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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2019

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESFor a summary of the significant accounting policies used by PG&E Corporation and the Utility, see Note 2 of the Condensed Consolidated Financial Statements above for bankruptcy-related policies and Note 2 of the Notes to the Consolidated Financial Statements in Item 8 of the 2018 Form 10-K.

Disallowance of Plant Costs

PG&E Corporation and the Utility record a charge when it is both probable that costs incurred or projected to be incurred for recently completed plant will not be recoverable through rates charged to customers and the amount of disallowance can be reasonably estimated.

In the three and nine months ended September 30, 2019, PG&E Corporation and the Utility recorded $237 million for pipeline-replacement costs disallowed in the 2019 GT&S rate case as a result of spending above amounts authorized in the 2015-2018 rate case period.

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.

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 September 30, 2019, 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 September 30, 2019, 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 and nine months ended September 30, 2019 and 2018 were as follows:


	Pension Benefits						Other Benefits
	Three Months Ended September 30,
(in millions)	2019		2018		2019		2018
Service cost for benefits earned⁽¹⁾	$	110	$	128	$	14	$	16
Interest cost	189		171		19		17
Expected return on plan assets	(226)		(255)		(31)		(33)
Amortization of prior service cost	(1)		(1)		3		4
Amortization of net actuarial loss	1		1		—		(1)
Net periodic benefit cost	73		44		5		3
Regulatory account transfer⁽²⁾	10		41		—		—
Total	$	83	$	85	$	5	$	3

⁽¹⁾A portion of service costs are capitalized pursuant to ASU 2017-07.

⁽²⁾The Utility recorded these amounts to a regulatory account since they are probable of recovery from, or refund to, customers in future rates.


	Pension Benefits						Other Benefits
	Nine Months Ended September 30,
(in millions)	2019		2018		2019		2018
Service cost for benefits earned⁽¹⁾	$	332	$	385	$	42	$	49
Interest cost	568		515		57		52
Expected return on plan assets	(679)		(766)		(92)		(98)
Amortization of prior service cost	(4)		(4)		10		11
Amortization of net actuarial loss	2		4		(2)		(4)
Net periodic benefit cost	219		134		15		10
Regulatory account transfer⁽²⁾	31		118		—		—
Total	$	250	$	252	$	15	$	10

⁽¹⁾A portion of service costs are capitalized pursuant to ASU 2017-07.

⁽²⁾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. Service costs are reflected in Operating and maintenance on the Condensed Consolidated Statements of Income.

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

On February 27, 2019, PG&E Corporation and the Utility received final approval from the Bankruptcy Court to maintain existing pension and other benefit plans, other than the non-qualified pension plan, during the pendency of the Chapter 11 Cases.

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 September 30, 2019
Beginning balance	$	(21)	$	17	$	(4)
Amounts reclassified from other comprehensive income:⁽¹⁾
Amortization of prior service cost (net of taxes of $0 and $1, respectively)	(1)		2		1
Amortization of net actuarial loss (net of taxes of $0 and $0, respectively)	1		—		1
Regulatory account transfer (net of taxes of $0 and $1, respectively)	—		(2)		(2)
Net current period other comprehensive gain (loss)	—		—		—
Ending balance	$	(21)	$	17	$	(4)

⁽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 September 30, 2018
Beginning balance	$	(30)	$	17	$	(13)
Amounts reclassified from other comprehensive income:⁽¹⁾
Amortization of prior service cost (net of taxes of $0 and $1, respectively)	(1)		3		2
Amortization of net actuarial loss (net of taxes of $0, and $0, respectively)	1		(1)		—
Regulatory account transfer (net of taxes of $0 and $1, respectively)	1		(2)		(1)
Net current period other comprehensive gain (loss)	1		—		1
Ending balance	$	(29)	$	17	$	(12)


