PG&E 2007 Annual Report Download

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PG&E CORPORATION ANNUAL REPORT 2007
OUR JOURNEY TO BECOME THE LEADING UTILITY STARTS
ANEW EVERY DAY WITH THE QUESTION: WHAT MUST WE DO
TO BE BETTER TOMORROW THAN WE WERE YESTERDAY?
A BETTER

Table of contents

  • Page 1
    PG&E CORPORATION ANNUAL REPORT 2007 A B E T T E R O U R J O U R N E Y T O B E C O M E T H E L E A D I N G U T I L I T Y S TA R T S A N E W E V E RY DAY W I T H T H E Q U E S T I O N : W H AT M U S T W E D O TO BE BETTER TOMORROW THAN WE WERE YESTERDAY?

  • Page 2
    ...N TE NT S A Letter to Our Stakeholders What Makes a Better Tomorrow? Financial Statements Corporate Governance PG&E Corporation and Pacific Gas and Electric Company Boards of Directors Officers of PG&E Corporation and Pacific Gas and Electric Company Shareholder Information 1 7 29 140 141 143...

  • Page 3
    ...and a cleaner and more secure energy future over the next generation. It is a standard to which we hold ourselves as a company and as 20,000 individuals. And it is a path to advance our vision of building the leading utility in the United States in the eyes of customers, employees, and shareholders.

  • Page 4
    .... Record operating results at the Diablo Canyon Power Plant was another. Exceeding our savings goals from supply chain improvements was yet another. Combined with progress on safety and reducing the number of outages and work errors, these and other accomplishments make the case for a solid year in...

  • Page 5
    ... year, and announced another 8 percent increase in February this year. Judged in terms of total shareholder return, however - stock price appreciation plus dividends - last year's results were less than satisfying. A er total returns of 15 percent in 2005 and 31 percent in 2006, Improving Customer...

  • Page 6
    ... in new supplies of competitively priced gas to California from the Rocky Mountains. On the electric generation front, in addition to ongoing investment in our existing allow utility customers to voluntarily offset greenhouse gases associated with their energy use. To date, 18,000 have signed up...

  • Page 7
    ...&E in a strong position. Last year, Innovest Strategic Value "On average, over 50 percent of the energy PG&E currently supplies comes from sources that emit no greenhouse gases." program that pays customers who choose to allow PG&E to remotely adjust their air conditioners at peak times. We aim to...

  • Page 8
    ...benefit from new incentive pricing structures and precision energy management tools. On average, over 50 percent of the energy PG&E currently supplies already comes from sources that emit no greenhouse gases. These include our hydroelectric system and the Diablo Canyon nuclear power plant. Last year...

  • Page 9
    ...efficient use of our energy supplies and new technologies to power our future. It's more Sustainable energy from clean renewable energy resources such as solar, wind, and waves to address global warming and other environmental challenges. It's being ever more Connected to our communities through 20...

  • Page 10
    E A SY Is it possible to love your gas and electric company? Most utilities would think this is a crazy question. We embraced... is one of the best ways for us to provide them with real value. One of the places we are starting is finding ways to make it easier to do business with PG&E. Accordingly...

  • Page 11
    CLICK HERE FO R PG&E: M A N AGE M Y AC C O UNT CUS TO MER SERVICE S AV E ENERGY & M O NE Y EN VIRO NMENT EDUC ATIO N & S A FE T Y

  • Page 12
    ... service options is one example. In one industry study last year, PG&E's website was named the best in the business for customer friendliness. We now offer customers greater online visibility into their accounts. We have also introduced more flexible payment options like using a checking account...

  • Page 13
    ... energy savings or better understand their carbon footprint. will be able to start and stop service faster, as the meter's two-way communication capabilities will allow PG&E to make these changes remotely. Other examples of ways we are working to make it easier for our customers include assisting...

  • Page 14
    ..., pipes, and other infrastructure and lining up affordable and adequate energy supplies along the way. Our teams are at work on this challenge every day. We understand the importance of the responsibilities we are entrusted with in these areas, and we are committed to doing whatever it takes to...

  • Page 15

  • Page 16
    ... over the 2008 through 2011 time frame. Additions to our infrastructure will include new highly efficient power plants, new gas and electric transmission lines to serve fast-growing areas in the Central Valley and access renewable energy supplies, and new and upgraded equipment for our neighborhood...

  • Page 17
    ...power generation assets. This year our Diablo Canyon nuclear plant is moving ahead with replacement of its massive steam generators. The $700 million project will ensure the plant is capable of continuing to provide emissions-free power for over two million California homes. PG&E's work in this area...

  • Page 18
    ... not only saves money, it is also one of the most effective and economic ways to cut greenhouse gases. PG&E's energy efficiency programs over the past 30 years have saved customers $22 billion and kept over 135 million tons of carbon out of the skies, while our company and California's economy have...

