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 June 30, 2014
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 July 22, 2014:
 
PG&E Corporation:
471,411,575
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 JUNE 30, 2014

TABLE OF CONTENTS



   
PAGE
GLOSSARY
 
ii
     
 
1
 
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
 
15
 
16
 
17
 
17
 
18
 
20
 
26
 
27
 
 
 
32
 
34
 
37
 
41
 
44
 
46
 
46
 
46
 
47
 
47
 
48
 
49
49
 
 
50
52
53
53
54
     
55
 

 
 
i
 


 
GLOSSARY

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

2013 Annual Report
PG&E Corporation's and Pacific Gas and Electric Company's combined Annual Report on Form 10-K for the year ended December 31, 2013
AFUDC
allowance for funds used during construction
ALJ
administrative law judge
CAISO
California Independent System Operator
CPUC
California Public Utilities Commission
CRRs
congestion revenue rights
EPA
Environmental Protection Agency
EPS
earnings per common share
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
NEIL
Nuclear Electric Insurance Limited
NRC
Nuclear Regulatory Commission
NTSB    National Transportation Safety Board
ORA
Office of Ratepayer Advocates
PSEP
pipeline safety enhancement plan
SEC
U.S. Securities and Exchange Commission
SED
Safety and Enforcement Division of the CPUC, formerly known as the Consumer Protection and Safety Division or the CPSD
TURN
The Utility Reform Network
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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions, except per share amounts)
 
2014
   
2013
   
2014
   
2013
 
Operating Revenues
                       
Electric
  $ 3,233     $ 3,059     $ 6,234     $ 5,858  
Natural gas
    719       717       1,609       1,590  
Total operating revenues
    3,952       3,776       7,843       7,448  
Operating Expenses
                               
Cost of electricity
    1,349       1,189       2,559       2,172  
Cost of natural gas
    200       179       560       525  
Operating and maintenance
    1,328       1,256       2,627       2,594  
Depreciation, amortization, and decommissioning
    557       516       1,095       1,019  
Total operating expenses
    3,434       3,140       6,841       6,310  
Operating Income
    518       636       1,002       1,138  
Interest income
    2       2       5       4  
Interest expense
    (188 )     (177 )     (373 )     (353 )
Other income, net
    43       24       62       52  
Income Before Income Taxes
    375       485       696       841  
Income tax provision
    104       153       195       267  
Net Income
    271       332       501       574  
Preferred stock dividend requirement of subsidiary
    4       4       7       7  
Income Available for Common Shareholders
  $ 267     $ 328     $ 494     $ 567  
Weighted Average Common Shares Outstanding, Basic
    467       442       463       438  
Weighted Average Common Shares Outstanding, Diluted
    469       443       465       439  
Net Earnings Per Common Share, Basic
  $ 0.57     $ 0.74     $ 1.07     $ 1.29  
Net Earnings Per Common Share, Diluted
  $ 0.57     $ 0.74     $ 1.06     $ 1.29  
Dividends Declared Per Common Share
  $ 0.46     $ 0.46     $ 0.91     $ 0.91  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
1

 

PG&E CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


   
(Unaudited)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
(in millions)
 
2014
   
2013
   
2014
   
2013
 
Net Income
  $ 271     $ 332     $ 501     $ 574  
Other Comprehensive Income
                               
Pension and other postretirement benefit plans obligations
                               
(net of taxes of $0, $3, $0 and $6, at respective dates)
    -       4       -       8  
Net change in investments
                               
(net of taxes of $7, $11, $3, $15  at respective dates)
    (11 )     16       (6 )     22  
Total other comprehensive income (loss)
    (11 )     20       (6 )     30  
Comprehensive Income
    260       352       495       604  
Preferred stock dividend requirement of subsidiary
    4       4       7       7  
Comprehensive Income Attributable to Common Shareholders
  $ 256     $ 348     $ 488     $ 597  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 




 
2

 

PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
June 30,
   
December 31,
 
(in millions)
 
2014
   
2013
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 132     $ 296  
Restricted cash
    299       301  
Accounts receivable:
               
Customers (net of allowance for doubtful accounts of $68 and $80
               
   at respective dates)
    1,009       1,091  
Accrued unbilled revenue
    870       766  
Regulatory balancing accounts
    1,745       1,124  
Other
    304       312  
Regulatory assets
    404       448  
Inventories:
               
