NOTE 11: EMPLOYEE BENEFIT PLANS

Pension Plan and Postretirement Benefits Other than Pensions (“PBOP”)

PG&E Corporation and the Utility sponsor a non-contributory defined benefit pension plan for eligible employees hired before December 31, 2012 and a cash balance plan for those eligible employees hired after this date or who made a one-time election to participate (“Pension Plan”). The trusts underlying certain of these plans are qualified trusts under the Internal Revenue Code of 1986, as amended. If certain conditions are met, PG&E Corporation and the Utility can deduct payments made to the qualified trusts, subject to certain limitations. PG&E Corporation’s and the Utility’s funding policy is to contribute tax-deductible amounts, consistent with applicable regulatory decisions and federal minimum funding requirements. Based upon current assumptions and available information, the Utility’s minimum funding requirements related to its pension plans is zero.

PG&E Corporation and the Utility also sponsor contributory postretirement medical plans for retirees and their eligible dependents, and non-contributory postretirement life insurance plans for eligible employees and retirees. PG&E Corporation and the Utility use a fiscal year-end measurement date for all plans.

Change in Plan Assets, Benefit Obligations, and Funded Status

The following tables show the reconciliation of changes in plan assets, benefit obligations, and the plans’ aggregate funded status for pension benefits and other benefits for PG&E Corporation during 2016 and 2015:

Pension Plan

(in millions)	2016		2015
Change in plan assets:
Fair value of plan assets at beginning of year	$	13,745		$	14,216
Actual return on plan assets		1,358			(176)
Company contributions		334			334
Benefits and expenses paid		(708)			(629)
Fair value of plan assets at end of year	$	14,729		$	13,745

Change in benefit obligation:
Benefit obligation at beginning of year	$	16,299		$	16,696
Service cost for benefits earned		453			479
Interest cost		715			673
Actuarial (gain) loss		637			(922)
Plan amendments		(91)			1
Transitional costs		-			1
Benefits and expenses paid		(708)			(629)
Benefit obligation at end of year (1)	$	17,305		$	16,299

Funded Status:
Current liability	$	(7)		$	(6)
Noncurrent liability		(2,569)			(2,547)
Net liability at end of year	$	(2,576)		$	(2,553)

(1) PG&E Corporation’s accumulated benefit obligation was $15.6 billion and $14.7 billion at December 31, 2016 and 2015, respectively.

Postretirement Benefits Other than Pensions

(in millions)	2016		2015
Change in plan assets:
Fair value of plan assets at beginning of year	$	2,035		$	2,092
Actual return on plan assets		167			(26)
Company contributions		52			61
Plan participant contribution		85			68
Benefits and expenses paid		(166)			(160)
Fair value of plan assets at end of year	$	2,173		$	2,035

Change in benefit obligation:
Benefit obligation at beginning of year	$	1,766		$	1,811
Service cost for benefits earned		52			55
Interest cost		76			71
Actuarial (gain) loss		11			(98)
Plan amendments		37			-
Transitional costs		-			1
Benefits and expenses paid		(153)			(146)
Federal subsidy on benefits paid		3			4
Plan participant contributions		85			68
Benefit obligation at end of year	$	1,877		$	1,766

Funded Status: (1)
Noncurrent asset	$	368		$	344
Noncurrent liability		(72)			(75)
Net asset at end of year	$	296		$	269

(1) At December 31, 2016 and 2015, the postretirement medical plan was in an overfunded position and the postretirement life insurance plan was in an underfunded position.

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

Components of Net Periodic Benefit Cost

Net periodic benefit cost as reflected in PG&E Corporation’s Consolidated Statements of Income was as follows:

Pension Plan

(in millions)	2016		2015			2014
Service cost	$	453		$	479		$	383
Interest cost		715			673			695
Expected return on plan assets		(828)			(873)			(807)
Amortization of prior service cost		8			15			20
Amortization of net actuarial loss		24			10			2
Net periodic benefit cost		372			304			293
Less: transfer to regulatory account (1)		(34)			34			42
Total expense recognized	$	338		$	338		$	335