  • Page 19

  • Page 20
    ... impacts. Last year, for example, we announced our intention to upgrade the high-tech gas and electric meters we are currently installing for all customers. The digital communications capabilities in the new devices create opportunities to provide the information and incentives customers need to...

  • Page 21
    ...last October. These free CFLs alone could collectively save the amount of energy needed to power 60,000 homes. tomers joined ClimateSmart , the first utility program giving them a choice to be carbon neutral by supporting sound investments to preserve California forests, which store carbon dioxide...

  • Page 22
    ... piece of the solution. But producing clean, cost-effective energy from new sources is undoubtedly another. On average, more than half of the electricity PG&E delivers already comes from carbon-free sources, including our own hydroelectric and nuclear facilities. We are also one of the nation...

  • Page 23

  • Page 24
    ...and geothermal energy to upstart technologies designed to tap remarkable new sources of power, like wave power PG&E is working with innovative companies and California dairy farmers to capture methane from large California dairy farms and turn it into a new source of clean, renewable natural gas for...

  • Page 25
    ... energy and transportation sectors are also exciting. Plug-in electric hybrid cars could some day offer an opportunity to supply clean power back to the grid at times when high demand for power might require using more carbon-intensive generation. PG&E is one of a number of companies exploring this...

  • Page 26
    .... As a giver of volunteer time and charitable dollars to support causes that reï¬,ect the values we share as neighbors and fellow Californians. In return, our communities give back to us - by giving us the great privilege to serve them and by being great places for our employees to live and work. 24

  • Page 27

  • Page 28
    ... to our long-term success. PG&E Corporation has committed to provide at least $60 million in shareholder-funded charitable contributions from 2005 to 2009. In addition to the company's giving, PG&E employees and retirees also give generously through our annual Campaign for the Community. This year...

  • Page 29
    ... for Humanity fit solar panels on new homes it built in PG&E's service area last year, thanks to a first-of-its-kind effort created with the support of PG&E's charitable program and our renewable energy expertise. program, an innovative partnership that is engaging California community colleges...

  • Page 30

  • Page 31
    P G & E C O R P O R AT I O N A N D PA C I F I C G A S A N D E L E C T R I C C O M PA N Y F I N A N C I A L S TAT E M E N T S 29

  • Page 32
    ...-Year Cumulative Total Shareholder Return Selected Financial Data Management's Discussion and Analysis PG&E Corporation and Pacific Gas and Electric Company Consolidated Financial Statements Notes to the Consolidated Financial Statements Quarterly Consolidated Financial Data Management's Report on...

  • Page 33
    ... on the Power Exchange Corporation liability from April 12, 2004 to February 10, 2005, in the Energy Recovery Bond Balancing Account as a result of completion of the verification audit by the CPUC in the Utility's 2005 annual electric true-up proceeding; and • Severance costs of approximately...

  • Page 34
    ... CUMUL ATIVE TOTAL SHAREHOLDER RETURN ( 1) This graph compares the cumulative total return on PG&E Corporation common stock (equal to dividends plus stock price appreciation) during the past five fiscal years with that of the Standard & Poor's Stock Index and the Dow Jones Utilities Index. $400...

  • Page 35
    ... Pacific Gas and Electric Company For the Year Operating revenues Operating income Income available for common stock At Year-End Total assets Long-term debt (excluding current portion) Rate reduction bonds (excluding current portion) Energy recovery bonds (excluding current portion) Financial debt...

  • Page 36
    ... is regulated primarily by the California Public Utilities Commission ("CPUC") and the Federal Energy Regulatory Commission ("FERC"). The Utility generates revenues mainly through the sale and delivery of electricity and natural gas at rates set by the CPUC and the FERC. Rates are set to permit the...

  • Page 37
    ... storage rates and associated revenue requirements for 2008 through 2010, with 2008 rates set at $446 million with the CPUC authorized the Utility to earn a ROE of 11.35% on its electric and natural gas distribution and electric generation rate base and to maintain an authorized capital structure...

  • Page 38
    ... rates, timing, and terms and conditions of any such financing. PG&E Corporation plans to contribute equity to the Utility to maintain the Utility's authorized capital structure. The timing and amount of these equity contributions will affect the timing and amount of any new PG&E Corporation...

  • Page 39
    ... climate change on the Utility's to access capital markets and other sources of credit in a timely manner on favorable terms; • the impact of environmental laws and regulations and the costs of compliance and remediation; • the effect of municipalization, direct access, community electricity...

  • Page 40
    ... 31, (in millions) 2007 2006 2005 Utility Electric operating revenues Natural gas operating revenues Total operating revenues Cost of electricity Cost of natural gas Operating and maintenance Depreciation, amortization, and decommissioning Total operating expenses Operating income Interest income...

  • Page 41
    ... refueling outage at the Utility's Diablo Canyon nuclear power plant. Historically, the CPUC also has conducted an annual cost of capital proceeding to determine the Utility's authorized capital structure and the authorized rate of return that the Utility may earn on its electricity and natural gas...

