10-Q 1 form10q.htm FORM 10-Q 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 June 30, 2013
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
77 Beale Street
P.O. Box 770000
San Francisco, California 94177
______________________________________
Address of principal executive offices, including zip code
Pacific Gas and Electric Company
(415) 973-7000
________________________________________
PG&E Corporation
(415) 973-1000
______________________________________
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 Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
PG&E Corporation:
[X] Yes [  ] No
Pacific Gas and Electric Company:
[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 July 22, 2013:
 
PG&E Corporation:
445,151,814
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 JUNE 30, 2013
TABLE OF CONTENTS

     PAGE
 GLOSSARY  
ii
     
PART I.
FINANCIAL INFORMATION
 
1
 
PG&E Corporation
 
   
1
   
2
   
3
   
5
 
Pacific Gas and Electric Company
 
   
6
   
7
   
8
   
10
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
11
 
12
 
14
 
15
 
15
 
16
 
16
 
18
 
24
 
24
 
 
 
29
 
30
 
32
 
36
 
39
 
40
 
43
 
45
 
45
 
45
 
45
 
46
46
 
 
47
48
48
48
49
     
50

 
i
 

GLOSSARY

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.

2012 Annual Report
PG&E Corporation's and Pacific Gas and Electric Company's combined Annual Report on Form 10-K for the year ended December 31, 2012
AFUDC
allowance for funds used during construction
ALJ
administrative law judge
ASU
accounting standards update
CAISO
California Independent System Operator
CARB
California Air Resources Board
CCSF
City and County of San Francisco
CPUC
California Public Utilities Commission
CRRs
congestion revenue rights
DRA
Division of Ratepayer Advocates
DTSC
California Department of Toxic Substances Control
EPA
Environmental Protection Agency
EPS
earnings per common share
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
GAAP
generally accepted accounting principles
GHG
greenhouse gas
GRC
general rate case
GT&S
gas transmission and storage
IRS
Internal Revenue Service
NEIL
Nuclear Electric Insurance Limited
NRC
Nuclear Regulatory Commission
NTSB
National Transportation Safety Board
PSEP
pipeline safety enhancement plan
ROE
return on equity
SED
Safety and Enforcement Division of the CPUC, formerly known as the Consumer Protection and Safety Division or the CPSD
TO
transmission owner
TURN
The Utility Reform Network
Utility
Pacific Gas and Electric Company
VIE(s)
variable interest entity(ies)


 
ii
 

PART I.  FINANCIAL INFORMATION

PG&E CORPORATION

   
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions, except per share amounts)
 
2013
   
2012
   
2013
   
2012
 
Operating Revenues
                       
Electric
  $ 3,059     $ 2,931     $ 5,858     $ 5,703  
Natural gas
    717       662       1,590       1,531  
Total operating revenues
    3,776       3,593       7,448       7,234  
Operating Expenses
                               
Cost of electricity
    1,189       962       2,172       1,821  
Cost of natural gas
    179       132       525       475  
Operating and maintenance
    1,256       1,426       2,594       2,794  
Depreciation, amortization, and decommissioning
    516       606       1,019       1,190  
Total operating expenses
    3,140       3,126       6,310       6,280  
Operating Income
    636       467       1,138       954  
Interest income
    2       3       4       4  
Interest expense
    (177 )     (176 )     (353 )     (350 )
Other income, net
    24       32       52       58  
Income Before Income Taxes
    485       326       841       666  
Income tax provision
    153       87       267       191  
Net Income
    332       239       574       475  
Preferred stock dividend requirement of subsidiary
    4       4       7       7  
Income Available for Common Shareholders
  $ 328     $ 235     $ 567     $ 468  
Weighted Average Common Shares Outstanding, Basic
    442       423       438       419  
Weighted Average Common Shares Outstanding, Diluted
    443       425       439       421  
Net Earnings Per Common Share, Basic
  $ 0.74     $ 0.56     $ 1.29     $ 1.12  
Net Earnings Per Common Share, Diluted
  $ 0.74     $ 0.55     $ 1.29     $ 1.11  
Dividends Declared Per Common Share
  $ 0.46     $ 0.46     $ 0.91     $ 0.91  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 

 
1
 

PG&E CORPORATION


   
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Net Income
  $ 332     $ 239     $ 574     $ 475  
Other Comprehensive Income, net of income tax
                               
Pension and other postretirement benefit plans
                               
Unrecognized prior service credit
    6       6       12       12  
Unrecognized net gain
    17       19       34       40  
Unrecognized net transition obligation
    -       4       -       8  
Transfer to regulatory account
    (19 )     (21 )     (38 )     (42 )
Other investments
    16       -       22       -  
Total other comprehensive income, net of income tax
    20       8       30       18  
Comprehensive Income
    352       247       604       493  
Preferred stock dividend requirement of subsidiary
    4       4       7       7  
Comprehensive Income Attributable to Common Shareholders
  $ 348     $ 243     $ 597     $ 486  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 



