PCG

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for PG&E Corporation (the holding company) and its primary subsidiary, Pacific Gas and Electric Company (the Utility). The Utility operates as a regulated public utility in northern and central California, providing electricity and natural gas distribution, generation, procurement, and transmission. The Utility serves approximately 5.1 million electricity customers and 4.3 million natural gas customers. The report is a combined filing, with separate financial statements provided for both entities.

Key Financial Metrics

Note: PG&E Corporation's consolidated figures include the Utility. The Utility's figures are standalone.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased by $302 million (8%) to $3,431 million compared to Q1 2008. This was driven by lower commodity costs passed through to customers (electricity and natural gas) and milder weather reducing demand.
• Profitability Increase: Despite lower revenues, Net Income increased by $17 million (8%) to $244 million. Diluted EPS rose to $0.65 from $0.62. This improvement was primarily due to a higher return on equity from increased authorized capital investments and lower storm/outage-related expenses compared to the prior year.
• Expense Pressures: Operating and maintenance expenses increased by $23 million (2%) due to higher wage/benefit costs, increased uncollectible accounts (due to economic conditions), and accelerated gas integrity survey costs. These were partially offset by lower public purpose program expenses.
• Cost of Goods: Cost of electricity decreased by $144 million (14%) and cost of natural gas decreased by $218 million (28%) due to lower market prices and reduced volumes.

Guidance, Outlook, Risks, and Contingencies

• Regulatory Matters: The CPUC approved the recovery of approximately $47 million in hydroelectric facility divestiture costs. The Utility filed an application to adjust revenue requirements to cover increased retirement plan contributions. A settlement in the Electric Transmission Owner rate case was requested, proposing a base revenue requirement of $776 million.
• Capital Projects: The Utility is investing heavily in the SmartMeter advanced metering infrastructure (estimated total cost $1.74 billion, with $824 million spent through Q1 2009) and the Diablo Canyon steam generator replacement project ($661 million incurred). The CPUC recently authorized an additional $466.8 million for SmartMeter upgrades.
• Disputed Claims: The Utility maintains a liability of approximately $1.737 billion for remaining Chapter 11 disputed claims from the 2000-2001 energy crisis. An escrow account holds $1.213 billion for these payments. A proposed agreement to transfer $700 million to the California Power Exchange (PX) was filed in April 2009.
• Environmental & Nuclear: The Utility faces potential costs related to environmental remediation (accrued liability of $587 million) and spent nuclear fuel storage. The DOE has failed to provide a permanent repository, requiring the Utility to build on-site dry cask storage. There is uncertainty regarding future cooling water intake regulations at Diablo Canyon which could require significant capital investment or curtailment of operations.
• Market Risk: The Utility uses derivatives to hedge commodity price risk. If the Utility's credit rating falls below investment grade, it would be required to post approximately $486 million in additional cash collateral.

Investor Verification Checklist

• Disputed Claims Resolution: Monitor the status of the $1.737 billion Chapter 11 disputed claims liability and the proposed $700 million transfer to the PX, as final resolution timing and amounts remain uncertain.
• Capital Expenditure Recovery: Verify the CPUC's approval of cost recovery for the SmartMeter program and Diablo Canyon steam generator replacement, as cost overruns could impact earnings if not fully recoverable.
• Environmental Liabilities: Track the outcome of the EPA and California Water Board regulations regarding Diablo Canyon's cooling water intake, as compliance could require massive capital outlays or force plant shutdowns.
• Regulatory Rate Cases: Watch for the outcome of the General Rate Case (GRC) and Transmission Owner (TO) rate cases, which determine future revenue requirements and authorized returns on equity.
• Collateral Requirements: Assess the impact of potential credit rating downgrades on liquidity, specifically the requirement to post additional cash collateral for derivative positions.