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34
OVERVIEW
PG&E Corporation, incorporated in California in 1995, is a
holding company whose primary purpose is to hold interests
in energy-based businesses. PG&E Corporation conducts
its business principally through Pacifi c Gas and Electric
Company (the “Utility”), a public utility operating in northern
and central California. The Utility engages in the busi-
nesses of electricity and natural gas distribution; electricity
generation, procurement, and transmission; and natural gas
procurement, transportation, and storage. PG&E Corporation
became the holding company of the Utility and its subsid-
iaries on January 1, 1997. Both PG&E Corporation and the
Utility are headquartered in San Francisco, California.
The Utility served approximately 5.1 million electricity
distribution customers and approximately 4.3 million natural
gas distribution customers at December 31, 2008. The Utility
had approximately $40.5 billion in assets at December 31,
2008 and generated revenues of approximately $14.6 billion
in the 12 months ended December 31, 2008.
The Utility 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 Utility to recover its
authorized “revenue requirements” from customers. Revenue
requirements are designed to allow the Utility an opportu-
nity to recover its reasonable costs of providing utility
services, including a return of, and a fair rate of return
on, its investment in Utility facilities (“rate base”). Changes
in any individual revenue requirement affect customer
rates and could affect the Utility’s revenues.
This is a combined annual report of PG&E Corpora-
tion and the Utility, and includes separate Consolidated
Financial Statements for each of these two entities. PG&E
Corporation’s Consolidated Financial Statements include
the accounts of PG&E Corporation, the Utility, and other
wholly owned and controlled subsidiaries. The Utility’s
Consolidated Financial Statements include the accounts of
the Utility and its wholly owned and controlled subsidiaries,
as well as the accounts of variable interest entities for which
the Utility absorbs a majority of the risk of loss or gain.
This combined Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”)
of PG&E Corporation and the Utility should be read in
conjunction with the Consolidated Financial Statements and
the Notes to the Consolidated Financial Statements included
in this annual report.
SUMMARY OF CHANGES IN
EARNINGS PER COMMON SHARE
AND NET INCOME FOR 2008
PG&E Corporation’s diluted earnings per common share
(“EPS”) for 2008 was $3.63 per share, compared to $2.78 per
share for 2007. PG&E Corporation’s 2008 net income increased
by approximately $332 million, or 33%, to $1,338 million,
compared to 2007 net income of $1,006 million. The increase
in diluted EPS and net income in 2008 is primarily due
to a settlement of federal tax audits of PG&E Corporation’s
consolidated tax returns for 2001 through 2004, which
increased net income by $257 million. (Approximately
$154 million of this amount has been reported as discon-
tinued operations on PG&E Corporation’s Consolidated
Statements of Income because it relates to a former sub-
sidiary of PG&E Corporation, National Energy & Gas
Transmission, Inc. (“NEGT”), which PG&E Corporation
disposed of in 2004.) The 2008 increase in diluted EPS
and net income also includes approximately $98 million
representing the Utility’s return on equity (“ROE”) on
higher authorized capital investments, and approximately
$25 million in incentive earnings awarded by the CPUC in
2008 for the Utility’s energy effi ciency program performance
in 2006 and 2007.
These increases in net income were partially offset by
higher operating and maintenance expenses of approximately
$50 million, due to storm-related outages, natural gas system
maintenance activities, and the extended outage to replace
the steam generators in one of the nuclear generating units
at the Utility’s Diablo Canyon nuclear generating facilities
(“Diablo Canyon”).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS