerated maintenance program. As a result, g ,,,g,,
- the estimated severance costs verued and expensed in 1994 Federal statutory income tax rate 35.0% 35.0% 35.0% :
were reduced by $18 million in 1995. Increase (decrease) in income tax rate resulting from: Note i 1: Income Taxes dera benefit) 3.7 4.8 8.3
.The Company files a consolidated federalincome tax return Effect of regulatory treatment that includes domestic subsidiaries in which its ownership is of depreciation differences 5.9 3.2 3.7 80 percent or more. Income tax expense includes current and Tax credits-net (1.4) (.8) (l.1) deferred income taxes resulting from operations during the Othemet 08) (24 05) year. Tax credits are amortized over the life of the related Effective tax rate 42.4% 40.1% 45.4%
property. The significant components of income tax expense were: Note 12: Commitments 1 ear endai Daemter S t. It96 1995 Capital Projects: C tprtal expenditures for 1997 are I 1994 l g,j estimated to be $1,773 million for utility, $38 million for ] Curret.- $ P)4,984 $ 1,011,358 $821,455 Diablo Canyon, and $211 million for diversified operatioas. ,) Deferred (' 1,250) (97,864) 34,657 At December 31,1996, Enterprises had $67 million in firm i hx credits--net (17,740) (18.205) (19,345) I commitments to make capital contributions for its equity share Total incame of generating facility projects.The contributions, payable upon tax expense , $_ 554,994, .,$ 895,289 $836,767 commercial c:peration of the projects, are estimated to be i 38
)
m _ _ . . _ _ -- _- _ _ .__ ___ . _ _ . _ _ _ . e
$52 million in 1997 (included in the expenditures above) and million for periods thereafter. Irrigation district and water
'2
$15 million in 1998, agency deliveries u the aggregate account for approximately l
.*- six percent of PGAE's 1996 electric energy requirements, and Letters of Credits PG&E utilizes approximately $247 no single contract accounted for more than five percent of million in standby letters of credit to secure future workers' PG&E's energy needs. compensation liabilities. The amount of energy received and the total payments made under QF and other power-purchase contracts were: Qualifying Facilities and Other Power Purchase Contraees: Under the Public Utility Regulatory Policies (m mdhons) Act of 1978, PG&E is required to purchase electric energy and Kilowatt-hours received 26,056 26.468 23.903 capacity provided by QFs which are cogenerators and small or energy payments $1,136 $1.140 $1,196 power producers.The CPUc established a series of power-pur. or capacity payments $ 521 $ 484 5 518 chase contracts with certain QFs and set the applicable terms, Other power purchase
= conditions, and price options. Under these contracts, PG&E is required to purchase electric energy and capacity;however, Note 13: Contingencies payments are ar8y required when energy .is supplied or when
, Nuclear insurance: PG&E has insurance coverage for l capacity comm.cments are met.The total cost of these pay. Property damage and business interruption losses as a mem- ! ments is recoverable in rates. PG&E's contracts with QFs expire I ber of Nuclear Mutual Limited (NML) and Nuclear Electric ! on various dates from 1997 to 2028. Energy payments to QFs Insurance Limited (NEIL). Under these policies,if a nuclear gen-are expected to decline in the years 1997 through 2000. erating facility of a member utility suffers a loss due to a pro-Capacity payments are expected to remain at current levels.
