ML20204H433

PG&E Annual Rept for 1986

ML20204H433
Person / Time
Site:	Diablo Canyon, Humboldt Bay, 05000000
Issue date:	12/31/1986
From:	Locke R PACIFIC GAS & ELECTRIC CO.
To:	Office of Nuclear Reactor Regulation
References
NUDOCS 8703270009
Download: ML20204H433 (53)

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P A C I F l C G A $

A N D E L E C T 11 i C C 0 M P A N Y HRHURMS 1986 1985* % Change Operating Revenues S 7,816,661,000

$ 8,430,981,000 (7)

Operating income

$ 1,653,625,000

$ 1,369,359,000 21 Net income S 1,081,223,000

$ 1,030,805,000 5

Eamings Available for Common Stock

$ 925,033,000

$ 866,575,000 7

Retum on Common Stock Equity 14.1%

15.1 %

(7)

Eamings Per Common Share

$2.60

$2.65 (2)

Dividends Declared Itr Common Share

$1.90

$1.81 5

Total Assets

$21,002,253,000

$19,098,003,000 10 lbnds Used for Construction S 1,833,720,000

$ 2,161,2M,000 (15)

Sales of Electricity to Customers (KWil) 61,837,484,000 M,727,602,000 (4)

Sales of Gas to Customers (MCF) 405,893,000 492,004,000 (18)

Tora! Customers 7,013,000 6,844,000 2

Number of Shareholders 404,843 423,563 (4)

Number of Common Shares Outstanding 368,127,176 337,348,282 9

Number of Employees 29,200 29,600 (1)

• Changed to conform to 1986 presentatmn.

i MTNNNC0hN0N EMANCSANO e rarn,ns, STOCKEftMTY DMMNGMRSHME a n.kv,sena, IV# tentage Ibitars Per Share 18 2 89 L -

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g___g_g 82 83 84 89 86 82 83 84 R$

86 I

P L E i i E R I O 5 H A R E H 0L D E R S NN down slightly from the previcus 3 rat PG&E for the fifth straight year camed substantially the rate of retum on utility Y

investment authorized by the Califomia Public Utilities Commission (CPUC).

The mdor factor afTecting eammgs in 1986 PG&E's new market-oriented stmtegy builds on the company's tmdition was the action by the CPUC to reduce of customer service to secure success in the more competitive times ahead; the companyiallowed retumon common company substantially earns authorized retum fifth stmight year ewhy fmm 1535 pemnt tg116 percent.

Authon, zed rates of retum m the utility We have already made considerable industry have been declining to reflect T heyear1986hasbrought significant changes to PG&E.

progress in carrying out our new strategy.

lowerretums being camed on capital Ihr the past several years, PG&E Among steps taken are:

investment thmughout the economy.

like virtually all U.S. energy O Cutting industrial electric rates by 25 As a reflection of our current fmancial utilities has faced growing com-percent during 1986; strength and expectations for the future, petition in its industrial and commercial O lowering the average industrial price the board of directors in May increased I

markets. Advances in technology and ofgas by 30 percent; the commoa stock dividend for the tenth l

the trend toward deregulstion will further O Cutting capital spending by 20 percent consecutive year to its current annual intensify competition in the future.

in 1987,the first step in a multi-year rate of $1.92.

This is a reality that faces every utility.

program to cut capital spending; American business needs to seize At PG&E we do not intend to let the future O Reducing spending for operations in new initiatives to regain its competitive simply happen to us.We are working 1987 below 1986 levels, even after absorb-position in a global economy.The utility to plan and manage in this dramatically ing the cost ofinflation, wage increases industry is not immune to the impact difTerent business environment so that and 100,000 new customers; of greater competition in world markets.

we can continue to prosper in the future O Taking advantage oflower interest For our business customers to be as we have in the past.

rates to refmance $2 billion of olde; competitive,we must be competitive-We have adopted a comprehensive high-cost securities and thus reducing especially for those with high energy costs.

st rategy to achieve this. We are aggressively annual financing costs by $66 million; Regulators and utilities are seeking marketing our gas and electricity, stress-O Streamlining our orgaruzation to to develop a new defmition of the utility ing our superior service and reliability, enhance productivity, managerial efTiciency marketplace that recognizes this changing reducing prices to be competitive, cutting and individual initiative, and basing busmess environment.

costs and seeking new markets.This compensation more on achievement.

Today, when many customers have strategy builds on the historic strength Maintaining our fmancial strength alternative means of meeting their energy of the company and at the same time is central to our strategy. We owe that to needs and PG&E no longer is the sole points us in new directions. It retains our our shareholders who have invested their provider ofgas and electricity,this obliga-traditional focus on customer service, savings with us.We owe it to our cus-tion to serve is being redefmed, while unleashing a more competitive and tomers as well, because we are best able to entrepreneurial spirit.

serve them when we are fmancially strong.

Although earnmgs for 1986 were 1

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ears no, early PIME grou-th oia rast section o(

, r Pirudent Wigginton the state of Caltfornia.

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Cnvistated a credo for ja the 611plus a

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pony has been to u'in the much has chanpxi~

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Q' public p>rxi trill by deserr-hnfraplants are more fk, h* '

ing thepublic good modern and so cer-u til To this end. the com-tainly are the trucks y

pany has intelligently and the equipment dervioped the gas anJ u hich company electric industries creus use in their uvrk.

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to meet the prndigious But one key thing

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We now differentiate between two fully fueled the regioni phenomenal types of markets: core markets and com-post-war growth. When fossil fuel short-petitive markets.The core market is ages threatened, PG&E successfully primarily made up of our residential and diversified into geothermal, nuclean wind smaller commercial customers who and other altemative energy sources and currently have no economic alternatives pioneered many conservation and load to PG&E-provided energy services. For management programs to maintain the this market, the traditional utility obliga-supply of energy to our customers.

tion to serve still is valid. We will continue Throughout our history, we have to serve these customers as we always stayed on the cutting edge of technological have, providing a full package of reliable innovation to meet our ideal of reliable, utility services at as low a price as possible.

Iow-cost service.

in the competitive market, primarily Maintaining our record ofleadership composed ofindustrial and larger com-in today's competitive markets requires mercial customers, we are moving toward that we continue building on our strengtts the"unbundling"ofour services: instead and focus on an objective which has of one full-service package we are l guided PG&E for many years: to provide i

ofTering an increasingly flexible range of

' customers with the right combination services and prices. Our aim is to provide nienersA csarte of products, prices and services for their these customers with the right combi-PG&E will continue to work with the energy dollars.

nation of products, services and prices so commission to achieve further reforms The changes PG&E faces raise new that they find doing business with PG&E to permit regulated utilities to compete challenges for the company's employees is a better value than obtaining their on a more equal footing with their as we strive to do more with less. It is energy from another source.

unregulated competitors.

because of the capabilities and dedication Retaining and expanding our PG&E is no stranger to competition.

of PG&E's managers and employees competitive customer base allows us to The forerunners of PG&E were the that I am confident the company will spread the fixed costs of maintaining our strongest and most successful of the many succeed in the future for its shareholders, system over a greater number of sales entrepreneurs who sought to serve the as it has in the past.

l units, and helps to keep energy prices emerging gas and electric markets in lower for all customers. Our shareholders Califomia in the last century.

benefit as we retain our revenue levels Since its incorporation in 1905, PG&E so we can eam our return.

has dammed rivers, strung wires and The CPUC alreaay has adopted run gas pipe through some of the Richard A. Clarke changes in its regulation of the state's ruggedest country in the United States.

Chairman of the Board gas and electric utilities in recognition After World War 11, when hydro and Chief Executive OfTicer t

of this new business environment. More power was not enough to meet the insati-changes are necessary, howevet and able demands of Califomia for energy, February 6,1987

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the company launched an all-out fossil generation building program that success-l l

l remains the same:

lYMEwntinues to meet the grutrth of a great part of the state That gmteth has been prw m, - digmus benmd the irnagin ings of the CXCCUtlCfs trho latJ the i

company \\

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PG&E TAKES ACTION TO WININMARKETPLACE Vigorous marketing, cost-cutting and organizational changes prepare the company to opemte in the new competitive environment for utilities.

of reliability and seek low-cost energy C ompetition forindustrial and commercial business is altematives as a matter of survival.

a fact oflife in the utility In PG&E's service area, competition business. Utilities can react first emerged in gas markets. It takes in one of three ways:

two forms. First, almost all very large OThey can accept the loss of business customers have dual-fuel capability and and seek higher rates from remaining can switch to altemative fuels when low customers to keep up their revenue levels; prices, such as now exist for oil, make O They can accept the loss of business, it attractive. Second, regulatory approval m

forgo rate increases and accept lower of a gas transportation program enables

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- P revenues and profits; fimas in PG&E s service territory to O They can vigorously market their secure their own gas supplies. PG&E products, cut their costs and make the must then transport their gas at a price r*

organizational changes necessary to designed to cover its costs.

operate in the free market.

Cogeneration is the major competitive q

The first choice may not be fair to challenge to PG&E's electric business.

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customers, the second is unfair to share-Industnal customers use waste heat from holders. PG&E has chosen the third their processes to generate electricity,

'q alternative. During 1986 the company or even use gas or oil to run generators p

initiated internal changes and sought and sell the excess electricity back to PG&E.

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regulatory approvals w hich would enable PG&E's competitive strategy is based S

q it to compete.

on determining what services the indi-

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loss ofindustrial and large commercial vidual customers need, what level of

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customers is not simply a result of PG&E's service reliability is required and the price prices being too high. Frequently, the of the customer's attemative, and then company's large, energy-intensive cus-marketing PG&E's service and price.

tomers face growing competition in their Decisions by the lideral Energy Regula-own industries, increasingly from foreign competitors. Some must sacrifice a degree for the first time, NMis supplying energy to an oftshere oil platform. Service to tinocal's Mattorm Irene could earn the company as much as $1.5 million a year.

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tory Commission and the Califomia a 30 percent drop in industrial gas prices Public Utilities Commission (CPUC) in 1986,PG&E has retained andin some have led to the"tmbundling"of PG&E's cases regained a number of customers by:

traditional utility senices so that the O Negotiating 204 individual gas contracts company can, for example, providejust for more than 266 million therms of gas transportation service to a gas customer and about $77 million in revenues; or standby electric service to a customer O Developing special contracts that allow that can generate its own powet customers either to buy gas from PG&E PG&E has alarge force ofmarketing or to buy their gas elsewhere and pay account executives in the field, working PG&E a transportation rate plus a with industrial, large commercial and demand charge, resulting in new volumes agricultural customers on an individual totaling more than 200 million therms basis to fmd the senices needed at of gas and $11 million in income; acceptable rates.

O Signing 102 short-term and long-term The line between " core" customers, transport contracts for 2.2 billion therms largely residential and small businesses, and $123 million in revenue.

and " competitive" customers, who have In the electric business, PG&E reduced attematives to PG1Ei service, has industrial rates about 25 percent in 1986.

been drawn for PG&Ei gas business.

As a result, several major customers In December the CPUC issued rules decided to postpone or discontinue cogen-

,. g explicitly ditTeren:iating between the eration projects. About $20 million in core and competitive gas markets and potentially lost revenue has been retained.

laying out regulations for dealing The companyhasalso completed a with competitive customers (story pg.12).

reorganization that puts decision-making The newregulations willend some authority as close to the customer as protections against changes in business possible, and is changing its personnel conditions.On the other hand,they and employee compensation policies willenable the company to move more to make advancement and fmancial swiftly to meet competition.

rewards more dependent on personal Sy The CPUC has alsolaunched an and organizational performance.

d

~ - * '

exammation of ratemaking mechanisms PG&E brings many strengths to the for electricity. A decision is expected process of competition. Among them in 1987.

are its fmancial health, technical and The company's aggressive marketing, managerial talent and the diversity of 4 oupled with the drop in the cost of the electric generating sources and gas from major suppliers, is already paying sources of gas supply at its command.

off. In the gas business,largely as a result of several new rate options and company are W exemphfred by the h schstehaltedfigure V in the nght fore-ground John it. Britton uns a self made man u'ho by force of unit rvse from besng a colbrtor ditt h-Jtgqer and roustabout for Oakland Gas Laght Company to twcome generalmanager of11h4Eduring a utthty canvr of almost 50 wars.

5

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'S C U S T 0 M E R S 0

of PG&E's service territory to another MN area with lower electric rates, as other l

air-reduction fums had done.

AT M

The Union Carbide plant primarily produces liquid nitrogen and oxygen for use in the petroleum refming, food MM processing and electronic industries.

Electricity represents more than 70 percent of total operating costs.

Many firms in PG&E's service territoty must reduce energy costs Througha specialagreement,PG&E in order to meet theircompetition; the company is working with them paid 20 percent of the cost of expanding and modifying the plant. Union Carbide individually to tailor programs that will retain them as customers.

agreed to staywith PG&E foratleast uccessful marketing means electric service was signed and filed with 10 years and increase production during S just fourexamplesofhow fmding what the customer the Califomia Public Utilities Commis-ofr. peak periods when energy is less needs and supplying it.

sion (CPUC).The agreement is the first of expensive. This innovative agreement PG&Eis doing this.liere are its kind,and was approved by the CPUC will produce $7 million in revenue for in January 1987.Under the contract, PG&E over the next 10 years.

the company has worked to meet the PG&E will retain about $1 millionin John Scarrone l' arms individual needs ofits customers.

revenues peryearfor15 years.

John Scarrone grows potatoes, chard, red San Mateo llospital Consortium Exxon Company, U.S.A.

leaflettuce, onions, bok choy, broccoli Energy costs make up about 10 percent Oil refmeries are PG&Eis largest category and squash on 450 acres near Bakersfield.

of the total cost of running a hospital, of combined gas and electric customers.

Like most farmers, he must cut and are prime targets for reduction in the Falling oil prices have squeezed profits production costs in order to stay in increasingly competitive health-care field.

and led refmers to look hard for cost-business. Electricity to run irrigation Three San Mateo County hospitals, cutting attematives.

pumps is a major cost item.

Peninsula, Mills and Sequoia,were plan-Exxon Company U.S.A.'s Benicia PG&E's agricultural energy manage-ning to install about 3,000 kilowatts of refmery advised PG&E that it planned to ment representative worked with Scarrone cogeneration capacity before the end of switch from natural gas to internally gen-to adapt his irrigation schedule to take 1986. Althoughcogenerationwasless erated propane. PG&E used two special advantage of PG&E's time-of-use rates.

costly forthe hospitals than PG&Els rates approved during 1986 by the CPUC Switching his electric use to oft-peak traditional rates, the company was able to to beat the propane price, keeping all hours saved Scarrone about $18,000 in offeraninnovative new rate based on of the refinery's natural gas business and electric costs during 1986, and probably its actualmarginalcost ofsupply to retaining $700,000 in revenues over an saved a customer for PG&E who other-the hospitals.

initial six-month period.

wise : light have converted to diesel-The hospitals agreed not to build the Union Carbide powemd pumping.

cogeneration facility, and a contract for Union Carbide had considered moving its air-reduction plant in Pittsburg out By shsrt.1g the wst of plant apgrades and ettering lower off-peak rates, PCM kept Union Carbide's Pittshwg plant in its service territory where it should generate $7 million in revenues ever 10 years.

rom thepaceset-ago u hen the company A ting electromcs uns young utre innora-i tire as trell companies of the area that has come in be o

its tun examples knoten as " Silicon l'

imm among many talley"to the dynamic shotrn here are a l

agnbusiness firms of specialpas-fired the Central tbihy

,1 otra for haking enameled IWAE's customers oi jenttrv and today areleaders in theirindustries.

some early-day Andin their das the heat treating customers ofdecades ofa boder I

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F iN A N C E A N D R A T-E S

=at the beginnir4 of the FOCUS ONMAINTAINING FINANCIAL STilENGTH

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exceeded that of any other utility, Tough budgeting and cost controls are keys to continued financial success; and was secondin dollarvolume among all U.S. corporations.

the company's huge refinancing program reduces the cost of debt; major The 1986 tax act willlower PG&E's rate cases have been dec.ded, moving toward cost-based rates for customers.

rates about $85 million, as the company i

PG&Ei stock sold above book value passes through its lower tax obligation M aintainingthecompany's fmancial strength and throughout 1986.The company sold to its ciistomers.

eaminga good retum for

$679 million in stock, some ofit nearly The company is pleased that the shareholders are key parts 50 percent above book value.

tax bill allows PG&E to continue to issue l

ofPG&E's market-driven On August 26,it reached $27%.

tax exempt pollution control bonds for i

strategy.The company has greatly Adjusted for stock splits, that is the highest its geothermal complex at The Geysers.

improved its fmancial performance levelin company history.The stock The company will be able to issue such since 1981 by tough budgeting and cost ended the yearat $24%,up from the $20 low-interest bonds through 1991. In control. Intensifying these efforts along at which it closed at the end of1985.

December 1986, the company issued $360 with a vigorous marketing program Total retum to shareholders in 1986 million wonh of such bonds at an and continuing the companyt innovative (increasein the price of the common annualized interest cost of 4.4 percent.

fmancing program will help it remain stock plus dividends) was 31.9 percent.

Rates an attractive investment.

Total retum was 35 percent in 1985, and On December 22,1986,the Califomia PG&E willlimit its 1987 budget to the five-year average total retum is Public Utilities Commission (CPUC) below 1986 levels. Cost increases associ-about 31 percent.

decided three major rate cases that atcd with the addition of100,000 new The company had by far the largest customers, higher wages and inflation fmancing year in its history in 1986, EAMED0fDc0STDFDffTATFEA# EAU h'*8' will be absorbed within that limit.

selling about $2.8 billion of new securities.

In addition, the company set a 1987 Last year was the previous high, with goal of reducing its capital expenditures

$1.4 billion in bond sales and $373 E

a by 20 percent to $1.6 billion, as the first million in stocks.

EE 8

step in a multi-year program to avoid future About $800 million was raised for E

6 price increases resulting from a high construction and other capital expenditures.

EEEE 4

EEE level of capital expenditures.

