form10q.htm
 
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, 2013
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
 
Pacific Gas and Electric Company
77 Beale Street
P.O. Box 770000
San Francisco, California 94177
________________________________________
PG&E Corporation
77 Beale Street
P.O. Box 770000
San Francisco, California 94177
______________________________________
Address of principal executive offices, including zip code
 
Pacific Gas and Electric Company
(415) 973-7000
________________________________________
PG&E Corporation
(415) 973-1000
______________________________________
Registrant's telephone number, including area code
 
Indicate by check mark whether each 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) have been subject to such filing requirements for the past 90 days.  [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, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
PG&E Corporation:
[X] Large accelerated filer
[  ] Accelerated filer
 
[  ] Non-accelerated filer
[  ] Smaller reporting company
Pacific Gas and Electric Company:
[  ] Large accelerated filer
[  ] Accelerated filer
 
[X] Non-accelerated filer
[  ] Smaller reporting 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
 
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 23, 2013:
 
PG&E Corporation:
442,173,394
Pacific Gas and Electric Company:
264,374,809


 
 

 

PG&E CORPORATION AND
PACIFIC GAS AND ELECTRIC COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

TABLE OF CONTENTS
 
         
PAGE
 
GLOSSARY         ii  
             
PART I.
 
FINANCIAL INFORMATION
       
         
   
PG&E Corporation
       
       
1
 
       
2
 
       
3
 
       
5
 
   
Pacific Gas and Electric Company
       
       
6
 
       
7
 
       
8
 
       
10
 
   
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
       
         
11
 
         
11
 
         
13
 
         
14
 
         
15
 
         
15
 
         
16
 
         
18
 
         
24
 
         
25
 
     
         
       
32
 
       
34
 
       
37
 
       
41
 
       
46
 
       
46
 
       
49
 
       
51
 
       
51
 
       
52
 
    Critical Accounting Policies     52  
    Accounting Standards Issued But Not Yet Adopted    
52
 
     
     
53
 
     
53
 
     
PART II.
 
OTHER INFORMATION
       
     
54
 
     
55
 
     
55
 
     
55
 
     
56
 
   
   
57
 

 

 

GLOSSARY

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.

2012 Annual Report
PG&E Corporation's and Pacific Gas and Electric Company's combined 2012 Annual Report on Form 10-K
ALJ
administrative law judge
ARO(s)
asset retirement obligation(s)
ASU
Accounting Standards Update
CAISO
California Independent System Operator
CARB
California Air Resources Board
CPUC
California Public Utilities Commission
CRRs
congestion revenue rights
DTSC
California Department of Toxic Substances Control
ERBs
Energy Recovery Bonds
EPS
earnings per common share
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
GAAP
generally accepted accounting principles
GHG
greenhouse gas
GRC
General Rate Case
GT&S
Gas Transmission and Storage
IRS
Internal Revenue Service
kWh(s)
kilowatt-hour(s)
NEIL
Nuclear Electric Insurance Limited
NRC
Nuclear Regulatory Commission
NTSB
National Transportation Safety Board
ROE
return on equity
San Bruno accident
On September 9, 2010, an underground 30-inch natural gas transmission pipeline owned and operated by the Utility, ruptured in a residential area located in the City of San Bruno, California.  The ensuing explosion and fire resulted in the deaths of eight people, numerous personal injuries, and extensive property damage.
SED
Safety and Enforcement Division of the CPUC, formerly known as the Consumer Protection and Safety Division or CPSD
TO
Transmission Owner
Utility
Pacific Gas and Electric Company
VIE(s)
variable interest entity(ies)


 
ii 

 

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)
 
2013
   
2012
 
Operating Revenues
           
Electric
  $ 2,799     $ 2,772  
Natural gas
    873       869  
Total operating revenues
    3,672       3,641  
Operating Expenses
               
