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Income Taxes

12 Months Ended

Dec. 31, 2014

NOTE 8: INCOME TAXES

PG&E Corporation and the Utility use the liability method of accounting for income taxes. The income tax provision includes current and deferred income taxes resulting from operations during the year. PG&E Corporation and the Utility estimate current period tax expense in addition to calculating deferred tax assets and liabilities. Deferred tax assets and liabilities result from temporary tax and accounting timing differences, such as those arising from depreciation expense.

PG&E Corporation and the Utility recognize a tax benefit if it is more likely than not that a tax position taken or expected to be taken in a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50% likely of being realized upon settlement. As such, the difference between a tax position taken or expected to be taken in a tax return in future periods and the benefit recognized and measured pursuant to this guidance represents an unrecognized tax benefit.

Investment tax credits are deferred and amortized to income over time. PG&E Corporation amortizes its investment tax credits over the projected investment recovery period. The Utility amortizes its investment tax credits over the life of the related property in accordance with regulatory treatment.

PG&E Corporation files a consolidated U.S. federal income tax return that includes the Utility and domestic subsidiaries in which its ownership is 80% or more. PG&E Corporation files a combined state income tax return in California. PG&E Corporation and the Utility are parties to a tax-sharing agreement under which the Utility determines its income tax provision (benefit) on a stand-alone basis.

The significant components of income tax provision (benefit) by taxing jurisdiction were as follows:

	PG&E Corporation									Utility
	Year Ended December 31,
(in millions)	2014			2013			2012			2014			2013			2012
Current:
Federal	$	(84	)	$	(218	)	$	(74	)	$	(84	)	$	(222	)	$	(52	)
State		(41	)		(26	)		33			(29	)		(23	)		41
Deferred:
Federal		396			552			374			426			604			404
State		78			(35	)		(92	)		75			(28	)		(91	)
Tax credits		(4	)		(5	)		(4	)		(4	)		(5	)		(4	)
Income tax provision	$	345		$	268		$	237		$	384		$	326		$	298

The following table describes net deferred income tax liabilities:

	PG&E Corporation						Utility
	Year Ended December 31,
(in millions)	2014			2013			2014			2013
Deferred income tax assets:
Customer advances for construction	$	88		$	90		$	88		$	90
Reserve for damages		137			161			137			161
Environmental reserve		111			152			111			152
Compensation		107			167			36			102
Net operating loss carryforward		1,177			890			946			670
GHG allowances		56			108			56			108
Other		74			135			100			128
Total deferred income tax assets	$	1,750		$	1,703		$	1,474		$	1,411
Deferred income tax liabilities:
Regulatory balancing accounts	$	512		$	261		$	512		$	261
Property related basis differences		8,683			8,048			8,666			8,038
Income tax regulatory asset ⁽¹⁾		974			748			974			748
Other		88			151			86			86
Total deferred income tax liabilities	$	10,257		$	9,208		$	10,238		$	9,133
Total net deferred income tax liabilities	$	8,507		$	7,505		$	8,764		$	7,722
Classification of net deferred income tax liabilities:
Included in current liabilities (assets)	$	(6	)	$	(318	)	$	(9	)	$	(320	)
Included in noncurrent liabilities		8,513			7,823			8,773			8,042
Total net deferred income tax liabilities	$	8,507		$	7,505		$	8,764		$	7,722

⁽¹⁾ Represents the deferred income tax component of the cumulative differences between amounts recognized for ratemaking purposes and amounts recognized in accordance with GAAP. (See Note 3 above.)

The following table reconciles income tax expense at the federal statutory rate to the income tax provision:

	PG&E Corporation						Utility
	Year Ended December 31,
	2014		2013		2012		2014		2013		2012
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
Increase (decrease) in income
tax rate resulting from:
State income tax (net of
federal benefit) ⁽¹⁾	1.4		(3.1	)	(3.9	)	1.6		(2.2	)	(3.0	)
Effect of regulatory treatment
of fixed asset differences ⁽²⁾	(15.0	)	(4.2	)	(4.1	)	(14.7	)	(3.8	)	(3.9	)
Tax credits	(0.7	)	(0.4	)	(0.6	)	(0.7	)	(0.4	)	(0.6	)
Benefit of loss carryback	(0.8	)	(1.1	)	(0.7	)	(0.8	)	(1.0	)	(0.4	)
Non deductible penalties	0.3		0.8		0.6		0.3		0.7		0.5
Other, net	(0.8	)	(2.2	)	(3.8	)	0.4		(0.9	)	(0.8	)
Effective tax rate	19.4	%	24.8	%	22.5	%	21.1	%	27.4	%	26.8	%

⁽¹⁾ Includes the effect of state flow-through ratemaking treatment.