Gas stored underground and fuel oil
    141       137  
Materials and supplies
    320       317  
Income taxes receivable
    613       574  
Other
    360       611  
Total current assets
    6,197       5,977  
Property, Plant, and Equipment
               
Electric
    43,990       42,881  
Gas
    15,040       14,379  
Construction work in progress
    1,981       1,834  
Other
    2       2  
Total property, plant, and equipment
    61,013       59,096  
Accumulated depreciation
    (18,530 )     (17,844 )
Net property, plant, and equipment
    42,483       41,252  
Other Noncurrent Assets
               
Regulatory assets
    4,821       4,913  
Nuclear decommissioning trusts
    2,428       2,342  
Income taxes receivable
    88       85  
Other
    1,008       1,036  
Total other noncurrent assets
    8,345       8,376  
TOTAL ASSETS
  $ 57,025     $ 55,605  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
3

 

PG&E CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
June 30,
   
December 31,
 
(in millions, except share amounts)
 
2014
   
2013
 
LIABILITIES AND EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 1,452     $ 1,174  
Long-term debt, classified as current
    -       889  
Accounts payable:
               
Trade creditors
    1,161       1,293  
Disputed claims and customer refunds
    86       154  
Regulatory balancing accounts
    1,069       1,008  
Other
    472       471  
Interest payable
    865       892  
Other
    1,544       1,612  
Total current liabilities
    6,649       7,493  
Noncurrent Liabilities
               
Long-term debt
    13,966       12,717  
Regulatory liabilities
    5,966       5,660  
Pension and other postretirement benefits
    1,578       1,601  
Asset retirement obligations
    3,561       3,539  
Deferred income taxes
    7,874       7,823  
Other
    2,151       2,178  
Total noncurrent liabilities
    35,096       33,518  
Commitments and Contingencies (Note 10)
               
Equity
               
Shareholders' Equity
               
Common stock, no par value, authorized 800,000,000 shares,
               
470,950,685 and 456,670,424 shares outstanding at respective dates
    10,176       9,550  
Reinvested earnings
    4,808       4,742  
Accumulated other comprehensive income
    44       50  
Total shareholders' equity
    15,028       14,342  
Noncontrolling Interest - Preferred Stock of Subsidiary
    252       252  
Total equity
    15,280       14,594  
TOTAL LIABILITIES AND EQUITY
  $ 57,025     $ 55,605  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
4

 

PG&E CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


   
(Unaudited)
 
   
Six Months Ended June 30,
 
(in millions)
 
2014
   
2013
 
Cash Flows from Operating Activities
           
Net income
  $ 501     $ 574  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation, amortization, and decommissioning
    1,095       1,019  
Allowance for equity funds used during construction
    (46 )     (52 )
Deferred income taxes and tax credits, net
    51       346  
Other
    139       157  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    (30 )     (22 )
Inventories
    (7 )     (31 )
Accounts payable
    (101 )     28  
Income taxes receivable/payable
    (39 )     (143 )
Other current assets and liabilities
    94       (367 )
Regulatory assets, liabilities, and balancing accounts, net
    (311 )     (192 )
Other noncurrent assets and liabilities
    (66 )     142  
Net cash provided by operating activities
    1,280       1,459  
Cash Flows from Investing Activities
               
Capital expenditures
    (2,320 )     (2,521 )
Decrease in restricted cash
    2       25  
Proceeds from sales and maturities of nuclear decommissioning
               
trust investments
    877       795  
Purchases of nuclear decommissioning trust investments
    (873 )     (786 )
Other
    21       16  
Net cash used in investing activities
    (2,293 )     (2,471 )
Cash Flows from Financing Activities
               
Borrowings (repayments) under revolving credit facilities
    (260 )     140  
Net issuances of commercial paper, net of discount of $1 at respective dates
    237       321  
Proceeds from issuance of short-term debt, net of issuance costs
    300       -  
Proceeds from issuance of long-term debt, net of premium, discount, and issuance
               
costs of $14 and $8 at respective dates
    1,236       742  
Repayments of long-term debt
    (889 )     (461 )
Common stock issued
    589       562  
Common stock dividends paid
    (408 )     (386 )
Other
    44       (26 )
Net cash provided by financing activities
    849       892  
Net change in cash and cash equivalents
    (164 )     (120 )
Cash and cash equivalents at January 1
    296       401  
Cash and cash equivalents at June 30
  $ 132     $ 281  
Supplemental disclosures of cash flow information
               
