10-Q 1 pge-033118x10q.htm 10-Q Document


 
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 March 31, 2018
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
 
 
 
 
 
 
 
 
PG&E Corporation
77 Beale Street
P.O. Box 770000
San Francisco, California 94177
 
 
 
Pacific Gas and Electric Company
77 Beale Street
P.O. Box 770000
San Francisco, California 94177
 
 
 
 
Address of principal executive offices, including zip code
 
 
 
 
 
 
 
 
 
 
 
PG&E Corporation
(415) 973-1000
 
 
 
Pacific Gas and Electric Company
(415) 973-7000
 
 
 
 
Registrant's telephone number, including area code
 
 
 
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the 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) has been subject to such filing requirements for the past 90 days. 
PG&E Corporation:
 
 
[X] Yes [  ] No
Pacific Gas and Electric Company:
 
 
[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, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
PG&E Corporation:
[X] Large accelerated filer
[  ] Accelerated filer
 
 
[  ] Non-accelerated filer (Do not check if a smaller reporting company) 
 
 
 
 
 
[  ] Smaller reporting company
[  ] Emerging growth company
Pacific Gas and Electric Company:
[  ] Large accelerated filer
[  ] Accelerated filer
 
 
[X] Non-accelerated filer (Do not check if a smaller reporting company)
 
 
 
 
 
[  ] Smaller reporting company
[  ] Emerging growth company
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
PG&E Corporation:
 
[  ]
 
 
Pacific Gas and Electric 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

1



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 April 24, 2018:
 
 
PG&E Corporation:
 
516,427,502

Pacific Gas and Electric Company:
 
264,374,809

 
 
 
 
 
 
 
 
 


2



PG&E CORPORATION AND
PACIFIC GAS AND ELECTRIC COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3



GLOSSARY

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
2017 Form 10-K
PG&E Corporation and Pacific Gas and Electric Company's combined Annual Report on Form 10-K for the year ended December 31, 2017
ARO
asset retirement obligation
ASU
accounting standard update issued by the FASB (see below)
CAISO
California Independent System Operator
Cal Fire
California Department of Forestry and Fire Protection
CCA
Community Choice Aggregator
CEC
California Energy Resources Conservation and Development Commission
CEMA
Catastrophic Event Memorandum Account
CPUC
California Public Utilities Commission
CRRs
congestion revenue rights
DER
distributed energy resources
Diablo Canyon
Diablo Canyon nuclear power plant
DOGGR
the Division of Oil, Gas, and Geothermal Resources
DTSC
Department of Toxic Substances Control
EPS
earnings per common share
EV
electric vehicle
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
GAAP
U.S. Generally Accepted Accounting Principles
GHG
greenhouse gas
GRC
general rate case
GT&S
gas transmission and storage
HSM
hazardous substance memorandum account
IOU(s)
investor-owned utility(ies)
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2, of this Form 10-Q
MGP(s)
manufactured gas plants
NAV
net asset value
NDCTP
Nuclear Decommissioning Cost Triennial Proceedings
NEIL
Nuclear Electric Insurance Limited
NRC
Nuclear Regulatory Commission
OES
State of California Office of Emergency Services
OII
order instituting investigation
OIR
order instituting rulemaking
ORA
Office of Ratepayer Advocates
PCIA
Power Charge Indifference Adjustment
PFM
petition for modification
RAMP
Risk Assessment Mitigation Phase
ROE
return on equity
SEC
U.S. Securities and Exchange Commission
SED
Safety and Enforcement Division of the CPUC
Tax Act
Tax Cuts and Jobs Act of 2017
TE
transportation electrification

4



TO
transmission owner
TURN
The Utility Reform Network
Utility
Pacific Gas and Electric Company
VIE(s)
variable interest entity(ies)
WEMA
Wildfire Expense Memorandum Account
Westinghouse
Westinghouse Electric Company, LLC


5



PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
PG&E CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
(Unaudited)
 
Three Months Ended
March 31,
(in millions, except per share amounts)
2018
 
2017
Operating Revenues
 
 
 
Electric
$
2,951

 
$
3,065

Natural gas
1,105

 
1,203

Total operating revenues
4,056

 
4,268

Operating Expenses
 
 
 
Cost of electricity
819

 
847

Cost of natural gas
289

 
325

Operating and maintenance
1,597

 
1,517

Depreciation, amortization, and decommissioning
752

 
712

Total operating expenses
3,457

 
3,401

Operating Income
599

 
867

Interest income
9

 
5

Interest expense
(220
)
 
(218
)
Other income, net
108

 
34

Income Before Income Taxes
496

 
688

Income tax provision
51

 
109

Net Income
445

 
579

Preferred stock dividend requirement of subsidiary
3

 
3

Income Available for Common Shareholders
$
442

 
$
576

Weighted Average Common Shares Outstanding, Basic
515

 
508

Weighted Average Common Shares Outstanding, Diluted
516

 
511

Net Earnings Per Common Share, Basic
$
0.86

 
$
1.13

Net Earnings Per Common Share, Diluted
$
0.86

 
$
1.13

Dividends Declared Per Common Share
$

 
$
0.49

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.



6



PG&E CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(Unaudited)
 
Three Months Ended
March 31,
(in millions)
2018
 
2017
Net Income
$
445

 
$
579

Other Comprehensive Income
 
 
 
Pension and other post-retirement benefit plans obligations (net of taxes of $0 and $0, at respective dates)

 

Total other comprehensive income (loss)

 

Comprehensive Income
445

 
579

Preferred stock dividend requirement of subsidiary
3

 
3

Comprehensive Income Attributable to
Common Shareholders
$
442

 
$
576

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.