'8
' 8* '" "
In 1996, N95, and 1994, PG&E negotiated early termination l . assessments of $29 million (property damage) and $8 million or suspension of certain QF Contracts to be paid through 1999 (business interruption),in each case per policy period,in the at discounted costs of $25, $142, and $155 million for 1996. 1995, and 1994, respectively.These amounts are expected to l PG&E has purchased primary insurance of $200 million for be recovered in rates and as such are reflected as deferred public liability claims resulting from a nuclear incident. An addi-chargrs on the accompanying balance sheet. At December 31, tional $8.7 billion of coverage is provided by secondary finan-1996, tm t . al discounted future payments remaining under QF I- cial protection which provides for loss sharing among utilities l carly termi, Won or suspen:; ion cor. tracts is $68 million. owning nuclear generating facilities if a costly incident occurs. l QF deliveries in the aggregate account for approximately 19 If a nuclear incident results in claims in excess of $200 million, percent of PG&E's 1996 electric energy requirements, and no PG&E may be assessed up to $159 million per incident, with single contract accounted for more than 5 percent of PG&E's payments in each year limited to a maximum of $20 million energy needs. per incident. j PGAE also has contracts with various irrigation districts and l water agencies to purchase hydroelectric power. Under these Environmental Remediation: The Company may be contracts, PG&E must make specified semi-annual ... unum pay-required to pay for environmental remediation at sites where ments whether or not any energy is supplied (subject to the the Company has been or may be a potentially responsible provider's retention of the FEnc's authorization) and variable party under the Comprehensive Environmental Response, payments for operation and maintenance costs incurred by the , Compensation and Uabihty Act (CERCLA) or the California providers.These contracts expire on various dates from 2004 5 riazardous Substance Account Act.These sites include former to 2031.The total cost of these payments is recoverable in
'. rates. At December 31,1996, the undiscounted future manufactured gas plar, . sites and sites used by PG&E for the storage or disposal of materials which may be determined to ' minimum payments under these contracts are $34 million for present a significant threat to human health or the environ-sach of the years 1997 through 2001 and a total of $383 ment because of an actual or potential release of hazardous l 39
PGat corpersoon Notes to Consolidated Financial Statements ) substances. Under CERCLA, the Company's financial responsibili- the ultimate outcome of these matters will not have a , ties may include remediation of hazardous substances, even if 1i material adverse impact on its financial position or results i the Company did not deposit those substances on the site. 'of operations. *! The Company records a liability when site assessments , indicate remediation is probable and a range of reasonably Helms Pumped Seorage Plant (He8ms): Helms is likely cleanup costs can be estimated. The Company reviews its a three-unit hydroelectric combined generating ;~i ,- ped 1 sites and measures the liability quarterly, by assessing a range storage plant with a net investment of $710 million at of reasonably likely costs for each identified site using cur- December 31,1996.The net investment is comprised of the rently available information, including existing technology, pumped storage facility (including regulatory assets of $51 mil-presently enacted laws and regulations, experience gained at lion), common plant, and dedicated transmission plant. As part similar sites, and the probable level of involvement and financial of the 1996 General Rate Case decision in December 1995, condition of other potentially responsible parties.Thest esti- the cPUC directed PG&E to perform a cost-effectiveness study mates include costs for site investigations, remediation, opera- of Helms. In July 1996 PG&E submitted its study, which con-tions and maintenance, monitoring, and site closure. Unless cluded that the continued operation of Helms is cost effective. ' there is a better estimate within this range of possible costs, As a result of the study, PG&E recommended that the cPUC take the Company records the lower end of this range (classified as no action and address Helms along with other generating other noncurrent liabilities). plats in the context of electric industry restructuring. The cost of the hazardous substance remediation ultimately PGAE is currently unable to predict whether there will be a undertaken by the Company is difficult to estimate. It is rea- change in rate recovery resulting from the study. As with its ' sonably possible that a change in the estimate will occur in other hydroelectric generating plants, the Company expects to . the near term due to uncertainty concerning the Company's seek recovery ofits net investment in Helms through ran and , responsibility, the complexity of environmental laws and regu- transition cost recovery. The Company believes that the ulti- ! lations, and the selection of compliance alternatives. The mate outcome of this matter will not have a material adverse : Company has an accrued liability at December 31,1996, of impact on its financial position or results of operations. >