Cash paid for:
               
Interest, net of amounts capitalized
  $ (318 )   $ (312 )
Income taxes, net
    (1 )     (65 )
Supplemental disclosures of noncash investing and financing activities
           
Common stock dividends declared but not yet paid
  $ 215     $ 202  
Capital expenditures financed through accounts payable
    224       253  
Noncash common stock issuances
    10       11  
Terminated capital leases
    68       -  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
5

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

   
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in millions)
 
2014
   
2013
   
2014
   
2013
 
Operating Revenues
                       
Electric
  $ 3,232     $ 3,057     $ 6,232     $ 5,855  
Natural gas
    719       718       1,609       1,591  
Total operating revenues
    3,951       3,775       7,841       7,446  
Operating Expenses
                               
Cost of electricity
    1,349       1,189       2,559       2,172  
Cost of natural gas
    200       179       560       525  
Operating and maintenance
    1,321       1,256       2,618       2,592  
Depreciation, amortization, and decommissioning
    556       516       1,094       1,019  
Total operating expenses
    3,426       3,140       6,831       6,308  
Operating Income
    525       635       1,010       1,138  
Interest income
    3       3       5       4  
Interest expense
    (185 )     (171 )     (364 )     (341 )
Other income, net
    17       22       37       46  
Income Before Income Taxes
    360       489       688       847  
Income tax provision
    110       160       210       281  
Net Income
    250       329       478       566  
Preferred stock dividend requirement
    4       4       7       7  
Income Available for Common Stock
  $ 246     $ 325     $ 471     $ 559  
                                 
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
June 30,
 
Six Months Ended
June 30,
 
(in millions)
2014
 
2013
 
2014
 
2013
 
Net Income
  $ 250     $ 329     $ 478     $ 566  
Other Comprehensive Income
                               
Pension and other postretirement benefit plans obligations
                               
 (net of taxes of $0, $3, $0 and $6 at respective dates)
    -       4       -       9  
Total other comprehensive income
    -       4       -       9  
Comprehensive Income
  $ 250     $ 333     $ 478     $ 575  
                                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
7

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
June 30,
   
December 31,
 
(in millions)
 
2014
   
2013
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 70     $ 65  
Restricted cash
    299       301  
Accounts receivable:
               
Customers (net of allowance for doubtful accounts of $68 and $80
               
  at respective dates)
    1,009       1,091  
Accrued unbilled revenue
    870       766  
Regulatory balancing accounts
    1,745       1,124  
Other
    306       313  
Regulatory assets
    404       448  
Inventories:
               
Gas stored underground and fuel oil
    141       137  
Materials and supplies
    320       317  
Income taxes receivable
    598       563  
Other
    208       523  
Total current assets
    5,970       5,648  
Property, Plant, and Equipment
               
Electric
    43,990       42,881  
Gas
    15,040       14,379  
Construction work in progress
    1,981       1,834  
Total property, plant, and equipment
    61,011       59,094  
Accumulated depreciation
    (18,529 )     (17,843 )
Net property, plant, and equipment
    42,482       41,251  
Other Noncurrent Assets
               
Regulatory assets
    4,821       4,913  
Nuclear decommissioning trusts
    2,428       2,342  
Income taxes receivable
    83       81  
Other
    824       814  
Total other noncurrent assets
    8,156       8,150  
TOTAL ASSETS
  $ 56,608     $ 55,049  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
8

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
 
   
Balance At
 
   
June 30,
   
December 31,
 
(in millions, except share amounts)
 
2014
   
2013
 
LIABILITIES AND SHAREHOLDERS' EQUITY
           
Current Liabilities
           
Short-term borrowings
  $ 1,340     $ 914  
Long-term debt, classified as current
    -       539  
Accounts payable:
               
Trade creditors
    1,161       1,293  
Disputed claims and customer refunds
    86       154  
Regulatory balancing accounts
    1,069       1,008  
Other
    462       432  
Interest payable
    862       887  
Other
    1,285       1,382  
Total current liabilities
    6,265       6,609  
Noncurrent Liabilities
               