Cost of electricity
    983       859  
Cost of natural gas
    346       343  
Operating and maintenance
    1,338       1,368  
Depreciation, amortization, and decommissioning
    503       584  
Total operating expenses
    3,170       3,154  
Operating Income
    502       487  
Interest income
    2       1  
Interest expense
    (176 )     (174 )
Other income, net
    28       26  
Income Before Income Taxes
    356       340  
Income tax provision
    114       104  
Net Income
    242       236  
Preferred stock dividend requirement of subsidiary
    3       3  
Income Available for Common Shareholders
  $ 239     $ 233  
Weighted Average Common Shares Outstanding, Basic
    434       414  
Weighted Average Common Shares Outstanding, Diluted
    435       416  
Net Earnings Per Common Share, Basic
  $ 0.55     $ 0.56  
Net Earnings Per Common Share, Diluted
  $ 0.55     $ 0.56  
Dividends Declared Per Common Share
  $ 0.46     $ 0.46  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
1

 

PG&E CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


   
(Unaudited)
 
   
Three Months Ended March 31,
 
(in millions)
 
2013
   
2012
 
Net Income
  $ 242     $ 236  
Other Comprehensive Income
               
Pension and other postretirement benefit plans
               
Unrecognized prior service credit (net of income tax of $5 during respective periods)
    6       6  
Unrecognized net gain (net of income tax of $11 during respective periods)
    17       21  
Unrecognized net transition obligation (net of income tax of $2 in 2012)
    -       4  
Transfer to regulatory account (net of income tax of $13 and $15 during respective periods)
    (19 )     (21 )
Other (net of income tax of $4 in 2013)
    6       -  
Total other comprehensive income
    10       10  
Comprehensive Income
    252       246  
Preferred stock dividend requirement of subsidiary
    3       3  
Comprehensive Income Attributable to Common Shareholders
  $ 249     $ 243  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
2

 

PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
March 31,
   
December 31,
 
(in millions)
 
2013
   
2012
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 278     $ 401  
Restricted cash
    304       330  
Accounts receivable
               
Customers (net of allowance for doubtful accounts of $84 and $87at respective dates)
    943       937  
Accrued unbilled revenue
    600       761  
Regulatory balancing accounts
    1,241       936  
Other
    298       365  
Regulatory assets
    486       564  
Inventories
               
Gas stored underground and fuel oil
    73       135  
Materials and supplies
    316       309  
Income taxes receivable
    166       211  
Other
    187       172  
Total current assets
    4,892       5,121  
Property, Plant, and Equipment
               
Electric
    40,356       39,701  
Gas
    12,786       12,571  
Construction work in progress
    2,100       1,894  
Other
    1       1  
Total property, plant, and equipment
    55,243       54,167  
Accumulated depreciation
    (16,961 )     (16,644 )
Net property, plant, and equipment
    38,282       37,523  
Other Noncurrent Assets
               
Regulatory assets
    6,778       6,809  
Nuclear decommissioning trusts
    2,233       2,161  
Income taxes receivable
    202       176  
Other
    675       659  
Total other noncurrent assets
    9,888       9,805  
TOTAL ASSETS
  $ 53,062     $ 52,449  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
3

 

PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
March 31,
   
December 31,
 
(in millions, except share amounts)
 
2013
   
2012
 
LIABILITIES AND EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 489     $ 492  
Long-term debt, classified as current
    1,399       400  
Accounts payable
               
Trade creditors
    1,043       1,241  
Disputed claims and customer refunds
    156       157  
Regulatory balancing accounts
    1,102       634  
Other
    488       444  
Interest payable
    831       870  
Income taxes payable
    10       6  
Deferred income taxes
    44       -  
Other
    1,486       2,012  
Total current liabilities
    7,048       6,256  
Noncurrent Liabilities
               
Long-term debt
    11,518       12,517  
Regulatory liabilities
    5,187       5,088  
Pension and other postretirement benefits
    3,626       3,575  
Asset retirement obligations
    2,924       2,919  
Deferred income taxes
    6,870       6,748  
Other
    2,065       2,020  
Total noncurrent liabilities
    32,190       32,867  
Commitments and Contingencies (Note 10)
               
