10-Q 1 form10q.htm Q3'09 FORM 10Q form10q.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-Q
(Mark One)
 
   
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009
 
OR
   
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from ___________ to __________
   
 
Commission
File
Number
_______________
Exact Name of
Registrant
as specified
in its charter
_______________
 
State or other
Jurisdiction of
Incorporation
______________
 
IRS Employer
Identification
Number
___________
       
1-12609
PG&E Corporation
California
94-3234914
1-2348
Pacific Gas and Electric Company
California
94-0742640
 
Pacific Gas and Electric Company
77 Beale Street
P.O. Box 770000
San Francisco, California 94177
________________________________________
PG&E Corporation
One Market, Spear Tower
Suite 2400
San Francisco, California 94105
______________________________________
Address of principal executive offices, including zip code
 
Pacific Gas and Electric Company
(415) 973-7000
________________________________________
PG&E Corporation
(415) 267-7000
______________________________________
Registrant's telephone number, including area code
 
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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.  [X] Yes     [  ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes     [  ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
PG&E Corporation:
[X] Large accelerated filer
 [  ] Accelerated Filer
 
[  ] Non-accelerated filer
[  ] Smaller reporting company
Pacific Gas and Electric Company:
[  ] Large accelerated filer
 [  ] Accelerated Filer
 
[X] Non-accelerated filer
[  ] Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
PG&E Corporation:
[  ] Yes [X] No
   
Pacific Gas and Electric Company:
[  ] 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 as of October 27, 2009:
 
   
PG&E Corporation
370,960,212
Pacific Gas and Electric Company
264,374,809
   

 

 
 
PG&E CORPORATION AND
PACIFIC GAS AND ELECTRIC COMPANY,
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
PAGE
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
PG&E Corporation
 
   
3
   
4
   
6
 
Pacific Gas and Electric Company
 
   
8
   
9
   
11
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 1:
13
 
NOTE 2:
13
 
NOTE 3:
18
 
NOTE 4:
22
 
NOTE 5:
23
 
NOTE 6:
23
 
NOTE 7:
25
 
NOTE 8:
29
 
NOTE 9:
33
 
NOTE 10:
33
 
NOTE 11:
34
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
 
41
 
43
 
44
 
51
 
55
 
55
 
56
 
56
 
56
 
60
 
61
 
61
 
63
 
ITEM 3.
65
ITEM 4.
65
 
PART II.
OTHER INFORMATION
 
 
ITEM 1.
66
ITEM 1A.
66
ITEM 2.
66
ITEM 5.
67
ITEM 6.
68


2



PART I.  FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions, except per share amounts)
 
2009
   
2008
   
2009
   
2008
 
Operating Revenues
                       
Electric
  $ 2,630     $ 2,880     $ 7,610     $ 8,039  
Natural gas
    605       794       2,250       2,946  
Total operating revenues
    3,235       3,674       9,860       10,985  
Operating Expenses
                               
Cost of electricity
    997       1,282       2,763       3,406  
Cost of natural gas
    134       351       879       1,613  
Operating and maintenance
    1,047       983       3,144       3,010  
Depreciation, amortization, and decommissioning
    450       419       1,298       1,240  
Total operating expenses
    2,628       3,035       8,084       9,269  
Operating Income
    607       639       1,776       1,716  
Interest income
    1       23       27       82  
Interest expense
    (174 )     (178 )     (533 )     (550 )
Other income (expense), net
    23       (14 )     63       (4 )
Income Before Income Taxes
    457       470       1,333       1,244  
Income tax provision
    136       163       376       413  
Net Income
    321       307       957       831  
Preferred stock dividend requirement of subsidiary
    3       3       10       10  
Income Available for Common Shareholders
  $ 318     $ 304     $ 947     $ 821  
Weighted Average Common Shares Outstanding, Basic
    370       357       367       356  
Weighted Average Common Shares Outstanding, Diluted
    388       358       386       357  
Net Earnings Per Common Share, Basic
  $ 0.84     $ 0.83     $ 2.53     $ 2.25  
Net Earnings Per Common Share, Diluted
  $ 0.83     $ 0.83     $ 2.49     $ 2.24  
Dividends Declared Per Common Share
  $ 0.42     $ 0.39     $ 1.26     $ 1.17  
   
See accompanying Notes to the Condensed Consolidated Financial Statements.
 
 
3

 
PG&E CORPORATION

   
(Unaudited)
 
   
Balance At
 
(in millions)
 
September 30,
2009
   
December 31, 2008
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 700     $ 219  
Restricted cash
    569       1,290  
Accounts receivable:
               
Customers (net of allowance for doubtful accounts of $68 million in 2009 and $76 million in 2008)
    1,609       1,751  
Accrued unbilled revenue
    807       685  
Regulatory balancing accounts
    882       1,197  
Inventories:
               
Gas stored underground and fuel oil
    141       232  
Materials and supplies
    204       191  
Income taxes receivable
    58       120  
Prepaid expenses and other
    640       718  
Total current assets
    5,610       6,403  
Property, Plant, and Equipment
               
Electric
    29,875       27,638  
Gas
    10,524       10,155  
Construction work in progress
    1,767       2,023  
Other
    15       17  
Total property, plant, and equipment
    42,181       39,833  
Accumulated depreciation
    (13,997 )     (13,572 )
Net property, plant, and equipment
    28,184       26,261  
Other Noncurrent Assets
               
Regulatory assets
    5,931       5,996  
Nuclear decommissioning funds
    1,870       1,718  
Income taxes receivable
    506       -  
Other
    450       482  
Total other noncurrent assets
    8,757       8,196  
TOTAL ASSETS
  $ 42,551     $ 40,860  

See accompanying Notes to the Condensed Consolidated Financial Statements.
 
4

 
PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
 
(in millions, except share amounts)
 
September 30,
2009
   
December 31, 2008
 
LIABILITIES AND EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 500     $ 287  
Long-term debt, classified as current
    342       600  
Energy recovery bonds, classified as current
    382       370  
Accounts payable:
               
Trade creditors
    864       1,096  
Disputed claims and customer refunds
    816       1,580  
Regulatory balancing accounts
    629       730  
Other
    370       343  
Interest payable
    794       802  
Income taxes payable
    589       -  
Deferred income taxes
    172       251  
Other
    1,491       1,567  
Total current liabilities
    6,949       7,626  
Noncurrent Liabilities
               
Long-term debt
    9,839       9,321  
Energy recovery bonds
    928       1,213  
Regulatory liabilities
    4,152       3,657  
Pension and other postretirement benefits
    2,221       2,088  
Asset retirement obligations
    1,545       1,684  
Income taxes payable
    -       35  
Deferred income taxes
    4,321       3,397  
Deferred tax credits
    90       94  
Other
    2,092       2,116  
Total noncurrent liabilities
    25,188       23,605  
Commitments and Contingencies
               
Equity
               
Shareholders’ Equity
               
Preferred stock, no par value, authorized 80,000,000 shares, $100 par value, authorized 5,000,000 shares, none issued
    -       -  
Common stock, no par value, authorized 800,000,000 shares, issued 370,877,751 common and 670,552 restricted shares in 2009 and issued 361,059,116 common and 1,287,569 restricted shares in 2008
    6,265       5,984  
Reinvested earnings
    4,097       3,614  
Accumulated other comprehensive loss
    (200 )     (221 )
Total shareholders’ equity
    10,162       9,377  
Noncontrolling Interest – Preferred Stock of Subsidiary
    252       252  
Total equity
    10,414       9,629  
TOTAL LIABILITIES AND EQUITY
  $ 42,551     $ 40,860  

See accompanying Notes to the Condensed Consolidated Financial Statements.
 
