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 September 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 October 22, 2013:
 
PG&E Corporation:
449,295,292
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, 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
 
11
 
14
 
16
 
16
 
17
 
18
 
20
 
28
 
29
 
 
 
36
 
39
 
41
 
47
 
52
 
52
 
57
 
60
 
61
 
61
 
62
 
63
63
 
 
64
66
67
67
68
     
69
 




 

 
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, including the information incorporated by reference into the report
ALJ
administrative law judge
ASU
accounting standards update
CAISO
California Independent System Operator
CARB
California Air Resources Board
CPUC
California Public Utilities Commission
CRRs
congestion revenue rights
DRA
Division of Ratepayer Advocates, now known as Office of Ratepayer Advocates
EPA
Environmental Protection Agency
EPS
earnings per common share
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
OSC
CPUC Order to Show Cause
PSEP
pipeline safety enhancement plan
Regional Board
California Regional Water Quality Control Board, Lahontan Region
ROE
return on equity
SEC
U.S. Securities and Exchange Commission
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
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PG&E CORPORATION

   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions, except per share amounts)
 
2013
   
2012
   
2013
   
2012
 
Operating Revenues
                       
Electric
  $ 3,517     $ 3,323     $ 9,375     $ 9,026  
Natural gas
    658       653       2,248       2,184  
Total operating revenues
    4,175       3,976       11,623       11,210  
Operating Expenses
                               
Cost of electricity
    1,645       1,283       3,817       3,104  
Cost of natural gas
    131       118       656       593  
Operating and maintenance
    1,585       1,344       4,179       4,138  
Depreciation, amortization, and decommissioning
    523       617       1,542       1,807  
Total operating expenses
    3,884       3,362       10,194       9,642  
Operating Income
    291       614       1,429       1,568  
Interest income
    2       2       6       6  
Interest expense
    (179 )     (178 )     (532 )     (528 )
Other income, net
    26       26       78       84  
Income Before Income Taxes
    140       464       981       1,130  
Income tax (benefit) provision
    (24 )     100       243       291  
Net Income
    164       364       738       839  
Preferred stock dividend requirement of subsidiary
    3       3       10       10  
Income Available for Common Shareholders
  $ 161     $ 361     $ 728     $ 829  
Weighted Average Common Shares Outstanding, Basic
    446       428       441       422  
Weighted Average Common Shares Outstanding, Diluted
    447       429       442       423  
Net Earnings Per Common Share, Basic
  $ 0.36     $ 0.84     $ 1.65     $ 1.96  
Net Earnings Per Common Share, Diluted
  $ 0.36     $ 0.84     $ 1.65     $ 1.96  
Dividends Declared Per Common Share
  $ 0.46     $ 0.46     $ 1.37     $ 1.37  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
1

 

PG&E CORPORATION


   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Net Income
  $ 164     $ 364     $ 738     $ 839  
Other Comprehensive Income
                               
Pension and other postretirement benefit plans
                               
Amortization of prior service cost (net of taxes of $5, $5,
                               
$14, and $15, at respective dates)
    6       7       18       19  
Amortization of actuarial loss (net of taxes of $11, $12,
                               
$35, and $38, at respective dates)
    18       18       52       58  
Amortization of transition obligation (net of taxes of $0, $2,
                               
$0, and $6, at respective dates)
    -       4       -       12  
Transfer to regulatory account (net of taxes of $13, $14, $39,
                               
and $44, at respective dates)
    (20 )     (21 )     (58 )     (63 )
Gain (loss) on investments (net of taxes of $2, $0, $13, and $0,
                               
at respective dates)
    (3 )     -       19       -  
Total other comprehensive income
    1       8       31       26  
Comprehensive Income
    165       372       769       865  
Preferred stock dividend requirement of subsidiary
    3       3       10       10  
Comprehensive Income Attributable to Common Shareholders
  $ 162     $ 369     $ 759     $ 855  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 




 
2

 

PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
September 30,
   
December 31,
 
(in millions)
 
2013
   
2012
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 281     $ 401  
Restricted cash
    301       330  
Accounts receivable:
               