7



PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
Balance At
(in millions)
March 31,
2018
 
December 31,
2017
ASSETS
 

 
 

Current Assets
 

 
 
Cash and cash equivalents
$
144

 
$
449

Accounts receivable:
 
 
 
Customers (net of allowance for doubtful accounts of $59 and $64
at respective dates)
1,222

 
1,243

Accrued unbilled revenue
851

 
946

Regulatory balancing accounts
1,367

 
1,222

Other
652

 
861

Regulatory assets
646

 
615

Inventories:
 
 
 
Gas stored underground and fuel oil
79

 
115

Materials and supplies
374

 
366

Other
520

 
464

Total current assets
5,855

 
6,281

Property, Plant, and Equipment
 
 
 
Electric
55,654

 
55,133

Gas
19,934

 
19,641

Construction work in progress
2,562

 
2,471

Other
2

 
3

Total property, plant, and equipment
78,152

 
77,248

Accumulated depreciation
(23,811
)
 
(23,459
)
Net property, plant, and equipment
54,341

 
53,789

Other Noncurrent Assets
 
 
 
Regulatory assets
3,724

 
3,793

Nuclear decommissioning trusts
2,842

 
2,863

Income taxes receivable
65

 
65

Other
1,327

 
1,221

Total other noncurrent assets
7,958

 
7,942

TOTAL ASSETS
$
68,154

 
$
68,012

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.

8



PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
(Unaudited)
 
Balance At
(in millions, except share amounts)
March 31,
2018
 
December 31,
2017
LIABILITIES AND EQUITY
 

 
 

Current Liabilities
 

 
 

Short-term borrowings
$
967

 
$
931

Long-term debt, classified as current
394

 
445

Accounts payable:
 
 
 
Trade creditors
1,231

 
1,646

Regulatory balancing accounts
1,264

 
1,120

Other
710

 
517

Disputed claims and customer refunds
245

 
243

Interest payable
145

 
217

Other
1,964

 
2,010

Total current liabilities
6,920

 
7,129

Noncurrent Liabilities
 
 
 
Long-term debt
17,407

 
17,753

Regulatory liabilities
8,586

 
8,679

Pension and other post-retirement benefits
2,094

 
2,128

Asset retirement obligations
4,946

 
4,899

Deferred income taxes
5,990

 
5,822

Other
2,228

 
2,130

Total noncurrent liabilities
41,251

 
41,411

Commitments and Contingencies (Note 9)


 


Equity
 
 
 
Shareholders' Equity
 
 
 
Common stock, no par value, authorized 800,000,000 shares;
516,003,957 and 514,755,845 shares outstanding at respective dates
12,701

 
12,632

Reinvested earnings
7,043

 
6,596

Accumulated other comprehensive loss
(13
)
 
(8
)
Total shareholders' equity
19,731

 
19,220

Noncontrolling Interest - Preferred Stock of Subsidiary
252

 
252

Total equity
19,983

 
19,472

TOTAL LIABILITIES AND EQUITY
$
68,154

 
$
68,012

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.


9



PG&E CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
Three Months Ended March 31,
(in millions)
2018
 
2017
Cash Flows from Operating Activities
 
 
 
Net income
$
445

 
$
579

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and decommissioning
752

 
712

Allowance for equity funds used during construction
(32
)
 
(19
)
Deferred income taxes and tax credits, net
178

 
252

Other
30

 
8

Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable
120

 
373

Butte-related insurance receivable
197

 
(7
)
Inventories
28

 
(2
)
Accounts payable
24

 
(13
)
Butte-related third-party claims
(118
)
 
(44
)
Other current assets and liabilities
(145
)
 
(137
)
Regulatory assets, liabilities, and balancing accounts, net
114

 
(176
)
Other noncurrent assets and liabilities
(81
)
 
48

Net cash provided by operating activities
1,512

 
1,574

Cash Flows from Investing Activities
 

 
 

Capital expenditures
(1,470
)
 
(1,216
)
Proceeds from sales and maturities of nuclear decommissioning trust investments
494

 
470

Purchases of nuclear decommissioning trust investments
(505
)
 
(493
)
Other
6

 
4

Net cash used in investing activities
(1,475
)
 
(1,235
)
Cash Flows from Financing Activities
 

 
 

Net issuances (repayments) of commercial paper, net of discount of $0 and $2 at respective dates
36

 
(755
)
Short-term debt financing
250

 
250

Short-term debt matured
(250
)
 
(250
)
Proceeds from issuance of long-term debt, net of discount and issuance costs of $0 and $10 at respective dates

 
590

Long-term debt matured or repurchased
(400
)
 

Common stock issued
35

 
146

Common stock dividends paid

 
(243
)
Other
(13
)
 
(90
)
Net cash used in financing activities
(342
)
 
(352
)
Net change in cash and cash equivalents
(305
)
 
(13
)
Cash and cash equivalents at January 1
449

 
177

Cash and cash equivalents at March 31
$
144

 
$
164


10



Supplemental disclosures of cash flow information
 

 
 

Cash received (paid) for:
 

 
 

Interest, net of amounts capitalized
$
(268
)
 
$
(246
)
Income taxes, net

 
1

Supplemental disclosures of noncash investing and financing activities
 
 
 
Common stock dividends declared but not yet paid
$

 
$
250

Capital expenditures financed through accounts payable
255

 
237

Noncash common stock issuances

 
4

Terminated capital leases
137

 

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.



11



PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
(Unaudited)
 
Three Months Ended
March 31,
(in millions)
2018
 
2017
Operating Revenues
 

 
 

Electric
$
2,951

 
$
3,067

Natural gas
1,105

 
1,204

Total operating revenues
4,056

 
4,271

Operating Expenses
 
 
 
Cost of electricity
819

 
847

Cost of natural gas
289

 
325

Operating and maintenance
1,597

 
1,518

Depreciation, amortization, and decommissioning
752

 
712

Total operating expenses
3,457

 
3,402

Operating Income
599

 
869

Interest income
9

 
5

Interest expense
(217
)
 
(216
)
Other income, net
109

 
31

Income Before Income Taxes
500

 
689

Income tax provision
48

 
120

Net Income
452

 
569

Preferred stock dividend requirement
3

 
3

Income Available for Common Stock
$
449

 
$
566

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.


12



PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(Unaudited)
 
Three Months Ended
March 31,
(in millions)
2018
 
2017
Net Income
$
452

 
$
569

Other Comprehensive Income
 
 
 
Pension and other post-retirement benefit plans obligations (net of taxes of $0 and $0, at respective dates )

 
1

Total other comprehensive income (loss)

 
1

Comprehensive Income
$
452

 
$
570

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.