Long-term debt
    13,616       12,717  
Regulatory liabilities
    5,966       5,660  
Pension and other postretirement benefits
    1,505       1,530  
Asset retirement obligations
    3,561       3,539  
Deferred income taxes
    8,060       8,042  
Other
    2,106       2,111  
Total noncurrent liabilities
    34,814       33,599  
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
    6,396       5,821  
Reinvested earnings
    7,540       7,427  
Accumulated other comprehensive income
    13       13  
Total shareholders' equity
    15,529       14,841  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 56,608     $ 55,049  
                 
See accompanying Notes to the Condensed Consolidated Financial Statements.
 


 
9

 

PACIFIC GAS AND ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
(Unaudited)
 
   
Six Months Ended June 30,
 
(in millions)
 
2014
   
2013
 
Cash Flows from Operating Activities
           
Net income
  $ 478     $ 566  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation, amortization, and decommissioning
    1,094       1,019  
Allowance for equity funds used during construction
    (46 )     (52 )
Deferred income taxes and tax credits, net
    18       337  
    Other
    108       126  
Effect of changes in operating assets and liabilities:
               
Accounts receivable
    (31 )     (24 )
Inventories
    (7 )     (31 )
Accounts payable
    (72 )     68  
Income taxes receivable/payable
    (35 )     (162 )
Other current assets and liabilities
    141       (317 )
Regulatory assets, liabilities, and balancing accounts, net
    (311 )     (192 )
Other noncurrent assets and liabilities
    (76 )     126  
Net cash provided by operating activities
    1,261       1,464  
Cash Flows from Investing Activities
               
Capital expenditures
    (2,320 )     (2,521 )
Decrease in restricted cash
    2       25  
Proceeds from sales and maturities of nuclear decommissioning
               
trust investments
    877       795  
Purchases of nuclear decommissioning trust investments
    (873 )     (786 )
Other
    17       8  
Net cash used in investing activities
    (2,297 )     (2,479 )
Cash Flows from Financing Activities
               
Net issuances of commercial paper, net of discount of $1 at respective dates
    125       321  
Proceeds from issuance of short-term debt, net of issuance costs
    300       -  
Proceeds from issuance of long-term debt, net of premium, discount, and issuance
               
costs of $11 and $8 at respective dates
    889       742  
Repayments of long-term debt
    (539 )     (461 )
Preferred stock dividends paid
    (7 )     (7 )
Common stock dividends paid
    (358 )     (358 )
Equity contribution
    580       665  
Other
    51       (20 )
Net cash provided by financing activities
    1,041       882  
Net change in cash and cash equivalents
    5       (133 )
Cash and cash equivalents at January 1
    65       194  
Cash and cash equivalents at June 30
  $ 70     $ 61  
Supplemental disclosures of cash flow information
               
Cash paid for:
               
Interest, net of amounts capitalized
  $ (307 )   $ (300 )
Income taxes, net
    (1 )     (86 )
Supplemental disclosures of noncash investing and financing activities
               
Capital expenditures financed through accounts payable
  $ 224     $ 253  
Terminated capital leases
    68       -  
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 whose primary operating subsidiary is 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.

This quarterly report on Form 10-Q is a combined report of PG&E Corporation and the Utility.  PG&E Corporation’s Condensed Consolidated Financial Statements include the accounts of PG&E Corporation, the Utility, and subsidiaries.  The Utility’s Condensed Consolidated Financial Statements include the accounts of the Utility and its subsidiaries.  All intercompany balances and transactions have been eliminated.  The Notes to the Condensed Consolidated Financial Statements apply to both PG&E Corporation and the Utility unless described otherwise.  PG&E Corporation and the Utility operate in one segment.

The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with GAAP and in accordance with the interim period reporting requirements of Form 10-Q and reflect all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair presentation of PG&E Corporation and the Utility’s financial condition, results of operations, and cash flows for the periods presented.  The information at December 31, 2013 in the Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets in the 2013 Annual Report.  This quarterly report should be read in conjunction with the 2013 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, asset retirement obligations, 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 2013 Annual Report.

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 was the primary beneficiary of any of these VIEs at June 30, 2014, 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 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, 2014, it did not consolidate any of them.