  • Page 42
    ...." In annual true-up proceedings, the Utility requests the CPUC to authorize an adjustment to electric and gas rates to (1) reï¬,ect over- and under-collections in the Utility's major electric and gas balancing accounts, and (2) implement various other electricity and gas revenue requirement changes...

  • Page 43
    ... by approximately $490 million. (See "Cost of Electricity" below.) • The dedicated rate component ("DRC") charges related due to the resolution of the Utility's claims for shareholder incentives related to energy efficiency and other public purpose programs, but no similar amount was recognized...

  • Page 44
    ... upon electricity and natural gas prices, the level of hydroelectric and nuclear power that the Utility produces, the cost of procuring more renewable energy, impacts from termination of DWR contracts, CPUC-ordered changes to QF pricing, and changes in customer demand. (See the "Risk Management...

  • Page 45
    ... Utility's claims for shareholder incentives related to energy efficiency and other public purpose programs, but no similar amount was recorded in 2006. Future natural gas operating revenues will be impacted by changes in the cost of natural gas, the Utility's gas transportation rates, natural gas...

  • Page 46
    ... consist mainly of the Utility's costs to operate and maintain its electricity and natural gas facilities, customer accounts and service expenses, public purpose program expenses, and administrative and general expenses. Generally, these expenses are offset by corresponding revenues authorized by...

  • Page 47
    ... Consolidated Financial Statements for a discussion of severance costs and California labor code issues.) In addition, the Utility may incur costs, not included in forecasts used to set rates in the GRC, to address safety and reliability issues in the Utility's electric and natural gas distribution...

  • Page 48
    ... of capital plant costs associated with electric industry restructuring costs that a December 2004 settlement agreement allowed the Utility to collect through rates in 2005. There was no similar depreciation expense in 2006. • Amortization of the regulatory asset related to Rate Reduction Bonds...

  • Page 49
    ... seasonal demand for electricity and natural gas, energy commodity costs, collateral requirements, the timing and effect of regulatory decisions and financings, and the amount and timing of capital expenditures, among other factors. PG&E Corporation and the Utility manage liquidity and debt levels...

  • Page 50
    ...the Utility's CPUCauthorized capital structure. Utility Corporate credit rating Senior unsecured debt Credit facility Pollution control bonds backed by letters of credit Pollution control bonds backed by bond insurance Preferred stock Commercial paper program PG&E Energy Recovery Funding LLC Energy...

  • Page 51
    ... of employee stock options, for the account of 401(k) plan participants, and under its DRSPP, generating approximately $175 million of cash. PG&E Corporation also expects to issue additional common stock, debt, or other securities, depending on market conditions, to fund a portion of the Utility...

  • Page 52
    ... due to higher gas prices during 2005. Investing Activities The Utility's investing activities consist of construction of new and replacement facilities necessary to deliver safe and reliable electricity and natural gas services to its customers. The level of cash used in investing activities...

  • Page 53
    ... facility Repayments under accounts receivable facility and working capital facility Net issuance (repayments) of commercial paper, net of discount of $1 million in 2007 and $2 million in 2006 Net proceeds from issuance of long-term debt Net proceeds from issuance of energy recovery bonds Long-term...

  • Page 54
    ... from the Utility, equity issuances, and external financing. PG&E Corporation's uses of cash, on a stand-alone basis, primarily relate to the payment of common stock dividends and common stock repurchases. Borrowings under accounts receivable facility and working capital facility Repayments under...

  • Page 55
    ... arrangements (such as long-term debt, preferred stock, and certain forms of regulatory financing), purchases of transportation capacity, natural gas and electricity to support customer demand, and the purchase of fuel and transportation to support the Utility's generation activities. (See Note...

  • Page 56
    ... enables the Utility to measure usage of electricity on a time-of-use basis and to charge demand-response rates. The main goal of demand-response rates is to encourage customers to reduce energy consumption during peak demand periods and to reduce peak period procurement costs. Advanced meters can...

  • Page 57
    ... the California Coastal Commission to build temporary structures at Diablo Canyon to house the new generators as they are prepared for installation and for certain ofï¬,oading activities. The Utility also has a conditional use permit from San Luis Obispo County to store the old generators on site at...

  • Page 58
    ... a 163-MW power plant to re-power the Utility's existing power plant at Humboldt Bay, which is at the end of its useful life. The CPUC adopted an initial capital cost of the Humboldt Bay project equal to the sum of the fixed contract costs plus the Utility's estimated owner's costs, but limited the...

  • Page 59
    ...' long-term electricity procurement plans covering 2007-2016. The CPUC's decision forecasts that the Utility will need to obtain an additional 800 to 1,200 MW of new generation by 2015 beyond the Utility's planned additions of renewable resources, energy efficiency, and demand reduction programs...