Equity
               
Shareholders' Equity
               
Preferred stock
    -       -  
Common stock, no par value, authorized 800,000,000 shares, 441,509,054 and 430,718,293 shares outstanding at respective dates
    8,879       8,428  
Reinvested earnings
    4,784       4,747  
Accumulated other comprehensive loss
    (91 )     (101 )
Total shareholders' equity
    13,572       13,074  
Noncontrolling Interest - Preferred Stock of Subsidiary
    252       252  
Total equity
    13,824       13,326  
TOTAL LIABILITIES AND EQUITY
  $ 53,062     $ 52,449  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
4

 

PG&E CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


   
(Unaudited)
 
   
Three Months Ended March 31,
 
(in millions)
 
2013
   
2012
 
Cash Flows from Operating Activities
           
Net income
  $ 242     $ 236  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization, and decommissioning
    503       584  
Allowance for equity funds used during construction
    (26 )     (27 )
Deferred income taxes and tax credits, net
    166       146  
Other
    57       73  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    209       221  
Inventories
    55       50  
Accounts payable
    (56 )     (213 )
Income taxes receivable/payable
    49       29  
Other current assets and liabilities
    (242 )     (70 )
Regulatory assets, liabilities, and balancing accounts, net
    (133 )     (171 )
Other noncurrent assets and liabilities
    45       73  
Net cash provided by operating activities
    869       931  
Cash Flows from Investing Activities
               
Capital expenditures
    (1,249 )     (1,094 )
Decrease (increase) in restricted cash
    26       (5 )
Proceeds from sales and maturities of nuclear decommissioning trust investments
    363       351  
Purchases of nuclear decommissioning trust investments
    (364 )     (370 )
Other
    17       25  
Net cash used in investing activities
    (1,207 )     (1,093 )
Cash Flows from Financing Activities
               
Net repayments of commercial paper, net of discount of $1 in 2012
    (2 )     (245 )
Energy recovery bonds matured
    -       (102 )
Common stock issued
    426       387  
Common stock dividends paid
    (191 )     (182 )
Other
    (18 )     48  
Net cash provided by (used in) financing activities
    215       (94 )
Net change in cash and cash equivalents
    (123 )     (256 )
Cash and cash equivalents at January 1
    401       513  
Cash and cash equivalents at March 31
  $ 278     $ 257  
Supplemental disclosures of cash flow information
               
Cash received (paid) for:
               
Interest, net of amounts capitalized
  $ (197 )   $ (204 )
Income taxes, net
    36       -  
Supplemental disclosures of noncash investing and financing activities
               
Common stock dividends declared but not yet paid
  $ 201     $ 193  
Capital expenditures financed through accounts payable
    257       276  
Noncash common stock issuances
    6       6  
Terminated capital leases
    -       136  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
5

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME


   
(Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
(in millions)
 
2013
   
2012
 
Operating Revenues
           
Electric
  $ 2,798     $ 2,771  
Natural gas
    873       869  
Total operating revenues
    3,671       3,640  
Operating Expenses
               
Cost of electricity
    983       859  
Cost of natural gas
    346       343  
Operating and maintenance
    1,336       1,366  
Depreciation, amortization, and decommissioning
    503       584  
Total operating expenses
    3,168       3,152  
Operating Income
    503       488  
Interest income
    1       1  
Interest expense
    (170 )     (168 )
Other income, net
    24       23  
Income Before Income Taxes
    358       344  
Income tax provision
    121       113  
Net Income
    237       231  
Preferred stock dividend requirement
    3       3  
Income Available for Common Stock
  $ 234     $ 228  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 




 
6

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


   
(Unaudited)
 
   
Three Months Ended March 31,
 
(in millions)
 
2013
   
2012
 
Net Income
  $ 237     $ 231  
Other Comprehensive Income
               
Pension and other postretirement benefit plans
               
Unrecognized prior service credit (net of income tax of $5 during respective periods)
    6       6  
Unrecognized net gain (net of income tax of $10 and $11 during respective periods)
    18       21  
Unrecognized net transition obligation (net of income tax of $2 in 2012)
    -       4  
Transfer to regulatory account (net of income tax of $13 and $15 during respective periods)
    (19 )     (21 )
Total other comprehensive income
    5       10  
Comprehensive Income
  $ 242     $ 241  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
7

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
March 31,
   
December 31,
 
(in millions)
 
