PG&E 2008 Annual Report Download - page 48

46
These increases were partially offset by a reduction of
approximately $34 million in the interest expense related
to the declining balance of the ERBs and RRBs. In addition,
other interest expense, including lower interest expense on
balances in certain regulatory balancing accounts, decreased
approximately $3 million.
The Utility’s interest expense in 2009 and future periods
will be impacted by changes in interest rates, as well as by
changes in the amount of debt outstanding as long-term debt
matures and additional long-term debt is issued (see “Liquidity
and Financial Resources” below for further discussion).
Other Income (Expense), Net
The Utility’s other income (expense), net, decreased by approx-
imately $24 million, or 63%, in 2008 compared to 2007. This
decrease is primarily due to an increase in costs of approxi-
mately $24 million that was spent in 2008 to oppose the
statewide initiative related to renewable energy (Proposition 7)
and the City of San Francisco’s municipalization efforts.
Income Tax Expense
The Utility’s income tax expense decreased by approximately
$83 million, or 15%, in 2008 compared to 2007. The effec-
tive tax rates were 28.9% and 35.8% for 2008 and 2007,
respectively. The decrease in the effective tax rate for 2008
was primarily due to a settlement of federal tax audits for
the tax years 2001 through 2004 and approval by the Internal
Revenue Service (“IRS”) of the Utility’s change in accounting
method for the capitalization of indirect service costs for
tax years 2001 through 2004. (See “Tax Matters” below
and Note 10 of the Notes to the Consolidated Financial
Statements for a discussion of “Income Taxes.”)
The Utility’s income tax expense decreased by approxi-
mately $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, due to an
increase in tax-deductible decommissioning expense in 2007
compared to 2006. The effective tax rates were 35.8% and
38.0% for 2007 and 2006, respectively.
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.
the settlement of refund claims made against electricity
suppliers for overcharges incurred during the 2000-2001
California energy crisis. (See Note 15 of the Notes to the
Consolidated Financial Statements.) In addition, other inter-
est income, including interest income associated with certain
balancing accounts, increased by approximately $6 million.
The Utility’s interest income in 2009 and future periods
will be primarily affected by changes in the balance held
in escrow related to disputed claims and changes in interest
rate levels.
Interest Expense
The Utility’s interest expense decreased by approximately
$34 million, or 5%, in 2008 as compared to 2007. Interest
expense decreased primarily due to the following factors:
• Interest expense decreased by approximately $29 million,
primarily due to lower FERC interest rates accrued on the
liability for disputed claims.
• Interest expense decreased by approximately $26 million,
due to the reduction in the outstanding balance of ERBs
and the maturity of the RRBs in December 2007.
• Interest expense on pollution control bonds decreased by
approximately $20 million due to the repurchase of auction-
rate pollution control bonds in March and April 2008.
The Utility partially refunded these bonds in September
and October 2008. Additionally, interest expense decreased
due to lower interest rates on outstanding variable rate
pollution control bonds.
• Interest expense decreased by approximately $24 million,
primarily due to lower interest rates affecting various
balancing accounts.
• Other interest expense decreased by approximately
$14 million, primarily due to a lower balance of borrow-
ings outstanding under the Utility’s $2 billion revolving
credit facility and lower commercial paper interest rates.
These decreases were partially offset by additional inter-
est expense of approximately $79 million in 2008, primarily
related to $1.8 billion in senior notes that were issued in
March, October, and November 2008.
In 2007, the Utility’s interest expense increased by
approximately $22 million, or 3%, compared to 2006,
including approximately $19 million of higher interest
expense related to disputed claims as a result of an increase
in the FERC-mandated interest rate (see Note 15 of the
Notes to the Consolidated Financial Statements). In addi-
tion, interest expense related to $1.2 billion in long-term
debt issued in 2007 and variable rate pollution control bond
loan agreements increased by approximately $40 million.