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Fair Value Measurements
3 Months Ended
Mar. 31, 2012
Fair Value Measurements

NOTE 8: FAIR VALUE MEASUREMENTS

PG&E Corporation and the Utility measure their cash equivalents, trust assets, and price risk management instruments 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 (money market investments and assets held in rabbi trusts are held by PG&E Corporation and not the Utility):

 

     Fair Value Measurements  
     At March 31, 2012      At December 31, 2011  
(in millions)    Level 1      Level 2      Level 3      Netting (1)     Total      Level 1      Level 2      Level 3      Netting (1)     Total  

Assets:

                           

Money market investments

     $ 206         $ -         $ -         $ -        $ 206         $ 206        $ -         $ -         $ -        $ 206  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Nuclear decommissioning trusts

                           

U.S. equity securities

     925        9        -         -        934        841        8        -         -        849  

Non-U.S. equity securities

     358        -         -         -        358        323        -         -         -        323  

U.S. government and agency securities

     734        138        -         -        872        744        156        -         -        900  

Municipal securities

     -         68        -         -        68        -         58        -         -        58  

Other fixed-income securities

     -         150        -         -        150        -         99        -         -        99  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total nuclear decommissioning trusts (2)

     2,017        365        -         -        2,382        1,908        321        -         -        2,229  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Price risk management instruments (Note 7)

                           

Electricity

     -         68        67        27       162        -         92        69        8       169  

Gas

     -         3        -         -        3        -         6        -         (3     3  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total price risk management instruments

     -         71        67        27       165        -         98        69        5       172  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Rabbi trusts

                           

Fixed-income securities

     -         26        -         -        26        -         25        -         -        25  

Life insurance contracts

     -         68        -         -        68        -         67        -         -        67  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total rabbi trusts

     -         94        -         -        94        -         92        -         -        92  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Long-term disability trust

                           

U.S. equity securities

     5        13        -         -        18        13        15        -         -        28  

Non-U.S. equity securities

     -         15        -         -        15        -         9        -         -        9  

Fixed-income securities

     -         142        -         -        142        -         145        -         -        145  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term disability trust

     5        170        -         -        175        13        169        -         -        182  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     $ 2,228        $ 700        $ 67        $ 27       $ 3,022        $ 2,127        $ 680        $ 69        $ 5       $ 2,881  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

                           

Price risk management instruments (Note 7)

                           

Electricity

     $ 436        $ 284        $ 166        $ (471 )     $ 415        $ 411        $ 289        $ 143        $ (441     $ 402  

Gas

     15        11        -         (18 )     8        31        13        -         (32     12  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     $ 451        $ 295        $ 166        $ (489     $ 423        $ 442        $ 302        $ 143        $ (473     $ 414  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

(2) Excludes $248 million and $188 million at March 31, 2012 and December 31, 2011, respectively, 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 table above.

Money Market Investments

PG&E Corporation invests 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 investments in these money market funds are generally valued using unadjusted prices in an active market for identical assets and are thus classified as Level 1. Money market funds are recorded as cash and cash equivalents in PG&E Corporation's 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 in active markets for identical securities and are classified as Level 1. Equity securities also include commingled funds composed of equity securities traded publicly on exchanges across multiple industry sectors in the U.S. and other regions of the world, which 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 either exchange-traded or over-the-counter traded. (See Note 7 above.)

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. Forwards and swaps transacted in the over-the-counter market 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. 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.

Exchange-traded options are valued using observable market data and market-corroborated data and are classified as Level 2. Over-the-counter options are classified as Level 3 and are valued using a standard option pricing model which includes forward prices for the underlying commodity, time value at a risk-free rate, and volatility. For periods where market data is not available, the Utility extrapolates observable data using internal models.

The Utility holds CRRs to hedge 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.

 

Transfers between Levels

PG&E Corporation and the Utility recognize any 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 months ended March 31, 2012.

Level 3 Measurements and Sensitivity Analysis

The Utility's Market and Credit Risk Management department 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 department and the Controller's organization collaborate to determine the appropriate fair value methodologies and classification for each derivative. Inputs used and 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. Unobservable inputs include forward electricity prices. Historical prices include CRR auction 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.)