  • Page 60
    ...Cost 2008 Authorized Capital Structure Weighted Cost Long-term debt Preferred stock Common equity Return on rate base 6.02% 5.87% 11.35% 46.00% 2.00% 52.00% 2.77% 0.12% 5.90% 8.79% 6.05% 5.68% 11.35% 46.00% 2.00% 52.00% 2.78% 0.11% 5.90% 8.79% In a second phase of the proceeding, the Utility...

  • Page 61
    ... incurred costs related to the on-site storage facilities are, in the case of Diablo Canyon, recoverable through rates and, in the case of Humboldt Bay Unit 3, recoverable through its decommissioning trust fund. RIS K M AN AGEM EN T AC T IV ITI E S The Utility and PG&E Corporation, mainly through...

  • Page 62
    ...non-core customers may not be fully recoverable. The Utility is subject to price and volumetric risk for the portion of intrastate natural gas transportation and storage capacity that has not been sold under long-term contracts providing for the recovery of all fixed costs through the collection of...

  • Page 63
    ...' electricity demands due to customer and economic growth, weather, implementation of new energy efficiency and demand response programs, direct access, and community choice aggregation; • the acquisition, retirement, or closure of generation facilities; and • changes in market prices that...

  • Page 64
    ... value. Changes in the fair value of the CRRs will be deferred and recorded in regulatory accounts to the extent they are recoverable through rates. Natural Gas Procurement (Electric Portfolio) A portion of the Utility's electric portfolio is exposed to natural gas price risk. The Utility manages...

  • Page 65
    ...-based rates within a cost-of-service framework. The Utility uses value-at-risk to measure the shareholders' exposure to price and volumetric risks resulting from variability in the price of and demand for natural gas transportation and storage services that could impact revenues due to changes in...

  • Page 66
    ... (including current balancing accounts payable) of approximately $5.1 billion. UNBILLED REVENUES The Utility records revenue as electricity and natural gas are delivered. Amounts delivered to customers are determined through the systematic readings of customer meters performed on a monthly...

  • Page 67
    ... balance for ARO by approximately 1.26%. Similarly, an increase in the discount rate by 25 basis points would decrease ARO by 0.95%. At December 31, 2007, the Utility's estimated cost of retiring these assets is approximately $1.6 billion. ACCOUNTING FOR INCOME TAXES PG&E Corporation and the Utility...

  • Page 68
    ... long-term nature of these obligations and the importance of the assumptions utilized, PG&E Corporation's and the Utility's estimate of these costs and obligations is a critical accounting estimate. Actuarial assumptions used in determining pension obligations include the discount rate, the average...

  • Page 69
    ...-term inï¬,ation rate. Equity returns were estimated based on estimates of dividend yield and real earnings growth added to a long-term rate of inï¬,ation. For the Utility's Retirement Plan, the assumed return of 7.4% compares to a ten-year actual return of 7.9%. The rate used to discount pension...

  • Page 70
    ... each input: • Level 1 - "Inputs that are quoted prices (unadjusted) in PG&E Corporation and the Utility are still evaluating the impact of the adjustment to price risk management assets and regulatory liabilities on their Consolidated Balance Sheets. The costs associated with procurement of CRRs...

  • Page 71
    ...typically include some form of "once-through" cooling in which water from natural bodies of water is used to cool a generating facility and the heated water is discharged back into the source. The Utility's Diablo Canyon power plant is among an estimated 539 generation facilities nationwide that are...

  • Page 72
    ... in a number of claims and lawsuits. In approving the original formation of a holding company for the Utility, the CPUC imposed certain conditions, including an obligation by PG&E Corporation's Board of Directors to give "first priority" to the capital requirements of the Utility, as determined to...

  • Page 73
    .... The Utility's financial condition particularly depends on its ability to recover in rates, in a timely manner, the costs of electricity and natural gas purchased for its customers, as well as an adequate return of and on the capital invested in its utility assets, including the long-term debt and...

  • Page 74
    ...peak demand and planning and operating reserves, deliverable to locations and at times as may be necessary to provide reliable electric service. If the CPUC makes comprehensive changes to the program, such as replacing the current structure with a centralized capacity market similar to the organized...

  • Page 75
    ... used for billing and other commercial purposes. The CPUC authorized the Utility to recover $1.74 billion in estimated project costs, including an estimated capital cost of $1.4 billion and approximately $54.8 million for costs related to marketing a new demand response rate based on critical peak...

  • Page 76
    ... owned or under contract by the Utility; implementation of new energy efficiency and demand response programs; the reallocation of the DWR power purchase contracts among California investor-owned electric utilities; and the acquisition, retirement, or closure of generation facilities. The amount of...

  • Page 77
    ... depend on many factors, including changes in the Utility's credit ratings, changes in the federal or state regulatory environment affecting energy companies, increased or natural volatility in electricity or natural gas prices, and general economic and market conditions. The completion of the...

