PG&E 2007 Annual Report Download - page 106

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Convertible Subordinated Notes are entitled to receive
“pass-through dividends” determined by multiplying the cash
dividend paid by PG&E Corporation per share of common
stock by a number equal to the principal amount of the
Convertible Subordinated Notes divided by the conversion
price. During 2007, PG&E Corporation paid approximately
$26 million of “pass-through dividends” to the holders of
Convertible Subordinated Notes. On January 15, 2008, PG&E
Corporation paid approximately $7 million of “pass-through
dividends.” Since no holders of the Convertible Subordi-
nated Notes exercised the one-time right to require PG&E
Corporation to repurchase the Convertible Subordinated
Notes on June 30, 2007, PG&E Corporation reclassifi ed
the Convertible Subordinated Notes as a noncurrent liabil-
ity (in Noncurrent Liabilities — Long-Term Debt) in the
Consolidated Balance Sheets effective as of that date.
In accordance with SFAS No. 133, the dividend partici-
pation rights component of the Convertible Subordinated
Notes is considered to be an embedded derivative instrument
and, therefore, must be bifurcated from the Convertible
Subordinated Notes and recorded at fair value in PG&E
Corporation’s Consolidated Financial Statements. Dividend
participation rights are recognized as operating cash fl ows
in PG&E Corporation’s Consolidated Statements of Cash
Flows. Changes in the fair value are recognized in PG&E
Corporation’s Consolidated Statements of Income as a
non-operating expense or income (in Other Income, Net).
At December 31, 2007 and December 31, 2006, the total
estimated fair value of the dividend participation rights
component, on a pre-tax basis, was approximately $62 mil-
lion and $79 million, respectively, of which $25 million
and $23 million, respectively, was classifi ed as a current
liability (in Current Liabilities — Other) and $37 million
and $56 million, respectively, was classifi ed as a noncurrent
liability (in Noncurrent Liabilities — Other) in the accom-
panying Consolidated Balance Sheets.
UTILITY
Senior Notes
In March 2007, the Utility issued $700 million principal
amount of 5.80% Senior Notes due March 1, 2037. The
Utility received proceeds of $690 million from the offering,
net of a $4 million discount and $6 million in issuance costs.
In December 2007, the Utility issued $500 million principal
amount of 5.625% Senior Notes due November 30, 2017.
The Utility received proceeds of $494 million from the offer-
ing, net of a $3 million discount and $3 million in issuance
costs. The proceeds from the sale of the Senior Notes were
used for capital expenditures and working capital purposes.
The Utility’s Senior Notes are unsecured and rank equally
with the Utility’s other senior unsecured and unsubordinated
debt. Under the indenture for the Senior Notes, the Utility
has agreed that it will not incur secured debt or engage in
sale leaseback transactions (except for (1) debt secured by
specifi ed liens, and (2) aggregate other secured debt and sales
and leaseback transactions not exceeding 10% of the Utility’s
net tangible assets, as defi ned in the indenture) unless the
Utility provides that the Senior Notes will be equally and
ratably secured.
Pollution Control Bonds
The California Pollution Control Financing Authority and
the California Infrastructure and Economic Development
Bank issued various series of tax-exempt pollution control
bonds for the benefi t of the Utility. At December 31, 2007,
pollution control bonds in the aggregate principal amount
of $1.6 billion were outstanding. Under the pollution control
bond loan agreements, the Utility is obligated to pay on the
due dates an amount equal to the principal, premium, if any,
and interest on these bonds to the trustees for these bonds.
All of the pollution control bonds fi nanced or refi nanced
pollution control facilities at the Utility’s Geysers geothermal
power plant (“Geysers Project”), 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 pur-
chase and sale agreements state that Geysers Power Company
LLC will use the facilities solely as pollution control facilities
within the meaning of Section 103(b)(4)(F) of the Internal
Revenue Code and associated regulations (“Code”).
On February 3, 2006, Geysers Power Company LLC fi led
a petition for relief under Chapter 11 of the Bankruptcy
Code with the United States Bankruptcy Court for the
Northern District of California (the “Bankruptcy Court”).
On December 19, 2007, the Bankruptcy Court entered an
order confi rming the Plan of Reorganization (the “Plan”)
fi led by Calpine Corporation and related debtors, including
Geysers Power Company LLC. The Plan became effective
on January 31, 2008. Pursuant to the Plan, Geysers Power
Company LLC assumed the purchase and sale agreements.
The Utility believes that the Geysers Project will continue to
meet the use requirements of the Code.