5

 
PG&E CORPORATION
 
 
   
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
(in millions)
 
2009
   
2008
 
Cash Flows from Operating Activities
           
Net income
  $ 957     $ 831  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization, and decommissioning
    1,455       1,388  
Allowance for equity funds used during construction
    (71 )     (51 )
Deferred income taxes and tax credits, net
    301       482  
Other changes in noncurrent assets and liabilities
    61       87  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    20       (181 )
Inventories
    78       (153 )
Accounts payable
    (159 )     (100 )
Disputed claims and customer refunds
    (700 )     -  
Income taxes receivable/payable
    658       177  
Regulatory balancing accounts, net
    226       (94 )
Other current assets
    27       (123 )
Other current liabilities
    (50 )     (68 )
Other
    4       (3 )
Net cash provided by operating activities
    2,807       2,192  
Cash Flows from Investing Activities
               
Capital expenditures
    (3,022 )     (2,691 )
Decrease (increase) in restricted cash
    732       (3 )
Proceeds from nuclear decommissioning trust sales
    1,177       1,121  
Purchases of nuclear decommissioning trust investments
    (1,219 )     (1,161 )
Other
    14       (41 )
Net cash used in investing activities
    (2,318 )     (2,775 )
Cash Flows from Financing Activities
               
Net borrowings under revolving credit facility
    -       283  
Net (repayment) issuance of commercial paper, net of discount of $3 million in 2009 and $9 million in 2008
    (290 )     524  
Proceeds from issuance of short-term debt, net of issuance costs of $1 million in 2009
    499       -  
Proceeds from issuance of long-term debt, net of premium, discount, and issuance costs of $16 million in 2009 and $2 million in 2008
    1,193       693  
Long-term debt matured or repurchased
    (909 )     (454 )
Energy recovery bonds matured
    (273 )     (260 )
Common stock issued
    211       150  
Common stock dividends paid
    (435 )     (406 )
Other
    (4 )     (41 )
Net cash (used in) provided by financing activities
    (8 )     489  
Net change in cash and cash equivalents
    481       (94 )
Cash and cash equivalents at January 1
    219       345  
Cash and cash equivalents at September 30
  $ 700     $ 251  
 
6

 
Supplemental disclosures of cash flow information
           
Cash received (paid) for:
           
Interest, net of amounts capitalized
  $ (493 )   $ (449 )
Income taxes, net
    437       146  
Supplemental disclosures of noncash investing and financing activities
               
Common stock dividends declared but not yet paid
  $ 156     $ 140  
Capital expenditures financed through accounts payable
    229       224  
Noncash common stock issuances
    50       6  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 
 
7

 
PACIFIC GAS AND ELECTRIC COMPANY
 
 
   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions)
 
2009
   
2008
   
2009
   
2008
 
Operating Revenues
                       
Electric
  $ 2,630     $ 2,880     $ 7,610     $ 8,039  
Natural gas
    605       794       2,250       2,946  
Total operating revenues
    3,235       3,674       9,860       10,985  
Operating Expenses
                               
Cost of electricity
    997       1,282       2,763       3,406  
Cost of natural gas
    134       351       879       1,613  
Operating and maintenance
    1,047       982       3,143       3,009  
Depreciation, amortization, and decommissioning
    450       419       1,298       1,239  
Total operating expenses
    2,628       3,034       8,083       9,267  
Operating Income
    607       640       1,777       1,718  
Interest income
    3       20       29       77  
Interest expense
    (162 )     (170 )     (501 )     (528 )
Other income (expense), net
    16       (2 )     52       24  
Income Before Income Taxes
    464       488       1,357       1,291  
Income tax provision
    111       167       374       421  
Net Income
    353       321       983       870  
Preferred stock dividend requirement
    3       3       10       10  
Income Available for Common Stock
  $ 350     $ 318     $ 973     $ 860  
   
See accompanying Notes to the Condensed Consolidated Financial Statements.
 
 
8


PACIFIC GAS AND ELECTRIC COMPANY

   
(Unaudited)
 
   
Balance At
 
 
(in millions)
 
September 30,
2009
   
December 31,
2008
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 511     $ 52  
Restricted cash
    569       1,290  
Accounts receivable:
               
Customers (net of allowance for doubtful accounts of $68 million in 2009 and $76 million in 2008)
    1,609       1,751  
Accrued unbilled revenue
    807       685  
Related parties
    2       2  
Regulatory balancing accounts
    882       1,197  
Inventories:
               
Gas stored underground and fuel oil
    141       232  
Materials and supplies
    204       191  
Income taxes receivable
    63       25  
Prepaid expenses and other
    635       705  
Total current assets
    5,423       6,130  
Property, Plant, and Equipment
               
Electric
    29,875       27,638  
Gas
    10,524       10,155  
Construction work in progress
    1,767       2,023  
Total property, plant, and equipment
    42,166       39,816  
Accumulated depreciation
    (13,983 )     (13,557 )
Net property, plant, and equipment
    28,183       26,259  
Other Noncurrent Assets
               
Regulatory assets
    5,931       5,996  
Nuclear decommissioning funds
    1,870       1,718  
Related parties receivable
    26       27  
Income taxes receivable
    518       -  
Other
    365       407  
Total other noncurrent assets
    8,710       8,148  
TOTAL ASSETS
  $ 42,316     $ 40,537  

See accompanying Notes to the Condensed Consolidated Financial Statements.
 
9

 
PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
(in millions, except share amounts)
 
September 30,
2009
   
December 31,
2008
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 500     $ 287  
Long-term debt, classified as current
    95       600  
Energy recovery bonds, classified as current
    382       370  
Accounts payable:
               
Trade creditors
    864       1,096  
Disputed claims and customer refunds
    816       1,580  
Related parties
    14       25  
Regulatory balancing accounts
    629       730  
Other
    371       325  
Interest payable
    777       802  
Income tax payable
    612       53  
Deferred income taxes
    177       257  
Other
    1,289       1,371  
Total current liabilities
    6,526       7,496  
Noncurrent Liabilities
               
Long-term debt
    9,491       9,041  
Energy recovery bonds
    928       1,213  
Regulatory liabilities
    4,152       3,657  
Pension and other postretirement benefits
    2,170       2,040  
Asset retirement obligations
    1,545       1,684  
Income taxes payable
    -       12  
Deferred income taxes
    4,353       3,449  
Deferred tax credits
    90       94  
Other
    2,057       2,064  
Total noncurrent liabilities
    24,786       23,254  
Commitments and Contingencies
               
Shareholders’ Equity
               
Preferred stock without mandatory redemption provisions:
               
Nonredeemable, 5.00% to 6.00%, outstanding 5,784,825 shares
    145       145  
Redeemable, 4.36% to 5.00%, outstanding 4,534,958 shares
    113       113  
Common stock, $5 par value, authorized 800,000,000 shares, issued 264,374,809 shares in 2009 and 2008
    1,322       1,322  
Additional paid-in capital
    3,022       2,331  
Reinvested earnings
    6,597       6,092  
Accumulated other comprehensive loss
    (195 )     (216 )
Total shareholders’ equity
    11,004       9,787  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 42,316     $ 40,537  

See accompanying Notes to the Condensed Consolidated Financial Statements.
 