 
2
 
 

PG&E CORPORATION

   
(Unaudited)
 
   
Balance At
 
   
June 30,
   
December 31,
 
(in millions)
 
2013
   
2012
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 281     $ 401  
Restricted cash
    305       330  
Accounts receivable:
               
Customers (net of allowance for doubtful accounts of $80 and $87
               
   at respective dates)
    1,034       937  
Accrued unbilled revenue
    766       761  
Regulatory balancing accounts
    1,205       936  
Other
    272       365  
Regulatory assets
    508       564  
Inventories:
               
Gas stored underground and fuel oil
    148       135  
Materials and supplies
    327       309  
Income taxes receivable
    365       211  
Other
    231       172  
Total current assets
    5,442       5,121  
Property, Plant, and Equipment
               
Electric
    41,227       39,701  
Gas
    13,162       12,571  
Construction work in progress
    2,030       1,894  
Other
    1       1  
Total property, plant, and equipment
    56,420       54,167  
Accumulated depreciation
    (17,353 )     (16,644 )
Net property, plant, and equipment
    39,067       37,523  
Other Noncurrent Assets
               
Regulatory assets
    6,786       6,809  
Nuclear decommissioning trusts
    2,214       2,161  
Income taxes receivable
    126       176  
Other
    689       659  
Total other noncurrent assets
    9,815       9,805  
TOTAL ASSETS
  $ 54,324     $ 52,449  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 

 
3
 
 

PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
June 30,
   
December 31,
 
(in millions, except share amounts)
 
2013
   
2012
 
LIABILITIES AND EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 952     $ 492  
Long-term debt, classified as current
    1,288       400  
Accounts payable:
               
Trade creditors
    1,155       1,241  
Disputed claims and customer refunds
    156       157  
Regulatory balancing accounts
    1,002       634  
Other
    456       444  
Interest payable
    877       870  
Income taxes payable
    17       6  
Deferred income taxes
    106       -  
Other
    1,373       2,012  
Total current liabilities
    7,382       6,256  
Noncurrent Liabilities
               
Long-term debt
    11,917       12,517  
Regulatory liabilities
    5,226       5,088  
Pension and other postretirement benefits
    3,665       3,575  
Asset retirement obligations
    2,932       2,919  
Deferred income taxes
    6,988       6,748  
Other
    2,092       2,020  
Total noncurrent liabilities
    32,820       32,867  
Commitments and Contingencies (Note 10)
               
Equity
               
Shareholders' Equity
               
Preferred stock
    -       -  
Common stock, no par value, authorized 800,000,000 shares,
               
444,717,704 and 430,718,293 shares outstanding at respective dates
    9,032       8,428  
Reinvested earnings
    4,909       4,747  
Accumulated other comprehensive loss
    (71 )     (101 )
Total shareholders' equity
    13,870       13,074  
Noncontrolling Interest - Preferred Stock of Subsidiary
    252       252  
Total equity
    14,122       13,326  
TOTAL LIABILITIES AND EQUITY
  $ 54,324     $ 52,449  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 

 
4
 
 

PG&E CORPORATION


   
(Unaudited)
 
   
Six Months Ended June 30,
 
(in millions)
 
2013
   
2012
 
Cash Flows from Operating Activities
           
Net income
  $ 574     $ 475  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation, amortization, and decommissioning
    1,019       1,190  
Allowance for equity funds used during construction
    (52 )     (53 )
Deferred income taxes and tax credits, net
    346       234  
Other
    157       137  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    (22 )     13  
Inventories
    (31 )     5  
Accounts payable
    28       (125 )
Income taxes receivable/payable
    (143 )     153  
Other current assets and liabilities
    (367 )     74  
Regulatory assets, liabilities, and balancing accounts, net
    (192 )     (115 )
Other noncurrent assets and liabilities
    142       186  
Net cash provided by operating activities
    1,459       2,174  
Cash Flows from Investing Activities
               
Capital expenditures
    (2,521 )     (2,219 )
Decrease (increase) in restricted cash
    25       (1 )
Proceeds from sales and maturities of nuclear decommissioning
               
trust investments
    795       666  
Purchases of nuclear decommissioning trust investments
    (786 )     (716 )
Other
    16       64  
Net cash used in investing activities
    (2,471 )     (2,206 )
Cash Flows from Financing Activities
               
