-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RuuemvkoeAa1/q9izxkcWMeUVZoiZBrObZXluagT64ItCOMTUGY/fcsxvKBiim6r 9MMUI5LN7vZpy7Hj1gLRFA== 0000929624-00-000321.txt : 20000309 0000929624-00-000321.hdr.sgml : 20000309 ACCESSION NUMBER: 0000929624-00-000321 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PG&E CORP CENTRAL INDEX KEY: 0001004980 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 943234914 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-01103 FILM NUMBER: 563035 BUSINESS ADDRESS: STREET 1: ONE MARKET SPEAR TOWER STREET 2: SUITE 2400 CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4152677000 MAIL ADDRESS: STREET 1: ONE MARKET SPEAR TOWER STREET 2: SUITE 2400 CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: PG&E PARENT CO INC DATE OF NAME CHANGE: 19951214 10-K 1 FORM 10-K -- PG&E CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
IRS Employer Commission Exact Name of Registrant State of Identification File Number as specified in its charter Incorporation Number ----------- --------------------------- ------------- -------------- 1-12609 PG&E CORPORATION California 94-3234914 1-2348 PACIFIC GAS AND ELECTRIC COMPANY California 94-0742640
Pacific Gas and Electric Company PG&E Corporation 77 Beale Street One Market, Spear Tower P.O. Box 770000 Suite 2400 San Francisco, California San Francisco, California (Address of principal executive (Address of principal executive offices) offices) 94177 94105 (Zip Code) (Zip Code) (415) 973-7000 (415) 267-7000 (Registrant's telephone number, (Registrant's telephone number, including area code) including area code) Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Title of Each Class Which Registered ------------------- --------------------------- PG&E Corporation Common Stock, no par value New York Stock Exchange and Pacific Exchange Pacific Gas and Electric Company First Preferred Stock, cumulative, American Stock Exchange and par value $25 per share: Pacific Exchange Redeemable: 7.04%, 5% Series A, 5%, 4.80%, 4.50%, 4.36% Mandatorily Redeemable: 6.57%, 6.30% Nonredeemable: 6%, 5.50%, 5% 7.90% Cumulative Quarterly Income Preferred American Stock Exchange and Securities, Series A (liquidation preference Pacific Exchange $25), issued by PG&E Capital I and guaranteed by Pacific Gas and Electric Company
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Aggregate market value of the voting stock held by non-affiliates of the registrant as of February 22, 2000: PG&E Corporation Common Stock $8,095 million Pacific Gas and Electric Company First Preferred Stock $331 million Common Stock outstanding as of February 22, 2000: PG&E Corporation: 384,825,799 Pacific Gas and Electric Company: Wholly owned by PG&E Corporation The market values of certain series of First Preferred Stock, for which market prices as of a date within 60 days prior to the date of filing were not available, were derived by dividing the annual dividend rate of each such series of stock by the average yield of all of Pacific Gas and Electric Company's Preferred Stock outstanding for which market prices were available. DOCUMENTS INCORPORATED BY REFERENCE Portions of the documents listed below have been incorporated by reference into the indicated parts of this report, as specified in the responses to the item numbers involved. (1) Designated portions of the combined Annual Report to Shareholders for the year ended December 31, 1999..... Part I (Item 1), Part II (Items 5, 6, 7, 7A, and 8) Part IV (Item 14) (2) Designated portions of the Joint Proxy Statement relating to the 2000 Annual Meetings of Shareholders.. Part III (Items 10, 11, 12, and 13)
TABLE OF CONTENTS
Page ---- Glossary of Terms.............................................. iii PART I Item 1. Business....................................................... 1 GENERAL........................................................ 1 Corporate Structure and Business............................... 1 Competition and the Changing Regulatory Environment............ 2 Regulation of PG&E Corporation................................. 3 Regulation of Pacific Gas and Electric Company................. 4 State Regulation............................................. 4 Federal Regulation........................................... 4 Licenses and Permits......................................... 4 Regulation of the National Energy Group........................ 4 Risk Management Programs....................................... 5 UTILITY OPERATIONS............................................. 7 Ratemaking Mechanisms.......................................... 7 Electric Ratemaking.......................................... 8 Gas Ratemaking............................................... 11 Electric Utility Operations.................................... 12 California Electric Industry Restructuring................... 12 The California Independent System Operator and the California Power Exchange................................. 12 Voluntary Generation Asset Divestiture..................... 13 Recovery of Transition Costs............................... 14 Retail Direct Access....................................... 14 Rate Levels and Rate Reduction Bonds....................... 15 Public Purpose Programs.................................... 15 Distributed Generation and Electric Distribution Competition............................................... 15 Electric Operating Statistics.................................. 16 Electric Generating Capacity................................... 17 Diablo Canyon.................................................. 18 Diablo Canyon Operations..................................... 18 Diablo Canyon Ratemaking..................................... 19 Nuclear Fuel Supply and Disposal............................. 19 Insurance.................................................... 20 Decommissioning.............................................. 20 Other Electric Resources....................................... 21 QF Generation and Other Power Purchase Contracts............. 21 Electric Transmission and Distribution......................... 22 Gas Utility Operations......................................... 23 Gas Operating Statistics....................................... 24 Natural Gas Supplies........................................... 25 Gas Regulatory Framework....................................... 25 Transportation Commitments..................................... 26 Core Procurement Incentive Mechanism........................... 27 NATIONAL ENERGY GROUP.......................................... 28 Gas Transmission Operations.................................... 28
i TABLE OF CONTENTS--(Continued)
Page ---- PG&E Gas Transmission, Texas................................ 28 PG&E GT-Northwest........................................... 29 Independent Power Generation.................................. 30 New England Operations...................................... 30 Portfolio of Operating Generating Plants...................... 31 Generation Development Projects............................. 32 Energy Trading................................................ 32 Energy Services............................................... 33 ENVIRONMENTAL MATTERS......................................... 34 Environmental Matters......................................... 34 Environmental Protection Measures........................... 34 Air Quality................................................. 34 Water Quality............................................... 35 Hazardous Waste Compliance and Remediation.................. 36 Potential Recovery of Hazardous Waste Compliance and Remediation Costs.......................................... 37 Compressor Station Litigation............................... 38 Electric and Magnetic Fields................................ 38 Low Emission Vehicle Programs............................... 38 Item 2. Properties.................................................... 39 Item 3. Legal Proceedings............................................. 39 Compressor Station Chromium Litigation........................ 39 Texas Franchise Fee Litigation................................ 40 Item 4. Submission of Matters to a Vote of Security Holders........... 42 EXECUTIVE OFFICERS OF THE REGISTRANTS......................... 43 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.......................................... 46 Item 6. Selected Financial Data....................................... 46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 46 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 46 Item 8. Financial Statements and Supplementary Data................... 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 47 PART III Item 10. Directors and Executive Officers of the Registrant............ 47 Item 11. Executive Compensation........................................ 47 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 47 Item 13. Certain Relationships and Related Transactions................ 47 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................................... 48 Signatures.................................................... 52 Independent Auditors' Report (Deloitte & Touche LLP).......... 53 Independent Auditors' Report (Arthur Andersen LLP)............ 54 Report of Independent Public Accountants (Arthur Andersen LLP)......................................................... 55
ii GLOSSARY OF TERMS AB 1890.................... Assembly Bill 1890, the California electric industry restructuring legislation AEAP....................... Annual Earnings Assessment Proceeding ATCP....................... Annual Transition Cost Proceeding BCAP....................... Biennial Cost Allocation Proceeding bcf........................ billion cubic feet BRPU....................... Biennial Resource Plan Update BTA........................ best technology available Btu........................ British thermal unit CARE....................... California Alternate Rates for Energy CCAA....................... California Clean Air Act CEC........................ California Energy Commission CEMA....................... Catastrophic Event Memorandum Account Central Coast Board........ Central Coast Regional Water Quality Control Board CERCLA..................... Comprehensive Environmental Response, Compensation, and Liability Act core customers............. residential and smaller commercial gas customers core subscription customers................. noncore customers who choose bundled service CPIM....................... core procurement incentive mechanism CPUC....................... California Public Utilities Commission CTC........................ competition transition charge Diablo Canyon.............. Diablo Canyon Nuclear Power Plant DOE........................ United States Department of Energy DSM........................ demand side management EDRA....................... Electric Deferred Refund Account El Paso.................... El Paso Natural Gas Company EMF........................ electric and magnetic fields EPA........................ United States Environmental Protection Agency ERCA....................... Electric Restructuring Costs Account FERC....................... Federal Energy Regulatory Commission Gas Accord................. Gas Accord Settlement Geysers.................... The Geysers Power Plant GRC........................ General Rate Case Holding Company Act........ Public Utility Holding Company Act of 1935 Humboldt................... Humboldt Bay Power Plant HWRC....................... hazardous waste remediation costs ICIP....................... Incremental Cost Incentive Price IPP........................ Independent power producer ISO........................ Independent System Operator kV......................... kilovolts kVa........................ kilovolt-amperes kW......................... kilowatts kWh........................ kilowatt-hour LEV........................ low emission vehicle Mcf........................ thousand cubic feet MDt........................ thousand decatherms MMcf....................... million cubic feet MMcf/d..................... million cubic feet per day MW......................... megawatts MWh........................ megawatt-hour NEES....................... New England Electric System NEIL....................... Nuclear Electric Insurance Limited
iii GLOSSARY OF TERMS--(Continued) NGL........................ natural gas liquids noncore customers.......... industrial and larger commercial gas customers NOx........................ oxides of nitrogen NRC........................ Nuclear Regulatory Commission Nuclear Waste Act.......... Nuclear Waste Policy Act of 1982 ORA........................ Office of Ratepayer Advocates, a division of the California Public Utilities Commission PBR........................ performance-based ratemaking PG&E Expansion............. the Pacific Gas and Electric Company portion of the Pipeline Expansion PG&E ET.................... PG&E Corporation's energy commodities activities, PG&E Energy Trading or PG&E ET PG&E ES.................... PG&E Corporation's energy services operations, PG&E Energy Services or PG&E ES PG&E Gen................... PG&E Generating Company, LLC and its affiliates PG&E GT.................... PG&E Corporation's gas transmission operations, PG&E Gas Transmission or PG&E GT PG&E GT-Northwest.......... PG&E Gas Transmission, Northwest Corporation formerly known as Pacific Gas Transmission Company PG&E GT NW Expansion....... PG&E Gas Transmission, Northwest Corporation's portion of the Pipeline Expansion PG&E GTT................... PG&E Gas Transmission, Texas Corporation PG&E OSC................... PG&E Operating Services Company Pipeline Expansion......... PG&E GT NW/PG&E Pipeline Expansion PPPs....................... public purpose programs PRP........................ potentially responsible party PURPA...................... Public Utility Regulatory Policies Act of 1978 PX......................... California Power Exchange QF......................... qualifying facility RAP........................ Revenue Adjustment Proceeding RRC........................ The Railroad Commission of Texas SEC........................ Securities and Exchange Commission SOS........................ Standard Offer Service Teco....................... Teco Pipeline Company TCBA....................... Transition Cost Balancing Account TRA........................ Transition Revenue Account Transwestern............... Transwestern Pipeline Company USGenNE.................... US Gen New England, Inc. Utility.................... Pacific Gas and Electric Company and it subsidiaries Valero..................... Valero Energy Corporation
iv PART I ITEM 1. Business. GENERAL Corporate Structure and Business PG&E Corporation is an energy-based holding company headquartered in San Francisco, California. Effective January 1, 1997, Pacific Gas and Electric Company (sometimes referred to herein as the "Utility") and its subsidiaries became subsidiaries of PG&E Corporation, which was incorporated in 1995. Pacific Gas and Electric Company, incorporated in California in 1905, is an operating public utility engaged principally in the business of providing electricity and natural gas distribution and transmission services throughout most of Northern and Central California. The Utility is primarily regulated by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC). In the holding company reorganization, Pacific Gas and Electric Company's outstanding common stock was converted on a share- for-share basis into PG&E Corporation common stock. Pacific Gas and Electric Company's debt securities and preferred stock were unaffected and remain securities of Pacific Gas and Electric Company. The consolidated financial statements of PG&E Corporation incorporated herein include the accounts of PG&E Corporation and its wholly owned and controlled subsidiaries (collectively, PG&E Corporation). The consolidated financial statements of Pacific Gas and Electric Company incorporated herein include the accounts of Pacific Gas and Electric Company and its wholly owned and controlled subsidiaries. The principal executive offices of PG&E Corporation are located at One Market, Spear Tower, Suite 2400, San Francisco, California 94105, and its telephone number is (415) 267-7000. The principal executive offices of Pacific Gas and Electric Company are located at 77 Beale Street, P.O. Box 770000, San Francisco, California 94177, and its telephone number is (415) 973-7000. In addition to the regulated utility business of Pacific Gas and Electric Company, PG&E Corporation's National Energy Group provides energy products and services throughout North America. The National Energy Group businesses develop, construct, operate, own, and manage independent power generation facilities that serve wholesale and industrial customers through PG&E Generating Company, LLC (formerly U.S. Generating Company, LLC) and its affiliates (collectively, PG&E Gen); own and operate natural gas pipelines, natural gas storage facilities, and natural gas processing plants, primarily in the Pacific Northwest and Texas, through various subsidiaries of PG&E Corporation (collectively, PG&E Gas Transmission or PG&E GT); purchase and sell energy commodities and provide risk management services to customers in major North American markets, including the National Energy Group's non- utility businesses, unaffiliated utilities, marketers, municipalities, and large end-use customers through PG&E Energy Trading--Gas Corporation, PG&E Energy Trading--Power, L.P., and their affiliates (collectively, PG&E Energy Trading or PG&E ET); and provide competitively priced electricity, natural gas, and related services to industrial, commercial, and institutional customers through PG&E Energy Services Corporation (PG&E Energy Services or PG&E ES). In the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a plan for the divestiture of PG&E Corporation's Texas natural gas and natural gas liquids business. Also in the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a plan for the divestiture of PG&E Corporation's retail energy services. See "National Energy Group--Gas Transmission Operations" and "National Energy Group--Energy Services" below. As of December 31, 1999, PG&E Corporation had $29.7 billion in assets. PG&E Corporation generated $20.8 billion in operating revenues for 1999. As of December 31, 1999, PG&E Corporation and its subsidiaries and affiliates had 22,433 employees. As of December 31, 1999, Pacific Gas and Electric Company had $21.4 billion in assets. The Utility generated $9.2 billion in operating revenues for 1999. As of December 31, 1999, the Utility had 18,935 employees. The gas and electric utility operations of Pacific Gas and Electric Company represent the largest component of PG&E Corporation's business, contributing 44% of PG&E Corporation's total revenues in 1999. 1 PG&E Corporation has identified four reportable operating segments. The Utility is one reportable operating segment and the other three are part of PG&E Corporation's National Energy Group (PG&E Gen, PG&E GT, and PG&E ET). Financial information about each reportable operating segment is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders and in Note 17 of the "Notes to Consolidated Financial Statements" beginning on page 63 of PG&E Corporation's 1999 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report. The following report includes forward-looking statements about the future that involve a number of risks and uncertainties. These statements are based on assumptions which management believes are reasonable and on information currently available to management. These forward-looking statements are identified by words such as "estimates," "expects," "anticipates," "plans," "believes," and other similar expressions. Actual results could differ materially from those contemplated by the forward-looking statements. Although PG&E Corporation and the Utility are not able to predict all the factors that may affect future results, some of the factors that could cause future results to differ materially from those expressed or implied by the forward-looking statements include: the pace and extent of the ongoing restructuring of the electric and natural gas industries across the United States; operational changes related to industry restructuring, including changes to the Utility's business processes and systems; the method and timing of disposition and valuation of the Utility's hydroelectric generation assets; the timing of the completion of the Utility's transition cost recovery and the consequent end of the current electric rate freeze in California; any changes in the amount the Utility is allowed to collect (recover) from its customers for certain costs which prove to be uneconomic under the new competitive market (called transition costs); future operating performance at the Utility's Diablo Canyon Nuclear Power Plant (Diablo Canyon); the method adopted by the CPUC for sharing the net benefits of operating Diablo Canyon with ratepayers and the timing of the implementation of the adopted method; the extent of anticipated growth of transmission and distribution services in the Utility's service territory; future market prices for electricity; future fuel prices; the success of management's strategies to maximize shareholder value in PG&E Corporation's National Energy Group which may include acquisitions or dispositions of assets or internal restructuring; the extent to which current or planned generation development projects are completed and the pace and cost of such completion; generating capacity expansion and retirements by others; the successful integration and performance of acquired assets; the outcome of the Utility's various regulatory proceedings, including the the proposal to auction the Utility's hydroelectric generation assets, the electric transmission rate case applications, and post-transition period ratemaking proceedings; fluctuations in commodity gas, natural gas liquid, and electricity prices and the ability to successfully manage such price fluctuations; and the pace and extent of competition in the California generation market and its impact on the Utility's costs and resulting collection of transition costs. As the ultimate impact of these and other factors is uncertain, these and other factors may cause future results to differ materially from results or outcomes currently expected or sought by PG&E Corporation. Competition and the Changing Regulatory Environment The electric and gas industries are continuing to undergo significant change. Under traditional regulation, utilities were provided the opportunity to earn a fair return on their invested capital in exchange for a commitment to serve all customers within a designated service territory. The objective of this regulatory policy was to provide universal access to safe and reliable utility services. Regulation was designed in part to take the place of competition and ensure that these services were provided at fair prices. In 1998, California became one of the first states in the country to implement electric industry restructuring and establish a competitive market framework for electric generation. Today, most Californians may continue to purchase their electricity from investor-owned utilities (such as Pacific Gas and Electric Company) or they may choose to purchase electricity from alternative generation providers (such as unregulated power generators and unregulated retail electricity suppliers such as marketers, brokers, and aggregators). For those customers who have not chosen an alternative generation provider, investor-owned utilities, such as Pacific Gas and Electric Company, continue to be the generation providers. Investor-owned utilities continue to provide distribution services to substantially all customers within their service territories, including those customers who choose an alternative generation provider. The framework for electric industry restructuring was established in Assembly 2 Bill 1890 (AB 1890) passed by the California Legislature and signed by the Governor in 1996. For information about California electric industry restructuring, see "Utility Operations--Electric Utility Operations-- California Electric Industry Restructuring" below. Although the initial stages of restructuring have focussed on competition among suppliers of generation, the CPUC also is studying the effect of distributed generation (where the electric energy source is located in close proximity to electric demand) in the California generation market and possible changes in the electric distribution function of traditional utilities. See "Utility Operations--Electric Utility Operations--California Electric Industry Restructuring--Distributed Generation and Electric Distribution Competition" below. Restructuring of the natural gas industry on both the national and the state level has given choices to California utility customers to meet their gas supply needs. In August 1997, the CPUC approved the Gas Accord settlement agreement (Gas Accord) which restructured the Utility's gas services and its role in the gas market. Among other matters, the Gas Accord separated, or "unbundled," the rates for the Utility's gas transmission services from its distribution services. As a result, the Utility's customers may buy gas directly from competing suppliers and purchase transmission-only and distribution-only services from the Utility. Most of the Utility's industrial and larger commercial customers (noncore customers) now purchase their gas from marketers and brokers. Substantially all residential and smaller commercial customers (core customers) buy gas as well as transmission and distribution services from the Utility as a bundled service. For more information about the Gas Accord and regulatory changes affecting the California natural gas industry, see "Utility Operations--Gas Utility Operations--Gas Regulatory Framework " below. Additional information concerning competition and the changing regulatory environment is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5, and in Note 2 of the "Notes to Consolidated Financial Statements" beginning on page 40 of the 1999 Annual Report to Shareholders, which information is hereby incorporated by reference. Regulation of PG&E Corporation PG&E Corporation and its subsidiaries are exempt from all provisions, except Section 9(a)(2), of the Public Utility Holding Company Act of 1935 (Holding Company Act). At present, PG&E Corporation has no expectation of becoming a registered holding company under the Holding Company Act. PG&E Corporation is not a public utility under the laws of California and is not subject to regulation as such by the CPUC. However, the CPUC approval authorizing Pacific Gas and Electric Company to form a holding company was granted subject to various conditions related to finance, human resources, records and bookkeeping, and the transfer of customer information. The financial conditions provide that the Utility is precluded from guaranteeing any obligations of PG&E Corporation without prior written consent from the CPUC, the Utility's dividend policy shall continue to be established by the Utility's Board of Directors as though Pacific Gas and Electric Company were a stand-alone utility company, and the capital requirements of the Utility, as determined to be necessary to meet the Utility's service obligations, shall be given first priority by the Boards of Directors of PG&E Corporation and Pacific Gas and Electric Company. The conditions also provide that the Utility shall maintain on average its CPUC-authorized utility capital structure, although it shall have an opportunity to request a waiver of this condition if an adverse financial event reduces the Utility's equity ratio by 1% or more. The CPUC also has adopted complex and detailed rules governing transactions between California's natural gas local distribution and electric utility companies and their non-regulated affiliates. The rules permit non-regulated affiliates of regulated utilities (such as PG&E Energy Services, the non- regulated energy marketing subsidiary of PG&E Corporation) to compete in the affiliated utility's service territory, and also to use the name and logo of their affiliated utility, provided that in California the affiliate includes certain designated disclaimer language which emphasizes the separateness of the entities and that the affiliate is not regulated by the CPUC. The rules also address the separation of regulated utilities and their non-regulated affiliates and information 3 exchange among the affiliates. The rules prohibit the utilities from engaging in certain practices, which would discriminate against energy service providers that compete with the utility's non-regulated affiliates. The CPUC has also established specific penalties and enforcement procedures for affiliate rules violations. Utilities are required to self-report affiliate rules violations. Regulation of Pacific Gas and Electric Company State Regulation The CPUC has jurisdiction to regulate the following utility functions within California: electric distribution service, gas distribution service, and gas transmission service. The CPUC regulates Pacific Gas and Electric Company's rates and conditions of service, sales of securities, dispositions of utility property, rates of return, rates of depreciation, and long-term resource procurement. The CPUC also conducts various reviews of utility performance and conducts investigations into various matters, such as deregulation, competition, and the environment, in order to determine its future policies. The CPUC consists of five members appointed by the Governor and confirmed by the State Senate for six-year terms. The California Energy Commission (CEC) has the responsibility to make electric-demand forecasts for the state and for specific service territories. Based upon these forecasts, the CEC determines the need for additional energy sources and for conservation programs. The CEC sponsors alternative-energy research and development projects, promotes energy conservation programs, and maintains a statewide plan of action in case of energy shortages. In addition, the CEC certifies power plant sites and related facilities within California. The CEC also administers funding for public purpose research and development, and renewable technologies programs. Federal Regulation The FERC regulates electric transmission rates and access, operation of the California Independent System Operator (ISO) and the California Power Exchange (PX), uniform systems of accounts, and electric contracts involving sales of electricity for resale. The FERC also has jurisdiction over the Utility's electric transmission revenue requirements and rates. The FERC also regulates the interstate transportation of natural gas. Further, most of the Utility's hydroelectric facilities are subject to licenses issued by the FERC. The Nuclear Regulatory Commission (NRC) oversees the licensing, construction, operation, and decommissioning of nuclear facilities, including Diablo Canyon and the nuclear generating unit at Humboldt Bay Power Plant (Unit 3). NRC regulations require extensive monitoring and review of the safety, radiological, and environmental aspects of these facilities. Licenses and Permits Pacific Gas and Electric Company obtains a number of permits, authorizations, and licenses in connection with the construction and operation of its generating plants, transmission lines, and gas compressor station facilities. Discharge permits, various Air Pollution Control District permits, United States Department of Agriculture--Forest Service permits, FERC hydroelectric facility and transmission line licenses, and NRC licenses are the most significant examples. Some licenses and permits may be revoked or modified by the granting agency if facts develop or events occur that differ significantly from the facts and projections assumed in granting the approval. Furthermore, discharge permits and other approvals and licenses are granted for a term less than the expected life of the associated facility. Licenses and permits may require periodic renewal, which may result in additional requirements being imposed by the granting agency. Pacific Gas and Electric Company currently has ten hydroelectric projects and one transmission line project undergoing FERC license renewal. Regulation of the National Energy Group In addition to Pacific Gas and Electric Company, certain of PG&E Corporation's other subsidiaries that conduct interstate gas transmission and storage and electric wholesale power marketing operations are subject to 4 FERC jurisdiction. The FERC also has authority to regulate rates for natural gas transportation and storage in interstate commerce. The FERC also regulates certain transportation and storage transactions on the intrastate pipelines pursuant to Section 311 of the Natural Gas Policy Act of 1978. The Railroad Commission of Texas (RRC) regulates gas utilities, including those owned by PG&E Corporation through PG&E Gas Transmission, Texas Corporation (PG&E GTT), PG&E Gas Transmission Teco, Inc., and other affiliates operating in Texas. The RRC's gas proration rules govern the wellhead production and purchase of gas. Intrastate pipelines can provide intrastate gas transportation at negotiated rates that are presumed just and reasonable. If the criteria for negotiated rates cannot be met, the RRC may assess a cost- of-service-based rate. The RRC also may regulate certain sales of gas. Currently, the price of natural gas sold under a majority of PG&E GTT's gas sales contracts is not regulated by the RRC. All transportation and gathering of gas is subject to the RRC Code of Conduct which prohibits undue discrimination among similarly situated shippers. Further, all transportation of gas, processing of gas, and transportation of natural gas liquids is subject to safety regulations enforced by the RRC and the Texas Natural Resource Conservation Commission. In addition, the power generation projects that PG&E Gen develops, manages, or owns are subject to differing types of federal regulation depending on the regulatory status of the particular project. Some of these projects are exempt wholesale generators (EWG) under the National Energy Policy Act of 1992, which status exempts the project from regulation under the Holding Company Act. EWG status is granted by the FERC upon application by the project. Some projects have received authority from the FERC to charge market-based rates for the power they sell, rather than traditional cost-based rates. Many of PG&E Gen's affiliated projects are qualifying facilities (QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA). QF status exempts the project from regulation under various federal and state laws concerning the electric industry. PG&E Gen's projects are also subject to various federal, state, and local regulations concerning siting and environmental matters. PG&E Corporation's indirect subsidiary USGen New England, Inc. (USGenNE) acquired the electric generating facilities of the New England Electric System (NEES) in September 1998. USGenNE also is subject to numerous federal, state, and local statutes and regulations. USGenNE sells at wholesale all of the electricity it generates, as well as electricity it purchases from third parties under existing power sales agreements. Under the Federal Power Act (FPA), the FERC regulates these wholesale sales. The FERC has approved USGenNE's rate schedule as a market-based schedule and, accordingly, the FERC granted USGenNE waivers of certain other requirements that otherwise are imposed on utilities with cost-based rate schedules. In addition, USGenNE owns and operates a number of hydroelectric and pumped storage projects that are licensed by the FERC. These licenses expire periodically and the projects must be relicensed at that time. USGenNE's licenses for these hydroelectric projects expire over a period from 2001 to 2020. Before expiration of any one of the hydroelectric licenses, there is an opportunity for the existing licensee (as well as others interested in owning and operating the project) to apply for, and obtain, a new license. USGenNE also is subject to limited regulation by certain state public utility commissions located in states where USGenNE owns and operates electric generating facilities. This regulation does not extend to its rates, which are regulated exclusively by the FERC, and the scope of this regulation has been substantially limited by various legislative initiatives. Other regulatory matters are described throughout this report. Risk Management Programs PG&E Corporation has an officer-level Risk Management Committee and has adopted a Risk Management Policy, approved by the Board of Directors of PG&E Corporation, for trading and risk management activities. The Risk Management Committee oversees implementation of the policy, approves the trading and risk management policies of subsidiaries, and monitors compliance with the policy. 5 The Risk Management Policy allows derivatives to be used for both hedging and non-hedging purposes. (A derivative is a contract whose value is dependent on or derived from the value of some underlying asset.) PG&E Corporation uses derivatives for hedging purposes primarily to offset underlying commodity price risks. PG&E Corporation also participates in markets using derivatives to gather market intelligence, create liquidity, maintain a market presence, and take a market view. Such derivatives include forward contracts, futures, swaps, and options. The Risk Management Policy and the trading and risk management policies of PG&E Corporation's subsidiaries prohibit the use of derivatives whose payment formula includes a multiple of some underlying asset. The Risk Management Committee also monitors the trading and risk management of PG&E ET, consistent with PG&E Corporation's Risk Management Policy. See "National Energy Group--Energy Trading." The CPUC has authorized Pacific Gas and Electric Company to trade natural gas-based financial instruments to manage price and revenue risks associated with its natural gas transmission and storage assets, subject to certain conditions. The CPUC also has authorized the Utility to trade natural gas- based financial instruments to hedge the gas commodity price swings in serving core gas customers. In May 1999, the PX obtained FERC approval to operate the "block forward market" which offers parties the ability to buy and sell contracts to purchase electricity in the future at prices set in the contracts. The Utility sought and obtained CPUC authority to participate in the PX block forward market for contracts that call for delivery of the purchased electricity by October 31, 2000, as well as to recover costs (such as gain/losses and transaction fees) associated with its participation in this market. Additional information concerning risk management activities and the financial impact of risk management activities on PG&E Corporation and Pacific Gas and Electric Company is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5 and in Notes 1, 3, and 4 of the "Notes to Consolidated Financial Statements" beginning on pages 36, 45, and 47, respectively, of the 1999 Annual Report to Shareholders, which information is hereby incorporated by reference. 6 UTILITY OPERATIONS Pacific Gas and Electric Company provides regulated electric and gas distribution and transmission services in Northern and Central California. The Utility's service territory covers 70,000 square miles with an estimated population of approximately 13 million and includes all or portions of 48 of California's 58 counties. The area's diverse economy includes aerospace, electronics, financial services, food processing, petroleum refining, agriculture, and tourism. Ratemaking Mechanisms The ratemaking mechanisms affecting both electricity and gas distribution operations are discussed below. General Rate Case. The CPUC authorizes an amount, known as "base revenues," to be collected from ratepayers to recover Pacific Gas and Electric Company's basic business and operational costs for its gas and electric distribution operations. Base revenues, which include non-fuel-related operating and maintenance costs, depreciation, taxes, and a return on invested capital, currently are authorized by the CPUC in General Rate Case (GRC) proceedings. During the GRC, which occurs every three years, the CPUC examines the Utility's costs and operations to determine the amount of base revenue requirement the Utility is authorized to collect from customers through base revenues. The revenue requirement is forecasted on the basis of a specified test year. (The return component of the Utility's revenue requirement is computed using the overall cost of capital authorized in other proceedings.) Following the revenue requirement phase of a GRC, the CPUC conducts a rate design phase, which allocates revenue requirements and establishes rate levels for the different classes of customers. On February 17, 2000, the CPUC issued a decision in the Utility's GRC for the period 1999-2001, further discussed below. The decision also orders that the Utility file a 2002 GRC, so that the revenue requirements established in the 2002 GRC will be the starting point for a future performance based ratemaking (PBR) mechanism (discussed below) that is intended to eventually replace the GRC mechanism and cost of capital proceedings. Cost of Capital. Each year, the Utility files an application with the CPUC to determine the authorized rate of return that the Utility may earn on its electric and gas distribution assets and recover from ratepayers. In November 1999, the Utility filed its 2000 cost of capital application. To reflect increasing interest rates, the Utility has requested a return on equity (ROE) of 12.5% and an overall rate of return of 9.76% as compared to its 1999 authorized rates of 10.6% ROE and 8.75% overall rate of return. The Utility has not requested any change in its current authorized capital structure of 46.2% long-term debt, 5.8% preferred stock, and 48% common equity. If granted, the requested ROE would increase electric distribution revenues by approximately $36.6 million and natural gas distribution revenues by approximately $127.8 million based upon the rate base authorized in the 1999 GRC. The Utility requested that a final CPUC decision be issued in June 2000. On February 17, 2000, the CPUC issued a decision to allow the final CPUC decision, when it is adopted, to be effective retroactively to February 17, 2000. The return on the Utility's electric transmission-related assets will be determined by the FERC in 2000. The return on the Utility's natural gas transmission and storage business was incorporated in rates established in the Gas Accord settlement. See "Gas Ratemaking--Gas Accord" below. The authorized ROE for the Utility's remaining generation assets, including Diablo Canyon, is 6.77% throughout the transition period. Electric and Gas Distribution Performance-Based Ratemaking. In November 1998, the Utility filed an application with the CPUC to establish performance- based ratemaking (PBR) for electric and gas distribution services. The proposed distribution PBR would establish electric and gas distribution revenue requirements for the year in which PBR is approved to 2004 taking the place of the GRC and cost of capital proceedings for these years. The Utility proposed that the revenue requirement for the year 2000 be determined by applying a formula, based principally on inflation and productivity factors, to the 1999 GRC authorized revenue requirement. In subsequent years, the formula would be applied to the previous year's authorized revenue requirement. The proposed PBR also includes a sharing mechanism for earnings that are significantly above or below the authorized cost of capital, and a framework for rewards and penalties based upon the achievement of various performance measures. 7 The final decision in the GRC requires the Utility to go forward with the performance rewards/penalties framework of its PBR proposal, but it requires a 2002 GRC before implementing the PBR mechanism that determines future revenue requirements based principally on inflation and productivity factors. The starting point for the PBR mechanism will be the revenue requirements established in the required 2002 GRC. In any event, after the transition period, the Utility's earnings from its electric distribution operations will be subject to volatility as a result of sales fluctuations. Annual Earnings Assessment Proceeding. The Annual Earnings Assessment Proceeding (AEAP) determines shareholder incentives to be earned for Pacific Gas and Electric Company's demand side management (DSM) programs. The Utility was authorized to collect $15.9 million in incentive payments during 1999. The Utility has filed an application seeking $28.7 million in incentive payments relating to 1998 energy efficiency and low-income assistance programs, and DSM programs from other years to be paid in 2000. After consolidating the adjusted incentive payment installments from prior years, the net revenue change in 2000 from DSM shareholder incentives should be an electric increase of approximately $2.47 million and a gas decrease of approximately $0.75 million assuming the Utility's incentive claims are approved. The 1999 AEAP decision is expected in the second quarter of 2000. Catastrophic Event Memorandum Account. The Catastrophic Event Memorandum Account (CEMA) allows Pacific Gas and Electric Company to track costs incurred in connection with catastrophic events. On January 7, 1999, the Utility filed an application with the CPUC in its first CEMA proceeding requesting increases in electric and gas revenue requirements of $60.1 million and $15.8 million, respectively, for costs incurred for several emergencies, including the 1991 Oakland Hills Fire and 1998 storms. In September 1999, the Utility entered into a settlement agreement providing for a $59 million increase in electric distribution revenue requirement and a $11 million increase in gas distribution revenue requirement effective January 1, 2000. A CPUC decision is expected in early 2000. Electric Ratemaking The California electric industry restructuring legislation provided for a transition period during which electric customer rates remain frozen. Any change in the Utility's electric revenue requirements resulting from the items discussed below will not change electric customer rates. Under the electric rate freeze, the portion of total actual revenue that exceeds authorized base revenues and certain other authorized revenue requirements and costs is available to recover transition costs during the transition period. Transition costs are certain generation-related costs that prove to be uneconomic under the new competitive generation market. (See "Electric Utility Operations-- California Electric Industry Restructuring--Recovery of Transition Costs.") Therefore, increases in base revenues would reduce the amount of revenue available to recover transition costs. Conversely, decreases in base revenues would increase revenue available from frozen rates for recovery of transition costs. The transition period will end the earlier of December 31, 2001, or when the Utility has recovered its eligible transition costs. The electric rate freeze will end the earlier of March 31, 2002, or when the Utility has recovered its eligible transition costs. General Rate Case. On February 17, 2000, the CPUC issued a decision in the Utility's GRC for the period 1999-2001. The decision is retroactive to January 1, 1999. The CPUC authorized increases in base revenues for the Utility's electric distribution function of $377 million over base revenues authorized in 1996. Revenue Adjustment Proceeding. On January 1, 1998, the Transition Revenue Account (TRA) was established. The TRA is credited with total revenue collected from ratepayers through frozen rates. From this total revenue the following items are subtracted: (1) revenues collected for transmission services and for the payment of rate reduction bond debt service, (2) the authorized revenue requirement for distribution services, public purpose programs, and nuclear decommissioning costs, and (3) electric industry restructuring implementation costs, energy procurement costs, and other costs. Remaining revenues, if any, are transferred to the Transition Cost Balancing Account (TCBA) to offset transition costs. The CPUC established a separate annual proceeding, the Revenue Adjustment Proceeding (RAP), to review and verify the amounts recorded in 8 the TRA, and to verify each electric utility's authorized revenue requirements, including any necessary adjustments to reflect the revenue requirements which are approved in other proceedings. The RAP also establishes revenue allocation and rate design, and identifies all electric balancing and memorandum accounts for continued retention or elimination. In June 1999, the CPUC issued a decision in the Utility's first RAP that, among other things, adopted an agreement between the Utility and the CPUC's Office of Ratepayer Advocates (ORA) that resolved several rate allocation and rate design issues, eliminated certain balancing and memorandum accounts, and allows the recovery of entries made into the TRA from January 1 through May 31, 1998 and certain other balancing accounts, subject to CPUC audit. On August 9, 1999, the Utility filed its application in the 1999 RAP addressing revenues and costs recorded in the TRA from June 1, 1998 through June 30, 1999. A CPUC decision on this application is expected in late 2000. Annual Transition Cost Proceeding. The Annual Transition Cost Proceeding (ATCP), applicable to all California investor owned electric utilities, was established to verify the accounting and recording of costs and revenues in the TCBA and ensure that only eligible transition costs have been entered. The TCBA tracks the revenues available to offset transition costs, including the accelerated recovery of plant balances, and other generation-related assets and obligations. Transition costs will receive a limited "reasonableness" review. On September 1, 1998, the Utility filed its application in the 1998 ATCP requesting that $1.8 billion of costs recorded in the TCBA from January 1 through June 30, 1998 be approved as eligible for recovery as transition costs. In July 1999, PG&E and ORA filed a joint motion with the CPUC for approval of a settlement that recommends that the CPUC approve substantially all costs requested by the Utility. On February 17, 2000, the CPUC issued a decision which accepts the settlement in its entirety, and decides most of the other issues in the case in the Utility's favor. Under the final decision, on a prospective basis, the utilities are required to assess the estimated market value of their remaining non-nuclear generating assets, including the land associated with those assets, on an aggregate basis at a value not less than the net book value of those assets and to credit the TCBA with the estimated value. The decision encourages the utilities to base such estimates on realistic assessments of the market value of the assets. The final decision did not adopt a recommendation contained in a previously issued proposed decision to establish a new regulatory asset account that would allow a true- up when the estimated market value is greater than actual market value. However, the decision states that crediting the TCBA with the aggregate net book value of the remaining non-nuclear generating assets is a conservative approach and remedies any concerns regarding the lack of a true-up. The decision provides that if the estimated market valuation is less than book value for any individual asset, accelerated amortization of the associated transition costs will continue until final market valuation of the asset occurs through sale, appraisal, or other divestiture. If the final value of the assets, determined through sale, appraisal or other divestiture, is higher than the estimate, the excess amount would be used to pay remaining transition costs, if any. The utilities are required to file the adjusted entries to their respective TCBA based on the estimated market values with the CPUC by March 9, 2000. The filing will become effective after appropriate review by the CPUC's Energy Division and the TCBA entries are subject to review in the next ATCP. On September 1, 1999, the Utility filed its 1999 ATCP application requesting that $2.6 billion recorded in the TCBA from July 1, 1998, through June 30, 1999, be approved as eligible for recovery as transition costs. Electric Industry Restructuring Implementation Costs. Under AB 1890, certain electric industry restructuring implementation costs found reasonable by the CPUC may be recovered from electric customers. In May 1999, the CPUC approved a multi-party settlement agreement that, among other things, permits the Utility to recover 1997 and 1998 restructuring implementation costs of $41.3 million (reflecting a reduction of $10 million from the Utility's requested revenue requirement). In addition, the Utility is authorized to recover in its TRA costs related to the Consumer Education Program and the Electric Education Trust funded by the Utility and FERC-approved ISO and PX development and start-up costs. At the end of the transition period, if recovery of these restructuring implementation costs recorded in the TRA displaces recovery of transition costs recorded in the TCBA, the Utility may recover up to $95 million of such displaced transition costs after the transition period. As part of the settlement agreement, the CPUC also authorized the Utility to establish the Electric Restructuring Costs Account (ERCA) to record the restructuring implementation costs that were removed from its 1999 GRC revenue requirement request, any unanticipated restructuring costs incurred as a result of directives 9 from the CPUC or the FERC, and certain other costs. The reasonableness of the entries made in the ERCA and the recovery of these costs will be made through a separate application by the Utility in 2000. Revenues from Must-Run Contracts. The ISO has designated certain units at electric generation facilities as necessary to remain available to maintain the reliability of the electric transmission system. These units are called "must-run" units. In general, the ISO dispatches these units under cost-based contracts regulated by the FERC that allow the owners to recover a portion of fixed and operating costs of the must-run units. The owners of must-run units choose among two different forms of must-run contract, both of which cover operating costs. One form provides payments of a percentage of the unit's fixed cost revenue requirement and does not limit market participation. The other form provides 100% fixed cost recovery but allows only very restricted market participation. The Utility's two remaining fossil-fueled power plants (Hunters Point and Humboldt Bay) and three of its hydroelectric generation facilities are under must-run contracts. The form of must-run contract chosen for all of these facilities (except Hunters Point) is the one that does not limit market participation. The Utility currently receives approximately $100 million per year as payments under these must-run contracts, plus fuel costs. In addition, the Utility has the opportunity to earn market revenues for all of these plants except Hunters Point when the ISO has not dispatched the plant. The Utility has filed an application with the CPUC to determine the market value of its hydroelectric generation facilities and related assets through an open competitive auction. FERC Transmission Owner Rate Case. The ISO controls most of the state's electric transmission facilities. The Utility serves as the scheduling coordinator to schedule transmission with the ISO to facilitate continuing service under wholesale transmission contracts that the Utility entered into before the ISO was established. The ISO bills the Utility for providing certain services associated with these contracts. These ISO charges are referred to as the "scheduling coordinator costs." As part of the Utility's Transmission Owner rate case filed at the FERC, the Utility established a balancing account, the Transmission Revenue Balancing Account (TRBA), to record these scheduling coordinator costs in order to recover these costs through transmission rates. Certain transmission-related revenues collected by the ISO and paid to the Utility are also recorded in the TRBA. Through December 31, 1999, the Utility has recorded approximately $39 million of these scheduling coordinator costs in the TRBA. (The Utility has also disputed approximately $22.5 million of these costs as incorrectly billed by the ISO. Any refunds that ultimately may be made by the ISO would be credited to the TRBA.). On September 1, 1999, a proposed decision was issued denying recovery of these scheduling coordinator costs. The proposed decision is subject to change by the FERC in its final decision. The FERC is expected to issue a final decision sometime in 2000. On January 11, 2000, the FERC accepted a proposal by the Utility to establish the Scheduled Coordinator Services (SCS) Tariff which would act as a back-up mechanism for recovery of the scheduling coordinator costs if the FERC ultimately decides that these costs may not be recovered in the TRBA. The FERC also conditionally granted the Utility's request that the SCS Tariff be effective retroactive to March 31, 1998, but the FERC suspended the procedural schedule until the final decision is issued regarding the inclusion of scheduling coordinator costs in the TRBA. AB 1890 Electric Base Revenue Increase. AB 1890 provided for an increase in the Utility's electric base revenues for 1997 and 1998, for enhancement of transmission and distribution system safety and reliability. The CPUC authorized a 1997 base revenue increase of $164 million. For 1998, the CPUC authorized an additional base revenue increase of $77 million. The CPUC will determine how much of the authorized increases were actually spent on system safety and reliability during 1997 and 1998, and adjust the amounts downward if necessary. The Utility claims that it overspent the 1997 authorized revenue requirement by approximately $11.8 million and that the Utility underspent 1998 incremental revenues by approximately $6.5 million. The Utility has proposed that the underspent amount be credited to TRA revenues. The CPUC's Office of Ratepayer Advocate (ORA) has recommended that $88.4 million in expenditures for 1997 and 1998 be disallowed. The Utility Reform Network (TURN) has recommended an additional $14 million disallowance for a total recommended disallowance for 1997 and 1998 expenditures of $102.4 million. The Utility opposed the recommended disallowances and hearings were held in October 1999. A proposed decision is not expected until the first quarter of 2000. Any proposed decision would be subject to comment by the parties and change by the CPUC before a final decision is issued. 10 Electric Transmission Revenues. Since April 1998, all electric transmission revenues are authorized by the FERC. During 1998 and 1999, the FERC issued orders that put into effect various rates to recover electric transmission costs from the Utility's former bundled rate transmission customers. All 1998 and 1999 rates are subject to refund, pending final decisions. In April 1999, the Utility filed a settlement with the FERC which, if approved, would allow the Utility to recover $345 million for the period of April 1998 through May 1999. In May 1999, the FERC accepted, subject to refund, the Utility's March 1999 request to begin recovering, as of May 31, 1999, $324 million annually. In October 1999, the FERC accepted, subject to refund, the Utility's September 1999 request to increase revenues to $370 million annually beginning in April 2000. Electric Deferred Refund Account (EDRA). In December 1996, the CPUC issued a decision establishing an EDRA. The CPUC ordered the Utility to place into the EDRA credits for CPUC-ordered electric disallowances, the utility electric generation share of gas disallowances ordered by the CPUC or the FERC, and amounts resulting from reasonableness disputes or fuel-related cost refunds made to the Utility based on regulatory agency decisions, plus interest charges. In February 2000, the Utility refunded approximately $25 million of EDRA refunds to customers, which included a refund of unspent research, development, and demonstration funds. Post-Transition Period Ratemaking Proceeding. In October 1999, the CPUC issued a decision in the Utility's post-transition period ratemaking proceeding. Among other matters, the CPUC decision addresses the mechanisms for ending the current electric rate freeze and for establishing post- transition period accounting mechanisms and rates. The decision prohibits the Utility from collecting after the rate freeze any electric costs incurred during the rate freeze but not recovered during the rate freeze, including costs that are not transition costs and not related to generation assets such as under-collected accounting balances relating to power purchases. The decision also requires the discontinuance of Diablo Canyon's performance-based ratemaking, the incremental cost incentive price (ICIP) mechanism, at the end of the transition period. Instead, after the transition period, Diablo Canyon generation must be sold at the prevailing market price for power. The Utility has filed an application for rehearing of the CPUC's decision. In the decision, the CPUC also established the Purchased Electric Commodity Account (PECA) for the Utility to track energy costs after the rate freeze and transition period end. The CPUC intends to explore other ratemaking issues, including whether dollar-for-dollar recovery of energy costs is appropriate, in the second phase of the post-transition electric ratemaking proceeding. There are three primary options for the future regulatory framework for utility electric energy procurement cost recovery after the rate freeze: (1) a CPUC-defined procurement practice, that if followed by the Utility, would pass through costs without the need for reasonableness reviews, (2) a pass through of costs subject to after-the-fact reasonableness reviews, or (3) a procurement incentive mechanisms with rewards and penalties determined based on the Utility's energy purchasing performance compared to a benchmark. The Utility proposed adoption of either a defined procurement practice or a procurement incentive mechanism, neither of which would involve reasonableness reviews. The volatility of earnings and risk exposure of the Utility related to post-transition period purchases of electricity is dependent on which of these options, or some other approach, is adopted. A decision in the second phase of the proceeding is expected in the first quarter 2000, addressing certain other post-transition period ratemaking issues including, among others, incentive mechanisms for commodity purchases and the allocation of certain transition costs that are recoverable after the transition period. Additional information about the financial impact of the end of the rate freeze and the end of the transition period on the Utility and PG&E Corporation is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5. Gas Ratemaking Gas Accord. The Gas Accord separated or "unbundled" the Utility's gas transmission services from its distribution services, changed the terms of service and rate structure for gas transportation, increased the opportunity for core customers to purchase gas from competing suppliers, established a form of incentive 11 mechanism to measure the reasonableness of core procurement costs, and established gas transmission and storage rates through 2002. Additional information about the Gas Accord is provided below in "Utility Operations--Gas Utility Operations" and in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5. General Rate Case. On February 17, 2000, the CPUC issued a decision in the Utility's GRC for the period 1999-2001. The decision is retroactive to January 1, 1999. The CPUC authorized increases in base revenues for the Utility's gas distribution function of approximately $93 million over base revenues authorized in 1996. The Biennial Cost Allocation Proceeding (BCAP). The BCAP remains the proceeding in which distribution costs and balancing account balances are allocated to customers. The BCAP normally occurs every two years and is updated in the interim year for purposes of amortizing any accumulation in the balancing accounts. Balancing accounts for natural gas costs accumulate differences between the actual recovery of gas costs and the revenues designed for recovery of such costs. Balancing accounts for sales volumes accumulate differences between authorized and actual base revenues. In June 1998, the CPUC adopted a decision in the 1998 BCAP granting an annual $97.8 million revenue requirement decrease effective September 1, 1998, compared to revenues established by the Gas Accord on March 1, 1998. The overall annual revenue requirement for the two-year BCAP period (September 1, 1998, through August 31, 2000) is approximately $1.5 billion, of which an annual average of approximately $102 million is allocated for the collection of balancing accounts. The Utility plans to file its 2000 BCAP application in the first half of 2000. Electric Utility Operations California Electric Industry Restructuring As a result of California electric industry restructuring, the electric generation function of traditional utilities has been opened up to competition, giving electric customers of investor-owned utilities (such as Pacific Gas and Electric Company) the choice of continuing to purchase electricity from investor-owned utilities or purchasing electricity from alternative providers (including unregulated power generators and unregulated retail electricity providers such as marketers, brokers, and aggregators). Purchasing electricity from an alternative generation provider is called "direct access." For those customers who have not chosen an alternative generation provider, investor-owned utilities continue to be the generation provider. Investor-owned utilities continue to provide distribution services to substantially all customers within their service territories, including those customers who choose direct access. The California Independent System Operator and the California Power Exchange. To create a competitive generation market, the PX and the ISO were established and began operating on March 31, 1998. The FERC has jurisdiction over both the ISO and the PX. The ISO operates and controls most of the state's electric transmission facilities (which continue to be owned and maintained by the California utilities) and provides comparable open access to electric transmission service. The ISO accepts balanced supply and load schedules from market participants and manages the availability of electric transmission on a statewide basis for these transactions. The ISO also purchases necessary generation and ancillary services to maintain grid reliability. The ISO is required to ensure reliable transmission services consistent with planning and operating reserve criteria no less stringent than those established by the Western Systems Coordinating Council and the North American Electric Reliability Council. Oversight of utility distribution systems remains with the CPUC. The PX provides a competitive auction process to establish transparent market clearing prices for electricity in the markets operated by the PX. During the transition period, the Utility is required to sell into the PX all of its generated electric power. "Must-take" generation resources, such as nuclear generation from Diablo Canyon, electric power generated by QFs and electricity that the Utility is required to purchase under existing contractual commitments, also are scheduled through the PX. During the transition period, the Utility must purchase all 12 electric power for its retail customers through the PX. Customers who buy power directly from non-regulated suppliers pay for that generation based upon negotiated contracts. The PX sets a market-clearing price for electricity by matching all demand load bids with supply bids ranked from lowest to highest. The highest-accepted generation supply bid used to serve load sets the PX market-clearing price for electricity. After the transition period, the Utility may continue to schedule its must- take generation resources into the PX. It is unsettled whether the Utility will be required to continue purchasing its electric power for its retail customers through the PX after the transition period. The Utility expects that the CPUC will address the issue of whether the purchase obligation will continue through December 31, 2001, if the Utility's rate freeze ends before that date, in the second phase of the Utility's post-transition period ratemaking proceeding in the first quarter of 2000. Some parties have argued that the utilities' purchase obligation may need to continue beyond December 31, 2001, depending on market conditions. See "Ratemaking Mechanisms--Electric Ratemaking--Post-Transition Period Ratemaking Proceeding" above. The ISO and PX are California public benefit non-profit corporations. Each has a Governing Board that includes representatives of investor-owned utility transmission systems, publicly owned utility transmission systems, non-utility electricity sellers, public buyers and sellers, private buyers and sellers, industrial end-users, commercial end-users, residential end-users, agricultural end-users, public interest groups, and non-market participant representatives. The ISO and PX currently are overseen by a five-member Electricity Oversight Board (EOB) that appoints the members of the ISO and PX Governing Boards. However, this appointment power was rejected by the FERC. Subsequently the California Legislature passed, and the Governor signed, Senate Bill (SB) 96 which redefined the relationship between the EOB and the ISO and PX. SB 96 limits the EOB's appointment power to representatives of those classes that represent California consumers' interests. The ISO or PX Governing Boards confirm all other appointments. SB 96 has been accepted in principle by the FERC. Bylaw amendments implementing SB 96 are pending before the FERC for the PX and the ISO currently is circulating draft bylaw amendments among its stakeholders. Voluntary Generation Asset Divestiture. California utilities, including Pacific Gas and Electric Company, have voluntarily begun divesting some of their generation assets. In 1998, the Utility sold three of its fossil-fueled electric generating plants located at Morro Bay, Moss Landing, and Oakland, California. In 1999, the Utility also sold three fossil-fueled generating facilities (the Pittsburg and Contra Costa power plants located in Contra Costa County, and the Potrero power plant in San Francisco) and its geothermal generating facilities (The Geysers Power Plant located in Lake and Sonoma Counties). The Utility has retained liability for required environmental remediation of any pre-closing soil or groundwater contamination at these plants. In September 1999, the Utility filed an application with the CPUC to determine the market value of the Utility's hydroelectric generation facilities and related assets through an open competitive auction. The Utility proposes to use an auction process similar to the one previously used in the sale of the Utility's fossil fueled and geothermal plants. Under the process proposed in the application. PG&E Gen would be permitted to participate in the auction on the same basis as other bidders. The sale of the hydroelectric facilities would be subject to certain conditions, including the transfer or re-issuance of various permits and licenses by the FERC and other agencies. On January 13, 2000, the CPUC issued a ruling which separates the proceeding into two concurrent phases: one to review the potential environmental impacts of the proposed auction under the California Environmental Quality Act (CEQA) and a second to determine whether the Utility's auction proposal, or some other alternative to the proposal, is in the public interest. The ruling sets a procedural schedule which calls for a final CPUC decision on the Utility's auction proposal by October 19, 2000, and a final environmental impact report published in November 2000. The schedule calls for the auction, if approved, to begin in early November 2000 and end in early January 2001. The schedule anticipates that the divestiture process would be closed by June 1, 2001. Finally, the ruling prohibits the Utility from withdrawing its application without express CPUC authority. It is uncertain whether the CPUC will ultimately approve the Utility's auction proposal. Additional information about the potential financial impact of the proposed auction on the Utility and PG&E Corporation is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5. 13 As required by AB 1890, Utility employees, under two-year operations and maintenance agreements with the new owners, will continue to operate and maintain the power plants that have been sold. To the extent that payments to the Utility under these agreements exceed the Utility's cost of operating the plants, the additional revenue would be given to ratepayers. Conversely, to the extent the Utility's operating costs exceed the revenues from these agreements, the Utility absorbs these losses in earnings. Recovery of Transition Costs. As market-based revenues may not be sufficient to recover certain of the Utility's generation costs, AB 1890 provides the investor-owned utilities the opportunity to recover such uneconomic generation costs (called transition costs) for a certain period of time (the transition period). Some transition costs may be recovered after the transition period. Costs eligible for recovery as transition costs, as determined by the CPUC, include (1) above-market sunk costs (i.e., costs associated with utility generating facilities that are fixed and unavoidable and that were included in customer rates on December 20, 1995) and future sunk costs, such as costs related to plant removal, (2) costs associated with long- term contracts to purchase power at above-market prices from QFs and other power suppliers, and (3) generation-related regulatory assets and obligations. (In general, regulatory assets are expenses deferred in the current or prior periods to be included in rates in subsequent periods.) Transition costs are eligible for recovery from all customers (with certain exceptions) through a nonbypassable competition transition charge, or CTC, included as part of rates. Transition costs that are disallowed by the CPUC for collection from customers will be written off. As a prerequisite to any consumer obtaining direct access services, the consumer must agree to pay its applicable nonbypassable CTC. Most transition costs must be recovered by December 31, 2001, although certain transition costs may be recovered after December 31, 2001. These costs include (1) certain employee-related transition costs, (2) above-market payments under existing long-term contracts to purchase power, (3) up to $95 million of transition costs to the extent that the recovery of such costs during the transition period was displaced by the recovery of electric industry restructuring implementation costs, and (4) transition costs financed by the issuance of rate reduction bonds. In addition, nuclear decommissioning costs are being recovered through a CPUC-authorized charge, which will extend until sufficient funds exist to decommission the nuclear facility. The total amount of sunk costs to be included as transition costs will be based on the aggregate of above-market and below-market values of utility- owned generation assets and obligations. Under AB 1890, valuation of generation-related assets through appraisal, sale, or other divestiture must be completed by December 31, 2001. The value of seven of the Utility's power plants was established when these facilities were sold to third parties. In October 1998, the CPUC ruled that the market value of the Hunters Point power plant is zero. In September 1999, the Utility filed an application with the CPUC to determine the market value of the Utility's hydroelectric generating facilities and related costs through an open competitive auction. Retail Direct Access. Customers participating in direct access may purchase their electric power directly either through (1) competing non-utility retail electric providers such as brokers, marketers, aggregators, or other retailers, or (2) direct negotiated contracts with electric generators. All customers (with limited exceptions), whether they choose direct access or not, must pay the nonbypassable CTC, which will be collected by their distribution utility in connection with recovery of the utilities' transition costs. Utilities began accepting requests for direct access in November 1997 to become effective after direct access began. As of February 17, 2000, Pacific Gas and Electric Company had transferred 94,454 customers to direct access. The CPUC requires that electric customers with an electricity demand, or load, of 50 kilowatts (kW) or more must have meters that are capable of providing hourly data in order to participate in direct access. Those customers with a load less than 50 kW may participate in direct access either through "load profiling" or by installing an hourly meter. (Load profiling approximates the pattern of electricity usage for a given customer class and provides the equivalent of hourly meter reads.) The customer is responsible for the cost of the meter and the meter installation. Energy service providers supplying the direct access market may choose one of three billing options: (1) consolidated energy supplier billing, under which the utility bills the energy supplier for the services provided directly by the utility to the customer, and the supplier, in turn, provides a consolidated bill to the customer, (2) consolidated distribution company billing, under which the utility places the supplier's energy charge on a 14 distribution bill, or (3) dual billing, under which the energy supplier and the utility bill separately for their own services. Since January 1, 1999, energy service providers may provide metering to all of their customers. During 1999, the Utility continued its efforts to develop and implement changes to its business processes and systems, including customer information and billing systems, to accommodate direct access. To the extent the Utility is unable to successfully and timely develop and implement such changes, there could be an adverse impact on PG&E Corporation's and the Utility's future results of operations. Rate Levels and Rate Reduction Bonds. As required by AB 1890, electric rates for all customers have been frozen at the level in effect on June 10, 1996, and, beginning January 1, 1998, rates for residential and small commercial customers were reduced by 10% from 1996 levels. The electric rate freeze and electric rate reduction will continue throughout the transition period. In 1997, the Utility refinanced the expected 10% rate reduction with the proceeds from rate reduction bonds. On December 8, 1997, a special purpose entity established by the California Infrastructure and Economic Development Bank issued $2.9 billion (the expected revenue reduction from the rate decrease) of rate reduction bonds on behalf of a wholly owned subsidiary of the Utility. The bonds were issued in eight classes with maturities ranging from 10 months to 10 years, and bearing interest at rates ranging from 5.94% to 6.48%. The Utility is collecting from residential and small commercial customers a separate nonbypassable charge on behalf of the bondholders to recover principal, interest, and related costs over the life of the bonds. The bond proceeds were used by the wholly owned subsidiary to purchase from the Utility the right to be paid the revenues from this separate charge. The bonds are secured by the future revenue from the separate charge and not by the Utility's assets. While the bonds are reflected as long-term debt on the Utility's balance sheet, the Utility's creditors do not have any recourse to the revenues from the separate charge. The bonds allow for the rate reduction by lowering the carrying cost on a portion of the transition costs and by deferring recovery of a portion of these transition costs until after the transition period. During the rate freeze, the rate reduction bond debt service will not increase the Utility customers' electric rates. If the transition period ends before December 31, 2001, the Utility may be obligated to return a portion of the economic benefits of the transaction to customers. The timing of any such return and the exact amount of such portion, if any, have not yet been determined. Public Purpose Programs. Under AB 1890, the Utility is authorized to collect not less than $198 million in a separate nonbypassable charge included in frozen electric rates to fund Utility and other entities' investments in four public purpose programs: (1) cost-effective energy efficiency and energy conservation programs, (2), research, development and demonstration programs, (3), renewable energy resources programs, and (4) low-income electricity programs including targeted energy efficiency services and rate discounts. Low-income energy efficiency programs are funded at the level of need, but are not to be funded at less than the 1996 level of expenditures. Under this provision of AB 1890, the Utility is obligated to fund through electric rates energy efficiency and conservation programs in an amount not less than $106 million per year, public interest research and development programs at not less than $30 million per year, renewable energy technologies at not less than $48 million per year, and low-income energy efficiency programs at not less than $14 million per year. The Utility also collects funds for the California Alternate Rates for Energy (CARE) low-income discount rate, a rate subsidy paid for by the Utility's other customers, which is currently about $31 million per year. Under the oversight of the CPUC, the Utility administers both the cost- effective energy efficiency and low-income energy efficiency programs. These two programs are reviewed annually in the Annual Earnings Assessment Proceeding. In March 1999, the CPUC determined that these programs should continue to be administered by investor-owned utilities, subject to CPUC oversight, through 2001. Effective January 1, 2000, Section 327 of the California Public Utilities Code requires utilities to continue to administer low-income energy efficiency programs. In accordance with AB 1890, the California Energy Resources Conservation and Development Commission, (also called the California Energy Commission (CEC)) administers both the public interest research and development program and the renewable energy program on a statewide basis. The Utility transfers $78 million per year to the CEC for these two programs. Distributed Generation and Electric Distribution Competition. In October 1999, the CPUC issued a decision outlining how the CPUC, in cooperation with other regulatory agencies and the California Legislature, 15 plans to address the issues surrounding distributed generation, electric distribution competition, and the role of the utility distribution companies (such as Pacific Gas and Electric Company) in the competitive retail electricity market. Distributed generation enables siting of electric generation technologies in close proximity to the electric demand (referred to as "load"). The CPUC decision opened a new rulemaking proceeding to examine various issues concerning distributed generation, including interconnection issues, who can own and operate distributed generation, environmental impacts, the role of utility distribution companies, and the rate design and cost allocation issues associated with the deployment of distributed generation facilities. With respect to electric distribution competition, the CPUC directed its staff to deliver a report by April 21, 2000 on the different policy options that the CPUC, in cooperation with the California Legislature, can pursue. Following the issuance of the report, the CPUC expects to open one or more new proceedings to address electric distribution competition and competition in the retail electric market. Electric Operating Statistics At December 31, 1999, Pacific Gas and Electric Company served approximately 4.6 million electric distribution customers. During the transition period, the Utility is required to buy from the PX all electricity needed to provide service to retail customers that continue to choose the Utility as their electricity supplier. The following table shows the Utility's operating statistics (excluding subsidiaries) for electric energy, including the classification of sales and revenues by type of service.
1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Customers (average for the year): Residential............ 4,017,428 3,962,318 3,915,370 3,874,223 3,825,413 Commercial............. 474,710 469,136 465,461 459,001 454,718 Industrial............. 1,151 1,093 1,121 1,248 1,253 Agricultural........... 85,131 85,429 86,359 87,250 88,546 Public street and highway lighting...... 20,806 18,351 17,955 17,583 17,089 Other electric utilities............. 0 14 47 28 35 ---------- ---------- ---------- ---------- ---------- Total................ 4,599,226 4,536,341 4,486,313 4,439,333 4,387,054 ========== ========== ========== ========== ========== Sales-kWh (in millions): Residential............ 27,739 26,846 25,946 25,458 24,391 Commercial............. 30,426 28,839 28,887 27,868 27,014 Industrial(1).......... 16,722 16,327 16,876 15,786 16,879 Agricultural(1)........ 3,739 3,069 3,932 3,631 3,478 Public street and highway lighting...... 437 445 446 438 425 Other electric utilities............. 167 2,358 3,291 1,213 3,172 ---------- ---------- ---------- ---------- ---------- Total energy delivered........... 79,230 77,884 79,378 74,394 75,359 ========== ========== ========== ========== ========== Revenues (in thousands): Residential............ $2,961,788 $2,891,424 $3,082,013 $3,033,613 $2,979,590 Commercial............. 2,837,111 2,793,336 2,932,560 2,840,101 2,964,568 Industrial............. 863,951 933,316 1,028,378 1,005,694 1,160,938 Agricultural........... 391,876 350,445 413,711 396,469 395,531 Public street and highway lighting...... 49,209 51,195 53,183 55,372 56,154 Other electric utilities............. 16,501 50,166 118,781 81,855 133,566 Revenues from energy deliveries.......... 7,120,436 7,069,882 7,628,626 7,413,104 7,690,347 Miscellaneous.......... 162,105 161,156 (9,439) 112,303 92,538 Regulatory balancing accounts.............. (50,780) (40,408) 71,441 (365,192) (396,578) ---------- ---------- ---------- ---------- ---------- Operating revenues... $7,231,761 $7,190,630 $7,690,628 $7,160,215 $7,386,307 ========== ========== ========== ========== ==========
16 The following table shows certain customer information:
1999 1998 1997 1996 1995 Selected Statistics: ----- ----- ----- ----- ----- Average annual residential usage (kWh)........... 6,905 6,776 6,627 6,571 6,377 Average billed revenues per kWh (cents per kWh): Residential..................................... 10.68 10.77 11.88 11.92 12.22 Commercial...................................... 9.32 9.69 10.15 10.19 10.97 Industrial(1)................................... 5.17 5.72 6.09 6.37 6.88 Agricultural(1)................................. 10.48 11.42 10.52 10.92 11.37 Net plant investment per customer ($)............ 2,388 2,705 3,027 3,198 3,228
- -------- (1) Beginning April 1998, the sales-kWh and average billed revenues per kWh include electricity provided to direct access customers where the Utility does not earn commodity charges. Electric Generating Capacity At the beginning of 1999, the Utility's electric generation facilities included five primarily natural gas-fueled steam power plants with 15 units, four combustion turbines, two nuclear power reactor units at Diablo Canyon, 67 hydroelectric powerhouses with 107 units, and the Helms hydroelectric pumped storage plant (Helms) with three units. In 1998, the Utility sold three of its fossil-fueled power plants. In April and May 1999, the Utility sold three of its five remaining fossil-fueled power plants, which include 10 steam units and three combustion turbines, and its geothermal energy complex of 14 units. Together, the seven divested power plants represented 91% of the Utility's fossil-fueled generating capacity and all of its geothermal generating capacity. The facilities generated approximately 31% of the Utility's total electric energy production. The Utility is committed under long-term contracts to purchase power produced by other generating entities that use a wide array of resources and technologies, including hydroelectric, wind, solar, biomass, geothermal, and cogeneration. In addition, the Utility is interconnected with electric power systems in 14 western states and British Columbia, Canada, for the purposes of buying, selling, and transmitting power. During the transition period, the Utility is required to bid or schedule into the PX and ISO markets all of the electricity generated by its power plants and electricity acquired under contractual agreements with unregulated generators. 17 Except as otherwise noted below, as of December 31, 1999, Pacific Gas and Electric Company owned and operated the following generating plants, all located in California, listed by energy source:
Number of Net Operating Generation Type County Location Units Capacity kW --------------- --------------- ------ ------------- Hydroelectric: Conventional Plants(1)....... 16 counties in Northern and Central California 107 2,684,100 Helms Pumped Storage Plant(1).................... Fresno 3 1,212,000 --- --------- Hydroelectric Subtotal..... 110 3,896,100 --- --------- Steam Plants: Humboldt Bay................. Humboldt 2 105,000 Hunters Point(2)............. San Francisco 3 377,000 --- --------- Steam Subtotal............. 5 482,000 --- --------- Combustion Turbines: Hunters Point(2)............. San Francisco 1 52,000 Mobile Turbines(3)........... Humboldt and Mendocino 3 45,000 --- --------- Combustion Turbines Subtotal.................. 4 97,000 --- --------- Nuclear: Diablo Canyon................ San Luis Obispo 2 2,160,000 --- --------- Total...................... 121 6,635,100 === =========
- -------- (1) In September 1999, the Utility filed an application with the CPUC to determine the market value of the Utility's hydroelectric generating facilities and related assets through an open competitive auction. (See "Utility Operations--Electric Utility Operations--California Electric Industry Restructuring" above.) (2) In July 1998, the Utility reached an agreement with the City and County of San Francisco regarding the Hunters Point fossil-fueled power plant, which the ISO has designated as a "must run" facility. The agreement expresses the Utility's intention to retire the plant when it is no longer needed by the ISO. (3) Listed to show capability; subject to relocation within the system as required. Diablo Canyon Diablo Canyon Operations Diablo Canyon consists of two nuclear power reactor units, each capable of generating up to approximately 26 million kilowatt-hours (kWh) of electricity per day. Diablo Canyon Units 1 and 2 began commercial operation in May 1985 and March 1986, respectively. The operating license expiration dates for Diablo Canyon Units 1 and 2 are September 2021 and April 2025, respectively. As of December 31, 1999, Diablo Canyon Units 1 and 2 had achieved lifetime capacity factors of 82% and 83%, respectively. The table below outlines Diablo Canyon's refueling schedule for the next five years. Diablo Canyon refueling outages typically are scheduled every 19 to 21 months. The schedule below assumes that a refueling outage for a unit will last approximately thirty days, depending on the scope of the work required for a particular outage. The schedule is subject to change in the event of unscheduled plant outages.
2000 2001 2002 2003 2004 ---- ---- ---- ---- ---- Unit 1 Refueling..................... October May February Startup....................... November June March Unit 2 Refueling..................... May February October Startup....................... June March November
18 Diablo Canyon Ratemaking Since January 1, 1997, the Utility's sunk costs in Diablo Canyon are recovered from ratepayers through a sunk cost revenue requirement, at a reduced return on common equity equal to 6.77% that will remain in effect through the end of the transition period. (Sunk costs are costs associated with the facility that are fixed and unavoidable.) The Diablo Canyon sunk costs revenue requirement is being recovered as a transition cost through the TCBA. In connection with the new ratemaking, the CPUC ordered that a financial verification audit of Diablo Canyon plant accounts be performed by an independent accounting firm, and that the CPUC hold a proceeding to review the results of the audit, including any proposed adjustments to Diablo Canyon accounts, following the completion of the audit. On August 31, 1998, an independent accounting firm retained by the CPUC completed its financial verification audit of the December 31, 1996 Diablo Canyon plant accounts. The audit resulted in the issuance of an unqualified opinion. The audit verified that Diablo Canyon sunk costs at December 31, 1996, were $3.3 billion of the total $7.1 billion construction costs. The independent accounting firm also issued an agreed-upon special procedures report, requested by the CPUC, which questioned $200 million of the $3.3 billion sunk costs. The CPUC will review the results of the audit and may seek to make adjustments to Diablo Canyon sunk costs subject to transition cost recovery. At this time, what action the CPUC may take regarding the audit, if any, cannot be predicted. Also since January 1, 1997, a performance-based Incremental Cost Incentive Price (ICIP) mechanism has been used to recover Diablo Canyon's operating costs and the cost of capital additions incurred after December 31, 1996. The ICIP mechanism establishes a rate per kWh generated by the facility for the period 1997 through 2001. The CPUC-authorized ICIP prices and revenue requirement for Diablo Canyon for 2000 and 2001 are shown below. The ICIP revenues are based on an assumed capacity factor of 83.6%.
Estimated Total Revenue Requirement ------------------- 2000 2001 --------- --------- ICIP (cents per kWh).................................. 3.43 3.49 Sunk Cost Recovery ($ in millions).................... $ 1,197 $ 1,135 ICIP Revenues ($ in millions)......................... 542 552 --------- --------- Total Revenue Requirement ($ in millions)............. $ 1,739 $ 1,687 ========= =========
Any variance between ICIP revenues and related costs is reflected in earnings. In October 1999, the CPUC issued a decision that will discontinue the ICIP mechanism after the transition period. After the transition period, Diablo Canyon generation must be sold at the prevailing market price for power. The Utility has filed an application for rehearing of this decision. Further, pursuant to the 1997 CPUC decision establishing the ICIP, the Utility is required to begin sharing 50% of the net benefits of operating Diablo Canyon with ratepayers beginning January 1, 2002. The CPUC may interpret a more recent CPUC decision to require sharing to begin at the end of the transition period. The Utility is required to file an application with the CPUC in July 2000 with its proposal for the methods to be used in the valuation of the benefits associated with the operation of Diablo Canyon and the mechanism to be used to share these benefits with ratepayers. (See "Utility Operations--Ratemaking Mechanisms--Electric Ratemaking--Post- Transition Period Ratemaking Mechanisms" above.) Additional information concerning the financial impact of Diablo Canyon ratemaking is included in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5, and in Note 2 of the "Notes to Consolidated Financial Statements" beginning on page 40 of the 1999 Annual Report to Shareholders. Nuclear Fuel Supply and Disposal Pacific Gas and Electric Company has purchase contracts for, and inventories of, uranium concentrates, uranium hexaflouride, and enriched uranium, as well as one contract for fuel fabrication. Based on current Diablo Canyon operations forecasts and a combination of existing contracts and inventories, the requirement for uranium 19 supply will be met through 2004, the requirement for the conversion of uranium to uranium hexaflouride will be met through 2001, and the requirement for the enrichment of the uranium hexaflouride to enriched uranium will be met through 2002. The fuel fabrication contract for the two units will supply their requirements for the next seven operating cycles of each unit. These contracts are intended to ensure long-term fuel supply, but permit the Utility the flexibility to take advantage of short-term supply opportunities. In most cases, the Utility's nuclear fuel contracts are requirements-based, with the Utility's obligations linked to the continued operation of Diablo Canyon. Under the Nuclear Waste Policy Act of 1982 (Nuclear Waste Act), the U.S. Department of Energy (DOE) is responsible for the transportation and ultimate long-term disposal of spent nuclear fuel and high-level radioactive waste. Under the Nuclear Waste Act, utilities are required to provide interim storage facilities until permanent storage facilities are provided by the federal government. The Nuclear Waste Act mandates that one or more such permanent disposal sites be in operation by 1998. Consistent with the law, Pacific Gas and Electric Company signed a contract with the DOE providing for the disposal of the spent nuclear fuel and high-level radioactive waste from the Utility's nuclear power facilities beginning not later than January 1998. However, due to delays in identifying a storage site, the DOE has been unable to meet its contract commitment to begin accepting spent fuel by January 1998. Further, under the DOE's current estimated acceptance schedule for spent fuel, Diablo Canyon's spent fuel may not be accepted by the DOE for interim or permanent storage before 2010, at the earliest. At the projected level of operation for Diablo Canyon, the Utility's facilities are sufficient to store on-site all spent fuel produced through approximately 2006 while maintaining the capability for a full-core off-load. It is likely that an interim or permanent DOE storage facility will not be available for Diablo Canyon's spent fuel by 2006. The Utility is examining options for providing additional temporary spent fuel storage at Diablo Canyon or other facilities, pending disposal or storage at a DOE facility. In July 1988, the NRC gave final approval to the Utility to store radioactive waste from the nuclear generating unit (Unit 3) at Humboldt Bay Power Plant (Humboldt) at Humboldt before ultimately decommissioning the unit. The Utility has agreed to remove all spent fuel when the federal disposal site is available. Insurance Pacific Gas and Electric Company has insurance coverage for property damage and business interruption losses as a member of Nuclear Electric Insurance Limited (NEIL). NEIL, which is owned by utilities with nuclear generating facilities, provides insurance coverage against property damage, decontamination, decommissioning, and business interruption and/or extra expenses during prolonged accidental outages for reactor units in commercial operation. Under these insurance policies, if the nuclear generating facility of a member utility suffers a loss due to a prolonged accidental outage, the Utility may be subject to maximum retrospective premium assessments of $15 million (property damage) and $4 million (business interruption), in each case per one-year policy period, if losses exceed the resources of NEIL. The Utility has purchased primary insurance of $200 million for public liability claims resulting from a nuclear incident. An additional $9.3 billion of coverage is provided by secondary financial protection required by federal law and provides for loss sharing among utilities owning nuclear generating facilities if a costly incident occurs. If a nuclear incident results in claims in excess of $200 million, the Utility may be assessed up to $176 million per incident, with payments in each year limited to a maximum of $20 million per incident. Decommissioning Pacific Gas and Electric Company's estimated total obligation to decommission and dismantle its nuclear power facilities is $1.6 billion in 1999 dollars ($5.1 billion in future dollars). This estimate, which includes labor, materials, waste disposal charges, and other costs, is based on a 1997 decommissioning cost study. A contingency to capture engineering, regulatory, and business environment changes is included in the total estimated obligation. Actual decommissioning costs are expected to vary from this estimate because of changes in the assumed dates of decommissioning, regulatory requirements, and technology, as well as differences in the 20 amount of labor, materials, and equipment needed to complete decommissioning. The estimated total obligation needed to complete decommissioning is recognized proportionately over the license term of each facility. Nuclear decommissioning costs recovered in rates are placed in external trust funds. These funds, along with accumulated earnings, will be used exclusively for decommissioning and dismantling the nuclear facilities. The trust funds maintain substantially all of their investments in debt and equity securities. All earnings on the trust fund, net of authorized disbursements from the trusts and management and administrative fees, are reinvested. Monies may not be released from the external trust funds until authorized by the CPUC. In December 1997, the CPUC granted the Utility's request for authority to disburse up to $15.7 million from the Humboldt Bay Power Plant decommissioning trust funds to finance three partial nuclear decommissioning projects at Humboldt Bay Power Plant Unit 3. Accordingly, as of December 31, 1999, $9.3 million (net of taxes) has been disbursed from the Humboldt Bay Power Plant Unit 3 non-tax-qualified trust to reimburse the Utility for nuclear decommissioning expenses associated with the partial decommissioning projects. The remaining $6.4 million of the approved expenses is expected to be funded with associated tax savings. In its 1999 GRC, Pacific Gas and Electric Company sought approval from the CPUC to use the tax savings resulting from the payment of tax-deductible nuclear decommissioning expenses from the Humboldt Bay Power Plant Unit 3 non- tax-qualified trust to fund nuclear decommissioning work. The CPUC found that the Utility's recommended approach of using the tax benefit to fund decommissioning activity was reasonable and approved the Utility's request. As of December 31, 1999, the Utility had accumulated external trust funds with an estimated fair value of $1.3 billion, based on quoted market prices and net of deferred taxes on unrealized gains, to be used for the decommissioning of the Utility's nuclear facilities. The amount recovered in rates for nuclear decommissioning costs is authorized by the CPUC as part of the GRC. The CPUC considers the trusts' asset levels, together with revised earnings and decommissioning cost assumptions, to determine the amount of decommissioning costs it will authorize in rates for contribution to the trusts. The monies contributed to the decommissioning trusts, together with existing trust fund balances and projected earnings, are intended to satisfy the estimated future obligation for decommissioning costs. For the year ended December 31, 1999, annual nuclear decommissioning trust contributions collected in rates were $26.47 million. Since January 1, 1998, nuclear decommissioning costs, which are not transition costs, have been recovered through a nonbypassable charge that will continue until those costs are fully recovered. Recovery of decommissioning costs may be accelerated to the extent possible under the rate freeze. The CPUC has established a Nuclear Decommissioning Costs Triennial Proceeding to determine the decommissioning costs and to establish the annual revenue requirement and attrition factors over subsequent three-year periods when and if GRCs are discontinued. Other Electric Resources QF Generation and Other Power Purchase Contracts By federal law, Pacific Gas and Electric Company is required to purchase electric energy and capacity provided by independent power producers that are qualifying facilities (QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA). The CPUC established a series of QF long-term power purchase contracts and set the applicable terms, conditions, price options, and eligibility requirements. Under these contracts, the Utility is required to make payments only when energy is supplied (an "energy payment") or when capacity commitments are met (a "capacity payment"). Costs associated with these contracts to purchase power are eligible for recovery by the Utility as transition costs through the collection of the nonbypassable CTC. The Utility's contracts with these power producers expire on various dates through 2028. Deliveries from these power producers account for approximately 23% of the Utility's 1999 electric energy requirements and no single contract accounted for more than 5% of the Utility's energy needs. 21 The Utility has negotiated with several QFs for early termination of their power purchase contracts. For other contracts, the Utility has negotiated with QFs to refrain from producing energy during the remaining term of the higher fixed energy price period under their contract (a "buy-down") or to curtail energy production for shorter periods of time (a "curtailment"). At December 31, 1999, the total discounted future payments due under the renegotiated contracts that are subject to early termination, buy-down or curtailment, was $16 million. Of the $16 million, the Utility has recovered $6.6 million in rates and expects to recover the remaining $9.4 million in future rates. As of December 31, 1999, the Utility had commitments to purchase approximately 5,200 MW of capacity under CPUC-mandated power purchase agreements. Of the 5,200 MW, approximately 4,500 MW are operational. Development of the majority of the balance is uncertain and it is estimated that very few of the remaining contracts will become operational. The 4,500 MW of operational capacity consists of 2,800 MW from co-generation projects, 700 MW from wind projects, and 1,000 MW from other projects, including biomass, waste-to-energy, geothermal, solar, and hydroelectric. The Utility also has contracts with various irrigation districts and water agencies to purchase hydroelectric power. Under these contracts, the Utility must make specified semi-annual minimum payments whether or not any energy is supplied (subject to the supplier's retention of the FERC's authorization) and variable payments for operation and maintenance costs incurred by the suppliers. These contracts expire on various dates from 2004 to 2031. Costs associated with these contracts to purchase power are eligible for recovery by the Utility as transition costs through the collection of the nonbypassable CTC. At December 31, 1999, the undiscounted future minimum payments under these contracts are approximately $32.7 million for each of the years 2000 through 2004 and a total of $280 million for periods thereafter. Irrigation district and water agency deliveries in the aggregate account for approximately 5.8% of the Utility's 1999 electric energy requirements. The amount of energy received and the total payments made under all these power purchase contracts were:
1999 1998 1997 ------ ------ ------ (in millions) Kilowatt-hours received.............................. 25,910 25,994 24,389 Energy payments...................................... $ 837 $ 943 $1,157 Capacity payments.................................... $ 539 $ 529 $ 538 Irrigation district and water agency payments........ $ 60 $ 53 $ 56
Electric Transmission and Distribution To transport energy to load centers, Pacific Gas and Electric Company as of December 31, 1999, owned approximately 18,624 circuit miles of interconnected transmission lines of 60 kilovolts (kV) to 500 kV and transmission substations having a capacity of approximately 42,106,600 kilovolt-amperes (kVa), including spares, excluding power plant interconnection facilities. Energy is distributed to customers through approximately 113,289 circuit miles of distribution system and distribution substations having a capacity of approximately 23,773,000 kVa. In 1998, the utilities relinquished control, but not ownership, of their transmission facilities to the ISO. The ISO commenced operations on March 31, 1998. The ISO, regulated by the FERC, controls the operation of the transmission system and provides open access transmission service on a nondiscriminatory basis. In 1998, the FERC approved the various forms of agreements for must-run facilities that have been entered into between the utilities and the ISO to ensure grid reliability. The FERC also has approved a proposal from Pacific Gas and Electric Company and the other California utilities that distinguishes between local distribution facilities and transmission facilities. The FERC will have jurisdiction over the transmission facilities as defined in the order and over the transmission aspects of direct access. Most of the Utility's distribution services remain subject to CPUC jurisdiction. 22 The CPUC is considering whether it should pursue further reforms in the structure and regulatory framework governing electricity distribution service. See "Utility Operations--Electric Utility Operations--California Electric Industry Restructuring" above. During 1999, the Utility and various other parties, including the ISO and the CPUC, issued reports on their investigation into the power outage that occurred on December 8, 1998, in the San Francisco Bay area. In March 1999, the ISO issued its report on the outage that concluded that the Utility's system was designed in accordance with industry standards and responded as expected under the circumstances. The ISO's report identified a number of measures for the Utility to undertake to minimize the likelihood of a similar event occurring in the future. Reports by other parties, including the CPUC, have also recommended corrective measures. Since the outage, the Utility has revised its grounding and switching procedures as preventive measures to minimize the risk that the type of initiating event that caused the outage could occur in the future. On October 20, 1999, the Utility submitted a report to the CPUC describing how its corrective actions implements the ISO's recommendations, and responds to the other parties' recommendations. The CPUC is currently holding workshops to address the issues in the proceeding. After the conclusion of the workshops, the CPUC plans to convene another prehearing conference to discuss how to address any remaining issues. Gas Utility Operations Pacific Gas and Electric Company owns and operates an integrated gas transmission, storage, and distribution system in California. The Utility served approximately 3.8 million gas customers at December 31, 1999. Most of these customers continue to obtain gas supplies from the Utility under regulated tariff rates. At December 31, 1999, the Utility's system, including the PG&E Expansion (Line 401), consisted of approximately 6,225 miles of transmission pipelines, three gas storage facilities, and approximately 37,487 miles of gas distribution lines. The PG&E Expansion is the Utility's portion of an expansion of the interconnected natural gas transmission systems of the Utility and PG&E Gas Transmission, Northwest Corporation (PG&E GT-Northwest) which extends from the Canadian border into California (Pipeline Expansion). Including the portion owned by PG&E GT-Northwest (PG&E GT-NW Expansion), the 840-mile combined Pipeline Expansion provides an additional 148 million cubic feet per day (MMcf/d) of firm capacity to the Pacific Northwest and an additional 851 MMcf/d of capacity to Northern and Southern California. The Gas Accord resolved various issues concerning the PG&E Expansion and also established certain rules for ratemaking and terms of service applicable to the PG&E Expansion. The Utility's peak day send-out of gas on its integrated system in California during the year ended December 31, 1999, was 3,503 million cubic feet (MMcf). The total volume of gas throughput during 1999 was approximately 840,000 MMcf, of which 309,000 MMcf was sold to direct end-use or resale customers, 47,000 MMcf was used by the Utility primarily for its fossil-fueled electric generating plants, and 484,000 MMcf was transported as customer-owned gas. The California Gas Report, which presents the outlook for natural gas requirements and supplies for California over a long-term planning horizon, is prepared annually by the California electric and gas utilities as a result of a CPUC order. A comprehensive biennial report is prepared in even-numbered years with a supplemental report in intervening odd-numbered years updating recorded data for the previous year. The 1998 California Gas Report updates the Utility's annual gas requirements forecast (excluding bypass volumes) for the years 1999 through 2015, forecasting average annual growth in gas throughput served by the Utility of approximately 1.5%. The gas requirements forecast is subject to many uncertainties and there are many factors that can influence the demand for natural gas, including weather conditions, level of utility electric generation, fuel switching, and new technology. In addition, some large customers, mostly in the industrial and enhanced oil recovery sectors, may have the ability to use unregulated private pipelines or interstate pipelines, bypassing the Utility's system entirely. 23 Gas Operating Statistics The following table shows Pacific Gas and Electric Company's operating statistics (excluding subsidiaries) for gas, including the classification of sales and revenues by type of service.
Years Ended December 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Customers (average for the year): Residential............ 3,593,355 3,536,089 3,491,963 3,455,086 3,417,556 Commercial............. 203,342 200,620 198,453 198,071 197,939 Industrial............. 1,625 1,610 1,650 1,500 1,500 Other gas utilities.... 4 5 3 2 2 ---------- ---------- ---------- ---------- ---------- Total.............. 3,798,326 3,738,324 3,692,069 3,654,659 3,616,997 ========== ========== ========== ========== ========== Gas supply--thousand cubic feet (Mcf) (in thousands): Purchased from suppliers in: Canada............... 230,808 298,125 280,084 253,209 261,800 California........... 18,956 17,724 10,655 28,130 31,158 Other states......... 107,226 122,342 131,074 110,604 117,538 ---------- ---------- ---------- ---------- ---------- Total purchased.... 356,990 438,191 421,813 391,943 410,496 Net (to storage) from storage............... (980) (14,468) 14,160 6,871 (10,921) ---------- ---------- ---------- ---------- ---------- Total.............. 356,010 423,723 435,973 398,814 399,575 Pacific Gas and Electric Company use, losses, etc.(1)....... 47,152 129,305 173,789 134,375 129,671 ---------- ---------- ---------- ---------- ---------- Net gas for sales.. 308,858 294,418 262,184 264,439 269,904 ========== ========== ========== ========== ========== Bundled gas sales and transportation service--Mcf (in thousands): Residential............ 233,482 223,706 191,327 190,246 191,724 Commercial............. 70,093 66,082 60,803 62,178 64,135 Industrial............. 5,255 4,616 10,054 12,015 14,045 Other gas utilities.... 28 14 0 0 0 ---------- ---------- ---------- ---------- ---------- Total.............. 308,858 294,418 262,184 264,439 269,904 ========== ========== ========== ========== ========== Transportation service only--Mcf (in thousands): Vintage system (Substantially all Industrial)(2)........ 447,867 319,099 218,660 189,695 143,921 PG&E Expansion (Line 401).................. 36,351 77,773 233,269 237,776 240,506 ---------- ---------- ---------- ---------- ---------- Total.............. 484,218 396,872 451,929 427,471 384,427 ========== ========== ========== ========== ========== Revenues (in thousands): Bundled gas sales and transportation service: Residential.......... $1,542,705 $1,414,313 $1,170,135 $1,109,463 $1,205,223 Commercial........... 448,655 426,299 374,084 362,819 421,397 Industrial........... 24,638 24,634 46,592 42,520 42,106 Other gas utilities.. 77 1,072 3,701 510 0 ---------- ---------- ---------- ---------- ---------- Bundled gas revenues.......... 2,016,075 1,866,318 1,594,512 1,515,312 1,668,726 Transportation only revenue: Vintage system (Substantially all Industrial)......... 267,544 232,038 207,160 180,197 167,325 PG&E Expansion (Line 401)................ 19,091 42,194 90,180 85,144 82,904 ---------- ---------- ---------- ---------- ---------- Transportation service only revenue.......... 286,635 274,232 297,340 265,341 250,229 Miscellaneous.......... (47,311) 41,364 50,295 (9,271) (18,018) Regulatory balancing accounts.............. (259,648) (448,351) (137,787) 57,864 (43,771) ---------- ---------- ---------- ---------- ---------- Operating revenues.......... $1,995,751 $1,733,563 $1,804,360 $1,829,246 $1,856,499 ========== ========== ========== ========== ==========
- -------- (1) Primarily includes fuel for Pacific Gas and Electric Company's fossil- fueled generating plants. (2) Does not include on-system transportation volumes transported on the PG&E Expansion of 1,251 MMcf, 34,169 MMcf, 72,958 MMcf, 78,552 MMcf, and 100,207 MMcf for 1999, 1998, 1997, 1996, and 1995, respectively. 24
Years Ended December 31, ---------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Selected Statistics: Average annual residential usage (Mcf)...................... 65 63 55 55 56 Heating temperature--% of normal (1)........................ 108.5 93.0 71.7 75.7 75.3 Average billed bundled gas sales revenues per Mcf: Residential................................................ $ 6.61 $ 6.32 $ 6.12 $ 5.83 $ 6.29 Commercial................................................. 6.40 6.45 6.15 5.84 6.57 Industrial................................................. 4.69 5.36 4.63 3.54 3.00 Average billed transportation only revenue per Mcf: Vintage system............................................. 0.66 0.66 0.71 0.67 0.69 PG&E Expansion (Line 401).................................. 0.53 0.54 0.39 0.36 0.34 Net plant investment per customer (2)...................... $1,011 $1,040 $1,031 $1,061 $1,025
- -------- (1) Over 100% indicates colder than normal. Natural Gas Supplies The objective of Pacific Gas and Electric Company's Gas Procurement Department is to maintain a balanced supply portfolio that provides supply reliability and contract flexibility, minimizes costs, and fosters competition among the Utility's gas suppliers. To ensure a diverse and competitive mix of natural gas supplies to serve the Utility's customers, the Utility purchases gas directly from producers and marketers in both Canada and the United States. Under current CPUC regulations, the Utility purchases natural gas from its various suppliers based on economic considerations, consistent with regulatory, contractual, and operational constraints. During the year ended December 31, 1999, approximately 65% of the Utility's total purchases of natural gas consisted of Canadian-sourced gas transported by Canadian pipeline companies and PG&E GT-Northwest and Rocky Mountain-sourced gas transported by PG&E GT- Northwest, approximately 5% was purchased in California, approximately 22% was purchased in the U.S. Southwest and was transported primarily by the El Paso Natural Gas Company and Transwestern Pipeline Company pipelines, and approximately 8% was purchased in the Rocky Mountains and transported by Kern River Gas Transmission Company. California purchases include supplies from various California producers and supplies transported into California by others. The following table shows the total volume and average price of gas in dollars per thousand cubic feet (Mcf) purchased by the Utility from these sources during each of the last five years.
1999 1998 1997 1996 1995 ------------------ ------------------ ------------------ ------------------ ------------------ Thousands Avg. Thousands Avg. Thousands Avg. Thousands Avg. Thousands Avg. of Mcf Price(1) of Mcf Price(1) of Mcf Price(1) of Mcf Price(1) of Mcf Price(1) --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- Canada................. 230,808 $2.50 298,125 $2.00 280,084 $1.77 253,209 $1.57 261,800 $1.34 California............. 18,956 2.45 17,724 2.44 10,655 2.12 28,130 1.90 31,158 1.32 Other states (substantially all U.S. Southwest)....... 107,227 2.42 122,342 2.62 131,074 3.75 110,604 3.72 117,538 2.64 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total/Weighted Average............... 356,991 $2.47 438,191 $2.19 421,813 $2.39 391,943 $2.21 410,496 $1.71 ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- -------- (1) The average prices for Canadian and U.S. Southwest gas include the commodity gas prices, interstate pipeline demand or reservation charges, transportation charges, and other pipeline assessments, including direct bills allocated over the quantities received at the California border. Beginning March 1, 1998, the average price for gas also includes intrastate pipeline demand and reservation charges. These costs previously were bundled in gas rates. Gas Regulatory Framework In August 1997, the CPUC approved the Gas Accord, which restructured Pacific Gas and Electric Company's gas services and its role in the gas market. Among other matters, the Gas Accord separates, or "unbundles," the rates for the Utility's gas transmission services from its distribution services. As a result of 25 the Gas Accord, the Utility's customers may buy gas directly from competing suppliers and purchase transmission-only and distribution-only services from the Utility. Most of the Utility's industrial and larger commercial customers (noncore customers) now purchase their gas from marketers and brokers. Substantially all residential and smaller commercial customers (core customers) buy gas as well as transmission and distribution services from the Utility as a bundled service. Customer rates for gas are updated on a monthly basis to reflect changes in the Utility's gas procurement costs. The Gas Accord established an incentive mechanism (the core procurement incentive mechanism or CPIM) for recovery of the Utility's core gas procurement costs as described below. The Gas Accord also established gas transmission and storage rates for the period from March 1998 through December 31, 2002. Rates for gas distribution service continue to be set by the CPUC in BCAP proceedings, and are designed to provide the Utility an opportunity to recover its costs of service and include a return on investment. See "Utility Operations--California Ratemaking Mechanisms--Gas Ratemaking--The Biennial Cost Allocation Proceeding (BCAP)." The CPUC is considering further changes in California's natural gas industry. Additional information concerning gas industry restructuring, and the financial impact of these changes on PG&E Corporation, is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5. Transportation Commitments Pacific Gas and Electric Company has gas transportation service agreements with various Canadian and interstate pipeline companies. These agreements include provisions for payment of fixed demand charges for reserving firm capacity on the pipelines. The total demand charges that the Utility will pay each year may change due to changes in tariff rates. The total demand and volumetric transportation charges paid by the Utility under these agreements were approximately $97 million in 1999. This amount includes payments made to PG&E GT-Northwest of approximately $47 million in 1999, which are eliminated in the consolidated financial statements of PG&E Corporation. As a result of regulatory changes, the Utility no longer procures gas for most of its noncore customers, resulting in a decrease in the Utility's need for firm transportation capacity for its gas purchases. The Utility continues to procure gas for almost all of its core customers and those noncore customers who choose bundled service (core subscription customers). The Utility is continuing its efforts to broker or assign any of its remaining contracted-for but unused interstate and Canadian transportation capacity, including unused capacity held for its core and core-subscription customers. Under a firm transportation agreement with PG&E GT-Northwest that runs through October 31, 2005, the Utility currently retains capacity of approximately 600 MMcf/d on the PG&E GT-Northwest system to support its core and core-subscription customers. The Utility has been able to broker its unused capacity on PG&E GT-Northwest's system, when not needed for core and core-subscription customers. In 1992, the Utility entered into a firm transportation agreement with Transwestern Pipeline Company (Transwestern), which expires in 2007, to hold capacity to meet core gas sales demands and electric generation needs. Since the Utility has sold most of its fossil-fueled generating plants in connection with electric industry restructuring and no longer needs natural gas for electric generation, the Utility permanently released 50 MMcf/d of firm capacity under this contract. As a result, the demand charges associated with the entire Transwestern capacity currently approximate $22 million per year. The Utility may recover demand charges through the CPIM and through brokering activities. 26 Core Procurement Incentive Mechanism The Utility's core gas procurement costs through 2002 are recoverable in rates under the CPIM, which provides the Utility with a direct financial incentive to procure gas and transportation services at the lowest reasonable costs. Under the CPIM, all Utility procurement costs are compared to an aggregate market-based benchmark. If costs fall within a range (tolerance band) around the benchmark, costs are deemed reasonable and fully recoverable from ratepayers. If procurement costs fall outside the tolerance band, the Utility's ratepayers and shareholders share savings or costs, respectively. Under the Gas Accord and CPIM mechanism, all Utility procurement costs from June 1, 1994 to October 31, 1998, were approved by the CPUC as reasonable. For the period from December 1, 1997 to October 31, 1998, the CPUC, with ORA support, has recognized savings outside of the tolerance band, and for that period has awarded approximately $2 million of the savings to shareholders. In January 2000, the Utility filed a CPIM performance report for the period of November 1, 1998, through October 31, 1999. The report determined that all gas commodity and transportation costs for the period were within the tolerance band, and therefore should be deemed reasonable and recoverable in full from ratepayers. 27 NATIONAL ENERGY GROUP PG&E Corporation's National Energy Group has been formed to pursue opportunities created by the gradual deregulation of the energy industry across the nation. The National Energy Group integrates PG&E Corporation's national power generation, gas transmission, and energy trading and services businesses. The National Energy Group contemplates increasing PG&E Corporation's national market presence through a balanced program of acquisition and development of energy assets and businesses, while at the same time undertaking ongoing portfolio management of its assets and businesses. PG&E Corporation's ability to anticipate and capture profitable business opportunities created by deregulation will have a significant impact on PG&E Corporation's future operating results. Gas Transmission Operations PG&E Corporation participates in the "midstream" portion of the gas business through PG&E GT. PG&E GT consists of three principal entities: PG&E Gas Transmission, Texas Corporation, PG&E Gas Transmission Teco, Inc., and PG&E GT-Northwest. PG&E Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc. are referred to collectively as PG&E Gas Transmission, Texas (PG&E GTT). The "midstream" gas business includes (1) gas gathering, processing, storage, and transportation of natural gas and natural gas liquids (NGLs), and (2) the marketing of natural gas and NGLs. PG&E GT's gas transmission facilities are operated through offices in various cities, including Houston and San Antonio, Texas and Portland, Oregon. PG&E GT competes with, among others, major interstate and intrastate pipeline companies in the transportation of natural gas and NGLs. The principal elements of competition among pipeline companies are rates, terms of service, flexibility, and reliability of service. Natural gas competes with other forms of energy available to PG&E GT's customers and end-users, including electricity, coal, and fuel oils. A significant competitive factor is price. Changes in the availability or price of natural gas and other forms of energy, the level of business activity, conservation, legislation, and governmental regulations, the capability to convert to alternative fuels, and other factors, including weather, affect the demand for natural gas. PG&E GT also competes with, among others, major integrated energy companies, the marketing affiliates of the major interstate and intrastate pipelines, national and local gas gatherers, brokers, marketers, and distributors for natural gas supplies, in gathering and processing natural gas and in marketing natural gas and NGLs. Competition for natural gas supplies is based on a number of factors, including flexibility in contract terms and conditions, reliability, availability of transportation, and price for the natural gas and NGLs. Competition for sales customers is based upon, among other factors, flexibility of contract terms and conditions, reliability and price of delivered natural gas and NGLs. PG&E Gas Transmission, Texas PG&E GTT owns and operates gas gathering, transportation, and processing facilities, and NGL pipelines. The NGL business includes the gathering of natural gas, the extraction of NGLs from natural gas, the fractionation of mixed NGLs into component products (e.g., ethane, propane, butane, and natural gasoline), and the transportation and marketing of NGLs. The Texas operations include approximately 6,700 miles of natural gas pipelines and joint ownership or leasehold interests in approximately 1,300 miles of pipelines, including pipelines from Waha in west Texas to the Katy area near Houston, Texas. These pipeline systems have the capacity to transport more than 3 billion cubic feet (bcf) of gas per day. The Texas assets also include approximately 536 miles of NGL pipelines and nine natural gas processing plants with a combined capacity of approximately 1.6 bcf per day of gas throughput, capable of producing approximately 100,000 barrels per day of NGLs, and a long-term lease of 7.2 bcf of storage capacity. PG&E GTT participates in all areas of the midstream portion of the gas business. PG&E GTT markets gas to gas distribution companies, electric utilities, municipalities, marketers, independent power producers, and end-use customers. It also transports natural gas for these customers, producers, and other pipelines, and markets and transports NGLs to various customers, including end-use customers. 28 On January 27, 2000, PG&E Corporation's National Energy Group signed a definitive agreement with El Paso Field Services Company providing for the sale to El Paso Field Services Company, a subsidiary of El Paso Energy Corporation, of the stock of PG&E Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc. (collectively PG&E GTT). Closing of the sale, which is expected near the end of the first half of 2000, is subject to approval under the Hart Scott Rodino Act. Additional information concerning the sale of PG&E GTT is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5, and in Note 5 of the "Notes to Consolidated Financial Statements" beginning on page 47 of the 1999 Annual Report to Shareholders. PG&E GT-Northwest PG&E GT-Northwest owns and operates gas transmission pipelines and associated facilities which extend over 612 miles from the Canada-U.S. border to the Oregon-California border. PG&E GT-Northwest participates in the midstream portion of the gas business by providing firm and interruptible transportation services to third party shippers on an open access, nondiscriminatory basis. Its customers are principally retail gas distribution utilities, electric utilities that use natural gas to generate electricity, natural gas marketing companies, natural gas producers, and industrial companies. PG&E GT-Northwest's largest customer in 1999 was Pacific Gas and Electric Company, accounting for approximately $49 million, or 23.5% of its transportation revenues. PG&E GT-Northwest's mainline system is composed of two parallel pipelines with 12 compressor stations totaling approximately 408,660 International Standards Organization (ISO) installed horsepower and ancillary facilities, including metering, regulating facilities, and a communications system. The dual pipeline system consists of approximately 639 miles of 36-inch diameter gas transmission line (612 miles of single 36-inch diameter pipe and 27 miles of 36-inch diameter pipeline looping) and approximately 590 miles of 42-inch diameter pipe. In addition, in 1995, PG&E GT-Northwest constructed two lateral pipeline extensions, adding approximately 84 miles of 12-inch diameter pipe, and 22 miles of 16-inch diameter pipe to serve its customers on those laterals. PG&E GT-Northwest's total transportation quantities for 1995 through 1999 are set forth in the following table.