$170 million for hazardous waste remediation costs at Helms became commercially operable in 1984, following those sites where such costs are prc,bable and quantifiable. delays due to a water conduit rupture in 1982 and various l Environmental remediation at identified sites may be as much start-up problems related to the plant's generators. As a result as $400 million if, among other things, other potentially of the rupture damage and the operational delay, PGAE incurred responsible par 6 are not financially able to contribute to additional costs which were excluded from rate base and lost f these costs, or further investigation indicates that the extent revenues during the period the plant was under repair. In 1994, of contamination or necessary remediation is greater than PG&E submitted for CPUc approval a settlement with the ORA ;
anticipated at sites for which the Company is responsible. regarding recovery of such additional costs and lost revenues. This upper limit of the range of costs was estimated using imounting to approximately $98 million. In September 1996, assumptions least favorable to the Company, based upon a the cPUc issued a final decision adopting the settlement which range of reasonably possible outcomes. Costs may be higher if permits PG&E to recover that amount. Because PG&E's current , the Company is found to be responsible for cleanup costs at rate recovery already reflects the anticipated settlement, additional sites or identifiable possible outcomes change. adoption of the settlement will have no impact on rates. i The Company will seek recovery of prudently incurred ; hazardous substance remediation costs through ratemaking t procedures approved by the cruc. The Company has recorded , a regulatory asset at December 31,1996, of $146 million , for recovery of these costs in future rates. Additionally, , the Company will seek recovery of costs from insurance carriers and from other third parties. The Company believes 40
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, . Legal Matters: Chromium Litisation: In 1994 through 1996, several civil Cities Franchise Fees Litigation: In 1994,the City of Santa suits were filed against PG&E on behalf of more than 1,500 indi-Cruz filed a class action suit in a state superior court (Court) viduals.The complaints seek an unspecified amount of com-against PG&E on behalf of itself and 106 other cities in PG&E's pensatory and punitive damages for alleged personal injuries service area.The complaint alleges that PG&E has underpaid resulting from exposure to chromium in the vicinity of PGAE's electric franchise fees to the cities by calculating those fees at gas compressor stations at Hinkley, Kettleman, and Topock.
. different rates from other cities not included in the complaint. PG&E is responding to the complaints and asserting affirma-In September 1995, the Court certified the class of 107 tive defenses. PG&E will pursue appropriate legal defenses, cities in this suit and approved the City of Santa Cruz as the including statute of limitations or exclusivity of workers' com-class representative. In January and March 1996, the Court pensation laws, and factual defenses including lack of exposure made two rulings against certain cities effectively eliminating a to chromium and the inability of chromium to cause certain major portion of the suit.The Court's rulings do not resolve of the illnesses alleged.
the suit completely. The cities appealed both rulings. The trial Given the uncertainty, the Company cannot predict the has been postponed pending the cities' appeal. outcome of this litigation. However, the Company believes that Should the cities prevail on the issue of franchise fee the ultimate outcome of this matter will not have a material calculation methodology, PG&E's annual systemwide city electric adverse impact on its financial position or results of franchise fees could increase by approximately $14 million and operations. damages for alleged underpayments for the years 1987 to 1996 j could be as much as $145 million (exclusive of interest). If the j Court's January and March 1996 rulings become final PG&E's annual systemwide city electric franchise fees for the remaining class member cities not subject to the Court's rulings could increase by approximately $4 million and damages for alleged underpayments for the years 1987 to 1996 could be as much as $39 million (exclusive of interest). The Company believes that the ultimate outcome of this matter will not have a material adverse impact on its financial position or results of operations. Hinkley: In 1996. PG&E settled a l993 lawsuit seeking dam-ages for personal injuries allegedly suffered as a result of expo-sure to chromium near PG&E's gas compressor station at Hinkley.This lawsuit was settled for the aggregate sum of $333 million, of which $50 million had been paid in 1994, with the remaining $283 million paid in 1996. PG&E had previously reserved $200 million for this litigation and in 1996 recorded an additional reserve of $l33 million for this settlement.The settlement does not resolve other pending chromium litiga-tion, described below. F 41
