-----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, WPKJ2TsvDztVnSPWG/FeBxzDm3I/CMRAomdI6YA9/xq5ayvSffJzJswaagxrgd4w WAjU2UAAxrRXIwzekiMsqA== 0000075488-98-000009.txt : 19980518 0000075488-98-000009.hdr.sgml : 19980518 ACCESSION NUMBER: 0000075488-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC GAS & ELECTRIC CO CENTRAL INDEX KEY: 0000075488 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 940742640 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02348 FILM NUMBER: 98625914 BUSINESS ADDRESS: STREET 1: 77 BEALE ST STREET 2: P O BOX 770000 MAIL CODE B7C CITY: SAN FRANCISCO STATE: CA ZIP: 94177 BUSINESS PHONE: 4159737000 MAIL ADDRESS: STREET 1: 77 BEALE STREET STREET 2: P O BOX 770000 CITY: SAN FRANCISCO STATE: CA ZIP: 94177 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Exact Name of Commission Registrant State or other IRS Employer File as specified Jurisdiction of Identification Number in its charter Incorporation Number - ----------- -------------- --------------- -------------- 1-12609 PG&E Corporation California 94-3234914 1-2348 Pacific Gas and California 94-0742640 Electric Company Pacific Gas and Electric Company PG&E Corporation 77 Beale Street One Market, Spear Tower P.O. Box 770000 Suite 2400 San Francisco, California 94177 San Francisco, California 94105 - ---------------------------------------------------------------------- (Address of principal (Address of principal executive offices) (Zip Code) executive offices) (Zip Code) Pacific Gas and Electric Company PG&E Corporation (415) 973-7000 (415) 267-7000 - ---------------------------------------------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No ---------- ----------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock Outstanding April 30, 1998: PG&E Corporation 381,473,556 shares Pacific Gas and Electric Company Wholly owned by PG&E Corporation PG&E CORPORATION AND PACIFIC GAS AND ELECTRIC COMPANY FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS PG&E CORPORATION STATEMENT OF CONSOLIDATED INCOME........................1 CONDENSED BALANCE SHEET.................................2 STATEMENT OF CASH FLOWS ................................3 PACIFIC GAS AND ELECTRIC COMPANY STATEMENT OF CONSOLIDATED INCOME........................4 CONDENSED BALANCE SHEET.................................5 STATEMENT OF CASH FLOWS.................................6 NOTE 1: GENERAL...........................................7 NOTE 2: THE ELECTRIC BUSINESS.............................9 NOTE 3: UTILITY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST HOLDING SOLELY UTILITY SUBORDINATED DEBENTURES...........13 NOTE 4: COMMITMENTS AND CONTINGENCIES....................13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION.............16 RESULTS OF OPERATIONS.....................................18 Common Stock Dividend..................................18 Earnings Per Common Share..............................19 Utility Results........................................19 Unregulated Business Results...........................19 FINANCIAL CONDITION.......................................20 COMPETITION AND CHANGING REGULATORY ENVIRONMENT...........20 THE ELECTRIC BUSINESS.....................................20 Electric Transition Plan...............................21 Rate Freeze and Rate Reduction.........................21 Transition Cost Recovery...............................21 Generation Divestiture.................................23 Customer Impacts of Transition Plan....................24 Voter Initiative.......................................25 THE GAS BUSINESS..........................................25 ACQUISITIONS AND SALES....................................26 YEAR 2000 COMPLIANCE....................................26 LIQUIDITY AND CAPITAL RESOURCES Sources of Capital.....................................27 Utility Cost of Capital................................29 1999 General Rate Case.............................29 Environmental Matters..................................30 Legal Matters..........................................30 Risk Management Activities.............................30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................31 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.........................................32 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......32 ITEM 5. OTHER INFORMATION.........................................36 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................36 SIGNATURE..........................................................38 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS PG&E CORPORATION STATEMENT OF CONSOLIDATED INCOME (in millions, except per share amounts)
Three months ended March 31, 1998 1997 --------- --------- Operating Revenues Utility $ 2,025 $ 2,274 Energy commodities and services 2,328 1,091 -------- -------- Total operating revenues 4,353 3,365 Operating Expenses Cost of energy for utility 666 725 Cost of energy commodities and services 2,153 1,017 Operating and maintenance, net 508 700 Depreciation and decommissioning 561 459 -------- -------- Total operating expenses 3,888 2,901 -------- -------- Operating Income 465 464 Interest expense, net 203 160 Other income and expense (18) (20) -------- -------- Income Before Income Taxes 280 324 Income taxes 141 151 -------- -------- Net Income $ 139 $ 173 ======== ======== Weighted Average Common Shares Outstanding 381 409 Earnings Per Common Share, Basic and Diluted $ .36 $ .42 Dividends Declared Per Common Share $ .30 $ .30 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
PG&E CORPORATION CONDENSED BALANCE SHEET (in millions)
Balance at March 31, December 31, 1998 1997 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 214 $ 237 Short-term investments 49 1,160 Accounts receivable Customers, net 1,428 1,514 Regulatory balancing accounts 782 658 Energy marketing 897 830 Inventories and prepayments 600 626 -------- -------- Total current assets 3,970 5,025 Property, Plant, and Equipment Utility 33,294 32,972 Gas transmission 3,454 3,484 Other 217 57 -------- -------- Total property, plant, and equipment (at original cost) 36,965 36,513 Accumulated depreciation and decommissioning (16,648) (16,041) -------- -------- Net property, plant, and equipment 20,317 20,472 Other Noncurrent Assets Regulatory assets 2,218 2,337 Nuclear decommissioning funds 1,074 1,024 Other 1,757 1,699 -------- -------- Total noncurrent assets 5,049 5,060 -------- -------- TOTAL ASSETS $ 29,336 $ 30,557 ======== ======== LIABILITIES AND EQUITY Current Liabilities Short-term borrowings $ 135 $ 103 Current portion of long-term debt 579 659 Current portion of rate reduction bonds 106 125 Accounts payable Trade creditors 752 754 Other 469 466 Energy marketing 777 758 Accrued taxes 482 226 Other 684 893 -------- -------- Total current liabilities 3,984 3,984 Noncurrent Liabilities Long-term debt 7,531 7,659 Rate reduction bonds 2,776 2,776 Deferred income taxes 4,067 4,029 Deferred tax credits 328 339 Other 2,017 2,034 -------- -------- Total noncurrent liabilities 16,719 16,837 Preferred Stock of Subsidiary With Mandatory Redemption Provisions 194 137 Utility Obligated Mandatorily Redeemable Preferred Securities of Trust Holding Solely Utility Subordinated Debentures 300 300 Stockholders' Equity Preferred stock of subsidiary without mandatory redemption provisions Nonredeemable 145 145 Redeemable 183 257 Common stock 5,819 6,366 Reinvested earnings 1,992 2,531 -------- -------- Total stockholders' equity 8,139 9,299 Commitments and Contingencies (Notes 2 and 4) - - -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,336 $ 30,557 ======== ======== The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
PG&E CORPORATION STATEMENT OF CASH FLOWS (in millions)
For the three months ended March 31, 1998 1997 ---------- ---------- Cash Flows From Operating Activities Net income $ 139 $ 173 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, decommissioning, and amortization 587 493 Deferred income taxes and tax credits-net (105) (44) Other deferred charges and noncurrent liabilities (304) 29 Net effect of changes in operating assets and liabilities: Accounts receivable 19 107 Regulatory balancing accounts receivable 296 (52) Inventories 78 27 Accounts payable 20 (34) Accrued taxes 257 220 Other working capital (147) 9 Other-net 12 41 --------- --------- Net cash provided by operating activities 852 969 --------- --------- Cash Flows From Investing Activities Capital expenditures (506) (328) Investments in unregulated projects (7) (31) Acquisitions - (41) Other-net (3) (16) --------- --------- Net cash used by investing activities (516) (416) --------- --------- Cash Flows From Financing Activities Net increase (decrease) in short-term borrowings 32 122 Long-term debt issued 158 - Long-term debt matured, redeemed, or repurchased-net (400) (257) Preferred stock redeemed or repurchased (7) - Common stock issued 17 14 Common stock repurchased (1,122) (320) Dividends paid (134) (131) Other-net (14) (4) --------- --------- Net cash used by financing activities (1,470) (576) --------- --------- Net Change in Cash and Cash Equivalents (1,134) (23) Cash and Cash Equivalents at January 1 1,397 144 --------- --------- Cash and Cash Equivalents at March 31 $ 263 $ 121 ========= ========= Supplemental disclosures of cash flow information Cash paid for: Interest (net of amounts capitalized) $ 141 $ 67 Income taxes 1 26 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
PACIFIC GAS AND ELECTRIC COMPANY STATEMENT OF CONSOLIDATED INCOME (in millions)
Three months ended March 31, 1998 1997 --------- --------- Electric utility $ 1,562 $ 1,722 Gas utility 463 552 -------- -------- Total operating revenues 2,025 2,274 Operating Expenses Cost of electric energy 488 510 Cost of gas 178 215 Operating and maintenance, net 726 661 Depreciation and decommissioning 529 443 Provision for regulatory adjustment mechanisms (322) - -------- -------- Total operating expenses 1,599 1,829 -------- -------- Operating Income 426 445 Interest expense, net 131 136 Other income and expense (4) (1) -------- -------- Income Before Income Taxes 299 310 Income taxes 144 138 -------- -------- Net Income 155 172 Preferred dividend requirement and redemption premium 7 8 -------- -------- Income Available for Common Stock $ 148 $ 164 ======== ======== The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
PACIFIC GAS AND ELECTRIC COMPANY CONDENSED BALANCE SHEET (in millions)
Balance at March 31, December 31, 1998 1997 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 89 $ 80 Short-term investments 24 1,143 Accounts receivable Customers, net 1,066 1,204 Regulatory balancing accounts 782 658 Related parties accounts receivable 851 459 Inventories and prepayments 475 523 --------- --------- Total current assets 3,287 4,067 Property, Plant, and Equipment Electric 26,330 26,033 Gas 6,964 6,939 --------- --------- Total property, plant, and equipment (at original cost) 33,294 32,972 Accumulated depreciation and decommissioning (16,129) (15,558) --------- --------- Net property, plant, and equipment 17,165 17,414 Other Noncurrent Assets Regulatory assets 2,177 2,283 Nuclear decommissioning funds 1,074 1,024 Other 351 359 -------- -------- Total noncurrent assets 3,602 3,666 -------- -------- TOTAL ASSETS $ 24,054 $ 25,147 ======== ======== LIABILITIES AND EQUITY Current Liabilities Current portion of long-term debt $ 503 $ 580 Current portion of rate reduction bonds 106 125 Accounts payable Trade creditors 440 441 Related parties 125 134 Other 426 424 Accrued taxes 506 229 Deferred income taxes 32 149 Other 472 527 -------- ------- Total current liabilities 2,610 2,609 Noncurrent Liabilities Long-term debt 5,945 6,218 Rate reduction bonds 2,776 2,776 Deferred income taxes 3,333 3,304 Deferred tax credits 327 338 Other 1,791 1,810 -------- ------- Total noncurrent liabilities 14,172 14,446 Preferred Stock of Subsidiary With Mandatory Redemption Provisions 137 137 Company Obligated Mandatorily Redeemable Preferred Securities of Trust Holding Solely Utility Subordinated Debentures 300 300 Stockholders' Equity Preferred stock without mandatory redemption provisions Nonredeemable 145 145 Redeemable 183 257 Common stock 4,132 4,582 Reinvested earnings 2,375 2,671 -------- -------- Total stockholders' equity 6,835 7,655 Commitments and Contingencies (Notes 2 and 4) - - -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,054 $ 25,147 ======== ======== The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
PACIFIC GAS AND ELECTRIC COMPANY STATEMENT OF CASH FLOWS (in millions)
For the three months ended March 31, 1998 1997 ----------- ----------- Cash Flows From Operating Activities Net income $ 155 $ 173 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, decommissioning, and amortization 557 476 Deferred income taxes and tax credits-net (114) (62) Other deferred charges and noncurrent liabilities 18 55 Provision for regulatory adjustment mechanisms (322) - Net effect of changes in operating assets and liabilities: Accounts receivable (255) 68 Regulatory balancing accounts receivable 296 (52) Inventories 42 28 Accounts payable 18 (145) Accrued taxes 272 218 Other working capital (61) (16) Other-net 7 7 --------- --------- Net cash provided by operating activities 613 750 --------- --------- Cash Flows From Investing Activities Capital expenditures (331) (321) Other-net (9) (98) --------- --------- Net cash used by investing activities (340) (419) --------- --------- Cash Flows From Financing Activities Net increase (decrease) in short-term borrowings - (74) Long-term debt matured, redeemed, or repurchased-net (389) (223) Preferred stock redeemed or repurchased (65) - Common stock repurchased (800) - Dividends paid (123) (131) Other-net (6) (6) --------- --------- Net cash used by financing activities (1,383) (434) --------- --------- Net Change in Cash and Cash Equivalents (1,110) (103) Cash and Cash Equivalents at January 1 1,223 144 --------- --------- Cash and Cash Equivalents at March 31 $ 113 $ 41 ========= ========= Supplemental disclosures of cash flow information Cash paid for: Interest (net of amounts capitalized) $ 96 $ 65 Income taxes - 26 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
PG&E CORPORATION AND PACIFIC GAS AND ELECTRIC COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: GENERAL Basis of Presentation: - ---------------------- This Quarterly Report on Form 10-Q is a combined report of PG&E Corporation and Pacific Gas and Electric Company (the Utility), a regulated subsidiary of PG&E Corporation. 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 and its wholly owned and controlled subsidiaries, including the Utility (collectively, the Corporation). The Utility's consolidated financial statements include its accounts as well as those of its wholly owned and controlled subsidiaries. The Utility's financial position and results of operations are the principal factors affecting the Corporation's consolidated financial position and results of operations. This quarterly report should be read in conjunction with the Corporation's and the Utility's Consolidated Financial Statements and Notes to Consolidated Financial Statements incorporated by reference in their combined 1997 Annual Report on Form 10-K. PG&E Corporation believes that the accompanying statements reflect all adjustments that are necessary to present a fair statement of the consolidated financial position and results of operations for the interim periods. All material adjustments are of a normal recurring nature unless otherwise disclosed in this Form 10-Q. All significant intercompany transactions have been eliminated from the consolidated financial statements. Certain amounts in the prior year's consolidated financial statements have been reclassified to conform to the 1998 presentation. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year. 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. Acquisitions and Sales: - ----------------------- In August 1997, the Corporation announced that its subsidiary, U.S. Generating Company (USGen), had agreed to buy a portfolio of electric generating assets and power supply contracts from the New England Electric System (NEES) for $1.59 billion, plus $85 million for early retirement and severance costs previously committed to by NEES. Including fuel and other inventories and transaction costs, financing requirements are expected to total approximately $1.75 billion, of which approximately $1.25 billion will be funded through debt borrowed by USGen. In addition, approximately $500 million of equity will be contributed. The assets to be acquired contain a balance of hydro, coal, oil, and natural gas generation facilities. The acquisition is expected to be completed in the second half of 1998. The acquisition is subject to regulatory approvals. In addition, as discussed below in Generation Divestiture, as part of electric industry restructuring, the Utility has informed the California Public Utilities Commission (CPUC) that it does not intend to retain any of its non-nuclear generation facilities. Accounting for Risk Management Activities: - ------------------------------------------ The Corporation, through its subsidiaries, engages in price risk management activities for both non-hedging and hedging purposes. The Corporation conducts non-hedging activities principally through its unregulated subsidiary, PG&E Energy Trading. Derivative and other financial instruments associated with the Corporation's electric power, natural gas, and related non-hedging activities are accounted for using the mark-to-market method of accounting. Additionally, the Corporation may engage in hedging activities using futures, options, and swaps to hedge the impact of market fluctuations on energy commodity prices, interest rates, and foreign currencies. Hedge transactions are accounted for under the deferral method with gains and losses on these transactions initially deferred and classified as inventories and prepayments and other liabilities in the Consolidated Balance Sheet and then recognized in cost of energy commodities and services when the hedged transaction occurs. The Utility manages price risk independently from the activities in the Corporation's unregulated businesses. In the first quarter of 1998, the CPUC granted approval for the Utility to use financial instruments to manage price volatility of gas purchased for the Utility's electric generation portfolio. The approval limits the Utility's outstanding financial instruments to $200 million, with downward adjustments occurring as fossil- fueled generation plants are divested. (See Generation Divestiture, below.) Authority to use these risk management instruments ceases upon the full divestiture of fossil-fueled generation plants or at the end of the current electric rate freeze (see Rate Freeze and Rate Reduction, below), whichever comes first. As stated above, the Corporation utilizes the mark-to-market method of accounting for its non-hedging commodity trading and price risk management activities. In accordance with the mark-to-market method of accounting, the Corporation's electric power, natural gas and related non-hedging contracts, including both physical and financial instruments, are recorded at market value, net of future servicing costs and reserves, and recognized in the income statement as revenue or expense in the period of contract execution. 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 (determined by reference to recent transactions) of these contract portfolios, resulting primarily from newly originated transactions and the impact of commodity price and interest rate movements, are recognized in operating revenue in the period of change. The resultant unrealized gains and losses and related reserves are recorded as inventories and prepayments and other liabilities. The Corporation's net gains and losses associated with price risk management activities for the quarter ended March 31, 1998, were not material. NOTE 2: The Electric Business On March 31, 1998, California became one of the first states in the country to allow open competition in the electric generation business. In developing state legislation to implement a competitive market, it was recognized that the Utility's market-based revenues would not be sufficient to recover (that is, to collect from customers) all generation costs resulting from past CPUC decisions. To recover these uneconomic costs, called transition costs, and to ensure a smooth transition to the competitive environment, the Utility, in conjunction with other California electric utilities, the CPUC, state legislators, consumer advocates, and others, developed a transition plan, in the form of state legislation, to position California for the new market environment. There are three principal elements to this transition plan: (1) an electric rate freeze and rate reduction, (2) recovery of transition costs, and (3) economic divestiture of Utility-owned generation facilities. Each one of these three elements, and the impact of the transition plan on the Utility's customers are discussed below. The transition plan will remain in effect until the earlier of March 31, 2002, or when the Utility has recovered its authorized transition costs as determined by the CPUC. This period is referred to as the transition period. 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. Rate Freeze and Rate Reduction: - ------------------------------- The first element of the transition plan is an electric rate freeze and an electric rate reduction. During 1997, electric rates for the Utility's customers were held at 1996 levels. Effective January 1, 1998, the Utility reduced electric rates for its residential and small commercial customers by 10 percent and will hold their rates at that level. All other electric customers' rates remained frozen at 1996 levels. The rate freeze will continue until the end of the transition period. During the first quarter of 1998, the electric rate reduction reduced operating revenue by approximately $94 million. To pay for the 10 percent rate reduction, the Utility financed $2.9 billion of its transition costs with rate reduction bonds. The bonds defer recovery of a portion of the transition costs until after the transition period. The transition costs associated with the rate reduction bonds are expected to be recovered over the term of the bonds. Transition Cost Recovery: - ------------------------ The second element of the transition plan is recovery of transition costs. Transition costs are costs which are unavoidable and which are not expected to be recovered through market-based revenues. These costs include: (1) the above-market cost of Utility-owned generation facilities, (2) costs associated with the Utility's long-term contracts to purchase power at above-market prices from Qualifying Facilities (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.) The costs of Utility-owned generation facilities are currently included in the Utility customers' rates. Above-market facility costs are those facilities whose values recorded on the Utility's balance sheet (book value) are expected to be in excess of their market values. Conversely, below- market facility costs are those whose market values are expected to be in excess of their book values. In general, the total amount of generation facility costs to be included as transition costs will be 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. A valuation of a Utility-owned generation facility where the market value exceeds the book value could result in a material charge if the valuation of the facility is determined based upon any method other than a sale of the facility to a third party. This is because any excess of market value over book value would be used to reduce other transition costs without being collected in rates. The Utility will not be able to determine the exact amount of generation facility costs that will be recoverable as transition costs until a market valuation process (appraisal, spin, or sale) is completed for each of the Utility's generation facilities. This market valuation process is expected to occur prior to the conclusion of the transition period. The first of these valuations occurred in 1997 when the Utility agreed to sell three Utility-owned electric generation plants for $501 million. The sale is scheduled to close during 1998. (See Generation Divestiture, below.) At March 31, 1998, the Utility's net investment in Diablo Canyon Nuclear Power Plant (Diablo Canyon) and non-nuclear generation facilities was $3.5 billion and $2.6 billion, respectively, including the plants to be sold in 1998. Costs associated with the Utility's long-term contracts to purchase power at above-market prices from QFs and other power suppliers are also eligible to be recovered as transition costs. The Utility has agreed to purchase electric power from these suppliers under long-term contracts expiring on various dates through 2028. Over the life of these contracts, the Utility estimates that it will purchase approximately 360 million megawatt-hours at an aggregate average price of 6.3 cents per kilowatt-hour. To the extent that this price is above the market price, the Utility is authorized to collect the difference between the contract price and the market price from customers, as a transition cost, over the term of the contract. Generation-related regulatory assets, net of regulatory obligations, are also eligible for transition cost recovery. As of March 31, 1998, the Utility has accumulated approximately $1.8 billion of these assets net of obligations. Under the transition plan, most transition costs must be recovered by March 31, 2002. This recovery period is significantly shorter than the recovery period of the related assets prior to restructuring. Effective January 1, 1998, in accordance with the transition plan, the Utility is recording depreciation of certain generating plants determined to be uneconomic in proceedings before the CPUC and amortization of most generation related regulatory assets over the transition period. The CPUC believes that the shortened recovery period reduces risks associated with recovery of all the Utility's generation assets, including Diablo Canyon and hydroelectric facilities. Accordingly, the Utility is receiving a reduced return for all of its Utility-owned generation facilities. In 1998, the reduced return on common equity is 6.77 percent. Although most transition costs must be recovered by March 31, 2002, certain transition costs can be included in customers' electric rates after the transition period. These costs include: (1) certain employee-related transition costs, (2) above-market payments under existing QF and power- purchase contracts discussed above, and (3) unrecovered electric industry restructuring implementation costs. In addition, transition costs financed by the issuance of rate reduction bonds are expected to be recovered over the term of the bonds. Further, the Utility's nuclear decommissioning costs are being recovered through a CPUC-authorized charge, which will extend until sufficient funds exist to decommission the facility. During the rate freeze, this charge will not increase the Utility customers' electric rates. Excluding these exceptions, the Utility will write-off any transition costs not recovered during the transition period. The CPUC has the ultimate authority to determine the recoverable amount of transition costs. Reviews by the CPUC to determine the reasonableness of transition costs are being conducted and will continue to be conducted throughout the transition period. In addition, the CPUC is conducting a financial verification audit of the Utility's Diablo Canyon accounts at December 31, 1996. Diablo Canyon accounts include sunk costs at December 31, 1996 of $3.3 billion which reflects total construction costs of $7.1 billion. (Sunk costs are costs associated with Utility-owned generating facilities that are fixed and unavoidable and currently included in the Utility customers' electric rates.) The CPUC will hold a proceeding to review the results of the audit, including any proposed adjustments to the recovery of Diablo Canyon costs in rates, following the completion of the audit. Transition costs that are disallowed by the CPUC for collection from Utility customers will be written off and may result in a material charge. At this time, the amount of disallowance of transition costs, if any, cannot be predicted. Effective January 1, 1998, the Utility is collecting eligible transition costs through a CPUC-authorized nonbypassable charge. The amount of revenue collected for transition costs recovery is subject to seasonal fluctuations in the Utility's sales volumes. The first quarter amortization and depreciation of transition costs exceeded revenue associated with transition costs recovery by $322 million. In accordance with CPUC rate treatment of transition costs, the Utility deferred this excess. The Utility's ability to recover its transition costs during the transition period will be dependent on several factors. These factors include: (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 market value of the Utility-owned generation facilities, (4) future Utility sales levels, (5) future Utility fuel and operating costs, (6) the extent to which the Utility's authorized revenues to recover distribution costs are increased or decreased, and (7) the market price of electricity. Given the Utility's current evaluation of these factors, the Utility believes that it will recover its transition costs. Also, the Utility believes that its regulatory assets and Utility-owned generation facilities are not impaired. 