2013
   
2012
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 53     $ 194  
Restricted cash
    304       330  
Accounts receivable
               
Customers (net of allowance for doubtful accounts of $84 and $87 at respective dates)
    943       937  
Accrued unbilled revenue
    600       761  
Regulatory balancing accounts
    1,241       936  
Other
    305       366  
Regulatory assets
    486       564  
Inventories
               
Gas stored underground and fuel oil
    73       135  
Materials and supplies
    316       309  
Income taxes receivable
    140       186  
Other
    161       160  
Total current assets
    4,622       4,878  
Property, Plant, and Equipment
               
Electric
    40,356       39,701  
Gas
    12,786       12,571  
Construction work in progress
    2,100       1,894  
Total property, plant, and equipment
    55,242       54,166  
Accumulated depreciation
    (16,960 )     (16,643 )
Net property, plant, and equipment
    38,282       37,523  
Other Noncurrent Assets
               
Regulatory assets
    6,778       6,809  
Nuclear decommissioning trusts
    2,233       2,161  
Income taxes receivable
    197       171  
Other
    403       381  
Total other noncurrent assets
    9,611       9,522  
TOTAL ASSETS
  $ 52,515     $ 51,923  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
8

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
March 31,
   
December 31,
 
(in millions, except share amounts)
 
2013
   
2012
 
LIABILITIES AND SHAREHOLDERS' EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 369     $ 372  
Long-term debt, classified as current
    1,399       400  
Accounts payable
               
Trade creditors
    1,044       1,241  
Disputed claims and customer refunds
    156       157  
Regulatory balancing accounts
    1,102       634  
Other
    520       419  
Interest payable
    820       865  
Income taxes payable
    17       12  
Deferred income taxes
    36       -  
Other
    1,267       1,794  
Total current liabilities
    6,730       5,894  
Noncurrent Liabilities
               
Long-term debt
    11,168       12,167  
Regulatory liabilities
    5,187       5,088  
Pension and other postretirement benefits
    3,546       3,497  
Asset retirement obligations
    2,924       2,919  
Deferred income taxes
    7,066       6,939  
Other
    2,005       1,959  
Total noncurrent liabilities
    31,896       32,569  
Commitments and Contingencies (Note 10)
               
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
    5,051       4,682  
Reinvested earnings
    7,346       7,291  
Accumulated other comprehensive loss
    (88 )     (93 )
Total shareholders' equity
    13,889       13,460  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 52,515     $ 51,923  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
9

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


   
(Unaudited)
 
   
Three Months Ended March 31,
 
(in millions)
 
2013
   
2012
 
Cash Flows from Operating Activities
           
Net income
  $ 237     $ 231  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization, and decommissioning
    503       584  
Allowance for equity funds used during construction
    (26 )     (27 )
Deferred income taxes and tax credits, net
    163       153  
    Other
    37       57  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    203       218  
Inventories
    55       50  
Accounts payable
    2       (182 )
Income taxes receivable/payable
    51       30  
Other current assets and liabilities
    (230 )     (69 )
Regulatory assets, liabilities, and balancing accounts, net
    (133 )     (171 )
Other noncurrent assets and liabilities
    45       75  
Net cash provided by operating activities
    907       949  
Cash Flows from Investing Activities
               
Capital expenditures
    (1,249 )     (1,094 )
Decrease (increase) in restricted cash
    26       (5 )
Proceeds from sales and maturities of nuclear decommissioning trust investments
    363       351  
Purchases of nuclear decommissioning trust investments
    (364 )     (370 )
Other
    5       3  
Net cash used in investing activities
    (1,219 )     (1,115 )
Cash Flows from Financing Activities
               
Net repayments of commercial paper, net of discount of $1 in 2012
    (2 )     (245 )
Energy recovery bonds matured
    -       (102 )
Preferred stock dividends paid
    (3 )     (3 )
Common stock dividends paid
    (179 )     (179 )
Equity contribution
    370       385  
Other
    (15 )     51  
Net cash provided by (used in) financing activities
    171       (93 )
Net change in cash and cash equivalents
    (141 )     (259 )
Cash and cash equivalents at January 1
    194       304  
Cash and cash equivalents at March 31
  $ 53     $ 45  
Supplemental disclosures of cash flow information
               