Borrowings under revolving credit facilities
    140       -  
Net issuances (repayments) of commercial paper, net of discount of $1 and $2
               
at respective dates
    321       (566 )
Proceeds from issuance of long-term debt, net of premium, discount, and issuance
               
costs of $8 and $6 at respective dates
    742       394  
Long-term debt matured or repurchased
    (461 )     (50 )
Energy recovery bonds matured
    -       (200 )
Common stock issued
    562       561  
Common stock dividends paid
    (386 )     (368 )
Other
    (26 )     40  
Net cash provided by (used in) financing activities
    892       (189 )
Net change in cash and cash equivalents
    (120 )     (221 )
Cash and cash equivalents at January 1
    401       513  
Cash and cash equivalents at June 30
  $ 281     $ 292  
Supplemental disclosures of cash flow information
               
Cash received (paid) for:
               
Interest, net of amounts capitalized
  $ (312 )   $ (319 )
Income taxes, net
    (65 )     114  
Supplemental disclosures of noncash investing and financing activities
               
Common stock dividends declared but not yet paid
  $ 202     $ 194  
Capital expenditures financed through accounts payable
    253       256  
Noncash common stock issuances
    11       12  
Terminated capital leases
    -       136  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
5
 

PACIFIC GAS AND ELECTRIC COMPANY


   
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Operating Revenues
                       
Electric
  $ 3,057     $ 2,930     $ 5,855     $ 5,701  
Natural gas
    718       662       1,591       1,531  
Total operating revenues
    3,775       3,592       7,446       7,232  
Operating Expenses
                               
Cost of electricity
    1,189       962       2,172       1,821  
Cost of natural gas
    179       132       525       475  
Operating and maintenance
    1,256       1,425       2,592       2,791  
Depreciation, amortization, and decommissioning
    516       606       1,019       1,190  
Total operating expenses
    3,140       3,125       6,308       6,277  
Operating Income
    635       467       1,138       955  
Interest income
    3       2       4       3  
Interest expense
    (171 )     (171 )     (341 )     (339 )
Other income, net
    22       22       46       45  
Income Before Income Taxes
    489       320       847       664  
Income tax provision
    160       93       281       206  
Net Income
    329       227       566       458  
Preferred stock dividend requirement
    4       4       7       7  
Income Available for Common Stock
  $ 325     $ 223     $ 559     $ 451  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 



 
6
 
 

PACIFIC GAS AND ELECTRIC COMPANY


   
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Net Income
  $ 329     $ 227     $ 566     $ 458  
Other Comprehensive Income, net of income tax
                               
Pension and other postretirement benefit plans
                               
Unrecognized prior service credit
    6       6       12       12  
Unrecognized net gain
    17       19       35       40  
Unrecognized net transition obligation
    -       4       -       8  
Transfer to regulatory account
    (19 )     (21 )     (38 )     (42 )
Total other comprehensive income, net of income tax
    4       8       9       18  
Comprehensive Income
  $ 333     $ 235     $ 575     $ 476  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 

 
7
 

PACIFIC GAS AND ELECTRIC COMPANY

   
(Unaudited)
 
   
Balance At
 
   
June 30,
   
December 31,
 
(in millions)
 
2013
   
2012
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 61     $ 194  
Restricted cash
    305       330  
Accounts receivable:
               
Customers (net of allowance for doubtful accounts of $80 and $87
               
  at respective dates)
    1,034       937  
Accrued unbilled revenue
    766       761  
Regulatory balancing accounts
    1,205       936  
Other
    275       366  
Regulatory assets
    508       564  
Inventories:
               
Gas stored underground and fuel oil
    148       135  
Materials and supplies
    327       309  
Income taxes receivable
    361       186  
Other
    169       160  
Total current assets
    5,159       4,878  
Property, Plant, and Equipment
               
Electric
    41,227       39,701  
Gas
    13,162       12,571  
Construction work in progress
    2,030       1,894  
Total property, plant, and equipment
    56,419       54,166  
Accumulated depreciation
    (17,352 )     (16,643 )
Net property, plant, and equipment
    39,067       37,523  
Other Noncurrent Assets
               
Regulatory assets
    6,786       6,809  
Nuclear decommissioning trusts
    2,214       2,161  
Income taxes receivable
    122       171  
Other
    417       381  
Total other noncurrent assets
    9,539       9,522  
TOTAL ASSETS
  $ 53,765     $ 51,923  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 

 
8
 
 

PACIFIC GAS AND ELECTRIC COMPANY
   
(Unaudited)
 
   
Balance At
 
   
June 30,
   
December 31,
 
(in millions, except share amounts)
 
2013
   
2012
 
LIABILITIES AND SHAREHOLDERS' EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 692     $ 372  
Long-term debt, classified as current
    938       400  
Accounts payable:
               