Quantities (in thousand decatherms Year (MDt)) ---- ------------ 1995.......................................................... 885,186 1996.......................................................... 934,029 1997.......................................................... 969,257 1998.......................................................... 1,003,266 1999.......................................................... 839,778
PG&E GT-Northwest's current rates were set in a rate settlement approved by the FERC in September 1996. In 1998, petitions filed by various parties for rehearing of the FERC order approving the settlement were denied. Three parties have appealed the FERC's denial of these rehearing petitions to the U.S. Court of Appeals for the District of Columbia Circuit. On February 1, 2000, the appellate court denied the petitions for review and reaffirmed the FERC settlement. Additional information concerning PG&E Corporation's gas transmission operations is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5, and in Note 17 of the "Notes to Consolidated Financial Statements" beginning on page 63 of the 1999 Annual Report to Shareholders. 29 Independent Power Generation Through PG&E Gen and its affiliates, PG&E Corporation participates in the development, construction, operation, ownership, and management of non-utility electric generating facilities that compete in the United States power generation market. PG&E Gen is headquartered in Bethesda, Maryland. As of December 31, 1999, PG&E Gen affiliates had ownership interests in 30 operating plants in 10 states. The total generating capacity of these 30 plants is approximately 6,560 MW. Ten of these plants operate as QFs with a combined capacity of 2,128 MW which is sold at fixed prices under long-term power purchase agreements. The remaining plants with a combined capacity of 4,435 MW are operated as merchant power plants that sell their power directly to wholesale customers (including other PG&E Corporation affiliates) at prevailing market prices. PG&E Corporation's combined net equity ownership and leased interest in these plants as of December 31, 1999, represented approximately 5,200 MW. The plants were financed largely with a combination of non-recourse debt and equity or equity commitments from the project sponsors. PG&E Gen, through its affiliate, PG&E Operating Services Company (PG&E OSC), provides contract operations and maintenance services to many of these facilities. PG&E Gen also manages power purchase agreements with an aggregate of 789 MW of capacity. PG&E Gen and its affiliated or managed facilities sold 29,187,905 megawatt-hours (MWh) of electricity in 1999. PG&E Gen also is engaged in the "greenfield" development of new merchant power plants, as discussed below. PG&E Gen competes with unaffiliated utilities and other independent power producers. New England Operations In 1998, PG&E Corporation, through its indirect subsidiary, USGenNE, purchased from the New England Electric System (NEES) a portfolio of electric generating assets with a combined generating capacity of about 4,000 MW. In addition, USGenNE assumed NEES' obligations to purchase power from various independent power producers (IPPs). As of December 31, 1999 these power purchase obligations represented an additional 470 MW of production capacity. NEES is required to make annual support payments to USGenNE through early 2008 to offset the cost of power associated with these above-market contracts. Finally, in connection with the NEES acquisition, USGenNE obtained the right to purchase NEES's nuclear generated electric energy, capacity, and associated products at market prices up to the entire amount available. In December 1999, USGenNE sold these nuclear entitlements. Three of the four states in which USGenNE operates generation facilities (Massachusetts, Rhode Island, and New Hampshire) were, like California, among the first states in the country to introduce retail competition. As part of electric industry restructuring in these New England states, local utility companies were required to offer standard offer service (SOS) to their retail customers. Retail customers may select alternate suppliers at any time. The SOS is intended to provide customers with a price benefit (the commodity electric price offered to the retail customer under SOS is expected to be less than the market price for the first several years), followed by a price disincentive that is intended to stimulate the retail market. Connecticut also has passed retail competition legislation. The New England assets are located within the New England Power Pool (NEPOOL). The wholesale electricity market in New England features a bid- based, real-time pricing structure. Traditionally, NEPOOL has operated as a "tight power pool," one in which the utilities within the pool dedicate their generation resources to be centrally dispatched. Dispatch starts with the lowest-cost generation and ends with the highest-cost generation. An independent system operator for the New England states (ISO-NE) provides central dispatch service and operates the power pool as a competitive wholesale marketplace. The duties of the ISO-NE include scheduling the operations of the regional transmission systems and, importantly, operating a power exchange for seven generation products (the "Interchange"). These products are energy, installed (monthly) capacity and operable (hourly) capacity, three types of reserves, and automatic generation control (adjustment of generators to meet the second-to-second changes in electric load). 30 Additional information concerning the New England electricity market and the Corporation's New England operations is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5. Portfolio of Operating Generating Plants The following table sets forth information regarding the operating generating plants in which PG&E Gen affiliates have an ownership or leasehold interest. Except as otherwise noted, PG&E Gen affiliates also manage or operate, or both manage and operate, power plant operations.
Date Placed in Commercial Plant MWs Fuel Location Service ----- --- ---- -------- -------------- Bear Swamp Facility(1),(2) Pumped Storage 2 Units.......... 588 Hydro Massachusetts 1974 Fife Brook...................... 10 Hydro 1974 Brayton Point Station(2) Unit Nos. 1, 2, and 3........... 1,130 Coal Massachusetts 1963, '64, '69 Unit No. 4...................... 446 Oil/Gas 1974 Diesel Generators.................. 10 Diesel Oil N/A Carneys Point...................... 260 Coal New Jersey 1994 Cedar Bay.......................... 250 Coal Florida 1994 Connecticut River(2) Hydroelectric 26 Units.......... 484 Hydro New Hampshire/Vermont 1909-1957 Deerfield River(2) Hydroelectric 15 Units.......... 84 Hydro Massachusetts/Vermont 1912-1927 Hermiston.......................... 474 Natural Gas Oregon 1996 Indiantown......................... 330 Coal Florida 1995 Logan.............................. 225 Coal New Jersey 1995 Manchester St. Station(2) 3 Combined Cycle Units.......... 495 Natural Gas Rhode Island 1995 MASSPOWER.......................... 240 Natural Gas Massachusetts 1993 Northampton........................ 110 Waste Coal Pennsylvania 1995 Pittsfield(1)...................... 165 Natural Gas Massachusetts 1990 Salem Harbor Station(2) Unit Nos. 1, 2, and 3........... 314 Coal Massachusetts 1952, '52, '58 Unit No. 4...................... 400 Oil 1972 Scrubgrass......................... 83 Waste Coal Pennsylvania 1993 Selkirk............................ 345 Natural Gas New York 1992, '94 ----- Total MWs/Operating Plants.. 6,443 PG&E Gen Affiliate Investments: Colstrip(3)........................ 37 Waste Coal Montana 1990 Panther Creek(3)................... 83 Waste Coal Pennsylvania 1992 ----- Total MWs from Investments.. 120 ----- Total MWs in Operation(4)... 6,563 =====
- -------- (1) Unlike other operating facilities in which PG&E Gen affiliates have ownership and management interests, the Bear Swamp Facility and the Pittsfield plant are owned by third parties through a single-investor lease arrangement. PG&E Gen maintains full management and operating responsibility for the facilities and is entitled to the output. (2) Acquired from NEES on September 1, 1998. (3) PG&E Gen affiliates have an ownership or leasehold interest in these plants, but do not manage power plant operations. (4) Of the total of 6,563 megawatts in operation, PG&E Gen's net equity ownership and leased percentage interest in the total is 5,225 megawatts. 31 Generation Development Projects Nationwide, PG&E Gen's greenfield power plant development activities exceed 10,000 MW in 9 states. The table below lists PG&E Gen's development projects. The Millennium Project in Charlton, Massachusetts (360 MW) and the Lake Road Project in Killingly, Connecticut (792 MW) are under construction. The La Paloma Project in McKittrick, California (1,048 MW) has been approved by PG&E Corporation's Board of Directors and the California Energy Commission. The other development projects listed below are in the early stages of the development process. The completion of these planned projects is subject to many factors, including but not limited to various regulatory and environmental approvals, adequate financing on satisfactory terms, competitive conditions including the expansion and retirement plans of others, market prices for electricity, and future fuel prices.
Estimated start of commercial Plant MW Fuel Location service ----- -- ---- -------- ---------- Millennium.................... 360 Natural gas Massachusetts 4Q 2000 Lake Road..................... 792 Natural gas Connecticut 2Q 2001 La Paloma..................... 1,048 Natural gas California 1Q 2002 Madison....................... 12 Wind New York 3Q 2000 Brayton V..................... 800 Natural gas Massachusetts 4Q 2002 Athens........................ 1,080 Natural gas New York 1Q 2002 Covert........................ 1,022 Natural gas Michigan 3Q 2002 Badger........................ 1,022 Natural gas Wisconsin 3Q 2002 Liberty....................... 1,048 Natural gas New Jersey 3Q 2002 Mantua Creek.................. 800 Natural gas New Jersey 1Q 2002 Otay Mesa..................... 510 Natural gas California 3Q 2002 Harquahala.................... 1,000 Natural gas Arizona 3Q 2003 Okeechobee.................... 550 Natural gas Florida 2Q 2004
Energy Trading PG&E Energy Trading-Gas Corporation and PG&E Energy Trading-Power, L.P. (also collectively referred to as PG&E ET), headquartered in Houston, Texas, purchase electric power from PG&E Corporation affiliates and the wholesale market and natural gas from producers, marketers, and other parties. PG&E ET then schedules, transports, and resells these commodities, either to third parties or to other PG&E Corporation affiliates (except the Utility). PG&E ET also provides risk management services to PG&E Corporation's other businesses (except the Utiltiy) and to unaffiliated wholesale customers. For more information, see "General--Risk Management Programs" above. PG&E ET competes with, among others, major integrated energy companies, marketing affiliates of major interstate pipelines, brokers, gas marketers, and gas distributors for natural gas supplies and/or in marketing natural gas. In addition, PG&E ET competes with unaffiliated electric utilities, marketers, and other entities in purchasing and selling electric power and other energy commodities. Competition in the energy marketing business is driven by various factors, including the price of commodities and services delivered along with quality and reliability of services delivered. Additional information concerning the wholesale operations of PG&E Corporation's affiliates is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5, and in Note 17 of the "Notes to Consolidated Financial Statements" beginning on page 63 of the 1999 Annual Report to Shareholders. 32 Energy Services PG&E Energy Services (PG&E ES), headquartered in San Francisco, California, provides retail gas and electric commodities nationwide, where permitted under applicable laws, and provides energy-related value-added services, including billing and information management services, energy efficiency and other energy management services, regulatory and rate analysis, and power quality solutions. PG&E ES targets primarily industrial, commercial, and institutional customers, offering comprehensive energy management solutions to reduce their energy costs and improve their productivity. PG&E ES has 20 offices nationwide to support its sales activities. PG&E ES currently competes with other non- utility electric retailers in California for direct access customers. See "Utility Operations--Electric Utility Operations--California Electric Industry Restructuring" above. In December 1999, PG&E Corporation's Board of Directors approved a plan to dispose of PG&E ES, its wholly owned subsidiary, through a sale. The intended disposal has been accounted for as a discontinued operation in PG&E Corporation's 1999 financial statements. While there is no definitive sales agreement, it is expected that the disposition will be completed by June 2000. Additional information concerning PG&E ES is provided in "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, beginning on page 5, and in Notes 5 and 17 of the "Notes to Consolidated Financial Statements" beginning on pages 47 and 63, respectively, of the 1999 Annual Report to Shareholders. 33 ENVIRONMENTAL MATTERS Environmental Matters The following discussion includes certain forward-looking information relating to estimated expenditures for environmental protection measures and the possible future impact of environmental compliance. This information below reflects current estimates, which are periodically evaluated and revised. Future estimates and actual results may differ materially from those indicated below. These estimates are subject to a number of assumptions and uncertainties, including changing laws and regulations, the ultimate outcome of complex factual investigations, evolving technologies, selection of compliance alternatives, the nature and extent of required remediation, the extent of the facility owner's responsibility, and the availability of recoveries or contributions from third parties. PG&E Corporation, the Utility, PG&E Gen and its affiliates (including USGenNE), and other PG&E Corporation subsidiaries and affiliates are subject to a number of federal, state, and local laws and regulations designed to protect human health and the environment by imposing stringent controls with regard to planning and construction activities, land use, air and water pollution, and treatment, storage, and disposal of hazardous or toxic materials. These laws and regulations affect future planning and existing operations, including environmental protection and remediation activities. The Utility has undertaken compliance efforts with specific emphasis on its purchase, use, and disposal of hazardous materials, the cleanup or mitigation of historic waste spill and disposal activities, and the upgrading or replacement of the Utility's bulk waste handling and storage facilities. The costs of compliance with environmental laws and regulations generally have been recovered in rates. Although the Utility has sold most of its fossil-fueled power plants and its geothermal generation facilities in connection with electric industry restructuring, the Utility has retained liability for certain required environmental remediation of pre-closing soil or groundwater contamination for fossil and geothermal generation facilities that have been sold. See "Utility Operations--Electric Utility Operations--California Electric Industry Restructuring--Voluntary Generation Asset Divestiture" above. Environmental Protection Measures The estimated expenditures of PG&E Corporation's subsidiaries for environmental protection are subject to periodic review and revision to reflect changing technology and evolving regulatory requirements. It is likely that the stringency of environmental regulations will increase in the future. As a result of the Utility's divestiture of most of its fossil-fueled power plants and its geothermal generation facilities, the Utility's oxides of nitrogen (NOx) emission reduction compliance costs have been reduced significantly. Air Quality Pacific Gas and Electric Company's thermal electric generating plants are subject to numerous air pollution control laws, including the California Clean Air Act (CCAA) with respect to emissions. Pursuant to the CCAA and the Federal Clean Air Act, two of the local air districts in which the Utility owns and operates fossil-fueled generating plants have adopted final rules that require a reduction in NOx emissions from the power plants of approximately 90% by 2004 (with numerous interim compliance deadlines). The Gas Accord authorizes $42 million to be included in rates through 2002, for gas NOx retrofit projects related to natural gas compressor stations on Pacific Gas and Electric Company's Line 300, which delivers gas from the Southwest. Other air districts are considering NOx rules that would apply to the Utility's other natural gas compressor stations in California. Eventually the rules are likely to require NOx reductions of up to 80% at many of these natural gas compressor stations. The Utility currently estimates that the total cost of complying with these various NOx rules will be up to $51 million over three years. Substantially all of these costs will be capital costs. 34 PG&E Gen's compliance with certain future regulatory requirements limiting the total amount of NOx emissions from its fossil-fueled power plants is expected to be achieved through installation of additional controls, fuel switching, and purchase of NOx allowances. USGenNE has agreed to be bound by a number of state and regional initiatives that will require it to achieve significant reductions of sulfur dioxide (SO\\2\\) and NOx emissions by the time its older fossil-fueled power plants have been in operation for 40 years or by 2010, whichever comes first. It is expected that USGenNE can meet these requirements through utilization of allowances it currently owns, installation of additional controls, or purchase of additional allowances. (SO\\2\\ allowances are emission credits that are traded in a national market under the United States Environmental Protection Agency's (EPA) Acid Rain Program. NOx allowances are emission credits that are traded in a regional market consisting of seven Northeast states known as the Ozone Transport Region.) It is estimated that USGenNE's total cost of complying with these requirements will be up to $4 million through the year 2001. Water Quality Pacific Gas and Electric Company's existing power plants, including Diablo Canyon, are subject to federal and state water quality standards with respect to discharge constituents and thermal effluents. The Utility's fossil-fueled power plants comply in all material respects with the discharge constituents standards and either comply in all material respects with or are exempt from the thermal standards. A thermal effects study at Diablo Canyon was completed in May 1988, and was reviewed by the Central Coast Regional Water Quality Control Board (Central Coast Board). The Central Coast Board did not make a final decision on the report and requested that the Utility continue its thermal effects monitoring program. In 1995, the Central Coast Board requested that the Utility prepare an updated comprehensive assessment of Diablo Canyon's thermal effects and approved a reduced environmental monitoring program. A comprehensive statistical analysis of Diablo Canyon's thermal effects was submitted to the Central Coast Board in December 1997 and a regulatory assessment was submitted in November 1998. If the Central Coast Board finds that Diablo Canyon's existing thermal limits are not protective of beneficial uses of the marine waters, major modifications (e.g., cooling towers) resulting in additional construction expenditures, or reduced power operation, could be required. Pursuant to the federal Clean Water Act, the Utility is required to demonstrate that the location, design, construction, and capacity of power plant cooling water intake structures reflect the best technology available (BTA) for minimizing adverse environmental impacts at its existing water- cooled thermal plants. The Utility has submitted detailed studies of each power plant's intake structure to various governmental agencies. Each plant's existing water intake structure was found to meet the BTA requirements. The Utility currently is completing a new study for Diablo Canyon. The study is scheduled to be submitted to the Central Coast Board for review in 2000. If the Central Coast Board finds that Diablo Canyon's cooling water intake structure does not meet the BTA requirements, additional expenses for construction or mitigation could be required. In addition, the promulgation or modification of statutes, regulations, or water quality control plans at the federal, state, or regional level may impose increasingly stringent cooling water discharge requirements on the Utility's remaining power plants in the future. Costs to comply with renewed permit conditions required to meet any more stringent requirements that might be imposed cannot be estimated at the present time. In December 1999, the Utility was notified by the purchaser of its former Moss Landing power plant that that it had identified a cleaning procedure used at the plant that released heated water from the intake, and that this procedure is not specified in the plant's National Pollutant Discharge Elimination System (NPDES) permit issued by the Central Coast Board. The purchaser notified the Central Coast Board of its findings and the Central Coast Board requested additional information from the purchaser. The Utility has initiated an investigation of these activities during the time it owned the plant. The Central Coast Board has been notified of the investigation and the results will be presented to the Central Coast Board when the investigation is complete. If the identified procedure was performed during the Utility's ownership and was beyond the scope of the relevant NPDES permits, the Central Coast Board may choose to initiate an enforcement action. If so, the Utility could be subject to significant penalties. Until the investigation is complete and the results discussed with the Central Coast Board, it is not possible to determine whether the Utility will suffer a loss in connection with this matter or to provide a more detailed estimate of such liability. 35 PG&E Gen's existing power plants, including USGenNE facilities, are subject to federal and state water quality standards with respect to discharge constituents and thermal effluents. Three of the fossil-fueled plants owned and operated by USGenNE are operating in compliance with NPDES permits that have expired. As to the facilities for which the NPDES permit has expired, new permit applications are pending, and it is anticipated that all three facilities will be able to continue to operate under existing terms and conditions until new permits are issued. USGenNE has submitted a permit renewal application and is negotiating with EPA on ongoing studies and permit conditions. It is estimated that USGenNE's cost to comply with these conditions could be as much as $5 million through the year 2001. Hazardous Waste Compliance and Remediation PG&E Corporation subsidiaries assess, on an ongoing basis, measures that may need to be taken to comply with laws and regulations related to hazardous materials and hazardous waste compliance and remediation activities. The Utility has a comprehensive program to comply with many hazardous waste storage, handling, and disposal requirements promulgated by the EPA under the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), along with other state hazardous waste laws and other environmental requirements. One part of this program is aimed at assessing whether and to what extent remedial action may be necessary to mitigate potential hazards posed by certain disposal sites and retired manufactured gas plant sites. During their operation, manufactured gas plants produced lampblack and tar residues, byproducts of a process that Pacific Gas and Electric Company, its predecessor companies, and other utilities used as early as the 1850s to manufacture gas from coal and oil. As natural gas became widely available (beginning about 1930), the Utility's manufactured gas plants were removed from service. The residues that may remain at some sites contain chemical compounds that now are classified as hazardous. The Utility has identified and reported to federal and California environmental agencies 96 manufactured gas plant sites that operated in the Utility's service territory. The Utility owns all or a portion of 29 of these manufactured gas plant sites. The Utility has a program, in cooperation with environmental agencies, to evaluate and take appropriate action to mitigate any potential health or environmental hazards at sites that the Utility owns. It is estimated that the Utility's program may result in expenditures of approximately $5 million in 2000. The full long-term costs of the program cannot be determined accurately until a closer study of each site has been completed. It is expected that expenses will increase as remedial actions related to these sites are approved by regulatory agencies or if the Utility is found to be responsible for cleanup at sites it currently does not own. In addition to the manufactured gas plant sites, the Utility may be required to take remedial action at certain other disposal sites if they are determined to present a significant threat to human health and the environment because of an actual or potential release of hazardous substances. The Utility has been designated as a potentially responsible party (PRP) under CERCLA (the federal Superfund law) with respect to the PRC Patterson site in Patterson, California, and the Industrial Waste Processing site near Fresno, California. With respect to the Casmalia site near Santa Maria, California, the Utility and several other generators of waste sent to the site have entered into a court-approved agreement with the EPA that requires these generators to perform certain site investigation and mitigation measures, and provides a release from liability for certain other site cleanup obligations. Although the Utility has not been formally designated a PRP with respect to the Geothermal Incorporated site in Lake County, California, the Central Valley Regional Water Quality Control Board and the California Attorney General's office have directed the Utility and other parties to initiate measures with respect to the study and remediation of that site. In addition, Pacific Gas and Electric Company has been named as a defendant in several civil lawsuits in which plaintiffs allege that the Utility is responsible for performing or paying for remedial action at sites the Utility no longer owns or never owned. The cost of hazardous substance remediation ultimately undertaken by Pacific Gas and Electric Company is difficult to estimate. It is reasonably possible that a change in the estimate may occur in the near term due to 36 uncertainty concerning the Utility's responsibility, the complexity of environmental laws and regulations, and the selection of compliance alternatives. At December 31, 1999, the Utility expects to spend $300 million for hazardous waste remediation costs at identified sites, including divested fossil-fueled power plants, where such costs are probable and quantifiable. (Although the Utility has sold most of its fossil-fueled power plants, the Utility has retained pre-closing environmental liability with respect to these plants.) The Utility had an accrued liability of $271 million at December 31, 1999, representing the discounted value of these costs. Environmental remediation at identified sites may be as much as $486 million if, among other things, other PRPs are not financially able to contribute to these costs or further investigation indicates that the extent of contamination or necessary remediation is greater than anticipated at sites for which the Utility is responsible. The Utility estimated the upper limit of the range of costs using assumptions least favorable to the Utility based upon a range of reasonably possible outcomes. Costs may be higher if the Utility is found to be responsible for cleanup costs at additional sites or identifiable possible outcomes change. PG&E Gen acquired the onsite environmental liability associated with USGenNE's acquisition of electric generating facilities from NEES, but did not acquire any offsite liability associated with the past disposal practices at the acquired facilities. PG&E Gen has obtained pollution liability and environmental remediation insurance coverage to limit the financial risk associated with the onsite pollution liability at all of its facilities. Potential Recovery of Hazardous Waste Compliance and Remediation Costs In 1994, the CPUC established a ratemaking mechanism for hazardous waste remediation costs (HWRC). That mechanism assigns 90% of the includable hazardous substance cleanup costs to utility ratepayers and 10% to utility shareholders, without a reasonableness review of such costs or of underlying activities. Under the HWRC mechanism, 70% of the ratepayer portion of Pacific Gas and Electric Company's cleanup costs is attributed to its gas department and 30% is attributed to its electric department. Insurance recoveries are assigned 70% to shareholders and 30% to ratepayers until both are reimbursed for the costs of pursuing insurance recoveries. The balance of insurance recoveries are allocated 90% to shareholders and 10% to ratepayers until shareholders are reimbursed for their 10% share of cleanup costs. Any unallocated funds remaining are held for five years and then distributed 60% to ratepayers and 40% to shareholders over the next five years. The Utility can seek to recover hazardous substance cleanup costs under the HWRC in the rate proceeding it deems most appropriate. In connection with electric industry restructuring, the HWRC mechanism may no longer be used to recover electric generation-related cleanup costs for contamination caused by events occurring after January 1, 1998. For each divested generation facility where the Utility retained environmental remediation liabilities, the plant's decommissioning cost estimate was adjusted by the Utility's estimated forecast of environmental remediation costs. (The buyers assumed the non-environmental decommissioning liability for these plants.) The CPUC ordered that excess recoveries of environmental and non-environmental decommissioning accruals related to the divested plants be used to offset other transition costs. As of December 31, 1999, the Utility has recovered from ratepayers approximately $114 million for environmental decommissioning accrual related to the divested plants. This amount will earn interest at 3% per year that will be used to meet the future environmental remediation costs for the divested plants. The net decommissioning accruals recovered from ratepayers attributable to the non- environmental liability for the divested plants was approximately $53 million. Because the Utility no longer has this non-environmental decommissioning liability, it has used this excess recovery amount to reduce other transition costs. Of the $271 million accrued liability, discussed above, the Utility has recovered $148 million through rates, including $34 million through depreciation, and expects to recover $95 million in future rates. Additionally, the Utility is mitigating its costs by seeking recovery of its costs from insurance carriers and from other third parties as appropriate. In 1992, Pacific Gas and Electric Company filed a complaint in San Francisco County Superior Court against more than 100 of its domestic and foreign insurers, seeking damages and declaratory relief for remediation and other costs associated with hazardous waste mitigation. The Utility previously had notified its insurance carriers 37 that it seeks coverage under its comprehensive general liability policies to recover costs incurred at certain specified sites. In general, the Utility's carriers neither admitted nor denied coverage, but requested additional information from the Utility. Although the Utility has received some amounts in settlements with certain of its insurers (approximately $71 million through December 31, 1999), the ultimate amount of recovery from insurance coverage, either in the aggregate or with respect to a particular site, cannot be quantified at this time. Compressor Station Litigation Several cases have been brought against Pacific Gas and Electric Company seeking damages from alleged chromium contamination at the Utility's Hinkley, Topock, and Kettleman Compressor Stations. See Item 3, "Legal Proceedings-- Compressor Station Chromium Litigation" below, for a description of the pending litigation. Electric and Magnetic Fields In January 1991, the CPUC opened an investigation into potential interim policy actions to address increasing public concern, especially with respect to schools, regarding potential health risks that may be associated with electric and magnetic fields (EMF) from utility facilities. In its order instituting the investigation, the CPUC acknowledged that the scientific community has not reached consensus on the nature of any health impacts from contact with EMF, but went on to state that a body of evidence has been compiled that raises the question of whether adverse health impacts might exist. In November 1993, the CPUC adopted an interim EMF policy for California energy utilities that, among other things, requires California energy utilities to take no-cost and low-cost steps to reduce EMF from new and upgraded utility facilities. California energy utilities are required to fund a $1.5 million EMF education program and a $5.6 million EMF research program managed by the California Department of Health Services. It is expected that the CPUC and the California Department of Health Services will complete its EMF research program by December 2001. As part of its effort to educate the public about EMF, Pacific Gas and Electric Company provides interested customers with information regarding the EMF exposure issue. The Utility also provides a free field measurement service to inform customers about EMF levels at different locations in and around their residences or commercial buildings. The Utility currently is not involved in third party litigation concerning EMF. In August 1996, the California Supreme Court held that homeowners are barred from suing utilities for alleged property value losses caused by fear of EMF from power lines. The Court expressly limited its holding to property value issues, leaving open the question as to whether lawsuits for alleged personal injury resulting from exposure to EMF are similarly barred. The Utility was a defendant in civil litigation in which plaintiffs alleged personal injuries resulting from exposure to EMF. In January 1998, the appeals court in this matter held that the CPUC has exclusive jurisdiction over personal injury and wrongful death claims arising from allegations of harmful exposure to EMF and barred plaintiffs' personal injury claims. Plaintiffs filed an appeal of this decision with the California Supreme Court. The California Supreme Court declined to hear the case. If the scientific community reaches a consensus that EMF presents a health hazard and further determines that the impact of utility-related EMF exposures can be isolated from other exposures, the Utility may be required to take mitigation measures at its facilities. The costs of such mitigation measures cannot be estimated with any certainty at this time. However, such costs could be significant, depending on the particular mitigation measures undertaken, especially if relocation of existing power lines ultimately is required. Low Emission Vehicle Programs In December 1995, the CPUC issued its decision in the Low Emission Vehicle (LEV) proceeding, which approved approximately $42 million in funding for Pacific Gas and Electric Company's LEV program for the 38 six-year period beginning in 1996. The CPUC's decision on electric industry restructuring found that the costs of utility LEV programs should continue to be collected by the utility for the duration of the six-year period. The Utility continues to run its LEV program as funded. ITEM 2. Properties. Information concerning Pacific Gas and Electric Company's electric generation units, electric and gas transmission facilities, and electric and gas distribution facilities is included in response to Item 1. All of the Utility's real properties and substantially all of the Utility's personal properties are subject to the lien of an indenture that provides security to the holders of the Utility's First and Refunding Mortgage Bonds. Information concerning properties and facilities owned by other PG&E Corporation subsidiaries is included in the discussion under the heading of this report entitled "National Energy Group." ITEM 3. Legal Proceedings. See Item 1, Business, for other proceedings pending before governmental and administrative bodies. In addition to the following legal proceedings, PG&E Corporation and Pacific Gas and Electric Company are subject to routine litigation incidental to their business. Compressor Station Chromium Litigation Pacific Gas and Electric Company is currently a defendant in three civil actions pending in California courts. These cases are (1) Aguayo v. Pacific Gas and Electric Company, filed March 15, 1995, in Los Angeles County Superior Court, (2) Aguilar v. Pacific Gas and Electric Company, filed October 4, 1996, in Los Angeles County Superior Court, and (3) Acosta, et al. v. Betz Laboratories, Inc., Pacific Gas and Electric Company, et al., filed November 27, 1996, in Los Angeles County Superior Court. These cases are collectively referred to as the "Aguayo Litigation." There are approximately 900 plaintiffs in the Aguayo Litigation. Each of the complaints in the Aguayo Litigation alleges personal injuries and seeks compensatory and punitive damages in an unspecified amount arising out of alleged exposure to chromium contamination in the vicinity of the Utility's gas compressor stations at Kettleman, Hinkley, and Topock, California. The plaintiffs in the Aguayo Litigation include current and former Utility employees, relatives of current and former employees, residents in the vicinity of the compressor stations, and persons who visited the gas compressor stations. The plaintiffs also include spouses or children of these plaintiffs who claim loss of consortium or wrongful death. All discovery and discovery motion practice in the Aguayo Litigation have been referred by the judge to a discovery referee. The discovery referee has set the procedures for selecting 18 trial test plaintiffs and two alternates in the Aguayo Litigation. Ten of these trial test plaintiffs were selected by plaintiffs, seven trial test plaintiffs were selected by defendants, and one trial test plaintiff and two alternates were selected at random. The trial date has been set for November 17, 2000 in Los Angeles Superior Court. The Utility is responding to the complaints and asserting affirmative defenses. The Utility will pursue appropriate legal defenses, including statute of limitations or exclusivity of workers' compensation laws, and factual defenses including lack of exposure to chromium and the inability of chromium to cause certain of the illnesses alleged. At this stage of the proceedings, there is substantial uncertainty concerning the claims alleged. The Utility is attempting to gather information concerning the alleged type and duration of exposure, the nature of injuries alleged by individual plaintiffs, and the additional facts necessary to support its legal defenses, in order to better evaluate and defend this litigation. PG&E Corporation believes that the ultimate outcome of this matter will not have a material adverse impact on its or Pacific Gas and Electric Company's financial position or results of operations. 39 Texas Franchise Fee Litigation On July 31, 1997, PG&E Corporation acquired Valero Energy Corporation (Valero), now known as PG&E Gas Transmission, Texas Corporation. PG&E Gas Transmission, Texas Corporation and its affiliates (PG&E GTT) succeeded to the cases described below, which were pending at the time of the acquisition against Valero and its affiliates. A lawsuit was also pending at such time that had been filed by the City of Pharr, but no PG&E GTT entity has been served in this case. These cases are collectively referred to as the "Texas Franchise Fees Litigation." These actions were brought by various cities in Texas arising out of several Texas statutes and city ordinances involving the following: (a) what rights, if any, Texas cities may have to require companies engaged in the gathering, production, distribution, transmission, and/or sale of natural gas to obtain consent from, and pay fees to, the cities within which such activities are being conducted, (b) what form any such consent, if required, must take, (c) what constitutes "use" of city property, and (d) what types of charges, if any, a Texas city properly can assess against gas pipeline and marketing companies for use of that city's property. There were seven cases pending against Valero entities at the time of the acquisition: (1) City of Edinburg v. Rio Grande Valley Gas Co. (RGVG), Valero Energy Corporation (now known as PG&E GTT), Valero Transmission Company (now known as PG&E Texas Pipeline Company), Valero Natural Gas Company (now known as PG&E Texas Natural Gas Company), Reata Industrial Gas Company a/k/a Valero Gas Marketing Company (now known as PG&E Energy Trading Holdings Corporation), Valero Transmission, L.P. (now known as PG&E Texas Pipeline, L.P.), and Reata Industrial Gas, L.P. (now known as PG&E Reata Energy, L.P.), Southern Union Company and its unincorporated division, Southern Union Gas Co. (Southern Union), and Mercado Gas Services, Inc., filed August 31, 1995, in the 92nd State District Court, Hidalgo County, Texas, (2) Cities of San Benito, Primera, and Port Isabel v. RGVG, Valero Energy Corporation (now known as PG&E GTT), Southern Union, et al., filed December 31, 1996, in the 107th State District Court, Cameron County, Texas, (3) City of Mercedes v. Reata Industrial Gas, L.P. (now known as PG&E Reata Energy, L.P.), and Valero Gas Marketing Company (now known as PG&E Energy Trading Holdings Corporation), filed April 16, 1997, in the 92nd State District Court in Hidalgo County, Texas, (4) Cities of Alton and Donna v. RGVG, Valero Energy Corporation (now known as PG&E Gas Transmission, Texas Corporation), Valero Transmission Company (now known as PG&E Texas Pipeline Company), Valero Natural Gas Company (now known as PG&E Texas Natural Gas Company), Reata Industrial Gas Company (now known as PG&E Energy Trading Holdings Corporation), Valero Transmission, L.P. (now known as PG&E Texas Pipeline, L.P.), and Reata Industrial Gas, L.P. (now known as PG&E Reata Energy, L.P.), Southern Union Gas Co., and Mercado Gas Services, Inc., filed July 18, 1996, in the 92nd State District Court, Hidalgo County, Texas, (5) City of La Joya v. RGVG, Valero Energy Corporation (now known as PG&E GTT), Southern Union Company, et al., filed December 27, 1996, in the 92nd State District Court, Hidalgo County, Texas, (6) Cities of San Juan, La Villa, Penitas, Edcouch, and Palmview v. RGVG, Valero Energy Corporation (now known as PG&E Gas Transmission, Texas Corporation), Southern Union Company, et al., filed December 27, 1996, in the 93rd State District Court, Hidalgo County, Texas, and (7) City of Weslaco v. Valero Natural Gas Company (now known as PG&E Texas Natural Gas Company), Valero Gas Marketing Co. (now known as PG&E Energy Trading Holdings Corporation), and Reata Industrial Gas, L.P. (now known as PG&E Reata Energy L.P.) filed April 17, 1997, in the 92nd State District Court, Hidalgo County, Texas. The lawsuits involving the City of La Joya (item number 5 above) and the Cities of San Juan, La Villa, Penitas, Edcouch, and Palmview (item number 6 above) were voluntarily dismissed on July 13, 1999, and February 23, 2000, respectively. However, all of these cities are class members in the San Benito class action (item number 5 above) as are the Cities of Alton and Donna. The trial in the City of Edinburg case began on June 15, 1998. On August 14, 1998, a jury returned a verdict in favor of the City of Edinburg, and awarded damages in the approximate aggregate amount of $9.8 million, plus attorneys' fees of approximately $3.5 million, against PG&E GTT, Southern Union and various affiliates of PG&E GTT and Southern Union. The jury refused to award punitive damages against the PG&E GTT defendants. On December 1, 1998, based on the jury verdict, the court entered a judgment in the City's favor, and awarded damages of $5.3 million, attorneys' fees of up to $3.5 million (to the extent that the City is successful on appeal), prejudgment interest of $1.6 million, and post-judgment interest at the rate of 10% per year, compounded annually, from December 1, 1998. The court found that various PG&E GTT and Southern 40 Union defendants were jointly and severally liable for $3.3 million of the damages, prejudgment interest in the amount of $1.1 million, and all the attorneys' fees. Certain PG&E GTT subsidiaries were found solely liable for $1.4 million of the damages and prejudgment interest of $440,000. The court did not clearly indicate the extent to which the PG&E GTT defendants could be found liable for the remaining damages. The judgment also decreed that (1) certain pipelines owned by PG&E Texas Pipeline, L.P. (formerly known as Valero Transmission, L.P.) encroached on the City's property without the City's consent and (2) based on certain jury findings, PG&E GTT was vicariously liable for certain conduct of the local distribution company, RGVG, from October 1, 1985, to September 30, 1993 (the date Valero, PG&E GTT's predecessor, sold RGVG to Southern Union). The PG&E GTT defendants are appealing the judgment. On November 4, 1997, the lawsuit filed in Cameron County, Texas, by the cities of San Benito, Primera, and Port Isabel was amended to name as defendants PG&E GTT and all of its subsidiaries (excluding its Canadian gas trading and power trading subsidiaries), PG&E Gas Transmission Teco, Inc. and its subsidiaries, and PG&E Energy Trading Corporation (now known as PG&E Energy Trading--Gas Corporation) (collectively these defendants are referred to as the "PG&E Corporation Texas defendants"). In November 1997, the court ordered a state-wide class certified and granted plaintiffs' request to dismiss RGVG and the Southern Union defendants. In connection with the certification of a class in this case, the court ordered notice to be sent to all potential class members and setting an opt-out deadline of December 31, 1997. Notices were mailed to approximately 159 Texas cities. Fewer than 20 cities opted out by the deadline. Some of the cities opting out include Austin, Brownsville, Houston, and San Antonio. The city of Los Indios has been severed from the class and its claims separately docketed in Cameron County, Texas. On November 22, 1999, the court signed an order dismissing from the class 42 cities because it determined there was no pipeline presence and no past or present sales activity in such cities, leaving 106 cities in the class. The parties are negotiating the terms of a final settlement agreement. The settlement proposal contemplates, among other things, that the PG&E Corporation Texas defendants would pay a total of not more than $12.2 million to the settling class cities, inclusive of attorney fees and expenses, which amount may be reduced by amounts attributable to certain opt-out cities. The defendants retain the right to reject the settlement if the settlement proposal is not approved by certain key cities and by 80% of the overall plaintiff class. Although a significant number of the 106 cities in the plaintiff class already have either approved the settlement by enacting the consent ordinance or have adopted resolutions to pass the ordinance, certain key cities have not yet approved the settlement. The settlement is also subject to final court approval. On January 27, 2000, the court approved the settlement proposal and established a 14-day period for the cities to decide whether to accept the negotiated settlement terms or opt out of the settlement. The court also stated that if the City of Corpus Christi does not accept the settlement proposal, it will be placed in a single city sub-class and its claims will not be finalized as part of the settlement approval. Corpus Christi has the right to opt out of this subclass. Although the 14-day period expired on February 11, 2000, certain cities have requested and received additional time to decide whether to opt out. In July 1996, the lawsuits originally filed by the cities of Alton and Donna as intervening actions in the City of Edinburg case were severed from the Edinburg lawsuit. The claims asserted by the cities of Alton and Donna are substantially similar to the San Benito litigation claims, except that no class claims are asserted. Damages are not quantified. Defendants' motion to transfer venue of both cases to Bexar County, Texas, is currently pending. The Cities of Alton and Donna are also members of the San Benito class, and will be required to dismiss their claims against PG&E GTT in this separate lawsuit if they agree to accept the settlement of the San Benito class action. On September 4, 1997, the City of Mercedes amended its petition to include class action claims and requested to be named as class representative for a statewide class consisting of all Texas municipal corporations, municipalities, towns, and villages, excluding the cities of Edinburg and Weslaco (both of which have filed separate actions), in which any of the defendants have sold or supplied gas, or used public rights-of-way to transport gas. The City of Mercedes has requested a damage award, but has not specified an amount. On November 26, 1997, defendants' motion to recuse the presiding judge was granted. Plaintiffs' request for class certification is still pending. 41 The causes of action alleged in the case brought by the City of Weslaco are identical to those alleged in the City of Mercedes case, except that no class claims are asserted. Damages are not quantified. A motion similar to the motion filed in Mercedes, seeking to recuse the judge of the 92nd State District Court, was filed but not ruled upon. On May 12, 1999, this case was transferred to the 370th State District Court of Hidalgo County, Texas. Defendants' motion to transfer venue to Bexar County, Texas, is currently pending. In addition to the cases described above, during May 1996, a petition in intervention was filed in the Edinburg case by the City of Pharr. On June 24, 1996, the court severed Pharr from the Edinburg case, certified the severed case as a class action against Southern Union Company and RGVG, and named Pharr as class representative for a class consisting of those Texas cities, excluding Edinburg and McAllen, that have or had natural gas franchise agreements with RGVG or Southern Union. The Pharr class was certified as to two claims: breach of contract and declaratory relief dealing with the rights, status, and legal relationship between plaintiff, the class members, and the local distribution company regarding payment of franchise fees and use of granted easements. Plaintiffs' original petition also sought injunctive relief, but the class order does not include injunctive relief. Plaintiffs seek actual damages, exemplary damages, attorneys' fees, costs, and pre- and post-judgment interest, but have not specified any amounts. On January 26, 1998, the court added the Cities of Mercedes and Weslaco as class representatives. None of the PG&E Corporation Texas entities have ever been served in the Pharr litigation. On December 30, 1997, in affirming the Pharr class certification, the appellate court specifically found that the PG&E GTT entities were not parties to the Pharr class action. However, the same 29 PG&E Corporation Texas entities that are class defendants in the San Benito litigation have subsequently been named and served as defendants in two ancillary suits brought during 1998 by the Pharr class plaintiffs. These ancillary suits seek only injunctive relief, for the stated purpose of "protecting" the Pharr class from alleged interference by the San Benito class. PG&E Corporation believes that the ultimate outcome of this matter will not have a material adverse impact on its financial position or results of operations. As discussed above under "Item 1--National Energy Group-- Gas Transmission Operations," in January 2000, PG&E Corporation's National Energy Group signed a definitive agreement to sell the stock of PG&E Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc., the National Energy Group subsidiaries which conduct gas transmission operations in Texas. The buyer will assume all liabilities associated with the cases described above. ITEM 4. Submission of Matters to a Vote of Security Holders. Not applicable. 42 EXECUTIVE OFFICERS OF THE REGISTRANTS "Executive officers," as defined by Rule 3b-7 of the General Rules and Regulations under the Securities and Exchange Act of 1934, of PG&E Corporation are as follows:
Age at December 31, Name 1999 Position ---- ------------ -------- R. D. Glynn, Jr. ....... 57 Chairman of the Board, Chief Executive Officer, and President T. G. Boren............. 50 Executive Vice President; President and Chief Executive Officer, PG&E National Energy Group, Inc. P. A. Darbee............ 47 Senior Vice President, Chief Financial Officer, and Treasurer S. W. Gebhardt.......... 48 Senior Vice President; President and Chief Executive Officer, PG&E Energy Services Corporation T. W. High.............. 52 Senior Vice President, Administration and External Relations P. C. Iribe............. 49 Senior Vice President; President and Chief Operating Officer, PG&E Generating Company T. B. King.............. 38 Senior Vice President; President and Chief Operating Officer, PG&E Gas Transmission Corporation L. E. Maddox............ 44 Senior Vice President; President and Chief Executive Officer, PG&E Energy Trading Corporation G. R. Smith............. 51 Senior Vice President; President and Chief Executive Officer, Pacific Gas and Electric Company G. B. Stanley........... 53 Senior Vice President, Human Resources B. R. Worthington....... 50 Senior Vice President and General Counsel
All officers of PG&E Corporation serve at the pleasure of the Board of Directors. During the past five years, the executive officers of PG&E Corporation had the following business experience. Except as otherwise noted, all positions have been held at PG&E Corporation.
Name Position Period Held Office ---- -------- ------------------ R. D. Glynn, Jr. ....... Chairman of the Board, Chief January 1, 1998, to present Executive Officer, and President Chairman of the Board of January 1, 1998, to present Directors, Pacific Gas and Electric Company President and Chief Executive June 1, 1997, to present Officer President and Chief Operating December 18, 1996, to May 31, 1997 Officer President and Chief Operating June 1, 1995, to May 31, 1997 Officer, Pacific Gas and Electric Company Executive Vice President, July 1, 1994, to May 31, 1995 Pacific Gas and Electric Company T. G. Boren............. Executive Vice President August 1, 1999, to present President and Chief Executive August 1, 1999, to present Officer, PG&E National Energy Group, Inc. President and Chief Executive February 18, 1992, to July 31, 1999 Officer, Southern Energy, Inc. Executive Vice President, June 1, 1999, to July 31, 1999 Southern Company Senior Vice President, February 16, 1998, to May 31, 1999 Southern Company Vice President, Southern July 17, 1995, to February 15, 1998 Company P. A. Darbee............ Senior Vice President, Chief September 20, 1999, to present Financial Officer, and Treasurer Vice President and Chief June 30, 1997, to September 19, 1999 Financial Officer, Advance Fibre Communications, Inc. Vice President, Chief January 10, 1994, to June 30, 1997 Financial Officer, and Controller, Pacific Bell S. W. Gebhardt.......... Senior Vice President April 1, 1997, to present President and Chief Executive April 1, 1997, to present Officer, PG&E Energy Services Corporation Executive Vice President, April 1, 1996, to March 28, 1997 PennUnion Energy Services Vice President, Enron Capital January 1, 1993, to December 31, 1995 & Trade Resources
43
Name Position Period Held Office ---- -------- ------------------ T. W. High.............. Senior Vice President, June 1, 1997, to present Administration and External Relations Senior Vice President, June 1, 1995, to May 31, 1997 Corporate Services, Pacific Gas and Electric Company Vice President and Assistant July 1, 1994, to May 31, 1995 to the Chief Executive Officer, Pacific Gas and Electric Company P. C. Iribe............. Senior Vice President January 1, 1999, to present President and Chief November 1, 1998, to present Operating Officer, PG&E Generating Company (formerly known as U.S. Generating Company) Executive Vice President and September 1, 1997, to October 31, 1998 Chief Operating Officer, U.S. Generating Company Executive Vice President, May 17, 1994, to September 1, 1997 Marketing, Development, and Asset Management, U.S. Generating Company T. B. King.............. Senior Vice President January 1, 1999, to present President and Chief November 23, 1998, to present Operating Officer, PG&E Gas Transmission Corporation President and Chief February 14, 1997, to November 22, 1998 Operating Officer, Kinder Morgan Energy Partners, L.P. Vice President, Commercial July 1, 1995, to February 14, 1997 Operations--Midwest Region, Enron Liquid Services Corporation Vice President, Gathering July 1994, to July 1, 1995 Services, Northern Natural Gas Company and Transwestern Pipeline Company L. E. Maddox............ Senior Vice President June 1, 1997, to present President and Chief May 12, 1997, to present Executive Officer, PG&E Energy Trading Corporation President, PennUnion Energys May 1995 to May 1997 Services, L.L.C. President, Brooklyn January 1993 to May 1995 Interstate Natural Gas Corp. G. R. Smith............. Senior Vice President January 1, 1999, to present (Please refer to description of business experience for executive officers of Pacific Gas and Electric Company below.) G. B. Stanley........... Senior Vice President, Human January 1, 1998, to present Resources Vice President, Human June 1, 1997, to December 31, 1997 Resources Vice President, Human July 1, 1996, to May 31, 1997 Resources, Pacific Gas and Electric Company Self-employed (human January 1995, to June 1996 resources consultant) B. R. Worthington....... Senior Vice President and June 1, 1997, to present General Counsel General Counsel December 18, 1996, to May 31, 1997 Senior Vice President and June 1, 1995, to June 30, 1997 General Counsel, Pacific Gas and Electric Company Vice President and General December 21, 1994, to May 31, 1995 Counsel, Pacific Gas and Electric Company
44 "Executive officers," as defined by Rule 3b-7 of the General Rules and Regulations under the Securities and Exchange Act of 1934, of Pacific Gas and Electric Company are as follows:
Age at December 31, Name 1999 Position ---- ------------ -------- G. R. Smith............. 51 President and Chief Executive Officer K. M. Harvey............ 41 Senior Vice President, Chief Financial Officer, Controller, and Treasurer R. J. Peters............ 45 Senior Vice President and General Counsel J. K. Randolph.......... 55 Senior Vice President and General Manager, Transmission, Distribution and Customer Service Business Unit D. D. Richard, Jr....... 49 Senior Vice President, Governmental and Regulatory Relations G. M. Rueger............ 49 Senior Vice President and General Manager, Nuclear Power Generation Business Unit
All officers of Pacific Gas and Electric Company serve at the pleasure of the Board of Directors. During the past five years, the executive officers of Pacific Gas and Electric Company had the following business experience. Except as otherwise noted, all positions have been held at Pacific Gas and Electric Company.
Name Position Period Held Office ---- -------- ------------------ G. R. Smith............. President and Chief June 1, 1997, to present Executive Officer Chief Financial Officer, December 18, 1996, to May 31, 1997 PG&E Corporation Senior Vice President and June 1, 1995, to May 31, 1997 Chief Financial Officer Vice President and Chief November 1, 1991, to May 31, 1995 Financial Officer K. M. Harvey............ Senior Vice President, Chief January 1, 2000, to present Financial Officer, Controller, and Treasurer Senior Vice President, Chief July 1, 1997, to December 31, 1999 Financial Officer, and Treasurer Vice President and Treasurer June 1, 1995, to June 30, 1997 Treasurer August 1, 1993, to May 31, 1995 R. J. Peters............ Senior Vice President and January 1, 1999, to present General Counsel Vice President and General July 1, 1997, to December 31, 1998 Counsel Chief Counsel, Regulatory January 1, 1993, to June 30, 1997 J. K. Randolph.......... Senior Vice President and July 1, 1997, to present General Manager, Transmission, Distribution and Customer Service Business Unit Vice President and General January 1, 1997, to June 30, 1997 Manager, Power Generation, Business Unit Vice President, Power November 1, 1991, to December 31, 1996 Generation D. D. Richard, Jr....... Senior Vice President, July 1, 1997, to present Governmental and Regulatory Relations Vice President, Governmental July 1, 1997, to present Relations, PG&E Corporation Vice President, Governmental January 1, 1997, to June 30, 1997 Relations Executive Vice President and January 1993, to December 1996 Principal, Morse, Richard, Weisenmiller & Assoc., Inc. (energy, project finance, and environmental consulting) G. M. Rueger............ Senior Vice President and November 1, 1991, to present General Manager, Nuclear Power Generation Business Unit
45 PART II ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Information responding to part of Item 5, for each of PG&E Corporation and Pacific Gas and Electric Company, is set forth on page 67 under the heading "Quarterly Consolidated Financial Data (Unaudited)" in the 1999 Annual Report to Shareholders, which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report. As of February 22, 2000, there were 149,708 holders of record of PG&E Corporation common stock. PG&E Corporation common stock is listed on the New York, Pacific, and Swiss stock exchanges. The discussion of dividends with respect to PG&E Corporation's common stock is hereby incorporated by reference from "Management's Discussion and Analysis--Dividends" on page 20 of the 1999 Annual Report to Shareholders. Neither Pacific Gas and Electric Company nor PG&E Corporation made any sales of unregistered equity securities during 1999, the period covered by this report. ITEM 6. Selected Financial Data. A summary of selected financial information for each of PG&E Corporation and Pacific Gas and Electric Company for each of the last five fiscal years is set forth on page 4 under the heading "Selected Financial Data" in the 1999 Annual Report to Shareholders, which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report. Pacific Gas and Electric Company's ratio of earnings to fixed charges for the year ended December 31, 1999, was 3.25. Pacific Gas and Electric Company's ratio of earnings to combined fixed charges and preferred stock dividends for the year ended December 31, 1999, was 3.08. The statement of the foregoing ratios, together with the statements of the computation of the foregoing ratios filed as Exhibits 12.1 and 12.2 hereto, are included herein for the purpose of incorporating such information and exhibits into Registration Statement Nos. 33-62488, 33-64136, 33-50707, and 33-61959 relating to Pacific Gas and Electric Company's various classes of debt and first preferred stock outstanding. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. A discussion of PG&E Corporation's and Pacific Gas and Electric Company's consolidated results of operations and financial condition is set forth on pages 5 through 25 under the heading "Management's Discussion and Analysis" in the 1999 Annual Report to Shareholders, which discussion is hereby incorporated by reference and filed as part of Exhibit 13 to this report. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. Information responding to Item 7A appears in the 1999 Annual Report to Shareholders on page 23 under the heading "Management's Discussion and Analysis--Debt Obligations and Rate Reduction Bonds," on pages 24 and 25 under the heading "Management's Discussion and Analysis--Price Risk Management Activities," and on pages 37, 38, 45, and 47 under Notes 1, 3, and 4 of the "Notes to Consolidated Financial Statements" of the 1999 Annual Report to Shareholders, which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report. ITEM 8. Financial Statements and Supplementary Data. Information responding to Item 8 appears on pages 26 through 69 of the 1999 Annual Report to Shareholders under the following headings for PG&E Corporation: "Statement of Consolidated Income," "Consolidated Balance Sheet," "Statement of Consolidated Cash Flows," and "Statement of Consolidated Common Stock Equity;" under the following headings for Pacific Gas and Electric Company: "Statement of Consolidated Income," "Consolidated Balance Sheet," "Statement of Consolidated Cash Flows," and 46 "Statement of Consolidated Stockholders' Equity;" and under the following headings for PG&E Corporation and Pacific Gas and Electric Company jointly: "Notes to Consolidated Financial Statements," "Quarterly Consolidated Financial Data (Unaudited)," "Report of Independent Public Accountants," and "Responsibility for Consolidated Financial Statements," which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Information responding to Item 9 has been previously reported by PG&E Corporation and Pacific Gas and Electric Company in a current report on Form 8-K dated February 17, 1999, and filed on February 23, 1999, as amended by a Current Report on Form 8-K/A filed on June 11, 1999. PART III ITEM 10. Directors and Executive Officers of the Registrant. Information regarding executive officers of PG&E Corporation and Pacific Gas and Electric Company is included in a separate item captioned "Executive Officers of the Registrant" contained on pages 43 through 45 in Part I of this report. Other information responding to Item 10 is included on pages 3 through 6 under the heading "Item No. 1: Election of Directors of PG&E Corporation and Pacific Gas and Electric Company" and page 38 under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2000 Joint Proxy Statement relating to the 2000 Annual Meetings of Shareholders, which information is hereby incorporated by reference. ITEM 11. Executive Compensation. Information responding to Item 11, for each of PG&E Corporation and Pacific Gas and Electric Company, is included on pages 9 and 10 under the heading "Compensation of Directors" and on pages 30 through 35 under the headings "Summary Compensation Table," "Option/SAR Grants in 1999," "Aggregated Option/SAR Exercises in 1999 and Year-End Option/SAR Values," "Long-Term Incentive Plan--Awards in 1999," "Retirement Benefits," and "Termination of Employment and Change In Control Provisions" in the 2000 Joint Proxy Statement relating to the 2000 Annual Meetings of Shareholders, which information is hereby incorporated by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Information responding to Item 12, for each of PG&E Corporation and Pacific Gas and Electric Company, is included on pages 11 and 12 under the heading "Security Ownership of Management" and on page 38 under the heading "Principal Shareholders" in the 2000 Joint Proxy Statement relating to the 2000 Annual Meetings of Shareholders, which information is hereby incorporated by reference. ITEM 13. Certain Relationships and Related Transactions. Information responding to Item 13, for each of PG&E Corporation and Pacific Gas and Electric Company, is included on page 10 under the heading "Certain Relationships and Related Transactions" in the 2000 Joint Proxy Statement relating to the 2000 Annual Meetings of Shareholders, which information is hereby incorporated by reference. 47 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as a part of this report: 1. The following consolidated financial statements, supplemental information, and report of independent public accountants contained in the 1999 Annual Report to Shareholders, which have been incorporated by reference in this report: Statements of Consolidated Income for the Years Ended December 31, 1999, 1998, and 1997, for each of PG&E Corporation and Pacific Gas and Electric Company. Statements of Consolidated Cash Flows for the Years Ended December 31, 1999, 1998, and 1997, for each of PG&E Corporation and Pacific Gas and Electric Company. Consolidated Balance Sheets at December 31, 1999, and 1998 for each of PG&E Corporation and Pacific Gas and Electric Company. Statement of Consolidated Common Stock Equity for the Years Ended December 31, 1999, 1998, and 1997, for PG&E Corporation. Statement of Consolidated Stockholders' Equity for the Years Ended December 31, 1999, 1998, and 1997, for Pacific Gas and Electric Company. Notes to Consolidated Financial Statements. Quarterly Consolidated Financial Data (Unaudited). Independent Auditors' Report (Deloitte & Touche LLP). 2. Independent Auditors' Report (Deloitte & Touche LLP) included at page 53 of this Form 10-K. 3. Report of Independent Public Accountants (Arthur Andersen LLP) included at page 54 of this Form 10-K. 4. Report of Independent Public Accountants (Arthur Andersen LLP) included at page 55 of this Form 10-K. 5. Financial statement schedules: I--Condensed Financial Information of Parent for the Years Ended December 31, 1999 and 1998. II--Consolidated Valuation and Qualifying Accounts for each of PG&E Corporation and Pacific Gas and Electric Company for the Years Ended December 31, 1999, 1998 and 1997. Schedules not included are omitted because of the absence of conditions under which they are required or because the required information is provided in the consolidated financial statements including the notes thereto. 6. Exhibits required to be filed by Item 601 of Regulation S-K: 3.1 Restated Articles of Incorporation of PG&E Corporation effective as of December 19, 1996 (PG&E Corporation's Form 8-B (File No. 1- 12609), Exhibit 3.1). 3.2 By-Laws of PG&E Corporation amended as of February 16, 2000. 3.3 Restated Articles of Incorporation of Pacific Gas and Electric Company effective as of May 6, 1998 (Pacific Gas and Electric Company's Form 10-Q for the quarter ended March 31, 1998 (File No. 1-2348), Exhibit 3.1). 3.4 By-Laws of Pacific Gas and Electric Company amended as of February 16, 2000. 4. First and Refunding Mortgage of Pacific Gas and Electric Company dated December 1, 1920, and supplements thereto dated April 23, 1925, October 1, 1931, March 1, 1941, September 1, 1947, May 15, 1950, May 1, 1954, May 21, 1958, November 1, 1964, July 1, 1965, July 1, 1969, January 1, 1975, June 1, 1979, August 1, 1983, and
48 December 1, 1988 (Registration No. 2-1324, Exhibits B-1, B-2, B- 3; Registration No. 2-4676, Exhibit B-22; Registration No. 2- 7203, Exhibit B-23; Registration No. 2-8475, Exhibit B-24; Registration No. 2-10874, Exhibit 4B; Registration No. 2-14144, Exhibit 4B; Registration No. 2-22910, Exhibit 2B; Registration No. 2-23759, Exhibit 2B; Registration No. 2-35106, Exhibit 2B; Registration No. 2-54302, Exhibit 2C; Registration No. 2-64313, Exhibit 2C; Registration No. 2-86849, Exhibit 4.3; Pacific Gas and Electric Company's Form 8-K dated January 18, 1989 (File No. 1-2348), Exhibit 4.2). 10. The Gas Accord Settlement Agreement, together with accompanying tables, adopted by the California Public Utilities Commission on August 1, 1997, in Decision 97-08-055. (PG&E Corporation and Pacific Gas and Electric Company's Form 10-K for the year ended December 31, 1997 (File No. 1-12609 and File No. 1-2348), Exhibit No. 10.2). 10.1 Stock Purchase Agreement By and Between PG&E National Energy Group, Inc. and El Paso Field Services Company, dated as of January 27, 2000. *10.2 PG&E Corporation Supplemental Retirement Savings Plan dated as of January 1, 2000. *10.3 Description of Compensation Arrangement between PG&E Corporation and Thomas G. Boren. (PG&E Corporation's Form 10-Q for the quarter ended September 30, 1999 (File No. 1-12609), Exhibit 10.2). *10.4 Description of Compensation Arrangement between PG&E Corporation and Peter Darbee. (PG&E Corporation's Form 10-Q for the quarter ended September 30, 1999 (File No. 1-12609), Exhibit 10.3). *10.5 PG&E Corporation Deferred Compensation Plan for Non-Employee Directors, as amended and restated effective as of July 22, 1998. (PG&E Corporation's Form 10-Q for the quarter ended September 30, 1998 (File No. 1-12609), Exhibit 10.2). *10.6 Description of Short-Term Incentive Plan for Officers of PG&E Corporation and its subsidiaries, effective January 1, 1999. (PG&E Corporation's Form 10-K for the year ended December 31, 1998 (File No. 1-12609), Exhibit 10.6). *10.7 Description of Short-Term Incentive Plan for Officers of PG&E Corporation and its subsidiaries, effective January 1, 2000. *10.8 Supplemental Executive Retirement Plan of the Pacific Gas and Electric Company, effective January 1, 1998 (PG&E Corporation's Form 10-K for the year ended December 31, 1998 (File No. 1- 12609), Exhibit 10.7). *10.9 Pacific Gas and Electric Company Relocation Assistance Program for Officers (Pacific Gas and Electric Company's Form 10-K for fiscal year 1989 (File No. 1-2348), Exhibit 10.16). *10.10 Postretirement Life Insurance Plan of the Pacific Gas and Electric Company (Pacific Gas and Electric Company's Form 10-K for fiscal year 1991 (File No. 1-2348), Exhibit 10.16). *10.11 PG&E Corporation Retirement Plan for Non-Employee Directors, as amended and terminated January 1, 1998. (PG&E Corporation Form 10-K for the year ended December 31, 1997, (File No. 1-12609), Exhibit No. 10.13). *10.12 PG&E Corporation Long-Term Incentive Program, as amended February 16, 2000, including the PG&E Corporation Stock Option Plan, Performance Unit Plan, and Non-Employee Director Stock Incentive Plan.
49 *10.13 PG&E Corporation Executive Stock Ownership Program, amended as of February 16, 2000. *10.14 PG&E Corporation Officer Severance Policy, amended as of July 21, 1999. (PG&E Corporation's Form 10-Q for the quarter ended September 30, 1999 (File No. 1-12609), Exhibit 10.1). *10.15 PG&E Corporation Director Grantor Trust Agreement dated April 1, 1998 (PG&E Corporation's Form 10-Q for the quarter ended March 31, 1998 (File No. 1-12609), Exhibit 10.1). *10.16 PG&E Corporation Officer Grantor Trust Agreement dated April 1, 1998 (PG&E Corporation's Form 10-Q for the quarter ended March 31, 1998 (File No. 1-12609), Exhibit 10.2). 11. Computation of Earnings Per Common Share. 12.1 Computation of Ratios of Earnings to Fixed Charges for Pacific Gas and Electric Company. 12.2 Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends for Pacific Gas and Electric Company. 13. 1999 Annual Report to Shareholders of PG&E Corporation and Pacific Gas and Electric Company--portions of the 1999 Annual Report to Shareholders under the headings "Selected Financial Data," "Management's Discussion and Analysis," "Independent Auditors' Report," "Responsibility for Consolidated Financial Statements," financial statements of PG&E Corporation entitled "Statement of Consolidated Income," "Consolidated Balance Sheet," "Statement of Consolidated Cash Flows," "Statement of Consolidated Common Stock Equity," financial statements of Pacific Gas and Electric Company entitled "Statement of Consolidated Income," "Consolidated Balance Sheet," "Statement of Consolidated Cash Flows," "Statement of Consolidated Stockholders' Equity," "Notes to Consolidated Financial Statements" and "Quarterly Consolidated Financial Data (Unaudited)" are included only. (Except for those portions that are expressly incorporated herein by reference, such 1999 Annual Report to Shareholders is furnished for the information of the Commission and is not deemed to be "filed" herein.) 18. Letter re change in Accounting Principles. 21. Subsidiaries of the Registrant. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Arthur Andersen LLP. 24.1 Resolutions of the Boards of Directors of PG&E Corporation and Pacific Gas and Electric Company authorizing the execution of the Form 10-K. 24.2 Powers of Attorney. 27.1 Financial Data Schedule for the year ended December 31, 1999, for PG&E Corporation. 27.2 Financial Data Schedule for the year ended December 31, 1999, for Pacific Gas and Electric Company.
- -------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K. 50 The exhibits filed herewith are attached hereto (except as noted) and those indicated above which are not filed herewith were previously filed with the Commission and are hereby incorporated by reference. All exhibits filed herewith or incorporated by reference are filed with respect to both PG&E Corporation (File No. 1-12609) and Pacific Gas and Electric Company (File No. 1-2348), unless otherwise noted. Exhibits will be furnished to security holders of PG&E Corporation or Pacific Gas and Electric Company upon written request and payment of a fee of $0.30 per page, which fee covers only the registrants' reasonable expenses in furnishing such exhibits. The registrants agree to furnish to the Commission upon request a copy of any instrument defining the rights of long-term debt holders not otherwise required to be filed hereunder. (b) Reports on Form 8-K Reports on Form 8-K(/1/) during the quarter ended December 31, 1999, and through the date hereof: 1. October 1, 1999 Item 5. Other Events--Reporting the filing of an application relating to the proposed auction of Pacific Gas and Electric Company's hydroelectric generation assets 2. October 20, 1999 Item 5. Other Events--Proposed decision in Pacific Gas and Electric Company's General Rate Case 3. October 21, 1999--Filed by PG&E Corporation only Item 5. Other Events-- A. Share Repurchase B. Proposed amendments to Articles of Incorporation and Bylaw Amendments 4. November 5, 1999 Item 5. Other Events-- A. Pacific Gas and Electric Company's Post-transition Period Ratemaking Proceeding B. Pacific Gas and Electric Company's 2000 Cost of Capital Proceeding 5. December 1, 1999 Item 5. Other Events--Performance Goals and Implementation Strategy 6. January 21, 2000 Item 5. Other Events-- A. Pacific Gas and Electric Company's General Rate Case Proceeding B. Proposed Auction of Pacific Gas and Electric Company's Hydroelectric Generating Assets C. 1998 Annual Transition Cost Proceeding 7. January 31, 2000 Item 5. Other Events--Sale of Texas Gas Transmission Companies 8. February 23, 2000 Item 5. Other Events-- A. Pacific Gas and Electric Company's General Rate Case Proceeding B. 1998 Annual Transition Cost Proceeding C. Disposition of PG&E Energy Services Corporation - -------- (1) Unless otherwise noted, all reports were filed under Commission File Number 1-2348 (Pacific Gas and Electric Company) and Commission File Number 1-12609 (PG&E Corporation) 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized, in the City and County of San Francisco, on the 6th day of March, 2000. PG&E CORPORATION PACIFIC GAS AND ELECTRIC COMPANY (Registrant) (Registrant) By /s/ Gary P. Encinas By /s/ Gary P. Encinas --------------------------------- --------------------------------- (Gary P. Encinas, Attorney-in-Fact) (Gary P. Encinas, Attorney-in-Fact) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- A. Principal Executive Officers *ROBERT D. GLYNN, JR. Chairman of the Board, Chief March 6, 2000 Executive Officer, and President (PG&E Corporation) *GORDON R. SMITH President and Chief Executive March 6, 2000 Officer (Pacific Gas and Electric Company) B. Principal Financial Officers *PETER A. DARBEE Senior Vice President, Chief March 6, 2000 Financial Officer, and Treasurer (PG&E Corporation) *KENT M. HARVEY Senior Vice President, Chief March 6, 2000 Financial Officer, Controller, and Treasurer (Pacific Gas and Electric Company) C. Principal Accounting Officers *CHRISTOPHER P. JOHNS Vice President and Controller March 6, 2000 (PG&E Corporation) *KENT M. HARVEY Senior Vice President, Chief March 6, 2000 Financial Officer, Controller, and Treasurer (Pacific Gas and Electric Company) D. Directors *RICHARD A. CLARKE *HARRY M. CONGER *DAVID A. COULTER *C. LEE COX *WILLIAM S. DAVILA *ROBERT D. GLYNN, JR. Directors of PG&E Corporation and *DAVID M. LAWRENCE, M.D. Pacific Gas and Electric Company, March 6, 2000 *MARY S. METZ except as noted *CARL E. REICHARDT *JOHN C. SAWHILL *GORDON R. SMITH (Director of Pacific Gas and Electric Company, only) *BARRY LAWSON WILLIAMS
*By /s/ Gary P. Encinas ---------------------------- (Gary P. Encinas, Attorney-in-Fact) 52 INDEPENDENT AUDITORS' REPORT To the Shareholders and the Boards of Directors of PG&E Corporation and Pacific Gas and Electric Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements as of and for the year ended December 31, 1999 included in the PG&E Corporation and Pacific Gas and Electric Company Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated March 3, 2000. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in Part IV, Item 14. (a)(5) in this Form 10-K are the responsibility of the management of PG&E Corporation and of Pacific Gas and Electric Company and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. Deloitte & Touche LLP San Francisco, California March 3, 2000 53 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of PG&E Corporation and Pacific Gas and Electric Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements as of December 31, 1998, and for each of the two years in the period ended December 31, 1998 included in the PG&E Corporation and Pacific Gas and Electric Company Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 8, 1999. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The Condensed Financial Information of Parent for the Year Ended December 31, 1998 and the Consolidated Valuation and Qualifying Accounts for each of PG&E Corporation and Pacific Gas and Electric Company for the Years Ended December 31, 1998 and 1997, are the responsibility of the management of PG&E Corporation and of Pacific Gas and Electric Company. These schedules are for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP San Francisco, California February 8, 1999 54 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of PG&E Corporation and Pacific Gas and Electric Company: We have audited the accompanying consolidated balance sheets of PG&E Corporation (a California corporation) and subsidiaries and Pacific Gas and Electric Company (a California corporation) and subsidiaries as of December 31, 1998, and the related statements of consolidated income, cash flows, and common stock equity of PG&E Corporation and subsidiaries and the related statements of consolidated income, cash flows and stockholders' equity of Pacific Gas and Electric Company and subsidiaries for each of the two years in the period ended December 31, 1998. These financial statements are the responsibility of the management of PG&E Corporation and Pacific Gas and Electric Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial positions of PG&E Corporation and subsidiaries, and of Pacific Gas and Electric Company and subsidiaries, as of December 31, 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California February 8, 1999 55 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF PARENT CONDENSED BALANCE SHEETS
December 31, -------------- 1999 1998 ------ ------ (in millions) Assets: Cash and cash equivalents.................................... $ 155 $ 9 Advances to affiliates....................................... 299 448 Other current assets......................................... -- 2 ------ ------ Total current assets..................................... 454 459 Equipment.................................................... 16 8 Accumulated depreciation..................................... (3) (1) ------ ------ Net equipment................................................ 13 7 Investments in subsidiaries.................................. 7,621 8,780 Other investments............................................ 52 41 Deferred income taxes........................................ 396 -- Other deferred charges....................................... -- 1 ------ ------ Total Assets............................................. $8,536 $9,288 ====== ====== Liabilities and Stockholders' Equity: Current Liabilities Short-term borrowings...................................... $526 $ 683 Accounts payable - related parties......................... 76 221 Accounts payable - trade................................... 10 9 Accrued taxes.............................................. 117 155 Dividends payable.......................................... 110 115 Other...................................................... 112 16 ------ ------ Total current liabilities................................ 951 1,199 Noncurrent Liabilities Deferred income taxes...................................... -- 19 Other...................................................... 5 4 ------ ------ Total noncurrent liabilities............................. 5 23 Stockholders' Equity Common stock............................................... 5,906 5,862 Reinvested earnings........................................ 1,674 2,204 ------ ------ Total stockholders' equity............................... 7,580 8,066 ------ ------ Total Liabilities and Stockholders' Equity............... $8,536 $9,288 ====== ======
SCHEDULE I--CONDENSED FINANCIAL INFORMATION FOR PARENT--(Continued) CONDENSED STATEMENTS OF INCOME For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------- ------- -------- (in millions, except per share amounts) Equity in earnings of subsidiaries............. $ 853 $ 736 $ 772 Operating expenses............................. (4) 1 (21) Loss on assets held for sale................... (1,275) -- -- Interest expense............................... (30) (52) (23) Other income................................... 16 5 -- ------- ------- -------- Income Before Income Taxes..................... (440) 690 728 Less: Income taxes............................. (447) (83) (17) ------- ------- -------- Income from continuing operations.............. $ 7 $ 773 $ 716 Discontinued operations........................ (98) (52) (29) Cumulative effect of a change in an accounting principle..................................... 12 -- -- ------- ------- -------- Net income (loss) before intercompany elimination................................... $ (79) $ 721 $ 716 Elimination of intercompany (profit) loss...... 6 (2) -- ------- ------- -------- Net income (loss).............................. $ (73) $ 719 $ 716 ======= ======= ======== Weighted Average Common Shares Outstanding..... 368 382 410 ======= ======= ======== Earnings Per Common Share, Basic and Diluted... $ (.20) $ 1.88 $ 1.75 ======= ======= ======== CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ------- ------- -------- (in millions) Cash Flows From Operating Activities Net income (loss).............................. $ (73) $ 721 $ 716 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiaries........... (853) (736) (772) Deferred taxes............................... (415) 19 -- Loss on assets held for sale................. 1,275 -- -- Dividends received from consolidated subsidiaries................................ 527 445 763 Other--net................................... 77 (574) (605) ------- ------- -------- Net cash provided (used) by operating activities.................................... $ 538 $ (125) $ 1,312 Cash Flows From Investing Activities Capital expenditures......................... (8) (8) -- Investments in subsidiaries.................. (722) (575) (150) Return of capital by Utility (share repurchases)................................ 926 1,600 -- Other--net................................... (12) -- -- ------- ------- -------- Net cash provided by investing activities...... $ 184 $ 1,017 $ (150) Cash Flows From Financing Activities Common stock issued.......................... 54 63 -- Common stock repurchased..................... (3) (1,158) (804) Short-term debt issued (redeemed)--net....... (157) 683 -- Dividends paid............................... (465) (470) (367) Other--net................................... (5) (2) 10 ------- ------- -------- Net cash used by financing activities.......... $ (576) $ (884) $ (1,161) Net Change in Cash and Cash Equivalents........ 146 8 1 Cash and Cash Equivalents at January 1......... 9 1 -- ------- ------- -------- Cash and Cash Equivalents at December 31....... $ 155 $ 9 $ 1 ======= ======= ========
PG&E CORPORATION SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1999, 1998, and 1997
Column A Column B Column C Column D Column E Additions --------------------- Balance Balance at Charged Charged at End Beginning to Costs to Other of Description of Period and Expenses Accounts Deductions Period ----------- ---------- ------------ -------- ---------- -------- (in thousands) Valuation and qualifying accounts deducted from assets: 1999: Allowance for uncollectible accounts (2)................... $58,577 $25,243 $ (183) $18,509(1) $65,128 ======= ======= ======= ======= ======= 1998: Allowance for uncollectible accounts (2)................... $72,912 $10,978 $(2,893) $22,420(1) $58,577 ======= ======= ======= ======= ======= 1997: Allowance for uncollectible accounts (2)................... $57,904 $42,500 $ -- $27,492(1) $72,912 ======= ======= ======= ======= =======
- -------- (1) Deductions consist principally of write-offs, net of collections of receivables previously written off. (2) Allowance for uncollectible accounts are deducted from "Accounts receivable--Customers, net" and "Accounts receivable--Energy Marketing." PACIFIC GAS AND ELECTRIC COMPANY SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1999, 1998, and 1997
Column A Column B Column C Column D Column E Additions --------------------- Balance Balance at Charged Charged at End Beginning to Costs to Other of Description of Period and Expenses Accounts Deductions Period ----------- ---------- ------------ -------- ---------- -------- (in thousands) Valuation and qualifying accounts deducted from assets: 1999: Allowance for uncollectible accounts (2)................... $47,347 $17,011 $ 44 $17,981(1) $46,421 ======= ======= ======= ======= ======= 1998: Allowance for uncollectible accounts (2)................... $59,608 $10,007 $ 152 $22,420(1) $47,347 ======= ======= ======= ======= ======= 1997: Allowance for uncollectible accounts (2)................... $57,904 $30,718 $(1,836) $27,178(1) $59,608 ======= ======= ======= ======= =======
- -------- (1) Deductions consist principally of write-offs, net of collections of receivables previously written off. (2) Allowance for uncollectible accounts are deducted from "Accounts receivable--Customers, net." EXHIBIT INDEX
Exhibit No. Description of Exhibit ----------- ---------------------- 3.1 Restated Articles of Incorporation of PG&E Corporation effective as of December 19, 1996 (PG&E Corporation's Form 8-B (File No. 1-12609), Exhibit 3.1)...................... 3.2 By-Laws of PG&E Corporation amended as of February 16, 2000...................................................... 3.3 Restated Articles of Incorporation of Pacific Gas and Electric Company effective as of May 6, 1998 (Pacific Gas and Electric Company's Form 10-Q for the quarter ended March 31, 1998 (File No. 1-2348), Exhibit 3.1)............ 3.4 By-Laws of Pacific Gas and Electric Company amended as of February 16, 2000......................................... 4. First and Refunding Mortgage of Pacific Gas and Electric Company dated December 1, 1920, and supplements thereto dated April 23, 1925, October 1, 1931, March 1, 1941, September 1, 1947, May 15, 1950, May 1, 1954, May 21, 1958, November 1, 1964, July 1, 1965, July 1, 1969, January 1, 1975, June 1, 1979, August 1, 1983, and December 1, 1988 (Registration No. 2-1324, Exhibits B-1, B-2, B-3; Registration No. 2-4676, Exhibit B-22; Registration No. 2-7203, Exhibit B-23; Registration No. 2- 8475, Exhibit B-24; Registration No. 2-10874, Exhibit 4B; Registration No. 2-14144, Exhibit 4B; Registration No. 2- 22910, Exhibit 2B; Registration No. 2-23759, Exhibit 2B; Registration No. 2-35106, Exhibit 2B; Registration No. 2- 54302, Exhibit 2C; Registration No. 2-64313, Exhibit 2C; Registration No. 2-86849, Exhibit 4.3; Pacific Gas and Electric Company's Form 8-K dated January 18, 1989 (File No. 1-2348), Exhibit 4.2)................................. 10. The Gas Accord Settlement Agreement, together with accompanying tables, adopted by the California Public Utilities Commission on August 1, 1997, in Decision 97-08- 055. (PG&E Corporation and Pacific Gas and Electric Company's Form 10-K for the year ended December 31, 1997 (File No. 1-12609 and File No. 1-2348), Exhibit No. 10.2)..................................................... 10.1 Stock Purchase Agreement By and Between PG&E National Energy Group, Inc. and El Paso Field Services Company, dated as of January 27, 2000.............................. *10.2 PG&E Corporation Supplemental Retirement Savings Plan dated as of January 1, 2000............................... *10.3 Description of Compensation Arrangement between PG&E Corporation and Thomas G. Boren. (PG&E Corporation's Form 10-Q for the quarter ended September 30, 1999 (File No. 1- 12609), Exhibit 10.2)..................................... *10.4 Description of Compensation Arrangement between PG&E Corporation and Peter Darbee. (PG&E Corporation's Form 10- Q for the quarter ended September 30, 1999 (File No. 1- 12609), Exhibit 10.3)..................................... *10.5 PG&E Corporation Deferred Compensation Plan for Non- Employee Directors, as amended and restated effective as of July 22, 1998. (PG&E Corporation's Form 10-Q for the quarter ended September 30, 1998 (File No. 1-12609), Exhibit 10.2)............................................. *10.6 Description of Short-Term Incentive Plan for Officers of PG&E Corporation and its subsidiaries, effective January 1, 1999. (PG&E Corporation's Form 10-K for the year ended December 31, 1998 (File No. 1-12609), Exhibit 10.6)....... *10.7 Description of Short-Term Incentive Plan for Officers of PG&E Corporation and its subsidiaries, effective January 1, 2000...................................................
Exhibit No. Description of Exhibit ----------- ---------------------- *10.8 Supplemental Executive Retirement Plan of the Pacific Gas and Electric Company, effective January 1, 1998 (PG&E Corporation's Form 10-K for the year ended December 31, 1998 (File No. 1-12609), Exhibit 10.7).................... *10.9 Pacific Gas and Electric Company Relocation Assistance Program for Officers (Pacific Gas and Electric Company's Form 10-K for fiscal year 1989 (File No. 1-2348), Exhibit 10.16)............................................ *10.10 Postretirement Life Insurance Plan of the Pacific Gas and Electric Company (Pacific Gas and Electric Company's Form 10-K for fiscal year 1991 (File No. 1-2348), Exhibit 10.16)............................................ *10.11 PG&E Corporation Retirement Plan for Non-Employee Directors, as amended and terminated January 1, 1998. (PG&E Corporation Form 10-K for the year ended December 31, 1997, (File No. 1-12609), Exhibit No. 10.13).......... *10.12 PG&E Corporation Long-Term Incentive Program, as amended February 16, 2000, including the PG&E Corporation Stock Option Plan, Performance Unit Plan, and Non-Employee Director Stock Incentive Plan............................. *10.13 PG&E Corporation Executive Stock Ownership Program, amended as of February 16, 2000........................... *10.14 PG&E Corporation Officer Severance Policy, amended as of July 21, 1999. (PG&E Corporation's Form 10-Q for the quarter ended September 30, 1999 (File No. 1-12609), Exhibit 10.1)............................................. *10.15 PG&E Corporation Director Grantor Trust Agreement dated April 1, 1998 (PG&E Corporation's Form 10-Q for the quarter ended March 31, 1998 (File No. 1-12609), Exhibit 10.1)..................................................... *10.16 PG&E Corporation Officer Grantor Trust Agreement dated April 1, 1998 (PG&E Corporation's Form 10-Q for the quarter ended March 31, 1998 (File No. 1-12609), Exhibit 10.2)..................................................... 11. Computation of Earnings Per Common Share.................. 12.1 Computation of Ratios of Earnings to Fixed Charges for Pacific Gas and Electric Company.......................... 12.2 Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends for Pacific Gas and Electric Company.......................................... 13. 1999 Annual Report to Shareholders of PG&E Corporation and Pacific Gas and Electric Company--portions of the 1999 Annual Report to Shareholders under the headings "Selected Financial Data," "Management's Discussion and Analysis," "Report of Independent Public Accountants," "Responsibility for Consolidated Financial Statements," financial statements of PG&E Corporation entitled "Statement of Consolidated Income," "Consolidated Balance Sheet," "Statement of Consolidated Cash Flows," "Statement of Consolidated Common Stock Equity," financial statements of Pacific Gas and Electric Company entitled "Statement of Consolidated Income," "Consolidated Balance Sheet," "Statement of Consolidated Cash Flows," "Statement of Consolidated Stockholders' Equity," "Notes to Consolidated Financial Statements" and "Quarterly Consolidated Financial Data (Unaudited)" are included only. (Except for those portions that are expressly incorporated herein by reference, such 1999 Annual Report to Shareholders is furnished for the information of the Commission and is not deemed to be "filed" herein.).............................
Exhibit No. Description of Exhibit ----------- ---------------------- 18. Letter re change in Accounting Principles.................... 21. Subsidiaries of the Registrant............................... 23.1 Consent of Deloitte & Touche LLP............................. 23.2 Consent of Arthur Andersen LLP............................... 24.1 Resolutions of the Boards of Directors of PG&E Corporation and Pacific Gas and Electric Company authorizing the execution of the Form 10-K................................... 24.2 Powers of Attorney........................................... 27.1 Financial Data Schedule for the year ended December 31, 1999, for PG&E Corporation......................................... 27.2 Financial Data Schedule for the year ended December 31, 1999, for Pacific Gas and Electric Company.........................