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

Postretirement Benefits Other than Pensions

(in millions)	2016		2015			2014
Service cost	$	52		$	55		$	45
Interest cost		76			71			76
Expected return on plan assets		(107)			(112)			(103)
Amortization of prior service cost		15			19			23
Amortization of net actuarial loss		4			4			2
Net periodic benefit cost	$	40		$	37		$	43

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

Components of Accumulated Other Comprehensive Income

PG&E Corporation and the Utility record unrecognized prior service costs and unrecognized gains and losses related to pension and post-retirement benefits other than pension as components of accumulated other comprehensive income, net of tax. In addition, regulatory adjustments are recorded in the Consolidated Statements of Income and Consolidated Balance Sheets to reflect the difference between expense or income calculated in accordance with GAAP for accounting purposes and expense or income for ratemaking purposes, which is based on authorized plan contributions. For pension benefits, a regulatory asset or liability is recorded for amounts that would otherwise be recorded to accumulated other comprehensive income. For post-retirement benefits other than pension, the Utility generally records a regulatory liability for amounts that would otherwise be recorded to accumulated other comprehensive income. As the Utility is unable to record a regulatory asset for these other benefits, the charge remains in accumulated other comprehensive income (loss).

The estimated amounts that will be amortized into net periodic benefit costs for PG&E Corporation in 2017 are as follows:


(in millions)	Pension Plan		PBOP Plans
Unrecognized prior service cost	$	(7)	$	15
Unrecognized net loss		22		4
Total	$	15	$	19

There were no material differences between the estimated amounts that will be amortized into net periodic benefit costs for PG&E Corporation and the Utility.

Valuation Assumptions

The following actuarial assumptions were used in determining the projected benefit obligations and the net periodic benefit costs. The following weighted average year-end assumptions were used in determining the plans’ projected benefit obligations and net benefit cost.

	Pension Plan						PBOP Plans
	December 31,						December 31,
	2016		2015		2014		2016		2015		2014
Discount rate	4.11	%	4.37	%	4.00	%	4.05 - 4.19	%	4.27 - 4.48	%	3.89 - 4.09	%
Rate of future compensation
increases	4.00	%	4.00	%	4.00	%	-		-		-
Expected return on plan
assets	5.30	%	6.10	%	6.20	%	2.80 - 6.00	%	3.20 - 6.60	%	3.30 - 6.70	%

The assumed health care cost trend rate as of December 31, 2016 was 7.2%, decreasing gradually to an ultimate trend rate in 2025 and beyond of approximately 4.5%. A one-percentage-point change in assumed health care cost trend rate would have the following effects:

	One-Percentage-Point		One-Percentage-Point
(in millions)	Increase		Decrease
Effect on postretirement benefit obligation	$	118	$	(120)
Effect on service and interest cost		9		(10)

Expected rates of return on plan assets were developed by determining projected stock and bond returns and then applying these returns to the target asset allocations of the employee benefit plan trusts, resulting in a weighted average rate of return on plan assets. Returns on fixed-income debt investments were projected based on real maturity and credit spreads added to a long-term inflation rate. Returns on equity investments were estimated based on estimates of dividend yield and real earnings growth added to a long-term inflation rate. For the pension plan, the assumed return of 5.3% compares to a ten-year actual return of 7.3%. The rate used to discount pension benefits and other benefits was based on a yield curve developed from market data of over approximately 696 Aa-grade non-callable bonds at December 31, 2016. This yield curve has discount rates that vary based on the duration of the obligations. The estimated future cash flows for the pension benefits and other benefit obligations were matched to the corresponding rates on the yield curve to derive a weighted average discount rate.

Investment Policies and Strategies

The financial position of PG&E Corporation’s and the Utility’s funded status is the difference between the fair value of plan assets and projected benefit obligations. Volatility in funded status occurs when asset values change differently from liability values and can result in fluctuations in costs in financial reporting, as well as the amount of minimum contributions required under the Employee Retirement Income Security Act of 1974, as amended. PG&E Corporation’s and the Utility’s investment policies and strategies are designed to increase the ratio of trust assets to plan liabilities at an acceptable level of funded status volatility.