Cash received (paid) for:
               
Interest, net of amounts capitalized
  $ (197 )   $ (204 )
Income taxes, net
    36       -  
Supplemental disclosures of noncash investing and financing activities
               
Capital expenditures financed through accounts payable
  $ 257     $ 276  
Terminated capital leases
    -       136  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
10

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

PG&E Corporation is a holding company that conducts its business through Pacific Gas and Electric Company, a public utility operating in 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.  The Utility’s accounts for electric and gas operations are maintained in accordance with the Uniform System of Accounts prescribed by the FERC.

This quarterly report on Form 10-Q is a combined report of PG&E Corporation and the Utility that includes separate Condensed Consolidated Financial Statements for each company.  The Notes to the Condensed Consolidated Financial Statements apply to both 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 from the Condensed Consolidated Financial Statements.  PG&E Corporation and the Utility operate in one segment.

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial statements and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission and therefore do not contain all of the information and footnotes required by GAAP and the U.S. Securities and Exchange Commission for annual financial statements.  PG&E Corporation’s and the Utility’s Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair presentation of their financial condition, results of operations, and cash flows for the periods presented.  The information at December 31, 2012 in both PG&E Corporation’s and the Utility’s Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets incorporated by reference into their combined 2012 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 21, 2013.  This quarterly report should be read in conjunction with the 2012 Annual Report.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on a wide range of factors, including future regulatory decisions and economic conditions, that are difficult to predict.  Some of the more critical estimates and assumptions relate to the Utility’s regulatory assets and liabilities, legal and regulatory contingencies, environmental remediation liabilities, ARO, and pension and other postretirement benefit plans obligations.  Management believes that its estimates and assumptions reflected in the Condensed Consolidated Financial Statements are appropriate and reasonable.  Actual results could differ materially from those estimates.
 
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
 
                The significant accounting policies used by PG&E Corporation and the Utility are discussed in Note 2 of the Notes to the Consolidated Financial Statements in the 2012 Annual Report.

Pension and Other Postretirement Benefits

PG&E Corporation and the Utility provide a non-contributory defined benefit pension plan for eligible employees, as well as contributory postretirement medical plans for retirees and their eligible dependents, and non-contributory postretirement life insurance plans for eligible employees and retirees.  The trusts underlying certain of these plans are qualified trusts under the Internal Revenue Code of 1986, as amended (“Code”).  If certain conditions are met, PG&E Corporation and the Utility can deduct payments made to the qualified trusts, subject to certain Code limitations.  PG&E Corporation and the Utility use a December 31 measurement date for all plans.

The net periodic benefit costs reflected in PG&E Corporation’s Condensed Consolidated Financial Statements for the three months ended March 31, 2013 and 2012 were as follows:

   
Pension Benefits
   
Other Benefits
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
(in millions)
 
2013
   
2012
   
2013
   
2012
 
Service cost for benefits earned
  $ 115     $ 99     $ 13     $ 12  
Interest cost
    156       164       19       21  
Expected return on plan assets
    (162 )     (149 )     (20 )     (19 )
Amortization of transition obligation
    -       -       -       6  
Amortization of prior service cost
    5       5       6       6  
Amortization of unrecognized loss
    27       31       1       1  
Net periodic benefit cost
    141       150       19       27  
Less: transfer to regulatory account (1)
    (57 )     (75 )     -       -  
Total
  $ 84     $ 75     $ 19     $ 27  
                                 
 (1) The Utility recorded these amounts to a regulatory account since they are probable of recovery from customers in futures rates.

There was no material difference between PG&E Corporation and the Utility for the information disclosed above.
 
11

 
Variable Interest Entities

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 was the primary beneficiary of any of these VIEs at March 31, 2013, it 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 exposure is limited to the amount the Utility pays for delivered electricity and capacity.  (See Note 10 below.)  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, 2013, it did not consolidate any of them.