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. Generation Divestiture: - ----------------------- The third element of the transition plan is the economic divestiture of Utility-owned generation facilities. To alleviate market power concerns of the CPUC, the Utility has agreed to sell its fossil-fueled generation facilities. In 1997, the Utility agreed to sell three electric Utility-owned fossil- fueled generating plants to Duke Energy Power Services Inc. (Duke) through a competitive auction process. The aggregate bid accepted for these plants was $501 million. These three fossil-fueled plants have a combined book value at March 31, 1998, of approximately $370 million and a combined capacity of 2,645 megawatts (MW). The three power plants are located at Morro Bay, Moss Landing, and Oakland. The sales have been approved by the CPUC. However, they are still subject to various regulatory approvals including the approval of the transfer of various permits and licenses, and the Federal Energy Regulatory Commission's acceptance for filing of Duke's requested regulatory treatment. Additionally, the Utility will retain liability for required environmental remediation of any pre-closing soil or groundwater contamination at these plants. Although the Utility is retaining such environmental remediation liability, the Utility does not expect any material impact on its or PG&E Corporation's financial position or results of operations. The sale of these three plants is scheduled to close in 1998. The Utility began an auction of four of its remaining fossil-fueled plants and its geothermal facilities in April 1998. These additional plants have a combined generating capacity of 4,718 MW and a combined book value at March 31, 1998, of approximately $720 million. During the transition period, the proceeds from the sale of the Utility- owned fossil-fueled and geothermal plants will be used to offset other transition costs. As a result, the Utility does not believe the sales will have a material impact on its results of operations. The Corporation has also informed the CPUC that it does not intend to retain the Utility's remaining 2,672 MW of fossil-fueled and hydroelectric facilities as part of the Utility. These remaining facilities have a combined book value at March 31, 1998, of approximately $1.7 billion. The Utility expects to announce a plan for disposition of these facilities by the third quarter of 1998. As previously mentioned, any plan for disposition of assets other than through sale to a third party could result in a material charge to the extent that the market value, as determined by the CPUC, is in excess of book value. Voter Initiative: - ----------------- Various consumer groups filed a voter initiative with the California Attorney General which would (1) require the Utility to provide an additional 10 percent rate reduction to its residential and small commercial customers; (2) eliminate transition cost recovery for nuclear investments (other than reasonable decommissioning costs); (3) restrict transition cost recovery for non-nuclear investments (other than costs associated with QFs), unless the CPUC finds that the Utility would be deprived of the opportunity to earn a fair rate of return; and (4) prohibit the collection of any customer charges for rate reduction bonds, or alternatively, require the Utility to offset such charges with an equal credit to customers. If the sponsors of the initiative obtain sufficient signatures to qualify the initiative for the November 1998, statewide ballot, and if the initiative were voted into law, a material charge would result to the extent that regulated rates would no longer be adequate to recover transition costs. In this event, we expect that legal challenges by the Utility and others would ensue. NOTE 3: 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 percent 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 approximately $9 million. The only assets of the Trust are deferrable interest subordinated debentures issued by the Utility with a face value of approximately $309 million, an interest rate of 7.90 percent, and a maturity date of 2025. NOTE 4: COMMITMENTS AND 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 these policies, if a nuclear generating facility suffers a loss due to a prolonged accidental outage, the Utility may be subject to maximum retrospective assessments of $18 million (property damage) and $6 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. An additional $8.7 billion of coverage is provided by secondary financial protection which is mandated by federal legislation 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 $159 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 the Utility has been or may be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or the California Hazardous Substance Account Act. These sites include former manufactured gas plant sites, power plant sites, and sites used by the Utility for the storage or disposal of potentially hazardous materials. Under CERCLA, the Utility may be responsible for remediation of hazardous substances, even if the Utility 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 cleanup 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) 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 to be undertaken by the Utility is difficult to estimate. It is reasonably possible that a change in the estimate will 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 had an accrued liability at March 31, 1998, of $246 million for hazardous waste remediation costs at identified sites, including fossil-fueled power plants. Environmental remediation at identified sites may be as much as $420 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. This upper limit of the range of costs was estimated 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. Of the $246 million liability, discussed above, the Utility has recovered $68 million and expects to recover $153 million in future rates. Additionally, the Utility is seeking recovery of its costs from insurance carriers and from other third parties as appropriate. Further, as discussed in Generation Divestiture above, the Utility will retain the pre-closing remediation liability associated with divested generation facilities. The 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. Helms Pumped Storage Plant (Helms): - ---------------------------------- Helms is a three-unit hydroelectric combined generating and pumped storage plant. At March 31, 1998, the Utility's net investment was $688 million. This net investment is comprised of the pumped storage facility (including regulatory assets of $48 million), common plant, and dedicated transmission plant. As part of the 1996 General Rate Case decision in December 1995, the CPUC directed the Utility to perform a cost-effectiveness study of Helms. In July 1996, the Utility submitted its study, which concluded that the continued operation of Helms is cost effective. The Utility recommended that the CPUC take no action and address Helms along with other generating plants in the context of electric industry restructuring. Under electric industry restructuring, the uneconomic, above-market portion of Helms is eligible for recovery as a transition cost. Ongoing operating costs of the facility are at risk for recovery through the newly restructured electric generation market. Because the CPUC has not specifically addressed the cost-effectiveness study, the Utility is currently unable to predict whether there will be further changes in rate recovery. The Corporation believes that the ultimate outcome of this matter will not have a material impact on its or the Utility's financial position or results of operations. The Corporation has also informed the CPUC that it does not intend to retain Helms as part of the Utility. See Generation Divestiture above. Stock Repurchase Program: - ------------------------- In January 1998, the Corporation repurchased in a specific transaction 37 million shares of PG&E Corporation common stock at $30.3125 per share. In connection with this transaction, the Corporation has entered into a forward contract with an investment institution. The Corporation will retain the risk of increases and the benefit of decreases in the price of the common shares purchased through the forward contract. This obligation will not be terminated until the investment institution has replaced the shares sold to the Corporation through purchases on the open market or through privately negotiated transactions. The contract is anticipated to expire by December 31, 1998. This additional obligation may be settled in either shares of stock or cash and is not expected to have a material impact on the Corporation's financial position or results of operations. Legal Matters: - -------------- Chromium Litigation: In 1994 through 1997, several civil suits were filed against the Utility on behalf of approximately 3,000 individuals. During the first quarter of 1998, claims on behalf of 240 of these individuals were dismissed, subject to possible appeal. The suits seek an unspecified amount of compensatory and punitive damages for alleged personal injuries and, in some cases, property damage, resulting from alleged exposure to chromium in the vicinity of the Utility's gas compressor stations at Hinkley, Kettleman, and Topock. 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. The Corporation believes that the ultimate outcome of this matter will not have a material 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 in July 1997, now known as PG&E Gas Transmission, Texas Corporation (GTT), GTT succeeded to the litigation described below. GTT and various of its affiliates are defendants in at least two class action suits and six separate suits filed by various Texas cities. The class action suits involve plaintiffs that serve as class representatives for classes consisting of every municipality in Texas (excluding certain cities which filed separate suits) in which any of the defendants engaged in business activities related to natural gas or natural gas liquids or sold or supplied gas or used public rights-of-way. Generally, these cities allege, among other things, that (1) the defendants that own or operate pipelines have occupied city property and conducted pipeline operations without the cities' consent and without compensating the cities, and (2) the defendants that are gas marketers have 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. The Corporation believes that the ultimate outcome of these matters will not have a material impact on its financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION San Francisco-based PG&E Corporation provides integrated energy services. PG&E Corporation's consolidated financial statements include the accounts of PG&E Corporation and its various business lines: - -Pacific Gas and Electric Company (Utility) - -Unregulated Business Operations consisting of: - Gas Transmission: through PG&E Gas Transmission - Electric Generation: through U.S. Generating Company (USGen) - Energy Commodities and Services: through PG&E Energy Trading and PG&E Energy Services Overview: - --------- This is a combined Quarterly Report on Form 10-Q of PG&E Corporation and Pacific Gas and Electric Company. Therefore, our Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition (MD&A) apply to both PG&E Corporation and the Utility. PG&E Corporation's consolidated financial statements include the accounts of PG&E Corporation and its wholly owned and controlled subsidiaries, including the Utility (collectively, the Corporation). Our Utility's consolidated financial statements include its accounts as well as those of its wholly owned and controlled subsidiaries. This MD&A should be read in conjunction with the consolidated financial statements included herein. Further, this quarterly report should be read in conjunction with the Corporation's and the Utility's Consolidated Financial Statements and Notes to Consolidated Financial Statements incorporated by reference in their combined 1997 Annual Report on Form 10-K. In this MD&A, we explain the results of operations for the three months ended March 31, 1998, as compared to the corresponding period in 1997 and discuss our financial condition. Our discussion of financial condition includes: - - changes in the energy industry and how we expect these changes to influence future results of operations, - - liquidity and capital resources, including discussions of capital financing activities, and uncertainties that could affect future results, and - - risk management activities. This Quarterly Report on Form 10-Q, including our discussion of results of operations and financial condition below, contains forward-looking statements that involve risks and uncertainties. Words such as "estimates," "expects," "anticipates," "plans," "believes," and similar expressions identify forward-looking statements involving risks and uncertainties. These risks and uncertainties include, but are not limited to, the ongoing restructuring of the electric and gas industries in California and nationally, the continued application of the regulatory framework established by the California Public Utilities Commission (CPUC) and state legislation, the outcome of the regulatory proceedings related to those restructurings, our Utility's ability to collect revenues sufficient to recover transition costs in accordance with its transition cost recovery plan, the planned sale of the electric Utility-owned fossil-fueled generating plants and the retention of the environmental remediation liability for these plants, as discussed in the Competition and the Changing Regulatory Environment section below. Risks and uncertainties also include the impact of our planned acquisition as discussed in the Acquisitions and Sales section below, the approval of our Utility's 1999 General Rate Case application resulting in the Utility's ability to earn its authorized rate of return as discussed in the Liquidity and Capital Resources section below, and our ability to successfully compete outside our traditional regulated markets. The ultimate impacts on future results of increased competition, the changing regulatory environment, our expansion into new businesses and markets, and the CPUC decision on the 1999 General Rate Case application are uncertain, but all are expected to fundamentally change how we conduct our business. The outcome of these changes and other matters discussed below may cause future results to differ materially from historic results, or from results or outcomes currently expected or sought by PG&E Corporation. RESULTS OF OPERATIONS In this section, we provide the components of our earnings for the three months ended March 31, 1998 and 1997. We then explain why operating revenues and expenses for 1998 and 1997 were different between the years. The following table shows our results of operations for the three months ended March 31, 1998 and 1997, and total assets at March 31, 1998 and 1997. The results of operations for PG&E Corporation on a stand-alone basis and intercompany eliminations have been shown as Corporate and Other. (in millions)
Unregulated Corporate Business and Utility Operations Other Total -------- ------------ --------- ------- For the three months ended March 31, 1998 Operating revenues $ 2,025 $ 2,341 $ (13) $ 4,353 Operating expenses 1,599 2,302 (13) 3,888 ------- ------- ------ ------- Operating income before income taxes 426 39 - 465 Income available for common stock 148 6 (15) 139 Total assets at March 31 $24,054 $ 6,555 $(1,273) $29,336 1997 Operating revenues $ 2,274 $ 1,104 $ (13) $ 3,365 Operating expenses 1,829 1,085 (13) 2,901 ------- ------- ------- ------- Operating income before income taxes 445 19 - 464 Income available for common stock 164 11 (2) 173 Total assets at March 31 $23,456 $ 3,357 $ (176) $26,637
Common Stock Dividend: - ---------------------- Our common stock dividend is based 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. The CPUC set a number of conditions when PG&E Corporation was formed as a holding company. One of these conditions requires our Utility to maintain, on average, its CPUC-authorized capital structure, potentially limiting the amount of dividends our Utility may pay PG&E Corporation. At March 31, 1998, our Utility was in compliance with its CPUC-authorized capital structure. We believe that our Utility will continue to meet this condition in the future without affecting our ability to pay common stock dividends to common shareholders. Earnings Per Common Share: - -------------------------- Earnings per common share for the three months ended March 31, 1998, decreased $.06 as compared to the same period in 1997. Earnings per common share were affected by the activity discussed below. Utility Results: - ---------------- Our Utility operating revenues for the three month period ended March 31, 1998, decreased $249 million as compared to the same period in 1997. Operating revenues declined because of the 10 percent electric rate reduction provided to residential and small commercial customers and due to changes in regulatory adjustment mechanisms resulting from electric industry restructuring. During the first quarter of 1998, the electric rate reduction decreased operating revenues by approximately $94 million. Electric rates for all our other customers have been held at 1996 levels. In connection with electric industry restructuring, our volumetric (ERAM) and energy cost (ECAC) revenue balancing accounts were terminated. Balancing account revenues related to ERAM and ECAC totaled approximately $166 million in the three month period ended March 31, 1997. The ERAM and ECAC balancing accounts have been replaced with regulatory adjustment mechanisms which impact expenses instead of revenues as discussed in Transition Cost Recovery, below. Utility operating expenses decreased $230 million for the three month period ended March 31, 1998, as compared to the same period in 1997. Operating expenses declined primarily as a result of lower gas prices and expense deferrals related to electric industry restructuring, which were partially offset by system reliability, storm response costs, and costs associated with a refueling and maintenance outage at Diablo Canyon Nuclear Power Plant (Diablo Canyon) from February 14, 1998 through March 28, 1998. As previously indicated, electric industry restructuring provides for recovery of certain costs in future periods. Some costs will be recovered as electric sales volumes increase during the summer months. Others relate to transition costs which will be recovered after the conclusion of the transition period. Utility operations contributed $16 million less to net income in the three month period ended March 31, 1998, than in the same period in 1997 primarily due to the lower authorized rate of return on equity of 6.77 percent applicable to all of our Utility-owned electric generation-related assets. Unregulated Business Results: - ----------------------------- Our unregulated business operations includes those business activities that are not directly regulated by the CPUC. Unregulated business operating revenues for the three month period ended March 31, 1998, increased $1.2 billion while operating expenses also increased $1.2 billion as compared to the same period in 1997, due to the acquisitions of Teco Pipeline Company in January 1997 and the natural gas operations of Valero Energy Corporation in July 1997, and due to operations associated with our energy commodities and services activities. Unregulated business operations contributed $5 million less in net income in the three month period ended March 31, 1998, than was contributed in the same period in 1997, primarily due to start up costs associated with the energy service business, which was partially offset by income generated from independent power projects managed by USGen. FINANCIAL CONDITION We begin this section by discussing the energy industry. We also discuss how we are responding to restructuring on a national level, including a planned acquisition. We then discuss liquidity and capital resources and our risk management activities. COMPETITION AND CHANGING REGULATORY ENVIRONMENT: Energy Industry: The Electric Business: On March 31, 1998, California became one of the first states in the country to allow open competition in the electric generation business. Today, Californians can choose who provides their electric generation power. Customers within our Utility's service territory can purchase electricity (1) from our Utility, (2) from retail electricity providers (for example, marketers including our energy service subsidiary, brokers, and aggregators), or (3) directly from unregulated power generators. Our Utility will continue to provide distribution services to substantially all electric consumers within its service territory. To create this competitive generation market, California has established a Power Exchange (PX) and an Independent Systems Operator (ISO). The PX is an open electric marketplace where electricity prices are set. The ISO oversees California's electric transmission grid making sure that all generators have comparable access. California utilities, while retaining ownership of utility transmission facilities, have relinquished operating control to the ISO. Starting March 31, 1998, the ISO schedules the delivery or regulatory "must-take" resources such as Qualifying Facilities (QFs) and Diablo Canyon. After scheduling must-take resources, the ISO satisfies the remaining aggregate demand from the PX. To meet the demand, the PX accepts the lowest bids from competing electric providers and establishes a market price. Customers choosing to buy power directly from non-regulated generators or retailers will pay for that generation based upon negotiated contracts. CPUC regulation requires our Utility to purchase all electric power for its retail customers from the PX or from must-take resources. And, excluding must-take resources, we must sell all of our Utility-generated electric power to the PX. In future periods, the Cost of Energy for Utility, reflected on the Statement of Consolidated Income, will be comprised of the cost of PX purchases and the cost of Utility generation net of sales to the PX. Generation revenues currently make up approximately 30 percent of our total Utility revenues. After the transition period, discussed below, generation revenues will be determined principally by an open electric commodity market. Over the past several years, we have been taking steps to prepare for competition in the electric generation business. We have been working with the CPUC to ensure a smooth transition into the competitive market environment. And, we have made strategic investments throughout the nation that will further position us as a national energy provider. The following sections discuss the transition plan. Electric Transition Plan: - ------------------------- In developing state legislation to implement a competitive market, it was anticipated that our Utility's market-based revenues would not be sufficient to recover (that is, to collect from customers) all generation costs resulting from past CPUC decisions. To recover these uneconomic costs, called transition costs, and to ensure a smooth transition to the competitive environment, our Utility in conjunction with other California electric utilities, the CPUC, state legislators, consumer advocates, and others, developed a transition plan, in the form of state legislation, to position California for the new market environment. There are three principal elements to this transition plan: (1) an electric rate freeze and rate reduction, (2) recovery of transition costs, and (3) economic divestiture of Utility-owned generation facilities. Each one of these three elements, and the impact of the transition plan on our Utility's customers are discussed below. The transition plan will remain in effect until the earlier of March 31, 2002, or when we have recovered our authorized transition costs as determined by the CPUC. This period is referred to as the transition period. At the conclusion of the transition period, we will be at risk to recover any of our Utility's remaining generation costs through market-based revenues. Rate Freeze and Rate Reduction: - ------------------------------- The first element of the transition plan is an electric rate freeze and an electric rate reduction. During 1997, electric rates for our Utility's customers were held at 1996 levels. Effective January 1, 1998, we reduced electric rates for our Utility's residential and small commercial customers by 10 percent and will hold their rates at that level. All other electric customers' rates remained frozen at 1996 levels. The rate freeze will continue until the end of the transition period. During the first quarter of 1998, the rate reduction reduced operating revenue by approximately $94 million. To pay for the 10 percent rate reduction, we financed $2.9 billion of our transition costs with rate reduction bonds. The bonds defer recovery of a portion of the transition costs until after the transition period. The transition costs associated with the rate reduction bonds are expected to be recovered over the term of the bonds. Transition Cost Recovery: - ------------------------- The second element of the transition plan is recovery of transition costs. Transition costs are costs which are unavoidable and which are not expected to be recovered through market-based revenues. These costs include: (1) the above-market cost of Utility-owned generation facilities, (2) costs associated with the Utility's 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.) The costs of Utility-owned generation facilities are currently included in our Utility customers' rates. Above-market facility costs are those facilities whose values recorded on our balance sheet (book value) are expected to be in excess of their market values. Conversely, below-market facility costs are those whose market values are expected to be in excess of their book values. In general, the total amount of generation facility costs to be included as transition costs will be 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. A valuation of a Utility-owned generation facility where the market value exceeds the book value could result in a material charge if the valuation of the facility is determined based upon any method other than a sale of the facility to a third party. This is because any excess of market value over book value would be used to reduce other transition costs without being collected in rates. We will not be able to determine the exact amount of generation facility costs that will be recoverable as transition costs until a market valuation process (appraisal, spin, or sale) is completed for each of our Utility's generation facilities. This market valuation process is expected to occur prior to the conclusion of the transition period. The first of these valuations occurred in 1997 when we agreed to sell three Utility-owned electric generation plants for $501 million. The sale is scheduled to close during 1998 (See Generation Divestiture, below). At March 31, 1998, our Utility's net investment in Diablo Canyon and Utility-owned non-nuclear generation facilities was $3.5 billion and $2.6 billion, respectively, including the plants to be sold in 1998. Costs associated with the Utility's long-term contracts to purchase power at above-market prices from QFs and other power suppliers are also eligible to be recovered as transition costs. Our Utility has agreed to purchase electric power from these suppliers under long-term contracts expiring on various dates through 2028. Over the life of these contracts, the Utility estimates that it will purchase approximately 360 million megawatt-hours at an aggregate average price of 6.3 cents per kilowatt-hour. To the extent that this price is above the market price, our Utility expects to collect the difference between the contract price and the market price from customers, as a transition cost, over the term of the contract. Generation-related regulatory assets, net of regulatory obligations, are also eligible for transition cost recovery. As of March 31, 1998, we have accumulated approximately $1.8 billion of these assets net of obligations. Under the transition plan, most transition costs must be recovered by March 31, 2002. This recovery period is significantly shorter than the recovery period of the related assets prior to restructuring. Effective January 1, 1998, in accordance with the transition plan, the Utility is recording depreciation of certain generating plants determined to be uneconomic in proceedings before the CPUC and amortization of most generation related regulatory assets over the transition period. The CPUC believes that the shortened recovery period reduces risks associated with recovery of all the Utility's generation assets, including Diablo Canyon and hydroelectric facilities. Accordingly, we are receiving a reduced return for all of our Utility-owned generation facilities. In 1998, the reduced return on common equity is 6.77 percent. Although most transition costs must be recovered by March 31, 2002, certain transition costs can be included in customers' electric rates after the transition period. These costs include: (1) certain employee-related transition costs, (2) above-market payments under existing QF and power- purchase contracts discussed above, and (3) unrecovered electric industry restructuring implementation costs. In addition, transition costs financed by the issuance of rate reduction bonds are expected to be recovered over the term of the bonds. Further, the Utility's nuclear decommissioning costs are being recovered through a CPUC-authorized charge, which will extend until sufficient funds exist to decommission the facility. During the rate freeze, this charge will not increase the Utility customers' electric rates. Excluding these exceptions, the Utility will write-off any transition costs not recovered during the transition period. The CPUC has the ultimate authority to determine the recoverable amount transition costs. Reviews by the CPUC to determine the reasonableness of transition costs are being conducted and will continue to be conducted throughout the transition period. In addition, the CPUC is conducting a financial verification audit of the Utility's Diablo Canyon accounts at December 31, 1996. Diablo Canyon accounts include sunk costs at December 31, 1996 of $3.3 billion which reflects total construction costs of $7.1 billion. (Sunk costs are costs associated with Utility-owned generating facilities that are fixed and unavoidable and currently included in the Utility customers' electric rates.) The CPUC will hold a proceeding to review the results of the audit, including any proposed adjustments to the recovery of Diablo Canyon costs in rates, following the completion of the audit. Transition costs that are disallowed by the CPUC for collection from Utility customers will be written off and may result in a material charge. At this time, the amount of disallowance of transition costs, if any, cannot be predicted. Effective January 1, 1998, the Utility is collecting eligible transition costs through a CPUC-authorized nonbypassable charge. The amount of revenue collected for transition costs recovery is subject to seasonal fluctuations in the Utility's sales volumes. The first quarter amortization and depreciation of transition costs exceeded revenue associated with transition costs recovery by $322 million. In accordance with CPUC rate treatment of transition costs, the Utility deferred this excess. Our Utility's ability to recover its transition costs during the transition period will be dependent on several factors. These factors include: (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 market value of our Utility-owned generation facilities, (4) future Utility sales levels, (5) future Utility fuel and operating costs, (6) the extent to which our Utility's authorized revenues to recover distribution costs are increased or decreased, and (7) the market price of electricity. Given our current evaluation of these factors, we believe that we will recover our transition costs. Also, we believe that our regulatory assets and Utility-owned generation facilities are not impaired. 