The trusts’ asset allocations are meant to manage volatility, reduce costs, and diversify its holdings. Interest rate, credit, and equity risk are the key determinants of PG&E Corporation’s and the Utility’s funded status volatility. In addition to affecting the trusts’ fixed income portfolio market values, interest rate changes also influence liability valuations as discount rates move with current bond yields. To manage volatility, PG&E Corporation’s and the Utility’s trusts hold significant allocations in long maturity fixed-income investments. Although they contribute to funded status volatility, equity investments are held to reduce long-term funding costs due to their higher expected return. Real assets and absolute return investments are held to diversify the trust’s holdings in equity and fixed-income investments by exhibiting returns with low correlation to the direction of these markets. Real assets include commodities futures, global REITS, global listed infrastructure equities, and private real estate funds. Absolute return investments include hedge fund portfolios.

In the Pension Plan, target allocations for 2017 were updated to reflect a 2% increase in global equity investments and a 2% decrease in fixed income investments. Target allocations for PBOP Plans remain unchanged. Derivative instruments such as equity index futures are used to meet target equity exposure. Derivative instruments, such as equity index futures and U.S. treasury futures, are also used to rebalance the fixed income/equity allocation of the pension’s portfolio. Foreign currency exchange contracts are used to hedge a portion of the non U.S. dollar exposure of global equity investments.

The target asset allocation percentages for major categories of trust assets for pension and other benefit plans are as follows:

	Pension Plan								PBOP Plans
	2017		2016			2015			2017			2016			2015
Global equity	27	%		25	%		25	%		32	%		32	%		31	%
Absolute return	5	%		5	%		5	%		3	%		3	%		3	%
Real assets	10	%		10	%		10	%		7	%		7	%		8	%
Fixed income	58	%		60	%		60	%		58	%		58	%		58	%
Total	100	%		100	%		100	%		100	%		100	%		100	%

PG&E Corporation and the Utility apply a risk management framework for managing the risks associated with employee benefit plan trust assets. The guiding principles of this risk management framework are the clear articulation of roles and responsibilities, appropriate delegation of authority, and proper accountability and documentation. Trust investment policies and investment manager guidelines include provisions designed to ensure prudent diversification, manage risk through appropriate use of physical direct asset holdings and derivative securities, and identify permitted and prohibited investments.

Fair Value Measurements

The following tables present the fair value of plan assets for pension and other benefits plans by major asset category at December 31, 2016 and 2015.

	Fair Value Measurements
	At December 31,
	2016												2015
(in millions)	Level 1			Level 2			Level 3			Total				Level 1			Level 2			Level 3			Total
Pension Plan:
Short-term investments	$	364	$		369	$		-	$		733	$			247	$		375	$		-	$		622
Global equity		996			-			-			996				903			-			-			903
Real assets		610			-			-			610				581			-			-			581
Fixed-income		1,754			4,774			5			6,533				1,841			4,495			3			6,339
Assets measured at NAV		-			-			-			5,950				-			-			-			5,308
Total	$	3,724	$		5,143	$		5	$		14,822	$			3,572	$		4,870	$		3	$		13,753
PBOP Plans:
Short-term investments	$	33	$		-	$		-	$		33	$			20	$		-	$		-	$		20
Global equity		115			-			-			115				104			-			-			104
Real assets		70			-			-			70				69			-			-			69
Fixed-income		150			656			-			806				150			632			-			782
Assets measured at NAV		-			-			-			1,153				-			-			-			1,065
Total	$	368	$		656	$		-	$		2,177	$			343	$		632	$		-	$		2,040
Total plan assets at fair value									$		16,999											$		15,793

In addition to the total plan assets disclosed at fair value in the table above, the trusts had other net assets of $97 million and $13 million at December 31, 2016 and 2015, respectively, comprised primarily of cash, accounts receivable, deferred taxes, and accounts payable.

Valuation Techniques

The following describes the valuation techniques used to measure the fair value of the assets and liabilities shown in the table above. All investments that are valued using a net asset value per share can be redeemed quarterly with a notice not to exceed 90 days.

Short-Term Investments

Short-term investments consist primarily of commingled funds across government, credit, and asset-backed sectors. These securities are categorized as Level 1 and Level 2 assets.