Trade creditors
    1,155       1,241  
Disputed claims and customer refunds
    156       157  
Regulatory balancing accounts
    1,002       634  
Other
    471       419  
Interest payable
    872       865  
Income taxes payable
    25       12  
Deferred income taxes
    85       -  
Other
    1,155       1,794  
Total current liabilities
    6,551       5,894  
Noncurrent Liabilities
               
Long-term debt
    11,917       12,167  
Regulatory liabilities
    5,226       5,088  
Pension and other postretirement benefits
    3,583       3,497  
Asset retirement obligations
    2,932       2,919  
Deferred income taxes
    7,191       6,939  
Other
    2,031       1,959  
Total noncurrent liabilities
    32,880       32,569  
Commitments and Contingencies (Note 10)
               
Shareholders' Equity
               
Preferred stock
    258       258  
Common stock, $5 par value, authorized 800,000,000 shares, 264,374,809
               
shares outstanding at respective dates
    1,322       1,322  
Additional paid-in capital
    5,346       4,682  
Reinvested earnings
    7,492       7,291  
Accumulated other comprehensive loss
    (84 )     (93 )
Total shareholders' equity
    14,334       13,460  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 53,765     $ 51,923  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 

 
9
 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


   
(Unaudited)
 
   
Six Months Ended June 30,
 
(in millions)
 
2013
   
2012
 
Cash Flows from Operating Activities
           
Net income
  $ 566     $ 458  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation, amortization, and decommissioning
    1,019       1,190  
Allowance for equity funds used during construction
    (52 )     (53 )
Deferred income taxes and tax credits, net
    337       242  
    Other
    126       108  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    (24 )     (50 )
Inventories
    (31 )     5  
Accounts payable
    68       (107 )
Income taxes receivable/payable
    (162 )     216  
Other current assets and liabilities
    (317 )     78  
Regulatory assets, liabilities, and balancing accounts, net
    (192 )     (115 )
Other noncurrent assets and liabilities
    126       202  
Net cash provided by operating activities
    1,464       2,174  
Cash Flows from Investing Activities
               
Capital expenditures
    (2,521 )     (2,219 )
Decrease (increase) in restricted cash
    25       (1 )
Proceeds from sales and maturities of nuclear decommissioning
               
trust investments
    795       666  
Purchases of nuclear decommissioning trust investments
    (786 )     (716 )
Other
    8       11  
Net cash used in investing activities
    (2,479 )     (2,259 )
Cash Flows from Financing Activities
               
Net issuances (repayments) of commercial paper, net of discount of $1 and $2
               
at respective dates
    321       (566 )
Proceeds from issuance of long-term debt, net of premium, discount, and issuance
               
costs of $8 and $6 at respective dates
    742       394  
Long-term debt matured or repurchased
    (461 )     (50 )
Energy recovery bonds matured
    -       (200 )
Preferred stock dividends paid
    (7 )     (7 )
Common stock dividends paid
    (358 )     (358 )
Equity contribution
    665       565  
Other
    (20 )     48  
Net cash provided by (used in) financing activities
    882       (174 )
Net change in cash and cash equivalents
    (133 )     (259 )
Cash and cash equivalents at January 1
    194       304  
Cash and cash equivalents at June 30
  $ 61     $ 45  
Supplemental disclosures of cash flow information
               
Cash received (paid) for:
               
Interest, net of amounts capitalized
  $ (300 )   $ (309 )
Income taxes, net
    (86 )     111  
Supplemental disclosures of noncash investing and financing activities
               
Capital expenditures financed through accounts payable
  $ 253     $ 256  
Terminated capital leases
    -       136  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 
 

 
10
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


PG&E Corporation is a holding company that conducts its business through Pacific Gas and Electric Company, a public utility operating in northern and central California.  The Utility generates revenues mainly through the sale and delivery of electricity and natural gas to customers.  The Utility is primarily regulated by the CPUC and the FERC.  In addition, the NRC oversees the licensing, construction, operation, and decommissioning of the Utility’s nuclear generation facilities.  The Utility’s accounts for electric and gas operations are maintained in accordance with the Uniform System of Accounts prescribed by the FERC.

This quarterly report on Form 10-Q is a combined report of PG&E Corporation and the Utility that includes separate Condensed Consolidated Financial Statements for each company.  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.  All intercompany transactions have been eliminated.  PG&E Corporation and the Utility operate in one segment.

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial statements and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission and therefore do not contain all of the information and footnotes required by GAAP and the U.S. Securities and Exchange Commission for annual financial statements.  PG&E Corporation’s and the Utility’s Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair presentation of their financial condition, results of operations, and cash flows for the periods presented.  The information at December 31, 2012 in the Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets incorporated by reference into the 2012 Annual Report.  This quarterly report should be read in conjunction with the 2012 Annual Report.

