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Fair Value Measurements
12 Months Ended
Dec. 31, 2014
Fair Value Measurements
        
NOTE 10: 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  December 31, 2014
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market investments
$
94
 
$
-
 
$
-
 
$
-
 
$
94
Nuclear decommissioning trusts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Money market investments
 
17
 
 
-
 
 
-
 
 
-
 
 
17
  Global equity securities
 
1,585
 
 
13
 
 
-
 
 
-
 
 
1,598
  Fixed-income securities
 
741
 
 
389
 
 
-
 
 
-
 
 
1,130
Total nuclear decommissioning trusts (2)
 
2,343
 
 
402
 
 
-
 
 
-
 
 
2,745
Price risk management instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Note 9)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Electricity
 
-
 
 
17
 
 
232
 
 
2
 
 
251
  Gas
 
1
 
 
1
 
 
-
 
 
-
 
 
2
Total price risk management instruments
 
1
 
 
18
 
 
232
 
 
2
 
 
253
Rabbi trusts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Fixed-income securities
 
-
 
 
42
 
 
-
 
 
-
 
 
42
  Life insurance contracts
 
-
 
 
72
 
 
-
 
 
-
 
 
72
Total rabbi trusts
 
-
 
 
114
 
 
-
 
 
-
 
 
114
Long-term disability trust
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Money market investments
 
7
 
 
-
 
 
-
 
 
-
 
 
7
  Global equity securities
 
-
 
 
25
 
 
-
 
 
-
 
 
25
  Fixed-income securities
 
-
 
 
128
 
 
-
 
 
-
 
 
128
Total long-term disability trust
 
7
 
 
153
 
 
-
 
 
-
 
 
160
Other investments
 
33
 
 
-
 
 
-
 
 
-
 
 
33
Total assets
$
2,478
 
$
687
 
$
232
 
$
2
 
$
3,399
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price risk management instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Note 9)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Electricity
$
47
 
$
5
 
$
163
 
$
(52
$
163
  Gas
 
-
 
 
3
 
 
-
 
 
-
 
 
3
Total liabilities
$
47
 
$
8
 
$
163
 
$
(52)
 
$
166
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes the effect of the contractual ability to settle contracts under master netting agreements and margin cash collateral.
(2) Represents amount before deducting $324 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 9)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  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 9)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  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 year ended December 31, 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.
 
Global 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 9 above.)
 
 
 
Fair Value at
 
 
 
 
 
 
 
(in millions)
 
December 31, 2014
 
 
 
 
 
 
 
Fair Value Measurement
 
Assets
 
Liabilities
 
Valuation Technique
 
Unobservable Input
 
Range (1)
Congestion revenue rights
 
$
232
 
$
63
 
Market approach
 
CRR auction prices
 
$
(15.97) - 8.17
Power purchase agreements
 
$
-
 
$
100
 
Discounted cash flow
 
Forward prices
 
$
16.04 - 56.21
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 table presents the reconciliation for Level 3 price risk management instruments for the years ended December 31, 2014 and 2013, respectively:
 
 
Price Risk Management Instruments
(in millions)
2014
 
2013
Liability balance as of January 1
$
(30)
 
$
(79)
Realized and unrealized gains:
 
 
 
 
 
Included in regulatory assets and liabilities or balancing accounts (1)
 
99
 
 
49
Asset (liability) balance as of December 31
$
69
 
$
(30)
 
 
 
 
 
 
    (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.
 
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 December 31, 2014 and 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 December 31, 2014 and 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 December 31,
 
2014
 
2013
(in millions)
Carrying Amount
 
Level 2 Fair Value
 
Carrying Amount
 
Level 2 Fair Value
Debt (Note 4)
 
 
 
 
 
 
 
 
 
 
 
PG&E Corporation
$
350
 
$
352
 
$
350
 
$
354
Utility
 
13,778
 
 
15,851
 
 
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 December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trusts
 
 
 
 
 
 
 
 
 
 
 
  Money market investments
$
17
 
$
-
 
$
-
 
$
17
  Global equity securities
 
520
 
 
1,087
 
 
(9
 
1,598
  Fixed-income securities
 
1,059
 
 
75
 
 
(4
 
1,130
Total nuclear decommissioning trusts (1)
 
1,596
 
 
1,162
 
 
(13
 
2,745
Other investments
 
5
 
 
28
 
 
-
 
 
33
Total
$
1,601
 
$
1,190
 
$
(13)
 
$
2,778
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)
$
1,569
 
$
1,178
 
$
(8)
 
$
2,739
 
 
 
 
 
 
 
 
 
 
 
 
 (1) Represents amounts before deducting $324 million and $313 million at December 31, 2014 and 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)
December 31, 2014
Less than 1 year
$
17
1-5 years
 
466
5-10 years
 
263
More than 10 years
 
384
Total maturities of debt securities
$
1,130
 
The following table provides a summary of activity for the debt and equity securities:
 
 
2014
 
2013
 
2012
(in millions)
 
 
 
 
 
 
 
 
Proceeds from sales and maturities of nuclear decommissioning trust
 
 
 
 
 
 
 
 
investments
$
1,336
 
$
1,619
 
$
1,133
Gross realized gains on sales of securities held as available-for-sale
 
118
 
 
94
 
 
19
Gross realized losses on sales of securities held as available-for-sale
 
(12
 
(13
 
(17
)