The remaining $2 billion represented 2

refmancing of high-interest bonds and sz s3 s4 ss as l

preferred stock to reduce interest expense l

l and preferred dividends.The refmancings l

will save the company about $66 million l

l l

helast decades of the

<ompetmg companies tnmg

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1800s and the first to sent the same anu decade of this century avre Competition among gas a time of apenmentation companies often hadcren andlearningin rmny anus more unsightly ellects as oIthe utshts field-includ-compermg companies dug ing utihts regulation.

up streets and sideuulks The early pourt poles to lay thnrgas hnes picturedgiiv an idea (there Allilthis graduallyled ta urre uwrse examples) of acceptance of theprinaple

& ;3 one aspect of unbridled that m a given any thepuf>

3 ;f competition - multiplica.

lie uns best sermiby get-

yF twn oIelectnc haes by tmg gas or c!cctricity from a

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increased PG&E's revenues $27.8 million

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starting January 1,1987: the 1987 General Rate Case,an Energy Cost Adjustment

+ <-4,, 7 Clause (ECAC) decision and a Gas

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Adjustment Clause (G AC) decision. The g SI 1

increase from the General Rate Case and e

v ;.

h' decreases from the other two net out to 4-a $28.5 million electne revenue increase s '-

and a $700,000 gas revenue decrease.

The CPUC also,in the General Rate

.g - -

Case decision, lowered PG&E's return on common equity from the 14.6 percent level approved for 1986 to 13.8 percent for 1987. Lower interest rates and the lower retums paid on similar investnients were the prime factors in the reduction.

A number of rate design issues were also decided in the General Rate Case.

g The CPUC adopted several PG&E suggestions that move the company's rates for a customer class closer to the

.m 9 actual cost of serving those customers.

in recent years, legislation and regula-e

.f '3 tions have required the company to charge w

industna: and commercial customers I.f rates higher than the cost of sersing them, a

in order to subsidize residential rates.

This subsidy has been one factor in the movement by industnal and commercial customers toward alternatives to PG&E service. Moving toward cost-based rates by eliminating these cross-subsidizations, as the CPUC is doing will aid PG&E's competitive position.

1 M/

Offpeak rates saved John Scarrone farms about $18.000 in electric costs in 1986.

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MMMO N industry average for all pumped storage plants is 83 percent.

Thanks to the performance ofIIelms N

and Diablo Can>un, PG&E easily met the summer peak electrical demand of 15,439,200 kilowatts, reached on August 4, DURING RRST YEAR

-====

tem, the largest privately owned system l

{ Unit 1 of the Diablo Canyon Nuclear Ibwer Plant undenvent its ftIst n the U.S., had a ve y good yeat imw-refueling; PG&Eh hydm system had a very good yeat cost hydro power made up 19.5 percent f the total mix of generation, up from he year 1986 was a record-rating from the Institute of Nuclear Ibwer T NuclearIbwerPlant.

14.9 percent the year before. The abun-setting, award-winning year Operations (INPO). INPO is the nuclear

• power hebd ME for the Diablo Canyon industry organization that rates the I wer. e etncra h performance of nuclear plants throughout Diablo Canyons Unit I the U.S. A "1"on the INPO scale of m

a sigmht conthn to MB completed its first full year of operation I to 5 is the highest rating givett on May 7,1986, with two national Another large PG&E facility, the IIelms President Reagan signed into law a performance records for a first-year plant, Pumped Storage f lydroelectric Plant,also

'"#"*"" ###" "8' including a capacity factor-actual pro-performed exceptionally well through 1986.

ma t mun@and duction as a percentage ofpotential Ifelms can produce 1.2 million kilo-ag amen wn tb h production-of 88 percent.

watts of electricity, enough to meet the

" E'# "#"" "#

Unit I was shut down,as scheduled, needs of over a million people. And it utilities when hydro projects come up for its first refueling on August 29.That can reach this capacity from a standing I" ##"##"

operation was completed in December; start injust three minutes.

."8

.N dropping Unit l's capacity factor since it At IIelms, water flows from a moun-began operation to 68 percent.That is sti!I tain reservoir down a 20,500-foot tunnel

} take over hydro projects nationwide, in u g mIM Mong to N f

above the industry average of 60 percent.

and through three huge turbines to a Unit 2 began operating on March 13, lake at a lower elevation, producing the

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1986. By year's end it had achieved a power at time of peak demand. At night, ac suc Shon,in dcWE capacity factor of 86 percent, also excellent when electricity use is lowest, the water

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for a new plant.

is pumped back up to the upper reser-E.

I Diablo Can>un was one ofonly six voir for reuse at Ihe time of the next peak.

holders who contacted their legislators l

nuclear plants nationwide to receive a"1" lielms was available forservice 92 percent of the time during 1986, only its second full year ofoperation.The Unit iet NM s ClaWe Cangen hiuclear l'6wer Mant estaWished two nattenalpertermance records during its Mrstyear eteperaties

\\

GSE mnointiivnen called for more i

A uns bnghtly demon-electricity m a strutedin 1916 by the pur.

hurry (1;&E chase of the "Ihmbass" brmght the half-ship and bonhed or halfofit.

After the American-budt l -.: ~

et permanent!y tanker len IhumtIn Rusua tymg tu output mto the com-tn 5%rld liarif hmke up pany sprem that Decemb< r j

tn a storrn. the stern leith There and elseu here l

Ib Ulukdonutt generator in the 111&E sprem the

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l kdnuutts it.r the twiter salcaged. tihen a p<ntuur

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lumber hocm in Eureka l

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NATURAL GASMARKET BEING RESTRUCTURED r

Regulatory changes in 1986, and more to come in 1987, should allow p

f PG&E to move more swil'tly in negotiations with industrial and commercial firms; spot market pun hases helped reduce gas costs.

k he gas market in Califomia l decision further opening up the gas

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underwent major restructuring market.The decision explicitly recognizes R yg in 1986,and sweeping regulatory the di!Terence between core and competi-q action taken in December tive markets and provides for development "9

promises even more extensive of separate regulations and sources of gas d

changes in 1987. PG&E's objective is to

, supply to serve them.

l achieve more flexibility to compete for l

The core market, mainly residential j

industrial and commercial gas customers. ! and smallcommercialcustomers who Warm weather and the etrects of l currently have no altemative to PG&E competition dropped PG&Et natural gas ; service, will continue to be served as k

sales to customers by 18 percent to 406 l in the past. PG&E will have a continuing billion cubic feet during 1986, down from obligation to provide the highest possible 492 billion in 1985.That years high level of senice at reasonable cost.

m.

sales level had been the first increase PG&E will be required to maintain a in seven years.

su!Ticient supply of gas to meet the needs During 1986, federal and state regula-l of core customers.

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tory action opened up the companyt I

Competitive market customers are service terntory to sa'es by outside parties, l mainly large industrial and commercial y

with PG&E providing transportation i entities able to secure supplies elsewhere, service at rates equivalent to those the

! including the use ofalternative fuels such p

company charges for selling gas. Transport l as oil.The company will be pemiitted 5

service is now about one-third of

! to "unbundle" its traditional sen ices and k

PG&E's industrial gas business.

! provide industrial customers with the L

in Decembet the Califomia Public combination of supply, transportation.

lI l

Utilities Commission (CPUC) issued a

' storage and load-balancing functions they

, require.The level of senice reliability h

l to non-core customers will depend on the y

' price they are willing to pay.

PG&E account esecutives have been working with New linited Motor Manufacturing Inc. (Nf)MMl}. ajoint venture of GeneralMotors and kyota in fremont, to

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reduce both gas and electnc costs in 1982 E==

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The new regulations increase PG&E's dropped from $41.83 to $40.09.

i Hexibility in dealing with industnal and The company bought more low-cost large commercial customers, setting pnces Canadian r,as throughout the yeat at the based on covering the company s costs same time reducing its purchases from a of the transaction plus whatever profit major U.S. suppliet El Paso Natural Gas margin,within hmits set up by the CPUC, Company. after El lho raised pnces can be obtamed Individual contracts dunng the summet T..

will still hase to be filed with the CPUC.

The company also was one of the The company must sell to competitive countrv's largest buyers on the " spot customers based on its average cost of market." Abundance of gas supply kept gas, which may still provide competitors spot market pnces low throughout the with an advantage in some transactions.

year. Approximate y 15 percent of PG&E's The ediciency of the company's total gas purchases in 1986 were made on delivery system and the diversity of its the spot market, usually on 30-day con-sources of supply should, with appropnate tracts at discount rates. At the same time action by the CPUC. allow the company the company protected itself from too to compete more etTectivel).

much reliance on the volatile spot market PG&E concentrated in 1986 on reduc-h> buying signif cant solumes of gas on c*

ing gas costs to improve its competitise sis-monin term contracts. These contrat ts shL mk![j y position and on further daersifying supply allowed the company the option of not jy in the buyer \\ market for gas. Ibr the taking the gas iflower-pnced supplies of

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yeat the company reduced its average gas were available.

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gas acquisition cost to $2.36 per thousand Additionally, the company activel)

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cubic feet from $3 27 in 1985. The lower sought to make sales to customers not cost allowed PG&E to drop industnal within the PG&E service area. It sold gas rates by 30 percent. and resulted in substantial amounts of gas to San Diego

,g more than $422 million in overall rate Gas and Electnc Compan) and recened s,f.. j decreases The average residential ga3 bill regulatory approval in the fall of 1986

- h$[

to sell specially targeted volumes of a

AnntIAL COSTOFPflRCHASED GAS Canadlan gas ta Southem Calilomia Gas y

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s7 Company, Southem Califomia 1:dison f3 4 '

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Company and San Diego Gas and g

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l-Electnc Company. These sales amounted.

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on some days, to well over 10 percent 7;g

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3-i of the company's total gas sendout.

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E t E C iR I C TI V R 0 U N D U P 166,000 kilowat ts of additional hydroelec-tric power and 326,000 kilowatts as its share of participation in a 1.3 million N

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kilowatt transmission line from the Pacific Northwest.

The remainder of PG&E's additional The balanced mix of PG&E's electric generating souires helps the company power needs vfl be purchases from to keep nites low now and will be just as important in the future.

others, including small projects developed

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by unregulated comorations. Under he diversity ofits electric from last year's record sales level.

federallaw, PG&E is required to sign r

I generating system will prove Lower indust rial and agricultural sales contracts to buy all power produced to be one of PG&E's major w ere largely responsible for this decline.

by these projects, known as Qualifying advantages in the new era The company's Diablo Canyon Nuclear Fac lities or"QFs,"at prices set by the

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ofcompetition.

Ibwer Plant increased its contribution t California Public Ut?tities Commission.

PG&E generates electricity from 16.3 percent of the company's total supply, The company now has about 8 million the largest privately operated hpiroelectric becoming the third largest source of kilowatts of QF capacity under contract-system in the country and the largest company-generated powec liydro power much more than it expects to need. In geothermal complex in the world in addi-was the second largest, up from 14.9 addition, the mandatory purchase of this tion to its workhorse fossil and nuclear percent in 1985 to 19.5 percent in 1986.

power will be made under a formula that units.The company also uses wind, Ilydro is the lowest-cost source of power does not fully reflect recent declines in

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cogeneration, biomass and solar powec available to PG&E. Ibssil fuel was the fuel prices. Thus, the power will cost more This diversity enables PG&E to top source, though down to 19.7 percent than power PG&E can generate on its utilize for its customers the lowest-cost from 34 percent in 1985, using principally own or obtaia elsewhere.

generation sources available at any the most ethcient fossil units. Geother-PG&E is working with regulators and particular point in time. PG&E has taken mal, at 12.4 percent, and other alternatives, QF operators to defer or reduce the amount good advantage of the current low fossil at 8 percent, made major contributions of capacity for which it must contract, fuel prices. At the same time, nuclean to the generating mix.

and to reduce the cost of QF power to l

hydro and other attematives will insulate The company purchased 32.1 percent of levels now available in the marketplace.

the company and its customers against its power during 1986, compared to 31.4 Because QF suppliers are unregulated, i

future increases in gas and oil prices.

percent in 1985.The purchases were mainly they have no obligation to supply power The abundant hydro andlow gas and oil low-cost hydropower from the Pacific when it is needed, or to refrain from costs allowed PG&E to lower electric Northwest, made under favorable terms.

delivering it when it is not. PG&E is rates significantly during 1986.

PG&E plans no major new construc-concemed that the growing dependence The lower rates helped minimize tion projects for electric supply over at on QF power will decrease its ability to a drop in 1986 electric sales, which were least the next decade, other than those serve customers economically and reliably.

61.8 billion kilowatthours, down 4 percent already under development.These include 335,000 kilowatts in three plants at its geothermal complex at The Geysers, NM is working with health care facilities in its service territory to held down energy tests through innovative new rate designs.

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statwn cles truc promvr1 In IC9. Cabfor-nta Electrie light Com-its the industrr gren:

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Tbrough this pannership and another I

N TY which allies PG&E with Califomia State University campuses, the company M

M ofTers a wide array of support including grants to teachers, scholarships and exchange programs.

Community involvem:nt through a bmad array of awan!-winning During the past 20 years,336 high school programs and the volunteerism characteristic of PG&E employees helps seniors have won $4,000 PG&E scholar-ships, and 418 have won $1,000 scholarships.

i the company to eam and maintain the goodwill ofits customers.

In other educationalprograms,PG&E energy conservation programs. ZIP employees act as volunteer tutors in C ommunity service haslong been an important component (Zero Interest Program) and CAS!!BACK many subjects,and the Adopt-A School of PG&Ei efTorts to earn and (a cash rebate incentive program) have program sends teams of volunteers to maintain the goodwill of the accomplished their objectives and have specific schools to raise the quality of I

people and communities it been phased out.These and other education through personal involvement.

serves. In a more competitive environment conservation programs resulted in the Many PG&E employees devote their when customers have a choice ofsuppliers, weatherization of well over a million resi-spare time to community activities. In the respect engendered by responsible dential units. PG&E remains committed 1986, the company created the FrederickW.

corporate citizenship will ollen have to conservation as a major component Mielke, Jc, Award, named for the retired a bearing on their choice.

ofits future energy supply, and continues PG&E chairman, to honor employees for To retain the goodwill ofits customers, to ofter information to its customers outstanding examples of volunteerism.

PG&E will continue to be responsibly on many conservation topics.

PG&E further recognizes employee imulved in the communities it serves.

One conservation program, a direct volunteerism by donating $100 to

)

PG&E's broad array of community weatherization program called llELP, w ill non-profit groups in which employees service programs camed the company continue to olTer low-income customers are active. The company has given 20 citations from the Presidenti Citation free home weatherization. In the past 1,180 such awards in the past four years.

Program for Private Sector Initiatives four years, llELP has applied conservation Because of the diversity of ethnic in 1986, for programs ranging from refugee measures to more than 150,000 dwellings.

groups in PG&Ei service territory, the energy education through weatherization Education has always been an impor-company has designed special programs for low-income consumers.

tant concem for PG&E.The company's low fossil fuel pnces have reduced the energy education partnership with cost-elTectiveness of many of PG&Et 53 community colleges m the service territory received national recognition in 1986, caming an award from the Keeping AmericaWorkingTask Force, as well as a Presidential citation.

<5e b

mm the mid 19th 1he compmy pnunoted century bamnings, its ? err sces and ci en made throuya the ids a hen

" Service"a part of the title thew sert ice trucks utre of the company mawine hncJ up for the or picture.

the uvrds of the olla tal

'v to the prewn! Jay dedica-history of the < ompany s

• ~

tion to scrring the customer fu%I lW) scars (through has been the kes to the 1%2) stillring true:

operation afIM and its ihr company ines it-forchears Surely determa-ably us of the pmpie and nation is evident in the for thepovple its hnes exprentons of tun storld cater almmt crers home.

%r Irra unma n has m. n 11 m rw.bu,m m and 16

to ensure that customers not familiar with English are given conservation and safety information.The Energy Educa-tion for Refugees program works with Southeast Asian customers,and the Asian Education program keeps the Chinese-speaking population informed.

The generosity of the companyi shareholders, customers and employees has enabled many customers who might otherwise have been unable to pay their energy bills to do so.Through PG&Eh REACll program, administered by The Salvation Army,70,000 households have been given one-time fmancial assistance to pay their energy bills. At the end of November 1986, the REACil pro-gram had pledges from customers and employees totaling $1,821,350.The first

$1.5 million of that will be matched dollar-for-dollar with shareholder funding.

Continuing its long-time support of community agencies, PG&E and its employees contributed $3.7 million to the United Way in 1986.

In addition, PG&Ei corporate contributions program donates money to a variety of worthy charitable, i

educational, civic and cultural activities.

The companyi total contributions, including the matching funds to REACII, were about $4 8 million in 1986.

I NMk naturnt ses honee prograne has esponded In Sacrannente, n estrict representatore escusses the cost savinge assocktent with the ese etnaturntges spoliances with a new home devoteper.

m industry and agriculture.

"And af one may brutr "If one seeks to define the cynicism of a matertal-l'(MI:one may find at istic unrid. one n JI fmd m J.

m the company:s employ ~

this utJity organtuttion.

ecs.. uts hnemen u ho risk a spirit and a strcngth and theirlives andendure a purpene ofits on n that hardships that wrrace are abotv and bnnnd the may be maintaincJ strength andpurpow of arithout Inter-onJartduals.. It has twome ruptton.. Its a ltrang lastintl cntity Irith servicemen erhose a character and a tradition skJIis on callfor the bawd firmly upon ab dedt-atJ ofs tostomers.

cativit to public scre ice.

17

0 R G A N I Z A T I O N 3

caliber ofleadership. Many of the changes NS fdled vacanc;es, but in some instances ofTicers were shilled to new responsibilities I

ITY N

to broaden their matu;i;ement skills, develop versatility and provide new leader-ship in some PG&E departments.

Decentralization of the field organization to take decision-making authority The companyalso beganimplementing closer to the customer; increased emphasis on marketing and customer a reduction in the workforce, focused primarily on stafT-related functions. The service, and streamlined operations are putting PG&E in competitive trim.

quality of customer sersice will not be n 1986, PG&E made a number emphasis on marketing, giving managers afTected. The company began offering an ofchanges designed to structure the in the field more marketing represen-early retirement package to eligible company to compete etTectively.

tatives to service customer needs. In employees at the end of Decembet and A majorstep is decentralization.