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. Generation Divestiture: - ----------------------- The third element of the transition plan is the economic divestiture of Utility-owned generation facilities. To alleviate market power concerns of the CPUC, we have agreed to sell our fossil-fueled generation facilities. In 1997, we agreed to sell three electric Utility-owned fossil-fueled generating plants to Duke Energy Power Services, Inc. (Duke) through a competitive auction process. The aggregate bid accepted for these plants was $501 million. These three fossil-fueled plants have a combined book value at March 31, 1998, of approximately $370 million and a combined capacity of 2,645 megawatts (MW). The three power plants are located at Morro Bay, Moss Landing, and Oakland. The sales have been approved by the CPUC. However, they are still subject to various regulatory approvals, including the approval of the transfer of various permits and licenses, and Federal Energy Regulatory Commission's (FERC) acceptance for filing of Duke's requested regulatory treatment. Additionally, the Utility will retain liability for required environmental remediation of any pre-closing soil or groundwater contamination at these plants. Although we are retaining such environmental remediation liability, we do not expect any material impact on the Utility's or our financial position or results of operations. The sale of these three plants is scheduled to close in 1998. We began an auction of four of our remaining Utility-owned fossil-fueled plants and our Utility-owned geothermal facilities in April 1998. These additional plants have a combined generating capacity of 4,718 MW and a combined book value at March 31, 1998, of approximately $720 million. We have also informed the CPUC that we do not intend to retain our remaining 2,672 MW of Utility-owned fossil-fueled and hydroelectric facilities as part of the Utility. These remaining facilities have a combined book value at March 31, 1998, of approximately $1.7 billion. Our Utility expects to announce a plan for the disposition of the facilities by the third quarter of 1998. As previously mentioned, any plan for disposition of assets other than through sale to a third party could result in a material charge to the extent that the market value, as determined by the CPUC, is in excess of book value. During the transition period, the proceeds from the sale of our Utility- owned fossil-fueled and geothermal plants will be used to offset other transition costs. As a result, we do not believe the sales will have a material impact on our results of operations. However, a material charge may occur if the fair values of generation facilities, which are disposed by the Utility but retained by the Corporation, are determined to be in excess of the facilities' book values. This is because the excess would be used to reduce other transition costs without being collected in rates. Customer Impacts of Transition Plan: - ------------------------------------ Effective March 31, 1998, all Californians may choose their electric commodity provider. As of March 31, 1998, our Utility had accepted approximately 30,000 requests to switch their electric commodity supplier from the Utility to another electric commodity provider. Regardless of the customer's choice of electric commodity provider, during the transition period, all customers will be billed for electricity used, for transmission and distribution services, for public purpose programs, and for recovery of transition costs. Customers who choose to purchase their electricity from non-Utility energy providers will see a change in their total bill only to the extent that their contracted electric commodity price differs from the PX price. Transition costs are being recovered from all Utility distribution customers through a nonbypassable charge regardless of their choice in commodity provider. We do not believe that the availability of choice to our customers will have a material impact on our ability to recover transition costs. In addition to supplying commodity electric power, commodity electric providers can choose the method of billing their customers and whether to provide their customers with metering services. We are tracking cost savings that result when billing, metering, and related services within our Utility's service territory are provided by another entity. Once these cost savings, or credits, are approved by the CPUC and the customer's energy provider is performing billing and metering services, we will reduce the customer's bill by the savings. The electric provider will then charge their customers for these services. To the extent that these credits equate to our actual cost savings from reduced billing, metering, and related services, we do not expect a material impact on the Utility's or our financial condition or results of operations. Voter Initiative: - ----------------- Various consumer groups filed a voter initiative with the California Attorney General which would (1) require the Utility to provide an additional 10 percent rate reduction to its residential and small commercial customers; (2) eliminate transition cost recovery for nuclear investments (other than reasonable decommissioning costs); (3) restrict transition cost recovery for non-nuclear investments (other than costs associated with QFs), unless the CPUC finds that the Utility would be deprived of the opportunity to earn a fair rate of return; and (4) prohibit the collection of any customer charges for rate reduction bonds, or alternatively, require the Utility to offset such charges with an equal credit to customers. If the sponsors of the initiative obtain sufficient signatures to qualify the initiative for the November 1998, statewide ballot, and if the initiative were voted into law, a material charge would result to the extent that regulated rates would no longer be adequate to recover transition costs. In this event, we expect that legal challenges by the Utility and others would ensue. The Gas Business: In March 1998, our Utility implemented the Gas Accord Settlement (Accord). The Accord is an agreement with a broad coalition of customer groups and industry participants that has restructured our Utility's natural gas business. Upon implementation, our Utility's gas business experienced five key changes: 1. The Accord separated (or unbundled) our Utility's gas transmission and storage services from its distribution services. 2. The Accord increased the opportunity for our Utility's residential and small commercial (core)customers to purchase gas from competing suppliers. 3. The Accord established a new method, based on market indices, to measure the reasonableness of our Utility's gas purchases to serve its core customers. 4. The Accord established gas transmission and storage rates for the period from March 1998 through December 2002. 5. The Accord eliminated regulatory protection for transmission revenues from our Utility's industrial and large commercial (noncore) customers. As a result, we are subject to an increased risk for variations in revenues arising from fluctuations in noncore transmission throughput. These differences were previously deferred in balancing accounts. We do not however expect these variations to have a material impact on the Utility's or the Corporation's financial position or results of operations. In January 1998, the CPUC opened a rule-making proceeding to further expand market-oriented policies in California's gas industry. Policies under consideration include the additional unbundling of services, streamlining regulation for noncompetitive services, mitigating the potential for anti-competitive behavior, and establishing appropriate consumer protections. The CPUC is currently studying various new alternative market structures with the goal of encouraging competition and customer choice, while maintaining a high standard of consumer protection. At this point, we cannot predict the outcome of these proceedings and their impact on our financial position and results of operations. ACQUISITIONS AND SALES: In 1997, PG&E Corporation announced that it had agreed to acquire, through its subsidiary USGen, a portfolio of electric generating assets and power supply contracts from the New England Electric System (NEES) for $1.59 billion, plus $85 million for early retirement and severance costs previously committed to by NEES. Including fuel and other inventories and transaction costs, financing requirements are expected to total approximately $1.75 billion, of which approximately $1.25 billion will be funded through debt borrowed by USGen. In addition, approximately $500 million of equity will be contributed. The assets contain a balance of hydro, coal, oil, and natural gas generation facilities. The acquisition is subject to regulatory approvals. The acquisition is expected to be completed in the second half of 1998. In addition, as discussed above in Generation Divestiture, as part of electric industry restructuring, our Utility has informed the CPUC that it does not intend to retain any of its non-nuclear generation facilities. YEAR 2000 COMPLIANCE In 1995, we began and presently continue to review and assess our computer and information systems in anticipation of Year 2000 issues. The Year 2000 issue exists because many software products use only two digits to identify a year in the date field and were developed without considering the impact of the upcoming change in the century. Some of these software products are critical to our operations and business processes and might fail or function incorrectly if not repaired or replaced with Year 2000 compliant products. In addition, many electronic monitoring and control systems have two-digit date coding embedded within their circuitry and may also be susceptible to failure or incorrect operation unless corrected or replaced with Year 2000 compliant products. PG&E Corporation expects to complete critical software modifications by the end of 1998 and to complete validation of these systems in 1999. We are compiling an inventory of all systems with embedded electronic components and assessing the degree of Year 2000 compliance. During 1999, we also expect to have completed validation of all critical vendor-supplied embedded electronic systems or replacement of those systems found not to be Year 2000 compliant. Our various lines of business are also dependent upon external parties including customers, suppliers, business partners, government agencies, and financial institutions for the reliable delivery of our products and services. To the extent that any of these parties experience Year 2000 problems in their systems, our service reliability may be adversely affected. We plan to assess the degree to which each of these external parties has adequate plans to address Year 2000 problems in its systems. If judged necessary and if possible, we will develop contingency plans to reduce the risk of material impacts on our operations through external Year 2000 problems. We believe our plans of action are adequate to secure Year 2000 compliance of our critical systems and to reduce the risk of external impacts to our operations. Therefore, we do not currently anticipate any material impact on the Utility's or PG&E Corporation's financial position or results of operations as a result of the Year 2000 issue. Nevertheless, achieving Year 2000 compliance is subject to the risks and uncertainties described above. If our internal systems, or the internal systems of external parties, fail to achieve Year 2000 compliance, business or results of operations of the Utility or PG&E Corporation could be adversely affected. LIQUIDITY AND CAPITAL RESOURCES: Sources of Capital: - ------------------ The Corporation's capital requirements are funded from cash provided by operations and, to the extent necessary, external financing. The Corporation's policy is to finance its assets 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 the Corporation's capital requirements, the Corporation may repurchase equity and long-term debt in order to manage the overall balance of its capital structure. During the three months ended March 31, 1998, PG&E Corporation issued $18 million of common stock, generally through the Dividend Reinvestment Plan and the Stock Option Plan. Also during the three months ended March 31, 1998, PG&E Corporation paid dividends of $126 million and declared dividends of $114 million. The Utility paid dividends of $115 million and declared dividends of $100 million to PG&E Corporation during the three months ended March 31, 1998. The Utility began a program of buying back its stock from PG&E Corporation in the first quarter of 1998. As of December 31, 1997, the Board of Directors had authorized us to repurchase up to $1.7 billion of our common stock on the open market or in negotiated transactions. As part of this authorization, in January 1998, the Corporation repurchased in a specific transaction 37 million shares of common stock at $30.3125 per share. In connection with this transaction, the Corporation has entered into a forward contract with an investment institution. The Corporation will retain the risk of increases and the benefit of decreases in the price of the common shares purchased through the forward contract. This obligation will not be terminated until the investment institution has replaced the shares sold to the Corporation through purchases on the open market or through privately negotiated transactions. The contract is anticipated to expire by December 31, 1998. This additional obligation may be settled in either shares of stock or cash and is not expected to have a material impact on the Corporation's financial position or results of operations. The Corporation maintains a $500 million revolving credit facility, and in August 1997, we entered into an additional $500 million temporary credit facility. Both of these credit facilities are to be used for general corporate purposes. There were no borrowings under the credit facilities at March 31, 1998. At March 31, 1998, the Corporation, primarily through an unregulated business subsidiary, had $135 million of outstanding short-term bank borrowings related to separate short-term credit facilities. The borrowings are unrestricted as to use. The carrying amount of short-term borrowings approximates fair value. In April 1998, the Utility repurchased $800 million of its common stock from PG&E Corporation with proceeds from the rate reduction bonds issued in December 1997, to reduce equity. The Utility's long-term debt matured, redeemed, or repurchased during the three months ended March 31, 1998, amounted to $357 million. Of this amount, $249 million related to the Utility's redemption of its 8 percent mortgage bonds due October 1, 2025, and $94 million related to Utility's repurchase of its other mortgage bonds. The remaining $14 million related primarily to the scheduled maturity of long-term debt. In January 1998, the Utility redeemed its Series 7.44 percent preferred stock with a face value of $65 million. 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 mutual agreement between the Utility and the banks. There were no borrowings under this credit facility at March 31, 1998. The table below provides information on PG&E Corporation's debt obligations at March 31, 1998: Expected Maturity Date 1998 1999 2000 2001 2002 Thereafter Total(1) - ---------------------- ---- ---- ---- ---- ---- ---------- ------- Long-term debt Fixed rate $566 $294 $460 $330 $515 $4,597 $6,762 Average interest rate 5.8% 6.3% 6.0% 7.8% 7.7% 7.2% 6.9% Variable rate - - - - - $1,348 $1,348 Rate reduction bonds $106 $265 $280 $300 $290 $1,641 $2,882 Average interest rate 5.9% 6.0% 6.2% 6.2% 6.3% 6.4% 6.3% (1) The fair value of the long-term debt and rate reduction bonds is the same as the book value. Utility Cost of Capital: - ------------------------ The CPUC authorized a return on rate base for the Utility's gas and electric distribution assets for 1998 of 9.17 percent. The authorized 1998 cost of common equity is 11.20 percent which is lower than the 11.60 percent authorized for 1997. On May 8, 1998, the Utility filed its Cost of Capital Application with the CPUC. The filing requests a return on common equity of 12.1 percent and an overall return on rate base of 9.53 percent for its gas and electric distribution operations. The Utility did not request a change in its currently authorized capital structure of 46.2 percent debt, 5.8 percent preferred equity and 48 percent common equity. A final CPUC decision is expected in December 1998, to be effective January 1, 1999. The Utility did not request a 1999 rate of return for its gas transmission, storage, or gas gathering operations because the CPUC has approved the Gas Accord which sets the rates and revenue requirements for these lines of business until 2002. Also, no request was included for electric transmission operations since under direct access the transmission network is regulated by the FERC. As discussed above, in Transition Cost Recovery, the CPUC separately reduced the authorized return on common equity on our Utility's hydroelectric and geothermal generation assets to 6.77 percent, or 90 percent of the Utility's 1997 adopted cost of debt. The Utility believes that this reduction is inappropriate and has sought a rehearing of this decision. The Utility will file a separate application if the rehearing request is granted. 1999 General Rate Case (GRC): - ----------------------------- In December 1997, we filed our 1999 GRC application with the CPUC. During the GRC process, the CPUC examines our Utility's non-fuel related costs to determine the amount we can charge customers. In our application, we requested an increase in our Utility's authorized revenues, effective January 1, 1999. The requested increase, as updated in April 1998, consists of an increase of $572 million in electric utility revenues and an increase of $460 million in gas utility revenues over authorized 1998 revenues. In April 1998, a CPUC commissioner issued a ruling which delays the projected date for a final CPUC decision in the GRC until January 1999, with a proposed decision scheduled to be issued in December 1998. This schedule delays the proceedings by approximately one month compared to previous expectations. The revised schedule reflects the desire by intervenor parties, including the CPUC's Office of Ratepayer Advocates, for more time to prepare analysis and testimony. To accommodate the delayed schedule, the ruling permits us to submit a plan for establishing interim rates, effective on January 1, 1999, to cover the period between that date and the date a final CPUC decision is issued. A decision on interim rates is scheduled to be issued in November 1998. The 1999 GRC will not affect the authorized revenues for electric and gas transmission services or for gas storage services. The authorized revenues for each of these services are determined in other proceedings. Utility electric transmission revenues are authorized by the FERC. In March 1998, we filed an application with the FERC requesting 1998 Utility electric retail transmission revenues of $331 million. The requested revenue is consistent with Utility electric transmission revenues in CPUC- authorized 1997 electric rates. In the application, we requested to place the new rates in effect, subject to refund, on March 31, 1998, consistent with the ISO and PX operational date. The new rates will supersede the previously requested revenues of $305 million currently in effect, subject to refund. Also, revenues associated with gas transmission and storage services were authorized as part of the Gas Accord. See the Gas Business section, above, for a discussion of the Gas Accord. Environmental Matters: - --------------------- We are subject to laws and regulations established to both improve and maintain the quality of the environment. Where our properties contain hazardous substances, these laws and regulations require us to remove or remedy the effect on the environment. At March 31, 1998, the Utility expects to spend $246 million for clean-up costs at identified sites over the next 30 years. If other responsible parties fail to pay or identified outcomes change, then these costs may be as much as $420 million. Of the $246 million, the Utility has recovered $68 million and expects to recover $153 million in future rates. Additionally, the Utility is seeking recovery of its costs from insurance carriers and from other third parties. Further, as discussed above, the Utility will retain the pre-closing remediation liability associated with divested generation facilities. (See Note 4 of Notes to Consolidated Financial Statements.) Legal Matters: - -------------- In the normal course of business, both the Utility and the Corporation are named as parties in a number of claims and lawsuits. Substantially all of these have been litigated or settled with no material impact on the Utility's or the Corporation's results of operations or financial position. See Part II, Item 1, Legal Proceedings and Note 4 to the Consolidated Financial Statements for further discussion of significant pending legal matters. Risk Management Activities: - --------------------------- In the first quarter of 1998, the CPUC granted approval for the Utility to use financial instruments to manage price volatility of gas purchased for our Utility electric generation portfolio. The approval limits the Utility's outstanding financial instruments to $200 million, with downward adjustments occurring as fossil-fueled generation plants are divested (See Generation Divestiture, above). Authority to use these risk management instruments ceases upon the full divestiture of fossil-fueled generation plants or at the end of the current electric rate freeze (See Rate Freeze and Rate Reduction, above), whichever comes first. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information concerning PG&E Corporation's and Pacific Gas and Electric Company's market risk is included in the table providing information about debt obligations in the above section Sources of Capital, and also in the above section Risk Management Activities. PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ----------------- A. Compressor Station Chromium Litigation As previously disclosed in PG&E Corporation's and Pacific Gas and Electric Company's Form 10-K for the fiscal year ended December 31, 1997, claims against Pacific Gas and Electric Company on behalf of approximately 2,800 plaintiffs were pending in eight civil actions filed in California courts (known collectively as the "Aguayo Litigation"). Two of these actions also name PG&E Corporation as a defendant; Little and Mustafa v Pacific Gas and Electric Company and PG&E Corporation, and Whipple, et al v. Pacific Gas and Electric Company and PG&E Corporation, both pending in San Bernardino Superior Court. Plaintiffs in both actions have agreed to dismiss PG&E Corporation as a defendant. Each of the complaints in the Aguayo Litigation, except Little and Mustafa v. Pacific Gas and Electric Company, 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 Pacific Gas and Electric Company's gas compressor stations located in Hinkley, Kettleman and Topock, California. The plaintiffs in the Aguayo Litigation include current and former Pacific Gas and Electric Company employees, residents in the vicinity of the compressor stations, and persons who visited the compressor stations, alleging exposure to chromium at or near the compressor stations. The plaintiffs also include spouses of these plaintiffs who claim loss of consortium or children of these plaintiffs who claim injury through the alleged exposure of their parents. On March 30, 1998, a Los Angeles Superior Court judge dismissed the claims of 240 plaintiffs in Aguayo v. Pacific Gas and Electric Company who were neither personally exposed to chromium nor yet conceived at the time of their parents' alleged exposure. The judge found that current California law precludes these types of preconception claims. It is expected that plaintiffs will appeal this ruling. The Corporation believes the ultimate outcome of the Aguayo Litigation will not have a material adverse impact on its or Pacific Gas and Electric Company's financial position or results of operation. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- PG&E Corporation: On April 15, 1998, PG&E Corporation held its annual meeting of shareholders. At that meeting, the following matters were voted as indicated: 1. Election of the following directors to serve until the next annual meeting of shareholders or until their successors shall be elected and qualified: For Withheld ---------- ---------- Richard A. Clarke 277,313,530 6,999,929 Harry M. Conger 278,179,795 6,133,664 David A. Coulter 275,721,980 8,591,479 Lee Cox 278,165,313 6,148,146 William S. Davila 278,194,826 6,118,633 Robert D. Glynn, Jr. 278,236,860 6,076,599 David M. Lawrence, MD 277,866,616 6,446,843 Richard B. Madden 278,145,725 6,167,734 Mary S. Metz 278,089,765 6,223,694 Rebecca Q. Morgan 275,597,117 8,716,342 Carl E. Reichardt 277,990,791 6,322,668 John C. Sawhill 278,166,923 6,146,536 Alan Seelenfreund 278,142,639 6,170,820 Barry Lawson Williams 278,077,940 6,235,519 2. Ratification of the appointment of Arthur Andersen LLP as independent public accountants for the year 1998: For: 279,482,833 Against: 2,005,818 Abstain: 2,824,808 The proposal was approved by a majority of the shares present and voting (including abstentions) which shares voting affirmatively also constituted a majority of the required quorum. Each of the shareholder proposals listed below was defeated as the number of shares voting affirmatively on each proposal constituted less than a majority of the shares voting and present (including abstentions) with respect to each proposal. 3. Consideration of a shareholder proposal to appoint independent directors to key Board committees: For: 72,457,935 Against: 158,238,439 Abstain: 9,002,693 Broker non-votes:(1) 44,614,392 4. Consideration of a shareholder proposal regarding super majority voting: For: 96,676,182 Against: 134,458,016 Abstain: 8,564,869 Broker non-votes:(1) 44,614,392 5. Consideration of a shareholder proposal regarding cumulative voting: For: 60,562,835 Against: 165,694,235 Abstain: 13,441,997 Broker non-votes:(1) 44,614,392 - -------------------- (1) A non-vote occurs when a broker or other nominee holding shares for a beneficial owner votes on one proposal, but does not vote on another proposal because the broker or other nominee does not have discretionary voting power and has not received instructions from the beneficial owner. 