  • Page 78
    ... weather; • supply and demand; • the availability of competitively priced alternative energy sources; • the level of production of natural gas; • the availability of nuclear fuel; • the availability of LNG supplies; • the price of fuels that are used to produce electricity, including...

  • Page 79
    ... also is conducting an informal investigation of the Utility's natural gas distribution maintenance practices. Depending on the results of the Utility's review, the Utility may incur costs, not included in forecasts used to set rates in the GRC, to address any identified issues associated with the...

  • Page 80
    ... of California, IFPTE Local 20, AFL-CIO and CLC covering 1,922 employees at December 31, 2007. The final terms of these new contracts will determine the impact of labor costs on the Utility's future results of operations as the collective bargaining agreements cover 12,929 of the Utility's total 19...

  • Page 81
    ... capacity to enable the Utility to operate Diablo Canyon until approximately 2010 for Unit 1, and 2011 for Unit 2. After receiving a permit from the NRC in March 2004, the Utility began building an on-site dry cask storage facility to store spent fuel through at least 2024. The Utility estimates...

  • Page 82
    ... a material amount of its capital expenditures, fuel costs, operating and maintenance costs, or additional procurement costs due to a determination that the costs were not reasonably or prudently incurred, PG&E Corporation's and the Utility's financial condition, results of operations, and...

  • Page 83
    ... to decommission its nuclear generation facilities and under pension and other post-retirement benefit plans. The value of these assets is subject to market ï¬,uctuations. Also, certain assets held in these trusts do not have readily determinable market values. Changes in the estimates and...

  • Page 84
    ... 31, (in millions, except per share amounts) 2007 2006 2005 Operating Revenues Electric Natural gas Total operating revenues Operating Expenses Cost of electricity Cost of natural gas Operating and maintenance Depreciation, amortization, and decommissioning Total operating expenses Operating Income...

  • Page 85
    ... in 2006) Regulatory balancing accounts Inventories: Gas stored underground and fuel oil Materials and supplies Income taxes receivable Prepaid expenses and other Total current assets Property, Plant, and Equipment Electric Gas Construction work in progress Other Total property, plant, and equipment...

  • Page 86
    ...Liabilities Short-term borrowings Long-term debt, classified as current Rate reduction bonds, classified as current Energy recovery bonds, classified as current Accounts payable: Trade creditors Disputed claims and customer refunds Regulatory balancing accounts Other Interest payable Income taxes...

  • Page 87
    ... funds used during construction Tax benefit from employee stock plans Gain on sale of assets Deferred income taxes and tax credits, net Other changes in noncurrent assets and liabilities Net effect of changes in operating assets and liabilities: Accounts receivable Inventories Accounts payable...

  • Page 88
    ... amortization Common stock dividends declared and paid Common stock dividends declared but not yet paid Tax benefit from employee stock plans Other Balance at December 31, 2005 Net income Comprehensive income Common stock issued Accelerated share repurchase settlement of stock repurchased in 2005...

  • Page 89
    ...fic Gas and Electric Company Year ended December 31, (in millions) 2007 2006 2005 Operating Revenues Electric Natural gas Total operating revenues Operating Expenses Cost of electricity Cost of natural gas Operating and maintenance Depreciation, amortization, and decommissioning Total operating...

  • Page 90
    ... in 2006) Related parties Regulatory balancing accounts Inventories: Gas stored underground and fuel oil Materials and supplies Income taxes receivable Prepaid expenses and other Total current assets Property, Plant, and Equipment Electric Gas Construction work in progress Total property, plant, and...

  • Page 91
    ...-term debt, classified as current Rate reduction bonds, classified as current Energy recovery bonds, classified as current Accounts payable: Trade creditors Disputed claims and customer refunds Related parties Regulatory balancing accounts Other Interest payable Deferred income taxes Other Total...

  • Page 92
    ... capital facility Net issuance (repayments) of commercial paper, net of discount of $1 million in 2007 and $2 million in 2006 Proceeds from issuance of long-term debt, net of discount and issuance costs of $16 million in 2007 and $3 million in 2005 Proceeds from issuance of energy recovery bonds...

  • Page 93
    ... Gas and Electric Company Preferred Stock Without Mandatory Redemption Provisions Accumulated Other Comprehensive Income (Loss) (in millions) Common Stock Additional Paid-in Capital Common Stock Held by Subsidiary Reinvested Earnings Total Shareholders' Equity Comprehensive Income Balance...

  • Page 94
    ...fic Gas and Electric Company ("Utility"), a public utility operating in northern and central California. The Utility engages in the businesses of electricity and natural gas distribution; electricity generation, procurement, and transmission; and natural gas procurement, transportation, and storage...

  • Page 95
    ... Fuel Property, plant, and equipment also includes nuclear fuel inventories. Stored nuclear fuel inventory is stated at weighted average cost. Nuclear fuel in the reactor is expensed as used based on the amount of energy output. Capitalized Software Costs PG&E Corporation and the Utility account for...