1 l PG&E Corporation I Quarterly Consolidated Financial Data (Unaudited) ; l i Quarterly Financial Datas Due to the seasonal nature against earnings of $182 million for contingencies related g of the utility business and the scheduled refueling outages to gas transportation commitments. for Diablo Canyon, operating revenues, operating income, and in the fourth quarter of 1996, the Company charged , net income are not generated evenly every quarter during to earnings $59 million in write-downs of nonregulated l the year. investmw. j All four quarters of 1996 reflected a decline in price per Tt Q upany recorded additional litigation reserves of $50 kilowatt-hours as provided in the modified pricing provisions million in the first and third quarters of 1995. Diablo Canyon of the Diablo Canyon ra a case settlement, and revenue reduc. scheduled refueling days and unscheduled outages reduced tions authorized by the 1996 General Rate Case (GRc) and earnings per common share in the fourth quarter of 1995. ; other related rate proceedings. In addition, maintenance and The Company's common stock is traded on the New York, ; operating expenses exceeded levels authorized by the GRc. Pacific, and Swiss stock exchanges.There were approximately : In the second quarter of 1996, the Company charged to 198,000 common shareholders of record at December 31, ! carnings $l33 million for the settlement of a litigation claim. 1996. Dividends are paid on a quarterly basis, and net Revenues were also reduced due to a greater number of cash flows are sufficient to maintain the current payment scheduled refueling days and unscheduled outages. of dividends. j in the third quarter of 1996, the Company took charges { Quarter ended December 31 September 30 June 30 March 31 (in thousands. except per share amounts) i 1996 ; Operating revenues $2,700,686 $2,521,852 $2,138,666 $2,248,768 Operating income 508,970 524.846 288.375 573,394 Net income 149,030 233,695 I i 1,780 260,704 Earnings per common share .34 .55 .25 .61 - ; Dividends declared per common share .30 .49 .49 .49 Common stock price per share High 24.25 23.88 23.75 28.38 i Low 20.88 19.50 21.50 22.38 ! 1995 Operating revenues $2,227,224 $2,637,653 $2,448,641 $2,308,247 Operating income 451,674 781,912 820,370 709.029 ! Net income 227,085 377,593 405,520 328,687 Earnings per common share ,48 .85 .92 .73 Dividends declared per common share .49 .49 .49 .49 Common stock price per share High 30.63 30.00 29.75 25.75 tow 27.13 28.38 .4.75 l 24.25 e I i j 42
PGal Corporation Report of Independent Public Accountants 3 f To the Shareholders and the Board of Directors of PG&E Corporation: D We have audited the accompanying consolidated balance sheet and the statement of consolidated capitalization of PG&E Corporation (a California corporation) and subsidiaries as of December 31,1996, and 1995, and the related statements of consoli- ! dated income, cash flows, common stock equity, preferred stock and preferred securities, and the schedule of consolidated seg-ment information for each of the three years in the period ended December 31,1996.These financial statements and schedule of , consolidated segment information are the responsibility of the Company's management. Our responsibility is to express an opinion l on these financial statements and schedules 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 f 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 consolidated financial statements and schedule of consolidated segment information referred to above ! present fairly,in all material respects, the financial position of PGAE Corporation and subsidiaries as of December 31,1996, and l 1995, and the results of their operations and cash flows for each of the three years in the period ended December 31,1996,in , conformity with generally accepted accounting principles. 6 ARTHUR ANDERSEN LLP f San Francisco, Calibrnia : February 10,1997 t
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I i t i f t t l l l I I 43
PG4E Corporation Responsibility for Consolidated Financial Statements
't The responsibility for the integrity of the consolidated financial statements and related finat dalinformation included in this g report rests with management. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles appropriate in the circumstances and are based on the Company's best estimates and judgments after giving consideration to materiality.
The Company maintains systems of internal controls supported by formal policies and procedures which are comw.aicated throughout the Company. These controls are adequate to provide reasonable assurance that assets are safeguarded from material loss or unauthorized use and to produce the records necessary for the preparation of consolidated financial statements.There are limits inherent in all systems of internal controls, based on the recognition that the costs of such systems should not exceed the l benefits to be derived. The Company believes its systems provide this appropriate balance. In addition, the Company's internal auditors perform audits and evaluate the adequacy of and the adherence to these controls, policies, and procedures. { Arthur Andersen LLP, the Company's independent public accountants, considered the Company's systems of internal accounting controls and corducted other tests as they deemed necessary to support their opinion on the consolidated financial statements. 4 Their auditors' report contains an independent informed judgment as to the fairness, in all material respects, of the Company's reported results of operations and financial position. l The financial data contained in this report have been reviewed by the Audit Committee of the Board of Directors.The Audit ) Committee is composed of six outside directors who meet regularly with management, the corporate internal auditors, and l Arthur Andersen LLP, jointly and separately, to review internal accounting controls and auditing and financial reporting matters.
- The Company maintains high standards in selecting, training, and developing personnel to ensure that management's objectives i
of maintaining strong and effective internal controls and maintaining unbiased and uniform reporting standards are attained. The
- Company believes its policies and procedures provide reasonable assurance that operations are conducted in conformity with
! applicable laws and with its commitment to a high standard of business conduct. 1 l l
)
I i .