13



PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
Balance At
 
March 31, 2018
 
December 31, 2017
(in millions)
 
ASSETS
 

 
 

Current Assets
 

 
 

Cash and cash equivalents
$
122

 
$
447

Accounts receivable:
 
 
 
Customers (net of allowance for doubtful accounts of $59 and $64
at respective dates)
1,222

 
1,243

Accrued unbilled revenue
851

 
946

Regulatory balancing accounts
1,367

 
1,222

Other
661

 
862

Regulatory assets
646

 
615

Inventories:
 
 
 
Gas stored underground and fuel oil
79

 
115

Materials and supplies
374

 
366

Other
519

 
465

Total current assets
5,841

 
6,281

Property, Plant, and Equipment
 
 
 
Electric
55,654

 
55,133

Gas
19,934

 
19,641

Construction work in progress
2,562

 
2,471

Total property, plant, and equipment
78,150

 
77,245

Accumulated depreciation
(23,808
)
 
(23,456
)
Net property, plant, and equipment
54,342

 
53,789

Other Noncurrent Assets
 
 
 
Regulatory assets
3,724

 
3,793

Nuclear decommissioning trusts
2,842

 
2,863

Income taxes receivable
64

 
64

Other
1,200

 
1,094

Total other noncurrent assets
7,830

 
7,814

TOTAL ASSETS
$
68,013

 
$
67,884

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.

14



PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
Balance At
 
March 31, 2018
 
December 31, 2017
(in millions. except share amounts)
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 

 
 

Short-term borrowings
$
846

 
$
799

Long-term debt, classified as current
45

 
445

Accounts payable:
 
 
 
Trade creditors
1,231

 
1,644

Regulatory balancing accounts
1,264

 
1,120

Other
760

 
538

Disputed claims and customer refunds
245

 
243

Interest payable
145

 
214

Other
1,982

 
2,018

Total current liabilities
6,518

 
7,021

Noncurrent Liabilities
 
 
 
Long-term debt
17,407

 
17,403

Regulatory liabilities
8,586

 
8,679

Pension and other post-retirement benefits
1,990

 
2,026

Asset retirement obligations
4,946

 
4,899

Deferred income taxes
6,130

 
5,963

Other
2,240

 
2,146

Total noncurrent liabilities
41,299

 
41,116

Commitments and Contingencies (Note 9)


 


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
8,505

 
8,505

Reinvested earnings
10,107

 
9,656

Accumulated other comprehensive income
4

 
6

Total shareholders' equity
20,196

 
19,747

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
68,013

 
$
67,884

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.


15



PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
Three Months Ended March 31,
(in millions)
2018
 
2017
Cash Flows from Operating Activities
 

 
 

Net income
$
452

 
$
569

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and decommissioning
752

 
712

Allowance for equity funds used during construction
(32
)
 
(19
)
Deferred income taxes and tax credits, net
175

 
264

Other
(1
)
 
57

Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable
112

 
322

Butte-related insurance receivable
197

 
(7
)
Inventories
28

 
(2
)
Accounts payable
55

 
(3
)
Butte-related third-party claims
(118
)
 
(44
)
Other current assets and liabilities
(131
)
 
(113
)
Regulatory assets, liabilities, and balancing accounts, net
114

 
(176
)
Other noncurrent assets and liabilities
(87
)
 
38

Net cash provided by operating activities
1,516

 
1,598

Cash Flows from Investing Activities
 
 
 
Capital expenditures
(1,470
)
 
(1,216
)
Proceeds from sales and maturities of nuclear decommissioning trust investments
494

 
470

Purchases of nuclear decommissioning trust investments
(505
)
 
(493
)
Other
6

 
4

Net cash used in investing activities
(1,475
)
 
(1,235
)
Cash Flows from Financing Activities
 
 
 
Net issuances (repayments) of commercial paper, net of discount of $0 and $2 at respective dates
47

 
(755
)
Short-term debt financing
250

 
250

Short-term debt matured
(250
)
 
(250
)
Proceeds from issuance of long-term debt, net of discount and issuance costs of $0 and $10 at respective dates

 
590

Long-term debt matured or repurchased
(400
)
 

Preferred stock dividends paid

 
(3
)
Common stock dividends paid

 
(244
)
Equity contribution from PG&E Corporation

 
125

Other
(13
)
 
(87
)
Net cash used in financing activities
(366
)
 
(374
)
Net change in cash and cash equivalents
(325
)
 
(11
)
Cash and cash equivalents at January 1
447

 
71

Cash and cash equivalents at March 31
$
122

 
$
60


16



Supplemental disclosures of cash flow information
 
 
 
Cash received (paid) for:
 
 
 
Interest, net of amounts capitalized
$
(259
)
 
$
(242
)
Supplemental disclosures of noncash investing and financing activities
 
 
 
Capital expenditures financed through accounts payable
$
255

 
$
237

Terminated capital leases
137

 

 
 
 
 
See accompanying Notes to the Condensed Consolidated Financial Statements.


17



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

PG&E Corporation is a holding company whose primary operating subsidiary is Pacific Gas and Electric Company, a public utility serving 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.

This quarterly report on Form 10-Q is a combined report of 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 in consolidation.  The Notes to the Condensed Consolidated Financial Statements apply to both PG&E Corporation and the Utility.  PG&E Corporation and the Utility assess financial performance and allocate resources on a consolidated basis (i.e., the companies operate in one segment).

The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with GAAP and in accordance with the interim period reporting requirements of Form 10-Q and reflect all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair presentation of PG&E Corporation’s and the Utility’s financial condition, results of operations, and cash flows for the periods presented.  The information at December 31, 2017 in the Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets in Item 8 of the 2017 Form 10-K.  This quarterly report should be read in conjunction with the 2017 Form 10-K. 

