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Fair Value Measurements

9 Months Ended

Sep. 30, 2013

NOTE 8: FAIR VALUE MEASUREMENTS

PG&E Corporation and the Utility measure their cash equivalents, trust assets, price risk management instruments, and other investments 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.

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 and other investments are held by PG&E Corporation and not the Utility):

	Fair Value Measurements
	At September 30, 2013
(in millions)	Level 1		Level 2		Level 3		Netting ⁽¹⁾			Total
Assets:
Money market investments	$	214	$	-	$	-	$	-		$	214
Nuclear decommissioning trusts
Money market investments		26		-		-		-			26
U.S. equity securities		1,009		10		-		-			1,019
Non-U.S. equity securities		435		-		-		-			435
U.S. government and agency securities		782		148		-		-			930
Municipal securities		-		26		-		-			26
Other fixed-income securities		-		128		-		-			128
Total nuclear decommissioning trusts ⁽²⁾		2,252		312		-		-			2,564
Price risk management instruments
(Note 7)
Electricity		1		27		65		2			95
Gas		-		4		-		-			4
Total price risk management instruments		1		31		65		2			99
Rabbi trusts
Fixed-income securities		-		30		-		-			30
Life insurance contracts		-		70		-		-			70
Total rabbi trusts		-		100		-		-			100
Long-term disability trust
Money market investments		5		-		-		-			5
U.S. equity securities		-		11		-		-			11
Non-U.S. equity securities		-		10		-		-			10
Fixed-income securities		-		116		-		-			116
Total long-term disability trust		5		137		-		-			142
Other investments		51		-		-		-			51
Total assets	$	2,523	$	580	$	65	$	2		$	3,170
Liabilities:
Price risk management instruments
(Note 7)
Electricity	$	53	$	100	$	147	$	(140	)	$	160
Gas		6		5		-		(6	)		5
Total liabilities	$	59	$	105	$	147	$	(146)		$	165

⁽¹⁾ Includes the effect of the contractual ability to settle contracts under master netting agreements and margin cash collateral.

⁽²⁾ Represents amount before deducting $292 million of deferred taxes primarily related to appreciation of investment value.

	Fair Value Measurements
	At December 31, 2012
(in millions)	Level 1		Level 2		Level 3		Netting ⁽¹⁾			Total
Assets:
Money market investments	$	209	$	-	$	-	$	-		$	209
Nuclear decommissioning trusts
Money market investments		21		-		-		-			21
U.S. equity securities		940		9		-		-			949
Non-U.S. equity securities		379		-		-		-			379
U.S. government and agency securities		681		139		-		-			820
Municipal securities		-		59		-		-			59
Other fixed-income securities		-		173		-		-			173
Total nuclear decommissioning trusts ⁽²⁾		2,021		380		-		-			2,401
Price risk management instruments
(Note 7)
Electricity		1		60		80		6			147
Gas		-		5		1		(6	)		-
Total price risk management instruments		1		65		81		-			147
Rabbi trusts
Fixed-income securities		-		30		-		-			30
Life insurance contracts		-		72		-		-			72
Total rabbi trusts		-		102		-		-			102
Long-term disability trust
Money market investments		10		-		-		-			10
U.S. equity securities		-		14		-		-			14
Non-U.S. equity securities		-		11		-		-			11
Fixed-income securities		-		136		-		-			136
Total long-term disability trust		10		161		-		-			171
Total assets	$	2,241	$	708	$	81	$	-		$	3,030
Liabilities:
Price risk management instruments
(Note 7)
Electricity	$	155	$	144	$	160	$	(156	)	$	303
Gas		8		9		-		(9	)		8
Total liabilities	$	163	$	153	$	160	$	(165)		$	311

⁽¹⁾ Includes the effect of the contractual ability to settle contracts under master netting agreements and margin cash collateral.

⁽²⁾ Represents amount before deducting $240 million of deferred taxes primarily related to appreciation of investment value.

Valuation Techniques

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

Money Market Investments

PG&E Corporation and the Utility invest in money market funds that seek to maintain a stable net asset value. These funds invest in high quality, short-term, diversified money market instruments, such as U.S. Treasury bills, U.S. agency securities, certificates of deposit, and commercial paper with a maximum weighted average maturity of 60 days or less. PG&E Corporation's and the Utility's investments in these money market funds are valued using unadjusted prices for identical assets in an active market and are thus classified as Level 1. Money market funds are recorded as cash and cash equivalents in the Condensed Consolidated Balance Sheets.