10



PACIFIC GAS AND ELECTRIC COMPANY
 
 
   
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
(in millions)
 
2009
   
2008
 
Cash Flows from Operating Activities
           
Net income
  $ 983     $ 870  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization, and decommissioning
    1,439       1,388  
Allowance for equity funds used during construction
    (71 )     (51 )
Deferred income taxes and tax credits, net
    274       470  
Other changes in noncurrent assets and liabilities
    95       55  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    20       (179 )
Inventories
    78       (153 )
Accounts payable
    (151 )     (85 )
Disputed claims and customer refunds
    (700 )     -  
Income taxes receivable/payable
    534       208  
Regulatory balancing accounts, net
    226       (94 )
Other current assets
    26       (125 )
Other current liabilities
    (62 )     (80 )
Other
    3       (4 )
Net cash provided by operating activities
    2,694       2,220  
Cash Flows from Investing Activities
               
Capital expenditures
    (3,022 )     (2,691 )
Decrease (increase) in restricted cash
    732       (3 )
Proceeds from nuclear decommissioning trust sales
    1,177       1,121  
Purchases of nuclear decommissioning trust investments
    (1,219 )     (1,161 )
Other
    7       21  
Net cash used in investing activities
    (2,325 )     (2,713 )
Cash Flows from Financing Activities
               
Net borrowings under revolving credit facility
    -       283  
Net (repayment) issuance of commercial paper, net of discount of $3 million in 2009 and $9 million in 2008
    (290 )     524  
Proceeds from issuance of short-term debt, net of issuance costs of $1 million in 2009
    499       -  
Proceeds from issuance of long-term debt, net of premium, discount, and issuance costs of $12 million in 2009 and $2 million in 2008
    847       693  
Long-term debt matured or repurchased
    (909 )     (454 )
Energy recovery bonds matured
    (273 )     (260 )
Preferred stock dividends paid
    (10 )     (10 )
Common stock dividends paid
    (468 )     (426 )
Equity contribution
    688       90  
Other
    6       (31 )
Net cash provided by financing activities
    90       409  
Net change in cash and cash equivalents
    459       (84 )
Cash and cash equivalents at January 1
    52       141  
Cash and cash equivalents at September 30
  $ 511     $ 57  
 
11


Supplemental disclosures of cash flow information
           
Cash received (paid) for:
           
Interest, net of amounts capitalized
  $ (481 )   $ (436 )
Income taxes, net
    297       138  
Supplemental disclosures of noncash investing and financing activities
               
Capital expenditures financed through accounts payable
  $ 229     $ 224  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 
 
12


 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


PG&E Corporation is a holding company whose primary purpose is to hold interests in energy-based businesses.  PG&E Corporation conducts its business principally through Pacific Gas and Electric Company (“Utility”), a public utility operating in northern and central California.  The Utility engages in the businesses of electricity and natural gas distribution; electricity generation, procurement, and transmission; and natural gas procurement, transportation, and storage.  The Utility is regulated primarily by the California Public Utilities Commission (“CPUC”) and the Federal Energy Regulatory Commission (“FERC”).

This quarterly report on Form 10-Q is a combined report of PG&E Corporation and the Utility.  Therefore, the Notes to the Condensed Consolidated Financial Statements apply to both PG&E Corporation and the Utility.  PG&E Corporation’s Condensed Consolidated Financial Statements include the accounts of PG&E Corporation, the Utility, and other wholly owned and controlled subsidiaries.  The Utility’s Condensed Consolidated Financial Statements include the accounts of the Utility and its wholly owned and controlled subsidiaries, as well as the accounts of variable interest entities (“VIEs”) for which the Utility absorbs a majority of the risk of loss or gain.  All intercompany transactions have been eliminated from the Condensed Consolidated Financial Statements.

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and therefore do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements.  PG&E Corporation’s and the Utility’s Condensed Consolidated Financial Statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition and results of operations for the periods presented.  The information at December 31, 2008 in both PG&E Corporation’s and the Utility’s Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets incorporated by reference into their combined Annual Report on Form 10-K for the year ended December 31, 2008.  PG&E Corporation’s and the Utility’s combined Annual Report on Form 10-K for the year ended December 31, 2008, together with the information incorporated by reference into such report, is referred to in this quarterly report on Form 10-Q as the “2008 Annual Report.”

The accounting policies used by PG&E Corporation and the Utility are discussed in Notes 1 and 2 of the Notes to the Consolidated Financial Statements in the 2008 Annual Report.  Any significant changes to those policies or new significant policies are described in Note 2 below.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on a wide range of factors, including future regulatory decisions and economic conditions that are difficult to predict.  Some of the more critical estimates and assumptions, discussed further below in these notes, relate to the Utility’s regulatory assets and liabilities, environmental remediation liability, asset retirement obligations (“ARO”), income tax-related assets and liabilities, pension plan and other postretirement plan obligations, and accruals for legal matters.  Management believes that its estimates and assumptions reflected in the Condensed Consolidated Financial Statements are appropriate and reasonable.  A change in management’s estimates or assumptions could result in an adjustment that would have a material impact on PG&E Corporation’s and the Utility’s financial condition and results of operations during the period in which such change occurred.

This quarterly report should be read in conjunction with PG&E Corporation’s and the Utility’s audited Consolidated Financial Statements and Notes to the Consolidated Financial Statements in the 2008 Annual Report.
 

Significant Accounting Policies

Consolidation of Variable Interest Entities

PG&E Corporation and the Utility are required to consolidate any entity over which it has control.  In most cases, control can be determined based on majority ownership.  However, for certain entities, control is difficult to discern based on voting equity interests only.  These entities are referred to as VIEs.  Characteristics of a VIE include equity investment at risk that is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or equity investors that lack any of the characteristics of a controlling financial interest.  The primary beneficiary, defined as the entity that absorbs a majority of the expected losses of the VIE, receives a majority of the expected residual returns of the VIE, or both, is required to consolidate the VIE.
 
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    The Utility’s exposure to VIEs relates primarily to entities with which it has a power purchase agreement.  For those entities, the Utility assesses operational risk, commodity price risk, credit risk, and tax benefit risk on a qualitative basis to determine whether the Utility is a primary beneficiary of the entity and is required to consolidate the entity.  This qualitative assessment also typically involves comparing the contract life to the economic life of the plant to consider the significance of the commodity price risk that the Utility might absorb.  As of September 30, 2009, the Utility is not the primary beneficiary of any entities with which it has power purchase agreements.