*l 44
I, , t I Directors
- Boards of Directors of Mary S. Metz Permanent Finance Committees A PG&E Corporation and Dean, University Extension. Committees of the Recommend long-range financial
,f Pacific Gas and University of California. Berkeley Boards of Directors policies and objectives, and actions , Electric Company
- of PG&E Corporation required to achieve those {
- Rebecca Q. Morgan and Pacific Gas and objectives.
j a President and Electric Company
- 4 Richard A. Clarke Chief Executive Officer, Chairman of the Board, Retired, joint Venture: Richard B. Madden (Chair)
Pacific Gus and Electric Company Silicon Valley Network Executive Committees R ha Acre
- (nonprofit collaborative addressing Within limits, may exercise Dv j
Harry M. Conger criticalissues facing Silicon valley) ers perform duties Chairman of the Board-b uh Barry Lawson Williams i Homestake Mining Company Samuel T. Reeves 2 l President, Stanley T. Skinner (Chair) 4 David A. Coulter Pinnacle Trading. LLC Harry M. Conger Chairman and Chief Executive (international investing) Nominating and ' Robert D. Glynn,Jr. Officer, Compensation ; Richard B. Madden + BankAmerica Corporation and Committees I Carl E. Reichardt Mary S. Metz , Bank of America NT&SA Recommend candidates for nomina-Chairman of the Board and Chief Carl E. Reichardt tion as directors, recommend com-Executive Officer, Retired. pensation and employee benefit 5 C. Lee Cox W'H' F*rg & Company and policies and practices, and review Vice Chairman, Wells Fargo Bank, N.A. ' ' Audit Committees Pl anning for executive development AirTouch Communications Review financial statements and and succession. and President and Chief Executive John C, Sawhill internal accounting and cc ntroi ; Officer, Retired, President and procedures with independent AirTouch Cellular Chief Executive Officer, public accountants. Carl E. Reichardt (Chair) I + The Nature Conservancy g mat na envimnmental 3 7p , I William S. Davila President Emeritus, , Harry M. Conger (Chair) John C. Sawhill The Vons Companies, inc' C. Lee Cox Alan Seelenfreund (retailgrocery) Wdliam S. Davila 3 Alan Seelenfreund - Mary S. Metz Chairman of the Board and Chief Rebecca Q. Morgan Public Policy Committees Robert D. Glynn,Jr. Ee t e c j Barry Lawson Williams Review public policy issues which i ' (distributor of pharmaceuticals and could significantly affect customers. Chiet Operating Officer, heMth cam products) shareholders, employees, or the . PG&E Corporation and Cap.ita; gnyestment communities served, and recom-Pacific Gas and Electric Company mend plans and programs to I l * 'I ' dv e I ng-term capitalinvest- address such issues. ~ vomi M. Lawrence, MD {"th*y"",d""d
, ment strategies and recommends PG&E Corporation and specific investment and divestment Mary S. Metz (Chair) aiser oun ation i eaIth Plan,Inc. Pacific Gas and Electric Company PP*'*"** *5- e and Kaiser Foundation Hospitals Barry Lawson Williams Carl E. Reichardt (Chair) Robert D. Glynn,Jr.