- -------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K. The exhibits filed herewith are attached hereto (except as noted) and those indicated above which are not filed herewith were previously filed with the Commission and are hereby incorporated by reference. All exhibits filed herewith or incorporated by reference are filed with respect to both PG&E Corporation (File No. 1-12609) and Pacific Gas and Electric Company (File No. 1-2348), unless otherwise noted. Exhibits will be furnished to security holders of PG&E Corporation or Pacific Gas and Electric Company upon written request and payment of a fee of $0.30 per page, which fee covers only the registrants' reasonable expenses in furnishing such exhibits. The registrants agree to furnish to the Commission upon request a copy of any instrument defining the rights of long-term debt holders not otherwise required to be filed hereunder. EX-3.2 2 BY-LAWS OF PG&E CORPORATION-2/16/2000 EXHIBIT 3.2 Bylaws of PG&E Corporation amended as of February 16, 2000 ------------------------------- Article I. SHAREHOLDERS. 1. Place of Meeting. All meetings of the shareholders shall be held at the office of the Corporation in the City and County of San Francisco, State of California, or at such other place, within or without the State of California, as may be designated by the Board of Directors. 2. Annual Meetings. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. Written notice of the annual meeting shall be given not less than ten (or, if sent by third-class mail, thirty) nor more than sixty days prior to the date of the meeting to each shareholder entitled to vote thereat. The notice shall state the place, day, and hour of such meeting, and those matters which the Board, at the time of mailing, intends to present for action by the shareholders. Notice of any meeting of the shareholders shall be given by mail or telegraphic or other written communication, postage prepaid, to each holder of record of the stock entitled to vote thereat, at his address, as it appears on the books of the Corporation. At an annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the annual meeting (or any supplement thereto) given by or at the direction of the Board, or (ii) otherwise properly brought before the annual meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, including the nomination of any person (other than a person nominated by or at the direction of the Board) for election to the Board, the shareholder must have given timely and proper written notice to the Corporate Secretary of the Corporation. To be timely, the shareholder's written notice must be received at the principal executive office of the Corporation not less than forty-five days before the date corresponding to the mailing date of the notice and proxy materials for the prior year's annual meeting of shareholders; provided, however, that if the annual meeting to which the shareholder's written notice relates is to be held on a date that differs by more than thirty days from the date of the last annual meeting of shareholders, the shareholder's written notice to be timely must be so received not later than the close of business on the tenth day following the date on which public disclosure of the date of the annual meeting is made or given to shareholders. To be proper, the shareholder's written notice must set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) the name and address of the shareholder as they appear on the Corporation's books, (c) the class and number of shares of the Corporation that are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. In addition, if the shareholder's written notice relates to the nomination at the annual meeting of any person for election to the Board, such notice to be proper must also set forth (a) the name, age, business address, and residence address of each person to be so nominated, (b) the principal occupation or employment of each such person, (c) the number of shares of capital stock of the Corporation beneficially owned by each such person, and (d) such other information concerning each such person as would be required under the rules of the Securities and Exchange Commission in a proxy statement soliciting proxies for the election of such person as a Director, and must be accompanied by a consent, signed by each such person, to serve as a Director of the Corporation if elected. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section. 3. Special Meetings. Special meetings of the shareholders shall be called by the Corporate Secretary or an Assistant Corporate Secretary at any time on order of the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, or the President. Special meetings of the shareholders shall also be called by the Corporate Secretary or an Assistant Corporate Secretary upon the written request of holders of shares entitled to cast not less than ten percent of the votes at the meeting. Such request shall state the purposes of the meeting, and shall be delivered to the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President, or the Corporate Secretary. A special meeting so requested shall be held on the date requested, but not less than thirty-five nor more than sixty days after the date of the original request. Written notice of each special meeting of shareholders, stating the place, day, and hour of such meeting and the business proposed to be transacted thereat, shall be given in the manner stipulated in Article I, Section 2, Paragraph 3 of these Bylaws within twenty days after receipt of the written request. 4. Attendance at Meetings. At any meeting of the shareholders, each holder of record of stock entitled to vote thereat may attend in person or may designate an agent or a reasonable number of agents, not to exceed three to attend the meeting and cast votes for his or her shares. The authority of agents must be evidenced by a written proxy signed by the shareholder designating the agents authorized to attend the meeting and be delivered to the Corporate Secretary of the Corporation prior to the commencement of the meeting. 2 5. Shareholder Action by Written Consent. Subject to Section 603 of the California Corporations Code, any action which, under any provision of the California Corporations Code, may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Any party seeking to solicit written consent from shareholders to take corporate action must deliver a notice to the Corporate Secretary of the Corporation which requests the Board of Directors to set a record date for determining shareholders entitled to give such consent. Such written request must set forth as to each matter the party proposes for shareholder action by written consents (a) a brief description of the matter and (b) the class and number of shares of the Corporation that are beneficially owned by the requesting party. Within ten days of receiving the request in the proper form, the Board shall set a record date for the taking of such action by written consent in accordance with California Corporations Code Section 701 and Article IV, Section 1 of these Bylaws. If the Board fails to set a record date within such ten-day period, the record date for determining shareholders entitled to give the written consent for the matters specified in the notice shall be the day on which the first written consent is given in accordance with California Corporations Code Section 701. Each written consent delivered to the Corporation must set forth (a) the action sought to be taken, (b) the name and address of the shareholder as they appear on the Corporation's books, (c) the class and number of shares of the Corporation that are beneficially owned by the shareholder, (d) the name and address of the proxyholder authorized by the shareholder to give such written consent, if applicable, and (d) any material interest of the shareholder or proxyholder in the action sought to be taken. Consents to corporate action shall be valid for a maximum of sixty days after the date of the earliest dated consent delivered to the Corporation. Consents may be revoked by written notice (i) to the Corporation, (ii) to the shareholder or shareholders soliciting consents or soliciting revocations in opposition to action by consent proposed by the Corporation (the "Soliciting Shareholders"), or (iii) to a proxy solicitor or other agent designated by the Corporation or the Soliciting Shareholders. Within three business days after receipt of the earliest dated consent solicited by the Soliciting Shareholders and delivered to the Corporation in the manner provided in California Corporations Code Section 603 or the determination by the Board of Directors of the Corporation that the Corporation should seek corporate action by written consent, as the case may be, the Corporate Secretary shall engage nationally recognized independent inspectors of elections for the purpose of performing a ministerial review of the validity of the consents and revocations. The cost of retaining inspectors of election shall be borne by the Corporation. 3 Consents and revocations shall be delivered to the inspectors upon receipt by the Corporation, the Soliciting Shareholders or their proxy solicitors, or other designated agents. As soon as consents and revocations are received, the inspectors shall review the consents and revocations and shall maintain a count of the number of valid and unrevoked consents. The inspectors shall keep such count confidential and shall not reveal the count to the Corporation, the Soliciting Shareholder or their representatives, or any other entity. As soon as practicable after the earlier of (i) sixty days after the date of the earliest dated consent delivered to the Corporation in the manner provided in California Corporations Code Section 603, or (ii) a written request therefor by the Corporation or the Soliciting Shareholders (whichever is soliciting consents), notice of which request shall be given to the party opposing the solicitation of consents, if any, which request shall state that the Corporation or Soliciting Shareholders, as the case may be, have a good faith belief that the requisite number of valid and unrevoked consents to authorize or take the action specified in the consents has been received in accordance with these Bylaws, the inspectors shall issue a preliminary report to the Corporation and the Soliciting Shareholders stating: (a) the number of valid consents, (b) the number of valid revocations, (c) the number of valid and unrevoked consents, (d) the number of invalid consents, (e) the number of invalid revocations, and (f) whether, based on their preliminary count, the requisite number of valid and unrevoked consents has been obtained to authorize or take the action specified in the consents. Unless the Corporation and the Soliciting Shareholders shall agree to a shorter or longer period, the Corporation and the Soliciting Shareholders shall have forty-eight hours to review the consents and revocations and to advise the inspectors and the opposing party in writing as to whether they intend to challenge the preliminary report of the inspectors. If no written notice of an intention to challenge the preliminary report is received within forty-eight hours after the inspectors' issuance of the preliminary report, the inspectors shall issue to the Corporation and the Soliciting Shareholders their final report containing the information from the inspectors' determination with respect to whether the requisite number of valid and unrevoked consents was obtained to authorize and take the action specified in the consents. If the Corporation or the Soliciting Shareholders issue written notice of an intention to challenge the inspectors' preliminary report within forty-eight hours after the issuance of that report, a challenge session shall be scheduled by the inspectors as promptly as practicable. A transcript of the challenge session shall be recorded by a certified court reporter. Following completion of the challenge session, the inspectors shall as promptly as practicable issue their final report to the Soliciting Shareholders and the Corporation, which report shall contain the information included in the preliminary report, plus all changes in the vote totals as a result of the challenge and a certification of whether the requisite number of valid and unrevoked consents was obtained to authorize or take the action specified in the consents. A copy of the final report of the inspectors shall be included in the book in which the proceedings of meetings of shareholders are recorded. Unless the consent of all shareholders entitled to vote have been solicited in writing, the Corporation shall give prompt notice to the shareholders in accordance with 4 California Corporations Code Section 603 of the results of any consent solicitation or the taking of the corporate action without a meeting and by less than unanimous written consent. Article II. DIRECTORS. 1. Number. As stated in Section I of Article Third of this Corporation's Articles of Incorporation, the authorized number of directors of this Corporation can be no less than nine (9) nor more than seventeen (17), with the exact number within the range determined by this Corporation's Board of Directors. The exact number of directors within the range shall be eleven (11), unless and until the Board of Directors fixes a different number within the range through amendment of these Bylaws which amendment may be adopted solely by the Board of Directors. 2. Powers. The Board of Directors shall exercise all the powers of the Corporation except those which are by law, or by the Articles of Incorporation of this Corporation, or by the Bylaws conferred upon or reserved to the shareholders. 3. Executive Committee. There shall be an Executive Committee of the Board of Directors consisting of the Chairman of the Committee, the Chairman of the Board, if these offices be filled, the President, and four Directors who are not officers of the Corporation. The members of the Committee shall be elected, and may at any time be removed, by a two-thirds vote of the whole Board. The Executive Committee, subject to the provisions of law, may exercise any of the powers and perform any of the duties of the Board of Directors; but the Board may by an affirmative vote of a majority of its members withdraw or limit any of the powers of the Executive Committee. The Executive Committee, by a vote of a majority of its members, shall fix its own time and place of meeting, and shall prescribe its own rules of procedure. A quorum of the Committee for the transaction of business shall consist of three members. 4. Time and Place of Directors' Meetings. Regular meetings of the Board of Directors shall be held on such days and at such times and at such locations as shall be fixed by resolution of the Board, or designated by the Chairman of the Board or, in his absence, the Vice Chairman of the Board, or the President of the Corporation and contained in the notice of any such meeting. Notice of meetings shall be delivered personally or sent by mail or telegram at least seven days in advance. 5. Special Meetings. The Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President, or any five directors 5 may call a special meeting of the Board of Directors at any time. Notice of the time and place of special meetings shall be given to each Director by the Corporate Secretary. Such notice shall be delivered personally or by telephone to each Director at least four hours in advance of such meeting, or sent by first-class mail or telegram, postage prepaid, at least two days in advance of such meeting. 6. Quorum. A quorum for the transaction of business at any meeting of the Board of Directors shall consist of six members. 7. Action by Consent. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. 8. Meetings by Conference Telephone. Any meeting, regular or special, of the Board of Directors or of any committee of the Board of Directors, may be held by conference telephone or similar communication equipment, provided that all Directors participating in the meeting can hear one another. Article III. OFFICERS. 1. Officers. The officers of the Corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a Chairman of the Executive Committee (whenever the Board of Directors in its discretion fills these offices), a President, a Chief Financial Officer, a General Counsel, one or more Vice Presidents, a Corporate Secretary and one or more Assistant Corporate Secretaries, a Treasurer and one or more Assistant Treasurers, and a Controller, all of whom shall be elected by the Board of Directors. The Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, and the President shall be members of the Board of Directors. 2. Chairman of the Board. The Chairman of the Board, if that office be filled, shall preside at all meetings of the shareholders and of the Directors, and shall preside at all meetings of the Executive Committee in the absence of the Chairman of that Committee. He shall be the chief executive officer of the Corporation if so designated by the Board of Directors. He shall have such duties and responsibilities as may be prescribed by the Board of Directors or the Bylaws. The Chairman of the Board shall have authority to sign on behalf of the Corporation agreements and instruments of every character, and, in the absence or disability of the President, shall exercise the President's duties and responsibilities. 3. Vice Chairman of the Board. The Vice Chairman of the Board, if that office be filled, shall have such duties and responsibilities as may be prescribed by the 6 Board of Directors, the Chairman of the Board, or the Bylaws. He shall be the chief executive officer of the Corporation if so designated by the Board of Directors. In the absence of the Chairman of the Board, he shall preside at all meetings of the Board of Directors and of the shareholders; and, in the absence of the Chairman of the Executive Committee and the Chairman of the Board, he shall preside at all meetings of the Executive Committee. The Vice Chairman of the Board shall have authority to sign on behalf of the Corporation agreements and instruments of every character. 4. Chairman of the Executive Committee. The Chairman of the Executive Committee, if that office be filled, shall preside at all meetings of the Executive Committee. He shall aid and assist the other officers in the performance of their duties and shall have such other duties as may be prescribed by the Board of Directors or the Bylaws. 5. President. The President shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, or the Bylaws. He shall be the chief executive officer of the Corporation if so designated by the Board of Directors. If there be no Chairman of the Board, the President shall also exercise the duties and responsibilities of that office. The President shall have authority to sign on behalf of the Corporation agreements and instruments of every character. 6. Chief Financial Officer. The Chief Financial Officer shall be responsible for the overall management of the financial affairs of the Corporation. He shall render a statement of the Corporation's financial condition and an account of all transactions whenever requested by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, or the President. The Chief Financial Officer shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. 7. General Counsel. The General Counsel shall be responsible for handling on behalf of the Corporation all proceedings and matters of a legal nature. He shall render advice and legal counsel to the Board of Directors, officers, and employees of the Corporation, as necessary to the proper conduct of the business. He shall keep the management of the Corporation informed of all significant developments of a legal nature affecting the interests of the Corporation. The General Counsel shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. 8. Vice Presidents. Each Vice President, if those offices are filled, shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. Each Vice President's authority to sign agreements and instruments on behalf 7 of the Corporation shall be as prescribed by the Board of Directors. The Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, or the President may confer a special title upon any Vice President. 9. Corporate Secretary. The Corporate Secretary shall attend all meetings of the Board of Directors and the Executive Committee, and all meetings of the shareholders, and he shall record the minutes of all proceedings in books to be kept for that purpose. He shall be responsible for maintaining a proper share register and stock transfer books for all classes of shares issued by the Corporation. He shall give, or cause to be given, all notices required either by law or the Bylaws. He shall keep the seal of the Corporation in safe custody, and shall affix the seal of the Corporation to any instrument requiring it and shall attest the same by his signature. The Corporate Secretary shall have such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. The Assistant Corporate Secretaries shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Corporate Secretary. In the absence or disability of the Corporate Secretary, his duties shall be performed by an Assistant Corporate Secretary. 10. Treasurer. The Treasurer shall have custody of all moneys and funds of the Corporation, and shall cause to be kept full and accurate records of receipts and disbursements of the Corporation. He shall deposit all moneys and other valuables of the Corporation in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors or any employee of the Corporation designated by the Board of Directors. He shall disburse such funds of the Corporation as have been duly approved for disbursement. The Treasurer shall perform such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, the Chief Financial Officer, or the Bylaws. The Assistant Treasurers shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, the Chief Financial Officer, or the Treasurer. In the absence or disability of the Treasurer, his duties shall be performed by an Assistant Treasurer. 11. Controller. The Controller shall be responsible for maintaining the accounting records of the Corporation and for preparing necessary financial reports and statements, and he shall properly account for all moneys and obligations due the Corporation and all properties, assets, and liabilities of the Corporation. He shall render to the officers such periodic reports covering the result of operations of the Corporation as may be required by them or any one of them. 8 The Controller shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, the Chief Financial Officer, or the Bylaws. He shall be the principal accounting officer of the Corporation, unless another individual shall be so designated by the Board of Directors. Article IV. MISCELLANEOUS. 1. Record Date. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty nor less than ten days prior to the date of such meeting nor more than sixty days prior to any other action for the purposes for which it is so fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise the rights, as the case may be. 2. Transfers of Stock. Upon surrender to the Corporate Secretary or Transfer Agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, and payment of transfer taxes, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. Subject to the foregoing, the Board of Directors shall have power and authority to make such rules and regulations as it shall deem necessary or appropriate concerning the issue, transfer, and registration of certificates for shares of stock of the Corporation, and to appoint and remove Transfer Agents and Registrars of transfers. 3. Lost Certificates. Any person claiming a certificate of stock to be lost, stolen, mislaid, or destroyed shall make an affidavit or affirmation of that fact and verify the same in such manner as the Board of Directors may require, and shall, if the Board of Directors so requires, give the Corporation, its Transfer Agents, Registrars, and/or other agents a bond of indemnity in form approved by counsel, and in amount and with such sureties as may be satisfactory to the Corporate Secretary of the Corporation, before a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to have been lost, stolen, mislaid, or destroyed. 9 Article V. AMENDMENTS. 1. Amendment by Shareholders. Except as otherwise provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by the affirmative vote of a majority of the outstanding shares entitled to vote at any regular or special meeting of the shareholders. 2. Amendment by Directors. To the extent provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by resolution adopted by a majority of the members of the Board of Directors. 10 EX-3.4 3 BY-LAWS OF PACIFIC GAS AND ELECTRIC-2/16/2000 EXHIBIT 3.4 Bylaws of Pacific Gas and Electric Company amended as of February 16, 2000 ------------------------------- Article I. SHAREHOLDERS. 1. Place of Meeting. All meetings of the shareholders shall be held at the office of the Corporation in the City and County of San Francisco, State of California, or at such other place, within or without the State of California, as may be designated by the Board of Directors. 2. Annual Meetings. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. Written notice of the annual meeting shall be given not less than ten (or, if sent by third-class mail, thirty) nor more than sixty days prior to the date of the meeting to each shareholder entitled to vote thereat. The notice shall state the place, day, and hour of such meeting, and those matters which the Board, at the time of mailing, intends to present for action by the shareholders. Notice of any meeting of the shareholders shall be given by mail or telegraphic or other written communication, postage prepaid, to each holder of record of the stock entitled to vote thereat, at his address, as it appears on the books of the Corporation. 3. Special Meetings. Special meetings of the shareholders shall be called by the Secretary or an Assistant Secretary at any time on order of the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, or the President. Special meetings of the shareholders shall also be called by the Secretary or an Assistant Secretary upon the written request of holders of shares entitled to cast not less than ten percent of the votes at the meeting. Such request shall state the purposes of the meeting, and shall be delivered to the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President or the Secretary. A special meeting so requested shall be held on the date requested, but not less than thirty-five nor more than sixty days after the date of the original request. Written notice of each special meeting of shareholders, stating the place, day, and hour of such meeting and the business proposed to be transacted thereat, shall be given in the manner stipulated in Article I, Section 2, Paragraph 3 of these Bylaws within twenty days after receipt of the written request. 4. Attendance at Meetings. At any meeting of the shareholders, each holder of record of stock entitled to vote thereat may attend in person or may designate an agent or a reasonable number of agents, not to exceed three to attend the meeting and cast votes for his shares. The authority of agents must be evidenced by a written proxy signed by the shareholder designating the agents authorized to attend the meeting and be delivered to the Secretary of the Corporation prior to the commencement of the meeting. 5. No Cumulative Voting. No shareholder of the Corporation shall be entitled to cumulate his or her voting power. Article II. DIRECTORS. 1. Number. The Board of Directors of this corporation shall consist of such number of directors, not less than nine (9) nor more than seventeen (17), and the exact number of directors shall be twelve (12) until changed, within the limits specified above, by an amendment to this Bylaw duly adopted by the Board of Directors or the shareholders. 2. Powers. The Board of Directors shall exercise all the powers of the Corporation except those which are by law, or by the Articles of Incorporation of this Corporation, or by the Bylaws conferred upon or reserved to the shareholders. 3. Executive Committee. There shall be an Executive Committee of the Board of Directors consisting of the Chairman of the Committee, the Chairman of the Board, if these offices be filled, the President, and four Directors who are not officers of the Corporation. The members of the Committee shall be elected, and may at any time be removed, by a two-thirds vote of the whole Board. The Executive Committee, subject to the provisions of law, may exercise any of the powers and perform any of the duties of the Board of Directors; but the Board may by an affirmative vote of a majority of its members withdraw or limit any of the powers of the Executive Committee. The Executive Committee, by a vote of a majority of its members, shall fix its own time and place of meeting, and shall prescribe its own rules of procedure. A quorum of the Committee for the transaction of business shall consist of three members. 4. Time and Place of Directors' Meetings. Regular meetings of the Board of Directors shall be held on such days and at such times and at such locations as shall be fixed by resolution of the Board, or designated by the Chairman of the Board or, in 2 his absence, the Vice Chairman of the Board, or the President of the Corporation and contained in the notice of any such meeting. Notice of meetings shall be delivered personally or sent by mail or telegram at least seven days in advance. 5. Special Meetings. The Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President, or any five directors may call a special meeting of the Board of Directors at any time. Notice of the time and place of special meetings shall be given to each Director by the Secretary. Such notice shall be delivered personally or by telephone to each Director at least four hours in advance of such meeting, or sent by first- class mail or telegram, postage prepaid, at least two days in advance of such meeting. 6. Quorum. A quorum for the transaction of business at any meeting of the Board of Directors shall consist of six members. 7. Action by Consent. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. 8. Meetings by Conference Telephone. Any meeting, regular or special, of the Board of Directors or of any committee of the Board of Directors, may be held by conference telephone or similar communication equipment, provided that all Directors participating in the meeting can hear one another. Article III. OFFICERS. 1. Officers. The officers of the Corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a Chairman of the Executive Committee (whenever the Board of Directors in its discretion fills these offices), a President, one or more Vice Presidents, a Secretary and one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers, a General Counsel, a General Attorney (whenever the Board of Directors in its discretion fills this office), and a Controller, all of whom shall be elected by the Board of Directors. The Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, and the President shall be members of the Board of Directors. 2. Chairman of the Board. The Chairman of the Board, if that office be filled, shall preside at all meetings of the shareholders, of the Directors, and of the Executive Committee in the absence of the Chairman of that Committee. He shall be the chief executive officer of the Corporation if so designated by the Board of Directors. He shall have such duties and responsibilities as may be prescribed by the Board of Directors or the Bylaws. The Chairman of the Board shall have authority to sign on behalf of the 3 Corporation agreements and instruments of every character, and in the absence or disability of the President, shall exercise his duties and responsibilities. 3. Vice Chairman of the Board. The Vice Chairman of the Board, if that office be filled, shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, or the Bylaws. He shall be the chief executive officer of the Corporation if so designated by the Board of Directors. In the absence of the Chairman of the Board, he shall preside at all meetings of the Board of Directors and of the shareholders; and, in the absence of the Chairman of the Executive Committee and the Chairman of the Board, he shall preside at all meetings of the Executive Committee. The Vice Chairman of the Board shall have authority to sign on behalf of the Corporation agreements and instruments of every character. 4. Chairman of the Executive Committee. The Chairman of the Executive Committee, if that office be filled, shall preside at all meetings of the Executive Committee. He shall aid and assist the other officers in the performance of their duties and shall have such other duties as may be prescribed by the Board of Directors or the Bylaws. 5. President. The President shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, or the Bylaws. He shall be the chief executive officer of the Corporation if so designated by the Board of Directors. If there be no Chairman of the Board, the President shall also exercise the duties and responsibilities of that office. The President shall have authority to sign on behalf of the Corporation agreements and instruments of every character. 6. Vice Presidents. Each Vice President shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. Each Vice President's authority to sign agreements and instruments on behalf of the Corporation shall be as prescribed by the Board of Directors. The Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, or the President may confer a special title upon any Vice President. 7. Secretary. The Secretary shall attend all meetings of the Board of Directors and the Executive Committee, and all meetings of the shareholders, and he shall record the minutes of all proceedings in books to be kept for that purpose. He shall be responsible for maintaining a proper share register and stock transfer books for all classes of shares issued by the Corporation. He shall give, or cause to be given, all notices required either by law or the Bylaws. He shall keep the seal of the Corporation in safe custody, and shall affix the seal of the Corporation to any instrument requiring it and shall attest the same by his signature. The Secretary shall have such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. 4 The Assistant Secretaries shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Secretary. In the absence or disability of the Secretary, his duties shall be performed by an Assistant Secretary. 8. Treasurer. The Treasurer shall have custody of all moneys and funds of the Corporation, and shall cause to be kept full and accurate records of receipts and disbursements of the Corporation. He shall deposit all moneys and other valuables of the Corporation in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors or any employee of the Corporation designated by the Board of Directors. He shall disburse such funds of the Corporation as have been duly approved for disbursement. The Treasurer shall perform such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. The Assistant Treasurer shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Treasurer. In the absence or disability of the Treasurer, his duties shall be performed by an Assistant Treasurer. 9. General Counsel. The General Counsel shall be responsible for handling on behalf of the Corporation all proceedings and matters of a legal nature. He shall render advice and legal counsel to the Board of Directors, officers, and employees of the Corporation, as necessary to the proper conduct of the business. He shall keep the management of the Corporation informed of all significant developments of a legal nature affecting the interests of the Corporation. The General Counsel shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. 10. Controller. The Controller shall be responsible for maintaining the accounting records of the Corporation and for preparing necessary financial reports and statements, and he shall properly account for all moneys and obligations due the Corporation and all properties, assets, and liabilities of the Corporation. He shall render to the officers such periodic reports covering the result of operations of the Corporation as may be required by them or any one of them. The Controller shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. He shall be the principal accounting officer of the Corporation, unless another individual shall be so designated by the Board of Directors. 5 Article IV. MISCELLANEOUS. 1. Record Date. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty nor less than ten days prior to the date of such meeting nor more than sixty days prior to any other action for the purposes for which it is so fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise the rights, as the case may be. 2. Transfers of Stock. Upon surrender to the Secretary or Transfer Agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, and payment of transfer taxes, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. Subject to the foregoing, the Board of Directors shall have power and authority to make such rules and regulations as it shall deem necessary or appropriate concerning the issue, transfer, and registration of certificates for shares of stock of the Corporation, and to appoint and remove Transfer Agents and Registrars of transfers. 3. Lost Certificates. Any person claiming a certificate of stock to be lost, stolen, mislaid, or destroyed shall make an affidavit or affirmation of that fact and verify the same in such manner as the Board of Directors may require, and shall, if the Board of Directors so requires, give the Corporation, its Transfer Agents, Registrars, and/or other agents a bond of indemnity in form approved by counsel, and in amount and with such sureties as may be satisfactory to the Secretary of the Corporation, before a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to have been lost, stolen, mislaid, or destroyed. Article V. AMENDMENTS. 1. Amendment by Shareholders. Except as otherwise provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by the affirmative vote of a majority of the outstanding shares entitled to vote at any regular or special meeting of the shareholders. 2. Amendment by Directors. To the extent provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by resolution adopted by a majority of the members of the Board of Directors. 6 EX-10.1 4 STOCK PURCHASE AGREEMENT-1/27/2000 EXHIBIT 10.1 STOCK PURCHASE AGREEMENT by and between PG&E NATIONAL ENERGY GROUP, INC., as Seller and EL PASO FIELD SERVICES COMPANY, as Buyer TABLE OF CONTENTS ARTICLE 1.................................................................................................... 1 1.1 Certain Defined Terms...................................................................... 1 --------------------- 1.2 Construction............................................................................... 9 ------------ ARTICLE 2.................................................................................................... 10 2.1 Agreement to Sell and to Purchase the Shares............................................... 10 -------------------------------------------- 2.2 Purchase Price and Payment................................................................. 10 -------------------------- 2.3 [Intentionally Omitted].................................................................... 10 ----------------------- 2.4 Calculation of Closing Consideration....................................................... 10 ------------------------------------ 2.5 Calculation and Payment of Adjustment Amount............................................... 10 -------------------------------------------- 2.6 Assumed Obligations........................................................................ 13 ------------------- ARTICLE 3.................................................................................................... 13 3.1 Closing.................................................................................... 13 ------- 3.2 Deliveries by Seller....................................................................... 13 -------------------- 3.3 Deliveries by Buyer........................................................................ 14 ------------------- ARTICLE 4.................................................................................................... 15 4.1 Corporate Organization..................................................................... 15 ---------------------- 4.2 Acquired Companies......................................................................... 15 ------------------ 4.3 Charter and Bylaws......................................................................... 16 ------------------ 4.4 Authority Relative to this Agreement....................................................... 16 ------------------------------------ 4.5 No Conflict................................................................................ 16 ----------- 4.6 Consents, Approvals, and Licenses.......................................................... 17 --------------------------------- 4.7 Financial Statements....................................................................... 17 -------------------- 4.8 Absence of Material Changes................................................................ 18 --------------------------- 4.9 Tax Matters................................................................................ 18 ----------- 4.10 Compliance With Laws....................................................................... 19 -------------------- 4.11 Legal Proceedings.......................................................................... 19 ----------------- 4.12 Title to Properties........................................................................ 19 ------------------- 4.13 Acquired Company Agreements................................................................ 20 --------------------------- 4.14 Employee Plans and Labor Matters........................................................... 21 -------------------------------- 4.15 Environmental Matters...................................................................... 22 --------------------- 4.16 Insurance.................................................................................. 23 --------- 4.17 Absence of Undisclosed Liabilities......................................................... 23 ---------------------------------- 4.18 Bank Accounts.............................................................................. 23 ------------- 4.19 Brokerage Fees............................................................................. 23 -------------- 4.20 Assets and Properties...................................................................... 23 --------------------- 4.21 Intellectual Property Rights............................................................... 24 ---------------------------- 4.22 Year 2000 Compliance....................................................................... 24 -------------------- 4.23 Copies of Indenture Supplement............................................................. 24 ------------------------------ 4.24 Condition of Assets........................................................................ 24 ------------------- 4.25 No Other Representations................................................................... 24 ------------------------ 4.26 Certain Limitations........................................................................ 24 ------------------- ARTICLE 5.................................................................................................... 25 5.1 Corporate Organization..................................................................... 25 ---------------------- 5.2 Authority Relative to This Agreement....................................................... 25 ------------------------------------
5.3 No Conflict................................................................................. 25 ----------- 5.4 Consents, Approvals, and Licenses........................................................... 26 --------------------------------- 5.5 Financing................................................................................... 26 --------- 5.6 Investment Intent; Investment Experience; Restricted Securities............................. 26 --------------------------------------------------------------- 5.7 Legal Proceedings........................................................................... 26 ----------------- 5.8 Brokerage Fees.............................................................................. 276 -------------- 5.9 Independent Investigation................................................................... 276 ------------------------- ARTICLE 6..................................................................................................... 27 6.1 Conduct and Preservation of the Acquired Companies.......................................... 27 -------------------------------------------------- 6.2 Restrictions on Certain Actions............................................................. 287 ------------------------------- 6.3 Indebtedness................................................................................ 29 ARTICLE 7..................................................................................................... 29 7.1 Access to Information and Confidentiality................................................... 930 ----------------------------------------- 7.2 Regulatory and Other Authorizations and Consents............................................ 321 ------------------------------------------------ 7.3 Employees and Parent Employee Plans......................................................... 33 ----------------------------------- 7.4 Public Announcements........................................................................ 365 -------------------- 7.5 Amendment of Schedules...................................................................... 365 ---------------------- 7.6 Fees and Expenses........................................................................... 36 ----------------- 7.7 Transfer Taxes.............................................................................. 36 -------------- 7.8 Action Regarding Indemnities................................................................ 36 ---------------------------- 7.9 [Intentionally Omitted] .................................................................... 36 7.10 Excluded Assets............................................................................. 376 --------------- 7.11 Transition Services......................................................................... 376 ------------------- 7.12 Guarantees; Wilson Storage Capacity; and Other Affiliate Contracts.......................... 37 ------------------------------------------------------------------ 7.13 Use of PG&E Marks........................................................................... 387 ----------------- 7.14 Insurance................................................................................... 387 --------- 7.15 Disclaimer of Warranties.................................................................... 38 ------------------------ ARTICLE 8..................................................................................................... 398 8.1 Representations and Warranties True......................................................... 398 ----------------------------------- 8.2 Covenants and Agreements Performed.......................................................... 39 ---------------------------------- 8.3 HSR Act and Consents........................................................................ 39 -------------------- 8.4 Legal Proceedings........................................................................... 39 ----------------- ARTICLE 9..................................................................................................... 39 9.1 Representations and Warranties True......................................................... 940 ----------------------------------- 9.2 Covenants and Agreements Performed.......................................................... 940 ---------------------------------- 9.3 HSR Act and Consents........................................................................ 940 -------------------- 9.4 Legal Proceedings........................................................................... 40 ----------------- 9.5 Repayment of Short-Term Debt of the Acquired Companies...................................... 40 ------------------------------------------------------ 9.6 Consents.................................................................................... 40 -------- ARTICLE 10.................................................................................................... 410 10.1 Termination................................................................................. 410 ----------- 10.2 Effect of Termination....................................................................... 410 --------------------- 10.3 Amendment................................................................................... 410 --------- 10.4 Waiver...................................................................................... 41 ------ ARTICLE 11.................................................................................................... 421 11.1 Tax Sharing Agreements...................................................................... 421 ----------------------
11.2 Tax Return Preparation.................................................................... 421 ---------------------- 11.3 Straddle Period Tax Allocation............................................................ 432 ------------------------------ 11.4 Straddle Returns.......................................................................... 432 ---------------- 11.5 Use of Consistent Tax Practices........................................................... 43 ------------------------------- 11.6 Refunds or Credits........................................................................ 443 ------------------ 11.7 Filing of Amended Returns................................................................. 443 ------------------------- 11.8 Assistance and Cooperation................................................................ 454 -------------------------- 11.9 Reimbursement for Net Tax Carrybacks...................................................... 454 ------------------------------------ 11.10 Tax Deductions for Stock Option Exercises................................................. 454 ----------------------------------------- 11.11 Buyer's Indemnity for Post Closing Transactions........................................... 45 ----------------------------------------------- 11.12 Reporting of Post-Closing Transactions.................................................... 465 -------------------------------------- 11.13 Closing Tax Certificate................................................................... 465 ----------------------- 11.14 Tax Allocation - Seller's Obligations..................................................... 465 ------------------------------------- 11.15 Taxes of Other Persons.................................................................... 465 ---------------------- 11.16 Tax Allocation - Buyer's Obligations...................................................... 465 ------------------------------------ 11.17 Tax Claim Notices......................................................................... 465 ----------------- 11.18 Pre-Closing Tax Period Tax Claims......................................................... 476 --------------------------------- 11.19 Straddle Period Tax Claims................................................................ 476 -------------------------- 11.20 Payments for Tax Benefits................................................................. 476 ------------------------- 11.21 Treatment of Tax Indemnity Payments....................................................... 487 ----------------------------------- 11.22 Liability for Existing Franchise Tax Claims............................................... 487 ------------------------------------------- 11.23 Survival and Time Limitation.............................................................. 487 ---------------------------- 11.24 Sole and Exclusive Remedy................................................................. 487 ------------------------- 11.25 Purchase Price Allocation................................................................. 47 ------------------------- ARTICLE 12.................................................................................................. 487 12.1. Indemnification........................................................................... 47 --------------- 12.2 Defense of Claims......................................................................... 510 ----------------- 12.3 Additional Provisions Relating to Environmental Indemnification........................... 521 --------------------------------------------------------------- 12.4 Procedures for Remedial Actions........................................................... 532 ------------------------------- 12.5 Tax Treatment of Indemnity Payments....................................................... 543 ----------------------------------- ARTICLE 13.................................................................................................. 543 13.1 Notices................................................................................... 543 ------- 13.2 Entire Agreement.......................................................................... 554 ---------------- 13.3 Binding Effect; Assignment; No Third Party Benefit........................................ 564 -------------------------------------------------- 13.4 Severability.............................................................................. 565 ------------ 13.5 Governing Law............................................................................. 565 ------------- 13.6 Further Assurances........................................................................ 565 ------------------ 13.7 Counterparts.............................................................................. 565 ------------ 13.8 Disclosure................................................................................ 565 ---------- 13.9 Consent to Jurisdiction................................................................... 575 ----------------------- 13.10 Bulk Sales or Transfer Laws............................................................... 576 ---------------------------
STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of January 27, 2000, between PG&E National Energy Group, Inc., a Delaware corporation ("Seller"), and El Paso Field Services Company, a Delaware corporation ("Buyer"). Seller and Buyer are referred to herein sometimes individually as a "Party" and collectively as the "Parties." Recitals: A. PG&E Gas Transmission, Texas Corporation, a Delaware corporation ("GTT") and PG&E Gas Transmission Teco, Inc., a Delaware corporation ("TECO" and collectively with GTT, the "Companies") are each wholly owned subsidiaries of Seller. B. Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, the Shares (as defined in Section 1.1) of the Companies, upon the terms ----------- and subject to the conditions in this Agreement. NOW, THEREFORE, Seller and Buyer agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Defined Terms. As used in this Agreement, each of the --------------------- following terms has the meaning given to it below: "Acquired Companies" means the Companies and the Company Subsidiaries. "Acquired Company" means any of the Acquired Companies. "Acquired Company Insurance Policies" means those material policies of insurance which Seller, PG&E, or any of the Acquired Companies maintains for the Acquired Companies or the Related Companies with respect to their assets and operations, all of which are listed on Schedule 4.16. ------------- "Adjusted Working Capital" has the meaning assigned to such term in Section ------- 2.5(f). - ------ "Adjustment Amount" has the meaning assigned to such term in Section ------- 2.5(a). - ------ "Adjustment Statement" has the meaning assigned to such term in Section ------- 2.5(b). - ------ "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. For the purposes of this definition, "control" means, when used with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise, and the terms "controlling" and "controlled" have correlative meanings. Stock Purchase Agreement Page 1 "Affiliated Group" means any affiliated group within the meaning of Code (S) 1504(a) or any similar group defined under a similar provision of state, local or foreign laws. "Applicable Environmental Laws" means any and all Applicable Laws in effect as of the date of this Agreement pertaining to protection of health, safety, and the environment in effect in any and all jurisdictions in which any Acquired Company has conducted operations, including the Clean Air Act, as amended, CERCLA, the Federal Water Pollution Control Act, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, and the Hazardous Materials Transportation Act, as amended. "Applicable Law" means any statute, law, rule, or regulation, or any judgment, order, ordinance, writ, injunction, or decree of, any Governmental Entity to which a specified Person or property is subject, excluding any statute, law, rule, regulation, judgment, order, ordinance, writ, injunction or decree that is the subject of the Existing Franchise Tax Claims, including any Losses with respect thereto, or that arises out of claims that are substantially similar to those asserted in the Existing Franchise Tax Claims, including any Losses with respect thereto. "Assumed Liabilities" has the meaning assigned to such term in Section 2.6. ----------- "Assumed Litigation" means all Proceedings (including those listed on Schedule 4.11) to which the Acquired Companies or their properties are or may - ------------- become subject, whether known or unknown, contingent or liquidated, and whether arising or relating to facts existing before, on, or after the Closing Date. "Balance Sheet Date" means December 31, 1999. "Base Purchase Price" means a purchase price of $278,500,000. "Buyer Indemnitees" means, collectively, Buyer and its Affiliates and its and their officers, directors, employees, agents, and representatives. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. "Closing" means the closing of the transactions contemplated hereby. "Closing Date" means the date on which the Closing occurs "Code" means the Internal Revenue Code of 1986, as amended. "Combined Financial Statements" has the meaning assigned to such term in Section 4.7. - ----------- Stock Purchase Agreement Page 2 "Commercial Contracts" means the contracts and agreements listed in Schedule 4.13 in accordance with clause (vi) and (vii) of Section 4.13. - ------------- ------------ "commercially reasonable efforts" means efforts in accordance with reasonable commercial practice and without the incurrence of unreasonable expense. "Company Employee Plans" means those Employee Plans established by or contributed to by the Acquired Companies as of the Date of this Agreement, or pursuant to which the Acquired Companies could have any liability (contingent or otherwise), excluding any Parent Employee Plan. "Company Subsidiaries" means the wholly owned subsidiaries of the Companies listed in Schedule 1.1(a). --------------- "Confidentiality Agreement" means that certain confidentiality letter agreement dated December 2, 1999, between Buyer and PG&E. "Deductible Amount" means an amount equal to $10,000,000. "Direct Claim" means any claim by an Indemnitee on account of a Loss which does not result from a Third Party Claim. "Disclosure Letter" means the letter, of even date herewith, of the Seller or the Buyer in which such party's Schedules are set forth, as same may be amended or supplemented in accordance with Section 7.5. ----------- "Dispute Deadline Date" has the meaning assigned to such term in Section ------- 2.5(c). - ------ "Effective Date Financial Statements" has the meaning assigned to such term in Section 2.5(b). -------------- "Employee Plan" means any stock purchase, stock option, pension, profit sharing, bonus, deferred compensation, incentive compensation, severance or termination pay, hospitalization or other medical or dental, life or other insurance, supplemental unemployment benefits plan or agreement or policy or other arrangement providing employment-related compensation or benefits, including, without limitation, "employee benefit plans," as defined in Section 3(3) of ERISA. "Effective Date" means the close of business on the last day of the month preceding the Closing Date. "Encumbrances" means liens, charges, pledges, options, mortgages, deeds of trust, security interests, claims, restrictions (whether on voting, sale, transfer, disposition, or otherwise), easements, and other encumbrances of every type and description, whether imposed by law, agreement, understanding, or otherwise. Stock Purchase Agreement Page 3 "EPE" means El Paso Energy Corporation, a Delaware corporation. "EPE Guaranty" means the guaranty of EPE to Seller, dated as of January 27, 2000, executed and delivered concurrently with the execution and delivery of this Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Plans" means, collectively, any of the Company Employee Plans which is an "employee benefit plan" as defined in Section 3(2) of ERISA. "Estimated Adjustment Amount" means Seller's estimate of the Adjustment Amount. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exhibits" means the exhibits attached to this Agreement. "Existing Franchise Tax Claims" means the litigation matters described in Section No. 1 of Schedule 4.11. - ------------- ------------- "FERC" means the Federal Energy Regulatory Commission. "First Mortgage Debt" means the indebtedness outstanding as of the date of determination under the Mortgage Indenture. "Government Antitrust Authority" means any Governmental Entity with jurisdiction over the enforcement of any applicable antitrust laws. "Governmental Approvals" means all material consents and approvals of Governmental Entities, including those required under the HSR Act or from the FERC, the Securities and Exchange Commission, and the RRC that reasonably may be deemed necessary so that the consummation of the transactions contemplated hereby will be in compliance with Applicable Law and the failure to comply with which would have a Material Adverse Effect. "Governmental Entity" means any court or tribunal in any jurisdiction (domestic or foreign) or any federal, state, municipal or local government or other governmental body, agency, authority, department, commission, board, bureau, instrumentality, arbitrator or arbitral body (domestic or foreign). "Guarantees" means any and all obligations relating to the guarantees, letters of credit, bonds and other credit assurances of a comparable nature of Seller or any of its Affiliates (other than the Acquired Companies and the Related Companies) for the benefit of any Acquired Company or any Related Company and listed or described on Schedule 7.12. ------------- "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Stock Purchase Agreement Page 4 "Indemnifying Party" means a Party required to provide indemnification under Section 12.1. ------------ "Indemnitee" means a Party entitled to receive indemnification under Section 12.1. - ------------ "Interest Adjustment" means interest (calculated based on the actual number of days elapsed, assuming a 360-day year) on the sum of the Base Purchase Price, plus the Estimated Adjustment Amount at the Prime Rate from (and including) the Effective Date to (but excluding) the Closing Date. "IRS" means the Internal Revenue Service. "knowledge" means, when used with respect to Seller, that which is actually known, after reasonable inquiry, by the officers of the Acquired Companies listed on Schedule 1.1(c), in their respective areas of responsibility, and when --------------- used with respect to Buyer, that which is actually known, after reasonable inquiry, by the officers of the Buyer listed on Schedule 1.1(d), in their --------------- respective areas of responsibility. "Losses" means, collectively, any and all claims, liabilities, losses, causes of action, fines, penalties, litigation, lawsuits, administrative proceedings, administrative investigations, costs, and expenses, including reasonable attorneys' fees, court costs, and other costs of suit. "Long-Term Debt" means the outstanding principal amount as of the date of the determination under the (i) MTN Program and (ii) First Mortgage Debt. "Material Adverse Effect" means, with respect to any Person, any adverse change or adverse condition in or relating to the financial condition, assets, liabilities, results of operations, or business of such Person and its Affiliates that is or is reasonably likely to be material to such Person and its Affiliates taken as a whole or that impedes the ability of such Person to consummate the transactions contemplated hereby, other than any change or changes in the prices of oil, gas, natural gas liquids, or other hydrocarbon products, general economic conditions, or local, regional, national, or international industry conditions. "Mortgage Indenture" means the Indenture of Mortgage and Deed of Trust and Security Agreement, dated as of March 25, 1987, from Valero Management Partnership, L.P. (now PG&E Texas Management Partnership, LP) to Bank of New England, N.A. (now State Street Bank and Trust Company, as successor corporate trustee) and Brian J. Curtis, as Trustees, as amended and supplemented to the date hereof. "Notice" means any notice, request, demand or other communications required or permitted to be given or made under this Agreement by either Party. "MTN Program" means the debt program of GTT pursuant to which from time to time GTT issued debt pursuant to that certain Indenture, dated as of March 30, 1992, between GTT (formerly known as Valero Energy Corporation) and Bankers Trust Company, as Trustee, as supplemented by the First Supplemental Indenture, dated as of March 13, 1995. Stock Purchase Agreement Page 5 "Parent Employee Plan" means any Employee Plan established by PG&E or any of its Affiliates (other than the Acquired Companies). "Parent Group" means the affiliated group of corporations within the meaning of Code Section 1504(a) for federal income Tax purposes of which Seller ------------ or PG&E is the common parent. "Pending FERC and RRC Proceedings" means (i) the Petition for Approval of Section 311 Contract Storage Rates, filed by PG&E Texas Pipeline, L.P., with the FERC on December 20, 1999 (Docket No. PROO-8-00); (ii) the Petition for Approval --------- of Section 311 Transportation Rates, filed by PG&E Texas Pipeline, L.P., with the FERC on December 20, 1999 (Docket No. PRO-9-000); (iii) the PG&E West Texas --------- Pipeline, L.P., Statement of Operating Conditions filed, with the FERC on December 21, 1999 (Docket No. PROO-4-000) and (iv) the filing of PG&E Texas Pipeline, L.P. with the RRC for a determination that its transportation rates are cost based (Docket No. 8945). "Permits" means licenses, permits, franchises, consents, approvals, variances, exemptions, and other authorizations of or from Governmental Entities, excluding licenses, permits, franchises, consents, approvals, variances, exemptions and other authorizations of or from Governmental Entities that are the subject of the Existing Franchise Tax Claims, including any Losses with respect thereto, or that arise out of claims that are substantially similar to the Existing Franchise Tax Claims, including any Losses with respect thereto. "Permitted Encumbrances" means (i) Encumbrances created by Buyer, or its successors and assigns, (ii) liens for Taxes not yet due and payable, (iii) statutory liens (including materialmen's, mechanic's, repairmen's, landlord's, and other similar liens) arising in connection with the ordinary course of business securing payments not yet due and payable, (iv) Encumbrances arising under the Mortgage Indenture, (v) Encumbrances of record that do not materially impair or interfere with the use or operation of the burdened property, and (vi) such defects, imperfections or irregularities of title, if any, as are not material in character, amount, or extent. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, enterprise, unincorporated organization, or Governmental Entity. "PG&E" means PG&E Corporation, a California corporation and the parent corporation of Seller. "PG&E Guaranty" means the guaranty of PG&E to Buyer, dated as of January 27, 2000, executed and delivered concurrently with the execution and delivery of this Agreement. "PG&E Marks" means the name "PG&E" and other trademarks, service marks, and trade names owned by Seller, PG&E and their respective Affiliates. Stock Purchase Agreement Page 6 "Post-Closing Tax Period" means any Tax period beginning after the Closing Date. "Post-Closing Tax Return" means any Tax Return that is required to be filed by any of the Acquired Companies with respect to a Post-Closing Tax Period; provided, however, it shall not include any Straddle Return. "Pre-Closing Tax Period" means any Tax periods or portions thereof ending on or before the Closing Date. "Pre-Closing Tax Return" means any Tax Return that is required to be filed with respect to any of the Acquired Companies with respect to a Pre-Closing Tax Period; provided, however, it shall not include any Straddle Return. "Prime Rate" means the prime interest rate reported in the Wall Street Journal on the Effective Date. "Purchase Price" means the aggregate purchase price consisting of the Base Purchase Price, plus the Interest Adjustment, as such sum is adjusted by the Adjustment Amount. "Proceedings" means all proceedings, actions, claims, suits, investigations, and inquiries by or before any arbitrator or Governmental Entity. "Related Agreements" means the Termination and Assignment Agreement attached as Exhibit 3.2(e). -------------- "Related Companies" has the meaning assigned to such term in Section ------- 4.2(a). - ------ "Retained E-Mail" means all electronic mail and other computer based communications stored on any electronic, digital, or other storage or back up media and retained in the ordinary course of PG&E's or Seller's or any of their respective Affiliates' or any of the Acquired Companies' business. "RRC" means the Texas Railroad Commission. "Scheduled Contracts" means any of the agreements, contracts, arrangements, or understandings listed on Schedule 4.13, other than the contracts and ------------- agreements listed in Schedule 4.13 in accordance with clauses (v) and (ix) of ------------- Section 4.13(a). - --------------- "Schedules" means the schedules attached to the Disclosure Letter of the Seller or the Buyer, as the case may be. "Securities Act" means the Securities Act of 1933, as amended. "Seller Indemnitees" means, collectively, the Seller and its Affiliates (other than the Acquired Companies) and its and their officers, directors, employees, agents, and representatives. Stock Purchase Agreement Page 7 "Settlement Amount" has the meaning assigned to such term in Section 4(b) ------------ of the Termination and Assignment Agreement attached as Exhibit 3.2(e). -------------- "Shares" means all the issued and outstanding capital stock of the Companies. "Straddle Period" means a Tax period or year commencing before and ending after the Closing Date. "Straddle Return" means a Tax Return for a Straddle Period. "Taxes" means any federal, state, local or foreign income, gross receipts, license, payroll, parking, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Sec. 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated tax or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not, including such item for which a liability arises as a transferee or successor-in-interest, but the term Taxes does not include any of the foregoing items arising in respect of the Existing Franchise Tax Claims, including any Losses with respect thereto, or any such items that arise out of claims that are substantially similar to those asserted in the Existing Franchise Tax Claims, including any Losses with respect thereto. "Taxing Authority" means any Governmental Entity responsible for the imposition or collection of any Tax. "Tax Benefit" means any decreases in Tax actually realized. "Tax Return" means any return or report, declaration, report, claim for refund, information return, or statement relating to Taxes, including any related schedules, attachments, or other supporting information, with respect to Taxes, and including any amendment thereto. "TECO Margin Loan" means the outstanding obligations under the Credit Agreement, dated as of June 15, 1998, between PG&E Gas Transmission TECO, Inc. and Chase Bank of Texas, National Association. "Third Party Claim" means any claim or the commencement of any claim, action or proceeding made or brought by a Third Party. "Third Party" means any Person other than (i) Seller or any of its Affiliates (including the Acquired Companies) or (ii) Buyer and its Affiliates. "Total Purchase Price" means the sum of (i) the Purchase Price plus (ii) the principal amount of Long-Term Debt outstanding as of the Closing. "Transferred Employees" has the meaning assigned to such term in Section ------- 7.3(a). - ------ Stock Purchase Agreement Page 8 "Treasury Regulations" means one or more treasury regulations promulgated under the Code by the Treasury Department of the United States. "U.S. GAAP" means generally accepted accounting principles in the United States of America from time to time, with such exceptions to such generally accepted accounting principles as may be noted or otherwise referred to on any individual financial statement or schedule. "Year 2000 Problems" shall mean the inability of any hardware, software or process to recognize and correctly calculate dates or the failure of computer systems, products or services to perform any of their intended functions in a proper manner in connection with data containing any date. 1.2 Construction. In construing this Agreement, the following ------------ principles shall be followed: (i) the terms "herein," "hereof," "hereby," and "hereunder," or other similar terms, refer to this Agreement as a whole and not only to the particular Article, Section, or other subdivision in which any such terms may be employed; (ii) references to Articles, Sections, and other subdivisions refer to the Articles, Sections, and other subdivisions of this Agreement; (iii) a reference to any Person shall include such Person's predecessors and successors; (iv) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with U.S. GAAP; (v) no consideration shall be given to the captions of the articles, sections, subsections, or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in its construction; (vi) examples shall not be construed to limit, expressly or by implication, the matter they illustrate; (vii) the word "includes" and its syntactical variants mean "includes, but is not limited to" and corresponding syntactical variant expressions; (viii) a defined term has its defined meaning throughout this Agreement, regardless of whether it appears before or after the place in this Agreement where it is defined; (ix) the plural shall be deemed to include the singular, and vice versa; and Stock Purchase Agreement Page 9 (x) each exhibit, attachment, and schedule to this Agreement is a part of this Agreement, but if there is any conflict or inconsistency between the main body of this Agreement and any exhibit, attachment, or schedule, the provisions of the main body of this Agreement shall prevail. ARTICLE 2 TERMS OF THE TRANSACTION 2.1 Agreement to Sell and to Purchase the Shares. At the Closing, and -------------------------------------------- on the terms and subject to the conditions in this Agreement, Seller shall sell, assign, transfer, deliver, and convey to Buyer, and Buyer shall purchase and accept from Seller, the Shares of the Companies free and clear of all Encumbrances. 2.2 Purchase Price and Payment. In consideration of the sale of the -------------------------- Shares to Buyer, Buyer shall pay to Seller at the Closing, in immediately available funds, an amount equal to the sum of the Base Purchase Price, plus the Interest Adjustment, plus the Estimated Adjustment Amount. Such payment shall be made by confirmed wire transfer to a bank account or accounts to be designated by Seller in the amount shown in Seller's statement delivered to Buyer in accordance with Section 2.4 below. ----------- 2.3 [Intentionally Omitted]. --------------------- 2.4 Calculation of Closing Consideration. Not later than 5 days prior ------------------------------------ to the date of Closing, Seller shall deliver to Buyer a written statement setting forth (i) the Base Purchase Price, (ii) the Interest Adjustment, and (iii) the Estimated Adjustment Amount (including an estimate of the Settlement Amount), with Seller's calculation of the Interest Adjustment and the Estimated Adjustment Amount in reasonable detail, based on information then available to Seller. If the Estimated Adjustment Amount is positive, the sum of the Base Purchase Price and the Interest Adjustment shall be increased by the Estimated Adjustment Amount, and if the Estimated Adjustment Amount is negative, the sum of the Base Purchase Price and the Interest Adjustment shall be reduced by the Estimated Adjustment Amount. 2.5 Calculation and Payment of Adjustment Amount. -------------------------------------------- (a) Adjustment Amount. The "Adjustment Amount" equals the net increase ----------------- to, or net decrease from, the Adjusted Working Capital (as defined herein) between the Balance Sheet Date and the Effective Date. For purposes of clarity, an increase in Adjusted Working Capital shall be represented by a positive number and a decrease in Adjusted Working Capital shall be represented by a negative number. (b) Effective Date Financial Statements and Adjustment Amount. As --------------------------------------------------------- promptly as practicable after the Closing Date, and in any event not later than 60 days after the Closing Date, Buyer shall deliver to Seller (i) a combined balance sheet, statement of income, and statement of cash flow of the Companies as of the Effective Date (the "Effective Date Financial Statements") prepared on substantially the same basis as the Combined Financial Statements have been prepared (except that the Effective Date Financial Statements shall be prepared using actual volumes and revenues as would be available at least 30 days after the Effective Date and based Stock Purchase Agreement Page 10 on other best available information through the period ending upon the date same is delivered to Seller), and (ii) a statement of Buyer (the "Adjustment Statement") showing in reasonable detail its calculation of the Adjustment Amount (using as the Settlement Amount the amount stipulated in Section 4(b) of ------------ the Termination and Assignment Agreement). Seller agrees, at no cost to Buyer, to give Buyer and its authorized representatives reasonable access to such employees, offices, and other facilities and such books and records of the Seller as are reasonably necessary to allow Buyer and its authorized representatives to prepare the Effective Date Financial Statements and the Adjustment Amount in compliance with this Section 2.5. Buyer, at no cost to ----------- Seller, shall give representatives of Seller reasonable access to its premises, employees and other facilities and to its and the Acquired Companies' books and records as are reasonably necessary for purposes of reviewing, verifying, and auditing the Effective Date Financial Statements and the Adjustment Amount. (c) Dispute Resolution. The Adjustment Statement shall become final and ------------------ binding on Seller and Buyer as to the Adjustment Amount on the 60th day following the date the Adjustment Statement is received by Seller (the "Dispute Deadline Date"), unless prior to the Dispute Deadline Date Seller delivers Notice to Buyer of its disagreement. Seller's Notice shall set forth all of Seller's disputed items together with Seller's proposed changes thereto, including an explanation in reasonable detail of the basis on which Seller proposes such changes. If Seller has delivered a timely Notice of disagreement, then Buyer and Seller shall use their good faith efforts to reach written agreement on the disputed items to determine the Adjustment Amount, which in no event shall be more favorable to Buyer than reflected on the Adjustment Statement prepared by Buyer nor more favorable to Seller than shown in the proposed changes delivered by Seller pursuant to its Notice of disagreement. If all of Seller's disputed items have not been resolved by Buyer and Seller by the 90th day following Seller's receipt of the Adjustment Statement, then Seller's disputed items shall be submitted to binding arbitration by an independent nationally recognized accounting firm without any material financial relationship to either Buyer or Seller, as mutually selected by Buyer and Seller within five (5) business days after the end of the foregoing 90-day period (or in the absence of agreement between Buyer and Seller by the close of business on such 5th business day as selected by the president of the American Arbitration Association or his designee). The fees and expenses of such arbitration shall be borne 50% by Seller and 50% by Buyer. The determination of the Adjustment Amount by such arbitration shall be final and binding upon Buyer and Seller as to the Adjustment Amount. (d) Final Date. The Adjustment Amount shall be deemed to be finally ---------- determined in the amount set forth in the Adjustment Statement on the Dispute Deadline Date unless a dispute Notice is given in accordance with Section 2.5(c) with respect to the calculation thereof. If such a dispute Notice - ------------- is given, the Adjustment Amount shall be deemed finally determined on the date that the selected accounting firm gives Notice to Buyer and Seller of its determination with respect to all disputes regarding the calculation thereof, or, if earlier, the date on which Seller and Buyer agree in writing on the amount thereof, in which case the Adjustment Amount shall be calculated in accordance with such determination or agreement, as the case may be. (e) Payments. If the Adjustment Amount, as finally determined, exceeds -------- the Estimated Adjustment Amount, then Buyer shall pay to Seller the amount of such excess, plus interest on the amount of such excess from (and including) the Closing Date to (but excluding) Stock Purchase Agreement Page 11 the date of payment at the Prime Rate. If the Adjustment Amount is less than the Estimated Adjustment Amount, then Seller shall pay to Buyer the amount of such deficiency, plus interest on the amount of such deficiency from (and including) the Closing Date to (but excluding) the date of payment at the Prime Rate. Any payment shall be made within 10 business days of the date the Adjustment Amount is deemed to be finally determined pursuant to Section 2.5(d). -------------- (f) Definition. The "Adjusted Working Capital" as of the Balance Sheet ---------- Date shall be as set forth in Section 2.5(g). The "Adjusted Working Capital" as -------------- of the Effective Date shall be calculated using the Effective Date Financial Statements and shall be equal to (w) the sum of (i) an amount equal to the portion of the assets of the Acquired Companies which constitute current assets, plus (ii) the sum of any amounts expended by any of the Acquired Companies since the Balance Sheet Date and on or prior to the Effective Date (A) to pay for capital expenditures that are permitted by Section 6.2(h) or (B) to the extent -------------- permitted in Section 6.2(l) and Schedule 6.2(l), plus (iii) the amount of any -------------- --------------- reduction in the outstanding principal balance of Long-Term Debt as of the Effective Date below the $561.5 million aggregate principal balance of Long-Term Debt outstanding as of the Balance Sheet Date, plus (iv) an amount (if positive) or less an amount (if negative) equal to the fair value (or so-called mark-to- market value) determined as of the Effective Date of the net contract position of the Acquired Companies under the contracts described in Part I of ------ Exhibit A of the Termination and Assignment Agreement, and plus (v) an amount - --------- (if positive) or less an amount (if negative) equal to the Settlement Amount, less (x) an amount equal to the portion of the liabilities of the Acquired Companies which constitutes current liabilities, as such current assets and current liabilities are included in the Effective Date Financial Statements, less (y) the amount of any increase in the amount of Long-Term Debt outstanding as of the Balance Sheet Date, and less (z) any amounts refunded to the Seller or any of its Affiliates (other than the Acquired Companies) in respect of prepaid insurance of the Acquired Companies cancelled on or prior to the Closing to the extent reflected as a current asset for the purposes of calculating Adjusted Working Capital. Notwithstanding the foregoing sentence, for the purpose of calculating Adjusted Working Capital, (i) none of the following shall be included in either current assets or current liabilities: (A) assets or liabilities of the Acquired Companies relating to Taxes (including any deferred Tax assets or liabilities); (B) any asset or liability of any of the Acquired Companies relating to pensions or other employee post-retirement benefits or any of the liabilities associated with the obligations in Section 7.3(c) through Section 7.3(h); (C) the current portion of any principal - -------------- -------------- payment obligation with respect to Long-Term Debt and the outstanding principal balance of indebtedness for borrowed money to be repaid by the Acquired Companies in accordance with Section 9.5; (D) cash or cash equivalents on ----------- hand or accounts receivable constituting the proceeds of insurance received or receivable by any of the Acquired Companies in respect of a casualty loss experienced by an Acquired Company after the Balance Sheet Date, which casualty loss involves an asset reflected as a non-current asset as of the Balance Sheet Date; (E) except as contemplated in clause (w)(ii)(B) of the preceding sentence, any liabilities and accounts payable associated with Proceedings described in Section 6.2(l); and (F) except as contemplated in clauses (w)(iv) and (w)(v) of - -------------- the preceding sentence, any amounts in respect of the contracts and agreements listed in Part I and Part II of Exhibit A to the Termination and Assignment ------ ------- --------- Agreement and (ii) the valuation of the inventories of the Acquired Companies as of the Effective Date shall be in the same manner as the valuation of such inventories as of the Balance Sheet Date. Except to the extent contemplated above, the Adjusted Working Capital as of the Balance Sheet Date has Stock Purchase Agreement Page 12 been calculated in a manner substantially consistent with the method for calculating Adjusted Working Capital as of the Effective Date. (g) Adjusted Working Capital Amount. Buyer and Seller each acknowledges ------------------------------- and agrees that the Adjusted Working Capital as of the Balance Sheet Date is set forth in Schedule 2.5(g) hereto, which also sets forth the calculation of the --------------- Adjusted Working Capital as of the Balance Sheet Date. 2.6 Assumed Obligations. Buyer acknowledges and agrees that, following ------------------- the Closing, the Acquired Companies shall remain obligated for their liabilities and obligations, including the Assumed Litigation and the Long-Term Debt outstanding as of the Closing (the "Assumed Liabilities"), and the Acquired Companies shall pay, perform, and discharge the Assumed Liabilities from and after the Closing. ARTICLE 3 CLOSING 3.1 Closing. Subject to fulfillment or waiver of the conditions in this ------- Agreement, the Closing shall take place on the Closing Date. The Closing shall take place at the offices of Andrews & Kurth L.L.P., 4200 Chase Tower, Houston, Texas 77002 or such other place as the Parties may agree, at 10:00 a.m., Houston, Texas time, on the fifth business day following the receipt of all Government Approvals and the satisfaction or waiver of the other conditions to Closing in Articles 8 and 9 or at such other time as the Parties may agree. ---------- - Unless otherwise agreed, all Closing transactions shall be deemed to have occurred simultaneously. 3.2 Deliveries by Seller. At the Closing, Seller will deliver the -------------------- following documents to Buyer: (a) A certificate executed on behalf of Seller by the president, senior vice president, or vice president of Seller, dated the Closing Date, representing and certifying, in such detail as Buyer may reasonably request, that the conditions set forth in Sections 9.1 and 9.2 have been fulfilled. ------------ --- (b) An opinion of counsel to Seller, dated the Closing Date, in the forms of Exhibit 3.2(b)(i) and 3.2(b)(ii). ----------------- ---------- (c) The certificates, instruments, and documents listed below: (i) The stock certificates representing the Shares duly endorsed in blank, or accompanied by stock powers duly executed in blank, and otherwise in form acceptable for transfer of the Shares to Buyer free and clear of all Encumbrances. (ii) The minute books, stock records, and corporate seal (if any) of each Acquired Company. Stock Purchase Agreement Page 13 (iii) The written resignations of the directors and officers of each Acquired Company, such resignations to be effective concurrently with the Closing on the Closing Date. (iv) Evidence of the Governmental Approvals of Seller. (v) Evidence that the revolving credit facilities of any of the Acquired Companies, the TECO Margin Loan and any indebtedness (other than accounts payable) of any of the Acquired Companies for borrowed money owed to the Seller or PG&E or any of their Affiliates (other than the Acquired Companies) have been, or concurrently with Closing are being, repaid in full. (vi) Such other certificates, instruments of conveyance, and documents as may be reasonably requested by Buyer prior to the Closing Date to carry out the intent and purposes of this Agreement. (d) [Intentionally Omitted]. (e) A Termination and Assignment Agreement substantially in the form of Exhibit 3.2(e) duly executed by Seller. - -------------- 3.3 Deliveries by Buyer. At the Closing, Buyer will deliver the ------------------- following documents to Seller: (a) A certificate executed by the president, senior vice president, or vice president of Buyer, dated the Closing Date, representing and certifying, in such detail as Seller may reasonably request, that the conditions set forth in Sections 8.1 and 8.2 have been fulfilled. - ------------ --- (b) An opinion of counsel to Buyer, dated the Closing Date, in the form of Exhibit 3.3(b). - -------------- (c) [Intentionally Omitted]. (d) A Termination and Assignment Agreement substantially in the form of Exhibit 3.2(e) duly executed by Buyer. - ------------- (e) All releases, replacements, and substitutions required by Section 8.5 with respect to the Guarantee listed in Part 1 of Part B of - ------------ ------ ------ Schedule 7.12, in form and substance satisfactory to Seller. - ------------- (f) Evidence of the Governmental Approvals of Buyer. (g) Such other certificates, instruments, and documents as may be reasonably requested by Seller prior to the Closing Date to carry out the intent and purposes of this Agreement. Stock Purchase Agreement Page 14 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER Subject to the provisions of Article 12, Seller represents and warrants to ---------- Buyer as of the date hereof and, subject to Section 7.5, as of the Closing Date ----------- as follows: 4.1 Corporate Organization. Seller is a corporation duly organized, ---------------------- validly existing, and in good standing under the laws of the jurisdiction of its incorporation. 4.2 Acquired Companies. ------------------ (a) List of Acquired Companies. Except as set forth on Schedule 4.2, the -------------------------- ------------ Companies do not own, directly or indirectly, any capital stock or other equity securities of any corporation or have any direct or indirect equity or ownership interest in any other Person. Schedule 4.2 lists (i) each Acquired Company, the ------------ jurisdiction of incorporation or formation of each Acquired Company, and the authorized (in the case of capital stock) and outstanding capital stock or other equity interests of each Acquired Company and (ii) each of the other entities (the "Related Companies") in which the Acquired Companies own any capital stock or other equity securities, the jurisdiction of incorporation or formation, and the capital stock or other equity interests of each such Related Company that are owned by any Acquired Company. Each corporate Acquired Company is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation, and each other Acquired Company is duly formed and validly existing under the laws of the jurisdiction of its formation. Each Acquired Company has all requisite corporate or other power and authority, as applicable, to own, lease, and operate its properties and to carry on its business as now being conducted. No actions or proceedings to dissolve any Acquired Company are pending. (b) No Encumbrances. Except as otherwise indicated on Schedule 4.2, all --------------- ------------ of the outstanding capital stock or other equity interests of each Acquired Company is owned directly or indirectly by Seller free and clear of all Encumbrances, other than (i) restrictions on transfer that may be imposed by federal or state securities laws, (ii) those that arise by virtue of any actions taken by or on behalf of Buyer or its Affiliates, or (iii) those that arise under the Mortgage Indenture. All outstanding shares of capital stock of each corporate Acquired Company have been validly issued and are fully paid and nonassessable. All equity interests of each other Acquired Company have been validly issued and are fully paid (to the extent required at such time). No shares of capital stock or other equity interests of any Acquired Company are subject to, nor have any been issued in violation of, preemptive or similar rights. (c) No Options. Except as set forth on Schedule 4.2, there are ---------- ------------ outstanding (i) no shares of capital stock or other voting securities of any Acquired Company, (ii) no securities of any Acquired Company convertible into or exchangeable for shares of capital stock or other voting securities of any Acquired Company, (iii) no options or other rights to acquire from Seller or any Acquired Company, and no obligation of Seller or any Acquired Company to issue or sell, any shares of capital stock or other voting securities of any Acquired Company or any securities convertible into or exchangeable for such capital stock or voting securities, and (iv) no equity equivalents, interests in the ownership or earnings, or other similar rights of or with respect to any Acquired Company. There are no outstanding obligations of Seller or any Acquired Stock Purchase Agreement Page 15 Company to repurchase, redeem, or otherwise acquire any of the foregoing shares, securities, options, equity equivalents, interests or rights. (d) Qualification. Each of the Acquired Companies is duly qualified or ------------- licensed to do business as a corporation, foreign corporation, limited partnership, or limited liability company, as applicable, and each of the Acquired Companies is in good standing in each of the jurisdictions set forth opposite its name on Schedule 4.2, which are all the jurisdictions in which ------------ the property owned, leased, or operated by it or the conduct of its business requires such qualification or licensing, except jurisdictions in which the failure to be so qualified or licensed would not, individually or in the aggregate, have a Material Adverse Effect. 4.3 Charter and Bylaws. Seller has made available to Buyer accurate and ------------------ complete copies of each Acquired Company's certificate of incorporation and bylaws (or equivalent organizational documents) as currently in effect and stock records of the Acquired Companies. 4.4 Authority Relative to this Agreement. Seller has full corporate ------------------------------------ power and corporate authority to execute, deliver, and perform this Agreement and the Related Agreements to which it is a party, and PG&E has full corporate power and corporate authority to execute, deliver and perform the PG&E Guaranty. The execution, delivery, and performance by Seller of this Agreement and the Related Agreements, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action of Seller. The execution, delivery, and performance by PG&E of the PG&E Guaranty, and the consummation by it of the transactions contemplated thereby, have been duly authorized by all necessary corporate action of PG&E. This Agreement has been duly executed and delivered by Seller and constitutes, and each Related Agreement executed or to be executed by Seller has been, or when executed will be, duly executed and delivered by Seller and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Seller, enforceable against Seller in accordance with its terms, except that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally and (ii) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances. The PG&E Guaranty has been duly executed and delivered by PG&E and constitutes a valid and legally binding obligation of PG&E, enforceable against PG&E in accordance with its terms, except that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally and (ii) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances. 4.5 No Conflict. Assuming all consents, approvals, authorizations, and ----------- other actions described in Section 4.6 have been obtained and all filings and ----------- notifications listed on Schedule 4.6 have been made, and except (a) for the ------------ matters that are the subject of the Existing Franchise Tax Claims or that arise out of claims that are substantially similar to the Existing Franchise Tax Claims, or (b) as may result from any facts or circumstances relating solely to Buyer or its Affiliates or as described on Schedule 4.5, the execution, ------------ delivery, and performance of this Agreement and the Related Agreements by Seller and of the PG&E Guaranty by PG&E and the consummation by each of them of the transactions contemplated hereby or thereby do not and will not (x) violate or breach the certificate of incorporation or by-laws (or equivalent Stock Purchase Agreement Page 16 organizational documents) of Seller or any Acquired Company or, in the case of the PG&E Guaranty, of PG&E, (y) violate or breach any Applicable Law binding upon Seller or any Acquired Company or PG&E or any of their respective assets or properties, except as would not have, individually or in the aggregate, a Material Adverse Effect, (z) result in any breach of, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any Encumbrance on any of the assets or properties of any Acquired Company pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument relating to such assets or properties to which any Acquired Company is a party or by which any of such assets or properties is bound or affected, except as would not have, individually or in the aggregate, a Material Adverse Effect. 4.6 Consents, Approvals, and Licenses. No consent, approval, --------------------------------- authorization, license, order or permit of, or declaration, filing or registration with, or notification to, any Governmental Entity, or any other Person, is required to be made or obtained by Seller or any Acquired Company or PG&E in connection with the execution, delivery and performance of this Agreement, the Related Agreements and the PG&E Guaranty and the consummation of the transactions contemplated hereby or thereby, except: (a) as set forth on Schedule 4.6; (b) applicable requirements of the HSR Act; (c) for the matters - ------------ that are the subject of the Existing Franchise Tax Claims or that arise out of claims that are substantially similar to the Existing Franchise Tax Claims; (d) where the failure to obtain such consents, approvals, authorizations, licenses, orders or permits of, or to make such declarations, filings, or registrations or notifications, would not have, individually or in the aggregate a Material Adverse Effect, and (e) as may be necessary as a result of any facts or circumstances relating solely to Buyer. To the knowledge of Seller, the Acquired Companies hold all Permits necessary or required for the conduct of the business of the Acquired Companies, except for Permits the absence of which would not have, individually or in the aggregate, a Material Adverse Effect. All of such Permits are in full force and effect and each Acquired Company is in compliance with each such Permit, except as would not have, individually or in the aggregate, a Material Adverse Effect. Except as disclosed in Schedule 4.6, ------------ no notice has been received by Seller or any Acquired Company and no Proceeding is pending or, to the knowledge of Seller, threatened with respect to any alleged failure by any Acquired Company to have any such Permit or not to be in compliance therewith, except as would not have, individually or in the aggregate, a Material Adverse Effect. No event has occurred and is continuing which permits, or after notice or lapse of time or both would permit, any modification or termination of any such Permit held by any Acquired Company, except as would not have, individually or in the aggregate, a Material Adverse Effect. 4.7 Financial Statements. Schedule 4.7 contains (i) an unaudited -------------------- ------------ combined balance sheet of TECO and GTT as of December 31, 1999 and the notes thereto, (ii) an unaudited statement of income for the 12-month period ending December 31, 1999, and (iii) an unaudited statement of cash flow for the 12- month period ending December 31, 1999 (collectively, the "Combined Financial Statements"). The Combined Financial Statements have been prepared in accordance with U.S. GAAP, assuming that as of such date GTT and TECO are eligible for consolidation and subject to the other assumptions and limitations set forth therein. The Combined Financial Statements are consistent with the books and records of the Companies and Stock Purchase Agreement Page 17 fairly present, in all material respects, the financial position, results of operations, and cash flows of the Companies as of the date and for the period indicated. 4.8 Absence of Material Changes. Except as disclosed on Schedule 4.8 --------------------------- ------------ and other than any change in the accounting books and records of GTT or TECO resulting from any gain, loss or impairment realized or realizable by the Seller or any Acquired Company in accordance with U.S. GAAP solely as a result of the transactions contemplated hereby or by virtue of the application of the accounting standards related to impairment analysis under U.S. GAAP (other than such an impairment analysis for any of the events described in clauses (i) through (iv) of this Section 4.8), since the Balance Sheet Date, (i) there has ----------- not been any adverse change in the assets, liabilities, business, results of operation, or financial condition of the Acquired Companies that would have, individually or in the aggregate, a Material Adverse Effect, (ii) the businesses of the Acquired Companies have been conducted only in the ordinary course consistent with past practice, (iii) no Acquired Company has incurred any material liability or entered into any material agreement, in each case, outside the ordinary course of business consistent with past practice, and (iv) no Acquired Company has suffered any material loss, damage, destruction, or other casualty to any of its property, plant, equipment or inventories (whether or not covered by insurance). 4.9 Tax Matters. Except as disclosed on Schedule 4.9: ----------- ------------ (a) each Acquired Company has filed, or has had filed on its behalf, in a timely manner (within any applicable extension periods) with the appropriate Taxing Authority all Tax Returns with respect to Taxes of each of the Acquired Companies other than those Tax Returns on which an immaterial amount of Taxes would properly be shown and each such return was correct and complete in all material respects when filed; (b) each Affiliated Group has filed in a timely manner (within any applicable extension periods) with the appropriate Taxing Authority all Tax Returns that it was required to file for each taxable period during which any of the Acquired Companies was a member of the group, other than those Tax Returns on which an immaterial amount of Taxes would be properly shown, and each such Tax Return was correct and complete in all material respects when filed; (c) all Taxes due and payable (whether or not shown as due) on all filed Tax Returns of or with respect to the Acquired Companies have been paid in full or adequate reserves (determined in accordance with GAAP) have been provided for on the Combined Financial Statements; (d) there are no outstanding agreements or waivers extending the statutory period of limitations applicable to any federal, state, local or foreign income or other material Tax Returns required to be filed by or with respect to any of the Acquired Companies; (e) none of the Tax Returns of or with respect to any of the Acquired Companies is currently being audited or examined by any Taxing Authority; Stock Purchase Agreement Page 18 (f) no material deficiency for any income Taxes has been assessed with respect to any of the Acquired Companies that has not been abated, paid in full or adequately provided for on the Combined Financial Statements; (g) there is no dispute or claim concerning any Tax liability of any Acquired Company either (i) claimed or raised by any Taxing Authority in writing or (ii) as to which the Seller has knowledge; (h) the Combined Financial Statements and the Effective Date Financial Statements accurately reflect unpaid Taxes of the Acquired Companies for the periods covered by each; (i) each partnership with respect to which an Acquired Company owns an interest, directly or indirectly, is a partnership for Tax purposes; (j) none of the Acquired Companies has been notified by the IRS or any Governmental Authority that it is required to pay for the Taxes of any Person (other than any of the Acquired Companies) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract or otherwise; (k) all Taxes that any Acquired Company is or was required to withhold or collect have been duly withheld or collected, and to the extent required, have been paid to the proper Taxing Authority or other Person; (l) no payments are due or will become due by any Acquired Company pursuant to any tax indemnification agreement; and (m) none of the property of the Acquired Companies is subject to a safe- harbor lease (pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954 as in effect after the Economic Recovery Tax Act of 1981 and before the Tax Reform Act of 1986) or is "tax-exempt use property" (within the meaning of Section 168(h) of the Code) or "tax-exempt bond financed property" (within the meaning of Section 168(g)(5) of the Code). 4.10 Compliance With Laws. The Acquired Companies are in compliance in -------------------- all material respects with all Applicable Laws (other than Applicable Environmental Laws, as to which Seller's sole representations and warranties are set forth in Section 4.15, and Taxes, as to which Seller's sole representations ------------ and warranties are set forth in Section 4.9), except (i) as disclosed on ----------- Schedule 4.10 or (ii) for noncompliance with such Applicable Laws which would - ------------- not have, individually or in the aggregate, a Material Adverse Effect. 4.11 Legal Proceedings. Except as disclosed on Schedule 4.11, there are ----------------- ------------- no Proceedings pending, or to the knowledge of Seller, threatened against or involving any Acquired Company or any properties of any Acquired Company which would have, individually or in the aggregate, a Material Adverse Effect. Except as disclosed on Schedule 4.11, no Acquired Company is subject to any judgment, ------------- order, writ, injunction, or decree of any Governmental Entity which has had, individually or in the aggregate, a Material Adverse Effect. 4.12 Title to Properties. Except (i) as disclosed on Schedule 4.12, ------------------- ------------- (ii) for the Permitted Encumbrances, and (iii) for such matters which would not have, individually or in the aggregate, Stock Purchase Agreement Page 19 a Material Adverse Effect, each of the Acquired Companies has good and defensible title to those material properties (real, personal, and mixed, tangible and intangible) reflected in its books and records and in the Combined Financial Statements, other than those disposed of after the Balance Sheet Date in the ordinary course of business consistent with past practice. 4.13 Acquired Company Agreements. --------------------------- (a) List of Agreements. Set forth on Schedule 4.13 is a list of the ------------------ ------------- following agreements and contracts to which any Acquired Company is a party or by which any Acquired Company or any of their respective properties is otherwise bound: (i) any commitment, agreement, note, loan, evidence of indebtedness, purchase order, letter of credit or guarantee of the indebtedness of others that Seller reasonably anticipates will, in accordance with its terms, involve aggregate payments by any Acquired Company of more than $1,000,000 within the remaining term of such agreement; (ii) any lease under which a Acquired Company is the lessor or lessee of real or personal property, which lease (A) cannot be terminated by any Acquired Company without penalty upon not more than 180 calendar days' notice and (B) involves an annual base rental during year 2000 or thereafter in excess of $1,000,000; (iii) any contracts or agreements containing covenants limiting the freedom of any Acquired Company to engage in any line of business or compete with any Person; (iv) any employment or consulting agreements having a primary term extending not less than six months after the date of this Agreement and involving annual payments during year 2000 or thereafter by any Acquired Company in excess of $250,000; (v) any pending sale or lease of real or personal property of any Acquired Company (other than sales of natural gas, natural gas liquids, or other terms of inventory in the ordinary course of business) in excess of $1,000,000; (vi) the gas purchase contracts, gas sales contracts, and gas transportation agreements representing in the aggregate approximately 80% of the revenue or expense of the Acquired Companies in calendar year 1999 under each such contract category; (vii) the gas processing agreements and natural gas liquids contracts representing in the aggregate approximately 80% of the contract volumes in calendar year 1999 under each such contract category; (viii) any contract requiring a capital expenditure or a commitment for a capital expenditure in excess of $500,000, other than any contracts solely related to the matters described in Schedule 6.2(h); or --------------- Stock Purchase Agreement Page 20 (ix) any obligation to make future payments, contingent or otherwise, arising out of or relating to the acquisition or disposition of any business, assets, or stock of other companies by any Acquired Company. (b) No Violations. During calendar year 1999, one or more of the Acquired ------------- Companies effected a transaction under the terms of each of the Scheduled Contracts that were listed in Schedule 4.13 in accordance with clauses (ii), ------------- ---- (vi), or (vii) of Section 4.13(a) with the counterparty or counterparties to - ---- ----- --------------- such Scheduled Contract. Except as disclosed in Schedule 4.13, no Acquired ------------- Company is in breach or violation of, or default under, any of the Scheduled Contracts, except where such breaches or violations or defaults would not have, individually or in the aggregate, a Material Adverse Effect. Each Scheduled Contract is a valid agreement, arrangement or commitment of the Acquired Company which is a party thereto, enforceable against the Acquired Company in accordance with its terms and, to the knowledge of Seller, is a valid agreement, arrangement or commitment of each other party thereto, enforceable against such party in accordance with its terms, except in each case where enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally and except where enforceability is subject to the application of equitable principles or remedies or as would not have, individually or in the aggregate, a Material Adverse Effect. True and complete copies of the written Scheduled Contracts were in the data room of Seller or otherwise have heretofore been made available to Buyer, except as where noted in the Schedules. 4.14 Employee Plans and Labor Matters. -------------------------------- (a) Disclosure. Seller has heretofore provided or made available to ---------- Buyer (i) a true and complete copy of each material Company Employee Plan (each of which is listed on Schedule 4.14), (ii) each trust agreement relating to ------------- such Company Employee Plan, (iii) the most recent IRS Form 5500 for such Company Employee Plans, and (iv) the most recent determination letter issued by the IRS with respect to any Company Employee Plan intended to be qualified under Section 401(a) of the Code. (b) ERISA. (i) None of the ERISA Plans, is a "multiemployer pension ----- plan," as described in Section 3(37) of ERISA, or a "multiple employer pension plan," as defined in Section 4063 of ERISA, and (ii) no material liability under Title IV of ERISA has been incurred by the Acquired Companies or any ERISA Plan that has not been satisfied in full, other than liability for premiums that are not yet due and payable to the Pension Benefit Guaranty Corporation, and there exist no facts or circumstances which could be expected to result in such liability. No plan has an "accumulated funding deficiency" (within the meaning of Section 302 of ERISA and Section 412 of the Code). Full payment has been made, or will be made in accordance with Section 404(a)(6) of the Code, of all amounts which any Acquired Company is required to pay under the terms of each of the Company Employee Plans and Section 412 of the Code, and all such amounts properly accrued through the date of this Agreement with respect to the current plan year thereof will be paid by the Acquired Companies on or prior to the date of this Agreement or have been properly recorded on the Combined Financial Statements. (c) Qualification. Except with respect to the PG&E Corporation Retirement ------------- Savings Plan (as to which an application has been filed, but the IRS has not yet issued its favorable determination letter), each Company Employee Plan intended to be qualified under Stock Purchase Agreement Page 21 Section 401(a) of the Code has received a favorable determination letter from the IRS to the effect that it is so qualified, and to the Seller's knowledge, nothing has occurred since the date of such letter to adversely affect the qualified status of each such plan. Except as set forth on Schedule 4.14, none ------------- of the Company Employee Plans or any other plan, program, or arrangement of the Acquired Companies would result, separately or in the aggregate, in the payment of any "excess parachute payment" within the meaning of Section 280G of the Code. Each Company Employee Plan has been operated in all material aspects in accordance with its terms and the requirements of Applicable Law. To the knowledge of Seller, there have been no non-exempt "prohibited transactions" within the meaning of Section 4975 of the Code or Section 406 of ERISA with respect to any Company Employee Plan to which either of those sections may apply. All contributions required to have been made with respect to any Company Employee Plan have been timely made. (d) Deferred Benefits. Except as set forth in Schedule 4.14, no Company ----------------- ------------- Employee Plan provides benefits, including death, medical or health benefits (whether or not insured), after an employee's termination of employment, other than (i) continuation coverage required pursuant to Section 4980B of the Code and Part 6 of Title I of ERISA, and the regulation thereunder, and any other applicable law, (ii) death benefits or retirement benefits under any employee pension benefit plan, (iii) life insurance and medical benefits under retiree life insurance and medical plans, (iv) deferred compensation benefits, reflected as liabilities on the books of an Acquired Company, or (v) benefits the full cost of which is borne by the current or former employee (or his beneficiary). (e) No Vesting. Except as set forth in Schedule 4.14, the consummation ---------- ------------- of the transactions contemplated by this Agreement will not (whether alone or upon the occurrence of any other event) (i) entitle any current or former employee of any Acquired Company to any payment or forgiveness or indebtedness, (ii) accelerate the time of payment or vesting, result in the funding or increase the amount of any benefit, award or compensation due any such employee, or (iii) result in a restriction on the right of the Buyer to cause any Company Employee Plan to be amended or terminated. (f) Claims. There are no pending, or to the knowledge of Seller, ------ threatened or anticipated Proceedings against any of the Company Employee Plans or any of the Acquired Companies involving any such Company Employee Plan (other than routine claims for benefits). (g) Labor Matters. Except as set forth in Schedule 4.14, the Acquired ------------- ------------- Companies are not (i) a party to, or bound by, any collective bargaining agreement with a labor union or labor organization, or (ii) the subject of any formal proceeding asserting that any Acquired Company has committed an unfair labor practice or is seeking to compel it to bargain with any labor organization as to wages or conditions of employment. (h) No Parent Company Plan Liability. The Acquired Companies will not -------------------------------- have any liability under any Parent Employee Plan after the Closing except for liabilities that have been properly accrued for periods through the Closing and properly recorded on the Combined Financial Statements. Stock Purchase Agreement Page 22 4.15 Environmental Matters. --------------------- (a) Compliance and Remedial Obligations. Except as set forth on Schedule ----------------------------------- -------- 4.15 and except for such matters as would not have, individually or in the - ---- aggregate, a Material Adverse Effect, (i) the Acquired Companies are and have been in compliance with all Applicable Environmental Laws, (ii) no condition exists on any property currently owned or leased by the Acquired Companies which would subject any Acquired Company or such property to any remedial obligations or other liabilities under any Applicable Environmental Laws, and (iii) neither the Seller nor the Acquired Companies have received any written notice of any liability or violation by any Person (other than a Governmental Entity) under any Applicable Environmental Laws. (b) CERCLA Notice. Except as set forth on Schedule 4.15, (i) neither the ------------- -------------- Seller nor the Acquired Companies have received any written claim or notice that any Acquired Company is or may be a potentially responsible person or otherwise liable under CERCLA or any analogous state law and (ii) since January 1, 1998, neither the Seller nor the Acquired Companies have received any written notice of liability or violation by any Governmental Entity under any Applicable Environmental Law, other than such notices that have been resolved with the applicable Governmental Entity. 4.16 Insurance. Set forth on Schedule 4.16 is a list of all Acquired --------- ------------- Company Insurance Policies. All premiums due and payable with respect to the Acquired Company Insurance Policies have been timely paid. No notice of cancellation of, or indication of an intention not to renew, any Acquired Company Insurance Policy has been received by Seller or any Acquired Company. 4.17 Absence of Undisclosed Liabilities. No Acquired Company has any ---------------------------------- liability or obligation, except (i) liabilities reflected on the Combined Financial Statements, (ii) liabilities which have arisen since the Balance Sheet Date in the ordinary course of business, (iii) liabilities arising under executory contracts entered into in the ordinary course of business, including liabilities relating to hedging arrangements, forward sales contracts and derivative arrangements of the Acquired Companies, (iv) liabilities specifically reflected on Schedule 4.17, (v) other liabilities which, in the aggregate, are ------------- not material to the Acquired Companies considered as a whole and (vi) the Assumed Litigation. Notwithstanding anything else to the contrary set forth in this Agreement, no representation is made by the Seller in this Agreement with respect to the accuracy or adequacy of the reserves included in the Combined Financial Statements for pending or threatened Proceedings. 4.18 Bank Accounts. Set forth on Schedule 4.18 are the names of each bank ------------- ------------- or other financial institution with which any Acquired Company has an account and a description of such account. 4.19 Brokerage Fees. Except as set forth on Schedule 4.19, neither Seller -------------- ------------- nor any of its Affiliates has retained any financial advisor, broker, agent, or finder or paid or agreed to pay any financial advisor, broker, agent, or finder on account of this Agreement or the transactions Stock Purchase Agreement Page 23 contemplated hereby for which Buyer or any Acquired Company shall have any responsibility or liability. 4.20 Assets and Properties. Except for the assets described in Section --------------------- ------- 7.10 or listed on Schedule 7.10, the assets owned or leased by the Acquired - ---- ------------- Companies constitute all the assets used in or necessary to conduct the businesses of the Acquired Companies as currently conducted. All such assets will continue to be owned or leased by the Acquired Companies after the Closing. Except for the assets described in Section 7.10 or listed on Schedule 7.10, ------------ ------------- neither the Seller nor any of its Affiliates (other than the Acquired Companies) owns any of the assets used in or necessary to conduct the business of the Acquired Companies. 4.21 Intellectual Property Rights. Except (i) for the assets described in ---------------------------- Section 7.10 or listed on Schedule 7.10, and (ii) for such matters which would not have, individually or in the aggregate, a Material Adverse Effect, (x) the Acquired Companies own or have the right to use pursuant to license, sublicense, other agreement all intellectual property necessary for the operation of the Acquired Companies in the ordinary course of business, (y) each item of intellectual property owned or used by the Acquired Companies immediately prior to the Closing will be owned or available for use by the Acquired Companies on identical terms and conditions immediately subsequent to the Closing, and (z) the Acquired Companies have not received any written notice, claim, or demand alleging any misappropriation or infringement of any intellectual property rights of third parties. 4.22 Year 2000 Compliance. The Acquired Companies have implemented a plan -------------------- for addressing the Year 2000 Problems. Except as would not have, individually or in the aggregate, a Material Adverse Effect, none of the assets of the Acquired Companies failed to perform because of, or due in any way to, a Year 2000 Problems. 4.23 Copies of Indenture Supplement. Seller has furnished to Buyer or its ------------------------------ agents a true and correct copy of the executed version of the Fourteenth Supplemental Indenture, dated as of January 18, 2000, to the Mortgage Indenture, which Fourteenth Supplemental Indenture has not been amended or supplemented. 4.24 Condition of Assets. All material equipment that is currently in ------------------- service and operated by any Acquired Company is in good operating condition and repair, except for (i) ordinary wear and tear and (ii) matters that would not have, individually or in the aggregate, a Material Adverse Effect. 4.25 No Other Representations. Except as and to the extent set forth in ------------------------ this Article 4, Seller makes no representations or warranties whatsoever to --------- Buyer and hereby disclaims all liability and responsibility for any representation, warranty, statement, or information made, communicated, or furnished (orally or in writing) to Buyer or its representatives (including any opinion, information, projection, or advice that may have been or may be provided to Buyer by any director, officer, employee, agent, consultant, or representative of Seller or any Affiliate thereof). Seller makes no representations or warranties to Buyer regarding the probable success or profitability of the business of the Acquired Companies. Stock Purchase Agreement Page 24 4.26 Certain Limitations. If any fact or circumstance that arose prior to ------------------- July 31, 1997 results in a breach of a representation or warranty of Seller contained in this Agreement or in any certificate, instrument or document delivered pursuant hereto or in connection herewith, there shall be deemed to be no breach of the applicable representation or warranty, unless, and only to the extent that, Seller has knowledge of such fact or circumstance. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER Subject to the provisions of Article 12, Buyer represents and warrants to ---------- Seller as of the date hereof and, subject to Section 7.5, as of the Closing Date ----------- as follows: 5.1 Corporate Organization. Buyer is a corporation duly organized, ---------------------- validly existing, and in good standing under the laws of the jurisdiction of its incorporation. 5.2 Authority Relative to This Agreement. Buyer has full corporate power ------------------------------------ and corporate authority to execute, deliver, and perform this Agreement and any Related Agreements to which it is a party, and EPE has full corporate power and corporate authority to execute, deliver, and perform the EPE Guaranty. The execution, delivery, and performance by Buyer of this Agreement and such Related Agreements and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action of Buyer. The execution, delivery, and performance by EPE of the EPE Guaranty and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary corporate action of EPE. This Agreement has been duly executed and delivered by Buyer and constitutes, and each such Related Agreement executed or to be executed by Buyer has been, or when executed will be, duly executed and delivered by Buyer and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Buyer, enforceable against Buyer in accordance with their terms, except that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally and (ii) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances. The EPE Guaranty has been duly executed and delivered by EPE and constitutes a valid and legally binding obligation of EPE, enforceable against EPE in accordance with its terms, except that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally and (ii) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances. 5.3 No Conflict. Assuming all consents, approvals, authorizations, and ----------- other actions described in Section 5.4 have been obtained and all filings and ----------- notifications listed in Section 5.4 have been made, and except as may result ----------- from any facts or circumstances relating solely to Seller or its Affiliates, the execution, delivery and performance of this Agreement and the Related Agreements by Buyer and of the EPE Guaranty by EPE and the consummation by each of them of the transactions contemplated hereby or thereby do not and will not (a) violate or breach the certificate of incorporation or by-laws of Buyer or, in the case of the EPE Guaranty, of EPE, (b) violate or breach any Applicable Law binding upon Buyer or EPE, except as would Stock Purchase Agreement Page 25 not have, individually and in the aggregate, a Material Adverse Effect or (c) result in any breach of, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any Encumbrance on any of the assets or properties of Buyer pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument relating to such assets or properties to which Buyer is a party or by which any of such assets or properties is bound or affected, except as would not have, individually or in the aggregate, a Material Adverse Effect. 5.4 Consents, Approvals, and Licenses. No consent, approval, --------------------------------- authorization, license, order, or permit of, or declaration, filing, or registration with, or notification to, any Governmental Entity, or any other Person, is required to be made or obtained by EPE or Buyer or any of its Affiliates in connection with the execution, delivery, and performance of this Agreement, the Related Agreements and the EPE Guaranty and the consummation of the transactions contemplated hereby or thereby, except (a) applicable requirements of the HSR Act, (b) where failure to obtain such consent, approval, authorization, or action, or to make such filing or notification, would not have, individually or in the aggregate, a Material Adverse Effect and (c) as set forth on Schedule 5.4. ------------ 5.5 Financing. Buyer has, and at the Closing will have, sufficient --------- cash, available lines of credit, or other sources of immediately available funds to enable it to pay the full Purchase Price to Seller when required hereunder. 5.6 Investment Intent; Investment Experience; Restricted Securities. --------------------------------------------------------------- Buyer is acquiring the Shares for its own account for investment and not with a view to, or for sale or other disposition in connection with, any distribution of all or any part thereof. In acquiring the Shares, Buyer is not offering or selling, and will not offer or sell, for Seller in connection with any distribution of the Shares, and Buyer does not have a participation and will not participate in any such undertaking or in any underwriting of such an undertaking except in compliance with applicable federal and state securities laws. Buyer acknowledges that it is able to fend for itself, can bear the economic risk of its investment in the Shares, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the Shares. Buyer is an "accredited investor" as such term is defined in Regulation D under the Securities Act. Buyer understands that the Shares will not have been registered pursuant to the Securities Act or any applicable state securities laws, that the Shares will be characterized as "restricted securities" under federal securities laws and that under such laws and applicable regulations the Shares cannot be sold or otherwise disposed of without registration under the Securities Act or an exemption therefrom. 5.7 Legal Proceedings. There are no Proceedings pending against Buyer ----------------- or its Affiliates or, to the knowledge of Buyer, threatened against Buyer or its Affiliates seeking to restrain, prohibit, or obtain damages or other relief in connection with this Agreement or the transactions contemplated hereby. 5.8 Brokerage Fees. Neither Buyer nor any of its Affiliates has -------------- retained any financial advisor, broker, agent, or finder or paid or agreed to pay any financial advisor, broker, agent, or Stock Purchase Agreement Page 26 finder on account of this Agreement or the transactions contemplated hereby for which Seller or its Affiliates will have any responsibility or liability. 