 

(in millions)    Fair Value at
March 31, 2012
   

Valuation Technique

  

Unobservable Input

  

Range

Fair Value Measurement

   Assets      Liabilities          

Congestion revenue rights

     $ 67        $ (8   Market approach    CRR auction prices    (6.30) - $ 5.10

Power purchase agreements

     $ -         $ (158   Discounted cash flow    Forward prices    2.00 - $ 61.05

Level 3 Reconciliation

The following table presents the reconciliation for Level 3 price risk management instruments for the three months ended March 31, 2012 and 2011.

 

     Price Risk Management Instruments  
(in millions)    2012     2011  

Liability balance as of January 1

     $ (74     $ (399

Realized and unrealized gains (losses):

    

Included in regulatory assets and liabilities or balancing accounts (1)

     (25     87  
  

 

 

   

 

 

 

Liability balance as of March 31

     $ (99     $ (312
  

 

 

   

 

 

 

(1) Price risk management activity is recoverable through customer rates. Therefore, net income was not impacted by realized amounts. 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, and the Utility's variable rate pollution control bond loan agreements approximate their carrying values at March 31, 2012 and December 31, 2011, 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 bond loan agreements, PG&E Corporation's fixed rate senior notes, and the ERBs issued by PERF were based on quoted market prices at March 31, 2012 and December 31, 2011.

 

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):

 

     March 31, 2012      December 31, 2011  
(in millions)    Carrying
Amount
     Level 2
Fair Value
     Carrying
Amount
     Level 2
Fair Value
 

Debt (Note 4)

           

PG&E Corporation

     $ 349         $ 382         $ 349         $ 380   

Utility

     10,546         12,412         10,545         12,543   

Energy recovery bonds (Note 4)

     321         327         423         433   

Nuclear Decommissioning Trust Investments

The Utility classifies its investments held in the nuclear decommissioning trust as "available-for-sale." As the day-to-day investing activities of the trusts are managed by external investment managers, the Utility does not have the ability to sell its investments at its discretion. Therefore, all unrealized losses are considered other-than-temporary impairments. Gains or losses on the nuclear decommissioning trust investments are refundable or recoverable, respectively, through customer rates. Therefore, trust earnings are deferred and included in the regulatory liability for recoveries in excess of ARO. There is no impact on the Utility's earnings or accumulated other comprehensive income. (See Note 3 above.)

The following table provides a summary of available-for-sale investments held in the Utility's nuclear decommissioning trusts:

 

(in millions)    Amortized
Cost
     Total
Unrealized
Gains
     Total
Unrealized
Losses
    Total Fair
Value (1)
 

As of March 31, 2012

          

Equity securities

          

U.S.

     $ 319        $ 616        $ (1     $ 934  

Non-U.S.

     197        162         (1     358  

Debt securities

          

U.S. government and agency securities

     787        86         (1     872  

Municipal securities

     66        3         (1     68  

Other fixed-income securities

     147        3         -        150  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     $ 1,516        $ 870        $ (4     $ 2,382  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2011

          

Equity securities

          

U.S.

     $ 334        $ 518        $ (3     $ 849  

Non-U.S.

     194        131        (2     323  

Debt securities

          

U.S. government and agency securities

     798        102        -        900  

Municipal securities

     56        2        -        58  

Other fixed-income securities

     96        3        -        99  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     $ 1,478        $ 756        $ (5     $ 2,229  
  

 

 

    

 

 

    

 

 

   

 

 

 

(1) Excludes $248 million and $188 million at March 31, 2012 and December 31, 2011, respectively, primarily related to deferred taxes on appreciation of investment value. The debt securities mature on the following schedule:

 

(in millions)    As of March 31, 2012  

Less than 1 year

     $ 29   

1–5 years

     408   

5–10 years

     264   

More than 10 years

     389   
  

 

 

 

Total maturities of debt securities

     $ 1,090   
  

 

 

 

 

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

 

     Three Months Ended  
(in millions)    March 31, 2012     March 31, 2011  

Proceeds from sales and maturities of nuclear decommissioning trust investments

     $ 351       $ 726  

Gross realized gains on sales of securities held as available-for-sale

     7       20  

Gross realized losses on sales of securities held as available-for-sale

     (3     (4 )
Pacific Gas And Electric Company [Member]
 