President, Richard B. Madden John C. Sawhill Richard B. Madden W$ams hcWic Ventums,Inc. Samuen Reem Chairman of the Board and Chief Executive Officer, Retired, (ventum cap i tal and real estate, John C. Sawhill ; Podacch Corporation c nsulting. and mediation) Barry Lawson Williams (diversified forest products) ' l l
'The composamn of the Bosnh cf Dirwtors. Executwo Commutees. Audit Commmees, Fmance Conntten Nommaung and Compensataan Commettm and Pubhc Pbhcy Commams b the same kw PGAE Corporaten and Pwnc Gas and Electric Company
**A commatee of the PGAE Corporaten board of Dwwtors only 45
O f fic e r s i'
~ Officers of Thomas W. High Robert L Harris Kathleen Rueger PG&E Corporation Senior Vice President, Vice President. Assistant Corporate Secretary j Corporate Services Community Relations g Gabriel B. Togneri l Stanley T Skinner jack E jenkins-Stark Kent M. Harvey Assistant Treasurer 8 Chairman of the Board and Senior Vice President and Vice President and Treasurer Chief Executive Officer General Manager,
! Gas Supply Business Unit Christopher P. Johns ! Robert D. Glynn,Jr. Vice President and Controlier Senior offlcers of l President and Gregory M. Rueger Principal PG&E [ Chief Operating Officer Senior Vice President and Enterprises Steven L Kline General Manager, Vice President. Subsidiaries and Gordon R. Smith Nuclear Power Generation Regulation Related Ventures Chief Financial Officer Business Unit Thomas C. Long Tony E DiStefano Bruce R. Worthington Gordon R' Smith Vice President, Se r Vic re nt and Chairman, President, and Chief General Counsel Customer information Systems Executive Officer of PG&E Enterprises Leslie H. Everett E.)mes Macias l Corporate Secretary Bruce R. Worthington r vice President and Joseph P. Kearney Senior Vice President and General Manager- President and Kent M. Harvey sectric Transmission Businen Unit Chief Executive Officer of Treasurer U.S. Generating Company
- Shan Bhattacharya Vice President, William R. Mazotti 8 8 n Christopher P, Johns Technical and junona A jonas Controller as e ces and Operan.ons President and l Construction Services l
Chief Operating Officer of jackalyne Pfannenstiel Vantus Energy Corporation Linda Y. H. Cheng Lee Callaway l Assistant Corporate Secretary Vice President. Vice President, Corporate Planning Robert Frommer Corporate Communications p Eric Montizambert PG&E Properties. Inc. Assistant Corporate Secretary Robert P. Powers ! Barbara Coull Wilh.ams Vice President, j Vice President, Diablo Canyon Operacons and Kathleen Rueger Divisi n O Perations Plant Manager Assistant Corporate Secretary Senior Officers of John C. Danielsen James K. Randolph Principal Pacific Gas Vice President, Gabriel B.Togneri Computer and Vice President and Transmission (PGT) Assistant Treasurer General Manager. Company Subsidiaries Te5 communications Services Power Generation Business Unit and ReIated Ventures Richard A.Draeger Vice President, Dan.iel D Richard,Jr. Officers of V ee President, Jack E jenkins-Stark Pacific Gas and Electric Service Reliability Chairman of the Board of PGT Governmental Relations Electric Company Leslie H. Everett Stephen P. Reynolds G. Brent Stanley Vice President and President and V ce President, Stanley T. Sk, m ner Corporate Secretary Chief Executive Officer of PGT Human Resources Chairman of the Board and Chief Executive Officer Katheryn M. Fong David Tudor Vice President, Lawrence E Womack V ce Preside" President and Robert D. Glynn,Jr. Customer Services Chief Executive Officer of Nuclear Technical Services President and Energy Source,Inc. Chief Operating Officer Roger J. Gray 5'"
- james D. Shiffer Genera erv es M ag n ie t ro .