⁽²⁾ Represents effect of federal flow-through ratemaking treatment including those deductions related to repairs and certain other property-related costs discussed below in the “2014 GRC Impact” section.

Unrecognized tax benefits

The following table reconciles the changes in unrecognized tax benefits:

	PG&E Corporation									Utility
	2014			2013			2012			2014			2013			2012
(in millions)
Balance at beginning of year	$	666		$	581		$	506		$	660		$	575		$	503
Additions for tax position taken
during a prior year		7			12			32			7			12			26
Reductions for tax position
taken during a prior year		(9	)		(6	)		(13	)		(9	)		(6	)		(10	)
Additions for tax position
taken during the current year		61			79			67			61			79			67
Settlements		(12	)		-			(11	)		(12	)		-			(11	)
Balance at end of year	$	713		$	666		$	581		$	707		$	660		$	575

The component of unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2014 for PG&E Corporation and the Utility was $20 million, with the remaining balance representing the potential deferral of taxes to later years.

PG&E Corporation's and the Utility's unrecognized tax benefits may change significantly within the next 12 months depending on the IRS guidance that is issued and the resolution of the audits related to the 2011, 2012, and 2013 tax returns (see “2014 GRC impact” below). As of December 31, 2014, it is reasonably possible that unrecognized tax benefits will decrease by approximately $330 million within the next 12 months, and most of this decrease would not impact net income.

Interest income, interest expense and penalties associated with income taxes are reflected in income tax expense on the Consolidated Statements of Income. For the years ended December 31, 2014, 2013, and 2012, these amounts were immaterial.

2014 GRC impact

The 2014 GRC decision authorized revenue requirements that reflect flow-through ratemaking for temporary income tax differences attributable to repair costs and certain other property-related costs for federal tax purposes. For these temporary differences, PG&E Corporation and the Utility recognize the deferred tax impact in the current period and record offsetting regulatory assets or liabilities. Therefore, PG&E Corporation's and the Utility's effective income tax rates are impacted as these differences arise and reverse. PG&E Corporation and the Utility recognize such differences as regulatory assets or liabilities as it is probable that these amounts will be recovered from or returned to customers in future rates. In addition, recent guidance from the IRS allowed the Utility to deduct more repair costs than previously forecasted in the GRC. For the year ended December 31, 2014, the Utility recognized a reduction in income tax expense of $235 million consistent with a lower revenue requirement in the 2014 GRC and IRS guidance.

IRS settlements and years that remain subject to examination

PG&E Corporation participates in the Compliance Assurance Process, a real-time IRS audit intended to expedite resolution of tax matters. The Compliance Assurance Process audit culminates with a letter from the IRS indicating its acceptance of the return.

The IRS is currently reviewing several matters in the 2011, 2012, and 2013 tax returns. The most significant relates to a 2011 accounting method change to adopt guidance issued by the IRS in determining which repair costs are deductible for the electric transmission and distribution businesses. PG&E Corporation and the Utility expect that the IRS will complete the review of the deductible repair costs for the electric transmission and distribution businesses in 2015. The IRS is also expected to issue guidance during 2015 that determines which repair costs are deductible for the natural gas transmission and distribution businesses.

The Tax Increase Prevention Act, signed into law on December 19, 2014, extended 50% bonus federal tax depreciation on qualified property placed into service in 2014.

Carryforwards

As of December 31, 2014, PG&E Corporation had approximatelyError! Bookmark not defined. $4.1 billion of federal net operating loss carryforwards and $77 million of tax credit carryforwards, which will expire between 2029 and 2034. In addition, PG&E Corporation had approximately $219 million of loss carryforwards related to charitable contributions, which will expire between 2015 and 2019. PG&E Corporation had $123 million of California net operating loss carryforwards which will expire between 2033 and 2034 and $30 million of California credit carryforwards, some of which will expire in 2024 and others which will carryforward indefinitely. PG&E Corporation believes it is more likely than not the tax benefits associated with the federal net operating loss, charitable contributions, and tax credits can be realized within the carryforward periods, therefore no valuation allowance was recognized as of December 31, 2014. As of December 31, 2014, PG&E Corporation had approximately $24 million of federal net operating loss carryforwards related to the tax benefit on employee stock plans that would be recorded in additional paid-in capital when used.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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