Decembet PG&E consolidated marketing, hopes that this and normal attrition will The company has completed sales and customer service functions accomplish most of the reduction.

reorganizing 13 regional units into six under a new Department of Marketing PG&E has embedded productivity operating regions, each headed by a vice and Customer Services, headed by a measurement and improvement in the president. l' art of the field reorganization vice president.

thinking ofits line managers.

involved restructuring the basic customer The companyt budgeting and cost Ihr 1987, PG&E has adopted key i

service units or divisions within the control systems are being refined and performance and productivity measures regional system that are closest to the redesigned, with more emphasis on linked to individual and team perfor-customet The reorganization combines sales and profit centers.

mance and reward systems, including gas and electric construction management A number of management changes monetary compensation.

l and crews and streamlines the operation.

during the year were designed to Results already are impressive. In the Decision-making authority and respon-maintain the company's historic high 1987 General Rate Case, the company sibility that once rested in the corporate reduced its request by $25 million, citing i

headquarters in San Francisco is now AMUAlSMMS/mUlaF#cOSTSMOAf productivity improvements from projects being shifted to regional and field U#U""

it has undertaken. And Ideas in Action, the PG&E employee suggestion system, managers,in order to make the company 30 more responsive to its customers.

recorded savings of $29.9 million-an 3

This is accompanied by increased all-time high.

i n

um l

5

== M i

j s2 s3 s4 as so l

l l

Tin technologand m

's 7

hank to adrana n both

,mL backunmndi Hie nt l l

i

%l *.

e turhme + nerator a stdl on I

vryms:ation. the wnpany thejub spmnmg out l

kdountts but todas at l

\\

1 has become more produc.

1 the compan.s \\ Helms tur m e r the yar, A marielm its day um y

l' umped Sturace Plant thrn I

thn li tw kdont all turbme-great umla cach 10 timo O neratur one of tuo the si:e ofihn one not at nt Iiburthou se, shou n only O ne rate ra rily more l

l Jurong a fmal m>;w tron twurr at off peuk tunes tour m 192)Iuith a hsdne tha yan be rua m n n r\\r ela tric Jam hudi m the la pump u att r bm k l

wmr ent pu ture d m Gi;hd! L! We a u A

l 18 l

i i

/

P A C I f I C G A S A N D E L E C i R I C C 0M P A N Y i

FINANCIAL DATA SELECTEDRNAnCIALIAHRMRTION

/

19M6 1985 1984 1983 1982 inThousands (except percentage and per share infonnation)

Operating Revenues S 7,816,661

$ 8,430,981

$ 7,829,703

$ 6,646,699

$ 6,785,095 i

Operating income

$ 1,653,625

$ 1,369,359

$ 1,103,388

$ 959,872

$ 913,244 Net income S 1,081,223

$ 1,030,805

$ 974,892

$ 787,967

$ 810,178 I

Eamings Per Common Share

$2.60

$2.65

$2.62

$2.15

$2.46 Disidends Declared Per Common Share

$1.90

$1.81

$1.69

$1.58

$1.47 Ilook Value Per Common Share at Year-end

$19.06

$18.05

$17.18

$16.39

$15.88 Market Price Per Common Share at Year-end

$24%

$20

$16%

$14%

$14%

Dividend Payout Ratio 73.1%

68.3 %

M.5%

73.5 %

59.7 %

Total Assets at Year-end

$21,002,253

$19,098,003

$17,319,359

$14,717,357

$13,635,318 Long-term Debt, Preferred Stock, and Capital lease Obligations at Year-end S 9,040,786

$ 9,187,957

$ 8,223,968

$ 7,055,825

$ 6,509,M8 The above table displays data which are dacussed in the Managementi Dncussion and Analysis of Consolidated Financial Condition and Results of Operainins.

ntANRGEnENT'SDISCt/SSMAnDANMSIS OFCOR60llDPTEDRNAnCIAL C0 mil 0NAnC REStMTS OFDWRAll0h6 1984 1985 1986 Revenues for 1986 decreased by $614.3 million. lower fuel costs passed on to ratepayers tbrough lower rates were U",,D *"l]" """*'

c g olTset partially by revenues related to Diablo Canyon

-for operating expenses

$232.3 s 676.7 cassousMr3 Nuclear Ibwer Plant Unit I (Unit 1) which was in full com-

-for retum on insestrnent 197.1 523.o OMAMasserMIArs mercial operation for the entire year compared to only Total

$429.4 s1.199.7 eight months for 1985, and Diablo Canyon Nuclear Ibwer

~

Plant Unit 2 (Unit 2) w hich began full commercial operation 8

on March 13,1986.

The Company has filed applications with the Califomia Revenues for 1985 increased by $601.3 million over 1984 Public Utilities Commission (CPUC) for recovery ofIhe costs as Unit I began full commercial operation on May 7,1985.

of owning, operating and eventually decommissioning Diablo Canyon. Pending the final outcome of this proceeding, 2

Diablo Canym Suclear Power Plant the Company is utilizing interim rates to collect a portion Revenues from Diablo Can>un are recorded through a of the revenue required to own and operate Diablo Canyon a ueane ac s mechanism called the Diablo Canyon Adjustment Account and is accruing the remaining revenue not being recovered (DCAA). This mechanism allows accumulation of Unit I in interim rates for future rate recovery.The total amount and Unit 2 expenses and retum on rate base (11.44% elTective of the receivable as of December 31,1986 is $871.1 million.

January 1,1987) for future recovery through the ratemaking If the CPUC does disallow some of the Diablo Can>un process. Current cash flows are not increased by the costs, the Company can expect certain adjustments to net operation of the DCAA. (Ibr the Diablo Canyon cash flow income and eamings per share. Ibr every $100 million of impact see the Liquidity and Capital Resources section.)

disallowed plant costs, assuming that the allowance for equity Diablo Canyon revenues, which are subject to possible and borrowed funds used during construction ( AFUDC)is future adjustment and refund, and their elTect on camings in the same proportion as the AFUDC in the plant and per share are as follows:

that the disallowance would apply equally to the two units, there would be an approximate $79.9 million reduction in net income and a 22c decrease in camings per share. This reduction in net income and camings per share also reflects 1 1

19

P A C 1 F i C G A S A N D E L E C I It I C C 0 M P A N Y ntRNAGEnENT'SESCUSSN cont.

1987 General Rate Case a proportionate reduction of the related DCAA revenues Although camings per share were reduced for the above noted through December 31,1986, and the 22e impact on camings items, basic utility operations remain sound due to recent per share would increase by approximately one-half cent regulatory decisions such as the 1987 General Rate Case per share per quarter thereaflet (GRC) and the new Gas Regulatory Framework, discussed The Financial Accounting Standards Board (FASB) below,in combitution with management's rigorous continuing is considering whether the capitalization of equity retum on program of cost controls.

investment once a plant is placed in service is appropriate.

In December 1986, the CPUC granted a GRC increase ARMCAS A MACM-Ifit is decided such capitalization of equity retum is not of $107.5 million, etTective January 1,1987. The 1987 GRC ASE E MCOME appropriate, the Company may be required to reserve part or decision provides for a 13.8% retum on common equity for all of the DCAA equity retum. The FASB proposal has not PG&Et stockholders, as compared to the previously author-indicated whether the application would be retroactive or ized 14.6% The CPUCh decision was influenced heavily by prospective. The Company has recorded $458.3 million, after current economic conditions. Declining inflation and the drop tax, of DCAA equity retum as of December 31,1986. The in fuel costs have held down the Companyt expenses, and E

Companyt maximum potential exposure to adjustment its cost ofcapital has been reduced by the fallin interest rates.

20 is $1.29 per share as of December 31,1986, and will increase PG&E has implemented a strategy for lowering the io by approximately 25C per share each quarter thereaftec costs ofoperating the Company to insure that expenses do n t exceed the levels authorized in the 1987 GRC decision.

u u

u AFUDC For example, the Company has implemented a Voluntary AFUDC declined for the third straight yeat The decrease Retirement Incentive (VRI) program to reduce the size of in AFUDC is due in part to the inclusion of the IIelms the workforce. (This matter is discussed more fully in Note Pumped Storage Project (llelms)in rate base in 1984 and the 7 to the financial statements.)

commercial operation of Diablo Can>ur Unit I and Unit 2 in 1985 and 1986, respectively. For 1986, AFUDC represented llalancing and Major Facility Adjustment Accounts 10.3% or net income, compared to 33 % and 49.3% in the Balancing accounts and major facility adjustment accounts past two years. Much of the decrease in AFUDC was offset authorized by the CPUC help maintain the Company's cam-by the increase in DCAA revenues noted above. 'l he ings stability. Energy-cost balancing accounts have been reduction also is due to the shorter construction time of the used to accrue for future recovery costs of gas and 91% of the Company's projects. AFUDC increases net income but does costs of purchased power and fuels used to generate electricity.

not contribute to cash flows until construction is completed An $871 million annualized net electric revenue decrease and projects are placed in service, included in utility rate was ordered by the CPUC in 1986 as a result oflower electric base, and the associated revenues billed to customers, energy costs. A $1%.9 million net gas revenue decrease was ordered in 1986 as a result oflower natural gas costs from Earnings Per Share suppliers. As discussed below, beginning in 1987, part of Eamings per share of the Company in 1986 were $2.60, as the ;;as adjustment mechanism will be and the electric compared to $2.65 in 1985 and $2.62 in 1984.The 1986 eamings adjustment mechanism may be phased out.

are equivalent to a 14.1% corporate retum on weighted Major facility adjustment accounts, such as the DCAA, average common equity and a 12.4% retum on utility rate base.

are used to accrue for future recovery of operating expenses 1984 1983 i9u and retum on major generation projects from the time they become operational until fmal rates are approved by the CPUC.

in Thousands accounts. These accounts are used to eh."

N Earnmss Available for mmate the impact Common Stock

$810.576 $866,575 5925.033 U"

• E**

Weighted Average Number of billed to customers are authon. zed by the CPUC based on

]

Common Shares Outstandmg 309,367 326.e 8 355,937 an estimated sales volume. Any differences between revenues Eamings per share were reduced in 1984,1985 and 1986 calculated using these estimates and revenues billed on principally due to the net etTect of the following items:

actual volumes are accumulated in the balancing accounts 1984 1985 19u and equalized through subsequent upward or downward CPUC reduction in rate rate adjustments. As discussed below, part of the gas sales of retum authonfed on fluctuation mechanism will be phased out.

c n equity

$(.14)

In December 1986, the CPUC adopted a new regulatory energy project costs

(.19)

(.14) framework for California natural gas utilities.The CPUC Adjustment of pnor decision separated gas customers into " core" and "non-core"

> cars' tax benefits

.13 classes. Core customers are those with few or no fuel CP 1 at on ratepa>ers alternatives to natural gas (such as most residential and coal properties

(.03) smaller commercial customers). Non-core customers are Famings per share impact

$t22)

$tol) 9.141 20

P A C i f I C G A S A N D E L E C iR I C C 0 M P A N Y l

those with attemative fuel capabbty or the ability, because to review the CPUC's interim decision that allowed the of size, to contract for their own gas supplies.

Company to retain the estimated net fuel cost savings of The new framework allows the Company to negotiate approximately $334.2 million annually resulting from the with non-core customers for the amounts charged for operation of Unit I and to increase electric rates by $53.8 the gas purchased as well as the cost of delivering that gas million annually to recover the operation and maintenance to the customet In exchange for this pricing flexibility, expenses for Unit L If the decision is reversed, the Company the sales-fluctuation and energy balancing accounts for gas could be required to refund a ponion or all of the $334.2 will be phased out for non-core customers and modified million net fuel cost savings. (The uncertainties surrounding for core customers. An camings cap above and below the ultimate rate treatment of Diablo Can>vn are discussed authorized retum will be in effect for non-core customers.

more fully in Note 10 to the fmancial statements.)

While this new concept allows the Company greater l

flexibility in competing for some customers, in exchange, IIelms Purnped Storage Project it loses some of the protection afforded previously by in June 1984, the IIelms hydroelectric project was placed the gas balancing accounts.

in service and its costs included in utility plant. Total in October 1986, the CPUC issued a proposal to revise capitalized expenditures on IIelms are approximately $956 ratemaking mechanisms for the California electric utility million in August 1985, the CPUC allowed in rate base industry. The proposal recommended elimination of the

$716 million of the requested $738 million, which was the electric sales-fluctuation balancing accounts and the attrition estimated cost to complete the plant at the time of a mechanism and the three-year GRC cycle. A fmal decision conduit rupture. Any portion of the remaming $218 million in this matter is not expected until late 1987.

in costs not recovered from thini parties will be included The combination c. balancing accounts and the nature in a future ratemaking application to the CPUC. Costs of of a cost.of-service regulated environment has helped to owning and operating the plant from the date ofcommercial minimize the effects ofinflation on the Company. Both the operation in June 1984 to the August 1985 decision were attrition mechanism and the energy-cost balancing accounts accumulated in a balancing account and collected except NErimm provide rate relief for the impact ofinflation, helping to for $5L7 million The $51.7 million is still in the balancing imHTYNATf2ASE neutralize its effect on PG&E. Inclusion of new assets in rate account pending a future rate application to the CPUC.

[*"**

base also minimizes the impact of replacing old facilities (These matters are discussed more fully in Note 10 to the L L with new ones, w hich are more costly.

fimncial statements.)

u All of these ratemaking procedures, coupled with management's commitment to operate within the revenue Construction Expenditures and expense limitations of general rate decisions, have lhture construction expenditures are anticipated to be for contributed to the soundness ofutility operations over the smaller projects with shorter construction periods. The 3

past several years. This is reflected in the fact that the carrying costs of such construction should be much less than u

Company has carned substantially the authorized rate of in the last few years. The Company plans to minimize its m i m,a

. womeo retum on utility investment in the past three years.

capi al requirements by signing long-term purchase contracts t

for energy from projects developed by others and by UpgNNYAAWC4MML MJOINCES continuing to develop conservation programs. Projected construction expenditures in 1987 also include outlays for Di:blo Can>un Nuclear Power Plant expanding or reinforcing the capacity of the Company's trans-Inclusion of Diablo Canyon Nuclear Ibwer Plant Unit I mission and distribution system, and modemizing facilities and Unit 2 in rate base would significantly improve the and equipment. Construction expenditures are expected Company's cash flow. The Company has filed applications to drop significantly each year through 1990 from the approxi-with the CPUC for recovery of the costs of owning, mately $1.8 billion and $2.2 billion spent in 1986 and 1985, operating and eventually decommissioning Diablo Canyca respectively.The Company conducts a continuing review This rate application is not expected to be decided upon ofits construction and financing programs and has budgeted before late 1988. By that date, total cumulative DCAA capital expenditures at $1.6 billion for 1987 with successive revenues are estimated to be $4.3 billion, including an accrual substantial reductions planned for future years.

of the equity retum of approximately $2.4 billion Of the total revenues, $2.1 billion are estimated to be collected, Other subject to refund, through interim rates. Pending the final The Company will also require capital to meet maturing outcome of this proceeding, the Company collects a portion debt and preferred stock issues.

of the revenue camed from Diablo Can>un through interim 1987 1988 1989 rates and accrues the remaining revenue camed for future rate recovery.

In December 1986, the Califomia Supreme Court agreed M d',"

$",d

• ]d d

3 Preferred Stock Sinking Fund Requirements)

$89

$112

$184 21

P A C I F i C G A S A N D E L E C i R I C C 0 M P A N Y

\\

hlANAGlhMIMMMCont.

l Capital is supplied by a combination ofintemally generated lected, as has been the case in 1984,1985, and 1986, the funds and external financings. External funds fmm the Company must borrow funds until the revenues, plus interest issuance of common stock and debt were the source of 54%

at the Company's commercial paper rate, are received. When of the Companyis capital requirements for 1986. As major revenues are overcollected, the Company uses the funds construction projects continue to be placed in utility rate until they are refunded with interest.

base and begin to generate additional cash (be>und interim in f:mding its total capital requirements, PG&E seeks rate levels for Diablo Canyon), the Companyis reliance on to maintain capitalization ratios comparable with those extemal fmancing should decrease.

authorized for its utility operations in the most recent general Shown below are the proceeds from fmancings during rate case decision. This objective was met in 1985 In 1986, 1984,1985 and 1986.

the Company took advantage oflower interest rates by 1984 1985 In6 refinancing oldet, high-cost securities and thus reducing fm nce costs. PG&E also took advantage of current low in y,nions interest rates by issuing additional first and refunding r ndiIg n ngs' mortgage bonds for general corporate purposes. The 1984 t t Common Stock

$ 232

$ 373 S 679 and 1985 GRC capitalizatim utios compared to actual Long-term Debt 1.035 1,082 475 ratios at December 31,1985 and 1986 were:

Total proceeds

$1,267

$1,455

%I.154 1984/1985 twe Important sources of common stock Imancing were public Authonzed* Actual

• Aut horised

• Actual

• offerings and the Companyis dividend reinvestment and Common Stock 42%

41%

4h 4h employee savings fund plans. tamg-term debt has been preferred stock 14 11 14 9

sold in the United States and in European fmancial markets.

1"ng. term Debt 44 48 43 46 At December 31,1986,the Company's common stock was Total 100 %

100 %

im, Im, selling at $24.25 per share, $5.19 above the bmk value of

• PG n on4 3MAACmfACC0fAFTS

$19.06 per share, flowever, sales of commt n sock at prices Funding requirements are also helped by adequate and f

belew book value may be necessary in the (utare, as has timely rate increases. These increases meet operational been the case in the past, to provide capital for planned requirements and permit extemal fmancings ofconstruction a

2a construction and other projects.

at a reasonable cost. In recent years the CPUC has allowed The Companyis bond indenture permits ti.e issuance such increases, including the recent 1937 GRC decision of first mortgage bonds up to the amount approved by the net increase in base rates of $107.5 milliort As noted above, a

Company's lloard of Directors. At December 31,1986, the it is uncertain what will happen with the Company's Diablo em a

Company had $5.9 billion outstanding in such mortgage Canyon rate requests. Also, elimination of parts of the bonds and may issue up to an additional $2.1 billion subject electric sales-Ductuation accounts and energy balancing s4 ssa s..

to indenture provisions as to camings coverage and property accounts for gas will put the Company at signi6cantly more anacreoitected available as collateral. Financings must also be approved risk when sales and/or gas price auctuations take place in

% uae. rm onma by the CPUC prior to issuance.

the market. Modification of the attrition mechanism will The Companyt short-term debt is issued primarily for increase the Companyis risk in relation to infhtion, since this interiin fmancing of the construction program and for general mechanism is designed to offset the efTects on camings of working capital. In addition, such debt has been utilized increased fmancial and operations expenses incurred in the to help fund fuel oil and gas inventory and any unrecovered years between general rate cases. Ilowever, the Company balances in the balancing accounts. This debt is primarily will have an opportunity for additional camings as a result commercial paper supported by bank revolving credit agree-ofratemaking modi 6 cations to the energyand sales-Auctuation ents, which were added in 1986, and lines of credit.This balancing accounts.

funding source gives the Company flexibility to meet expected The effect of the Tax Reform Act ofl986(the Act)on the capital needs and to schedule long-term debt issuances.