6. Consideration of a shareholder proposal regarding director compensation: For: 20,512,623 Against: 208,057,428 Abstain: 11,129,016 Broker non-votes:(1) 44,614,392 Pacific Gas and Electric Company: On April 15, 1998, Pacific Gas and Electric Company held its annual meeting of shareholders. Shares of capital stock of Pacific Gas and Electric Company consist of shares of common stock and shares of first preferred stock. PG&E Corporation, as owner of all of the 409,120,387 outstanding shares of common stock, holds approximately 95% of the combined voting power of the outstanding capital stock of Pacific Gas and Electric Company. PG&E Corporation voted all of its shares of common stock for the nominees named in the joint proxy statement, for the ratification of the appointment of Arthur Andersen LLP as independent public accountants for the year 1998, and for the management proposal to decrease the minimum number of directors. The balance of the votes shown below were cast by holders of shares of first preferred stock. At the annual meeting, the following matters were voted as indicated: 1. Election of the following directors to serve until the next annual meeting of shareholders or until their successors shall be elected and qualified: For Withheld ----------- ----------- Richard A. Clarke 423,365,574 269,854 Harry M. Conger 423,368,303 267,125 David A. Coulter 423,366,425 269,003 C. Lee Cox 423,370,269 265,159 William S. Davila 423,372,395 263,033 Robert D. Glynn, Jr. 423,374,990 260,438 David M. Lawrence, MD 423,366,246 269,182 Richard B. Madden 423,370,055 265,373 Mary S. Metz 423,361,953 273,475 Rebecca Q. Morgan 423,358,458 276,970 Carl E. Reichardt 423,362,050 273,378 John C. Sawhill 423,360,841 274,587 Alan Seelenfreund 423,365,942 269,486 Gordon R. Smith 423,374,019 261,409 Barry Lawson Williams 423,362,357 273,071 2. Ratification of the appointment of Arthur Andersen LLP as independent public accountants for the year 1998: For: 423,229,793 Against: 138,185 Abstain: 267,450 - -------------------- (1) A non-vote occurs when a broker or other nominee holding shares for a beneficial owner votes on one proposal, but does not vote on another proposal because the broker or other nominee does not have discretionary voting power and has not received instructions from the beneficial owner. 3. Management proposal regarding decrease in the minimum number of directors (Item 7 in the joint proxy statement): For: 423,002,572 Against: 249,621 Abstain: 383,235 Item 5. Other Information ----------------- A. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Pacific Gas and Electric Company's earnings to fixed charges ratio for the three months ended March 31, 1998 was 2.66. Pacific Gas and Electric Company's earnings to combined fixed charges and preferred stock dividends ratio for the three months ended March 31, 1998 was 2.50. 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 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: Exhibit 3.1 Restated Articles of Incorporation of Pacific Gas and Electric Company effective as of May 6, 1998 Exhibit 3.2 Bylaws of Pacific Gas and Electric Company, dated May 6, 1998 Exhibit 10.1 PG&E Corporation Director Grantor Trust Agreement dated April 1, 1998 Exhibit 10.2 PG&E Corporation Officer Grantor Trust Agreement dated April 1, 1998 Exhibit 11 Computation of Earnings Per Common Share Exhibit 12.1 Computation of Ratios of Earnings to Fixed Charges for Pacific Gas and Electric Company Exhibit 12.2 Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends for Pacific Gas and Electric Company Exhibit 27.1 Financial Data Schedule for the quarter ended March 31, 1998 for PG&E Corporation Exhibit 27.2 Financial Data Schedule for the quarter ended March 31, 1998 for Pacific Gas and Electric Company (b) Reports on Form 8-K during the first quarter of 1998 and through the date hereof (2): 1. January 22, 1998 (as amended by Form 8-K/A dated February 5, 1998) Item 5. Other Events A. Performance Incentive Plan - Year-to-date Financial Results B. 1997 Consolidated Earnings (unaudited) C. Accelerated Share Repurchase Program 2. April 16, 1998 Item 5. Other Events A. First Quarter 1998 Consolidated Earnings (unaudited) B. Pacific Gas and Electric Company's General Rate Case Proceeding - -------------------- (2) Unless otherwise noted, all Reports on Form 8-K were filed under both Commission File Number 1-12609 (PG&E Corporation) and Commission File Number 1-2348 (Pacific Gas and Electric Company) SIGNATURE Pursuant to the requirements 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. PG&E CORPORATION and PACIFIC GAS AND ELECTRIC COMPANY CHRISTOPHER P. JOHNS May 15, 1998 By______________________________ CHRISTOPHER P. JOHNS Controller (PG&E Corporation) Vice President and Controller (Pacific Gas and Electric Company) Exhibit Index Exhibit No. Description of Exhibit 3.1 Restated Articles of Incorporation of Pacific Gas and Electric Company effective as of May 6, 1998 3.2 Bylaws of Pacific Gas and Electric Company, dated May 6, 1998 10.1 PG&E Corporation Director Grantor Trust Agreement dated April 1, 1998 10.2 PG&E Corporation Officer Grantor Trust Agreement dated April 1, 1998 11 Computation of Earnings Per Common Share 12.1 Computation of Ratio of Earnings to Fixed Charges for Pacific Gas and Electric Company 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for Pacific Gas and Electric Company 27.1 Financial Data Schedule for the quarter ended March 31, 1998 for PG&E Corporation 27.2 Financial Data Schedule for the quarter ended March 31, 1998 for Pacific Gas and Electric Company PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ----------------- A. Compressor Station Chromium Litigation As previously disclosed in PG&E Corporation's and Pacific Gas and Electric Company's Form 10-K for the fiscal year ended December 31, 1997, claims against Pacific Gas and Electric Company on behalf of approximately 2,800 plaintiffs were pending in eight civil actions filed in California courts (known collectively as the "Aguayo Litigation"). Two of these actions also name PG&E Corporation as a defendant; Little and Mustafa v Pacific Gas and Electric Company and PG&E Corporation, and Whipple, et al v. Pacific Gas and Electric Company and PG&E Corporation, both pending in San Bernardino Superior Court. Plaintiffs in both actions have agreed to dismiss PG&E Corporation as a defendant. Each of the complaints in the Aguayo Litigation, except Little and Mustafa v. Pacific Gas and Electric Company, 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 Pacific Gas and Electric Company's gas compressor stations located in Hinkley, Kettleman and Topock, California. The plaintiffs in the Aguayo Litigation include current and former Pacific Gas and Electric Company employees, residents in the vicinity of the compressor stations, and persons who visited the compressor stations, alleging exposure to chromium at or near the compressor stations. The plaintiffs also include spouses of these plaintiffs who claim loss of consortium or children of these plaintiffs who claim injury through the alleged exposure of their parents. On March 30, 1998, a Los Angeles Superior Court judge dismissed the claims of 240 plaintiffs in Aguayo v. Pacific Gas and Electric Company who were neither personally exposed to chromium nor yet conceived at the time of their parents' alleged exposure. The judge found that current California law precludes these types of preconception claims. It is expected that plaintiffs will appeal this ruling. The Corporation believes the ultimate outcome of the Aguayo Litigation will not have a material adverse impact on its or Pacific Gas and Electric Company's financial position or results of operation. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- PG&E Corporation: On April 15, 1998, PG&E Corporation held its annual meeting of shareholders. At that meeting, the following matters were voted as indicated: 1. Election of the following directors to serve until the next annual meeting of shareholders or until their successors shall be elected and qualified: For Withheld ---------- ---------- Richard A. Clarke 277,313,530 6,999,929 Harry M. Conger 278,179,795 6,133,664 David A. Coulter 275,721,980 8,591,479 Lee Cox 278,165,313 6,148,146 William S. Davila 278,194,826 6,118,633 Robert D. Glynn, Jr. 278,236,860 6,076,599 David M. Lawrence, MD 277,866,616 6,446,843 Richard B. Madden 278,145,725 6,167,734 Mary S. Metz 278,089,765 6,223,694 Rebecca Q. Morgan 275,597,117 8,716,342 Carl E. Reichardt 277,990,791 6,322,668 John C. Sawhill 278,166,923 6,146,536 Alan Seelenfreund 278,142,639 6,170,820 Barry Lawson Williams 278,077,940 6,235,519 2. Ratification of the appointment of Arthur Andersen LLP as independent public accountants for the year 1998: For: 279,482,833 Against: 2,005,818 Abstain: 2,824,808 The proposal was approved by a majority of the shares present and voting (including abstentions) which shares voting affirmatively also constituted a majority of the required quorum. Each of the shareholder proposals listed below was defeated as the number of shares voting affirmatively on each proposal constituted less than a majority of the shares voting and present (including abstentions) with respect to each proposal. 3. Consideration of a shareholder proposal to appoint independent directors to key Board committees: For: 72,457,935 Against: 158,238,439 Abstain: 9,002,693 Broker non-votes:(1) 44,614,392 4. Consideration of a shareholder proposal regarding super majority voting: For: 96,676,182 Against: 134,458,016 Abstain: 8,564,869 Broker non-votes:(1) 44,614,392 5. Consideration of a shareholder proposal regarding cumulative voting: For: 60,562,835 Against: 165,694,235 Abstain: 13,441,997 Broker non-votes:(1) 44,614,392 - -------------------- (1) A non-vote occurs when a broker or other nominee holding shares for a beneficial owner votes on one proposal, but does not vote on another proposal because the broker or other nominee does not have discretionary voting power and has not received instructions from the beneficial owner. 6. Consideration of a shareholder proposal regarding director compensation: For: 20,512,623 Against: 208,057,428 Abstain: 11,129,016 Broker non-votes:(1) 44,614,392 Pacific Gas and Electric Company: On April 15, 1998, Pacific Gas and Electric Company held its annual meeting of shareholders. Shares of capital stock of Pacific Gas and Electric Company consist of shares of common stock and shares of first preferred stock. PG&E Corporation, as owner of all of the 409,120,387 outstanding shares of common stock, holds approximately 95% of the combined voting power of the outstanding capital stock of Pacific Gas and Electric Company. PG&E Corporation voted all of its shares of common stock for the nominees named in the joint proxy statement, for the ratification of the appointment of Arthur Andersen LLP as independent public accountants for the year 1998, and for the management proposal to decrease the minimum number of directors. The balance of the votes shown below were cast by holders of shares of first preferred stock. At the annual meeting, the following matters were voted as indicated: 1. Election of the following directors to serve until the next annual meeting of shareholders or until their successors shall be elected and qualified: For Withheld ----------- ----------- Richard A. Clarke 423,365,574 269,854 Harry M. Conger 423,368,303 267,125 David A. Coulter 423,366,425 269,003 C. Lee Cox 423,370,269 265,159 William S. Davila 423,372,395 263,033 Robert D. Glynn, Jr. 423,374,990 260,438 David M. Lawrence, MD 423,366,246 269,182 Richard B. Madden 423,370,055 265,373 Mary S. Metz 423,361,953 273,475 Rebecca Q. Morgan 423,358,458 276,970 Carl E. Reichardt 423,362,050 273,378 John C. Sawhill 423,360,841 274,587 Alan Seelenfreund 423,365,942 269,486 Gordon R. Smith 423,374,019 261,409 Barry Lawson Williams 423,362,357 273,071 2. Ratification of the appointment of Arthur Andersen LLP as independent public accountants for the year 1998: For: 423,229,793 Against: 138,185 Abstain: 267,450 - -------------------- (1) A non-vote occurs when a broker or other nominee holding shares for a beneficial owner votes on one proposal, but does not vote on another proposal because the broker or other nominee does not have discretionary voting power and has not received instructions from the beneficial owner. 3. Management proposal regarding decrease in the minimum number of directors (Item 7 in the joint proxy statement): For: 423,002,572 Against: 249,621 Abstain: 383,235 Item 5. Other Information ----------------- A. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Pacific Gas and Electric Company's earnings to fixed charges ratio for the three months ended March 31, 1998 was 2.66. Pacific Gas and Electric Company's earnings to combined fixed charges and preferred stock dividends ratio for the three months ended March 31, 1998 was 2.50. 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 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: Exhibit 3.1 Restated Articles of Incorporation of Pacific Gas and Electric Company effective as of May 6, 1998 Exhibit 3.2 Bylaws of Pacific Gas and Electric Company, dated May 6, 1998 Exhibit 10.1 PG&E Corporation Director Grantor Trust Agreement dated April 1, 1998 Exhibit 10.2 PG&E Corporation Officer Grantor Trust Agreement dated April 1, 1998 Exhibit 11 Computation of Earnings Per Common Share Exhibit 12.1 Computation of Ratios of Earnings to Fixed Charges for Pacific Gas and Electric Company Exhibit 12.2 Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends for Pacific Gas and Electric Company Exhibit 27.1 Financial Data Schedule for the quarter ended March 31, 1998 for PG&E Corporation Exhibit 27.2 Financial Data Schedule for the quarter ended March 31, 1998 for Pacific Gas and Electric Company (b) Reports on Form 8-K during the first quarter of 1998 and through the date hereof (2): 1. January 22, 1998 (as amended by Form 8-K/A dated February 5, 1998) Item 5. Other Events A. Performance Incentive Plan - Year-to-date Financial Results B. 1997 Consolidated Earnings (unaudited) C. Accelerated Share Repurchase Program 2. April 16, 1998 Item 5. Other Events A. First Quarter 1998 Consolidated Earnings (unaudited) B. Pacific Gas and Electric Company's General Rate Case Proceeding - -------------------- (2) Unless otherwise noted, all Reports on Form 8-K were filed under both Commission File Number 1-12609 (PG&E Corporation) and Commission File Number 1-2348 (Pacific Gas and Electric Company) SIGNATURE Pursuant to the requirements 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. PG&E CORPORATION and PACIFIC GAS AND ELECTRIC COMPANY CHRISTOPHER P. JOHNS May 15, 1998 By______________________________ CHRISTOPHER P. JOHNS Controller (PG&E Corporation) Vice President and Controller (Pacific Gas and Electric Company) Exhibit Index Exhibit No. Description of Exhibit 3.1 Restated Articles of Incorporation of Pacific Gas and Electric Company effective as of May 6, 1998 3.2 Bylaws of Pacific Gas and Electric Company, dated May 6, 1998 10.1 PG&E Corporation Director Grantor Trust Agreement dated April 1, 1998 10.2 PG&E Corporation Officer Grantor Trust Agreement dated April 1, 1998 11 Computation of Earnings Per Common Share 12.1 Computation of Ratio of Earnings to Fixed Charges for Pacific Gas and Electric Company 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for Pacific Gas and Electric Company 27.1 Financial Data Schedule for the quarter ended March 31, 1998 for PG&E Corporation 27.2 Financial Data Schedule for the quarter ended March 31, 1998 for Pacific Gas and Electric Company EX-3.1 2 RESTATED ARTICLES OF INCORPORATION OF PACIFIC GAS AND ELECTRIC COMPANY ROBERT D. GLYNN, JR. and LESLIE H. EVERETT certify that: 1. They are the Chairman of the Board, and the Vice President and Corporate Secretary, respectively, of Pacific Gas and Electric Company, a California corporation (the "Company"). 2. The Articles of Incorporation of the corporation, as amended to the date of the filing of this certificate, including the amendments set forth herein but not separately filed (and with the omissions required by Section 910 of the Corporations Code) are amended and restated as follows: FIRST: That the name of said corporation shall be PACIFIC GAS AND ELECTRIC COMPANY. SECOND: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. The right is reserved to this corporation to amend the whole or any part of these Articles of Incorporation in any respect not prohibited by law. THIRD: That this corporation shall have perpetual existence. FOURTH: The corporation elects to be governed by all of the provisions of the General Corporation Law (as added to the California Corporations Code effective January 1, 1977, and as subsequently amended) not otherwise applicable to this corporation under Chapter 23 of said General Corporation Law. FIFTH: The Board of Directors by a vote of two-thirds of the whole Board may appoint from the Directors an Executive Committee, which Committee may exercise such powers as may lawfully be conferred upon it by the Bylaws of the Corporation. Such Committee may prescribe rules for its own government and its meetings may be held at such places within or without California as said Committee may determine or authorize. SIXTH: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. SEVENTH: The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaws, resolutions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code. EIGHTH: The total number of shares which this corporation is authorized to issue is eight hundred eighty-five million (885,000,000) of the aggregate par value of six billion eight hundred seventy-five million dollars ($6,875,000,000). All of these shares shall have full voting rights. Said eight hundred eighty-five million (885,000,000) shares shall be divided into three classes, designated as common stock, first preferred stock and $100 first preferred stock. Eight hundred million (800,000,000) of said shares shall be common stock, of the par value of $5 per share, seventy-five million (75,000,000) of said shares shall be first preferred stock, of the par value of $25 per share, and ten million(10,000,000) of said shares shall be $100 first preferred stock, of the par value of $100 per share. FIRST PREFERRED STOCK AND $100 FIRST PREFERRED STOCK The first preferred stock and $100 first preferred stock each shall be divided into series. The first series of first preferred stock shall consist of four million two hundred eleven thousand six hundred sixty-two (4,211,662) shares and be designated as Six Per Cent First Preferred Stock. The second series of first preferred stock shall consist of one million one hundred seventy-three thousand one hundred sixty-three (1,173,163) shares and be designated as Five and One-Half Per Cent First Preferred Stock. The third series of first preferred stock shall consist of four hundred thousand (400,000) shares and be designated as Five Per Cent First Preferred Stock. The remainder of said first preferred stock, viz., 69,215,175 shares, and all of the $100 first preferred stock may be issued in one or more additional series, as determined from time to time by the Board of Directors. Except as provided herein, the Board of Directors is hereby authorized to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon the first preferred stock or $100 first preferred stock or any series thereof with respect to any wholly unissued series of first preferred stock or $100 first preferred stock, and to fix the number of shares of any series of first preferred stock or $100 first preferred stock and the designation of any such series of first preferred stock or $100 first preferred stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. The owners and holders of shares of said first preferred stock and $100 first preferred stock, when issued as fully paid, are and shall be entitled to receive, from the date of issue of such shares, out of funds legally available therefor, cumulative preferential dividends, when and as declared by the Board of Directors, at the following rates upon the par value of their respective shares, and not more, viz.: Six per cent (6%) per year upon Six Per Cent First Preferred Stock; five and one-half per cent (5-l/2%) per year upon Five and One-Half Per Cent First Preferred Stock; five per cent (5%) per year upon Five Per Cent First Preferred Stock; and upon the shares of each additional series of said first preferred stock and of each series of $100 first preferred stock the dividend rate fixed therefor; and such dividends on both classes of first preferred stock and $100 first preferred stock shall be declared and shall be either paid or set apart for payment before any dividend upon the shares of common stock shall be either declared or paid. Upon the liquidation or dissolution of this corporation at any time and in any manner, the owners and holders of shares of said first preferred stock and $100 first preferred stock issued as fully paid will be entitled to receive an amount equal to the par value of such shares plus an amount equal to all accumulated and unpaid dividends thereon to and including the date fixed for such distribution or payment before any amount shall be paid to the holders of said common stock. If any share or shares of first preferred stock and $100 first preferred stock shall at any time be issued as only partly paid, the owners and holders of such partly paid share or shares shall have the right to receive dividends and to share in the assets of this corporation upon its liquidation or dissolution in all respects like the owners and holders of fully paid shares of first preferred stock and $100 first preferred stock, except that such right shall be only in proportion to the amount paid on account of the subscription price for which such partly paid share or shares shall have been issued. The unissued shares of said first preferred stock and $100 first preferred stock may be offered for subscription or sale or in exchange for property and be issued from time to time upon such terms and conditions as said Board of Directors shall prescribe. The first three series of said first preferred stock, namely, the Six Per Cent First Preferred Stock, the Five and One-Half Per Cent First Preferred Stock, and the Five Per Cent First Preferred Stock, are not subject to redemption. Any or all shares of each series of said first preferred stock and $100 first preferred stock other than said first three series of first preferred stock may be redeemed at the option of this corporation, at any time or from time to time, at the redemption price fixed for such series together with accumulated and unpaid dividends at the rate fixed therefor to and including the date fixed for redemption. If less than all the outstanding shares of any such series are to be redeemed, the shares to be redeemed shall be determined pro rata or by lot in such manner as the Board of Directors may determine. Unless the certificate of determination for any series of the first preferred stock or the $100 first preferred stock shall otherwise provide, notice of every such redemption shall be published in a newspaper of general circulation in the City and County of San Francisco, State of California, and in a newspaper of general circulation in the Borough of Manhattan, City and State of New York, at least once in each of two (2) successive weeks, commencing not earlier than sixty (60) nor later than thirty (30) days before the date fixed for redemption; successive publications need not be made in the same newspaper. A copy of such notice shall be mailed within the same period of time to each holder of record, as of the record date, of the shares to be redeemed, but the failure to mail such notice to any shareholder shall not invalidate the redemption of such shares. From and after the date fixed for redemption, unless default be made by this corporation in paying the amount due upon redemption, dividends on the shares called for redemption shall cease to accrue, and such shares shall be deemed to be redeemed and shall be no longer outstanding, and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto except the right to receive from this corporation upon surrender of their certificates the amount payable upon redemption without interest. Or, if this corporation shall deposit, on or prior to the date fixed for redemption, with any bank or trust company in the City and County of San Francisco, having capital, surplus and undivided profits aggregating at least five million dollars ($5,000,000), as a trust fund, a sum sufficient to redeem the shares called for redemption, with irrevocable instructions and authority to such bank or trust company to publish or complete the publication of the notice of redemption (if this corporation shall not have theretofore completed publication of such notice), and to pay, on and after the date fixed for redemption, or on and after such earlier date as the Board of Directors may determine, the amount payable upon redemption of such shares, then from and after the date of such deposit (although prior to the date fixed for redemption) such shares shall be deemed to be redeemed; and dividends on such shares shall cease to accrue after the date fixed for redemption. The said deposit shall be deemed to constitute full payment of the shares to their respective holders and from and after the date of such deposit the shares shall be no longer outstanding, and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto except the right to receive from said bank or trust company the amount payable upon redemption of such shares, without interest, upon surrender of their certificates therefor, and except, also, any right which such shareholders may then have to exchange or convert such shares prior to the date fixed for redemption. Any part of the funds so deposited which shall not be required for redemption payments because of such exchange or conversion shall be repaid to this corporation forthwith. The balance, if any, of the funds so deposited which shall be unclaimed at the end of six (6) years from the date fixed for redemption shall be repaid to this corporation together with any interest which shall have been allowed thereon; and thereafter the unpaid holders of shares so called for redemption shall have no claim for payment except as against this corporation. All shares of the first preferred stock and $100 first preferred stock shall rank equally with regard to preference in dividend and liquidation rights, except that shares of different classes or different series thereof may differ as to the amounts of dividends or liquidation payments to which they are entitled, as herein set forth. COMMON STOCK When all accrued dividends upon all of the issued and outstanding shares of the first preferred stock and $100 first preferred stock of this corporation shall have been declared and shall have been paid or set apart for payment, but not before, dividends may be declared and paid, out of funds legally available therefor, upon all of the issued and outstanding shares of said common stock. Upon the liquidation or dissolution of this corporation, after the owners and holders of such first preferred stock and $100 first preferred stock shall have been paid the full amount to which they shall have been entitled under the provisions of these Articles of Incorporation, the owners and holders of such common stock shall be entitled to receive and to have paid to them the entire residue of the assets of this corporation in proportion to the number of shares of said common stock held by them respectively. If any share or shares of common stock shall at any time be issued as only partly paid, the owners and holders of such partly paid share or shares shall have the right to receive dividends and to share in the assets of this corporation upon its liquidation or dissolution in all respects like the owners and holders of fully paid shares of common stock, except that such right shall be only in proportion to the amount paid on account of the subscription price for which such partly paid share or shares shall have been issued. The unissued shares of said common stock may be offered for subscription or sale or in exchange for property and be issued from time to time upon such terms and conditions as said Board of Directors may prescribe. PROHIBITION AGAINST ASSESSMENTS Shares of such stock, whether first preferred, $100 first preferred stock or common stock, the subscription price of which shall have been paid in full, whether such price be par or more or less than par, shall be issued as fully paid shares and shall never be subject to any call or assessment for any purpose whatever. Shares of such stock, whether first preferred, $100 first preferred stock or common stock, a part only of the subscription price of which shall have been paid, shall be subject to calls for the unpaid balance of the subscription price thereof. But no call made on partly paid first preferred stock, partly paid $100 first preferred stock or partly paid common stock shall be recoverable by action or be enforceable otherwise than by sale or forfeiture of delinquent stock in accordance with the applicable provisions of the Corporations Code of California. If at any time, whether by virtue of any amendment of these Articles of Incorporation or any amendment or change of the law of the State of California relating to corporations or otherwise, any assessment shall, in any event whatever, be levied and collected on any subscribed and issued shares of said first preferred stock or $100 first preferred stock after the subscription price thereof shall have been paid in full, the rights of the owners and holders thereof to receive dividends and their rights to share in the assets upon the liquidation or dissolution of this corporation shall, immediately upon the payment of such assessment and by virtue thereof, be increased in the same ratio as the total amount of the assessment or assessments so levied and collected shall bear to the par value of such shares of first preferred stock or $100 first preferred stock. RESERVES The Board of Directors of this corporation shall, notwithstanding the foregoing provisions of these Articles of Incorporation, have authority from time to time to set aside, out of the profits arising from the business of this corporation, such reasonable sums as may in their judgment be necessary and proper for working capital and for usual reserves and surplus. NINTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 5% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of Preferences of the 5% Redeemable First Preferred Stock which is attached hereto as Exhibit 1 is hereby incorporated by reference as Article NINTH of these Articles of Incorporation. TENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 5% REDEEMABLE FIRST PREFERRED STOCK, SERIES A: The Certificate of Determination of Preferences of the 5% Redeemable First Preferred Stock, Series A, which is attached hereto as Exhibit 2 is hereby incorporated by reference as Article TENTH of these Articles of Incorporation. ELEVENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 4.80% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of Preferences of the 4.80% Redeemable First Preferred Stock which is attached hereto as Exhibit 3 is hereby incorporated by reference as Article ELEVENTH of these Articles of Incorporation. TWELFTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 4.50% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of Preferences of the 4.50% Redeemable First Preferred Stock which is attached hereto as Exhibit 4 is hereby incorporated by reference as Article TWELFTH of these Articles of Incorporation. THIRTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 4.36% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of Preferences of the 4.36% Redeemable First Preferred Stock which is attached hereto as Exhibit 5 is hereby incorporated by reference as Article THIRTEENTH of these Articles of Incorporation. FOURTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 6.57% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of Preferences of the 6.57% Redeemable First Preferred Stock which is attached hereto as Exhibit 6 is hereby incorporated by reference as Article FOURTEENTH of these Articles of Incorporation. FIFTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 7.04% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of Preferences of the 7.04% Redeemable First Preferred Stock which is attached hereto as Exhibit 7 is hereby incorporated by reference as Article FIFTEENTH of these Articles of Incorporation. SIXTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 6-7/8% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of Preferences of the 6-7/8% Redeemable First Preferred Stock which is attached hereto as Exhibit 8 is hereby incorporated by reference as Article SIXTEENTH of these Articles of Incorporation. SEVENTEENTH: CERTIFICATE OF DETERMINATION OF PREFERENCES OF THE 6.30% REDEEMABLE FIRST PREFERRED STOCK: The Certificate of Determination of Preferences of the 6.30% Redeemable First Preferred Stock which is attached hereto as Exhibit 9 is hereby incorporated by reference as Article SEVENTEENTH of these Articles of Incorporation. 