Global Equity

The global equity category includes investments in common stock and equity-index futures. Equity investments in common stock are actively traded on public exchanges and are therefore considered Level 1 assets. These equity investments are generally valued based on unadjusted prices in active markets for identical securities. Equity-index futures are valued based on unadjusted prices in active markets and are Level 1 assets.

Real Assets

The real asset category includes portfolios of commodity futures, global REITS, global listed infrastructure equities, and private real estate funds. The commodity futures, global REITS, and global listed infrastructure equities are actively traded on a public exchange and are therefore considered Level 1 assets.

Fixed-Income

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 debt 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

On January 1, 2016, PG&E Corporation and the Utility adopted FASB ASU No. 2015-07, Fair Value Measurement (Topic 820):

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) and applied it retrospectively for the periods presented in their Consolidated Financial Statements. (See Note 2 above.) In accordance with this guidance, investments in the pension and PBOP plans 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 Consolidated Balance Sheets. These investments include commingled funds that are composed of equity securities traded publicly on exchanges, hedge funds, private real estate funds, and fixed-income securities that are composed primarily of U.S. government securities and asset-backed securities.

Transfers Between Levels

Any transfers between levels in the fair value hierarchy are recognized as of the end of the reporting period. No material transfers between levels occurred in the years ended December 31, 2016 and 2015.

Level 3 Reconciliation

The following table is a reconciliation of changes in the fair value of instruments for the pension plan that have been classified as Level 3 for the years ended December 31, 2016 and 2015:


(in millions)	Fixed-
For the year ended December 31, 2016	Income
Balance at beginning of year	$	3
Actual return on plan assets:
Relating to assets still held at the reporting date		3
Relating to assets sold during the period		-
Purchases, issuances, sales, and settlements:
Purchases		-
Settlements		(1)
Balance at end of year	$	5


(in millions)	Fixed-
For the year ended December 31, 2015	Income
Balance at beginning of year	$	12
Actual return on plan assets:
Relating to assets still held at the reporting date		(3)
Relating to assets sold during the period		1
Purchases, issuances, sales, and settlements:
Purchases		2
Settlements		(9)
Balance at end of year	$	3

There were no material transfers out of Level 3 in 2016 and 2015.

Cash Flow Information

Employer Contributions

PG&E Corporation and the Utility contributed $334 million to the pension benefit plans and $52 million to the other benefit plans in 2016. These contributions are consistent with PG&E Corporation’s and the Utility’s funding policy, which is to contribute amounts that are tax-deductible and consistent with applicable regulatory decisions and federal minimum funding requirements. None of these pension or other benefits were subject to a minimum funding requirement requiring a cash contribution in 2016. The Utility’s pension benefits met all the funding requirements under ERISA. PG&E Corporation and the Utility expect to make total contributions of approximately $327 million and $61 million to the pension plan and other postretirement benefit plans, respectively, for 2017.

Benefits Payments and Receipts

As of December 31, 2016, the estimated benefits expected to be paid and the estimated federal subsidies expected to be received in each of the next five fiscal years, and in aggregate for the five fiscal years thereafter, are as follows:

	Pension		PBOP		Federal
(in millions)	Plan		Plans		Subsidy
2017	$	739	$	87	$	(8)
2018		781		93		(9)
2019		821		97		(10)
2020		857		103		(10)
2021		892		108		(11)
Thereafter in the succeeding five years		4,879		592		(15)

There were no material differences between the estimated benefits expected to be paid by PG&E Corporation and paid by the Utility for the years presented above. There were also no material differences between the estimated subsidies expected to be received by PG&E Corporation and received by the Utility for the years presented above.

Retirement Savings Plan

PG&E Corporation sponsors a retirement savings plan, which qualifies as a 401(k) defined contribution benefit plan under the Internal Revenue Code 1986, as amended. This plan permits eligible employees to make pre-tax and after-tax contributions into the plan, and provide for employer contributions to be made to eligible participants. Total expenses recognized for defined contribution benefit plans reflected in PG&E Corporation’s Consolidated Statements of Income were $97 million, $89 million, and $80 million in 2016, 2015, and 2014, respectively.

There were no material differences between the employer contribution expense for PG&E Corporation and the Utility for the years presented above.