NOTE 8: INCOME TAXES

PG&E Corporation and the Utility use the asset and liability method of accounting for income taxes. The income tax provision includes current and deferred income taxes resulting from operations during the year. PG&E Corporation and the Utility estimate current period tax expense in addition to calculating deferred tax assets and liabilities. Deferred tax assets and liabilities result from temporary tax and accounting timing differences, such as those arising from depreciation expense.

PG&E Corporation and the Utility recognize a tax benefit if it is more likely than not that a tax position taken or expected to be taken in a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50% likely of being realized upon settlement. As such, the difference between a tax position taken or expected to be taken in a tax return in future periods and the benefit recognized and measured pursuant to this guidance in the financial statements represents an unrecognized tax benefit.

Investment tax credits are deferred and amortized to income over time. PG&E Corporation amortizes its investment tax credits over the projected investment recovery period. The Utility amortizes its investment tax credits over the life of the related property in accordance with regulatory treatment.

PG&E Corporation files a consolidated U.S. federal income tax return that includes the Utility and domestic subsidiaries in which its ownership is 80% or more. PG&E Corporation files a combined state income tax return in California. PG&E Corporation and the Utility are parties to a tax-sharing agreement under which the Utility determines its income tax provision (benefit) on a stand-alone basis.

The significant components of income tax provision (benefit) by taxing jurisdiction were as follows:

	PG&E Corporation									Utility
	Year Ended December 31,
(in millions)	2017		2016			2015			2017				2016			2015
Current:
Federal	$	(10)		$	(105)		$	(89)			$	61		$	(105)		$	(88)
State		48			(70)			11				50			(66)			6
Deferred:
Federal		481			218			131				326			229			136
State		6			16			(76)				4			16			(69)
Tax credits		(14)			(4)			(4)				(14)			(4)			(4)
Income tax provision (benefit)	$	511		$	55		$	(27)			$	427		$	70		$	(19)

The following table describes net deferred income tax liabilities:

	PG&E Corporation				Utility
	Year Ended December 31,
(in millions)	2017		2016			2017		2016
Deferred income tax assets:
Tax carryforwards		830		1,851			736		1,596
Compensation		274		277			205		199
Income tax regulatory liability (1)		286		-			286		-
Other (2)		185		186			194		203
Total deferred income tax assets	$	1,575	$	2,314		$	1,421	$	1,998
Deferred income tax liabilities:
Property related basis differences		7,269		10,429			7,256		10,411
Income tax regulatory asset (1)		-		1,572			-		1,572
Other (3)		128		526			128		525
Total deferred income tax liabilities	$	7,397	$	12,527		$	7,384	$	12,508
Total net deferred income tax liabilities	$	5,822	$	10,213		$	5,963	$	10,510

(1) Represents the tax gross up portion of the deferred income tax for the cumulative differences between amounts recognized for ratemaking purposes and amounts recognized for tax, including the impact of changes in net deferred taxes associated with a lower federal income tax rate as a result of the Tax Act. (For more information see Note 3 above and “Tax Cuts and Jobs Act of 2017” below.)

(2) Amounts include benefits, environmental reserve, and customer advances for construction.

(3) Amounts primarily relate to regulatory balancing accounts.

The following table reconciles income tax expense at the federal statutory rate to the income tax provision:

	PG&E Corporation								Utility
	Year Ended December 31,
	2017		2016		2015			2017				2016			2015
Federal statutory income tax rate	35.0	%	35.0	%		35.0	%			35.0	%		35.0	%		35.0	%
Increase (decrease) in income
tax rate resulting from:
State income tax (net of
federal benefit) (1)	1.5		(2.5)			(4.9)				1.6			(2.2)			(4.8)
Effect of regulatory treatment
of fixed asset differences (2)	(16.5)		(23.7)			(33.6)				(16.8)			(23.4)			(33.7)
Tax credits	(1.1)		(0.8)			(1.3)				(1.1)			(0.8)			(1.3)
Benefit of loss carryback	-		(1.1)			(1.5)				-			(1.1)			(1.5)
Non deductible penalties (3)	0.4		0.8			4.3				0.4			0.8			4.3
Tax Reform Adjustment (4)	6.8		-			-				3.0			-			-
Other, net (5)	(2.5)		(3.9)			(1.1)				(2.0)			(3.5)			(0.2)
Effective tax rate	23.6	%	3.8	%		(3.1)	%			20.1	%		4.8	%		(2.2)	%