3. The foregoing amendments and restatement of the Articles of Incorporation of this corporation have been duly approved by the Board of Directors. 4. The foregoing amendments and restatement of the Articles of Incorporation were adopted (i) to delete the first paragraph of Article Fifth, which previously required that the Board of Directors of this corporation consist of not less than fourteen nor more than seventeen directors; (ii) to eliminate Article Fourteenth, which previously set forth the Certificate of Determination of Preferences of the 7.44% Redeemable First Preferred Stock, to reflect the reduction in the authorized number of shares of that series to zero which occurred upon filing the Certificate of Decrease with respect to such series immediately preceding the filing of these Restated Articles, pursuant to California Corporations Code Section 401(c), and the elimination of that series as an authorized series of the corporation pursuant to California Corporations Code Section 401(f); and (iii) to renumber the remaining Articles to reflect the deletion of Article Fourteenth. 5. The amendment to Article Fifth to delete the first paragraph thereof regarding the authorized number of directors has been approved by the required vote of the corporation's shareholders in accordance with California Corporations Code Section 902. There were 409,120,387 shares of common stock, and 18,979,056 shares of first preferred stock, entitled to vote with respect to the amendment to Article Fifth. The number of shares of common stock and first preferred stock voting in favor of the amendment exceeded the vote required for approval. Approval of the amendment required the affirmative vote of the majority of the outstanding shares of common stock and first preferred stock voting together 6. Pursuant to California Corporations Code Sections 202(e)(3), 203.5(b), 401(c) and 401(f), amendments to the Articles of Incorporation for the purpose of eliminating the 7.44% Redeemable First Preferred Stock series need not be approved by the affirmative vote of the majority of the outstanding shares; accordingly, such amendments and restatement may be adopted with approval of the Board of Directors alone. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: April 30, 1998 ROBERT D. GLYNN, JR. --------------------- ROBERT D. GLYNN, JR. Chairman of the Board LESLIE H. EVERETT ---------------------- LESLIE H. EVERETT Vice President and Corporate Secretary EXHIBIT 1 PACIFIC GAS AND ELECTRIC COMPANY CERTIFICATE OF DETERMINATION OF PREFERENCES OF 5% REDEEMABLE FIRST PREFERRED STOCK WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 5% Redeemable First Preferred Stock, $25 par value (herein called the "5% Series"); and WHEREAS, this corporation has elected to redeem, purchase, or otherwise acquire 1,082,805 shares of the 5% Series from time to time; and WHEREAS, pursuant to California Corporations Code Section 401(c), this corporation filed a Certificate of Decrease in Number of Shares of Certain Series of First Preferred Stock on March 23, 1994, which amended the Articles of Incorporation to decrease the number of shares constituting the 5% Series from 2,860,977 to 1,778,172 shares; and WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the 1,082,805 shares constituting the decrease in the 5% Series resumed the status of authorized and unissued shares of First Preferred Stock, $25 par value; and WHEREAS, it is in the best interest of this corporation to restate the four existing Certificates of Determination of Preferences of the 5% Series to (i) reflect the reduction in the authorized number of shares of the 5% Series, (ii) consolidate such existing Certificates of Determination of Preferences into a single Certificate of Determination of Preferences of the 5% Series, and (iii) eliminate the portions of the officers' certificates and verifications which do not set forth any of the rights, preferences, privileges, or restrictions of the 5% Series NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificates of Determination of Preferences of the 5% Series is hereby approved; and BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences of the 5% Series is hereby approved and adopted as restated in its entirety as follows: 1,778,172 shares of this corporation's unissued redeemable First Preferred Stock shall constitute a series designated "5% Redeemable First Preferred Stock"; the dividend rate of such shares shall be five per cent per year; such shares shall have no conversion rights; and the redemption price of such shares shall be $28.25 per share if redeemed on or before July 31, 1953, $27.75 per share if redeemed thereafter and on or before July 31, 1958, $27.25 per share if redeemed thereafter and on or before July 31, 1963, and $26.75 per share if redeemed thereafter. EXHIBIT 2 PACIFIC GAS AND ELECTRIC COMPANY CERTIFICATE OF DETERMINATION OF PREFERENCES OF 5% REDEEMABLE FIRST PREFERRED STOCK, SERIES A WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 5% Redeemable First Preferred Stock, Series A, $25 par value (herein called the "5% Series A"); and WHEREAS, this corporation has elected to redeem, purchase, or otherwise acquire 815,678 shares of the 5% Series A from time to time; and WHEREAS, pursuant to California Corporations Code Section 401(c), this corporation filed a Certificate of Decrease in Number of Shares of Certain Series of First Preferred Stock on March 23, 1994, which amended the Articles of Incorporation to decrease the number of shares constituting the 5% Series A from 1,750,000 to 934,322 shares; and WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the 815,678 shares constituting the decrease in the 5% Series A resumed the status of authorized and unissued shares of First Preferred Stock, $25 par value; and WHEREAS, it is in the best interest of this corporation to restate the two existing Certificates of Determination of Preferences of the 5% Series A to (i) reflect the reduction in the authorized number of shares of the 5% Series A, (ii) consolidate such existing Certificates of Determination of Preferences into a single Certificate of Determination of Preferences of the 5% Series A, and (iii) eliminate the portions of the officers' certificates and verifications which do not set forth any of the rights, preferences, privileges, or restrictions of the 5% Series A. NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificates of Determination of Preferences of the 5% Series A is hereby approved; and BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences of the 5% Series A is hereby approved and adopted as restated in its entirety as follows: 934,322 shares of this corporation's unissued redeemable First Preferred Stock shall constitute a series designated "5% Redeemable First Preferred Stock, Series A"; the dividend rate of such shares shall be five per cent per year; such shares shall have no conversion rights; and the redemption price of such shares shall be $28.25 per share if redeemed on or before July 31, 1953, $27.75 per share if redeemed thereafter and on or before July 31, 1958, $27.25 per share if redeemed thereafter and on or before July 31, 1963, and $26.75 per share if redeemed thereafter. EXHIBIT 3 PACIFIC GAS AND ELECTRIC COMPANY CERTIFICATE OF DETERMINATION OF PREFERENCES OF 4.80% REDEEMABLE FIRST PREFERRED STOCK WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 4.80% Redeemable First Preferred Stock, $25 par value (herein called the "4.80% Series"); and WHEREAS, this corporation has elected to redeem, purchase, or otherwise acquire 724,344 shares of the 4.80% Series from time to time; and WHEREAS, pursuant to California Corporations Code Section 401(c), this corporation filed a Certificate of Decrease in Number of Shares of Certain Series of First Preferred Stock on March 23, 1994, which amended the Articles of Incorporation to decrease the number of shares constituting the 4.80% Series from 1,517,375 to 793,031 shares; and WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the 724,344 shares constituting the decrease in the 4.80% Series resumed the status of authorized and unissued shares of First Preferred Stock, $25 par value; and WHEREAS, it is in the best interest of this corporation to restate the two existing Certificates of Determination of Preferences of the 4.80% Series to (i) reflect the reduction in the authorized number of shares of the 4.80% Series, (ii) consolidate such existing Certificates of Determination of Preferences into a single Certificate of Determination of Preferences of the 4.80% Series, and (iii) eliminate the portions of the officers' certificates and verifications which do not set forth any of the rights, preferences, privileges, or restrictions of the 4.80% Series. NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificates of Determination of Preferences of the 4.80% Series is hereby approved; and BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences of the 4.80% Series is hereby approved and adopted as restated in its entirety as follows: 793,031 shares of this corporation's unissued redeemable First Preferred Stock shall constitute a series designated "4.80% Redeemable First Preferred Stock"; the dividend rate of such shares shall be 4.80% per year; such shares shall have no conversion rights; and the redemption price for such shares shall be $28.75 per share if redeemed on or before January 31, 1955; $28.25 per share if redeemed thereafter and on or before January 31, 1960; $27.75 per share if redeemed thereafter and on or before January 31, 1965; and $27.25 per share if redeemed thereafter. EXHIBIT 4 PACIFIC GAS AND ELECTRIC COMPANY CERTIFICATE OF DETERMINATION OF PREFERENCES OF 4.50% REDEEMABLE FIRST PREFERRED STOCK WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 4.50% Redeemable First Preferred Stock, $25 par value (herein called the "4.50% Series"); and WHEREAS, this corporation has elected to redeem, purchase, or otherwise acquire 516,284 shares of the 4.50% Series from time to time; and WHEREAS, pursuant to California Corporations Code Section 401(c), this corporation filed a Certificate of Decrease in Number of Shares of Certain Series of First Preferred Stock on March 23, 1994, which amended the Articles of Incorporation to decrease the number of shares constituting the 4.50% Series from 1,127,426 to 611,142 shares; and WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the 516,284 shares constituting the decrease in the 4.50% Series resumed the status of authorized and unissued shares of First Preferred Stock, $25 par value; and WHEREAS, it is in the best interest of this corporation to restate the two existing Certificates of Determination of Preferences of the 4.50% Series to (i) reflect the reduction in the authorized number of shares of the 4.50% Series, (ii) consolidate such existing Certificates of Determination of Preferences into a single Certificate of Determination of Preferences of the 4.50% Series, and (iii) eliminate the portions of the officers' certificates and verifications which do not set forth any of the rights, preferences, privileges, or restrictions of the 4.50% Series. NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificates of Determination of Preferences of the 4.50% Series is hereby approved; and BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences of the 4.50% Series is hereby approved and adopted as restated in its entirety as follows: 611,142 shares of this corporation's unissued redeemable first preferred stock shall constitute a series designated "4.50% Redeemable First Preferred Stock"; the dividend rate of such shares shall be 4.50% per year; such shares shall have no conversion rights; and the redemption price of such shares shall be $27.25 per share if redeemed on or before July 31, 1959; $26.75 per share if redeemed thereafter and on or before July 31, 1964; $26.25 per share if redeemed thereafter and on or before July 31, 1969; and $26.00 per share if redeemed thereafter. EXHIBIT 5 PACIFIC GAS AND ELECTRIC COMPANY CERTIFICATE OF DETERMINATION OF PREFERENCES OF 4.36% REDEEMABLE FIRST PREFERRED STOCK WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 4.36% Redeemable First Preferred Stock, $25 par value (herein called the "4.36% Series"); and WHEREAS, this corporation has elected to redeem, purchase or otherwise acquire 581,709 shares of the 4.36% Series from time to time; and WHEREAS, pursuant to California Corporations Code Section 401(c), this corporation filed a Certificate of Decrease in Number of Shares of Certain Series of First Preferred Stock on March 23, 1994, which amended the Articles of Incorporation to decrease the number of shares constituting the 4.36% Series from 1,000,000 to 418,291 shares; and WHEREAS, pursuant to California Corporations Code Section 202(e)(3), the 581,709 shares constituting the decrease in the 4.36% Series resumed the status of authorized and unissued shares of First Preferred Stock, $25 par value; and WHEREAS, it is in the best interest of this corporation to restate the Certificate of Determination of Preferences of the 4.36% Series to (i) reflect the reduction in the authorized number of shares of the 4.36% Series and (ii) eliminate the portions of the officers' certificate and verification which do not set forth any of the rights, preferences, privileges, or restrictions of the 4.36% Series. NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificate of Determination of Preferences of the 4.36% Series is hereby approved; and BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences of the 4.36% Series is hereby approved and adopted as restated in its entirety as follows: 418,291 shares of this corporation's unissued Redeemable First Preferred Stock shall constitute a series designated "4.36% Redeemable First Preferred Stock"; the dividend rate of such shares shall be 4.36% per year; such shares shall have no conversion rights; and the redemption price of such shares shall be $26.75 per share if redeemed on or before October 31, 1960; $26.50 per share if redeemed thereafter and on or before October 31, 1965; $26.25 per share if redeemed thereafter and on or before October 31, 1970; $26.00 per share if redeemed thereafter and on or before October 31, 1975; and $25.75 per share if redeemed thereafter EXHIBIT 6 CERTIFICATE OF DETERMINATION OF PREFERENCES OF 6.57% REDEEMABLE FIRST PREFERRED STOCK OF PACIFIC GAS AND ELECTRIC COMPANY WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 6.57% Redeemable First Preferred Stock, $25 par value (herein called the "6.57% Series"); and WHEREAS, it is in the best interest of this corporation to restate the Certificate of Determination of Preferences of the 6.57% Series to eliminate the portions of the officers' certificate and verification which do not set forth any of the rights, preferences, privileges, or restrictions of the 6.57% Series. NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificate of Determination of Preferences of the 6.57% Series is hereby approved; and BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences of the 6.57% Series is hereby approved and adopted as restated in its entirety as follows: 3,000,000 shares of this corporation's unissued First Preferred Stock, $25 par value, shall constitute a series designated "6.57% Redeemable First Preferred Stock" (hereinafter referred to as the "6.57% Series"). The terms of the 6.57% Series are hereby fixed as follows: (a) The holders of shares of the 6.57% Series shall be entitled to receive, when and as declared by the Board of Directors, dividends at the rate of 6.57 percent of par value thereof per annum, and no more. Such dividends shall be cumulative with respect to each share from the date of issuance thereof. (b) No dividend shall be declared or paid on any shares of the 6.57% Series or on any shares of any other series or class of preferred stock unless a ratable dividend on the 6.57% Series and such other series or class of preferred stock, in proportion to the full preferential amounts to which each series or class is entitled, is declared and is paid or set apart for payment. As used herein, the term "preferred stock" shall mean all series of the first preferred stock, $25 par value per share, and first preferred stock, $100 par value per share, and any other class of stock ranking equally with the preferred stock as to preference in dividends and liquidation rights, notwithstanding that shares of such series and classes may differ as to the amounts of dividends or liquidation payments to which they are entitled. (c) No junior shares or shares of preferred stock shall be purchased, redeemed or otherwise acquired by the corporation, and no moneys shall be paid to or set aside or made available for a sinking fund for the purchase or redemption of junior shares or shares of preferred stock, unless full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set aside for payment. As used herein, the term "junior shares" shall mean common shares or any other shares ranking junior to the preferred stock either as to dividends or upon liquidation, dissolution, or winding up. (d) The shares of the 6.57% Series shall not be subject to redemption by this corporation prior to July 31, 2002. On or after July 31, 2002, the redemption price shall be $25.00 per share, together with an amount equal to all accumulated and unpaid dividends thereon to and including the date of redemption. (e) Shares of the 6.57% Series shall also be subject to redemption through the operation of a sinking fund (herein called the "Sinking Fund") at the redemption price (the "Sinking Fund Redemption Price") of $25.00 per share plus an amount equal to the accumulated and unpaid dividends thereon to and including the redemption date, whether or not earned or declared. For the purposes of the Sinking Fund, out of any funds of the corporation legally available therefor remaining after full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set apart for payment, the corporation shall redeem 150,000 shares of the 6.57% Series annually on each July 31, from 2002 through 2006, inclusive, and 2,250,000 shares on July 31, 2007, at the Sinking Fund Redemption Price. The Sinking Fund shall be cumulative so that if on any such July 31 the funds of the corporation legally available therefor shall be insufficient to permit the required redemption in full, or if for any other reason such redemption shall not have been made in full, the remaining shares of the 6.57% Series so required to be redeemed shall be redeemed before any cash dividend shall be paid or declared, or any distribution made, on any junior shares or before any junior shares or any shares of preferred stock shall be purchased, redeemed or otherwise acquired by the corporation, or any monies shall be paid to or set aside or made available for a sinking fund for the purchase or redemption or any junior shares or any shares of preferred stock; provided, however, that, notwithstanding the existence of any such deficiency, the corporation may make any required sinking fund redemption on any other series or class of preferred stock if the number of shares of such other series or class of preferred stock being so redeemed bears (as nearly as practicable) the same ratio to the aggregate number of shares of such other series or class then due to be redeemed as the number of shares of the 6.57% Series being redeemed bears to the aggregate number of shares of the 6.57% Series then due to be redeemed. (f) Shares of the 6.57% Series redeemed otherwise than as required by section (e) or purchased or otherwise acquired by the corporation may, at the option of the corporation, be applied as a credit against any Sinking Fund redemption required by section (e). Moneys available for the Sinking Fund shall be applied on each such July 31 to the redemption of shares of the 6.57% Series. (g) Any shares of the 6.57% Series which have been redeemed, purchased, or otherwise acquired by the corporation shall become authorized and unissued shares of the First Preferred Stock, $25 par value, but shall not be reissued as shares of the 6.57% Series. (h) Upon liquidation, dissolution, or winding up of the corporation, the holders of shares of the 6.57% Series shall be entitled to receive the liquidation value per share, which is hereby fixed at $25.00 per share, plus an amount equal to all accumulated and unpaid dividends thereon at such time, whether or not earned or declared. (i) Dividends shall be computed on a basis of a 360-day year of twelve 30-day months. (j) If the date for payment of any dividend or the date fixed for redemption of any share of the 6.57% Series shall not be on a business day, then payment of the dividend or applicable redemption price need not be made on such date, but may be made on the next succeeding business day with the same force and effect as if made on the date for payment of such dividend or date fixed for redemption. EXHIBIT 7 CERTIFICATE OF DETERMINATION OF PREFERENCES OF 7.04% REDEEMABLE FIRST PREFERRED STOCK OF PACIFIC GAS AND ELECTRIC COMPANY WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 7.04% Redeemable First Preferred Stock, $25 par value (herein called the "7.04% Series"); and WHEREAS, it is in the best interest of this corporation to restate the Certificate of Determination of Preferences of the 7.04% Series to eliminate the portions of the officers' certificate and verification which do not set forth any of the rights, preferences, privileges, or restrictions of the 7.04% Series. NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificate of Determination of Preferences of the 7.04% Series is hereby approved; and BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences of the 7.04% Series is hereby approved and adopted as restated in its entirety as follows: 3,000,000 shares of this corporation's unissued First Preferred Stock, $25 par value, shall constitute a series designated "7.04% Redeemable First Preferred Stock" (hereinafter referred to as the "7.04% Series"). The terms of the 7.04% Series are hereby fixed as follows: (a) The holders of shares of the 7.04% Series shall be entitled to receive, when and as declared by the Board of Directors, dividends at the rate of 7.04 percent of par value thereof per annum, and no more. Such dividends shall be cumulative with respect to each share from the date of issuance thereof. (b) No dividend shall be declared or paid on any shares of the 7.04% Series or on any shares of any other series or class of preferred stock unless a ratable dividend on the 7.04% Series and such other series or class of preferred stock, in proportion to the full preferential amounts to which each series or class is entitled, is declared and is paid or set apart for payment. As used herein, the term "preferred stock" shall mean all series of the first preferred stock, $25 par value per share, and first preferred stock, $100 par value per share, and any other class of stock ranking equally with the preferred stock as to preference in dividends and liquidation rights, notwithstanding that shares of such series and classes may differ as to amounts of dividends or liquidation payments to which they are entitled. (c) No junior shares or shares of preferred stock shall be purchased, redeemed, or otherwise acquired by the corporation, and no moneys shall be paid to or set aside or made available for a sinking fund for the purchase or redemption of junior shares or shares of preferred stock, unless full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set aside for payment. As used herein, the term "junior shares" shall mean common shares or any other shares ranking junior to the preferred stock either as to dividends or upon liquidation, dissolution, or winding up. (d) The shares of the 7.04% Series shall not be subject to redemption by this corporation prior to January 31, 2003. On and after January 31, 2003, the redemption price shall be as follows: If redeemed during the 12 months' period beginning January 31, 2003 $25.88 2008 $25.44 2004 $25.79 2009 $25.35 2005 $25.70 2010 $25.26 2006 $25.62 2011 $25.18 2007 $25.53 2012 $25.09 and at $25.00 per share on and after January 31, 2013, together in each case with an amount equal to all accumulated and unpaid dividends thereon to and including the date of redemption. For the purpose of redeeming any shares of the 7.04% Series, payment of the redemption price shall be out of any funds of the corporation legally available therefor remaining after: (i) full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set apart for payment, and (ii) all money shall have been paid to or set aside or made available for any sinking fund for the purchase or redemption of all series of and classes of preferred stock as may be required by the terms of such preferred stock. (e) Any shares of the 7.04% Series which have been redeemed, purchased, or otherwise acquired by the corporation shall become authorized and unissued shares of the First Preferred Stock, $25 par value, but shall not be reissued as shares of the 7.04% Series. (f) Upon liquidation, dissolution, or winding up of the corporation, the holders of shares of the 7.04% Series shall be entitled to receive the liquidation value per share, which is hereby fixed at $25.00 per share, plus an amount equal to all accumulated and unpaid dividends thereon at such time, whether or not earned or declared. (g) Dividends shall be computed on a basis of a 360-day year of twelve 30-day months. (h) If the date for payment of any dividend or the date fixed for redemption of any share of the 7.04% Series shall not be a business day, then payment of the dividend or applicable redemption price need not be made on such date, but may be made on the next succeeding business day with the same force and effect as if made on the date for payment of such dividend or date fixed for redemption. EXHIBIT 8 CERTIFICATE OF DETERMINATION OF PREFERENCES OF 6-7/8% REDEEMABLE FIRST PREFERRED STOCK OF PACIFIC GAS AND ELECTRIC COMPANY WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 6-7/8% Redeemable First Preferred Stock, $25 par value (herein called the "6-7/8% Series"); and WHEREAS, it is in the best interest of this corporation to restate the Certificate of Determination of Preferences of the 6-7/8% Series to eliminate the portions of the officers' certificate and verification which do not set forth any of the rights, preferences, privileges, or restrictions of the 6-7/8% Series. NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificate of Determination of Preferences of the 6-7/8% Series is hereby approved; and BE IT FURTHER RESOLVED that the Certificate of Determination of Preferences of the 6-7/8% Series is hereby approved and adopted as restated in its entirety as follows: 5,000,000 shares of this corporation's unissued Redeemable First Preferred Stock, $25 par value, shall constitute a series designated "6-7/8% Redeemable First Preferred Stock" (hereinafter referred to as the "6-7/8% Series"). The terms of the 6-7/8% Series are hereby fixed as follows: (a) The holders of shares of the 6-7/8% Series shall be entitled to receive, when and as declared by the Board of Directors, dividends at the rate of 6-7/8 percent of par value thereof per annum, and no more. Such dividends shall be cumulative with respect to each share from the date of issuance thereof. (b) No dividend shall be declared or paid on any shares of the 6-7/8% Series or on any shares of any other series or class of preferred stock unless a ratable dividend on the 6- 7/8% Series and such other series or class of preferred stock, in proportion to the full preferential