Company is not known yet because ofcomplicated ratemaking At December 31,1986,as part ofits refmancing program, the implications. The CPUC is currently investigating the Compar. used funds provided by short-term debt in part impact of the tax changes on Califomia utilities. Revenues to provide interim financing to repurchase bonds outstandin&

collected in 1987 will be subject to refund, pending a decision At December 31,1986, the Company had available credit by the CPUC as to whether the impact of the Act will facilities totaling $9fA7 milhon, against u hich it had borrowed alTect the ratepayers or shareholders. The Company and the

$875.8 million.

CPUC stipulated to reduce the amount ofits rate request The regulatory balancing accounts authorized by the in the 1987 general rate case by appmsimately $85.3 million CPUC also afTect cash flows. When revenues are undercol-to renect its preliminary estimate of the elTect of the Act.

The tax impact on Diablo Canyon will be addressed in the Diablo Canyon proceeding 22

P A C I f I C G A 5 A N D E L E C i 11 1 C C 0M PA N Y SMWMMOFCOMSQUDMEDInCOM Years 11ded December 31 1986 1985 1984 In Thousands (except per share amounts)

Operating Retenues Electric

$5,567,438

$5,819,983

$5,158,165 Gas 2,249,223 2,610,998 2,671,538 Total Operating Revenues 7,816,661 8,430,981 7,829,703 Operating Espenses Operation Cost of Electric Energy I,252.414 2,072,548 2,098,473 Cost of Gas Sold 1,074,392 1,749,207 1,823,218 Transmission 148,788 148,479 130,340 Distribution 188,499 173,081 171,907 Customer Accounts and Senices 339,583 357,189 317,125 Administrative and General 635,792 591,926 510,015 Other 276,091 257,025 118,000 Total Operation 3,915,559 5,349,455 5,169,078 Maintenance 352,230 312,531 287,882 Depreciation 693,675 535,654 445,690 Gas Exploration 56,947 45,301 48,977 income Taxes 927,647 652,669 637,674 Property and OtherTaxes 216,978 166,012 137,014 Total Operating Expenses 6,163,036 7,061,622 6,726,315 Operating Income 1,653,625 1,369,359 1,103,388 Other Income and (Income Deductions)

Allowance for Equity Funds Used During Construction 69,164 247,367 365,625 Interest income 120,431 132,985 59,771 Minority Interest in Net Inc)me of Subsidiary Companies (2.364)

(13,525)

(14,123)

Reserve-Construction Prokts (7,125)

(6,712)

(59,137)

Disallowed Project Costs (58,882)

(16,653)

Other-Net (28,271) 32,000 101,446 Total Other Income and (income Deductions) 151,835 333,233 436,929 income liefore interest Espense 1,805,460 1,702,592 1,540,317 Interest Espense Interest on Long-term Debt 707,975 709,258 609,086 Other Interest Charges

$8,802 55,588 70,960 Allowance for Borrowed Funds Used During Construction (42,540)

(93,059)

(114,621)

Total Interest Expense 724,237 671,787 565,425 Net income 1,081,223 1,030,805 974,892 Preferred Dividend Requirements 156,190 164,230 164,316 Earnings Anallable for Common Stock S 925,033

$ 866.575

$ 810,576 Meighted Aserage Common Shares Outstandin;t 355.937 326,838 309,367 Earnings Per Common Share S2.60

$2.65

$2.62 Disidends Declared Per Common Share SI,90

$1.81

$1.69 T he accompan>ing notes to consolidated Imancial statements are an integral part of this statement.

23

T, P A C i F i C G,A S A N D E L E C I R I C C 0 M P A N Y CONSOUDMEDBRLAntE.9tEET December 31 1986 1985' In Thousands Assets Plant in Senice (at original cost)

Electric

$16,659,173

$13,591,161 Gas 3,335,255 3,065,009 Total Plant in Service 19,994,428 16,656,170 Accumulated Depreciation (5,466,767)

(4,806,255)

Net Plant in Senice 14,527,661 11,849,915 Construction Wrk in Progress 1,178,254 2,852,691 Nuclear fuel and Other Capital I. eases 434,303 436,376 Gas Exploration Costs 235,791 2M,865 Advances to Gas Producers 367,426 361,250 j

Construction Funds IIeld by liustee 243,161 66,985 l

insestments Alberta Natural Gas Company Ltd 48,170 45,802 ANGUS Chemical Company 35,169 32,981 Other Investments 39,723 27,585 lbtal Insestments 123,062 106,368 Customer Consenation 1.oans Receisable (net of current portion $33,697 in 1986; $43,722 in 1985) 60,935 75,250 Current Assets Cash 5,618 7,759 Short term Investments (at cost which approximates market) 112,586 374,035 l

Accounts Receivable Customers 556,648 721,606 Other 460,673 285,206 Allowance for Uncollectible Accounts (8,951)

(9,899)

Regulatory Balancing Accounts Receivable 361,380 378,531 Inventories (at average cost) i Fuel Od 223,472 257,405 l

Gas Stored Underground 263,507 290,474 l

Materials and Supplies 165,223 170,301 Prepayments 31,754 27,607 j

Tbtal Current Assets 2,171,910 2,503,025 Deferred Charges Diablo Can>un Balancing Accounts 871,144 157,739 Project Costs Pending Regulatory Action 16,970 40,710 l

Unamortized Project Costs 116,084 137,865 l

Workers' Compensation and Disability Claims Recoverable 93,500 73,000 Unamortized Debt Expense 37,459 18,136 Unamortized Imss Net of Gain on Reacquired Debt 303,049 Other-Net 221,544 153,828 lbtal Deferred Charges 1,659,750 581,278 lbtal Aswas

$21,002,253

$19.098,003

• Charged to confonn to 1986 prewnutnin.

The accompanung notes to conmbdated financial statements are an integral part of this statement.

24

P A C I f I C G A 5 A N D E L E C T R I C C 0 M P A N Y i

l December 31 1986 1985' l

in Thu1 sands Capitalliation and Liabilities Capitalization Common Stock

$ 1,840,636

$ 1,686,741 Additional Paid-in Capital 2,319,344 1,790,222 Reinvested Earnings 2,855,748 2,610,512 Common Stock Equity 7,015,728 6,087,475 Preferred Stock Without Mandatory Redemption Provision 1,207,865 1,427,451 Preferred Stock With Mandatory Redemption Provision 225,285 252,500 long-term Debt 7,255,956 7,146,866 Total Capitalization 15,704,834 14,914,292 Customer Conservation Loans Funding 80,300 96,400 Other Noncurrent Liabilities Capital lease Obligations 351,680 361,140 Customer Advances for Construction 125,212 119,435 Workers' Compensation and Disability Claims 93,500 73,000 Other 25,172 19,677 Total Other Noncurrent Liabilities 595,564 573,252 Current Liabilities Short-term Borrowings 1,101,213 520,435 Accounts Payable-Trade Creditors 459,255 547,304 Accounts Payable-Other 217,104 206,497 Accrued Taxes 49,834 29,648 Deferred Income Taxes-Current Ibrtion 153,168 157,490 long-term Debt-Current Ibrtion 84,314 94,673 Capital lease Obligations-Current Ibition 89,892 82,7 %

Interest Payable 76,345

%,484 Dividends Payable 176,602 155,302 Amounts Due Customers

$9,295 73,203 Other 76,962 100,038 Total Current Llabilities 2,543,984 2,063,870 Deferred Credits Deferred Investment Tax Credits

$19,351 504,710 Deferred Income Taxes 1,517,194 783,316 Unamortized Gain Net ofloss on Reacquired Debt 26,769 Other 31,846 22,305 Tbtal Deferred Credits 2,068,391 1,337,100 Minority Interest in Subsidiary Companies 9,180 113,089 Contingencies (Note 10)

Total Capitalliation and Liabilities

$21,002,253

$19.098,003

\\

P A C iF i C G A $

A N D E L E C T R I C C 0 M PA N Y SMTEnENTOFCONSOUDMTEDRNE USEDRMCONSTNCTIDW Years Dided December 31 1986 1985*

1984*

InThousands Funds From Operations Net income

$1,081,223

$1,030,805

$ 974,892 Nonfund items in Net income Depreciation 693,675 535,654 445,690 s

Allowance for Equity Ibnds Used During Construction (69,lM)

(247,367)

(365,625)

Deferred Taxes 373,177 252,565 167,434 Reserve-Construction Projects 7,125 6,712 59,137 c

Disallowed Project Costs 58,882 16,653 Other-Net 114,174 181,408 133,053 Funds From Operations 2,200,210 1,818,659 1,431,234 Regulatory Balancing Accounts Diablo Canyon Balancing Accounts (713,405)

(157,739)

Other 17,151 37,252 (483,870)

Deferred Taxes Related to Regulatory Balancing Accounts 356,652 62,657 247,885 Net Funds 1,860,608 1,760,829 1,195,249 Funds From Financings Common Stock Sold 536,299 373,458 232,196 Common Stock issued for PGT Merger 143,159 Long-term Debt issued 2,044,300 1,386,726 1,034,908 Construction Ibnds IIeld by Trustee (176,176)

(37,944) 20,868 Net Short-term Borrowings (Investments) 842,227 (269,299) 120,380 Total ihnds from linancings 3,389,809 1,452,941 1,408,352 1

Funds From Changes in Accrued Taxes 20,186 (4,198)

(45,223)

Accounts Receivable (20,534) 30,178 (322,417)

Accounts Ibyable (77,442)

(50,792) 150,280 OtherWorking Capital (a)

(32,751)

(42,621) 32,681 Fuel Oil and Natural Gas Inventories 60,900 51,M3 42,634 Other-Net (54,308) 47,295 104,573 Consersation 1.oans to Customers 24,340 22,730 (17,569)

Total Other Funds (79.609) 54.235 (55.N1)

Total Funds Prosided 5.170,808 3.268,005 2,548,560 Funds Used for OtherThan Construction Preferred Stock Redeemed (243,242)

(7,500)

Long term Debt Matured or Redeemed (2,247,050)

(513,192)

(77,424) long-term Debt Purchased for Sinking I'und (at cost)

(63,978)

(56,745)

(57,117)

Dividends on Preferred and Common Stock (835,882)

(758,771)

(688,933)

Customer Conservation Loans ibnded (16,100)

(17,900) 17,300 Total Funds Used for OtherThan Construction (3,406,252)

(1,354,108)

(806 174)

Construction Espenditures 1,764,556 1,913,897 1,742,386 Allowance for Equity Ibnds Used During Construction 69.164 247,367 365,625

'Ibtal Funds tied for Construction

$1,833,720

$2,161.2M

$2,108,011 ial Other Workmg Capital ewtudes changes m current portions of long-temi deht: 1986, ($10,359); 1985, t$148.123 6.1984, $134 J81; conservatmn loans to customers 1986, q $10,025); 1985,($652),1984, ($10,432L,*nd capital lease obligations: 1986, $7,096,19M5, $23,14 5; 1984, $59.651.

' Changed to conform to 1986 presentatmrt The aanmpanung notes to conwledated Imanual statements are an mtegral part of this statement.

26

l P A C i F 1 C G A S A N D

'E L E C T fl I C C 0 M P A N Y SMTERENTOFCONSOUDMTEDCCMM STOCKEQtMTYAnWMFEMDSTOCK Preferred Preferred Stock Stock Without With Additional Common Mandatory Mandatory Common Paid-in Reinvested Stock Redemption Redemption Stock Capital Eamings Equity Provision Provision InThouunds Balance, December 31,1983

$1,502,456 $1,368,853 $2,054,953 $4,926,262 $1,427,451

$260,000 Net income for 1984 974,892 974,892 Common Stock Sold (16,417,292 shares) 82,086 150,110 232,1%

f Cash Dividends Declared Preferred Stock (IM,316)

(1M,316)

Common Stock (524,617)

(524,617)

Ibreign Currency Translation Adjustment (871)

(871)

Balance, December 31,1984 1,584,542 1,518,963 2,340,041 5,443,546 1,427,451 260,000 Net income for 1985 1,030,805 1,030,805 Common Stock Sold (20,439,834 shares) 102,199 271,259 373,458 Preferred Stock Redeemed (75,000 shares)

(7,500)

Cash Dividends Declared Preferred Stock (164,342)

(IM,342)

Common Stock (594,429)

(594,429)

Ibreign Currency Translation Adjustment (1,563)

(1,563)

B: lance, Decemher 31,1985 1,686,741 1,790,222 2,610,512 6,087,475 1,427,451 252,500 Net Income for 1986 1,081,223 1,081.223 Common Stock Sold (23,519,3M shares) I17,597 4I8,702 536,299 Common Stock issued for PGT Merger (7,259,530 shares) 36,298 106,1161 143,159 Preferred Stock Redeemed (9,055,557 shares) 3,559 3,559 (219,586)

(27,215)

Cash Divider.ds Declared Preferred Stock (156,190) (156,190)

Common Stock (679,692) (679,692)

Ibreign Currency Translation Adjustment (105)

(105) llalance, December 31,1986 Si,840,636 $2,319,344 $2,855,748 S7,015,728 SI.207,865

$225,285 The accompanying notes to mnwlidated financi.d wiements are an integral part of this stement.

27

1 P A C I F l C G A S A N D E L E C T 11 i C C 0 M P A N Y STATEnENTOFCONSQUDMED CR M MllZA R DW December 31 1986 1985*

In Thousands (except percentages)

Common Stock,ihr%lue $5 Per Share (authorized 800,000,000 shares, issued and outstanding at December 31, 1986:36&l27,176;1985:337,348,282)

$ 1,840,636

$ 1,686,741 Additional Paid-in Capital 2,319,344 1,790,222 Reinvested Eamings 2,855,748 2,610,512 c

Common Stock Equity 7,015,728 44%

6,087,475 41%

Preferred Stock Without Mandatory Redemption Provision Par %1ue $25 Per Share (authorized 75,000,000 shares)

Nonredeemable 5% to 6%-5,785,000 shares outstanding 144,621 144,621 Redeemable 4.36% to 8.2%-13,534,000 and 17,225,0rJ0 shares outstanding 338,373 430,629 9% to 10.46%-21,088,000 shares outstanding 527,201 527,201 12.8% to 17.38%-7,907,000 and 13,000,000 shares outstanding 197,670 325,000 1,207,865 1,427,451 l

Preferred Stock With Mandatory Redemption Provision Par %Iue $100 Per Share (authorized 10,000,000 shares) 9% to 14.75%-2,253,000 and 2,525,000 shares outstanding 225,285 252,500 Total Preferred Stock I 433,150 9%

1,679,951 11%

Pacific Gas and Electric Company First and Refunding Mortgage Bonds Maturity Interest Rates 1986-1991 3.375% to 9.375%

160,720 222,384 1992-2016 4.25% to 8.0%

1,304,505 1,244 9)5 1995-2020 8.125% to 8.875%

1,449,984

$49,984

^

192-2019 9.0% to 10.125%

1,613,500 1,013,500 19 2-2022 10.5% to 16.25%

1,419,794 3,033,726 Principal Amounts Outstanding 5,94M503 6,064,09)

_ _ 53,829)

Unamortized Discount Net of Premium (91,859)

(

Total Mortgage Bonds 5,856,644 s,010,270 _

Unsecured Debentures,5.25% to 12%, due 1994-2000 223.650 123,650 lbilution Control loan Agreem:nts, variable rate, due 2008-2016 925,000 565,000 Other long-term Debt 40,2n3 42,408 7,04'.5f7 6,841,328 Total PG&E Long-term Debt s

Pacific Gas and Electric Finance Company N.V Guaranteed Debentures,12% to 15.75% due 1989-1991 1Mn 000 260,000 Total PG&E Finance NN 1ong-term Debt

)l}r,000 260,000 Pacific Gas Ranunlulon Company

~

Bank Term loan 63,106 73,100 9,187 Other Total PGT Long-term Debt 63.106 82,287 Natural Gas Corporation of California Other Long-term Debt 51,607 57,924

'IotalI.ong-term Debt of PG&E and Subsidiaries 7,340,270 47%

7,241,539 48 %

Less: Long-term Debt-Current Portion PGAE

&,237 71,611 Subsidiary Companies 24,077 23,062 TotalI.one-tum Debt-Current Portion 84,314 94.673 f.ong-term Debt inlotal Capitalliation 7.255,956 7,146,866

' lima Capitallistion SI5,704 M34

$14,9f 4,292

• Changed to conlorm to 1986 presentation.

The accompanung notes to comohdated financial statements are an integral pan of this statement.

s 28

PJA'C 1.F l<C

/G fAf S' h. A1N iD i 'E LJ E'., C a T 'R 71 C?C 0 : Mi P ( AIN ' V' > I hyY F, Old SCNElMEDFCONSENWED M B R E N Tin F O R M M t w Intersegment Years Ended December 31 Electric Gas Eliminations Total in Thousands 1986 Operating Revenues S 5,567,438

$ 2,249,223

$ 7,816,661 Intersegment Sales (a) 7,817 515,293

$ (523,110)

Total Operating Revenues 5,575,255 2,764,516 (523,110) 7,816,661 Depreciation 550,205 143,470 693,675 IncomeTaxes(b) 745,397 I82,250 927,647 Other Operating Expenses (b) 2,910,313 2,154,511 (523,110) 4,541,714 Total Operating Expenses 4,205,915 2,480,231 (523,110) 6,163,036 Operating Income

$ 1,369,340

$ 284,285

- S 1,653,625 Funds Used for Construction (c)

$ 1,502,105 S 331,615 S 1,833,720 Net Plant in Service and Construction Work in Progress (c)

$13,689,094 S 2,016,821 S15,705,915 Otheridentifiable Assets S 2,607,302 S 1,565,655 4,172,957 Corporate Assets 1,123,381 l'otal A w ts

$21,002,253 1985*

Operating Revenues

$ 5,819,983

$ 2,610,998

$ 8,430,981 gersegment Sales (a) 8,190 1,351,806

$(1,359,996)

Total Operating Revenues 5,828,173 3,962,804 (1,359,996) 8,430,981 Depreciation 399,825 135,829 535,654 IncomeTaxes(b) i 463,415 189,254 652,669 Other Operaung F/,penses(b) 3,909,483 3,323,812 (1,359,996) 5,873,299

" Total Operating Expenses 4,772,723 3,M8,895 (1,359,996) 7,061,622 jhperanagInconn

$ I,055,450

$ 313,909

$ 1,369,359

, Qds Used for Construction (c)

$ 1,784,784

$ 376,480

$ 2,161,2M

• wet 1%nt in ServFnhd Construef.on Work in Progresac)

$12,827,123

$ 1,875,483

$14,702,606 OtherIdentifiable A,4ets

$ 2,141,339

$ 1,514,890 3,656,229 Corporate Assets 739,168 Total Assets

$19,098,003 l

1984*

Operating Revenues

~

^

$ 5,158,165

$ 2,671,538

$ 7,829,703 Intersegmer,t Sales (a)

__ y 6,763 1,379,486

$(1,386,249)

Totai Operating Revenues 5,lM,928 4,051,024 (1,386,249) 7,829,703 Depreciation 310,638 135,052 445,690 incomeTaxes(b) 444,475 193,199 637,674 Other Operating Expenses (b) 3,629,670 3,399,530 (1,386,249) 5 M2,951 Total Operating Expenses 4.384,783 3,727,781 (1,386,249) 6.726,315 Operating Income

$ 780,145

$ 323,243

$ 1,103388 7

i

. [ Funds Used for Construction (c)

- l Net Plant in Sersice and Constrrction

$ D)6,074

$ 311,937

$ 2,108,011 Work in Progress (c)

$11,633.589

$ 1,706,199

$13,344,788 p"Otheridentifiable Assere

$ 1,715.551 S 1,794,760 3,510,311 Corporate Assets 4M,260 Tbtal Assets

$17,319,359 ri. (a) in' event Electnc and Ge sales are accowe,4 (or % tand rates prescnbed by the CPUC tb) income Taxes and general corporate expenses are allocated in accordance with the FERC Uniform System of Accounts and requirements of the CrUC

4) Intludes r}acation rf ccymon utihty plant.

