DERIVATIVES

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Use of Derivative Instruments

The Utility is exposed to commodity price risk as a result of its electricity and natural gas procurement activities. Procurement costs are recovered through customer rates. The Utility uses both derivative and non-derivative contracts to manage volatility in customer rates due to fluctuating commodity prices. Derivatives include contracts, such as power purchase agreements, forwards, futures, swaps, options, and CRRs that are traded either on an exchange or over-the-counter. By order dated April 8, 2019, the Bankruptcy Court authorized the Utility to continue these programs in the ordinary course of business in a manner consistent with its pre-petition practices.

Derivatives are presented in the Utility’s Condensed Consolidated Balance Sheets recorded at fair value and on a net basis in accordance with master netting arrangements for each counter-party. The fair value of derivative instruments is further offset by cash collateral paid or received where the right of offset and the intention to offset exist.

Price risk management activities that meet the definition of derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets. These instruments are not held for speculative purposes and are subject to certain regulatory requirements. The Utility expects to fully recover in rates all costs related to derivatives under the applicable ratemaking mechanism in place as long as the Utility’s price risk management activities are carried out in accordance with CPUC directives. Therefore, all unrealized gains and losses associated with the change in fair value of these derivatives are deferred and recorded within the Utility’s regulatory assets and liabilities on the Condensed Consolidated Balance Sheets. Net realized gains or losses on commodity derivatives are recorded in the cost of electricity or the cost of natural gas with corresponding increases or decreases to regulatory balancing accounts for recovery from or refund to customers.

The Utility elects the normal purchase and sale exception for eligible derivatives. Eligible derivatives are those that require physical delivery in quantities that are expected to be used by the Utility over a reasonable period in the normal course of business, and do not contain pricing provisions unrelated to the commodity delivered. These items are not reflected in the Condensed Consolidated Balance Sheets at fair value.

Volume of Derivative Activity

The volumes of the Utility’s outstanding derivatives were as follows:


		Contract Volume at
Underlying Product	Instruments	September 30, 2019	December 31, 2018
Natural Gas ⁽¹⁾ (MMBtus ⁽²⁾)	Forwards, Futures and Swaps	186,320,892	177,750,349
	Options	32,310,000	13,735,405
Electricity (Megawatt-hours)	Forwards, Futures and Swaps	8,270,404	3,833,490
	Congestion Revenue Rights ⁽³⁾	316,273,308	340,783,089

⁽¹⁾ Amounts shown are for the combined positions of the electric fuels and core gas supply portfolios.

⁽²⁾ Million British Thermal Units.

⁽³⁾ CRRs are financial instruments that enable the holders to manage variability in electric energy congestion charges due to transmission grid limitations.

Presentation of Derivative Instruments in the Financial Statements

At September 30, 2019, the Utility’s outstanding derivative balances were as follows:


	Commodity Risk
(in millions)	Gross Derivative Balance		Netting		Cash Collateral		Total Derivative Balance
Current assets – other	$	46	$	—	$	41	$	87
Other noncurrent assets – other	170		—		—		170
Current liabilities – other	(29)		—		3		(26)
Noncurrent liabilities – other	(140)		—		1		(139)
Total commodity risk	$	47	$	—	$	45	$	92

At December 31, 2018, the Utility’s outstanding derivative balances were as follows:


	Commodity Risk
(in millions)	Gross Derivative Balance		Netting		Cash Collateral		Total Derivative Balance
Current assets – other	$	44	$	(1)	$	89	$	132
Other noncurrent assets – other	165		—		—		165
Current liabilities – other	(29)		1		7		(21)
Noncurrent liabilities – other	(90)		—		2		(88)
Total commodity risk	$	90	$	—	$	98	$	188

Cash inflows and outflows associated with derivatives are included in operating cash flows on the Utility’s Condensed Consolidated Statements of Cash Flows.

The majority of the Utility’s derivatives instruments, including power purchase agreements, contain collateral posting provisions tied to the Utility’s credit rating from each of the major credit rating agencies, also known as a credit-risk-related contingent feature. During the first quarter of 2019, multiple credit rating agencies downgraded the Utility’s credit ratings below investment grade, which resulted in the Utility posting additional collateral. As of September 30, 2019, the Utility satisfied or has otherwise addressed its obligations related to the credit-risk related contingency features.