	Pension Benefits		Other Benefits		Total
(in millions, net of income tax)	Nine Months Ended September 30, 2019
Beginning balance	$	(21)	$	17	$	(4)
Amounts reclassified from other comprehensive income:⁽¹⁾
Amortization of prior service cost (net of taxes of $1 and $3, respectively)	(3)		7		4
Amortization of net actuarial loss (net of taxes of $0 and $1, respectively)	2		(1)		1
Regulatory account transfer (net of taxes of $1 and $2, respectively)	1		(6)		(5)
Net current period other comprehensive gain (loss)	—		—		—
Ending balance	$	(21)	$	17	$	(4)


	Pension Benefits		Other Benefits		Total
(in millions, net of income tax)	Nine Months Ended September 30, 2018
Beginning balance	$	(25)	$	17	$	(8)
Amounts reclassified from other comprehensive income:⁽¹⁾
Amortization of prior service cost (net of taxes of $1 and $3, respectively)	(3)		8		5
Amortization of net actuarial loss (net of taxes of $1 and $1, respectively)	3		(3)		—
Regulatory account transfer (net of taxes of $0 and $2, respectively)	1		(5)		(4)
Reclassification of stranded income tax to retained earnings	(5)		—		(5)
Net current period other comprehensive gain (loss)	(4)		—		(4)
Ending balance	$	(29)	$	17	$	(12)

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

Revenue Recognition

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 because of seasonality, weather, and customer usage patterns.

Regulatory Balancing Account Revenue

The CPUC authorizes most of the Utility’s revenues in the Utility’s GRC and its GT&S rate case, 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.

The following table presents the Utility’s revenues disaggregated by type of customer:


	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2019		2018		2019		2018
Electric
Revenue from contracts with customers
Residential	$	1,557	$	1,649	$	3,839	$	4,023
Commercial	1,481		1,430		3,568		3,737
Industrial	466		448		1,085		1,126
Agricultural	496		523		844		966
Public street and highway lighting	17		18		50		55
Other ⁽¹⁾	(82)		(273)		(391)		(388)
Total revenue from contracts with customers - electric	3,935		3,795		8,995		9,519
Regulatory balancing accounts ⁽²⁾	(381)		(328)		297		211
Total electric operating revenue	$	3,554	$	3,467	$	9,292	$	9,730

Natural gas
Revenue from contracts with customers
Residential	$	249	$	242	$	1,764	$	1,652
Commercial	92		87		461		402
Transportation service only	264		287		950		847
Other ⁽¹⁾	(98)		30		(303)		(149)
Total revenue from contracts with customers - gas	507		646		2,872		2,752
Regulatory balancing accounts ⁽²⁾	371		269		222		190
Total natural gas operating revenue	878		915		3,094		2,942
Total operating revenues	$	4,432	$	4,382	$	12,386	$	12,672

⁽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.

Recently Adopted Accounting Standards

Recognition of Lease Assets and Liabilities

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amended the guidance related to the definition of a lease, the recognition of lease assets and liabilities, and the disclosure of key information about leasing arrangements. Under the new standard, a lease exists when an arrangement allows the lessee to control the use of an identified asset for a stated period in exchange for payments. This determination is made at inception of the arrangement. All leases must be recognized as a ROU asset and a lease liability on the balance sheet of the lessee. The ROU asset reflects the lessee’s right to use the underlying asset for the lease term and the lease liability reflects the obligation to make the lease payments. PG&E Corporation and the Utility adopted the ASU for leases on January 1, 2019.

PG&E Corporation and the Utility elected certain practical expedients and will carry forward historical conclusions related to (1) contracts that contain leases, (2) existing lease and easement classification, and (3) initial direct costs. After adoption of the new standard, PG&E Corporation and Utility elected not to separate lease and non-lease components. Additionally, PG&E Corporation and the Utility will not restate comparative reporting periods.