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Some of the more significant estimates and assumptions relate to the Utility’s regulatory assets and liabilities, legal and regulatory contingencies, insurance recoveries, environmental remediation liabilities, AROs, and pension and other post-retirement benefit plans obligations.  Management believes that its estimates and assumptions reflected in the Condensed Consolidated Financial Statements are appropriate and reasonable.  A change in management’s estimates or assumptions could result in an adjustment that would have a material impact on PG&E Corporation’s and the Utility’s financial condition and results of operations during the period in which such change occurred.

Beginning on October 8, 2017, multiple wildfires spread through Northern California, including Napa, Sonoma, Butte, Humboldt, Mendocino, Del Norte, Lake, Nevada, and Yuba Counties, as well as in the area surrounding Yuba City (the “Northern California wildfires”).  According to the Cal Fire California Statewide Fire Summary dated October 30, 2017, at the peak of the wildfires, there were 21 major wildfires in Northern California that, in total, burned over 245,000 acres and destroyed an estimated 8,900 structures. The wildfires also resulted in 44 fatalities. The Northern California wildfires are under investigation by Cal Fire and the CPUC, including the possible role of the Utility’s power lines and other facilities. The Utility expects that Cal Fire will issue a report or reports stating its conclusions as to the sources of ignition of the fires and the ways that they progressed. Further, the CPUC's SED is conducting investigations to assess the compliance of electric and communication companies' facilities with applicable rules and regulations in fire-impacted areas. See "Northern California Wildfires" in Note 9 below. 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For a summary of the significant accounting policies used by PG&E Corporation and the Utility, see Note 2 of the Notes to the Consolidated Financial Statements in Item 8 of the 2017 Form 10-K.

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 a primary beneficiary and is required to consolidate the VIE. 


18



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 has a controlling interest or was the primary beneficiary of any of these VIEs at March 31, 2018, the Utility 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 obligation 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 March 31, 2018, it did not consolidate any of them.

Pension and Other Post-Retirement Benefits

PG&E Corporation and the Utility sponsor a non-contributory defined benefit pension plan and cash balance plan.  Both plans are included in “Pension Benefits” below.  Post-retirement medical and life insurance plans are included in “Other Benefits” below.

The net periodic benefit costs reflected in PG&E Corporation’s Condensed Consolidated Financial Statements for the three months ended March 31, 2018 and 2017 were as follows:
 
Pension Benefits
 
Other Benefits
 
Three Months Ended March 31,
(in millions)
2018
 
2017
 
2018
 
2017
Service cost for benefits earned
$
128

 
$
118

 
$
16

 
$
15

Interest cost
172

 
179

 
17

 
19

Expected return on plan assets
(255
)
 
(193
)
 
(33
)
 
(24
)
Amortization of prior service cost
(1
)
 
(2
)
 
4

 
4

Amortization of net actuarial loss
1

 
6

 
(1
)
 
1

Net periodic benefit cost
45

 
108

 
3

 
15

Regulatory account transfer (1)
39

 
(23
)
 

 

Total
$
84

 
$
85

 
$
3

 
$
15

 
 
 
 
 
 
 
 
(1) The Utility recorded these amounts to a regulatory account since they are probable of recovery from, or refund to, customers in future rates.

Non-service costs are reflected in Other income, net on the Condensed Consolidated Statements of Income.

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

19




Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Loss)

The changes, net of income tax, in PG&E Corporation’s accumulated other comprehensive income (loss) are summarized below:
 
Pension
Benefits
 
Other
Benefits
 
Total
(in millions, net of income tax)
Three Months Ended March 31, 2018
Beginning balance
$
(25
)
 
$
17

 
$
(8
)
Amounts reclassified from other comprehensive income:
 
 
 
 
 
Amortization of prior service cost (net of taxes of $0 and $1, respectively) (1)
(1
)
 
3

 
2

Amortization of net actuarial loss (net of taxes of $0 and $0, respectively) (1)
1

 
(1
)
 

Regulatory account transfer (net of taxes of $0 and $1, respectively) (1)

 
(2
)
 
(2
)
Reclassification of stranded income tax to retained earnings (net of taxes of $0 and $0, respectively)
(5
)
 

 
(5
)
Net current period other comprehensive gain (loss)
(5
)
 

 
(5
)
Ending balance
$
(30
)
 
$
17

 
$
(13
)
 
 
 
 
 
 
(1) These components are included in the computation of net periodic pension and other post-retirement benefit costs.  (See the “Pension and Other Post-Retirement Benefits” table above for additional details.)

 
Pension Benefits
 
Other
Benefits
 
Total
(in millions, net of income tax)
Three Months Ended March 31, 2017
Beginning balance
$
(25
)
 
$
16

 
$
(9
)
Amounts reclassified from other comprehensive income: (1)
 
 
 
 
 
Amortization of prior service cost (net of taxes of $1 and $2, respectively)
(1
)
 
2

 
1

Amortization of net actuarial loss (net of taxes of $3, and $0, respectively)
3

 
1

 
4

Regulatory account transfer (net of taxes of $2 and $2, respectively)
(2
)
 
(3
)
 
(5
)
Net current period other comprehensive gain (loss)

 

 

Ending balance
$
(25
)
 
$
16

 
$
(9
)
 
 
 
 
 
 
(1) These components are included in the computation of net periodic pension and other post-retirement benefit costs.  (See the “Pension and Other Post-Retirement Benefits” table above for additional details.)

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

Recently Adopted Accounting Standards

Revenue Recognition Standard

In May 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606), which amends the previous revenue recognition guidance.  The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across entities, industries, jurisdictions, and capital markets and to provide more useful information to users of financial statements through improved and expanded disclosure requirements.  PG&E Corporation and the Utility applied the requirements using the modified retrospective method when the ASU became effective on January 1, 2018. The adoption of this guidance did not have a material impact on the Condensed Consolidated Financial Statements as of the adoption date or for the three months ended March 31, 2018. A majority of the Utility's revenue from contracts with customers continues to be recognized on a monthly basis based on applicable tariffs and customers' monthly consumption. Such revenue is recognized using the invoice practical expedient which allows an entity to recognize revenue in the amount that directly corresponds to the value transferred to the customer.