amounts to which each series or class is entitled, is declared and is paid or set apart for payment. As used herein, the term "preferred stock" shall mean all series of the first preferred stock, $25 par value per share, and first preferred stock, $100 par value per share, and any other class of stock ranking equally with the preferred stock as to preference in dividends and liquidation rights, notwithstanding that shares of such series and classes may differ as to amounts of dividends or liquidation payments to which they are entitled. (c) No junior shares or shares of preferred stock shall be purchased, redeemed, or otherwise acquired by the corporation, and no moneys shall be paid to or set aside or made available for a sinking fund for the purchase or redemption of junior shares or shares of preferred stock, unless full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set aside for payment. As used herein, the term "junior shares" shall mean common shares or any other shares ranking junior to the preferred stock either as to dividends or upon liquidation, dissolution, or winding up. (d) The shares of the 6-7/8% Series shall not be subject to redemption by this corporation prior to July 31, 1998. On and after July 31, 1998, the redemption price shall be $25.00 per share, together with an amount equal to all accumulated and unpaid dividends thereon to and including the date of redemption. For the purpose of redeeming any shares of the 6-7/8% Series, payment of the redemption price shall be out of any funds of the corporation legally available therefor remaining after: (i) full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set apart for payment, and (ii) all money shall have been paid to or set aside or made available for any sinking fund for the purchase or redemption of all series of and classes of preferred stock as may be required by the terms of such preferred stock. (e) Any shares of the 6-7/8% Series which have been redeemed, purchased, or otherwise acquired by the corporation shall become authorized and unissued shares of the First Preferred Stock, $25 par value, but shall not be reissued as shares of the 6-7/8% Series. (f) Upon liquidation, dissolution, or winding up of the corporation, the holders of shares of the 6-7/8% Series shall be entitled to receive the liquidation value per share, which is hereby fixed at $25.00 per share, plus an amount equal to all accumulated and unpaid dividends thereon at such time, whether or not earned or declared. (g) Dividends shall be computed on a basis of a 360-day year of twelve 30-day months. (h) If the date for payment of any dividend or the date fixed for redemption of any share of the 6-7/8% Series shall not be a business day, then payment of the dividend or applicable redemption price need not be made on such date, but may be made on the next succeeding business day with the same force and effect as if made on the date for payment of such dividend or date fixed for redemption. EXHIBIT 9 CERTIFICATE OF DETERMINATION OF PREFERENCES OF 6.30% REDEEMABLE FIRST PREFERRED STOCK OF PACIFIC GAS AND ELECTRIC COMPANY WHEREAS, the Articles of Incorporation of this corporation provide for a class of stock known as First Preferred Stock, issuable from time to time in one or more series, of which a series of such class of stock was issued as the 6.30% Redeemable First Preferred Stock, $25 par value (herein called the "6.30% Series"); and WHEREAS, it is in the best interest of this corporation to restate the Certificate of Determination of Preferences of the 6.30% Series to eliminate the portions of the officers' certificate and verification which do not set forth any of the rights, preferences, privileges, or restrictions of the 6.30% Series. NOW, THEREFORE, BE IT RESOLVED that the foregoing restatement of the Certificate of Determination of Preferences of the 6.30% Series is hereby approved; and BE IT FURTHER RESOLVED, that the Certificate of Determination of Preferences of the 6.30% Series is hereby approved and adopted as restated in its entirety as follows: 2,500,000 shares of this corporation's unissued Redeemable First Preferred Stock, $25 par value, shall constitute a series designated "6.30% Redeemable First Preferred Stock" (hereinafter referred to as the "6.30% Series"). The terms of the 6.30% Series are hereby fixed as follows: (a) The holders of shares of the 6.30% Series shall be entitled to receive, when and as declared by the Board of Directors, dividends at the rate of 6.30 percent of par value thereof per annum, and no more. Such dividends shall be cumulative with respect to each share from the date of issuance thereof (b) No dividend shall be declared or paid on any shares of the 6.30% Series or on any shares of any other series or class of preferred stock unless a ratable dividend on the 6.30% Series and such other series or class of preferred stock, in proportion to the full preferential amounts to which each series or class is entitled, is declared and is paid or set apart for payment. As used herein, the term "preferred stock" shall mean all series of the first preferred stock, $25 par value per share, and first preferred stock, $100 par value per share, and any other class of stock ranking equally with the preferred stock as to preference in dividends and liquidation rights, notwithstanding that shares of such series and classes may differ as to amounts of dividends or liquidation payments to which they are entitled. (c) No junior shares or shares of preferred stock shall be purchased, redeemed, or otherwise acquired by the corporation, and no moneys shall be paid to or set aside or made available for a sinking fund for the purchase or redemption of junior shares or shares of preferred stock, unless full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set aside for payment. As used herein, the term "junior shares" shall mean common shares or any other shares ranking junior to the preferred stock either as to dividends or upon liquidation, dissolution, or winding up. (d) The shares of the 6.30% Series shall not be subject to redemption by this corporation prior to January 31, 2004. On and after January 31, 2004, the redemption price shall be $25.00 per share, together with an amount equal to all accumulated and unpaid dividends thereon to and including the date of redemption. For the purpose of redeeming any shares of the 6.30% Series, payment of the redemption price shall be out of any funds of the corporation legally available therefor remaining after: (i) full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set apart for payment, and (ii) all money shall have been paid to or set aside or made available for any sinking fund for the purchase or redemption of all series of and classes of preferred stock as may be required by the terms of such preferred stock. (e) Shares of the 6.30% Series shall also be subject to redemption through the operation of a sinking fund (herein called the "Sinking Fund") at the redemption price (the "Sinking Fund Redemption Price") of $25.00 per share plus an amount equal to the accumulated and unpaid dividends thereon to and including the redemption date, whether or not earned or declared. For the purposes of the Sinking Fund, out of any funds of the corporation legally available therefor remaining after full cumulative dividends upon all series and classes of preferred stock then outstanding to the end of the dividend period next preceding the date fixed for such redemption (and for the current dividend period if the date fixed for such redemption is a dividend payment date) shall have been declared and shall have been paid or set apart for payment, the corporation shall redeem 125,000 shares of the 6.30% Series annually on each January 31, from 2004 through 2008, inclusive, and 1,875,000 shares on January 31, 2009, at the Sinking Fund Redemption Price. The Sinking Fund shall be cumulative so that if on any such January 31 the funds of the corporation legally available therefor shall be insufficient to permit the required redemption in full, or if for any other reason such redemption shall not have been made in full, the remaining shares of the 6.30% Series so required to be redeemed shall be redeemed before any cash dividend shall be paid or declared, or any distribution made, on any junior shares or before any junior shares or any shares of preferred stock shall be purchased, redeemed or otherwise acquired by the corporation, or any moneys shall be paid to or set aside or made available for a sinking fund for the purchase or redemption of any junior shares or any shares of preferred stock; provided, however, that, notwithstanding the existence of any such deficiency, the corporation may make any required sinking fund redemption on any other series or class of preferred stock if the number of shares of such other series or class of preferred stock being so redeemed bears (as nearly as practicable) the same ratio to the aggregate number of shares of such other series or class then due to be redeemed as the number of shares of the 6.30% Series being redeemed bears to the aggregate number of shares of the 6.30% Series then due to be redeemed. (f) Shares of the 6.30% Series redeemed otherwise than as required by section (e) or purchased or otherwise acquired by the corporation may, at the option of the corporation, be applied as a credit against any Sinking Fund redemption required by section (e). Moneys available for the Sinking Fund shall be applied on each such January 31 to the redemption of shares of the 6.30% Series. (g) Any shares of the 6.30% Series which have been redeemed, purchased, or otherwise acquired by the corporation shall become authorized and unissued shares of the First Preferred Stock, $25 par value, but shall not be reissued as shares of the 6.30% Series. (h) Upon liquidation, dissolution, or winding up of the corporation, the holders of shares of the 6.30% Series shall be entitled to receive the liquidation value per share, which is hereby fixed at $25.00 per share, plus an amount equal to all accumulated and unpaid dividends thereon at such time, whether or not earned or declared. (i) Dividends shall be computed on a basis of a 360-day year of twelve 30-day months. (j) If the date for payment of any dividend or the date fixed for redemption of any share of the 6.30% Series shall not be a business day, then payment of the dividend or applicable redemption price need not be made on such date, but may be made on the next succeeding business day with the same force and effect as if made on the date for payment of such dividend or date fixed for redemption. EX-3.2 3 Bylaws of Pacific Gas and Electric Company amended as of May 6, 1998 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 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 fifteen (15) 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 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 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. 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. 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. EX-10.1 4 PG&E CORPORATION DIRECTOR GRANTOR TRUST AGREEMENT This Director Grantor Trust Agreement (the "Trust Agreement") is made this 1st day of April 1998, by and between PG&E CORPORATION ("the Company") and WACHOVIA BANK, N.A. ("the Trustee"). Recitals - -------- (a) WHEREAS, the Company has adopted the nonqualified deferred compensation Plans and Agreements (the "Arrangements") as listed in Attachment I; (b) WHEREAS, the Company has incurred or expects to incur liability under the terms of such Arrangements with respect to the individuals participating in such Arrangements (the "Participants and Beneficiaries"); (c) WHEREAS, the Company hereby establishes a Trust (the "Trust") and shall contribute to the Trust assets that shall be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Participants and their Beneficiaries in such manner and at such times as specified in the Arrangements and in this Trust Agreement; (d) WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Arrangements as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and (e) WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds (the "Fund") to assist it in satisfying its Liabilities under the Arrangements. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment of The Trust -------------------------- (a) The Trust is intended to be a Grantor Trust, of which the Company is the Grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (b) The Company shall be considered a Grantor for the purposes of the Trust. (c) The Trust hereby established shall be irrevocable. (d) The Company hereby deposits with the Trustee in the Trust One Thousand Dollars and Zero Cents ($1,000.00) which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (e) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Participants and general creditors as herein set forth. Participants and their Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Arrangements and this Trust Agreement shall be unsecured contractual rights of Participants and their Beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the general creditors of the Company under federal and state law in the event the Company is Insolvent, as defined in Section 3(a) herein. (f) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property acceptable to the Trustee in the Trust to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Prior to a Change of Control, neither the Trustee nor any Participant or Beneficiary shall have any right to compel additional deposits. (g) Upon a Change of Control, the Company shall, as soon as possible, but in no event longer than thirty (30) days following the occurrence of a Change of Control, as defined herein, make an irrevocable contribution to the Trust in an amount that is sufficient to fund the Trust in an amount equal to no less than 100% but no more than 120% of the amount necessary to pay each Participant or Beneficiary the benefits to which Participants or their Beneficiaries would be entitled pursuant to the terms of the Arrangements as of the date on which the Change of Control occurred. The Company shall also fund an expense reserve for the Trustee in the amount of $225,000.00. Section 2. Payments Participants and Their Beneficiaries --------------------------------------------- (a) Prior to a Change of Control, distributions from the Trust shall be made by the Trustee to Participants and Beneficiaries at the direction of the Company. The entitlement of a Participant or his or her Beneficiaries to benefits under the Arrangements shall be determined by the Company or such party or professional administrator as it shall designate under the Arrangements as the Company's agent, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Arrangements. (b) The Company may make payment of benefits directly to Participants or their Beneficiaries as they become due under the terms of the Arrangements. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Participants or their Beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Arrangements, the Company shall make the balance of each such payment as it falls due in accordance with the Arrangements. The Trustee shall notify the Company where principal and earnings are not sufficient. Nothing in this Agreement shall relieve the Company of its liabilities to pay benefits due under the Arrangements except to the extent such liabilities are met by application of assets of the Trust. (c) After a Change of Control, the Company shall continue to make the determination of benefits due to Participants or their Beneficiaries and shall provide the Trustee with a schedule of benefits due. The Trustee shall pay benefits due in accordance with such schedule; provided however, a Participant or their Beneficiaries may make application to the Trustee for an independent decision as to the amount or form of their benefits due under the Arrangements. In making any determination required or permitted to be made by the Trustee under this Section, the Trustee shall, in each such case, reach its own independent determination, in its absolute and sole discretion, as to the Participant's or Beneficiary's entitlement to a payment hereunder. In making its determination, the Trustee may consult with and make such inquiries of such persons, including the Participant or Beneficiary, the Company, legal counsel, actuaries or other persons, as the Trustee may reasonably deem necessary. Any reasonable costs incurred by the Trustee in arriving at its determination shall be reimbursed by the Company and, to the extent not paid by the Company within a reasonable time, shall be charged to the Trust. The Company waives any right to contest any amount paid over by the Trustee hereunder pursuant to a good faith determination made by the Trustee notwithstanding any claim by or on behalf of the Company (absent a manifest abuse of discretion by the Trustee) that such payments should not be made. (d) The Trustee agrees that it will not itself institute any action at law or at equity, whether in the nature of an accounting, interpleading action, request for a declaratory judgment or otherwise, requesting a court or administrative or quasi-judicial body to make the determination required to be made by the Trustee under this Section 2 in the place and stead of the Trustee. The Trustee may institute an action to collect a contribution due the Trust following a Change of Control or in the event that the Trust should ever experience a short-fall in the amount of assets necessary to make payments pursuant to the terms of the Arrangements. (e) In the event any Participant or his or her Beneficiary is determined to be subject to federal income tax on any amount to the credit of his or her account under any Arrangement prior to the time of payment hereunder, whether or not due to the establishment of or contributions to this Trust, a portion of such taxable amount equal to the federal, state and local taxes (excluding any interest or penalties) owed on such taxable amount, shall be distributed by the Trustee as soon thereafter as practicable to such Participant or Beneficiary. The Company shall promptly reimburse the Trust for any such distribution in an amount certified by the Trustee to be needed for the Participant's benefits. For these purposes, a Participant or Beneficiary shall be deemed to pay state and local taxes at the highest marginal rate of taxation in the state in which the Participant resides or is employed (or both) where a tax is imposed and federal income taxes at the highest marginal rate of taxation, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. Such distributions shall be at the direction of the Company or the Trustee, or upon proper application of the Participant or Beneficiary; provided that the actual amount of the distribution shall be determined by the Company prior to a Change of Control and the Trustee following a Change of Control. An amount to the credit of a Participant's Account shall be determined to be subject to federal income tax upon the earliest of: (a) a final determination by the United States Internal Revenue Service addressed to the Participant or his Beneficiary which is not appealed to the courts; (b) a final determination by the United States Tax Court or any other federal court affirming any such determination by the Internal Revenue Service; or (c) an opinion by the Company's tax counsel, addressed to the Company and the Trustee, to the effect that by reason of Treasury Regulations, amendments to the Internal Revenue Code, published Internal Revenue Service rulings, court decisions or other substantial precedent, amounts to the credit of Participants hereunder are subject to federal income tax prior to payment. The Company may undertake at its sole expense to defend any tax claims described herein which are asserted by the Internal Revenue Service against any Participant or Beneficiary, including attorney fees and cost of appeal, and shall have the sole authority to determine whether or not to appeal any determination made by the Service or by a lower court. The Company also agrees to reimburse any Participant or Beneficiary for any interest or penalties in respect of tax claims hereunder upon receipt of documentation of same. Any distributions from the Fund to a Participant or Beneficiary under this Section 2(e) shall be applied in accordance with the provisions of the Arrangement to reduce the Company liabilities to such Participant and/or Beneficiary under the Arrangement with such reductions to be made on a pro-rata basis over the term of benefit payments under the Arrangement; provided, however, that in no event shall any Participant, Beneficiary or estate of any Participant or Beneficiary have any obligation to return all or any part of such distribution to the Company if such distribution exceeds benefits payable under an Arrangement. Any reduction in accordance with the foregoing sentence and the Arrangements shall be determined by the Company prior to a Change of Control. Following a Change of Control, the Company shall continue to make such determination subject to the right of a Participant to petition the Trustee under Section 2(c). Section 3. Trustee Responsibility Regarding Payments To The Trust Beneficiary When The Company Is Insolvent ------------------------------------------------ (a) The Trustee shall cease payment of benefits to Participants and their Beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing that the Company is Insolvent. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants or their Beneficiaries. (2) Unless the Trustee has actual knowledge that the Company is Insolvent, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (3) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Participants or their Beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Arrangements or otherwise. (4) The Trustee shall resume the payment of benefits to Participants or their Beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants or their Beneficiaries under the terms of the Arrangements for the period of such discontinuance, less the aggregate amount of any payments made to Participants or their Beneficiaries by the Company in lieu of the payments provided for hereunder curing any such period of discontinuance. Section 4. Payments if a Short-Fall of The Trust Assets Occurs --------------------------------------------- (a) If there are not sufficient assets for the payment of benefits pursuant to Section 2 or Section 3(c) hereof and the Company does not otherwise make such payments within a reasonable time after demand from the Trustee, the Trustee shall make payment of benefits from the Trust to the Participants or their Beneficiaries in the following order of priority: (1) retired Participants and their Beneficiaries; (2) vested Participants over the age of 55 who were terminated within two years following a Change of Control and their Beneficiaries; (3) vested active Participants over the age of 55 and their Beneficiaries; (4) any other vested active Participants and their Beneficiaries; (5) vested former Participants and their Beneficiaries; and (6) non-vested Participants and their Beneficiaries (b) Within each category set forth under Section 4(a), payments shall be prioritized in the following order: (c) Upon receipt of a contribution from the Company necessary to make up for a short-fall in the payments due, the Trustee shall resume payments to all the Participants and Beneficiaries under the Arrangements. Following a Change of Control, the Trustee shall have the right to compel a contribution to the Trust from the Company to make-up for any short-fall. Section 5. Payments to the Company ----------------------- Except as provided in Sections 3, 8, and 14 hereof, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Participants and their Beneficiaries pursuant to the terms of the Arrangements. Section 6. Investment Authority -------------------- (a) The Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the Fund, if it acts for the exclusive benefit of the Participants and their Beneficiaries, in good faith and as a prudent person would act in accomplishing a similar task and in accordance with the terms of this Trust Agreement and any applicable federal or state laws, rules or regulations. (b) Subject to investment guidelines agreed to in writing from time to time by the Company and the Trustee prior to a Change of Control, the Trustee shall have the power in investing and reinvesting the Fund in its sole discretion: (1) To invest and reinvest in any readily marketable common and preferred stocks, bonds, notes, debentures (including convertible stocks and securities but not including any stock or security of other than a de minimus amount held in a collective or mutual fund), certificates of deposit or demand or time deposits (including any such deposits with the Trustee) and shares of investment companies and mutual funds, without being limited to the classes or property in which the Trustees are authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the Fund; (2) To commingle for investment purposes all or any portion of the Fund with assets of any other similar trust or trusts established by the Company with the Trustee for the purpose of safeguarding deferred compensation or retirement income benefits of its employees and/or directors; (3) To retain any property at any time received by the Trustee; (4) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future; (5) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person; (6) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof any assessments levied with respect to any such property to deposited; (7) To extend the time of payment of any obligation held by it; (8) To hold uninvested any moneys received by it, without liability for interest thereon, but only in anticipation of payments due for investments, reinvestments, expenses or disbursements; (9) To exercise all voting or other rights with respect to any property held by it and to grant proxies, discretionary or otherwise; (10) For the purposes of the Trust, to borrow money from others, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it; (11) To employ suitable contractors and counsel, who may be counsel to the Company or to the Trustee, and to pay their reasonable expenses and compensation from the Fund to the extent not paid by the Company; (12) To register investments in its own name or in the name of a nominee; to hold any investment in bearer form; and to combine certificates representing securities with certificates of the same issue held by it in other fiduciary capacities or to deposit or to arrange for the deposit of such securities with any depository, even though, when so deposited, such securities may be held in the name of the nominee of such depository with other securities deposited therewith by other persons, or to deposit or to arrange for the deposit of any securities issued or guaranteed by the United States government, or any agency or instrumentality thereof, including securities evidenced by book entries rather than by certificates, with the United States Department of the Treasury or a Federal Reserve Bank, even though, when so deposited, such securities may not be held separate from securities deposited therein by other persons; provided, however, that no securities held in the Fund shall be deposited with the United States Department of the Treasury or a Federal Reserve Bank or other depository in the same account as any individual property of the Trustee, and provided, further, that the books and records of the Trustee shall at all times show that all such securities are part of the Trust Fund; (13) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, respectively, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom; (14) To hold and retain policies of life insurance, annuity contracts, and other property of any kind which policies are contributed to the Trust by the Company or any subsidiary of the Company or are purchased by the Trustee; (15) To hold any other class of assets which may be contributed by the Company and that is deemed reasonable by the Trustee, unless expressly prohibited herein; (16) To loan any securities at any time held by it to brokers or dealers upon such security as may be deemed advisable, and during the terms of any such loan to permit the loaned securities to be transferred into the name of and voted by the borrower or others; and (17) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Fund. (c) Prior to a Change of Control, the Company shall have the right, subject to this Section to direct the Trustee with respect to investments. (1) The Company may at any time direct the Trustee to segregate all or a portion of the Fund in a separate investment account or accounts and may appoint one or more investment managers and/or an Investment Committee established by the Company as described in Section 6(d) hereof to direct the investment and reinvestment of each such investment account or accounts. In such event, the Company shall notify the Trustee of the appointment of each such investment manager and/or Investment Committee. No such investment manager shall be related, directly or indirectly, to the Company, but members of the Investment Committee may be employees of the Company. (2) Thereafter, the Trustee shall make every sale or investment with respect to such investment account as directed in writing by the investment manager or Investment Committee. It shall be the duty of the Trustee to act strictly in accordance with each direction. The Trustee shall be under no duty to question any such direction of the investment manager or Investment Committee, to review any securities or other property held in such investment account or accounts acquired by it pursuant to such directions or to make any recommendations to the investment managers or Investment Committee