' Changed tr* auform to 1986 presentation.

T he accompanung notes to Canachdated financial statements are an integral part of thw ichedule.

29

N P A -C i F i C G A S A N D.

EL E C T R I C C 0 M P A N Y MOTES TO CONSOUMTED RNAnCIAL STATERENTS 1

Years Ended December 31,1986,1985 and 1984 M ft SIAleimMSARAMNCAAffACCINAM MUCAFS basis throughout each month. In accordance with orders of the CPUC, the Company has established regulatory Accounting Records balancmg accounts for electric en'ergy' costs, sales and The accounting records of Pacific Gas and Electric major plant additions, and gas msts and sales. Operating i

Company (PG&E) are maintained in accordance with the revenues include changes in these regulatory balancing Uniform System of Accounts prescribed by the Federal accounts.These changes reproent amounts authorized e

l Energy Regulatory Commission (FERC) and adopted by the CPUC to be deferred for future recovery from by the Califomia Public Utilities Commission (CPUC).

or repayment to customers.The effect of using these regulatory balancing accounts is that changes in sales, Principles of Consolidation cost of sales of electric energy and gas, and regulatory The consolidated fmancial statements include the lags associated with major plant additions do not accounts of PG&E and its wholly-owned and majority-affect the Companyi earnings significantly.

owned subsidiaries (the Company) for all periods The early home of presented. All significant intercompany transac"ons Utility Plant Crmt Etern Iburr and accoants have been eliminated in consolidation.

The costs ofadditions to plant in service and replacements

, ff",#$[,, "" -

PG&Ei major subsidiaries are Pacific GasTransmission of retirement units of property are capitalized. Until Company (PGT), which transports and sells natural an addition is placed in senice, the costs are accumulated l purchased by /W&E I in 1930 and /ully gas outside Califomia; Pacific Gas and Electric I~mance in Construction Work in Progress. Costs include laboi; l obsorbedinto / War Company N.V (Finance), which was organized in the material and similar items and indirect charges for such

by 1933. nis acqmsi-Netherlands Antilles to borrow funds outside the United items as enginceting, supervision, and transportation.

l tion and that o/ San States and to lend such funds to PG&E and its Costs also include allowance for funds used during uIr Cor subsidiary companies; Alberta and Southem Gas Co.

construction (AFUDC), at rates calculated in conformity at n in f thesameperiodgarc Ltd. (A&S), whose principal functions are purchasing gas with FERC pronouncements, for the imputed cost of

' IWAErssentiallyin in Canada and arranging for its transportation to the equity investment and a net after-tax amount for present serrice territory U.S. border; Natural Gas Corporation of Califomia borrowed funds.The equity component of AFUDC is o/much o/ northern (NGC), which is r. natural gas exploration and produc-included in other income and the borrowed funds com-andcentralCali/orm.a.

tion company; and Pacific Conservation Senices penent, net of federal and state income taxes, is recorded Company (PCSC), which provided loans to PG&E as a reduction ofinterest charges. Costs nf depreciable residential customers for installation of conservation uaits of plant retired are eliminated from plant in service and weatherization measures.

accounts, and such costs plus removal expenses less Alberta Natural Gas Company Ltd (ANG) is the salvage are charged to accumulated depreciation. Costs largest subsidiary of PGT. ANG owns and operates a of repairing property and replacement of minor items pipeline which transports natural gas for A&S through of property are included in the consolidated statement Car.e.da to the bordet In addition, ANG owns and ofincome as maintenance.

operates an extraction plant near Cochrane, Alberta, which removes hydrocarbons from the gas stream. ANG Depreciation and PGTow n ANGUS Chemical Company (ANGUS),

Ibr fmancial statement purposes, depreciation of plant which is engaged in the production and sale of nitro-in senice is computed using a straight-line remaining parafTms. ANGUS is currently involved in a joint venture life method at rates based on the estimated usefullives construction project of a chemicals plant located in of properties. For federal income tax purposes, depre-Ireland, which is due to be completed in mid-1987.

ciation is generally computed using the most liberalized l

The investments in ANG and ANGUS, which are methods allowed by the Internal Revenue Code.

l less than 50% owned subsidiaries, are accounted for

)

in accordance with the equity method of accounting.

Income Taxes

)

PG&E and its 80% or more owned subsidiaries fde a Resenues i consolidated federalincome tax return.

Revenues consist of billiags to customers and changes income tax expense includes the tax liability generated in reu!atory halancing accountt Hillings to customers from the yeart operations plus deferred taxes on most are ireluded in revenues as meters are read on a cycle major timing difTerences between fmancial and income tax reporting to the extent permitted for ratemaking purposes.These timing differences include balancing g

account revenues, tax depreciation under the Accelerated Cost Recovery System (ACRS) and loss on reacquired 30

P A C I F i C G A S A N D E L E C T R I C C 0 MPA N Y debt. Deferred taxes are also provided for the benefits Workers' Compensation and Disability Claims recognized for Investment Tax Credits (ITC).

The liability for future workers' compensation and disa-Although the tax effect ofmost major timing difTerences bility claims is recorded in noncurrent liabilities in accord-is deferred, the tax effect of cenain deductions is ance with Statement of Financial Accounting Standards recorded when paid.These include overhead costs capital-(SFAS) No.71.The corresponding amount to be recovered ized, percentage repair allowance, property taxes charged thmugh future rates is shown as a deferred charge.

to construction, state tax depreciation, and removal costs and federal tax depreciation for pre-1981 property Nonearning Assets Because the recognition of most tax deferrals was There are certain project costs which are being amortized allowed only recently, timing differences exist for which over a period set by the CPUC as well as project costs deferred taxes were not provided and, therefore, have that are pending regulatory action.These costs are not not yet been recovered through rates. At December 31, in rate base and, therefore, they are not earning a return 1986, the cumulative net amount of timing differences on PG&E's investment.These projects are discussed for which deferred income taxes have not been provided further in Note 10.

is approximately $2.3 billion for federal and $2.8 billion for state purposes, the tax efTects of which are expected Imentories to be recovered in future rates.

Inventories are valued at average cost. In January 1987, the Company made an adjustment to value its low sulfur Debt Premium, Discount, and Related Expenses fuel oil at the current market value.This adjustment long-term debt issuance premium or discount and will be amortized and recovered through rates over a related expenses are amortized over the lives of the issues twenty-four month period beginning in January 1987, in San Joaquin / burr to which they penain. The gain or loss on reacquisition accordance with a stipulation approved by the CPUC.

Company andits imme.

of mortgage bonds is amortized over the remaining life The stipulation also equired a change in valuation date succem: San of the respective issues, consistent with ratemaking. The of this low sulfur fuel oil to a last-in, hrst-out (LIFO)

("7}"

federal income tax on such gain is recognized over the cost, effective January 1987. Fuel oil other than low sulfur plaWa decisin rEle life of the remaining property, and the tax efTect of fuel oil will remain valued at average cost.

m denloping the the loss is deferred and recognized over the remaining rallps agricu/ rural life of the issue.

NOTE 2:PREFERRE0 STOCK mduary through elec.

The nonredeemable Preferred Stock Without Gas Exploration Costs Mandatory Redemption Provision (issued at $25 par) and mmp/cred merger The majority of gas exploration costs are capitalized consists ofa 5% a 5.5% and a 6% series, which are entitled o/is sniem into under a modified " full-cost" method of accounting to to annual dividends per share of $1.25, $1.375, ar'd

/Y;&Eis in 1933 reflect cost recovery procedures authorized by the CPUC.

$1.50, respectively.

Unsuccessful project costs, current operating costs, and The redeemable Preferred Stock Without Mandatory the financing costs of the gas exploration program are Redemption Provision (issued at $25 par) is subject recoveird through gas exploration development balancing to redemption,in whole or in part, solely at the option T

account procedures and, therefore, do not alTect the of the Company upon payment of the redemption Company's income.The CPUC terminated the gas explora-price plus accumulated and unpaid dividends to the date tion program in 1985, but all liquidation costs except ftxed for redemption. The redemption premium per for certain financing costs will continue to be recovered share declines in accordance with terms of the specific through the existing balancing account procedures.

issue. Per share information is as follows:

The successful efTorts method ofaccounting is used Io Series Annual Dividend Redemption Price determine the profits and losses on certain operations not 436% to 8.2%

$1.09 to $2.05

$25.75 to $28.75 accorded the balancing account procedure by the CPUC.

9% to 10.46%

$2.25 to $2.615

$25.85 to $29.25 12.8% and 1738%

$120 and $4345

$29.70 and $31.85 The Preferred Stock With Mandatory Redemption Pmvision (issued at $100 par) consists of a 9% a 10.17%

and a 14.75% series. Each series is entitled to a sinking l

fund providing for the retirement of outstanding stock I

at $100 per share plus accumulated and unpaid dividends.

The combined aggregate amount of redemption require-ments, excluding any accumulated and unpaid dividends, 31

P A C 1 F l C G A 5 A N D E L E C T R I C C 0 M P A N Y NOTES TO CONS 0llDMTED RNMCIAL STATEnENTS Cont.

for the years 1987 and 1988 is $7.5 million and $9.25 PG&E is required, according to provisions of the milrion, respectively, and for each of the years 1989 through First and Refunding blortgage, to make semi-annual 1991,is $14.4 million.

sinking fund payments on February I and August 1 In addition to retirements through the sinking fund, of each year for the retirement of the bonds of PG&E the 9% series, the 14.75% series, and aller August 14,1993, equal to % of1% of the aggregate bonded indebtedness the 10.17% series, may be redeemed at the option of outstanding on the preceding November 30 and hiay 31, PG&E at $100 per share plus accumulated and unpaid respectively. Bonds of any series may be used to satisfy this dividends and a redemption premium. At December 31, requirement. In addition, holders of Series 84D Bonds 1986, the redemption premium for the 9Yo series and maturing on November 1,2017 have an option to redeem the 14.75% series was $6375 per share and $14.75 per their bonds on June 1,1995.

share, respectively.

During 1986, PG&E issued $1.7 billion in First and From July 1986 to December 1986, PG&E redeemed Refunding Mortgage Bonds, Series 86A thmugh 861 with for approximately $243.2 million a portion ofits preferred interest rates ranging from 8.125% to 10.5% and with stock having a par value of $246.8 million. The series maturity dates from October 1,1995 to January 1,2020.

l heific Scrrice #aga.

fully or partially redeemed ranged from 436% to 1738%.

Proceeds from these bonds were used for the redemp-

ine chronichvithe The $11.2 million net gain realized from reaequiring the tion, repayment or retirement ofoutstanding indebledness company' history fo' preferred stock, which includes adjustments for original or preferred stock, the financing of additions to utility s

bn su f n premiums, discounts and issuance costs, was credited plant or other general corporate purposes. Of the $1.7 d the Great Deprenion of to shareholders' equity, as prescribed under FERC billion of bonds issued, $1.1 billion replaced outstanding the 19 Ms. This inue requirements.This gain will be retumed to the bonds with interest rates ranging from 10.7% to 15375%

reprtedon /Y;&E ratepayers over 10 years.

and $243.2 million replaced 9.1 million shares of Redeem-emp4mes urcing "onr In February 1987, PG&E redeemed an additional 2.9 able Preferred Stock ranging from 436% to 1738% with there"in Imr/J liarI.

million shares of 1738% preferred stock with the proceeds a par value of $246.8 million.

. E9...

from a bond issuance (see Note 3).

The Company reacquired in 1986 a total of $1.8 billion Dividends on preferred stock are cumulative. All of outstanding bonds at a loss of $325 million, which shares of the preferred stock rank equally with regard will be amortized and recovered over the remaining life in to preference in dividend and liquidation rights, except of the respective bonds replaced. This total includes that shares of different classes or series thereof may the $tl billion of bonds replaced referred to above.

differ as to the amounts ofdividends or liquidation In January 1987, PG&E issued $250 million in payments to which they are entitled. Upon liquidation Series 87A Bonds at 8.5%, to mature on February 1,2020.

or disso!ution of PG&E, holders of the preferred stock The proceeds from these Bonds will become part of l

would be entitled to receive an amount equal to the the treasury funds of the Company and will be used for l

par value of such shares plus all accumulated and unpaid construction expenditures and to fmance the redemp-l dividends thereon.

tion of 2.9 million shares of preferred stock.The cost l

of the redemption was approximately $92 million.

MTE3:LOM-TERMMBT Debentures and Unsecured Debt Mortgage Bonds in April and November 1985, PG&E entered into loan The First and Refunding h1ortgage Bonds of PG&E are agreements with an agency of the State of Califomia issued in series, bear annual interest from 3375% to to fmance air and water pollution control, and sewage and 15375% and mature from December 1,1987 to June 1,2022.

solid waste disposal facilities. At December 31,1986, Subject to indenture provisions as to camings coverage the balances of these loan agreements were $65 million i

and bondable property available for security. additional and $500 million with interest rates of 4.75% and 4.55%

l bonds may be issued up to an outstanding aggregate and maturities of April 1,2009 and November 1,2008, amount of $8 billion. The Board of Directors of PG&E respectively. In hlay and December 1986, PG&E entered may, from time to time, increase the amount authorized.

into additional loan agreements for $60 million with 1

All real properties and substantially all personal an interest rate of 7.5% and $360 million with an interest properties are subject to the lien of the indenture, rate of 4% due hlay 1,2016 and December 1,2016, l

Stock representing PG&E's investments in subsidiaries respectively. Except for the $60 million loan, from the day is pledged as collateral for PG&E bonds.

ofissuance, these rates may float on a daily, weekly, or a term basis or may be converted to a fixed rate at PG&Ei option. Additionally, the loan agreements are subject 32

P A C 1 F i C G A S A N O E L E C T R I C C 0 M P A N Y to redemption prior to maturity under certain loan is secured by a negative pledge on certain producing circumstances by the holder and PG&E.

properties. The interest rate on the loan is based on the PG&E issued 5%% Debentures in November 1985 prime interest rate. At December 31,1986, $10.4 million for 150 million Swiss francs with a maturity of November was outstanding at an etTective interest rate of 8%

1,1995. As with the 7% Debentures described below, NGC al o has a note with fixed inteiest rates rangmg the Company entered into a foreign currency exchange from 14.57% to 15.07%The note is secured by selected agreement. This results in an effective interest rate of producing gas properties. The note required interest-only 10.81% and a PG&E liability of $67.4 million.

payments through May 1,1986 and requires equal PG&E issued $75 million in Debentures at 12%

quarterly installments through November 1,1994. At

" Admirably adapted to in January 1985, maturing in 2000. These Debentures December 31,1986, the balance outstanding on this note all/orms o/commer.

are subject to redemption at PG&E's option at any was $20.6 million.

cialand other large time on or after January 9,1997. Additionally, they are subject to redemption at the option of the holder Repa3 ment Schedule for the Elsbach lamp, on January 9,1992.

Rr the years 1987 through 1991, the Company's combined named forits Austrian In December 1984, PG&E issued 7% Debentures in aggregate amount of debt maturing and sinking fund imrntor Alacyasbestos the amount of 20 billion yen to mature in 1994. To protect requirements, as of December 31,1986 are $8L1 million, mantle became mcan.

"d the Company from future fluctuations in the exchange

$102.4 million, $170.1 million, $175.8 million, and

[fgjj rate, principal and interest payments due in yen are

$214 million, respectively.

bare gasjei. San Fran.

covered by a currency exchange agreement that secures cisco' last gas stnyt s

the exchange rate over the term of the debentures ACTE 4t3#0RT-TSW80M00Mus Ic nps une extm.

resulting in an efTective interest rate of approximately PG&E maintains credit facilities with twenty-five banks, guishedin 19M 12% The transaction results in a PG&E liability of principally to support the sale of commercial papec

$81.25 million.

These credit facilities have a three year date of renewal and total $650 million, all of which was available on I une-term lh ht of Subsidiaries December 31,1986. In addition, the Company had avail-Finance's Guaranteed Debentures,which are unsecured able on December 31,1986 temporary lines of credit and unsubordinated obligations ofI'inance, do not with two banks, totaling $230 million. PG&E made no have sinking fund requirements and are unconditionally significant borrowings against these facilities during the guaranteed by PG&E. The Debentures are subject year The usual maturity for commercial paper is 10 to redemption, at specified redemption prices, during to 90 days.

specified periods at Finance's option. The 15%%

A&S maintains a $35 million (Canadian) line of credit Guaranteed Debentures which were due in 1989 were with a bank to support the sale of commercial paper L

redeemed in January 1986.

for take-or-pay payments on gas contracts. On December PGT's bank term loans are to be repaid in six 31,1986, this line of credit was unused.

remaining annual payments 'hrough 1992. The effective A&S also maintains lines of credit with four banks V

UU interest rate on the amount ( atstanding at December totaling $24 millior. (Canadian) for operations. As of 31,1986 was 7.16% This interest rate is subject to December 31,1986, A&S had no significant outstanding redetermination in accordance with the terms of the borrowings against these lines of credit.

credit agreement.