Trust Assets

The assets held by the nuclear decommissioning trusts, the rabbi trusts related to the non-qualified deferred compensation plans, and the long-term disability trust are composed primarily of equity securities, debt securities, and life insurance policies. In general, investments held in the trusts are exposed to various risks, such as interest rate, credit, and market volatility risks.

Equity securities primarily include investments in common stock, which are valued based on unadjusted prices for identical securities in active markets and are classified as Level 1. Equity securities also include commingled funds, that are valued using a net asset value per share and are composed of equity securities traded publicly on exchanges across multiple industry sectors in the U.S. and other regions of the world and are classified as Level 2. Price quotes for the assets held by these funds are readily observable and available.

Debt securities are primarily composed of U.S. government and agency securities, municipal securities, and other fixed-income securities, including corporate debt securities. U.S. government and agency securities primarily consist of U.S. Treasury securities that are classified as Level 1 because the fair value is determined by observable market prices in active markets. A market approach is generally used to estimate the fair value of debt securities classified as Level 2. Under a market approach, fair values are determined based on evaluated pricing data, such as broker quotes, for similar securities adjusted for observable differences. Significant inputs used in the valuation model generally include benchmark yield curves and issuer spreads. The external credit ratings, coupon rate, and maturity of each security are considered in the valuation model, as applicable.

Price Risk Management Instruments

Price risk management instruments include physical and financial derivative contracts, such as power purchase agreements, forwards, swaps, options, and CRRs that are traded either on an exchange or over-the-counter.

Power purchase agreements, forwards, and swaps are valued using a discounted cash flow model. Exchange-traded forwards and swaps that are valued using observable market forward prices for the underlying commodity are classified as Level 1. Over-the-counter forwards and swaps that are identical to exchange-traded forwards and swaps or are valued using forward prices from broker quotes that are corroborated with market data are classified as Level 2. Exchange-traded options are valued using observable market data and market-corroborated data and are classified as Level 2. Long-dated power purchase agreements that are valued using significant unobservable data are classified as Level 3. These Level 3 contracts are valued using either estimated basis adjustments from liquid trading points or techniques, including extrapolation from observable prices, when a contract term extends beyond a period for which market data is available.

The Utility holds CRRs to hedge the financial risk of CAISO-imposed congestion charges in the day-ahead market. CRRs are valued based on prices observed in the CAISO auction, which are discounted at the risk-free rate. Limited market data is available in the CAISO auction and between auction dates; therefore, the Utility uses models to forecast CRR prices for those periods not covered in the auctions. CRRs are classified as Level 3.

Other Investments

Other investments in common stock are valued based on unadjusted prices for the investments and are actively traded on public exchanges. These investments are therefore considered Level 1 assets.

Transfers between Levels

PG&E Corporation and the Utility recognize transfers between levels in the fair value hierarchy as of the end of the reporting period. There were no transfers between levels for the three and nine months ended September 30, 2013.

Level 3 Measurements and Sensitivity Analysis

The Utility's market and credit risk management function is responsible for determining the fair value of the Utility's price risk management derivatives. Market and credit risk management reports to the Chief Risk Officer of the Utility. Market and credit risk management utilizes models to derive pricing inputs for the valuation of the Utility's Level 3 instruments. These models use pricing inputs from brokers and historical data. The market and credit risk management function and the Utility's finance function collaborate to determine the appropriate fair value methodologies and classification for each derivative. Inputs used and the fair value of Level 3 instruments are reviewed period-over-period and compared with market conditions to determine reasonableness. Valuation models and techniques are reviewed periodically.

CRRs and power purchase agreements are valued using historical prices or significant unobservable inputs derived from internally developed models. Historical prices include CRR auction prices. Unobservable inputs include forward electricity prices. Significant increases or decreases in any of those inputs would result in a significantly higher or lower fair value, respectively. All reasonable costs related to Level 3 instruments are expected to be recoverable through customer rates; therefore, there is no impact to net income resulting from changes in the fair value of these instruments. (See Note 7 above.)

