Derivatives

9 Months Ended

Sep. 30, 2013

Derivatives

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	$	(164)

                        Gains and losses associated with price risk management activities were recorded as follows:

	Commodity Risk
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in millions)	2013			2012			2013			2012
Unrealized gain - regulatory assets and liabilities (1)	$	40		$	162		$	115		$	327
Realized loss - cost of electricity (2)		(57	)		(108	)		(136	)		(383	)
Realized loss - cost of natural gas (2)		(2	)		(5	)		(14	)		(32	)
Total commodity risk	$	(19)		$	49		$	(35)		$	(88)

⁽¹⁾ Unrealized gains and losses on commodity risk-related derivative instruments are recorded to regulatory assets or liabilities, rather than being recorded to the  Condensed Consolidated Statements of Income.  These amounts exclude the impact of cash collateral postings.

⁽²⁾ These amounts are fully passed through to customers in rates.  Accordingly, net income was not impacted by realized amounts on these instruments.

Volume of Derivative Activity

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

		Contract Volume (1)
			1 Year or	3 Years or
			Greater but	Greater but
		Less Than 1	Less Than 3	Less Than 5	5 Years or
Underlying Product	Instruments	Year	Years	Years	Greater (2)
Natural Gas (3)	Forwards and
(MMBtus (4))	Swaps	282,212,809	84,938,674	4,907,500	-
	Options	206,604,635	115,753,835	1,500,000	-
Electricity	Forwards and
(Megawatt-hours)	Swaps	2,537,023	2,396,080	2,008,046	1,685,781
	Options	95,158	239,233	239,015	24,350
	Congestion
	Revenue Rights	57,166,228	78,318,934	60,465,135	11,609,557

⁽¹⁾ Amounts shown reflect the total gross derivative volumes by commodity type that are expected to settle in each period.

      ⁽²⁾ Derivatives in this category expire between 2018 and 2022.

      ⁽³⁾ Amounts shown are for the combined positions of the electric fuels and core gas portfolios.

⁽⁴⁾ Million British Thermal Units.

At December 31, 2012, the volumes of PG&E Corporation's and the Utility's outstanding derivatives were as follows:

		Contract Volume (1)
			1 Year or	3 Years or
			Greater but	Greater but
		Less Than 1	Less Than 3	Less Than 5	5 Years or
Underlying Product	Instruments	Year	Years	Years	Greater (2)
Natural Gas (3)	Forwards and
(MMBtus (4))	Swaps	329,466,510	98,628,398	5,490,000	-
	Options	221,587,431	216,279,767	10,050,000	-
Electricity	Forwards and
(Megawatt-hours)	Swaps	2,537,023	3,541,046	2,009,505	2,538,718
	Options	-	239,015	239,233	119,508
	Congestion
	Revenue Rights	74,198,690	74,187,803	74,240,147	25,699,804

⁽¹⁾ Amounts shown reflect the total gross derivative volumes by commodity type that are expected to settle in each period.

⁽²⁾ Derivatives in this category expire between 2018 and 2022.

⁽³⁾ Amounts shown are for the combined positions of the electric fuels and core gas portfolios.

⁽⁴⁾ Million British Thermal Units.

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.  If the Utility's credit rating was 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.  At September 30, 2013, the Utility's credit rating was investment grade.  

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
	September 30,			December 31,
(in millions)	2013			2012
Derivatives in a liability position with credit risk-related
contingencies that are not fully collateralized	$	(133	)	$	(266	)
Related derivatives in an asset position		29			59
Collateral posting in the normal course of business related to
these derivatives		112			103
Net position of derivative contracts/additional collateral
posting requirements (1)	$	8		$	(104)

 ⁽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.