5.9 Independent Investigation. Buyer hereby acknowledges and affirms ------------------------- that it has completed its own independent investigation, analysis and evaluation of the Acquired Companies, that it has made all such reviews and inspections of the business, assets, results of operations, condition (financial or otherwise) and prospects of the Acquired Companies as it has deemed necessary or appropriate, and that in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby it has relied solely on its own independent investigation, analysis, and evaluation of the Acquired Companies. Without limitation of the foregoing, Buyer acknowledges that it (i) is capable of, and has, evaluated the Proceedings based upon the information with respect thereto made available to the Buyer by the Seller (which information Buyer acknowledges has excluded information that, if it were disclosed by Seller or any of the Acquired Companies to Buyer, Seller has concluded may jeopardize any privilege available to Seller or any of the Acquired Companies), (ii) has made its own conclusion as to the amount or range of amounts of Losses, if any, which the Acquired Companies may incur in respect of such Proceedings and (iii) in making its conclusions referred to in clause (ii) of this sentence, the Buyer has not relied on the reserves, if any, reflected therefor in the Combined Financial Statements, as the case may be. ARTICLE 6 CONDUCT OF ACQUIRED COMPANIES PENDING CLOSING Seller hereby covenants and agrees with Buyer as follows: 6.1 Conduct and Preservation of the Acquired Companies. Except as -------------------------------------------------- provided in this Agreement, during the period from the date hereof to the Closing, Seller shall cause each Acquired Company to conduct its operations according to its ordinary course of business consistent with past practice and in compliance with all Applicable Laws and shall use commercially reasonable efforts to preserve, maintain, and protect its assets, rights, and properties, except that (i) Seller and the Acquired Companies shall not be required to make any payments or enter into or amend any contractual agreements, arrangements, or understandings to satisfy the foregoing obligation unless such payment or other action is required or consistent with past practice, (ii) Seller and the Acquired Companies may create, amend, or terminate any of the contracts described in Parts II and III of Exhibit A of the Termination and Assignment --------- --- --------- Agreement or, on or prior to the Closing Date, any other intercompany financial arrangement between one of the Acquired Companies, on the one hand, and Seller or its Affiliates (other than the Acquired Companies), on the other hand, and (iii) the Acquired Companies may assign to Seller or its Affiliates (other than the Acquired Companies) the contracts described in Exhibit B of the Termination --------- and Assignment Agreement. Seller agrees to use its commercially reasonable efforts to keep the Acquired Company Insurance Policies in force through Closing. 6.2 Restrictions on Certain Actions. Without limiting the generality of ------------------------------- Section 6.1, and except as otherwise expressly provided in this Agreement, prior - ----------- to the Closing, Seller shall not permit any Acquired Company, without the prior written consent of Buyer, to: Stock Purchase Agreement Page 27 (a) amend its charter or bylaws or other governing instruments; (b) (i) issue, sell, or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase, or otherwise) any shares of its capital stock of any class or any other securities or equity equivalents; or (ii) amend any of the terms of any such securities outstanding as of the date hereof; (c) (i) split, combine, or reclassify any shares of its capital stock; (ii) declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock; (iii) repurchase, redeem or otherwise acquire any of its securities; or (iv) adopt a plan of complete or partial liquidation or resolutions providing for or authorizing a liquidation, dissolution, merger, consolidation, restructuring, recapitalization, or other reorganization of any Acquired Company; (d) (i) except in the ordinary course of business consistent with past practice, for obligations of another Acquired Company, and for any indebtedness to be repaid prior to Closing in accordance with Section 6.3, create, incur, ----------- guarantee, or assume any indebtedness for borrowed money or otherwise become liable or responsible for the obligations of any other Person; (ii) make any loans, advances, or capital contributions to, or investments in, any other Person (other than to wholly owned subsidiaries or to another Acquired Company and customary loans or advances to employees in amounts not material to the maker of such loan or advance); or (iii) mortgage, or pledge any of its material assets, tangible or intangible, or create or suffer to exist any material lien thereupon; (e) (i) except as may be required by Applicable Law or except to the extent consistent with amendments or modifications made to similar plans or arrangements of Seller or its corporate parent, enter into, adopt or make any material amendments to or terminate any bonus, profit sharing, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, stock equivalent, stock purchase, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan, fund or other arrangement for the benefit or welfare of any director, officer or employee; (ii) except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to the Acquired Companies, taken as a whole, increase the benefits or compensation to any director, officer, or employee; or (iii) pay to any director, officer, or employee any benefit not permitted by any employee benefit agreement, trust, plan, fund, or other arrangement as in effect on the date hereof; (f) acquire, sell, lease, transfer, or otherwise dispose of, directly or indirectly, any assets outside the ordinary course of business consistent with past practice or any assets that in the aggregate are material to the Acquired Companies considered as a whole; (g) acquire (by merger, consolidation, or acquisition of stock or assets or otherwise) any corporation, partnership, or other business organization or division thereof; (h) make any capital expenditure or expenditures, which, individually, is in excess of $500,000 or, in the aggregate, are in excess of $2,500,000, except (i) for any capital expenditure Stock Purchase Agreement Page 28 made for the items described in Schedule 6.2(h), and (ii) reasonable --------------- expenditures made by any Acquired Company in connection with any emergency or other force majeure events affecting such Acquired Company; (i) pay, discharge, or satisfy any material claims, liabilities or obligations (whether accrued, absolute, contingent, unliquidated or otherwise, and whether asserted or unasserted), other than (i) the payment, discharge or satisfaction in the ordinary course of business consistent with past practice, or in accordance with their terms, of liabilities reflected or reserved against in the Combined Financial Statements or incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice, (ii) the settlement of any Proceeding to the extent contemplated in Section 6.2(l), and -------------- (iii) the Acquired Companies may continue to pursue and prosecute the Pending FERC and RRC Proceedings; (j) amend, modify, or change in any material respect (i) any Commercial Contract that had revenues of $5,000,000 or more in calendar year 1999 and that as of December 31, 1999 had a remaining term of 1 year or greater or (ii) any contract or agreement listed in Schedule 4.13 in accordance with clause (ix) of ------------- Section 4.13; - ------------ (k) change in any material respect any of the accounting principles or practices used by it, except for any change required by reason of a concurrent change in generally accepted accounting principles; and (l) settle or resolve any pending or threatened litigation constituting a Proceeding including those listed on Schedule 4.11 or Proceeding pending ------------- before FERC, except for the matters described in Schedule 6.2(l) and subject to --------------- the limitation set forth therein. 6.3 Indebtedness. Seller shall cause (i) the principal amount of long- ------------ term indebtedness for borrowed money of the Acquired Companies outstanding immediately prior to the Closing not to exceed the principal amount of the Long- Term Debt outstanding as of the date of this Agreement and (ii) any additional indebtedness for borrowed money incurred since the date of this Agreement to be repaid in full prior to Closing as contemplated in accordance with Section ------- 3.2(c)(v). - --------- ARTICLE 7 ADDITIONAL AGREEMENTS 7.1 Access to Information and Confidentiality. ----------------------------------------- (a) Access. Between the date hereof and the Closing, Seller (i) shall ------ give Buyer and its authorized representatives reasonable access, during regular business hours and upon reasonable advance Notice, to such employees, plants, pipelines, and other facilities, and such books and records, of the Acquired Companies, as are reasonably necessary to allow Buyer and its authorized representatives to make such inspections as they may reasonably require to verify the accuracy of any representation or warranty contained in Article 4 and --------- (ii) shall cause officers of the Acquired Companies to furnish Buyer and its authorized representatives with such financial and operating data and other information with respect to the Acquired Companies and the Related Companies as Buyer may from time to time reasonably request and with respect to Stock Purchase Agreement Page 29 the Related Companies, as Seller or any Acquired Company then has on hand. Seller shall have the right to have a representative present at all times of any such inspections, interviews, and examinations conducted at or on the offices or other facilities or properties of Seller or the Acquired Companies. Additionally, Buyer shall hold in confidence all such information on the terms and subject to the conditions contained in the Confidentiality Agreement. Buyer shall have no right of access to, and Seller shall have no obligation to provide to Buyer, (1) bids received from others in connection with the transactions contemplated by this Agreement and information and analysis (including financial analysis) relating to such bids, (2) any information the disclosure of which Seller has concluded may jeopardize any privilege available to any Acquired Company, any Related Company or Seller relating to such information or would cause Seller or any Acquired Company to breach a confidentiality obligation or (3) except to the extent contemplated in Section 7.1(d), Retained E-Mail. Buyer -------------- agrees that if Buyer or its authorized representatives receive, or if the information (whether in electronic mail format, on computer hard drives or otherwise) held by any of the Acquired Companies or any of the Related Companies as of the Closing includes information that relates to the business operations or other strategic matters of the Seller, PG&E or any of their Affiliates (other than the Acquired Companies) such information shall be held in confidence on the terms and subject to the conditions contained in the Confidentiality Agreement, but the term of the restriction on the disclosure and use of such information shall continue in effect as to such information for a period of two years from the Closing. Buyer further agrees that if Seller or an Acquired Company inadvertently furnishes to Buyer copies of or access to information that is subject to clause (2) of the second preceding sentence, Buyer will, upon Seller's request promptly return same to Seller or such Acquired Company together with any and all extracts therefrom or notes pertaining thereto (whether in electronic or other format). Buyer shall indemnify, defend, and hold harmless Seller and its Affiliates from and against any Losses asserted against or suffered by the Seller Indemnitees relating to, resulting from, or arising out of, examinations or inspections made by Buyer or its authorized representatives pursuant to this Section 7.1(a). -------------- (b) Retention by Seller. Buyer agrees that Seller may retain (i) a copy of ------------------- all materials included in the Data Room, together with a copy of all documents referred to in such materials, (ii) all books and records prepared in connection with the transactions contemplated by this Agreement, including bids received from others and information relating to such bids, (iii) copies of any books and records which may be relevant in connection with the defense of (A) the matters referred to in Article 12 or (B) disputes arising hereunder, (iv) all ---------- consolidating and consolidated financial information and all other accounting books and records prepared or used in connection with the preparation of financial statements of Seller or PG&E, and (v) all Retained E-Mail. (c) Record Preservation by Buyer. Buyer agrees that it shall preserve and ---------------------------- keep all books and records relating to the business or operations of the Acquired Companies or the Related Companies on or before the Closing Date in Buyer's possession for a period of at least 6 years from the Closing Date. After such 6-year period, before Buyer may dispose of any of such books and records, at least 90 calendar days' prior Notice to such effect shall be given by Buyer to Seller, and Seller shall be given an opportunity, at its cost and expense, to remove and retain all or any part of such books and records that Buyer elects to dispose of. Notwithstanding the foregoing, Buyer agrees that it shall preserve and keep all books and records of the Acquired Companies relating to any investigation instituted by a Governmental Entity or any litigation Stock Purchase Agreement Page 30 (whether or not existing on the Closing Date) if it is reasonably likely that such investigation or litigation may relate to matters occurring prior to the Closing, without regard to the 6-year period set forth in this Section 7.1(c). -------------- (d) Cooperation. Each Party agrees that it will cooperate with and make ----------- available to the other Party during normal business hours, all books and records, information, and employees (without substantial disruption of employment) retained and remaining in existence after the Closing Date which are necessary or useful in connection with (i) any Tax inquiry, audit, investigation, or dispute, (ii) any litigation or investigation, or (iii) any other matter requiring any such books and records, information, or employees for any reasonable business purpose, provided that (a) with respect to providing Buyer access to Retained E-Mail, Seller shall provide access to Buyer upon Buyer's request, and shall furnish Buyer with copies of, only those portions of the Retained E-Mail that pertain or relate to any of the Acquired Companies or its business or assets and (b) Seller shall not be required by this Section ------- 7.1(d) to make available to Buyer any information referred to in clause (1) of - ------ the fourth sentence of Section 7.1(a) or clause (ii) of Section 7.1(b), or any -------------- -------------- of the items referred to in Section 7.10. The Party requesting any such books ------------ and records, information, or employees shall bear all of the out-of-pocket costs and expenses (including attorneys' fees and reimbursement for the reasonable salaries and employee benefits for those employees who are made available) reasonably incurred in connection with providing such books and records, information, or employees. Seller may require certain financial information relating to the Acquired Companies' businesses for periods prior to the Closing Date for the purpose of filing federal, state, local, and foreign Tax Returns and other governmental reports, and Buyer agrees to furnish such information to Seller at Seller's request and expense. Stock Purchase Agreement Page 31 7.2 Regulatory and Other Authorizations and Consents. ------------------------------------------------ (a) Filings. Each Party shall use all commercially reasonable efforts to ------- obtain all authorizations, consents, orders, and approvals of, and to give all notices to and make all filings with, all Governmental Entities (including those pertaining to the Governmental Approvals) and other Third Parties that may be or become necessary for its execution and delivery of, and the performance of its obligations under this Agreement and will cooperate fully with the other Party in promptly seeking to obtain all such authorizations, consents, orders, and approvals, giving such notices, and making such filings. To the extent required by the HSR Act, each Party shall (i) file or cause to be filed, as promptly as practicable but in no event later than the fifth business day after the execution and delivery of this Agreement, with the Federal Trade Commission and the United States Department of Justice, all reports and other documents required to be filed by such Party under the HSR Act concerning the transactions contemplated hereby and (ii) promptly comply with or cause to be complied with any requests by the Federal Trade Commission or the United States Department of Justice for additional information concerning such transactions, in each case so that the waiting period applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall expire as soon as practicable after the execution and delivery of this Agreement. Each Party agrees to request, and to cooperate with the other Party in requesting, early termination of any applicable waiting period under the HSR Act. Buyer shall pay the filing fees payable in connection with the filings by the Parties required by the HSR Act. In addition, prior to the Closing the Buyer and the Seller agree that Seller may continue to pursue and prosecute in good faith the Pending FERC and RRC Proceedings. (b) Additional Undertakings of Buyer. Without limiting the generality of -------------------------------- Buyer's undertakings pursuant to Section 7.2(a), Buyer shall: -------------- (i) take promptly any or all of the following actions to the extent necessary to eliminate any concerns on the part of any Government Antitrust Authority regarding the legality under any antitrust law of Buyer's acquisition of the Shares: entering into negotiations, providing information, making proposals, entering into and performing agreements to dispose of assets or properties, holding separate (through the establishment of a trust or otherwise) particular assets or categories of assets, or businesses, of the Acquired Companies, or agreeing to dispose of one or more assets or properties (whether owned by Buyer or its Affiliates or the Acquired Companies) following the Closing; provided, however, that -------- ------- nothing in this Agreement shall require the Buyer, its Affiliates, or the Acquired Companies to dispose of or sell assets or properties, hold separate particular assets or categories of assets, or businesses, or agree to dispose of or hold separate one or more assets or properties or take any other action that could have an adverse impact on the Buyer, its Affiliates, or the Acquired Companies, except that the Buyer, its Affiliates, or the Acquired Companies shall, if required, agree to dispose of or sell assets or properties with an aggregate fair market value of $400,000,000 or less and to agree to such reasonable undertakings necessary to consummate such disposition(s) or sale(s) (provided that such undertakings do not expand Buyer's obligations under this Section 7.2(b)(i)), as a condition to eliminate a Government Antitrust Authority's concerns regarding the legality under any antitrust law of Buyer's acquisition of the Shares; and Stock Purchase Agreement Page 32 (ii) use commercially reasonable efforts (including taking the steps contemplated by Section 7.2(b)(i)) to prevent the entry in a judicial or ----------------- administrative proceeding brought under any antitrust law by any Government Antitrust Authority or any other party for a permanent or preliminary injunction or other order that would make consummation of the transactions contemplated by this Agreement unlawful or that would prevent or delay such consummation; and (iii) take promptly, in the event that such an injunction or order has been issued in such a proceeding, any and all commercially reasonable steps, including the appeal thereof, the posting of a bond or the steps contemplated by Section 7.2(b)(i), necessary to vacate, modify, or suspend ----------------- such injunction or order so as to permit such consummation on a schedule as close as possible to that contemplated by this Agreement. (c) Transfer. If the transfer of any instrument, contract, license, lease, -------- permit, or other document to Buyer hereunder shall require the consent of any party thereto other than Seller, then this Agreement shall not constitute an agreement to assign the same, and such item shall not be assigned to or assumed by Buyer, if an actual or attempted assignment thereof would constitute a breach thereof or default thereunder. In such case, Seller and Buyer shall cooperate and each shall use commercially reasonable efforts to obtain such consents to the extent required of such other parties and, if and when any such consents are obtained, to transfer the applicable instrument, contract, license, lease, permit, or other document. If any such consent cannot be obtained, Seller shall cooperate in any reasonable arrangement designed to obtain for Buyer all benefits, privileges, obligations and privileges of the applicable instrument, contract, license, lease, permit, or document, including possession, use, risk of loss, potential for gain and dominion, control and demand. Buyer agrees that if any of the assets referred to in Section 7.10 require the consent of any ------------ party thereto other than an Acquired Company, the Seller or any of its Affiliates and such consent is not received prior to Closing, Seller and Buyer shall cooperate and each shall use commercially reasonable efforts to obtain such consents to the extent required of such other parties and, if and when any such consents are obtained, to transfer the applicable instrument, contract, license, lease, permit, or other document, and (b) if any such consent cannot be obtained, Buyer shall cooperate in any reasonable arrangement designed to obtain for Seller all benefits, privileges, obligations and privileges of the applicable instrument, contract, license, lease, permit, or document, including possession, use, risk of loss, potential for gain and dominion, control and demand. (d) Third Party Consents. Buyer will use its commercially reasonable -------------------- efforts to assist Seller in obtaining any consents of Third Parties necessary or advisable in connection with the transactions contemplated by this Agreement, including providing to such Third Parties such financial statements and other publicly available financial information with respect to Buyer as such Third Parties may reasonably request. 7.3 Employees and Parent Employee Plans. ----------------------------------- (a) Transfer of Employees. On or prior to the Closing, the employees --------------------- listed on Schedule 7.3(a) shall be transferred to and become, or otherwise --------------- remain, employees of Seller or one of its Affiliates (other than the Acquired Companies)(the "Transferred Employees"). Stock Purchase Agreement Page 33 (b) Withdrawal from Parent Employee Plans. As of the Closing, the ------------------------------------- Acquired Companies shall cease to participate in any Parent Employee Plan. (c) Severance Benefits. For a period of not less than 12 months ------------------ following the Closing Date Buyer agrees to provide, or cause an Affiliate of Buyer to provide, to those individuals who are employees of the Acquired Companies on the Closing (other than Transferred Employees) with severance pay and continued medical (if any) and out-placement (if any) benefits that are not less than the severance benefits such employees would be entitled to receive under the Acquired Companies' severance programs or, if applicable, the Officer's Severance Policy of PG&E as in effect for any such employee immediately prior to the Closing. (d) Service Credit. Buyer shall, and shall cause the Acquired Companies -------------- to, grant all individuals who are employees of the Acquired Companies on the Closing Date credit under the plans and benefit programs of Buyer and its Affiliates for all service with the Acquired Companies prior to the Closing for all purposes for which such service was recognized by the Acquired Companies (other than benefit accrual under any defined benefit pension plan of Buyer or any of its Affiliates). Credit for service with the Acquired Companies shall include the cash balance pay credits, the Extended Illness Bank, Paid Time off, and employee recognition awards, so long as such crediting would not violate ERISA or the Code. In addition, Buyer shall, and shall cause the Acquired Companies to, waive any pre-existing condition exclusions and actively-at-work requirements and provide that any expenses incurred on or before the Closing Date by any such individuals or their covered dependents shall be taken into account for purposes of satisfying applicable deductible, coinsurance and maximum out-of-pocket provisions under health plans covering such individuals after the Closing in the plan year in which the Closing occurs. (e) Indemnity. Buyer shall indemnify Seller and hold it harmless from and --------- against any damages, liabilities, costs or expenses which may be incurred or suffered by Seller or any of its Affiliates (other than the Acquired Companies) by reason of Buyer's failure to comply with any of the provisions of this Section 7.3, and Seller shall indemnify the Buyer and its Affiliates (including - ----------- the Acquired Companies after the Closing) and hold each of them harmless from and against any damages, liabilities, costs or expenses which may be incurred or suffered by any of them by reason of Seller's failure to comply with any of the provisions of this Section 7.3. ----------- (f) [Intentionally Omitted]. (g) [Intentionally Omitted]. (h) Stay-on Bonus. Buyer shall, or shall cause an Affiliate to, pay the ------------- stay-on bonuses to the eligible employees of the Acquired Companies as provided in Schedule 7.3(h). --------------- (i) Solicitation. For a period of 12 months after the date hereof, Buyer ------------ and its subsidiaries shall not, without the prior written consent of Seller, directly or indirectly, solicit (other than pursuant to general solicitations of employees not directed specifically at an employee of Seller or its Affiliates), encourage, induce, or permit any of the Transferred Employees or any other employee of Seller or its Affiliates (other than the Acquired Companies) to become an employee, contractor, or consultant of the Buyer or its Affiliates. For a period of Stock Purchase Agreement Page 34 12 months after the date hereof, Seller and its subsidiaries shall not, without the prior written consent of Buyer, directly or indirectly, solicit (other than pursuant to general solicitations of employees not directed specifically at any employee of the Acquired Companies), encourage, induce, or permit any employee of any of the Acquired Companies (other than the Transferred Employees) to become an employee, contractor, or consultant of the Seller or its Affiliates. (j) Vesting. Prior to the Closing, Seller shall take all action necessary ------- such that, immediately prior to the Closing, all employees of the Acquired Companies (other than the Transferred Employees) who participate in the PG&E Corporation Retirement Savings Plan (the "Savings Plan") shall (i) become fully ------------ vested in any unvested portion their accounts under the Savings Plan, and (ii) be entitled to a lump sum distribution from the Savings Plan within the meaning of Code Section 401(k)(10)(B) as soon as practicable after the Closing. (k) Transfer. Seller shall cause the trustee of any master trust in which -------- any of the Company Employee Plans participates (each, a "Master Trust"), as of ------------ the Master Trust's valuation date on or next following the Closing (the "Valuation Date"), to value, in a manner consistent with its prior practice, -------------- each such Company Employee Plan's allocable share of the assets of the Master Trust (each such allocable share, a "Plan Asset Value"). With respect to each ---------------- such Company Employee Plan, as soon as practicable after the determination of the Plan Asset Value, Seller shall cause the trustee of the Master Trust to transfer to a successor tax-qualified trust designated by Buyer an amount in cash equal to the Plan Asset Value (i) increased by interest during the period from the Valuation Date to the date of transfer (the "Interim Period") at an -------------- interest rate equal to the interest rate credited on short-term investments held in the Master Trust (the "Short-Term Rate") and (ii) reduced by benefit payments --------------- to employees or their beneficiaries made in accordance with the provisions of such Company Employee Plan during the Interim Period plus interest on such benefit payments at the Short-Term Rate from the date of payment until the transfer date. (l) Participation. Seller shall, or shall cause the Acquired Companies ------------- to, take all action necessary such that, as of the Closing, the Acquired Companies shall be the only employers that participate in the PG&E Gas Transmission - Texas Corporation Retirement Plan. (m) Indemnity. Except for liabilities and obligations expressly assumed --------- by Buyer pursuant to this Agreement, Seller shall indemnify and hold harmless the Buyer Indemnitees against any and all Losses incurred or suffered by any of the Buyer Indemnitees arising out of or relating to the funding, operation, administration, amendment, termination of, or withdrawal from, any employee benefit plan, program or arrangement established, maintained or contributed to by Seller or any of its Affiliates, other than a Company Employee Plan, whether arising out of or relating to any event or state of facts occurring or existing before, on or after the Closing, and including Losses arising under Title IV of ERISA, Section 302 of ERISA and Sections 412 and 4971 of the Code. Except for any breach of a representation or warranty of Seller in Section 4.14, Buyer ------------ shall indemnify and hold harmless the Seller Indemnitees from and against any Losses incurred by any of the Seller Indemnitees relating to or arising out of the funding, operation, amendment, termination of, or withdrawal from, any Company Employee Plan or employee plan of Buyer or any Affiliate of Buyer, whether arising out of or relating to any event or state of facts occurring or existing before or after the Closing, and including Losses arising under Title IV of ERISA, Section 302 of ERISA, and Sections 412 and 4971 of the Code. Stock Purchase Agreement Page 35 7.4 Public Announcements. The initial press release or releases to be -------------------- issued in connection with the execution of this Agreement shall be mutually agreed upon by the Parties prior to the issuance thereof. Prior to the fifth business day after the Closing, Buyer and Seller shall consult with each other before they or any of their Affiliates issue any other press release or otherwise make any other public statement with respect to this Agreement or the transactions contemplated hereby. For a 15 day period after any termination of the Agreement, Buyer and Seller shall consult with each other before they or any of their Affiliates issue any other press release or otherwise make any other public statement with respect to such termination. Buyer and Seller and their Affiliates shall not issue any such other press release or make any such other public statement prior to any such consultation (but no approval thereof shall be required), except as may be required by Applicable Law. 7.5 Amendment of Schedules. Each Party agrees that, with respect to the ---------------------- representations and warranties of such Party contained in this Agreement, such Party shall have the continuing obligation until the Closing to supplement or amend promptly the Schedules to such Party's Disclosure Letter with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules. For all purposes of this Agreement, including for purposes of determining whether the conditions set forth in Articles 8 and 9 have been ---------- - fulfilled, the Schedules to a Party's Disclosure Letter shall be deemed to include only that information contained therein on the date of this Agreement and shall be deemed to exclude all information contained in any supplement or amendment thereto, but if the Closing shall occur, then all matters disclosed pursuant to any such supplement or amendment at or prior to the Closing shall be waived and no Party shall be entitled to make a claim thereon pursuant to the terms of this Agreement. 7.6 Fees and Expenses. Except as otherwise expressly provided in this ----------------- Agreement, all fees and expenses, including fees and expenses of counsel, financial advisors, and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such fee or expense, whether or not the Closing shall have occurred. Buyer shall be obligated to pay any and all costs of any audit of the Acquired Companies as may be required to enable Buyer to complete and file any filing by Buyer or an affiliate of Buyer with the Securities and Exchange Commission. 7.7 Transfer Taxes. All sales, transfer, filing, recordation, -------------- registration and similar Taxes and fees arising from or associated with the transactions contemplated hereunder, whether levied on Buyer or Seller, shall be borne by Buyer, and Buyer shall file all necessary documentation with respect to, and make all payments of, such Taxes and fees on a timely basis and if required by Applicable Law, Seller shall and shall cause its Affiliates to join the execution of any such documentation. 7.8 Action Regarding Indemnities. Buyer and Seller shall each use ---------------------------- commercially reasonable efforts to not take any action after the Closing that would limit, reduce or extinguish any indemnity or right of contribution from a Third Party which may be available to Seller, Buyer, or the Acquired Companies, and will use commercially reasonable efforts to take all necessary action, of which it has actual knowledge, to preserve claims under any such indemnity. Stock Purchase Agreement Page 36 7.9 [Intentionally omitted]. --------------------- 7.10 Excluded Assets. Notwithstanding Article 6 hereof, the --------------- --------- transactions contemplated by this Agreement exclude, and prior to the Closing Date Seller may cause an Acquired Company to transfer to Seller or any of its Affiliates (other than the Acquired Companies and the Related Companies) the following: (a) the assets listed or described on Schedule 7.10; ------------- (b) except to the extent contemplated in Section 7.14, all insurance ------------ policies and rights under any insurance policies in respect to any and all claims made under such policies whether such claims are asserted before or after the Closing Date and all rights to any proceeds payable under any such policy, other than claims made, and proceeds with respect to periods, prior to the Closing Date; (c) the information described in the fourth sentence of Section 7.1(a); -------------- (d) the PG&E Marks. Notwithstanding anything to the contrary provided elsewhere in this Agreement, Seller's representations and warranties in Article 4 shall not apply --------- to any of the items described in clauses (a) through (d) of the immediately preceding sentence. 7.11 Transition Services. Between the date hereof and the Closing, Buyer ------------------- and Seller shall each cooperate to develop and negotiate the terms of a Transition Services Agreement under which Seller or its Affiliates will perform transition activities reasonably requested by Buyer as to the businesses of the Acquired Companies for a period not to exceed 6 months. 7.12 Guarantees; Wilson Storage Capacity; and Other Affiliate Contracts. ------------------------------------------------------------------ Buyer and Seller shall cooperate and use commercially reasonable efforts to cause as of the Closing Date, (i) the Guarantees and any liabilities related thereto to be released as to Seller or such Affiliate and (ii) substitute arrangements, if required, of Buyer or its Affiliates to be in effect. Unless otherwise agreed to by the Buyer, prior to or contemporaneous with the Closing the firm storage contract between PG&E Energy Trading Gas Corporation and PG&E Texas Pipeline, L.P. relating to the Wilson Storage Facility will be terminated. Prior to or contemporaneously with the Closing, all other agreements between any of the Acquired Companies and the Seller or any of its Affiliates (other than the Acquired Companies and the Related Companies) shall be canceled or terminated, other than the First Amended and Restated Remittance Agreement, dated as of January 27, 2000, between PG&E and GTT which shall continue in effect after the Closing in accordance with its terms. 7.13 Use of PG&E Marks. PG&E Marks will appear on some of the assets of ----------------- the Acquired Companies, including on signage throughout the real property of the Acquired Companies, and on supplies, materials, stationery, brochures, advertising materials, manuals and similar consumable items of the Acquired Companies. Buyer acknowledges and agrees that it obtains no right, title, interest, license or any other right whatsoever to use the PG&E Marks. In Stock Purchase Agreement Page 37 furtherance thereof, Buyer shall, (a) within 180 days after the Closing Date, remove the PG&E Marks from the assets of the Acquired Companies, including signage on the real and personal property of the Acquired Companies, and, if required by Seller in writing, provide written verification thereof to Seller promptly after completing such removal and (b) within two weeks after the Closing Date, return or destroy (with proof of destruction) all other assets of the Acquired Companies that contain any PG&E Marks that are not removable. Buyer agrees never to challenge Seller's (or its Affiliates') ownership of the PG&E Marks or any application for registration thereof or any registration thereof or any rights of Seller or its Affiliates therein as a result, directly or indirectly, of its ownership of the Acquired Companies. Buyer will not do any business or offer any goods or services under the PG&E Marks. Buyer will not send, or cause to be sent, any correspondence or other materials to any Person on any stationery that contains any PG&E Marks or otherwise operate the Acquired Companies in any manner which would or might confuse any Person into believing that Buyer has any right, title, interest, or license to use the PG&E Marks. 7.14 Insurance. Buyer acknowledges and agrees that, following the --------- Closing, the Acquired Company Insurance Policies shall be terminated or modified to exclude coverage of all or any portion of the Acquired Companies by Seller or PG&E (but no such termination shall adversely affect any claims of the Acquired Companies existing at the Closing), and, as a result, Buyer shall be obligated at or before Closing to obtain at its sole cost and expense replacement insurance, including insurance required by any third party to be maintained by any of the Acquired Companies. Buyer further acknowledges and agrees that Buyer will need to provide to certain Governmental Entities and third parties evidence of such replacement or substitute insurance coverage for the continued operations of the businesses of the Acquired Companies following the Closing. Notwithstanding Section 7.10(b), if any claims are made or losses occur prior to --------------- the Closing Date that relate solely to the business activities of the Acquired Companies and such claims, or the claims associated with such losses, may be made against the policies retained by Seller or its Affiliates pursuant to Section 7.10 or under policies otherwise retained by Seller or its Affiliates - ------------ after the Closing, then Seller shall use its reasonable commercial efforts so that the Acquired Companies can file, notice, and otherwise continue to pursue these claims pursuant to the terms of such policies. 7.15 Disclaimer of Warranties. Notwithstanding anything contained in ------------------------ this Agreement, it is the explicit intent of each Party that Seller is not making any representations or warranties whatsoever, express or implied, beyond those expressly given in Article 4 of this Agreement, and it is understood that, --------- except for the representations and warranties contained herein, Buyer takes the Shares and the business and assets of the Acquired Companies "as is" and "where is." Without limiting the generality of the immediately foregoing, except for the representations and warranties contained in Article 4, the Seller hereby --------- expressly disclaims and negates any representation or warranty, expressed or implied, at common law, by statute, or otherwise, relating to (a) the condition of the assets of the Acquired Companies (including any implied or expressed warranty of merchantability or fitness for a particular purpose, or of conformity to models or samples of materials) or (b) any infringement by Seller or any of its Affiliates (including the Acquired Companies and the Related Companies) of any patent or proprietary right of any Third Party; it being the intention of Seller and Buyer that the business and assets of Stock Purchase Agreement Page 38 the Acquired Companies are to be accepted by Buyer in their present condition and state of repair. It is understood that any cost estimates, projections, or other predictions contained or referred to in the offering materials that have been provided to Buyer are not and shall not be deemed to be representations or warranties of Seller or any of its Affiliates or the Acquired Companies. ARTICLE 8 CONDITIONS TO OBLIGATIONS OF SELLER The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment on or prior to the Closing Date of each of the following conditions: 8.1 Representations and Warranties True. All the representations and ----------------------------------- warranties of Buyer contained in this Agreement, and in any agreement, instrument, or document delivered pursuant hereto or in connection herewith on or prior to the Closing Date that are qualified as to materiality shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on such date, and each of the representations and warranties of Buyer herein and therein that is not so qualified as to materiality shall be true and correct in all material respects on and as of the date hereof and on and as of Closing Date as if made on and as of such date, in each such case except as affected by transactions permitted by this Agreement and except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as set forth above as of such specified date. 8.2 Covenants and Agreements Performed. Buyer shall have performed and ---------------------------------- complied with in all material respects all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date, and all deliveries contemplated by Section 3.3 shall have been made. ----------- 8.3 HSR Act and Consents. All waiting periods (and any extensions -------------------- thereof) applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall have expired or been terminated, and there shall have been obtained any and all other Governmental Approvals specified on Schedules --------- 4.6 and 5.4. - --- --- 8.4 Legal Proceedings. No preliminary or permanent injunction or other ----------------- order, decree, or ruling issued by a Governmental Entity, and no statute, rule, regulation, or executive order promulgated or enacted by a Governmental Entity, shall be in effect which restrains, enjoins, prohibits, or otherwise makes illegal the consummation of the transactions contemplated hereby. Stock Purchase Agreement Page 39 ARTICLE 9 CONDITIONS TO OBLIGATIONS OF BUYER The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment on or prior to the Closing Date of each of the following conditions: 9.1 Representations and Warranties True. All the representations and ----------------------------------- warranties of Seller contained in this Agreement, and in any agreement, instrument, or document delivered pursuant hereto or in connection herewith on or prior to the Closing Date that are qualified as to materiality shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on such date, and each of the representations and warranties of Seller herein and therein that is not so qualified as to materiality shall be true and correct in all material respects on and as of the date hereof and on and as of the Closing Date as if made on and as of such date, in each such case except as affected by transactions permitted by this Agreement and except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as set forth above as of such specified date. 9.2 Covenants and Agreements Performed. Seller shall have performed and ---------------------------------- complied with in all material respects all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date, and all deliveries contemplated by Section 3.2 shall have been made. ----------- 9.3 HSR Act and Consents. All waiting periods (and any extensions -------------------- thereof) applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall have expired or been terminated, and there shall have been obtained any and all other Governmental Approvals specified on Schedules --------- 4.6 and 5.4. - --- --- 9.4 Legal Proceedings. No preliminary or permanent injunction or other ----------------- order, decree or ruling issued by a Governmental Entity, and no statute, rule, regulation or executive order promulgated or enacted by a Governmental Entity, shall be in effect which restrains, enjoins, prohibits, or otherwise makes illegal the consummation of the transactions contemplated hereby. 9.5 Repayment of Short-Term Debt of the Acquired Companies. Prior to or ------------------------------------------------------ concurrently with the Closing, all revolving credit facilities of any of the Acquired Companies, the TECO Margin Loan and any indebtedness of any of the Acquired Companies for borrowed money owed to the Seller or its corporate parent will be repaid in full. 9.6 Consents. All of the consents and approvals from third parties -------- referred to in items 1 and 2 of Schedule 4.6 shall have been obtained. ------------ Stock Purchase Agreement Page 40 ARTICLE 10 TERMINATION, AMENDMENT, AND WAIVER 10.1 Termination. This Agreement may be terminated and the transactions ----------- contemplated hereby abandoned at any time prior to the Closing in the following manner: (a) by mutual written consent of Seller and Buyer; (b) subject to the obligations of Buyer set forth in Section 7.2(b), by -------------- either Seller or Buyer, if any Governmental Entity with jurisdiction over such matters shall have issued an order or injunction restraining, enjoining, or otherwise prohibiting the sale of the Shares hereunder and such order, decree, ruling, or other action shall have become final and unappealable; or (c) by either Seller or Buyer, if the Closing shall not have occurred on or before 180 days after the date of this Agreement, but the right to terminate this Agreement under this Section 10.1(c) shall not be available to a Party --------------- whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur prior to such date. 10.2 Effect of Termination. If a Party terminates this Agreement under --------------------- Section 10.1, then such Party shall promptly give Notice to the other Party specifying the provision hereof pursuant to which such termination is made, and this Agreement shall become void and have no effect, except that the agreements contained in this Article 10 and in Article 13 and Sections 7.1(a), 7.3(i), 7.4, ---------- ---------- --------------- ------ --- and 7.6 shall survive the termination hereof. Nothing contained in this Section --- ------- 10.2 shall relieve either Party from liability for damages actually incurred as - ---- a result of any breach of this Agreement. No termination of this Agreement shall affect the obligations of the Parties pursuant to the Confidentiality Agreement, except to the extent specified in such letter agreement. 10.3 Amendment. This Agreement may not be amended except by an --------- instrument in writing signed by or on behalf of both Parties. 10.4 Waiver. Either Party may (i) waive any inaccuracies in the ------ representations and warranties of the other contained herein or in any document, certificate, or writing delivered pursuant hereto or (ii) waive compliance by the other Party with any of the other Party agreements or fulfillment of any conditions to its own obligations contained herein. Any agreement on the part of a Party to any such waiver shall be valid only if set forth in an instrument in writing signed by or on behalf of such Party. No failure or delay by a Party in exercising any right, power, or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. ARTICLE 11 TAX MATTERS 11.1 Tax Sharing Agreements. Except for the Tax Sharing Agreement dated ---------------------- as of July 31, 1997 between Valero Energy Corporation (now known as GTT), Valero Refining and Stock Purchase Agreement Page 41 Marketing Company (now known as Valero Energy Corporation) and PG&E Corporation (the "Valero Tax Agreement"), and the agreements with respect to Taxes set forth in Article VIII of the Agreement and Plan of Merger, dated as of November 18, ------------ 1996, between TECO Pipeline Company, et al and Pacific Gas Transmission Company (the "TECO Tax Agreement" and, together with the Valero Tax Agreement, the "Retained Tax Agreements"), all Tax allocation or Tax sharing agreements or arrangements between either Company or any of the other Acquired Companies and any other Person, including Seller or PG&E, hereby are terminated as of the Effective Date, and no cash amounts shall be paid in respect of any amounts owing under such agreements as of such date and all rights and obligations of either Company and the other Acquired Companies with respect to Taxes shall be as provided herein. Seller shall assume all obligations relating to Taxes and rights of the Acquired Companies under the Valero Tax Agreement and under the TECO Tax Agreement with respect to any Pre-Closing Tax Period. Seller shall be responsible for and shall pay all Losses relating to Taxes with respect to any Pre-Closing Tax Period under the Retained Tax Agreements, shall be entitled to represent the interests of the Acquired Companies with respect to such matters and shall be entitled to any payments to which any of the Acquired Companies may be entitled thereunder. Each Acquired Company shall pay over (or cause the recipient of any such payment to pay over) to Seller any such payments received with respect to the Acquired Company within 10 business days after receipt thereof. Any payments not made within such 10 business day period shall bear interest from the date received by the Buyer or an Acquired Company at the Prime Rate. 11.2 Tax Return Preparation. Each Pre-Closing Tax Return shall be ---------------------- prepared and filed by (or shall be the responsibility of) Seller. All such Pre- Closing Tax Returns shall be filed on a basis consistent with prior Tax Returns filed by Seller or PG&E with respect to the Acquired Companies. Seller shall timely pay or cause to be paid all Taxes shown on such Pre-Closing Tax Returns. Except as provided in Section 11.12 and subject to Section 11.11, Seller or PG&E ------------- ------------- will include the income of the Acquired Companies (including any deferred income triggered into income by Treasury Regulations Sections 1.1502-13 and 1.1502-14, and any excess loss accounts taken into income under Treasury Regulation Section 1.1502-19) on the Seller or PG&E consolidated federal income Tax Returns for all periods through the Closing and pay any federal income Taxes attributable to such income. Buyer shall cause the Acquired Companies to furnish Tax information to Seller or PG&E for inclusion in the federal and state consolidated or combined income or franchise Tax returns in accordance with the past custom and practice of the Acquired Companies. All Tax Returns which (i) are a Post- Closing Tax Return, or (ii) are required to be filed by or with respect to any Acquired Company for a Tax period ending after the Closing Date, including any Straddle Return, shall be prepared and filed by Buyer, subject to the rights to payment under Sections 11.14 and 11.16. Buyer shall timely pay or cause to be -------------- ----- paid all Taxes shown on such Tax Returns. 11.3 Straddle Period Tax Allocation. With respect to any Straddle ------------------------------ Period, to the extent permitted by Applicable Law, Seller or Buyer shall elect to treat the Closing Date as the last day of the Tax period. If Applicable Law will not permit the Closing Date to be the last day of a period, the Tax attributable to the operations of the Acquired Companies for the portion of the period up to and including the Closing Date shall be (i) in the case of real or personal property Taxes, Taxes imposed by the State of Texas and based on income or capital, or a flat minimum dollar amount tax, the total amount of such Taxes multiplied by a fraction, the numerator of Stock Purchase Agreement Page 42 which is the number of days in the partial period through and including the Closing Date and the denominator of which is the total number of days in such Straddle Period, (ii) in the case of all other Taxes based on or in respect of income, the Tax computed on the basis of the taxable income or loss of the Acquired Companies for such partial period as determined from its books and records, and (iii) in the case of all other Taxes, on the basis of the actual activities or attributes of the Acquired Companies for such partial period as determined from its books and records. 11.4 Straddle Returns. With respect to any Straddle Return, Buyer shall ---------------- deliver, at least 45 days prior to the due date for filing such Straddle Return (including any extension) to Seller a statement setting forth the amount of Tax that Seller owes pursuant to Section 11.14, including the allocation of taxable ------------- income and Taxes under Section 11.3, and copies of such Straddle Return, ------------ including copies of any partnership returns, together with workpapers supporting the allocation of partnership income, with respect to any partnerships in which an Acquired Company owns an interest, with respect to the partnership Tax period (or portion thereof) through the Closing Date. Seller shall have the right to review such Straddle Returns and the allocation of taxable income and liability for Taxes and to suggest to Buyer any reasonable changes to such Straddle Returns no later than 15 days prior to the date for the filing of such Straddle Returns. Seller and Buyer agree to consult and to attempt to resolve in good faith any issue arising as a result of the review of such Straddle Returns and allocation of taxable income and liability for Taxes and mutually to consent to the filing as promptly as possible of such Straddle Returns. Not later than 5 days before the due date for the payment of Taxes with respect to such Straddle Returns, Seller shall pay to Buyer an amount equal to the Taxes as agreed to by Buyer and Seller as being owed by Seller pursuant to Section 11.14. If Buyer ------------- and Seller cannot agree on the amount of Taxes owed by Seller with respect to a Straddle Return, Seller shall pay to Buyer the amount of Taxes reasonably determined by Buyer to be owed by Seller pursuant to Section 11.14. Within 10 ------------- days after such payment, Seller and Buyer shall refer the matter to an independent "Big-Five" accounting firm agreed to by Buyer and Seller to arbitrate the dispute. Seller and Buyer shall equally share the fees and expenses of such accounting firm and its determination as to the amount owing by Seller pursuant to Section 11.14 with respect to a Straddle Return shall be ------------- binding on both Parties. Within five days after the determination by such accounting firm, if necessary, the appropriate Party shall pay the other Party any amount which is determined by such accounting firm to be owed. Seller shall be entitled to reduce its obligation to pay Taxes with respect to a Straddle Return by the amount of any estimated Taxes paid with respect to such Taxes by or on behalf of the Acquired Companies on or before the Closing Date. 11.5 Use of Consistent Tax Practices. Any Tax Return which includes or ------------------------------- is based on the operations, ownership, assets or activities of any of the Acquired Companies for any Pre-Closing Period, and any Tax Return which includes or is based on the operations, ownership, assets or activities of either Company for any Post-Closing Tax Period to the extent the items reported on such Tax Return might reasonably be expected to increase any Tax liability of Seller or PG&E for any Pre-Closing Tax Period or any Straddle Period, shall be prepared in accordance with past Tax accounting practices used by the Acquired Companies, Seller or PG&E with respect to the Tax Returns in question (unless such past practices are no longer permissible under applicable Tax law), and to the extent any items are not covered by past practices (or in the event Stock Purchase Agreement Page 43 such past practices are no longer permissible under applicable Tax law), in accordance with reasonable Tax accounting practices selected by the Party responsible for filing such Tax Return hereunder with the consent, not to be unreasonably withheld or delayed, of the other Party. 11.6 Refunds or Credits. Except as otherwise set forth in this Agreement, ------------------ (i) to the extent any refunds or credits with respect to Taxes paid by the Acquired Companies are attributable to a Pre-Closing Tax Period, such refunds or credits shall be for the account of Seller, and (ii) to the extent that any refunds or credits with respect to Taxes paid by the Acquired Companies are attributable to a Post-Closing Tax Period, such refunds or credits shall be for the account of Buyer. To the extent any refunds or credits with respect to Taxes paid by the Acquired Companies are attributable to a Straddle Period, such refund or credit with respect to Taxes shall be apportioned between Buyer and Seller based on the appropriate allocation method set forth in clauses (i), (ii) or (iii) of Section 11.3. Buyer shall cause the Acquired Companies to forward to ------------ to Seller or to reimburse Seller for any such refunds or credits for the account of Seller within 10 business days from receipt thereof by any of Buyer, any of its Affiliates or the Acquired Companies. Seller shall forward to Buyer or reimburse Buyer for any refunds or credits for the account of Buyer within 10 business days from receipt thereof by Seller. Any refunds or reimbursements not made within the 10 business day period specified above shall bear interest from the date received by the refunding or reimbursing Party at the Prime Rate. 11.7 Filing of Amended Returns. Any amended Tax Return or claim for Tax ------------------------- refund for any Pre-Closing Tax Period shall be filed, or caused to be filed, only by Seller or PG&E. Seller shall not, without the prior written consent of Buyer, make or cause to be made, any such filing, to the extent such filing, if accepted, reasonably might be expected to increase by more than an immaterial amount the Tax liability of Buyer for any Tax period. An amended Tax Return or claim for Tax refund for any Straddle Period hereunder shall be filed, or caused to be filed, by the Party responsible for filing the original Tax Return for such Tax period hereunder, if either Buyer or Seller so requests, except that such filing shall not be done without the consent, which shall not be unreasonably withheld or delayed, of Seller (if the request is made by Buyer) or of Buyer (if the request is made by Seller). Any amended Tax Return or claim for Tax refund for any Post-Closing Tax Period shall be filed, or caused to be filed, only by Buyer. Buyer shall not, without the prior written consent of Seller, file, or cause to be filed, any amended Tax Return or claim for Tax refund for any Post-Closing Tax Period to the extent that such filing, if accepted, reasonably might be expected to increase by more than an immaterial amount the Tax liability of PG&E, Seller, or any Affiliate for any Pre-Closing Tax Period. 11.8 Assistance and Cooperation. Seller, Buyer, their respective -------------------------- Affiliates, and the Acquired Companies shall cooperate (and cause their Affiliates to cooperate) with each other and with each other's agents, including accounting firms and legal counsel, in connection with Tax matters relating to the Acquired Companies, including (i) preparation and filing of Tax Returns, (ii) determining the liability and amount of any Taxes due, the right to and amount of any refund of Taxes, and the liability and amount of any Tax Benefit payments, (iii) examinations of Tax Returns, and (iv) any administrative or judicial proceeding in respect of Taxes assessed or proposed to be assessed. Each Party shall (i) retain all Tax Returns, schedules and work papers, and all material records and other documents relating thereto, until the expiration of the Stock Purchase Agreement Page 44 applicable statute of limitations (including, to the extent notified by any Party, any extensions thereof) of the Tax period to which such Tax Returns and other documents and information relate or until the final determination of any controversy with respect to such Tax period and until the final determination of any payments that may be required with respect to such Tax period under this Agreement or the Retained Tax Agreements, and (ii) give the other Party reasonable written notice prior to transferring, destroying or discarding any such Tax Returns, records and documents and, if the other Party so requests, the Buyer or the Seller, as the case may be, shall allow the other Party to take possession of such Tax Returns, records and documents. Each of the Parties shall also make available to the other Parties, as reasonably requested and available, personnel (including officers, directors, employees and agents) responsible for preparing, maintaining, and interpreting information and providing information or documents in connection with any administrative or judicial proceedings relating to Taxes. 11.9 Reimbursement for Net Tax Carrybacks. If, after the Closing Date, ------------------------------------ Seller or any of its Affiliates receives or is credited with a refund of any Tax attributable to the utilization or carryback of any Tax attribute (for example, net operating losses and Tax credits) of any of the Acquired Companies arising after the Closing Date, Seller shall pay to Buyer within 10 days of receipt an amount equal to the amount of such refund together with any interest received from or credited thereon by the applicable Taxing Authority, net of any Taxes imposed upon Seller or such Affiliate by reason of the receipt of such refund or credit. Seller and PG&E will not elect to retain any net operating loss carryovers or capital loss carryovers of the Acquired Companies under Treasury Regulation Section 1.1502-20(g). 11.10 Tax Deductions for Stock Option Exercises. Buyer and Seller agree ----------------------------------------- that, to the maximum extent allowed by law, Seller shall be entitled to any Tax deductions for compensation expense attributable to the exercise of options to purchase stock in Seller or PG&E by employees (or former employees) of any of the entities acquired by Buyer hereunder. To the extent Seller determines that Seller or PG&E may not be entitled to claim such deductions, Buyer agrees that, upon Seller's request, Buyer will cause such deductions to be claimed on the appropriate Tax Returns identified by Seller and to remit to Seller any resulting Tax Benefit thereby derived. 11.11 Buyer's Indemnity for Post Closing Transactions. Buyer agrees to ----------------------------------------------- indemnify Seller for any additional Tax owed by PG&E, Seller, or any Affiliate (including Tax owed by PG&E, Seller, or any Affiliate due to this indemnification payment) resulting from any transaction not in the ordinary course of business occurring on the Closing Date after Buyer's purchase of the Shares. 11.12 Reporting of Post-Closing Transactions. Buyer and Seller agree to -------------------------------------- report all transactions not in the ordinary course of business occurring on the Closing Date after Buyer's purchase of the Shares on Buyer's federal income Tax Return to the extent permitted by Treasury Regulation Section 1.1502- 76(b)(1)(ii)(B). 11.13 Closing Tax Certificate. At the Closing, Seller shall deliver to ----------------------- Buyer a certificate signed under penalties of perjury (i) stating that it is not a foreign corporation, foreign partnership, foreign trust or foreign estate, (ii) providing its U.S. Employer Identification Number and (iii) providing its address, all pursuant to Section 1445 of the Code. Stock Purchase Agreement Page 45 11.14 Tax Allocation - Seller's Obligations. Seller shall be solely ------------------------------------- liable for, shall pay, and shall indemnify the Buyer Indemnitees against, all Taxes of the Acquired Companies and all Losses arising therefrom, relating to (i) any Pre-Closing Tax Period and (ii) the portion of the Taxes for any Straddle Period allocable to the period up to and including the Closing Date under Section 11.3. Seller shall be entitled to reduce its obligation to pay ------------ Taxes for which it is liable pursuant to this Section 11.14 by the amount of ------------- such Taxes paid by or on behalf of the Acquired Companies (i) on or before the Effective Date or (ii) on or before the Closing Date with respect to Taxes (other than Taxes based on net income) attributable to the period between the Effective Date and the Closing Date, but only to the extent not previously credited or otherwise taken into account. 11.15 Taxes of Other Persons. Seller agrees to indemnify the Buyer from ---------------------- and against the liability of any of the Acquired Companies (i) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law) by reason of an Acquired Company's having been a member of any consolidated, combined, or unitary group at any time on or prior to the Closing, or (ii) with respect to any Pre-Closing Tax Period, as a transferee or successor. 11.16 Tax Allocation - Buyer's Obligations. Buyer shall be solely ------------------------------------ liable for, shall pay, and shall indemnify the Seller Indemnitees against, all Taxes of the Acquired Companies and all Losses arising therefrom, relating to (i) any Post-Closing Tax Period or (ii) the portion of the Taxes for any Straddle Period which are allocable to the period after the Closing Date under Section 11.3. - ------------ 11.17 Tax Claim Notices. Each Party shall promptly notify the other ----------------- Party of (i) the commencement of any demand, claim, audit, examination, action or other proposed change or adjustment by any Taxing Authority concerning any Tax and (ii) any other adjustment or claim which could give rise to a liability for Taxes of the other Party or other payment pursuant to this Article 11 ---------- (including pursuant to the Retained Tax Agreements) or Section 7.7, as the case ----------- may be (each a "Tax Claim"). Such notice shall contain factual information describing the asserted Tax Claim in reasonable detail and shall include copies of any notice or other document received from any Taxing Authority or other Person in respect of any such asserted Tax Claim. 11.18 Pre-Closing Tax Period Tax Claims. Seller, or an Affiliate of --------------------------------- Seller, at its own expense, shall have the sole right to represent the Acquired Companies' interests in any Tax Claim relating to any Pre-Closing Tax Period and to employ counsel of its choice. Buyer shall have the right to participate in such Tax Claim at its own expense. None of Seller or its Affiliates shall consent to any settlement of issues relating to the Acquired Companies that reasonably would be expected to have an adverse effect on the Taxes of any of the Acquired Companies in any period after the Closing Date without Buyer's consent, which consent shall not be unreasonably withheld. If Seller elects to control the defense, compromise or settlement of any Tax Claim, Seller shall keep Buyer informed of the progress and disposition of such Tax Claim. Buyer shall handle any Tax Claim relating to any Tax period of the Acquired Companies included in a Pre-Closing Tax Period which Seller elects in writing not to control, and Buyer shall be entitled to defend, compromise or settle such Tax Claim in its sole discretion. Stock Purchase Agreement Page 46 11.19 Straddle Period Tax Claims. With respect to any Straddle Period, -------------------------- Buyer shall control, and Seller, or an Affiliate of Seller, at its own expense, shall have the right to participate in, the defense and settlement of any Tax Claim and each Party shall cooperate with the other Party and there shall be no settlement or closing or other agreement with respect thereto without the consent of the other Party, which consent shall not be unreasonably withheld; provided, however, that if either Party shall refuse (the "Refusing Party") to consent to any settlement, closing or other agreement agreed to by the relevant Taxing Authority with respect to any such Tax Claim that the other Party (the "Accepting Party") proposed to accept (a "Proposed Settlement"), then (i) the Accepting Party's liability with respect to the subject matter of the Proposed Settlement shall be limited to the amount that such liability would have been if the Proposed Settlement had been accepted, and (ii) the Refusing Party shall be responsible for all liabilities and expenses incurred or imposed thereafter in connection with the contest of such Tax Claim to the extent that the final settlement is more than the Proposed Settlement. 11.20 Payments for Tax Benefits. Buyer shall pay Seller the amount of ------------------------- any Tax Benefit resulting from any Tax deduction taken into account on or after the Closing Date relating to any current liability that was taken into account in computing Adjusted Working Capital as of the Effective Date. Seller shall pay Buyer the amount of any actual increase in Tax resulting from any taxable income or gain taken into account by an Acquired Company after the Closing Date with respect to the difference between the amount of an asset taken into account in computing Adjusted Working Capital as of the Effective Date and the adjusted tax basis of such asset for federal income tax purposes as of such date. Any Tax Benefit or Tax cost to be reflected on a 2000 Tax Return shall be estimated and paid at the same time that the Adjustment Amount is settled pursuant to Section 2.5(e). Any difference between the estimated and actual Tax Benefit or - -------------- Tax cost shall be settled within 30 days after the filing of any Tax Return reflecting such Tax Benefit or Tax cost. 11.21 Treatment of Tax Indemnity Payments. Buyer and Seller, their ----------------------------------- respective Affiliates, and the Acquired Companies shall, to the extent permitted by Applicable Law, treat any payments made pursuant to this Article 11 as ---------- adjustments to the Purchase Price. To the extent that any such payment is not permitted to be treated as an adjustment to the Purchase Price, the amount of such payment shall be increased by the amount of any actual additional Tax cost incurred as a result of the receipt of such payment. Any Tax Benefit actually received by the recipient of such payment or any of its Affiliates as a result of its payment of the Tax to which such indemnity payment relates shall either reduce the amount of such indemnity payment or otherwise be paid by the recipient to the payor of such indemnity. 11.22 Liability for Existing Franchise Tax Claims. Nothing in this ------------------------------------------- Article 11 shall impose upon Seller, PG&E, or any Affiliate of PG&E, directly or - ---------- indirectly (including pursuant to the Retained Tax Agreements), any liability or responsibility for any Losses that arise out of claims that are substantially similar to those asserted in the Existing Franchise Tax Claims. 11.23 Survival and Time Limitation. All of the covenants, obligations ---------------------------- and agreements of the Parties set forth in this Article 11 shall survive the ---------- Closing. Notwithstanding the foregoing sentence, after Closing, any assertion by Buyer or any Buyer Indemnitee that Seller is liable to Buyer or any Buyer Indemnitee, or any assertion by Seller or any Seller Indemnitee that Stock Purchase Agreement Page 47 Buyer is liable to Seller or any Seller Indemnitee, under this Article 11 must ---------- be made in writing and must be given to the indemnifying party on or prior to the date that is 90 days after the date on which the applicable statute of limitations expires with respect to such matters (or not at all). 11.24 Sole and Exclusive Remedy. Except as otherwise provided in ------------------------- Sections 2.5(f), 4.14, 7.3, 7.7, 12.2(d), 12.5 and clause (ii) of Section - --------------- ---- --- --- ------- ---- ------- 12.1(i), from and after the Closing, the provisions of this Article 11 shall be - ------- ---------- the exclusive agreement among the Parties (including the Seller Indemnitees and the Buyer Indemnitees) with respect to Tax matters, including indemnification for Tax matters. 11.25 Purchase Price Allocation. The Base Purchase Price shall be ------------------------- allocated as set forth on Schedule 11.25 which shall be used in the filing of -------------- any Tax Returns. To the extent that interest accrues or an Adjustment Amount occurs, Buyer and Seller shall promptly make appropriate adjustments to such allocations, and such changed allocations shall then be the allocations that each Party to this Agreement uses. ARTICLE 12 SURVIVAL AND INDEMNIFICATION 12.1. Indemnification. --------------- (a) Seller's Indemnity. From and after the Closing, subject to the other ------------------ terms and limitations in this Article 12, Seller shall indemnify, defend, ---------- reimburse, and hold harmless the Buyer Indemnitees from and against any and all Losses actually incurred by any of the Buyer Indemnitees or asserted by a Third Party against any of the Buyer Indemnitees (i) for any breach of Seller's representations or warranties made, as of the Closing Date, in this Agreement or the Related Agreements, (ii) in respect of the Excluded Assets, (iii) for any events occurring after the Closing Date under the agreements and arrangements assigned pursuant to Section 5 of the Termination and Assignment Agreement, or --------- (iv) for or arising out of any breach of the covenants or obligations of Seller and its Affiliates under this Agreement (other than a breach of any covenant or obligation in Article 11) or the Related Agreements. ---------- (b) Buyer's Indemnity. From and after the Closing, subject to the other ----------------- terms and limitations in this Article 12, Buyer shall indemnify, defend, ---------- reimburse, and hold harmless the Seller Indemnitees from and against any and all Losses actually incurred by any of the Seller Indemnitees or asserted by a Third Party against any of the Seller Indemnitees (i) for any breach of Buyer's representations or warranties made, as of the Closing Date, in this Agreement, (ii) for or arising out of any breach of the covenants or obligations of Buyer and its Affiliates under this Agreement (other than a breach of any covenant or obligation in Article 11) or the Related Agreements, (iii) in respect of the ---------- Assumed Liabilities, (iv) that relate to any of the Guarantees to the extent such Guarantee has not been released or replaced on or as of the Closing with a guarantee of Buyer or its Affiliates, (v) that relate to or arise out of the actions taken under Section 3 of the Termination and Assignment Agreement with --------- respect to Item 8 of Part 3 of Exhibit A thereto, or (vi) that relate to or ------ ------ --------- arise out of the businesses or operations of the Acquired Companies or that otherwise relate to or arise out of the Acquired Companies (whether Stock Purchase Agreement Page 48 relating to periods prior to or after the Closing Date) to the extent such Losses are not properly asserted by Buyer under the provisions of Section ------- 12.1(a) (subject to the limitations set forth in Section 12.1(e)) by the date - ------- ---------------- specified in Section 12.1(g). Buyer acknowledges and agrees that the Losses --------------- described in clauses (iii), (v), and (vi) of the preceding sentence shall be retained by and transfer with the Acquired Companies and shall continue to be the responsibility of the Acquired Companies. (c) Seller's Waiver. Notwithstanding anything to the contrary in this --------------- Agreement or the Related Agreements, Buyer shall not be liable to the Seller Indemnitees for any exemplary, punitive, special, indirect, consequential, remote, or speculative damages, except to the extent any such damages are included in any action by a Third Party against a Seller Indemnitee for which such Seller Indemnitee is entitled to indemnification under this Agreement. (d) Buyer's Waiver. Notwithstanding anything to the contrary in this -------------- Agreement or the Related Agreements, Seller shall not be liable to the Buyer Indemnitees for any exemplary, punitive, special, indirect, consequential, remote or speculative damages, except to the extent any such damages are included in any action by a Third Party against a Buyer Indemnitee for which such Buyer Indemnitee is entitled to indemnification under this Agreement. (e) Limitations on Indemnity. None of the Buyer Indemnitees shall be ------------------------ entitled to assert any right to indemnification under Section 12.1(a)(i) until ------------------ the aggregate amount of all the Losses actually suffered by the Buyer Indemnitees exceeds the Deductible Amount, and then only to the extent such Losses exceed, in the aggregate, the Deductible Amount. Except as provided in the immediately following sentence, Losses taken into account under Section ------- 12.1(f) shall not be taken into account under this Section 12.1(e). In no event - ------- --------------- shall Seller ever be required to indemnify the Buyer Indemnitees for Losses under Section 12.1(a)(i) and Section 12.1(f) and to make any payment to Buyer, ------------------ --------------- pursuant to the second sentence of Section 12.5 in any amount exceeding, in the ------------ aggregate, $150,000,000. (f) Seller's Small Claim Indemnity. From and after the Closing, subject to ------------------------------ the other terms and limitations in this Article 12, Seller shall indemnify, ---------- defend, reimburse, and hold harmless the Buyer Indemnitees from and against any and all Losses actually incurred by any of the Buyer Indemnitees or asserted by a Third Party against any of the Buyer Indemnitees for any breach of Seller's representations or warranties made, as of the Closing Date, pursuant to Article ------- 4 determined solely for purposes of this Section 12.1(f) without regard to any - - --------------- qualification contained in such representation or warranty of "Material Adverse Effect." Notwithstanding the preceding sentence, none of the Buyer Indemnitees shall be entitled to assert any right to indemnification for any Loss under this Section 12.1(f) unless the amount of that Loss (determined individually and not - --------------- on an aggregate basis with other Losses) exceeds $8,500,000, and then only to the extent that all such Losses eligible for recovery in accordance with this Section 12.1(f) exceed $8,500,000. In no event shall Seller ever be required to - --------------- indemnify the Buyer Indemnitees for Losses under this Section 12.1(f) and to --------------- make any payment to Buyer, pursuant to the second sentence of Section 12.5 in ------------ any amount exceeding, in the aggregate, $22,500,000. Stock Purchase Agreement Page 49 (g) Survival and Time Limitation. All of the representations, ---------------------------- warranties, covenants, obligations and agreements of the Parties set forth in this Agreement and the Related Agreements, including those obligations set forth in this Article 12, shall survive the Closing. Notwithstanding the foregoing ---------- sentence, except as provided in Section 11.23, after Closing, any assertion by ------------- Buyer or any Buyer Indemnitee that Seller is liable to Buyer or any Buyer Indemnitee for indemnification under the terms of this Agreement, the Related Agreements, or for any other reason in connection with the transactions contemplated in this Agreement must be made in writing and must be given to Seller on or prior to the date that is 18 months after the Closing Date (or not at all), provided that an assertion by (i) Buyer or any Buyer Indemnitee with respect to any breach of Sections 4.2(a), 4.2(b), or 4.2(c) or (ii) any Party --------------- ------ ------ with respect to a breach of Sections 7.3(e) or 7.3(m) shall survive the Closing --------------- ------ without limitation. (h) Compliance with Express Negligence Rule. All releases, disclaimers, --------------------------------------- limitations on liability, and indemnities in this Agreement, including those in this Section 12.1, shall apply even in the event of the sole, joint, and/or ------------ concurrent negligence, strict liability, or other fault of the Party whose liability is released, disclaimed, limited, or indemnified. (i) Further Indemnity Limitations. The amount of any Loss shall be ----------------------------- reduced (i) to the extent any Person entitled to receive indemnification under this Agreement receives any insurance proceeds with respect to a Loss, (ii) to take into account any Tax Benefit arising from the recognition of the Loss, and (iii) to take into account any payment or payments actually received by a Person entitled to receive indemnification under this Article 12 with respect to a ---------- Loss. (j) Sole and Exclusive Remedy. From and after the Closing, except as ------------------------- provided in Section 11.24, the indemnification provisions of this Article 12 ------------- ---------- shall be the sole and exclusive remedy of each Party (including the Seller Indemnitees and the Buyer Indemnitees) (i) for any breach of the other Party's representations, warranties, covenants, or agreements contained in this Agreement or the Related Agreements or (ii) otherwise with respect to this Agreement or the Related Agreements and the transactions contemplated hereby or thereby (including the Acquired Companies). 12.2 Defense of Claims. ----------------- (a) Notice. If an Indemnitee receives notice of the assertion of any ------ claim or of the commencement of any Third Party Claim with respect to which indemnification is to be sought from the Indemnifying Party, the Indemnitee will give such Indemnifying Party reasonable prompt Notice thereof, but in any event not later than 7 calendar days after the Indemnitee's receipt of notice of such Third Party Claim, but the failure to give timely Notice will not affect the rights or obligations of the Indemnifying Party except and only to the extent that, as a result of such failure, the Indemnifying Party was substantially disadvantaged. Such Notice shall describe the nature of the Third Party Claim in reasonable detail and will indicate the estimated amount, if practicable, of the Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving Notice to the Indemnitee, to elect to assume the defense of, any Third Party Claim at such Indemnifying Party's own expense Stock Purchase Agreement Page 50 and by such Indemnifying Party's own counsel, and the Indemnitee will cooperate in good faith in such defense at such Indemnitee's own expense. (b) Defense. If within 10 calendar days after an Indemnitee provides ------- Notice to the Indemnifying Party of any Third Party Claim, the Indemnitee receives Notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim, the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof. The Indemnitee shall be entitled to participate in the defense of such Third Party Claim and to employ counsel for such purpose at the sole cost and expense of Indemnitee. Without the prior written consent of the Indemnitee, the Indemnifying Party will not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder, or which would impose any injunctive or other equitable remedy on the Indemnitee. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder (or which would not impose any injunctive or other equitable remedy on the Indemnitee) and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party will give Notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within 10 calendar days after its receipt of such Notice, the Indemnitee may continue to contest or defend such Third Party Claim and, in such event, the maximum liability of the Indemnifying Party to such Third Party Claim will be the amount of such settlement offer, plus reasonable costs and expenses paid or incurred by the Indemnitee up to the date of such notice. (c) Direct Claim. Any Direct Claim will be asserted by giving the ------------ Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event not later than 20 calendar days after the Indemnitee becomes aware of such Direct Claim (but the obligations of the Indemnifying Party and the rights of the Indemnitee shall not be affected by the failure to give such notice, except and only to the extent that, as a result of such failure, the Indemnifying Party is substantially disadvantaged). The Indemnifying Party will have a period of 30 calendar days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such 30-day period, the Indemnifying Party will be deemed to have accepted such Direct Claim. If the Indemnifying Party rejects such Direct Claim, the Indemnitee will be free to seek enforcement of its rights to indemnification under this Agreement. (d) Subrogation. If the amount of any Loss, at any time subsequent to the ----------- making of an indemnity payment in respect thereof, is reduced by recovery, settlement, or otherwise under or pursuant to any insurance coverage or Tax Benefit, or pursuant to any claim, recovery, settlement or payment by or against any other entity, the amount of such reduction, less any costs, expenses, or premiums incurred in connection therewith, will promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any indemnity payment, the Indemnifying Party will, to the extent of such indemnity payment, be subrogated to all rights of the Indemnitee against any Third Party in respect of the Loss to which the indemnity payment relates; provided, however, that (i) the Indemnifying Party is in compliance with its obligations under this Agreement in respect of such Loss, (ii) until the Indemnitee recovers full payment of its Loss, Stock Purchase Agreement Page 51 any and all claims of the Indemnifying Party against any such Third Party on account of said indemnity payment are hereby made expressly subordinated and subjected in right of payment to the Indemnitee's rights against such Third Party, and (iii) under no circumstance shall Buyer or its Affiliates (including the Acquired Companies) have any rights to pursue recovery under the Acquired Company Insurance Policies. Without limiting the generality or effect of any other provision hereof, each such Indemnitee and Indemnifying Party will execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights. Nothing in this Section ------- 12.2(d) shall be construed to require a Party to obtain or maintain any - ------- insurance coverage. 12.3 Additional Provisions Relating to Environmental Indemnification. --------------------------------------------------------------- In addition to the limitations set forth elsewhere in this Article 12, Seller's ---------- obligation to indemnify the Buyer pursuant to Section 12.1(a) with respect to --------------- environmental matters shall be further qualified as specified below: (a) Hazardous Materials. If Buyer has a Loss pursuant to Section 12.1(a) ------------------- --------------- of this Agreement that relates to the presence of a hazardous material that has been released to the soils, groundwater, sediments, or otherwise to the environment, Seller shall only be required to defend, indemnify, and hold harmless Buyer to the extent that: (i) the facts that form a basis for such loss constitute a breach by Seller of one or more of its representations or warranties contained in this Agreement; (ii) investigation or remediation of the hazardous material is required pursuant to an Applicable Environmental Law that is in effect as of and is enforceable as of the Closing Date; (iii) such investigation or remediation is conducted using the most cost effective methods for investigation, remediation, or containment consistent with Applicable Environmental Laws. To the extent that the Losses incurred in connection with an investigation or remediation are in excess of the Losses that would be incurred for an investigation or remediation meeting the conditions set forth in this Section 12.3(a), Seller shall have no obligation to indemnify Buyer for such - --------------- excess Losses. (b) Increased Costs. If the costs of an investigation or remediation --------------- that is subject to an indemnity by Seller under Section 12.1(a) or Section --------------- ------- 12.1(f) are increased due to an act or omission (occurring after the Closing - ------- Date) by a Person other than Seller or an agent, representative, or contractor of Seller, Seller shall not be responsible for any such increase in costs incurred. Additionally, Seller shall not be responsible for any increased Losses that are due to (i) the closure of operations at any of the affected assets, other than a closure resulting from a breach by Seller of its representations and warranties set forth in Section 4.15, or (ii) a change in use of the ------------ affected assets from the use of such assets as of the Closing Date. (c) Buyer's Costs. Seller shall not be responsible for the costs ------------- associated with Buyer's oversight of Seller's performance of its defense and indemnity obligations under this Agreement, including the cost of Buyer's oversight of Seller's legal counsel, consultants, or employees. (d) Claims. Claims that require investigation and remediation of ------ hazardous materials shall also be subject to the procedures of Section 12.4. ------------ Stock Purchase Agreement Page 52 (e) Sharing of Losses. Seller shall only be required to bear and pay 50% ----------------- of Losses owing by Seller to Buyer or the Buyer Indemnitees under Section ------- 12.1(a)(i) or Section 12.1(f) for a breach by Seller of its representations and - ---------- --------------- warranties set forth in Section 4.15. ------------ 12.4 Procedures for Remedial Actions. ------------------------------- (a) Control by Seller. Seller shall have the right, but not the ----------------- obligation, to control the management of an environmental investigation or remediation that is subject to indemnification pursuant to Section 12.1(a) --------------- (except for on-site investigation or remediation, the management of which shall be controlled by Buyer). Seller shall notify Buyer, within 20 calendar days of receipt of notice of Buyer's claim for indemnification for such matter, either that (i) it intends to undertake such responsibility, (ii) it does not intend to undertake such responsibility, or (iii) that more information is needed from Buyer before Seller can reasonably determine that Buyer's claim is subject to indemnification pursuant to this Agreement. Buyer shall promptly respond to such requests for information (to the extent such information is reasonably available to Buyer) and, within 30 days of receipt of such information, Seller shall notify Buyer as to whether it shall undertake the investigation and remediation. (b) Seller's Investigation. If Seller undertakes the responsibility ---------------------- for off-site investigation or remediation, Seller shall promptly provide copies to Buyer of all notices, correspondence, draft reports, submissions, work plans, and final reports and shall give Buyer a reasonable opportunity (at Buyer's own expense) to comment on any such submissions Seller intends to deliver or submit to the appropriate Governmental Entity prior to such submission. Buyer may, at its own expense, hire its own consultants, attorneys, or other professionals to monitor the investigation or remediation, including any field work undertaken by Seller, and Seller shall provide Buyer with the results of all such field work. Notwithstanding the above, Buyer shall not take any actions that shall unreasonably interfere with Seller's performance of the investigation and remediation. Seller shall undertake any such work required herein in a manner designed to minimize any disruption, to the greatest extent possible, in the conduct of operations at the affected assets. Buyer shall allow Seller reasonable access to conduct any of the work contemplated herein and shall fully cooperate with Seller in the performance of the investigation and remediation, including providing Seller with reasonable access to employees and documents as necessary. (c) Buyer's Investigation. For all on-site investigation and --------------------- remediation, or if Seller declines to undertake the performance of an off-site investigation and remediation hereunder, Buyer shall be entitled to undertake the investigation and remediation. Buyer shall promptly provide copies to Seller of all notices, correspondence, draft reports, submissions, work plans and final reports and shall give Seller a reasonable opportunity (at Seller's own expense) to comment on any submissions Buyer intends to deliver or submit to the appropriate Governmental Entity prior to said submission. Seller may, at its own expense, hire its own consultants, attorneys or other professionals to monitor the investigation and remediation, including any field work undertaken by Buyer, and Buyer shall provide Seller with the results of all such field work. Notwithstanding the above, Seller shall not take any action that shall unreasonably interfere with Buyer's performance of investigation and remediation. Stock Purchase Agreement Page 53 12.5 Tax Treatment of Indemnity Payments. Each Party, to the extent ----------------------------------- permitted by Applicable Law, agrees to treat any payments made pursuant to this Article 12 as adjustments to the Purchase Price for all federal and state income - ---------- and franchise Tax purposes. To the extent that any such payment is not permitted to be treated as an adjustment to the Purchase Price, the amount of such payment shall be increased by the amount of any actual additional Tax cost incurred as a result of the receipt of such payment. ARTICLE 13 OTHER PROVISIONS 13.1 Notices. All notices, requests, demands, and other communications ------- required or permitted to be given or made hereunder by either Party (each a "Notice") shall be in writing and shall be deemed to have been duly given or made if (i) delivered personally, (ii) transmitted by first class registered or certified mail, postage prepaid, return receipt requested, (iii) delivered by prepaid overnight courier service, or (iv) delivered by confirmed telecopy or facsimile transmission to the Parties at the following addresses (or at such other addresses as shall be specified by the Parties by similar notice): If to Buyer: El Paso Field Services Company 1001 Louisiana Street Houston, Texas 77002 Attention: Mark Leland Fax: (713) 420-2087 with a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004-1980 Attention: Gary Cooperstein Fax: (212) 859-4000 If to Seller: PG&E National Energy Group, Inc. 1100 Louisiana Street Suite No. 1000 Houston, Texas 77002 Attention: Thomas B. King Fax: (713) 371-6787 Stock Purchase Agreement Page 54 with a copy to: Andrews & Kurth L.L.P. 4200 Chase Tower 600 Travis Street Houston, Texas 77002 Attention: G. Michael O'Leary or Hal V. Haltom Fax: (713) 220-4285 Notices shall be effective (i) if delivered personally or sent by courier service, upon actual receipt by the intended recipient, (ii) if mailed, upon the earlier of five days after deposit in the mail or the date of delivery as shown by the return receipt therefor, or (iii) if sent by telecopy or facsimile transmission, when the answer back is received. 13.2 Entire Agreement. This Agreement, together with the Schedules, the ---------------- Exhibits, and the Related Agreements, including the Confidentiality Agreement, constitute the entire agreement between the Parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, between the Parties with respect to the subject matter hereof. There are no restrictions, promises, representations, warranties, covenants or undertakings between the Parties, other than those expressly set forth or referred to herein or therein. 13.3 Binding Effect; Assignment; No Third Party Benefit. Subject to the -------------------------------------------------- following sentence, this Agreement shall be binding upon and inure to the benefit of the Parties and their successors and assigns. Neither this Agreement nor any of the rights, interests, or obligations hereunder shall be assigned or delegated by either Party, other than to an Affiliate (provided that if either Party so assigns or delegates to an Affiliate, such Party shall not be released from its obligations hereunder as a result of such assignment), without the prior written consent of the other Party. Except as provided herein, nothing in this Agreement is intended to or shall confer upon any Person other than the Parties, and their successors and assigns, any rights, benefits, or remedies of any nature whatsoever under or by reason of this Agreement. 13.4 Severability. If any provision of this Agreement is held to be ------------ unenforceable, this Agreement shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Agreement shall remain in full force and effect. 13.5 Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the laws of the State of Texas, without regard to its conflict of laws rules or principles. 13.6 Further Assurances. From time to time following the Closing, at the ------------------ request of either Party and without further consideration, the other Party shall execute and deliver to such requesting Party such instruments and documents and take such other action (but without incurring any material financial obligation) as such requesting Party may reasonably request to consummate more fully and effectively the transactions contemplated hereby. Stock Purchase Agreement Page 55 13.7 Counterparts. This Agreement may be executed by the Parties in any ------------ number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. 13.8 Disclosure. Certain information set forth in the Schedules is ---------- included solely for informational purposes, is not an admission of liability with respect to the matters covered by the information, and may not be required to be disclosed pursuant to this Agreement. The specification of any dollar amount in the representations and warranties contained in this Agreement or the inclusion of any specific item in the Schedules is not intended to imply that such amounts (or higher or lower amounts) are or are not material, and no Party shall use the fact of the setting of such amounts or the fact of the inclusion of any such item in the Schedules in any dispute or controversy between the Parties as to whether any obligation, item, or matter not described herein or included in a Schedule is or is not material for purposes of this Agreement. 13.9 Consent to Jurisdiction. The Parties hereby irrevocably submit to ----------------------- the jurisdiction of the courts of the State of Texas and the federal courts of the United States of America located in Harris County, Texas over any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby, and each Party irrevocably agrees that all claims in respect of such dispute or proceeding shall be heard and determined in such courts. The Parties hereby irrevocably waive, to the fullest extent permitted by Applicable Law, any objection which they may now or hereafter have to the venue of any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby brought in such court or any defense of inconvenient forum for the maintenance of such dispute. Each Party agrees that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Applicable Law. 13.10 Bulk Sales or Transfer Laws. The Buyer hereby waives compliance by --------------------------- the Seller with the provisions of the bulk sales or transfer laws of all applicable jurisdictions. Stock Purchase Agreement Page 56 IN WITNESS WHEREOF, the Parties have executed this Agreement, or caused this Agreement to be executed by their duly authorized representatives, all as of the day and year first above written. PG&E NATIONAL ENERGY GROUP, INC. (Seller) By: /s/ Thomas B. King --------------------------------- Thomas B. King Designated Agent EL PASO FIELD SERVICES COMPANY (Buyer) By: /s/ Robert G. Phillips --------------------------------- Robert G. Phillips President LIST OF SCHEDULES AND EXHIBITS List of Schedules Schedule 1.1(a) - List of Company Subsidiaries Schedule 1.1(c) - List of Seller Personnel Schedule 1.1(d) - List of Buyer Personnel Schedule 2.5(g) - Adjusted Working Capital Schedule 2.7 - Purchase Price Allocation Schedule 4.2 - Acquired Companies Schedule 4.5 - No Conflict Schedule 4.6 - Required Consents and Approvals Schedule 4.7 - Financial Statements Schedule 4.8 - Absence of Material Changes Schedule 4.9 - Taxes Schedule 4.10 - Compliance with Laws Schedule 4.11 - Litigation Schedule 4.12 - Title Defects Schedule 4.13 - Scheduled Contracts Schedule 4.14 - Employee Matters Schedule 4.15 - Environmental Matters Schedule 4.16 - Insurance Schedule 4.17 - Undisclosed Liabilities Schedule 4.18 - Bank Accounts Schedule 4.19 - Brokerage Fees Schedule 5.4 - Consents and Approvals Schedule 6.2(h) - Capital Expenditures Schedule 6.2(l) - Litigation Matters Schedule 7.3(a) - Transferred Employees Schedule 7.3(h) - Stay On Bonus Schedule 7.10 - Excluded Assets Schedule 7.12 - Guarantees Schedule 11.25 - Purchase Price Allocation List of Exhibits Exhibit 3.2(b)(i) - Form of Opinion of Counsel to Seller Exhibit 3.2(b)(ii) - Form of Opinion of Andrews & Kurth L.L.P. Exhibit 3.2(e) - Termination and Assignment Agreement Exhibit 3.3(b) - Form of Opinion of Counsel to Buyer Stock Purchase Agreement Page 58 EXHIBITS TO STOCK PURCHASE AGREEMENT Exhibit 3.2(b) to Stock Purchase Agreement Opinion of Counsel to Seller _______, 2000 El Paso Field Services Company 1001 Louisiana Street Houston, Texas 77002 Ladies and Gentlemen: I am Senior Vice President and General Counsel of PG&E Corporation, the corporate parent of PG&E National Energy Group, Inc. ("Seller"). In such capacity, I, or the attorneys working under my supervision, have acted as counsel for Seller and reviewed (i) the Stock Purchase Agreement, dated as of January 27, 2000 (the "Purchase Agreement"), between Seller and El Paso Field Services Company ("Buyer"), providing for, among other things, the sale to Buyer by Seller of all of the issued and outstanding shares of capital stock of PG&E Gas Transmission, Texas Corporation, a Delaware corporation and PG&E Gas Transmission Teco, Inc., a Delaware corporation (ii) the Transition Services Agreement and the Termination and Assignment Agreement entered into by Seller and Buyer in connection with the transactions contemplated by the Purchase Agreement (the "Related Agreements"), (iii) the PG&E Guaranty, and (iv) the EPE Guaranty, and such certificates of public officials, organizational documents, and other records of the Seller and other certificates and instruments as I, or they, have deemed necessary for the purpose of the opinions herein expressed. This opinion is rendered pursuant to Section 3.3(b)(i) of the Purchase Agreement. Unless otherwise defined in this opinion, terms used herein that are defined in the Purchase Agreement shall have the meanings given to them in the Purchase Agreement. In rendering the opinions expressed below, I have assumed that (i) each of Buyer and PG&E is duly formed, validly existing, and in good standing under the laws of its jurisdiction of existence, (ii) Buyer has full power and authority to execute the Purchase Agreement and the Related Agreements to which Buyer is a Party and to consummate the transactions contemplated thereby, (iii) EPE has full power and authority to execute the EPE Guaranty, (iv) Buyer has taken all necessary action to authorize execution of the Purchase Agreement and the Related Agreements to which Buyer is a Party on its behalf by the person executing the same, (v) EPE has taken all necessary action to authorize execution of the EPE Guaranty, (vi) Buyer has properly executed and delivered the Purchase Agreement and the Related Agreements to which Buyer is a Party, (vii) EPE has properly executed and delivered the EPE Guaranty, and (viii) the Purchase Agreement and the Related Agreements to which Buyer is a Party, and the EPE Guaranty, are each enforceable against Buyer and, in the case of the EPE Guaranty, EPE in accordance with its terms, subject to (A) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, or fraudulent transfer laws, or any other laws or judicial decisions affecting creditors' rights and remedies generally, and (B) the effect of the general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). Page 2 In rendering the opinions expressed below, I have assumed the genuineness of all signatures, the legal capacity, and the authority of all natural persons signing the Purchase Agreement, the Related Agreements and the EPE Guaranty on behalf of the parties thereto (other than the officers of the Seller), the authenticity of all documents submitted to me as certified, conformed, or photostatic copies, the authenticity of the originals of such copies, and the absence of evidence extrinsic to the provisions of the Purchase Agreement, the Related Agreements, the EPE Guaranty, and the PG&E Guaranty. I am a member of the Bar of the State of California, and I do not herein express any opinion as to the law of any state other than the State of California, except for the General Corporation Law of the State of Delaware, and the federal laws of the United States of America. Based on the foregoing and subject to the qualifications set forth below, I am of the opinion that: 1. The Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. PG&E is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 2. The Seller has the corporate power and authority to execute, deliver, and perform its obligations under the Purchase Agreement and the Related Agreements. PG&E has the corporate power and authority to execute, deliver, and perform its obligations under the PG&E Guaranty. 3. The execution and delivery of the Purchase Agreement and the Related Agreements by the Seller and the performance of the Seller's obligations under the Purchase Agreement and the Related Agreements have been duly authorized by all requisite action of the Seller, and the Purchase Agreement and the Related Agreements has been duly executed and delivered by the Seller. 4. The execution and delivery of the PG&E Guaranty by PG&E and the performance of the obligations under the PG&E Guaranty have been duly authorized by all requisite action of PG&E, and the PG&E Guaranty has been duly executed and delivered by PG&E. 5. The execution and delivery by the Seller of the Purchase Agreement and the Related Agreements does not, and the performance by the Seller of its obligations thereunder will not contravene, conflict with or result in any breach of any of the provisions of, or constitute a default under, (i) the certificate of incorporation or by-laws of the Seller; (ii) any law, rule, regulation, or ordinance applicable to the Seller; or (iii) to my actual knowledge (A) any material agreement, contract, or instrument to which the Seller is a party or by which the Seller or any of its properties is bound, or (B) any writ, judgment, injunction, decree, determination, or award of any court or other governmental authority by which the Seller or any of its properties is bound. 6. The execution and delivery by PG&E of the PG&E Guaranty does not, and the performance Page 3 by PG&E of its obligations thereunder will not, contravene, conflict with or result in any breach of any of the provisions of, or constitute a default under, (i) the certificate of incorporation or by-laws of PG&E; (ii) any law, rule, regulation, or ordinance applicable to PG&E; or (iii) to my actual knowledge (A) any material agreement, contract, or instrument to which PG&E is a party or by which PG&E or any of its properties is bound, or (B) any writ, judgment, injunction, decree, determination, or award of any court or other governmental authority by which PG&E or any of its properties is bound. 7. No consent, order, authorization, waiver, approval, or any other action by, or registration, declaration or filing with, any governmental authority is required for the Seller to enter into the Purchase Agreement and the Related Agreements or for the Seller to perform and to be legally bound to perform its obligations thereunder. 8. No consent, order, authorization, waiver, approval, or any other action by, or registration, declaration or filing with, any governmental authority is required for PG&E to enter into the PG&E Guaranty or for PG&E to perform and to be legally bound to perform its obligations thereunder. 9. There is no action, suit, legal or arbitral proceeding or investigation at law or in equity or by or before any court or administrative agency pending or to my actual knowledge threatened against the Seller which may have a material adverse effect on the Seller's ability to perform its obligations under the Purchase Agreement and the Related Agreements. 10.There is no action, suit, legal or arbitral proceeding or investigation at law or in equity or by or before any court or administrative agency pending or to my actual knowledge threatened against PG&E which may have a material adverse effect on the PG&E's ability to perform its obligations under the PG&E Guaranty. As counsel to the Seller, I am furnishing this letter to you at your request and solely for the benefit of the named addressees hereof in connection with the transactions contemplated by the Purchase Agreement, the Related Agreements and the PG&E Guaranty. This letter is not to be quoted or relied upon by any other person or firm, or used for any other purpose, without my express written consent. This opinion is rendered as of the date first set forth above, and I expressly disclaim any obligation to update this opinion from and after the date hereof. Very truly yours, Bruce R. Worthington BRW:gj Page 4 Exhibit 3.2(b)(ii) to Stock Purchase Agreement [ Letterhead of Andrews & Kurth, L.L.P. ] ____________, 2000 El Paso Field Services Company 1001 Louisiana Street Houston, Texas 77002 Ladies and Gentlemen: We have acted as counsel for PG&E National Energy Group Inc., a Delaware corporation ("Seller"), in connection with the preparation, execution and delivery of (i) the Stock Purchase Agreement, dated January 27, 2000 (the "Purchase Agreement"), between the Seller and El Paso Field Services Company, a Delaware corporation ("Buyer"), (ii) the Transition Services Agreement and the Termination and Assignment Agreement entered into by Seller and Buyer in connection with the transactions contemplated by the Purchase Agreement (the "Related Agreements"). This opinion is rendered pursuant to Section 3.3(b)(ii) of the Purchase Agreement. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Purchase Agreement. For purposes of this opinion, we have also examined the following documents and records: 1. The Certificate of Incorporation, as amended, of Seller, certified as of a recent date by the Secretary of State of Delaware to be true and correct; 2. A copy of the Bylaws of Seller, certified as of a recent date by the Secretary of Seller to be true and correct; 3. An executed copy or counterpart of the Purchase Agreement, the Related Agreements, the PG&E Guaranty, and the EPE Guaranty; and 4. Such other documents and agreements as we have deemed necessary for purposes of this opinion. For purposes of this opinion, we have examined such statutes, regulations and such other corporate records and documents and certificates of corporate and public officials as we have deemed necessary for the purposes of this opinion. We have also examined the original, certified, conformed or photostatic copies of such other documents, records, agreements and certificates as we have considered relevant hereto. In all such examinations, we have assumed the authenticity of all documents submitted to us as originals, and the conformity to original documents of all copies submitted to us as certified, conformed or photostatic copies, which facts we have not verified independently. As to certificates of public officials, we have assumed the same to have been properly given and to be accurate. We have relied, as to the matters set forth therein, on certificates and telegrams of public officials and the representations and warranties of Seller and Buyer contained in the Purchase Agreement. As to matters of fact to which this opinion pertains, we have relied upon (i) certificates of certain officers of the Seller, and (ii) the representations and warranties of Seller contained in the Purchase Agreement. We have also assumed that the Purchase Agreement and each of the Related Agreements have been duly authorized, executed and delivered by each party of Seller and Buyer, and constitute the legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their terms subject to (A) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, or fraudulent transfer laws, or any other laws or judicial decisions affecting creditors' rights and remedies generally and (B) the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). Based upon the foregoing, and having due regard for such legal considerations as we have deemed relevant, we are of the opinion that the Purchase Agreement and the Related Agreements constitute legal, valid and binding obligations of the Seller, enforceable against the Seller in accordance with their terms. The foregoing opinion regarding the enforceability of the Purchase Agreement and the Related Agreements is subject to the following qualifications: (a) The enforceability of the Purchase Agreement and the Related Agreements may be limited or adversely affected by (i) bankruptcy, insolvency, reorganization, moratorium, liquidation, rearrangement, fraudulent transfer, fraudulent conveyance and other similar laws (including court decisions) now or hereafter in effect and affecting the rights and remedies of creditors generally or providing for the relief of debtors generally, (ii) the refusal of a particular court to grant equitable remedies, including but without limiting the generality of the foregoing, specific performance and injunctive relief, and (iii) general principles of equity (regardless of whether such remedies are sought in a proceeding in equity or at law). (b) In rendering the foregoing opinions, we express no opinion as to the enforceability of provisions of the Purchase Agreement and the Related Agreements (i) restricting access of Seller or Buyer to courts or to legal or equitable remedies, (ii) purporting to waive or affect rights, claims, defenses or other benefits bestowed by law to the extent that any of the same cannot be waived or so affected, (iii) relating to indemnities to the extent prohibited by public policy or to the extent indemnification is required for losses or expenses caused by gross negligence, willful misconduct, fraud, or illegal action on the part of an indemnified party, or for negligence on the part of an indemnified party unless such indemnification for negligence is expressly and conspicuously provided for in the Purchase Agreement or the Related Agreements, or (iv) purporting to waive or to otherwise affect the rights of third parties. Notwithstanding the limitations set forth above in this paragraph, the Purchase Agreement and the Related Agreements each contain adequate provisions for the practical realization of the principal legal benefits afforded thereby except for the economic consequences resulting from any delay or procedure imposed by applicable law. The foregoing opinion is expressly limited to the laws of the State of Texas, the General Corporation Law of the State of Delaware, and the Federal laws of the United States of America. The opinion expressed herein is solely for the benefit of and may only be relied upon by, the named addressee hereof in connection with the transactions contemplated by the Purchase Agreement and the Related Agreements. This opinion may not be relied upon by any other person without our prior written consent. The opinion expressed herein is limited to the date hereof, and we make no undertaking to amend or supplement such opinion as facts and circumstances come to our attention or changes in law occur which could affect such opinion. Very truly yours, Exhibit 3.2(e) to Stock Purchase Agreement TERMINATION AND ASSIGNMENT AGREEMENT ------------------------------------ THIS TERMINATION AND ASSIGNMENT AGREEMENT (this "Agreement"), dated __________, 2000, is by and among PG&E Corporation, a California corporation ("PG&E"), PG&E National Energy Group, Inc., a Delaware corporation ("Seller"), PG&E Gas Transmission, Texas Corporation, a Delaware corporation ("GTT"), PG&E Gas Transmission Teco, Inc., a Delaware corporation ( "TECO"), and El Paso Field Services Company, a Delaware corporation ("Buyer"). PG&E, Seller, GTT, TECO, and Buyer are sometimes referred to herein individually as a "Party" and collectively as the "Parties." Recitals: A. Under the Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of January ______, 2000, by and between Seller and Buyer, Seller has agreed to sell and transfer all of the Shares of GTT and TECO to Buyer. B. The contracts, agreements, understandings, and arrangements listed or provisions referenced (i) in Part I of Exhibit A (collectively, the "Continuing ----- --------- Contracts") are between or among (a) one or more of the Acquired Companies and (b) one or more unaffiliated Persons, (ii) in Parts II and III of Exhibit A -------- --- --------- (collectively, the "Terminated Contracts") are between or among (a) one or more of the Acquired Companies and (b) Seller or one of its affiliates, excluding the Acquired Companies (individually, a "PG&E Company" and, collectively, the "PG&E Companies") and (iii) in Exhibit B (collectively, the "Assigned Contracts") are --------- between or among one or more of the Acquired Companies and one or more unaffiliated Persons. C. The Continuing Contracts will continue in full force and effect after the Closing, and each of the Acquired Companies that is a party to any of the Continuing Contracts shall remain entitled to all rights and benefits, and shall remain subject to the liabilities and obligations, to which it is entitled thereunder. D. At or prior to the Closing, Buyer and Seller desire (i) to terminate, or cause to be terminated, all of the Terminated Contracts as between the Acquired Companies and each PG&E Company that is a party thereto, and (ii) to cause the Acquired Companies to assign to the PG&E Companies all rights, interests and obligations of the Acquired Companies arising after the Closing under the Assigned Contracts. E. Capitalized terms used herein but not defined in this Agreement have the meanings given to them in the Stock Purchase Agreement. NOW, THEREFORE, in consideration of and subject to the mutual agreements, terms and conditions contained in this Agreement, the parties agree, contingent upon the occurrence of Closing, as follows: 1. List of Swaps and Derivative Contracts. Part I of Exhibit A contains -------------------------------------- ------ --------- a list of all swaps, derivatives, hedges and similar contracts or arrangements to which any of the Acquired Page 5 Companies and one or more unaffiliated Persons are the contracting parties, and Part II of Exhibit A contains a list of all master ISDA or other swap, - ------- --------- derivative, hedge or similar contracts to which any of the Acquired Companies and a PG&E Company are the contracting parties. The contracts listed in Parts I ------- and II of Exhibit A had one or more transactions that remained opened, -- --------- unsettled, or otherwise uncompleted after the Effective Date. 2. Continuing Contracts. The Parties hereby agree that the Continuing -------------------- Contracts shall continue in full force and effect, as between the applicable Acquired Company and the unaffiliated Person(s) that are parties thereto, after the date hereof in accordance with their terms. The Parties further agree that any changes occurring after the Effective Date in the net contract position (or the fair value of such position) of the Acquired Companies under any of the Continuing Contracts shall be for the account of the Acquired Companies. 3. Terminated Contracts. Seller and Buyer hereby acknowledge and agree -------------------- that all of the Terminated Contracts have been, or will be, terminated, as between the applicable Acquired Company, on the one hand, and the applicable PG&E Company, on the other hand. Such Terminated Contracts shall continue in full force and effect, however, insofar as they create or evidence any contract, agreement, understanding, or arrangement between one PG&E Company and another PG&E Company. Such terminations of the Terminated Contracts have been effected prior to, or will be effective at, the Closing. 4. Post Closing Performance. ------------------------ (a) Post Closing Settlement. Seller shall (and shall cause the PG&E ----------------------- Companies to) and Buyer shall (and shall cause the Acquired Companies to) pay any amounts that remain to be paid by such Person under any of the Terminated Contracts for services performed or goods received prior to the Closing Date under such Terminated Contract. (b) True Up for Certain Terminated Contracts; Working Capital Adjustment. -------------------------------------------------------------------- Attached as Exhibit C hereto is a statement setting forth the payments to be --------- made to, and the payments to be made by, the Acquired Companies after the Effective Date in respect of the termination and cancellation of the Terminated Contracts listed in Part II of Exhibit A in accordance with Section 3 hereof. ------- --------- --------- The net sum (the "Settlement Amount"), if positive, of the amounts set forth in Exhibit C constitutes the net total amount to be paid to, and such Settlement - --------- Amount, if negative, constitutes the net total amount to be paid by, the Acquired Companies in respect of such termination and cancellation of the Terminated Contracts listed in Part II of Exhibit A. The Settlement Amount ------- --------- shall be included in Adjusted Working Capital pursuant to clause (w)(v) of the ------------- second sentence of Section 2.5(f) of the Stock Purchase Agreement. -------------- 5. Assigned Contracts. Seller and Buyer hereby agree that effective ------------------ immediately prior to the Closing each Acquired Company that is a party to an Assigned Contract has assigned, and hereby does assign, to the PG&E Companies all of its rights, interests and obligations under such Assigned Contract, which rights, interests and obligations arise or otherwise relate to the period after the Closing. Page 6 6. Joinder by PG&E Companies. To the extent that any PG&E Company or ------------------------- Acquired Company is not or may not be bound by this Agreement, Seller and Buyer agree that, to the extent they lawfully may do so, they shall make reasonable efforts to cause each such PG&E Company or Acquired Company, as the case may be, to ratify this Agreement. 7. Other Provisions. ---------------- (a) Assignment. None of the Parties may assign, in whole or in part, any ---------- of the rights, obligations or benefits arising under this Agreement without the prior written consent of the other Party (which consent may be withheld in the sole discretion of such other Party), except that any Party may assign or delegate its rights, obligations and benefits hereunder to an Affiliate. Subject to the preceding sentence, this Agreement shall be binding upon and inure to the benefit of the Parties hereto and their successors and assigns. (b) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ITS CONFLICT OF LAWS RULES OR PRINCIPLES. (c) Notices. Any notice, request, consent, payment, demand or other ------- communication required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service if served personally on the party or parties to whom notice is given, on the date of confirmation of receipt if sent by facsimile or on the third day after mailing if mailed to the party or parties to whom notice is given by certified mail, return receipt requested, postage prepaid and properly addressed as follows: If to Seller or any of the other PG&E Companies: PG&E National Energy Group, Inc. c/o PG&E Energy Trading 1100 Louisiana, Suite 1000 Houston, Texas 77002 Attention: General Counsel Telecopy Number: 713-371-6797 Telephone Number: 713-371-6777 If to Buyer: El Paso Field Services Company 1001 Louisiana Street Houston, Texas 77002 Attention: Mark Leland Telecopy Number: (713) 420-2087 Telephone Number: (713) 420-4282 Page 7 Either Party may change its address by giving the other Parties hereto written notice of the new address in the manner set forth above. (d) Severability. If any portion of this Agreement shall be found by a ------------ court of competent jurisdiction to be illegal, unenforceable, or invalid, that portion of this Agreement will be null and void and the remainder of this Agreement will be binding on the parties as if the illegal, unenforceable or invalid provisions had never been contained therein. (e) Waiver. No waiver by either Party of any term or any breach of this ------ Agreement shall be construed as a waiver of any other term or breach hereof, or of the same or a similar term or breach on any other occasion. (f) Amendment. No modification or amendment of this Agreement shall be --------- binding upon either party unless in writing and signed by the Parties hereto. (g) Third-Party Beneficiaries. There are no third-party beneficiaries to ------------------------- this Agreement. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the Parties hereto and their successors and assigns any right, remedy, or benefit. (h) Rights and Remedies Cumulative. The rights and remedies of each Party ------------------------------ under this Agreement shall be cumulative and nonexclusive of any other rights or remedies which each such Party may have under any other agreement or instrument, by operation of law, or otherwise. (i) Conflicts. In the event of any conflict between the terms of this --------- Agreement and the Purchase Agreement, the terms of the Purchase Agreement shall control. (j) Entire Agreement. This Agreement and the Stock Purchase Agreement ---------------- constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties hereto regarding the subject matter hereof. (k) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. Page 8 IN WITNESS WHEREOF, the Parties have executed this Agreement effective as of the date and year first above written. PG&E: PG&E CORPORATION By:___________________________ Name:_________________________ Title:________________________ Seller: PG&E NATIONAL ENERGY GROUP, INC. By:___________________________ Name:_________________________ Title:________________________ GTT: PG&E GAS TRANSMISSION, TEXAS CORPORATION By:___________________________ Name:_________________________ Title:________________________ TECO: PG&E GAS TRANSMISSION TECO, INC. By:___________________________ Name:_________________________ Title:________________________ Page 9 BUYER: ______________________________ By:___________________________ Name:_________________________ Title:________________________ Page 10 Exhibit 3.3(e) to Stock Purchase Agreement Exhibit A CONTINUING AND TERMINATED CONTRACTS Part I See Annex I attached hereto Part II 1. ISDA Master Agreement by and between PG&E Energy Trading-Gas Corporation and PG&E Texas Industrial Energy, L.P. dated November 1, 1997. 2. ISDA Master Agreement by and between PG&E Energy Trading-Gas Corporation and PG&E NGL Marketing, L.P. dated November 1, 1997. Part III 1. Master Firm Purchase/Sale Agreement by and between PG&E Energy Trading-Gas Corporation and PG&E Texas Pipeline, L.P. dated August 1, 1999. 2. Amendatory Agreement to Gas Transportation Agreement 5201-839 by and among PG&E Texas Pipeline, L.P., PG&E Reata Energy, L.P. and PG&E Energy Trading- Gas Corporation dated August 1, 1999. 3. Amendatory Agreement to Gas Transportation Agreement 5202-134 by and among PG&E Texas Pipeline, L.P., PG&E Texas Industrial Energy, L.P. and PG&E Energy Trading-Gas Corporation dated August 1, 1999. 4. Amendatory Agreement to Gas Transportation Agreement 5201-904 by and among PG&E Texas Industrial Energy, L.P., PG&E Texas Pipeline, L.P. and PG&E Energy Trading-Gas Corporation dated August 1, 1999. 5. Service Agreement for NGPA Section 311 Storage Service, Storage Contract No. SE99-001 by and between PG&E Texas Pipeline, L.P. and PG&E Energy Trading-Gas Corporation dated August 4, 1999. 6. Service Agreement for Intrastate Storage Service, Storage Contract No. SA99-001 by and between PG&E Texas Pipeline, L.P. and PG&E Energy Trading- Gas Corporation dated July 30, 1999. 7. Service Agreement for Intrastate Storage Service, Storage Contract No. SA00-002 by and between PG&E Texas Pipeline, L.P. and PG&E Energy Trading- Gas Corporation dated July 30, 1999. Exhibits to Stock Purchase Agreement Page 11 Exhibit 3.3(e) to Stock Purchase Agreement 8. The undertaking set forth in Section 6.2(c) of that certain Agreement and -------------- Plan of Merger, dated as of January 31, 1997, between Valero Energy Corporation, PG&E and PG&E Acquisition Corporation. 9. Base Contract for Short-Term Sale and Purchase of Natural Gas by and between PG&E Energy Trading-Gas Corporation and PG&E Texas Pipeline, L.P. dated November 1, 1999. 10. Base Contract for Short-Term Sale and Purchase of Natural Gas by and between PG&E Energy Trading Corporation and PG&E Texas Industrial Energy, L.P. dated November 1, 1997. 11. Technical Services Agreement, dated as of January 1, 1998, between U.S. Generating Company and PG&E Gas Transmission Texas Corporation. 12. Restated Continuing Services Agreement, dated as of October 15, 1999 between Pacific Gas and Electric Company and PG&E Gas Transmission Texas Corporation. Exhibits to Stock Purchase Agreement Page 12 Exhibit 3.3(e) to Stock Purchase Agreement EXHIBIT B ASSIGNED CONTRACTS 1. Lease Agreement #0514422002 by and between PG&E Texas Management Company and Pitney Bowes Credit Corporation, dated July 30, 1998. 2. Lease Agreement 63954-00 by and between PG&E Texas Management Company and Xerox dated November 1998. 3. Lease Agreement #2698133001 by and between PG&E Gas Transmission, Texas Corporation and Pitney Bowes Credit Corporation dated July 31, 1997. 4. Office Space Lease Agreement by and between Capital Guidance Associates IV., L.P., as Landlord and PG&E Gas Transmission, Texas Corporation, as Tenant dated June 10, 1997, as amended. 5. Sublease Agreement by and between PG&E Gas Transmission, Texas Corporation and Trione & Gordon, Inc. dated June 5, 1998. 6. Service Agreement by and between PG&E Gas Transmission, Texas Corporation and Adelman Travel Systems, Inc. d/b/a Adelman Travel Group dated April 26, 1999.