Customers (net of allowance for doubtful accounts of $81 and $87
               
   at respective dates)
    1,099       937  
Accrued unbilled revenue
    809       761  
Regulatory balancing accounts
    1,004       936  
Other
    286       365  
Regulatory assets
    483       564  
Inventories:
               
Gas stored underground and fuel oil
    184       135  
Materials and supplies
    316       309  
Income taxes receivable
    377       211  
Other
    382       172  
Total current assets
    5,522       5,121  
Property, Plant, and Equipment
               
Electric
    41,939       39,701  
Gas
    13,381       12,571  
Construction work in progress
    1,996       1,894  
Other
    1       1  
Total property, plant, and equipment
    57,317       54,167  
Accumulated depreciation
    (17,560 )     (16,644 )
Net property, plant, and equipment
    39,757       37,523  
Other Noncurrent Assets
               
Regulatory assets
    6,827       6,809  
Nuclear decommissioning trusts
    2,272       2,161  
Income taxes receivable
    163       176  
Other
    673       659  
Total other noncurrent assets
    9,935       9,805  
TOTAL ASSETS
  $ 55,214     $ 52,449  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
3

 

PG&E CORPORATION

   
(Unaudited)
 
   
Balance At
 
   
September 30,
   
December 31,
 
(in millions, except share amounts)
 
2013
   
2012
 
LIABILITIES AND EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 953     $ 492  
Long-term debt, classified as current
    1,288       400  
Accounts payable:
               
Trade creditors
    1,303       1,241  
Disputed claims and customer refunds
    156       157  
Regulatory balancing accounts
    1,002       634  
Other
    388       444  
Interest payable
    852       870  
Income taxes payable
    39       6  
Other
    1,663       2,012  
Total current liabilities
    7,644       6,256  
Noncurrent Liabilities
               
Long-term debt
    11,918       12,517  
Regulatory liabilities
    5,343       5,088  
Pension and other postretirement benefits
    3,711       3,575  
Asset retirement obligations
    2,946       2,919  
Deferred income taxes
    7,275       6,748  
Other
    2,117       2,020  
Total noncurrent liabilities
    33,310       32,867  
Commitments and Contingencies (Note 10)
               
Equity
               
Shareholders' Equity
               
Preferred stock
    -       -  
Common stock, no par value, authorized 800,000,000 shares,
               
448,590,070 and 430,718,293 shares outstanding at respective dates
    9,212       8,428  
Reinvested earnings
    4,866       4,747  
Accumulated other comprehensive loss
    (70 )     (101 )
Total shareholders' equity
    14,008       13,074  
Noncontrolling Interest - Preferred Stock of Subsidiary
    252       252  
Total equity
    14,260       13,326  
TOTAL LIABILITIES AND EQUITY
  $ 55,214     $ 52,449  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
4

 

PG&E CORPORATION


   
(Unaudited)
 
   
Nine Months Ended September 30,
 
(in millions)
 
2013
   
2012
 
Cash Flows from Operating Activities
           
Net income
  $ 738     $ 839  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation, amortization, and decommissioning
    1,542       1,807  
Allowance for equity funds used during construction
    (78 )     (79 )
Deferred income taxes and tax credits, net
    527       624  
PSEP disallowed capital expenditures
    196       -  
Other
    274       230  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    (160 )     (326 )
Inventories
    (56 )     (34 )
Accounts payable
    84       (55 )
Income taxes receivable/payable
    (133 )     69  
Other current assets and liabilities
    (269 )     16  
Regulatory assets, liabilities, and balancing accounts, net
    12       66  
Other noncurrent assets and liabilities
    156       295  
Net cash provided by operating activities
    2,833       3,452  
Cash Flows from Investing Activities
               
Capital expenditures
    (3,881 )     (3,361 )
Decrease (increase) in restricted cash
    29       (38 )
Proceeds from sales and maturities of nuclear decommissioning
               
trust investments
    1,152       903  
Purchases of nuclear decommissioning trust investments
    (1,150 )     (964 )
Other
    37       101  
Net cash used in investing activities
    (3,813 )     (3,359 )
Cash Flows from Financing Activities
               