PGT maintains lines of credit with seven banks for NGC has a term loan requiring repayment in equal direct borrowings or to support the sale of commercial quarterly installments through May 1,1990. The loan is papet On December 31,1986, these lines of credit totaled secured by pipe and tubular goods held in inventory. The

$22 million. At no time during the year were the lines interest rate on the loan is based on the prime interest of credit used for direct bank borrowings.

rate or the certificate of deposit rate at the option of PG&E also has an agreement with Pacific EnergyTrust NGC. At December 31,1986,$17.5 million was outstanding (PET) which permits borrowing of an amount up to at an elTective interest rate of 8%

the difTerence between $450 million and PET's investment In July 1985, NGC entered into a $12. 5 million revolving in nuclear fuel with a maximum of $180 million. As of line of credit that converted on January 1,19% to December 31,1986, PG&E had no outstanding borrowings a term loan. In December 1986 the amount available with respect to this agreement.

under the loan decreased to $10.4 million with quarterly payments of $.8 million until December 31,1989, at w hich time the remaining principal would be repaid.The 33

P A C i F l C G A $

A N O E L E C T 11 I C C 0 M P A N'Y n0TES T0 CONSOUDMTED RNANCIAL STAWAWNTS Cont.

The Company compensates banks for credit facilities A10TESILEASES and other banking services by fee payments.

Short-term bormwings and interest rates thereon Nuclear Fuel were as follows-PG&E leases nuclear fuel from PET for use at the Diablo Canyon Nuclear Ibwer Plant (Diablo).Two capital December 31 im 1985 In Thousands into with PET in 1981 and 1984 in order to meet Diablot except pen entagest fuel requirements.The first lease expires in the year ikdance of Short-term Borrowings commercial Paper s1.u9N.212

$518,434 2030 and the second lease expires in the year 1989.

Other s

3.001

$ 2.001 PET) total investment in nuclear fuel is limited to me Naper

$600 million (see Note 4 for short-tenn borrowing infor-7.a t.

8.5%

mation related to these leases), if the nuclear fuelleases Other M.5 %

8.9%

are terminated, PG&E is obligated to reimburse PET for all costs of ownership related to the nuclear fuel.

These leases provide for the ownership of the spent The Company stopped accepting applications for Zem nuclear fuel by PG&E. A contract has been entered into Interest Program (ZIP) loans from residential customers with the United States Department of Energy for the on December 31,1986 due to a CPUC decision.These disposal of the spent nuclear fuel.

interest-free loans were used to finance the installation of The lease payments are based upon the cost of the several conservation measures and require repa> ment nuclear fuel bumed plus the daily finance charges on 1 ET's Naturalgas uws new up to 50 or 100 months.

in-core net investment during the period.The daily f$ef,Iae I acifi Conservation Services Company (PCSC) finance charges relating to the in-core fuel are paid even a fonned a holly-owned PG&E mbsMiary t a puNi3her to scIlthis when Diablo is not producing electric energy.

assume responsibility for the customer conservation loan During pre-commercial operation, lease payments are puNication for 2Jcents a copy Naturalgas program. Although the Zero Interest Program has capitalized as part of the cost of the plant. After com-uus brought to the been terminated, operational expenses and debt service mercial operation begins, lease payments and spent nuclear

' $n xpenses will continue to be recovered through the fuel disposal costs are charged to nuclear fuel expense fr Ar Conservation Financing Adjustment (CFA) tariffs, the and recovered through balancing account procedures.

endo /the San Joaquin proceeds of which are collected by PG&E and transferred Diablo Unit I went into commercial operation in tidkyin 1921by a 2mmde-long pipe.

to PCSC. PCSC has contracted with PG&E to obtain 141ay 1985. Diablo Unit 2 went into commercial operation line, then the the administrative services needed to acquire and process in March 1986.The nuclear fuellease payments longst in the Mt-the customer conservation loans and payments.

capitalized and nuclear fuel lease expenses pertaining These loans are funded by a revolving line of credit to Units I and 2 were as follows:

B with ten banks. The line ofcredit, which is not guaranteed 1*

1985 1984 by PG&E, permitted PCSC to borrow at any time in Thousands through 1986 up to the lesser of the commitment amount or 80% of customer conservation loans outstanding Nuclear I uel L. ease at its choice of a floating rate determined in accordance Pa>ments capitatued S 5.30N

$16.591

$3.897 with the agreement or a fixed rate based on average

[*,r ae en e 9

certificate ofdeposit or Eu.,odollar rates. At year end the Interest Ibrtion ofIapense s 9.5N4

$ 5.311 5 -

commitment amount was $85 million; the commitment amount at January 15,1987 was $80 million. The line ofcredit is anticipated to be extended through June 30, 1987. PCSC must pay a commitment fee on the unused portion of the commitment equal to W of 1% on the first $50 million not used and % of 1% thereaftet Ilorrowings under the agreement mature on December 31, 1994.The agreement has various covenants and con-ditions, including the continuing existence of the CFA j

tariff. On December 31,1986, the balance outstanding was

$80.3 million at an average interest rate of 7.5%

I l

i I

l I

34

P A C I F l C G A S A N D E L E C i 11 iC C 0 M P A N Y These leases have been recorded on the balance sheet Early Retirement Plan as an asset in the line item," Nuclear Fuel and Other In January 1987, PG&E offered an early retirement plan Capital Leases." The related noncurrent obligation has to certain employees who have reached age 50 and have been recorded as" Capital Lease Obligations"in the at least 15 years of service with PG&E.The employees "Other Noncurrent Liabilities"section.The asset t, dances had until January 30,1987 to accept the one-time ofter were as follows:

of early retirement.

The cost of the early retirement plan to be recognized December 31 1986 1985 in Thousands md. lion and will consist oflump-sum payments and the present value of expected future payments.

n u gas Les :

u uLted Amortization 5

Net M17,825

$423.873 1.ife Insurance O" ##"#####"N allourdIWto eflec.

Life insurance benefits for substantially all retired fj,fy n, tire gas-making Other I. cases employees are provided by the Company.The Group plants like this big The Company has entered into various arrangements Life Insurance benefit is available to all retirees.

one in San rmncisco's to lease real property and equipment.The leases are This benefit is provided through an insurance company

/btn m di3trict, though it and about a dozen accounted for as operating and capital leases in accordance whose premiums are based on total claims paid in with Statements of Financial Accounting Standards the prioryearThe Post Retirement Life Insurance Plan,

,jf fyf, Nos.13 and 7L Annuallease expenses are not material.

which is available to certain management employees, the /Es Theadjoining uses the same actuarial methods and assumptions as the

/btrem /burrrlantuus MTE 7: MTMSENTMANAM NSTMTMEnEMTntNERTS Retirement Plan.Tbe annual contribution is equal to the area's first user the normal cost plus the amortization of the unfunded ofnatumigas.

A"#""## #

Retirement I'lan actuarial liability. The cost of providing both the Group The Company provides a retirement plan covering Life and the Post Retirement Life benefits is charged to substantially all employees.The cost of this plan is charged expense and utility plant and totaled $2.3 million, $3.8 mil-4 to expense and utility plant and amounted to $107 lion, and $3.8 million for 1986,1985, and 1984, respectively.

million, $97 million and $89 million for 1984,1985, and

, 4 1984, respectively. These amounts include amortization Medical lienefits of past service cost. Costs of the retirement plan are The Company also provides certain medical benefits accrued in accordance with an actuarial cost method for substantially all retired employees. Through 1986, (entry age normal method). The Company makes the benefits were provided or administered by medical contributions to the plan equal to the amounts accrued care providers whose costs were based on benefits for pension expense. A comparison of accumulated paid during each yeat The cost ofproviding these benefits plan benefits and plan net assets for the Companyi for retirees is not separable from the cost of providing defined benefit plan follows-the benefits for active employees. The medical costs and the number of retired and active employees are January i 19xe 1985 in Thousands 19M6 1985 1984 Actuarul present value of accumubted pLn benefits Medical Costs

%MH.non.non

$61JX)0JXM

$67,000.000 Vested 51.574.0"#

$1.433JxX)

Retired Employees 7.300 7.000 6.800 Nonvested 71.000 93/100 Active Emplo>ees 30.700 30.200 28.700 cunIuNed plEn$en The cost of medical benefits for the Company is charged s

51.645.n00

$1.526.000 to expense and utility plant.

Net assets avaibble for benefits (at market nalue)

%1.867.000

$1.498.000 The assumed rate of retum used in determining the actuarial present value of accumulated plan benefits was 7% in 1986 and 1985. The actuarial present values are based on historic pay as prescribed by the Financial Accounting Standards Board.

I 35

P A C I F I C G A 5 A N D E L E C T H t C C 0 M P A N Y NOTES TO CONSOUDMTED RNMCIAL STATEnENTS Cont.

mus:mcowMKES wiE8:CONR8MENTS Income before tax expense for the years 1986,1985,and 1984 was $2,033,141,000, $1,643,914,000, and $1,519,673,000, funds t' sed for Construction respectively.

Funds to be used for construction during 1987, including Income tax expense is included in the consolidated AFUDC, are estimated at $1.6 billion.

fmancial statements as follows:

l Natural GasTake-or-Pa> It yments a

ex6 N85 1984 The Company through its gas purchasing subsidiary, A&S, Ir Thousands is required to make take-or-pay payments to Canadian Included in operating expenses $927.647 $652,669 $637,674 g

g g

included in other income 24,271 (39,560)

(92.813)

Total 5951,918 $613,109 $544.781 contracts with the Canadian producers permit make-up The detail ofincome tax expense is:

of the prepaid gas and also provide for reimbursement Nx6 1985*

1984 of take-or-pay payments if make-up of the gas prior to the expiration of the contracts is not possible. Total in Thousands advances by A&S to producers as of December 31,1986 current Rderal s t32.444 $113.867 $(12,644) are $356 million. Advances unreimbursed by A&St I

State and other 75.268 84,909 52.277 gas customers are financed by short-term borrowings.

fordecades a landmark in dosentou'n l'rnno.

Total current 207.712 198,776 39.633 PG&E has executed guarantees to assume liabilities the onetime headquar-not to exceed $350 million on commercial paper and Defem d ters /orSan Joaquin changes in regulatory a standby bank line of credit of A&S to cover A&Si I.ight and /buer corp"-

balancing accounts take-or-pay borrowings.

// b During 1981, the Company negotiated a reduction I at s te 89 2

San Jouquin Region.

ACRS depreciation 259,7M2 227,756 114,469 in take-or-pay liability under its contract with Canadian un agriculturalempire less on reacquired debt gas producers. In 1982, gas purchase contracts covering hardly to be equalled Rderal 134.nM9 14,135 1,356 a substantial portion of the Companyi Canadian gas upply were further amended to extend the reduction Oth r net I

)

' 99 52.

in take-or-pay liability through June 30,1984. In con-Total Deferred 729.565 309.010 416,454 nection with contract years beginning on July 1,1984 and investment tax credits-net 14.641 105.323 88.694 thereafter, the Company has negotiated additional TotalIncome Taxes 5951.91s $613,109 $544,781 take-or-pay reductions in the contracts with the Canadian

• changed to conform to 1986 presentation.

producers. Most of the producers have signed the The differences between the statutory federal income amended contracts. Negotiations with the remaining tax rate of 46% and the Companyi efTective tax rate are producers are continuing. Any additional payments which as follows:

might be required by any contracts not amended would result in additional Advances togas Producers. Such nx6 1985*

1984, ounb md aggregak apsa$ M Rderalincome tax rate 4 6.n '.

46.0 %

46.0 %

million through the contract year ended June 30,1986, Increases (reductions) resuting from:

Albeance for equity and none of which was recorded as of December 31,1986.

Sorrowed funds used during es,struction

( 2.5 )

(9.5)

(14.5) ggp p

Imesti. +nt tas credits

( 2.M l (2.3)

(2.0)

State income tax In October 1986, the CPUC approved the Stock Option (net of federal benefit) 4.2 3.7 3.7 Plan, through which the Company may grant options I,"p$c$' nIn"c'xcess to key management employees to purchase as many of tax depreciation 5.3 4.4 4.1 as 1.5 million shares ofits $5 par value common stock.The Adjust pnor years (2.6)

Stock Option Plan previously had been approved Other-net (3.41 (2.4)

{ l.4) by the Companyilloard of Directors and stockholders.

trective tax rate 46.x*.

37.3 %

35.9 %

The plan will terminate on April 15,1996, aller

' changed to conform to 1986 presentation.

w hich date no options may be granted. The common stock used can be authorized but unissued shares, or issued shares that have been reacquired by PG&E.

Any incentin awards under the plan or any costs resulting from the awards will not be recoverable in rates.

36

P A C l l iC

-G A 5 A N D E L E C T R I C C 0 M P A N Y As of December 31,1986, the Company had not NOFE NtC0AffMEflMS granted any options under the plan. lioweven on January 21,1987, the Board of Directors granted nonqualified Diablo Canyon Nuclear Ibwer Plant stock options to purchase a total of 91,500 shares of The Companyi Diablo Can3cn Nuclear Power Plant common stock.

experienced significant delays and substantial cost increases during the construction period which began hiern Area Puwer Administration Energy Agreement in 1968. Unit I and Unit 2 went into full commercial The Company has an agreement with the United States operation on Ma) 7,1985 and March 13,1986, respectively.

W; stem Area Ibwer Administration (WAPA) under The CPUC has granted PG&E interim rate recovery for which it purchases energy from WAPA and resells the Unit 1, subject to refund, to cover operation and energy to WAPA upon WAPA's request. Energy purchased maintenance expenses and an additional amount equal by the Company prior to the 1%7 effective date of to the value of fuel saved.The CPUC has approved the current agreement must be resold to WAPA at a fixed a stipulation for Unit 2 to collect revenues equal to the contract price that is substantially below the Companyt value of fuel saved pending a decision on interim current cost of production. Approximately 75% of the rates which is currently expected by the first quarter of The highlyprized energy under contract has been purchased by the Company 1987. Through balancing account mechanisms, the charles A co/ Tin Amrd from WAPA since 1%7 at favorable prices based on Company reconizes revenues for operating expenses rwnt to PCEin 1952 WAPA's cost of generation.That energy must be sold and a retum (11.44% elTective January 1,1987) on rate base

[{#

"#{a back to WAPA at a price equal to the Companyi current and ofTsets the related receivables with the accumulaad elatric needs done d thermal production cost at the time of delivery to WAPA value of fuel saved due to the actual operation of the the nations most rupidly less the Companyi savings that resulted from the plant.The following table summarizes the Companyi expanding regions."

purchases at the lower WAPA prices.

balancing account treatment for Diablo Canyon since

/t recogni;ed the com-P""J P"###ld * #

S The contract will expire on January 1,2005.The commercial operation of Units I and 2:

Companyi total cost to retum the amount of energy Un 1 Un:2 Total tt n et Ian t currently available to WAPA over the remaining life of the mr undertaken in the in gai;on, contract,if valued using the Companyi thermal produc-utdity industrv tion cost at December 31,1986, would be approximately Y,*MQY8 through I

$548 million. Most of that cost, howeven would be in

- for operating expenses 5

$ 609.3

$ 299.7

$ 909.0 elTect a retum of the benefits the Company received

- for interest 175.2 86.6 261.8 through its purchases from WAPA since 1%7(due to the

-r r equity retum 306.7 151.6 458.3 pricing mechanism described above), which were passed Total revenues recognized 1,091.2 537.9 1,629.1 on to ratepayers at that time.The total cost of the Less: Amountsbilled2 (636.4)

(156.2)

(792.6) energy resold to WAPA would be mcluded in the Energy Cost Adjustment Clause balancing account and is Plus: Interest at commercial s, t expected to be recovered from ratepayers.

gper 3

25.5 9.1 34.6 Merger of l'acific Gas Transmiwinn Company g

On March 21,1986, the Company increased its ownership

!)ecember 31,19863

$ 480.3

$ 390.8

$ 871.14 to 100% of its subsidiary I acific Gas Transmission tsubject to actiustment and refund.

Company, for $143 million. This meludes goodwill of 2 subject to refund.

$39 million which is being amortized over 8 years on a 3 subject to adjustment.

straight-line basis.

' Included in Deferred Charges in the Consolidated Balance Sheet.

5 l

Excludes expenses related to nuclear fuel.

All investment in Diablo Canyon is subject to deter-mination by the CPUC as to whether all such costs ultimately will be permitted to be included in rate base and recovered in rates. Because the Diablo plant repre-sents such a large portion of the Company s assets, l

a significant disallowance ofcosts for ratemaking purposes could have a significant etrect on the Company's financial position.

37

P A C 1 F i C G A S A N O E L E C T 11 iC C 0 M P A N Y NOTES TO CONS 0UMWD RNMCIAL STAMAENTS Cont.

As of December 31,1986, the Company's $5.5 billion for Unit I which is being recovered through the Energy investment in Diablo Canyon was included in Plant in Cost Adjustment Clause account.This was the result of Service in the Consolidated Balance Sheet. After one Unit 1 operating in excess of the target range during its year of commercial operation, the Company's total invest-first year of operation. Both the ratepayers and the share-ment is estimated to be $5.8 billion, w hich would have holders benefited by the unit's operating above the 80%

represented an estimated 28% of total Company assets capacity factot The target capacity factor mechanism and 2% of total Plant in Service at December 31,1986.

for Unit I expired on May 6,1986. Unit 2 has operated at Final rate recovery and/or adjustment of all Diablo an average capacity factor of 86% during its first ten Canyon related revenues will not be authorized until after months of operation. Ilowevet since the target capacity i

reasonableness hearings are completed, probably not factor provision for Unit 2 is related to the unit's fuel ne company' annual before late 1988. If the CPUC should disallow recoveiy cycle, the average capacity factor will be reduced for s

refwes haw come a of a portion of the plant investment, a portion of the refueling down-time.

Iong uv and so hau accumulated revenue, net of tax elTects,would be charged The CPUC is also considering an altemative rate-

1. ){"j'n'**,"#['#

against camings in the year disallowed along with the making concept for Diablo Canyon w hich would provide o/ operating mrnue, disallowed plant investment.

revenues based primarily on the amount of electricity of J2/7 million; this On October 29,1986, the CPUC announced its decision generated by the plant, rather than on more traditional por' nymrt tells o/

to disallow $345 million or 8% of the $4.5 billion it cost-based ratemaking concepts.The Company is currently s

menues o/J73bdlinn.

cost at commercial operation for Southem Califomia evaluating the accounting, income tax, and financial f[com.

Ediscn (Edison) and San Diego Gas and Electric Company implications of this altemative ratemaking concept.

pony's /migas rate (San Diego Gas) to build San Onofre Nuclear Generating inen av in 29 pars.