- ------------------------------------------------------------------------------------------------------------------------------------ Assumption: The software listed below will be transferred in whole or in part from PGE GTT to PGE ET. - ------------------------------------------------------------------------------------------------------------------------------------ Est. Lics Product Name Vendor Version Transfer Method Xferred - ------------------------------------------------------------------------------------------------------------------------------------ Hyena Disk Report Tool Adkins Resources Transfer up to 3 licenses to ET 3 - ------------------------------------------------------------------------------------------------------------------------------------ Acrobat-Author Adobe Systems Inc. 4 Transfer all but 2 licenses to ET 4 - ------------------------------------------------------------------------------------------------------------------------------------ TransEnergy ALTRA/TransEnergy Mgt Systems 4.1p Transfer 175 licenses to ET 175 - ------------------------------------------------------------------------------------------------------------------------------------ CAST Workbench Developer toolkit Cast Software 3.6. Transfer all but 15 licenses to ET - ------------------------------------------------------------------------------------------------------------------------------------ CAST Workbench Repository Cast Software 3.6. Transfer all but 1 licenses to ET 5 - ------------------------------------------------------------------------------------------------------------------------------------ PIX Firewall Cisco Systems, Inc. 4.1.3. Transfer all licenses to ET 1 - ------------------------------------------------------------------------------------------------------------------------------------ Impromptu - Unlimited Site License Cognos Corp. 5.00. Transfer 40 licenses to ET 40 - ------------------------------------------------------------------------------------------------------------------------------------ PowerPlay - Unlimited Site License Cognos Corp. 5.00. Transfer 5 licenses to ET 5 - ------------------------------------------------------------------------------------------------------------------------------------ Advanced Helpdesk (AHD) Computer Assoc. Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------ Asset Management (AMO) Computer Assoc. 9902 Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------ Remote Control Computer Assoc. Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------ Software Delivery Computer Assoc. Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------ Workload Computer Assoc. Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------ DTN Data service DTN Transfer all but 8 licenses to ET 57 - ------------------------------------------------------------------------------------------------------------------------------------ D&B Ram Dunn and Bradstreet 4 Transfer all but 5 licenses to ET 1 - ------------------------------------------------------------------------------------------------------------------------------------
Exhibits to Stock Purchase Agreement Page 13 Exhibit 3.3(e) to Stock Purchase Agreement
- --------------------------------------------------------------------------------------------------------------------------------- Assumption: The software listed below will be transferred in whole or in part from PGE GTT to PGE ET. - --------------------------------------------------------------------------------------------------------------------------------- Est. Lics Product Name Vendor Version Transfer Method Xterred - --------------------------------------------------------------------------------------------------------------------------------- DBArtisan-Oracle Embarcadero Technologies, Inc. 4.02 Transfer 2 licenses to ET 2 - --------------------------------------------------------------------------------------------------------------------------------- DBArtisan-Sybase Embarcadero Technologies, Inc. 4.02 Transfer 2 licenses to ET 2 - --------------------------------------------------------------------------------------------------------------------------------- Rapid SQL-Oracle Embarcadero Technologies, Inc. 5.2. Transfer 10 licenses to ET 10 - --------------------------------------------------------------------------------------------------------------------------------- Rapid SQL-Sybase Embarcadero Technologies, Inc. 5.2. Transfer 10 licenses to ET 10 - --------------------------------------------------------------------------------------------------------------------------------- RapidSQL Pro-Oracle Embarcadero Technologies, Inc. 5.2. Transfer 10 licenses to ET 10 - --------------------------------------------------------------------------------------------------------------------------------- RapidSQL Pro-Sybase Embarcadero Technologies, Inc. 5.2. Transfer 10 licenses to ET 10 - --------------------------------------------------------------------------------------------------------------------------------- Symmetrix Manager for Open Systems EMC Corp. 3.03. Split licenses as needed with ET - --------------------------------------------------------------------------------------------------------------------------------- Prophet-X FIMI 1.13. Transfer all but 8 licenses to ET 57 - --------------------------------------------------------------------------------------------------------------------------------- 100 Base T EISA Input/Output Driver Hewlett Packard Corp. B.10.20.01 Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- 100 Base T9000 Lan Driver Hewlett Packard Corp. B.11.00.01 Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- 100 Base T9000 Lan Driver Hewlett Packard Corp. B.10.20.03 Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- 100 Base T9000 Lan Driver Hewlett Packard Corp. B.10.20.02 Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- GlancePlus M/M (All) PN B3693AJ Hewlett Packard Corp. 11.00.26. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- GlancePlus M/M (All) PN B3693AJ Hewlett Packard Corp. 10.20.95. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- GlancePlus M/M (All) PN B3693AJ Hewlett Packard Corp. 10.20.72. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- GlancePlus M/M (All) PN B3693AJ Hewlett Packard Corp. 10.20.140. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- GlancePlus Pak (Workstation) PN Hewlett Packard Corp. 11.00.26. Transfer licenses to ET proportional B3691AA to ET servers - --------------------------------------------------------------------------------------------------------------------------------- HP-UX Hewlett Packard Corp. 11.0. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- HP-UX Hewlett Packard Corp. 10.20. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- HSC FDDI Hewlett Packard Corp. 10.20. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- MC/ServiceGuard (Server) Hewlett Packard Corp. 11.00. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- MC/ServiceGuard (Server) Hewlett Packard Corp. 10.06. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- Measureware software/UX Hewlett Packard Corp. B.10.20.89 Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- Measureware software/UX Hewlett Packard Corp. 11.00.26. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- MirrorDisk/UX (Workstation) Hewlett Packard Corp. 11.00. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- MirrorDisk/UX (Workstation) Hewlett Packard Corp. 10.20. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- ONLINEJFS (Server) Hewlett Packard Corp. B.11.00.01 Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- ONLINEJFS (Server) Hewlett Packard Corp. B.10.20. Transfer licenses to ET proportional to ET servers - --------------------------------------------------------------------------------------------------------------------------------- PerfView Analizer (Server) Hewlett Packard Corp. B.10.20.95 Split licenses as needed with ET - --------------------------------------------------------------------------------------------------------------------------------- AIX-OS (RS-6000 Unix) IBM Corp. 4.1.0. Transfer 2 licenses to ET 2 - ---------------------------------------------------------------------------------------------------------------------------------
Exhibits to Stock Purchase Agreement Page 14 Exhibit 3.3(e) to Stock Purchase Agreement
- ------------------------------------------------------------------------------------------------------------------------------------ Assumption: The software listed below will be transferred in whole or in part from PGE GTT to PGE ET. - ------------------------------------------------------------------------------------------------------------------------------------ Est. Lics Product Name Vendor Version Transfer Method Xferred - ------------------------------------------------------------------------------------------------------------------------------------ WS-FTP IpSwitch 1 Transfer 1 license to ET 1 - ------------------------------------------------------------------------------------------------------------------------------------ Tree Size Pro JAM Transfer up to 3 licenses to ET 3 - ------------------------------------------------------------------------------------------------------------------------------------ NetWorker for Windows NT Legato Systems, Inc. 5.0. Transfer 1 license to ET 1 - ------------------------------------------------------------------------------------------------------------------------------------ Definity G3RV3 Lucent Technologies V.6.2. Transfer 1 license to ET 1 - ------------------------------------------------------------------------------------------------------------------------------------ TERRANOVA ECS Lucent Technologies 5.0. Transfer 2 license to ET 2 - ------------------------------------------------------------------------------------------------------------------------------------ MS-Messenger Microsoft Corp. Split licenses as needed with ET - ------------------------------------------------------------------------------------------------------------------------------------ WinZip File Compressor- 1000 user Nico Mak Computing, Inc. 6.3. Transfer up to 500 licenses to ET 500 pack - ------------------------------------------------------------------------------------------------------------------------------------ Peoplesoft Software Peoplesoft, Inc. 7.00. Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------ QIP QIP V3. Transfer all licenses to ET 1 - ------------------------------------------------------------------------------------------------------------------------------------ Quota Advisor Quinn 1 - ------------------------------------------------------------------------------------------------------------------------------------ Reuters Terminal Reuters America, Inc. 3.63 Transfer all but 3 licenses to ET 35 - ------------------------------------------------------------------------------------------------------------------------------------ RightFax Client RightFax Inc. 6.5 Transfer up to 50 licenses to ET 50 - ------------------------------------------------------------------------------------------------------------------------------------ RightFax Server RightFax Inc. 6.5 Transfer up to 1 license to ET 1 - ------------------------------------------------------------------------------------------------------------------------------------ Crystal Reports Seagate Software 4.5. Transfer licenses to ET proportional to ET PeopleSoft users. - ------------------------------------------------------------------------------------------------------------------------------------ Telnet Seattle Labs Transfer licenses to ET proportional to 47 ET NT servers (47) - ------------------------------------------------------------------------------------------------------------------------------------ Image Expert Sierra Imaging 1.6 Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------ Adaptive Server Enterprise -Client Sybase/Powersoft, Inc. 11.0.3.2. Transfer 175 licenses to ET 175 - ------------------------------------------------------------------------------------------------------------------------------------ Adaptive Server Enterprise -Server Sybase/Powersoft, Inc. 11.0.3.2. Transfer all but 4 licenses to ET 2 - ------------------------------------------------------------------------------------------------------------------------------------ Open Client/C Developers Lib Sybase/Powersoft, Inc. 11.1.1 Transfer all but 4 licenses to ET HP9000/800 - ------------------------------------------------------------------------------------------------------------------------------------ Open Client/C Developers Lib Win 95/98 Sybase/Powersoft, Inc. 11.1.1 Transfer 175 licenses to ET 175 - ------------------------------------------------------------------------------------------------------------------------------------ Open Client/C Developers Lib Win NT Sybase/Powersoft, Inc. 11.1.1 Transfer 175 licenses to ET 175 - ------------------------------------------------------------------------------------------------------------------------------------ Ghost - Unlimited Site License Symantec Corp. Transfer licenses to ET proportional to 500 users. - ------------------------------------------------------------------------------------------------------------------------------------ Norton Antivirus - Unlimited Site Symantec Corp. 5 Transfer licenses to ET proportional to 500 License users. - ------------------------------------------------------------------------------------------------------------------------------------ PC Anywhere Symantec Corp. Transfer all but 4 licenses to ET - ------------------------------------------------------------------------------------------------------------------------------------ Procomm Symantec Corp. Transfer all but 20 licenses to ET - ------------------------------------------------------------------------------------------------------------------------------------ Snagit TechSmith Corp. 32.00. Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------ Visio Professional Visio Corp. 5.0. Transfer licenses to ET proportional to users. - ------------------------------------------------------------------------------------------------------------------------------------
[More detail to come.] Exhibit to Stock Purchase Agreement Page 15 Exhibit 3.3(e) to Stock Purchase Agreement EXHIBIT C SETTLEMENT AMOUNT [To come -- Settlement Amount of Terminated Contracts listed in Part II of ------- Exhibit A.] - --------- Exhibits to Stock Purchase Agreement Page 16 Exhibit 3.3(b) to Stock Purchase Agreement Opinion of Counsel to Buyer PG&E National Energy Group, Inc. c/o PG&E Energy Trading 1100 Louisiana Street Suite No. 1000 Houston, Texas 77002 Gentlemen: We have acted as counsel for El Paso Energy Corporation, a Delaware corporation ("EPE"), and El Paso Field Services Company, a Delaware corporation ("Buyer"), in connection with the negotiation and execution (i) the Stock Purchase Agreement, dated as of January 27, 2000 (the "Purchase Agreement"), between Buyer and PG&E National Energy Group, Inc., a Delaware corporation ("Seller"), providing for, among other things, the purchase by Buyer from Seller of all of the issued and outstanding shares of capital stock of PG&E Gas Transmission, Texas Corporation, a Delaware corporation and PG&E Gas Transmission Teco, Inc., a Delaware corporation, (ii) the Transition Services Agreement and Termination and Assignment Agreement entered into by Buyer in connection with the transactions contemplated by the Purchase Agreement (the "Related Agreements"), (iii) the PG&E Guaranty, and (iv) the EPE Guaranty. Unless otherwise defined in this opinion, terms used herein that are defined in the Purchase Agreement shall have the meanings given to them in the Purchase Agreement. This opinion is being delivered pursuant to Section 3.3(b) of the Purchase Agreement. In connection with the opinions expressed below, we have examined the following: (a) a copy, certified by the Secretary of State of the State of Delaware to be a true copy, of the Certificate of Incorporation of the Buyer; (b) a copy, certified by the Secretary of the Buyer to be a true copy, of the Bylaws of the Buyer; (c) copies of letters, certificates or telegrams received by us from public officials in the State of Delaware as to the due incorporation, valid existence and good standing of the Buyer; (d) copies, certified by the Secretary of the Company to be true copies, of minutes of certain resolutions duly adopted by the Board of Directors of the Buyer on ____________, 2000; Exhibits to Stock Purchase Agreement Page 17 Exhibit 3.3(e) to Stock Purchase Agreement (e) an executed original or counterpart of the Purchase Agreement, the Related Agreements, the PG&E Guaranty, and the EPE Guaranty; (f) such other documents as we have deemed appropriate for purposes of the opinions expressed below. In addition, we have examined all statutes, corporate records, and other instruments that we have deemed necessary to examine for the purpose of this opinion. In rendering the opinions herein set forth, we assumed that (i) Seller is duly formed, validly existing, and in good standing under the laws of its jurisdiction of organization, (ii) Seller has full power and authority to execute the Purchase Agreement and the Related Agreements and to consummate the transactions contemplated thereby, (iii) Seller has taken all necessary action to authorize execution of the Purchase Agreement and the Related Agreements on its behalf by the person executing the same, (iv) Seller has properly executed and delivered the Purchase Agreement and the Related Agreements, and (v) the Purchase Agreement and the Related Agreements are each enforceable against Seller in accordance with their terms subject to (A) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, or fraudulent transfer laws, or any other laws or judicial decisions affecting creditors' rights and remedies generally and (B) the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). Based upon the foregoing and subject to the qualifications set forth below, we are of the opinion that: 1. Each of Buyer and EPE is a corporation duly incorporated and validly existing and in good standing under the laws of its jurisdiction of organization. 2. Buyer has the requisite corporate power and authority to execute and deliver the Purchase Agreement and the Related Agreements and to perform the transactions contemplated thereby. EPE has the requisite corporate power and authority to execute and deliver the EPE Guaranty and to perform the transactions contemplated thereby. 3. The execution, delivery, and performance by Buyer of the Purchase Agreement and the Related Agreements have been duly authorized by all necessary corporate action on the part of Buyer. 4. The execution, delivery, and performance by EPE of the EPE Guaranty has been duly authorized by all necessary corporate action on the part of EPE. 5. The execution and delivery of the Purchase Agreement by Buyer and the Related Agreements does not, and the consummation by Buyer of the transactions contemplated thereby will not, conflict with or result in a Exhibits to Stock Purchase Agreement Page 18 Exhibit 3.3(e) to Stock Purchase Agreement breach of any of the provisions of, or constitute a default under, (i) the Certificate of Incorporation or Bylaws of Buyer, (ii) any law, rule, regulation or ordinance applicable to Buyer or any of its properties or require Buyer to obtain any approval, consent, or waiver of, or to make any filing with, any governmental or regulatory agency or administrative body, in each case that has not been obtained or made, or (iii) any material agreement, contract or instrument to which the Buyer is a party or by which the Buyer or any of its properties is bound or any writ, judgment, injunction, decree, determination, or award of any court or other governmental authority by which the Buyer or any of its properties is bound. 6. The execution and delivery of the EPE Guaranty by EPE does not, and the consummation by EPE of the transactions contemplated thereby will not, conflict with or result in a breach of any of the provisions of, or constitute a default under, (i) the Certificate of Incorporation or Bylaws of EPE, (ii) any law, rule, regulation or ordinance applicable to EPE or any of its properties or require EPE to obtain any approval, consent, or waiver of, or to make any filing with, any governmental or regulatory agency or administrative body, in each case that has not been obtained or made, or (iii) any material agreement, contract or instrument to which EPE is a party or by which EPE or any of its properties is bound or any writ, judgment, injunction, decree, determination, or award of any court or other governmental authority by which the EPE or any of its properties is bound. 7. No consent, order, authorization, waiver, approval, or any other action by, or registration, declaration or filing with, any governmental authority is required for the Buyer to enter into the Purchase Agreement and the Related Agreements, for EPE to enter into the Guaranty Agreement, or for Buyer or EPE, as the case may be, to perform and to be legally bound to perform its obligations thereunder. 8. There is no action, suit, legal or arbitral proceeding or investigation at law or in equity or by or before any court or administrative agency pending or, to our actual knowledge, threatened against the Buyer or EPE which may have a material adverse effect on (i) the Seller's ability to perform its obligations under the Purchase Agreement and the Related Agreements or (ii) EPE's ability to perform its obligations under the EPE Guaranty. 9. The Purchase Agreement and Related Agreements each constitute the legal, valid, and binding obligation of Buyer enforceable against Buyer in accordance with their terms. 10. The EPE Guaranty constitutes the legal, valid, and binding obligation of EPE enforceable against EPE in accordance with their terms. Exhibits to Stock Purchase Agreement Page 19 Exhibit 3.3(e) to Stock Purchase Agreement The foregoing opinions regarding the enforceability of the Purchase Agreement and the Related Agreements are subject to the following qualifications: (a) The enforceability of the Purchase Agreement, the Related Agreements and the EPE Guaranty may be limited or adversely affected by (i) bankruptcy, insolvency, reorganization, moratorium, liquidation, rearrangement, fraudulent transfer, fraudulent conveyance and other similar laws (including court decisions) now or hereafter in effect and affecting the rights and remedies of creditors generally or providing for the relief of debtors generally, (ii) the refusal of a particular court to grant equitable remedies, including but without limiting the generality of the foregoing, specific performance and injunctive relief, and (iii) general principles of equity (regardless of whether such remedies are sought in a proceeding in equity or at law). (b) In rendering the foregoing opinions, we express no opinion as to the enforceability of provisions of the Purchase Agreement, the Related Agreements, and the EPE Guaranty (i) restricting access of Seller or Buyer or, in the case of the EPE Guaranty, EPE to courts or to legal or equitable remedies, (ii) purporting to waive or affect rights, claims, defenses or other benefits bestowed by law to the extent that any of the same cannot be waived or so affected, (iii) relating to indemnities to the extent prohibited by public policy or to the extent indemnification is required for losses or expenses caused by gross negligence, willful misconduct, fraud, or illegal action on the part of an indemnified party, or for negligence on the part of an indemnified party unless such indemnification for negligence is expressly and conspicuously provided for in the Purchase Agreement, the Related Agreements or the EPE Guaranty, or (iv) purporting to waive or to otherwise affect the rights of third parties. Notwithstanding the limitations set forth above in this paragraph, the Purchase Agreement, the Related Agreements and the EPE Guaranty each contain adequate provisions for the practical realization of the principal legal benefits afforded thereby except for the economic consequences resulting from any delay or procedure imposed by applicable law. In rendering the opinions expressed in paragraph 1 above, we have relied exclusively upon certificates obtained from public officials of the jurisdiction in which Buyer is organized. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals, and the conformity to the originals of all documents submitted to me as copies, which facts we have not verified independently. The foregoing opinions are expressly limited to the laws of the State of Texas, the General Corporation Law of the State of Delaware, and the Federal law of the United States. Exhibits to Stock Purchase Agreement Page 20 Exhibit 3.3(e) to Stock Purchase Agreement The opinions expressed herein are solely for the benefit of and may only be relied upon by, the named addressees hereof in connection with the transactions contemplated by the Purchase Agreement, the Related Agreements and the EPE Guaranty. This opinion may not be relied upon by any other person without the prior written consent of the undersigned. The opinions expressed herein are limited to the date hereof, and I make no undertaking to amend or supplement such opinions as facts and circumstances come to my attention or changes in law occur which could affect such opinions. Very truly yours, Exhibits to Stock Purchase Agreement Page 21 EX-10.2 5 PG&E SUPPLEMENTAL RETIREMENT PLAN-1/1/2000 EXHIBIT 10.2 PG&E CORPORATION SUPPLEMENTAL RETIREMENT SAVINGS PLAN This is the controlling and definitive statement of the PG&E CORPORATION ("PG&E CORP") Supplemental Retirement Savings Plan (the "Plan"). Except as provided herein, the Plan is effective as of January 1, 2000, with respect to all individuals who were Eligible Employees as of such date. The Plan takes the place of and assumes existing benefits under the PG&E Corporation Deferred Compensation Plan for Officers, the PG&E Corporation Supplemental Executive Retirement Plan, the Savings Fund Plan Excess Benefit Arrangement of Pacific Gas and Electric Company, and any other non-qualified defined contribution retirement plan excess benefit plans, programs or practices maintained by any Participating Subsidiary of PG&E CORP. The Plan is effective January 1, 2000, for Eligible Employees of Pacific Gas and Electric Company and for Grandfathered Eligible Employees of PG&E CORP; it is effective January 1, 1999, for Eligible Employees of PG&E Generating Company; and it is effective January 1, 1997, for all other Eligible Employees of PG&E CORP. 1. Purpose of the Plan ------------------- The Plan is established and is maintained for the benefit of a select group of management and highly compensated employees of PG&E CORP and its Participating Subsidiaries in order to provide such employees with certain deferred compensation benefits. The Plan is an unfunded deferred compensation plan that is intended to qualify for the exemptions provided in Sections 201, 301, and 401 of ERISA. 2. Definitions ----------- The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context: (a) "Basic Employer Contributions" shall mean the amounts credited to ---------------------------- Eligible Employees' Accounts under the Plan by the Employers, in accordance with Section 3(c). (b) "Board of Directors" shall mean the Board of Directors of PG&E CORP, ------------------ as from time to time constituted. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- Reference to a specific section of the Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing, or superseding such section. (d) "Committee" shall mean the Nominating and Compensation Committee of --------- the Board, as it may be constituted from time to time. (e) "Eligible Employee" shall mean an Employee who: ----------------- (1) Is an officer of PG&E CORP or any Participating Subsidiary and who is in Officer Band 5 or above; or (2) Is a key employee of PG&E CORP or any Participating Subsidiary and who is designated by the Plan Administrator as eligible to participate in the Plan. (f) "Eligible Employee's Account" or "Account" shall mean as to any --------------------------- ------- Eligible Employee, the separate account maintained on the books of the Employer in accordance with Section 6(a) in order to reflect his or her interest under the Plan. Accounts shall be centrally administered by the Plan Administrator or its designee. (g) "Employee" shall mean an individual who is treated in the records of -------- an Employer as an employee of the Employer, who is not on an unpaid leave of absence, and/or who is not covered by a collective bargaining agreement; provided, however, such term shall not mean an individual who is a "leased employee" or who has entered into a written contract or agreement with an Employer which explicitly excludes such individual from participation in an Employer's benefit plans. The provisions of this definition shall govern, whether or not it is determined that an individual otherwise meets the definition of "common law" employee. (h) "Employers" shall mean PG&E CORP and the Participating Subsidiaries --------- designated by the Employee Benefit Committee of PG&E CORP. An initial list of the Participating Subsidiaries is contained in Appendix A to this Plan. (i) "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended. Reference to a specific section of ERISA shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing, or superseding such section. (j) "Grandfathered" shall mean an individual who was an Employee of ------------- Pacific Gas and Electric Company and who has become an Employee of PG&E CORP by reason of a transfer prior to January 1, 2000. (k) "Investment Funds" shall mean (i) the PG&E CORP Phantom Stock Fund, ---------------- (ii) the AA Utility Bond Fund, and (iii) the S&P 500 Index Fund. The Investment Funds shall be used for tracking phantom investment results under the Plan. (l) "Matching Employer Contributions" shall mean the amounts credited to ------------------------------- Eligible Employees' Accounts under the Plan by the Employers, in accordance with Section 3(b). (m) "Participating Subsidiary" shall mean a United States-based subsidiary ------------------------ of PG&E CORP, which has been designated by the Employee Benefit Committee of PG&E CORP as a Participating Subsidiary under this Plan. At such times and under such conditions as the Committee may direct, one or more other subsidiaries of PG&E CORP may become Participating -2- Subsidiaries or a Participating Subsidiary may be withdrawn from the Plan. An initial list of the Participating Subsidiaries is contained in Appendix A to this Plan. (n) "PG&E CORP" shall mean PG&E Corporation, a California corporation. --------- (o) "Plan" shall mean the PG&E Corporation Supplemental Retirement Savings ---- Plan, as set forth in this instrument and as heretofore and hereafter amended from time to time. (p) "Plan Year" shall mean the calendar year. --------- (q) "Retirement" or "Retire" shall mean an Eligible Employee's "separation ---------- ------ from service" within the meaning of Section 401(k) of the Code, provided that the Eligible Employee is at least 55 years of age and has been employed by an Employer for at least five years. (r) "RSP" shall mean, with respect to any Eligible Employee, the PG&E --- Corporation Retirement Savings Plan or any predecessor qualified retirement plan sponsored by PG&E CORP or any of its subsidiary companies. (s) "Valuation Date" shall mean: -------------- (1) For purposes of valuing Plan assets and Eligible Employees' Accounts for periodic reports and statements, the date as of which such reports or statements are made; and (2) For purposes of determining the amount of assets actually distributed to the Eligible Employee, his or her beneficiary, or an Alternate Payee (or available for withdrawal), a date that shall not be more than seven business days prior to the date the check is issued to the Eligible Employee. In any other case, the Valuation Date shall be the date designated by the Plan Administrator (in its discretion) or the date otherwise set forth in this Plan. In all cases, the Plan Administrator (in its discretion) may change the Valuation Date, on a uniform and nondiscriminatory basis, as is necessary or appropriate. Notwithstanding the foregoing, the Valuation Date shall occur at least annually. 3. Employer Contributions ---------------------- (a) Matching Employer Contributions. Subject to the provisions of Section ------------------------------- 13, the Eligible Employee's Account shall be credited for each Plan Year with a Matching Employer Contribution, calculated in the manner provided in Sections 3(a) (1), (2), and (3) below: -3- (1) First, an amount shall be calculated equal to the maximum matching contribution that would be made under the terms of the RSP, taking into account for such Plan Year the amount of pre-tax deferrals and after-tax contributions the Eligible Employee elected under the RSP. For purposes of this calculation, any amounts deferred under Subsection 4(a) of this Plan shall be treated as pre-tax deferrals under the RSP. (2) The calculation made in accordance with this Section 3(a) (1) above shall be made without regard to any limitation on such amounts under the RSP resulting from the application of any of the limitations under Code Sections 401(m), 401(a)(17), or 415. (3) The Employer Matching Contribution to be credited to the Account of an Eligible Employee for any Plan Year shall equal the amount calculated in accordance with Sections 3(a) (1) and (2) above, reduced by the amount of matching contribution made to such Eligible Employee's account for such Plan Year under the RSP. (b) Crediting of Matching Employer Contributions. Matching Employer -------------------------------------------- Contributions shall be calculated and credited to the Eligible Employee's Account as of the first business day of the calendar year following the Plan Year and shall be credited only if the Eligible Employee is an Employee on the last day of Plan Year for which the amounts are credited. (c) Basic Employer Contributions. Subject to the provisions of Section ---------------------------- 13, the Account of each Eligible Employee shall be credited for each Plan Year with a Basic Employer Contribution, calculated in the manner provided in Sections 3(c) (1), (2), and (3) below: (1) First, an amount shall be calculated equal to the Basic Employer Contribution that would be made under the terms of the RSP, taking into account for such Plan Year the Eligible Employee's Covered Compensation under the RSP, before any deductions for compensation deferrals elected by such Eligible Employee under Subsection 4(a) of this Plan. For Eligible Employees as defined by Section 2(e)(1) of this Plan, compensation shall also reflect such Eligible Employee's Short Term Incentive Plan awards. (2) The calculation made in accordance with this Section 3(c)(1) above shall be made without regard to any limitation on such amounts under the RSP resulting from the application of any of the limitations under Code Sections 401(a)(4), 401(a)(17), or 415. (3) The Employer Contribution to be credited to the Account of an Eligible Employee for any Plan Year shall equal the amount calculated in accordance with Sections 3(c)(1) and (2) above, reduced by the amount of Basic Employer Contributions made to such Eligible Employee's account for such Plan Year under the RSP. -4- (d) Crediting of Basic Employer Contributions. The Employer Contribution ----------------------------------------- attributable to an Eligible Employee's Short Term Incentive Plan award shall be credited to an Eligible Employee's Account as of the first business day of the month following the date on which the Short Term Incentive Plan award is paid. All other Employer Contributions made in respect of an Eligible Employee shall be credited to the Eligible Employee's Account as of the first business day of the calendar year following the Plan Year and shall be credited only if the Eligible Employee is an Employee on the last day of the Plan Year for which the amounts are credited. (e) FICA Taxes. All amounts credited to an Eligible Employee's Account ---------- under Section 3 shall be net of FICA taxes withheld on behalf of such Eligible Employee. 4. Eligible Employee Deferrals --------------------------- (a) Amount of Deferral. An Eligible Employee may defer (i) 5 percent to ------------------ 50 percent of his or her annual salary; and (ii) all or part of his or her Short Term Incentive Plan awards, Long Term Incentive Plan awards (other than stock options), Perquisite Allowances, and any other special payments, awards, or bonuses as authorized by the Plan Administrator. (b) Credits to Accounts. Salary deferrals shall be credited to an ------------------- Eligible Employee's Account as of each payroll period. All other deferrals attributable to allowances, awards, bonuses, and other payments shall be credited as of the date that they otherwise would have been paid. (c) Deferral Election. An Eligible Employee must file an election form ----------------- with the Plan Administrator which indicates the percentage of salary and applicable pay periods, and the amount of any awards, allowances, payments, and bonuses to be deferred under the Plan. Notwithstanding the foregoing, upon first becoming an Eligible Employee, an election to defer shall be effective for the month following the filing of a Deferral Election Form, provided said Form is filed within 60 days following the date when the employee first becomes an Eligible Employee. (d) Deferral of Special Incentive Stock Ownership Premiums. All of an ------------------------------------------------------ Eligible Employee's Special Incentive Stock Ownership Premiums are automatically deferred to the Plan immediately upon grant and converted into units in the PG&E CORP Phantom Stock Fund. The units attributable to Special Incentive Stock Ownership Premiums and any additional units resulting from the conversion of dividend equivalents thereon remain unvested until the earlier of the third anniversary of the date on which the Special Incentive Stock Ownership Premiums are credited to an Eligible Employee's account (provided the Eligible Employee continues to be employed on such date), death, disability, or retirement of the participant, or upon a Change in Control as defined in the PG&E Corporation Long-Term Incentive Program (LTIP). (The term "disability" shall, for purposes of the Plan, have the same meaning as in Section 22(e)(3) of the Internal Revenue Code.) Unvested units attributable to Special Incentive Stock Ownership Premiums and any additional units resulting from the conversion of dividend equivalents thereon shall be forfeited upon termination of the Eligible Employee's employment unless otherwise provided in the PG&E Corporation Officer Severance Policy, or if an Eligible Employee's stock ownership falls below the levels set forth in the Executive Stock Ownership Program. -5- 5. Investment Funds ---------------- (a) Although no assets will be segregated or otherwise set aside with respect to an Eligible Employee's Account, the amount that is ultimately payable to the Eligible Employee with respect to such Account shall be determined as if such Account had been invested in some or all of the Investment Funds. The Plan Administrator, in its sole discretion, shall adopt (and modify from time to time) such rules and procedures as it deems necessary or appropriate to implement the deemed investment of the Eligible Employees' Accounts. Such procedures generally shall provide that an Eligible Employee's Account shall be deemed to be invested among the three Investment Funds in the manner elected by the Eligible Employee in such percentages and manner as prescribed by the Plan Administrator. In the event no election has been made by the Eligible Employee, such Account will be deemed to be invested in the AA Utility Bond Fund. Eligible Employees shall be able to reallocate their Accounts between the Investment Funds and reallocate amounts newly credited to their Accounts at such time and in such manner as the Plan Administrator shall prescribe. Anything to the contrary herein notwithstanding, an Eligible Employee may not reallocate Account balances between Investment Funds if such reallocation would result in a non-exempt Discretionary Transaction as defined in Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or any successor to Rule 16b-3, as in effect when the reallocation is requested. (1) AA Utility Bond Fund. On the first business day of each calendar quarter, interest shall be credited on the amounts invested in the AA Utility Bond Fund as of the last business day of the immediately preceding calendar quarter and prorated based on the number of days in the quarter that the balance was allocated to the AAA Utility Bond Fund. Such interest shall be at a rate equal to the AA Utility Bond Yield reported in Moody's Public Utility, ---------------------- published in the issue of Moody's Investors Service immediately ------------------------- preceding the first day of the calendar quarter in which the interest is to be credited. Such interest shall become a part of the Eligible Employee's Account and shall be paid at the same time or times as the balance of the Eligible Employee's Account. Notwithstanding the above, if before the end of the quarter an Eligible Employee has requested that his or her Account balance be reallocated to another Investment Fund(s) or the Eligible Employee's Account balance has been paid to the Eligible Employee or to the Eligible Employee's beneficiary, prorated interest on the Eligible Employee's Account balance shall be calculated at a rate equal to the AA Utility Bond Yield reported in Moody's ------- Public Utility, published in the issue of Moody's Investors -------------- ----------------- Service immediately preceding the date of such reallocation or ------- payment and shall be credited to the Eligible Employee's Account in such other Investment Fund(s) on the date of reallocation or paid directly to the Eligible Employee or the Eligible Employee's beneficiary, whichever is applicable. (2) PG&E CORP Phantom Stock Fund. Amounts credited to the PG&E CORP Phantom Stock Fund shall be converted into units (including fractions computed to three decimal places) each representing a share of PG&E CORP common stock. The value of a unit for purposes of determining the number of units to credit upon initial allocation or upon reallocation from another Investment Fund, and for determining the dollar value of the aggregate number of units to be reallocated from the PG&E CORP Phantom Stock Fund to another Investment Fund and for -6- distributions from the Plan, shall be the average of the daily high and low price of a share of PG&E CORP common stock as traded on the New York Stock Exchange for the 30 trading days preceding the date that (i) amounts are credited to an Eligible Employee's Account in the PG&E CORP Phantom Stock Fund, or (ii) the Plan Administrator receives a reallocation request, in the case of reallocations. Thereafter, the value of a unit shall fluctuate in accordance with the closing price of PG&E CORP common stock on the New York Stock Exchange. Each time that PG&E CORP pays a dividend on its common stock, an amount equal to such dividend payable with respect to each share of PG&E CORP common stock, multiplied by the number of units credited to an Eligible Employee's Account, shall be credited to the Eligible Employee's Account and converted into additional units. The number of additional units shall be calculated by dividing the aggregate amount of credited dividends, i.e. the dividend multiplied by the number of units credited to the Eligible Employee's Account as of the dividend record date, by the closing price of a share of PG&E CORP common stock on the New York Stock Exchange on the dividend payment date. If, after the record date but before the dividend payment date, an Eligible Employee's balance in the PG&E CORP Phantom Stock Fund has been reallocated to another Investment Fund(s) or has been paid to the Eligible Employee or to the Eligible Employee's beneficiary, then an amount equal to the aggregated dividend shall be credited to the Eligible Employee's Account in such other Investment Fund(s) or paid directly to the Eligible Employee or the Eligible Employee's beneficiary, whichever is applicable. (3) S&P 500 Index Fund. Amounts credited to the S&P 500 Index Fund shall be converted into units each representing a LCSF unit held in the RSP on the date of allocation. Thereafter, the value of a unit held in the S&P Index Fund shall be determined in the same manner as the value of a LCSF unit under Section 18 of the RSP. 6. Accounting ---------- (a) Eligible Employees' Accounts. At the direction of the Plan ---------------------------- Administrator, there shall be established and maintained on the books of the Employer, a separate account for each Eligible Employee in order to reflect his or her interest under the Plan. (b) Investment Earnings. Each Eligible Employee's Account shall initially ------------------- reflect the value of his or her Account's interest in each of the Investment Funds, deemed acquired with the amounts credited thereto. Each Eligible Employee's Account shall also be credited (or debited) as of the end of each day with the net appreciation (or depreciation), earnings and gains (or losses) with respect to the investments deemed made by his or her Account. Any such net earnings or gains deemed realized with respect to any investment of any Eligible Employee's Account shall be deemed reinvested in additional amounts of the same investment and credited to the Eligible Employee's Account. -7- (c) Accounting Methods. The accounting methods or formulae to be used ------------------ under the Plan for the purpose of maintaining the Eligible Employees' Accounts shall be determined by the Plan Administrator. The accounting methods or formulae selected by the Plan Administrator may be revised from time to time but shall conform to the extent practicable with the accounting methods used under the Applicable Plan. (d) Valuations and Reports. The fair market value of each Eligible ---------------------- Employee's Account shall be determined as of each Valuation Date. In making such determinations and in crediting net deemed earnings and gains (or losses) in the Investment Funds to the Eligible Employees' Accounts, the Plan Administrator (in its discretion) may employ such accounting methods as the Plan Administrator (in its discretion) may deem appropriate in order to fairly reflect the fair market values of the Investment Funds and each Eligible Employee's Account. For this purpose, the Plan Administrator may rely upon information provided by the Plan Administrator or other persons believed by the Plan Administrator to be competent. (e) Statements of Eligible Employee's Accounts. Each Eligible Employee ------------------------------------------ shall be furnished with periodic statements of his or her interest in the Plan, at least annually. 7. Distributions ------------- (a) Distribution of Account Balances. Unless the Eligible Employee has -------------------------------- elected otherwise under this Section 7, distribution of the balance credited to an Eligible Employee's Account shall be made in a single sum in the January of the year following Retirement or termination of service: (1) In the case of an Alternate Payee (as defined in Section 9(a)), distribution shall be made as directed in a domestic relations order which the Plan Administrator determines is a QDRO (as defined in Section 9(a)), but only as to the portion of the Eligible Employee's Account which the QDRO states is payable to the Alternate Payee. (2) Any provisions of the Plan notwithstanding distribution of account balances must commence no later than in the January following the year which the Eligible Employee reaches age 72. (b) Installment Distributions. In lieu of a single sum payment, an ------------------------- Eligible Employee may elect in writing and file with the Plan Administrator an election that payment of amounts credited to the Eligible Employee's Account be made in a specified number of approximately equal annual installments (not in excess of 10). (c) Early Distributions. By filing an election with the Plan ------------------- Administrator, an Eligible Employee may elect to commence distribution at any time other than Retirement or termination or may alter a previously filed election, provided that: -8- (1) such election or alteration is made at least one year prior to the earliest date that (i) Retirement or termination of the Eligible Employee, or (ii) the date selected for distribution to begin under a previously filed election; and (2) such election or alteration does not provide for the receipt of such amounts earlier than one year from the date of the election or alteration. (d) Death Distributions. If an Eligible Employee dies before the entire ------------------- balance of his or her Account has been distributed (whether or not the Eligible Employee had previously terminated employment and whether or not installment payments had previously commenced), the remaining balance of the Eligible Employee's Account shall be distributed to the beneficiary designated or otherwise determined in accordance with Section 7(g), as soon as practicable after the date of death. (e) Special Incentive Stock Ownership Premiums. Distributions ------------------------------------------ attributable to Special Incentive Stock Ownership Premiums shall only be made in January following the year in which an Eligible Employee terminates employment, Retires, or dies, and shall only be made in the form of one or more certificates for the number of vested Special Incentive Stock Ownership Premium units, rounded down to the nearest whole share. (f) Effect of Change in Eligible Employee Status. If an Eligible Employee -------------------------------------------- ceases to be an Eligible Employee, the balance credited to his or her Account shall continue to be credited (or debited) with appreciation, depreciation, earnings, gains or losses under the terms of the Plan and shall be distributed to him or her at the time and in the manner set forth in this Section 7; provided, however, that if an Eligible Employee terminates employment with an Employer other than by reason of Retirement, the entire balance credited to his or her Account shall be distributed in a lump sum cash payment in January of the year following the year of termination of employment. Anything to the contrary notwithstanding, the Plan Administrator, in its sole discretion, may authorize an accelerated distribution of the balance credited to his or her Account in the form of a lump sum cash payment as of any earlier date. (g) Payments to Incompetents. If any individual to whom a benefit is ------------------------ payable under the Plan is a minor or if the Plan Administrator determines that any individual to whom a benefit is payable under the Plan is incompetent to receive such payment or to give a valid release therefor, payment shall be made to the guardian, committee, or other representative of the estate of such individual which has been duly appointed by a court of competent jurisdiction. If no guardian, committee, or other representative has been appointed, payment may be made to any person as custodian for such individual under the California Uniform Transfers to Minors Act (or similar law of another state) or may be made to or applied to or for the benefit of the minor or incompetent, the incompetent's spouse, children or other dependents, the institution or persons maintaining the minor or incompetent, or any of them, in such proportions as the Plan Administrator from time to time shall determine; and the release of the person or institution receiving the payment shall be a valid and complete discharge of any liability of PG&E CORP with respect to any benefit so paid. -9- (h) Beneficiary Designations. Each Eligible Employee may designate, in a ------------------------ signed writing delivered to the Plan Administrator, on such form as it may prescribe, one or more beneficiaries to receive any distribution which may become payable under the Plan as the result of the Eligible Employee's death. An Eligible Employee may designate different beneficiaries at any time by delivering a new designation in like manner. Any designation shall become effective only upon its receipt by the Plan Administrator, and the last effective designation received by the Plan Administrator shall supersede all prior designations. If an Eligible Employee dies without having designated a beneficiary or if no beneficiary survives the Eligible Employee, the Eligible Employee's Account shall be payable to the beneficiary or beneficiaries designated or otherwise determined under the RSP. (i) Undistributable Accounts. Each Eligible Employee and (in the event of ------------------------ death) his or her beneficiary shall keep the Plan Administrator advised of his or her current address. If the Plan Administrator is unable to locate the Eligible Employee or beneficiary to whom an Eligible Employee's Account is payable under this Section 7, the Eligible Employee's Account shall be frozen as of the date on which distribution would have been completed in accordance with this Section 7, and no further appreciation, depreciation, earnings, gains or losses shall be credited (or debited) thereto. PG&E CORP shall have the right to assign or transfer the liability for payment of any undistributable Account to the Eligible Employee's former Employer (or any successor thereto). (j) Plan Administrator Discretion. Within the specific time periods ----------------------------- described in this Section 7, the Plan Administrator shall have sole discretion to determine the specific timing of the payment of any Account balance under the Plan. 8. Distribution Due to Unforeseeable Emergency ------------------------------------------- A participant may request a distribution due to an unforseeable emergency by submitting a written request to the Plan Administrator. The Plan Administrator shall have the authority to require such evidence as it deems necessary to determine if a distribution is warranted. If an application for a hardship distribution due to an unforeseeable emergency is approved, the distribution shall be payable in a method determined by the Plan Administrator as soon as possible after approval of such distribution. A participant who has commenced receiving installment payments under the Plan may request acceleration of such payments in the event of an unforeseeable emergency. The Administrator may permit accelerated payments to the extent such accelerated payment does not exceed the amount necessary to meet the emergency. 9. Domestic Relations Orders ------------------------- (a) Qualified Domestic Relations Orders. The Plan Administrator shall ----------------------------------- establish written procedures for determining whether a domestic relations order purporting to dispose of any portion of an Eligible Employee's Account is a qualified domestic relations order (within the meaning of Section 414(p) of the Code) (a "QDRO"). ---- -10- (1) No Payment Unless a QDRO. No payment shall be made to any person designated in a domestic relations order (an "Alternate Payee") --------------- until the Plan Administrator (or a court of competent jurisdiction reversing an initial adverse determination by the Plan Administrator) determines that the order is a QDRO. Payment shall be made to each Alternate Payee as specified in the QDRO. (2) Time of Payment. Payment may be made to an Alternate Payee in the form of a lump sum, at the time specified in the QDRO, but no earlier than as soon as practicable following the date the QDRO determination is made. (3) Hold Procedures. Notwithstanding any contrary Plan provision, prior to the receipt of a domestic relations order, the Plan Administrator may, in its sole discretion, place a hold upon all or a portion of an Eligible Employee's Account for a reasonable period of time (as determined by the Plan Administrator) if the Plan Administrator receives notice that (a) a domestic relations order is being sought by the Eligible Employee, his or her spouse, former spouse, child or other dependent, and (b) the Eligible Employee's Account is a source of the payment under such domestic relations order. For purposes of this Section 9(a)(3), a "hold" means that no withdrawals, distributions, or investment ---- transfers may be made with respect to an Eligible Employee's Account. If the Plan Administrator places a hold upon an Eligible Employee's Account pursuant to this Section 9(a)(3), it shall inform the Eligible Employee of such fact. 10. Vesting ------- Except as provided in Section 4(d), an Eligible Employee's interest in his or her Account at all times shall be 100 percent vested and nonforfeitable. 11. Administration of the Plan -------------------------- (a) Plan Administrator. The Employee Benefit Committee of PG&E CORP is ------------------ hereby designated as the administrator of the Plan (within the meaning of Section 3(16)(A) of ERISA). The Plan Administrator delegates to the Senior Human Resource Officer for PG&E CORP, or his or her designee, the authority to carry out all duties and responsibilities of the Plan Administrator under the Plan. The Plan Administrator shall have the authority to control and manage the operation and administration of the Plan. (b) Powers of Plan Administrator. The Plan Administrator shall have all ---------------------------- discretion and powers necessary to supervise the administration of the Plan and to control its operation in accordance with its terms, including, but not by way of limitation, the power to interpret the provisions of the Plan and to determine, in its sole discretion, any question arising under, or in connection with the administration or operation of, the Plan. -11- (c) Decisions of Plan Administrator. All decisions of the Plan ------------------------------- Administrator and any action taken by it in respect of the Plan and within the powers granted to it under the Plan shall be conclusive and binding on all persons and shall be given the maximum deference permitted by law. 12. Funding ------- All amounts credited to an Eligible Employee's Account under the Plan shall continue for all purposes to be a part of the general assets of PG&E CORP. The interest of the Eligible Employee in his or her Account, including his or her right to distribution thereof, shall be an unsecured claim against the general assets of PG&E CORP. While PG&E CORP may choose to invest a portion of its general assets in investments identical or similar to those selected by Eligible Employees for purposes of determining the amounts to be credited (or debited) to their Accounts, nothing contained in the Plan shall give any Eligible Employee or beneficiary any interest in or claim against any specific assets of PG&E CORP. 13. Modification or Termination of Plan ----------------------------------- (a) Employers' Obligations Limited. The Plan is voluntary on the part of ------------------------------ the Employers, and the Employers do not guarantee to continue the Plan. PG&E CORP at any time may, by appropriate amendment of the Plan, suspend Matching Employer Contributions and/or Basic Employer Contributions or may discontinue Matching Employer Contributions and/or Basic Employer Contributions, with or without cause. (b) Right to Amend or Terminate. The Board of Directors, acting through --------------------------- its Nominating and Compensation Committee, reserves the right to alter, amend, or terminate the Plan, or any part thereof, in such manner as it may determine, for any reason whatsoever. (1) Limitations. Any alteration, amendment, or termination shall take effect upon the date indicated in the document embodying such alteration, amendment, or termination, provided that no such alteration or amendment shall divest any portion of an Account that is then vested under the Plan. (c) Effect of Termination. If the Plan is terminated, the balances --------------------- credited to the Accounts of the Eligible Employees affected by such termination shall be distributed to them at the time and in the manner set forth in Section 7; provided, however, that the Plan Administrator, in its sole discretion, may authorize accelerated distribution of Eligible Employees' Accounts as of any earlier date. 14. General Provisions ------------------ (a) Inalienability. Except to the extent otherwise directed by a domestic -------------- relations order which the Plan Administrator determines is a QDRO (as defined in Section 9(a) or mandated by applicable law, in no event may either an Eligible Employee, a former Eligible Employee or his or her spouse, beneficiary or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose of any right or interest under the Plan; and such rights and interests shall not at any time be subject to the claims of creditors nor be liable to attachment, execution, or other legal process. -12- (b) Rights and Duties. Neither the Employers nor the Plan Administrator ----------------- shall be subject to any liability or duty under the Plan except as expressly provided in the Plan, or for any action taken, omitted, or suffered in good faith. (c) No Enlargement of Employment Rights. Neither the establishment or ----------------------------------- maintenance of the Plan, the making of any Matching Employer Contributions, nor any action of any Employer or Plan Administrator, shall be held or construed to confer upon any individual any right to be continued as an Employee nor, upon dismissal, any right or interest in any specific assets of the Employers other than as provided in the Plan. Each Employer expressly reserves the right to discharge any Employee at any time, with or without cause or advance notice. (d) Apportionment of Costs and Duties. All acts required of the Employers --------------------------------- under the Plan may be performed by PG&E CORP for itself and its Participating Subsidiaries, and the costs of the Plan may be equitably apportioned by the Plan Administrator among PG&E CORP and the other Employers. Whenever an Employer is permitted or required under the terms of the Plan to do or perform any act, matter or thing, it shall be done and performed by any officer or employee of the Employer who is thereunto duly authorized by the board of directors of the Employer. (e) Applicable Law. The provisions of the Plan shall be construed, -------------- administered, and enforced in accordance with the laws of the State of California and, to the extent applicable, ERISA. (f) Severability. If any provision of the Plan is held invalid or ------------ unenforceable, its invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provision had not been included. (g) Captions. The captions contained in and the table of contents -------- prefixed to the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge, or describe the scope or intent of the Plan nor in any way shall affect the construction of any provision of the Plan. Execution --------- IN WITNESS WHEREOF, PG&E CORP, by its duly authorized officer, has executed this Plan on the date indicated below. PG&E CORPORATION Dated: _______________ By: ________________________________________ Title: _____________________________________ -13- APPENDIX A PARTICIPATING SUBSIDIARIES Participating Subsidiaries as of January 1, 1997 ------------------------------------------------ - PG&E Gas Transmission Corporation - PG&E Gas Transmission, Texas Corporation - PG&E Gas Transmission TECO, Inc. - PG&E Energy Trading-Gas Corporation - PG&E Energy Services Corporation - And the U.S. subsidiaries of each of the above-named corporations. Additional Participating Subsidiaries as of January 1, 1998 ----------------------------------------------------------- - PG&E Corporation - Pacific Gas and Electric Company - PG&E Generating Company - PG&E Corporation Support Services, Inc. - And the U.S. subsidiaries of each of the above-named corporations. -14- EX-10.7 6 PG&E SHORT-TERM INCENTIVE PLAN-1/1/2000 EXHIBIT 10.7 CONFIDENTIAL -------------------------------------------- 2000 OFFICER SHORT-TERM INCENTIVE PLAN FINANCIAL PERFORMANCE MEASURE -------------------------------------------- NOMINATING AND COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS MARCH 2, 2000 [LOGO of PG&E Corporation] 2000 OFFICER STIP FINANCIAL PERFORMANCE MEASURE - -------------------------------------------------------------------------------- BACKGROUND SHORT-TERM INCENTIVE PLAN STRUCTURE - ----------------------------------- - - At its meeting on September 15, 1999, the Nominating and Compensation Committee reviewed and approved the 2000 Short-Term Incentive Plan (STIP) structure for officers of the Corporation and each subsidiary. The structure established the weighting of corporate earnings per share (EPS), subsidiary EPS, and other performance factors for officers. The structure requires and implementing methodology to link the EPS performance levels to threshold, minimum, and maximum incentive payout levels, which is contained in this document. 2000 0FFICER STIP FINANCIAL PERFORMANCE MEASURE - -------------------------------------------------------------------------------- 2000 SHORT-TERM INCENTIVE PLAN STRUCTURE
OFFICER GROUP AWARD COMPONENT WEIGHT PERFORMANCE MEASURE ------------- --------------- ------ ------------------- PGE&E Corporation Corporate Financial Performance 100% Corporate EPS from operations President & CEO, PG&E Corporate Financial Performance 25% Corporate EPS from operations National Energy Group Subsidiary Performance 75% Average STIP rating of respective President & CEO, subsidiary(ies) Pacific Gas and Electric Company - ------------------------------------------------------------------------------------------------------------------------------------ Pacific Gas and Electric Subsidiary Financial Performance 75% Subsidiary contribution to corporate EPS Company from operations Subsidiary Operational 25% Financial, operating, and service Performance measures determined by subsidiary CEO - ------------------------------------------------------------------------------------------------------------------------------------ PG&E Gas Transmission PG&E National Energy Group 50 - 100% National Energy Group contribution to PG&E Energy Trading Financial Performance corporate EPS from operations PG&E Energy Service PG&E Generating Corporate Financial Performance 0 - 25% Corporate EPS from operations Subsidiary Operational/Financial 0 - 50% Financial, operating, and service Performance measures determined by President & CEO, PG&E National Energy Group
1 EX-10.12 7 PG&E LONG-TERM INCENTIVE PROGRAM-2/16/2000 EXHIBIT 10.12 PG&E CORPORATION LONG-TERM INCENTIVE PROGRAM (As amended effective as of February 16, 2000) 1. Purpose of the Program ---------------------- This is the controlling and definitive statement of the PG&E Corporation Long-Term Incentive Program, as amended and restated herein (hereinafter called the PROGRAM/1/). The purpose of the PROGRAM is to advance the interests of the CORPORATION by providing ELIGIBLE PARTICIPANTS with financial incentives to promote the success of its long-term (five to ten years) business objectives, and to increase their proprietary interest in the success of the CORPORATION. It is the intent of the CORPORATION to reward those ELIGIBLE PARTICIPANTS who have a significant impact on improved long-term corporate achievements. Inasmuch as the PROGRAM is designed to encourage financial performance and to improve the value of shareholders' investment in PG&E CORPORATION, the costs of the PROGRAM will be funded from corporate earnings. 2. Program Administration ---------------------- The PROGRAM shall be administered by the COMMITTEE, except that the BOARD OF DIRECTORS shall administer the PROGRAM with respect to grants of INCENTIVE AWARDS TO NON-EMPLOYEE DIRECTORS. The BOARD OF DIRECTORS may at any time revest authority to administer the PROGRAM in all respects in the BOARD OF DIRECTORS. Subject to the provisions of the PROGRAM, the COMMITTEE or the BOARD OF DIRECTORS, as the case may be, shall have full and final authority, in its sole discretion: (a) to determine the ELIGIBLE PARTICIPANTS to whom INCENTIVE AWARDS shall be granted and the number of shares of COMMON STOCK to be awarded under each INCENTIVE AWARD, based on the recommendation of the CHIEF EXECUTIVE OFFICER (except that awards to the CHIEF EXECUTIVE OFFICER shall be based on the recommendation of the BOARD OF DIRECTORS and awards to NON-EMPLOYEE DIRECTORS shall be based on the recommendation of the COMMITTEE); (b) to determine the time or times at which INCENTIVE AWARDS shall be granted; (c) to designate the types of INCENTIVE AWARD being granted; _______________ /1/ Capitalized words are defined in Section 20 hereof. (d) to vary the OPTION vesting schedule described in the STOCK OPTION PLAN; (e) to determine the terms and conditions, not inconsistent with the terms of the PROGRAM, of any INCENTIVE AWARD granted hereunder (including, but not limited to, the consideration and method of payment for shares purchased upon the exercise of an INCENTIVE AWARD, and any vesting acceleration or exercisability provisions in the event of a CHANGE IN CONTROL or TERMINATION), based in each case on such factors as the COMMITTEE or BOARD OF DIRECTORS shall deem appropriate; (f) to approve forms of agreement for use under the PROGRAM; (g) to construe and interpret the PROGRAM and any related INCENTIVE AWARD agreement and to define the terms employed herein and therein; (h) except as provided in Section 18 hereof, to modify or amend any INCENTIVE AWARD or to waive any restrictions or conditions applicable to any INCENTIVE AWARD or the exercise or realization thereof; (i) except as provided in Section 18 hereof, to prescribe, amend and rescind rules, regulations and policies relating to the administration of the PROGRAM; (j) except as provided in Section 18 hereof, to suspend, terminate, modify or amend the PROGRAM; (k) to delegate to one or more agents such administrative duties as the COMMITTEE or BOARD OF DIRECTORS may deem advisable, to the extent permitted by applicable law; and (l) to make all other determinations and take such other action with respect to the PROGRAM and any INCENTIVE AWARD granted hereunder as the COMMITTEE may deem advisable, to the extent permitted by applicable law. Notwithstanding the provisions contained in the foregoing paragraph, the CHIEF EXECUTIVE OFFICER shall have the authority, in his sole discretion: (a) to grant INCENTIVE AWARDS to any ELIGIBLE PARTICIPANT who, at the time of the INCENTIVE AWARD grant, (i) is not an officer of the CORPORATION or a DIRECTOR, and (ii) if such ELIGIBLE PARTICIPANT is an EMPLOYEE, is receiving an annual salary which is below the level which requires approval by the COMMITTEE; (b) to determine the time or times at which INCENTIVE AWARDS shall be granted to such ELIGIBLE PARTICIPANTS; (c) to designate the types of INCENTIVE AWARD being granted to such ELIGIBLE 2 PARTICIPANTS; and (d) to vary the OPTION vesting schedule described in the STOCK OPTION PLAN for the OPTIONS granted to such ELIGIBLE PARTICIPANTS; provided, however, that all grants of INCENTIVE AWARDS by the CHIEF EXECUTIVE OFFICER shall conform to the guidelines previously approved by the COMMITTEE. 3. Shares of Stock Subject to the Program -------------------------------------- There shall be reserved for use under the PROGRAM (subject to the provisions of Section 13 hereof) a total of 34,389,230 shares of COMMON STOCK, which shares may be authorized but unissued shares of COMMON STOCK or issued shares of COMMON STOCK which shall have been reacquired by PG&E CORPORATION. Such shares consist of (i) 13,000,000 shares of COMMON STOCK originally reserved for use under the PROGRAM at the time it first became effective on January 1, 1992, (ii) 389,230 shares of COMMON STOCK remaining under the 1986 OPTION PLAN and carried over to the PROGRAM, (iii) 10,000,000 shares of COMMON STOCK added to the PROGRAM effective as of January 1, 1996, and (iv) 11,000,000 shares of COMMON STOCK added to the PROGRAM effective as of April 21, 1999. If (i) any INCENTIVE AWARD expires or terminates for any reason without having been exercised or purchased in full, (ii) an INCENTIVE AWARD is surrendered in exchange for one or more other INCENTIVE AWARDS, or (iii) any RESTRICTED STOCK is forfeited, then, in each such case, any unexercised, unpurchased, surrendered or forfeited shares which were subject to such INCENTIVE AWARD (except shares as to which a related TANDEM SAR has been exercised) shall again be available for the future grant of INCENTIVE AWARDS under the PROGRAM (unless the PROGRAM has terminated). In addition, shares may be reused or added back to the PROGRAM to the extent permitted by applicable law. 4. Eligibility ----------- INCENTIVE AWARDS will be granted only to ELIGIBLE PARTICIPANTS. ISOS will be granted only to EMPLOYEES. The COMMITTEE, in its sole discretion, may grant INCENTIVE AWARDS to an ELIGIBLE PARTICIPANT who is a resident or citizen of a foreign country, with such modifications as the COMMITTEE may deem advisable to reflect the laws, tax policy or customs of such foreign country. The PROGRAM shall not confer upon any RECIPIENT any right to continuation of employment, service as a DIRECTOR or consulting relationship with the CORPORATION; nor shall it interfere in any way with the right of the RECIPIENT or the CORPORATION to terminate such employment, service as a DIRECTOR or consulting relationship at any time, with or without cause. 3 5. Designation of Incentive Awards ------------------------------- At the time of the grant of each INCENTIVE AWARD under the Program, the COMMITTEE (or the CHIEF EXECUTIVE OFFICER, in the case of INCENTIVE AWARDS granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof, or the BOARD OF DIRECTORS, in the case of INCENTIVE AWARDS granted by the BOARD OF DIRECTORS to NON-EMPLOYEE DIRECTORS) shall determine whether such INCENTIVE AWARD is to be designated as an ISO, NON-QUALIFIED STOCK OPTION, SAR, DIVIDEND EQUIVALENT, PERFORMANCE UNIT, stock grant, RESTRICTED STOCK, LSAR, PHANTOM STOCK or other STOCK-BASED AWARD; provided, however, that ISOS may be granted only to EMPLOYEES. Notwithstanding such designation, to the extent that the aggregate FAIR MARKET VALUE (determined for each share as of the date of grant of the OPTION covering each share) of the shares with respect to which OPTIONS designated as ISOS become exercisable for the first time by any RECIPIENT during any calendar year exceeds $100,000, such OPTIONS shall be treated as NON-QUALIFIED STOCK OPTIONS. Any INCENTIVE AWARD may be granted alone, contingent upon, in addition to or in TANDEM with one or more other INCENTIVE AWARDS granted under the PROGRAM. In addition, except as provided in Section 12 hereof, any INCENTIVE AWARD may be granted in exchange for one or more other INCENTIVE AWARDS. 6. Stock Options, Tandem Stock Appreciation Rights and Tandem Dividend ------------------------------------------------------------------- Equivalents ----------- Except as provided in Section 9 below (relating to grants of INCENTIVE AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion, may grant ISOS, NON-QUALIFIED STOCK OPTIONS, TANDEM SARS and TANDEM DIVIDEND EQUIVALENTS to ELIGIBLE PARTICIPANTS, subject to the terms and conditions set forth in the STOCK OPTION PLAN attached hereto as Exhibit A. 7. Performance Units ----------------- Except as provided in Section 9 below (relating to grants of INCENTIVE AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion, may grant PERFORMANCE UNITS to ELIGIBLE PARTICIPANTS, subject to the terms and conditions set forth in the PERFORMANCE UNIT PLAN attached hereto as Exhibit B. 8. Other Incentive Awards ---------------------- 4 Except as provided in Section 9 below (relating to grants of INCENTIVE AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion, may grant other INCENTIVE AWARDS (including, but not limited to, SARS granted without OPTIONS, DIVIDEND EQUIVALENTS granted without OPTIONS, stock grants, RESTRICTED STOCK, LSARS, PHANTOM STOCK or other STOCK-BASED AWARDS) to ELIGIBLE PARTICIPANTS, subject to such terms and conditions as the COMMITTEE shall deem appropriate. 9. Grants of Incentive Awards to Non-Employee Directors ---------------------------------------------------- NON-EMPLOYEE DIRECTORS will only be eligible to be granted DIRECTOR RESTRICTED STOCK, PHANTOM STOCK and NON-QUALIFIED STOCK OPTIONS in accordance with, and subject to the terms and conditions contained in, the NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN RULES attached hereto as Exhibit C. 10. Termination of Employment or Relationship with the CORPORATION -------------------------------------------------------------- The COMMITTEE may, in its sole discretion, establish terms and conditions pertaining to the effect of TERMINATION on INCENTIVE AWARDS granted to a RECIPIENT prior to TERMINATION, to the extent permitted by applicable law. 11. Tax Withholding --------------- When a RECIPIENT incurs tax liability in connection with the exercise of an INCENTIVE AWARD or the receipt of shares of COMMON STOCK pursuant to an INCENTIVE AWARD, which tax liability is subject to tax withholding under applicable tax laws, and the RECIPIENT is obligated to pay the CORPORATION an amount required to be withheld under applicable tax laws, the RECIPIENT may satisfy the withholding tax obligation by (i) electing to have the CORPORATION withhold such amount from his or her current compensation through payroll deductions, or (ii) making a direct payment to the CORPORATION in cash or by check. The COMMITTEE may, in its sole discretion, permit a RECIPIENT to satisfy all or part of his or her withholding tax obligations by having the CORPORATION withhold from the shares to be issued to the RECIPIENT that number of shares having a FAIR MARKET VALUE equal to the amount required to be withheld determined on the date when taxes otherwise would be withheld in cash. The payment of withholding taxes in this manner, if permitted by the COMMITTEE, shall be subject to such restrictions as the COMMITTEE may impose, including any restrictions required by rules of the Securities and Exchange Commission. 5 12. Replacement of Grants --------------------- The COMMITTEE may, in its sole discretion, offer a RECIPIENT (other than NON-EMPLOYEE DIRECTORS) the option of surrendering an unexercised OPTION or other INCENTIVE AWARD in exchange for another INCENTIVE AWARD of the same type or for a different type of INCENTIVE AWARD; provided, however, that no OPTION or INCENTIVE AWARD may be exchanged for a new OPTION or INCENTIVE AWARD having an OPTION PRICE or purchase price that is lower than the OPTION PRICE or purchase price of the original OPTION or INCENTIVE AWARD. 13. Deferral of Payments -------------------- The COMMITTEE may, in its sole discretion, approve a RECIPIENT'S deferral of any cash payments which may become due under the PROGRAM. Such deferrals shall be subject to any conditions, restrictions or requirements as the COMMITTEE may determine. 14. Adjustments Upon Changes in Number or Value of Shares of Common Stock --------------------------------------------------------------------- If there are any changes in the number or value of shares of COMMON STOCK by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers, consolidations or other events that materially increase or decrease the number or value of issued and outstanding shares of COMMON STOCK, the COMMITTEE may make such adjustments as it shall deem appropriate, in order to prevent dilution or enlargement of rights. 15. Non-Transferability of Incentive Awards --------------------------------------- An INCENTIVE AWARD shall not be transferable by the RECIPIENT otherwise than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the CODE, Title I of ERISA or the rules thereunder. During the lifetime of the RECIPIENT, an INCENTIVE AWARD may be exercised only by the RECIPIENT or by an alternate payee under a qualified domestic relations order. 16. Change in Control ----------------- Upon the occurrence of a CHANGE IN CONTROL (as defined below): (a) Any time periods relating to the exercise or realization of any INCENTIVE AWARD granted hereunder shall be accelerated so that such INCENTIVE AWARD may be immediately exercised or realized in full; (b) All shares of RESTRICTED STOCK granted hereunder shall immediately cease to be forfeitable; and 6 (c) All conditions relating to the realization of any STOCK-BASED AWARD granted hereunder shall immediately terminate. A "CHANGE IN CONTROL" shall be deemed to have occurred if: (a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any trustee, agent or other fiduciary for any such plan acting in such person's capacity as such fiduciary), directly or indirectly, becomes the beneficial owner of securities of the CORPORATION representing twenty percent (20%) or more of the combined voting power of the CORPORATION's then outstanding securities; (b) during any two consecutive years, individuals who at the beginning of such a period constitute the BOARD OF DIRECTORS cease for any reason to constitute at least a majority of the BOARD OF DIRECTORS, unless the election, or the nomination for election by the shareholders of the CORPORATION, of each new DIRECTOR was approved by a vote of at least two-thirds (2/3) of the DIRECTORS then still in office who were DIRECTORS at the beginning of the period; or (c) the shareholders of the CORPORATION shall have approved (i) any consolidation or merger of the CORPORATION other than a merger or consolidation which would result in the voting securities of the CORPORATION outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent of such surviving entity) at least 70 percent of the Combined Voting Power of the CORPORATION, such surviving entity or the parent of such surviving entity outstanding immediately after the merger or consolidation; (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the CORPORATION, or (iii) any plan or proposal for the liquidation or dissolution of the CORPORATION. For purposes of this paragraph, the term Combined Voting Power shall mean the combined voting power of the CORPORATION's or other relevant entity's then outstanding voting securities. 17. Listing and Registration of Shares ---------------------------------- Each INCENTIVE AWARD shall be subject to the requirement that if at any time the COMMITTEE shall determine, in its discretion, that the listing, registration or qualification of the shares covered thereby under any securities exchange or under any state or federal law or the consent or approval of any governmental regulatory body, including the California Public Utilities Commission, is necessary or desirable as a condition of, or in connection with, the granting of such 7 INCENTIVE AWARD or the issue or purchase of shares thereunder, such INCENTIVE AWARD may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the COMMITTEE. 18. Amendment and Termination of the Program and Incentive Awards ------------------------------------------------------------- The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate, modify or amend the PROGRAM in any respect; provided, however, that to the extent necessary and desirable to comply with Section 422 of the CODE (or any other applicable law or regulation, including the requirements of any stock exchange on which the COMMON STOCK is listed or quoted), shareholder approval of any PROGRAM amendment shall be obtained in such a manner and to such a degree as is required by the applicable law or regulation. No suspension, termination, modification or amendment of the PROGRAM may, without the consent of the RECIPIENT, adversely affect his or her rights under INCENTIVE AWARDS theretofore granted to such RECIPIENT. In the event of amendments to the CODE or applicable rules or regulations relating to ISOS subsequent to the date hereof, the CORPORATION may amend the PROGRAM, and the CORPORATION and RECIPIENTS holding OPTION agreements may agree to amend outstanding OPTION agreements, to conform to such amendments. The BOARD OF DIRECTORS or COMMITTEE may make such amendments or modifications in the terms and conditions of any INCENTIVE AWARD as it may deem advisable, or cancel or annul any grant of an INCENTIVE AWARD; provided, however, that no such amendment, modification, cancellation or annulment may, without the consent of the RECIPIENT, adversely affect his or her rights under such INCENTIVE AWARD; and provided further the BOARD OF DIRECTORS or COMMITTEE may not reduce the OPTION PRICE or purchase price of any OPTION or INCENTIVE AWARD below the original OPTION PRICE or purchase price. Notwithstanding the foregoing, the BOARD OF DIRECTORS or COMMITTEE reserves the right, in its sole discretion, to (i) convert any outstanding ISOS to NON-QUALIFIED STOCK OPTIONS, (ii) to require a RECIPIENT to forfeit any unexercised or unpurchased INCENTIVE AWARDS, any shares received or purchased pursuant to an INCENTIVE AWARD, or any gains realized by virtue of the receipt of an INCENTIVE AWARD in the event that such RECIPIENT competes against the CORPORATION, and (iii) to cancel or annul any grant of an INCENTIVE AWARD in the event of a RECIPIENT'S TERMINATION FOR CAUSE. For purposes of the PROGRAM, "TERMINATION FOR CAUSE" shall include, but not be limited to, termination because of dishonesty, criminal offense or violation of a work rule, and shall be determined by, and in the sole discretion of, the BOARD OF DIRECTORS or COMMITTEE. 8 19. Effective Date of the Program and Duration ------------------------------------------ The Program first became effective as of January 1, 1992. The first amendment and restatement of the PROGRAM as of January 1, 1996, was approved by the shareholders of Pacific Gas and Electric Company at its Annual Meeting on April 17, 1996. Effective January 1, 1997, the PROGRAM was assumed by PG&E CORPORATION. At its meeting on December 17, 1997, the BOARD OF DIRECTORS amended and restated the PROGRAM effective January 1, 1998, to (i) reflect the adoption of new RULE 16B-3 which became effective November 1, 1996, and (ii) provide automatic formula awards of NON- QUALIFIED STOCK OPTIONS and PHANTOM STOCK to NON-EMPLOYEE DIRECTORS within the limits of the PROGRAM as previously approved by shareholders in 1996. The PROGRAM was subsequently amended on October 21, 1998, April 21, 1999, and February 16, 2000. Unless terminated sooner pursuant to Section 16 hereof, the PROGRAM shall terminate on December 31, 2005. 20. Definitions ----------- (a) BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION. ------------------ (b) CHANGE IN CONTROL has the meaning set forth in Section 16 hereof. ----------------- (c) CHIEF EXECUTIVE OFFICER means the Chief Executive Officer of PG&E ----------------------- CORPORATION. (d) CODE means the Internal Revenue Code of 1986, as amended from time to ---- time. (e) COMMITTEE means the Nominating and Compensation Committee of the BOARD --------- OF DIRECTORS or any successor to such committee. (f) COMMON STOCK means common shares of PG&E CORPORATION with no par value ------------ and any class of common shares into which such common shares hereafter may be converted. (g) CONSULTANT means any person, including an advisor, who is engaged by ---------- the CORPORATION to render services. (h) CORPORATION means PG&E CORPORATION, and any parent corporation (as ----------- defined in Section 424(e) of the CODE) or subsidiary corporation (as defined in Section 424(f) of the CODE). (i) DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or -------- the Board of Directors of any parent corporation (as defined in Section 424(e) of the CODE) which may hereafter be established, including an advisory, emeritus or honorary director. 9 (j) DIRECTOR RESTRICTED STOCK means RESTRICTED STOCK granted to a NON- ------------------------- EMPLOYEE DIRECTOR under the NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN. (k) DIVIDEND EQUIVALENT means a right that entitles the RECIPIENT to ------------------- receive cash or COMMON STOCK based on the dividends declared on the COMMON STOCK covered by such right. (l) ELIGIBLE PARTICIPANT means any KEY EMPLOYEE. It also means, if so -------------------- identified by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the case of INCENTIVE AWARDS granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof), other EMPLOYEES, DIRECTORS, CONSULTANTS, employees or consultants of any affiliates of PG&E CORPORATION, and other persons whose participation in the PROGRAM is deemed by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the case of INCENTIVE AWARDS granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof) to be in the best interests of the CORPORATION. (m) EMPLOYEE means any person who is employed by the CORPORATION. The -------- payment of a director's fee or consulting fee by the CORPORATION shall not be sufficient to constitute "employment" by the CORPORATION. (n) ERISA means the Employee Retirement Income Security Act of 1974, as ----- amended. (o) EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. ------------ (p) FAIR MARKET VALUE means the closing price of the COMMON STOCK reported ----------------- on the New York Stock Exchange Composite Transactions for the date specified for determining such value. (q) INCENTIVE AWARD means any ISO, NON-QUALIFIED STOCK OPTION, SAR, --------------- DIVIDEND EQUIVALENT, PERFORMANCE UNIT or other STOCK-BASED AWARD granted under the PROGRAM. (r) ISO means an OPTION intended to qualify as an incentive stock option --- under Section 422 of the CODE. (s) KEY EMPLOYEE means the Corporate Secretary, Treasurer, Vice Presidents ------------ and other executive officers of PG&E CORPORATION above the rank of Vice President. It also means, if so identified by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the case of 10 INCENTIVE AWARDS granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof), executive officers of wholly-owned subsidiaries of PG&E CORPORATION (including subsidiaries which become such after adoption of the PROGRAM) and any other key management employee of PG&E CORPORATION or any wholly-owned subsidiary of PG&E CORPORATION. (t) LSAR means a limited stock appreciation right which is ---- exercisable only in the event of a CHANGE IN CONTROL. (u) 1986 OPTION PLAN means the Pacific Gas and Electric Company 1986 ---------------- Stock Option Plan, as amended to date. (v) NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE. --------------------- (w) NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN RULES means the Non- ------------------------------------------------ Employee Director Stock Incentive Plan attached hereto as Exhibit C or any successor rules which the BOARD OF DIRECTORS may adopt from time to time with respect to the grant of INCENTIVE AWARDS to NON-EMPLOYEE DIRECTORS under the PROGRAM. (x) NON-QUALIFIED STOCK OPTION means any OPTION which is not an ISO. -------------------------- (y) OPTION means an option to purchase shares of COMMON STOCK granted ------ under the STOCK OPTION PLAN. (z) OPTION PRICE means the purchase price for the COMMON STOCK upon ------------ exercise of an OPTION. (aa) PERFORMANCE UNIT means a performance unit granted under the ---------------- PERFORMANCE UNIT PLAN. (bb) PERFORMANCE UNIT PLAN means the Performance Unit Plan Rules --------------------- attached hereto as Exhibit B or any successor rules which the COMMITTEE may adopt from time to time with respect to the grant of PERFORMANCE UNITS under the PROGRAM. (cc) PG&E CORPORATION means PG&E CORPORATION, a California ---------------- corporation. (dd) PHANTOM STOCK means allocated hypothetical shares of COMMON STOCK ------------- that can be converted at a future date into cash or stock. 11 (ee) PROGRAM means the PG&E Corporation Long-Term Incentive Program ------- set forth herein and as may be amended from time to time. (ff) RECIPIENT means the ELIGIBLE PARTICIPANT receiving the INCENTIVE --------- AWARD, or his or her legal representative, legatees, distributees or alternate payees, as the case may be. (gg) RESTRICTED STOCK means COMMON STOCK that is subject to forfeiture ---------------- by the RECIPIENT to the CORPORATION under such circumstances as may be specified by the COMMITTEE in its sole discretion. (hh) RETIREMENT means termination of employment with the CORPORATION ---------- at age 55 or later, provided that the ELIGIBLE PARTICIPANT was employed by the CORPORATION for at least five consecutive years prior to the date of termination. (ii) RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any ---------- successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (jj) SAR means a stock appreciation right whose value is based on the --- increase in the FAIR MARKET VALUE of the COMMON STOCK covered by such right. (kk) SECTION 16 OFFICER means any person who is designated by the ------------------ BOARD OF DIRECTORS as an executive officer of PG&E CORPORATION and any other person who is designated as an officer of PG&E CORPORATION for purposes of Section 16 of the EXCHANGE ACT. (ll) STOCK-BASED AWARD means any award that is valued in whole or in ----------------- part by reference to, or is otherwise based on, the COMMON STOCK, including, but not limited to, stock grants, RESTRICTED STOCK, LSARS and PHANTOM STOCK. (mm) STOCK OPTION PLAN means the Stock Option Plan Rules attached ----------------- hereto as Exhibit A or any successor rules which the COMMITTEE may adopt from time to time with respect to the grant of OPTIONS under the PROGRAM. (nn) TANDEM refers to an INCENTIVE AWARD granted in conjunction with ------ another INCENTIVE AWARD. (oo) TERMINATION occurs when an EMPLOYEE ceases to be employed by the ----------- CORPORATION as a common law employee, when a DIRECTOR ceases to be a member of the BOARD OF DIRECTORS or the Board of 12 Directors of any parent corporation which may hereafter be established (as the case may be), or when the relationship between the CORPORATION and a CONSULTANT or other ELIGIBLE PARTICIPANT terminates, as the case may be. (pp) TERMINATION FOR CAUSE has the meaning set forth in Section 18 --------------------- hereof. 13 EXHIBIT A PG&E CORPORATION STOCK OPTION PLAN (As amended effective as of February 16, 2000) 1. Purpose of the Plan ------------------- This is the controlling and definitive statement of the PG&E Corporation Stock Option Plan set forth herein and as may be amended from time to time (hereinafter called the PLAN/2/). The purpose of the PLAN is to advance the interests of the CORPORATION by providing ELIGIBLE PARTICIPANTS with financial incentives to promote the success of its long-term (five to ten years) business objectives, and to increase their proprietary interest in the success of the CORPORATION. It is the intent of the CORPORATION to reward those ELIGIBLE PARTICIPANTS who have a significant impact on improved long-term corporate achievements. Inasmuch as the PLAN is designed to encourage financial performance and to improve the value of shareholders' investment in PG&E CORPORATION, the costs of the PLAN will be funded from corporate earnings. 2. Plan Administration ------------------- The PLAN shall be administered by the COMMITTEE, which shall be constituted in such a manner as to comply with the rules governing a plan intended to qualify as a discretionary plan under RULE 16b-3. Subject to the provisions of the PLAN, the COMMITTEE shall have full and final authority, in its sole discretion: (a) to determine the ELIGIBLE PARTICIPANTS to whom OPTIONS shall be granted and the number of shares of COMMON STOCK to be awarded under each OPTION, based on the recommendation of the CHIEF EXECUTIVE OFFICER (except that awards to the CHIEF EXECUTIVE OFFICER shall be shall be based on the recommendation of the BOARD OF DIRECTORS); provided, however, that the number of shares of COMMON STOCK to be awarded under each OPTION shall be subject to the limitations specified in Section 5 hereof; (b) to determine the time or times at which OPTIONS shall be granted; _____________ /2/ Capitalized words are defined in Section 20 hereof. 14 (c) to designate the OPTIONS being granted as ISOS or NON-QUALIFIED STOCK OPTIONS; (d) to vary the OPTION vesting schedule described in Section 11 hereof; (e) to determine the terms and conditions, not inconsistent with the terms of the PLAN, of any OPTION granted hereunder (including, but not limited to, the consideration and method of payment for shares purchased upon the exercise of an OPTION, and any vesting acceleration or exercisability provisions in the event of a CHANGE IN CONTROL or TERMINATION), based in each case on such factors as the COMMITTEE shall deem appropriate; (f) to approve forms of agreement for use under the PLAN; (g) to construe and interpret the PLAN and any related OPTION agreement and to define the terms employed herein and therein; (h) except as provided in Section 18 hereof, to modify or amend any OPTION or to waive any restrictions or conditions applicable to any OPTION or the exercise thereof; (i) except as provided in Section 18 hereof, to prescribe, amend and rescind rules, regulations and policies relating to the administration of the PLAN; (j) except as provided in Section 18 hereof, to suspend, terminate, modify or amend the PLAN; (k) to delegate to one or more agents such administrative duties as the COMMITTEE may deem advisable, to the extent permitted by applicable law; and (l) to make all other determinations and take such other action with respect to the PLAN and any OPTION granted hereunder as the COMMITTEE may deem advisable, to the extent permitted by applicable law. Notwithstanding the provisions contained in the foregoing paragraph, the CHIEF EXECUTIVE OFFICER shall have the authority, in his sole discretion: (a) to grant OPTIONS to any ELIGIBLE PARTICIPANT who, at the time of the OPTION grant, (i) is not an officer of the CORPORATION or a DIRECTOR, and (ii) if such ELIGIBLE PARTICIPANT is an EMPLOYEE, is receiving an annual salary which is below the level which requires approval by the COMMITTEE; (b) to determine the time or times at which OPTIONS shall be granted to such ELIGIBLE PARTICIPANTS; (c) to designate the OPTIONS being granted to such ELIGIBLE PARTICIPANTS as ISOS or NON-QUALIFIED STOCK 15 OPTIONS; and (d) to vary the OPTION vesting schedule described in Section 11 hereof for the OPTIONS granted to such ELIGIBLE PARTICIPANTS; provided, however, that (x) all grants of OPTIONS by the CHIEF EXECUTIVE OFFICER shall conform to the guidelines previously approved by the COMMITTEE, and (y) the number of shares of COMMON STOCK to be awarded under each OPTION shall be subject to the limitations specified in Section 5 hereof. 3. Shares of Stock Subject to the Plan ----------------------------------- There shall be reserved for use under the PLAN and for the grant of any other incentive awards pursuant to the PROGRAM (subject to the provisions of Section 14 hereof) a total of 34,389,230 shares of COMMON STOCK, which shares may be authorized but unissued shares of COMMON STOCK or issued shares of COMMON STOCK which shall have been reacquired by PG&E CORPORATION. If any OPTION expires or terminates for any reason without having been exercised in full, then any unexercised, shares which were subject to such OPTION (except shares as to which a related TANDEM SAR has been exercised) shall again be available for the future grant of OPTIONS under the PLAN (unless the PLAN has terminated). In addition, shares may be reused or added back to the PLAN to the extent permitted by applicable law. 4. Eligibility ----------- OPTIONS will be granted only to ELIGIBLE PARTICIPANTS. ISOS will be granted only to EMPLOYEES. The COMMITTEE, in its sole discretion, may grant OPTIONS to an ELIGIBLE PARTICIPANT who is a resident or citizen of a foreign country, with such modifications as the COMMITTEE may deem advisable to reflect the laws, tax policy or customs of such foreign country. The PLAN shall not confer upon any OPTIONEE any right to continuation of employment, service as a DIRECTOR or consulting relationship with the CORPORATION; nor shall it interfere in any way with the right of the OPTIONEE or the CORPORATION to terminate such employment, service as a DIRECTOR or consulting relationship at any time, with or without cause. 5. Limitation on Options and SARs Awarded to Any Eligible Participant ------------------------------------------------------------------ The aggregate number of shares of COMMON STOCK with respect to which any ELIGIBLE PARTICIPANT may be granted OPTIONS and SARS under the PLAN during any calendar year shall in no event exceed two percent (2%) of the total number of shares reserved for use under the PLAN. 16 6. Designation of Options ---------------------- At the time of the grant of each OPTION under the PLAN, the COMMITTEE (or the CHIEF EXECUTIVE OFFICER, in the case of OPTIONS granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof) shall determine whether such OPTION is to be designated as an ISO or a NON-QUALIFIED STOCK OPTION; provided, however, that ISOS may be granted only to EMPLOYEES. Notwithstanding such designation, to the extent that the aggregate FAIR MARKET VALUE (determined for each share as of the date of grant of the OPTION covering each share) of the shares with respect to which OPTIONS designated as ISOS become exercisable for the first time by any OPTIONEE during any calendar year exceeds $100,000, such OPTIONS shall be treated as NON-QUALIFIED STOCK OPTIONS. 7. Option Price ------------ The OPTION PRICE of the COMMON STOCK under each OPTION issued shall be the FAIR MARKET VALUE of the COMMON STOCK on the date of grant. 8. Stock Appreciation Rights ------------------------- At the discretion of the COMMITTEE, an OPTION may be granted with or without a TANDEM SAR which permits the OPTIONEE to surrender unexercised an OPTION or portion thereof and to receive in exchange a payment having a value equal to the difference between (x) the FAIR MARKET VALUE of the COMMON STOCK covered by the surrendered portion of the OPTION on the date the SAR is exercised and (y) the OPTION PRICE for such COMMON STOCK. The SAR is subject to the same terms and conditions as the related OPTION, except that (i) the SAR may be exercised only when there is a positive spread (i.e., when the FAIR MARKET VALUE of the COMMON STOCK subject to the OPTION exceeds the OPTION PRICE), (ii) in accordance with Section 9 hereof, payment of the DEA (if any) to the OPTIONEE may be restricted, and (iii) if the OPTIONEE is a SECTION 16 OFFICER, DIRECTOR or other person whose transactions in the COMMON STOCK are subject to Section 16(b) of the EXCHANGE ACT, the SAR may be exercised only during the period beginning on the third (3rd) business day following the date of release of the CORPORATION's quarterly or annual statement of earnings and ending on the twelfth (12th) business day following such date. Upon the exercise of a SAR, the number of shares subject to exercise under the related OPTION shall be automatically reduced by the number of shares represented by the OPTION or portion thereof surrendered. No payment will be required from the OPTIONEE upon the exercise of a SAR, except that any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld. 17 9. Dividend Equivalent Account --------------------------- At the discretion of the COMMITTEE, an OPTION may be granted with or without TANDEM DIVIDEND EQUIVALENTS. When an OPTION is granted with TANDEM DIVIDEND EQUIVALENTS, a Dividend Equivalent Account ("DEA") shall be established for the OPTIONEE. This DEA shall be credited quarterly on each dividend record date with dividends which would have been paid on the COMMON STOCK subject to the unexercised portion of the OPTION (including any portion which has not yet vested on the record date), if such portion had been exercised. Except as provided in Section 12(d) hereof, at the time the OPTION or any related SAR is exercised, the OPTIONEE shall receive all funds which have accumulated in the DEA with respect to the shares of COMMON STOCK for which the OPTION or SAR is being exercised; provided, however, that if the OPTIONEE exercises a SAR, such DEA funds shall only be paid to the OPTIONEE if (i) the percentage increase in the FAIR MARKET VALUE of the COMMON STOCK over the OPTION PRICE averages at least five percent (5%) per year for the first five (5) years after the grant, or (ii) in the case of OPTIONS held for longer than five (5) years from the date of grant, such FAIR MARKET VALUE has increased by at least twenty-five percent (25%) over the OPTION PRICE. 10. Terms of Options ---------------- The term of each ISO shall be for ten (10) years from the date of grant, subject to earlier termination as provided in Section 12 hereof. The term of each NON-QUALIFIED STOCK OPTION shall be ten (10) years and one (1) day from the date of grant, subject to earlier termination as provided in Section 12 hereof. Any provision of the PROGRAM to the contrary notwithstanding, no OPTION shall be exercised after the time limitations stated in this Section 10. 11. Limitations on Exercise ----------------------- (a) Each OPTION granted under the PROGRAM shall become exercisable and vested only to the following extent: (i) up to one-third (1/3) of the OPTIONS granted may be exercised on or after the second (2nd) anniversary of the date of grant; (ii) up to two-thirds (2/3) of the OPTIONS granted may be exercised on or after the third (3rd) anniversary of the date of grant; and (iii) up to one hundred percent (100%) of the OPTIONS granted may be exercised on or after the fourth (4th) anniversary of the date of grant. (b) No OPTION under the PROGRAM designated by the COMMITTEE as an ISO and granted before January 1, 1987 may be exercised while there is outstanding in the hands of the OPTIONEE any ISO which was granted 18 before the granting of the ISO hereunder sought to be exercised. For this purpose an ISO shall be treated as outstanding until such OPTION is (i) exercised in full, (ii) surrendered in full by exercising SARS pursuant to Section 8 hereof, or (iii) rendered void by reason of lapse of time. 12. Termination of Employment or Relationship with the CORPORATION -------------------------------------------------------------- (a) In the event of a TERMINATION by reason of a discharge or TERMINATION FOR CAUSE, any unexercised OPTIONS theretofore granted to an OPTIONEE under the PROGRAM shall forthwith terminate. (b) In the event of a TERMINATION by reason of RETIREMENT, all OPTIONS held by the OPTIONEE, to the extent that such OPTIONS have not previously expired or been exercised, shall become fully exercisable and vested, notwithstanding the provisions of Section 11(a) hereof, and the OPTIONEE shall have the right to exercise such OPTIONS in full at any time within their respective terms or within five (5) years after such RETIREMENT, whichever is shorter. This five-year period shall be extended if an OPTIONEE remains on the BOARD OF DIRECTORS after RETIREMENT. In such case, the OPTIONS may be exercised as long as the OPTIONEE remains a DIRECTOR and for a period of six (6) months thereafter, or within five (5) years after RETIREMENT, whichever is longer; provided, however, that no OPTION may be exercised after the expiration of its term. To the extent any ISO held by the OPTIONEE is exercised after the expiration of three (3) months after such TERMINATION, the exercise will be deemed to involve the exercise of a NON-QUALIFIED STOCK OPTION. (c) In the event of a TERMINATION by reason of disability or death, all OPTIONS held by the OPTIONEE, to the extent that such OPTIONS have not previously expired or been exercised, shall become fully exercisable and vested, notwithstanding the provisions of Section 11(a) hereof, and the OPTIONEE (or the OPTIONEE'S estate or a person who acquired the right to exercise such OPTIONS by bequest or inheritance) shall have the right to exercise such OPTIONS at any time within their respective terms or within one (1) year after the date of such TERMINATION, whichever is shorter. The term "disability" shall, for the purposes of the PLAN, be defined in Section 22(e)(3) of the CODE. (d) In the event of a TERMINATION by reason of a divestiture or change in control of a subsidiary of PG&E CORPORATION, which divestiture or change in control results in such subsidiary no longer qualifying as a subsidiary corporation under Section 424(f) of the CODE, all OPTIONS held by the OPTIONEE, to the extent that such OPTIONS have not previously expired or been exercised, shall become fully exercisable and 19 vested, notwithstanding the provisions of Section 11(a) hereof, and the OPTIONEE shall have the right to exercise such OPTIONS in full at any time within their respective terms or within three (3) years after such TERMINATION, whichever is shorter. This three-year period shall be extended if an OPTIONEE remains on the BOARD OF DIRECTORS after such TERMINATION. In such case, the OPTIONS may be exercised as long as the OPTIONEE remains a DIRECTOR and for a period of six (6) months thereafter, or within three (3) years after such TERMINATION, whichever is longer; provided, however, that no OPTION may be exercised after the expiration of its term. To the extent any ISO held by the OPTIONEE is exercised after the expiration of three (3) months after such TERMINATION, the exercise will be deemed to involve the exercise of a NON-QUALIFIED STOCK OPTION. (e) In the event of a TERMINATION within one year after a CHANGE IN CONTROL of the CORPORATION (other than a TERMINATION covered by clauses (a), (b), or (c) above), OPTIONEE shall have the right to exercise OPTIONS which OPTIONEE then holds (which OPTIONS will have been accelerated previously in accordance with Section 16 below), to the extent that such OPTIONS have not previously expired or been exercised, in full at any time within their respective terms or within three (3) years after such TERMINATION, whichever is shorter. This three-year period shall be extended if an OPTIONEE remains on the BOARD OF DIRECTORS after such TERMINATION. In such case, the OPTIONS may be exercised as long as the OPTIONEE remains a DIRECTOR and for a period of six (6) months thereafter, or within three (3) years after such TERMINATION, whichever is longer; provided, however, that no OPTION may be exercised after the expiration of its term. To the extent any ISO held by the OPTIONEE is exercised after the expiration of three (3) months after such TERMINATION, the exercise will be deemed to involve the exercise of a NON-QUALIFIED STOCK OPTION. (f) In the event of a TERMINATION for any reason other than those specified in subparagraphs (a) through (e) above, (i) any unexercised OPTION or OPTIONS granted under the PROGRAM shall be deemed canceled and terminated forthwith, except that the OPTIONEE may exercise any unexercised OPTIONS theretofore granted which are otherwise exercisable and vested within the provisions of Section 11(a) hereof, during the balance of their respective terms or within thirty (30) days of such TERMINATION, whichever is shorter, and (ii) the DEA (if any) shall not be credited with any dividends paid after the date of such TERMINATION. 20 (g) Notwithstanding the provisions of subparagraphs (a) through (f) above, the COMMITTEE may, in its sole discretion, establish different terms and conditions pertaining to the effect of TERMINATION, to the extent permitted by applicable federal and state law. 13. Payment for Shares Upon Exercise of Options ------------------------------------------- The exercise of any OPTION shall be contingent upon receipt by the CORPORATION of (i) cash (including any DEA funds payable to the OPTIONEE in connection with the exercise of such OPTION), (ii) check, (iii) shares of COMMON STOCK, (iv) an executed exercise notice together with irrevocable instructions to a broker to either sell the shares subject to the OPTION or hold such shares as collateral for a margin loan and to promptly deliver to the CORPORATION the amount of sale or loan proceeds required to pay the OPTION PRICE, (v) any combination of the foregoing in an amount equal to the full OPTION PRICE of the shares being purchased, or (vi) such other consideration and method of payment, other than a note from the OPTIONEE, as the COMMITTEE, in its sole discretion, may allow (which, in the case of an ISO shall be determined at the time of grant), to the extent permitted by applicable law. For purposes of this paragraph, shares of COMMON STOCK that are delivered in payment of the OPTION PRICE must have been previously owned by the OPTIONEE for a minimum of one year, and shall be valued at their FAIR MARKET VALUE as of the date of the exercise of the OPTION. The CORPORATION shall not make loans to any OPTIONEE for the purpose of exercising OPTIONS. 14. Adjustments Upon Changes in Number or Value of Shares of Common Stock --------------------------------------------------------------------- If there are any changes in the number or value of shares of COMMON STOCK by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers, consolidations or other events that materially increase or decrease the number or value of issued and outstanding shares of COMMON STOCK, the COMMITTEE may make such adjustments as it shall deem appropriate, in order to prevent dilution or enlargement of rights. 15. Non-Transferability of Options ------------------------------ An OPTION shall not be transferable by the OPTIONEE otherwise than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the CODE, Title I of ERISA or the rules thereunder. During the lifetime of the OPTIONEE, an OPTION may be exercised only by the OPTIONEE or by an alternate payee under a qualified domestic relations order. 16. Change in Control ----------------- 21 Upon the occurrence of a CHANGE IN CONTROL (as defined below), any time periods relating to the exercise of any OPTION granted hereunder shall be accelerated so that such OPTION may be immediately exercised in full. A "CHANGE IN CONTROL" shall be deemed to have occurred if: (a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any trustee, agent or other fiduciary for any such plan acting in such person's capacity as such fiduciary), directly or indirectly, becomes the beneficial owner of securities of PG&E CORPORATION representing twenty percent (20%) or more of the combined voting power of the CORPORATION's then outstanding securities; (b) during any two consecutive years, individuals who at the beginning of such a period constitute the BOARD OF DIRECTORS cease for any reason to constitute at least a majority of the BOARD OF DIRECTORS, unless the election, or the nomination for election by the shareholders of the CORPORATION, of each new DIRECTOR was approved by a vote of at least two-thirds (2/3) of the DIRECTORS then still in office who were DIRECTORS at the beginning of the period; or (c) the shareholders of the CORPORATION shall have approved (i) any consolidation or merger of the CORPORATION other than a merger or consolidation which would result in the voting securities of the CORPORATION outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent of such surviving entity) at least 70 percent of the Combined Voting Power of the CORPORATION, such surviving entity or the parent of such surviving entity outstanding immediately after the merger or consolidation; (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the CORPORATION, or (iii) any plan or proposal for the liquidation or dissolution of the CORPORATION. For purposes of this paragraph, the term Combined Voting Power shall mean the combined voting power of the CORPORATION's or other relevant entity's then outstanding voting securities. 22 17. Listing and Registration of Shares ---------------------------------- Each OPTION shall be subject to the requirement that if at any time the COMMITTEE shall determine, in its discretion, that the listing, registration or qualification of the shares covered thereby under any securities exchange or under any state or federal law or the consent or approval of any governmental regulatory body, including the California Public Utilities Commission, is necessary or desirable as a condition of, or in connection with, the granting of such OPTION or the issue or purchase of shares thereunder, such OPTION may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the COMMITTEE. 18. Amendment and Termination of the Plan and Options ------------------------------------------------- The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate, modify or amend the PLAN in any respect; provided, however, that, to the extent necessary and desirable to comply with Section 422 of the CODE (or any other applicable law or regulation, including the requirements of any stock exchange on which the COMMON STOCK is listed or quoted), shareholder approval of any PLAN amendment shall be obtained in such a manner and to such a degree as is required by the applicable law or regulation. No suspension, termination, modification or amendment of the PLAN may, without the consent of the OPTIONEE, adversely affect his or her rights under OPTIONS theretofore granted to such OPTIONEE. In the event of amendments to the CODE or applicable rules or regulations relating to ISOS subsequent to the date hereof, the CORPORATION may amend the PLAN, and the CORPORATION and OPTIONEES holding OPTION agreements may agree to amend outstanding OPTION agreements, to conform to such amendments. The COMMITTEE may make such amendments or modifications in the terms and conditions of any OPTION as it may deem advisable, or cancel or annul any grant of an OPTION; provided, however, that no such amendment, modification, cancellation or annulment may, without the consent of the OPTIONEE, adversely affect his or her rights under such OPTION; and provided further the COMMITTEE may not reduce the OPTION PRICE or purchase price of any OPTION or OPTION below the original OPTION PRICE or purchase price. Notwithstanding the foregoing, the COMMITTEE reserves the right, in its sole discretion, to (i) convert any outstanding ISOS to NON-QUALIFIED STOCK OPTIONS, (ii) to require a OPTIONEE to forfeit any unexercised or unpurchased OPTIONS, any shares received or purchased pursuant to an OPTION, or any gains realized by virtue of the receipt of an OPTION in the event that such OPTIONEE competes against the CORPORATION, and (iii) to cancel or annul any grant of an 23 OPTION in the event of a OPTIONEE'S TERMINATION FOR CAUSE. For purposes of the PROGRAM, "TERMINATION FOR CAUSE" shall include, but not be limited to, termination because of dishonesty, criminal offense or violation of a work rule, and shall be determined by, and in the sole discretion of, the COMMITTEE. 19. Effective Date of the Plan and Duration --------------------------------------- The PLAN first became effective as of January 1, 1992. It has since been amended and restated. The amended and restated PLAN became effective as of January 1, 1996, upon approval by the shareholders of Pacific Gas and Electric Company at its Annual Meeting on April 17, 1996. Effective January 1, 1997, the PLAN was assumed by PG&E CORPORATION. The PLAN was subsequently amended on October 21, 1998, April 21, 1999, and February 16, 2000. Unless terminated sooner pursuant to Section 18 hereof, the PLAN shall terminate on December 31, 2005. 20. Definitions ----------- (a) BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION. ------------------ (b) CHANGE IN CONTROL has the meaning set forth in Section 16 hereof. ----------------- (c) CHIEF EXECUTIVE OFFICER means the Chief Executive Officer of PG&E ----------------------- CORPORATION. (d) CODE means the Internal Revenue Code of 1986, as amended from time to ---- time. (e) COMMITTEE means the Nominating and Compensation Committee of the BOARD --------- OF DIRECTORS or any successor to such committee. (f) COMMON STOCK means common shares of PG&E CORPORATION with no par value ------------ and any class of common shares into which such common shares hereafter may be converted. (g) CONSULTANT means any person, including an advisor, who is engaged by ---------- the CORPORATION to render services. (h) CORPORATION means PG&E CORPORATION, and any parent corporation (as ----------- defined in Section 424(e) of the CODE) or subsidiary corporation (as defined in Section 424(f) of the CODE). (i) DEA means a Dividend Equivalent Account described in Section 9 hereof. --- 24 (j) DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or -------- the Board of Directors of any parent corporation (as defined in Section 424(e) of the CODE) which may hereafter be established, including an advisory, emeritus or honorary director. (k) DIVIDEND EQUIVALENT means a right that entitles the OPTIONEE to ------------------- receive cash or COMMON STOCK based on the dividends declared on the COMMON STOCK covered by such right. (l) ELIGIBLE PARTICIPANT means any KEY EMPLOYEE. It also means, if so -------------------- identified by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the case of OPTIONS granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof), other EMPLOYEES, DIRECTORS, CONSULTANTS, employees or consultants of any affiliates of PG&E CORPORATION, and other persons whose participation in the PROGRAM is deemed by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the case of OPTIONS granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof) to be in the best interests of the CORPORATION; provided, however, that DIRECTORS who are not EMPLOYEES shall not be ELIGIBLE PARTICIPANTS for purposes of the PLAN. (m) EMPLOYEE means any person who is employed by the CORPORATION. The -------- payment of a director's fee or consulting fee by the CORPORATION shall not be sufficient to constitute "employment" by the CORPORATION. (n) ERISA means the Employee Retirement Income Security Act of 1974, as ----- amended. (o) EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. ------------ (p) FAIR MARKET VALUE means the closing price of the COMMON STOCK reported ----------------- on the New York Stock Exchange Composite Transactions for the date specified for determining such value. (q) ISO means an OPTION intended to qualify as an incentive stock option --- under Section 422 of the CODE. (r) KEY EMPLOYEE means the Corporate Secretary, Treasurer, Vice Presidents ------------ and other executive officers of PG&E CORPORATION above the rank of Vice President. It also means, if so identified by the 25 COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the case of OPTIONS granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof), executive officers of wholly-owned subsidiaries of PG&E CORPORATION (including subsidiaries which become such after adoption of the PROGRAM) and any other key management employee of PG&E CORPORATION or any wholly-owned subsidiary of PG&E CORPORATION. (s) NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE. --------------------- (t) NON-QUALIFIED STOCK OPTION means any OPTION which is not an ISO. -------------------------- (u) OPTION means an option to purchase shares of COMMON STOCK granted ------ under the PLAN. (v) OPTIONEE means the ELIGIBLE PARTICIPANT receiving the OPTION, or his -------- or her legal representative, legatees, distributees or alternate payees, as the case may be. (w) OPTION PRICE means the purchase price for the COMMON STOCK upon ------------ exercise of an OPTION. (x) PG&E CORPORATION means PG&E CORPORATION, a California corporation. ---------------- (y) PLAN means this Stock Option Plan as amended and restated herein and ---- as may be amended from time to time, or any successor plan which the COMMITTEE may adopt from time to time with respect to the grant of OPTIONS under the PROGRAM. (z) PROGRAM means the PG&E Corporation Long-Term Incentive Program, as ------- amended effective as of April 21, 1999, and as may be amended from time to time, pursuant to which the PLAN is adopted. (aa) RETIREMENT means termination of employment with the CORPORATION at age ---------- 55 or later, provided that the ELIGIBLE PARTICIPANT was employed by the CORPORATION for at least five consecutive years prior to the date of termination. (bb) RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any successor to ---------- Rule 16b-3, as in effect when discretion is being exercised with respect to the PLAN. 26 (cc) SAR means a stock appreciation right whose value is based on the --- increase in the FAIR MARKET VALUE of the COMMON STOCK covered by such right. (dd) SECTION 16 OFFICER means any person who is designated by the BOARD OF ------------------ DIRECTORS as an executive officer of PG&E CORPORATION and any other person who is designated as an officer of PG&E CORPORATION for purposes of Section 16 of the EXCHANGE ACT. (ee) TANDEM refers to a DIVIDEND EQUIVALENT or SAR (as the case may be) ------ granted in conjunction with an OPTION. (ff) TERMINATION occurs when an EMPLOYEE ceases to be employed by the ----------- CORPORATION as a common law employee, when a DIRECTOR ceases to be a member of the BOARD OF DIRECTORS or the Board of Directors of any parent corporation which may hereafter be established (as the case may be), or when the relationship between the CORPORATION and a CONSULTANT or other ELIGIBLE PARTICIPANT terminates, as the case may be. (gg) TERMINATION FOR CAUSE has the meaning set forth in Section 12 hereof. --------------------- 27 EXHIBIT B PG&E CORPORATION PERFORMANCE UNIT PLAN This is the controlling and definitive statement of the Performance Unit Plan ("PLAN"/3/) for ELIGIBLE EMPLOYEES of PG&E CORPORATION ("CORPORATION") and such other companies, affiliates, subsidiaries, or associations as the BOARD OF DIRECTORS may designate from time to time. The PLAN was first adopted by the BOARD in 1989 and was effective January 1, 1990. It has since been amended from time to time, most recently on February 16, 2000. ARTICLE I DEFINITIONS ----------- 1.01 Board of Directors or Board shall mean the BOARD OF DIRECTORS of ------------------ the CORPORATION or, when appropriate, any committee of the BOARD which has been delegated the authority to take action with respect to the PLAN. 1.02 Committee shall mean the Nominating and Compensation Committee --------- of the BOARD OF DIRECTORS. 