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Fair Value Measurements

9 Months Ended

Sep. 30, 2014

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. A three-tier fair value hierarchy is established that prioritizes the inputs to valuation methodologies used to measure 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, 2014
(in millions)	Level 1		Level 2		Level 3		Netting ⁽¹⁾			Total
Assets:
Money market investments	$	53	$	-	$	-	$	-		$	53
Nuclear decommissioning trusts
Money market investments		16		-		-		-			16
U.S. equity securities		1,118		12		-		-			1,130
Non-U.S. equity securities		432		1		-		-			433
U.S. government and agency securities		745		164		-		-			909
Municipal securities		-		54		-		-			54
Other fixed-income securities		-		163		-		-			163
Total nuclear decommissioning trusts ⁽²⁾		2,311		394		-		-			2,705
Price risk management instruments
(Note 7)
Electricity		1		29		95		5			130
Gas		3		4		-		-			7
Total price risk management instruments		4		33		95		5			137
Rabbi trusts
Fixed-income securities		-		41		-		-			41
Life insurance contracts		-		71		-		-			71
Total rabbi trusts		-		112		-		-			112
Long-term disability trust
Money market investments		4		-		-		-			4
U.S. equity securities		-		9		-		-			9
Non-U.S. equity securities		-		12		-		-			12
Fixed-income securities		-		107		-		-			107
Total long-term disability trust		4		128		-		-			132
Other investments		36		-		-		-			36
Total assets	$	2,408	$	667	$	95	$	5		$	3,175
Liabilities:
Price risk management instruments
(Note 7)
Electricity	$	9	$	17	$	115	$	(16	)	$	125
Gas		3		-		-		-			3
Total liabilities	$	12	$	17	$	115	$	(16)		$	128

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

⁽²⁾ Represents amount before deducting $306 million, primarily related to deferred taxes on appreciation of investment value.

	Fair Value Measurements
	At December 31, 2013
(in millions)	Level 1		Level 2		Level 3		Netting ⁽¹⁾			Total
Assets:
Money market investments	$	226	$	-	$	-	$	-		$	226
Nuclear decommissioning trusts
Money market investments		38		-		-		-			38
U.S. equity securities		1,046		11		-		-			1,057
Non-U.S. equity securities		457		-		-		-			457
U.S. government and agency securities		760		156		-		-			916
Municipal securities		-		25		-		-			25
Other fixed-income securities		-		162		-		-			162
Total nuclear decommissioning trusts ⁽²⁾		2,301		354		-		-			2,655
Price risk management instruments
(Note 7)
Electricity		2		27		107		3			139
Gas		-		5		-		(1	)		4
Total price risk management instruments		2		32		107		2			143
Rabbi trusts
Fixed-income securities		-		39		-		-			39
Life insurance contracts		-		70		-		-			70
Total rabbi trusts		-		109		-		-			109
Long-term disability trust
Money market investments		9		-		-		-			9
U.S. equity securities		-		14		-		-			14
Non-U.S. equity securities		-		12		-		-			12
Fixed-income securities		-		122		-		-			122
Total long-term disability trust		9		148		-		-			157
Other investments		84		-		-		-			84
Total assets	$	2,622	$	643	$	107	$	2		$	3,374
Liabilities:
Price risk management instruments
(Note 7)
Electricity	$	19	$	72	$	137	$	(84	)	$	144
Gas		1		3		-		(1	)		3
Total liabilities	$	20	$	75	$	137	$	(85)		$	147

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

⁽²⁾ Represents amount before deducting $313 million, primarily related to deferred taxes on 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. Investments, primarily consisting of equity securities, that are valued using a net asset value per share can be redeemed quarterly with notice not to exceed 90 days. Equity investments valued at net asset value per share utilize investment strategies aimed at matching the performance of indexed funds. Transfers between levels in the fair value hierarchy are recognized as of the end of the reporting period. There were no material transfers between any levels for the nine months ended September 30, 2014 and 2013.

Trust Assets

Nuclear decommissioning trust assets and other trust assets 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 that are valued based on quoted prices in active markets and are classified as Level 1. Equity securities also include commingled funds that are composed of equity securities traded publicly on exchanges across multiple industry sectors in the U.S. and other regions of the world. Investments in these funds are classified as Level 2 because price quotes 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 using 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. Market and credit risk management utilizes models to derive pricing inputs for the valuation of the Utility's Level 3 instruments using pricing inputs from brokers and historical data.