At March 31, 2013, PG&E Corporation affiliates had entered into four tax equity agreements to fund residential and commercial retail solar energy installations with two privately held companies that are considered VIEs.  Under these agreements, PG&E Corporation has made lease payments and investment contributions of $363 million to these companies in exchange for the right to receive benefits from local rebates, federal grants, and a share of the customer payments made to these companies.  The majority of these amounts are recorded in other noncurrent assets – other in PG&E Corporation’s Condensed Consolidated Balance Sheets.  PG&E Corporation determined that it does not have control over the companies’ significant economic activities, such as the design of the companies, vendor selection, and construction. PG&E Corporation’s remaining financial exposure is not material.  Since PG&E Corporation was not the primary beneficiary of any of these VIEs at March 31, 2013, it did not consolidate any of them.

Adoption of New Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities

In January 2013, the FASB issued an ASU that clarifies the scope of disclosures about offsetting assets and liabilities.  The guidance requires an entity to disclose gross and net information about derivatives that are offset in the balance sheet or subject to an enforceable master-netting arrangement or similar agreement   The ASU became effective for PG&E Corporation and the Utility on January 1, 2013.   (See Note 7 below).

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued an ASU that requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income.  The ASU became effective for PG&E Corporation and the Utility on January 1, 2013. 

The changes, net of income tax, in PG&E Corporation’s other comprehensive income for the three months ended March 31, 2013 consist of the following:

 
Pension and
         
 
Other
         
 
Postretirement
         
(in millions)
Benefit Plans
 
Other
 
Total
 
Beginning balance (net of total income tax of $101)
$ (105 ) $ 4   $ (101 )
Other comprehensive income before reclassifications (net of total income tax of $9)
  (19 )   6     (13 )
Amounts reclassified from other comprehensive income:
                 
      Amortization of prior service cost (net of total income tax of $5) (1)
  6     -     6  
      Amortization of actuarial gains (net of total income tax of $11) (1)
  17     -     17  
Net current period other comprehensive income
  4     6     10  
Ending balance (net of total income tax of $94)
$ (101 ) $ 10   $ (91 )
                   
 (1) These other comprehensive income components are included in the computation of net periodic pension and other postretirement costs.  (See the “Pension and Other Postretirement Benefits” table above for additional details.)

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

 
12

 
Accounting Standards Issued But Not Yet Adopted

Joint and Several Liability

In February 2013, the FASB issued an ASU that will require certain obligations resulting from joint and several liability arrangements to be recognized as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors.  The ASU also requires entities to disclose the nature and amount of the obligation as well as other information about those obligations.  This ASU will be effective retrospectively beginning on January 1, 2014.  PG&E Corporation and the Utility are currently evaluating the impact of the ASU.

NOTE 3: REGULATORY ASSETS, LIABILITIES, AND BALANCING ACCOUNTS

Regulatory Assets

Long-Term Regulatory Assets

Long-term regulatory assets are composed of the following:

   
Balance at
 
   
March 31,
   
December 31,
 
(in millions)
 
2013
   
2012
 
Pension benefits
  $ 3,299     $ 3,275  
Deferred income taxes
    1,668       1,627  
Utility retained generation
    539       552  
Environmental compliance costs
    596       604  
Price risk management
    185       210  
Electromechanical meters
    179       194  
Unamortized loss, net of gain, on reacquired debt
    136       141  
Other
    176       206  
Total long-term regulatory assets
  $ 6,778     $ 6,809  
 
Regulatory Liabilities

Long-Term Regulatory Liabilities

Long-term regulatory liabilities are composed of the following:

 
Balance at
 
 
March 31,
 
December 31,
 
(in millions)
2013
 
2012
 
Cost of removal obligations
  $ 3,709     $ 3,625  
Recoveries in excess of AROs
    673       620  
Public purpose programs
    539       590  
Other
    266       253  
Total long-term regulatory liabilities
  $ 5,187     $ 5,088  
 
 
13

 
Regulatory Balancing Accounts
 
                The Utility’s recovery of a significant portion of revenue requirements and costs is decoupled from the volume of sales.  The Utility records differences between actual customer billings and the Utility’s authorized revenue requirement as well as differences between incurred costs and customer billings or authorized revenue.  To the extent these differences are probable of recovery or refund, the Utility records a regulatory balancing account receivable or payable.  Regulatory balancing accounts receivable and payable will fluctuate during the year based on seasonal electric and gas usage and timing of cost and collections.