  • Page 96
    ... design, estimate, and schedule work. PG&E Corporation and the Utility amortize capitalized software costs ratably over the expected lives of the software ranging from 3 to 15 years, commencing upon operational use. REGUL ATION AND STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 71 PG&E Corporation...

  • Page 97
    ..., short-term borrowings, accounts payable, customer deposits, and the Utility's variable rate pollution control bond loan agreements approximate their carrying values as of December 31, 2007 and 2006. • The fair values of the Utility's fixed rate senior notes, fixed The Utility has identified...

  • Page 98
    ... at their carrying value in the Consolidated Balance Sheets): At December 31, 2007 (in millions) Carrying Amount Fair Value Carrying Amount 2006 Fair Value Debt (Note 4): PG&E Corporation Utility Rate reduction bonds (Note 5)(1) Energy recovery bonds (Note 6) (1) Rate Reduction Bonds matured on...

  • Page 99
    ...CPUC-approved rates. The Utility's revenues are recognized as electricity and natural gas are delivered, and include amounts for services rendered but not yet billed at the end of each year. As further discussed in Note 17, in January 2001, the California Department of Water Resources ("DWR"), began...

  • Page 100
    ... its exposure to ï¬,uctuations in commodity prices. Price risk management activities involve entering into contracts to procure electricity, natural gas, nuclear fuel, and firm transmission rights for electricity. The Utility uses a variety of energy and financial instruments, such as forward...

  • Page 101
    ... and core gas transportation and storage contracts that are not derivative instruments and are not reï¬,ected in the Utility's Consolidated Balance Sheets at fair value. Expenses are recognized as incurred. See Note 12 of the Notes to the Consolidated Financial Statements. ADOPTION OF NEW ACCOUNTING...

  • Page 102
    ... charges in the Market Redesign and Technology Upgrade ("MRTU") day-ahead market. PG&E Corporation and the Utility are still evaluating the impact of the adjustment to price risk management assets and regulatory liabilities on their Consolidated Balance Sheets. The costs associated with procurement...

  • Page 103
    ... for ratemaking purposes. At December 31, 2006, "Other" is primarily related to price risk management contracts entered into by the Utility to procure electricity and natural gas to reduce commodity price risks, which are accounted for as derivatives under SFAS No. 133. The costs and proceeds...

  • Page 104
    .... These revenues will be used by the Utility to promote the use of solar energy in residential homes and commercial, industrial, and agricultural properties. Price risk management liabilities consist of contracts to procure electricity and natural gas with terms in excess of one year designed to...

  • Page 105
    ... Electricity revenue and cost balancing accounts Natural gas revenue and cost balancing accounts Total $618 55 $673 $ 951 79 $1,030 During 2007, the under-collection in the Utility's electricity revenue and cost balancing account assets increased from 2006 mainly due to higher procurement costs...

  • Page 106
    ... or at the Utility's Diablo Canyon Power Plant ("Diablo Canyon"). In 1999, the Utility sold the Geysers Project to Geysers Power Company LLC, a subsidiary of Calpine Corporation. The Geysers Project purchase and sale agreements state that Geysers Power Company LLC will use the facilities solely as...

  • Page 107
    ... 345 454 $1,619 Total credit support (1) Off-balance sheet commitments. (2) Principal and debt service insured by bond insurance companies. Generally, under the loan agreements related to the Utility's pollution control bonds, the Utility, among other things, agrees to pay principal, interest, or...

  • Page 108
    ... aggregate facility by up to $100 million provided certain conditions are met. The fees and interest rates PG&E Corporation pays under the senior credit facility vary depending on the Utility's unsecured debt ratings issued by Standard & Poor's Ratings Service ("S&P") and Moody's Investors Service...

  • Page 109
    ... for natural gas and energy procurement transactions. At December 31, 2007, there were approximately $165 million of letters of credit and $250 million of borrowings outstanding under the working capital facility. In addition, the Utility treats the amount of its outstanding commercial paper...

  • Page 110
    ... the PG&E Corporation Long-Term Incentive Program and the 2006 Long-Term Incentive Plan ("2006 LTIP") and 4,920,648 shares were issued upon the exercise of employee stock options, for the account of 401(k) plan participants, and for the Dividend Reinvestment and Stock Purchase Plan ("DRSPP"). (See...

  • Page 111
    ..., the Board of Directors of PG&E Corporation declared a dividend of $0.36 per share, totaling approximately $137 million that was paid on January 15, 2008 to shareholders of record on December 31, 2007. PG&E Corporation and the Utility record common stock dividends declared to Reinvested Earnings...

  • Page 112
    ... specified for the class and series. On June 15, 2005, the Utility's Board of Directors authorized the redemption of all of the outstanding shares of the Utility's 7.04% Redeemable First Preferred Stock totaling approximately $36 million aggregate par value plus approximately $1 million related to...