Station (SONGS) Units 2 and 3. The disallowance was IIelms Pumped Storage Project gm based on the CPUC's conclusion that construction delays The IIelms Pumped Storage Project (lielms), which I. An umd and excessive costs could have been avoided if Edison, was delayed due to a water conduit rupture in September wpY -

W h oversaw construction, had acted more prudently.

1982 and various start-up problems, became commer-c

^1 Edison and San Diego Gas have appealed the ruling.

cially operable on June 30,1984.

In view of this CPUC decision,it appears reasonable to Total cost of the project was $956 million, of which expect that the CPUC will disallow some portion of the

$716 million has been included in rate base and $22 Diablo Canyon plant costs and the related balancing million has been disallowed by the CPUC.The remaining account revenues. Because Diablo Can>un represents such

$218 million in costs may be recovered through litigation a large portion of the Company's assets, if a disallowance or future ratemaking applications. (This matter is included of costs is significant, it could have a significant adverse in the Noneaming Assets section of this note.)

effect on the Company's fmancial position. Ilowevet The CPUC has indicated that PG&E will bear a heavy the Company is currently unable to estimate the amount burden of proofin establishing the reasonableness of these of such disallowance or predict w hether such disallow-costs. In addition, if PG&E seeks to recover in rates ance would have a significant adverse impact on its the costs related to the water conduit rupture, the CPUC financial position or results of operations.

intends to consider an olTset to revenues to refect The CPUC established target capacity factor ranges lost or deferred capacity benefits due to the delay in of 55% to 80% for Unit I and Unit 2.The shareholder and commercial operation.

ratepayer share equally any fuel savings if the units Notwithstanding the above, the Company believes exceed the 80% capacity factor and split the additional that all llelms costs not recovered through claims and fuel costs if the units fall below the 55% capacity factot litigation processes should be recoverable through l

l Within the performance range of $5% to 80%, no savings the ratemaking process and that any costs disallowed or penalty would be awarded. PG&E has recorded,in by the CPUC would not have a significant impact 1986. the target capacity factor adjustment of $13.9 million on its fmancial position or results of operations.

In its August 1985 Ilelms rate case decision, the CPUC declined to include in rates the revenues accrued during the time ifelms was out of service due to the replacement of certain generator parts.These revenues, with interest accrued through December 31,1986, I

38

fA C i F i C G A S A N D E L E C i R I C C 0 M P A N Y amount to $51.7 million. PG&E will be allowed to file some recovery has been authorized. Project costs not a separate application for recovery of this amount.

currently eaming a retum on investment include:

The Company believes that any revenues disallowed uccember 31 i986 1985 by the CPUC would not have a significant impact on the In Thousands Company's financial position or results of operations.

IIelms Pumped Storage Project

$2 t N,UM7

$228,668 Ilumboldt llay Nuclear Power Plant liumboldt Bay Nuclear In 1983, PG&E elected to decommission the ilumboldt Power Plant 33,972 45,194 Bay Nuclear Power Plant Unit No. 3 (Unit 3). In decisions 9ue[ed NaturalGas issued in August and November of1985, the CPUC Ten Section Field 26.559 31,703 disallowed $22.6 million of AFUDC and $14.5 million Feasibility Study and RD&D Project Costs IM.492 36,975 of direct costs and permitted recovery through rates of approximately $44.3 million of the $84 million net Total vi51,779

$419.61 t investment in Unit 3.The disallowances were charged Of the $353.8 million of noneaming assets above, PG&E against income.The decisions permit recovery over has been granted rate recovery of $116 million. Accordingly, a four-year period with no rate base treatment for the the Company has amortized and recovtred $48.4 million unamortized balance.

during the year ended December 31,1986.

In December 1985, the CPUC authorized PG&E In 1984, the CPUC disallowed $46.6 million of to recover the estimated $9.7 million of costs associated AFUDC for the Liquefied Natural Gas Project (LNG),

with the Company's custodial safe storage plan which and the Company provided a reserve against its invest-the CPUC found reasonabic. It further authorized the ment for that amount. Included in the LNG costs are Company to establish a decommissioning fund for the

$19.6 million in losses on tangible assets sold and And then there arre nuclear unit at the Ilumboldt Bay Power Plant to collect remaining assets to be sold. This amount is currently those inantions that approximately $58 million over a four-year r:riod.

being deferred based on a CPUC decision to defer reim.

nmr quite made it.

N'Ml ' "'"# 0 #8 This amount reflects the cost of decommissioning the bursement until after the assets are sold and the resu' ting

?

?

prudently constructed plant. PG&E was ordered by the proceeds are used to ofTset the direct costs of the assets.

hurn J

CPUC to estimate how much ofIhe $58 million was As of December 31,1986, approximately $37.1 million of bre consumer enthusi.

attributable to decommissioning the disallowed plant the LNG costs included in the $56.7 million above usm. 5/ ore substantial facilities.The Company believes that the $58 million remain to be amortized.The four-year amortization uns the contribution

""d#h " """*#

estimate does not include the costs to decommission the period began in 1985. Steps to wind up the afTairs of this J

disallowed plant and that therefore PG&E is entitled abandoned project are continuing.

hh"7 to recover all of the $58 million originally requested. If the PG&E requested recovery in the 1987 General Rate ducedws cooking stons CPUC does disallow some of the decommissioning Case for the costs of the Ten Section Field. In December into Cali/ornia.

costs as " imprudent," the Company's shareholders will 1986, the CPUC granted rate recovery of those costs bear the cost.This cost has not yet been determined-over a four-year period, beginning in 1987.

but is not expected to be significant.

PG&E currently estimates that the revenues required Nuclear insurance to recover the costs of decommissioning Unit 3 will PG&E is a member of Nuclear Ntutual Limited (NNIL) be $27.6 million in 1987 and $26 million annually in 1988, and Nuclear Electric Insurance Limited (NEIL I and II).

1989 and 1990.This estimate assumes recovery at the in the event of property damage to a nuclear plant of anticipated effective date of July 1,1987.

a member utility or increased cost of replacement power due to prolonged accidental outage of a member utilityi Noncarning Awets reactor unit PG&E may be subject to maximum assess-PG&E has several noneaming assets which are not ments of $61 million (property damage) or $9.5 million caming a retum on imestment currently, but for which (replacement power), respectively, in each case per policy period, iflosses exceed premiums, reserves, and other NNIL, NEIL I or NEIL 11 resources. With respect to property damage, the NN1L coverage is limited to $500 million and the NEIL 11 coverage provides an additional

$575 million in excess of that provided by NNIL 39

P A C i F I C G A S A N O E L E C i R I C C 0M P A N Y MOTES TO CNSOUNTED RMMAL STATEnENTS Cont.

PG&E's maximum public liability for claims resulting SMUD in tum, has withheld payment for PG&E from any nuclear incident is limited to $700 million energy deliveries, estimated to be $44.4 million through under provisions of the Price-Anderson Act. In the evem the December 1986 billing. This receivable is included there is a nuclear incident involving any of the nationi in current assets.

licensed reactors, PG&E is subject to a retrospective The dispute is in litigation and the case has been assessment of up to $5 million per incident for each of stayed indefinitely pending resolution of the dispute at its two licensed reactors with an aggregate assessment the Rderal Energy Regulatory Comm'ssion.The per calendar year of $10 million per reactor with pay-Company believes that it will recover substantially all futin scrricein mid-ments in excess deferred to the next calendar yeac of these amounts.

l.925, the thne turbin+

pnerators o/ Pit J Capacitv W ments to SMl;D I.itigation-Geothermal Steam Contracts 3

^Q" PG&E lias a cc ntract with Sacramento Municipal Utility In January 1987, two lawsuits were filed against the g

to the company' capa.

District (SMUD) to purchase surplus energy and capacity Company relating to the sale of geothermal steam to the s

city-and enth prnhc from the Rancno Seco Nuclear Power Plant (Rancho Company for use in the generation of electricity at the onrhauls are still Seco), which shut down in December 1985.

Company's The Geysers Geothermal Pbwer Plant (The making this contribu-As a result of the shutdown, PG&E stopped accruing Geysers). In total, the lawsuits claim damages in excess rion six decades later a liability and making payments to SMUD for capacity in of $120 million for breach of contract, improper calcu-B.7 December 1985. The total unpaid amount through lation of the steam price and inadequate operation December 1986 is $35.9 million. PG&E has also filed of The Geysers.

a claim requesting that SMUD retum $27.5 million in The Company plans to vigorously defend these law-capacity payments made during 1985 for capacity that was suits and believes that the ultimate outcome of this not received during the months of January through matter will not have a significant impact on its financial November 1985 when Rancho Seco was inoperative, position or results ofoperations.

MPNTOFIAMPEANNTPGBUCACCOUNTAWTS To the Stockholders and the Board of Directors of Pacific Gas and Electric Company We have examined the consolidated balance sheet and statement of consolidated capitalization of Paci6c Gas and Electric Company (a Califomia corporation) and subsidiaries as of December 31,1986 and 1985, and the related statements of consolidated income, funds used for construction, common stock equity and preferred stock, and the schedule of consolidated segment information for each of the three years in the period ended December 31,1986.

Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included j

such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed more fully in Note 10 to the fmancial statements, the Diablo Canyon Nuclear Pbwer Plant experienced signincant delays and substantial cost increases. In connection with the Califomia Public Utilities Commission (CPUC) review ofinterim rates for Unit I and a stipulation for Unit 2, the Company has recorded the revenues for operating expenses and a retum on rate base and recognized as a deferred asset the amounts not allowed in current rates.The allowed interim rates, accrued revenues and deferred asset are subject to adjustment pending the l

CPUC reasonableness review of plant costs. In view of the events discussed in Note 10, the Company believes it appears reasonable to expect that the CPUC will disallow rate recovery of some portion of the Diablo Can>un plant costs and the related balancing account revenues.The Company is currently unable to estimate the amount of such disallowance or predict whether such disallowance of the Diablo Canyon plant costs and related revenues and deferred asset would have a significant adverse impact on its financial position and results of operations.

In our opinion, subject to the effects of such adjustments as might have been required had the outcome of the uncertainties referred to in the preceeding paragraph been known, the consolidated financial statements and schedule ofconsolidated segment information ceferred to above present fairly the financial position of Pacific Gas and Electric Company and subsidiaries as of December 31,1986 and 1985, and the results ofits operations and funds used for construction for each of the three years in the period ended December 31,1986 in conformity with generally accepted accounting principles applied on a consistent basis.

ARTilUR ANDERSEN & CO.

San Francisco, Califomia February 6,1987 40

P A C 1 F f C G A S A N D E L E C T 11 1 C C 0 M P A N Y RE99stBKITYNMRNnhCIALSWEnENTS The responsibility for the integrity of the fmancial public accountants, review and evaluate the Companyi information included in this annual report rests with intemal accounting control systems to the cAtent they management. Such information has been prepared in consider necessary in order to support their opinion accordance with generally accepted accounting prit ciples on the consolidated financial statements. Their auditors' appropriate in the circumstances, and is based on the report, above, contains an independent informed Company s best estimates andjudgements after giving judgement as to the faimess of the Company's reported consideration to materiality.

results of operations and financial position.

Pacific Gas and Electric Company maintains systems In a further attempt to assure objectivity and remove ofintemal accounting controls supported by formal bias, the financial data contained in this report have policies and procedures which are communicated been reviewed by the audit committee of the board throughout the Company. These controls are adequate of directors. The audit committee is composed of five to provide reasonable assurance that assets are safe-outside directors who m( et regularly with management, guarded from loss or unauthorized use and to produce the corporate internal auditors and Arthur Andersen &

the secords necessary for the preparation of financial Co., jointly and separately, to review internal accounting information. There are limits inherent in all systems controls and auditing and financial reporting matters.

ofinternal control, based on the recognition that the The Company maintains high standards in selecting, costs of such systems should not exceed the benefits training and developing personnel to ensure that manage-to be derived. The Company believes its systems provide menth objectives of maintaining strong, elTective intemal this appropriate balance. In addition, the Company's controls and unbiased, uniform reporting standards are intemal auditors perfot m audits and evaluate the attained. The Company believes its policies and proced-adequacy of and the adherence to these controls, policies ures provide reasonable assurance that operations are and procedures.

conducted in conformity with applicable laws and with Arthur Andersen & Co., the Companyiindependent its commitment to a high standard of business conduct.

QUARTERLYCONSOUBETEDRNANCIAL DMTA (unaudited)

Quarterly financial data for the four quarters of 1986 New York, Pacific, Iondon, Amsterdam, Basel and Znrich and 1985 are shown in the table below. Due to the seasonal Stock Exchanges. The approximate number of common nature of the utility business, operating revenues.

stockholders of record as of December 31,1986 was operating income, and net income are not generated 298,000. Dividends are paid on a quarterly basis, and evenly by quarter during the yeat there are no material restrictions on the present or future The Companyi common stock is traded on the ability of the Company to pay dividends.

4th 3rd 2nd 1st inThousands (except per share amounts) 1986 Operating Revenues S t,927,405 S2,000,896 SI,876,724 S2,0ll,636 Operating Income S 396,699

$ 461,897 S 419,415 S 375,614 Net Income S 235,998

$ 299,578 S 265,339

$ 280.308 Esmings Itr Common Share S

.54

.73

.63

.70 Dividends Declared Per Common Share S

.48

.48

.48 S

.46 Common Stock Price Itr Share fligh S

26%

S 27 %

S 23 %

23 %

low S

23 %

S 22W S

21 18 %

1985 Operating Revenues

$ 2,066,862

$ 2,167,401

$ 2,024,1%

$ 2,172,522 Operating income

$ 345,438

$ 415,543

$ 334,253

$ 274,125 Net income

$ 234,284

$ 278,175

$ 266,146

$ 252,200 Earnings Itr Common Share

.58

.72

.70

.66 Dividends Declared Itr Common Share

.46

.46

.46

.43 Common Stock Price Per Share liigh 20%

20 20 %

17%

low 17%

17 %

17 %

16 41

P A C 1 F l C G A $

A N O E L E C T R I C C 0 M P A N Y PSAECMGMRATNESTATM(Unaudited)

Years Ended December 31 1986 1985 1984 1983 Electric Statistics Net System Output (hiillions of KWII) 75,436 76,156 75,866 71,614 Net System Output Percent liydroelectric Plants 19.5 %

14.9 %

19.9 %

25.3 %

Thermal Electric Plants (excluding Nuclear) 32.1 45.1 41.1 31.8 Nuclear Plants 16.3 8.6 Other Producers 32.1 31.4 39.0 42.9 Total 100.0 %

100.0 %

100.0 %

100.0 %

System Capability-KW (at annual peak)

Ilydroelectric Plants (adverse conditions) 3,856,900 3,693,700 3,6M,900 2,374,700 Thermal Electric Plants (excluding Nuclear) 9,173,400 8,924,700 8,924,700 8,923,000 Nuclear Plants 2,152,000 1,073,000 Other Producers (adverse conditions) 3,500,200 2,933,600 3,296,900 3,466,800 Total 1H,682,500 16,625,000 15.886,500 14,764,500 Net System Itak Demand-KW 13,371,000 14,403,000 14,224,600 13,243,100 Reserves Capacity hiargin at Peak-Percent 25.7 %

11.6 %

6.2%

8.8%

Annual load Facto -Percent 64.4 %

60.5 %

61.1%

61.7 %

Average Annual Residential Consumption-KWil 6,343 6,533 6,557 6,386 Average Residential Revenue ihr KWII 7.82e 7.88c 6.75c 6.03c Average Annual Residential Bill

$496.28

$514.57

$442.88

$385.18 Total Customers (end of year) 3,M54,787 3,760,521 3,686,179 3,594,124 Plant investment ltr Customer S3,592

$3,407

$3,157

$2,847 Customers Itr hiile of Distribution Line 39.5 38.8 38.3 39.4 Gas Statistics Gas Purchased for U.S. Operations (Thousands of htCF) 586,135 778,318 690,455 621,539 Source of Gas Pun:hased-Itrcent From Califomia 24.4 %

21.9 %

24.0 %

23.1%

From Other States 33.7 39.3 42.4 36.9 Fmm Canada 41.9 38.8 33.6 40.0 Total 100.0 %

100.0 %

100.0 %

100.0 %

Average Cost of Gas Purchased Itr h1CF (U.S. Operations)

From Califomia S2.20

$2.88

$3.60

$3.40 From Other States

$2.58

$3.61

$3.98

$4.02 Fmm Canada S2.26

$3.14

$4.21

$4.49 Average

$2.36

$3.27

$3.%

$4.07 Peak Day Sendout-hihtCF 3,107 3,603 3,205 3,025 Average Annual Residential Consumption-h1CF 64.6 75.1 69.6 73.0 Average Residential Revenue Itr h1CF S4.75

$5.38

$5.43

$4.84 Average Annual Residential Bill S306.93

$4N.15

$377.94

$353.42 Total Customers (end of year) 3,158,426 3,082,935 3,020,803 2,948,950 Plant Investment Itr Customer S595

$555

$500

$471 Customers Per hiite of Distribution hiain 99.H 98.9 98.4 97.2 Miscellaneous Statistics Customers Served Itr Employee 240 231 236 240 Depreciation and Amortization as a Ivrcent of Average Depreciable Plant Electric 3.5%

3.6%

3.7%

3.5%

Gas 4.2%

4.3%

4.3%

4.2%

PG&E Composite (includes Common Utility Plant) 3.H%

3.8%

3.9%

3.7%

42

4 P A C l F i C G A 5 A N O E L E C_ i 11 i C C 0 M P A N Y 1982 1981 1980 1979 1978 1977 1976 71,292 72,829 69,962 70,339 67,669 65,428 66,416 21.8 %

14.6 %

19.0 %

16.8 %

19.9 %

9.2%

12.2 %

34.8 54.0 50.5 59.1 49.5 72.4 61.7 00,3 43.4 31.4 30.5 24.1 30.6 18.4 25.8 100.0 %

100.0 %

100.0 %

100.0 %

100.0 %

100.0 %

100.0 %

2,362,700 2,377,200 2J54,600 2,360,000 2,350,900 2,350,900 2,419,900 8,675,000 8,847,000 8,754,000 8,612,000 8,294,000 8,294,000 8,198,000 63,000 3,245,100 5,621J00 3,971,000 4,112,900 2,791,100 3,302,900 3,743,400 14.282,800 16,845,500 15,079.600 15.084,900 13.436,000 13,947,800 14.424,300 12,214,600 13,680,100 13,440,400 13,215,200 12,970,600 12,191,800 12,245,800 9.6%