Although the Utility is not required to consolidate any of these VIEs as of September 30, 2009, it held a significant variable interest in three VIEs as a result of being a party to the following power purchase agreements:

·  
A 25-year power purchase agreement approved by the CPUC in 2009 to purchase energy from a 250-megawatt (“MW”) solar photovoltaic energy facility beginning on the date of commercial operations (expected in 2012);

·  
A 20-year power purchase agreement approved by the CPUC in 2009 to purchase energy from a 550-MW solar photovoltaic energy facility beginning on the date of commercial operations (expected in 2013); and

·  
A 25-year power purchase agreement approved by the CPUC in 2008 to purchase energy from a 554-MW solar trough facility beginning on the date of commercial operations (expected in 2011).

Each of these VIEs is a subsidiary of another company whose activities are financed primarily through equity from investors and proceeds from non-recourse project-specific debt financing.  Activities of the VIEs consist of renewable energy production from electric generating facilities for sale to the Utility.  Under each of the power purchase agreements, the Utility is obligated to purchase as-delivered electric generation output from the VIEs.  The Utility does not provide any other financial or other support to these VIEs.  The Utility’s financial exposure is limited to the amounts paid for delivered electricity.

Asset Retirement Obligations

See Note 2 of the Notes to the Consolidated Financial Statements in the 2008 Annual Report for a discussion of PG&E Corporation’s and the Utility’s accounting policy for ARO.  A reconciliation of the changes in the ARO liability is as follows:

(in millions)
     
ARO liability at December 31, 2008
  $ 1,684  
Revision in estimated cash flows
    (172
Accretion
    73  
Liabilities settled
    (40
ARO liability at September 30, 2009
  $ 1,545  

Detailed studies of the cost to decommission the Utility’s nuclear power plants are conducted every three years in conjunction with the filing of the Nuclear Decommissioning Cost Triennial Proceedings.  Estimated cash flows were revised as a result of the studies completed in the first quarter of 2009.

Pension and Other Postretirement Benefits

PG&E Corporation and the Utility provide a non-contributory defined benefit pension plan for certain employees and retirees (referred to collectively as “pension benefits”), contributory postretirement medical plans for certain employees and retirees and their eligible dependents, and non-contributory postretirement life insurance plans for certain employees and retirees (referred to collectively as “other benefits”).  PG&E Corporation and the Utility use a December 31 measurement date for all plans.

The net periodic benefit costs as reflected in PG&E Corporation’s Condensed Consolidated Statements of Income as a component of Operating and maintenance for the three and nine months ended September 30, 2009 and 2008 were as follows:
 
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Pension Benefits
   
Other Benefits
 
   
Three Months Ended
September 30,
   
Three Months Ended
September 30,
 
(in millions)
 
2009
   
2008
   
2009
   
2008
 
Service cost for benefits earned
  $ 62     $ 59     $ 7     $ 7  
Interest cost
    158       148       23       21  
Expected return on plan assets
    (144 )     (173 )     (17 )     (22 )
Amortization of transition obligation
    -       -       6       6  
Amortization of prior service cost
    16       12       4       4  
Amortization of unrecognized (gain) loss
    27       1       1       (3 )
     Net periodic benefit cost
    119       47       24       13  
     Less: transfer to regulatory account (1)
    (78 )     (5 )     -       -  
     Total
  $ 41     $ 42     $ 24     $ 13  
                                 
(1) For the three months ended September 30, 2009 and 2008, the Utility recorded $78 million as an addition to the existing pension regulatory asset and $5 million as a reduction to the existing pension regulatory liability, respectively, to reflect the difference between pension expense or income for accounting purposes and pension expense or income for ratemaking purposes, which is based on a funding approach.
 

   
Pension Benefits
   
Other Benefits
 
   
Nine Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(in millions)
 
2009
   
2008
   
2009
   
2008
 
Service cost for benefits earned
  $ 194     $ 177     $ 22     $ 22  
Interest cost
    468       436       66       61  
Expected return on plan assets
    (434 )     (522 )     (51 )     (70 )
Amortization of transition obligation
    -       -       19       19  
Amortization of prior service cost
    39       35       12       12  
Amortization of unrecognized (gain) loss
    76       1       2       (11 )
     Net periodic benefit cost
    343       127       70       33  
     Less: transfer to regulatory account (1)
    (221 )     (3 )     -       -  
     Total
  $ 122     $ 124     $ 70     $ 33  
                                 
(1) For the nine months ended September 30, 2009 and 2008, the Utility recorded $221 million as an addition to the existing pension regulatory asset and $3 million as a reduction to the existing pension regulatory liability, respectively, to reflect the difference between pension expense or income for accounting purposes and pension expense or income for ratemaking purposes, which is based on a funding approach.
 
 
There was no material difference between PG&E Corporation’s and the Utility’s consolidated net periodic benefit costs for the three and nine months ended September 30, 2009 and 2008.

Adoption of New Accounting Pronouncements

Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133

On January 1, 2009, PG&E Corporation and the Utility adopted Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No. 161”).  SFAS No. 161 requires an entity to provide qualitative disclosures about its objectives and strategies for using derivative instruments and quantitative disclosures that detail the fair value amounts of, and gains and losses on, derivative instruments.  SFAS No. 161 also requires disclosures about credit risk-related contingent features of derivative instruments.  (See Note 7 of the Notes to the Condensed Consolidated Financial Statements.)
 
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Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51

On January 1, 2009, PG&E Corporation and the Utility adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 establishes accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 defines a “noncontrolling interest,” previously called a “minority interest,” as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.  Among other items, SFAS No. 160 requires that an entity (1) include a noncontrolling interest in its consolidated statement of financial position within equity separate from the parent’s equity, (2) report amounts inclusive of both the parent’s and noncontrolling interest’s shares in consolidated net income, and (3) separately report the amounts of consolidated net income attributable to the parent and noncontrolling interest on the consolidated statement of operations.  If a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary must be measured at fair value, and a gain or loss must be recognized in net income based on such fair value.

PG&E Corporation has reclassified its noncontrolling interest in the Utility from Preferred Stock of Subsidiaries to equity in PG&E Corporation’s Condensed Consolidated Financial Statements in accordance with SFAS No. 160 for all periods presented.  The Utility had no material noncontrolling interests in consolidated subsidiaries as of September 30, 2009 and December 31, 2008.

PG&E Corporation and the Utility applied the presentation and disclosure requirements of SFAS No. 160 retrospectively.  Other than the change in presentation of noncontrolling interests, adoption of SFAS No. 160 did not have a material impact on PG&E Corporation’s or the Utility’s Condensed Consolidated Financial Statements.

Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement

On January 1, 2009, PG&E Corporation and the Utility adopted Emerging Issues Task Force (“EITF”) 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement” (“EITF 08-5”).  EITF 08-5 clarifies the unit of account in determining the fair value of a liability.  Specifically, it requires an entity to exclude any third-party credit enhancements that are issued with, and are inseparable from, a debt instrument from the fair value measurement of that debt instrument.  Adoption of EITF 08-5 did not have a material impact on PG&E Corporation’s or the Utility’s Condensed Consolidated Financial Statements.