Executive Vice President PGT Australia PTY Limited Anthony Harris Er.ic Montizambert Robert J. Haywood Vice President. Assistant Corporate Secretary - Senior Vice President and Business Customer Service General Manager, Customer Energy Services 46
__.______m.__.._ - _ . . . . _a m._ .m _ _ - - -- __..___m.._ . _ _ . ._.. . . _ _ _ PG&E C e r p o r a tio n Shareholder Information T Shareholder Services Office Stock Held in Brokerage Accounts 0 77 Beale Street, Room 2600 (" Street Name") y' San Francisco, CA 94105 1814 When you purchase your stock and it is held for you by your
- Call Toll Free 1 800/367-7731 Fax 415/973 7831 broker, the shares are listed with us in the broker's name, or
" street name." We do not know the identity of the individual ;
For financial and other information about PG&E Corporation shareholders who hold their shares in this manner-we simply or Pacific Gas and Electric Company, please visit our site on the know that a broker holds a number of shares which may be held ; World Wide Web at: www.pge.com f r any number of investors. If you hold your stock in a street name account, you receive all dividend payments, tax forms, ! If you have questions about your account or need copies of Publications, and proxy materials through your broker. If you are i PG&E Corporation's or Pacific Gas and Electric Company's publica- receiving unwanted duplicate mailings, you should contact your f tions, please write or call the Shareholder Services Office at. broker to eliminate the duplications. j Manager of Shareholder Services PG&E Corporation Dividend Reinvestment Plan i David M. Kelly if you hold PG&E Corporation or Pacific Gas and Electric Company Mail Code B26B
]
stock in your own name, rather than through a broker, you may P.O. Box 770000 automatically reinvest dividend payments from common and/or San Francisco, CA 94177-0001 preferred stock in shares of PG&E Corporation common I-800/367-7731 stock through the Dividend Reinvestment Plan (the " Plan"). You may obtain a Plan prospectus and enroll by contacting the Shareholder Services Office, if your certificates are held by a if you have general questions about PG&E Corporation or Pacific broker (in " street name"), you are not eligible to participate Gas and Electric Company, please write or call the Corporate I" *h' ""* Secretary's Office: Corporate Secretary Direct Deposit of Dividends Leslie H. Everett if you hold stock in your own name, rather than through a broker, j Mail Code B32 you may have your common and/or preferred dividends trans- , P.O. Box 770000 mitted to your bank electronically. You may obtain a direct deposit ) San Francisco, CA 94177-0001 authorization orm by contacting the Shareholder Services Office. j 4lS/973-2880 Replacement of Dividend Checks ) If you hold stock in your own name and do not receive your dividend j Securities analysts, portfolio managers, or other representatives check within five business days after the payment date, or if a j of the investment community should write or call the investor check is iost or destroyed you should notify the Shareholder Services Relations' Office: Office so that payment may be stopped on the check and a Manager of Investor Relations replacement mailed. Angela M. Comstock Mail Code B8C Lost or Stolen Stock Certificates P.O. Box 770000 If y u hold stock in your own name and your stock certificate has San Francisco, CA 94177-0001 been lost, stolen, or in some way destroyed, you should notify L the Sharehofder Services Office immediately. f 41S/973-3007 I t PG&E Corporation Pacific Gas and Electric Company N GeneralInformation 415/973 7000 b L 47 l . _ _ . . .
.. > - .- . . - - . . ~ . - . . . _ - .- - _ . .. . - - ~ . . -, . .
i l i PG&E Corporation Stock Exchange Listings 4 Pacific Gas and Electric Company PG&E Corporation's common stock is' traded on the New York, T Annual Meetings of Shareholders Pacific, and Swiss stock exchanges. The official New York Stock , Date: April 16,1997 Exchange symbol is "PCG" but PG&E Corporation common
. Time: 10.00 a.m. stock is listed in daily newspapers under "PG&E" or "PGE."
Location: Masonic Auditorium Local newspaper symbols may vary. Illi California Street San Francisco, California . Pacific Gas and Electric Company has 13 issues of preferred stock and one preferred security, all of which are listed on the A joint notice of the annual meetings. joint proxy statement, and American and Pacific stock exchanges. proxy form are being mailed with this annual report on or about March 3,1997, to all shareholders of record as of February 18, Newspaper 1997, Issue Symbol
- First Preferred, Cumulative, 10.K Report Par Value $25 Per Share if you would like a copy of the 1996 Form 10-K Report to the - <
Securities and Exchange Commission, please contact the Redeemable: Shareholder Services Office, or visit our site on the World Wide 7,44% PacGE pfQ Web at: www.pge.com 7.04 % PacGE pfU 6.875% PacGE pfX 1997 Dividend Payment Dates 6.57% PacGE pfY 6.30% PacGE pfZ Pacific Gas and 5.00% PacGE pfD PG&E Corporation Electric Company 5.00% Series A PacGE pfE Common Stock Preferred Stock 4.80% PacGE pfG
~
4.50% PacGE pfH january 15 February 15 4.36% PacGE pfI April 15 - May 15 july 15 August 15 Non-Redeemable: October 15 November 15
)
6.00% PacGE pfA ! 5.50% PacGE pfB 5.00% PacGE pfC 1 l i Cumulative Quarterly income Preferred Securities: 7.90% Series A PG&E Cap A quips
- Local newspaper symbols may vary N l
1 t 1 i ! 48
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