5.9%

9.0%

12.1%

8.4%

10.6 %

5.0%

66.7 %

60.8 %

$9.3%

60.8 %

$9.6%

61.3 %

61.7 %

6,252 6,489 6,535 6,811 6,553 6,408 6,509 7.33c 5.77c 5.16e 3.54c 3.93c 3.81c 3.02c

$458.46

$374.21

$337.43

$240.88

$257.66

$243.86

$19648 3,545,923 3,515,099 3,447,739 3,365,950 3,270J02 3,179,362 3,087J00

$2,554

$2,310

$2,199

$2,032

$1,869

$1,755

$1,666 39.1 39.2 39.1 38.9 38.5 38.1 37.7 698,166 835,684 781,643 843,381 711,052 817,745 852,935 18.2 %

19.5 %

16.0 %

16.8 %

16.4 %

16.1 %

16.5 %

45.4 49.2 43.7 37.0 35.1 36.2 37.5 36.4 31.3 40.3 46.2 48.5 47.7 46.0 100.0 %

100.0 %

100.0 %

100.0 %

100.0 %

100.0 %

100.0 %

$3.09

$2.60

$2.16

$1.74

$1.59

$1.12

$3.54

$2.57

$230

$1.79

$1.35

$1.10

$.83

$5.14

$4.86

$4.34

$2.61

$2.22

$2.00

$1.75

$4.04

$3.29

$3.10

$2.16

$1.81

$1.53

$1.28 3,133 3,144 3,275 3,398 3,244 3,186 3,348 78.3 72.7 81.6 90.4 86.9 90.5 100.8

$4.39

$3.91

$3.70

$2.37

$1.97

$1.85

$1.71

$344.07

$284.20

$301.67

$214.17

$170.97

$167.45

$172.63 2,914,977 2,897,455 2,858,129 2,805,471 2,738,767 2,674,890 2,611,551

$474

$475

$467

$450

$441

$441

$439 96 8 96.9 97.0 97.2 97.4 97.2 96.8 249 241 229 230 228 230 232 3.5%

3.3%

3.3%

3.1%

3.0%

3.0%

3.0%

4.2%

3.5%

3.5%

3.1%

3.1%

3.1%

3.2%

3.7%

3.4%

3.4%

3.2%

3.1%

3.1%

3.1%

l l

l 43 l

P A C 1 F i C G A $

A N D E L E C i 11 1 C C 0 M P A N Y CNSlKIBRTED ntVEMS AM SnlES(unaudited)

Yem Ended December 31 19 %

1985 1984 1983 Electric Department Revenues Residential S I,639,10M

$ 1,659,401

$ 1,400,148

$ 1,192,997 Commercial I,91M,093 1,952,531 1,580,192 1,326,406 Industrial (1000 KW demand or over) 1,1M4,217 1,381,346 1,105,750 914,786 Agricultural Ihwer 220,462 287,226 239,M4 157,528 Ibblic Street and Ilighway Lighting 45,149 46,997 41,970 48,320 Other Electric Utilities 63,915 93,473 99,350 129,992 hliscellaneous 73,839 92,737 116,050 40,350 Other 3,504 5,305 7,113 7,890 Regulatoryllalancing Accounts 419,151 300,967 567,948 87,545 Total S 5,567,43M

$ 5,819,983

$ 5,158,165

$ 3,905,814 Sales-K%11 Residential 20,949,230 21,067,234 20,730,060 19,778,553 Commercial 21,286,100 21,452,853 20,626,467 19,259,758 Industrial (1000 KW demand or over) 15,972,091 17,N2,349 16,108,571 14,986,722 Agricultural Ibwer 2,560,390 3,252,215 3,309,155 2,3M,205 ltblic Street and liighway Ughting 344,276 336,736 329,378 339,823 Other Electric Utilities 725,397 1,576,215 2,230,163 3,341,984 Total Sales to Customers 61,M37,484 M,727#)2 63,333,794 60,011,045 Gas Department Revenues Residential S M99,039

$ 1,156,002

$ 1,058,995

$ 972,150 Commercial 435,351 562,590 5%,107 651,332 Industrial 437,677 800,651 732,875 M8,832 Other Gas Utilities 2M,962 38,322 37,410 39,202 hliscellaneous 19,471 6,069 3,686 5,469 Regulatory llalancing Accounts 220,840 (233,064)

(107,521) 91,820 Subsidiary Companies (U.S. and Canada) 207,MM3 280,428 349,986 332,080 Total 5 2,249.223

$ 2,610,998

$ 2,671,538

$ 2,740,885 Sales-MCF Residential 189.120 214,935 195,092 200,774 Cemmercial 7M,0M7 89,415 90,027 109,637 Industrial 12M,M54 178,407 137,178 114,310 Other Gas Utilities 9,M32 9,247 8,281 8,532 Total Sales to Customers 405,M93 492,0N 430,578 433,253 l'G&E Use (primarily electric generation) 153,566 263,017 242,985 170,773 Subsidiary Companies (U.S. and Canada) 354 436 563 362 Total 559,M13 755,457 674,126 604,388 1

44

P A C iF 1 C G A 5 A N D E L E C iR I C C 0 M P A N Y 1982 1981 1980 1979 1978 1977 1976 In1houunds

$ 1,401,267

$ 1,128,851

$ 998,130

$ 693,368

$ 720,112

$ 661,502

$ $17,574 1,530,542 1,233,5M 1,067,198 752,359 852,265 789,401 536,937 1,078,493 860,577 699,073 461,653 531,593 498,462 277,694 235,164 241,221 212,770 142,727 149,986 212,M9 115,952 53,224 41,498 38,225 30,491 34,179 33,501 24,537 172,819 117,791 71,926 67,740 69,855 103,890 61,664 56,256 70,094 58,568 50,111 43,584 42,075 33,727 8,008 7,313 5,336 4,115 3,814 3,6M 3,757 (687,171) 204,964 (223,385) 261,281 (308,455) 9,989 249,1%

$ 3,848,602

$ 3,905,873

$ 2,927.841

$ 2,463,845

$ 2,096,933

$ 2,355,133

$ 1,820,948 19,107,415 19,575,283 19,329,190 19,605,541 18,314,721 17,383,011 17,147,610 18,662,382 18,722,954 18,283,154 17,891,820 17,166,973 16,771,232 17,162,248 15,843,M6 16,401,293 14,801,260 15,253,371 14,815,289 14,354,359 14,258,149 2,922,541 3,890,088 3,540,022 3,715,026 3,120,644 5,113,726 4,601,147 365,119 401,930 431,$M 455,445 485,725 491,558 465,387 3,544,563 2,676,998 1,906,465 2,807,249 2,232,5(3 3,957,141 2,925,285 N),445/46 61.668,546 58,291,655 59,728,452 56,135,915 58,071,027 56,559,826

$ 935,996

$ 7M,468

$ 799,307

$ $55,017

$ 432,865

$ 414,087

$ 416,660 681,520 607,417 626,611 406,497 346,229 365,623 130,878 712,341 794,786 708,259 499,242 340,546 366,293 502,942 52,589 158,433 148,074 85 867 18,384 14,349 13,492 8,835 2,2'X)

(6,560) 7.128 4,315 4,773 10,914 149,817 (276,749)

(133,807) 176,354 193,960 (19,477) 35,665 395,395 238,057 189,174 170,519 136,141 128,749 117.047

$ 2,936,493

$ 2,288,702

$ 2.331,058

$ 1,900,624

$ 1,472,440

$ 1.274,397

$ 1,227,598 213,031 195,631 216,184 234J95 220,076 223,732 243,258 124,622 128,758 146,827 143,707 144,162 163,828 74,718 132,789 171,769 161,0N)

'86,165 138,975 162,529 284,261 12,021 35,135 34,821 36,013 9.926 7,810 8,716 482,463 531,293 558,892 600,180 513,139 557,899 610,953 201,219 280,990 202,9M 216,062 125,636 217,272 194,949 345 252 223 518 259 78 78 684,027 812.535 762,079 816,760 639,034 775,249 805,980 45

P A C i F i C G A 5 A N D E t f C T ft I C C 0 M P A N Y MMCTORSAhGNRMRS nannowmuCTonc cauwrretsarue B8nne w E nECrDRV Richard A.Cla Le

%laryS.Stetz Executlie Committee Compensation and Chairman of the Board President, hiills College Within limits, may 31anagement Development C"* "I"

and Chief Executive Omcet exercise powers and perform I

Pacific Gas and Electric Frederick W. Sliclke, Jr.

duties of the Board.

Recommends compensation Company Ibrmer Chairman of the and employee benefit Richard A. Clarke policies and practices.

Board and Chief Executive (Chairman) liarry St. Conger Omcer, Pacific Gas and Reviews planning for Lewis S. Eaton Chairman of the Board Electric Company executive development Robert B. limver and succession.

and Chief Executive Omce; Richard B. hiadden llomestake hiining William E 5 tiller Robert B. Iloover Petu A hiagowan Company President and George A. hiancatis (Chairman)

Chief Executive Omcer, hielvin B. lane Lewis S. Eaton SRIInternational udit Committee leslie L Luttgens Chairman of the Board, (research and consulting)

Reviews fmancial statements Richard B. Aladden Guarantee Financial J hn B. h1. Place and intemal accounting Corporation of Califomia John 11. St. Place and control procedures (savings and loan Ibmier Chairman of the holding company)

Board and Chief Executive with independent pubhc p

an untants.

Omccr,Crocker National Recommends candidates fra Stichaellic> man Corporation and Crocker lewis S. Eaton (Chairman) for nomination as directors.

Chancellor, University National llank Ira Michaellicyman Richard A. Clarke of Califomia, Berkeley Stary S. hfetz (Chairman)

Carl E. Reichardt William E Miller

"*"Y "8"

Robert 11. lionier Chairman of the Board Wilson C. Rites Ibrmer Chairman and Chief Executive Omcet Leslie L Luttgens of the Board and Chief Wells Fargo & Company Finance Committee d

k* k Executive Omcet and Wells Fargo Bank, N.A.

Recommends long-range J hn B. hl. Place The Pacific Lumber financial policies and Company Milson C. Riles objectives and actions President, Wilson Riles and required to achieve those Meliin 11.1.ane Associates,Inc. (educational objectives.

Chairman of the ik>ard, development and consulting)

Lane Publishing Company I

(SUNSET Magazine)

Stanicy T. Skinner g

Vice Chairman of the Board,

1. i"I'*

I,eslie i. I.utturns Pacific Gas and Electric San Francisco llay Area Company l

community leader Stanley T. Skinner MMCTDMSEnnill/S l

Richard 11. Sladden l

Chairman of the Ikurd John E ilonner and Chief Executive OMcer, Ibrmer President and Chief lbtlatch Corporation Executive Omcer, Pacific (diversified forest products)

Gas and Electric Company Peter A. Magowan Richard ll. I'eterson Chairman of the lloard Ibrmer Chairman and Chief Executive OMcer, of the Ikurd. Pacific Gas Safeway Stores, incorporated and Electric Company George A. Manesth President, Pacific Gas and Electric Company I. As or Ntarch 1.N87 46 l

l

P A C I f I C G A S A N D E L E C i R I C C 0 M P A N Y NFNEW Rich:rd A. Clarke 2 Ruwell II. Cunningham Grant N. Ilorne

\\1rgil G. Rose Chairman of the Board Vice President Vice President Vice President and Chief Executive OfTicer liuman Resources Corporate Communications Electric Operations St:nle3 T. Skinner 2 John C. Danielsen John C. Ke3scr Gregory 31. Rueger Vice Chairman of the Board Vice President Vice President Vice President Computer Systems and hlarketing and Customer Electnc Resources Planning George A..\\lancatis?

Senices Services and Development President Owen 11. Dasis John E. Koehn James D. Shiffer 31:Icolm II. Furhush2 Vice President Vice President Vice President Executin Vice President Golden Gate Region Community and Nuclear Ibwer Generation Govemmental Relations John A.Sproul?

Richard A. Draeger Gordon R. Smith Executive Vice President Vice President Jack LaRue Vice President General Senices Vice President Finance and Treasurer Ellis 11. I. angle), Jr.2 Sacramento Valley Region SeniorVice President Gene G. Elam James B. Stoutamore Operations Vice President and C. Robert 51artin Vice President Comptroller Vice President Gas Operations

%1ason Wilf rich 2 San JoaquinValley Region SeniorVice President Daniel E. Gibson William II. Wallace Jackal ne Pfannenstiel Vice President Corporate Planning and Vice President 3

Information Systems Ibel Resources Vice President Engineering Corporate Planning Donald A. Ilrand lionard \\.' Colub Dasid 11. Allison Vice President Vice President and Grant N. Radford Assistant Secretary Ibwer Generation General Counsel Vice President hiissionTrail Region lirian I.. SicGrath Norman I.. Ilr>an Robert J. Ila3nood Assistant Secretary Vice President Vice President Stephen P. Rc3nolds Redwood Region Ibwer Contracts Vice President Alan W lleringsmith Rates Assistant Treasurer George E Clifton Jr.

Jew R. lierrera Vice President Vice President Julia ll.%rk East llay Region General Construction Assistant Treasurer Thomas W. liigh Vice President and Corporate Secretary L As of Alah 1,1987

2. Member Nian.igement Committee 47

P A C 1 F iC G A S AN D E L E C i R I C C 0 M P A N Y MAMMMRMM AnwlAt aufnmW AconSSC#mE 10-KMPORT toSTOnST0tE#CEnnnCATES SNAN#0LMAS Shareholders should advise A copy of the Company's D#C M S The annual meeting of the Stock Transfer Agent im.

1986 lbrm 10-K Report to the Shareholders whose certin-shareholders of hcinc Gas mediatelyofanychangein ad-Securities and Exchange cates or dividend checks are and Electric Company will dress. Please include the old Commission may be obtained missing or destroyed should be held at the hfasonic Audi-address and the new address.

by contacting the Stock notify the Stock Transfer torium,Illi Califomia Stmet, If possible, please enclose a Transfer Agent.

Agent immediately so that San Francisco, Califomia, copy ofa recent mailinglabel.

a N p" can be placed on on Wednesday, April 15,1987, All changes of address STOCKEJC#AMSEllSTIES the old certincate or check, at 2:00 p.m. A notice of the must be provided in writing.

PG&E's common stock is and a new certincate or meeting, pmxy statement, traded on the New York, check can be issued.

and proxy form are being MillTIMEDINN#DDIECKS hcine, london,Basel, Zurich, mailedwiththisannualreport ANDDilMICATEMAILIMS and Amsterdam stock TORMOREIMORMATION on orabout Rbruary26,1987 Some shareholders hold their exchanges. The ofTicial New Shareholders who need more to all shareholders of record, stock in difTerent but similar York Stock Exchange symbol information about their A report on the annual names (for example, as is "PCG" but the Company's account, or copies of com-meeting will be included in Robert A. Johnson and as common stock usuallyis pany publications, should PG&E's first quarter report, R. A. Johnson). When this listed in the newspaperunder write to the Stock Transfer mailed to shareholders of occurs,it is necessary to "IbcGE" Agent at the address shown record in early hlay.

create a separate account for The Company has below or call (800) 367-7731.

cach name. Even though 23 issues of preferred stock, Shareholders who have DIWN#DAtVMENT the mailing addresses are the most of which are listed general questions about DATES: 1987 same, we are required to on the American Stock PG&E or information con-Co on erred mail separate dividend Exchange and the Pacine tained in the annual or checks and annual and quar-Stock Exchange.

quarterly reportsshouldwrite January 15 Itbruary 17 terly reports to each account.

to the OfTice of the Corpo-April 15 hiay 15 Shareholders who want to Issue rate Secretary at the address July 15 August 15 eliminate multiple dividend shown below or call October 15 November 15 checks and mailings should First Preferred, Cumulative, (415) 973-2880.

cor: tact the Stock Transfer Par %)ue $25 Itr Share Security analysts, portfolio Redeemable:

D/WN#DREl#KSTMENTPLAN Agent to request " Account managers and other repre-12.80 %

PGEpfY Shareholders may automati-Consolidation Ibrms sentatives of the investment I

P cally reinvest their dividends Shareholders who want to com.munity should write to 10.28 %

PGEpfW from commonand preferred eliminate duplicate mailings the Director ofInvestor Rela-10.18 %

PGEpfT stock in new shares but wish to continue receiv-tions at the address shown 9

pfR of PG&E common stock ing multiple dividend checks below or call (415) 972-3007.

9 thmugh the Company's should send labels (or a copy 9'

PG p Vice President and Dividend Reinvestment and of the labels) from each mail.

9#

PGEPR Corporate Secretary Common Stock Purchase ing to the Stock Transfer 0

Plan. Through an tptional Agent, indicating the name 8.16 %

PGEpfK 77 Beale Street, Room 3212 cash investment" feature, they wish to keep on the mail-8m WW

&n h h,G M Plan participants also may inglist forannualand quarterly 7.84 %

PGEpfht purchase additional shares of reports and the names Stock Transfer Agent 5

common stock, subject to they wish deleted. This Se'i'5 A Daniel T.12mey l

limitations set forth in the will only affect these mail-PGErfG 77 Beale Street, Room 1580 Plan prospectus.

ings; dividend checks and k'50%

PGEP lI San Francisco, CA 941%

f Dividends and cash proxy materials will continue 4.36 %

PGEpfl DirectorofinvestorRelations invested through the Plan to be sent to each account.

i during the last 13 years by Non-Redeemable:

6.00 %

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PGEpfC

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shareholders handbook

$100 First Preferred, Registrar of Stock l

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enrollment form may be the Companyis shareholder First Interstate Bank of

$100 Itr Share l

obtained by contacting the services, stock certif cates, Califomia 14 Unbsted Stock Transfer Agent.

and stock transfer systems.

405 hiontgomery Street 10.17 %

Unlisted Copies are available from San Francisco, CA 941M 9.00 %

Unlisted the Stock Transfer Agent.

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PACIFIC OAS AND E LE C T RIC C O M PANY 77 DE ALE STREET, S AN FR ANCISCO, C ALIFORNI A 941C6 TELEPHONE (415) 9 / b 6615 P.O. BOX 7 4 4 2, S A N F R ANCISCO, C ALIFORNI A 94120 TELECCPIER (415) 543 7813 MICH ARD P. LOCME A7708'=tf AT L AW March 18, 1987 Director Office of Nuclear Reactor Regulation US Nuclear Regulatory Commission Washington DC 20555 Re:

Docket No. 50-133 Docket No. 50-275 Docket No. 50-323 Dear Sir Enclosed are ten copies of Pacific Gas and Electric Company's annual report for the calendar year 1986.

Very r ly yours, v

lV hO RFL:nl Enclosures copy w/ encl Mr. Jerome D. Saltzman

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