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 relate to the Utility’s regulatory assets and liabilities, legal and regulatory contingencies, environmental remediation liabilities, asset retirement obligations, and pension and other postretirement benefit plans obligations.  Management believes that its estimates and assumptions reflected in the Condensed Consolidated Financial Statements are appropriate and reasonable.  Actual results could differ materially from those estimates.

 
11
 

 
        The significant accounting policies used by PG&E Corporation and the Utility are discussed in Note 2 of the Notes to the Consolidated Financial Statements in the 2012 Annual Report.

Pension and Other Postretirement Benefits

PG&E Corporation and the Utility provide a non-contributory defined benefit pension plan for eligible employees, as well as contributory postretirement medical plans for retirees and their eligible dependents, and non-contributory postretirement life insurance plans for eligible employees and retirees.

The net periodic benefit costs reflected in PG&E Corporation’s Condensed Consolidated Financial Statements for the three and six months ended June 30, 2013 and 2012 were as follows:

   
Pension Benefits
   
Other Benefits
 
   
Three Months Ended June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Service cost for benefits earned
  $ 115     $ 98     $ 13     $ 11  
Interest cost
    156       165       18       21  
Expected return on plan assets
    (163 )     (150 )     (20 )     (20 )
Amortization of transition obligation
    -       -       -       6  
Amortization of prior service cost
    5       5       5       6  
Amortization of unrecognized loss
    28       32       2       2  
Net periodic benefit cost
    141       150       18       26  
Less: transfer to regulatory account (1)
    (56 )     (75 )     -       -  
Total
  $ 85     $ 75     $ 18     $ 26  
                                 
 (1) The Utility recorded these amounts to a regulatory account since they are probable of recovery from customers in futures rates.

   
Pension Benefits
   
Other Benefits
 
   
Six Months Ended June 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Service cost for benefits earned
  $ 230     $ 197     $ 26     $ 23  
Interest cost
    312       329       37       42  
Expected return on plan assets
    (325 )     (299 )     (40 )     (39 )
Amortization of transition obligation
    -       -       -       12  
Amortization of prior service cost
    10       10       11       12  
Amortization of unrecognized loss
    55       63       3       3  
Net periodic benefit cost
    282       300       37       53  
Less: transfer to regulatory account (1)
    (113 )     (150 )     -       -  
Total
  $ 169     $ 150     $ 37     $ 53  
                                 
 (1) The Utility recorded these amounts to a regulatory account since they are probable of recovery from customers in future rates.

There was no material difference between PG&E Corporation and the Utility for the information disclosed above.

Variable Interest Entities

A VIE is an entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, or whose equity investors lack any characteristics of a controlling financial interest.  An enterprise that has a controlling financial interest in a VIE is known as the VIE’s primary beneficiary and is required to consolidate the VIE.  In determining whether consolidation of a particular entity is required, PG&E Corporation and the Utility first evaluate whether the entity is a VIE.  If the entity is a VIE, PG&E Corporation and the Utility use a qualitative approach to determine if either is the primary beneficiary of the VIE.

Some of the counterparties to the Utility’s power purchase agreements are considered VIEs.  Each of these VIEs was designed to own a power plant that would generate electricity for sale to the Utility.  To determine whether the Utility was the primary beneficiary of any of these VIEs at June 30, 2013, it assessed whether it absorbs any of the VIE’s expected losses or receives any portion of the VIE’s expected residual returns under the terms of the power purchase agreement, analyzed the variability in the VIE’s gross margin, and considered whether it had any decision-making rights associated with the activities that are most significant to the VIE’s performance, such as dispatch rights and operating and maintenance activities.  The Utility’s financial exposure is limited to the amount the Utility pays for delivered electricity and capacity.  The Utility did not have any decision-making rights associated with any of the activities that are most significant to the economic performance of any of these VIEs.  Since the Utility was not the primary beneficiary of any of these VIEs at June 30, 2013, it did not consolidate any of them.

PG&E Corporation affiliates have entered into four tax equity agreements to fund residential and commercial retail solar energy installations with two privately held companies that are considered VIEs.  Under these agreements, PG&E Corporation has made cumulative lease payments and investment contributions of $363 million to these companies in exchange for the right to receive benefits from local rebates, federal grants, and a share of the customer payments made to these companies.  At June 30, 2013 and December 31, 2012, the carrying amount of PG&E Corporation’s investment in these agreements was $143 million and $166 million, respectively.  PG&E Corporation determined that it does not have control over the companies’ significant economic activities, such as the design of the companies, vendor selection, construction, and the ongoing operations of the companies.  PG&E Corporation has no material remaining commitment to fund these agreements.  Since PG&E Corporation was not the primary beneficiary of any of these VIEs at June 30, 2013, it did not consolidate any of them.