  • Page 113
    ... basic" differs from actual per share amounts paid as dividends, as the EPS computation under GAAP requires the use of the weighted average, rather than the actual number, of shares outstanding. PG&E Corporation stock options to purchase 7,285 and 28,500 shares were excluded from the computation of...

  • Page 114
    ...) 2007 2006 Utility 2007 2006 Year ended December 31, Deferred income tax assets: Customer advances for construction Reserve for damages Environmental reserve Compensation Other Total deferred income tax assets Deferred income tax liabilities: Regulatory balancing accounts Property related basis...

  • Page 115
    ..., if not used by 2008, will expire. PG&E Corporation believes it has accrued adequate reserves for tax years that are open for California tax purposes. N O T E 12: DERIVAT IV ES AN D H EDGIN G AC T IV IT IES The Utility enters into contracts to procure electricity, natural gas, nuclear fuel, and...

  • Page 116
    ... of each nuclear unit. In the Utility's 2005 Nuclear Decommissioning Cost Triennial Proceeding ("NDCTP"), used to determine the level of Utility trust contributions and related revenue requirement, the CPUC assumed that the eventual decommissioning of Diablo Canyon Unit 1 would be scheduled to begin...

  • Page 117
    ...costs recovered in rates are placed in nuclear decommissioning trusts. The Utility has three decommissioning trusts for its Diablo Canyon and Humboldt Bay Unit 3 nuclear facilities. The Utility has elected that two of these trusts be treated under the Code as qualified trusts. If certain conditions...

  • Page 118
    ...Diablo Canyon As part of the Nuclear Waste Policy Act of 1982, Congress authorized the U.S. Department of Energy ("DOE") and elec- storage facility. On January 15, 2008, the NRC decided to hold hearings on whether it provided a complete list of the tric utilities with commercial nuclear power plants...

  • Page 119
    ...incurred costs related to the on-site storage facilities are, in the case of Diablo Canyon, recoverable through rates and, in the case of Humboldt Bay Unit 3, recoverable through its decommissioning trust fund. benefit life insurance plans for certain retired employees (referred to collectively as...

  • Page 120
    ... reconcile changes in aggregate projected benefit obligations for pension benefits and changes in the benefit obligation of other benefits during 2007 and 2006: Pension Benefits PG&E Corporation (in millions) 2007 2006 Utility 2007 2006 Projected benefit obligation at January 1 Service cost...

  • Page 121
    ...the fair value of the plan assets, PG&E Corporation and the Utility use publicly quoted market values and independent pricing services depending on the nature of the assets, as reported by the trustee. The following tables reconcile aggregate changes in plan assets during 2007 and 2006: Pension Bene...

  • Page 122
    ... in PG&E Corporation's Consolidated Statements of Income for 2007, 2006, and 2005 is as follows: Pension Benefits December 31, (in millions) 2007 2006 2005 Service cost for benefits earned(1) Interest cost Expected return on plan assets Amortized prior service cost Amortization of unrecognized...

  • Page 123
    ...with SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106. Pre-tax amounts recognized in accumulated other comprehensive income consist of: PG&E Corporation (in millions) 2007 2006 Utility 2007 2006 Pension Benefits: Beginning unrecognized prior service cost Adoption of SFAS No. 158...

  • Page 124
    ... inï¬,ation rate. Equity returns were estimated based on estimates of dividend yield and real earnings growth added to a long-term rate of inï¬,ation. For the Utility pension plan, the assumed return of 7.4% compares to a ten-year actual return of 7.9%. The rate used to discount pension and other...

  • Page 125
    ... interest rate sensitivity of the plans' assets with that of the plans' liabilities. Changes in the value of these investments will affect future contributions to the trust and net periodic benefit cost on a lagged basis. CASH FLOW INFORMATION Employer Contributions PG&E Corporation and the Utility...

  • Page 126
    ...funds available to the plan at any time after they have been credited to the employee's account. Employer contribution expense reï¬,ected in PG&E Corporation's Consolidated Statements of Income amounted to: (in millions) PG&E Corporation Utility PG&E Corporation Supplemental Retirement Savings Plan...

  • Page 127
    ... continue to be governed by the terms and conditions of the PG&E Corporation Long-Term Incentive Program. PG&E Corporation and the Utility use an estimated annual forfeiture rate of 2%, based on historic forfeiture rates, for purposes of determining compensation expense for share-based incentive...

  • Page 128
    ..., certain non-employee directors of PG&E Corporation were awarded stock options. The following table summarizes stock option activity for the Utility for 2007: Weighted Average Remaining Contractual Term Options Shares Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding at...

  • Page 129
    ... was approximately $20 million of total unrecognized compensation cost relating to restricted stock, of which $15 million related to the Utility. The cost is expected to be recognized over a weighted average period of 1.4 years by PG&E Corporation and the Utility. Performance Shares During 2007, PG...