20




Revenue from Contracts with Customers

The Utility recognizes revenues when electricity and natural gas services are delivered.  The Utility records unbilled revenues for the estimated amount of energy delivered to customers but not yet billed at the end of the period.  Unbilled revenues are included in accounts receivable on the Condensed Consolidated Balance Sheets.  Rates charged to customers are based on CPUC and FERC authorized revenue requirements. Revenues can vary significantly from period to period as a result of seasonality, weather, and customer usage patterns.

The FERC authorizes the Utility’s revenue requirements in periodic (often annual) TO rate cases.  The Utility’s ability to recover revenue requirements authorized by the FERC is dependent on the volume of the Utility’s electricity sales, and revenue is recognized only for amounts billed and unbilled, net of revenues subject to refund.

Regulatory Balancing Account Revenue

The CPUC authorizes most of the Utility’s revenues in the Utility’s GRC and its GT&S rate cases, which generally occur every three or four years.  The Utility’s ability to recover revenue requirements authorized by the CPUC in these rate cases is independent, or “decoupled” from the volume of the Utility’s sales of electricity and natural gas services.  The Utility recognizes revenues that have been authorized for rate recovery, are objectively determinable and probable of recovery, and are expected to be collected within 24 months.  Generally, electric and natural gas operating revenue is recognized ratably over the year.  The Utility records a balancing account asset or liability for differences between customer billings and authorized revenue requirements that are probable of recovery or refund. 

The CPUC also has authorized the Utility to collect additional revenue requirements to recover costs that the Utility has been authorized to pass on to customers, including costs to purchase electricity and natural gas, and to fund public purpose, demand response, and customer energy efficiency programs.  In general, the revenue recognition criteria for pass-through costs billed to customers are met at the time the costs are incurred. The Utility records a regulatory balancing account asset or liability for differences between incurred costs and customer billings or authorized revenue meant to recover those costs, to the extent that these differences are probable of recovery or refund. As a result, these differences have no impact on net income.


21



The following table presents the Utility's revenues disaggregated by type of customer:
(in millions)
Three Months Ended March 31,
Electric
2018
Revenue from contracts with customers
 
   Residential
$
1,336

   Commercial
1,073

   Industrial
324

   Agricultural
125

   Public street and highway lighting
20

   Other (1)
(201
)
      Total revenue from contracts with customers - electric
2,677

Regulatory balancing accounts (2)
274

Total electric operating revenue
$
2,951

 
 
Natural gas
 
Revenue from contracts with customers
 
   Residential
$
958

   Commercial
196

   Transportation service only
297

   Other (1)
(52
)
      Total revenue from contracts with customers - gas
1,399

Regulatory balancing accounts (2)
(294
)
Total natural gas operating revenue
1,105

Total operating revenues
$
4,056

 
 
(1) This activity is primarily related to the change in unbilled revenue, partially offset by other miscellaneous revenue items.
(2) These amounts represent revenues authorized to be billed or refunded to customers.

Presentation of Net Periodic Pension and Post-Retirement Benefit Costs

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715), which amends the guidance relating to the presentation of net periodic pension cost and net periodic other post-retirement benefit costs.  PG&E Corporation and the Utility applied the requirements when the ASU became effective on January 1, 2018.

On a retrospective basis, the amendment requires an employer to separate the service cost component from the other components of net benefit cost and provides explicit guidance on how to present the service cost component and other components in the income statement.  As a result, the Condensed Consolidated Statements of Income for PG&E Corporation and the Utility were restated. This change resulted in increases to Operating and maintenance expenses and Other income, net, of $13 million and $14 million for PG&E Corporation and the Utility, respectively, for the three months ended March 31, 2017.

On a prospective basis, the ASU limits the component of net benefit cost eligible to be capitalized to service costs. The FERC has allowed and the Utility has made a one-time election to adopt the new FASB guidance for regulatory filing purposes.  In January 2018, the CPUC approved modifications to the Utility’s calculation for pension-related revenue requirements to allow for capitalization of only the service cost component determined by a plan’s actuaries. The capitalization of service costs only will result in higher rate base and will lead to a reduction in the Utility's 2018 revenues.  The changes in capitalization of retirement benefits did not have a material impact on PG&E Corporation’s and the Utility’s Condensed Consolidated Financial Statements.


22



Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance relating to the recognition, measurement, presentation, and disclosure of financial instruments.  The amendments require equity investments (excluding those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income.  The majority of PG&E Corporation’s and the Utility’s investments are held in the nuclear decommissioning trusts and gains or losses are refundable or recoverable, respectively, from customers through rates.  The ASU became effective for PG&E Corporation and the Utility on January 1, 2018 and did not have a material impact on the Condensed Consolidated Financial Statements and related disclosures.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. When amounts are reclassified from accumulated other comprehensive income to the Condensed Consolidated Statement of Income, PG&E Corporation and the Utility recognize the related income tax expense at the tax rate in effect at that time. The ASU is effective for PG&E Corporation and the Utility on January 1, 2019, and early adoption is permitted. PG&E Corporation and the Utility early adopted this ASU on January 1, 2018, resulting in an immaterial reclassification.

Accounting Standards Issued But Not Yet Adopted

Recognition of Lease Assets and Liabilities

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the guidance relating to the definition of a lease, recognition of lease assets and lease liabilities on the balance sheet, and the disclosure of key information about leasing arrangements.  In November, 2017, the FASB tentatively decided to amend the new leasing guidance such that entities may elect not to restate their comparative periods in the period of adoption. Under the new standard, all lessees must recognize an asset and liability on the balance sheet. Operating leases were previously not recognized on the balance sheet.  The ASU will be effective for PG&E Corporation and the Utility on January 1, 2019, with early adoption permitted.  PG&E Corporation and the Utility plan to adopt this guidance in the first quarter of 2019.  PG&E Corporation and the Utility expect this standard to increase lease assets and lease liabilities on the Condensed Consolidated Balance Sheets and do not expect the guidance will have a material impact on the Condensed Consolidated Statements of Income, Statements of Cash Flows and related disclosures.