1.03 Corporation shall mean PG&E CORPORATION, a California ----------- corporation. 1.04 Eligible Employee shall mean employees of the CORPORATION who ----------------- are officers at the vice presidential level or above, the corporate secretary, the controller, and the treasurer of the CORPORATION, and such other employees of the CORPORATION, other companies, affiliates, subsidiaries, or associations as may be designated by the COMMITTEE. 1.05 Performance Targets shall mean the annual CORPORATION financial ------------------- and operational goals adopted by the COMMITTEE to be used in determining awards under the PLAN. 1.06 Plan shall mean the Performance Unit Plan ("PUP") as set forth ---- herein and as may be amended from time to time. 1.07 Plan Administrator shall mean the COMMITTEE or such individual ------------------ or individuals as that COMMITTEE may appoint to handle the day-to-day affairs of the PLAN. ____________________________________ /3/ Words in all capitals are defined in Article I. 28 1.08 Price shall mean the average market price of STOCK for the last ----- 30-day period of the YEAR preceding the YEAR in which UNITS are payable. 1.09 PUP Units shall mean the units granted to ELIGIBLE EMPLOYEES who --------- participate in the PLAN. A PUP UNIT has the equivalent value of the current market price of a share of STOCK at the time of grant. 1.10 Retirement means termination of employment with the CORPORATION ---------- at age 55 or later, provided that the ELIGIBLE EMPLOYEE was employed by the CORPORATION for at least five consecutive years prior to the date of termination. 1.11 Stock shall mean the common stock of the CORPORATION and any ----- class of common shares into which such STOCK hereafter may be converted. 1.12 Vesting Period shall mean the three calendar YEARS commencing -------------- with the YEAR in which PUP UNITS are granted. 1.13 Year shall mean a calendar year. ---- ARTICLE II 2.01 Prior to the beginning of each YEAR, the COMMITTEE shall determine whether PUP UNITS will be granted for such YEAR, the ELIGIBLE EMPLOYEES to whom PUP UNITS will be granted, and the number of PUP UNITS to be granted to each ELIGIBLE EMPLOYEE. Employees who become ELIGIBLE EMPLOYEES after the beginning of a YEAR shall be entitled to a prorata grant of PUP UNITS. 2.02 At the same time that the COMMITTEE makes its determination as to the granting of PUP UNITS, it shall also establish PERFORMANCE TARGETS. Although it is intended that PERFORMANCE TARGETS will not change in the course of the YEAR, the COMMITTEE reserves the right to modify or adjust a previously set PERFORMANCE TARGET if, in its sole discretion, extraordinary events warrant such modification or adjustment; provided, however, that no such modification or adjustment shall increase the amount of any payment that would otherwise be due based upon performance as measured against the original PERFORMANCE TARGET. 2.03 Each grant of PUP UNITS shall have its own VESTING PERIOD. Subject to modification as measured against a given YEAR's applicable PERFORMANCE TARGET, each grant of PUP UNITS shall be payable as follows: a. One-third after the end of the first YEAR of the VESTING PERIOD; 29 b. One-third after the end of the second YEAR of the VESTING PERIOD; and c. One-third after the end of the third YEAR of the VESTING PERIOD. 2.04 To determine the number of PUP UNITS earned, the applicable PERFORMANCE TARGET shall be the PERFORMANCE TARGET for the YEAR in which the PUP UNITS vest. Performance as measured against the applicable PERFORMANCE TARGET for a YEAR shall modify all PUP UNITS that vest at the end of such YEAR. The PERFORMANCE TARGETS established by the COMMITTEE may modify the number of UNITS earned from 0% to 200% of the number of vested UNITS. 2.05 ELIGIBLE EMPLOYEES shall receive a cash payment as soon as practicable following the YEAR PUP UNITS vest pursuant to the schedule set forth in Section 2.03. The amount of the payment shall be equal to the product of the number of PUP UNITS earned multiplied by the PRICE of STOCK. 2.06 Each time that the CORPORATION declares a dividend on its STOCK, an amount equal to the dividend multiplied by an ELIGIBLE EMPLOYEE's outstanding, but unearned PUP UNITS, shall be accrued on behalf of each ELIGIBLE EMPLOYEE. As soon as practicable following the end of each YEAR, ELIGIBLE EMPLOYEES shall receive a cash payment of the dividends accrued for that YEAR, modified by performance for that YEAR as measured under Section 2.04. 2.07 An ELIGIBLE EMPLOYEE may elect to defer the payment of PUP UNITS and/or dividends paid on PUP UNITS by making a timely election under the Deferred Compensation Plan. Deferrals of benefits payable under this Plan shall be subject to the rules contained in the Deferred Compensation Plan governing elections to defer and receipt of deferred amounts. ARTICLE III 3.01 Retirement. Upon RETIREMENT, all outstanding PUP UNITS continue ---------- to be payable according to the terms of the PLAN. Thus, the number of UNITS eventually earned by a retired employee is still subject to modification depending on the extent to which applicable PERFORMANCE TARGETS are met during the YEAR preceding the January in which UNITS become payable under the schedule of Section 2.03. A retired employee is not entitled to receive grants of PUP UNITS after RETIREMENT. 3.02 Disability. If an ELIGIBLE EMPLOYEE is both disabled and ---------- entitled to receive benefits under Pacific Gas and Electric Company's Long Term 30 Disability Plan, UNITS granted prior to the date of disability shall continue to be payable according to the terms of this PLAN. An ELIGIBLE EMPLOYEE is not entitled to receive grants of PUP UNITS after the date of disability as determined under the provisions of the Long Term Disability Plan. If an ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE because of disability and is not entitled to receive benefits under Pacific Gas and Electric Company's Long Term Disability Plan, all outstanding grants of PUP UNITS become vested and payable as soon as practicable in the YEAR following the YEAR in which the ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE. All of the UNITS payable shall be subject to modification based upon performance as measured against the PERFORMANCE TARGET for the YEAR in which the ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE. 3.03 Death. In the event of the death of an ELIGIBLE EMPLOYEE, all ----- outstanding grants of PUP UNITS held by the ELIGIBLE EMPLOYEE at the date of death shall become vested and payable as soon as practicable in the YEAR following the YEAR of death. All of the UNITS payable after an ELIGIBLE EMPLOYEE's death shall be subject to modification based upon performance as measured against the PERFORMANCE TARGET for the YEAR in which the death of the ELIGIBLE EMPLOYEE occurs. 3.04 Termination. If an ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE ----------- EMPLOYEE for any reason other than RETIREMENT, disability, or death, all outstanding grants of PUP UNITS shall be canceled as of the date that the ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE unless otherwise provided in the PG&E Corporation Officer Severance Policy. 3.05 Change in Control. Upon a Change in Control as defined in the ----------------- PG&E Corporation Long Term Incentive Program (Program), all PUP UNITS shall become vested and payable as soon as practicable in the YEAR following the Change in Control in accordance with Section 16 of the Program. ARTICLE IV ADMINISTRATIVE PROVISIONS ------------------------- 4.01 Administration. The PLAN shall be administered by the PLAN -------------- ADMINISTRATOR who shall have the authority to interpret the PLAN and make such rules as it deems appropriate. The PLAN ADMINISTRATOR shall have the duty and responsibility of maintaining records, making the requisite calculations, and disbursing payments hereunder. The PLAN ADMINISTRATOR's interpretations, determinations, rules, and calculations shall be final and binding on all persons and parties concerned. 4.02 Amendment and Termination. The CORPORATION may amend or ------------------------- terminate the PLAN at any time, provided, however, that no such amendment or 31 termination shall adversely affect PUP UNITS which an ELIGIBLE EMPLOYEE has earned prior to the date of such amendment or termination. PUP UNITS outstanding but unearned at the date of any such amendment or termination may, in the sole discretion of the CORPORATION, be canceled, and the CORPORATION shall have no obligation to provide a substitute benefit of lesser, equal, or greater value. 4.03 Nonassignability of Benefits. The benefits payable under this ---------------------------- PLAN or the right to receive future benefits under this PLAN may not be anticipated, alienated, pledged, encumbered, or subject to any charge or legal process, and if any attempt is made to do so, or a person eligible for any benefits becomes bankrupt, the interest under the PLAN of the person affected may be terminated by the PLAN ADMINISTRATOR which, in its sole discretion, may cause the same to be held if applied for the benefit of one or more of the dependents of such person or make any other disposition of such benefits that it deems appropriate. 4.04 No Guarantee of Employment. Nothing contained in this PLAN -------------------------- shall be construed as a contract of employment between the CORPORATION or the ELIGIBLE EMPLOYEE, or as a right of the ELIGIBLE EMPLOYEE to be continued in the employ of the CORPORATION, to remain as an officer of the CORPORATION, or as a limitation on the right of the CORPORATION to discharge any of its employees, with or without cause. 4.05 Benefits Unfunded and Unsecured. The benefits under this PLAN ------------------------------- are unfunded, and the interest under this PLAN of any ELIGIBLE EMPLOYEE and such ELIGIBLE EMPLOYEE's right to receive a distribution of benefits under this PLAN shall be an unsecured claim against the general assets of the CORPORATION. 4.06 Applicable Law. All questions pertaining to the construction, -------------- validity, and effect of the PLAN shall be determined in accordance with the laws of the United States, and to the extent not preempted by such laws, by the laws of the State of California. 32 EXHIBIT C PG&E CORPORATION NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN (As amended effective as of April 21, 1999) 1. Purpose of the Plan ------------------- This is the controlling and definitive statement of the PG&E Corporation Non-Employee Director Stock Incentive Plan (hereinafter called the PLAN/4/). The purpose of the PLAN is to advance the interests of the CORPORATION by providing NON-EMPLOYEE DIRECTORS with financial incentives to promote the success of its long-term (five to ten years) business objectives, and to increase their proprietary interest in the success of the CORPORATION. Inasmuch as the PLAN is designed to encourage financial performance and to improve the value of shareholders' investment in PG&E CORPORATION, the costs of the PLAN will be funded from corporate earnings. 2. Formula Awards of Director Restricted Stock, Non-Qualified Stock Options ------------------------------------------------------------------------ and Phantom Stock to Non-Employee Directors ------------------------------------------- All awards of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK under the PLAN shall be automatic and non-discretionary, and shall be made strictly in accordance with the provisions contained herein. No person shall have any discretion to select which NON-EMPLOYEE DIRECTORS shall be granted DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or PHANTOM STOCK. Further, no person shall have any discretion to determine the number of shares of DIRECTOR RESTRICTED STOCK awarded to a NON-EMPLOYEE DIRECTOR, and, except as otherwise provided in Section 4 with respect to a NON-EMPLOYEE DIRECTOR'S election to allocate formula awards between NON- QUALIFIED STOCK OPTIONS and PHANTOM STOCK, no person shall have any discretion to determine the number of shares underlying NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK awarded to a NON-EMPLOYEE DIRECTOR. 3. Awards of Director Restricted Stock ----------------------------------- (a) On the first business day of each calendar year beginning on January 1, 1998, during the duration of the PLAN, each person who is a NON-EMPLOYEE DIRECTOR on the first business day of the applicable calendar year shall receive a grant of DIRECTOR RESTRICTED STOCK in an amount to be determined in accordance with the formula set forth in this Section 3(a). The number of shares of DIRECTOR RESTRICTED - ----------------------------- /4/Capitalized words are defined in Section 15 hereof. 33 STOCK to be granted to each NON-EMPLOYEE DIRECTOR each calendar year shall be determined by (i) dividing ten thousand dollars ($10,000) by the FAIR MARKET VALUE of the COMMON STOCK on the first business day of the applicable calendar year, and (ii) rounding the resulting number down to the nearest whole share. No person shall receive more than one (1) grant of DIRECTOR RESTRICTED STOCK during any calendar year. (b) Shares of DIRECTOR RESTRICTED STOCK shall vest cumulatively as follows: (i) twenty percent (20%) of such shares on the first anniversary of the date of grant; (ii) forty percent (40%) of such shares on the second anniversary of the date of grant; (iii) sixty percent (60%) of such shares on the third anniversary of the date of grant; (iv) eighty percent (80%) of such shares on the fourth anniversary of the date of grant; and (v) one hundred percent (100%) of such shares on the fifth anniversary of the date of grant. Shares of DIRECTOR RESTRICTED STOCK may not be resold or otherwise transferred by a GRANTEE until such shares are vested in accordance with the provisions of this Section 3(b). 4. Annual Election to Receive Non-Qualified Stock Options and Phantom Stock ------------------------------------------------------------------------ By June 30 of each calendar year during the term of the Plan, each person who is then a NON-EMPLOYEE DIRECTOR shall deliver to the Corporate Secretary a written election to receive either NON-QUALIFIED STOCK OPTIONS or PHANTOM STOCK, or both, with an aggregate value of $20,000, on the first business day of the following calendar year, provided the person continues to be a NON-EMPLOYEE DIRECTOR on the date the award would otherwise be made. A NON-EMPLOYEE DIRECTOR may allocate between NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK in minimum increments with a value equal to $5,000, as determined in accordance with Section 5 below with respect to NON-QUALIFIED STOCK OPTIONS, and Section 6 below, with respect to PHANTOM STOCK. All awards of NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK made to NON-EMPLOYEE DIRECTORS shall comply with Section 5 and Section 6 below, respectively. A NON-EMPLOYEE DIRECTOR who has failed to make a timely election or who became a NON-EMPLOYEE DIRECTOR after June 30 shall be awarded NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK, each with a value of $10,000 as determined in accordance with Section 5 and Section 6, respectively, provided that the NON-EMPLOYEE DIRECTOR continues to be a NON-EMPLOYEE DIRECTOR on the on the first business day of the following calendar year. Notwithstanding the foregoing, elections for calendar year 1998 must be received by December 31, 1997, to be effective on the first business day of calendar year 1998. 34 5. Grant of Non-Qualified Stock Options to Non-Employee Directors -------------------------------------------------------------- (a) On the first business day of each calendar year beginning on January 1, 1998, during the duration of the PLAN, each person who is then a NON-EMPLOYEE DIRECTOR and who has elected to receive an award of NON- QUALIFIED STOCK OPTIONS in accordance with Section 4, shall receive a grant of NON-QUALIFIED STOCK OPTIONS with an aggregate value equal to $5,000, $10,000, $15,000, or $20,000, as previously elected by the NON-EMPLOYEE DIRECTOR (or $10,000 in the case of a NON-EMPLOYEE DIRECTOR who has failed to make a timely election in accordance with Section 4 or who became a NON-EMPLOYEE DIRECTOR after June 30) (the "Elected Option Value"). The number of shares subject to the NON- QUALIFIED STOCK OPTIONS shall be determined by dividing the Elected Option Value by the value of a NON-QUALIFIED STOCK OPTION to purchase a single share of PG&E Corporation common stock as of the first business day of the applicable calendar year. The per stock option value shall be calculated in accordance with the Black-Scholes stock option valuation method using the average preceding November closing price of PG&E Corporation stock and reducing the per option value so calculated by twenty percent. The resulting number of NON-QUALIFIED STOCK OPTIONS shall be rounded down to the nearest whole share. No person shall receive more than one grant of NON-QUALIFIED STOCK OPTIONS during any calendar year. (b) The OPTION PRICE of the COMMON STOCK subject under each NON-QUALIFIED STOCK OPTION shall be the FAIR MARKET VALUE of the COMMON STOCK on the date of grant. The exercise of any NON-QUALIFIED STOCK OPTION shall be contingent upon receipt by the CORPORATION of (i) cash, (ii) check, (iii) shares of COMMON STOCK, (iv) an executed exercise notice together with irrevocable instructions to a broker to either sell the shares subject to the NON-QUALIFIED STOCK OPTION or hold such shares as collateral for a margin loan and to promptly deliver to the CORPORATION the amount of sale or loan proceeds required to pay the OPTION PRICE, or (v) any combination of the foregoing in an amount equal to the full OPTION PRICE of the shares being purchased. For purposes of this paragraph, shares of COMMON STOCK that are delivered in payment of the OPTION PRICE must have been previously owned by the GRANTEE for a minimum of one year, and shall be valued at their FAIR MARKET VALUE as of the date of the exercise of the NON-QUALIFIED STOCK OPTION. The CORPORATION shall not make loans to any GRANTEE for the purpose of exercising NON-QUALIFIED STOCK OPTIONS. (c) Each NON-QUALIFIED STOCK OPTION granted under the Plan shall become exercisable and vested cumulatively as follows: (i) up to thirty- 35 three percent (33%) of the NON-QUALIFIED STOCK OPTION may be exercised on or after the second anniversary of the date of grant; (ii) up to sixty-six percent (66%) of the NON-QUALIFIED STOCK OPTION may be exercised on or after the third anniversary of the date of grant; and (iii) up to one hundred percent (100%) of the NON-QUALIFIED STOCK OPTION may be exercised on or after the fourth anniversary of the date of grant. (d) The term of each NON-QUALIFIED STOCK OPTION shall be ten years and one day from the date of grant, subject to earlier termination as provided in Section 9 hereof. Any provision of the PLAN to the contrary notwithstanding, no NON-QUALIFIED STOCK OPTION shall be exercised after the time limitations stated in this Section 5(d). 6. Awards of Phantom Stock to Non-Employee Directors ------------------------------------------------- (a) On the first business day of each calendar year beginning on January 1, 1998, during the duration of the PLAN, each person who is then a NON-EMPLOYEE DIRECTOR and who has elected to receive an award of PHANTOM STOCK in accordance with Section 4, shall be credited with an amount of PHANTOM STOCK with a value (as determined by the FAIR MARKET VALUE of the COMMON STOCK on the first business day of the applicable calendar year) equal to $5,000, $10,000, $15,000, or $20,000, as previously elected by the NON-EMPLOYEE DIRECTOR (the "Elected Phantom Stock Value"). The number of shares of PHANTOM STOCK (including fractions computed to three decimal places) to be granted to each NON- EMPLOYEE DIRECTOR each calendar year shall be determined by dividing the Elected Phantom Stock Value (or $10,000 in the case of a NON- EMPLOYEE DIRECTOR who has failed to make a timely election in accordance with Section 4 or who became a NON-EMPLOYEE DIRECTOR after June 30) by the FAIR MARKET VALUE of the COMMON STOCK on the first business day of the applicable calendar year. No person shall receive more than one grant of PHANTOM STOCK during any calendar year. The shares of PHANTOM STOCK awarded to a NON-EMPLOYEE DIRECTOR shall be credited to a newly established PHANTOM STOCK account for the NON- EMPLOYEE DIRECTOR. Each share of PHANTOM STOCK shall be deemed to be equal to one share (or fraction thereof) of COMMON STOCK on the date of grant, and shall thereafter fluctuate in value in accordance with the FAIR MARKET VALUE of the COMMON STOCK. (b) Each NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall be credited quarterly on each dividend payment date with additional shares of PHANTOM STOCK (including fractions computed to three decimal places) determined by dividing (i) the aggregate amount of dividends, i.e,. the dividend multiplied by the number of shares of 36 PHANTOM STOCK credited to the participant's account as of the dividend record date, by (ii) by the FAIR MARKET VALUE of the COMMON STOCK on the dividend payment date. (c) Payment of the shares of PHANTOM STOCK credited to a NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall only be made after the NON- EMPLOYEE DIRECTOR'S RETIREMENT or MANDATORY RETIREMENT from the BOARD OF DIRECTORS. Payment shall be made only in the form of shares of COMMON STOCK equal to the number of shares of PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account on the date of distribution, rounded down to the nearest whole share. The NON- EMPLOYEE DIRECTOR may elect to receive the number of shares of COMMON STOCK to which he is entitled in a lump sum distribution of the entire amount or in a series of ten or less approximately equal annual installments, provided that distribution shall commence no later than January of the year following the year in which the NON-EMPLOYEE DIRECTOR'S RETIREMENT or MANDATORY RETIREMENT occurred. 7. Shares of Stock Subject to the Plan ----------------------------------- There shall be reserved for use under the PLAN and for the grant of any other INCENTIVE AWARDS pursuant to the PROGRAM (subject to the provisions of Section 10 hereof) a total of 34,389,230 shares of COMMON STOCK, which shares may be authorized but unissued shares of COMMON STOCK or issued shares of COMMON STOCK which shall have been reacquired by PG&E CORPORATION. 8. Dividend, Voting and Other Shareholder Rights --------------------------------------------- Except as otherwise provided in the PLAN, each GRANTEE shall have all of the rights of a shareholder of PG&E CORPORATION with respect to all outstanding shares of DIRECTOR RESTRICTED STOCK registered in his or her name, whether or not such shares are vested, including the right to receive dividends and other distributions paid or made with respect to such shares and the right to vote such shares. No GRANTEE shall have any of the rights of a shareholder of PG&E CORPORATION with respect to a NON-QUALIFIED STOCK OPTION until the shares acquired upon exercise of such NON-QUALIFIED STOCK OPTION have been issued and registered in his or her name. No GRANTEE shall have any of the rights of a shareholder of PG&E CORPORATION with respect to PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account under the Plan. 9. Termination of Status as a Non-Employee Director ------------------------------------------------ 37 (a) In the event of a TERMINATION by reason of disability or death, (i) all shares of DIRECTOR RESTRICTED STOCK held by the GRANTEE shall become fully vested, notwithstanding the provisions of Section 3(b) hereof, and the GRANTEE (or the GRANTEE'S estate or a person who acquired the shares of DIRECTOR RESTRICTED STOCK by bequest or inheritance) shall have the right to resell or transfer such shares at any time, (ii) all NON-QUALIFIED STOCK OPTIONS held by the GRANTEE, to the extent that such NON-QUALIFIED STOCK OPTIONS have not previously expired or been exercised, shall become fully vested and exercisable, notwithstanding the provisions of Section 5(c) hereof, and the GRANTEE (or the GRANTEE'S estate or a person who acquired the right to exercise the NON-QUALIFIED STOCK OPTION by bequest or inheritance) shall have the right to exercise the NON-QUALIFIED STOCK OPTIONS at any time within their respective terms or within one (1) year after the date of the GRANTEE'S death or disability, whichever is shorter, and (iii) all shares of PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall immediately become payable to the GRANTEE (or the GRANTEE'S estate or a person who acquired the shares of PHANTOM STOCK by bequest or inheritance) in the form of a number of shares of COMMON STOCK equal to the number of shares of PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account, rounded down to the nearest whole share. The term "disability" shall, for the purposes of the PLAN, be defined in Section 22(e)(3) of the CODE. (b) In the event of a TERMINATION by reason of MANDATORY RETIREMENT, (i) all shares of DIRECTOR RESTRICTED STOCK held by the GRANTEE shall become fully vested, notwithstanding the provisions of Section 3(b) hereof, and the GRANTEE shall have the right to resell or transfer such shares at any time, (ii) the NON-QUALIFIED STOCK OPTIONS then held by the GRANTEE, to the extent that such NON-QUALIFIED STOCK OPTIONS have not previously expired or been exercised, shall become fully vested and exercisable, notwithstanding the provisions of Section 5(c) hereof, and the GRANTEE shall have the right to exercise the NON-QUALIFIED STOCK OPTIONS at any time within their respective terms or within five (5) years after such MANDATORY RETIREMENT, whichever is shorter; and (iii) all shares of PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall become payable to the GRANTEE in accordance with Section 6(c) hereof. (c) In the event of a TERMINATION for any reason other than those specified in subparagraphs (a) and (b) above, (i) any unvested shares of DIRECTOR RESTRICTED STOCK granted hereunder shall be forfeited and the GRANTEE shall return to the CORPORATION for cancellation any stock certificates representing such forfeited shares which forfeited shares shall 38 be deemed to be canceled and no longer outstanding as of the date of TERMINATION; and from and after the date of TERMINATION, the GRANTEE shall cease to be a shareholder with respect to such forfeited shares and shall have no dividend, voting or other rights with respect thereto, (ii) any NON-QUALIFIED STOCK OPTIONS granted hereunder that have not yet vested and become exercisable shall terminate, (iii) the GRANTEE shall have the right to exercise NON-QUALIFIED STOCK OPTIONS, to the extent that such NON-QUALIFIED STOCK OPTIONS have vested and become exercisable as of the date of TERMINATION, at any time within their respective terms or within three months after such TERMINATION, whichever is shorter, after which the NON-QUALIFIED STOCK OPTIONS shall terminate, and (iv) all shares of PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall be forfeited on the date of TERMINATION; provided, however, that if the TERMINATION results from the NON-EMPLOYEE DIRECTOR'S RETIREMENT, then the PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall become payable in accordance with Section 6(c) hereof. (d) Notwithstanding the provisions of subparagraphs (a) through (c) above, the BOARD OF DIRECTORS may, in its sole discretion, establish different terms and conditions pertaining to the effect of TERMINATION, to the extent permitted by applicable federal and state law. 10. Adjustments Upon Changes in Number or Value of Shares of Common Stock --------------------------------------------------------------------- If there are any changes in the number or value of shares of COMMON STOCK by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers, consolidations or other events that materially increase or decrease the number or value of issued and outstanding shares of COMMON STOCK, the BOARD OF DIRECTORS or COMMITTEE may make such adjustments as it shall deem appropriate, in order to prevent dilution or enlargement of rights. 11. Non-Transferability ------------------- NON-QUALIFIED STOCK OPTIONS, PHANTOM STOCK, and shares of DIRECTOR RESTRICTED STOCK that have not vested in accordance with the provisions of Section 3(b) hereof, shall not be transferable by the GRANTEE otherwise than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the CODE, Title I of ERISA or the rules thereunder. 12. Change in Control ----------------- 39 Upon the occurrence of a CHANGE IN CONTROL (as defined below), (i) any time periods relating to the vesting of any shares of DIRECTOR RESTRICTED STOCK granted hereunder shall be accelerated so that all such shares immediately become fully vested, (ii) any time periods relating to the vesting of NON- QUALIFIED STOCK OPTIONS granted hereunder shall be accelerated so that all such NON-QUALIFIED STOCK OPTIONS immediately become fully vested and exercisable for the remainder of their terms, and (iii) all shares of PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTORS' PHANTOM STOCK accounts shall become payable in accordance with Section 6(c) hereof as if the CHANGE IN CONTROL constituted a RETIREMENT. A "CHANGE IN CONTROL" shall be deemed to have occurred if: (a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any trustee, agent or other fiduciary for any such plan acting in such person's capacity as such fiduciary), directly or indirectly, becomes the beneficial owner of securities of PG&E CORPORATION representing twenty percent (20%) or more of the combined voting power of PG&E CORPORATION's then outstanding securities; (b) during any two consecutive years, individuals who at the beginning of such a period constitute the BOARD OF DIRECTORS cease for any reason to constitute at least a majority of the BOARD OF DIRECTORS, unless the election, or the nomination for election by the shareholders of PG&E CORPORATION, of each new DIRECTOR was approved by a vote of at least two-thirds (2/3) of the DIRECTORS then still in office who were DIRECTORS at the beginning of the period; or the shareholders of the CORPORATION shall have approved (i) any consolidation or merger of the CORPORATION other than a merger or consolidation which would result in the voting securities of the CORPORATION outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent of such surviving entity) at least 70 percent of the Combined Voting Power of the CORPORATION, such surviving entity or the parent of such surviving entity outstanding immediately after the merger or consolidation; (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the CORPORATION, or (iii) any plan or proposal for the liquidation or dissolution of the CORPORATION. For purposes of this paragraph, the term Combined Voting Power shall mean the combined voting power of the CORPORATION's or other relevant entity's then outstanding voting securities. 13. Amendment and Termination of the Plan ------------------------------------- 40 The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate, modify or amend the PLAN in any respect; provided, however, that, to the extent necessary and desirable to comply with the CODE (or any other applicable law or regulation, including the requirements of any stock exchange on which the COMMON STOCK is listed or quoted), shareholder approval of any PLAN amendment shall be obtained in such a manner and to such a degree as is required by the applicable law or regulation. No suspension, termination, modification or amendment of the PLAN may, without the consent of the GRANTEE, adversely affect his or her rights with respect to DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or PHANTOM STOCK theretofore granted to such GRANTEE. Except as provided in Section 2 hereof, the BOARD OF DIRECTORS or COMMITTEE may make such amendments or modifications in the terms and conditions of any grant of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or PHANTOM STOCK as it may deem advisable, or cancel or annul any grant of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or PHANTOM STOCK; provided, however, that no such amendment, modification, cancellation or annulment may, without the consent of the GRANTEE, adversely affect his or her rights with respect to such grant. 14. Effective Date of the Plan and Duration --------------------------------------- This PLAN became effective as of January 1, 1996, upon approval by the shareholders of Pacific Gas and Electric Company at its Annual Meeting on April 17, 1996. Effective January 1, 1997, the PLAN was assumed by PG&E CORPORATION. At its meeting on December 17, 1997, the BOARD OF DIRECTORS amended and restated the PLAN effective January 1, 1998, to (i) reflect the adoption of new RULE 16B-3 which became effective November 1, 1996, and (ii) provide automatic formula awards of NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK to NON-EMPLOYEE DIRECTORS within the limits of the PROGRAM as previously approved by shareholders in 1996. The COMMITTEE made various amendments to the PLAN effective October 21, 1998. Effective April 21, 1999, the PLAN, and the PROGRAM of which the PLAN is a part, were amended to add 11,000,000 shares of COMMON STOCK to the total number of shares of COMMON STOCK reserved for use under the PLAN and the PROGRAM. Unless terminated sooner pursuant to Section 13 hereof, the PLAN shall terminate on December 31, 2005. 15. Definitions ----------- (a) BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION. ------------------ 41 (b) CHANGE IN CONTROL has the meaning set forth in Section 12 hereof. ----------------- (c) CODE means the Internal Revenue Code of 1986, as amended from time to ---- time. (d) COMMITTEE means the Nominating and Compensation Committee of the BOARD --------- OF DIRECTORS or any successor to such committee. (e) COMMON STOCK means common shares of PG&E CORPORATION with no par value ------------ and any class of common shares into which such common shares hereafter may be converted. (f) CORPORATION means PG&E CORPORATION, and any parent corporation (as ----------- defined in Section 424(e) of the CODE) or subsidiary corporation (as defined in Section 424(f) of the CODE). (g) DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or -------- the Board of Directors of any parent corporation (as defined in Section 424(e) of the CODE) which may hereafter be established, including an advisory, emeritus or honorary director. (h) DIRECTOR RESTRICTED STOCK means RESTRICTED STOCK granted to a NON- ------------------------- EMPLOYEE DIRECTOR under the PLAN. (i) EMPLOYEE means any person who is employed by the CORPORATION. The -------- payment of a director's fee or consulting fee by the CORPORATION shall not be sufficient to constitute "employment" by the CORPORATION. (j) ERISA means the Employee Retirement Income Security Act of 1974, as ----- amended. (k) EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. ------------ (l) FAIR MARKET VALUE means the closing price of the COMMON STOCK reported ----------------- on the New York Stock Exchange Composite Transactions for the date specified for determining such value. (m) GRANTEE means the NON-EMPLOYEE DIRECTOR receiving the DIRECTOR ------- RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK or his or her legal representative, legatees, distributees or alternate payees, as the case may be. (n) MANDATORY RETIREMENT means retirement as a DIRECTOR at age 70 or at -------------------- such other age as may be specified in the retirement policy for the BOARD OF DIRECTORS or the Board of Directors of any parent 42 corporation which may hereafter be established (as the case may be), as in effect at the time of a NON-EMPLOYEE DIRECTOR'S TERMINATION. (o) NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE. --------------------- (p) NON-QUALIFIED STOCK OPTION means a option to purchase shares of COMMON -------------------------- STOCK which is not intended to qualify as an incentive stock option under Section 422 of the CODE. (q) PG&E CORPORATION means PG&E CORPORATION, a California corporation. ---------------- (r) PHANTOM STOCK means allocated hypothetical shares of COMMON STOCK that ------------- can be converted at a future date into stock. (s) PLAN means this Non-Employee Director Stock Incentive Plan, as may be ---- amended from time to time, or any successor plan which the COMMITTEE or BOARD OF DIRECTORS may adopt from time to time with respect to the grant of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS, PHANTOM STOCK or other stock-based incentive awards under the PROGRAM. (t) PROGRAM means the PG&E Corporation Long-Term Incentive Program, as ------- amended effective April 21, 1999, and as may be amended from time to time, pursuant to which this PLAN is adopted. (u) RESTRICTED STOCK means COMMON STOCK that is subject to forfeiture by ---------------- the GRANTEE to the CORPORATION under such circumstances as may be specified by the COMMITTEE. (v) RETIREMENT means TERMINATION of service on the BOARD OF DIRECTORS ---------- after serving continuously for five consecutive years. (w) RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any successor to ---------- Rule 16b-3, as in effect when discretion is being exercised with respect to the PLAN. (x) TERMINATION occurs when a NON-EMPLOYEE DIRECTOR ceases to be a member ----------- of the BOARD OF DIRECTORS or the Board of Directors of any parent corporation which may hereafter be established (as the case may be). 43 EX-10.13 8 PG&E EXECUTIVE STOCK OWNERSHIP PROGRAM-2/16/2000 EXHIBIT 10.13 PG&E CORPORATION EXECUTIVE STOCK OWNERSHIP PROGRAM Administrative Guidelines ------------------------- (As amended February 16, 2000) 1. Description. The Executive Stock Ownership Program ("Program") was approved ----------- by the Nominating and Compensation Committee of the Board of Directors on October 15, 1997. The Program is an important element of the Committee's compensation policy of aligning executive interests with those of the Corporation's shareholders. As an integral part of the Program, the Committee also authorized the use of Special Incentive Stock Ownership Premiums ("SISOPs") which are designed to provide incentives to Eligible Executives to assist in achieving minimum stock ownership targets established by the Committee. These Guidelines were originally adopted by the Committee on November 19, 1997, amended by the Committee on July 22, 1998, October 21, 1998, and February 16, 2000. These amended Guidelines, along with the written materials provided to the Committee on October 15, 1997, describe the Program which became effective on January 1, 1998. The Program is administered by the Corporation's Senior Human Resources Officer. 2. Eligible Executives. The Chief Executive Officer shall designate the ------------------- officers of the Corporation and its affiliates who shall be Eligible Executives covered by the Program. Initially, the officers covered by the Guidelines and the applicable stock ownership Target are:
- ------------------------------------------------------------------------------ Officer Band Position Stock Ownership Target - ------------------------------------------------------------------------------ 1 CEO 3 x base salary - ------------------------------------------------------------------------------ 2 Heads of Business Lines, 2 x base salary CFO, & General Counsel - ------------------------------------------------------------------------------ 3 SVPs of Corp. 1.5 x base salary - ------------------------------------------------------------------------------
3. Annual Milestones. Under the Guidelines, stock ownership levels are ----------------- designed to be achieved by the end of the fifth calendar year following the calendar year in which an officer first becomes an Eligible Executive ("Target Date"). Annual Milestones have been established as a means of measuring progress towards achieving Targets and of providing incentives for Eligible Executives to expeditiously meet their Targets. The Annual Milestone at the end of the first full calendar year is 20 percent of the Target, and the Annual Milestone for each succeeding year is an additional 20 percent of the Target. Annual Milestones shall be adjusted to reflect changes in base salary; provided, however, that in each instance any such modification shall be amortized over the remaining original five-year term. Following the Target Date, annual Targets also shall be modified to reflect changes in base salary. 4. Calculation of Stock Ownership Levels. Stock ownership level is the dollar ------------------------------------- value of stock and stock equivalents owned by an Eligible Executive and calculated as of the last day of the calendar year ("Measurement Date"). The purpose of this calculation is to determine the value of the stock or stock equivalents owned by the Eligible Executive as compared with the Annual Milestone or Target for that executive. For purposes of this calculation, the value per share of stock or stock equivalent ("Measurement Value") is the average closing price of PG&E Corporation common stock as traded on the New York Stock Exchange for the last thirty (30) trading days of the year. a) The value of stock beneficially owned by the Eligible Executive is determined by multiplying the number of shares owned beneficially on the Measurement Date times the Measurement Value. b) The value of PG&E Corporation phantom stock units credited to the Eligible Executive's account in the PG&E Corporation Deferred Compensation Plan for Officers ("DCP") is determined by multiplying the number of phantom stock units credited to the Eligible Executive's DCP account on the Measurement Date times the Measurement Value. c) The value of stock held in the PG&E Corporation stock fund of any defined contribution plan maintained by PG&E Corporation or any of its subsidiaries is the value of the Eligible Executive's PG&E Corporation stock fund on the Measurement Date. d) The value of vested stock options is the difference between the number of options multiplied by the Measurement Value minus the number of options multiplied by the option exercise price (for purposes of this calculation, any value attributable to dividend equivalents is excluded). 5. Award of SISOPs. SISOPs are awarded to Eligible Executives who achieve and --------------- maintain stock ownership levels prior to the end of the third year following the year in which an officer first became an Eligible Executive. For purposes of determining awards, the total stock ownership level is calculated as set forth under paragraph 4, on the Measurement Date. The amount of a SISOP award shall be equal to: a) For the first year, 20 percent of the amount of the Eligible Executive's stock ownership level at the end of the year, up to the Annual Milestone, plus an additional 30 percent of the amount by which the stock ownership level exceeds the Annual Milestone up to the target; and b) For each of the second and third years, 20 percent of the amount up to the Annual Milestone by which the end of the year stock ownership level exceeds the beginning of the year stock ownership level, plus an additional 30 percent of the amount by which the end of the year balance exceeds the Annual Milestone, up to the Target. Each time a SISOP award calculation is made, a second calculation also is made to determine the minimum number of shares which must be retained by the Eligible Executive to avoid forfeiture of the SISOP award ("Minimum Ownership Level") as discussed below in paragraph 8. This calculation converts the dollar value of the stock ownership level used as the basis for qualifying for SISOPs into a number of shares of stock. It is calculated by dividing the stock ownership level by the Measurement Value. 2 Thus, for example, if an Eligible Executive's stock ownership level was $250,000 and the Measurement Value was $25 per share, then the Minimum Ownership Level would be 10,000 shares. For purposes of this calculation, the maximum share ownership level used is the Eligible Executive's Target. If an Eligible Executive has a share ownership level higher than his/her Target, the increment over the Target is not included. Thus, for example, if an Eligible Executive has a Target of $750,000 and his/her share ownership level is $900,000, then only $750,000 is used to calculate the Minimum Ownership Level. 6. SISOPs Credited to the Deferred Compensation Plan. Upon award, SISOPs are ------------------------------------------------- credited to the Eligible Executive's DCP account and converted into units of phantom stock each equal in value to a share of PG&E Corporation common stock ("SISOP units") as determined in accordance with paragraph 6 of the DCP. The SISOP units constitute "incentive awards" authorized to be awarded by the Committee to Eligible Executives under the PG&E Corporation Long- Term Incentive Program ("LTIP"). Upon credit of SISOP units to an Eligible Executive's DCP account, an equal number of shares of PG&E Corporation common stock shall be reserved for issuance from the pool of shares authorized for issuance under the LTIP. Once a SISOP unit is credited to the Eligible Executive's DCP account, it shall be subject to all of the terms and conditions specifically applicable to SISOP units under the DCP. Once vested in accordance with paragraph 7 below, SISOP units are distributed in the form of an equal number of shares of PG&E Corporation common stock as provided in the DCP. 7. Vesting. SISOPs vest only upon the expiration of three years after the date ------- of award (provided the Eligible Executive continues to be employed on such date), or, if earlier, upon an Eligible Executive's death, disability, Retirement, or upon a Change in Control, as defined in the LTIP. An Eligible Executive's unvested SISOPs will be forfeited upon termination of employment unless otherwise provided in the PG&E Corporation Officer Severance Policy. 8. Forfeiture of SISOP Units. So long as SISOP units remain unvested, such ------------------------- units are subject to forfeiture if, on each Measurement Date, the Eligible Executive's stock ownership is less than the Minimum Ownership Level established when the SISOPs were granted (see paragraph 5). To determine forfeiture, the following steps are followed on each Measurement Date: a) The number of shares and PG&E Corporation phantom stock units credited to the Eligible Executive's DCP account is determined. b) The share-equivalent of the value of the vested "in the money" stock options is determined by dividing the value of such options (computed in the manner described in 4(d)) by the current Measurement Value (e.g., if the value of the vested "in the money" options is $100,000 and the current Measurement Value is $25 per share, then the share equivalent is 4,000 shares). c) The number of shares, PG&E Corporation phantom stock units, and share- equivalents of vested "in the money" options is added together. This total ("Current Holdings") is compared with the Minimum Ownership Level determined when the SISOPs were granted. If the Current Holdings are equal to or greater than the Minimum Ownership Level, then no unvested SISOP units are forfeited. If the Current Holdings are less than the 3 Minimum Ownership Level, then the unvested SISOP units are forfeited in the same proportion as the Current Holdings are less than Minimum Ownership Level (for example, if the Current Holdings are 20 percent less than the Minimum Ownership Level, then 20 percent of the SISOP units are forfeited). 9. Failure to Achieve or Maintain Target. Failure to achieve stock ownership ------------------------------------- levels at Target on the Target Date, or to maintain stock ownership levels at Target on any Measurement Date thereafter, will result in the deferral into the PG&E Corporation Phantom Stock Fund of the DCP of annual awards from the Performance Unit Plan ("PUP") and the Short Term Incentive Plan ("STIP"). As of any Measurement Date, to the extent that stock ownership levels are below Target, PUP awards shall be converted into PG&E Corporation Phantom Stock Units and held in the PG&E Corporation Phantom Stock Fund of the DCP. If, with the addition of the phantom stock units attributable to the PUP award, the stock ownership level is still below Target for any Measurement Date, any STIP award above target STIP also shall be converted into phantom stock units, to the extent necessary to achieve the Target stock ownership level. Such conversion of PUP and STIP awards shall continue for successive Measurement Dates, if necessary, until Target is met. Phantom stock units attributable to PUP and STIP awards described in this paragraph 9 will be paid from the DCP in a lump sum in January of the year following the year in which the Eligible Executive's employment terminates, or upon such earlier date as may have been elected by the Eligible Executive within thirty days after the date of mandatory deferral of PUP and/or STIP awards which date shall not be earlier than three (3) years after the date of mandatory deferral. 4 EX-11 9 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 PG&E CORPORATION COMPUTATION OF EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------------------------------- Three months ended Twelve months ended December 31, December 31, ------------------- --------------------- (in millions, except per share amounts) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE (EPS)/1/ Earnings available for common stock $ (611) $ 196 $ (73) $ 719 ======== ========= ======== ======== Average common shares outstanding/2/ 366 383 368 382 ======== ========= ======== ======== Basic EPS $ (1.67) $ 0.51 $ (0.20) $ 1.88 ======== ========= ======== ======== DILUTED EARNINGS PER SHARE (EPS)/1/ Earnings available for common stock $ (611) $ 196 $ (73) $ 719 ======== ========= ======== ======== Average common shares outstanding 366 383 368 382 Add: outstanding options, reduced by the number of shares that could be repurchased with the proceeds from such exercise (at average market price) - 1 1 1 -------- --------- -------- -------- Average common shares outstanding as adjusted 366 384 369 383 ======== ========= ======== ======== Diluted EPS $ (1.67) $ 0.51 $ (0.20) $ 1.88 ======== ========= ======== ======== - ---------------------------------------------------------------------------------------------------------
1 This presentation is submitted in accordance with Item 601(b)(11) of Regulation S-K and Statement of Financial Accounting Standards No. 128. 2 Average common shares outstanding exclude shares held by a subsidiary of PG&E Corporation (23,815,000 shares at December 31, 1999) and shares held by the Company to secure deferred compensation obligations (281,985 shares at December 31, 1999). EX-12.1 10 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 PACIFIC GAS AND ELECTRIC COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - ----------------------------------------------------------------------------- Year ended December 31, ------------------------------------------- (dollars in millions) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------- Earnings: $ 788 $ 729 $ 768 $ 755 $1,339 Net income Adjustments for minority interests in losses of less than 100% owned affiliates and the Company's equity in undistributed losses (income) of less than 50% owned affiliates - - - 3 4 Income tax expenses 648 629 609 555 895 Net fixed charges 637 673 628 683 716 ------ ------ ------ ------ ------ Total Earnings $2,073 $2,031 $2,005 $1,996 $2,954 ====== ====== ====== ====== ====== Fixed Charges: Interest on long- term debt, net $ 523 $ 585 $ 485 $ 574 $ 616 Interest on short- term borrowings 81 50 101 75 83 Interest on capital leases 3 2 2 3 3 AFUDC debt 7 12 17 8 11 Earnings required to cover the preferred stock dividend and preferred security distribution requirements of majority owned trust 24 24 24 24 3 ------ ------ ------ ------ ------ Total Fixed Charges $ 638 $ 673 $ 629 $ 684 $ 716 ====== ====== ====== ====== ====== Ratios of Earnings to Fixed Charges 3.25 3.02 3.19 2.92 4.13 - ----------------------------------------------------------------------------- Note: For the purpose of computing Pacific Gas and Electric Company's ratios of earnings to fixed charges, "earnings" represent net income adjusted for the minority interest in losses of less than 100% owned affiliates, cash distributions from and equity in undistributed income or loss of Pacific Gas and Electric Company's less than 50% owned affiliates, income taxes and fixed charges (excluding capitalized interest). "Fixed charges" include interest on long-term debt and short-term borrowings (including a representative portion of rental expense), amortization of bond premium, discount and expense, interest of subordinated debentures held by trust, interest in capital leases, and earnings required to cover the preferred stock dividend requirements. EX-12.2 11 FIXED CHARGES AND PREFERRED STOCK DIVIDENDS EXHIBIT 12.2 PACIFIC GAS AND ELECTRIC COMPANY COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS - -------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------ (dollars in millions) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Earning68 Net income $ 788 $ 729 $ 768 $ 755 $1,339 Adjustments for minority interests in losses of less than 100% owned affiliates and the Company's equity in undistributed losses (income) of less than 50% owned affiliates - - - 3 4 Income tax expense 648 629 609 555 895 Net fixed charges 637 673 628 683 716 ------ ------ ------ ------ ------ Total Earnings $2,073 $2,031 $2,005 $1,996 $2,954 ====== ====== ====== ====== ====== Fixed Charges: Interest on long- term debt, net $ 523 $ 585 $ 485 $ 574 $ 616 Interest on short term borrowings 81 50 101 75 83 Interest on capital leases 3 2 2 3 3 AFUDC debt 7 12 17 8 11 Earnings required to cover the preferred stock dividend and preferred security distribution requirements of majority owned trust 24 24 24 24 3 ------ ------ ------ ------ ------ Total Fixed Charges $ 638 $ 673 $ 629 $ 684 $ 716 ------ ------ ------ ------ ------ Preferred Stock Dividends: Tax Deductible dividends $ 9 $ 9 $ 10 $ 10 $ 11 Pretax earnings required to cover non-tax deductible preferred stock dividend requirements $ 27 $ 31 $ 39 $ 39 $ 100 ------ ------ ------ ------ ------ Total Preferred Stock Dividends $ 36 $ 40 $ 49 $ 49 $ 111 ------ ------ ------ ------ ------ Total Combined Fixed Charges and Preferred Stock Dividends $ 674 $ 713 $ 678 $ 733 $ 827 ====== ====== ====== ====== ====== Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends 3.08 2.85 2.96 2.72 $ 3.57 - ------------------------------------------------------------------------------- Note: For the purpose of computing Pacific Gas and Electric Company's ratios of earning to combined fixed charges and preferred stock dividends, "earnings" represent net income adjusted for the minority interest in losses of less than 100% owned affiliates, cash distributions from and equity in undistributed income or loss of Pacific Gas and Electric Company's less than 50% owned affiliates, income taxes and fixed charges (excluding capitalized interest). "Fixed charges" include interest on long-term debt and short-term borrowings (including a representative portion of rental expense), amortization of bond premium, discount and expense, interest on capital leases, interest of subordinated debentures held by trust, and earnings required to cover the preferred stock dividend requirements of majority owned subsidiaries. "Preferred stock dividends" represent pretax earnings which would be required to cover such dividend requirements. EX-13 12 1999 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995 PG&E CORPORATION(1) FOR THE YEAR Operating revenues $20,820 $19,577 $15,255 $ 9,610 $ 9,622 Operating income 878 2,098 1,762 1,896 2,763 Income from continuing operations 13 771 745 722 1,269 Earnings per common share from continuing operations, basic and diluted 0.04 2.02 1.82 1.75 2.99 Dividends declared per common share 1.20 1.20 1.20 1.77 1.96 AT YEAR-END Book value per common share $ 19.13 $ 21.08 $ 21.30 $ 20.73 $ 20.77 Common stock price per share 20.50 31.50 30.31 21.00 28.38 Total assets 29,715 33,234 31,115 26,237 26,871 Long-term debt (excluding current portions) 6,673 7,422 7,659 7,770 8,049 Rate reduction bonds (excluding current portions) 2,031 2,321 2,611 -- -- Redeemable preferred stock and securities of subsidiaries (excluding current portions) 635 635 750 694 694 PACIFIC GAS AND ELECTRIC COMPANY FOR THE YEAR Operating revenues $ 9,228 $ 8,924 $ 9,495 $ 9,610 $ 9,622 Operating income 1,993 1,876 1,820 1,896 2,763 Income available for common stock 763 702 735 722 1,269 AT YEAR-END Total assets $21,470 $22,950 $25,147 $26,237 $26,871 Long-term debt (excluding current portions) 4,877 5,444 6,218 7,770 8,049 Rate reduction bonds (excluding current portions) 2,031 2,321 2,611 -- -- Redeemable preferred stock and securities (excluding current portions) 586 586 694 694 694
(1) PG&E Corporation became the holding company for Pacific Gas and Electric Company on January 1, 1997. The Selected Financial Data of PG&E Corporation and Pacific Gas and Electric Company (the Utility) for the years 1995 and 1996 are identical because they reflect the accounts of the Utility as the predecessor of PG&E Corporation. Matters relating to certain data above, including discontinued operations and the cumulative effect of a change in an accounting principle are discussed in Management's Discussion and Analysis and in the Notes to Consolidated Financial Statements. 4 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS PG&E Corporation is an energy-based holding company headquartered in San Francisco, California. PG&E Corporation's Northern and Central California energy utility subsidiary, Pacific Gas and Electric Company (the Utility), provides natural gas and electric service to one of every 20 Americans. PG&E Corporation's National Energy Group provides energy products and services throughout North America. The National Energy Group businesses develop, construct, operate, own, and manage independent power generation facilities that serve wholesale and industrial customers through PG&E Generating Company, LLC (formerly U.S. Generating Company, LLC) and its affiliates (collectively, PG&E Gen); own and operate natural gas pipelines, natural gas storage facilities, and natural gas processing plants, primarily in the Pacific Northwest and in Texas, through various subsidiaries of PG&E Corporation (collectively, PG&E Gas Transmission or PG&E GT); purchase and sell energy commodities and provide risk management services to customers in major North American markets, including the other National Energy Group non-utility businesses, unaffiliated utilities, marketers, municipalities, and large end-use customers through PG&E Energy Trading--Gas Corporation, PG&E Energy Trading--Power, L.P., and their affiliates (collectively, PG&E Energy Trading or PG&E ET); and provide competitively priced electricity, natural gas, and related services to industrial, commercial, and institutional customers through PG&E Energy Services Corporation (PG&E Energy Services or PG&E ES). In the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a plan for the divestiture of PG&E Corporation's Texas natural gas and natural gas liquids business. Also in the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a plan for the divestiture of PG&E Corporation's retail energy services. This is a combined annual report of PG&E Corporation and Pacific Gas and Electric Company. It includes separate consolidated financial statements for each entity. The consolidated financial statements of PG&E Corporation reflect the accounts of PG&E Corporation, the Utility, and PG&E Corporation's wholly owned and controlled subsidiaries. The consolidated financial statements of the Utility reflect the accounts of the Utility and its wholly owned and controlled subsidiaries. This Management's Discussion and Analysis (MD&A) should be read in conjunction with the consolidated financial statements included herein. This combined annual report, including our Letter to Shareholders and this MD&A, contains forward-looking statements about the future that are necessarily subject to various risks and uncertainties. These statements are based on assumptions which management believes are reasonable and on information currently available to management. These forward-looking statements are identified by words such as "estimates," "expects," "anticipates," "plans," "believes," and other similar expressions. Actual results could differ materially from those contemplated by the forward-looking statements. Factors that could cause future results to differ materially from those expressed in or implied by the forward-looking statements or historical results include: - the pace and extent of the ongoing restructuring of the electric and natural gas industries across the United States; - operational changes related to industry restructuring, including changes in the Utility's business processes and systems; - the method and timing of disposition and valuation of the Utility's hydroelectric generation assets; - the timing of the completion of the Utility's transition cost recovery and the consequent end of the current electric rate freeze in California; - any changes in the amount the Utility is allowed to collect (recover) from its customers for certain costs that prove to be uneconomic under the new competitive market (called transition costs); - future operating performance at the Diablo Canyon Nuclear Power Plant (Diablo Canyon); - the method adopted by the California Public Utilities Commission (CPUC) for sharing the net benefits of operating Diablo Canyon with ratepayers and the timing of the implementation of the adopted method; - the extent of anticipated growth of transmission and distribution services in the Utility's service territory; - future market prices for electricity; - future fuel prices; 5 - the success of management's strategies to maximize shareholder value in PG&E Corporation's National Energy Group, which may include acquisitions or dispositions of assets, or internal restructuring; - the extent to which our current or planned generation development projects are completed and the pace and cost of such completion; - generating capacity expansion and retirements by others; - the successful integration and performance of acquired assets; - the outcome of the Utility's various regulatory proceedings, including the proposal to auction the Utility's hydroelectric generation assets, the electric transmission rate case applications, and post-transition period ratemaking proceedings; - fluctuations in commodity gas, natural gas liquids, and electric prices and our ability to successfully manage such price fluctuations; and - the pace and extent of competition in the California generation market and its impact on the Utility's costs and resulting collection of transition costs. As the ultimate impact of these and other factors is uncertain, these and other factors may cause future earnings to differ materially from results or outcomes we currently seek or expect. Each of these factors is discussed in greater detail in this MD&A. In this MD&A, we first discuss our competitive and regulatory environment. We then discuss earnings and changes in our results of operations for 1999, 1998, and 1997. Finally, we discuss liquidity and financial resources, various uncertainties that could affect future earnings, and our risk management activities. Our MD&A applies to both PG&E Corporation and the Utility. COMPETITIVE AND REGULATORY ENVIRONMENT This section provides a discussion of the competitive environment in the evolving energy industry, the California electric industry, the California natural gas business, the National Energy Group, and regulatory matters. THE COMPETITIVE ENVIRONMENT IN THE EVOLVING ENERGY INDUSTRY Historically, energy utilities operated as regulated monopolies within specific service territories where they were essentially the sole suppliers of natural gas and electricity services. Under this model, the energy utilities owned and operated all of the businesses necessary to procure, generate, transport, and distribute energy. These services were priced on a combined (bundled) basis, with rates charged by the energy companies designed to include all of the costs of providing these services. Now, energy utilities face intensifying pressures to "unbundle," or price separately, those activities that are no longer considered natural monopoly services. The most significant of these services are electricity generation and natural gas supply. The driving forces behind these competitive pressures are customers who believe they can obtain energy at lower unit prices and competitors who want access to those customers. Regulators and legislators are responding to those customers and competitors by providing for more competition in the energy industry. Regulators and legislators are requiring utilities to "unbundle" rates (separate their various energy services and the prices of those services). This allows customers to compare unit prices of the Utility and other providers when selecting their energy service provider. In the natural gas industry, Federal Energy Regulatory Commission (FERC) Order 636 required interstate pipeline companies to divide their services into separate gas commodity sales, transportation, and storage services. Under Order 636, interstate gas pipelines must provide transportation service regardless of whether the customer (often a local gas distribution company) buys the gas commodity from the pipeline. In the electric industry, the Public Utilities Regulatory Policies Act of 1978 (PURPA) specifically provided that unregulated companies could become wholesale generators of electricity and that utilities were required to purchase and use power generated by these unregulated companies in meeting their customers' needs. The National Energy Policies Act of 1992 was designed and implemented through FERC Orders 888 and 889 to increase competition in the wholesale unregulated generation market by requiring access to electric utility transmission systems by all wholesale unregulated generators, sellers, and buyers of electricity. Now, an increasing number of states throughout the country either have implemented plans or are considering proposals to separate the generation from the transmission and distribution of electricity through some form of electric industry restructuring. 6 To date, the states, not the federal government, have taken the initiative on electric industry restructuring at the retail level. While many bills mandating restructuring of the electric industry have been introduced in Congress, none have passed. As a result, the pace, extent, and methods for restructuring the electric industry vary widely throughout the country. For instance, as of December 31, 1999, 21 states had enacted electric industry restructuring legislation, including California, Texas, Illinois, Pennsylvania, New Jersey, Massachusetts, Rhode Island, New Hampshire, and Connecticut. There also are some states that have passed legislation precluding or significantly slowing down restructuring. Differences in how individual states view electric industry restructuring often relate to the existing unit cost of energy supplies within each state. Generally, states having higher energy unit costs are moving more quickly to deregulate energy supply markets. Implementation of our national energy strategy depends, in part, upon the opening of energy markets to provide customer choice of supplier. Undue delays by states or federal legislation to deregulate the electric generation and natural gas supply business could impact the pace of growth of our National Energy Group. THE CALIFORNIA ELECTRIC INDUSTRY In 1998, California became one of the first states in the country to implement electric industry restructuring and establish a competitive market framework for electric generation. Today, most Californians may continue to purchase their electricity from investor-owned utilities such as Pacific Gas and Electric Company, or they may choose to purchase electricity from alternative generation providers (such as unregulated power generators and unregulated retail electricity suppliers such as marketers, brokers, and aggregators). For those customers who have not chosen an alternative generation provider, investor-owned utilities, such as the Utility, continue to be the generation providers. Investor-owned utilities continue to provide distribution services to substantially all customers within their service territories, including customers who choose an alternative generation provider. COMPETITIVE MARKET FRAMEWORK: To create a competitive generation market, a Power Exchange (PX) and an Independent System Operator (ISO) began operating on March 31, 1998. The PX provides a competitive auction process to establish market clearing prices for electricity in the markets operated by the PX. The ISO schedules delivery of electricity for all market participants. The Utility continues to own and maintain a portion of the transmission system, but the ISO controls the operation of the system. Unless or until the CPUC determines otherwise, the Utility is required to bid or schedule into the PX and ISO markets all of the electricity generated by its power plants and electricity acquired under contractual agreements with unregulated generators. Also, the Utility is required to buy from the PX all electricity needed to provide service to retail customers that continue to choose the Utility as their electricity supplier. In November 1999, the FERC approved the extension of the ISO's authority to establish price limitations through 2000. The ISO Board increased the applicable price limitation to $750 per megawatt-hour (MWh) on October 1, 1999, but has the option to decrease it to $500 per MWh or make other changes, in view of the FERC's decision. This limits the amount of volatility that occurs in the California electricity market. However, the ISO will review the appropriate level for any price limitations for the summer of 2000 in light of market redesign efforts now being considered, including changes to reduce uninstructed deviations from ISO dispatch orders and changes to permit loads to participate by submitting bids for price-responsive demand in energy or ancillary services markets. The Utility is continuing its efforts to develop and implement changes to its business processes and systems, including the customer information and billing system, to accommodate electric industry restructuring. To the extent that the Utility is unable to develop and implement such changes in a successful and timely manner, there could be an adverse impact on the Utility's or PG&E Corporation's future results of operations. TRANSITION PERIOD, RATE FREEZE, AND RATE REDUCTION: California's electric industry restructuring established a transition period during which electric rates remain frozen at 1996 levels (with the exception that, on January 1, 1998, rates for small commercial and residential customers were reduced by 10 percent and remain frozen at this reduced level) and investor-owned utilities may recover their transition costs. Transition costs are generation-related costs that prove to be uneconomic under the new competitive structure. The transition period ends the earlier of December 31, 2001, or when the particular utility has recovered its eligible transition costs. 7 Revenues from frozen electric rates provide for the recovery of authorized Utility costs, including transmission and distribution service, public purpose programs, nuclear decommissioning, and rate reduction bond debt service. To the extent the revenues from frozen rates exceed authorized Utility costs, the remaining revenues constitute the competitive transition charge (CTC), which recovers the transition costs. These CTC revenues are being recovered from all Utility distribution customers and are subject to seasonal fluctuations in the Utility's sales volumes and certain other factors. As the CTC is collected regardless of the customer's choice of electricity supplier (i.e., the CTC is non-bypassable), the Utility believes that the availability of choice to its customers will not have a material impact on its ability to recover transition costs. To pay for the 10 percent rate reduction, the Utility refinanced $2.9 billion (the expected revenue reduction from the rate decrease) of its transition costs with the proceeds from the rate reduction bonds. The bonds allow for the rate reduction by lowering the carrying cost on a portion of the transition costs and by deferring recovery of a portion of these transition costs until after the transition period. During the rate freeze, the rate reduction bond debt service will not increase Utility customers' electric rates. If the transition period ends before December 31, 2001, the Utility may be obligated to return a portion of the economic benefits of the transaction to customers. The timing of any such return and the exact amount of such portion, if any, have not yet been determined. TRANSITION COST RECOVERY: Although most transition costs must be recovered during the transition period, certain transition costs can be recovered after the transition period. Except for certain transition costs discussed below, at the conclusion of the transition period, the Utility will be at risk to recover any of its remaining generation costs through market-based revenues. Transition costs consist of (1) above-market sunk costs (costs associated with utility generating facilities that are fixed and unavoidable and that were included in customers' rates on December 20, 1995) and future sunk costs, such as costs related to plant removal, (2) costs associated with long-term contracts to purchase power at above-market prices from qualifying facilities (QF) and other power suppliers, and (3) generation-related regulatory assets and obligations. (In general, regulatory assets are expenses deferred in the current or prior periods, to be included in rates in subsequent periods.) Above-market sunk costs result when the book value of a facility exceeds its market value. Conversely, below-market sunk costs result when the market value of a facility exceeds its book value. The total amount of generation facility costs to be included as transition costs is based on the aggregate of above-market and below-market values. The above-market portion of these costs is eligible for recovery as a transition cost. The below-market portion of these costs will reduce other unrecovered transition costs. These above- and below-market sunk costs are related to generating facilities that are classified as either non-nuclear or nuclear sunk costs. The Utility cannot determine the exact amount of above-market non-nuclear sunk costs that will be recoverable as transition costs until the valuation of the Utility's remaining non-nuclear generating assets, primarily its hydroelectric generating assets, is completed. The valuation, through appraisal, sale, or other divestiture, must be completed by December 31, 2001. The value of seven of the Utility's other non-nuclear generating facilities was determined when these facilities were sold to third parties. The portion of the sales proceeds that exceeded the book value of these facilities was used to reduce other transition costs. On September 30, 1999, the Utility filed an application with the CPUC to determine the market value of its hydroelectric generating facilities and related assets through an open, competitive auction. (See "Generation Divestiture" below.) The Utility plans to use an auction process similar to the one previously approved by the CPUC and successfully used in the sale of the Utility's fossil and geothermal plants. If the market value of the Utility's hydroelectric facilities is determined based upon any method other than a sale of the facilities to a third party, a material charge to Utility earnings could result. Any excess of market value over book value would be used to reduce other transition costs. (See "Generation Divestiture" below.) For nuclear transition costs, revenues provided for transition cost recovery are based on the accelerated recovery of the investment in Diablo Canyon over a five-year period ending December 31, 2001. The amount of nuclear generation sunk costs was determined separately through a CPUC proceeding and was subject to a final verification audit that was completed in August 1998. The audit of the Utility's Diablo Canyon accounts at December 31, 1996, resulted in the issuance of an unqualified opinion. The audit verified that Diablo Canyon sunk costs at December 31, 1996, were $3.3 billion of the total $7.1 billion construction costs. The independent accounting firm also issued an agreed-upon special procedures report, requested by the CPUC, that questioned 8 $200 million of the $3.3 billion sunk costs. The CPUC will review the results of the audit and may seek to make adjustments to Diablo Canyon's sunk costs subject to transition cost recovery. At this time, the Utility cannot predict what actions, if any, the CPUC may take regarding the audit report. Costs associated with the Utility's long-term contracts to purchase electric power are included as transition costs. Regulation required the Utility to enter into such long-term agreements with non-utility generators. Prices fixed under these contracts are now typically above prices for power in wholesale markets. (See Note 14 of Notes to Consolidated Financial Statements.) Over the remaining life of these contracts, the Utility estimates that it will purchase 299 million MWh of electric power. To the extent that the individual contract prices are above the market price, the Utility is collecting the difference between the contract price and the market price from customers, as a transition cost, over the term of the contract. The contracts expire at various dates through 2028. The total costs under long-term contracts are based on several variables, including the capacity factors of the related generating facilities and future market prices for electricity. During 1999, the average price paid under the Utility's long-term contracts for electricity was 6.3 cents per kilowatt-hour (kWh). The average cost of electricity purchased at market rates from the PX for the year ended December 31, 1999, was 3.7 cents per kWh. The average cost of electricity purchased at market rates from the PX for the period from March 31, 1998, the PX's establishment date, to December 31, 1998, was 3.2 cents per kWh. Generation-related regulatory assets and obligations (net generation-related regulatory assets) are included as transition costs. At December 31, 1999 and 1998, the Utility's generation-related net regulatory assets totaled $4 billion and $5.4 billion, respectively. Certain transition costs can be recovered through a non-bypassable charge to distribution customers after the transition period. These costs include (1) certain employee-related transition costs, (2) above-market payments under existing long-term contracts to purchase power, discussed above, (3) up to $95 million of transition costs to the extent that the recovery of such costs during the transition period was displaced by the recovery of electric industry restructuring implementation costs, and (4) transition costs financed by the rate reduction bonds. Transition costs financed by the issuance of rate reduction bonds will be recovered over the term of the bonds. In addition, the Utility's nuclear decommissioning costs are being recovered through a CPUC-authorized charge, which will extend until sufficient funds exist to decommission the nuclear facility. During the rate freeze, the charge for these costs will not increase Utility customers' electric rates. Excluding these exceptions, the Utility will write off any transition costs not recovered during the transition period. The Utility is amortizing its transition costs, including most generation-related regulatory assets, over the transition period in conjunction with the available CTC revenues. During the transition period, a reduced rate of return on common equity of 6.77 percent applies to all generation assets, including those generation assets reclassified to regulatory assets. Effective January 1, 1998, the Utility started collecting these eligible transition costs through the non-bypassable CTC and generation divestiture. For the years ended December 31, 1999 and 1998, regulatory assets related to electric industry restructuring decreased by $1,359 million and $609 million, respectively, which reflects the recovery of eligible transition costs. During the transition period, the CPUC reviews the Utility's compliance with accounting methods established in the CPUC's decisions governing transition cost recovery and the amount of transition costs requested for recovery. The CPUC is currently reviewing non-nuclear transition costs amortized during 1998 and the first six months of 1999. GENERATION DIVESTITURE: In 1998, the Utility sold three fossil-fueled generation plants for $501 million. These three fossil-fueled plants had a combined book value at the time of the sale of $346 million and had a combined capacity of 2,645 megawatts (MW). On April 16, 1999, the Utility sold three other fossil-fueled generation plants for $801 million. At the time of sale, these three fossil-fueled plants had a combined book value of $256 million and had a combined capacity of 3,065 MW. On May 7, 1999, the Utility sold its complex of geothermal generation facilities for $213 million. At the time of sale, these facilities had a combined book value of $244 million and had a combined capacity of 1,224 MW. 9 The gains from the sale of the fossil-fueled generation plants were used to offset other transition costs. Likewise, the loss from the sale of the complex of geothermal generation facilities is being recovered as a transition cost. The Utility has retained a liability for required environmental remediation related to any pre-closing soil or groundwater contamination at the plants it has sold. On September 30, 1999, the Utility filed an application with the CPUC to determine the market value of its hydroelectric generating facilities and related assets through an open, competitive auction. The Utility proposes to use an auction process similar to the one previously approved by the CPUC and successfully used in the sale of the Utility's fossil and geothermal plants. Under the process proposed in the application, another subsidiary of PG&E Corporation, PG&E Gen, would be permitted to participate in the auction on the same basis as other bidders. The sale of the hydroelectric facilities would be subject to certain conditions, including the transfer or re-issuance of various permits and licenses by the FERC and other agencies. In addition, the FERC must approve assignment of the Utility's Reliability Must Run Contract with the ISO for any facility subject to such contract. Under the proposed purchase and sale agreement, the CPUC's approval of the proposed sale on terms acceptable to the Utility in the Utility's sole discretion is also a condition precedent to the closing of any sale. On January 13, 2000, a scoping memo and ruling was issued that separates the proceeding into two concurrent phases: one to review the potential environmental impacts of the proposed auction under the California Environmental Quality Act and a second to determine whether the Utility's auction proposal, or some other alternative to the proposal, is in the public interest. The ruling notes that the divestiture and valuation issues can best be considered after the environmental impacts of a change in ownership have been reviewed. Potential bidders will also be able to incorporate the costs of any mitigation measures that may be required into their bids. The ruling sets a procedural schedule which calls for a final decision on the Utility's auction proposal by October 19, 2000, and a final environmental impact report published in November 2000. The ruling also anticipates that a final CPUC decision approving the sale would be issued by May 15, 2001. Finally, the ruling prohibits the Utility from withdrawing its application without express CPUC authority. It is uncertain whether the CPUC will ultimately approve the Utility's auction proposal. At December 31, 1999, the book value of the Utility's net investment in hydroelectric generation assets was approximately $0.7 billion, excluding approximately $0.5 billion of net investment reclassified as regulatory assets. Any excess of market value over the $0.7 billion book value would be used to reduce transition costs, including the remaining $0.5 billion of regulatory assets related to the hydroelectric generation assets. If the market value of the hydroelectric generation assets is determined by any method other than a sale of the assets to a third party, or if the winning bidder for any of the auctioned assets is PG&E Gen, a material charge to Utility earnings could result. The timing and nature of any such charge is dependent upon the valuation method and procedure adopted, and the method of implementation. As discussed below, it is possible that the CPUC will require an interim valuation through an estimate of market value of the assets prior to transfer, sale, or other divestiture, which could also result in a material charge. While transfer or sale to an affiliated entity such as PG&E Gen would result in a material charge to income, neither PG&E Corporation nor the Utility believes that the sale of any generation facilities to a third party will have a material impact on its results of operations. The Utility's ability to continue recovering its transition costs depends on several factors, including (1) the continued application of the regulatory framework established by the CPUC and state legislation, (2) the amount of transition costs ultimately approved for recovery by the CPUC, (3) the determined value of the Utility's hydroelectric generation facilities, (4) future Utility sales levels, (5) future Utility fuel and operating costs, and (6) the market price of electricity. Given the current evaluation of these factors, PG&E Corporation believes that the Utility will recover its transition costs. However, a change in one or more of these factors could affect the probability of recovery of transition costs and result in a material charge. POST-TRANSITION PERIOD: In October 1999, the CPUC issued a decision in the Utility's post-transition period ratemaking proceeding. Among other matters, the CPUC's decision addresses the mechanisms for ending the current electric rate freeze and for establishing post-transition period accounting mechanisms and rates. The decision requires Diablo Canyon generation to be priced at prevailing market rates after the transition period. This portion of the decision is further discussed below under "Regulatory Matters - Post-Transition Period Ratemaking Proceeding." 10 The CPUC decision requires the Utility to provide quarterly forecasts of when the Utility's rate freeze (i.e., transition period) may end based on various assumptions regarding energy prices and the book value of the Utility's remaining generation assets. The Utility is required to notify the CPUC three months before the earliest forecasted end of its rate freeze and provide draft tariff language and sample calculations of the rates that would go into effect when the rate freeze ends. After the Utility completes its transition cost recovery, it must implement its post-rate-freeze rates. The timing of the end of the rate freeze and corresponding transition period will, in part, depend on the timing of the valuation of the Utility's hydroelectric generating assets and the ultimate determined value of such assets since any excess of market value over the assets' book value would be used to reduce transition costs. If the value of the Utility's hydroelectric generation assets is significantly higher than the related book value, the transition period and the rate freeze could end before December 31, 2001, and potentially could end during 2000. The CPUC is considering the Utility's proposal to auction its hydroelectric assets, although the CPUC could also require the Utility to implement an interim valuation of the assets. In another proceeding (the 1998 Annual Transition Cost Proceeding (ATCP)), a CPUC administrative law judge issued a proposed decision on January 7, 2000, which contained a proposed change to the rules previously in place for the amortization of transition costs. Under the final decision, issued on February 17, 2000, on a prospective basis the utilities are required to assess the estimated market value of their remaining non-nuclear generating assets, including the land associated with those assets, on an aggregate basis at a value not less than the net book value of those assets and to credit the Transition Cost Balancing Account (TCBA) with the estimated value. The decision encourages the utilities to base such estimates on realistic assessments of the market value of the assets. The final decision did not adopt the proposed decision's recommendation to establish a new regulatory asset account that would allow a true-up when the estimated market value is greater than actual market value. However, the decision states that crediting the TCBA with the aggregate net book value of the remaining non-nuclear generating assets is a conservative approach and remedies any concerns regarding the lack of a true-up. The decision provides that if the estimated market valuation is less than book value for any individual asset, accelerated amortization of the associated transition costs will continue until final market valuation of the asset occurs through sale, appraisal, or other divestiture. If the final value of the assets, determined through sale, appraisal, or other divestiture, is higher than the estimate, the excess amount would be used to pay remaining transition costs, if any. The utilities are required to file the adjusted entries to their respective TCBA based on the estimated market values with the CPUC by March 9, 2000. The filing will become effective after appropriate review by the CPUC's Energy Division and the TCBA entries are subject to review in the next ATCP. If an estimate of the market value of the non-nuclear generating assets is adopted that exceeds the aggregate net book value of those assets, a charge to earnings would result. After the rate freeze and transition periods end, the Utility must refund to electric customers any over-collected transition costs (plus interest at the Utility's authorized rate of return) within one year after the end of the rate freeze. The Utility also will be prohibited from collecting after the rate freeze any electric costs incurred during the rate freeze but not recovered during the rate freeze, including costs that are not classified as transition costs. Through the end of its rate freeze, the Utility will continue to incur certain non-transition costs and place those costs into balancing and memorandum accounts for future recovery. There is a risk that the Utility will be unable to collect certain non-transition costs that, due to lags in the regulatory cost approval process, have not been approved for recovery nor collected when the rate freeze ends. The Utility is unable to predict the amount of such potential unrecoverable costs. The CPUC also has established the Purchased Electric Commodity Account for the Utility to track energy costs after the rate freeze and transition period end. The CPUC intends to explore other ratemaking issues, including whether dollar-for-dollar recovery of energy costs is appropriate, in the second phase of the post-transition electric ratemaking proceeding. There are three primary options for the future regulatory framework for utility electric energy procurement cost recovery after the rate freeze: (1) a CPUC-defined procurement practice, that if followed by the Utility, would pass through costs without the need for reasonableness reviews, (2) a pass-through of costs subject to after-the-fact reasonableness reviews, or (3) a procurement incentive mechanism with rewards and penalties determined based on the Utility's energy purchasing performance compared to a benchmark. The Utility proposed adoption of either a defined procurement practice or a procurement incentive mechanism, neither of which would involve reasonableness reviews. The volatility of earnings and risk exposure of the Utility related to post-transition period purchases of electricity is dependent on which of these options, or some other approach, is adopted. 11 After the transition period, the Utility's future earnings from its electric distribution will be subject to volatility as a result of sales fluctuations. DISTRIBUTED GENERATION AND ELECTRIC DISTRIBUTION COMPETITION: In October 1999, the CPUC issued a decision outlining how the CPUC, in cooperation with other regulatory agencies and the California Legislature, plans to address the issues surrounding distributed generation, electric distribution competition, and the role of the utility distribution companies (such as Pacific Gas and Electric Company) in the competitive retail electric market. Distributed generation enables siting of electric generation technologies in close proximity to the electric demand (referred to as "load"). The CPUC decision opened a new rulemaking proceeding to examine various issues concerning distributed generation, including interconnection issues, who can own and operate distributed generation, environmental impacts, the role of utility distribution companies, and the rate design and cost allocation issues associated with the deployment of distributed generation facilities. With respect to electric distribution competition, the CPUC directed its staff to deliver a report by April 21, 2000, on the different policy options that the CPUC, in cooperation with the California Legislature, can pursue. Following the issuance of the report, the CPUC expects to open one or more new proceedings to address electric distribution competition and competition in the retail electric market. THE CALIFORNIA NATURAL GAS BUSINESS Restructuring of the natural gas industry on both the national and the state levels has given choices to California utility customers to meet their gas supply needs. The Utility offers transmission, distribution, and storage services as separate and distinct services to its industrial and larger commercial gas (noncore) customers. Customers have the opportunity to select from a menu of services offered by the Utility and they pay only for the services that they use. Access to the transmission system is possible for all gas marketers and shippers, as well as noncore end users. The Utility's residential and smaller commercial gas (core) customers can select the commodity gas supplier of their choice. However, the Utility continues to purchase gas as a regulated supplier for those core customers who request it, serving 3.8 million core customers in its service territory. The Utility's costs of purchasing gas for core customers through 2002 are regulated by the core procurement incentive mechanism, a form of incentive ratemaking that provides the Utility a direct financial incentive to procure gas and transportation services at the lowest reasonable costs by comparing all procurement costs to an aggregate market-based benchmark. If costs fall within a range (referred to as "tolerance band") around the benchmark, costs are considered reasonable and fully recoverable from ratepayers. If procurement costs fall outside the tolerance band, ratepayers and shareholders share savings or costs, respectively. The Gas Accord settlement agreement, approved by the CPUC in 1997, established gas transmission rates within California for the period from March 1998 through December 2002 for the Utility's core and noncore customers and eliminated regulatory protection against variations in noncore transmission revenues. As a result, the Utility is at risk for variations between actual and forecasted transmission throughput volumes. Rates for gas distribution services continue to be set by the CPUC and are designed to provide the Utility an opportunity to recover its costs of service and include a return on its investment. The regulatory mechanisms for setting gas distribution rates are discussed below under "Regulatory Matters." NATIONAL ENERGY GROUP PG&E Corporation's National Energy Group has been formed to pursue opportunities created by the gradual restructuring of the energy industry across the nation. The National Energy Group integrates our national power generation, gas transmission, and energy trading and services businesses. The National Energy Group contemplates increasing PG&E Corporation's national market presence through a balanced program of acquisition and development of energy assets and businesses, while at the same time undertaking ongoing portfolio management of its assets and businesses. PG&E Corporation's ability to anticipate and capture profitable business opportunities created by restructuring will have a significant impact on PG&E Corporation's future operating results. Certain New England states where our National Energy Group operates electric generation facilities were, like California, among the first states in the country to introduce electric industry restructuring. As a result of this restructuring and certain other regulatory initiatives, the wholesale unregulated electricity market in New England features a bid-based market and an ISO. 12 INDEPENDENT POWER GENERATION: Through PG&E Gen and its affiliates, we participate in the development, construction, operation, ownership, and management of non-utility electric generating facilities that compete in the United States power generation market. In September 1998, PG&E Corporation, through its indirect subsidiary USGen New England, Inc. (USGenNE), completed the acquisition of a portfolio of electric generation assets and power supply contracts from the New England Electric System (NEES). The purchased assets include hydroelectric, coal, oil, and natural gas generation facilities with a combined generating capacity of about 4,000 MW. Including fuel and other inventories and transaction costs, the financing requirements for this transaction were approximately $1.8 billion, funded through an aggregate of $1.3 billion of PG&E Gen and USGenNE debt and a $425 million equity contribution from PG&E Corporation. The net purchase price has been allocated as follows: (1) electric generating assets of $2.3 billion, (2) receivable for support payments of $0.8 billion, and (3) above-market contractual obligations of $1.3 billion, relating to acquired power purchase agreements, gas agreements, and standard offer agreements. As part of the New England electric industry restructuring, the local utility companies were required to offer Standard Offer Service (SOS) to their retail customers. Retail customers may select alternative suppliers at any time. The SOS is intended to provide customers with a price benefit (the commodity electric price offered to the retail customer is expected to be less than the market price) for the first several years, followed by a price disincentive that is intended to stimulate the retail market. Retail customers may continue to receive SOS through June 30, 2002, in New Hampshire (subject to early termination on December 31, 2000, at the discretion of the New Hampshire Public Service Commission), through December 31, 2004, in Massachusetts, and through December 31, 2009, in Rhode Island. However, if customers choose an alternate supplier, they are precluded from going back to the SOS. In connection with the purchase of the generation assets, USGenNE entered into wholesale agreements with certain of the retail companies of NEES to supply at specified prices the electric capacity and energy requirements necessary for their retail companies to meet their SOS obligations. These companies are responsible for passing on to us the revenues generated from the SOS. USGenNE currently is indirectly serving a large portion of the SOS electric capacity and energy requirements for these companies, except in New Hampshire. For the year ended December 31, 1999, the SOS price paid to generators was $0.035 per Kwh for generation. On March 1, 1999, Constellation Power Source, Inc. (Constellation) won the New Hampshire component of the SOS through a competitive bidding solicitation. On January 7, 2000, USGenNE paid approximately $15 million to a third party for this third party's assumption of 10 percent of the Massachusetts Electric Company/Nantucket Electric Company SOS and 40 percent of the Narragansett SOS. Like other utilities, New England utilities previously entered into agreements with unregulated companies (e.g., qualifying facilities under PURPA) to provide energy and capacity at prices that are anticipated to be in excess of market prices. We assumed NEES' contractual rights and duties under several of these power purchase agreements. At December 31, 1999, these agreements provided for an aggregate 470 MW of capacity. However, NEES will make support payments to us toward the cost of these agreements. The support payments by NEES total $0.9 billion in the aggregate (undiscounted) and are due in monthly installments from September 1998 through January 2008. In certain circumstances, with our consent, NEES may make a full or partial lump-sum accelerated payment. Initially, approximately 90 percent of the acquired operating capacity, including capacity and energy generated by other companies and provided to us under power purchase agreements, is dedicated to servicing SOS customers. To the extent that customers eligible to receive SOS choose alternate suppliers, or as these obligations are sold to other parties, this percentage will decrease. As customers choose alternate suppliers, or the SOS obligations are sold, a greater proportion of the output of the acquired operating capacity will be subject to market prices. GAS TRANSMISSION OPERATIONS: PG&E Corporation participates in the "midstream" portion of the gas business through PG&E GT NW. PG&E GT NW owns and operates gas transmission pipelines and associated facilities which extend over 612 miles from the Canada-U.S. border to the Oregon-California border. PG&E GT NW provides firm and interruptible transportation services to third party shippers on an open-access basis. Its customers are principally retail gas 13 distribution utilities, electric utilities that use natural gas to generate electricity, natural gas marketing companies, natural gas producers, and industrial consumers. On January 27, 2000, PG&E Corporation's National Energy Group signed a definitive agreement with El Paso Field Services Company (El Paso) providing for the sale to El Paso, a subsidiary of El Paso Energy Corporation, of the stock of PG&E Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc. (collectively, PG&E GTT). The consideration to be received by the National Energy Group includes $279 million in cash subject to a working capital adjustment, the assumption by El Paso of debt having a book value of $624 million, and other liabilities associated with PG&E GTT. In 1999, PG&E Corporation recognized a charge against earnings of $890 million after tax, or $2.42 per share, to reflect PG&E GTT's assets at their fair market value. The composition of the pre-tax charge is as follows: (1) an $819 million write-down of net property, plant, and equipment, (2) the elimination of the unamortized portion of goodwill, in the amount of $446 million, and (3) an accrual of $10 million representing selling costs. Proceeds from the sale will be used to retire short-term debt associated with PG&E GTT's operations and for other corporate purposes. Closing of the sale, which is expected in the first half of 2000, is subject to approval under the Hart Scott Rodino Act. ENERGY TRADING: Through PG&E ET, we purchase bulk volumes of power and natural gas from PG&E Corporation affiliates and the wholesale market. We then schedule, transport, and resell these commodities, either directly to third parties or to other PG&E Corporation affiliates. PG&E ET also provides risk management services to PG&E Corporation's other businesses (except the Utility) and to wholesale customers. (See "Price Risk Management Activities" below; and Note 3 of the Notes to Consolidated Financial Statements.) ENERGY SERVICES: In December 1999, PG&E Corporation's Board of Directors approved a plan to dispose of PG&E ES, its wholly owned subsidiary, through a sale. As of December 31, 1999, the intended disposal has been accounted for as a discontinued operation. In connection with this transaction, PG&E Corporation's investment in PG&E ES was written down to its estimated net realizable value. In addition, PG&E Corporation provided a reserve for anticipated losses through the date of sale. The total provision for discontinued operations was $58 million, net of income taxes of $36 million. While there is no definite sales agreement, it is expected that the disposition will be completed in 2000. The amounts that PG&E Corporation will ultimately realize from this disposal could be materially different from the amounts assumed in arriving at the estimated loss on disposal of the discontinued operations. The PG&E ES business segment generated net losses of $40 million (or $0.11 per share), $52 million (or $0.14 per share), and $29 million (or $0.07 per share), for the years ended December 31, 1999, 1998, and 1997, respectively. REGULATORY MATTERS A significant portion of PG&E Corporation's operations are regulated by federal and state regulatory commissions. These commissions oversee service levels and, in certain cases, PG&E Corporation's pricing for its regulated services. Following are the percentages of 1999 revenues that fell under the jurisdiction of these various regulatory agencies:
UTILITY CONSOLIDATED Cost of service-based 96.8% 42.3% Market 3.2% 57.7%
The Utility is the only subsidiary with significant regulatory proceedings at this time. Some of the items that affected reported 1999 results, and will affect future Utility authorized revenues, include the 1999 General Rate Case, the year 2000 cost of capital proceeding, the post-transition period ratemaking proceeding, the FERC transmission rate cases, the catastrophic event memorandum account proceeding, the CPUC's gas strategy investigation-Phase 2, and the 1997 and 1998 electric base revenue increase proceeding. These items are discussed below. Any requested change in authorized electric revenues resulting from any of the electric proceedings would not impact the Utility's customer electric rates through the transition period because these rates are frozen in accordance with the electric transition plan. However, the amount of remaining revenues providing for the 14 recovery of transition costs would be affected. Any change in authorized gas revenues resulting from gas proceedings would increase or decrease the Utility's customer gas rates. THE 1999 GENERAL RATE CASE (GRC): In December 1997, the Utility filed its 1999 GRC application with the CPUC. During the GRC process, the CPUC examines the Utility's costs to determine the amount the Utility may charge customers for base revenues (non-fuel related costs). The Utility requested distribution revenue increases to maintain and improve natural gas and electric distribution reliability, safety, and customer service. The requested revenues, as updated, included an increase of $445 million in electric base revenues and an increase of $377 million in natural gas base revenues over the 1998 authorized revenues. The Utility received a final decision on its 1999 GRC application on February 17, 2000. This final decision increased electric distribution revenues by $163 million and gas distribution revenues by $93 million, as compared to revenues authorized for 1998. This revenue increase is retroactive to January 1, 1999. The impact of these increases resulted in an increase in earnings of $153 million, or $0.42 per share, and was reflected in the fourth quarter of 1999. The Utility's GRC application also contained a proposal for an Attrition Rate Adjustment (ARA) to adjust revenues in 2000 and 2001 if a performance-based ratemaking (PBR) mechanism is not adopted for 2000 or 2001. The final decision denies the Utility's request for an ARA to adjust revenues in 2000, but adopts an ARA for 2001. The final decision orders that the CPUC oversee an audit of the Utility's 1999 distribution capital spending, and that the 2001 ARA be subject to modification to take into account the results of the audit. The 2001 ARA will also be subject to modification to recognize amounts recorded in a new balancing account that the final decision requires be established for vegetation management expenses. THE YEAR 2000 COST OF CAPITAL PROCEEDING: In November 1999, the Utility filed its 2000 cost of capital application with the CPUC to establish its authorized rates of return on an unbundled basis for electric and natural gas distribution operations. To reflect increasing interest rates, the Utility has requested a return on equity (ROE) of 12.5 percent and an overall rate of return of 9.76 percent as compared to its 1999 authorized rates of 10.6 percent ROE and 8.75 percent overall rate of return. The Utility has not requested any change in its authorized capital structure for 2000. The Utility's current authorized capital structure is 46.2 percent long-term debt, 5.8 percent preferred stock, and 48 percent common equity. If granted, the requested ROE would increase electric distribution revenues by approximately $127.8 million and natural gas distribution revenues by approximately $36.6 million, based on the rate base authorized in the Utility's 1999 GRC. The Utility requested that a final CPUC decision be issued in June 2000. On February 17, 2000, the CPUC issued a decision to allow the final CPUC decision, when it is adopted, to be effective retroactively to February 17, 2000. Consistent with the rate freeze, there will be no change in electric rates in 2000. Also, the return on the Utility's electric transmission-related assets will be determined by the FERC in 2000. Finally, the return on the Utility's natural gas transmission and storage business was incorporated in rates established in the Gas Accord. POST-TRANSITION PERIOD RATEMAKING PROCEEDING: In October 1999, the CPUC issued a decision in the Utility's post-transition period ratemaking proceeding. Among other matters, the CPUC's decision addresses the mechanisms for ending the current electric rate freeze and for establishing post-transition period accounting mechanisms and rates. The decision prohibits the Utility from continuing to price electric generation from Diablo Canyon based on the incremental cost incentive price (ICIP) after the transition period has ended. The ICIP, which has been in place since January 1, 1997, is a performance-based mechanism that establishes a rate per kWh generated by the facility. The ICIP prices for 1999, 2000, and 2001 are 3.37 cents per kWh, 3.43 cents per kWh, and 3.49 cents per kWh, respectively. The average price for base load electric energy (the price received for a constant level of electric generation for all hours of electric demand) sold at market rates to the California PX for the 12-month period ended December 31, 1999, was 3.7 cents per kWh. The average price for base load electric energy sold at market rates to the PX from March 31, 1998, the PX's establishment date, to December 31, 1998, was 3.2 cents per kWh. 15 Future market prices may be higher or lower. Under the CPUC's decision, after the transition period, the Utility must price Diablo Canyon generation at the prevailing market price for power. Further, pursuant to the 1997 CPUC decision establishing the ICIP, the Utility is required to begin sharing 50 percent of the net benefits of operating Diablo Canyon with ratepayers commencing January 1, 2002. The CPUC may interpret a more recent decision to commence the benefit-sharing at the end of the transition period. The Utility is required to file an application by July 2000 with its proposal for the methods to be used in the valuation of the benefits associated with the operation of Diablo Canyon, and the mechanism to be used to share these benefits with ratepayers. The Utility and PG&E Corporation are unable to predict what type of valuation and sharing mechanism will be adopted and what the ultimate financial impact of the sharing mechanism will have on results of operation or financial position. The CPUC's decision also prohibits the Utility from collecting after the rate freeze any electric costs incurred but not recovered during the rate freeze, including costs that are not transition costs and are not related to generation assets such as under-collected accounting balances relating to power purchases. See the discussion above under "Competitive and Regulatory Environment -- The California Electric Industry Post-Transition Period." In November 1999, the Utility filed an application for rehearing the CPUC's decision. The ultimate financial impact of the provisions of the CPUC's decision described above will depend on the date the Utility's transition cost recovery is completed and the rate freeze ends, future costs including Diablo Canyon operating costs, future market prices for electricity, the amount of any electric non-transition costs that have been incurred but not recovered as of the end of the rate freeze, the timing of various regulatory proceedings in which the Utility seeks approval for rate recovery of various costs incurred during the rate freeze, and other variables that PG&E Corporation and the Utility are unable to predict. FERC TRANSMISSION RATE CASES: Since April 1998, all electric transmission revenues are authorized by the FERC. During 1998 and 1999, the FERC issued orders that put into effect various rates to recover electric transmission costs from the Utility's former bundled rate transmission customers. All 1998 and 1999 rates currently are subject to refund, pending final decisions in the transmission cases. In April 1999, the Utility filed a settlement with the FERC that, if approved, would allow the Utility to recover $345 million for the period of April 1998 through May 1999. In May 1999, the FERC accepted, subject to refund, the Utility's March 1999 request to begin recovering, as of May 31, 1999, $324 million annually. In October 1999, the FERC accepted, subject to refund, the Utility's request to increase revenues to $370 million annually, beginning in April 2000. The Utility does not expect a material impact on its financial position or results of operations resulting from these matters. CATASTROPHIC EVENT MEMORANDUM ACCOUNT PROCEEDING: In September 1999, the Utility entered into a Settlement Agreement with the CPUC's Office of Ratepayer Advocates (ORA), and other parties, in a proceeding addressing the Catastrophic Events Memorandum Account. The settlement provides for a $59 million increase in electric distribution revenue requirement and an $11 million increase in gas distribution revenue requirement effective January 1, 2000. The increase compensates the Utility for service restoration following several events, beginning with the Oakland Hills fire of 1991 and ending with the storms of February 1998. A CPUC decision is expected in early 2000. THE CPUC'S GAS STRATEGY INVESTIGATION, PHASE 2: In January 1998, the CPUC opened a rulemaking proceeding to explore changes in the natural gas industry in California. In July 1999, the CPUC issued a decision identifying promising options for restructuring the natural gas industry. In the decision, the CPUC reaffirmed the basic structure of the Gas Accord. The CPUC further stated that it seeks to explore a market structure that maintains the utilities' traditional role of providing fully integrated default service while removing obstacles to competitive unbundled services. The CPUC opened a new investigative proceeding to explore in more detail the anticipated costs and benefits associated with the different market structure options it has identified. On January 28, 2000, PG&E Corporation and a broad-based coalition of shippers, consumer groups, marketers, and others filed a settlement with the CPUC which would reaffirm the basic structure of the Gas Accord and continue the Gas Accord through its original term of December 31, 2002. 16 ELECTRIC BASE REVENUE INCREASE PROCEEDING: Section 368(e) of the California Public Utilities Code was adopted as part of the California electric industry restructuring legislation. It provided for an increase in the Utility's electric base revenues for 1997 and 1998, for enhancement of transmission and distribution system safety and reliability. In accordance with Section 368(e), the CPUC authorized a 1997 base revenue increase of $164 million. For 1998, the CPUC authorized an additional base revenue increase of $77 million. Section 368(e) expenditures are subject to review by the CPUC. In July 1999, the ORA filed reports on the Utility's Section 368(e) expenditures recommending a disallowance of $88.4 million in expenditures for 1997 and 1998. In August 1999, The Utility Reform Network (TURN) recommended an additional $14 million disallowance for a total recommended disallowance for 1997 and 1998 expenditures of $102.4 million. The Utility opposed the recommended disallowances and hearings were held in October 1999. A proposed decision is not expected until the first quarter of 2000. Any proposed decision would be subject to comment by the parties and change by the CPUC before a final decision is issued. The Utility does not expect a material impact on its financial position or results of operations resulting from these matters. RESULTS OF OPERATIONS In this section, we present the components of our results of operations for 1999, 1998, and 1997. The Utility received a final decision on its 1999 GRC application on February 17, 2000. As discussed further in "Regulatory Matters" above, the final decision did not increase electric revenues, although it increased the deferral of electric transition costs by $163 million over the amount that would have been deferred under the 1998 revenue requirement. This revenue increase was retroactive to January 1, 1999. The impact of the 1999 GRC resulted in an increase in earnings of $153 million, or $0.42 per share, and was reflected in the fourth quarter of 1999. The table below shows for 1999, 1998, and 1997, certain items from our Statement of Consolidated Income detailed by Utility and National Energy Group operations of PG&E Corporation. (In the "Total" column, the table shows the combined results of operations for these groups.) The information for PG&E Corporation (the "Total" column) excludes transactions between its subsidiaries (such as the purchase of natural gas by the Utility from the unregulated business operations). Following this table we discuss earnings and explain why the components of our results of operations varied from the year before for 1999 and 1998. 17
UTILITY NATIONAL ENERGY GROUP -------- ---------------------------------------------------------- PG&E GT ELIMINATIONS & (IN MILLIONS) PG&E GEN NW TEXAS PG&E ET OTHER(1) TOTAL 1999 Operating revenues $9,228 $1,122 $224 $ 1,148 $10,521 $(1,423) $20,820 Operating expenses 7,235 1,007 104 2,446 10,582 (1,432) 19,942 Operating income 878 Other income, net 155 Interest expense, net (772) Income taxes 248 Income from continuing operations 13 Net loss $ (73) EBITDA(2) $3,523 $ 203 $181 $(1,178) $ (53) $ 19 $ 2,695 1998 Operating revenues $8,924 $ 649 $237 $ 1,941 $ 8,509 $ (683) $19,577 Operating expenses 7,048 489 101 1,996 8,528 (683) 17,479 Operating income 2,098 Other income, net 65 Interest expense, net (781) Income taxes 611 Income from continuing operations 771 Net income $ 719 EBITDA(2) $3,294 $ 200 $177 $ 15 $ (15) $ (7) $ 3,664 1997 Operating revenues $9,495 $ 148 $233 $ 1,004 $ 4,808 $ (433) $15,255 Operating expenses 7,675 176 127 1,023 4,840 (348) 13,493 Operating income 1,762 Other income, net 212 Interest expense, net (664) Income taxes 565 Income from continuing operations 745 Net income $ 716 EBITDA(2) $3,606 $ (40) $144 $ 16 $ (29) $ 57 $ 3,754
