Pacific Gas & Electric (PCG)

Liquidity

PG&E Corporation and the Utility intend to retain sufficient cash for operating needs and to manage debt levels to maintain access to credit. Available cash, combined with cash from operations and cash generated from refinancing of the Settlement Regulatory Asset will be used for planned capital expenditures and repayment of existing long-term debt. Surplus cash either will be returned to investors through dividend payments and/or share repurchases or utilized to fund incremental capital investments.

PG&E Corporation and the Utility seek to manage their liquidity and capital resources within the following parameters and assumptions:

•                  PG&E Corporation and the Utility target cash balances, which, together with credit facilities, accommodates normal and unforeseen demands on its liquidity. Currently, PG&E Corporation and the Utility have credit facilities totaling $200 million and $1.5 billion, respectively;

•                  The Utility seeks to maintain or strengthen its credit ratings to provide efficient access to financial and trade credit and to ensure adequate liquidity. The Utility’s issuer credit ratings, as of February 16, 2005, are BBB from Standard & Poor’s, or S&P, and Baa3 from Moody’s Investors Service, or Moody’s. The Utility’s secured debt ratings are currently BBB from S&P and Baa2 from Moody’s;

•                  The Utility seeks to manage its operating expenses and capital expenditures to earn not less than its 11.22% authorized rate of return on the equity portion of its authorized rate base assets. Under the Settlement Agreement, the Utility’s authorized return on equity floor of 11.22% and allowed equity ratio of 52% cannot be reduced until its long-term issuer credit ratings are at least A- from S&P or A3 from Moody’s;

Liquidity

        PG&E Corporation and the Utility intend to retain sufficient cash for operating needs and to manage debt levels to maintain access to credit. Available cash, combined with cash from operations and cash generated from refinancing of the Settlement Regulatory Asset will be used for planned capital expenditures and repayment of existing long-term debt. Surplus cash either will be returned to investors through dividend payments and/or share repurchases or utilized to fund incremental capital investments.

20

        PG&E Corporation and the Utility seek to manage their liquidity and capital resources within the following parameters and assumptions:

•

PG&E Corporation and the Utility target cash balances, which, together with credit facilities, accommodates normal and unforeseen demands on its liquidity. Currently, PG&E Corporation and the Utility have credit facilities totaling $200 million and $1.5 billion, respectively;



•

The Utility seeks to maintain or strengthen its credit ratings to provide efficient access to financial and trade credit and to ensure adequate liquidity. The Utility's issuer credit ratings, as of February 16, 2005, are BBB from Standard & Poor's, or S&P, and Baa3 from Moody's Investors Service, or Moody's. The Utility's secured debt ratings are currently BBB from S&P and Baa2 from Moody's;



•

The Utility seeks to manage its operating expenses and capital expenditures to earn not less than its 11.22% authorized rate of return on the equity portion of its authorized rate base assets. Under the Settlement Agreement, the Utility's authorized return on equity floor of 11.22% and allowed equity ratio of 52% cannot be reduced until its long-term issuer credit ratings are at least A- from S&P or A3 from Moody's;



•

The Utility estimates average capital expenditures of approximately $2.0 billion annually over the next five years (excluding additional potential capital expenditures as discussed below under "Capital Expenditures");



•

The Utility assumes that the second series of ERBs in the approximate amount of up to $1.1 billion will be issued in November 2005;



•

The Utility assumes that its total natural gas and electric rate base will grow at the rate of 4.5%-6.5% per year over the next five years, depending on the level of capital spending for infrastructure needs. Rate base is expected to reach approximately $15.3 billion in 2005 and $16.0 billion in 2006; and



•

The Utility remains under cost-of-service regulation by the CPUC and, with respect to electricity transmission, the FERC, and the CPUC authorizes sufficient revenues for the Utility to recover its energy procurement and base expenses.

        At December 31, 2004, PG&E Corporation and its subsidiaries had consolidated cash and cash equivalents of approximately $1.0 billion, and restricted cash of approximately $2.0 billion. PG&E Corporation and the Utility maintain separate bank accounts. At December 31, 2004, PG&E Corporation on a stand-alone basis had cash and cash equivalents of approximately $189 million. At December 31, 2004, the Utility had cash and cash equivalents of approximately $783 million, and restricted cash of approximately $2.0 billion. The Utility's restricted cash includes amounts deposited in escrow related to the remaining disputed Chapter 11 claims, collateral required by the ISO and deposits under certain third party agreements. PG&E Corporation and the Utility primarily invest their cash in money market funds and in short-term obligations of the U.S. Government and its agencies.