23



NOTE 3: REGULATORY ASSETS, LIABILITIES, AND BALANCING ACCOUNTS

Regulatory Assets and Liabilities

Current Regulatory Assets

At March 31, 2018 and December 31, 2017, the Utility had current regulatory assets of $646 million and $615 million, which included $444 million and $426 million, respectively, of costs related to CEMA fire prevention and vegetation management.

Long-Term Regulatory Assets

Long-term regulatory assets are comprised of the following:
 
Asset Balance at
(in millions)
March 31, 2018
 
December 31, 2017
Pension benefits
$
1,915

 
$
1,954

Environmental compliance costs
749

 
837

Utility retained generation
308

 
319

Price risk management
68

 
65

Unamortized loss, net of gain, on reacquired debt
88

 
79

Catastrophic event memorandum account
314

 
274

Other
282

 
265

Total long-term regulatory assets
$
3,724

 
$
3,793


Long-Term Regulatory Liabilities

Long-term regulatory liabilities are comprised of the following:
 
Liability Balance at
(in millions)
March 31, 2018
 
December 31, 2017
Cost of removal obligations
$
5,674

 
$
5,547

Deferred income taxes
873

 
1,021

Recoveries in excess of AROs
533

 
624

Public purpose programs
591

 
590

Other
915

 
897

Total long-term regulatory liabilities
$
8,586

 
$
8,679


For more information, see Note 3 of the Notes to the Consolidated Financial Statements in Item 8 of the 2017 Form 10-K.

24



Regulatory Balancing Accounts

Current regulatory balancing accounts receivable and payable are comprised of the following:
 
Receivable Balance at
(in millions)
March 31, 2018
 
December 31, 2017
Electric distribution
$
176

 
$

Electric transmission
125

 
139

Utility generation
203

 

Gas distribution and transmission
269

 
486

Energy procurement
1

 
71

Public purpose programs
115

 
103

Other
478

 
423

Total regulatory balancing accounts receivable
$
1,367

 
$
1,222


 
Payable Balance at
(in millions)
March 31, 2018
 
December 31, 2017
Electric distribution
$

 
$
72

Electric transmission
108

 
120

Utility generation

 
14

Energy procurement
265

 
149

Public purpose programs
491

 
452

Other
400

 
313

Total regulatory balancing accounts payable
$
1,264

 
$
1,120


For more information, see Note 3 of the Notes to the Consolidated Financial Statements in Item 8 of the 2017 Form 10-K.


NOTE 4: DEBT

Revolving Credit Facilities and Commercial Paper Program

The following table summarizes PG&E Corporation’s and the Utility’s outstanding borrowings under their revolving credit facilities and commercial paper programs at March 31, 2018:
(in millions)
Termination Date
 
Facility
Limit
 
Letters of
Credit
Outstanding
 
Commercial
Paper
 
Facility
Availability
PG&E Corporation
April 2022
 
$
300

(1) 
$

 
$
121

 
$
179

Utility
April 2022
 
3,000

(2) 
48

 
97

 
2,855

Total revolving credit facilities
 
 
$
3,300

 
$
48

 
$
218

 
$
3,034

 
 
 
 
 
 
 
 
 
 
(1) Includes a $50 million lender commitment to the letter of credit sublimit and a $100 million commitment for swingline loans defined as loans that are made available on a same-day basis and are repayable in full within 7 days.
(2) Includes a $500 million lender commitment to the letter of credit sublimit and a $75 million commitment for swingline loans.

Other Short-term Borrowings

In February 2018, the Utility’s $250 million floating rate unsecured term loan, issued in February 2017, matured and was repaid. Additionally, in February 2018, the Utility entered into a $250 million floating rate unsecured term loan that will mature on February 22, 2019.  The proceeds were used for general corporate purposes, including the repayment of a portion of the Utility’s outstanding commercial paper.


25



Long-term Debt Issuances and Redemptions

In January 2018, the Utility sent a notice of redemption to redeem all $400 million aggregate principal amount of the 8.25% Senior Notes due October 15, 2018. On January 31, 2018, the Utility deposited with the trustee funds sufficient to effect the early redemption of these bonds and satisfy and discharge its remaining obligation of $400 million on February 18, 2018.

In April 2018, PG&E Corporation entered into a $350 million floating rate unsecured term loan. The term loan matures on April 16, 2020, unless extended by PG&E Corporation pursuant to the terms of the term loan agreement. The proceeds were used for general corporate purposes, including the early redemption of PG&E Corporation's outstanding $350 million principal amount of 2.40% Senior Notes due March 1, 2019. On April 16, 2018, PG&E Corporation issued a notice of early redemption of these bonds, with a redemption date of April 26, 2018.

Variable Rate Interest

At March 31, 2018, 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 1.52% to 1.65%.  At March 31, 2018, the interest rates on the $149 million principal amount of pollution control bonds Series 2009 A and B, and the related loan agreements, were 1.60%.

NOTE 5: EQUITY

PG&E Corporation’s and the Utility’s changes in equity for the three months ended March 31, 2018 were as follows:
 
PG&E Corporation
 
Utility
(in millions)
Total
Equity
 
Total
Shareholders' Equity
Balance at December 31, 2017
$
19,472

 
$
19,747

Comprehensive income
445

 
452

Common stock issued
35

 

Share-based compensation
34

 

Preferred stock dividend requirement

 
(3
)
Preferred stock dividend requirement of subsidiary
(3
)
 

Balance at March 31, 2018
$
19,983

 
$
20,196


There were no issuances under the PG&E Corporation February 2017 equity distribution agreement for the three months ended March 31, 2018.  As of March 31, 2018, the remaining gross sales available under this agreement were $246.3 million.

PG&E Corporation issued common stock under the PG&E Corporation 401(k) plan and share-based compensation plans.  During the three months ended March 31, 2018, 1.2 million shares were issued for cash proceeds of $35.1 million under these plans.