Borrowings under revolving credit facilities
    140       -  
Net issuances (repayments) of commercial paper, net of discount of $1 and $3
               
at respective dates
    322       (1,247 )
Proceeds from issuance of long-term debt, net of premium, discount, and issuance
               
costs of $9 and $10 at respective dates
    741       1,140  
Long-term debt matured or repurchased
    (461 )     (50 )
Energy recovery bonds matured
    -       (313 )
Common stock issued
    724       702  
Common stock dividends paid
    (583 )     (556 )
Other
    (23 )     14  
Net cash provided by (used in) financing activities
    860       (310 )
Net change in cash and cash equivalents
    (120 )     (217 )
Cash and cash equivalents at January 1
    401       513  
Cash and cash equivalents at September 30
  $ 281     $ 296  
Supplemental disclosures of cash flow information
               
Cash received (paid) for:
               
Interest, net of amounts capitalized
  $ (499 )   $ (486 )
Income taxes, net
    (65 )     114  
Supplemental disclosures of noncash investing and financing activities
               
Common stock dividends declared but not yet paid
  $ 204     $ 195  
Capital expenditures financed through accounts payable
    277       228  
Noncash common stock issuances
    17       18  
Terminated capital leases
    -       136  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
5

 

PACIFIC GAS AND ELECTRIC COMPANY


   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Operating Revenues
                       
Electric
  $ 3,517     $ 3,321     $ 9,372     $ 9,022  
Natural gas
    657       653       2,248       2,184  
Total operating revenues
    4,174       3,974       11,620       11,206  
Operating Expenses
                               
Cost of electricity
    1,645       1,283       3,817       3,104  
Cost of natural gas
    131       118       656       593  
Operating and maintenance
    1,583       1,343       4,175       4,134  
Depreciation, amortization, and decommissioning
    523       617       1,542       1,807  
Total operating expenses
    3,882       3,361       10,190       9,638  
Operating Income
    292       613       1,430       1,568  
Interest income
    2       2       6       5  
Interest expense
    (172 )     (172 )     (513 )     (511 )
Other income, net
    20       19       66       64  
Income Before Income Taxes
    142       462       989       1,126  
Income tax (benefit) provision
    (20 )     122       261       328  
Net Income
    162       340       728       798  
Preferred stock dividend requirement
    3       3       10       10  
Income Available for Common Stock
  $ 159     $ 337     $ 718     $ 788  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 

 
6

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Net Income
  $ 162     $ 340     $ 728     $ 798  
Other Comprehensive Income
                               
Pension and other postretirement benefit plans
                               
Amortization of prior service cost (net of taxes of $5, $5, $14,
                               
and $15, at respective dates)
    6       7       18       19  
Amortization of actuarial loss (net of taxes of $11, $12, $34,
                               
and $38, at respective dates)
    18       18       53       58  
Amortization of transition obligation (net of taxes of $0, $2
                               
$0, and $6, at respective dates)
    -       4       -       12  
Transfer to regulatory account (net of taxes of $13, $14, $39, and
                               
$44, at respective dates)
    (20 )     (21 )     (58 )     (63 )
Total other comprehensive income
    4       8       13       26  
Comprehensive Income
  $ 166     $ 348     $ 741     $ 824  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
7

 

PACIFIC GAS AND ELECTRIC COMPANY

   
(Unaudited)
 
   
Balance At
 
   
September 30,
   
December 31,
 
(in millions)
 
2013
   
2012
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 60     $ 194  
Restricted cash
    301       330  
Accounts receivable:
               
Customers (net of allowance for doubtful accounts of $81 and $87
               
  at respective dates)
    1,099       937  
Accrued unbilled revenue
    809       761  
Regulatory balancing accounts
    1,004       936  
Other
    289       366  
Regulatory assets
    483       564  
Inventories:
               
Gas stored underground and fuel oil
    184       135  
Materials and supplies
    316       309  
Income taxes receivable
    377       186  
Other
    344       160  
Total current assets
    5,266       4,878  
Property, Plant, and Equipment
               
Electric
    41,939       39,701  
Gas
    13,381       12,571  
Construction work in progress
    1,996       1,894  
Total property, plant, and equipment
    57,316       54,166  
Accumulated depreciation
    (17,559 )     (16,643 )
Net property, plant, and equipment
    39,757       37,523  
Other Noncurrent Assets
               