  • Page 130
    ... Corporation, and among themselves. The Utility and PG&E Corporation exchange administrative and professional services in support of operations. Services are priced at their fully loaded costs (i.e., direct cost of good or service plus all applicable indirect charges and overheads). PG&E Corporation...

  • Page 131
    ... CPUC required California investor-owned electric utilities to enter into long-term power purchase agreements with QFs and approved the applicable terms, conditions, prices, and eligibility requirements. These agreements require the Utility to pay for energy and capacity. Energy payments are based...

  • Page 132
    ... electricity purchased from renewable resources equals at least 20% of its total retail sales by the end of 2010. During 2007, the Utility entered into several new renewable power purchase contracts that will help the Utility meet its goals. The CPUC's decision in the Utility's long-term procurement...

  • Page 133
    ... gas procurement contracts have ï¬,uctuated generally based on market conditions. At December 31, 2007, the Utility's undiscounted obligations for natural gas purchases and gas transportation services were as follows: (in millions) 2008 2009 2010 2011 2012 Thereafter Total fixed capacity payments...

  • Page 134
    ... coverage of up to $3.24 billion per incident for Diablo Canyon. In addition, NEIL provides $131 million of property damage insurance for Humboldt Bay Unit 3. Under this insurance, if any nuclear generating facility insured by NEIL suffers a catastrophic loss causing a prolonged outage, the Utility...

  • Page 135
    ...loss-sharing program is required for all owners of nuclear reactors that are licensed to operate, designed for the production of electrical energy, and have a rated capacity of 100 MW or higher. If a nuclear incident results in costs in excess of $300 million, then the Utility may be responsible for...

  • Page 136
    ...typically include some form of "once-through" cooling in which water from natural bodies of water is used to cool a generating facility and the heated water is discharged back into the source. The Utility's Diablo Canyon power plant is among an estimated 539 generation facilities nationwide that are...

  • Page 137
    ... Board require the installation of cooling towers at Diablo Canyon, and if installation of such cooling towers is not technically or economically feasible, the Utility may be forced to cease operations at Diablo Canyon. CALIFORNIA L ABOR CODE ISSUES Approximately 12,929 of the Utility's employees...

  • Page 138
    ...operations, diluted Net income per common share, basic Net income per common share, diluted Common stock price per share: High Low Utility Operating revenues Operating income Net income Income available for common stock 2006 PG&E Corporation Operating revenues Operating income Income from continuing...

  • Page 139
    ... PG&E Corporation's and the Utility's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting...

  • Page 140
    .... In 2006 the Company and the Utility adopted new accounting standards for defined benefit pensions and other postretirement plans and sharebased payments. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's and the...

  • Page 141
    ... of the Company and the Utility and our report dated February 21, 2008 expressed an unqualified opinion on those financial statements and financial statement schedules and included an explanatory paragraph relating to accounting changes. DELOITTE & TOUCHE LLP San Francisco, California February 21...

  • Page 142
    ... Y.H. Cheng PG&E Corporation One Market, Spear Tower, Suite 2400 San Francisco, CA 94105-1126 On May 17, 2007, Peter A. Darbee, Chairman of the Board, Chief Executive Officer, and President of PG&E Corporation submitted an Annual CEO Certification to the New York Stock Exchange, certifying that he...

  • Page 143
    ... PACIFIC GAS AND ELECTRIC COMPANY ( 1) DAVI D R. AND REW S L E S L IE S . B IL L E R DAV ID A . C O U LTE R Senior Vice President, Government Affairs, General Counsel, and Secretary, Retired, PepsiCo, Inc. Vice Chairman and Chief Operating Officer, Retired, Wells Fargo & Company Managing Director...

  • Page 144
    ... financial plans; dividend policy; short-term and long-term financing plans; proposed capital projects; proposed divestitures; strategic plans and initiatives; major commercial and investment banking, financial consulting, and other financial relationships; and risk management activities. Annually...

  • Page 145
    ...Chief Information Officer NANC Y E . M C FA D D E N Vice President, Gas Transmission and Distribution MARK S. JOHNSON Senior Vice President, Human Resources L INDA Y.H. CH EN G Senior Vice President, Public Affairs EDWARD A . S A L A S Vice President, Corporate Governance and Corporate Secretary...

  • Page 146
    ... Reinvestment and Stock Purchase Plan P. O. Box 358015 Pittsburgh, PA 15252-8015 Toll-free telephone services: 1.800.719.9056 Website: www.melloninvestor.com If you have general questions about PG&E Corporation or Pacific Gas and Electric Company, please contact the Corporate Secretary's Office...

  • Page 147
    ... May 14, 2008 Time: 10:00 a.m. Location: San Ramon Valley Conference Center 3301 Crow Canyon Road San Ramon, California A joint notice of the annual meetings, joint proxy statement, and proxy card are being mailed with this annual report on or about April 2, 2008, to all shareholders of record as of...

  • Page 148