SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2020

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 Condensed Consolidated Financial Statements above for bankruptcy-related policies and Note 3 of the Notes to the Consolidated Financial Statements in Item 8 of the 2019 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.

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 June 30, 2020, 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 June 30, 2020, 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 six months ended June 30, 2020 and 2019 were as follows:


	Pension Benefits						Other Benefits
	Three Months Ended June 30,
(in millions)	2020		2019		2020		2019
Service cost for benefits earned⁽¹⁾	$	132	$	111	$	16	$	14
Interest cost	179		190		15		19
Expected return on plan assets	(261)		(226)		(35)		(30)
Amortization of prior service cost	(2)		(2)		4		3
Amortization of net actuarial loss	1		—		(5)		(1)
Net periodic benefit cost	49		73		(5)		5
Regulatory account transfer⁽²⁾	34		10		—		—
Total	$	83	$	83	$	(5)	$	5

⁽¹⁾A portion of service costs are capitalized pursuant to GAAP.

⁽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
	Six Months Ended June 30,
(in millions)	2020		2019		2020		2019
Service cost for benefits earned⁽¹⁾	$	264	$	222	$	31	$	28
Interest cost	357		379		31		38
Expected return on plan assets	(522)		(453)		(69)		(61)
Amortization of prior service cost	(3)		(3)		7		7
Amortization of net actuarial loss	2		1		(10)		(2)
Net periodic benefit cost	98		146		(10)		10
Regulatory account transfer⁽²⁾	68		21		—		—
Total	$	166	$	167	$	(10)	$	10

⁽¹⁾A portion of service costs are capitalized pursuant to GAAP.

⁽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.

Pursuant to the Plan and Confirmation Order, all existing pension and other benefit plans were deemed assumed by PG&E Corporation and the Utility.

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) consisted of the following:


	Pension Benefits		Other Benefits		Total
(in millions, net of income tax)	Three Months Ended June 30, 2020
Beginning balance	$	(22)	$	17	$	(5)
Amounts reclassified from other comprehensive income:⁽¹⁾
Amortization of prior service cost (net of taxes of $1 and $1, respectively)	(1)		3		2
Amortization of net actuarial loss (net of taxes of $1 and $1, respectively)	—		(4)		(4)
Regulatory account transfer (net of taxes of $0 and $0, respectively)	1		1		2
Net current period other comprehensive gain (loss)	—		—		—
Ending balance	$	(22)	$	17	$	(5)

⁽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 June 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 $1, respectively)	(1)		2		1
Amortization of net actuarial loss (net of taxes of $0, and $1, respectively)	—		—		—
Regulatory account transfer (net of taxes of $1 and $0, respectively)	1		(2)		(1)
Net current period other comprehensive gain (loss)	—		—		—
Ending balance	$	(21)	$	17	$	(4)


	Pension Benefits		Other Benefits		Total
(in millions, net of income tax)	Six Months Ended June 30, 2020
Beginning balance	$	(22)	$	17	$	(5)
Amounts reclassified from other comprehensive income:⁽¹⁾
Amortization of prior service cost (net of taxes of $1 and $2, respectively)	(2)		5		3
Amortization of net actuarial loss (net of taxes of $1 and $3, respectively)	1		(7)		(6)
Regulatory account transfer (net of taxes of $0 and $1, respectively)	1		2		3
Net current period other comprehensive gain (loss)	—		—		—
Ending balance	$	(22)	$	17	$	(5)


	Pension Benefits		Other Benefits		Total
(in millions, net of income tax)	Six Months Ended June 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 $2, respectively)	(2)		5		3
Amortization of net actuarial loss (net of taxes of $0 and $1, respectively)	1		(1)		—
Regulatory account transfer (net of taxes of $1 and $1, respectively)	1		(4)		(3)
Net current period other comprehensive gain (loss)	—		—		—
Ending balance	$	(21)	$	17	$	(4)

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 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.

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


	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2020		2019		2020		2019
Electric
Revenue from contracts with customers
Residential	$	987	$	994	$	2,230	$	2,282
Commercial	1,075		1,135		2,082		2,088
Industrial	342		326		682		619
Agricultural	368		261		491		347
Public street and highway lighting	17		16		34		33
Other⁽¹⁾	269		—		203		(309)
Total revenue from contracts with customers - electric	3,058		2,732		5,722		5,060
Regulatory balancing accounts⁽²⁾	377		214		753		678
Total electric operating revenue	$	3,435	$	2,946	$	6,475	$	5,738

Natural gas
Revenue from contracts with customers
Residential	$	426	$	343	$	1,492	$	1,515
Commercial	110		129		344		369
Transportation service only	296		304		643		686
Other⁽¹⁾	(159)		(129)		(180)		(205)
Total revenue from contracts with customers - gas	673		647		2,299		2,365
Regulatory balancing accounts ⁽²⁾	425		350		65		(149)
Total natural gas operating revenue	1,098		997		2,364		2,216
Total operating revenues	$	4,533	$	3,943	$	8,839	$	7,954

⁽¹⁾This activity is primarily related to the change in unbilled revenue and amounts subject to refund, partially offset by other miscellaneous revenue items.

⁽²⁾These amounts represent revenues authorized to be billed or refunded to customers.