Current Regulatory Balancing Accounts, Net

   
Receivable (Payable)
 
   
Balance at
 
   
March 31,
   
December 31,
 
(in millions)
 
2013
   
2012
 
Distribution revenue adjustment mechanism
  $ 359     $ 219  
Utility generation
    321       117  
Hazardous substance
    76       56  
Public purpose programs
    (69 )     (83 )
Gas fixed cost
    (81 )     44  
Energy recovery bonds
    (192 )     (43 )
Energy procurement
    (31 )     77  
U.S. Department of Energy Settlement
    (250 )     (250 )
Greenhouse gas allowance auction proceeds (1)
    (141 )     -  
Other
    147       165  
Total regulatory balancing accounts, net
  $ 139     $ 302  
                 
(1) The CARB has adopted regulations that established a state-wide, “cap-and-trade” program (effective January 1, 2013) that sets a gradually declining limit on the amount of GHGs that may be emitted each year. This balancing
     account is used to record proceeds collected by the Utility for GHG emission allowances associated with the cap-and-trade program.  These amounts will be refunded to customers in future periods.

NOTE 4: DEBT

Revolving Credit Facilities – PG&E Corporation and the Utility
 
                At March 31, 2013, PG&E Corporation had $120 million of cash borrowings and no letters of credit outstanding under its $300 million revolving credit facility.

At March 31, 2013, the Utility had no cash borrowings and $243 million of letters of credit outstanding under its $3.0 billion revolving credit facility.

On April 1, 2013, PG&E Corporation and the Utility entered into an amendment and restatement of their respective $300 million and $3.0 billion five-year revolving credit facilities that were entered into on May 31, 2011.  PG&E Corporation’s and the Utility’s amended and restated credit agreements contain substantially similar terms as their 2011 credit agreements, except that the termination dates have been extended to April 1, 2018.

Utility

Pollution Control Bonds

At March 31, 2013, 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 0.10% to 0.17%.  At March 31, 2013, the interest rates on the $309 million principal amount of pollution control bonds Series 2009 A-D and the related loan agreements ranged from 0.10% to 0.11%.

Commercial Paper Program

At March 31, 2013, the Utility had $368 million of commercial paper outstanding.

 
14

 

NOTE 5: EQUITY

PG&E Corporation’s and the Utility’s changes in equity for the three months ended March 31, 2013 were as follows:
             
   
PG&E Corporation
   
Utility
 
   
Total
   
Total
 
(in millions)
 
Equity
   
Shareholders' Equity
 
Balance at December 31, 2012
  $ 13,326     $ 13,460  
Comprehensive income
    252       242  
Common stock issued
    432       -  
Share-based compensation expense
    19       (1 )
Common stock dividends declared
    (202 )     (179 )
Preferred stock dividend requirement
    -       (3 )
Preferred stock dividend requirement of subsidiary
    (3 )     -  
Equity contributions
    -       370  
Balance at March 31, 2013
  $ 13,824     $ 13,889  
                 
In March 2013, PG&E Corporation sold 7,200,000 shares of its common stock in an underwritten public offering for cash proceeds of $300 million, net of fees and commissions.  During the three months ended March 31, 2013, PG&E Corporation issued 2,109,980 shares of its common stock under its 401(k) plan, its Dividend Reinvestment and Stock Purchase Plan, and its share-based compensation plans for total cash proceeds of $63 million. PG&E Corporation also sold 1,480,900 shares of its common stock under the Equity Distribution Agreement executed in November 2011 for cash proceeds of $63 million, net of fees, exhausting the remaining capacity under this agreement.

During the three months ended March 31, 2013, PG&E Corporation contributed equity of $370 million to the Utility to maintain the Utility’s CPUC-authorized capital structure, which consists of 52% common equity and 48% debt and preferred stock.
 
