Pacific Gas & Electric (PCG)

NEGT Operating Results

Included within earnings from discontinued operations on the Consolidated Statements of Operations of PG&E Corporation are NEGT’s operating results, summarized below:

(1)                                 Amounts shown have been adjusted for intercompany eliminations.

Prior to July 8, 2003, NEGT had accounted for certain of its subsidiaries as discontinued operations. The operating results shown above reflect the operating results of USGen New England, Inc. through July 7, 2003 and the other previously discontinued operations through the respective disposal dates. The 2003 pre-tax loss of NEGT and its subsidiaries includes the following gains and losses on disposal of those subsidiaries: a pre-tax gain of approximately $19 million on disposal related to the sale of Mountain View Power Partners, LLC in January 2003, an additional pre-tax loss of approximately $3 million on disposal related to the sale of PG&E Energy Trading, Canada Corporation in the first quarter of 2003, and a pre-tax loss of approximately $9 million on disposal related to the sale of certain Ohio generating plants and related equipment in the second quarter of 2003. Also included in the 2003 pre-tax loss are impairments, write-offs, and other charges of approximately $229 million.

The 2002 pre-tax loss of NEGT and its subsidiaries includes the following gains and losses on disposal of subsidiaries: a pre-tax loss of approximately $25 million on the anticipated disposition of PG&E Energy Trading, Canada Corporation in the fourth quarter 2002, subsequently disposed of in 2003 as described above, and a $1.1 billion pre-tax loss for USGen New England deemed discontinued operations in the fourth quarter 2002. Also included in the 2002 pre-tax loss of NEGT and its subsidiaries are impairments, write-offs, and other charges of approximately $2.8 billion.

During the second quarter of 2003, NEGT determined that its historical financial reporting presentation of revenues and expenses related to hedging and certain ISO purchase and sales transactions had not been consistent. Certain types of transactions had been reported on a net basis (whereby revenues had been offset by the related expense item) and other types of transactions had been reported on a gross basis. In order to provide a consistent reporting of its trading and hedging transactions, NEGT adopted a net presentation approach for such transactions. PG&E Corporation believes that this method of presentation is preferable under the circumstances. Adopting this change reduced previously reported revenues and expenses of NEGT by approximately $843 million for the year ended December 31, 2002. In addition, adjustments were made principally for the effects of transactions that had not previously been eliminated in consolidation by NEGT. Such adjustments decreased previously

NEGT Operating Results

        Included within earnings from discontinued operations on the Consolidated Statements of Operations of PG&E Corporation are NEGT's operating results, summarized below:

⁽¹⁾

Amounts shown have been adjusted for intercompany eliminations.

        Prior to July 8, 2003, NEGT had accounted for certain of its subsidiaries as discontinued operations. The operating results shown above reflect the operating results of USGen New England, Inc. through July 7, 2003 and the other previously discontinued operations through the respective disposal dates. The 2003 pre-tax loss of NEGT and its subsidiaries includes the following gains and losses on disposal of those subsidiaries: a pre-tax gain of approximately $19 million on disposal related to the sale of Mountain View Power Partners, LLC in January 2003, an additional pre-tax loss of approximately $3 million on disposal related to the sale of PG&E Energy Trading, Canada Corporation in the first quarter of 2003, and a pre-tax loss of approximately $9 million on disposal related to the sale of certain Ohio generating plants and related equipment in the second quarter of 2003. Also included in the 2003 pre-tax loss are impairments, write-offs, and other charges of approximately $229 million.

        The 2002 pre-tax loss of NEGT and its subsidiaries includes the following gains and losses on disposal of subsidiaries: a pre-tax loss of approximately $25 million on the anticipated disposition of PG&E Energy Trading, Canada Corporation in the fourth quarter 2002, subsequently disposed of in 2003 as described above, and a $1.1 billion pre-tax loss for USGen New England deemed discontinued operations in the fourth quarter 2002. Also included in the 2002 pre-tax loss of NEGT and its subsidiaries are impairments, write-offs, and other charges of approximately $2.8 billion.

        During the second quarter of 2003, NEGT determined that its historical financial reporting presentation of revenues and expenses related to hedging and certain ISO purchase and sales transactions had not been consistent. Certain types of transactions had been reported on a net basis (whereby revenues had been offset by the related expense item) and other types of transactions had been reported on a gross basis. In order to provide a consistent reporting of its trading and hedging transactions, NEGT adopted a net presentation approach for such transactions. PG&E Corporation believes that this method of presentation is preferable under the circumstances. Adopting this change reduced previously reported revenues and expenses of NEGT by approximately $843 million for the year ended December 31, 2002. In addition, adjustments were made principally for the effects of transactions that had not previously been eliminated in consolidation by NEGT. Such adjustments decreased previously reported revenues and expenses by approximately $671 million for the year ended December 31, 2002. These changes did not result in any change in consolidated operating income or net income, in the Consolidated Statements of Operations.

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        As a result of the adoption of DIG C15 and C16, NEGT recognized net losses in 2002 related to the cumulative effect of a change in accounting principle of $61 million, after-tax. As a result of the adoption of SFAS No. 143, NEGT recognized net losses in 2003 related to a change in accounting principle of $5 million, after-tax.

        On October 29, 2004, the effective date of NEGT's plan of reorganization, amounts due as a result of NEGT affiliates' defaults on numerous agreements were determined and resolved. PG&E Corporation is not a party to these agreements, nor does it anticipate any obligation related to these agreements.