PG&E Corporation affiliates have entered into four tax equity agreements to fund residential and commercial retail solar energy installations with four separate privately held funds that are considered VIEs.  Under these agreements, PG&E Corporation has made cumulative lease payments and investment contributions of $363 million to these companies since 2010 in exchange for the right to receive benefits from local rebates, federal grants, and a share of the customer payments made to these companies.  At June 30, 2014 and December 31, 2013, the carrying amount of PG&E Corporation’s investment in these VIEs was $87 million and $98 million, respectively.  PG&E Corporation does not have decision-making rights associated with any of the activities that are most significant to the economic performance of any of these VIEs, such as the design of the companies, vendor selection, construction, and the ongoing operations of the companies.  Since PG&E Corporation was not the primary beneficiary of any of these VIEs at June 30, 2014, it did not consolidate any of them.  On July 2, 2014, PG&E Corporation disposed of its interest in the tax equity agreements.  PG&E Corporation has no remaining commitment to fund these agreements.



 
11

 

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 net periodic benefit costs reflected in PG&E Corporation’s Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013 were as follows:

   
Pension Benefits
   
Other Benefits
 
   
Three Months Ended June 30,
 
(in millions)
 
2014
   
2013
   
2014
   
2013
 
Service cost for benefits earned
  $ 96     $ 115     $ 11     $ 13  
Interest cost
    173       156       19       18  
Expected return on plan assets
    (201 )     (163 )     (26 )     (20 )
Amortization of prior service cost
    5       5       5       5  
Amortization of net actuarial loss
    1       28       1       2  
Net periodic benefit cost
    74       141       10       18  
Less: transfer to regulatory account (1)
    9       (56 )     -       -  
Total
  $ 83     $ 85     $ 10     $ 18  
                                 
 (1) The Utility recorded these amounts to a regulatory account since they are probable of recovery from customers in future rates.

   
Pension Benefits
   
Other Benefits
 
   
Six Months Ended June 30,
 
(in millions)
 
2014
   
2013
   
2014
   
2013
 
Service cost for benefits earned
  $ 195     $ 230     $ 22     $ 26  
Interest cost
    346       312       38       37  
Expected return on plan assets
    (403 )     (325 )     (52 )     (40 )
Amortization of prior service cost
    10       10       11       11  
Amortization of net actuarial loss
    1       55       1       3  
Net periodic benefit cost
    149       282       20       37  
Less: transfer to regulatory account (1)
    19       (113 )     -       -  
Total
  $ 168     $ 169     $ 20     $ 37  
                                 
 (1) The Utility recorded these amounts to a regulatory account since they are probable of recovery from customers in future rates.

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


 
12

 
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

The changes, net of income tax, in PG&E Corporation’s accumulated other comprehensive income (loss) are summarized below:

   
Pension
   
Other
   
Other
       
   
Benefits
   
Benefits
   
Investments
   
Total
 
(in millions, net of income tax)
 
Three Months Ended June 30, 2014
 
Beginning balance
  $ (7 )   $ 15     $ 47     $ 55  
Other comprehensive income before reclassifications:
                               
      Gain on investments (net of taxes of $0, $0, and $3,
                               
      respectively)
    -       -       5       5  
Amounts reclassified from other comprehensive income:
                               
      Amortization of prior service cost (net of taxes of
                               
      $2, $2, and $0, respectively) (1)
    3       3       -       6  
      Amortization of net actuarial loss (net of taxes of
                               
      $0, $0, and $0, respectively) (1)
    1       1       -       2  
     Transfer to regulatory account (net of taxes of
                               
     $2, $2, and $0, respectively) (1)
    (4 )     (4 )     -       (8 )
     Realized gain on investments (net of taxes of
                               
     $0, $0, and $10, respectively)
    -       -       (16 )     (16 )
Net current period other comprehensive loss
    -       -       (11 )     (11 )
Ending balance
  $ (7 )   $ 15     $ 36     $ 44  
                                 
 (1) These components are included in the computation of net periodic pension and other postretirement benefit costs.  (See the “Pension and Other Postretirement Benefits” table above for additional details.)