Equity Method Investment Accounting

On January 1, 2009, PG&E Corporation and the Utility adopted EITF 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”).  EITF 08-6 applies to investments accounted for under the equity method and requires an entity to measure its equity investment initially at cost.  Generally, contingent consideration associated with an equity method investment should only be included in the initial measurement of that investment if it is required to be recognized by specific authoritative guidance other than the Business Combinations Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).  However, the investor in an equity method investment could be required to recognize a liability for the related contingent consideration features if the fair value of the investor’s share of the investee’s net assets exceeds the investor’s initial costs.  An equity method investor is required to recognize other-than-temporary impairments of an equity method investment and shall account for a share issuance by an investee as if the investor had sold a proportionate share of its investment.  Any gain or loss to the investor resulting from an investee’s share issuance shall be recognized in earnings.  Adoption of EITF 08-6 did not have a material impact on PG&E Corporation’s or the Utility’s Condensed Consolidated Financial Statements.

Subsequent Events

On June 30, 2009, PG&E Corporation and the Utility adopted SFAS No. 165, “Subsequent Events” (“SFAS No. 165”).  SFAS No. 165 does not significantly change the prior accounting practice for subsequent events, except for the requirement to disclose the date through which an entity has evaluated subsequent events and the basis for that date.  PG&E Corporation and the Utility have evaluated material subsequent events through October 29, 2009, the issue date of PG&E Corporation’s and the Utility’s Condensed Consolidated Financial Statements.  Other than this disclosure, adoption of SFAS No. 165 did not have a material impact on PG&E Corporation’s or the Utility’s Condensed Consolidated Financial Statements.

Interim Disclosures about Fair Value of Financial Instruments

On June 30, 2009, PG&E Corporation and the Utility adopted FASB Staff Position (“FSP”) SFAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments.”  This FSP requires disclosures about the fair value of financial instruments for interim reporting periods that were previously only required for annual reporting periods.  In particular, an entity is required to disclose the fair value of financial assets and liabilities together with the related carrying amount and to disclose where the carrying amount is classified in the Condensed Consolidated Balance Sheets.  (See Note 8 of the Notes to the Condensed Consolidated Financial Statements.)
 
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Recognition and Presentation of Other-Than-Temporary Impairments

On June 30, 2009, PG&E Corporation and the Utility adopted FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  Under this FSP, to assess whether an other-than-temporary impairment exists for a debt security, an entity must (1) evaluate the likelihood of liquidating the debt security prior to recovering its cost basis and (2) determine if any impairment of the debt security is related to credit losses.  In addition, this FSP requires enhanced disclosures of other-than-temporary impairments on debt and equity securities in the financial statements.  However, this FSP does not amend recognition and measurement guidance for other-than-temporary impairments of equity securities.  Adoption of this FSP did not have a material impact on PG&E Corporation’s or the Utility’s Condensed Consolidated Financial Statements.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

On June 30, 2009, PG&E Corporation and the Utility adopted FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  This FSP provides guidance on estimating fair value when the volume or the level of activity for an asset or a liability has significantly decreased or when transactions are not orderly, when compared with normal market conditions.  In particular, this FSP calls for adjustments to quoted prices or historical transaction data when estimating fair value in such circumstances.  This FSP also provides guidance to identify such circumstances.  Furthermore, this FSP requires fair value measurement disclosures made pursuant to the Fair Value Measurements and Disclosures Topic of the FASB ASC to be categorized by major security type (i.e., based on the nature and risks of the security).  (See Note 8 of the Notes to the Condensed Consolidated Financial Statements.)  Other than this change, adoption of this FSP did not have a material impact on PG&E Corporation’s or the Utility’s Condensed Consolidated Financial Statements.

Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168 - The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles

On July 1, 2009, PG&E Corporation and the Utility adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168 - The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”).  ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards CodificationTM (“Codification”) and, for SEC registrants, guidance issued by the SEC.  The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC.  The Codification is amended to effect non-SEC changes to authoritative GAAP.  Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in PG&E Corporation’s and the Utility’s Notes to the Condensed Consolidated Financial Statements.

Accounting Pronouncements Issued But Not Yet Adopted

Employers’ Disclosures about Postretirement Benefit Plan Assets

In December 2008, the FASB issued FSP SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.”  This FSP amends and expands the disclosure requirements of the Compensation - Retirement Benefits Topic of the FASB ASC.  In particular, this FSP requires an entity to provide qualitative disclosures about how investment allocation decisions are made, the inputs and valuation techniques used to measure the fair value of plan assets, and the concentration of risk within plan assets.  In addition, this FSP requires quantitative disclosures showing the fair value of each major category of plan assets, the levels in which each asset is classified within the fair value hierarchy, and a reconciliation for the period of plan assets that are measured using significant unobservable inputs.  This FSP is effective prospectively for PG&E Corporation and the Utility for the annual period ending December 31, 2009 and for subsequent annual periods.  PG&E Corporation and the Utility will include the expanded disclosures described above in PG&E Corporation’s and the Utility’s Notes to the Consolidated Financial Statements for the annual period ending December 31, 2009.

Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140” (“SFAS No. 166”).  SFAS No. 166 eliminates the concept of a qualifying special-purpose entity and clarifies the requirements for derecognizing a financial asset and for applying sale accounting to a transfer of a financial asset.  In addition, SFAS No. 166 requires an entity to disclose more information about transfers of financial assets, the entity’s continuing involvement, if any, with transferred financial assets, and the entity’s continuing risks, if any, from transferred financial assets.  SFAS No. 166 is effective prospectively for PG&E Corporation and the Utility beginning on January 1, 2010.  PG&E Corporation and the Utility are currently evaluating the impact of SFAS No. 166.
 
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Amendments to FASB Interpretation No. 46(R)

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”).  SFAS No. 167 amends the Consolidation Topic of the FASB ASC regarding when and how to determine, or re-determine, whether an entity is a VIE.  In addition, SFAS No. 167 replaces the Consolidation Topic of the FASB ASC’s quantitative approach for determining who has a controlling financial interest in a VIE with a qualitative approach.  Furthermore, SFAS No. 167 requires ongoing assessments of whether an entity is the primary beneficiary of a VIE.  SFAS No. 167 is effective prospectively for PG&E Corporation and the Utility beginning on January 1, 2010.  PG&E Corporation and the Utility are currently evaluating the impact of SFAS No. 167.


The Utility accounts for the financial effects of regulation based on the Regulated Operations Topic of the FASB ASC, which applies to regulated entities whose rates are designed to recover the cost of providing service (“cost-of-service rate regulation”).  All of the Utility’s operations are subject to cost-of-service rate regulation.

The Utility capitalizes and records, as a regulatory asset, costs that would otherwise be charged to expense if it is probable that the incurred costs will be recovered in future rates.  The regulatory assets are amortized over future periods when the costs are expected to be recovered.  If costs expected to be incurred in the future are currently being recovered through rates, the Utility records those expected future costs as regulatory liabilities.  In addition, amounts that are probable of being credited or refunded to customers in the future are recorded as regulatory liabilities.

To the extent that portions of the Utility’s operations cease to be subject to cost-of-service rate regulation, or recovery is no longer probable as a result of changes in regulation or other reasons, the related regulatory assets and liabilities are written off.