Initial and annual contributions to the Wildfire Fund established pursuant to AB 1054

On the Effective Date, PG&E Corporation and the Utility contributed, in accordance with AB 1054, an initial contribution of approximately $4.8 billion and first annual contribution of approximately $193 million to the Wildfire Fund to secure participation of the Utility therein. PG&E Corporation and the Utility will account for the contributions to the Wildfire Fund similarly to prepaid insurance with expense being allocated to periods ratably based on an estimated period of coverage. At June 30, 2020, PG&E Corporation and the Utility satisfied the eligibility and other requirements set forth in AB 1054 and as a result, upon payment of the initial contribution on the Effective Date, the Wildfire Fund is available to pay for eligible claims arising as of the effective date of AB 1054, subject to a limit of 40% of the amount of such claims arising as of the effective date of AB 1054 and the Utility’s emergence from Chapter 11, additionally limited to the portion of such claims that exceeds the greater of (i) $1.0 billion in the aggregate in any calendar year and (ii) the amount of insurance coverage required to be in place for the electric utility company pursuant to Section 3293 of the Public Utilities Code, added by AB 1054. Therefore, PG&E Corporation and the Utility have recorded a current liability of $5.2 billion in “Wildfire fund liability” and $1.5 billion in Other noncurrent liabilities for the present value of unpaid contribution amounts, as well as $6.5 billion in assets for its commitment to make contributions, reduced by amortization, of which $6.0 billion are non-current, called “Wildfire fund asset” in the Condensed Consolidated Balance Sheets. On June 30, 2020, the Utility recorded amortization expense of $173 million related to the coverage received from the effective date of AB 1054 to June 30, 2020. The amortization of the asset, accretion of the liability, and if applicable, impairment of the asset is reflected in “Wildfire fund expense” in the Condensed Consolidated Statements of Income. Contributions are discounted to the present value using the 10-year US treasury rate at the date PG&E Corporation and the Utility satisfied all the eligibility requirements to participate in the Wildfire Fund. A useful life of 15 years is being used to amortize the Wildfire Fund asset.

AB 1054 did not specify a period of coverage, therefore, this accounting treatment is subject to significant accounting judgments and estimates. In estimating the period of coverage, PG&E Corporation and the Utility used a Monte Carlo simulation based on twelve years of historical data from wildfires caused by electrical equipment to estimate expected loss. The assumptions create a high degree of uncertainty related to the estimated useful life of the Wildfire Fund. The most significant assumption is the number and severity of catastrophic fires that could occur in California within the participating electric utilities’ service territories during the term of the Wildfire Fund. PG&E Corporation and the Utility utilize historical, publicly available fire-loss data as a starting point; however, future fire-loss can be difficult to estimate due to uncertainties around the impacts of climate change, land use changes, and mitigation efforts by the California electric utility companies.

Other assumptions include the estimated cost of wildfires caused by other electric utilities, the amount at which wildfire claims would be settled, the likely adjudication of the CPUC in cases of electric utility-caused wildfires, the level of future insurance coverage held by the electric utilities, the FERC-allocable portion of loss recovery, and the future transmission and distribution equity rate base growth of other electric utilities. Significant changes in any of these estimates could materially impact the amortization period.

PG&E Corporation and the Utility will evaluate all assumptions quarterly, or upon claims being made from the Wildfire Fund for catastrophic wildfires, and the expected life of the Wildfire Fund will be adjusted as required. PG&E Corporation and the Utility will assess the Wildfire Fund asset for impairment in the event that a participating utility's electrical equipment is found to be the substantial cause of a catastrophic wildfire. Timing of any such impairment could lag as the emergence of sufficient cause and claims information can take many quarters and could be limited to public disclosure of the participating electric utility, if ignition were to occur outside the Utility’s service territory. At June 30, 2020, there were no such known events requiring a reduction of the Wildfire Fund asset.

Recently Adopted Accounting Standards

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. PG&E Corporation and the Utility adopted the ASU on January 1, 2020. The adoption of this ASU did not have a material impact on the 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. PG&E Corporation and the Utility adopted the ASU on January 1, 2020.

PG&E Corporation and the Utility have three categories of financial assets in scope, each with their own associated credit risks. In applying the new guidance, PG&E Corporation and the Utility have incorporated forward-looking data in its estimate of credit loss as follows. Trade receivables are represented by customer accounts receivable and have credit exposure risk related to California unemployment rates. Insurance receivables are related to the liability insurance policies PG&E Corporation and the Utility carry. Insurance receivable risk is related to each insurance carrier’s risk of defaulting on their individual policies. Lastly, available-for-sale debt securities requires each company to determine if a decline in fair value is below amortized costs basis, or, impaired. Furthermore, if an impairment exists on available-for-sale debt securities, PG&E Corporation and the Utility will examine if there is an intent to sell, if it is more likely than not a requirement to sell prior to recovery, and if a portion of the unrealized loss is a result of credit loss. There was no material impact to PG&E Corporation or the Utility’s Condensed Consolidated Financial Statements resulting from the adoption of this ASU. During the three months ended June 30, 2020, expected credit losses of $44 million were recorded in Operating and maintenance expense on the Condensed Consolidated Statements of Income.

Reference Rate Reform

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. PG&E Corporation and the Utility adopted this ASU on April 1, 2020 and elected the optional amendments for contract modifications prospectively. There was no material impact to PG&E Corporation or the Utility’s Condensed Consolidated Financial Statements resulting from the adoption of this ASU.

Accounting Standards Issued But Not Yet Adopted

Defined Benefit Plans

In August 2018, the FASB issued ASU No. 2018-14, Fair Value Measurement (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which amends the existing guidance relating to the disclosure requirements for Defined Benefit Plans. PG&E Corporation and the Utility plan to adopt this guidance in the fourth quarter of 2020. PG&E Corporation and the Utility are currently evaluating the impact the guidance will have on their Condensed Consolidated Financial Statements and related disclosures.

Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends the existing guidance to reduce complexity relating to Income Tax disclosures. PG&E Corporation and the Utility plan to adopt this guidance in the first quarter of 2021. PG&E Corporation and the Utility does not anticipate the guidance will have a material impact on their Condensed Consolidated Financial Statements and related disclosures.