 
12
 
Adoption of New Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities

In January 2013, the FASB issued an ASU that clarifies the scope of disclosures about offsetting assets and liabilities.  The guidance requires an entity to disclose gross and net information about derivatives that are offset in the balance sheet or subject to an enforceable master-netting arrangement or similar agreement.  The ASU became effective for PG&E Corporation and the Utility on January 1, 2013.  (See Note 7 below.)

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued an ASU that requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income.  The ASU became effective for PG&E Corporation and the Utility on January 1, 2013. 

The changes, net of income tax, in PG&E Corporation’s other comprehensive income for the three and six months ended June 30, 2013 consist of the following:

   
Pension and
             
   
Other
             
   
Postretirement
 
Other
       
   
Benefit Plans
 
Investments
 
Total
 
(in millions, net of income tax)
Three Months Ended June 30, 2013
 
Beginning balance
  $ (101 )   $ 10     $ (91 )
Other comprehensive income before reclassifications
    (19 )     16       (3 )
Amounts reclassified from other comprehensive income:
                       
      Amortization of prior service cost (1)
    6       -       6  
      Amortization of actuarial gains (1)
    17       -       17  
Net current period other comprehensive income
    4       16       20  
Ending balance
  $ (97 )   $ 26     $ (71 )
                         
 (1) These other comprehensive income components are included in the computation of net periodic pension and other postretirement costs.  (See the “Pension and Other Postretirement Benefits” table above for additional details.)

   
Pension and
             
   
Other
             
   
Postretirement
 
Other
       
   
Benefit Plans
 
Investments
 
Total
 
(in millions, net of income tax)
Six Months Ended June 30, 2013
 
Beginning balance
  $ (105 )   $ 4     $ (101 )
Other comprehensive income before reclassifications
    (38 )     22       (16 )
Amounts reclassified from other comprehensive income:
                       
      Amortization of prior service cost  (1)
    12       -       12  
      Amortization of actuarial gains (1)
    34       -       34  
Net current period other comprehensive income
    8       22       30  
Ending balance
  $ (97 )   $ 26     $ (71 )
                         
 (1) These other comprehensive income components are included in the computation of net periodic pension and other postretirement costs.  (See the “Pension and Other Postretirement Benefits” table above for additional details.)

There was no material difference between PG&E Corporation and the Utility for the information disclosed above, with the exception of other investments which are held by PG&E Corporation.

 
13
 
 

Regulatory Assets

Long-Term Regulatory Assets

Long-term regulatory assets are composed of the following:

 
Balance at
(in millions)
June 30, 2013
 
December 31, 2012
Pension benefits
$
3,324
 
$
3,275
Deferred income taxes
 
1,700
   
1,627
Utility retained generation
 
527
   
552
Environmental compliance costs
 
604
   
604
Price risk management
 
163
   
210
Electromechanical meters
 
165
   
194
Unamortized loss, net of gain, on reacquired debt
 
146
   
141
Other
 
157
   
206
Total long-term regulatory assets
$
6,786
 
$
6,809
 
Regulatory Liabilities

Long-Term Regulatory Liabilities

Long-term regulatory liabilities are composed of the following:

 
Balance at
 
June 30,
 
December 31,
(in millions)
2013
 
2012
Cost of removal obligations
$
3,763
 
$
3,625
Recoveries in excess of asset retirement obligations
 
633
   
620
Public purpose programs
 
571
   
590
Other
 
259
   
253
Total long-term regulatory liabilities
$
5,226
 
$
5,088

Regulatory Balancing Accounts
 
        The Utility’s recovery of a significant portion of revenue requirements and costs is decoupled from the volume of sales.  The Utility records (1) differences between actual customer billings and the Utility’s authorized revenue requirement, and (2) differences between incurred costs and customer billings.  To the extent these differences are probable of recovery or refund, the Utility records a regulatory balancing account receivable or payable.  Regulatory balancing accounts receivable and payable will fluctuate during the year based on seasonal electric and gas usage and the timing of when costs are incurred and customer revenues are collected.
 