Regulatory assets
    6,827       6,809  
Nuclear decommissioning trusts
    2,272       2,161  
Income taxes receivable
    158       171  
Other
    411       381  
Total other noncurrent assets
    9,668       9,522  
TOTAL ASSETS
  $ 54,691     $ 51,923  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
8

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
September 30,
   
December 31,
 
(in millions, except share amounts)
 
2013
   
2012
 
LIABILITIES AND SHAREHOLDERS' EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 693     $ 372  
Long-term debt, classified as current
    938       400  
Accounts payable:
               
Trade creditors
    1,303       1,241  
Disputed claims and customer refunds
    156       157  
Regulatory balancing accounts
    1,002       634  
Other
    404       419  
Interest payable
    841       865  
Income taxes payable
    49       12  
Other
    1,443       1,794  
Total current liabilities
    6,829       5,894  
Noncurrent Liabilities
               
Long-term debt
    11,918       12,167  
Regulatory liabilities
    5,343       5,088  
Pension and other postretirement benefits
    3,628       3,497  
Asset retirement obligations
    2,946       2,919  
Deferred income taxes
    7,484       6,939  
Other
    2,055       1,959  
Total noncurrent liabilities
    33,374       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
    5,516       4,682  
Reinvested earnings
    7,472       7,291  
Accumulated other comprehensive loss
    (80 )     (93 )
Total shareholders' equity
    14,488       13,460  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 54,691     $ 51,923  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
9

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


   
(Unaudited)
 
   
Nine Months Ended September 30,
 
(in millions)
 
2013
   
2012
 
Cash Flows from Operating Activities
           
Net income
  $ 728     $ 798  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation, amortization, and decommissioning
    1,542       1,807  
Allowance for equity funds used during construction
    (78 )     (79 )
Deferred income taxes and tax credits, net
    545       633  
    PSEP disallowed capital expenditures
    196       -  
    Other
    231       189  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    (162 )     (327 )
Inventories
    (56 )     (34 )
Accounts payable
    125       (31 )
Income taxes receivable/payable
    (154 )     153  
Other current assets and liabilities
    (250 )     15  
Regulatory assets, liabilities, and balancing accounts, net
    12       66  
Other noncurrent assets and liabilities
    147       315  
Net cash provided by operating activities
    2,826       3,505  
Cash Flows from Investing Activities
               
Capital expenditures
    (3,881 )     (3,361 )
Decrease (increase) in restricted cash
    29       (38 )
Proceeds from sales and maturities of nuclear decommissioning
               
trust investments
    1,152       903  
Purchases of nuclear decommissioning trust investments
    (1,150 )     (964 )
Other
    14       14  
Net cash used in investing activities
    (3,836 )     (3,446 )
Cash Flows from Financing Activities
               
Net issuances (repayments) of commercial paper, net of discount of $1 and $3
               
at respective dates
    322       (1,247 )
Proceeds from issuance of long-term debt, net of premium, discount, and issuance
               
costs of $9 and $10 at respective dates
    741       1,140  
Long-term debt matured or repurchased
    (461 )     (50 )
Energy recovery bonds matured
    -       (313 )
Preferred stock dividends paid
    (10 )     (10 )
Common stock dividends paid
    (537 )     (537 )
Equity contribution
    835       715  
Other
    (14 )     25  
Net cash provided by (used in) financing activities
    876       (277 )
Net change in cash and cash equivalents
    (134 )     (218 )
Cash and cash equivalents at January 1
    194       304  
Cash and cash equivalents at September 30
  $ 60     $ 86  
Supplemental disclosures of cash flow information
               
Cash received (paid) for:
               
Interest, net of amounts capitalized
  $ (487 )   $ (476 )
Income taxes, net
    (86 )     174  
Supplemental disclosures of noncash investing and financing activities
               
Capital expenditures financed through accounts payable
  $ 277     $ 228  
Terminated capital leases
    -       136  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 

 
10

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

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 SEC 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 in 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.
 
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

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.

