PG&E 2007 Annual Report Download - page 37

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coordinator (“SC”) costs that the Utility began incurring
in 1998 (representing a $77 million decrease in net income
as compared to 2006), (2) the recovery of certain interest
and litigation costs following the CPUC’s completion of
a verifi cation audit (representing a $39 million decrease in
net income as compared to 2006), and (3) a decrease in the
amount accrued for long-term disability benefi ts and a tax
benefi t recognized in 2006 related to a tax loss carry forward
(representing a $26 million decrease in net income as com-
pared to 2006).
KEY FACTORS AFFECTING RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
PG&E Corporation and the Utility’s results of operations
and fi nancial condition depend primarily on whether the
Utility is able to operate its business within authorized
revenue requirements, timely recover its authorized costs,
and earn its authorized rate of return. A number of factors
have had, or are expected to have, a signifi cant impact on
PG&E Corporation’s and the Utility’s results of operations
and fi nancial condition, including:
• The Outcome of Regulatory Proceedings — The amount
of the Utility’s revenues and the amount of costs that the
Utility is authorized to recover from customers are prima-
rily determined through regulatory proceedings. The timing
of CPUC and FERC decisions also affect when the Utility
is able to record the authorized revenues. In March 2007,
the CPUC issued a decision in the 2007 GRC, effective
January 1, 2007, establishing a $4.9 billion annual rev-
enue requirement for the Utility’s electric and natural gas
distribution operations and its electric generation opera-
tions for 2007 through 2010, with authorized increases
in each of 2008, 2009, and 2010. In June 2007, the FERC
approved the Utility’s annual electric transmission retail
revenue requirement at $674 million, effective March 1,
2007. In addition, in September 2007, the FERC accepted
the Utility’s proposed electric transmission retail revenue
requirement effective March 1, 2008, subject to hearing
and refund, an amount that would represent a revenue
increase of approximately $78 million over March 1, 2007
rates. In September 2007, the CPUC approved a multi-
party settlement agreement (known as the Gas Accord IV)
that establishes the Utility’s natural gas transmission and
storage rates and associated revenue requirements for 2008
through 2010, with 2008 rates set at $446 million with
slight escalations in each subsequent year. Finally,
during 2007, the CPUC established incentive ratemaking
mechanisms applicable to the California investor-owned
utilities’ implementation of their energy effi ciency pro-
grams funded for the 2006–2008 and 2009–2011 program
cycles. The maximum amount of incentives that the
Utility could earn (and the maximum amount that
the Utility could be required to reimburse customers)
over the 2006–2008 program cycle is $180 million. The
actual amount and timing of the fi nancial impact will
depend on the level of energy effi ciency savings actually
achieved over the three-year program cycle, the amount of
the savings attributable to the Utility’s energy effi ciency
programs, and when the applicable accounting standard
for recognizing incentives or reimbursement obligations is
met. The outcome of various other pending regulatory pro-
ceedings also could have a material effect on the Utility’s
results of operations. (See “Regulatory Matters” below.)
• Capital Structure and Return on Common Equity — In 2007,
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 that included a 52% common equity component.
On December 20, 2007, the CPUC authorized the Utility
to earn the same ROE and maintain the same capital
structure in 2008. In December 2007, Moody’s Investors
Service (“Moody’s”) upgraded the Utility’s credit rating
to A3, thereby terminating a provision in the December
2003 settlement agreement among PG&E Corporation,
the Utility, and the CPUC to resolve the Utility’s pro-
ceeding under Chapter 11 of the U.S. Bankruptcy Code
(“Chapter 11 Settlement Agreement”) that had required
the CPUC to authorize a minimum ROE for the Utility
of 11.22% and a minimum common equity component of
52% until the Utility received a credit rating of “A3” from
Moody’s or “A-” from Standard & Poor’s Ratings Service
(“S&P”). (See “Liquidity and Financial Resources” below.)