Current Regulatory Balancing Accounts, Net

 
Receivable (Payable)
 
Balance at
 
June 30,
 
December 31,
(in millions)
2013
 
2012
Distribution revenue adjustment mechanism
$
407
 
$
219
Utility generation
 
267
   
117
Hazardous substance
 
75
   
56
Public purpose programs
 
(151)
   
(83)
Gas fixed cost
 
25
   
44
Energy recovery bonds
 
(181)
   
(43)
Energy procurement
 
13
   
77
U.S. Department of Energy Settlement
 
(279)
   
(250)
GHG allowance auction proceeds (1)
 
(199)
   
-
Other
 
226
   
165
Total regulatory balancing accounts, net
$
203
 
$
302
           
 (1) The CARB has adopted regulations that established a state-wide, “cap-and-trade” program (effective January 1, 2013) that sets a gradually declining limit on the amount of GHGs that may be emitted each year. This balancing account is used to record proceeds collected by the Utility for GHG emission allowances associated with the cap-and-trade program.  These amounts will be refunded to customers in future periods.
 
 
14
 

Senior Notes

In June 2013, the Utility issued $375 million principal amount of 3.25% Senior Notes due June 15, 2023 and $375 million principal amount of 4.60% Senior Notes due June 15, 2043.  The proceeds were used to repurchase $461 million principal amount, net of $21 million of premiums and accrued interest, of the Utility’s $1.0 billion outstanding 4.80% Senior Notes due March 1, 2014, to repay a portion of outstanding commercial paper, and for general corporate purposes.

Revolving Credit Facilities
 
    In April 2013, PG&E Corporation and the Utility amended and restated their revolving credit facilities to extend their termination dates from May 31, 2016 to April 1, 2018.  These agreements contain substantially similar terms as their original 2011 credit agreements.
 
At June 30, 2013, PG&E Corporation had $260 million of cash borrowings and no letters of credit outstanding under its $300 million revolving credit facility.

At June 30, 2013, the Utility had no cash borrowings and $91 million of letters of credit outstanding under its $3.0 billion revolving credit facility.

Pollution Control Bonds

At June 30, 2013, the interest rates on the $614 million principal amount of pollution control bonds Series 1996 C, E, F, and 1997 B and the related loan agreements ranged from 0.04% to 0.06%.  At June 30, 2013, the interest rates on the $309 million principal amount of pollution control bonds Series 2009 A-D and the related loan agreements ranged from 0.01% to 0.05%.

Commercial Paper Program

At June 30, 2013, the Utility had $692 million of commercial paper outstanding under its revolving credit facility.
 

PG&E Corporation’s and the Utility’s changes in equity for the six months ended June 30, 2013 were as follows:

             
   
PG&E Corporation
   
Utility
 
   
Total
   
Total
 
(in millions)
 
Equity
   
Shareholders' Equity
 
Balance at December 31, 2012
  $ 13,326     $ 13,460  
Comprehensive income
    604       575  
Common stock issued
    573       -  
Share-based compensation expense
    31       (1 )
Common stock dividends declared
    (405 )     (358 )
Preferred stock dividend requirement
    -       (7 )
Preferred stock dividend requirement of subsidiary
    (7 )     -  
Equity contributions
    -       665  
Balance at June 30, 2013
  $ 14,122     $ 14,334  
                 

In May 2013, PG&E Corporation entered into a new Equity Distribution Agreement providing for the sale of PG&E Corporation common stock having an aggregate gross sales price of up to $400 million.  As of June 30, 2013, PG&E Corporation common stock having an aggregate gross sales price of $50 million had been sold under this equity distribution agreement.

During the six months ended June 30, 2013, PG&E Corporation issued 14 million shares of its common stock for aggregate net cash proceeds of $562 million in the following transactions:

·  
7 million shares were sold in an underwritten public offering for cash proceeds of $300 million, net of fees and commissions;

·  
4 million shares were issued for cash proceeds of $149 million under the PG&E Corporation 401(k) plan, the Dividend Reinvestment and Stock Purchase Plan, and share-based compensation plans; and

·  
3 million shares were sold for cash proceeds of $113 million, net of commissions paid of $1 million, under the equity distribution agreements.

During the six months ended June 30, 2013, PG&E Corporation contributed equity of $665 million to the Utility to maintain the Utility’s CPUC-authorized capital structure, which consists of 52% common equity and 48% debt and preferred stock.

 
15
 
 

PG&E Corporation’s basic EPS is calculated by dividing the income available for common shareholders by the weighted average number of common shares outstanding.  PG&E Corporation applies the treasury stock method of reflecting the dilutive effect of outstanding share-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 common shares outstanding for calculating diluted EPS:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions, except per share amounts)
 
2013
   
2012
   
2013
   
2012
 
Income available for common shareholders
  $ 328     $ 235     $ 567     $ 468  
Weighted average common shares outstanding, basic
    442       423       438       419  
Add incremental shares from assumed conversions:
                               
Employee share-based compensation
    1       2       1       2  
Weighted average common share outstanding, diluted
    443       425       439       421  
Total earnings per common share, diluted
  $ 0.74     $ 0.55     $ 1.29     $ 1.11  

For each of the periods presented above, the calculation of weighted average common shares outstanding on a diluted basis excluded an insignificant amount of options and securities that were antidilutive.