(1) Net income on intercompany positions recognized by segments using mark-to-market accounting is eliminated. Intercompany transactions are also eliminated. (2) EBITDA measures earnings (after preferred dividends) before interest expense (net of interest income), income taxes, depreciation, and amortization. OVERALL RESULTS PG&E Corporation had a net loss in 1999 of $73 million, or $0.20 per share. In 1998 PG&E Corporation had net income of $719 million, or $1.88 per share. The decrease is principally due to the write-down to fair value of our natural gas business in Texas and the accrual for the discontinuance of operations of our Energy Services segment. The PG&E GTT write-down was approximately $890 million after taxes, and the PG&E ES discontinued operations generated a charge of $58 million after tax. Partially offsetting these charges were increases in Utility income, primarily as a result of the 1999 GRC, and an adjustment of a litigation reserve associated with a court-approved settlement proposal. In addition, PG&E Gen changed its method of accounting for major maintenance and overhauls at its generating facilities. Effective January 1, 1999, PG&E Gen adopted a method that accounts for expenditures associated with major maintenance and overhauls as incurred. Previously, PG&E Gen estimated the cost of major maintenance and overhauls and accrued such costs in advance in a systematic and rational manner over the period between major maintenance and overhauls. The cumulative effect of the accounting change resulted in recognition of approximately $12 million of income, net of tax. The Utility's net income available for common stock increased to $763 million in 1999 as compared to 1998 net income of $702 million, primarily because of the impacts of the 1999 GRC. However, the increases from the 18 GRC were partially offset by a reduction in the Utility's authorized cost of capital and a lower return on its assets due to the sale of a significant portion of its generating assets and recovery of transition costs (see Note 2 of the Notes to Consolidated Financial Statements). Net income for the Utility decreased $33 million in 1998 as compared to 1997 due to the reduced rate of return on generation assets and increased interest expense associated with the rate reduction bonds. OPERATING INCOME Operating income for PG&E Corporation in 1999 was $878 million, which includes the charge to write down the investment in PG&E GTT to its net realizable value. Operating income for the Utility was $1,993 million in 1999 as compared to $1,876 million in 1998. This increase is primarily because of the impacts of the 1999 GRC. However, the increases from the GRC were partially offset by a reduction in the Utility's authorized cost of capital and a lower return on its assets due to the sale of a significant portion of its generating assets and recovery of transition costs (see Note 2 of the Notes to Consolidated Financial Statements). Operating income of the National Energy Group decreased $62 million in 1999 as compared to 1998, excluding the charge to write PG&E GTT down to its net realizable value. The decline resulted from mild weather in the Northeast, lower interruptible sales in the Pacific Northwest, less portfolio management activity, and trading losses in the U.S. gas portfolio. This decline was partially offset by cost containment efforts across the organization and an increase in the differential between natural gas liquids prices and the cost of natural gas. The operating income increase in 1998 as compared to 1997 was primarily due to the growth of the National Energy Group, which contributed $195 million of the increase. The 1998 income from continuing operations also includes a loss on the sale of our Australian energy holdings. OPERATING REVENUES UTILITY: Utility operating revenues increased $304 million in 1999 as compared to 1998. This increase is primarily due to: (1) a $147 million increase in gas revenues from residential and commercial gas customers due to higher usage, (2) a $93 million increase in gas revenues as a result of the GRC, (3) a $43 million increase in revenues from small and medium electric customers due to increased customers, and (4) a $16 million increase in revenues from an increase in gas transportation volumes. Utility operating revenues decreased $571 million in 1998 as compared to 1997. This decrease is primarily due to: (1) a $410 million decrease for the 10 percent electric rate reduction provided to residential and small commercial customers, which was partially offset by $108 million of higher revenues due to increased consumption of electricity by these customers, (2) a $151 million decrease in revenues from medium and large electric customers, many of whom are now purchasing their electricity directly from unregulated power generators, (3) a $63 million decrease in sales to commercial and agricultural electric customers resulting from their lower demand for irrigation water pumping as a result of heavier rainfall in 1998, and (4) a $100 million decrease for the termination of the volumetric (ERAM) and energy cost (ECAC) revenue balancing accounts. The ERAM and ECAC accounts were replaced with the TCBA, which affects expenses, rather than revenues. NATIONAL ENERGY GROUP: The National Energy Group's 1999 operating revenues increased $939 million as compared to 1998 operating revenues, principally due to: (1) the PG&E Gen business segment receiving a full year of revenue from the New England assets acquired in September 1998, and (2) increases in trading revenues at PG&E ET reflecting the further maturation of its business. The 1999 operating revenues also reflect revenue increases resulting from an improved differential between the natural gas liquids prices and the incoming natural gas. These revenue increases were partially offset by (1) a decline in interruptible revenues in the Northwest due to the lower natural gas prices in the Southwest as compared to Canadian prices, and (2) lower transportation revenue on the Texas transmission system. In addition, effective July 1999, certain gas trading activities conducted by PG&E GTT were transferred to PG&E ET, thus contributing to the decline in PG&E GTT revenues. Operating revenues associated with the National Energy Group increased $4,893 million in 1998 as compared to 1997. This was primarily due to revenue increases from energy trading volumes, 12 months of revenue from the 19 Texas acquisitions versus seven months in 1997, portfolio management activity by PG&E Gen, and the acquisition of the New England generating assets in September 1998. OPERATING EXPENSES UTILITY: The Utility's operating expenses increased $187 million in 1999 as compared to 1998. This increase reflects the increased cost of gas due to higher usage and the increased amortization of electric transition costs. Utility operating expenses in 1998 decreased $627 million as compared to 1997. This decrease reflects a reduction in the amount of amortization of transition costs, primarily due to lower revenues from residential and small commercial customers discussed above in "Operating Revenues--Utility". Also contributing to the decrease in operating expenses was a reduction in gas transportation demand charges of $134 million, due to the expiration of contracted pipeline capacity. NATIONAL ENERGY GROUP: The National Energy Group's operating expenses increased $2,276 million in 1999 as compared to 1998, due to the charge associated with the disposition of PG&E GTT, having a full year of operating expenses associated with the generation facilities in New England, and growth of PG&E ET operations. Operating expenses for the National Energy Group increased $4,613 million in 1998 as compared to 1997. This increase reflects the increase in the volumes of energy commodities purchased, operating costs associated with the New England assets acquired in September 1998 and the gas transportation assets acquired in 1997. INCOME TAXES PG&E Corporation has recorded income tax expense of $248 million for 1999. The effective tax rate primarily results from two factors: (1) electric industry restructuring has resulted in the reversal of temporary differences whose tax benefits were originally flowed through to customers causing an increase in income tax expense independent of pre-tax income, and (2) the disposition of PG&E GTT resulted in a capital loss for tax purposes, which could not be fully recognized. Income taxes in 1998 increased $46 million as compared to 1997. The overall effective tax rate increased 1.1 percent in 1998 largely due to accelerated book depreciation and amortization related to electric industry restructuring. These increases were partially offset by a lowered effective state tax rate resulting from our expanded business operations. DIVIDENDS We base our common stock dividend on a number of financial considerations, including sustainability, financial flexibility, and competitiveness with investment opportunities of similar risk. Our current quarterly common stock dividend is $.30 per common share, which corresponds to an annualized dividend of $1.20 per common share. We continually review the level of our common stock dividend, taking into consideration the impact of the changing regulatory environment throughout the nation, the resolution of asset dispositions, the operating performance of our business units, and our capital and financial resources in general. The CPUC requires the Utility to maintain its CPUC-authorized capital structure, potentially limiting the amount of dividends the Utility may pay PG&E Corporation. During 1999, the Utility has been in compliance with its CPUC-authorized capital structure. PG&E Corporation and the Utility believe that this requirement will not affect PG&E Corporation's ability to pay common stock dividends. However, depending on the timing and outcome of the valuation of the Utility's hydroelectric facilities discussed in "Generation Divestiture" above, certain valuation methods could necessitate a waiver of the CPUC's authorized capital structure in order to permit PG&E Corporation or the Utility to continue paying common stock dividends at the current level. 20 LIQUIDITY AND FINANCIAL RESOURCES CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by PG&E Corporation's operating activities totaled $2,287 million, $2,283 million, and $2,618 million in 1999, 1998, and 1997, respectively. Net cash provided by the Utility's operating activities totaled $2,200 million, $2,610 million, and $1,768 million in 1999, 1998, and 1997, respectively. CASH FLOWS FROM FINANCING ACTIVITIES PG&E CORPORATION: We fund investing activities from cash provided by operations after capital requirements and, to the extent necessary, external financing. Our policy is to finance our investments with a capital structure that minimizes financing costs, maintains financial flexibility, and, with regard to the Utility, complies with regulatory guidelines. Based on cash provided from operations and our investing and disposition activities, we may repurchase equity and long-term debt in order to manage the overall size and balance of our capital structure. During 1999, 1998, and 1997, we issued $54 million, $63 million, and $54 million of common stock, respectively, primarily through the Dividend Reinvestment Plan and the stock option plan component of the Long-Term Incentive Program. During 1997, we also issued $1.1 billion of common stock to acquire the natural gas assets in Texas. During 1999, 1998, and 1997, we declared dividends on our common stock of $460 million, $466 million, and $485 million, respectively. During 1999, 1998, and 1997, we repurchased $693 million, $1,158 million, and $804 million of our common stock, respectively. The repurchases made in 1998 and through September 1999 were executed through separate, accelerated share repurchase programs. As of December 31, 1997, the Board of Directors had authorized the repurchase of up to $1.7 billion of PG&E Corporation's common stock on the open market or in negotiated transactions. As part of this authorization, in January 1998, we repurchased in a specific transaction 37 million shares of common stock. As of December 31, 1998, approximately $570 million remained available under this repurchase authorization. In February 1999, we used this remaining authorization to purchase 16.6 million shares at a cost of $502 million. In connection with this transaction, we entered into a forward contract with an investment institution. We settled the forward contract and its additional obligation of $29 million in September 1999. We used a subsidiary of PG&E Corporation to make this repurchase, along with subsequent stock repurchases. The stock held by the subsidiary is treated as treasury stock and reflected as Stock Held by Subsidiary on the Consolidated Balance Sheet of PG&E Corporation. In October 1999, the Board of Directors of PG&E Corporation authorized an additional $500 million for the purpose of repurchasing shares of the Corporation's common stock on the open market. This authorization supplements the approximately $40 million remaining from the amount previously authorized by the Board of Directors on December 17, 1997. The authorization for share repurchase extends through September 30, 2001. As of December 31, 1999, through our wholly owned subsidiary, we repurchased 7.2 million shares, at a cost of $159 million under this authorization. Any open market purchases will be made by the wholly owned subsidiary of PG&E Corporation. During 1999, our National Energy Group retired $128 million of long-term debt. This amount includes PG&E GTT's June 1999 redemption of the outstanding balance of $69 million of its senior notes, which resulted in a gain on redemption of approximately $1.7 million. In 1998, our National Energy Group retired $75 million of long-term debt and retired the notes used in the acquisition of our Australian energy holdings. In 1997, our National Energy Group issued $30 million and retired $109 million of long-term debt. Also in 1997, we assumed $780 million of long-term debt in connection with the acquisition of our natural gas assets in Texas. We maintain a number of credit facilities to support commercial paper programs, letters of credit, and other short-term liquidity requirements. PG&E Corporation maintains two $500 million revolving credit facilities, one of which expires in November 2000 and the other in 2002. These credit facilities are used to support the commercial paper program and other liquidity needs. The facility expiring in 2000 may be extended annually for additional one-year periods upon agreement with the lending institutions. There was $450 million of commercial paper outstanding at December 31, 1999. PG&E Corporation introduced a $200 million Extendible Commercial Note (ECN) program during the third quarter of 1999. The ECN program supplements our short-term borrowing capability. There was $76 million of extendible commercial notes outstanding at December 31, 1999, which are not supported by the credit facilities. 21 PG&E Gen maintains two $550 million revolving credit facilities. One facility expires in August 2000 and the other expires in 2003. The total amount outstanding at December 31, 1999, backed by the facilities, was $898 million in commercial paper. Of these loans, $550 million is classified as noncurrent in the Consolidated Balance Sheet of PG&E Corporation. In 1998, USGenNE, a subsidiary of PG&E Gen, established a $100 million revolving credit facility that expires in 2003. As of December 31, 1999, there is no outstanding balance on this facility. PG&E GT NW maintains a $100 million revolving credit facility that expires in 2002, but has an annual renewal option allowing the facility to maintain a three-year duration. PG&E GT NW also maintains a $50 million 364-day credit facility that expires in 2000, but can be extended for successive 364-day periods. At December 31, 1999, PG&E GT NW had an outstanding commercial paper balance of $99 million, which is classified as noncurrent in the Consolidated Balance Sheet of PG&E Corporation. PG&E GTT maintains four separate credit facilities that total $250 million and are guaranteed by PG&E Corporation. At December 31, 1999, PG&E GTT had $176 million of outstanding short-term bank borrowings related to these credit facilities. These lines may be cancelled upon demand and bear interest at each respective bank's quoted money market rate. The borrowings are unsecured and unrestricted as to use. UTILITY: In December 1999, 7.6 million shares of the Utility's common stock, with an aggregate purchase price of $200 million, was purchased by a subsidiary of the Utility. This purchase is reflected as stock held by subsidiary in the Consolidated Balance Sheet of Pacific Gas and Electric Company. Earlier in 1999, the Utility repurchased and cancelled 20 million shares of its common stock from PG&E Corporation for an aggregate purchase price of $726 million to maintain its authorized capital structure. In 1999, 1998, and 1997, the Utility declared dividends on its common stock of $415 million, $300 million, and $699 million, respectively. The Utility's long-term debt that either matured, was redeemed, or was repurchased during 1999 totaled $654 million. Of this amount, (1) $290 million related to the Utility's rate reduction bonds maturing, (2) $135 million related to the Utility's repurchase of mortgage and various other bonds, (3) $147 million related to maturity of various utility mortgage bonds, and (4) $82 million related to the maturities and redemption of various of the Utility's medium-term notes and other debt. The Utility's long-term debt that either matured, was redeemed, or was repurchased during 1998 totaled $1.4 billion. Of this amount, (1) $249 million related to the Utility's redemption of its 8% mortgage bonds due October 1, 2025, (2) $252 million related to the Utility's repurchase of various other mortgage bonds, (3) $397 million related to the maturity of the Utility's 5 3/8% mortgage bonds, (4) $204 million related to the other scheduled maturities of long-term debt, and (5) $290 million related to rate reduction bonds maturing. In 1997, the Utility redeemed or repurchased $225 million of long-term debt to manage the overall balance of its capital structure. Also in 1997, the Utility replaced $360 million of fixed interest rate pollution control bonds with the same amount of variable interest rate pollution control bonds. During 1999 and 1997, the Utility did not redeem or repurchase any of its preferred stock. In 1998, the Utility redeemed its Series 7.44% preferred stock with a face value of $65 million and its Series 6 7/8% preferred stock with a face value of $43 million. In December 1997, a subsidiary of the Utility issued $2.9 billion of rate reduction bonds through a special-purpose entity established by the California Infrastructure and Economic Development Bank. The proceeds were used by the Utility to retire debt and reduce equity. (See Note 9 of Notes to Consolidated Financial Statements.) The Utility maintains a $1 billion revolving credit facility, which expires in 2002. The Utility may extend the facility annually for additional one-year periods upon agreement with the banks. This facility is used to support the Utility's commercial paper program and other liquidity requirements. The total amount outstanding at December 31, 1999, backed by this facility, was $449 million in commercial paper. There were no bank notes outstanding at December 31, 1999. 22 CASH FLOWS FROM INVESTING ACTIVITIES UTILITY: The primary uses of cash for investing activities are additions to property, plant, and equipment, unregulated investments in partnerships, and acquisitions. The Utility's estimated capital spending for 2000 is approximately $1.3 billion, excluding capital expenditures for divested fossil and geothermal power plants. The Utility's capital expenditures were $1,181 million, $1,382 million, and $1,522 million for the years ended December 31, 1999, 1998, and 1997, respectively. During 1999, the Utility sold three fossil-fueled generation facilities and its geothermal generation facilities. These sales closed in April and May 1999, respectively, and generated proceeds of $1,014 million. In 1998, the Utility had proceeds of $501 million from the sale of three fossil-fueled generation plants. NATIONAL ENERGY GROUP: PG&E Gen is associated with the construction of two natural gas-fueled combined-cycle power plants, and plans to begin construction on a third plant in early 2000. These power plants, referred to as "merchant power plants," will sell power as a commodity in the competitive marketplace. The electricity generated by these plants will be sold on a wholesale basis to local utilities and power marketers, including PG&E ET, which, in turn, will sell it to industrial, commercial, and other electricity customers. Millennium Power, a 360-MW power plant located in Massachusetts, is scheduled to begin commercial service in the fourth quarter of 2000. Lake Road Generating Plant (Lake Road), an approximately 790-MW power plant located in Connecticut, is scheduled to begin commercial service in 2001. Lake Road is being financed through a synthetic lease with a third party owner. PG&E Gen will operate the plant under an operating lease (See Note 14 of Notes to Consolidated Financial Statements). La Paloma Generating Plant, an approximately 1,050-MW power plant, is located in California, and is scheduled to begin commercial service in 2002. The estimated cost to construct these plants is approximately $1.4 billion. In 1998, PG&E Corporation sold its Australian energy holdings for proceeds of approximately $126 million. In 1997, PG&E Corporation sold its interest in International Generating Company, Ltd., resulting in an after-tax gain of approximately $120 million. DEBT OBLIGATIONS AND RATE REDUCTION BONDS The table below provides information about our debt obligations and rate reduction bonds at December 31, 1999:
THERE- EXPECTED MATURITY DATE 2000 2001 2002 2003 2004 AFTER (dollars in millions) Utility: Long-term debt Variable rate obligations........ $200 $100 $738 $310 $ -- $ -- Fixed rate obligations........... $265 $274 $379 $354 $392 $2,330 Average interest rate............ 6.6% 8.0% 7.8% 6.3% 6.4% 7.1% Rate reduction bonds............... $290 $290 $290 $290 $290 $ 871 Average interest rate............ 6.2% 6.2% 6.3% 6.4% 6.4% 6.5% National Energy Group: Long-term debt Variable rate obligations........ $ 44 $ 11 $109 $560 $ 9 $ 87 Fixed rate obligations........... $ 83 $ 95 $137 $ 47 $ 69 $ 672 Average interest rate............ 8.5% 9.1% 8.6% 9.8% 9.8% 8.2% FAIR VALUE AT DEC. 31, EXPECTED MATURITY DATE TOTAL 1999 (dollars in millions) Utility: Long-term debt Variable rate obligations........ $1,348 $1,348 Fixed rate obligations........... $3,994 $3,869 Average interest rate............ 7.1% Rate reduction bonds............... $2,321 $2,265 Average interest rate............ 6.3% National Energy Group: Long-term debt Variable rate obligations........ $ 820 $ 820 Fixed rate obligations........... $1,103 $1,058 Average interest rate............ 8.5%
23 ENVIRONMENTAL MATTERS We are subject to laws and regulations established to both maintain and improve the quality of the environment. Where our properties contain hazardous substances, these laws and regulations require us to remove those substances or remedy effects on the environment. At December 31, 1999, the Utility has accrued $271 million ($300 million on an undiscounted basis) for clean-up costs at identified sites. If other responsible parties fail to pay or expected outcomes change, then these costs may be as much as $486 million. Of the $271 million, the Utility has recovered $148 million through rates, including $34 million through depreciation and expects to recover another $95 million in future rates. Additionally, the Utility mitigates its cost by seeking recovery from insurance carriers and other third parties. (See Note 15 of Notes to Consolidated Financial Statements.) The cost of the hazardous substance remediation ultimately undertaken by the Utility is difficult to estimate. A change in the estimate may occur in the near term due to uncertainty concerning the Utility's responsibility, the complexity of environmental laws and regulations, and the selection of compliance alternatives. The Utility estimates the upper limit of the range using assumptions least favorable to the Utility, based upon a range of reasonably possible outcomes. Costs may be higher if the Utility is found to be responsible for clean-up costs at additional sites or expected outcomes change. In December 1999, the Utility was notified by the purchaser of its former Moss Landing power plant that it had identified a cleaning procedure used at the plant that released heated water from the intake, and that this procedure is not specified in the plant's National Pollutant Discharge Elimination System (NPDES) permit issued by the Central Coast Regional Water Quality Control Board (Central Coast Board). The purchaser notified the Central Coast Board of its findings and the Central Coast Board requested additional information from the purchaser. The Utility has initiated an investigation of these activities during the time it owned the plant. The Central Coast Board has been notified of the investigation and the results will be presented to the Central Coast Board when the investigation is complete. If the identified procedure was performed during the Utility's ownership and was beyond the scope of the relevant NPDES permits, the Central Coast Board may choose to initiate an enforcement action. If so, the Utility could be subject to significant penalties. Until the investigation is complete and the results discussed with the Central Coast Board, it is not possible to determine whether the Utility will suffer a loss in connection with this matter or to provide a more detailed estimate of such liability. YEAR 2000 (Y2K) PG&E Corporation successfully transitioned into the Year 2000 without any Y2K-related service disruptions. There is, however, a risk that some computer-related problems might not manifest themselves for a period of time and that supplier or business partner Y2K problems may materialize and have an adverse impact on our operations. As of December 31, 1999, expenditures to address potential Y2K problems totaled $185 million, of which $93 million is attributed to the Utility. Included are systems replaced or enhanced for general business purposes and for which implementation schedules were critical to our Y2K readiness. INFLATION Financial statements, which are prepared in accordance with generally accepted accounting principles, report operating results in terms of historical costs and do not evaluate the impact of inflation. Inflation affects our construction costs, operating expenses, and interest charges. In addition, the Utility's electric revenues will not reflect the impact of inflation due to the current electric rate freeze. However, inflation at current levels is not expected to have a material adverse impact on the Utility's or our financial position or results of operations. PRICE RISK MANAGEMENT ACTIVITIES We have established a risk management policy that allows derivatives to be used for both hedging and non-hedging purposes (a derivative is a contract whose value is dependent on or derived from the value of some underlying asset). We use derivatives for hedging purposes primarily to offset underlying commodity price risks. We also participate in markets using derivatives to gather market intelligence, create liquidity, and maintain a market presence. Such derivatives include forward contracts, futures, swaps, and options. Net open positions often exist or are established due to PG&E Corporation's assessment of its response to changing market conditions. To 24 the extent that PG&E Corporation has an open position, it is exposed to the risk that fluctuating market prices may adversely impact its financial results. Our risk management policy and the trading and risk management policies of our subsidiaries prohibit the use of derivatives whose payment formula includes a multiple of some underlying asset. We prepare a daily assessment of our portfolio market risk exposure using value-at-risk and other methodologies that simulate future price movements in the energy markets to estimate the size and probability of future potential losses. The quantification of market risk using value-at-risk provides a consistent measure of risk across diverse energy markets and products. The use of this methodology requires a number of important assumptions, including the selection of a confidence level for losses, volatility of prices, market liquidity, and a holding period. We utilize historical data for calculating the price volatility of our positions and how likely the prices of those positions will move together. The model includes all derivative and commodity investments in our non-hedging portfolio and only derivative commodity investments for our hedging portfolio (but not the related underlying hedged position). We express value-at-risk as a dollar amount of the potential loss in the fair value of our portfolio based on a 95 percent confidence level using a one-day liquidation period. Therefore, there is a 5 percent probability that our portfolio will incur a loss in one day greater than our value-at-risk. The value-at-risk is aggregated for PG&E Corporation as a whole by correlating the daily returns of the portfolios for natural gas, natural gas liquids, and power for the previous 22 trading days. Our daily value-at-risk for commodity price-sensitive derivative instruments as of December 31, 1999 and 1998, for non-hedging activities was $4.4 million and $6.2 million, respectively. Our daily value-at-risk for commodity price-sensitive derivative instruments as of December 31, 1999 and 1998, for hedging activities was $30,000 and $210,000, respectively. For the year ended December 31, 1999, the average, high, and low value-at-risk amounts for non-hedging activities were $4.3 million, $6.2 million, and $1.3 million, respectively. The average, high, and low value-at-risk amounts over the same reporting period for hedging activities were $0.6 million, $1.7 million, and $0.0 million, respectively. The average, high and low amounts for the reporting period were computed using the value-at-risk amounts at the beginning of the reporting period and the four quarter-end amounts. Value-at-risk has several limitations as a measure of portfolio risk, including, but not limited to, underestimation of the risk of a portfolio with significant options exposure, inadequate indication of the exposure of a portfolio to extreme price movements, and the inability to address the risk resulting from intra-day trading activities. In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which delayed the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," by one year to require adoption in years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter. PG&E Corporation expects to adopt SFAS No. 133 no later than January 1, 2001. The Statement will require us to recognize all derivatives, as defined in the Statement, on the balance sheet at fair value. Derivatives, or any portion thereof, that are not effective hedges must be adjusted to fair value through income. If derivatives are effective hedges, depending on the nature of the hedges, changes in the fair value of derivatives either will be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or will be recognized in other comprehensive income until the hedged items are recognized in earnings. We currently are evaluating what the effect of SFAS No. 133 will be on the earnings and financial position of PG&E Corporation. However, we already use the mark-to-market method of accounting for our commodity non-hedging and price risk management activities. LEGAL MATTERS In the normal course of business, both the Utility and PG&E Corporation are named as parties in a number of claims and lawsuits. (See Note 15 of Notes to Consolidated Financial Statements for further discussion of significant pending legal matters.) 25 - -------------------------------------------------------------------------------- PG&E Corporation STATEMENT OF CONSOLIDATED INCOME (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 OPERATING REVENUES Utility $ 9,228 $ 8,924 $ 9,495 Energy commodities and services 11,592 10,653 5,760 ------- ------- ------- TOTAL OPERATING REVENUES 20,820 19,577 15,255 ------- ------- ------- OPERATING EXPENSES Cost of energy for utility 3,149 2,942 3,208 Cost of energy commodities and services 10,587 9,852 5,368 Operating and maintenance, net 3,151 3,083 3,066 Depreciation, amortization, and decommissioning 1,780 1,602 1,851 Loss on assets held for sale 1,275 -- -- ------- ------- ------- TOTAL OPERATING EXPENSES 19,942 17,479 13,493 ------- ------- ------- OPERATING INCOME 878 2,098 1,762 Interest expense, net (772) (781) (664) Other income, net 155 65 212 ------- ------- ------- INCOME BEFORE INCOME TAXES 261 1,382 1,310 Income taxes 248 611 565 ------- ------- ------- INCOME FROM CONTINUING OPERATIONS 13 771 745 DISCONTINUED OPERATIONS (NOTE 5) Loss from operations of PG&E Energy Services (net of applicable income taxes of $35 million, $41 million, and $17 million, respectively) (40) (52) (29) Loss on disposal of PG&E Energy Services (net of applicable income taxes of $36 million) (58) -- -- ------- ------- ------- NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NOTE 1) (85) 719 716 CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE (NET OF APPLICABLE INCOME TAXES OF $8 MILLION) 12 -- -- ------- ------- ------- NET INCOME (LOSS) $ (73) $ 719 $ 716 ======= ======= ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 368 382 410 EARNINGS (LOSS) PER COMMON SHARE, BASIC AND DILUTED INCOME FROM CONTINUING OPERATIONS $ 0.04 $ 2.02 $ 1.82 DISCONTINUED OPERATIONS (0.27) (0.14) (0.07) CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE 0.03 -- -- ------- ------- ------- NET INCOME (LOSS) $ (0.20) $ 1.88 $ 1.75 DIVIDENDS DECLARED PER COMMON SHARE $ 1.20 $ 1.20 $ 1.20
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 26 - -------------------------------------------------------------------------------- PG&E Corporation CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AMOUNTS)
BALANCE AT DECEMBER 31, ------------------- 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 281 $ 286 Short-term investments 187 55 Accounts receivable Customers, net 1,486 1,856 Energy marketing 532 507 Price risk management 607 1,416 Inventories and prepayments 598 671 Deferred income taxes 133 -- -------- -------- TOTAL CURRENT ASSETS 3,824 4,791 PROPERTY, PLANT, AND EQUIPMENT Utility 23,001 24,160 Non-utility Electric generation 1,905 1,967 Gas transmission 2,541 3,347 Construction work in progress 436 407 Other 184 127 -------- -------- TOTAL PROPERTY, PLANT, AND EQUIPMENT (AT ORIGINAL COST) 28,067 30,008 Accumulated depreciation and decommissioning (11,291) (12,026) -------- -------- NET PROPERTY, PLANT, AND EQUIPMENT 16,776 17,982 OTHER NONCURRENT ASSETS Regulatory assets 4,957 6,347 Nuclear decommissioning funds 1,264 1,172 Other 2,894 2,942 -------- -------- TOTAL NONCURRENT ASSETS 9,115 10,461 -------- -------- TOTAL ASSETS $ 29,715 $ 33,234 ======== ========
27 - -------------------------------------------------------------------------------- PG&E Corporation CONSOLIDATED BALANCE SHEET (CONTINUED) (IN MILLIONS, EXCEPT SHARE AMOUNTS)
BALANCE AT DECEMBER 31, ------------------- 1999 1998 LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term borrowings $ 1,499 $ 1,644 Current portion of long-term debt 592 338 Current portion of rate reduction bonds 290 290 Accounts payable Trade creditors 708 1,001 Other 559 443 Regulatory balancing accounts 384 79 Energy marketing 480 381 Accrued taxes 211 103 Price risk management 575 1,412 Other 1,033 1,064 ------- ------- TOTAL CURRENT LIABILITIES 6,331 6,755 NONCURRENT LIABILITIES Long-term debt 6,673 7,422 Rate reduction bonds 2,031 2,321 Deferred income taxes 3,147 3,861 Deferred tax credits 231 283 Other 3,636 3,746 ------- ------- TOTAL NONCURRENT LIABILITIES 15,718 17,633 PREFERRED STOCK OF SUBSIDIARIES 480 480 UTILITY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST HOLDING SOLELY UTILITY SUBORDINATED DEBENTURES 300 300 COMMON STOCKHOLDERS' EQUITY Common stock, no par value, authorized 800,000,000 shares, issued, 384,406,113 and 382,603,564 shares, respectively 5,906 5,862 Common stock held by subsidiary, at cost, 23,815,500 shares (690) -- Reinvested earnings 1,670 2,204 ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY 6,886 8,066 ------- ------- Commitments and Contingencies (Notes 1, 2, 3, 4, 5, 14, and 15) -- -- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,715 $33,234 ======= =======
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 28 - -------------------------------------------------------------------------------- PG&E Corporation STATEMENT OF CONSOLIDATED CASH FLOWS (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (73) $ 719 $ 716 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation, amortization, and decommissioning 1,780 1,602 1,851 Deferred income taxes and tax credits--net (754) (107) (160) Other deferred charges and noncurrent liabilities 102 18 121 Loss (gain) on sale of assets -- 23 (120) Loss on assets held for sale 1,275 -- -- Loss from discontinued operations 98 52 29 Cumulative effect of change in accounting principle (12) -- -- Net effect of changes in operating assets and liabilities: Accounts receivable--trade 370 (342) (242) Inventories and prepayments 73 (179) (4) Price risk management assets and liabilities, net (28) (16) 12 Accounts payable--trade (293) 247 210 Regulatory balancing accounts payable 305 537 126 Accrued taxes 108 (123) (54) Other working capital 159 199 (85) Other--net (824) (347) 218 Cash provided in discontinued operations 1 -- -- ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,287 2,283 2,618 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,584) (1,619) (1,822) Acquisitions and investments in unregulated projects -- (1,779) (116) Proceeds from sale of assets 1,014 1,106 146 Other--net 453 66 21 ------- ------- ------- NET CASH USED BY INVESTING ACTIVITIES (117) (2,226) (1,771) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under credit facilities (145) 2,115 (587) Long-term debt issued -- -- 386 Long-term debt matured, redeemed, or repurchased (798) (1,552) (961) Proceeds from issuance of rate reduction bonds -- -- 2,881 Preferred stock redeemed or repurchased -- (108) -- Common stock issued 54 63 54 Common stock repurchased (693) (1,158) (804) Dividends paid (465) (470) (524) Other--net 4 (3) (39) ------- ------- ------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,043) (1,113) 406 ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS 127 (1,056) 1,253 CASH AND CASH EQUIVALENTS AT JANUARY 1 341 1,397 144 ------- ------- ------- CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 468 $ 341 $ 1,397 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest (net of amounts capitalized) $ 727 $ 774 $ 624 Income taxes (net of refunds) 723 770 801
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 29 - -------------------------------------------------------------------------------- PG&E Corporation STATEMENT OF CONSOLIDATED COMMON STOCK EQUITY (IN MILLIONS, EXCEPT SHARE AMOUNTS)
COMMON TOTAL ADDITIONAL STOCK COMMON COMMON PAID-IN HELD BY REINVESTED STOCK STOCK CAPITAL SUBSIDIARY EARNINGS EQUITY BALANCE DECEMBER 31, 1996 $2,018 $ 3,710 $ -- $2,636 $ 8,364 Net income 716 716 Holding company formation 3,710 (3,710) -- Common stock issued (2,302,544 shares) 54 54 Acquisitions (45,683,005 shares) 1,069 1,069 Common stock repurchased (33,823,950 shares) (496) (308) (804) Cash dividends declared on common stock (485) (485) Other 11 (28) (17) BALANCE DECEMBER 31, 1997 6,366 -- -- 2,531 8,897 Net income 719 719 Common stock issued (2,028,303 shares) 63 63 Common stock repurchased (37,090,630 shares) (565) (593) (1,158) Cash dividends declared on common stock (466) (466) Other (2) 13 11 BALANCE DECEMBER 31, 1998 5,862 -- -- 2,204 8,066 Net loss (73) (73) Common stock issued (1,879,474 shares) 54 54 Common stock repurchased (23,892,425 shares) (2) (690) (1) (693) Cash dividends declared on common stock (460) (460) Other (8) (8) BALANCE DECEMBER 31, 1999 $5,906 $ -- $(690) $1,670 $ 6,886 ====== ======= ===== ====== =======
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 30 - -------------------------------------------------------------------------------- Pacific Gas and Electric Company STATEMENT OF CONSOLIDATED INCOME (IN MILLIONS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 OPERATING REVENUES Electric $7,232 $7,191 $7,691 Gas 1,996 1,733 1,804 ------ ------ ------ TOTAL OPERATING REVENUES 9,228 8,924 9,495 ------ ------ ------ OPERATING EXPENSES Cost of electric energy 2,411 2,321 2,501 Cost of gas 738 621 707 Operating and maintenance, net 2,522 2,668 2,719 Depreciation, amortization, and decommissioning 1,564 1,438 1,748 ------ ------ ------ TOTAL OPERATING EXPENSES 7,235 7,048 7,675 ------ ------ ------ OPERATING INCOME 1,993 1,876 1,820 Interest expense, net (593) (621) (570) Other income, net 36 103 127 ------ ------ ------ INCOME BEFORE INCOME TAXES 1,436 1,358 1,377 Income taxes 648 629 609 ------ ------ ------ NET INCOME 788 729 768 Preferred dividend requirement 25 27 33 ------ ------ ------ INCOME AVAILABLE FOR COMMON STOCK $ 763 $ 702 $ 735 ====== ====== ======
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 31 - -------------------------------------------------------------------------------- Pacific Gas and Electric Company CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AMOUNTS)
BALANCE AT DECEMBER 31, ------------------- 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 80 $ 73 Short-term investments 21 17 Accounts receivable Customers, net 1,201 1,383 Related parties 9 14 Inventories Fuel oil 2 23 Gas stored underground 137 130 Materials and supplies 155 159 Prepayments 34 50 Deferred income taxes 119 -- -------- -------- TOTAL CURRENT ASSETS 1,758 1,849 PROPERTY, PLANT, AND EQUIPMENT Electric 15,762 17,088 Gas 7,239 7,072 Construction work in progress 214 273 -------- -------- TOTAL PROPERTY, PLANT, AND EQUIPMENT (AT ORIGINAL COST) 23,215 24,433 Accumulated depreciation and decommissioning (10,497) (11,397) -------- -------- NET PROPERTY, PLANT, AND EQUIPMENT 12,718 13,036 OTHER NONCURRENT ASSETS Regulatory assets 4,895 6,288 Nuclear decommissioning funds 1,264 1,172 Other 835 605 -------- -------- TOTAL NONCURRENT ASSETS 6,994 8,065 -------- -------- TOTAL ASSETS $ 21,470 $ 22,950 ======== ========
32 - -------------------------------------------------------------------------------- Pacific Gas and Electric Company CONSOLIDATED BALANCE SHEET (CONTINUED) (IN MILLIONS, EXCEPT SHARE AMOUNTS)
BALANCE AT DECEMBER 31, ------------------- 1999 1998 LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term borrowings $ 449 $ 668 Current portion of long-term debt 465 260 Current portion of rate reduction bonds 290 290 Accounts payable Trade creditors 577 718 Related parties 216 60 Regulatory balancing accounts 384 79 Other 333 374 Accrued taxes 118 2 Other 529 561 ------- ------- TOTAL CURRENT LIABILITIES 3,361 3,012 NONCURRENT LIABILITIES Long-term debt 4,877 5,444 Rate reduction bonds 2,031 2,321 Deferred income taxes 2,510 3,060 Deferred tax credits 231 283 Other 2,252 2,045 ------- ------- TOTAL NONCURRENT LIABILITIES 11,901 13,153 PREFERRED STOCK WITH MANDATORY REDEMPTION PROVISIONS 6.30% and 6.57%, outstanding 5,500,000 shares, due 2002-2009 137 137 COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST HOLDING SOLELY UTILITY SUBORDINATED DEBENTURES 7.90%, 12,000,000 shares due 2025 300 300 STOCKHOLDERS' EQUITY Preferred stock without mandatory redemption provisions Nonredeemable--5% to 6%, outstanding 5,784,825 shares 145 145 Redeemable--4.36% to 7.04%, outstanding 5,973,456 shares 149 149 Common stock, $5 par value, authorized 800,000,000 shares, issued 321,314,760 and 341,353,455 shares, respectively 1,606 1,707 Common stock held by subsidiary, at cost, 7,627,765 shares (200) -- Additional paid in capital 1,964 2,087 Reinvested earnings 2,107 2,260 ------- ------- TOTAL STOCKHOLDERS' EQUITY 5,771 6,348 Commitments and Contingencies (Notes 2, 6, 14, and 15) -- -- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,470 $22,950 ======= =======
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 33 - -------------------------------------------------------------------------------- Pacific Gas and Electric Company STATEMENT OF CONSOLIDATED CASH FLOWS (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 788 $ 729 $ 768 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and decommissioning 1,564 1,438 1,748 Deferred income taxes and tax credits--net (485) (257) (182) Other deferred charges and noncurrent liabilities 101 31 133 Net effect of changes in operating assets and liabilities: Accounts receivable--trade 187 266 (582) Inventories and prepayments 34 (21) 12 Accounts payable--trade 15 203 (80) Regulatory balancing accounts payable 305 537 126 Accrued taxes 116 (227) (62) Other working capital (73) (50) (128) Other--net (352) (39) 15 ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,200 2,610 1,768 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,181) (1,382) (1,522) Proceeds from sale of assets 1,014 501 -- Other--net 234 40 (117) ------- ------- ------- NET CASH USED BY INVESTING ACTIVITIES 67 (841) (1,639) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under credit facilities (219) 668 (681) Long-term debt issued -- -- 355 Long-term debt matured, redeemed, or repurchased (672) (1,413) (852) Proceeds from issuance of rate reduction bonds -- -- 2,881 Preferred stock redeemed or repurchased -- (108) -- Common stock repurchased (926) (1,600) -- Dividends paid (440) (444) (739) Other--net 1 (5) (14) ------- ------- ------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,256) (2,902) 950 ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS 11 (1,133) 1,079 CASH AND CASH EQUIVALENTS AT JANUARY 1 90 1,223 144 ------- ------- ------- CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 101 $ 90 $ 1,223 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest (net of amounts capitalized) $ 531 $ 600 $ 547 Income taxes (net of refunds) 1,001 1,115 841
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 34 - -------------------------------------------------------------------------------- Pacific Gas and Electric Company STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (IN MILLIONS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON TOTAL WITHOUT ADDITIONAL STOCK COMMON MANDATORY COMMON PAID-IN HELD BY REINVESTED STOCK REDEMPTION (IN MILLIONS) STOCK CAPITAL SUBSIDIARY EARNINGS EQUITY PROVISIONS BALANCE DECEMBER 31, 1996 $2,018 $ 3,710 -- $2,636 $ 8,364 $ 402 Net income 768 768 Holding company formation (1,146) (1,146) Cash dividends declared Preferred stock (33) (33) Common stock (699) (699) Other (1) (1) BALANCE DECEMBER 31, 1997 $2,018 $ 2,564 -- $2,671 $ 7,253 $ 402 Net income 729 729 Common stock repurchased (62,150,837 shares) (311) (481) (808) (1,600) Preferred stock redeemed (4,323,948 shares) (7) (3) (10) (98) Cash dividends declared Preferred stock (28) (28) Common stock (300) (300) Other 11 (1) 10 (10) BALANCE DECEMBER 31, 1998 $1,707 $ 2,087 -- $2,260 $ 6,054 $ 294 Net income 788 788 Common stock repurchased (27,666,460 shares) (101) (123) (200) (502) (926) Cash dividends declared Preferred stock (25) (25) Common stock (415) (415) Other 1 1 BALANCE DECEMBER 31, 1999 $1,606 $ 1,964 $(200) $2,107 $ 5,477 $ 294 ====== ======= ===== ====== ======= =====
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 35 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements NOTE 1: GENERAL BASIS OF PRESENTATION PG&E Corporation became the holding company of Pacific Gas and Electric Company (the Utility) on January 1, 1997. Prior to that time, the Utility was the predecessor of PG&E Corporation. Effective with PG&E Corporation's formation, the Utility's interests in its unregulated subsidiaries were transferred to PG&E Corporation. This is a combined annual report of PG&E Corporation and the Utility. Therefore, the Notes to Consolidated Financial Statements apply to both PG&E Corporation and the Utility. PG&E Corporation's consolidated financial statements include the accounts of PG&E Corporation, the Utility, and PG&E Corporation's wholly owned and controlled subsidiaries. The Utility's consolidated financial statements include its accounts as well as those of its wholly owned and controlled subsidiaries. All significant intercompany transactions have been eliminated from the consolidated financial statements. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 1999 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of revenues, expenses, assets, and liabilities and the disclosure of contingencies. Actual results could differ from these estimates. Accounting principles used include those necessary for rate-regulated enterprises, which reflect the ratemaking policies of the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC). OPERATIONS PG&E Corporation is an energy-based holding company headquartered in San Francisco, California. Its businesses provide energy services throughout North America. PG&E Corporation's Northern and Central California utility subsidiary, Pacific Gas and Electric Company, provides natural gas and electric service to one of every 20 Americans. PG&E Corporation's National Energy Group provides energy products and services throughout North America. The National Energy Group businesses develop, construct, operate, own, and manage independent power generation facilities that serve wholesale and industrial customers through PG&E Generating Company, LLC (formerly U.S. Generating Company, LLC) and its affiliates (collectively, PG&E Gen); own and operate natural gas pipelines, natural gas storage facilities, and natural gas processing plants, primarily in the Pacific Northwest and in Texas, through various subsidiaries of PG&E Corporation (collectively, PG&E Gas Transmission or PG&E GT); purchase and sell energy commodities and provide risk management services to customers in major North American markets, including the other National Energy Group non-utility businesses, unaffiliated utilities, marketers, municipalities, and large end-use customers through PG&E Energy Trading--Gas Corporation, PG&E Energy Trading--Power, L.P., and their affiliates (collectively, PG&E Energy Trading or PG&E ET); and provide competitively priced electricity, natural gas, and related services to industrial, commercial, and institutional customers through PG&E Energy Services Corporation (PG&E Energy Services or PG&E ES). In the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a plan for the divestiture of PG&E Corporation's Texas natural gas and natural gas liquids business. Also in the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a plan for the divestiture of PG&E Corporation's retail energy services. REGULATION AND STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 71 The Utility is regulated by the CPUC, the FERC, and the Nuclear Regulatory Commission, among others. The gas transmission business in the Pacific Northwest is regulated by the FERC. The gas transmission business in Texas is regulated by the Texas Railroad Commission. PG&E Corporation and the Utility account for the financial effects of regulation in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement allows for the deferral as a regulatory asset costs that otherwise would have been expensed if it is 36 probable that the costs will be recovered in future regulated revenues. In addition, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires PG&E Corporation and the Utility to write off regulatory assets when they are no longer probable of recovery. On an ongoing basis, PG&E Corporation and the Utility review their regulatory assets and liabilities for the continued applicability of SFAS No. 71 and the effect of SFAS No. 121. Regulatory assets and liabilities are comprised of the following:
BALANCE AT DECEMBER 31, ------------------- (IN MILLIONS) 1999 1998 Utility: Generation-related transition costs(1) $3,996 $5,355 Unamortized loss, net of gain, on reacquired debt 288 289 Regulatory assets for deferred income tax 295 293 Other, net 316 351 ------ ------ Total Utility $4,895 $6,288 National Energy Group 62 59 ------ ------ Regulatory assets $4,957 $6,347 ====== ====== Regulatory liabilities $ 771 $ 526 ====== ======
(1) See Note 2 of Notes to Consolidated Financial Statements for further discussion. Regulatory assets and liabilities are amortized over the period that the costs are reflected in regulated revenues. The majority of the Utility's regulatory assets are included in generation-related transition costs. The Utility is amortizing its eligible transition costs, including generation-related regulatory assets, over the transition period in conjunction with the available competitive transition charge (CTC) revenues. During 1999, regulatory assets related to electric industry restructuring decreased by $1,359 million. This decrease reflects the recovery of eligible transition costs of $806 million through amortization and $553 million through the gain on the sale of generating plants. REVENUES AND REGULATORY BALANCING ACCOUNTS In connection with electric industry restructuring, use of the Utility's sales and energy cost balancing accounts for electric utility revenues was discontinued in 1998. These balancing accounts have been replaced with regulatory adjustment mechanisms that impact expenses instead of revenues. (See Note 2.) For gas utility revenues, sales balancing accounts accumulate differences between authorized and actual base revenues. Further, gas cost balancing accounts accumulate differences between the actual cost of gas and the revenues designated for recovery of such costs. The regulatory balancing accounts accumulate balances until they are refunded to or received from Utility customers through authorized rate adjustments. Utility revenues included amounts for services rendered but unbilled at the end of each year. ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES PG&E Corporation, primarily through its subsidiaries, engages in price risk management activities for both non-hedging and hedging purposes. PG&E Corporation conducts non-hedging activities principally through its unregulated subsidiary, PG&E ET. Derivative and other financial instruments associated with our electric power, natural gas, natural gas liquids, and related non-hedging activities are accounted for using the mark-to-market method of accounting. Under mark-to-market accounting, PG&E Corporation's non-hedging contracts, including both physical contracts and financial instruments, are recorded at market value, which approximates fair value. The market prices used to value these transactions reflect management's best estimates considering various factors including market quotes, time value, and volatility factors of the underlying commitments. The values are adjusted to reflect the potential impact of liquidating a position in an orderly manner over a reasonable period of time under present market conditions. Changes in the market value of these contract portfolios, resulting primarily from newly originated transactions and the impact of commodity price and interest rate movements, are recognized in operating revenues in the 37 period of change. Unrealized gains and losses of these contract portfolios are recorded as assets and liabilities, respectively, from price risk management. In addition to the non-hedging activities discussed above, PG&E Corporation may engage in hedging activities using futures, forward contracts, options, and swaps to hedge the impact of market fluctuations on energy commodity prices, interest rates, and foreign currencies when there is a high degree of correlation between price movements in the derivative and the item designated as being hedged. PG&E Corporation accounts for hedge transactions under the deferral method. Initially, PG&E Corporation defers unrealized gains and losses on these transactions and classifies them as assets or liabilities. When the hedged transaction occurs, PG&E Corporation recognizes the gain or loss in operating expense. In instances where the anticipated correlation of price movements does not occur, hedge accounting is terminated and future changes in the value of the derivative are recognized as gains or losses. If the hedged item is sold, the value of the associated derivative is recognized in income. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which delayed the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," by one year to require adoption in years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter. PG&E Corporation expects to adopt SFAS No. 133 no later than January 1, 2001. The Statement will require PG&E Corporation to recognize all derivatives, as defined in the Statement, on the balance sheet at fair value. Derivatives, or any portion thereof, that are not effective hedges must be adjusted to fair value through income. If derivatives are effective hedges, depending on the nature of the hedges, changes in the fair value of derivatives either will be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or will be recognized in other comprehensive income until the hedged items are recognized in earnings. We currently are evaluating what effect of SFAS No. 133 will be on the earnings and financial position of PG&E Corporation. However, we already use the mark-to-market method of accounting for our commodity non-hedging and price risk management activities. In compliance with regulatory requirements, the Utility manages price risk independently from the activities in PG&E Corporation's unregulated business. During 1998, the CPUC authorized Pacific Gas and Electric Company to trade natural gas-based financial instruments to manage price and revenue risks associated with its natural gas transmission and storage assets, subject to certain conditions. Also in 1998, the CPUC authorized the Utility to trade natural gas-based financial instruments to hedge the gas commodity price swings in serving core gas customers. In May 1999, the Power Exchange (PX) obtained FERC approval to operate the "block forward market" which offers parties the ability to buy and sell contracts to purchase electricity in the future at prices set in the contracts. The Utility sought and obtained CPUC authority to participate in the PX block forward market for contracts that call for delivery of the purchased electricity by October 31, 2000, as well as to recover costs (such as gains/losses and transaction fees) associated with its participation in this market. PROPERTY, PLANT, AND EQUIPMENT Plant additions and replacements are capitalized. The capitalized costs include labor, materials, construction overhead, and capitalized interest or an allowance for funds used during construction (AFUDC). AFUDC is the estimated cost of debt and equity funds used to finance regulated plant additions. The Utility recovers AFUDC in rates through depreciation expense over the useful life of the related asset. Nuclear fuel inventories are included in property, plant, and equipment. Stored nuclear fuel inventory is stated at lower of average cost or market. Nuclear fuel in the reactor is amortized based on the amount of energy output. The original cost of retired plant and removal costs less salvage value is charged to accumulated depreciation upon retirement of plant in service for the Utility and the National Energy Group businesses that apply SFAS No. 71. For the remainder of our National Energy Group business operations, the cost and accumulated depreciation of property, plant, and equipment retired or otherwise disposed of are removed from related accounts and included in the determination of the gain or loss on disposition. Property, plant, and equipment is depreciated using a straight-line remaining-life method. PG&E Corporation's composite depreciation rates were 3.60 percent, 3.89 percent, and 3.45 percent for the years ended December 31, 1999, 1998, and 1997, respectively. The Utility's composite depreciation rates were 3.41 percent, 3.88 percent, and 3.26 percent for the years ended December 31, 1999, 1998, and 1997, respectively. 38 GAINS AND LOSSES ON REACQUIRED DEBT Any gains and losses on reacquired debt associated with regulated operations that are subject to the provisions of SFAS No. 71 are deferred and amortized over the remaining original lives of the debt reacquired, consistent with ratemaking principles. Gains and losses on reacquired debt associated with unregulated operations are recognized in earnings at the time such debt is reacquired. INVENTORIES Inventories include material and supplies, gas stored underground, coal, and fuel oil. Materials and supplies, coal, and gas stored underground are valued at average cost. Fuel oil is valued by the last-in first-out method. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents (stated at cost, which approximates market) include working funds and consist primarily of Eurodollar time deposits, bankers acceptances, and some commercial paper with original maturities of three months or less. INCOME TAXES PG&E Corporation uses the liability method of accounting for income taxes. Income tax expense includes current and deferred income taxes resulting from operations during the year. Tax credits are amortized over the life of the related property. PG&E Corporation files a consolidated federal income tax return that includes domestic subsidiaries in which its ownership is 80 percent or more. The Utility and various other subsidiaries are parties to a tax-sharing arrangement with PG&E Corporation. PG&E Corporation files consolidated state income tax returns when applicable. The Utility reports taxes on a stand-alone basis. RELATED PARTY AGREEMENTS In accordance with various agreements, the Utility and other subsidiaries provide and receive various services from their parent, PG&E Corporation. Services include the Utility's provision of general and administrative services. The Utility and other subsidiaries receive general and administrative services and financing from PG&E Corporation. Corporate costs, such as administrative costs, interest, and income taxes, are allocated to subsidiaries using a variety of factors, including their share of employees, operating expenses, assets, and other cost causal methods. Also, the Utility purchases gas commodity and transmission services from PG&E ET and transmission services from PG&E GT NW. Intercompany transactions are eliminated in consolidation and no profit results from these transactions. At December 31, 1999, the Utility has a net intercompany payable to affiliates of $207 million, of which $163 million relates to short-term borrowings, including interest. For the years ended December 31, 1999 and 1998, the Utility's significant related party transactions are provided in the table below.
(IN MILLIONS) 1999 1998 Utility revenues from: Administrative services provided to PG&E Corporation $ 23 $17 Transportation and distribution services provided to PG&E ES 134 -- Gas reservation services provided to PG&E ET 7 1 Other 3 4 Utility expenses from: Administrative services received from PG&E Corporation 66 58 Gas commodity and transmission services received from PG&E ET 30 1 Transmission services received from PG&E GT NW 47 49
39 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD Effective January 1, 1999, PG&E Corporation changed its method of accounting for major maintenance and overhauls at the National Energy Group. Beginning January 1, 1999, the cost of major maintenance and overhauls, principally at the PG&E Gen business segment, were accounted for as incurred. Previously, the estimated cost of major maintenance and overhauls was accrued in advance in a systematic and rational manner over the period between major maintenance and overhauls. The change resulted in PG&E Corporation recording income of $12 million net of income tax ($0.03 per share), reflecting the cumulative effect of the change in accounting principle. The effect on current year results of operations was immaterial. Accordingly, the unaudited quarterly consolidated information has been restated. (See "Quarterly Consolidated Financial Data (Unaudited)" below.) The Utility has consistently accounted for major maintenance and overhauls as incurred. NOTE 2: THE CALIFORNIA ELECTRIC INDUSTRY In 1998, California became one of the first states in the country to implement electric industry restructuring and establish a competitive market framework for electric generation. Today, most Californians may continue to purchase their electricity from investor-owned utilities such as Pacific Gas and Electric Company, or they may choose to purchase electricity from alternative generation providers (such as unregulated power generators and unregulated retail electricity suppliers such as marketers, brokers, and aggregators). For those customers who have not chosen an alternative generation provider, investor-owned utilities, such as the Utility, continue to be the generation providers. Investor-owned utilities continue to provide distribution services to substantially all customers within their service territories, including customers who choose an alternative generation provider. COMPETITIVE MARKET FRAMEWORK To create a competitive generation market, a PX and an Independent System Operator (ISO) began operating on March 31, 1998. The PX provides a competitive auction process to establish market clearing prices for electricity in the markets operated by the PX. The ISO schedules delivery of electricity for all market participants. The Utility continues to own and maintain a portion of the transmission system, but the ISO controls the operation of the system. Unless or until the CPUC determines otherwise, the Utility is required to bid or schedule into the PX and ISO markets all of the electricity generated by its power plants and electricity acquired under contractual agreements with unregulated generators. Also, the Utility is required to buy from the PX all electricity needed to provide service to retail customers that continue to choose the Utility as their electricity supplier. In November 1999, the FERC approved the extension of the ISO's authority to establish price limitations through 2000. The ISO Board increased the applicable price limitation to $750 per megawatt-hour (MWh) on October 1, 1999, but has the option to decrease it to $500 per MWh or make other changes, in view of the FERC's decision. This limits the amount of volatility that occurs in the California electricity market. However, the ISO will review the appropriate level for any price limitations for the summer of 2000 in light of market redesign efforts now being considered, including changes to reduce uninstructed deviations from ISO dispatch orders and changes to permit loads to participate by submitting bids for price responsive demand in energy or ancillary services markets. For the year ended December 31, 1999, and for the period of March 31, 1998 (the PX's establishment date) to December 31, 1998, the cost of electric energy for the Utility, reflected on the Statement of Consolidated Income, is comprised of the cost of PX purchases, ancillary services purchased from the ISO, cost of transmission, and the cost of Utility generation, net of sales to the PX as follows:
YEAR ENDED DECEMBER 31, ------------------- (IN MILLIONS) 1999 1998 Cost of fuel for electric generation and qualifying facilities (QF) purchases $1,489 $ 2,030 Cost of purchases from the PX 1,114 723 Cost of ancillary services 630 617 Proceeds from sales to the PX (822) (1,049) ------ ------- Cost of electric energy $2,411 $ 2,321 ====== =======
40 TRANSITION PERIOD, RATE FREEZE, AND RATE REDUCTION California's electric industry restructuring established a transition period during which electric rates remain frozen at 1996 levels (with the exception that, on January 1, 1998, rates for small commercial and residential customers were reduced by 10 percent and remain frozen at this reduced level) and investor-owned utilities may recover their transition costs. Transition costs are generation-related costs that prove to be uneconomic under the new competitive structure. The transition period ends the earlier of December 31, 2001, or when the particular utility has recovered its eligible transition costs. Revenues from frozen electric rates provide for the recovery of authorized Utility costs, including transmission and distribution service, public purpose programs, nuclear decommissioning, and rate reduction bond debt service. To the extent the revenues from frozen rates exceed authorized Utility costs, the remaining revenues constitute the CTC, which recovers the transition costs. These CTC revenues are being recovered from all Utility distribution customers and are subject to seasonal fluctuations in the Utility's sales volumes and certain other factors. As the CTC is collected regardless of the customer's choice of electricity supplier (i.e., the CTC is non-bypassable), the Utility believes that the availability of choice to its customers will not have a material impact on its ability to recover transition costs. To pay for the 10 percent rate reduction, the Utility refinanced $2.9 billion (the expected revenue reduction from the rate decrease) of its transition costs with the proceeds from the rate reduction bonds. The bonds allow for the rate reduction by lowering the carrying cost on a portion of the transition costs and by deferring recovery of a portion of these transition costs until after the transition period. During the rate freeze, the rate reduction bond debt service will not increase Utility customers' electric rates. If the transition period ends before December 31, 2001, the Utility may be obligated to return a portion of the economic benefits of the transaction to customers. The timing of any such return and the exact amount of such portion, if any, have not yet been determined. TRANSITION COST RECOVERY Although most transition costs must be recovered during the transition period, certain transition costs can be recovered after the transition period. Except for certain transition costs discussed below, at the conclusion of the transition period, the Utility will be at risk to recover any of its remaining generation costs through market-based revenues. Transition costs consist of (1) above-market sunk costs (costs associated with utility generating facilities that are fixed and unavoidable and that were included in customers' rates on December 20, 1995) and future sunk costs, such as costs related to plant removal, (2) costs associated with long-term contracts to purchase power at above-market prices from qualifying facilities and other power suppliers, and (3) generation-related regulatory assets and obligations. (In general, regulatory assets are expenses deferred in the current or prior periods, to be included in rates in subsequent periods.) Above-market sunk costs result when the book value of a facility exceeds its market value. Conversely, below-market sunk costs result when the market value of a facility exceeds its book value. The total amount of generation facility costs to be included as transition costs is based on the aggregate of above-market and below-market values. The above-market portion of these costs is eligible for recovery as a transition cost. The below-market portion of these costs will reduce other unrecovered transition costs. These above- and below-market sunk costs are related to generating facilities that are classified as either non-nuclear or nuclear sunk costs. The Utility cannot determine the exact amount of above-market non-nuclear sunk costs that will be recoverable as transition costs until the valuation of the Utility's remaining non-nuclear generating assets, primarily its hydroelectric generating assets, is completed. The valuation, through appraisal, sale, or other divestiture, must be completed by December 31, 2001. The value of seven of the Utility's other non-nuclear generating facilities was determined when these facilities were sold to third parties. The portion of the sales proceeds that exceeded the book value of these facilities was used to reduce other transition costs. On September 30, 1999, the Utility filed an application with the CPUC to determine the market value of its hydroelectric generating facilities and related assets through an open, competitive auction. (See "Generation Divestiture" below.) The Utility plans to use an auction process similar to the one previously approved by the CPUC and successfully used in the sale of the Utility's fossil and geothermal plants. If the market value of the Utility's hydroelectric facilities is determined based upon any method other than a sale of the facilities to a third party, a material charge to Utility earnings could result. Any 41 excess of market value over book value would be used to reduce other transition costs. (See "Generation Divestiture" below.) For nuclear transition costs, revenues provided for transition cost recovery are based on the accelerated recovery of the investment in Diablo Canyon Nuclear Power Plant (Diablo Canyon) over a five-year period ending December 31, 2001. The amount of nuclear generation sunk costs was determined separately through a CPUC proceeding and was subject to a final verification audit that was completed in August 1998. The audit of the Utility's Diablo Canyon accounts at December 31, 1996, resulted in the issuance of an unqualified opinion. The audit verified that Diablo Canyon sunk costs at December 31, 1996, were $3.3 billion of the total $7.1 billion construction costs. The independent accounting firm also issued an agreed-upon special procedures report, requested by the CPUC, that questioned $200 million of the $3.3 billion sunk costs. The CPUC will review the results of the audit and may seek to make adjustments to Diablo Canyon's sunk costs subject to transition cost recovery. At this time, the Utility cannot predict what actions, if any, the CPUC may take regarding the audit report. Costs associated with the Utility's long-term contracts to purchase electric power are included as transition costs. Regulation required the Utility to enter into such long-term agreements with non-utility generators. Prices fixed under these contracts are now typically above prices for power in wholesale markets (See Note 14). Over the remaining life of these contracts, the Utility estimates that it will purchase 299 million MWh of electric power. To the extent that the individual contract prices are above the market price, the Utility is collecting the difference between the contract price and the market price from customers, as a transition cost, over the term of the contract. The contracts expire at various dates through 2028. The total costs under long-term contracts are based on several variables, including the capacity factors of the related generating facilities and future market prices for electricity. During 1999, the average price paid under the Utility's long-term contracts for electricity was 6.3 cents per kilowatt-hour (kWh). The average cost of electricity purchased at market rates from the PX for the year ended December 31, 1999, was 3.7 cents per kWh. The average cost of electricity purchased at market rates from the PX for the period from March 31, 1998, the PX's establishment date, to December 31, 1998, was 3.2 cents per kWh. Generation-related regulatory assets and obligations (net generation-related regulatory assets) are included as transition costs. At December 31, 1999 and 1998, the Utility's generation-related net regulatory assets totaled $4 billion and $5.4 billion, respectively. Certain transition costs can be recovered through a non-bypassable charge to distribution customers after the transition period. These costs include (1) certain employee-related transition costs, (2) above-market payments under existing long-term contracts to purchase power, discussed above, (3) up to $95 million of transition costs to the extent that the recovery of such costs during the transition period was displaced by the recovery of electric industry restructuring implementation costs, and (4) transition costs financed by the rate reduction bonds. Transition costs financed by the issuance of rate reduction bonds will be recovered over the term of the bonds. In addition, the Utility's nuclear decommissioning costs are being recovered through a CPUC-authorized charge, which will extend until sufficient funds exist to decommission the nuclear facility. During the rate freeze, the charge for these costs will not increase Utility customers' electric rates. Excluding these exceptions, the Utility will write off any transition costs not recovered during the transition period. The Utility is amortizing its transition costs, including most generation-related regulatory assets, over the transition period in conjunction with the available CTC revenues. During the transition period, a reduced rate of return on common equity of 6.77 percent applies to all generation assets, including those generation assets reclassified to regulatory assets. Effective January 1, 1998, the Utility started collecting these eligible transition costs through the non-bypassable CTC and generation divestiture. For the years ended December 31, 1999 and 1998, regulatory assets related to electric industry restructuring decreased by $1,359 million and $609 million, respectively, which reflects the recovery of eligible transition costs. During the transition period, the CPUC reviews the Utility's compliance with accounting methods established in the CPUC's decisions governing transition cost recovery and the amount of transition costs requested for recovery. The CPUC is currently reviewing non-nuclear transition costs amortized during 1998 and the first six months of 1999. 42 GENERATION DIVESTITURE In 1998, the Utility sold three fossil-fueled generation plants for $501 million. These three fossil-fueled plants had a combined book value at the time of the sale of $346 million and had a combined capacity of 2,645 megawatts (MW). On April 16, 1999, the Utility sold three other fossil-fueled generation plants for $801 million. At the time of sale, these three fossil-fueled plants had a combined book value of $256 million and had a combined capacity of 3,065 MW. On May 7, 1999, the Utility sold its complex of geothermal generation facilities for $213 million. At the time of sale, these facilities had a combined book value of $244 million and had a combined capacity of 1,224 MW. The gains from the sale of the fossil-fueled generation plants were used to offset other transition costs. Likewise, the loss from the sale of the complex of geothermal generation facilities is being recovered as a transition cost. The Utility has retained a liability for required environmental remediation related to any pre-closing soil or groundwater contamination at the plants it has sold. On September 30, 1999, the Utility filed an application with the CPUC to determine the market value of its hydroelectric generating facilities and related assets through an open, competitive auction. The Utility proposes to use an auction process similar to the one previously approved by the CPUC and successfully used in the sale of the Utility's fossil and geothermal plants. Under the process proposed in the application, another subsidiary of PG&E Corporation, PG&E Gen, would be permitted to participate in the auction on the same basis as other bidders. The sale of the hydroelectric facilities would be subject to certain conditions, including the transfer or re-issuance of various permits and licenses by the FERC and other agencies. In addition, the FERC must approve assignment of the Utility's Reliability Must Run Contract with the ISO for any facility subject to such contract. Under the proposed purchase and sale agreement, the CPUC's approval of the proposed sale on terms acceptable to the Utility in the Utility's sole discretion is also a condition precedent to the closing of any sale. On January 13, 2000, a scoping memo and ruling was issued that separates the proceeding into two concurrent phases: one to review the potential environmental impacts of the proposed auction under the California Environmental Quality Act and a second to determine whether the Utility's auction proposal, or some other alternative to the proposal, is in the public interest. The ruling notes that the divestiture and valuation issues can best be considered after the environmental impacts of a change in ownership have been reviewed. Potential bidders will also be able to incorporate the costs of any mitigation measures that may be required into their bids. The ruling sets a procedural schedule which calls for a final decision on the Utility's auction proposal by October 19, 2000, and a final environmental impact report published in November 2000. The ruling also anticipates that a final CPUC decision approving the sale would be issued by May 15, 2001. Finally, the ruling prohibits the Utility from withdrawing its application without express CPUC authority. It is uncertain whether the CPUC will ultimately approve the Utility's auction proposal. At December 31, 1999, the book value of the Utility's net investment in hydroelectric generation assets was approximately $0.7 billion, excluding approximately $0.5 billion of net investment reclassified as regulatory assets. Any excess of market value over the $0.7 billion book value would be used to reduce transition costs, including the remaining $0.5 billion of regulatory assets related to the hydroelectric generation assets. If the market value of the hydroelectric generation assets is determined by any method other than a sale of the assets to a third party, or if the winning bidder for any of the auctioned assets is PG&E Gen, a material charge to Utility earnings could result. The timing and nature of any such charge is dependent upon the valuation method and procedure adopted, and the method of implementation. As discussed below, it is possible that the CPUC will require an interim valuation through an estimate of market value of the assets prior to transfer, sale or other divestiture, which could also result in a material charge. While transfer or sale to an affiliated entity such as PG&E Gen would result in a material charge to income, neither PG&E Corporation nor the Utility believes that the sale of any generation facilities to a third party will have a material impact on its results of operations. The Utility's ability to continue recovering its transition costs depends on several factors, including (1) the continued application of the regulatory framework established by the CPUC and state legislation, (2) the amount of transition costs ultimately approved for recovery by the CPUC, (3) the determined value of the Utility's hydroelectric generation facilities, (4) future Utility sales levels, (5) future Utility fuel and operating costs, and 43 (6) the market price of electricity. Given the current evaluation of these factors, PG&E Corporation believes that the Utility will recover its transition costs. However, a change in one or more of these factors could affect the probability of recovery of transition costs and result in a material charge. POST-TRANSITION PERIOD In October 1999, the CPUC issued a decision in the Utility's post-transition period ratemaking proceeding. Among other matters, the CPUC's decision addresses the mechanisms for ending the current electric rate freeze and for establishing post-transition period accounting mechanisms and rates. The decision requires Diablo Canyon generation to be priced at prevailing market rates after the transition period. The CPUC decision requires the Utility to provide quarterly forecasts of when the Utility's rate freeze (i.e., transition period) may end based on various assumptions regarding energy prices and the book value of the Utility's remaining generation assets. The Utility is required to notify the CPUC three months before the earliest forecasted end of its rate freeze and provide draft tariff language and sample calculations of the rates that would go into effect when the rate freeze ends. After the Utility completes its transition cost recovery, it must implement its post-rate-freeze rates. The timing of the end of the rate freeze and corresponding transition period will, in part, depend on the timing of the valuation of the Utility's hydroelectric generating assets and the ultimate determined value of such assets since any excess of market value over the assets' book value would be used to reduce transition costs. If the value of the Utility's hydroelectric generation assets is significantly higher than the related book value, the transition period and the rate freeze could end before December 31, 2001, and potentially could end during 2000. The CPUC is considering the Utility's proposal to auction its hydroelectric assets, although the CPUC could also require the Utility to implement an interim valuation of the assets. In another proceeding (the 1998 Annual Transition Cost Proceeding (ATCP)), a CPUC administrative law judge issued a proposed decision on January 7, 2000, which contained a proposed change to the rules previously in place for the amortization of transition costs. Under the final decision, issued on February 17, 2000, on a prospective basis the utilities are required to assess the estimated market value of their remaining non-nuclear generating assets, including the land associated with those assets, on an aggregate basis at a value not less than the net book value of those assets and to credit the Transition Cost Balancing Account (TCBA) with the estimated value. The decision encourages the utilities to base such estimates on realistic assessments of the market value of the assets. The final decision did not adopt the proposed decision's recommendation to establish a new regulatory asset account that would allow a true-up when the estimated market value is greater than actual market value. However, the decision states that crediting the TCBA with the aggregate net book value of the remaining non-nuclear generating assets is a conservative approach and remedies any concerns regarding the lack of a true-up. The decision provides that if the estimated market valuation is less than book value for any individual asset, accelerated amortization of the associated transition costs will continue until final market valuation of the asset occurs through sale, appraisal, or other divestiture. If the final value of the assets, determined through sale, appraisal, or other divestiture, is higher than the estimate, the excess amount would be used to pay remaining transition costs, if any. The utilities are required to file the adjusted entries to their respective TCBA based on the estimated market values with the CPUC by March 9, 2000. The filing will become effective after appropriate review by the CPUC's Energy Division and the TCBA entries are subject to review in the next ATCP. If an estimate of the market value of the non-nuclear generating assets is adopted that exceeds the aggregate net book value of those assets, a charge to earnings would result. After the rate freeze and transition periods end, the Utility must refund to electric customers any over-collected transition costs (plus interest at the Utility's authorized rate of return) within one year after the end of the rate freeze. The Utility also will be prohibited from collecting after the rate freeze any electric costs incurred during the rate freeze but not recovered during the rate freeze, including costs that are not classified as transition costs. Through the end of its rate freeze, the Utility will continue to incur certain non-transition costs and place those costs into balancing and memorandum accounts for future recovery. There is a risk that the Utility will be unable to collect certain non-transition costs that, due to lags in the regulatory cost approval process, have not been approved for recovery nor collected when the rate freeze ends. The Utility is unable to predict the amount of such potential unrecoverable costs. 44 The CPUC also has established the Purchased Electric Commodity Account for the Utility to track energy costs after the rate freeze and transition period end. The CPUC intends to explore other ratemaking issues, including whether dollar-for-dollar recovery of energy costs is appropriate, in the second phase of the post-transition electric ratemaking proceeding. There are three primary options for the future regulatory framework for utility electric energy procurement cost recovery after the rate freeze: (1) a CPUC-defined procurement practice, that if followed by the Utility, would pass through costs without the need for reasonableness reviews, (2) a pass-through of costs subject to after-the-fact reasonableness reviews, or (3) a procurement incentive mechanism with rewards and penalties determined based on the Utility's energy purchasing performance compared to a benchmark. The Utility proposed adoption of either a defined procurement practice or a procurement incentive mechanism, neither of which would involve reasonableness reviews. The volatility of earnings and risk exposure of the Utility related to post-transition period purchases of electricity is dependent on which of these options, or some other approach, is adopted. After the transition period, the Utility's future earnings from its electric distribution will be subject to volatility as a result of sales fluctuations. NOTE 3: PRICE RISK MANAGEMENT AND FINANCIAL INSTRUMENTS The following table is a summary of the contract or notional amounts and maturities of PG&E Corporation's contracts used for non-hedging activities related to commodity price risk management as of December 31, 1999 and 1998. Short and long positions pertaining to derivative contracts used for hedging activities as of December 31, 1999 and 1998, are immaterial.
MAXIMUM NATURAL GAS, ELECTRICITY, PURCHASE SALE TERM IN AND NATURAL GAS LIQUIDS CONTRACTS (LONG) (SHORT) YEARS (BILLIONS OF MMBTU EQUIVALENTS(1)) Non-Hedging Activities--December 31, 1999 Swaps 2.28 2.20 7 Options 0.93 0.85 8 Futures 0.19 0.18 2 Forward contracts 1.47 1.42 12 Non-Hedging Activities--December 31, 1998 Swaps 6.21 6.06 8 Options 1.50 1.28 5 Futures 0.58 0.61 4 Forward contracts 3.70 3.55 5
(1) One MMBtu is equal to one million British thermal units. PG&E Corporation's electric power contracts, measured in megawatts, were converted to MMBtu equivalents using a conversion factor of 10 MMBtu's per 1 megawatt-hour. PG&E Corporation's natural gas liquids contracts were converted to MMBtu equivalents using an appropriate conversion factor for each type of natural gas liquids product. Volumes shown for swaps, futures, and options represent notional volumes that are used to calculate amounts due under the agreements and do not necessarily represent volumes exchanged. Moreover, notional amounts are indicative only of the volume of activity and are not a measure of market risk. PG&E Corporation's net gains (losses) on swaps, options, futures, and forward contracts held during the years ended December 31, 1999 and 1998 are as follows:
YEAR ENDED DECEMBER 31, ----------------------- (IN MILLIONS) 1999 1998 Swaps $ 15 $ 69 Options (41) (49) Futures (36) (63) Forward contracts 98 101 ---- ---- Net gain (loss) $ 36 $ 58 ==== ====
45 The following table discloses the estimated fair values of price risk management assets and liabilities as of December 31, 1999 and 1998. The ending and average fair values and associated carrying amounts of derivative contracts used for hedging purposes are not material as of December 31, 1999 and 1998.
AVERAGE ENDING (IN MILLIONS) FAIR VALUE FAIR VALUE Non-Hedging Activities--December 31, 1999 Assets: Swaps $ 643 $ 244 Options 106 92 Futures 175 47 Forward contracts 667 596 ------ ------ Total $1,591 $ 979 ------ ------ Noncurrent portion $ 372 Current portion $ 607 Liabilities: Swaps $ 592 $ 218 Options 109 81 Futures 201 67 Forward contracts 561 456 ------ ------ Total $1,463 $ 822 ------ ------ Noncurrent portion $ 247 Current portion $ 575 Non-Hedging Activities--December 31, 1998 Assets: Swaps $ 494 $ 947 Options 121 154 Futures 115 150 Forward contracts 342 499 ------ ------ Total $1,072 $1,750 ------ ------ Noncurrent portion $ 334 Current portion $1,416 Liabilities: Swaps $ 476 $ 908 Options 147 201 Futures 111 186 Forward contracts 282 398 ------ ------ Total $1,016 $1,693 ------ ------ Noncurrent portion $ 281 Current portion $1,412
PG&E Corporation, primarily through its subsidiaries, engages in price risk management activities for both non-hedging and hedging purposes. Non-hedging activities are conducted principally through its unregulated subsidiary, PG&E ET. In compliance with regulatory requirements, the Utility manages price risk independently from the activities in PG&E Corporation's unregulated businesses (see Note 1 for further discussion). The Utility primarily engages in hedging activities which, noted above, were immaterial for the years ended December 31, 1999 and 1998. In valuing its electric power, natural gas, and natural gas liquids portfolios, PG&E Corporation considers a number of market risks and estimated costs and continuously monitors the valuation of identified risks and adjusts them based on present market conditions. Considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that PG&E Corporation could realize in the current market. Generally, exchange-traded futures contracts require deposit of margin cash, the amount of which is subject to change based on market movement and in accordance with exchange rules. Margin cash requirements for over-the-counter financial instruments are specified by the particular instrument and often do not require margin 46 cash and are settled monthly. Both exchange-traded and over-the-counter options contracts require payment/ receipt of an option premium at the inception of the contract. Margin cash for commodities futures and cash on deposit with counterparties was immaterial at December 31, 1999. NOTE 4: CONCENTRATIONS OF MARKET AND CREDIT RISK MARKET RISK Market risk is the risk that changes in market prices will adversely affect earnings and cash flows. PG&E Corporation is primarily exposed to the market risk associated with energy commodities such as electric power, natural gas, and natural gas liquids. Therefore, PG&E Corporation's price risk management activities primarily involve buying and selling fixed-price commodity commitments into the future. Net open positions often exist or are established due to PG&E Corporation's assessment of and response to changing market conditions. To the extent that PG&E Corporation has an open position, it is exposed to the risk that fluctuating market prices may adversely impact its financial results. CREDIT RISK The use of financial instruments to manage the risks associated with changes in energy commodity prices creates exposure resulting from the possibility of nonperformance by counterparties pursuant to the terms of their contractual obligation. The counterparties in PG&E Corporation's portfolio consist primarily of investor-owned and municipal utilities, energy trading companies, financial institutions, and oil and gas production companies. PG&E Corporation minimizes credit risk by dealing primarily with creditworthy counterparties in accordance with established credit approval practices and limits. PG&E Corporation routinely assesses the financial strength of its counterparties and may require letters of credit or parental guarantees when the financial strength of a counterparty is not considered sufficient. PG&E Corporation has experienced no material losses due to the nonperformance of counterparties in 1999. The credit exposure of the five largest counterparties comprised approximately $250 million of the total credit exposure associated with financial instruments used to manage price risk. Counterparties considered to be investment grade or higher comprise 70 percent of the total credit exposure. NOTE 5: ACQUISITIONS AND SALES In January 1997, PG&E Corporation acquired Teco Pipeline Company for $378 million, consisting of $317 million of PG&E Corporation common stock and the purchase of a $61 million note. In April 1997, through one of its wholly owned subsidiaries, PG&E Corporation sold its interest in International Generating Company, Ltd., which resulted in an after-tax gain of approximately $120 million. In July 1997, PG&E Corporation completed its acquisition of Valero Energy Corporation's natural gas business and a gas marketing business located in Texas. PG&E Corporation issued approximately 31 million shares of its common stock to acquire Valero along with the assumption of $780 million in long-term debt, equating to a purchase price of approximately $1.5 billion. The acquisition was accounted for as a purchase and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on estimated fair values. In September 1997, PG&E Corporation became the sole owner of PG&E Gen, an independent power developer, owner, and manager; PG&E Operating Services Company, PG&E Gen's operations and maintenance affiliate; and USGen Power Services, L.P., PG&E Gen's power marketing affiliate. Additionally, PG&E Corporation has acquired all or part of interest in several power projects that are affiliated with PG&E Gen. In July 1998, PG&E Corporation sold its Australian energy holdings. The sale represents a premium on the price in local currency of PG&E Corporation's 1996 investment in the assets. However, the transaction resulted in a charge of $.06 per share in the second quarter of 1998. This charge was primarily due to the 22 percent currency devaluation of the Australian dollar against the U.S. dollar during 1998 and 1997. In September 1998, PG&E Corporation, through its indirect subsidiary USGen New England, Inc. (USGenNE), completed the acquisition of a portfolio of electric generating assets and power supply contracts from the New England Electric System (NEES). The acquisition has been accounted for using the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon an assessment of the fair values at the date of acquisition. 47 Including fuel and other inventories and transaction costs, PG&E Corporation's financing requirements for this acquisition were approximately $1.8 billion, funded through an aggregate of $1.3 billion PG&E Gen and USGenNE debt and a $425 million equity contribution from PG&E Corporation. The net purchase price has been allocated as follows: (1) electric generating assets of $2.3 billion classified as property, plant, and equipment, (2) receivable for support payments of $0.8 billion, and (3) contractual obligations of $1.3 billion classified as current liabilities and other noncurrent liabilities. The assets include hydroelectric, coal, oil, and natural gas generation facilities with a combined generating capacity of 4,000 MW. In addition, USGenNE assumed 23 multi-year power purchase agreements representing an additional 800 MW of production capacity. USGenNE entered into agreements with NEES as part of the acquisition, which (1) provide that NEES shall make support payments over the next 9 years to USGenNE for the purchase power agreements, and (2) require that USGenNE provide electricity to certain of NEES affiliates under contracts that expire over the next 3 to 10 years. In December 1999, PG&E Corporation's Board of Directors approved a plan to dispose of PG&E ES, its wholly owned subsidiary, through a sale. As of December 31, 1999, the intended disposal has been accounted for as a discontinued operation. In connection with this transaction, PG&E Corporation's investment in PG&E ES was written down to its estimated net realizable value. In addition, PG&E Corporation provided a reserve for anticipated losses through the date of sale. The total provision for discontinued operations was $58 million, net of income taxes of $36 million. While there is no definite sales agreement, it is expected that the disposition will be completed in 2000. The amounts that PG&E Corporation will ultimately realize from this disposal could be materially different from the amounts assumed in arriving at the estimated loss on disposal of the discontinued operations. The PG&E ES business segment generated net losses of $40 million (or $0.11 per share), $52 million (or $0.14 per share), and $29 million (or $0.07 per share), for the years ended December 31, 1999, 1998 and 1997, respectively. The total assets and liabilities, including the charge noted above, of PG&E ES included in the PG&E Corporation Consolidated Balance Sheet at December 31, 1999 and 1998, are as follows:
BALANCE AT DECEMBER 31, ---------------------- (IN MILLIONS) 1999 1998 ASSETS Current assets $114 $148 Noncurrent assets 83 54 ---- ---- Total Assets $197 $202 LIABILITIES Current liabilities $ 61 $ 72 Noncurrent liabilities 10 9 ---- ---- Total liabilities 71 81 ---- ---- NET ASSETS 126 121 ==== ====
On January 27, 2000, PG&E Corporation's National Energy Group signed a definitive agreement with El Paso Field Services Company (El Paso) providing for the sale to El Paso, a subsidiary of El Paso Energy Corporation, of the stock of PG&E Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc. (collectively, PG&E GTT). The consideration to be received by the National Energy Group includes $279 million in cash subject to a working capital adjustment, the assumption by El Paso of debt having a book value of $624 million, and other liabilities associated with PG&E GTT. In 1999, PG&E Corporation recognized a charge against earnings of $890 million after-tax, or $2.42 per share, to reflect PG&E GTT's assets at their fair market value. The composition of the pre-tax charge is as follows: (1) an $819 million write down of net property, plant, and equipment, (2) the elimination of the unamortized portion of goodwill, in the amount of $446 million, and (3) an accrual of $10 million representing selling costs. Proceeds from the sale will be used to retire short-term debt associated with PG&E GTT's operations and for other corporate purposes. Closing of the sale, which is expected in the first half of 2000, is subject to approval under the Hart Scott Rodino Act. 48 The sale of PG&E GTT represents disposal of the PG&E GTT business segment and a portion of the PG&E ET business segment. PG&E GTT's total assets and liabilities, including the charge noted above, included in the PG&E Corporation Consolidated Balance Sheet at December 31, 1999 and 1998, are as follows:
BALANCE AT DECEMBER 31, ------------------- (IN MILLIONS) 1999 1998 ASSETS Current assets $ 229 $ 366 Noncurrent assets 988 2,346 ------ ------ Total Assets $1,217 $2,712 LIABILITIES Current liabilities $ 448 $ 486 Noncurrent liabilities 624 1,174 ------ ------ Total liabilities 1,072 1,660 ------ ------ NET ASSETS 145 1,052 ====== ======
NOTE 6: COMMON STOCK PG&E CORPORATION PG&E Corporation has authorized 800 million shares of no-par common stock of which 384 million and 383 million shares were issued as of December 31, 1999 and 1998, respectively. During the years ended December 31, 1999 and 1998, PG&E Corporation repurchased $693 million and $1,158 million of its common stock, respectively. The repurchases in 1998 and through September 1999 were executed through separate, accelerated share repurchase programs. Under the 1999 agreement, PG&E Corporation repurchased in a specific transaction 16.6 million shares of its common stock at a cost of $502 million. In connection with this transaction, PG&E Corporation entered into a forward contract with an investment institution. PG&E Corporation settled the forward contract and its additional obligation of $29 million in September 1999. A wholly owned subsidiary of PG&E Corporation made this repurchase, along with subsequent stock repurchases. The stock held by the subsidiary is treated as treasury stock and reflected as stock held by subsidiary on the Consolidated Balance Sheet of PG&E Corporation. In October 1999, the Board of Directors of PG&E Corporation authorized an additional $500 million for the purpose of repurchasing shares of the Corporation's common stock on the open market. This authorization supplements the approximately $40 million remaining from the amount previously authorized by the Board of Directors on December 17, 1997. The authorization for share repurchase extends through September 30, 2001. As of December 31, 1999, a subsidiary of PG&E Corporation has repurchased 7.2 million shares at a cost of $159 million under this authorization. UTILITY All of the Utility's outstanding common stock is held by PG&E Corporation and a subsidiary of the Utility. In connection with the formation of the holding company, all of the Utility's then-outstanding common stock was converted on a share-for-share basis to PG&E Corporation common stock. The Utility has authorized 800 million shares of $5 par value common stock of which 321 million and 341 million shares were issued as of December 31, 1999 and 1998, respectively. Prior to December 1999, the Utility repurchased 20 million shares of its common stock from PG&E Corporation for an aggregate purchase price of $726 million to maintain its authorized capital structure. In December 1999, 7.6 million shares of the Utility's common stock, with an aggregate purchase price of $200 million, was purchased by a subsidiary of the Utility. This purchase is reflected as stock held by subsidiary in the Consolidated Balance Sheet of Pacific Gas and Electric Company. The CPUC requires the Utility to maintain its CPUC-authorized capital structure, potentially limiting the amount of dividends the Utility may pay PG&E Corporation. In 1999, the Utility was in compliance with its CPUC-authorized capital structure. 49 NOTE 7: PREFERRED STOCK AND UTILITY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST HOLDING SOLELY UTILITY SUBORDINATED DEBENTURES PREFERRED STOCK OF UTILITY The Utility has authorized 75 million shares of $25 par value preferred stock which may be issued as redeemable or nonredeemable preferred stock. At December 31, 1999 and 1998, the Utility had issued and outstanding 5,784,825 shares of nonredeemable preferred stock. At December 31, 1999 and 1998, the Utility had issued and outstanding 5,973,456 shares of redeemable preferred stock. The Utility's redeemable preferred stock is subject to redemption at the Utility's option, in whole or in part, if the Utility pays the specified redemption price plus accumulated and unpaid dividends through the redemption date. Annual dividends and redemption prices per share at December 31, 1999, range from $1.09 to $1.76 and from $25.75 to $27.25, respectively. In 1998, the Utility redeemed its Series 7.44% preferred stock with a face value of $65 million. Also in 1998, the Utility redeemed its Series 6 7/8% preferred stock with a face value of $43 million. The Utility's redeemable preferred stock with mandatory redemption provisions consists of 3 million shares of the 6.57% series and 2.5 million shares of the 6.30% series at December 31, 1999. The 6.57% series and 6.30% series may be redeemed at the Utility's option beginning in 2002 and 2004, respectively, at par value plus accumulated and unpaid dividends through the redemption date. These series of preferred stock are subject to mandatory redemption provisions entitling them to sinking funds providing for the retirement of stock outstanding. Holders of the Utility's nonredeemable preferred stock 5%, 5.5%, and 6% series have rights to annual dividends per share ranging from $1.25 to $1.50. Dividends on all preferred stock are cumulative. All shares of preferred stock have voting rights and equal preference in dividend and liquidation rights. Upon liquidation or dissolution of the Utility, holders of preferred stock would be entitled to the par value of such shares plus all accumulated and unpaid dividends, as specified for the class and series. PREFERRED STOCK OF THE NATIONAL ENERGY GROUP Preferred stock of the National Energy Group consists of $57 million of preferred stock issued by a subsidiary of PG&E Gen. The preferred stock, with $100 par value, has a stated dividend of $3.35 per share, per quarter, and is redeemable when there is an excess of available cash. There were 549,594 shares outstanding at December 31, 1999 and 1998. UTILITY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST HOLDING SOLELY UTILITY SUBORDINATED DEBENTURES The Utility, through its wholly owned subsidiary, PG&E Capital I (Trust), has outstanding 12 million shares of 7.90% cumulative quarterly income preferred securities (QUIPS), with an aggregate liquidation value of $300 million. Concurrent with the issuance of the QUIPS, the Trust issued to the Utility 371,135 shares of common securities with an aggregate liquidation value of $9 million. The Trust in turn used the net proceeds from the QUIPS offering and issuance of the common stock securities to purchase subordinated debentures issued by the Utility with a face value of $309 million, an interest rate of 7.9%, and a maturity date of 2025. These subordinated debentures are the only assets of the Trust. Proceeds from the sale of the subordinated debentures were used to redeem and repurchase higher-cost preferred stock. The Utility's guarantee of the QUIPS, considered together with the other obligations of the Utility with respect to the QUIPS, constitutes a full and unconditional guarantee by the Utility of the Trust's contractual obligations under the QUIPS issued by the Trust. The subordinated debentures may be redeemed at the Utility's option beginning in 2000 at par value plus accrued interest through the redemption date. The proceeds of any redemption will be used by the Trust to redeem QUIPS in accordance with their terms. Upon liquidation or dissolution of the Utility, holders of these QUIPS would be entitled to the liquidation preference of $25 per share plus all accrued and unpaid dividends thereon to the date of payment. 50 NOTE 8: LONG-TERM DEBT Long-term debt at December 31, 1999 and 1998, consisted of the following:
BALANCE AT DECEMBER 31, ------------------- (IN MILLIONS) 1999 1998 Utility long-term debt First and refunding mortgage bonds Maturity Interest rates 2000-2003 6.25% to 8.75% $ 816 $ 969 2004-2008 5.875% to 6.25% 600 615 2009-2021 6.35% to 7.59% 160 160 2022-2026 5.85% to 8.80% 2,004 2,117 ------ ------ Principal amounts outstanding 3,580 3,861 Unamortized discount net of premium (29) (32) ------ ------ Total mortgage bonds 3,551 3,829 Pollution control loan agreements, variable rates, due 2010-2026 1,348 1,348 Unsecured medium-term notes, 5.56% to 8.45%, Due 2000-2014 418 498 Other Utility long-term debt 25 29 ------ ------ Total Utility long-term debt 5,342 5,704 Current portion of long-term debt 465 260 ------ ------ Total Utility long-term debt, net of current portion 4,877 5,444 ------ ------ National Energy Group long-term debt First mortgage notes, 10.02% to 11.50%, due 2000-2009 333 370 Senior notes Maturity Interest rates 1999 10.58% -- 69 2005 7.10% 250 250 Medium-term notes, 6.61% to 9.25%, due 2000-2012 299 298 Senior debentures, 7.80%, due 2025 150 150 Amounts outstanding under credit facilities (See Note 10) 649 654 Other long-term debt 242 265 ------ ------ Total National Energy Group long-term debt 1,923 2,056 Current portion of long-term debt 127 78 ------ ------ Total National Energy Group long-term debt, net of current portion 1,796 1,978 ------ ------ Total long-term debt $6,673 $7,422 ====== ======
UTILITY FIRST AND REFUNDING MORTGAGE BONDS: First and refunding mortgage bonds are issued in series and bear annual interest rates ranging from 5.85 percent to 8.80 percent. All real properties and substantially all personal properties of the Utility are subject to the lien of the bonds, and the Utility is required to make semi-annual sinking fund payments for the retirement of the bonds. Additional bonds may be issued subject to CPUC approval, up to a maximum total amount outstanding of $10 billion, assuming compliance with indenture covenants for earnings coverage and available property balances as security. The Utility redeemed or repurchased $281 million and $501 million of the bonds in 1999 and 1998, respectively, with interest rates ranging from 6.25 percent to 8.80 percent. These bonds were to mature from 2002 to 2026. Included in the total of outstanding bonds at December 31, 1999 and 1998, are $345 million of bonds held in trust for the California Pollution Control Financing Authority (CPCFA) with interest rates ranging from 5.85 percent 51 to 6.625 percent and maturity dates ranging from 2009 to 2023. In addition to these bonds, the Utility holds long-term pollution control loan agreements with the CPCFA as described below. POLLUTION CONTROL LOAN AGREEMENTS: Pollution control loan agreements from the CPCFA totaled $1,348 million at December 31, 1999 and 1998. Interest rates on the loans vary with average annual interest rates. For 1999 the interest rates ranged from 2.36 percent to 3.39 percent. These loans are subject to redemption by the holder under certain circumstances. These loans are secured primarily by irrevocable letters of credit which mature in 2000 through 2003. NATIONAL ENERGY GROUP Long-term debt of the National Energy Group consists of first mortgage bonds and other secured and unsecured obligations. The first mortgage notes are comprised of three series due annually through 2009, and are secured by mortgages and security interests in the natural gas transmission and natural gas processing facilities and other real and personal property of PG&E GTT. The mortgage indenture requires semi-annual payments with one-half of each interest payment and one-fourth of each annual principal payment escrowed quarterly in advance. The mortgage indenture also contains covenants that restrict the ability of PG&E GTT to incur additional indebtedness and precludes cash distributions if certain cash flow coverages are not met. In January 2000, PG&E GTT obtained an amendment that provides PG&E GTT the ability to redeem in whole or in part, its Mortgage Notes, including the premium set forth in the Mortgage Note Indenture, anytime after January 1, 2000. These notes will be assumed by the buyer of PG&E GTT (see Note 5). Other long-term debt consists of project financing associated with unregulated generation facilities, premiums, and other loans. REPAYMENT SCHEDULE At December 31, 1999, PG&E Corporation's combined aggregate amounts of maturing long-term debt and sinking fund requirements, for the years 2000 through 2004, are $592 million, $480 million, $1,363 million, $1,271 million, and $470 million, respectively. The Utility's share of those maturities and sinking fund requirements is $465 million, $374 million, $1,117 million, $664 million, and $392 million, respectively. NOTE 9: RATE REDUCTION BONDS In December 1997, PG&E Funding LLC (SPE), a special-purpose entity wholly owned by the Utility, issued $2.9 billion of rate reduction bonds to the California Infrastructure and Economic Development Bank Special Purpose Trust PG&E-1 (Trust), a special-purpose entity. The terms of the bonds generally mirror the terms of the pass-through certificates issued by the Trust. The proceeds of the rate reduction bonds were used by the SPE to purchase from the Utility the right, known as "transition property," to be paid a specified amount from a non-bypassable tariff levied on residential and small commercial customers which was authorized by the CPUC pursuant to state legislation. The rate reduction bonds have maturities ranging from 6 months to 8 years, and bear interest at rates ranging from 6.15 percent to 6.48 percent. The bonds are secured solely by the transition property and there is no recourse to the Utility or PG&E Corporation. At December 31, 1999, $2.3 billion of rate reduction bonds were outstanding. The combined expected principal payments on the rate reduction bonds for the years 2000 through 2004 are $290 million for each year. While the SPE is consolidated with the Utility for purposes of these financial statements, the SPE is legally separate from the Utility. The assets of the SPE are not available to creditors of the Utility or PG&E Corporation, and the transition property is not legally an asset of the Utility or PG&E Corporation. NOTE 10: CREDIT FACILITIES PG&E CORPORATION At December 31, 1999 and 1998, PG&E Corporation had borrowed $2,148 million and $2,298 million, respectively, under various credit facilities discussed below. $649 million and $654 million of these borrowings at December 31, 1999 and 1998, respectively, are classified as long-term debt. (See Note 8.) The weighted average interest rate on the short-term borrowings was 5.4 percent and 5.6 percent for 1999 and 1998, respectively. 52 PG&E Corporation maintains two $500 million revolving credit facilities, one of which expires in November 2000 and the other in 2002. These credit facilities are used to support the commercial paper program and other liquidity needs. The facility expiring in 2000 may be extended annually for additional one-year periods upon agreement with the lending institutions. There was $450 million and $683 million of commercial paper outstanding at December 31, 1999 and 1998, respectively. PG&E Corporation introduced a $200 million Extendible Commercial Note (ECN) program during the third quarter of 1999. The ECN program supplements our short-term borrowing capability. There was $76 million of ECNs outstanding at December 31, 1999, which are not supported by the credit facilities. UTILITY The Utility maintains a $1 billion revolving credit facility which expires in 2002. The facility may be extended annually for additional one-year periods upon agreement with the banks. This facility is used to support the Utility's commercial paper program and other liquidity requirements. The total amount outstanding at December 31, 1999, backed by this facility, was $449 million in commercial paper. The total amount outstanding at December 31, 1998, backed by this facility was $567 million in commercial paper and $101 million of bank notes. NATIONAL ENERGY GROUP PG&E Gen maintains two $550 million revolving credit facilities. One facility expires in August 2000 and the other expires in 2003. The amount outstanding at December 31, 1999 and 1998, backed by the facilities, was $898 million and $233 million, respectively in commercial paper. Also outstanding at December 31, 1998, was a $540 million eurodollar loan drawn on one of the revolving credit facilities, which was subsequently paid off in 1999. At December 31, 1999 and 1998, $550 million of these loans is classified as noncurrent in the consolidated balance sheet. In 1998, USGenNE, a subsidiary of PG&E Gen, established a $100 million revolving credit facility that expires in 2003. No amounts were outstanding at December 31, 1999. PG&E GT NW maintains a $100 million revolving credit facility that expires in 2002, but has an annual renewal option allowing the facility to maintain a three-year duration. PG&E GT NW also maintains a $50 million 364-day credit facility which expires in 2000, but may be extended for successive 364-day periods. No amounts were outstanding under either of these credit facilities at December 31, 1999. At December 31, 1999 and 1998, PG&E GT NW had an outstanding commercial paper balance of $99 million and $104 million, respectively, which is classified as noncurrent in the Consolidated Balance Sheet of PG&E Corporation. PG&E GTT maintains four separate credit facilities that total $250 million and are guaranteed by PG&E Corporation. At December 31, 1999, PG&E GTT had $176 million of outstanding short-term bank borrowings related to these credit facilities. At December 31, 1998, PG&E GTT had $70 million of outstanding short-term bank borrowings related to two credit facilities. These lines may be cancelled upon demand and bear interest at each respective bank's quoted money market rate. The borrowings are unsecured and unrestricted as to use. NOTE 11: NUCLEAR DECOMMISSIONING Decommissioning of the Utility's nuclear power plants is scheduled to begin for ratemaking purposes in 2015 with scheduled completion in 2034. Nuclear decommissioning means to safely remove nuclear facilities from service and reduce residual radioactivity to a level that permits termination of the Nuclear Regulatory Commission license and release of the property for unrestricted use. The estimated total obligation for nuclear decommissioning costs, based on a 1997 site study, is $1.6 billion in 1999 dollars (or $5.1 billion in future dollars). This estimate assumes after-tax earnings on the tax-qualified and non-tax-qualified decommissioning funds of 6.34 percent and 5.39 percent, respectively, as well as a future annual escalation rate of 5.5 percent for decommissioning costs. The decommissioning cost estimates are based on the plant location and cost characteristics for the Utility's nuclear plants. Actual decommissioning costs are expected to vary from this estimate because of changes in assumed dates of decommissioning, regulatory requirements, technology, and costs of labor, materials, and equipment. The estimated total obligation is being recognized proportionately over the license term of each facility. For the year ended December 31, 1999, nuclear decommissioning costs recovered in rates were $26.5 million. For the years ended December 31, 1998 and 1997, nuclear decommissioning costs recovered in rates were $33 million per year, respectively. The CPUC has established a Nuclear Decommissioning Cost Triennial 53 Proceeding to review, every three years, updated decommissioning cost estimates and to establish the annual trust contribution, absent general rate cases. At December 31, 1999, the total nuclear decommissioning obligation accrued was $1.3 billion and is included in the balance sheet classification of accumulated depreciation and decommissioning. Decommissioning costs recovered in rates are placed in external trust funds. These funds along with accumulated earnings will be used exclusively for decommissioning and cannot be released from the trust funds until authorized by the CPUC. The following table provides a summary of fair value, based on quoted market prices, of these nuclear decommissioning funds:
YEAR ENDED DECEMBER 31, ------------------------------- MATURITY (IN MILLIONS) DATES 1999 1998 U.S. government and agency issues 2000-2030 $ 380 $ 379 Equity securities -- 223 246 Municipal bonds and other 2000-2031 201 164 Gross unrealized holding gains 474 394 Gross unrealized holding losses (14) (11) ------ ------ Fair value (net of tax) $1,264 $1,172 ====== ======
The proceeds received from sales of securities were $1.7 billion in 1999, and $1.4 billion in 1998 and 1997. The gross realized gains on sales of securities held as available-for-sale were $59 million, $52 million, and $40 million in 1999, 1998, and 1997, respectively. The gross realized losses on sales of securities held as available-for-sale were $60 million, $39 million, and $24 million in 1999, 1998, and 1997, respectively. The cost of debt and equity securities sold is determined by specific identification. Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE) is responsible for the permanent storage and disposal of spent nuclear fuel. The Utility has signed a contract with the DOE to provide for the disposal of spent nuclear fuel and high-level radioactive waste from the Utility's nuclear power facilities. The DOE's current estimate for an available site to begin accepting physical possession of the spent nuclear fuel is 2010. At the projected level of operation for Diablo Canyon, the Utility's facilities are sufficient to store on-site all spent fuel produced through approximately 2006. It is likely that an interim or permanent DOE storage facility will not be available for Diablo Canyon's spent fuel by 2006. The Utility is examining options for providing additional temporary spent fuel storage at Diablo Canyon or other facilities, pending disposal or storage at a DOE facility. NOTE 12: EMPLOYEE BENEFIT PLANS Several of PG&E Corporation's subsidiaries provide noncontributory defined benefit pension plans for their employees and retirees. In addition, these subsidiaries provide contributory defined benefit medical plans for certain retired employees and their eligible dependents and noncontributory defined benefit life insurance plans for certain retired employees (referred to collectively as other benefits). For both pension and other benefit plans, the Utility's plan represents substantially all of the plan assets and the benefit obligation. Therefore, all descriptions and assumptions are based on the Utility's plans. The schedules below aggregate all of the plans employed by PG&E Corporation's subsidiaries. 54 The following schedule reconciles the plans' funded status (the difference between fair value of plan assets and the benefit obligation) to the prepaid or accrued benefit cost recorded on the consolidated balance sheet as of and for the years ended December 31, 1999 and 1998:
PENSION BENEFITS OTHER BENEFITS ------------------- ------------------- (IN MILLIONS) 1999 1998 1999 1998 CHANGE IN BENEFIT OBLIGATION Benefit obligation at January 1 $(4,977) $(4,457) $ (949) $(907) Service cost for benefits earned (121) (108) (19) (19) Interest cost (347) (333) (69) (64) Actuarial gain (loss) 372 (321) (19) (36) Adopted plan benefits -- -- (4) -- Participant paid benefits -- -- (14) -- Benefits and expenses paid 266 242 104 77 ------- ------- ------ ----- Benefit obligation at December 31 (4,807) (4,977) (970) (949) CHANGE IN PLAN ASSETS Fair value of plan assets at January 1 7,104 6,419 951 823 Actual return on plan assets 1,331 919 240 173 Company contributions 4 27 15 18 Participant paid benefits -- -- 14 13 Benefits and expenses paid (286) (261) (103) (76) ------- ------- ------ ----- FAIR VALUE OF PLAN ASSETS AT DECEMBER 31 8,153 7,104 1,117 951 PLAN ASSETS IN EXCESS OF BENEFIT OBLIGATION 3,346 2,127 147 2 (BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS) Unrecognized prior service cost 93 104 17 19 Unrecognized net loss (gain) (2,963) (2,025) (546) (430) Unrecognized net transition obligation 65 79 339 366 ------- ------- ------ ----- PREPAID (ACCRUED) BENEFIT COST $ 541 $ 285 $ (43) $ (43) ======= ======= ====== =====
The Utility's share of the plans' assets in excess of the benefit obligation for pensions in 1999 and 1998 was $3,344 million and $2,134 million, respectively. The Utility's share of the prepaid benefit cost for the pensions in 1999 and 1998 was $556 million and $301 million, respectively. The plan assets of the Utility exceeded its share of the benefit obligation for other benefits by $167 million and $24 million in 1999 and 1998, respectively. The Utility's share of the accrued benefit liability for other benefits in 1999 and 1998 was $22 million and $26 million, respectively. Unrecognized prior service costs and the net gains are amortized on a straight-line basis over the average remaining service period of active plan participants. The transition obligations for pension benefits and other benefits are being amortized over 17.5 years from 1987. Net benefit income (cost) was as follows:
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------------ DECEMBER 31, 1999 1998 1997 1999 1998 1997 (IN MILLIONS) Service cost for benefits earned $(121) $(108) $(102) $(19) $(19) $(21) Interest cost (347) (333) (316) (69) (64) (64) Expected return on assets 634 567 486 83 73 60 Amortized prior service and transition cost (25) (26) (22) (27) (28) (28) Actuarial gain recognized 111 114 74 20 22 13 ----- ----- ----- ---- ---- ---- Benefit income (cost) $ 252 $ 214 $ 120 $(12) $(16) $(40) ===== ===== ===== ==== ==== ====
The Utility's share of the net benefit income for pensions in 1999, 1998, and 1997 was $253 million, $215 million, and $123 million, respectively. 55 The Utility's share of the net benefit cost for other benefits in 1999, 1998, and 1997 was $9 million, $12 million, and $38 million, respectively. Net benefit income (cost) is calculated using an expected long-term rate of return on plan assets of 9.0 percent. The difference between actual and expected long-term rate of return on plan assets is included in net amortization and deferral and is considered in the determination of future net benefit income (cost). In 1999, 1998, and 1997, actual return on plan assets exceeded expected return. In conformity with SFAS No. 71, regulatory adjustments have been recorded in the income statement and balance sheet of the Utility which reflect the difference between Utility pension income determined for accounting purposes and Utility pension income determined for ratemaking, which is based on a funding approach. The CPUC also has authorized the Utility to recover the costs associated with its other benefit plans for 1993 and beyond. Recovery is based on the lesser of the annual accounting costs or the annual contributions on a tax-deductible basis to the appropriate trusts. The following actuarial assumptions were used in determining the plans' funded status and net benefit income (cost). Year-end assumptions are used to compute funded status, while prior year-end assumptions are used to compute net benefit income (cost).
