PG&E 2007 Annual Report Download - page 49

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In 2006, the Utility’s interest expense increased by
approximately $156 million, or 28%, compared to 2005,
primarily due to an increase in interest expense related to
Disputed Claims, interest expense associated with the ERBs,
and accrued interest on higher balances in certain regula-
tory balancing accounts. Increased interest rates associated
with these accounts also contributed to this higher interest
expense. These increases were partially offset by lower
interest expense on the declining balance of RRBs.
The Utility’s interest expense in 2008 will be impacted by
changes in interest rates as the Utility’s short-term debt and
a portion of its long-term debt bear variable interest rates,
as well as by changes in the amount of debt, including debt
expected to be issued in subsequent periods to fi nance capital
expenditures. (See “Liquidity and Financial Resources” below.)
Income Tax Expense
The Utility’s income tax expense decreased by approximately
$31 million, or 5%, in 2007 compared to 2006, primarily
due to a decrease of approximately $29 million as a result of
fi xed asset related tax deductions, mainly due to an increase
in tax-deductible decommissioning expense in 2007 com-
pared to 2006. The effective tax rates were 35.8% and 38.0%
for 2007 and 2006, respectively.
The Utility’s income tax expense increased by approxi-
mately $28 million, or 5%, in 2006 compared to 2005, pri-
marily due to an increase in pre-tax income of $79 million
for 2006. The effective tax rate was 38.0% for both 2006
and 2005.
PG&E CORPORATION,
ELIMINATIONS, AND OTHER
Operating Revenues and Expenses
PG&E Corporation’s revenues consist mainly of billings to
its affi liates for services rendered, all of which are eliminated
in consolidation. PG&E Corporation’s operating expenses
consist mainly of employee compensation and payments
to third parties for goods and services. Generally, PG&E
Corporation’s operating expenses are allocated to affi liates.
These allocations are made without mark-up and are elimi-
nated in consolidation. PG&E Corporation’s interest expense
relates to its 9.50% Convertible Subordinated Notes and is
not allocated to affi liates.
There were no material changes to PG&E Corporation’s
operating income in 2007 compared to 2006 and in 2006
compared to 2005.
Income Tax Benefi t
PG&E Corporation’s income tax benefi t in 2007 decreased
approximately $16 million, or 33%, compared to 2006, pri-
marily due to a tax benefi t booked in 2006 related to capital
losses carried forward and used in PG&E Corporation’s
2005 consolidated federal and state income tax returns with
no comparable benefi t in 2007.
PG&E Corporation’s income tax benefi t in 2006 increased
approximately $18 million, or 60%, compared to 2005 pri-
marily due to tax benefi ts related to capital losses carried
forward and used in PG&E Corporation’s 2005 consolidated
federal and state income tax returns.
Discontinued Operations
In 2005, PG&E Corporation received additional informa-
tion from its former subsidiary, NEGT, regarding PG&E
Corporation’s 2004 and 2003 federal income tax returns. As
a result, PG&E Corporation recorded $13 million in income
from discontinued operations in 2005. (See Note 7 of the
Notes to the Consolidated Financial Statements.)
LIQUIDITY AND
FINANCIAL RESOURCES
OVERVIEW
The level of PG&E Corporation’s and the Utility’s current
assets and current liabilities may fl uctuate as a result of
seasonal demand for electricity and natural gas, energy com-
modity costs, collateral requirements, the timing and effect
of regulatory decisions and fi nancings, and the amount and
timing of capital expenditures, among other factors.
PG&E Corporation and the Utility manage liquidity and
debt levels in order to meet expected operating and fi nancial
needs and maintain access to credit for contingencies. At
December 31, 2007, PG&E Corporation and its subsidiar-
ies had consolidated cash and cash equivalents of approxi-
mately $345 million and restricted cash of approximately
$1.3 billion. At December 31, 2007, PG&E Corporation
on a stand-alone basis had cash and cash equivalents of
approximately $204 million; the Utility had cash and cash
equivalents of approximately $141 million and restricted
cash of approximately $1.3 billion. Restricted cash primarily
consists of approximately $1.2 billion of cash held in escrow
pending the resolution of the remaining Disputed Claims as
well as deposits made under certain third-party agreements.
PG&E Corporation and the Utility maintain separate bank
accounts. PG&E Corporation and the Utility primarily
invest their cash in money market funds.