Regulatory Assets

Long-Term Regulatory Assets

Long-term regulatory assets are composed of the following:

   
Balance At
 
 
(in millions)
 
September 30,
2009
   
December 31,
2008
 
Pension benefits
  $ 1,732     $ 1,624  
Energy recovery bonds
    1,219       1,487  
Deferred income tax
    982       847  
Utility retained generation
    754       799  
Price risk management
    340       362  
Environmental compliance costs
    398       385  
Unamortized loss, net of gain, on reacquired debt
    209       225  
Regulatory assets associated with plan of reorganization
    87       99  
Contract termination costs
    71       82  
Other
    139       86  
Total long-term regulatory assets
  $ 5,931     $ 5,996  

The regulatory asset for pension benefits represents the cumulative differences between amounts recognized for ratemaking purposes and amounts recognized in accordance with GAAP, which also includes amounts that otherwise would be fully recorded to Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets.  (See Note 14 of the Notes to the Consolidated Financial Statements in the 2008 Annual Report.)

In connection with the December 19, 2003 settlement agreement among PG&E Corporation, the Utility, and the CPUC to resolve the Utility’s proceeding under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11 Settlement Agreement”), the CPUC authorized the Utility to recover $2.21 billion (“settlement regulatory asset”) over a nine year period.  In order to lower the costs borne by customers, PG&E Energy Recovery Funding LLC (“PERF”), a wholly owned consolidated subsidiary of the Utility, issued energy recovery bonds (“ERB”) to refinance the settlement regulatory asset.  The regulatory asset for ERBs represents the refinancing of the settlement regulatory asset.  The regulatory asset is amortized over the life of the bonds consistent with the period over which the related billed revenues and bond-related expenses are recognized. The Utility expects to fully recover this asset by the end of 2012 when the ERBs mature.

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    The regulatory assets for deferred income tax represent deferred income tax benefits previously passed through to customers offset by deferred income tax liabilities.  The CPUC requires the Utility to pass through certain tax benefits to customers, ignoring the effect of deferred taxes on rates.  Based on current regulatory ratemaking and income tax laws, the Utility expects to recover deferred income taxes related to regulatory assets over periods ranging from 1 to 45 years.

In connection with the Chapter 11 Settlement Agreement, the CPUC authorized the Utility to recover $1.2 billion of costs related to the Utility’s retained generation assets. The individual components of these regulatory assets are amortized over the respective lives of the underlying generation facilities, consistent with the period over which the related revenues are recognized.  The weighted average remaining life of the assets is 16 years.

Price risk management regulatory assets represent the deferral of unrealized losses related to price risk management derivative instruments with terms in excess of one year.  (See Note 7 of the Notes to the Condensed Consolidated Financial Statements.)

The regulatory assets for environmental compliance costs represent the portion of estimated environmental remediation expense that the Utility expects to recover in future rates as actual remediation costs are incurred.  The Utility expects to recover these costs over the next 30 years.  (See Note 11 of the Notes to the Condensed Consolidated Financial Statements.)

The regulatory assets for unamortized loss, net of gain, on reacquired debt represent costs related to debt reacquired or redeemed prior to maturity with associated discount and debt issuance costs.  These costs are expected to be recovered over the remaining original amortization period of the reacquired debt over the next 17 years, and these costs will be fully recovered by 2026.

Regulatory assets associated with the Utility’s plan of reorganization represent costs incurred in relation to the Utility’s plan of reorganization under Chapter 11, including financing costs and costs to oversee the environmental enhancement projects of the Pacific Forest and Watershed Land Stewardship Council, an entity that was established pursuant to the Utility’s plan of reorganization.  The Utility expects to recover these costs over the remaining periods ranging from 4 to 25 years, and these costs should be fully recovered by 2034.

The regulatory assets for contract termination costs represent costs that the Utility incurred in terminating a 30-year power purchase agreement.  These costs are being amortized and collected in rates on a straight-line basis through the end of September 2014, the power purchase agreement’s original termination date.

At September 30, 2009, “Other” primarily consisted of regulatory assets relating to ARO costs recorded in accordance with GAAP, which are probable of future recovery through the ratemaking process, as well as costs associated with the replacement of the steam generators in the Utility’s two nuclear generating units at the Diablo Canyon Power Plant (“Diablo Canyon”), as approved by the CPUC for future recovery.  At December 31, 2008, “Other” primarily consisted of regulatory assets relating to ARO costs, as well as scheduling coordinator costs that the Utility incurred beginning in 1998 in its capacity as scheduling coordinator for its then-existing wholesale electric transmission customers.

In general, the Utility does not earn a return on regulatory assets in which the related costs do not accrue interest.  Accordingly, the Utility earns a return only on the Utility’s retained generation regulatory assets; unamortized loss, net of gain, on reacquired debt; and regulatory assets associated with the plan of reorganization.

Current Regulatory Assets

At September 30, 2009 and December 31, 2008, the Utility had current regulatory assets of $421 million and $355 million, respectively, consisting primarily of the current portion of price risk management regulatory assets.  Price risk management regulatory assets represent the deferral of unrealized losses related to price risk management derivative instruments with terms of less than one year.  (See Note 7 of the Notes to the Condensed Consolidated Financial Statements.)  Current regulatory assets are included in Prepaid expenses and other in the Condensed Consolidated Balance Sheets.
 
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Regulatory Liabilities

Long-Term Regulatory Liabilities

Long-term regulatory liabilities are composed of the following:

   
Balance At
 
 
(in millions)
 
September 30,
2009
   
December 31,
2008
 
Cost of removal obligation
  $ 2,886     $ 2,735  
Public purpose programs
    521       442  
Recoveries in excess of asset retirement obligation
    498       226  
Price risk management
    82       81  
Gateway Generating Station
    65       67  
Environmental remediation insurance recoveries
    39       52  
Other
    61       54  
Total long-term regulatory liabilities
  $ 4,152     $ 3,657  

The regulatory liability for the Utility’s cost of removal obligations represents differences between amounts collected in rates for asset removal costs and the asset removal costs recorded in accordance with GAAP.

The regulatory liability for public purpose programs represents amounts received from customers designated for public purpose program costs that are expected to be incurred in the future.  For example, these regulatory liabilities include revenues collected from customers to pay for costs that the Utility expects to incur in the future under the California Solar Initiative to promote the use of solar energy in residential homes and commercial, industrial, and agricultural properties.

The regulatory liability for recoveries in excess of ARO represents differences between amounts collected in rates for decommissioning the Utility’s nuclear power facilities and the decommissioning expenses recorded in accordance with GAAP.  Decommissioning costs recovered in rates are placed in nuclear decommissioning trusts.  The regulatory liability for recoveries in excess of ARO also represents the deferral of realized and unrealized gains and losses on those nuclear decommissioning trust assets.

The regulatory liability for price risk management represents the deferral of unrealized gains related to price risk management derivative instruments with terms in excess of one year.  (See Note 7 of the Notes to the Condensed Consolidated Financial Statements.)

The regulatory liability related to the Gateway Generating Station (“Gateway”) represents the gain associated with the Utility’s acquisition of Gateway, as part of a settlement that the Utility entered with Mirant Corporation, to be credited to customers in future rates.  The regulatory liability is being amortized over 30 years beginning in January 2009, when Gateway was placed in service.

The regulatory liabilities associated with environmental remediation insurance recoveries represent amounts that are refunded to customers as a reduction to rates, as costs are incurred for hazardous substance remediation.

“Other” is an aggregate of various other regulatory liabilities representing amounts collected for future costs.