(1) Includes the effect of state flow-through ratemaking treatment. In 2016 and 2015, amounts reflect an agreement with the IRS on a 2011 audit related to electric transmission and distribution repairs deductions. The 2017 amount reflects an agreement with the IRS on a 2013 audit related to generation repairs deductions.

(2) Includes the effect of federal flow-through ratemaking treatment for certain property-related costs as authorized by the 2014 GRC decision in all periods presented and by the 2015 GT&S decision which impacted 2016 and 2017. All amounts are impacted by the level of income before income taxes. The 2014 GRC and 2015 GT&S rate case decisions authorized revenue requirements that reflect flow-through ratemaking for temporary income tax differences attributable to repair costs and certain other property-related costs for federal tax purposes. For these temporary tax differences, PG&E Corporation and the Utility recognize the deferred tax impact in the current period and record offsetting regulatory assets and liabilities. Therefore, PG&E Corporation’s and the Utility’s effective tax rates are impacted as these differences arise and reverse. PG&E Corporation and the Utility recognize such differences as regulatory assets or liabilities as it is probable that these amounts will be recovered from or returned to customers in future rates.

(3) Primarily represents the effects of a non-tax deductible penalty associated with the Butte fire for 2017, non-tax deductible fines and penalties associated with the natural gas distribution facilities record-keeping decision for 2016 and the effects of the San Bruno Penalty Decision for 2015.

(4) Represents the required adjustment to deferred tax balances, due to the federal income tax rate being lowered from 35% to 21% beginning in 2018 as a result of the enactment of the Tax Act.

(5) These amounts primarily represent the impact of tax audit settlements.

Unrecognized Tax Benefits

The following table reconciles the changes in unrecognized tax benefits:

	PG&E Corporation						Utility
(in millions)	2017		2016		2015		2017		2016		2015
Balance at beginning of year	$	388	$	468	$	713	$	382	$	462	$	707
Additions for tax position taken
during a prior year		-		-		40		-		-		40
Reductions for tax position
taken during a prior year		(71)		(77)		(349)		(71)		(77)		(349)
Additions for tax position
taken during the current year		48		56		64		48		56		64
Settlements		(14)		(59)		-		(8)		(59)		-
Expiration of statute		(3)		-		-		(3)		-		-
Balance at end of year	$	349	$	388	$	468	$	349	$	382	$	462

The component of unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2017 for PG&E Corporation and the Utility was $21 million.

PG&E Corporation’s and the Utility’s unrecognized tax benefits may change significantly within the next 12 months due to the resolution of several matters, including audits. As of December 31, 2017, it is reasonably possible that unrecognized tax benefits will decrease by approximately $20 million within the next 12 months.

Interest income, interest expense and penalties associated with income taxes are reflected in income tax expense on the Consolidated Statements of Income. For the years ended December 31, 2017, 2016, and 2015, these amounts were immaterial.

Tax Cuts and Jobs Act of 2017

On December 22, 2017, the U.S. government enacted expansive tax legislation commonly referred to as the Tax Act. Among other provisions, the Tax Act reduces the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018 and eliminated bonus depreciation for utilities. The Tax Act required PG&E Corporation and the Utility to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. PG&E Corporation and the Utility have made reasonable estimates to reflect the impacts of the Tax Act and recorded provisional amounts, in accordance with rules issued by the SEC in Staff Accounting Bulletin No. 118, for the re-measurement of deferred tax balances as of December 31, 2017.