The Utility estimates the ROU assets and lease liabilities at net present value using its incremental secured borrowing rates, unless the implicit discount rate in the leasing arrangement can be ascertained. The incremental secured borrowing rate is based on observed market data and other information available at the lease commencement date. The ROU assets and lease liabilities only include the fixed lease payments for arrangements with terms greater than 12 months. Renewal and termination options only impact the lease term if it is reasonably certain that they will be exercised. PG&E Corporation recognizes lease expense on a straight-line basis over the lease term. The Utility recognizes lease expense in conformity with ratemaking.

Operating leases are included in operating lease ROU assets and current and noncurrent operating lease liabilities on the Condensed Consolidated Balance Sheets. Finance leases are included in property, plant, and equipment, other current liabilities, and other noncurrent liabilities on the Condensed Consolidated Balance Sheets. Financing leases were immaterial for the nine months ended September 30, 2019.

On January 1, 2019, PG&E Corporation and the Utility recorded ROU assets and lease liabilities of $2.8 billion, representing the net present value of only the fixed lease payments. This amount is presented within the supplemental disclosures of noncash activities. For the nine months ended September 30, 2019, the Utility made total cash payments, including fixed and variable, of $1.79 billion for operating leases which are presented within operating activities on the Condensed Consolidated Statement of Cash Flows. The fixed cash payments for the principal portion of the financing lease liabilities are immaterial and continue to be included within financing activities on the Condensed Consolidated Statement of Cash Flows. Any variable lease payments for financing leases are included in operating activities on the Condensed Consolidated Statement of Cash Flows.

The majority of the Utility’s ROU assets and lease liabilities relate to various power purchase agreements. These power purchase agreements primarily consist of generation plants leased to meet customer demand plus applicable reserve margins. PG&E Corporation and the Utility have also recorded ROU assets and lease liabilities related to property and land arrangements.

At September 30, 2019, the Utility’s leases had a weighted average remaining lease term of 6.1 years and a weighted average discount rate of 6.1%.

The following table shows the lease expense recognized for the fixed and variable component of the Utility’s lease obligations:


(in millions)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease fixed cost	$	266	$	502
Operating lease variable cost	669		1,468
Total operating lease costs	$	935	$	1,970

The following table shows the Utility’s future expected operating lease payments:


(in millions)	September 30, 2019
2019⁽¹⁾	$	184
2020	679
2021	623
2022	548
2023	255
2024	96
Thereafter	596
Total lease payments	2,981
Less imputed interest	(554)
Total	$	2,427

⁽¹⁾Represents the remaining expected operating lease payments from October 1, 2019 through December 31, 2019.

The following table shows the Utility’s future expected obligations for power purchase and other lease commitments:


(in millions)	December 31, 2018
2019	$	684
2020	677
2021	621
2022	546
2023	252
Thereafter	581
Total lease commitments	$	3,361

Accounting Standards Issued But Not Yet Adopted

Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements, which amends the existing guidance relating to the disclosure requirements for fair value measurements. The ASU will be effective for PG&E Corporation and the Utility on January 1, 2020 with early adoption permitted. PG&E Corporation and the Utility are currently evaluating the impact the guidance will have on their Condensed Consolidated Financial Statements and related disclosures.

Intangibles—Goodwill and Other

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU will be effective for PG&E Corporation and the Utility on January 1, 2020 with early adoption permitted. PG&E Corporation and the Utility are currently evaluating the impact of the guidance on their Condensed Consolidated Financial Statements and related disclosures.

Financial Instruments—Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides a model, known as the current expected credit loss model, to estimate the expected lifetime credit loss on financial assets, including trade and other receivables, rather than incurred losses over the remaining life of most financial assets measured at amortized cost. The guidance also requires use of an allowance to record estimated credit losses on available-for-sale debt securities. This ASU will be effective for PG&E Corporation and the Utility on January 1, 2020. PG&E Corporation and the Utility are currently evaluating the impact of the guidance on their Condensed Consolidated Financial Statements and related disclosures.