with respect to such securities or other property. (3) Notwithstanding the foregoing, the Trustee, without obtaining prior approval or direction from an investment manager or Investment Committee, shall invest cash balances held by it from time to time in short term cash equivalents including, but not limited to, through the medium of any short term common, collective or commingled trust fund established and maintained by the Trustee subject to the instrument establishing such trust fund, U.S. Treasury Bills, commercial paper (including such forms of commercial paper as may be available through the Trustee's Trust Department), certificates of deposit (including certificates issued by the Trustee in its separate corporate capacity), and similar type securities, with a maturity not to exceed one year; and, furthermore, sell such short term investments as may be necessary to carry out the instructions of an investment manager or Investment Committee regarding more permanent type investment and directed distributions. (4) The Trustee shall neither be liable nor responsible for any loss resulting to the Fund by reason of any sale or purchase of an investment directed by an investment manager or Investment Committee nor by reason of the failure to take any action with respect to any investment which was acquired pursuant to any such direction in the absence of further directions of such investment manager or Investment Committee. (5) Notwithstanding anything in this Agreement to the contrary, the Trustee shall be indemnified and saved harmless by the Company from and against any and all personal liability to which the Trustee may be subjected by carrying out any directions of an investment manager or Investment Committee issued pursuant hereto or for failure to act in the absence of directions of the investment manager or Investment Committee including all expenses reasonably incurred in its defense in the event the Company fails to provide such defense; provided, however, the Trustee shall not be so indemnified if it participates knowingly in, or knowingly undertakes to conceal, an act or omission of an investment manager or Investment Committee, having actual knowledge that such act or omission is a breach of a fiduciary duty; provided further, however, that the Trustee shall not be deemed to have knowingly participated in or knowingly undertaken to conceal an act or omission of an investment manager or Investment Committee with knowledge that such act or omission was a breach of fiduciary duty by merely complying with directions of an investment manager or Investment Committee or for failure to act in the absence of directions of an investment manager or Investment Committee. The Trustee may rely upon any order, certificate, notice, direction or other documentary confirmation purporting to have been issued by the investment manager or Investment Committee which the Trustee believes to be genuine and to have been issued by the investment manager or Investment Committee. The Trustee shall not be charged with knowledge of the termination of the appointment of any investment manager or Investment Committee until it receives written notice thereof from the Company. (d) Prior to a Change of Control, the Board of Directors of the Company may appoint an Investment Committee to direct the investment of the Fund. The Investment Committee may exercise any powers relating to the investment of Trust assets as described in Sections 6 and 7 hereof. The Investment Committee shall exercise its authority by an affirmative action of a majority of members constituting the Investment Committee, expressed from time to time by a vote at a meeting of the Investment Committee, or in an action in writing signed by all members without a meeting. Prior to a Change of Control, the Board of Directors of the Company shall have the right to remove and to replace any member of the Investment Committee at any time by notice in writing to that member. Following a Change of Control, the Company shall have no authority to remove or replace members of the Investment Committee, and any vacancy in the membership of the Investment Committee, created by resignation, disability, death or otherwise, shall be filled by the vote of a majority of the members of the Investment Committee then in office. Following a Change of Control, the Investment Committee may, on its own initiative, acquire fiduciary insurance for the benefit of its members at the Company's expense. If for any reason, the Company does not pay the premiums for such insurance, the Trustee shall pay such premiums out of the Trust assets and seek reimbursement from the Company. (e) Following a Change of Control, unless there is then in existence an Investment Committee as described in Section 6(d) above, the Trustee shall have the sole and absolute discretion in the management of the Trust assets and shall have all the powers set forth under Section 6(b). In investing the Trust assets, the Trustee shall consider: (1) the needs of the Arrangements; (2) the need for matching of the Trust assets with the liabilities of the Arrangements; and (3) the duty of the Trustee to act solely in the best interests of the Participants and their Beneficiaries. (f) The Trustee shall have the right, in its sole discretion, to delegate its investment responsibility to an investment manager who may be an affiliate the Trustee. In the event the Trustee shall exercise this right, the Trustee shall remain, at all times responsible for the acts of an investment manager. The Trustee shall have the right to purchase an insurance policy or an annuity to fund the benefits of the Arrangements. (g) The Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. Section 7. Insurance Contracts ------------------- (a) To the extent that the Trustee is directed by the Company prior to a Change of Control or by the Investment Committee after a Change of Control to invest part or all of the Trust Fund in insurance contracts, the type and amount thereof shall be specified by the Company. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified. (b) Each insurance contract issued shall provide that the Trustee shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a Change of Control, be subject to the direction of the Company. After a Change of Control, the Trustee shall have all such rights to the extent an Investment Committee had not been established. (c) The Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against an insurance policy held in the Trust Fund. (d) No insurer shall be deemed to be a party to the Trust and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by the insurer. Section 8. Disposition of Income --------------------- (a) Prior to a Change of Control, all income received by the Trust, net of expenses and taxes, may be returned to the Company or accumulated and reinvested within the Trust at the direction of the Company. In addition, if, at any time prior to a Change of Control, the value of assets held in the Trust exceeds 100 percent of the amount necessary to pay each Participant or Beneficiary the benefits to which Participants or their Beneficiaries would be entitled pursuant to the terms of the Arrangements as of the date on which the determination is made, the Trustee shall return the excess to the Company at the Company's written request. (b) Following a Change of Control, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested within the Trust. Section 9. Accounting by The Trustee ------------------------- The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee within forty-five (45) days following the close of each calendar year and within forty-five (45) days after the removal or resignation of the Trustee. The Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. The Company may approve such account by an instrument in writing delivered to the Trustee. In the absence of the Company's filing with the Trustee objections to any such account within ninety (90) days after its receipt, the Company shall be deemed to have so approved such account. In such case, or upon the written approval by the Company of any such account, the Trustee shall, to the extent permitted by law, be discharged from all liability to the Company for its acts or failures to act described by such account. The foregoing, however, shall not preclude the Trustee from having its accounting settled by a court of competent jurisdiction. The Trustee shall be entitled to hold and to commingle the assets of the Trust in one Fund for investment purposes but at the direction of the Company prior to a Change of Control, the Trustee shall create one or more sub-accounts. Section 10. Responsibility of The Trustee ----------------------------- (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Arrangements or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute, subject, however to Section 2(d) hereof. (b) The Company hereby indemnifies the Trustee against losses, liabilities, claims, costs and expenses in connection with the administration of the Trust, unless resulting from the negligence or misconduct of Trustee. To the extent the Company fails to make any payment on account of an indemnity provided in this paragraph 10(b), in a reasonably timely manner, the Trustee may obtain payment from the Trust. If the Trustee undertakes or defends any litigation arising in connection with this Trust or to protect a Participant's or Beneficiary's rights under the Arrangements, the Company agrees to indemnify the Trustee against the Trustee's costs, reasonable expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) Prior to a Change of Control, the Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. Following a Change of Control the Trustee shall select independent legal counsel and may consult with counsel or other persons with respect to its duties and with respect to the rights of Participants or their Beneficiaries under the Arrangements. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder and may rely on any determinations made by such agents and information provided to it by the Company. (e) The Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein. (f) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 11. Compensation and Expenses of The Trustee ---------------------------------------- The Trustee's compensation shall be as agreed in writing from time to time by the Company and the Trustee. The Company shall pay all administrative expenses and the Trustee's fees and shall promptly reimburse the Trustee for any fees and expenses of its agents. If not so paid, the fees and expenses shall be paid from the Trust. Section 12. Resignation and Removal of The Trustee -------------------------------------- (a) Prior to a Change of Control, the Trustee may resign at any time by written notice to the Company, which shall be effective sixty (60) days after receipt of such notice unless the Company and the Trustee agree otherwise. Following a Change of Control, the Trustee may resign only after the appointment of a successor Trustee. (b) The Trustee may be removed by the Company on sixty days (60) days notice or upon shorter notice accepted by the Trustee prior to a Change of Control. Subsequent to a Change of Control, the Trustee may only be removed by the Company with the consent of a majority of the Participants. (c) If the Trustee resigns within two years after a Change of Control, as defined herein, the Company, or if the Company fails to act within a reasonable period of time following such resignation, the Trustee shall apply to a court of competent jurisdiction for the appointment of a successor trustee or for instructions. (d) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. (e) If the Trustee resigns or is removed, a successor shall be appointed by the Company, in accordance with Section 13 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section l3. Appointment of Successor ------------------------ (a) If the Trustee resigns or is removed in accordance with Section 12 hereof, the Company may appoint, subject to Section 12, any third party national banking association with a market capitalization exceeding $100,000,000 to replace the Trustee upon resignation or removal. The successor Trustee shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Section 8 and 9 hereof. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. Section 14. Amendment or Termination ------------------------ (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Arrangements or shall make the Trust revocable after it has become irrevocable in accordance with Section 1 hereof. (b) The Trust shall not terminate until the date on which Participants and their Beneficiaries have received all of the benefits due to them under the terms and conditions of the Arrangements. Upon termination of the Trust, the Trust assets shall be returned to the Company. (c) Upon written approval of all Participants or Beneficiaries entitled to payment of benefits pursuant to the terms of the Arrangements, the Company may terminate this Trust prior to the time all benefit payments under the Arrangements have been made. All assets in the Trust at termination shall be returned to the Company. (d) This Trust Agreement may not be amended or terminated by the Company for two (2) years following a Change of Control without the written consent of a majority of the Participants. Section 15. Change of Control ----------------- (a) A "Change of Control" shall be deemed to have occurred if: (1) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, 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 Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; (2) during any two consecutive years, individuals who at the beginning of such a period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company, unless the election, or the nomination for election by the shareholders of the Company, 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 (3) the Company has executed and delivered a definitive agreement which would require the consummation of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of common stock are converted into cash, securities or other property, other than a merger of the Company in which the holders of the common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (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 Company, or (iii) any plan or proposal for the liquidation or dissolution of the Company. (4) the shareholders of the Company shall have approved (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of common stock are converted into cash, securities or other property, other than a merger of the Company in which the holders of the common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (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 Company, or (iii) any plan or proposal for the liquidation or dissolution of the Company. Notwithstanding the foregoing, the phrase "Change of Control" shall not apply to any reorganization or merger initiated voluntarily by the Company in which the Company is the continuing surviving entity. For purposes of this Section 15(a), the Board of Directors of the Company, by a majority vote, shall have the power to determine on the basis of information known to them (a) the number of shares beneficially owned by any person, entity or group; (b) whether there exists an agreement, arrangement or understanding with another as to matters referred to in this Section 15(a); and (c) such other matters with respect to which a determination is necessary under this Section 15(a). (b) The General Counsel of the Company shall have the specific authority to determine whether a Change of Control has transpired under the guidance of this Section 15(a) and shall be required to give the Trustee notice of a Change of Control. The Trustee shall be entitled to rely upon such notice, but if the Trustee receives notice of a Change of Control from another source, the Trustee shall make its own independent determination. Section 16. Miscellaneous ------------- (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) The Company hereby represents and warrants that all of the Arrangements have been established, maintained and administered in accordance with all applicable laws, including without limitation, ERISA. The Company hereby indemnifies and agrees to hold the Trustee harmless from all liabilities, including attorney's fees, relating to or arising out of the establishment, maintenance and administration of the Arrangements. To the extent the Company does not pay any of such liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) Benefits payable to Participants and their Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (d) This Trust Agreement shall be governed by and construed in accordance with the laws of North Carolina. IN WITNESS WHEREOF, this Grantor Trust Agreement has been executed on behalf of the parties hereto on the day and year first above written. PG&E CORPORATION WACHOVIA BANK, N.A. BRUCE R. WORTHINGTON JOE O. LONG --------------------------- ----------------------- By: BRUCE R. WORTHINGTON By: JOE O. LONG Name: Bruce R. Worthington Name: Joe O. Long Its: Senior Vice President and Its: Senior Vice President General Counsel Chairperson, Employee Benefit Committee ATTEST: ATTEST: By: LINDA Y.H. CHENG By: JOHN N. SMITH ------------------ -------------------- Name: Linda Y.H. Cheng Name: John N. Smith Its: Assistant Corporate Its: Assistant Secretary Secretary Attachment I ------------ PG&E CORPORATION DIRECTOR GRANTOR TRUST AGREEMENT NONQUALIFIED BENEFIT PLANS COVERED - PG&E Corporation Retirement Plan for Non-Employee Directors - PG&E Corporation Deferred Compensation Plan for Non-Employee Directors EX-10.2 5 PG&E CORPORATION OFFICER GRANTOR TRUST AGREEMENT This Officer Grantor Trust Agreement (the "Trust Agreement") is made this 1st day of April 1998, by and between PG&E CORPORATION ("the Company") and WACHOVIA BANK, N.A. ("the Trustee"). Recitals - --------- (a) WHEREAS, the Company has adopted the nonqualified deferred compensation Plans and Agreements (the "Arrangements") as listed in Attachment I; (b) WHEREAS, the Company has incurred or expects to incur liability under the terms of such Arrangements with respect to the individuals participating in such Arrangements (the "Participants and Beneficiaries"); (c) WHEREAS, the Company hereby establishes a Trust (the "Trust") and shall contribute to the Trust assets that shall be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Participants and their Beneficiaries in such manner and at such times as specified in the Arrangements and in this Trust Agreement; (d) WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Arrangements as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and (e) WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds (the "Fund") to assist it in satisfying its Liabilities under the Arrangements. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment of The Trust -------------------------- (a) The Trust is intended to be a Grantor Trust, of which the Company is the Grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (b) The Company shall be considered a Grantor for the purposes of the Trust. (c) The Trust hereby established shall be irrevocable. (d) The Company hereby deposits with the Trustee in the Trust One Thousand Dollars and Zero Cents ($1,000.00) which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (e) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Participants and general creditors as herein set forth. Participants and their Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Arrangements and this Trust Agreement shall be unsecured contractual rights of Participants and their Beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the general creditors of the Company under federal and state law in the event the Company is Insolvent, as defined in Section 3(a) herein. (f) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property acceptable to the Trustee in the Trust to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Prior to a Change of Control, neither the Trustee nor any Participant or Beneficiary shall have any right to compel additional deposits. (g) Upon a Change of Control, the Company shall, as soon as possible, but in no event longer than thirty (30) days following the occurrence of a Change of Control, as defined herein, make an irrevocable contribution to the Trust in an amount that is sufficient to fund the Trust in an amount equal to no less than 100% but no more than 120% of the amount necessary to pay each Participant or Beneficiary the benefits to which Participants or their Beneficiaries would be entitled pursuant to the terms of the Arrangements as of the date on which the Change of Control occurred. The Company shall also fund an expense reserve for the Trustee in the amount of $225,000.00. Section 2. Payments Participants and Their Beneficiaries --------------------------------------------- (a) Prior to a Change of Control, distributions from the Trust shall be made by the Trustee to Participants and Beneficiaries at the direction of the Company. The entitlement of a Participant or his or her Beneficiaries to benefits under the Arrangements shall be determined by the Company or such party or professional administrator as it shall designate under the Arrangements as the Company's agent, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Arrangements. (b) The Company may make payment of benefits directly to Participants or their Beneficiaries as they become due under the terms of the Arrangements. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Participants or their Beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Arrangements, the Company shall make the balance of each such payment as it falls due in accordance with the Arrangements. The Trustee shall notify the Company where principal and earnings are not sufficient. Nothing in this Agreement shall relieve the Company of its liabilities to pay benefits due under the Arrangements except to the extent such liabilities are met by application of assets of the Trust. (c) After a Change of Control, the Company shall continue to make the determination of benefits due to Participants or their Beneficiaries and shall provide the Trustee with a schedule of benefits due. The Trustee shall pay benefits due in accordance with such schedule; provided however, a Participant or their Beneficiaries may make application to the Trustee for an independent decision as to the amount or form of their benefits due under the Arrangements. In making any determination required or permitted to be made by the Trustee under this Section, the Trustee shall, in each such case, reach its own independent determination, in its absolute and sole discretion, as to the Participant's or Beneficiary's entitlement to a payment hereunder. In making its determination, the Trustee may consult with and make such inquiries of such persons, including the Participant or Beneficiary, the Company, legal counsel, actuaries or other persons, as the Trustee may reasonably deem necessary. Any reasonable costs incurred by the Trustee in arriving at its determination shall be reimbursed by the Company and, to the extent not paid by the Company within a reasonable time, shall be charged to the Trust. The Company waives any right to contest any amount paid over by the Trustee hereunder pursuant to a good faith determination made by the Trustee notwithstanding any claim by or on behalf of the Company (absent a manifest abuse of discretion by the Trustee) that such payments should not be made. (d) The Trustee agrees that it will not itself institute any action at law or at equity, whether in the nature of an accounting, interpleading action, request for a declaratory judgment or otherwise, requesting a court or administrative or quasi-judicial body to make the determination required to be made by the Trustee under this Section 2 in the place and stead of the Trustee. The Trustee may institute an action to collect a contribution due the Trust following a Change of Control or in the event that the Trust should ever experience a short-fall in the amount of assets necessary to make payments pursuant to the terms of the Arrangements. (e) In the event any Participant or his or her Beneficiary is determined to be subject to federal income tax on any amount to the credit of his or her account under any Arrangement prior to the time of payment hereunder, whether or not due to the establishment of or contributions to this Trust, a portion of such taxable amount equal to the federal, state and local taxes (excluding any interest or penalties) owed on such taxable amount, shall be distributed by the Trustee as soon thereafter as practicable to such Participant or Beneficiary. The Company shall promptly reimburse the Trust for any such distribution in an amount certified by the Trustee to be needed for the Participant's benefits. For these purposes, a Participant or Beneficiary shall be deemed to pay state and local taxes at the highest marginal rate of taxation in the state in which the Participant resides or is employed (or both) where a tax is imposed and federal income taxes at the highest marginal rate of taxation, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. Such distributions shall be at the direction of the Company or the Trustee, or upon proper application of the Participant or Beneficiary; provided that the actual amount of the distribution shall be determined by the Company prior to a Change of Control and the Trustee following a Change of Control. An amount to the credit of a Participant's Account shall be determined to be subject to federal income tax upon the earliest of: (a) a final determination by the United States Internal Revenue Service addressed to the Participant or his Beneficiary which is not appealed to the courts; (b) a final determination by the United States Tax Court or any other federal court affirming any such determination by the Internal Revenue Service; or (c) an opinion by the Company's tax counsel, addressed to the Company and the Trustee, to the effect that by reason of Treasury Regulations, amendments to the Internal Revenue Code, published Internal Revenue Service rulings, court decisions or other substantial precedent, amounts to the credit of Participants hereunder are subject to federal income tax prior to payment. The Company may undertake at its sole expense to defend any tax claims described herein which are asserted by the Internal Revenue Service against any Participant or Beneficiary, including attorney fees and cost of appeal, and shall have the sole authority to determine whether or not to appeal any determination made by the Service or by a lower court. The Company also agrees to reimburse any Participant or Beneficiary for any interest or penalties in respect of tax claims hereunder upon receipt of documentation of same. Any distributions from the Fund to a Participant or Beneficiary under this Section 2(e) shall be applied in accordance with the provisions of the Arrangement to reduce the Company liabilities to such Participant and/or Beneficiary under the Arrangement with such reductions to be made on a pro-rata basis over the term of benefit payments under the Arrangement; provided, however, that in no event shall any Participant, Beneficiary or estate of any Participant or Beneficiary have any obligation to return all or any part of such distribution to the Company if such distribution exceeds benefits payable under an Arrangement. Any reduction in accordance with the foregoing sentence and the Arrangements shall be determined by the Company prior to a Change of Control. Following a Change of Control, the Company shall continue to make such determination subject to the right of a Participant to petition the Trustee under Section 2(c). Section 3. Trustee Responsibility Regarding Payments To The Trust Beneficiary When The Company Is Insolvent ------------------------------------------- (a) The Trustee shall cease payment of benefits to Participants and their Beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing that the Company is Insolvent. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants or their Beneficiaries. (2) Unless the Trustee has actual knowledge that the Company is Insolvent, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (3) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Participants or their Beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Arrangements or otherwise. (4) The Trustee shall resume the payment of benefits to Participants or their Beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants or their Beneficiaries under the terms of the Arrangements for the period of such discontinuance, less the aggregate amount of any payments made to Participants or their Beneficiaries by the Company in lieu of the payments provided for hereunder curing any such period of discontinuance. Section 4. Payments if a Short-Fall of The Trust Assets Occurs --------------------------------------------- (a) If there are not sufficient assets for the payment of benefits pursuant to Section 2 or Section 3(c) hereof and the Company does not otherwise make such payments within a reasonable time after demand from the Trustee, the Trustee shall make payment of benefits from the Trust to the Participants or their Beneficiaries in the following order of priority: (1) retired Participants and their Beneficiaries; (2) vested Participants over the age of 55 who were terminated within two years following a Change of Control and their Beneficiaries; (3) vested active Participants over the age of 55 and their Beneficiaries; (4) any other vested active Participants and their Beneficiaries; (5) vested former Participants and their Beneficiaries; and (6) non-vested Participants and their Beneficiaries (b) Within each category set forth under Section 4(a), payments shall be prioritized in the following order: (c) Upon receipt of a contribution from the Company necessary to make up for a short-fall in the payments due, the Trustee shall resume payments to all the Participants and Beneficiaries under the Arrangements. Following a Change of Control, the Trustee shall have the right to compel a contribution to the Trust from the Company to make-up for any short-fall. Section 5. Payments to the Company ----------------------- Except as provided in Sections 3, 8, and 14 hereof, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Participants and their Beneficiaries pursuant to the terms of the Arrangements. Section 6. Investment Authority -------------------- (a) The Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the Fund, if it acts for the exclusive benefit of the Participants and their Beneficiaries, in good faith and as a prudent person would act in accomplishing a similar task and in accordance with the terms of this Trust Agreement and any applicable federal or state laws, rules or regulations. (b) Subject to investment guidelines agreed to in writing from time to time by the Company and the Trustee prior to a Change of Control, the Trustee shall have the power in investing and reinvesting the Fund in its sole discretion: (1) To invest and reinvest in any readily marketable common and preferred stocks, bonds, notes, debentures (including convertible stocks and securities but not including any stock or security of other than a de minimus amount held in a collective or mutual fund), certificates of deposit or demand or time deposits (including any such deposits with the Trustee) and shares of investment companies and mutual funds, without being limited to the classes or property in which the Trustees are authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the Fund; (2) To commingle for investment purposes all or any portion of the Fund with assets of any other similar trust or trusts established by the Company with the Trustee for the purpose of safeguarding deferred compensation or retirement income benefits of its employees and/or directors; (3) To retain any property at any time received by the Trustee; (4) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future; (5) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person; (6) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof any assessments levied with respect to any such property to deposited; (7) To extend the time of payment of any obligation held by it; (8) To hold uninvested any moneys received by it, without liability for interest thereon, but only in anticipation of payments due for investments, reinvestments, expenses or disbursements; (9) To exercise all voting or other rights with respect to any property held by it and to grant proxies, discretionary or otherwise; (10) For the purposes of the Trust, to borrow money from others, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it; (11) To employ suitable contractors and counsel, who may be counsel to the Company or to the Trustee, and to pay their reasonable expenses and compensation from the Fund to the extent not paid by the Company; (12) To register investments in its own name or in the name of a nominee; to hold any investment in bearer form; and to combine certificates representing securities with certificates of the same issue held by it in other fiduciary capacities or to deposit or to arrange for the deposit of such securities with any depository, even though, when so deposited, such securities may be held in the name of the nominee of such depository with other securities deposited therewith by other persons, or to deposit or to arrange for the deposit of any securities issued or guaranteed by the United States government, or any agency or instrumentality thereof, including securities evidenced by book entries rather than by certificates, with the United States Department of the Treasury or a Federal Reserve Bank, even though, when so deposited, such securities may not be held separate from securities deposited therein by other persons; provided, however, that no securities held in the Fund shall be deposited with the United States Department of the Treasury or a Federal Reserve Bank or other depository in the same account as any individual property of the Trustee, and provided, further, that the books and records of the Trustee shall at all times show that all such securities are part of the Trust Fund; (13) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, respectively, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom; (14) To hold and retain policies of life insurance, annuity contracts, and other property of any kind which policies are contributed to the Trust by the Company or any subsidiary of the Company or are purchased by the Trustee; (15) To hold any other class of assets which may be contributed by the Company and that is deemed reasonable by the Trustee, unless expressly prohibited herein; (16) To loan any securities at any time held by it to brokers or dealers upon such security as may be deemed advisable, and during the terms of any such loan to permit the loaned securities to be transferred into the name of and voted by the borrower or others; and (17) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Fund. (c) Prior to a Change of Control, the Company shall have the right, subject to this Section to direct the Trustee with respect to investments. (1) The Company may at any time direct the Trustee to segregate all or a portion of the Fund in a separate investment account or accounts and may appoint one or more investment managers and/or an Investment Committee established by the Company as described in Section 6(d) hereof to direct the investment and reinvestment of each such investment account or accounts. In such event, the Company shall notify the Trustee of the appointment of each such investment manager and/or Investment Committee. No such investment manager shall be related, directly or indirectly, to the Company, but members of the Investment Committee may be employees of the Company. (2) Thereafter, the Trustee shall make every sale or investment with respect to such investment account as directed in writing by the investment manager or Investment Committee. It shall be the duty of the Trustee to act strictly in accordance with each direction. The Trustee shall be under no duty to question any such direction of the investment manager or Investment Committee, to review any securities or other property held in such investment account or accounts acquired by it pursuant to such directions or to make any recommendations to the investment managers or Investment Committee with respect to such securities or other property. (3) Notwithstanding the foregoing, the Trustee, without obtaining prior approval or direction from an investment manager or Investment Committee, shall invest cash balances held by it from time to time in short term cash equivalents including, but not limited to, through the medium of any short term common, collective or commingled trust fund established and maintained by the Trustee subject to the instrument establishing such trust fund, U.S. Treasury Bills, commercial paper (including such forms of commercial paper as may be available through the Trustee's Trust Department), certificates of deposit (including certificates issued by the Trustee in its separate corporate capacity), and similar type securities, with a maturity not to exceed one year; and, furthermore, sell such short term investments as may be necessary to carry out the instructions of an investment manager or Investment Committee regarding more permanent type investment and directed distributions. (4) The Trustee shall neither be liable nor responsible for any loss resulting to the Fund by reason of any sale or purchase of an investment directed by an investment manager or Investment Committee nor by reason of the failure to take any action with respect to any investment which was acquired pursuant to any such direction in the absence of further directions of such investment manager or Investment Committee. (5) Notwithstanding anything in this Agreement to the contrary, the Trustee shall be indemnified and saved harmless by the Company from and against any and all personal liability to which the Trustee may be subjected by carrying out any directions of an investment manager or Investment Committee issued pursuant hereto or for failure to act in the absence of directions of the investment manager or Investment Committee including all expenses reasonably incurred in its defense in the event the Company fails to provide such defense; provided, however, the Trustee shall not be so indemnified if it participates knowingly in, or knowingly undertakes to conceal, an act or omission of an investment manager or Investment Committee, having actual knowledge that such act or omission is a breach of a fiduciary duty; provided further, however, that the Trustee shall not be deemed to have knowingly participated in or knowingly undertaken to conceal an act or omission of an investment manager or Investment Committee with knowledge that such act or omission was a breach of fiduciary duty by merely complying with directions of an investment manager or Investment Committee or for failure to act in the absence of directions of an investment manager or Investment Committee. The Trustee may rely upon any order, certificate, notice, direction or other documentary confirmation purporting to have been issued by the investment manager or Investment Committee which the Trustee believes to be genuine and to have been issued by the investment manager or Investment Committee. The Trustee shall not be charged with knowledge of the termination of the appointment of any investment manager or Investment Committee until it receives written notice thereof from the Company. (d) Prior to a Change of Control, the Board of Directors of the Company may appoint an Investment Committee to direct the investment of the Fund. The Investment Committee may exercise any powers relating to the investment of Trust assets as described in Sections 6 and 7 hereof. The Investment Committee shall exercise its authority by an affirmative action of a majority of members constituting the Investment Committee, expressed from time to time by a vote at a meeting of the Investment Committee, or in an action in writing signed by all members without a meeting. Prior to a Change of Control, the Board of Directors of the Company shall have the right to remove and to replace any member of the Investment Committee at any time by notice in writing to that member. Following a Change of Control, the Company shall have no authority to remove or replace members of the Investment Committee, and any vacancy in the membership of the Investment Committee, created by resignation, disability, death or otherwise, shall be filled by the vote of a majority of the members of the Investment Committee then in office. Following a Change of Control, the Investment Committee may, on its own initiative, acquire fiduciary insurance for the benefit of its members at the Company's expense. If for any reason, the Company does not pay the premiums for such insurance, the Trustee shall pay such premiums out of the Trust assets and seek reimbursement from the Company. (e) Following a Change of Control, unless there is then in existence an Investment Committee as described in Section 6(d) above, the Trustee shall have the sole and absolute discretion in the management of the Trust assets and shall have all the powers set forth under Section 6(b). In investing the Trust assets, the Trustee shall consider: (1) the needs of the Arrangements; (2) the need for matching of the Trust assets with the liabilities of the Arrangements; and (3) the duty of the Trustee to act solely in the best interests of the Participants and their Beneficiaries. (f) The Trustee shall have the right, in its sole discretion, to delegate its investment responsibility to an investment manager who may be an affiliate the Trustee. In the event the Trustee shall exercise this right, the Trustee shall remain, at all times responsible for the acts of an investment manager. The Trustee shall have the right to purchase an insurance policy or an annuity to fund the benefits of the Arrangements. (g) The Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. Section 7. Insurance Contracts ------------------- (a) To the extent that the Trustee is directed by the Company prior to a Change of Control or by the Investment Committee after a Change of Control to invest part or all of the Trust Fund in insurance contracts, the type and amount thereof shall be specified by the Company. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified. (b) Each insurance contract issued shall provide that the Trustee shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a Change of Control, be subject to the direction of the Company. After a Change of Control, the Trustee shall have all such rights to the extent an Investment Committee had not been established. (c) The Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against an insurance policy held in the Trust Fund. (d) No insurer shall be deemed to be a party to the Trust and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by the insurer. Section 8. Disposition of Income --------------------- (a) Prior to a Change of Control, all income received by the Trust, net of expenses and taxes, may be returned to the Company or accumulated and reinvested within the Trust at the direction of the Company. In addition, if, at any time prior to a Change of Control, the value of assets held in the Trust exceeds 100 percent of the amount necessary to pay each Participant or Beneficiary the benefits to which Participants or their Beneficiaries would be entitled pursuant to the terms of the Arrangements as of the date on which the determination is made, the Trustee shall return the excess to the Company at the Company's written request. (b) Following a Change of Control, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested within the Trust. Section 9. Accounting by The Trustee ------------------------- The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee within forty-five (45) days following the close of each calendar year and within forty-five (45) days after the removal or resignation of the Trustee. The Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. The Company may approve such account by an instrument in writing delivered to the Trustee. In the absence of the Company's filing with the Trustee objections to any such account within ninety (90) days after its receipt, the Company shall be deemed to have so approved such account. In such case, or upon the written approval by the Company of any such account, the Trustee shall, to the extent permitted by law, be discharged from all liability to the Company for its acts or failures to act described by such account. The foregoing, however, shall not preclude the Trustee from having its accounting settled by a court of competent jurisdiction. The Trustee shall be entitled to hold and to commingle the assets of the Trust in one Fund for investment purposes but at the direction of the Company prior to a Change of Control, the Trustee shall create one or more sub-accounts. Section 10. Responsibility of The Trustee ----------------------------- (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Arrangements or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute, subject, however to Section 2(d) hereof. (b) The Company hereby indemnifies the Trustee against losses, liabilities, claims, costs and expenses in connection with the administration of the Trust, unless resulting from the negligence or misconduct of Trustee. To the extent the Company fails to make any payment on account of an indemnity provided in this paragraph 10(b), in a reasonably timely manner, the Trustee may obtain payment from the Trust. If the Trustee undertakes or defends any litigation arising in connection with this Trust or to protect a Participant's or Beneficiary's rights under the Arrangements, the Company agrees to indemnify the Trustee against the Trustee's costs, reasonable expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) Prior to a Change of Control, the Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. Following a Change of Control the Trustee shall select independent legal counsel and may consult with counsel or other persons with respect to its duties and with respect to the rights of Participants or their Beneficiaries under the Arrangements. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder and may rely on any determinations made by such agents and information provided to it by the Company. (e) The Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein. (f) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 11. Compensation and Expenses of The Trustee ---------------------------------------- The Trustee's compensation shall be as agreed in writing from time to time by the Company and the Trustee. The Company shall pay all administrative expenses and the Trustee's fees and shall promptly reimburse the Trustee for any fees and expenses of its agents. If not so paid, the fees and expenses shall be paid from the Trust. Section 12. Resignation and Removal of The Trustee -------------------------------------- (a) Prior to a Change of Control, the Trustee may resign at any time by written notice to the Company, which shall be effective sixty (60) days after receipt of such notice unless the Company and the Trustee agree otherwise. Following a Change of Control, the Trustee may resign only after the appointment of a successor Trustee. (b) The Trustee may be removed by the Company on sixty days (60) days notice or upon shorter notice accepted by the Trustee prior to a Change of Control. Subsequent to a Change of Control, the Trustee may only be removed by the Company with the consent of a majority of the Participants. (c) If the Trustee resigns within two years after a Change of Control, as defined herein, the Company, or if the Company fails to act within a reasonable period of time following such resignation, the Trustee shall apply to a court of competent jurisdiction for the appointment of a successor trustee or for instructions. (d) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. (e) If the Trustee resigns or is removed, a successor shall be appointed by the Company, in accordance with Section 13 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section l3. Appointment of Successor ------------------------ (a) If the Trustee resigns or is removed in accordance with Section 12 hereof, the Company may appoint, subject to Section 12, any third party national banking association with a market capitalization exceeding $100,000,000 to replace the Trustee upon resignation or removal. The successor Trustee shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Section 8 and 9 hereof. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. Section 14. Amendment or Termination ------------------------ (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Arrangements or shall make the Trust revocable after it has become irrevocable in accordance with Section 1 hereof. (b) The Trust shall not terminate until the date on which Participants and their Beneficiaries have received all of the benefits due to them under the terms and conditions of the Arrangements. Upon termination of the Trust, the Trust assets shall be returned to the Company. (c) Upon written approval of all Participants or Beneficiaries entitled to payment of benefits pursuant to the terms of the Arrangements, the Company may terminate this Trust prior to the time all benefit payments under the Arrangements have been made. All assets in the Trust at termination shall be returned to the Company. (d) This Trust Agreement may not be amended or terminated by the Company for two (2) years following a Change of Control without the written consent of a majority of the Participants. Section 15. Change of Control ----------------- (a) A "Change of Control" shall be deemed to have occurred if: (1) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, 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 Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; (2) during any two consecutive years, individuals who at the beginning of such a period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company, unless the election, or the nomination for election by the shareholders of the Company, 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 (3) the Company has executed and delivered a definitive agreement which would require the consummation of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of common stock are converted into cash, securities or other property, other than a merger of the Company in which the holders of the common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (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 Company, or (iii) any plan or proposal for the liquidation or dissolution of the Company. (4) the shareholders of the Company shall have approved (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of common stock are converted into cash, securities or other property, other than a merger of the Company in which the holders of the common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (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 Company, or (iii) any plan or proposal for the liquidation or dissolution of the Company. Notwithstanding the foregoing, the phrase "Change of Control" shall not apply to any reorganization or merger initiated voluntarily by the Company in which the Company is the continuing surviving entity. For purposes of this Section 15(a), the Board of Directors of the Company, by a majority vote, shall have the power to determine on the basis of information known to them (a) the number of shares beneficially owned by any person, entity or group; (b) whether there exists an agreement, arrangement or understanding with another as to matters referred to in this Section 15(a); and (c) such other matters with respect to which a determination is necessary under this Section 15(a). (b) The General Counsel of the Company shall have the specific authority to determine whether a Change of Control has transpired under the guidance of this Section 15(a) and shall be required to give the Trustee notice of a Change of Control. The Trustee shall be entitled to rely upon such notice, but if the Trustee receives notice of a Change of Control from another source, the Trustee shall make its own independent determination. Section 16. Miscellaneous ------------- (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) The Company hereby represents and warrants that all of the Arrangements have been established, maintained and administered in accordance with all applicable laws, including without limitation, ERISA. The Company hereby indemnifies and agrees to hold the Trustee harmless from all liabilities, including attorney's fees, relating to or arising out of the establishment, maintenance and administration of the Arrangements. To the extent the Company does not pay any of such liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) Benefits payable to Participants and their Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (d) This Trust Agreement shall be governed by and construed in accordance with the laws of North Carolina. IN WITNESS WHEREOF, this Grantor Trust Agreement has been executed on behalf of the parties hereto on the day and year first above written. PG&E CORPORATION WACHOVIA BANK, N.A. Bruce R. Worthington Joe O. Long -------------------- --------------- By: Bruce R. Worthington By: Joe O. Long Name: Bruce R. Worthington Name: Joe O. Long Its: Senior Vice President and Its: Senior Vice President General Counsel Chairperson, Employee Benefit Committee ATTEST: ATTEST: Linda Y. H. Cheng John N. Smith ------------------- ------------------ By: Linda Y. H. Cheng By: John N. Smith Its: Assistant Corporate Its: Assistant Secretary Secretary Attachment I ------------ PG&E CORPORATION OFFICER GRANTOR TRUST AGREEMENT NONQUALIFIED BENEFIT PLANS COVERED - Pacific Gas and Electric Company Supplemental Executive Retirement Plan (SERP) - Pacific Gas and Electric Company Retirement Excess Benefit Plan - PG&E Corporation Deferred Compensation Plan for Officers EX-11 6 EXHIBIT 11 PG&E CORPORATION COMPUTATION OF EARNINGS PER COMMON SHARE
- ----------------------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------------- (in millions, except per share amounts) 1998 1997 - ----------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE (EPS) AS SHOWN IN THE STATEMENT OF CONSOLIDATED INCOME Earnings available for common stock $ 139 $ 173 ======== ======== Average common shares outstanding 381 409 ======== ======== Basic EPS $ .36 $ .42 ======== ======== DILUTED EPS (1) Earnings available for common stock $ 139 $ 173 ======== ======== Average common shares outstanding 381 409 Add exercise of options, reduced by the number of shares that could have been purchased with the proceeds from such exercise (at average market price) 1 - -------- -------- Average common shares outstanding as adjusted 382 409 ======== ======== Diluted EPS $ .36 $ .42 ======== ======== - ----------------------------------------------------------------------------------------- (1) This presentation is submitted in accordance with Statement of Financial Accounting Standards No. 128.
EX-12.1 7 EXHIBIT 12.1 PACIFIC GAS AND ELECTRIC COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- --------------------------------------------------------------------------------------------------- Three Months Year ended December 31, ended ------------------------------------------------------- (dollars in millions) March 31, 1998 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------- Earnings: Net income $ 155 $ 768 $ 755 $ 1,339 $ 1,007 $ 1,065 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 (3) 7 Income tax expense 144 609 555 895 837 902 Net fixed charges 180 628 683 716 729 775 -------- -------- -------- -------- -------- -------- Total Earnings $ 479 $ 2,005 $ 1,996 $ 2,954 $ 2,570 $ 2,749 ======== ======== ======== ======== ======== ======== Fixed Charges: Interest on long- term debt, net $ 156 $ 485 $ 574 $ 616 $ 639 $ 652 Interest on short- term borrowings 14 101 75 83 77 88 Interest on capital leases - 2 3 3 2 2 Capitalized Interest - 1 1 - 2 46 AFUDC Debt 4 16 7 11 11 33 Earnings required to cover the preferred stock dividend and preferred security distribution requirements of majority owned trust 6 24 24 3 - - -------- -------- -------- -------- -------- -------- Total Fixed Charges $ 180 $ 629 $ 684 $ 716 $ 731 $ 821 ======== ======== ======== ======== ======== ======== Ratios of Earnings to Fixed Charges 2.66 3.19 2.92 4.13 3.52 3.35 - ---------------------------------------------------------------------------------------------------- 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 on capital leases, and earnings required to cover the preferred stock dividend requirements.
EX-12.2 8 EXHIBIT 12.2 PACIFIC GAS AND ELECTRIC COMPANY COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
- ---------------------------------------------------------------------------------------------------- Three Months Year ended December 31, ended ------------------------------------------------------- (dollars in millions) March 31, 1998 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- Earnings: Net income $ 155 $ 768 $ 755 $ 1,339 $ 1,007 $ 1,065 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 (3) 7 Income tax expense 144 609 555 895 837 902 Net fixed charges 180 628 683 716 729 775 -------- -------- -------- -------- -------- -------- Total Earnings $ 479 $ 2,005 $ 1,996 $ 2,954 $ 2,570 $ 2,749 ======== ======== ======== ======== ======== ======== Fixed Charges: Interest on long- term debt, net $ 156 $ 485 $ 574 $ 616 $ 639 $ 652 Interest on short- term borrowings 14 101 75 83 77 88 Interest on capital leases - 2 3 3 2 2 Capitalized Interest - 1 1 - 2 46 AFUDC Debt 4 16 7 11 11 33 Earnings required to cover the preferred stock dividend and preferred security distribution requirements of majority owned trust 6 24 24 3 - - -------- -------- -------- -------- -------- -------- Total Fixed Charges $ 180 $ 629 $ 684 $ 716 $ 731 $ 821 -------- -------- -------- -------- -------- -------- Preferred Stock Dividends: Tax deductible dividends $ 3 $ 10 $ 10 $ 11 $ 5 $ 5 Pretax earnings required to cover non-tax deductible preferred stock dividend requirements 8 39 39 100 96 109 -------- -------- -------- -------- -------- -------- Total Preferred Stock Dividends $ 11 $ 49 $ 49 $ 111 $ 101 $ 114 -------- -------- -------- -------- -------- -------- Total Combined Fixed Charges and Preferred Stock Dividends $ 191 $ 678 $ 733 $ 827 $ 832 $ 935 ======== ======== ======== ======== ======== ======== Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends 2.50 2.96 2.72 3.57 3.09 2.94 - --------------------------------------------------------------------------------------------------- Note: For the purpose of computing Pacific Gas and Electric Company's ratios of earnings 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-27.1 9
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 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 PER-BOOK 20,317 652 3,970 2,752 1,645 29,336 5,819 0 1,992 7,811 494 328 7,423 135 0 108 579 0 0 0 12,458 29,336 4,353 141 3,888 3,888 465 18 483 203 139 0 139 114 90 852 0.36 0.36
EX-27.2 10
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 PACIFIC GAS AND ELECTRIC COMPANY 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 PER-BOOK 17,165 0 3,287 2,544 1,058 24,054 1,865 2,267 2,375 6,507 437 328 5,945 0 0 0 503 0 0 0 10,334 24,054 2,025 144 1,599 1,599 426 4 430 131 155 7 148 100 90 613 0.00 0.00
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