   
Pension
   
Other
   
Other
       
   
Benefits
   
Benefits
   
Investments
   
Total
 
(in millions, net of income tax)
 
Three Months Ended June 30, 2013
 
Beginning balance
  $ (28 )   $ (73 )   $ 10     $ (91 )
Other comprehensive income before reclassifications:
                               
      Gain on investments (net of taxes of $0, $0, and $11,
                               
      respectively)
    -       -       16       16  
Amounts reclassified from other comprehensive income: (1)
                               
      Amortization of prior service cost (net of taxes of
                               
      $2, $2, and $0, respectively)
    3       3       -       6  
      Amortization of net actuarial loss (net of taxes of
                               
      $12, $1, and $0, respectively)
    16       1       -       17  
     Transfer to regulatory account (net of taxes of
                               
     $13, $0, and $0, respectively)
    (19 )     -       -       (19 )
Net current period other comprehensive income
    -       4       16       20  
Ending balance
  $ (28 )   $ (69 )   $ 26     $ (71 )
                                 
 (1) These components are included in the computation of net periodic pension and other postretirement benefit costs.  (See the “Pension and Other Postretirement Benefits” table above for additional details.)

 
13

 
 
   
Pension
   
Other
   
Other
       
   
Benefits
   
Benefits
   
Investments
   
Total
 
(in millions, net of income tax)
 
Six Months Ended June 30, 2014
 
Beginning balance
  $ (7 )   $ 15     $ 42     $ 50  
Other comprehensive income before reclassifications:
                               
      Gain on investments (net of taxes of $0, $0, and $7,
                               
      respectively)
    -       -       10       10  
Amounts reclassified from other comprehensive income:
                               
      Amortization of prior service cost (net of taxes of
                               
      $4, $4, and $0, respectively) (1)
    6       7       -       13  
      Amortization of net actuarial loss (net of taxes of
                               
      $0, $0, and $0, respectively) (1)
    1       1       -       2  
     Transfer to regulatory account (net of taxes of
                               
     $4, $4, and $0, respectively) (1)
    (7 )     (8 )     -       (15 )
     Realized gain on investments (net of taxes of
                               
     $0, $0, and $10, respectively)
    -       -       (16 )     (16 )
Net current period other comprehensive loss
    -       -       (6 )     (6 )
Ending balance
  $ (7 )   $ 15     $ 36     $ 44  
                                 
 (1) These components are included in the computation of net periodic pension and other postretirement benefit costs.  (See the “Pension and Other Postretirement Benefits” table above for additional details.)

   
Pension
   
Other
   
Other
       
   
Benefits
   
Benefits
   
Investments
   
Total
 
(in millions, net of income tax)
 
Six Months Ended June 30, 2013
 
Beginning balance
  $ (28 )   $ (77 )   $ 4     $ (101 )
Other comprehensive income before reclassifications:
                               
      Gain on investments (net of taxes of $0, $0, and $15,
                               
      respectively)
    -       -       22       22  
Amounts reclassified from other comprehensive income: (1)
                               
      Amortization of prior service cost (net of taxes of
                               
      $4, $5, and $0, respectively)
    6       6       -       12  
      Amortization of net actuarial loss (net of taxes of
                               
      $23, $1, and $0, respectively)
    32       2       -       34  
     Transfer to regulatory account (net of taxes of
                               
     $26, $0, and $0, respectively)
    (38 )     -       -       (38 )
Net current period other comprehensive income
    -       8       22       30  
Ending balance
  $ (28 )   $ (69 )   $ 26     $ (71 )
                                 
 (1) These components are included in the computation of net periodic pension and other postretirement benefit 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, with the exception of other investments which are held by PG&E Corporation.


 
14

 

Accounting Standards Issued But Not Yet Adopted

Revenue Recognition Standard

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which amends existing revenue recognition guidance.  The accounting standards update will be effective on January 1, 2017.  PG&E Corporation and the Utility are currently evaluating the impact the guidance will have on their consolidated financial statements and related disclosures.