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)
 
2013
   
2012
 
Income available for common shareholders
  $ 239     $ 233  
Weighted average common shares outstanding, basic
    434       414  
Add incremental shares from assumed conversions:
               
Employee share-based compensation
    1       2  
Weighted average common share outstanding, diluted
    435       416  
Total earnings per common share, diluted
  $ 0.55     $ 0.56  

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.
 
15

 
NOTE 7: DERIVATIVES
 
                The Utility uses both derivative and non-derivative contracts in managing its customers’ exposure to commodity-related price risk, including forward contracts, swap agreements and 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 discussed above 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 on the Condensed Consolidated Balance Sheets.  (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 PG&E Corporation’s and the Utility’s 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 March 31, 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
  $ 47     $ (27 )   $ 33     $ 53  
Other noncurrent assets – other
    92       (4 )     -       88  
Current liabilities – other
    (182 )     27       55       (100 )
Noncurrent liabilities – other
    (188 )     4       11       (173 )
Total commodity risk
  $ (231 )   $ -     $ 99     $ (132 )
 
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 )
 
 
16

 
                    Gains and losses recorded on PG&E Corporation’s and the Utility’s derivatives were as follows:

 
Commodity Risk
 
 
Three Months Ended
 
 
March 31,
 
(in millions)
2013
 
2012
 
Unrealized gain/(loss) - regulatory assets and liabilities (1)
  $ 98     $ (54 )
Realized loss - cost of electricity (2)
    (48 )     (151 )
Realized loss - cost of natural gas (2)
    (8 )     (22 )
Total commodity risk
  $ 42     $ (227 )
                 

(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 March 31, 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
    311,804,316       85,857,500       4,812,500       -  
 
Options
    209,274,282       166,356,071       7,050,000       -  
Electricity
Forwards and
                               
(Megawatt-hours)
Swaps
    2,537,023       3,164,680       2,008,046       2,402,346  
 
Options
    21,002       239,233       239,015       98,505  
 
Congestion
                               
 
Revenue Rights
    63,826,023       74,481,760       74,358,484       17,972,340  
                                   
(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 2023.
(3) Amounts shown are for the combined positions of the electric fuels and core gas portfolios.
(4) Million British Thermal Units.

 
17

 
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 2023.
(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.  At March 31, 2013, 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
 
   
March 31,
   
December 31,
 
(in millions)
 
2013
   
2012
 
Derivatives in a liability position with credit risk-relatedcontingencies that are not fully collateralized
  $ (191 )   $ (266 )
Related derivatives in an asset position
    59       59  
Collateral posting in the normal course of business related to these derivatives
    63       103  
Net position of derivative contracts/additional collateral posting requirements (1)
   $ (69 )    $ (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.
 
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.  Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.  A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring 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.

 
18

 


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
 
   
At March 31, 2013
 
(in millions)
 
Level 1
   
Level 2
   
Level 3
   
Netting (1)
   
Total
 
Assets:
                             
Money market investments
  $ 205     $ -     $ -     $ -     $ 205  
Nuclear decommissioning trusts
                                       
  Money market investments
    25       -       -       -       25  
  U.S. equity securities
    984       10       -       -       994  
  Non-U.S. equity securities
    394       -       -       -       394  
  U.S. government and agency securities
    692       159       -       -       851  
  Municipal securities
    -       65       -       -       65  
  Other fixed-income securities
    -       177       -       -       177  
Total nuclear decommissioning trusts (2)
    2,095       411       -       -       2,506  
Price risk management instruments
                                       
(Note 7)
                                       
  Electricity
    4       53       76       7       140  
  Gas
    -       4       2       (5 )     1  
Total price risk management instruments
    4       57       78       2       141  
Rabbi trusts
                                       
  Fixed-income securities
    -       30       -       -       30  
  Life insurance contracts
    -       72       -       -       72  
Total rabbi trusts
    -       102       -       -       102  
Long-term disability trust
                                       
  Money market investments
    4       -       -       -       4  
  U.S. equity securities
    -       12       -       -       12  
  Non-U.S. equity securities
    -       12       -       -       12  
  Fixed-income securities
    -       136       -       -       136  
Total long-term disability trust
    4       160       -       -       164  
Total assets
 </