 
        The Utility uses both derivative and non-derivative contracts in managing its exposure to commodity-related price risk, including forward contracts, swap agreements, futures contracts, and option contracts.

These instruments are not held for speculative purposes and are subject to certain regulatory requirements.  Customer rates are designed to recover the Utility’s reasonable costs of providing services, including the costs related to price risk management activities.

Price risk management activities that meet the definition of derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets.  As long as the current ratemaking mechanism remains in place and the Utility’s price risk management activities are carried out in accordance with CPUC directives, the Utility expects to recover fully, in rates, all costs related to derivatives.  Therefore, all unrealized gains and losses associated with the change in fair value of these derivatives are deferred and recorded within the Utility’s regulatory assets and liabilities.  (See Note 3 above.)  Net realized gains or losses on commodity derivatives are recorded in the cost of electricity or the cost of natural gas with corresponding increases or decreases to regulatory balancing accounts for recovery from or refund to customers.

The Utility elects the normal purchase and sale exception for eligible derivatives.  Derivatives that require physical delivery in quantities that are expected to be used by the Utility over a reasonable period in the normal course of business, and do not contain pricing provisions unrelated to the commodity delivered are eligible for the normal purchase and sale exception.  The fair value of derivatives that are eligible for the normal purchase and sales exception are not reflected in the Condensed Consolidated Balance Sheets.

Presentation of Derivative Instruments in the Financial Statements

In the Condensed Consolidated Balance Sheets, derivatives are presented on a net basis by counterparty where the right and the intention to offset exists under a master netting agreement.  All derivatives that are subject to a master netting arrangement have been netted.  The net balances include outstanding cash collateral associated with derivative positions.

At June 30, 2013, PG&E Corporation’s and the Utility’s outstanding derivative balances were as follows:

 
Commodity Risk
 
 
Gross
         
Total
 
(in millions)
Balance
 
Netting
 
Cash Collateral
 
Balance
 
Current assets – other
  $ 31     $ (11 )   $ 28     $ 48  
Other noncurrent assets – other
    71       (5 )     -       66  
Current liabilities – other
    (188 )     11       133       (44 )
Noncurrent liabilities – other
    (168 )     5       40       (123 )
Total commodity risk
  $ (254 )   $ -     $ 201     $ (53 )
 
At December 31, 2012, PG&E Corporation’s and the Utility’s outstanding derivative balances were as follows:

 
Commodity Risk
 
 
Gross
         
Total
 
(in millions)
Balance
 
Netting
 
Cash Collateral
 
Balance
 
Current assets – other
  $ 48     $ (25 )   $ 36     $ 59  
Other noncurrent assets – other
    99       (11 )     -       88  
Current liabilities – other
    (255 )     25       115       (115 )
Noncurrent liabilities – other
    (221 )     11       14       (196 )
Total commodity risk
  $ (329 )   $ -     $ 165     $ (164 )
 
 
16
 
        Gains and losses associated with price risk management activities were recorded as follows:

 
Commodity Risk
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
(in millions)
2013
 
2012
 
2013
 
2012
 
Unrealized gain/(loss) - regulatory assets and liabilities (1)
  $ (23 )   $ 219     $ 75     $ 165  
Realized loss - cost of electricity (2)
    (31 )     (125 )     (79 )     (275 )
Realized loss - cost of natural gas (2)
    (4 )     (5 )     (12 )     (27 )
Total commodity risk
  $ (58 )   $ 89     $ (16 )   $ (137 )
                                 
 (1) Unrealized gains and losses on commodity risk-related derivative instruments are recorded to regulatory assets or liabilities, rather than being recorded to the  Condensed Consolidated Statements of Income.  These amounts exclude the impact of cash collateral postings.
 (2) These amounts are fully passed through to customers in rates.  Accordingly, net income was not impacted by realized amounts on these instruments.
 
Volume of Derivative Activity

        At June 30, 2013, the volumes of PG&E Corporation’s and the Utility’s outstanding derivatives were as follows:

     
Contract Volume (1)
 
           
1 Year or
   
3 Years or
       
           
Greater but
   
Greater but
       
     
Less Than 1
   
Less Than 3
   
Less Than 5
   
5 Years or
 
Underlying Product
Instruments
 
Year
   
Years
   
Years
   
Greater (2)
 
Natural Gas (3)
Forwards and
                       
(MMBtus (4))
Swaps
    290,542,776       86,670,000       6,900,000       -  
 
Options
    209,492,494       136,515,176       4,950,000       -  
Electricity
Forwards and