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------------ DECEMBER 31, 1999 1998 1997 1999 1998 1997 Discount rate 7.5% 7.0% 7.5% 7.5% 7.0% 7.5% Average expected rate of future compensation increases 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Expected long-term rate of return on plan assets 8.5% 9.0% 9.0% 9.0% 9.0% 9.0%
The assumed health care cost trend rate for 2000 is approximately 8.5 percent, grading down to an ultimate rate in 2006 of approximately 6.0 percent. The assumed health care cost trend rate can have a significant effect on the amounts reported for health care plans. A one percentage point change would have the following effects:
1-PERCENTAGE 1-PERCENTAGE (IN MILLIONS) POINT INCREASE POINT DECREASE Effect on total service and interest cost components $ 6 $ (6) Effect on postretirement benefit obligation $62 $(57)
LONG-TERM INCENTIVE PROGRAM PG&E Corporation maintains a Long-term Incentive Program (Program) that provides for grants of stock options to eligible participants with or without associated stock appreciation rights and dividend equivalents. As of December 31, 1999, 34,389,230 shares of PG&E Corporation common stock have been authorized for award with 15,779,821 shares still available under this program. Shares granted in 1999, 1998 and 1997, had approximate values of $23 million, $27 million, and $12 million, respectively, using the Black-Scholes valuation method. In addition, PG&E Corporation granted 9,712,900 shares on January 3, 2000 at an option price of $19.8125 and 18,000 shares on February 1, 2000 at an option price of $22.1875, the then-current market prices. Outstanding stock options become exercisable on a cumulative basis at one-third each year commencing two years from the date of grant and expire ten years and one day after the date of grant. Shares outstanding at December 31, 1999, had option prices ranging from $16.75 to $34.25 and a weighted-average remaining contractual life of 7.8 years. As permitted under SFAS No. 123 "Accounting for Stock-Based Compensation," PG&E Corporation applies Accounting Board Opinion No. 25 in accounting for the program. As the exercise price of all stock options are equal to their fair market value at the time the options are granted, PG&E Corporation does not recognize any compensation expense related to the program using the intrinsic value based method. Had compensation expense been recognized using the fair value based method under SFAS No. 123, PG&E Corporation's consolidated earnings would have been reduced by $16 million, $10 million and $4 million in 1999, 1998, and 1997, respectively. 56 The following table summarizes the program's activity as of and for the year ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTION OPTION OPTION (SHARES IN MILLIONS) SHARES PRICE SHARES PRICE SHARES PRICE Outstanding-- beginning of year 11.1 $28.35 6.2 $26.21 3.5 $29.56 Granted during year 7.0 $30.94 6.4 $30.53 3.0 $22.55 Exercised during year (0.5) $25.86 (0.7) $29.63 (0.2) $27.36 Cancellations during year (1.2) $29.82 (0.8) $28.16 (0.1) $27.82 Outstanding-end of year 16.4 $29.43 11.1 $28.35 6.2 $26.21 Exercisable-end of year 3.0 $29.08 2.4 $29.06 1.9 $30.84
NOTE 13: INCOME TAXES The significant components of income tax expense for continuing operations were:
PG&E CORPORATION UTILITY ------------------------------ ------------------------------ YEAR ENDED DECEMBER 31, 1999 1998 1997 1999 1998 1997 (IN MILLIONS) Current $1,002 $718 $ 725 $1,133 $ 886 $ 791 Deferred (702) (51) (119) (433) (201) (142) Tax credits, net (52) (56) (41) (52) (56) (40) ------ ---- ----- ------ ----- ----- INCOME TAX EXPENSE $ 248 $611 $ 565 $ 648 $ 629 $ 609 ====== ==== ===== ====== ===== =====
In 1999, the income tax expense of PG&E Corporation was allocated to continuing operations ($248 million), discontinued operations ($71 million tax benefit), and cumulative effect of a change in an accounting principle ($8 million). The significant components of net deferred income tax liabilities were:
PG&E CORPORATION UTILITY ------------------- ------------------- DECEMBER 31, 1999 1998 1999 1998 (IN MILLIONS) DEFERRED INCOME TAX ASSETS: Customer advances for construction $ 109 $ 68 $ 109 $ 68 Unamortized investment tax credits 118 127 118 127 Provision for injuries and damages 185 220 185 171 Deferred contract costs 182 242 -- -- Other 544 562 442 477 ------ ------ ------ ------ TOTAL DEFERRED INCOME TAX ASSETS $1,138 $1,219 $ 854 $ 843 ------ ------ ------ ------ DEFERRED INCOME TAX LIABILITIES: Regulatory balancing accounts (47) 43 (47) 40 Plant in service 2,827 3,722 2,428 2,930 Income tax regulatory asset 297 391 287 381 Other 1,075 968 577 555 ------ ------ ------ ------ TOTAL DEFERRED INCOME TAX LIABILITIES 4,152 5,124 3,245 3,906 ------ ------ ------ ------ TOTAL NET DEFERRED INCOME TAXES $3,014 $3,905 $2,391 $3,063 ====== ====== ====== ====== CLASSIFICATION OF NET DEFERRED INCOME TAXES: Included in current (assets) liabilities $ (133) $ 44 $ (119) $ 3 Included in noncurrent liabilities 3,147 3,861 2,510 3,060 ------ ------ ------ ------ TOTAL NET DEFERRED INCOME TAXES $3,014 $3,905 $2,391 $3,063 ====== ====== ====== ======
57 The differences between income taxes and amounts determined by applying the federal statutory rate to income before income tax expense for continuing operations were:
PG&E CORPORATION UTILITY ------------------------------ ------------------------------ YEAR ENDED DECEMBER 31, 1999 1998 1997 1999 1998 1997 Federal statutory income tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% Increase (decrease) in income tax rate resulting from: State income tax (net of federal benefit) 10.1 3.2 5.2 6.2 6.6 4.6 Effect of regulatory treatment of depreciation differences 51.7 9.7 7.9 9.4 9.8 7.5 Tax credits--net (19.9) (4.0) (3.1) (3.6) (4.1) (2.9) Effect of foreign earnings at different tax rates (1.3) 0.6 (2.1) -- -- -- Stock sale differences (6.8) -- -- -- -- -- Stock sale valuation allowance 30.2 -- -- -- -- -- Other--net (4.0) (0.3) 0.2 (1.9) (1.0) -- ----- ---- ---- ---- ---- ---- EFFECTIVE TAX RATE 95.0% 44.2% 43.1% 45.1% 46.3% 44.2% ===== ==== ==== ==== ==== ====
Historically, the benefits of certain temporary differences have been utilized to reduce the Utility's customers rates. Accordingly, a regulatory asset has been recorded reflecting the pre-tax amount that will be recovered from customers as the temporary difference reverses. In connection with the California electric restructuring plan, the Utility is collecting the regulatory asset over four years. During 1999, PG&E Corporation generated a capital loss carryforward of approximately $225 million, which will expire in 2005. A valuation allowance of approximately $75 million has been recorded reflecting the estimated net realizable value of this capital loss carryforward. NOTE 14: COMMITMENTS UTILITY LETTERS OF CREDIT AND SURETY BONDS: The Utility uses $409 million in standby letters of credit and surety bonds to secure future workers' compensation liabilities. RESTRUCTURING TRUST GUARANTEES: Tax-exempt restructuring trusts were established to oversee the development of the operating framework for the competitive generation market in California. (See Note 2.) The CPUC has authorized California utilities to guarantee bank loans of up to $85 million to be used by the trusts for this purpose. Under the CPUC authorization, the Utility's remaining guarantee is for up to a maximum of $38 million of the loan. The remaining bank loan will be repaid and the guarantee removed when the trust obtains proceeds from permanent financing or rate recovery. POWER PURCHASE CONTRACTS: By federal law, the Utility is required to purchase electric energy and capacity provided by independent power producers that are qualifying facilities (QFs) under the Public Utilities Regulatory Policies Act of 1978 (PURPA). The CPUC established a series of QF long-term power purchase contracts and set the applicable terms, conditions, price options, and eligibility requirements. Under these contracts, the Utility is required to make payments only when energy is supplied or when capacity commitments are met. Costs associated with these contracts are eligible for recovery by the Utility as transition costs through the collection of the nonbypassable CTC. The Utility's contracts with these power producers expire on various dates through 2028. Deliveries from these power producers account for approximately 23 percent of the Utility's 1999 electric energy requirements, and no single contract accounted for more than five percent of the Utility's energy needs. The Utility has negotiated with several QFs for early termination of their power purchase contracts. For other contracts, the Utility has negotiated with QFs to refrain from producing energy during the remaining term of the higher fixed energy price period under their contract (a "buy-down") or to curtail energy production for shorter periods of time (a "curtailment"). At December 31, 1999, the total discounted future payments due under the renegotiated contracts that are subject to early termination, buy-down, or curtailment was $16 million, of which 58 $6.6 million has been recovered in rates and the Utility expects to recover the remaining $9.4 million in future rates. The Utility also has contracts with various irrigation districts and water agencies to purchase hydroelectric power. Under these contracts, the Utility must make specified semi-annual minimum payments whether or not any energy is supplied (subject to the supplier's retention of the FERC's authorization) and variable payments for operation and maintenance costs incurred by the suppliers. These contracts expire on various dates from 2004 to 2031. Costs associated with these contracts to purchase power are eligible for recovery by the Utility as transition costs through the collection of the nonbypassable CTC. At December 31, 1999, the undiscounted future minimum payments under these contracts were $32.7 million for each of the years 2000 through 2004 and a total of $247 million for periods thereafter. Irrigation district and water agency deliveries in the aggregate account for approximately 5.8 percent of the Utility's 1999 electric energy requirements. The amount of energy received and the total payments made under all of these power purchase contracts were:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 (IN MILLIONS) Kilowatt-hours received 25,910 25,994 24,389 Energy payments $837 $943 $1,157 Capacity payments $539 $529 $ 538 Irrigation district and water agency payments $ 60 $ 53 $ 56
NATURAL GAS TRANSPORTATION COMMITMENTS: The Utility has long-term gas transportation service contracts with various Canadian and interstate pipeline companies. These agreements include provisions for payment of fixed demand charges for reserving firm capacity on the pipelines. The total demand charges that the Utility will pay each year may change due to changes in tariff rates. The total demand and volumetric transportation charges the Utility paid under these agreements were $97 million, $113 million, and $255 million in 1999, 1998, and 1997, respectively. These amounts include payments made by the Utility to PG&E GT NW of $47 million, $49 million, and $49 million in 1999, 1998, and 1997, respectively, which are eliminated in the consolidated financial statements of PG&E Corporation. The Utility's obligations related to capacity held pursuant to long-term contracts on various pipelines are as follows:
(IN MILLIONS) 2000 $100 2001 97 2002 78 2003 78 2004 78 Thereafter 98 ---- Total $529 ====
As a result of regulatory changes, the Utility no longer procures gas for most of its industrial and larger commercial (noncore) customers, resulting in a decrease in the Utility's need for capacity on these pipelines. Despite these changes, the Utility continues to procure gas for substantially all of its residential and smaller commercial (core) customers and its noncore customers who choose bundled service. To the extent that the Utility's current capacity holdings exceed demand for gas transportation by its customers, the Utility will continue its efforts to broker such excess capacity. NATIONAL ENERGY GROUP POWER PURCHASE CONTRACTS: As a part of the acquisition of a portfolio of electric generating assets and power supply contracts from NEES (see Note 5), NEES transferred to PG&E Gen contractual rights and duties under several power purchase contracts with third-party independent power producers. At December 31, 1999, these agreements provided for an aggregate 59 of 470 MW of capacity. Under the transfer agreement, PG&E Gen is required to pay to NEES amounts due to the third-party power producers under the power purchase contracts. PG&E Gen's payment obligations to NEES are reduced by NEES's monthly payment obligation, payable in monthly installments from September 1998 through January 2008. In certain circumstances, NEES, with the consent of PG&E Gen, will make a full or partial lump-sum accelerated payment of the monthly payment obligation to such party as PG&E Gen may direct. The approximate dollar amounts under these agreements are as follows:
POWER PURCHASE SUPPORT (IN MILLIONS) CONTRACT PAYMENTS 2000 $ 233 $119 2001 228 120 2002 215 121 2003 217 112 2004 220 108 Thereafter 1,804 334 ------ ---- Total $2,917 $914 ====== ====
GAS SUPPLY AND TRANSPORTATION AGREEMENTS: PG&E Gen is obligated to purchase and fuel suppliers are required to supply all the fuel needed at PG&E Gen's facilities. Fuel requirements include the quality and estimated quantity of fuel needed to operate each facility. The price of fuel escalates annually for the term of each contract. In addition, PG&E Gen has transportation contracts with various entities to deliver the fuel to each facility. The approximate dollar obligations under these gas supply and transportation agreements are as follows:
(IN MILLIONS) 2000 $ 103 2001 101 2002 101 2003 102 2004 11 Thereafter 848 ------ Total $1,266 ======
STANDARD OFFER AGREEMENTS: As a part of the acquisition of a portfolio of electric generating assets and power supply contracts from NEES (see Note 5), PG&E Gen entered into agreements to supply the electric capacity and energy necessary for certain of NEES affiliates to meet their obligations to provide standard offer service. The agreements to provide standard offer service range in length from 3 to 10 years. The price per MWh is standard for all agreements. For the year ended December 31, 1999, the standard offer service price paid generators was $0.035 per Kwh for generation. OPERATING LEASES: PG&E Corporation and the National Energy Group have entered into various long-term lease commitments. PG&E Gen has an agreement to lease Lake Road under a five-year operating lease agreement which is extendible. The lease term will commence upon the completion of the construction of a gas-fired generating facility, which is anticipated to be mid-2001. The minimum obligations under this lease cannot be determined until the commencement of the lease because the minimum rent payments are based on the final cost to complete the facility. The approximate obligations below are based on the current estimated total cost of the facility. USGenNE entered into a $479 million sale-and-leaseback transaction whereby USGenNE sold and leased back its Bear Swamp facility to a third party. The related lease is being accounted for as an operating lease. The rental expense under this lease in 1999 was $2 million. PG&E Gen leases the Pittsfield facility from General Electric Credit Corporation. The rental expense for this facility in 1999 was $28 million. 60 PG&E GTT has an operating lease commitment in connection with gas storage. The term of the gas storage facility lease and related arrangements run through January 2008 and subject to certain conditions, has one or more optional renewal periods of five years each at fair market value. The rental expense for this gas storage facility in 1999 was approximately $10 million. PG&E Corporation and our National Energy Group have leases for office space primarily located in California, Maryland, Oregon, Massachusetts, and Texas. For the year ended December 31, 1999, rent expense for these facilities amounted to $27 million. The approximate obligations under these operating lease agreements are as follows:
(IN MILLIONS) 2000 $ 96 2001 110 2002 116 2003 109 2004 124 Thereafter 1,266 ------ Total $1,821 ======
NOTE 15: CONTINGENCIES NUCLEAR INSURANCE The Utility has insurance coverage for property damage and business interruption losses as a member of Nuclear Electric Insurance Limited (NEIL). Under this insurance, if a nuclear generating facility suffers a loss due to a prolonged accidental outage, the Utility may be subject to maximum retrospective assessments of $15 million (property damage) and $4 million (business interruption), in each case per policy period, in the event losses exceed the resources of NEIL. The Utility has purchased primary insurance of $200 million for public liability claims resulting from a nuclear incident. The Utility has secondary financial protection which provides an additional $9.3 billion in coverage, which is mandated by federal legislation. It provides for loss sharing among utilities owning nuclear generating facilities if a costly incident occurs. If a nuclear incident results in claims in excess of $200 million, then the Utility may be assessed up to $176 million per incident, with payments in each year limited to a maximum of $20 million per incident. ENVIRONMENTAL REMEDIATION The Utility may be required to pay for environmental remediation at sites where it has been or may be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act and similar state environmental laws. These sites include former manufactured gas plant sites, power plant sites, and sites used by it for the storage or disposal of potentially hazardous materials. Under federal and California laws, it may be responsible for remediation of hazardous substances, even if it did not deposit those substances on the site. The Utility records a liability when site assessments indicate remediation is probable and a range of reasonably likely clean-up costs can be estimated. The Utility reviews its remediation liability quarterly for each identified site. The liability is an estimate of costs for site investigations, remediation, operations and maintenance, monitoring, and site closure. The remediation costs also reflect (1) current technology, (2) enacted laws and regulations, (3) experience gained at similar sites, and (4) the probable level of involvement and financial condition of other potentially responsible parties. Unless there is a better estimate within this range of possible costs, the Utility records the lower end of this range. The cost of the hazardous substance remediation ultimately undertaken by the Utility is difficult to estimate. A change in estimate may occur in the near term due to uncertainty concerning the Utility's responsibility, the complexity of environmental laws and regulations, and the selection of compliance alternatives. At December 31, 1999, the Utility expects to spend $300 million for hazardous waste remediation costs at identified sites, including 61 divested fossil-fueled power plants. The Utility had an accrued liability of $271 million and $296 million at December 31, 1999 and 1998, respectively, representing the discounted value of these costs. Of the $271 million accrued liability discussed above, the Utility has recovered $148 million through rates, including $34 million through depreciation, and expects to recover another $95 million in future rates. Additionally, the Utility is mitigating its costs by obtaining recovery of its costs from insurance carriers and from other third parties as appropriate. Environmental remediation at identified sites may be as much as $486 million if, among other things, other potentially responsible parties are not financially able to contribute to these costs or further investigation indicates that the extent of contamination or necessary remediation is greater than anticipated. The Utility estimated this upper limit of the range of costs using assumptions least favorable to the Utility, based upon a range of reasonably possible outcomes. Costs may be higher if the Utility is found to be responsible for clean-up costs at additional sites or outcomes change. Further, as discussed in "Generation Divestiture" above, the Utility will retain the pre-closing remediation liability associated with divested generation facilities. PG&E Corporation believes the ultimate outcome of these matters will not have a material impact on its or the Utility's financial position or results of operations. LEGAL MATTERS CHROMIUM LITIGATION: Several civil suits are pending against the Utility in California state court. The suits seek an unspecified amount of compensatory and punitive damages for alleged personal injuries resulting from alleged exposure to chromium in the vicinity of the Utility's gas compressor stations at Hinkley, Kettleman, and Topock, California. Currently, there are claims pending on behalf of approximately 900 individuals. The Utility is responding to the suits and asserting affirmative defenses. The Utility will pursue appropriate legal defenses, including statute of limitations or exclusivity of workers' compensation laws, and factual defenses, including lack of exposure to chromium and the inability of chromium to cause certain of the illnesses alleged. PG&E Corporation believes that the ultimate outcome of these matters will not have a material adverse impact on its or the Utility's financial position or results of operations. TEXAS FRANCHISE FEE LITIGATION: In connection with PG&E Corporation's acquisition of Valero Energy Corporation, now known as PG&E Gas Transmission Texas (PG&E GTT), PG&E GTT succeeded to the litigation described below. PG&E GTT and various of its affiliates are defendants in at least two class action suits and five separate suits filed by various Texas cities. Generally, these cities allege, among other things, that (1) owners or operators of pipelines occupied city property and conducted pipeline operations without the cities' consent and without compensating the cities, and (2) the gas marketers failed to pay the cities for accessing and utilizing the pipelines located in the cities to flow gas under city streets. Plaintiffs also allege various other claims against the defendants for failure to secure the cities' consent. Damages are not quantified. In 1998, a jury trial was held in the separate suit brought by the City of Edinburg (the City). This suit involved, among other things, a particular franchise agreement entered into by a former subsidiary of PG&E GTT (now owned by Southern Union Gas Company (SU)) and the City and certain conduct of the defendants. On December 1, 1998, based on the jury verdict, the court entered a judgment in the City's favor, and awarded damages of $5.3 million, and attorneys' fees of up to $3.5 million plus interest. The court found that various PG&E GTT and SU defendants were jointly and severally liable for $3.3 million of the damages and all the attorneys' fees. Certain PG&E GTT subsidiaries were found solely liable for $1.4 million of the damages. The court did not clearly indicate the extent to which the PG&E GTT defendants could be found liable for the remaining damages. The PG&E GTT defendants are in the process of appealing the judgment. In connection with the certification of a class in one of the class actions, the court ordered notice to be sent to all potential class members and setting an opt-out deadline of December 31, 1997. Notices were mailed to approximately 159 Texas cities. Fewer than 20 cities opted out by the deadline. In November 1999, the court signed an order dismissing from the class 42 cities because it determined there was no pipeline presence and no 62 past or present sales activity, leaving 106 cities in the class. The parties in this class action are negotiating the terms of a settlement agreement. The settlement proposal contemplates, among other things, that the PG&E Corporation defendants would pay $12.2 million to the class cities, inclusive of attorney fees, reduced by amounts attributable to opt-out cities. The defendants retain the right to reject the settlement if the settlement proposal is not approved by certain key cities and by 80% of the plaintiff class. Although a significant number of the 106 cities in the plaintiff class already have either approved the settlement or adopted resolutions to pass the ordinance, certain key cities have not yet approved the settlement. The settlement is also subject to court approval. On January 27, 2000, the court approved the settlement proposal and established a 14-day period whether to accept the negotiated settlement terms or opt out of the settlement. The Court also stated that if Corpus Christi does not accept the settlement proposal, it will be placed in a sub-class, whose claims will not be finalized as part of the settlement approval. Corpus Christi has the right to opt out of this subclass. PG&E Corporation believes that the ultimate outcome of these matters will not have a material adverse impact on its financial position or its results of operations. As discussed above in Note 5, in January 2000, PG&E Corporation's National Energy Group signed a definitive agreement to sell the stock of PG&E Gas Transmission, Texas Corporation and PG&E Gas Transmission Teco, Inc. The buyer will assume all liabilities associated with the cases described above. RECORDED LIABILITY FOR LEGAL MATTERS: In accordance with SFAS No. 5, PG&E Corporation makes a provision for a liability when both it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. In the fourth quarter of 1999, PG&E Corporation reduced the amount of the recorded liability for legal matters associated with a court approved settlement proposal and other settlement discussions of certain matters described above. Approximately $55 million of the adjustments, arising from a pre-acquisition contingency related to a purchased business, are reflected in "Other income, net" in PG&E Corporation's Statement of Consolidated Income. The following table reflects the current year's activity to the recorded liability for legal matters:
PG&E CORPORATION UTILITY (IN MILLIONS) ----------- -------- Beginning Balance, January 1, 1999 $175 $ 52 Provisions for liabilities 16 14 Payments (41) (29) Adjustments (44) 13 ---- ---- Ending Balance, December 31, 1999: $106 $ 50 ==== ====
NOTE 16: GENERAL RATE CASE In December 1997, the Utility filed its 1999 application with the CPUC During the GRC process, the CPUC examines the Utility's costs to determine the amount the Utility may charge customers for base revenues (non-fuel related costs). The Utility requested distribution revenue increases to maintain and improve natural gas and electric distribution reliability, safety, and customer service. The requested revenues, as updated, included an increase of $445 million in electric base revenues and an increase of $377 million in natural gas base revenues over the 1998 authorized revenues. The Utility received a final decision on its 1999 GRC application on February 17, 2000. This final decision increased electric distribution revenues by $163 million and gas distribution revenues by $93 million, as compared to revenues authorized for 1998. This revenue increase is retroactive to January 1, 1999. The impact of these increases resulted in an increase in earnings of $153 million, or $0.42 per share, and was reflected in the fourth quarter of 1999. NOTE 17: SEGMENT INFORMATION PG&E Corporation has identified four reportable operating segments. The Utility is one reportable operating segment and the other three are part of PG&E Corporation's National Energy Group. These four reportable operating segments provide different products and services and are subject to different forms of regulation or jurisdictions. PG&E Corporation's reportable segments are described below. 63 UTILITY: PG&E Corporation's Northern and Central California energy utility subsidiary, Pacific Gas and Electric Company, provides natural gas and electric service to one of every 20 Americans. NATIONAL ENERGY GROUP: The National Energy Group businesses develop, construct, operate, own, and manage independent power generation facilities that serve wholesale and industrial customers through PG&E Generating Company, LLC (formerly U.S. Generating Company, LLC) and its affiliates (collectively, PG&E Gen); own and operate natural gas pipelines, natural gas storage facilities, and natural gas processing plants, primarily in the Pacific Northwest and in Texas, through various subsidiaries of PG&E Corporation (collectively, PG&E Gas Transmission or PG&E GT); and purchase and sell energy commodities and provide risk management services to customers in major North American markets, including the other National Energy Group non-utility businesses, unaffiliated utilities, marketers, municipalities, and large end-use customers through PG&E Energy Trading--Gas Corporation, PG&E Energy Trading--Power, L.P., and their affiliates (collectively, PG&E Energy Trading or PG&E ET). In the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a plan for the divestiture of PG&E Corporation's Texas natural gas and natural gas liquids business. Also in the fourth quarter of 1999, PG&E Corporation's Board of Directors approved a plan for the divestiture of PG&E Corporation's retail energy services, conducted through PG&E ES. PG&E ES had total assets of $197 million, $202 million, and $60 million, as of December 31, 1999, 1998, and 1997, respectively. 64 Segment information for the years 1999, 1998, and 1997 was as follows:
UTILITY NATIONAL ENERGY GROUP -------- ---------------------------------------------------------- PG&E GT ELIMINATIONS & (IN MILLIONS) PG&E GEN NW TEXAS PG&E ET OTHER TOTAL 1999 Operating revenues $ 9,084 $1,116 $ 172 $1,034 $9,404 $ 10 $20,820 Intersegment revenues(1) 144 6 52 114 1,117 (1,433) -- ------- ------ ------ ------ ------ ------- ------- Total operating revenues 9,228 1,122 224 1,148 10,521 (1,423) 20,820 Depreciation, amortization and decommissioning 1,564 89 41 75 9 2 1,780 Interest expense(2) (593) (63) (41) (59) (12) (4) (772) Other income (expense) 11 61 21 53 3 6 155 Income taxes(3) 648 16 32 (407) (36) (5) 248 Income from continuing operations 763 97 68 (897) (34) 16 13 Capital expenditures 1,181 323 30 19 14 -- 1,567 Total assets at year-end(4) $21,470 $3,852 $1,160 $1,217 $1,876 $ (57) $29,518 1998 Operating revenues $ 8,919 $ 645 $ 185 $1,640 $8,183 $ 5 $19,577 Intersegment revenues(1) 5 4 52 301 326 (688) -- ------- ------ ------ ------ ------ ------- ------- Total operating revenues 8,924 649 237 1,941 8,509 (683) 19,577 Depreciation, amortization and decommissioning 1,438 52 39 65 5 3 1,602 Interest expense(2) (621) (43) (43) (77) (7) 10 (781) Other income (expense) 76 18 3 13 5 (50) 65 Income taxes(3) 629 28 31 (47) (17) (13) 611 Income (loss) from continuing operations 702 106 65 (71) (6) (25) 771 Capital expenditures 1,396 98 49 39 12 1 1,595 Total assets at year-end(4) $22,950 $3,844 $1,169 $2,655 $2,555 $ (141) $33,032 1997 Operating revenues $ 9,495 $ 148 $ 186 $ 800 $4,613 $ 13 $15,255 Intersegment revenues(1) -- -- 47 204 195 (446) -- ------- ------ ------ ------ ------ ------- ------- Total operating revenues 9,495 148 233 1,004 4,808 (433) 15,255 Depreciation, amortization and decommissioning 1,748 19 38 33 3 10 1,851 Interest expense(2) (570) (5) (41) (26) (2) (20) (664) Other income (expense) 94 (25) 1 13 3 126 212 Income taxes(3) 609 (17) 26 (8) (12) (33) 565 Income (loss) from continuing operations 735 (41) 40 (24) (19) 54 745 Capital expenditures 1,529 23 34 45 5 50 1,686 Total assets at year-end(4) $25,147 $ 989 $1,208 $2,800 $1,452 $ (541) $31,055
(1) Intersegment electric and gas revenues are recorded at market prices, which for the Utility and PG&E GT NW are tariffed rates prescribed by the CPUC and FERC, respectively. (2) Net interest expense incurred by PG&E Corporation is allocated to the segments using specific identification. (3) Income tax expense for the Utility is computed on a stand-alone basis. The balance of the consolidated income tax provision is allocated among the National Energy Group. (4) Assets of PG&E Corporation are included in "Eliminations & Other" column exclusive of investment in its subsidiaries. (5) Income from equity-method investees for 1999, 1998, and 1997 was $61 million, $113 million, and $41 million, respectively, for PG&E Gen, and none, $3 million, and $2 million, respectively, for PG&E GTT. 65 NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS PG&E Corporation estimates fair value of its financial instruments based on quoted market prices, where available. Fair value of the Utility's rate reduction bonds, and Utility obligated manditorily redeemable preferred securities of trust holding solely Utility subordinated debentures are all determined based on quoted market prices. Fair value of the Utility's preferred stock with mandatory provisions is based on indicative market prices. Where quoted or indicative market prices are not available, the estimated fair value is determined using other valuation techniques (for example, the present value of future cash flows). Most of PG&E Corporation's and the Utility's debt is determined using quoted market prices, but the fair value of a small portion of Utility debt is determined using the present value of future cash flows. The carrying value of PG&E Corporation's short-term borrowings approximates fair value. At December 31, 1999 and 1998, PG&E Corporation's carrying amount and ending fair value of its financial instruments are:
1999 1998 ------------------- ------------------- CARRYING FAIR CARRYING FAIR (IN MILLIONS) AMOUNT VALUE AMOUNT VALUE PG&E Corporation: Current price risk management assets (see Note 3) $ 607 $ 607 $1,416 $1,416 Noncurrent price risk management assets (see Note 3) 372 372 334 334 Current price risk management liabilities (see Note 3) 575 575 1,412 1,412 Noncurrent price risk management liabilities (see Note 3) 247 247 281 281 Total long-term debt(1) (see Note 8) 7,265 7,095 7,760 8,079 Utility: Nuclear decommissioning funds noncurrent asset (see Note 11) 1,264 1,264 1,172 1,172 Total long-term debt(1) (see Note 8) 5,342 5,217 5,704 6,008 Rate reduction bonds(2) (see Note 9) 2,321 2,265 2,611 2,676 Preferred stock with mandatory redemption provisions (see Note 7) 137 140 137 143 Utility obligated mandatorily redeemable preferred securities of trust holding solely Utility subordinated debentures (see Note 7) 300 267 300 303
(1) Total long-term debt includes current portion of long-term debt. (2) Rate reduction bonds include current portion of rate reduction bonds. 66 QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
QUARTER ENDED (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 1999 PG&E CORPORATION Operating revenues $4,795 $6,217 $4,682 $5,126 Operating income (loss)(1)(2)(3) (579) 516 480 461 Income (loss) from continuing operations (547) 197 196 167 Net income (loss)(1)(2)(3) (611) 185 182 171 Earnings (loss) per common share from continuing operations, basic (1.49) 0.54 0.53 0.45 Earnings (loss) per common share from continuing operations, diluted (1.49) 0.54 0.50 0.39 Dividends declared per common share 0.30 0.30 0.30 0.30 Common stock price per share High 26.69 33.25 34.00 33.69 Low 20.25 25.00 30.56 29.50 UTILITY Operating revenues $2,323 $2,587 $2,233 $2,085 Operating income(3) 633 486 452 422 Net income(3) 272 185 178 153 Income available for common stock 265 179 172 147 1998 PG&E CORPORATION Operating revenues $5,364 $5,208 $4,695 $4,310 Operating income(1) 485 554 579 480 Income from continuing operations 208 225 188 150 Net income(1) 196 210 174 139 Earnings per common share from continuing operations, basic and diluted 0.54 0.59 0.49 0.39 Dividends declared per common share 0.30 0.30 0.30 0.30 Common stock price per share High 35.06 33.44 33.19 33.56 Low 30.38 29.88 30.06 29.06 UTILITY Operating revenues $2,218 $2,563 $2,117 $2,026 Operating income 446 512 494 424 Net income 176 205 193 155 Income available for common stock 169 199 186 148
(1) In the fourth quarter 1999, the National Energy Group adopted a plan to dispose of the PG&E ES segment. This planned transaction has been accounted for as a discontinued operation. Results of operations of PG&E ES have been excluded from continuing operations for all periods presented. The operating loss and net loss of PG&E ES for the quarters ending March 31, June 30, and September 30, 1999, were $15 million and $8 million, $23 million and $14 million, and $20 million and $12 million, respectively. The operating loss and net loss for PG&E ES for the quarters ending March 31, June 30, and September 30, 1998, were $17 million and $11 million, $22 million and $14 million, and $27 million and $15 million, respectively. (2) Amounts have been restated to reflect the change in accounting for major maintenance and overhauls at the National Energy Group (see Note 1 of the Notes to Consolidated Financial Statements), and reclassification of PG&E ES operating results to discontinued operations (see above). The accounting change resulted in a cumulative effect being recorded as of January 1, 1999, of $12 million ($0.03 per share), net of income taxes of $8 million. Operating income previously reported for 1999 was $442 million, $454 million, and $492 million for each of the first three quarters, respectively. Net income previously reported for 1999 was $156 million ($0.42 per share), $180 million ($0.49 per share), and $183 million ($0.50 per share) for the same periods. (3) In the fourth quarter 1999, the Utility recorded the effects of the outcome of the GRC. This resulted in an increase of $256 million in operating income and an increase of $153 million in net income. Additionally, the National Energy Group recorded an after-tax charge of $890 million reflecting PG&E GTT's assets at their fair market value. (See Notes 5 and 16 of the Notes to Consolidated Financial Statements.) 67 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT To the Boards of Directors and Shareholders of PG&E Corporation and Pacific Gas and Electric Company We have audited the accompanying consolidated balance sheets of PG&E Corporation and subsidiaries and of Pacific Gas and Electric Company and subsidiaries as of December 31, 1999, and the related statements of consolidated income, cash flows, and common stock equity of PG&E Corporation and the related statements of consolidated income, cash flows, and stockholders' equity of Pacific Gas and Electric Company for the year then ended. These financial statements are the responsibility of management of PG&E Corporation and of Pacific Gas and Electric Company. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements for the years ended December 31, 1998 and 1997 were audited by other auditors whose report, dated February 8, 1999, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such 1999 financial statements present fairly, in all material respects, the consolidated financial position of PG&E Corporation and Pacific Gas and Electric Company as of December 31, 1999, and the results of their consolidated operations and cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 1 of the Notes to Consolidated Financial Statements, in 1999 PG&E Corporation changed its method of accounting for major maintenance and overhauls. DELOITTE & TOUCHE LLP San Francisco, California March 3, 2000 68 - -------------------------------------------------------------------------------- RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS At both PG&E Corporation and Pacific Gas and Electric Company (the Utility) management is responsible for the integrity of the accompanying consolidated financial statements. These statements have been prepared in accordance with generally accepted accounting principles. Management considers materiality and uses its best judgment to ensure that such statements reflect fairly the financial position, results of operations, and cash flows of PG&E Corporation and the Utility. PG&E Corporation and the Utility maintain systems of internal controls supported by formal policies and procedures which are communicated throughout PG&E Corporation and the Utility. These controls are adequate to provide reasonable assurance that assets are safeguarded from material loss or unauthorized use and that necessary records are produced for the preparation of consolidated financial statements. There are limits inherent in all systems of internal controls, based on recognition that the costs of such systems should not exceed the benefits to be derived. PG&E Corporation and the Utility believe that their systems of internal control provide this appropriate balance. PG&E Corporation management also maintains a staff of internal auditors who evaluate the adequacy of, and assess the adherence to, these controls, policies, and procedures for all of PG&E Corporation, including the Utility. Both PG&E Corporation's and the Utility's 1999 consolidated financial statements have been audited by Deloitte & Touche LLP, PG&E Corporation's independent auditors. The audit includes consideration of internal accounting controls and performance of tests necessary to support an opinion. The auditors' report contains an independent informed judgment as to the fairness, in all material respects, of reported results of operations and financial position. The Audit Committee of the Board of Directors for PG&E Corporation meets regularly with management, internal auditors, and Deloitte & Touche, jointly and separately, to review internal accounting controls and auditing and financial reporting matters. The internal auditors and Deloitte & Touche LLP have free access to the Audit Committee, which consists of five outside directors. The Audit Committee has reviewed the financial data contained in this report. PG&E Corporation and the Utility are committed to full compliance with all laws and regulations and to conducting business in accordance with high standards of ethical conduct. Management has taken the steps necessary to ensure that all employees and other agents understand and support this commitment. Guidance for corporate compliance and ethics is provided by an officers' Ethics Committee and by a Legal Compliance and Business Ethics organization. PG&E Corporation and the Utility believe that these efforts provide reasonable assurance that each of their operations is conducted in conformity with applicable laws and with their commitment to ethical conduct. 69 EX-18 13 LETTER REGARDING CHANGES IN ACCOUNTING EXHIBIT 18 [LETTERHEAD OF DELOITTE & TOUCHE LLP] March 3, 2000 PG&E Corporation One Market Street Spear Tower, Suite 2400 San Francisco, CA 94105 Dear Sirs/Madams: We have audited the consolidated financial statements of PG&E Corporation as of December 31, 1999 and for the year then ended, included in your Annual Report on Form 10-K to the Securities and Exchange Commission, and have issued our report thereon dated March 3, 2000. Note 1 to such financial statements contains a description of your change during the year ended December 31, 1999 to account for major maintenance and overhauls expenditures at power production facilities as incurred. In our judgment, such change is to an alternative accounting principle that is preferable under the circumstances. Yours truly, /s/ DELOITTE & TOUCHE LLP EX-21 14 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of PG&E Corporation and Pacific Gas and Electric Company _____________________________________________________________________ 1. Name, State of organization, location and nature of business of registrants and every subsidiary thereof, 1.1. PG&E Corporation One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E Corporation, incorporated under the laws of the State of California, is a holding company formed by Pacific Gas and Electric Company, a public utility. On January 1, 1997 PG&E Corporation became the parent of Pacific Gas and Electric Company pursuant to a corporate reorganization plan. PG&E Corporation is also the parent of nonutility subsidiaries formerly owned by Pacific Gas and Electric Company. 1.2. Subsidiaries 1.2.1. Elm Power Corporation One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 Elm Power Corporation, incorporated under the laws of the State of Delaware, is a wholly subsidiary of PG&E Corporation. 1.2.2. Pacific Gas and Electric Company 77 Beale Street P.O. Box 770000 San Francisco, CA 94177 Pacific Gas and Electric Company, incorporated under the laws of the State of California, is a wholly owned subsidiary of PG&E Corporation. Pacific Gas and Electric Company is an operating public utility engaged principally in the business of supplying electric and natural gas service throughout most of Northern and Central California. 1.2.2.1. Alberta and Southern Gas Co., Ltd. 1500 Bankers Hall 855 Second Street., SW Calgary, Alberta T2P 4J7 Alberta and Southern Gas Co. Ltd., incorporated under the laws of Alberta, is a wholly owned Canadian subsidiary of Pacific Gas and Electric Company. Alberta and Southern Gas Co. Ltd. formerly purchased natural gas in Canada for the California market. 1.2.2.1.1. Alberta and Southern Gas Marketing, Inc. 1500 Bankers Hall 855 Second Street., SW Calgary, Alberta T2P 4J7 Alberta and Southern Gas Marketing, Inc., incorporated under the laws of Alberta, is a wholly owned subsidiary of Alberta and Southern Gas Co. Ltd. Alberta and Southern Gas Marketing, Inc. formerly marketed natural gas in non-California markets. 1.2.2.2. Natural Gas Corporation of California P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 1 Natural Gas Corporation of California, incorporated under the laws of the State of California, is a wholly owned subsidiary of Pacific Gas and Electric Company. Natural Gas Corporation of California acts as the vehicle for the amortization of certain regulatory assets. 1.2.2.2.1. NGC Production Company P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 NGC Production Company, incorporated under the laws of the State of California, is a wholly owned subsidiary of Natural Gas Corporation of California. NGC Production Company facilitates project financing for Natural Gas Corporation of California's capital requirements. 1.2.2.2.2. Alaska Gas Exploration Associates P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Alaska Gas Exploration Associates, incorporated under the laws of the State of California, is 50% owned by Natural Gas Corporation of California. 1.2.2.3. Pacific Conservation Services Company P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Pacific Conservation Services Company, incorporated under the laws of the State of California, is a wholly owned subsidiary of Pacific Gas and Electric Company. Pacific Conservation Services Company engages in borrowing and lending operations required to fund Pacific Gas and Electric Company conservation loan programs. 1.2.2.4. Calaska Energy Company P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Calaska Energy Company, incorporated under the laws of the State of California, is a wholly owned subsidiary of Pacific Gas and Electric Company. Calaska Energy Company was Pacific Gas and Electric Company's representative in the Alaska Highway Pipeline Project, which was formed to bring Prudhoe Bay natural gas to the lower 48 states. 1.2.2.5. Eureka Energy Company P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Eureka Energy Company, incorporated under the laws of the State of California, is a wholly owned subsidiary of Pacific Gas and Electric Company. Eureka Energy Company owns land in San Luis Obispo County. 1.2.2.6. Standard Pacific Gas Line, Inc. P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Standard Pacific Gas Line, Inc., incorporated under the laws of the State of California, is a subsidiary of Pacific Gas and Electric Company. Standard Pacific Gas Line, Inc. transports natural gas in California. Pacific Gas and Electric Company owns a 85.71% interest, and Chevron Pipe Line Company owns the remaining 14.29% interest. 2 1.2.2.7. Pacific California Gas System, Inc. P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Pacific California Gas System, Inc., incorporated under the laws of the State of California, is a wholly owned subsidiary of Pacific Gas and Electric Company. Pacific California Gas System, Inc. was created to hold intrastate gas pipeline operations. 1.2.2.8. Pacific Energy Fuels Company P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Pacific Energy Fuels Company, incorporated under the laws of the State of California, is a wholly owned subsidiary of Pacific Gas and Electric Company. Pacific Energy Fuels Company owns and finances nuclear fuel inventory. 1.2.2.9. Pacific Gas Properties Company P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Pacific Gas Properties Company, incorporated under the laws of the State of California, is a wholly owned subsidiary of Pacific Gas and Electric Company. Pacific Gas Properties Company owns California property. 1.2.2.9.1. Pacific Properties P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 Pacific Properties, incorporated under the laws of the State of California, is 50% owned by Pacific Gas Properties Company. Pacific Properties owns California property. 1.2.2.10. Chico Commons, L.P. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 Chico Commons, L.P., a California partnership, is 41% owned by Pacific Gas and Electric Company as a limited partner. Chico Commons, L.P. was created to construct and own low income housing. 1.2.2.11. PG&E Capital I P.O. Box 770000 77 Beale Street, 32nd Floor San Francisco, CA 94177 PG&E Capital I, a business trust, is 3% owned by Pacific Gas and Electric Company. PG&E Capital I was formed as a special purpose financing vehicle for the purpose of issuing deferrable income securities. 1.2.2.12. PG&E Funding, LLC 245 Market Street, Suite 424 San Francisco, CA 94105 PG&E Funding, LLC, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of Pacific Gas and Electric Company. PG&E Funding, LLC is a special purpose financing vehicle formed for the ownership of transition property and issuance of securities. 1.2.2.13. 201 Turk Street, L.P. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 3 201 Turk Street, L.P., a California partnership, is 32.4% owned by Pacific Gas and Electric Company as a limited partner. 201 Turk Street, L.P. was created to construct and own a low income housing project. 1.2.2.14. 1989 Oakland Housing Partnership Associates, L.P. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 1989 Oakland Housing Partnership Associates, L.P., a California partnership, is owned 40% by Pacific Gas and Electric Company as a limited partner. 1989 Oakland Housing Partnership Associates, L.P. was created to construct and own low income housing. 1.2.2.15. 1992 Oakland Regional Housing Partnership Associates, L.P. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 1992 Oakland Regional Housing Partnership Associates, L.P., a California partnership, is owned 17% by Pacific Gas and Electric Company as a limited partner. 1992 Oakland Housing Partnership Associates, L.P. was created to construct and own low income housing. 1.2.2.16. 1994 Oakland Regional Housing Partnership Associates, L.P. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 1994 Oakland Regional Housing Partnership Associates, L.P., a California partnership, is owned 12% by Pacific Gas and Electric Company as a limited partner. 1994 Oakland Regional Housing Partnership Associates, L.P. was created to construct and own low income housing. 1.2.2.17. Pacific Gas and Electric Housing Fund Partnership, L.P. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 Pacific Gas and Electric Housing Fund Partnership, L.P., a California partnership, is owned 99.9% by Pacific Gas and Electric Company as a limited partner. Pacific Gas and Electric Housing Fund Partnership, L.P., invests in projects that construct and own low income housing. 1.2.2.18. Merritt Community Capital Fund V, L.P. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 Merritt Community Capital Fund V, L.P., a California partnership, is owned 2.2% by Pacific Gas and Electric Company as a limited partner. Merritt Community Capital Fund V, L.P., was created to construct and own low income housing. 1.2.2.19. Schoolhouse Lane Apartments, L.P. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 Schoolhouse Lane Apartments, L.P., a California partnership, is owned 99% by Pacific Gas and Electric Company as a limited partner. Schoolhouse Lane Apartments, L.P., was created to construct and own low income housing. 1.2.2.20. PG&E Holdings, LLC One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E Holdings, LLC, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of Pacific Gas and Electric Company. PG&E Holdings, LLC 4 was formed as a holding company for repurchased shares. 1.2.3. PG&E National Energy Group, Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E National Energy Group, Inc. (formerly PG&E Diversified Investments, Inc.), incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Corporation. PG&E Diversified Investments, Inc. was formed for the purpose of holding ownership of PG&E Corporation's unregulated subsidiaries, both direct and indirect. 1.2.3.1. PG&E Capital, LLC One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E Capital, LLC, incorporated under the laws of the State of Delaware, is a wholly-owned subsidiary of PG&E National Energy Group, Inc., formed for financing and other transactions related to the energy industry. 1.2.3.2. PG&E Corporation Support Services, Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E Corporation Support Services, Inc., incorporated under the laws of the State of Delaware, is a wholly- owned subsidiary of PG&E National Energy Group, Inc. that provides general corporate support services to the family outside the State of California. 1.2.3.3. PG&E Energy Trading - Gas Corporation 1100 Louisiana, Suite 1000 Houston, Texas 77002 PG&E Energy Trading - Gas Corporation, incorporated under the laws of the State of California, is a wholly owned subsidiary of PG&E National Energy Group, Inc. PG&E Energy Trading - Gas Corporation purchases and resells energy commodities and related financial instruments. 1.2.3.3.1. PG&E Energy Trading, Canada Corporation 335 Eighth Avenue, S.W. Suite 1740 Calgary, Alberta T2P 1CP Canada PG&E Energy Trading, Canada Corporation, incorporated in the province of Alberta, Canada, is a wholly owned subsidiary of PG&E Energy Trading - Gas Corporation. PG&E Energy Trading, Canada Corporation markets and trades natural gas in Canada. 1.2.3.3.1.1. CEG Energy Options Inc. 2366 Avenue C North, Suite 101 Saskatoon, Saskatchewan S7L 5X5 Canada CEG Energy Options Inc., incorporated in the province of Saskatchewan, Canada, is a wholly owned subsidiary of PG&E Energy Trading, Canada Corporation. CEG Energy Options Inc. markets natural gas in Canada. 1.2.3.4. PG&E Enterprises One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E Enterprises, incorporated under the laws of the State of California, is a wholly owned subsidiary of PG&E National Energy Group, Inc. PG&E Enterprises was formed as a holding company for oil and gas, real estate, electric generation, and technology investments. 5 1.2.3.4.1. PG&E Shareholdings, Inc. (formerly PG&E Generating Company) One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E Shareholdings, Inc.(formerly PG&E Generating Company), incorporated under the laws of the State of California, is a wholly owned non- regulated subsidiary of PG&E Enterprises. Through its subsidiaries, PG&E Shareholdings, Inc. develops real estate in Pacific Gas and Electric Company's service territory. In addition, some subsidiaries of PG&E Shareholdings, Inc. have made fuel-related investments and a limited number of non-energy related investments. 1.2.3.4.1.1. Gilia Enterprises California Corporation 100% owned by PG&E Shareholdings, Inc. 4615 Cowell Blvd. Davis, CA 95616 A wholly owned, non-regulated indirect subsidiary of PG&E Enterprises through its ownership of PG&E Generating Company. Formed to hold interest in real estate investment 1.2.3.4.1.1.1. Marengo Ranch Joint Venture California Partnership 3% owned by PG&E Shareholdings, Inc. as limited partner, 1.3% owned by Gilia Enterprises as general partner 4615 Cowell Blvd. Davis, CA 95616 Land development in Sacramento County 1.2.3.4.1.1.2. Oat Creek Associates Joint Venture California Partnership 50% owned by PG&E Shareholdings, Inc. as limited partner 50% owned by Gilia Enterprises as general partner 4615 Cowell Blvd. Davis, CA 95616 Land development in Yolo County 1.2.3.4.1.2. Rancho Murieta Joint Venture California Partnership 45% owned by PG&E Shareholdings, Inc. as limited partner 4615 Cowell Blvd. Davis, CA 95616 Real estate development. 1.2.3.4.1.3. 1701 Oak Partnership California Partnership 50% owned by PG&E Shareholdings, Inc. as limited partner 4615 Cowell Blvd. Davis, CA 95616 Real estate development. 1.2.3.4.1.4. 1801 Oak Partnership California Partnership 50% owned by PG&E Shareholdings, Inc. as limited partner 4615 Cowell Blvd. 6 Davis, CA 95616 Real estate development. 1.2.3.4.1.5. BPS I, Inc. California Corporation 100% owned by PG&E Shareholdings, Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 A wholly-owned, non-regulated real estate development subsidiary of PG&E Enterprises through its ownership of PG&E Shareholdings, Inc. 1.2.3.4.1.5.1. Solano Business Park Associates, L.P. California Partnership 50% owed by BPS I, Inc. as general partner 4615 Cowell Blvd. Davis, CA 95616 1.2.3.4.1.5.2. Alhambra Pacific (Joint Venture) California Partnership 80% owned by PG&E Shareholdings, Inc. as general partner 20% owned by BPS I, Inc. as limited partner 4615 Cowell Blvd. Davis, CA 95616 Ownership of property in Yolo County. 1.2.3.4.1.6. The Conaway Ranch Company California Corporation 100% owned by PG&E Shareholdings, Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 A wholly-owned, non-regulated indirect subsidiary of PG&E Enterprises through its ownership of PG&E Shareholdings, Inc., in partnership with the Conaway Conservancy Group, an existing California general partnership owning the Conaway Ranch. 1.2.3.4.1.6.1. Conaway Conservancy Group Joint Venture California partnership 70% by PG&E Shareholdings, Inc 30% by Conaway Ranch Company 4615 Cowell Blvd. Davis, CA 95616 Ownership of property in Yolo County. 1.2.3.4.1.7. DPR, Inc. California corporation 100% owned by PG&E Shareholdings, Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 A wholly-owned, non-regulated indirect subsidiary of PG&E Enterprises through its ownership of PG&E Shareholdings, Inc.; general partner in a real estate partnership. 1.2.3.4.1.8. McSweeney Ranch Joint Venture California partnership 50% owned by PG&E Shareholdings, Inc. 4615 Cowell Blvd. Davis, CA 95616 1.2.3.4.1.9. PG&E Energy Trading - Power Holdings Corporation 7 California corporation 100% owned by PG&E Generating Company 7500 Old Georgetown Rd., Suite 1300 Bethesda, MD 20814 This corporation serves as the 2% sole general partner of PG&E Energy Trading - Power, L.P. 1.2.3.4.1.9.1. PG&E ET Investments Corporation Delaware corporation 100% owned by PG&E Energy Trading - Power Holdings Corporation 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 This investment corporation owns the 98% limited partner interest in PG&E Energy Trading - Power, L.P. 1.2.3.4.1.9.1.1. PG&E Energy Trading-Power, L.P. Delaware limited partnership 98% owned by PG&E ET Investments Corporation 2% owned by PG&E Energy Trading - Power Holdings Corporation 7500 Old Georgetown Rd., Suite 1300 Bethesda, MD 20814 This limited partnership is engaged in electric power marketing and trading. 1.2.3.4.1.10. PG&E International Inc. (formerly "PG&E Generating International Company") One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E International Inc., incorporated under the laws of the State of California, is a wholly owned subsidiary of PG&E Shareholdings, Inc. PG&E International Inc. is a holding company for overseas project companies. 1.2.3.4.1.10.1. PG&E International Development Holdings, LLC Delaware corporation One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 A wholly-owned subsidiary of PG&E International, Inc., incorporated under the laws of the State of Delaware, formed to own and sell an Australian pipeline development company. 1.2.3.4.1.10.2. Gannet Power Corporation California corporation 100% owned by PG&E International Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 1.2.3.4.1.10.3. PG&E Overseas Holdings I, LTD. Cayman Islands Company 100% owned by PG&E International Inc. P.O. Box 309, George Town Grand Cayman, Cayman Islands, BWI A wholly-owned, non-regulated indirect subsidiary of PG&E Enterprises through its ownership of PG&E Shareholdings, Inc. and PG&E International, Inc. Holding Company for PG&E Overseas Holdings II, Ltd. 1.2.3.4.1.10.3.1. PG&E Overseas Holdings II, Ltd. Labuan Company 8 Unit Level 9(A2), Main Office Tower Financial Park Labuan, Jalan Merdeka 87000 W.P. Labuan Malaysia 100% owned by PG&E Overseas Holdings I, LTD. A wholly-owned, non-regulated indirect subsidiary of PG&E Enterprises through its ownership of PG&E Shareholdings, Inc., PG&E International, Inc., and PG&E Overseas Holdings I, Ltd. 1.2.3.4.1.10.3.1.1. PG&E Corporation Australian Holdings Pty, Ltd.(formerly PGT Nominees Pty Ltd) Level 33, Waterfront Place One Eagle Street Brisbane, Queensland 4000 Australia PG&E Corporation Australian Holdings Pty, Ltd., incorporated under the laws of Australia, is a wholly owned subsidiary of PG&E Overseas Holdings II, Ltd. PG&E Corporation Australian Holdings Pty, Ltd. was created in anticipation of the expansion of business operations in Australia. 1.2.3.4.1.10.3.1.1.1. PG&E Gas Transmission Australia Pty Ltd. (formerly PGT Australia Pty Ltd.) Level 33, Waterfront Place One Eagle Street Brisbane, Queensland 4000 Australia PG&E Gas Transmission Australia Pty Ltd., incorporated under the laws of Australia, is a wholly owned subsidiary of PG&E Corporation Australian Holdings Pty, Ltd. PG&E Gas Transmission Australia Pty Ltd. was formed to pursue new business development opportunities in Australia. 1.2.3.4.1.10.3.1.1.2. PG&E Gas Transmission Queensland Pty Ltd (formerly PGT Queensland Pty Ltd) (GTQ) Level 33, Waterfront Place One Eagle Street Brisbane, Queensland 4000 Australia GTQ, incorporated under the laws of Australia, is a wholly owned subsidiary of PG&E Corporation Australian Holdings Pty, Ltd. GTQ operated a natural gas pipeline and associated facilities in Australia capable of transporting natural gas within the State of Queensland. 1.2.3.4.1.10.3.1.1.3. PG&E Gas Transmission Unit Holdings Pty Ltd (formerly PGT Victoria Pty Ltd.) (GTUH) Level 33, Waterfront Place One Eagle Street Brisbane, Queensland 4000 Australia GTUH, incorporated under the laws of Australia, is a wholly owned subsidiary of PG&E Corporation Australian Holdings Pty, Ltd. GTUH was created in anticipation of the expansion of business operations in Australia. 9 1.2.3.4.1.10.3.1.1.4. PG&E Energy Trading Australia Pty Ltd Level 33, Waterfront Place One Eagle Street Brisbane, Queensland 4000 Australia PG&E Energy Trading Australia Pty Ltd, incorporated under the laws of Australia, is a wholly owned subsidiary of PG&E Corporation Australian Holdings Pty, Ltd. PG&E Energy Trading Australia Pty Ltd sells natural gas and provides energy services. 1.2.3.4.1.10.3.1.1.5. PG&E Corporation Australia Pty Ltd. (formerly PGT Australia Pty Ltd.) Level 33, Waterfront Place One Eagle Street Brisbane, Queensland 4000 Australia PG&E Corporation Australia Pty Ltd., incorporated under the laws of Australia, is a wholly owned subsidiary of PG&E Corporation Australian Holdings Pty, Ltd. PG&E Corporation Australia Pty Ltd. provides corporate services. 1.2.3.4.1.10.4. PG&E Gas Transmission Bundaberg Pty Ltd. Level 33, Waterfront Place One Eagle Street Brisbane, Queensland 4000 Australia PG&E Gas Transmission Bundaberg Pty Ltd, incorporated under the laws of Australia, is a wholly owned subsidiary of PG&E International Inc. and was created to develop projects. 1.2.3.4.1.10.5. Rocksavage Services I, Inc. 100% owned by PG&E International Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 1.2.3.4.1.11. PG&E Generating Company, LLC Delaware Limited Liability Company 100% owned by PG&E Shareholdings, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1. PG&E Generating Energy Group, LLC Delaware Limited Liability Company 100% owned by PG&E Generating Company, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.1. Badger Power Corporation Delaware Corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.1.1. Badger Generating Company, LLC Delaware Limited Liability Company 99% owned by Badger Power Corporation 1% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.2. BLACK HAWK POWER CORPORATION California Corporation 100% owned by PG&E Generating Energy Group, LLC 10 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.1.2.1. ATHENS GENERATING COMPANY, L.P. Delaware Limited Partnership 51% owned by Black Hawk Power Corporation 49% owned by Peach I Power Corporation 7500 Old Georgetown Rd., 13TH Floor Bethesda, MD 20814 1.2.3.4.1.11.1.3. BLACK HAWK III POWER CORPORATION California Corporation 100% owned by PG&E Generating Energy Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.1.3.1. Lake Road Generating Company, L.P. Delaware Limited Partnership 51% owned by Black Hawk III Power Corporation 49% owned by Peach IV Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.3.2. Lake Road Power I, LLC Delaware Limited Liability Company 100% owned by Black Hawk III Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.4. HARLAN POWER CORPORATION California Corporation 100% owned by PG&E Generating Energy Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.1.4.1. UMATILLA GENERATING COMPANY, L.P. Delaware Limited Partnership 51% owned by Harlan Power Corporation 49% owned by Juniper Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.5. PEACH I POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.5.1. Athens Generating Company, L.P. Delaware Limited Partnership 51% owned by Black Hawk Power Corporation 49% owned by Peach I Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.6. PEACH IV POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.6.1. Lake Road Generating Company, L.P. Delaware Limited Partnership 51% owned by Black Hawk III Power Corporation 49% owned by Peach IV Power Corporation 11 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.6.2. Lake Road Power II, LLC Delaware Limited Liability Corporation 100% owned by Peach IV Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.7. JUNIPER POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.7.1. Umatilla Generating Company, L.P. Delaware Limited Partnership 51% owned by Black Harlan Power Corporation 49% owned by Juniper Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.8. PLOVER POWER CORPORATION California Corporation 100% owned by PG&E Energy Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.1.8.1. MANTUA CREEK GENERATING COMPANY, L.P. Delaware Limited Partnership 51% owned by Plover Power Corporation 49% owned by Beech Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.8.2. Mantua Creek Urban Renewal, L.P. Delaware Limited Partnership 51% owned by Plover Power Corporation 49% owned by Beech Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.9. BEECH POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.9.1. Mantua Creek Generating Company, L.P. Delaware Limited Partnership 51% owned by Plover Power Corporation 49% owned by Beech Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.9.2. Mantua Creek Urban Renewal, L.P. Delaware Limited Partnership 51% owned by Plover Power Corporation 49% owned by Beech Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.10. BLACK HAWK II POWER CORPORATION California Corporation 12 100% owned by PG&E Generating Energy Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.1.10.1. MILLENNIUM POWER PARTNERS, L.P. Delaware Limited Partnership 51% owned by Black Hawk II Power Corporation 49% owned by Peach III Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.10.2. Millennium Power I, LLC Delaware Limited Liability Company 100% owned by Black Hawk II Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.11. PEACH III POWER CORPORATION Delaware corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.11.1. Millennium Power Partners, L.P. Delaware Limited Partnership 51% owned by Black Hawk II Power Corporation 49% owned by Peach III Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.11.2. Millennium Power II, LLC Delaware Limited Liability Company 100% owned by Peach III Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.12. USGen NEW ENGLAND, INC. Delaware Corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13t Floor Bethesda, MD 20814 1.2.3.4.1.11.1.12.1. USGen Services Company, LLC Delaware Limited Liability Company 100% owned by USGen New England, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.13. KENNERDELL POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.13.1. KENNERDELL GENERATING COMPANY, LLC Delaware Limited Liability Company 99% owned by Kennerdell Power Corporation 1% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.14. LA PALOMA POWER CORPORATION Delaware corporation 100% owned by PG&E Generating Energy Group, LLC 13 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.14.1. LA PALOMA GENERATING COMPANY, LLC Delaware Limited Liability Company 99% owned by La Paloma Power Corporation 1% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.15. LIBERTY GENERATING CORPORATION Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.15.1. LIBERTY GENERATING COMPANY, LLC Delaware Limited Liability Company 99% owned by Liberty Generating Corporation 1% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.16. OTAY MESA POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.16.1. OTAY MESA GENERATING COMPANY, LLC Delaware Limited Liability Company 99% owned by Otay Mesa Power Corporation 1% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.17. Bluebonnet Power Corporation Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.17.1. Bluebonnet Generating Company, LLC Delaware Limited Liability Company 99% owned by Bluebonnet Power Corporation 1% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.18. First Arizona Land Corporation Delaware Corporation 100% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.19. Harquahala Power Corporation Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.19.1. Harquahala Generating Company, LLC Delaware Limited Liability Company 99% owned by Harquahala Power Corporation 1% owned by PG&E Generating Energy Group,LLC 14 1.2.3.4.1.11.1.20. Madison Wind Power Corporation Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.20.1 Madison Windpower, LLC Delaware Limited Liability Company 99% owned by Madison Wind Power Corporation 1% owned by PG&E Generating Energy Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.21. Okeechobee Power Corporation Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.21.1. Okeechobee Generating Company, LLC Delaware Limited Liability Company 99& owned by Okeechobee Power Corporation 1% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.22. PG&E Generating New England, Inc. Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.22.1. PG&E Generating New England, LLC Delaware Limited Liability Company 100% owned by PG&E Generating New England, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.23. PG&E Dispersed Power Corporation Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.23.1. PG&E Dispersed Generating Company, LLC Delaware Limited Liability Company 99% owned by PG&E Dispersed Power Corporation 1% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.24. Covert Power Corporation Delaware Corporation 100% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.1.24.1. Covert Generating Company, LLC Delaware Limited Liability Company 99% owned by Covert Power Corporation 1% owned by PG&E Generating Energy Group,LLC 7500 Old Georgetown Rd., 13th Floor 15 Bethesda, MD 20814 1.2.3.4.1.11.2. PG&E Generating Power Group, LLC Delaware Limited Liability Company 100% owned by PG&E Generating Company, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.1. Aplomado Power Corporation California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.2. Beale Generating Company (formerly J. Makowski Company, Inc.) Delaware corporation 89% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.2.1. Indian Orchard Generating Company, Inc. Delaware Corporation 100% owned by Beale Generating Company 7500 Old Georgetown Road Bethesda, MD 20814 1.2.3.4.1.11.2.2.1.1. MASSPOWER, LLC (formerly Masspower, Inc.) Delaware Limited Liability Company 49% owned by Indian Orchard Generating Company, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.1.1.1. MASSPOWER Massachusetts general partnership 30% owned by MASSPOWER, L.L.C. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.2. JMC Altresco, Inc. Colorado corporation 100% owned by Beale Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.2.1. Altresco, Inc. Colorado corporation 100% owned by JMC Altresco, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.2.1.1. Pittsfield Generating Company, L.P. (formerly Altresco Pittsfield, L.P.) Delaware partnership 99% owned by Altresco, Inc. 1% owned by Pittsfield Partners, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.2.2. Berkshire Pittsfield, Inc. Colorado corporation 100% owned by JMC Altresco, Inc. One Bowdoin Square Boston, MA 02114 16 1.2.3.4.1.11.2.2.2.2.1. Berkshire Feedline Acquisition Limited Partnership Massachusetts partnership 1% owned by Berkshire Pittsfield, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.2.3. Pittsfield Partners, Inc. Colorado corporation 100% owned by JMC Altresco, Inc. One Bowdoin Square Boston, MA 02114 Pittsfield Partners, Inc. holds a 1% LP Interest in Pittsfield Generating Company, L.P. 1.2.3.4.1.11.2.2.2.3. Pittsfield Generating Company, L.P. (formerly Altresco Pittsfield, L.P.) Delaware partnership 99% owned by Altresco, Inc. 1% owned by Pittsfield Partners, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.3. JMC Iroquois, Inc. Delaware corporation 100% owned by Beale Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.3.1. Iroquois Gas Transmission System Delaware partnership 4.93% owned by JMC Iroquois, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4. JMC Selkirk Holdings, Inc. Delaware corporation 100% owned by Beale Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.1. JMC Selkirk, Inc. Delaware corporation 100% owned by JMC Selkirk Holdings, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.1.1. PentaGen Investors, L.P. (formerly JMCS I INVESTORS, L.P.) Delaware partnership 46.57%owned by JMC Selkirk, Inc. 3.43% owned by JMCS I Holdings, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.1.1.1. Selkirk Cogen Partners, L.P. Delaware partnership 5.2502% owned by Pentagen Investors, L.P. 2.0417% directly owned by JMC Selkirk, Inc. One Bowdoin Square Boston, MA 02114 17 1.2.3.4.1.11.2.2.4.1.1.1.1. Selkirk Cogen Funding Corporation Delaware corporation 100% owned by Selkirk Cogen Partners, L.P. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.1.2. Selkirk Cogen Partners,L.P. Delaware partnership 5.2502% owned by Pentagen Investors, L.P. 2.0417% directly owned by JMC Selkirk, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.1.2.1. Selkirk Cogen Funding Corporation Delaware corporation 100% owned by Selkirk Cogen Partners, L.P. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.2. JMCS I Holdings, Inc. Delaware corporation 100% owned by JMC Selkirk Holdings, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.2.1. PentaGen Investors, L.P. (formerly JMCS I INVESTORS, L.P.) Delaware partnership 46.57%owned by JMC Selkirk, Inc. 3.43% owned by JMCS I Holdings, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.2.1.1. Selkirk Cogen Partners, L.P. Delaware partnership 5.2502% owned by Pentagen Investors, Inc. 2.0417% owned by JMC Selkirk, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.4.2.1.1.1. Selkirk Cogen Funding Corporation Delaware corporation 100% owned by Selkirk Cogen Partners, L.P. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.2.5. Orchard Gas Corporation Delaware corporation 100% owned by Beale Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.3. Mason Generating Company Delaware corporation 89% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.3.1. Bowdoin Storage Services, Inc. Delaware corporation 18 100% owned by Mason Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.3.2. J. Makowski Associates, Inc. Massachusetts corporation 100% owned by Mason Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.3.3. JMC Avoca, Inc. Delaware corporation 100% owned by Mason Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.3.3.1. Avoca Natural Gas Storage New York general partnership 46.88% owned by JMC Avoca, Inc. One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.3.4. JMC Cayuta, Inc. Delaware Corporation 100% owned by Mason Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.3.5. JMC Steuben, Inc. Delaware Corporation 100% owned by Mason Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.3.6. Steuben Pipeline Services, Inc. Delaware Corporation 100% owned by Mason Generating Company One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.2.4. BLACK HAWK I POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.5. PEACH II POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.6. BRODIA ENTERPRISES California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.6.1. WALLKILL GENERATING COMPANY, L.P. Delaware Limited Partnership 51% owned by Brodia Enterprises 49% owned by Dogwood Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 19 1.2.3.4.1.11.2.7. DOGWOOD POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.7.1. WALLKILL GENERATING COMPANY, L.P. Delaware Limited Partnership 51% owned by Brodia Enterprises 49% owned by Dogwood Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.8. Eagle Power Corporation California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.8.1. Granite Generating Company, L.P. Delaware Limited Partnership 50% owned by Eagle Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.8.1.1. Granite Water Supply Company, Inc. Delaware Corporation 100% owned by Granite Generating Company, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.8.2. Keystone Cogeneration Company, L.P. Delaware Limited Partnership 50% owned by Eagle Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.8.2.1. Keystone Urban Renewal Limited Partnership Delaware Limited Partnership 99% owned by Keystone Cogeneration Company, L.P. 1% owned by Granite Generating Company, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.8.3. Logan Generating Company, L.P. Delaware Limited Partnership 50% owned by Eagle Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.9. Larkspur Power Corporation California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.9.1. Hermiston Generating Company, L.P. Delaware Limited Partnership 80% owned by Larkspur Power Corporation 20% owned by Buckeye Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 20 1.2.3.4.1.11.2.10. Buckeye Power Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.10.1. Hermiston Generating Company, L.P. Delaware Limited Partnership 80% owned by Larkspur Power Corporation 20% owned by Buckeye Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.11. RAPTOR HOLDINGS COMPANY California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.11.1. GRAY HAWK POWER CORPORATION Delaware Corporation 100% owned by Raptor Holdings Company 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.11.1.1. CEDAR BAY COGENERATION, INC. Delaware Corporation 100% owned by Gray Hawk Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.11.1.1.1. CEDAR BAY GENERATING COMPANY, Limited Partnership Delaware Limited Partnership 80% owned by Cedar Bay Cogeneration, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.11.2. PG&E MANAGEMENT SERVICES COMPANY California Corporation 100% owned by Raptor Holdings Company 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.12. RED TAIL POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.13. TOYAN ENTERPRISES California Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.13.1. INDIANTOWN COGENERATION, L.P. Delaware Limited Partnership 30.05% owned by Toyan Enterprises 24.817% of 19.95% owned by Indiantown Project Investment Partnership, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.13.2. INDIANTOWN PROJECT INVESTMENT PARTNERSHIP, L.P. 21 Delaware Limited Partnership 24.817% owned by Toyan Enterprises 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.13.2.1. INDIANTOWN COGENERATION, L.P. Delaware Limited Partnership 30.06% owned by Toyan Enterprises 19.95% owned by Indiantown Project Investment Partnership, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.13.2.1.1. INDIANTOWN COGENERATION FUNDING CORPORATION Delaware Corporation 100% owned by Indiantown Cogeneration, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.14. SPRUCE POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.14.1. Spruce Limited Partnership Delaware Limited Partnership 34% owned by Spruce Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.14.2. COLSTRIP ENERGY, LIMITED PARTNERSHIP Montana Limited Partnership 37.5% owned by Harrier Power Corporation 37.5% owned by Spruce Limited Partnership 314 N. Last Chance Gulch Helena, MT 59624 1.2.3.4.1.11.2.15. SYCAMORE POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.16. WILLOW POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group,LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.16.1. ROTTERDAM GENERATING COMPANY, L.P. Delaware Limited Partnership 49% owned by Cormorant Power Corporation 49% owned by Willow Power Corporation 2% owned by PG&E Shareholdings, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.17. MERLIN POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 22 1.2.3.4.1.11.2.17.1. FELLOWS GENERATING COMPANY, L.P. Delaware Limited Partnership 51% owned by Merlin Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.18. OSPREY POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.18.1. EAST SYRACUSE GENERATING COMPANY, L.P. Delaware Limited Partnership 50% owned by Osprey Power Corporation 50% owned by Magnolia Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.18.2. MAGNOLIA POWER CORPORATION Delaware Corporation 100% owned by Osprey Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.18.2.1. EAST SYRACUSE GENERATING COMPANY, L.P. Delaware Limited Partnership 50% owned by Osprey Power Corporation 50% owned by Magnolia Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.19. PACIFIC ENERGY SERVICES COMPANY California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.20. PELICAN POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.20.1. OKEELANTA POWER LIMITED PARTNERSHIP Delaware Limited Partnership 37.54% owned by Pelican Power Corporation 316 Royal Poinciana Plaza Palm Beach, FL 33480 1.2.3.4.1.11.2.21. PEREGRINE POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.21.1. CHAMBERS COGENERATION, LIMITED PARTNERSHIP Delaware Limited Partnership 50% owned by Peregrine Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.22. HARRIER POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 23 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.22.1. COLSTRIP ENERGY, LIMITED PARTNERSHIP Montana Limited Partnership 37.5% owned by Harrier Power Corporation 37.5% owned by Spruce Limited Partnership 314 N. Last Chance Gulch Helena, MT 59624 1.2.3.4.1.11.2.23. HERON POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.23.1. GATOR GENERATING COMPANY, L.P. Delaware Limited Partnership 79.2% owned by Heron Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.24. JAEGER POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.24.1. NORTHAMPTON GENERATING COMPANY, L.P. Delaware Limited Partnership 50% owned by Jaeger Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.24.1.1. NORTHAMPTON FUEL SUPPLY COMPANY, INC. Delaware Corporation 100% owned by Northampton Generating Company, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.24.1.2. NORTHAMPTON WATER SUPPLY, INC. Delaware Corporation 100% owned by Northampton Generating Company, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.25. KESTREL POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.26. GOSHAWK POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.27. FALCON POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 24 1.2.3.4.1.11.2.27.1. SCRUBGRASS GENERATING COMPANY, L.P. Delaware Limited Partnership 25.13% owned by Falcon Power Corporation 24.87% owned by Scrubgrass Power Corp. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.27.2. SCRUBGRASS POWER CORP. Pennsylvania Corporation 100% owned by Falcon Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.27.2.1. SCRUBGRASS GENERATING COMPANY, L.P. Delaware Limited Partnership 25.13% owned by Falcon Power Corporation 24.87% owned by Scrubgrass Power Corp. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.27.2.1.1. CLEARFIELD PROPERTIES, INC. Delaware Corporation 100% owned by Scrubgrass Generating Company, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.27.2.1.2. LEECHBURG PROPERTIES, INC. Delaware Corporation 100% owned by Scrubgrass Generating Company, L.P. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.28. DOGWOOD I POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.28.1. WALLKILL TRANSPORT COMPANY, L.P. Delaware Limited Partnership 51% owned by Brodia I Enterprises 49% owned by Dogwood I Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.29. EUCALYPTUS POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.29.1. CITRUS GENERATING COMPANY, L.P. Delaware Limited Partnership 49% owned by Cooper's Hawk Power Corporation 49% owned by Eucalyptus Power Corporation 2% owned by PG&E Shareholdings, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.30. WHITE TAIL POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor 25 San Francisco, CA 94111 1.2.3.4.1.11.2.31. JACARANDA POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.32. IBIS POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.33. BRODIA I ENTERPRISES California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.33.1. WALLKILL TRANSPORT COMPANY, L.P. Delaware Limited Partnership 51% owned by Brodia I Enterprises 49% owned by Dogwood I Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.34. CARACARA POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.35. COOPER'S HAWK POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.35.1. CITRUS GENERATING COMPANY, L.P. Delaware Limited Partnership 49% owned by Cooper's Hawk Power Corporation 49% owned by Eucalyptus Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 The 2% interest is held by PG&E Generating Company 1.2.3.4.1.11.2.36. CORMORANT POWER CORPORATION California Corporation 100% owned by PG&E Generating Power Group, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.2.36.1. ROTTERDAM GENERATING COMPANY, L.P. Delaware Limited Partnership 49% owned by Cormorant Power Corporation 49% owned by Willow Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 2% interest is held by PG&E Generating Company 1.2.3.4.1.11.2.37. LARCH POWER CORPORATION Delaware Corporation 26 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.2.38. LOON POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Power Group, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3. PG&E Generating Services, LLC Delaware Limited Liability Company 100% owned by PG&E Generating Company, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.1. J. MAKOWSKI PITTSFIELD, INC. Delaware Corporation 100% owned by PG&E Generating Services, LLC One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.3.2. J. MAKOWSKI SERVICES, INC. Delaware Corporation 100% owned by PG&E Generating Services, LLC One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.3.3. JMCS I MANAGEMENT, INC. Delaware Corporation 100% owned by PG&E Generating Services, LLC One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.3.4. USGen FUEL SERVICES, INC. (formerly JMC Fuel Services, Inc.) Delaware Corporation 100% owned by PG&E Generating Services, LLC One Bowdoin Square Boston, MA 02114 1.2.3.4.1.11.3.5. PG&E Operating Services Holdings, Inc. (formerly PG&E Operating Services Company) California Corporation 100% owned by PG&E Generating Services, LLC 100 Pine Street, 20th Floor San Francisco, CA 94111 1.2.3.4.1.11.3.5.1. USOSC HOLDINGS, INC. Delaware Corporation 100% owned by PG&E Operating Services Holdings, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.5.1.1. PG&E Operating Services Company (formerly U.S. Operating Services Company) California General Partnership 98% owned by PG&E Operating Services Holdings, Inc. 2% owned by USOSC Holdings, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.6. USGEN HOLDINGS, INC. Delaware Corporation 27 100% Owned by PG&E Generating Services, LLC 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.6.1. PG&E Generating Company (formerly U.S. Generating Company) California General Partnership 98% owned by PG&E Operating Services, LLC 2% owned by USGen Holdings, Inc. 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.6.1.1. FIRST OREGON LAND CORPORATION Delaware Corporation 100% owned by PG&E Generating Company 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.6.1.2. TOPAZ POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Company 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.6.1.2.1. CARNEYS POINT GENERATING COMPANY Delaware General Partnership 50% owned by Topaz Power Corporation 50% owned by Garnet Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.6.1.3. GARNET POWER CORPORATION Delaware Corporation 100% owned by PG&E Generating Company 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.11.3.6.1.3.1. CARNEYS POINT GENERATING COMPANY Delaware Partnership 50% owned by Topaz Power Corporation 50% owned by Garnet Power Corporation 7500 Old Georgetown Rd., 13th Floor Bethesda, MD 20814 1.2.3.4.1.12. Valley Real Estate, Inc. California Corporation 100% owned by PG&E Shareholdings, Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 Real estate development. 1.2.3.4.2. PG&E Overseas, Inc. California corporation 100% owned by PG&E Enterprises One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 A wholly-owned, non-regulated subsidiary of PG&E Enterprises; U.S. shareholder of PG&E Overseas, Ltd. and PG&E Overseas II, Ltd. 1.2.3.4.2.1. PG&E Australia California corporation 100% owned by PG&E Overseas, Inc. One Market, Spear Tower, Suite 2400 28 San Francisco, CA 94105 A wholly-owned, non-regulated indirect subsidiary of PG&E Enterprises through its ownership of PG&E Overseas, Inc. for business development in Australia. 1.2.3.4.2.2. PG&E Overseas, Ltd. Cayman Islands company Maples & Calder P.O. Box 309 George Town, Grand Cayman Cayman Islands, B.W.I. A wholly-owned, indirect subsidiary of PG&E Enterprises through its ownership of PG&E Overseas, Inc.; holding company for PG&E Pacific I, Ltd. and PG&E Pacific II, Ltd. 1.2.3.4.2.2.1. PG&E Pacific I, Ltd. Cayman Islands company Maples & Calder P.O. Box 309 George Town, Grand Cayman Cayman Islands, B.W.I. A non-regulated indirect subsidiary of PG&E Enterprises through its ownership of PG&E Overseas Inc.; an overseas distribution company of PG&E Overseas, Ltd. 1.2.3.4.2.2.2. PG&E Pacific II, Ltd. Cayman Islands company Maples & Calder P.O. Box 309 George Town, Grand Cayman Cayman Islands, B.W.I. A non-regulated indirect subsidiary of PG&E Enterprises through its ownership of PG&E Overseas Inc.; an overseas distribution company of PG&E Overseas, Ltd. 1.2.3.4.3. Quantum Ventures California corporation 100% owned by PG&E Enterprises One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 A wholly-owned, non-regulated subsidiary of PG&E Enterprises; holding company for PG&E Energy Services Corporation. 1.2.3.4.3.1. PG&E Energy Services Corporation (formerly Vantus Energy Corporation) California corporation 100% owned by Quantum Ventures 345 California Street, Suite 2600 San Francisco, CA 94104 1.2.3.4.3.1.1. Barakat & Chamberlin, Inc. California Corporation 100% owned by PG&E Energy Services Corporation 345 California Street, Suite 2600 San Francisco, CA 94104 1.2.3.4.3.1.2. Creston Financial California Corporation 100% owned by PG&E Energy Services Corporation 29 345 California Street, Suite 2600 San Francisco, CA 94104 1.2.3.4.3.1.3. PGCH, Inc. Delaware Corporation 50% owned by PG&E Energy Services Corporation c/o The Corporation Trust Company 3 Hutton Centre Drive Santa Ana, CA 92707 1.2.3.4.3.1.4. Real Estate Energy Solutions, LLC Delaware limited liability company 50% owned by PG&E Energy Services Corporation 50% owned by Jones Lang LaSalle Management Services, Inc. 888 S.W. Fifth Avenue, Suite 1050 Portland, OR 97204 1.2.3.5. PG&E Gas Transmission Corporation formerly PG&E Gas Holdings (Gas Transmission) 2100 SW River Parkway Portland, OR 97201 Gas Transmission, incorporated under the laws of the State of California, is a gas holding company and is a wholly owned subsidiary of PG&E National Energy Group, Inc. (formerly PG&E Diversified Investments, Inc.) 1.2.3.5.1. PG&E Gas Transmission, Northeast Corporation 2100 SW River Parkway Portland, Oregon 97201 PG&E Gas Transmission, Northeast Corporation, incorporated under the laws of the State of California, is a wholly owned subsidiary of Gas Transmission. PG&E Gas Transmission, Northeast Corporation was created to pursue business opportunities in the Northeast United States. 1.2.3.5.2. PG&E Gas Transmission, Northwest Corporation (formerly Pacific Gas Transmission Company) 2100 SW River Parkway Portland, Oregon 97201 PG&E Gas Transmission, Northwest Corporation, incorporated under the laws of the State of California, is a wholly owned subsidiary of Gas Transmission. PG&E Gas Transmission, Northwest Corporation owns and operates gas transmission pipelines and associated facilities capable of transporting natural gas from the Canadian-U.S. border to the Oregon-California border. 1.2.3.5.2.1. Pacific Gas Transmission International, Inc. 2100 SW River Parkway Portland, Oregon 97201 Pacific Gas Transmission International, Inc. incorporated under the laws of the State of California, is a wholly owned subsidiary of PG&E Gas Transmission, Northwest Corporation. Pacific Gas Transmission International, Inc. previously owned 99% of the beneficial interest of PGT Queensland Unit Trust. 1.2.3.5.2.2. Pacific Gas Transmission Company 2100 SW River Parkway Portland, Oregon 97201 Pacific Gas Transmission Company, incorporated under the laws of the State of California, is a wholly owned subsidiary of PG&E Gas Transmission, Northwest Corporation. Pacific Gas Transmission Company was created to pursue business opportunities in the 30 natural gas business in the United States. 1.2.3.6. PG&E Gas Transmission, Texas Corporation (GTT) 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 GTT, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E National Energy Group, Inc. GTT is a holding company for businesses owning Texas natural gas pipelines, natural gas storage facilities, and natural gas processing plants. 1.2.3.6.1. PG&E Texas Natural Gas Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Natural Gas Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of GTT. PG&E Texas Natural Gas Company is a holding company and serves as a general partner of PG&E Texas Gas Partners, L.P., PG&E Texas Management Partnership, L.P., and PG&E-Tex, L.P. 1.2.3.6.1.1. PG&E Texas Pipeline Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Pipeline Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Texas Natural Gas Company. PG&E Texas Pipeline Company serves as a general partner of PG&E Texas Pipeline, L.P. and PG&E Texas LDC, L.P. 1.2.3.6.1.1.1. VT Company 1201 North Market Street Wilmington, DE 19899 VT Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Texas Pipeline Company. VT Company owns a limited partnership interest in PG&E Texas Gas Partners, L.P. 1.2.3.6.1.1.2. PG&E Texas Gas Partners, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Gas Partners, L.P., formed under the laws of the State of Delaware, is owned 49.3% by PG&E Texas Pipeline Company, 46.7% by VT Company, 2.7% by PG&E Hydrocarbons Company, 0.3% by PG&E Texas Energy Company, and 1% by PG&E Texas Natural Gas Company. PG&E Texas Gas Partners, L.P. is a natural gas holding company. 1.2.3.6.1.1.2.1. PG&E-Tex, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E-Tex, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Gas Partners, L.P., and 1% by PG&E Texas Natural Gas Company. PG&E-Tex, L.P. owns, operates, and leases gas-related facilities. 1.2.3.6.1.1.2.2. PG&E Texas Management Partnership, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Management Partnership, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Gas Partners, L.P., and 1% by PG&E Texas Natural Gas Company. PG&E Texas Management Partnership, L.P. serves as a 31 limited partner of PG&E Hydrocarbons, L.P., PG&E NGL Marketing, L.P., PG&E Texas Pipeline, L.P., PG&E Texas LDC, L.P., PG&E Reata Energy, L.P., PG&E Rivercity Energy, L.P., PG&E Texas VGM, L.P., and PG&E Texas Industrial Energy, L.P. 1.2.3.6.1.1.2.2.1. PG&E Hydrocarbons, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Hydrocarbons, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Management Partnership, L.P. and 1% by PG&E Hydrocarbons Company. PG&E Hydrocarbons, L.P. processes natural gas. 1.2.3.6.1.1.2.2.2. PG&E NGL Marketing, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E NGL Marketing, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Management Partnership, L.P. and 1% by PG&E Hydrocarbons Company. PG&E NGL Marketing, L.P. owns natural gas pipelines and markets natural gas liquids. 1.2.3.6.1.1.2.2.3. PG&E Texas Pipeline, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Pipeline, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Management Partnership, L.P. and 1% by PG&E Texas Pipeline Company. PG&E Texas Pipeline, L.P. owns and operates natural gas pipelines and related assets. 1.2.3.6.1.1.2.2.3.1. PG&E West Texas Pipeline Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E West Texas Pipeline Company, a Texas joint venture, is 50% owned by PG&E Texas Pipeline, L.P., and 50% owned by PG&E Gas Transmission Teco, Inc. PG&E West Texas Pipeline Company operates natural gas pipelines. 1.2.3.6.1.1.2.2.4. PG&E Texas LDC, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas LDC, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Management Partnership, L.P. and 1% by PG&E Texas Pipeline Company. PG&E Texas LDC, L.P. is engaged in natural gas intrastate transmission. 1.2.3.6.1.1.2.2.5. PG&E Reata Energy, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Reata Energy, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Management Partnership, L.P. and 1% by PG&E Texas Energy Company. PG&E Reata Energy, L.P. markets gas. 1.2.3.6.1.1.2.2.6. PG&E Rivercity Energy, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Rivercity Energy, L.P., formed under the 32 laws of the State of Delaware, is owned 99% by PG&E Texas Management Partnership, L.P. and 1% by PG&E Texas Energy Company. PG&E Rivercity Energy, L.P. markets gas. 1.2.3.6.1.1.2.2.7. PG&E Texas VGM, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas VGM, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Management Partnership, L.P. and 1% by PG&E Energy Trading Holdings Corporation. PG&E Texas VGM, L.P. markets gas. 1.2.3.6.1.1.2.2.8. PG&E Texas Industrial Energy, L.P. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Industrial Energy, L.P., formed under the laws of the State of Delaware, is owned 99% by PG&E Texas Management Partnership, L.P. and 1% by PG&E Texas Energy Company. PG&E Texas Industrial Energy, L.P. markets gas. 1.2.3.6.1.2. PG&E Hydrocarbons Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Hydrocarbons Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Texas Natural Gas Company. PG&E Hydrocarbons Company serves as a general partner of PG&E Hydrocarbons, L.P. and PG&E NGL Marketing, L.P. 1.2.3.6.1.3. PG&E Texas Field Services Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Field Services Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Texas Natural Gas Company. PG&E Texas Field Services Company is engaged in gas gathering and related services. 1.2.3.6.1.4. PG&E Texas Gas Storage Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Gas Storage Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Texas Natural Gas Company. PG&E Texas Gas Storage Company leases a gas storage cavern. 1.2.3.6.1.5. PG&E Texas Hub Services Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Hub Services Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Texas Natural Gas Company. PG&E Texas Hub Services Company provides title transfer tracking service for the Kansas City Board of Trade. 1.2.3.6.1.6. PG&E Energy Trading Holdings Corporation 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Energy Trading Holdings Corporation, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Texas Natural Gas Company. PG&E Energy Trading Holdings Corporation serves as a general partner of PG&E Texas VGM, L.P. 33 1.2.3.6.1.6.1. PG&E Texas Energy Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Energy Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Energy Trading Holdings Corporation. PG&E Texas Energy Company serves as a general partner of PG&E Reata Energy, L.P., PG&E Rivercity Energy, L.P., and PG&E Texas Industrial Energy, L.P. 1.2.3.6.2. PG&E Texas Management Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Texas Management Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of GTT. PG&E Texas Management Company provides administrative services. 1.2.3.7. PG&E Gas Transmission Teco, Inc. 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E Gas Transmission Teco, Inc., incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E National Energy Group, Inc. PG&E Gas Transmission Teco, Inc. has investments in natural gas pipelines, and gas gathering and processing facilities. 1.2.3.7.1. Teco Gas Gathering Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 Teco Gas Gathering Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Gas Transmission Teco, Inc. and is in the gas gathering business. 1.2.3.7.2. Teco Gas Marketing Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 Teco Gas Marketing Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Gas Transmission Teco, Inc. Teco Gas Marketing Company markets gas. 1.2.3.7.3. Teco Gas Processing Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 Teco Gas Processing Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Gas Transmission Teco, Inc. and processes gas. 1.2.3.7.4. Teco Gas Services Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 Teco Gas Services Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Gas Transmission Teco, Inc. Teco Gas Services Company markets gas. 1.2.3.7.4.1. San Jacinto Industrial Gas Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 San Jacinto Industrial Gas Company, a Texas general partnership, is owned 50% by Teco Gas Services Company and 50% by PanEnergy Marketing Company 34 (not affiliated with Claimant). San Jacinto Industrial Gas Company is engaged in natural gas marketing. 1.2.3.7.5. Teco Industrial Gas Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 Teco Industrial Gas Company, incorporated under the laws of the State of Delaware, is a wholly owned subsidiary of PG&E Gas Transmission Teco, Inc. Teco Industrial Gas Company serves as a 50% general partner in San Jacinto Gas Transmission Company. 1.2.3.7.5.1. San Jacinto Gas Transmission Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 San Jacinto Gas Transmission Company, a Texas general partnership, is owned 50% by Teco Industrial Gas Company and 50% by Centana Intrastate Pipeline Company (not affiliated with Claimant) and it owns an intrastate pipeline. 1.2.3.7.6. MidTexas Pipeline Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 MidTexas Pipeline Company, a Texas general partnership, is owned 50% by PG&E Gas Transmission Teco, Inc. and 50% by Houston Pipe Line Company (not affiliated with Claimant). MidTexas Pipeline Company owns an intrastate natural gas pipeline. 1.2.3.7.7. Jackson County Pipeline System [also known as "Toro Grande" and "Edna (Campeon) System"] 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 Jackson County Pipeline System, a Texas joint venture, is owned 50% by PG&E Gas Transmission Teco, Inc. and 50% by Gateway Energy Corporation (not affiliated with Claimant). Jackson County Pipeline System owns an intrastate natural gas pipeline and gathering system. 1.2.3.7.8. PG&E West Texas Pipeline Company 7330 San Pedro Avenue, Suite 400 San Antonio, TX 78216-6236 PG&E West Texas Pipeline Company, a Texas joint venture, is 50% owned by PG&E Texas Pipeline, L.P. and 50% owned by PG&E Gas Transmission Teco, Inc. PG&E West Texas Pipeline Company operates natural gas pipelines. 1.2.4. PG&E Strategic Capital, Inc. One Market, Spear Tower, Suite 2400 San Francisco, CA 94105 PG&E Strategic Capital, Inc., incorporated under the laws of Delaware, is a wholly-owned subsidiary of PG&E Corporation. PG&E Strategic Capital, Inc. was formed for general business purposes. 35 EX-23.1 15 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333- 16255 and 333-25685 on Form S-3 and 33-50601, 33-23692, 333-16253, 333-68155, 333-69437, 333-77145, 333-77149, and 333-27015 on Form S-8 of PG&E Corporation and Registration Statements No. 33-62488, 33-61959, 33-64136 and 33-62488 on Form S-3 of Pacific Gas and Electric Company of our reports dated March 3, 2000, appearing in and incorporated by reference in this Annual Report on Form 10-K of PG&E Corporation and Pacific Gas and Electric Company for the year ended December 31, 1999. /s/ DELOITTE & TOUCHE LLP San Francisco, California March 6, 2000 EX-23.2 16 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23.2 [LETTERHEAD OF ARTHUR ANDERSEN LLP] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 8,1999, incorporated by reference in this Form 10-K, into the Company's previously filed registration statements as follows: (1) PG&E Corporation's Form S-3 Registration Statement File No. 333-16255 (relating to PG&E Corporation's Dividend Reinvestment Plan); (2) Pacific Gas and Electric Company's Form S-3 Registration Statement File No. 33-64136 (relating to $2,000,000,000 aggregate principal amount of Pacific Gas and Electric Company's First and Refunding Mortgage Bonds and Medium-Term Notes); (3) Pacific Gas and Electric Company's Form S-3 Registration Statement File No. 33-50707 (relating to $1,500,000,000 aggregate principal amount of Pacific Gas and Electric Company's First and Refunding Mortgage Bonds); (4) PG&E Corporation's Form S-8 Registration Statement No. 33-50601 (relating to Pacific Gas and Electric Company Savings Fund Plan for Employees (for union-represented employees); (5) PG&E Corporation's Form S-8 Registration Statement File No. 33-23692 (relating to PG&E Corporation's 1986 Stock Option Plan); (6) Pacific Gas and Electric Company's Form S-3 Registration Statement File No. 33-62488 (relating to 10,000,000 shares of Pacific Gas and Electric Company's Redeemable First Preferred Stock); (7) Form S-3 Registration Statement File No. 33-61959 (relating to $335,000,000 aggregate liquidation value of Cumulative Quarterly Income Preferred Securities); (8) PG&E Corporation's Form S-8 Registration Statement File No. 333-16253 (relating to PG&E Corporation's Long-Term Incentive Program); (9) PG&E Corporation's Form S-3 Registration Statement File No. 333- 25685 (relating to the resale of PG&E Corporation shares held by certain shareholders); (10) PG&E Corporation's Post-Effective Amendment on Form S-8 to Form S-4 Registration Statement File No. 333-27015 (relating to Valero Energy Corporation Stock Option Plan No. 4, Valero Energy Corporation Stock Option Plan No. 5, and Valero Energy Corporation Executive Stock Incentive Plan); (11) PG&E Corporation's Form S-8 Registration Statement File No. 333-68155 (relating to PG&E Gas Transmission, Northwest Corporation Savings Fund Plan for Non- Management Employees); and (12) PG&E Corporation's Form S-8 Registration Statement File No. 333-69437 (relating to U.S. Generating Company 401(k) Profit- Sharing Plan for Bargaining Unit Employees); (13) PG&E Corporation's Form S-8 Registration Statement File No. 333-77145 (relating to the PG&E Corporation Retirement Savings Plan); and (14) PG&E Corporation's Form S-8 Registration Statement File No. 333-77149 (relating to PG&E Corporation's Long-Term Incentive Program). /s/ ARTHUR ANDERSEN LLP San Francisco, California March 3, 2000 EX-24.1 17 RESOLUTIONS OF THE BOARD OF DIRECTORS EXHIBIT 24.1 RESOLUTION OF THE ----------------- BOARD OF DIRECTORS OF --------------------- PG&E CORPORATION ---------------- February 28, 2000 ----------------- BE IT RESOLVED that each of LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES is hereby authorized to sign on behalf of this corporation and as attorneys in fact for the Chairman of the Board, President, and Chief Executive Officer, the Senior Vice President, Chief Financial Officer, and Treasurer, and the Vice President and Controller of this corporation the Form 10-K Annual Report for the year ended December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and all amendments and other filings or documents related thereto to be filed with the Securities and Exchange Commission, and to do any and all acts necessary to satisfy the requirements of the Securities Exchange Act of 1934 and the regulations of the Securities and Exchange Commission adopted thereunder with regard to said Form 10-K Annual Report I, LINDA Y.H. CHENG, do hereby certify that I am an Assistant Corporate Secretary of PG&E CORPORATION, a corporation organized and existing under the laws of the State of California; that the above and foregoing is a full, true, and correct copy of a resolution which was duly adopted by the Board of Directors of said corporation by unanimous written consent of the directors of said Board on February 28, 2000; and that this resolution has never been amended, revoked, or repealed, but is still in full force and effect. WITNESS my hand and the seal of said corporation hereunto affixed this 1st day of March, 2000. /s/ Linda Y.H. Cheng ------------------------------- Linda Y.H. Cheng Assistant Corporate Secretary PG&E CORPORATION C O R P O R A T E S E A L RESOLUTION OF THE ----------------- BOARD OF DIRECTORS OF --------------------- PACIFIC GAS AND ELECTRIC COMPANY -------------------------------- February 28, 2000 ----------------- BE IT RESOLVED that each of LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES is hereby authorized to sign on behalf of this company and as attorneys in fact for the President and Chief Executive Officer and the Senior Vice President - Chief Financial Officer, Controller, and Treasurer of this company the Form 10-K Annual Report for the year ended December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and all amendments and other filings or documents related thereto to be filed with the Securities and Exchange Commission, and to do any and all acts necessary to satisfy the requirements of the Securities Exchange Act of 1934 and the regulations of the Securities and Exchange Commission adopted thereunder with regard to said Form 10-K Annual Report. I, LINDA Y.H. CHENG, do hereby certify that I am Senior Assistant Corporate Secretary of PACIFIC GAS AND ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of California; that the above and foregoing is a full, true, and correct copy of a resolution which was duly adopted by the Board of Directors of said corporation by unanimous written consent of the directors of said Board on February 28, 2000; and that this resolution has never been amended, revoked, or repealed, but is still in full force and effect. WITNESS my hand and the seal of said corporation hereunto affixed this 1st day of March, 2000. /s/ Linda Y.H. Cheng ------------------------------- Linda Y.H. Cheng Senior Assistant Corporate Secretary PACIFIC GAS AND ELECTRIC COMPANY C O R P O R A T E S E A L EX-24.2 18 POWERS OF ATTORNEY EXHIBIT 24.2 POWER OF ATTORNEY Each of the undersigned Directors of PG&E Corporation hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his or her attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his or her capacity as such Director of said corporation the Form 10-K Annual Report for the year ended December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, we have signed these presents this 28th day of February, 2000. /s/ Richard A. Clarke /s/ David M. Lawrence - ---------------------------- ---------------------------- Richard A. Clarke David M. Lawrence, MD /s/ Harry M. Conger /s/ Mary S. Metz - ---------------------------- ---------------------------- Harry M. Conger Mary S. Metz /s/ David A. Coulter /s/ Carl E. Reichardt - ---------------------------- ---------------------------- David A. Coulter Carl E. Reichardt /s/ C. Lee Cox /s/ John C. Sawhill - ---------------------------- ---------------------------- C. Lee Cox John C. Sawhill /s/ William S. Davila /s/ Barry Lawson Williams - ---------------------------- ---------------------------- William S. Davila Barry Lawson Williams /s/ Robert D. Glynn, Jr. - ---------------------------- Robert D. Glynn, Jr. POWER OF ATTORNEY ROBERT D. GLYNN, JR., the undersigned, Chairman of the Board, Chief Executive Officer, and President of PG&E Corporation, hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Chairman of the Board and Chief Executive Officer (principal executive officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have signed these presents this 28th day of February, 2000. /s/ Robert D. Glynn, Jr. ---------------------------------- Robert D. Glynn, Jr. POWER OF ATTORNEY PETER A. DARBEE, the undersigned, Senior Vice President, Chief Financial Officer, and Treasurer of PG&E Corporation, hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Senior Vice President, Chief Financial Officer, and Treasurer (principal financial officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have signed these presents this 28th day of February, 2000. /s/ Peter A. Darbee ----------------------------- Peter A. Darbee POWER OF ATTORNEY CHRISTOPHER P. JOHNS, the undersigned, Vice President and Controller of PG&E Corporation, hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Vice President and Controller (principal accounting officer) of said corporation the Form 10 K Annual Report for the year ended December 31, 1998, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have signed these presents this 28th day of February, 2000. /s/ Christopher P. Johns ---------------------------------- Christopher P. Johns POWER OF ATTORNEY Each of the undersigned Directors of Pacific Gas and Electric Company hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his or her attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his or her capacity as such Director of said corporation the Form 10-K Annual Report for the year ended December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, we have signed these presents this 28th day of February, 2000. /s/ Richard A. Clarke /s/ David M. Lawrence, MD - ---------------------------- ------------------------------ Richard A. Clarke David M. Lawrence, MD /s/ Harry M. Conger /s/ Mary S. Metz - ---------------------------- ------------------------------ Harry M. Conger Mary S. Metz /s/ David A. Coulter /s/ Carl E. Reichardt - ---------------------------- ------------------------------ David A. Coulter Carl E. Reichardt /s/ C. Lee Cox /s/ John C. Sawhill - ---------------------------- ------------------------------ C. Lee Cox John C. Sawhill /s/ William S. Davila /s/ Gordon R. Smith - ---------------------------- ------------------------------ William S. Davila Gordon R. Smith /s/ Robert D. Glynn, Jr. /s/ Barry Lawson Williams - ---------------------------- ------------------------------ Robert D. Glynn, Jr. Barry Lawson Williams POWER OF ATTORNEY GORDON R. SMITH, the undersigned, President and Chief Executive Officer of Pacific Gas and Electric Company, hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as President and Chief Executive Officer (principal executive officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have signed these presents this 28th day of February, 2000. /s/ Gordon R. Smith ----------------------------- Gordon R. Smith POWER OF ATTORNEY KENT M. HARVEY, the undersigned, Senior Vice President - Chief Financial Officer, Controller, and Treasurer of Pacific Gas and Electric Company, hereby constitutes and appoints LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, DEAN R. MORTENSEN, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Senior Vice President - Chief Financial Officer, Controller, and Treasurer (principal financial officer and principal accounting officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 1999, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have signed these presents this 28th day of February, 2000. /s/ Kent M. Harvey ---------------------------- Kent M. Harvey EX-27.1 19 FINANCIAL DATA SCHEDULE-PG&E CORPORATION WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PG&E CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 16,776 1,879 3,824 3,259 3,977 29,715 5,216 0 1,670 6,886 780 0 6,673 1,499 0 0 592 0 0 0 13,285 29,715 20,820 248 19,942 19,942 878 69 947 772 (73) 0 (73) 460 336 2,287 ($0.20) ($0.20)
EX-27.2 20 FINANCIAL DATA SCHEDULE-PACIFIC GAS & ELECTRIC CO.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC GAS AND ELECTRIC COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 12,718 0 1,758 3,079 3,915 21,470 1,406 1,964 2,107 5,477 437 294 4,877 0 0 449 465 0 0 0 9,471 21,470 9,228 648 7,235 7,235 1,993 36 2,029 593 788 25 763 415 336 2,200 $0.00 $0.00
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