During the three months and year ended December 31, 2017, PG&E Corporation, on a consolidated basis, recorded a one-time provisional tax expense of $147 million to reflect the transitional impacts of the Tax Act. Of this amount, $83 million is attributable to the re-measurement of PG&E Corporation’s net deferred tax asset comprised primarily of net operating loss carry-forwards and compensation-related items. The remaining $64 million is related to the re-measurement of the Utility’s deferred taxes not reflected in authorized revenue requirements, such as of disallowed plant. The Utility also recorded a provisional $5.7 billion re-measurement of its deferred tax balances (related to flow-through and normalized timing differences for plant-related items) which was offset by a change from a net deferred income tax regulatory asset to a net regulatory liability. The deferred income tax regulatory liability will be refunded to customers over the regulatory lives of the related assets.

The final transition impacts of the Tax Act may differ from the above recorded amounts, possibly materially, due to, among other things, regulatory decisions from the CPUC that could differ from the Utility’s determination of how the impacts of the Tax Act are allocated between customers and shareholders. In addition, while PG&E Corporation and the Utility were able to make reasonable estimates of the impact of the reduction in federal tax rate and the elimination of bonus depreciation due to the enactment of the Tax Act; changes in interpretations, guidance on legislative intent, and any changes in accounting standards for income taxes in response to the Tax Act could impact the recorded amounts. PG&E Corporation and the Utility will finalize and record any adjustments related to the Tax Act within the one year measurement period provided under Staff Accounting Bulletin No. 118.

Tax Settlements

PG&E Corporation’s tax returns have been accepted through 2015 except for a few matters, the most significant of which relates to deductible repair costs for gas transmission and distribution lines of business. In February 2017, the Joint Committee of Taxation approved PG&E Corporation’s settlement with the IRS related to deductible electric transmission and distribution repairs for the 2011 and 2012 tax years. The agreement provided that the methodology used in determining the deductible amount should be followed for all subsequent periods, absent any material change in facts. In November 2017, PG&E Corporation reached an agreement with the IRS on deductible generation repairs for the 2013 and 2014 tax years. The IRS may issue guidance in 2018 that clarifies which repair costs are deductible for the natural gas transmission and distribution lines of business.

Tax years after 2008 remain subject to examination by the state of California.

2015 Gas Transmission and Storage Rate Case

The final phase two decision reduced rate base by the full amount of the disallowed capital expenditures but did not remove the associated deferred taxes, which the Utility believes constitutes a normalization violation. In the final decision, the CPUC authorized the Utility to establish a Tax Normalization Memorandum Account to track relevant costs and clarified that it is the CPUC’s intention that the Utility comply with normalization rules and avoid the potential adverse consequences of a normalization violation. The CPUC allowed the Utility to seek a ruling from the IRS and the Utility filed the ruling request with the IRS on April 10, 2017. On October 5, 2017, the IRS issued a private letter ruling indicating the final decision rate base reduction was inconsistent with the IRS tax normalization requirements. As a result of the IRS private letter ruling, the Utility filed an advice letter with the CPUC on December 11, 2017, requesting a rate base adjustment of $7 million, $28 million, $49 million, and $61 million, in 2015, 2016, 2017, and 2018, respectively.

Carryforwards

The following table describes PG&E Corporation’s operating loss and tax credit carryforward balances:

	December 31,		Expiration
(in millions)	2017		Year
Federal:
Net operating loss carryforward	$	4,233	2031 - 2036
Tax credit carryforward		103	2029 - 2036
Charitable contribution loss carryforward		93	2019 - 2021

State:
Net operating loss carryforward	$	-	N/A
Tax credit carryforward		13	Various
Charitable contribution loss carryforward		24	2020 - 2021

PG&E Corporation believes it is more likely than not the tax benefits associated with the federal and California net operating losses, charitable contributions and tax credits can be realized within the carryforward periods, therefore no valuation allowance was recognized as of December 31, 2017 for these tax attributes.