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 September 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 September 30, 2013, it did not consolidate any of them.

 
11

 
PG&E Corporation affiliates have entered into four tax equity agreements to fund residential and commercial retail solar energy installations with four separate privately held funds 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 September 30, 2013 and December 31, 2012, the carrying amount of PG&E Corporation’s investment in these agreements was $138 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 September 30, 2013, it did not consolidate any of them.

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 nine months ended September 30, 2013 and 2012 were as follows:

   
Pension Benefits
   
Other Benefits
 
   
Three Months Ended September 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Service cost for benefits earned
  $ 121     $ 100     $ 14     $ 14  
Interest cost
    158       165       19       21  
Expected return on plan assets
    (162 )     (150 )     (20 )     (19 )
Amortization of transition obligation
    -       -       -       6  
Amortization of prior service cost
    5       5       6       7  
Amortization of net actuarial loss
    28       29       1       1  
Net periodic benefit cost
    150       149       20       30  
Less: transfer to regulatory account (1)
    (66 )     (75 )     -       -  
Total
  $ 84     $ 74     $ 20     $ 30  
                                 
 (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
 
   
Nine Months Ended September 30,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Service cost for benefits earned
  $ 351     $ 297     $ 40     $ 37  
Interest cost
    470       494       56       63  
Expected return on plan assets
    (487 )     (449 )     (60 )     (58 )
Amortization of transition obligation
    -       -       -       18  
Amortization of prior service cost
    15       15       17       19  
Amortization of net actuarial loss
    83       92       4       4  
Net periodic benefit cost
    432       449       57       83  
Less: transfer to regulatory account (1)
    (179 )     (225 )     -       -  
Total
  $ 253     $ 224     $ 57     $ 83  
                                 
 (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.

 
12

 

Adoption of New Accounting Pronouncements

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the Financial Accounting Standards Board 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 accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2013 consist of the following:
                   
                   
 
Pension
 
Other
 
Other
     
 
Benefits
 
Benefits
 
Investments
 
Total
 
(in millions, net of income tax)
Three Months Ended September 30, 2013
 
Beginning balance
  $ (28 ) $ (69 ) $ 26   $ (71 )
Other comprehensive income before reclassifications
    (20 )   -     (3 )   (23 )
Amounts reclassified from other comprehensive income:
                         
      Amortization of prior service cost (1)
    3     3     -     6  
      Amortization of net actuarial loss (1)
    17     1     -     18  
Net current period other comprehensive income (loss)
    -     4     (3 )   1  
Ending balance
  $ (28 ) $ (65 ) $ 23   $ (70 )
                           
 (1) These 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
 
Other
 
Other
     
 
Benefits
 
Benefits
 
Investments
 
Total
 
(in millions, net of income tax)
Nine Months Ended September 30, 2013
 
Beginning balance
  $ (28 ) $ (77 ) $ 4   $ (101 )
Other comprehensive income before reclassifications
    (58 )   -     19     (39 )
Amounts reclassified from other comprehensive income:
                         
      Amortization of prior service cost (1)
    9     9     -     18  
      Amortization of net actuarial loss (1)
    49     3     -     52  
Net current period other comprehensive income (loss)
    -     12     19     31  
Ending balance
  $ (28 ) $ (65 ) $ 23   $ (70 )
                           
 (1) These 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.

Disclosures about Offsetting Assets and Liabilities

In January 2013, the Financial Accounting Standards Board 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.)


 
13

 

NOTE 3: REGULATORY ASSETS, LIABILITIES, AND BALANCING ACCOUNTS

Regulatory Assets

Long-Term Regulatory Assets

Long-term regulatory assets are composed of the following:
 
   
Balance at
 
   
September 30,
   
December 31,
 
(in millions)
 
2013
   
2012
 
Pension benefits
  $ 3,356     $ 3,275  
Deferred income taxes
    1,772       1,627  
Utility retained generation
    515       552  
Environmental compliance costs
    609       604  
Price risk management
    144       210  
Electromechanical meters
    150       194  
Unamortized loss, net of gain, on reacquired debt
    140       141  
Other
    141       206  
Total long-term regulatory assets
  $ 6,827     $ 6,809  

