Pacific Gas & Electric (PCG)

Convertible Subordinated Notes

PG&E Corporation currently has outstanding $280 million of 9.50% Convertible Subordinated Notes that are scheduled to mature on June 30, 2010.  These Convertible Subordinated Notes may be converted (at the option of the holder) at any time prior to maturity into 18,558,655 shares of common stock of PG&E Corporation, at a conversion price of approximately $15.09 per share.  The conversion price is subject to adjustment should a significant change occur in the number of PG&E Corporation’s outstanding common shares.  To date, the conversion price has not required adjustment.  In addition, holders of the Convertible Subordinated Notes are entitled to receive pass-through dividends at the same payout as common stockholders with the number of shares determined by dividing the principal amount of the Convertible Subordinated Notes by the conversion price.  On April 15, 2005, PG&E Corporation paid approximately $6 million of pass-through dividends to holders of the Convertible Subordinated Notes.  The holders have a one-time right to require PG&E Corporation to repurchase the Convertible Subordinated Notes on June 30, 2007, at a purchase price equal to the principal amount plus accrued and unpaid interest (including liquidated damages and pass-through dividends, if any).

In accordance with SFAS No. 133. “Accounting for Derivative Instruments and Hedging Activities,” or SFAS No. 133, the dividend participation rights component is considered to be an embedded derivative instrument and, therefore, must be bifurcated from the Convertible Subordinated Notes and marked to market on PG&E Corporation’s Consolidated Statements of Income as a non-operating expense (in Other expense, net), and reflected at fair value on PG&E Corporation’s Consolidated Balance Sheet at March 31, 2005.  At March 31, 2005, the total estimated fair value of the dividend participation rights component, on a pre-tax basis, was approximately $92 million of which $20 million is classified as a current liability (in Current liabilities-Other) and $72 million is classified as a noncurrent liability (in Noncurrent liabilities-Other).  The change in mark to market fair value for the quarter ended March 31, 2005, was immaterial, and approximately $32 million, pre-tax, for the quarter ended March 31, 2004.

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Convertible Subordinated Notes

PG&E Corporation currently has outstanding $280 million of 9.50% Convertible Subordinated Notes that are scheduled to mature on June 30, 2010. These Convertible Subordinated Notes may be converted (at the option of the holder) at any time prior to maturity into 18,558,655 shares of common stock of PG&E Corporation, at a conversion price of $15.09 per share. The conversion price is subject to adjustment should a significant change occur in the number of PG&E Corporation’s outstanding common shares. To date, the conversion price has not required adjustment. In addition, the terms of the Convertible Subordinated Notes entitle the note holders to participate in any dividends declared and paid on PG&E Corporation’s common shares based on their equity conversion value. The holders have a one-time right to require PG&E Corporation to repurchase the Convertible Subordinated Notes on June 30, 2007, at a purchase price equal to the principal amount plus accrued and unpaid interest (including liquidated damages and pass-through dividends, if any).

In accordance with SFAS No. 133, the dividend participation rights component is considered to be an embedded derivative instrument and, therefore, must be bifurcated from the Convertible Subordinated Notes and marked to market on PG&E Corporation’s Consolidated Statements of Operations as a non-operating expense (in Other expense, net), and reflected at fair value on PG&E Corporation’s Consolidated Balance Sheet at December 31, 2004 as $76 million of non-current liability (in Non-current liabilities—other) and $15 million of current liability (in Current liabilities—other). At December 31, 2004, the total estimated fair value of the dividend participation rights component on a pre-tax basis was approximately $91 million.

Convertible Subordinated Notes

        PG&E Corporation currently has outstanding $280 million of 9.50% Convertible Subordinated Notes that are scheduled to mature on June 30, 2010. These Convertible Subordinated Notes may be converted (at the option of the holder) at any time prior to maturity into 18,558,655 shares of common stock of PG&E Corporation, at a conversion price of $15.09 per share. The conversion price is subject to adjustment should a significant change occur in the number of PG&E Corporation's outstanding common shares. To date, the conversion price has not required adjustment. In addition, the terms of the Convertible Subordinated Notes entitle the note holders to participate in any dividends declared and paid on PG&E Corporation's common shares based on their equity conversion value. The holders have a one-time right to require PG&E Corporation to repurchase the Convertible Subordinated Notes on June 30, 2007, at a purchase price equal to the principal amount plus accrued and unpaid interest (including liquidated damages and pass-through dividends, if any).

        In accordance with SFAS No. 133, the dividend participation rights component is considered to be an embedded derivative instrument and, therefore, must be bifurcated from the Convertible Subordinated Notes and marked to market on PG&E Corporation's Consolidated Statements of Operations as a non-operating expense (in Other expense, net), and reflected at fair value on PG&E Corporation's Consolidated Balance Sheet at December 31, 2004 as $76 million of non-current liability (in Non-current liabilities—other) and $15 million of current liability (in Current liabilities—other). At December 31, 2004, the total estimated fair value of the dividend participation rights component on a pre-tax basis was approximately $91 million.