NOTE 3: REGULATORY ASSETS, LIABILITIES, AND BALANCING ACCOUNTS

Regulatory Assets

Long-term regulatory assets are composed of the following:

   
Balance at
 
   
June 30,
   
December 31,
 
(in millions)
 
2014
   
2013
 
Pension benefits
  $ 1,415     $ 1,444  
Deferred income taxes
    1,932       1,835  
Utility retained generation
    479       503  
Environmental compliance costs
    599       628  
Price risk management
    83       106  
Electromechanical meters
    103       135  
Unamortized loss, net of gain, on reacquired debt
    124       135  
Other
    86       127  
Total long-term regulatory assets
  $ 4,821     $ 4,913  

Regulatory Liabilities

Long-term regulatory liabilities are composed of the following:

 
Balance at
 
 
June 30,
 
December 31,
 
(in millions)
2014
 
2013
 
Cost of removal obligations
  $ 3,978     $ 3,844  
Recoveries in excess of asset retirement obligations
    754       748  
Public purpose programs
    677       587  
Other
    557       481  
Total long-term regulatory liabilities
  $ 5,966     $ 5,660  

Regulatory Balancing Accounts
 
                The Utility’s recovery of revenue requirements and costs is generally decoupled from the volume of sales.  The Utility records (1) differences between the Utility’s authorized revenue requirement and actual customer billings, and (2) differences between incurred costs and customer billings.  To the extent these differences are probable of recovery or refund over the next 12 months, the Utility records a current regulatory balancing account receivable or payable.  Regulatory balancing accounts that the Utility does not expect to collect or refund over the next 12 months are included in other noncurrent assets – regulatory assets or noncurrent liabilities – regulatory liabilities, respectively, in the Condensed Consolidated Balance Sheets.

The Utility sells and delivers electricity and natural gas.  The Utility also administers public purpose programs, primarily related to customer energy efficiency programs.  The balancing accounts associated with these items will fluctuate during the year based on seasonal electric and gas usage and the timing of when costs are incurred and customer revenues are collected.

 
15

 
Current regulatory balancing accounts receivable and payable are composed of the following:
 
 
Receivable
 
 
Balance at
 
 
June 30,
 
December 31,
 
(in millions)
2014
 
2013
 
Electric distribution
  $ 455     $ 102  
Utility generation
    257       57  
Gas distribution
    154       70  
Energy procurement
    486       410  
Public purpose programs
    39       56  
Other
    354       429  
Total regulatory balancing accounts receivable
  $ 1,745     $ 1,124  


 
Payable
 
 
Balance at
 
 
June 30,
 
December 31,
 
(in millions)
2014
 
2013
 
Energy procurement
  $ 298     $ 298  
Public purpose programs
    199       171  
Other
    572       539  
Total regulatory balancing accounts payable
  $ 1,069     $ 1,008  

NOTE 4: DEBT

Senior Notes
 
                 In February 2014, the Utility issued $450 million principal amount of 3.75% Senior Notes due February 15, 2024 and $450 million principal amount of 4.75% Senior Notes due February 15, 2044.  The proceeds were used to repay the 4.80% Senior Notes, in the principal outstanding amount of $539 million, to fund capital expenditures, and for general corporate purposes.  In addition, in May 2014, the Utility issued $300 million principal amount of Floating Rate Senior Notes due May 11, 2015.  The proceeds were used for general corporate purposes, including the repayment of a portion of the Utility's outstanding commercial paper.
 
                 In February 2014, PG&E Corporation issued $350 million principal amount of 2.40% Senior Notes due March 1, 2019.  The proceeds were used to repay the 5.75% Senior Notes, in the principal outstanding amount of $350 million.

Revolving Credit Facilities and Commercial Paper Program
 
                 In April 2014, PG&E Corporation and the Utility each extended the termination dates of their existing revolving credit facilities by one year from April 1, 2018 to April 1, 2019.  PG&E Corporation and the Utility can issue commercial paper up to the maximum amounts of $300 million and $1.75 billion, respectively.  PG&E Corporation and the Utility treat the amount of outstanding commercial paper as a reduction to the amount available under their respective revolving credit facilities.

The following table summarizes PG&E Corporation’s and the Utility’s outstanding borrowings at June 30, 2014:

       
Letters of
             
 
Termination
Facility
 
Credit
     
Commercial
 
Facility
 
(in millions)
Date
Limit
 
Outstanding
 
Borrowings
 
Paper
 
Availability
 
PG&E Corporation
April 2019
  $ 300 (1)           $ -     $ -     $ 112     $ 188  
Utility
April 2019
    3,000 (2)             86