PCG

Business Context and Reporting Period

This Form 8-K, dated May 4, 2004, reports the financial results for PG&E Corporation and its subsidiary, Pacific Gas and Electric Company (PG&E), for the quarter ended March 31, 2004. The filing highlights a transition to regulatory and financial stability following the resolution of the California energy crisis through a December 2003 settlement agreement with the California Public Utilities Commission (CPUC).

Key Financial Metrics

Note on Cash Flow and Debt: The filing text does not provide specific values for operating cash flow or total debt levels. However, it notes that the majority of the reported net income ($6.96 per share) consists of one-time, non-cash entries related to regulatory assets. Cash will be received over the life of these assets as they are amortized.

Material Changes Versus Prior Period

• Net Income Surge: The shift from a $354 million loss in Q1 2003 to a $3.03 billion profit in Q1 2004 is primarily driven by a non-cash accounting gain of approximately $2.95 billion ($6.96 per share). This gain recognizes two regulatory assets established under the CPUC settlement to resolve $11.8 billion in undercollected costs from the energy crisis.
• Operating Performance: Excluding non-operating items, "Earnings from Operations" remained relatively flat, decreasing slightly from $0.45 per share in Q1 2003 to $0.41 per share in Q1 2004.
• Revenue Growth: Total operating revenues increased by approximately 28% year-over-year, driven by higher electric and natural gas revenues.
• Discontinued Operations: Results for National Energy & Gas Transmission, Inc. (NEGT) are no longer consolidated. NEGT filed for Chapter 11 in July 2003, and its reorganization plan was approved in May 2004, eliminating PG&E Corporation's equity interest.

Guidance, Outlook, and Risks

2004 Guidance: PG&E Corporation reaffirmed its guidance for 2004 "Earnings from Operations" to be in the range of $2.00 to $2.10 per share. This guidance excludes NEGT results and assumes the CPUC issues a final decision on the 2003 General Rate Case (GRC) and 2004 attrition adjustment consistent with the settlement agreement.

Management Commentary: CEO Robert D. Glynn, Jr. stated the company is on track to deliver performance in line with estimates, citing a new period of regulatory stability and a healthy utility core business.

Risks and Contingencies:

• Regulatory Decisions: Final decisions on the 2003 GRC and 2004 attrition revenue increases are pending; earnings do not yet reflect the positive impacts of these expected revenue increases.
• Legal Appeals: Risks include the timing and resolution of petitions for review regarding the CPUC settlement and appeals of the bankruptcy court's order confirming the Plan of Reorganization.
• Market Volatility: Future results depend on wholesale electricity and natural gas prices, supplies, and the utility's ability to recover increased costs.
• Securitization: The value of the $2.21 billion regulatory asset could be materially reduced by securitization or generator settlements.

Investor Verification Checklist

• Verify the timing and outcome of the CPUC's final decision on the 2003 General Rate Case and 2004 attrition adjustment.
• Confirm the status of legal appeals regarding the December 2003 Settlement Agreement and the NEGT bankruptcy reorganization plan.
• Monitor the conditions and timing for the securitization of the $2.21 billion regulatory asset.
• Review future filings for the actual cash flow impact of the regulatory assets as they are amortized, distinguishing them from the non-cash accounting gains reported in Q1 2004.
• Track the resolution of the NEGT Chapter 11 case to ensure no residual equity interest or liability remains for PG&E Corporation.