Regulatory Liabilities

Long-Term Regulatory Liabilities

Long-term regulatory liabilities are composed of the following:
 
 
Balance at
 
 
September 30,
 
December 31,
 
(in millions)
2013
 
2012
 
Cost of removal obligations
  $ 3,805     $ 3,625  
Recoveries in excess of asset retirement obligations
    674       620  
Public purpose programs
    594       590  
Other
    270       253  
Total long-term regulatory liabilities
  $ 5,343     $ 5,088  

 
14

 
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
 
   
September 30,
   
December 31,
 
(in millions)
 
2013
   
2012
 
Distribution revenue adjustment mechanism
  $ (3 )   $ 219  
Utility generation
    (22 )     117  
Hazardous substance
    75       56  
Public purpose programs
    (100 )     (83 )
Gas fixed cost
    179       44  
Energy recovery bonds
    (170 )     (43 )
Energy procurement
    281       77  
U.S. Department of Energy Settlement
    (279 )     (250 )
GHG allowance auction proceeds (1)
    (250 )     -  
Other
    291       165  
Total regulatory balancing accounts, net
  $ 2     $ 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.
 
15

 
 
NOTE 4: DEBT

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 $15 million of premiums and $6 million of 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 September 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 September 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 September 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 0.05% to 0.07%.  At September 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 0.04%.
 
Commercial Paper Program

At September 30, 2013, the Utility had $693 million of commercial paper outstanding supported by available capacity under its revolving credit facility.
 
NOTE 5: EQUITY

PG&E Corporation’s and the Utility’s changes in equity for the nine months ended September 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
    769       741  
Equity contributions
    -       835  
Common stock issued
    741       -  
Share-based compensation expense
    43       (1 )
Common stock dividends declared
    (609 )     (537 )
Preferred stock dividend requirement
    -       (10 )
Preferred stock dividend requirement of subsidiary
    (10 )     -  
Balance at September 30, 2013
  $ 14,260     $ 14,488  
                 
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 September 30, 2013, PG&E Corporation sold common stock having an aggregate gross sales price of $150 million under this agreement.  During the three and nine months ended September 30, 2013, PG&E Corporation paid commissions of $1 million, respectively, under this agreement.

 
16

 
During the nine months ended September 30, 2013, PG&E Corporation issued 18 million shares of its common stock for aggregate net cash proceeds of $724 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;

·  
6 million shares were issued for cash proceeds of $212 million under the PG&E Corporation 401(k) plan, the Dividend Reinvestment and Stock Purchase Plan, and share-based compensation plans; and

·  
5 million shares were sold for cash proceeds of $212 million, net of commissions paid of $2 million, under equity distribution agreements.

NOTE 6: EARNINGS PER SHARE

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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions, except per share amounts)
 
2013
   
2012
   
2013
   
2012
 
Income available for common shareholders
  $ 161     $ 361     $ 728     $ 829  
Weighted average common shares outstanding, basic
    446       428       441       422  
Add incremental shares from assumed conversions:
                               
Employee share-based compensation
    1       1       1       1  
Weighted average common share outstanding, diluted
    447       429       442       423  
Total earnings per common share, diluted
  $ 0.36     $ 0.84     $ 1.65     $ 1.96  
 
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.

 
17

 
NOTE 7: DERIVATIVES
 
        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 September 30, 2013, PG&E Corporation’s and the Utility’s outstanding derivative balances were as follows:

 
Commodity Risk
 
 
Gross Derivative
         
Total Derivative
 
(in millions)
Balance
 
Netting
 
Cash Collateral
 
Balance
 
Current assets – other
  $ 31   $ (12 ) $ 19   $ 38  
Other noncurrent assets – other
    66     (5 )   -     61  
Current liabilities – other
    (162 )   12     106     (44 )
Noncurrent liabilities – other
    (149 )   5     23     (121 )
Total commodity risk
  $ (214 ) $ -   $ 148   $ (66 )
 
At December 31, 2012, PG&E Corporation’s and the Utility’s outstanding derivative balances were as follows:

 
Commodity Risk
 
 
Gross Derivative
         
Total Derivative
 
(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   $