The Utility holds CRRs to hedge the financial risk of CAISO-imposed congestion charges in the day-ahead market. CRRs are classified as Level 3 and are valued based on CRR auction prices, including historical prices. 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.

Level 3 Measurements and Sensitivity Analysis

The Utility's market and credit risk management function, which reports to the Chief Risk Officer of the Utility, is responsible for determining the fair value of the Utility's price risk management derivatives. The Utility's finance and risk management functions 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.

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, 2014
Fair Value Measurement	Assets		Liabilities		Valuation Technique	Unobservable Input	Range ⁽¹⁾
Congestion revenue rights	$	95	$	28	Market approach	CRR auction prices	$	(19.16) - 12.04
Power purchase agreements	$	-	$	87	Discounted cash flow	Forward prices	$	22.54 - 63.45

⁽¹⁾ Represents price per megawatt-hour

	Fair Value at
(in millions)	December 31, 2013
Fair Value Measurement	Assets		Liabilities		Valuation Technique	Unobservable Input	Range ⁽¹⁾
Congestion revenue rights	$	107	$	32	Market approach	CRR auction prices	$	(6.47) - 12.04
Power purchase agreements	$	-	$	105	Discounted cash flow	Forward prices	$	23.43 - 51.75

⁽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, 2014 and 2013:

	Price Risk Management Instruments
(in millions)	2014			2013
Liability balance as of July 1	$	(11)		$	(76)
Net realized and unrealized gains:
Included in regulatory assets and liabilities or balancing accounts ⁽¹⁾		(9	)		(6	)
Liability balance as of September 30	$	(20)		$	(82)

⁽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)	2014		2013
Liability balance as of January 1	$	(30)	$	(79)
Realized and unrealized gains (losses):
Included in regulatory assets and liabilities or balancing accounts ⁽¹⁾		10		(3	)
Liability balance as of September 30	$	(20)	$	(82)

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, floating rate senior notes, and the Utility's variable rate pollution control bond loan agreements approximate their carrying values at September 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013.

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):

	At September 30, 2014				At December 31, 2013
(in millions)	Carrying Amount		Level 2 Fair Value		Carrying Amount		Level 2 Fair Value
PG&E Corporation	$	349	$	351	$	350	$	354
Utility		13,283		14,992		12,334		13,444

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, 2014
Nuclear decommissioning trusts
Money market investments	$	16	$	-	$	-		$	16
Equity securities
U.S.		269		863		(2	)		1,130
Non-U.S.		256		183		(6	)		433
Debt securities
U.S. government and agency securities		855		57		(3	)		909
Municipal securities		50		4		-			54
Other fixed-income securities		163		1		(1	)		163
Total nuclear decommissioning trusts ⁽¹⁾		1,609		1,108		(12	)		2,705
Other investments		5		31		-			36
Total	$	1,614	$	1,139	$	(12)		$	2,741
As of December 31, 2013
Nuclear decommissioning trusts
Money market investments	$	38	$	-	$	-		$	38
Equity securities
U.S.		246		811		-			1,057
Non-U.S.		215		242		-			457
Debt securities
U.S. government and agency securities		870		51		(5	)		916
Municipal securities		24		2		(1	)		25
Other fixed-income securities		163		1		(2	)		162
Total nuclear decommissioning trusts ⁽¹⁾		1,556		1,107		(8	)		2,655
Other investments		13		71		-			84
Total	$	1,569	$	1,178	$	(8)		$	2,739

⁽¹⁾ Represents amounts before deducting $306 million and $313 million at September 30, 2014 and December 31, 2013, respectively, primarily related to deferred taxes on appreciation of investment value.

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

	As of
(in millions)	September 30, 2014
Less than 1 year	$	27
1-5 years		483
5-10 years		257
More than 10 years		359
Total maturities of debt securities	$	1,126

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2014		2013				2014		2013
(in millions)
Proceeds from sales and maturities of nuclear decommissioning
trust investments	$	182	$	357		$	1,059		$	1,152
Gross realized gains on securities held as available-for-sale		30		7			114			44
Gross realized losses on securities held as available-for-sale		-		(4	)		(3	)		(10	)

- 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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