Current Regulatory Liabilities

At September 30, 2009 and December 31, 2008, the Utility had current regulatory liabilities of $232 million and $313 million, respectively, primarily consisting of regulatory liabilities for the current portion of electric transmission wheeling revenue refunds and amounts that the Utility expects to refund to customers for over-collected electric transmission rates.  Current regulatory liabilities are included in Current Liabilities – Other in the Condensed Consolidated Balance Sheets.

Regulatory Balancing Accounts

The Utility uses regulatory balancing accounts to accumulate differences between actual billed and unbilled revenues and the Utility’s authorized revenue requirements for the period.  The Utility also uses regulatory balancing accounts to accumulate differences between incurred costs and actual billed and unbilled revenues, as well as differences between incurred costs and authorized revenue meant to recover those costs.  Under-collections that are probable of recovery through regulated rates are recorded as regulatory balancing account assets.  Over-collections that are probable of being credited to customers are recorded as regulatory balancing account liabilities.

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The Utility’s current regulatory balancing accounts represent the amount expected to be refunded to or received from the Utility’s customers through authorized rate adjustments within the next 12 months.  Regulatory balancing accounts that the Utility does not expect to collect or refund in the next 12 months are included in Other Noncurrent Assets – Regulatory assets and Noncurrent Liabilities – Regulatory liabilities in the Condensed Consolidated Balance Sheets.

Current Regulatory Balancing Accounts, net

   
Receivable (Payable)
 
   
Balance At
 
(in millions)
 
September 30, 2009
   
December 31, 2008
 
Utility generation
  $ 199     $ 164  
Gas fixed cost
    167       60  
Transmission revenue
    147       173  
Public purpose programs
    (70 )     (263 )
Energy procurement costs
    (117 )     598  
Energy recovery bonds
    (167 )     (231 )
Other
    94       (34 )
Total regulatory balancing accounts, net
  $ 253     $ 467  

The utility generation balancing account is used to record and recover the authorized revenue requirements associated with Utility-owned electric generation, including capital and related non-fuel operating and maintenance expenses.  The Utility’s recovery of these revenue requirements is independent, or “decoupled,” from the volume of sales; therefore, the Utility recognizes revenue evenly over the year, even though the level of cash collected from customers will fluctuate depending on the volume of electricity sales.  During periods of more temperate weather, there is generally an under-collection in this balancing account due to lower electricity sales and lower rates.  During the warmer months of summer, the under-collection generally decreases due to higher rates and electric usage that cause an increase in generation revenues.

The gas fixed cost balancing account is used to track the recovery of CPUC-authorized gas distribution revenue requirements and certain other gas-distribution related costs.  The under-collection or over-collection position of this account is dependent on seasonality and volatility in gas prices.

The transmission revenue balancing account represents the difference between electric transmission wheeling revenues received by the Utility from the California Independent System Operator (“CAISO”) (on behalf of electric transmission wholesale customers) and refunds to customers plus interest.

The public purpose programs balancing accounts primarily track the recovery of the authorized public purpose program revenue requirement and the actual cost of such programs.  The public purpose programs primarily consist of the energy efficiency programs; low-income energy efficiency programs; research, development, and demonstration programs; and renewable energy programs.  A refund of $230 million from the California Energy Commission for unspent renewable program funding previously collected is being returned to customers through lower rates throughout 2009.

The Utility is generally authorized to recover 100% of its prudently incurred electric fuel and energy procurement costs.  The Utility tracks energy procurement costs in balancing accounts and files annual forecasts of energy procurement costs that it expects to incur during the following year, and rates are set to recover such expected costs.

The energy recovery bonds balancing account records certain benefits and costs associated with ERBs that are provided to, or received from, customers.  In addition, this account ensures that customers receive the benefits of the net amount of energy supplier refunds, claim offsets, and other credits received by the Utility after the second series of ERBs were issued.

At September 30, 2009 and December 31, 2008, “Other” includes the California Alternate Rates for Energy balancing account, which records the revenue shortfall associated with the low-income customer assistance program.  Participation in the program is generally impacted by economic conditions.  Program spending increases as more customers participate in the programs, resulting in an under-collection.  At December 31, 2008, “Other” also included incentive awards earned by the Utility for implementing customer energy efficiency programs.

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PG&E Corporation

Senior Notes

On March 12, 2009, PG&E Corporation issued $350 million principal amount of 5.75% Senior Notes due April 1, 2014.

Credit Facility

At September 30, 2009, PG&E Corporation had no borrowings outstanding under its $187 million revolving credit facility.  PG&E Corporation amended its revolving credit facility on April 27, 2009 to remove Lehman Brothers Bank, FSB (“Lehman Bank”) as a lender.  Prior to the amendment, the total borrowing capacity under the revolving credit facility was $200 million, including a commitment from Lehman Bank that represented $13 million, or 7%, of the total.

Utility

Senior Notes

On March 6, 2009, the Utility issued $550 million principal amount of 6.25% Senior Notes due March 1, 2039.

On June 11, 2009, the Utility issued $500 million principal amount of Floating Rate Senior Notes due June 10, 2010.  The interest rate for the Floating Rate Senior Notes is equal to the three-month London Interbank Offered Rate plus 0.95% and will reset quarterly beginning on September 10, 2009.  At September 30, 2009, the interest rate on the Floating Rate Senior Notes was 1.25%.

Pollution Control Bonds

The California Pollution Control Financing Authority and the California Infrastructure and Economic Development Bank (“CIEDB”), serving as conduit issuer, have issued various series of tax-exempt pollution control bonds for the benefit of the Utility.

On September 1, 2009, the CIEDB issued $149 million of tax-exempt pollution control bonds series 2009 A and B due on November 1, 2026 and $160 million of tax-exempt pollution control bonds series 2009 C and D due on December 1, 2016.  The proceeds were used to repurchase the corresponding series of 2008 pollution control bonds.  The series 2009 bonds, issued at par with an initial rate of 0.20%, are variable rate demand notes with interest resetting daily and backed by direct-pay letters of credit.  Unlike the series 2008 bonds, interest earned on the series 2009 bonds is not subject to the alternative minimum tax (“AMT”).  A provision in the American Recovery and Reinvestment Act of 2009 allows certain tax-exempt bonds that are subject to AMT to be reissued or refunded in 2009 or 2010 as tax-exempt bonds that are not subject to AMT.  As a result, the series 2009 bonds were issued at a lower interest rate, reducing the Utility’s interest expense.

Credit Facility and Short-Term Borrowings

At September 30, 2009, the Utility had $273 million of letters of credit outstanding under the Utility’s $1.94 billion revolving credit facility.  The Utility amended its revolving credit facility on April 27, 2009 to remove Lehman Bank as a lender.  Prior to the amendment, the total borrowing capacity under the revolving credit facility was $2.0 billion, including a commitment from Lehman Bank that represented $60 million, or 3%, of the total.

The revolving credit facility also provides liquidity support for commercial paper offerings.  At September 30, 2009, the Utility had no commercial paper outstanding.

Energy Recovery Bonds

PG&E Energy Recovery Funding LLC, a wholly owned consolidated subsidiary of the Utility, issued two separate series of ERBs in the aggregate amount of $2.7 billion in 2005.  The proceeds of the ERBs were used by PERF to purchase from the Utility the right, known as “recovery property,” to be paid a specified amount from a dedicated rate component.  The total amount of ERB principal outstanding was $1.3 billion at September 30, 2009.