26



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 March 31,
(in millions, except per share amounts)
2018
 
2017
Income available for common shareholders
$
442

 
$
576

Weighted average common shares outstanding, basic
515

 
508

Add incremental shares from assumed conversions:
 
 
 
Employee share-based compensation
1

 
3

Weighted average common shares outstanding, diluted
516

 
511

Total earnings per common share, diluted
$
0.86

 
$
1.13


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

NOTE 7: DERIVATIVES

Use of Derivative Instruments

The Utility is exposed to commodity price risk as a result of its electricity and natural gas procurement activities.  Procurement costs are recovered through customer rates.  The Utility uses both derivative and non-derivative contracts to manage volatility in customer rates due to fluctuating commodity prices.  Derivatives include contracts, such as power purchase agreements, forwards, futures, swaps, options, and CRRs that are traded either on an exchange or over-the-counter. 

Derivatives are presented in the Utility’s Condensed Consolidated Balance Sheets recorded at fair value and on a net basis in accordance with master netting arrangements for each counterparty.  The fair value of derivative instruments is further offset by cash collateral paid or received where the right of offset and the intention to offset exist.  

Price risk management activities that meet the definition of derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets. These instruments are not held for speculative purposes and are subject to certain regulatory requirements. The Utility expects to fully recover in rates all costs related to derivatives under the applicable ratemaking mechanism in place as long as the Utility’s price risk management activities are carried out in accordance with CPUC directives. 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 on the Condensed Consolidated Balance Sheets. 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.  Eligible derivatives are those 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.  These items are not reflected in the Condensed Consolidated Balance Sheets at fair value.  Eligible derivatives are accounted for under the accrual method of accounting.

27




Volume of Derivative Activity

The volumes of the Utility’s outstanding derivatives were as follows:
 
 
 
 
Contract Volume at
Underlying Product
 
Instruments
 
March 31,
2018
 
December 31,
2017
Natural Gas (1) (MMBtus (2))
 
Forwards, Futures and Swaps
 
184,948,051

 
228,768,745

 
 
Options
 
31,481,247

 
60,736,806

Electricity (Megawatt-hours)
 
Forwards, Futures and Swaps
 
2,602,376

 
2,872,013

 
 
Congestion Revenue Rights (3)
 
304,484,831

 
312,272,177

 
 
 
 
 
 
 
(1) Amounts shown are for the combined positions of the electric fuels and core gas supply portfolios.
(2) Million British Thermal Units.
(3) CRRs are financial instruments that enable the holders to manage variability in electric energy congestion charges due to transmission grid limitations.

Presentation of Derivative Instruments in the Financial Statements

At March 31, 2018, the Utility’s outstanding derivative balances were as follows:
 
Commodity Risk
(in millions)
Gross Derivative
Balance
 
Netting
 
Cash Collateral
 
Total Derivative
Balance
Current assets – other
$
30

 
$
(2
)
 
$
6

 
$
34

Other noncurrent assets – other
98

 
(1
)
 

 
97

Current liabilities – other
(52
)
 
2

 
19

 
(31
)
Noncurrent liabilities – other
(68
)
 
1

 
12

 
(55
)
Total commodity risk
$
8

 
$

 
$
37

 
$
45


At December 31, 2017, the Utility’s outstanding derivative balances were as follows:
 
Commodity Risk
(in millions)
Gross Derivative
Balance
 
Netting
 
Cash Collateral
 
Total Derivative
Balance
Current assets – other
$
30

 
$
(3
)
 
$
10

 
$
37

Other noncurrent assets – other
103

 
(1
)
 

 
102

Current liabilities – other
(47
)
 
3

 
13

 
(31
)
Noncurrent liabilities – other
(66
)
 
1

 
8

 
(57
)
Total commodity risk
$
20

 
$

 
$
31

 
$
51


Gains and losses associated with price risk management activities were recorded as follows:
 
 
Commodity Risk
 
 
Three Months Ended March 31,
(in millions)
 
2018
 
2017
Unrealized gain (loss) - regulatory assets and liabilities (1)
 
$
(12
)
 
$
(48
)
Realized loss - cost of electricity (2)
 
(18
)
 
(5
)
Realized loss - cost of natural gas (2)
 
(1
)
 
(1
)
Net commodity risk
 
$
(31
)
 
$
(54
)
 
 
 
 
 
(1) Unrealized gains and losses on commodity risk-related derivative instruments are recorded to regulatory liabilities or assets, respectively, 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.

Cash inflows and outflows associated with derivatives are included in operating cash flows on the Utility’s Condensed Consolidated Statements of Cash Flows.

28




The majority of the Utility’s derivatives contain collateral posting provisions tied to the Utility’s credit rating from each of the major credit rating agencies.  At March 31, 2018, the Utility’s credit rating was investment grade.  If the Utility’s credit rating were to fall below investment grade, the Utility would be required to post additional cash immediately to fully collateralize some of its net liability derivative positions.

The additional cash collateral that the Utility would be required to post if the credit risk-related contingency features were triggered was as follows:
 
Balance at
(in millions)
March 31,
2018
 
December 31,
2017
Derivatives in a liability position with credit risk-related
contingencies that are not fully collateralized
$
(1
)
 
$
(1
)
Related derivatives in an asset position

 

Collateral posting in the normal course of business related to
    these derivatives

 

Net position of derivative contracts/additional collateral
posting requirements (1)
$
(1
)
 
$
(1
)
 
 
 
 
(1) This calculation excludes the impact of closed but unpaid positions, as their settlement is not impacted by any of the Utility’s credit risk-related contingencies.

NOTE 8: FAIR VALUE MEASUREMENTS

PG&E Corporation and the Utility measure their cash equivalents, trust assets, and price risk management instruments at fair value.  A three-tier fair value hierarchy is established that prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Other inputs that are directly or indirectly observable in the marketplace.

Level 3 – Unobservable inputs which are supported by little or no market activities.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.


29



Assets and liabilities measured at fair value on a recurring basis for PG&E Corporation and the Utility are summarized below.

Assets held in rabbi trusts are held by PG&E Corporation and not the Utility.
 