	Fair Value at
(in millions)	September 30, 2013
Fair Value Measurement	Assets		Liabilities		Valuation Technique	Unobservable Input	Range ⁽¹⁾
Congestion revenue rights	$	65	$	13	Market approach	CRR auction prices	$	(7.58) - 7.93
Power purchase agreements	$	-	$	134	Discounted cash flow	Forward prices	$	10.36 - 54.86

⁽¹⁾ Represents price per megawatt-hour

	Fair Value at
(in millions)	December 31, 2012
Fair Value Measurement	Assets		Liabilities		Valuation Technique	Unobservable Input	Range ⁽¹⁾
Congestion revenue rights	$	80	$	16	Market approach	CRR auction prices	$	(9.04) - 55.15
Power purchase agreements	$	-	$	145	Discounted cash flow	Forward prices	$	8.59 - 62.90

⁽¹⁾Represents price per megawatt-hour

Level 3 Reconciliation

The following tables present the reconciliation for Level 3 price risk management instruments for the three and nine months ended September 30, 2013 and 2012:

	Price Risk Management Instruments
(in millions)	2013			2012
Liability balance as of July 1	$	(76)		$	(80)
Realized and unrealized gains (losses):
Included in regulatory assets and liabilities or balancing accounts ⁽¹⁾		(6	)		(4	)
Liability balance as of September 30	$	(82)		$	(84)

⁽¹⁾ The costs related to price risk management activities are recoverable through customer rates, therefore, balancing account revenue is recorded for amounts settled and purchased and there is no impact to net income. Unrealized gains and losses are deferred in regulatory liabilities and assets.

	Price Risk Management Instruments
(in millions)	2013			2012
Liability balance as of January 1	$	(79)		$	(74)
Realized and unrealized gains (losses):
Included in regulatory assets and liabilities or balancing accounts ⁽¹⁾		(3	)		(10	)
Liability balance as of September 30	$	(82)		$	(84)

Financial Instruments

PG&E Corporation and the Utility use the following methods and assumptions in estimating fair value for financial instruments:

The fair values of cash, restricted cash, net accounts receivable, short-term borrowings, accounts payable, customer deposits, and the Utility's variable rate pollution control bond loan agreements approximate their carrying values at September 30, 2013 and December 31, 2012, as they are short-term in nature or have interest rates that reset daily.

The fair values of the Utility's fixed-rate senior notes and fixed-rate pollution control bonds and PG&E Corporation's fixed-rate senior notes were based on quoted market prices at September 30, 2013 and December 31, 2012.

The carrying amount and fair value of PG&E Corporation's and the Utility's debt instruments were as follows (the table below excludes financial instruments with carrying values that approximate their fair values):

	September 30, 2013				December 31, 2012
(in millions)	Carrying Amount		Level 2 Fair Value		Carrying Amount		Level 2 Fair Value
Debt (Note 4)
PG&E Corporation	$	350	$	359	$	349	$	371
Utility		11,934		12,750		11,645		13,946

Available for Sale Investments

The following table provides a summary of available-for-sale investments:

				Total		Total
	Amortized			Unrealized		Unrealized			Total Fair
(in millions)	Cost			Gains		Losses			Value
As of September 30, 2013
Nuclear decommissioning trusts
Money market investments	$	26	$	-	$	-		$	26
Equity securities
U.S.		267		753		(1	)		1,019
Non-U.S.		205		230		-			435
Debt securities
U.S. government and agency securities		870		63		(3	)		930
Municipal securities		24		2		-			26
Other fixed-income securities		128		1		(1	)		128
Total nuclear decommissioning trusts ⁽¹⁾		1,520		1,049		(5	)		2,564
Other investments		13		38		-			51
Total	$	1,533	$	1,087	$	(5)		$	2,615
As of December 31, 2012
Nuclear decommissioning trusts
Money market investments	$	21	$	-	$	-		$	21
Equity securities
U.S.		331		618		-			949
Non-U.S.		199		181		(1	)		379
Debt securities
U.S. government and agency securities		723		97		-			820
Municipal securities		56		4		(1	)		59
Other fixed-income securities		168		5		-			173
Total ⁽¹⁾	$	1,498	$	905	$	(2)		$	2,401

⁽¹⁾ Represents amounts before deducting $292 million and $240 million at September 30, 2013 and December 31, 2012, respectively, of deferred taxes primarily related to appreciation of investment value.

The fair value of debt securities by contractual maturity is as follows:

	As of
(in millions)	September 30, 2013
Less than 1 year	$	17
1-5 years		512
5-10 years		241
More than 10 years		314
Total maturities of debt securities	$	1,084

The following table provides a summary of activity for the debt and equity securities:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012				2013		2012
(in millions)
Proceeds from sales and maturities of nuclear decommissioning
trust investments	$	357		$	237		$	1,152		$	903
Gross realized gains on sales of securities held as available-for-sale		7			3			44			17
Gross realized losses on sales of securities held as available-for-sale		(4	)		(6	)		(10	)		(13	)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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