While PERF is a wholly owned subsidiary of the Utility, it is legally separate from the Utility.  The assets, including the recovery property, of PERF are not available to creditors of the Utility or PG&E Corporation, and the recovery property is not legally an asset of the Utility or PG&E Corporation.

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PG&E Corporation’s and the Utility’s changes in equity for the nine months ended September 30, 2009 were as follows:

   
PG&E Corporation
   
Utility
 
(in millions)
 
Total
Equity
   
Total
Shareholders’ Equity
 
Balance at December 31, 2008
  $ 9,629     $ 9,787  
Net income
    957       983  
Common stock issued
    261       -  
Share-based compensation amortization
    17       -  
Common stock dividends declared and paid
    (309 )     (468 )
Common stock dividends declared but not yet paid
    (156 )     -  
Preferred stock dividend requirement
    -       (10 )
Preferred stock dividend requirement of subsidiary
    (10 )     -  
Tax benefit from employee stock plans
    4       3  
Other comprehensive income
    21       21  
Equity contribution
    -       688  
Balance at September 30, 2009
  $ 10,414     $ 11,004  

For the nine months ended September 30, 2009, PG&E Corporation contributed equity of $688 million to the Utility in order to maintain the 52% common equity target authorized by the CPUC and to ensure that the Utility has adequate capital to fund its capital expenditures.

Dividends

During the nine months ended September 30, 2009, the Utility paid common stock dividends totaling $468 million to PG&E Corporation.

During the nine months ended September 30, 2009, PG&E Corporation paid common stock dividends totaling $435 million, net of $18 million that was reinvested in additional shares of common stock by participants in the PG&E Corporation Dividend Reinvestment and Stock Purchase Plan.  On September 16, 2009, the Board of Directors of PG&E Corporation declared a dividend of $0.42 per share, totaling $156 million, which was paid on October 15, 2009 to shareholders of record on September 30, 2009.

During the nine months ended September 30, 2009, the Utility paid cash dividends totaling $10 million to holders of its outstanding series of preferred stock.  On September 16, 2009, the Board of Directors of the Utility declared a cash dividend totaling $3 million on its outstanding series of preferred stock, payable on November 15, 2009 to shareholders of record on October 30, 2009.


Earnings per common share (“EPS”) is calculated utilizing the “two-class” method, by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding during the period.  In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities.  PG&E Corporation’s 9.5% Convertible Subordinated Notes (“Convertible Subordinated Notes”) are entitled to receive pass-through dividends and meet the criteria of participating securities.  All of the participating securities participate in dividends on a 1:1 basis with shares of common stock.

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The following is a reconciliation of PG&E Corporation’s income available for common shareholders and weighted average shares of common stock outstanding for calculating basic earnings per share:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions, except per share amounts)
 
2009
   
2008
   
2009
   
2008
 
Basic
                       
Income Available for Common Shareholders
  $ 318     $ 304     $ 947     $ 821  
Less: distributed earnings to common shareholders
    156       140       465       419  
Undistributed earnings
  $ 162     $ 164     $ 482     $ 402  
Allocation of undistributed earnings to common shareholders
                               
Distributed earnings to common shareholders
  $ 156     $ 140     $ 465     $ 419  
Undistributed earnings allocated to common shareholders
    155       156       461       382  
Total common shareholders earnings
  $ 311     $ 296     $ 926     $ 801  
Weighted average common shares outstanding, basic
    370       357       367       356  
Convertible Subordinated Notes
    16       19       17       19  
Weighted average common shares outstanding and participating securities
    386       376       384       375  
Net earnings per common share, basic
                               
Distributed earnings, basic (1)
  $ 0.42     $ 0.39     $ 1.27     $ 1.18  
Undistributed earnings, basic
    0.42       0.44       1.26       1.07  
Total
  $ 0.84     $ 0.83     $ 2.53     $ 2.25  
       
(1) Distributed earnings, basic may differ from actual per share amounts paid as dividends, as the EPS computation under GAAP requires the use of the weighted average, rather than the actual, number of shares outstanding.
 

In calculating diluted EPS, PG&E Corporation applies the if-converted method to reflect the dilutive effect of the Convertible Subordinated Notes to the extent that the impact is dilutive when compared to basic EPS.  In addition, PG&E Corporation applies the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS.  The following is a reconciliation of PG&E Corporation’s income available for common shareholders and weighted average shares of common stock outstanding for calculating diluted earnings per share for three and nine months ended September 30, 2009:

   
September 30, 2009
 
(in millions, except per share amounts)
 
Three Months Ended
   
Nine Months Ended
 
Diluted
           
Income Available for Common Shareholders
  $ 318     $ 947  
Add earnings impact of assumed conversion of participating securities:
               
Interest expense on Convertible Subordinated Notes, net of tax
    4       12  
Unrealized loss on embedded derivative, net of tax
    -       2  
Income Available for Common Shareholders and Assumed Conversion
  $ 322     $ 961  
                 
Weighted average common shares outstanding, basic
    370       367  
Add incremental shares from assumed conversions:
               
Convertible Subordinated Notes
    16       17  
Employee share-based compensation
    2       2  
Weighted average common shares outstanding, diluted
    388       386  
Total earnings per common share, diluted
  $ 0.83     $ 2.49  

Stock options to purchase 7,285 and 11,935 shares of PG&E Corporation common stock were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2009, respectively, because the exercise prices of these options were greater than the average market price of PG&E Corporation common stock during these periods.

The following is a reconciliation of PG&E Corporation’s income available for common shareholders and weighted average shares of common stock outstanding for calculating diluted earnings per share for three and nine months ended September 30, 2008:
 
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September 30, 2008
 
(in millions, except per share amounts)
 
Three Months Ended
   
Nine Months Ended
 
Diluted
           
Income Available for Common Shareholders
  $ 304     $ 821  
Less: distributed earnings to common shareholders
    140       419  
Undistributed earnings
  $ 164     $ 402  
                 
Allocation of undistributed earnings to common shareholders
               
Distributed earnings to common shareholders
  $ 140     $ 419  
Undistributed earnings allocated to common shareholders
    156       382  
Total common shareholders earnings
  $ 296     $ 801  
                 
Weighted average common shares outstanding, basic
    357       356  
Convertible Subordinated Notes
    19       19  
Weighted average common shares outstanding and participating securities, basic
    376       375  
Weighted average common shares outstanding, basic
    357       356  
Employee share-based compensation
    1       1  
Weighted average common shares outstanding, diluted
    358       357  
Convertible Subordinated Notes
    19       19  
Weighted average common shares outstanding and participating securities, diluted
    377       376  
Net earnings per common share, diluted
               
Distributed earnings, diluted
  $ 0.39     $ 1.17  
Undistributed earnings, diluted
    0.44       1.07  
Total earnings per common share, diluted
  $ 0.83     $ 2.24  

Stock options to purchase 7,285 shares of PG&E Corporation common stock were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2008, respectively, because the exercise prices of these options were greater than the average market price of PG&E Corporation common stock during these periods.