Fair Value Measurements
 
March 31, 2018
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trusts
 
 
 
 
 
 
 
 
 
Short-term investments
$
28

 

 

 

 
$
28

Global equity securities
1,862

 

 

 

 
1,862

Fixed-income securities
776

 
599

 

 

 
1,375

Assets measured at NAV

 

 

 

 
17

Total nuclear decommissioning trusts (2)
2,666

 
599

 

 

 
3,282

Price risk management instruments (Note 7)
 
 
 
 
 
 
 
 
 
Electricity

 
2

 
125

 
3

 
130

Gas

 
1

 

 

 
1

Total price risk management instruments

 
3

 
125

 
3

 
131

Rabbi trusts
 
 
 
 
 
 
 
 
 
Fixed-income securities

 
74

 

 

 
74

Life insurance contracts

 
69

 

 

 
69

Total rabbi trusts

 
143

 

 

 
143

Long-term disability trust
 
 
 
 
 
 
 
 
 
Short-term investments
5

 

 

 

 
5

Assets measured at NAV

 

 

 

 
162

Total long-term disability trust
5

 

 

 

 
167

TOTAL ASSETS
$
2,671

 
$
745

 
$
125

 
$
3

 
$
3,723

Liabilities:
 
 
 
 
 
 
 
 
 
Price risk management instruments (Note 7)
 
 
 
 
 
 
 
 
 
Electricity
$
8

 
$
25

 
$
85

 
$
(33
)
 
$
85

Gas

 
2

 

 
(1
)
 
1

TOTAL LIABILITIES
$
8

 
$
27

 
$
85

 
$
(34
)
 
$
86

 
 
 
 
 
 
 
 
 
 
(1) Includes the effect of the contractual ability to settle contracts under master netting agreements and margin cash collateral.
(2) Represents amount before deducting $440 million, primarily related to deferred taxes on appreciation of investment value.


30



 
Fair Value Measurements
 
December 31, 2017
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Short-term investments
$
385

 
$

 
$

 
$

 
$
385

Nuclear decommissioning trusts
 
 
 
 
 
 
 
 
 
Short-term investments
23

 

 

 

 
23

Global equity securities
1,967

 

 

 

 
1,967

Fixed-income securities
733

 
562

 

 

 
1,295

Assets measured at NAV

 

 

 

 
18

Total nuclear decommissioning trusts (2)
2,723

 
562

 

 

 
3,303

Price risk management instruments (Note 7)
 
 
 
 
 
 
 
 
 
Electricity

 
3

 
129

 
6

 
138

Gas

 
1

 

 

 
1

Total price risk management instruments

 
4

 
129

 
6

 
139

Rabbi trusts
 
 
 
 
 
 
 
 
 
Fixed-income securities

 
72

 

 

 
72

Life insurance contracts

 
71

 

 

 
71

Total rabbi trusts

 
143

 

 

 
143

Long-term disability trust
 
 
 
 
 
 
 
 
 
Short-term investments
8

 

 

 

 
8

Assets measured at NAV

 

 

 

 
167

Total long-term disability trust
8

 

 

 

 
175

TOTAL ASSETS
$
3,116

 
$
709

 
$
129

 
$
6

 
$
4,145

Liabilities:
 
 
 
 
 
 
 
 
 
Price risk management instruments (Note 7)
 
 
 
 
 
 
 
 
 
Electricity
$
10

 
$
15

 
$
87

 
$
(25
)
 
$
87

Gas

 
1

 

 

 
1

TOTAL LIABILITIES
$
10

 
$
16

 
$
87

 
$
(25
)
 
$
88

 
 
 
 
 
 
 
 
 
 
(1) Includes the effect of the contractual ability to settle contracts under master netting agreements and margin cash collateral.
(2) Represents amount before deducting $440 million, primarily related to deferred taxes on appreciation of investment value.

Valuation Techniques

The following describes the valuation techniques used to measure the fair value of the assets and liabilities shown in the tables above.  There are no restrictions on the terms and conditions upon which the investments may be redeemed.  Transfers between levels in the fair value hierarchy are recognized as of the end of the reporting period.  There were no material transfers between any levels for the three months ended March 31, 2018 and 2017.

Trust Assets

Assets Measured at Fair Value

In general, investments held in the trusts are exposed to various risks, such as interest rate, credit, and market volatility risks. Nuclear decommissioning trust assets and other trust assets are composed primarily of equity and fixed-income securities and also include short-term investments that are money market funds valued at Level 1.

Global equity securities primarily include investments in common stock that are valued based on quoted prices in active markets and are classified as Level 1.


31



Fixed-income securities are primarily composed of U.S. government and agency securities, municipal securities, and other fixed-income securities, including corporate debt securities.  U.S. government and agency securities primarily consist of U.S. Treasury securities that are classified as Level 1 because the fair value is determined by observable market prices in active markets.  A market approach is generally used to estimate the fair value of fixed-income securities classified as Level 2 using evaluated pricing data such as broker quotes, for similar securities adjusted for observable differences.  Significant inputs used in the valuation model generally include benchmark yield curves and issuer spreads.  The external credit ratings, coupon rate, and maturity of each security are considered in the valuation model, as applicable.

Assets Measured at NAV Using Practical Expedient

Investments in the nuclear decommissioning trusts and the long-term disability trust that are measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy tables above.  The fair value amounts are included in the tables above in order to reconcile to the amounts presented in the Condensed Consolidated Balance Sheets.  These investments include commingled funds that are composed of equity securities traded publicly on exchanges as well as fixed-income securities that are composed primarily of U.S. government securities and asset-backed securities. 

Price Risk Management Instruments

Price risk management instruments include physical and financial derivative contracts, such as power purchase agreements, forwards, futures, swaps, options, and CRRs that are traded either on an exchange or over-the-counter. 

Power purchase agreements, forwards, and swaps are valued using a discounted cash flow model.  Exchange-traded futures that are valued using observable market forward prices for the underlying commodity are classified as Level 1.  Over-the-counter forwards and swaps that are identical to exchange-traded futures, or are valued using forward prices from broker quotes that are corroborated with market data are classified as Level 2.  Exchange-traded options are valued using observable market data and market-corroborated data and are classified as Level 2. 

Long-dated power purchase agreements that are valued using significant unobservable data are classified as Level 3.  These Level 3 contracts are valued using either estimated basis adjustments from liquid trading points or techniques, including extrapolation from observable prices, when a contract term ext