Fair Value Measurements

NOTE 8: FAIR VALUE MEASUREMENTS

PG&E Corporation and the Utility measure their cash equivalents, trust assets, and price risk management instruments 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 (money market investments and assets held in rabbi trusts are held by PG&E Corporation and not the Utility):

 

     Fair Value Measurements  
     At March 31, 2012      At December 31, 2011  
(in millions)    Level 1      Level 2      Level 3      Netting (1)     Total      Level 1      Level 2      Level 3      Netting (1)     Total  

Assets:

                           

Money market investments

     $ 206         $ -         $ -         $ -        $ 206         $ 206        $ -         $ -         $ -        $ 206  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Nuclear decommissioning trusts

                           

U.S. equity securities

     925        9        -         -        934        841        8        -         -        849  

Non-U.S. equity securities

     358        -         -         -        358        323        -         -         -        323  

U.S. government and agency securities

     734        138        -         -        872        744        156        -         -        900  

Municipal securities

     -         68        -         -        68        -         58        -         -        58  

Other fixed-income securities

     -         150        -         -        150        -         99        -         -        99  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total nuclear decommissioning trusts (2)

     2,017        365        -         -        2,382        1,908        321        -         -        2,229  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Price risk management instruments (Note 7)

                           

Electricity

     -         68        67        27       162        -         92        69        8       169  

Gas

     -         3        -         -        3        -         6        -         (3     3  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total price risk management instruments

     -         71        67        27       165        -         98        69        5       172  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Rabbi trusts

                           

Fixed-income securities

     -         26        -         -        26        -         25        -         -        25  

Life insurance contracts

     -         68        -         -        68        -         67        -         -        67  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total rabbi trusts

     -         94        -         -        94        -         92        -         -        92  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Long-term disability trust

                           

U.S. equity securities

     5        13        -         -        18        13        15        -         -        28  

Non-U.S. equity securities

     -         15        -         -        15        -         9        -         -        9  

Fixed-income securities

     -         142        -         -        142        -         145        -         -        145  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term disability trust

     5        170        -         -        175        13        169        -         -        182  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     $ 2,228        $ 700        $ 67        $ 27       $ 3,022        $ 2,127        $ 680        $ 69        $ 5       $ 2,881  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

                           

Price risk management instruments (Note 7)

                           

Electricity

     $ 436        $ 284        $ 166        $ (471 )     $ 415        $ 411        $ 289        $ 143        $ (441     $ 402  

Gas

     15        11        -         (18 )     8        31        13        -         (32     12  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     $ 451        $ 295        $ 166        $ (489     $ 423        $ 442        $ 302        $ 143        $ (473     $ 414  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

(2) Excludes $248 million and $188 million at March 31, 2012 and December 31, 2011, respectively, 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 table above.

Money Market Investments

PG&E Corporation invests 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 investments in these money market funds are generally valued using unadjusted prices in an active market for identical assets and are thus classified as Level 1. Money market funds are recorded as cash and cash equivalents in PG&E Corporation's 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 in active markets for identical securities and are classified as Level 1. Equity securities also include commingled funds composed of equity securities traded publicly on exchanges across multiple industry sectors in the U.S. and other regions of the world, which 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 either exchange-traded or over-the-counter traded. (See Note 7 above.)

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. Forwards and swaps transacted in the over-the-counter market 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. 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.

Exchange-traded options are valued using observable market data and market-corroborated data and are classified as Level 2. Over-the-counter options are classified as Level 3 and are valued using a standard option pricing model which includes forward prices for the underlying commodity, time value at a risk-free rate, and volatility. For periods where market data is not available, the Utility extrapolates observable data using internal models.

The Utility holds CRRs to hedge 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.

 

Transfers between Levels

PG&E Corporation and the Utility recognize any 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 months ended March 31, 2012.

Level 3 Measurements and Sensitivity Analysis

The Utility's Market and Credit Risk Management department 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 department and the Controller's organization collaborate to determine the appropriate fair value methodologies and classification for each derivative. Inputs used and 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. Unobservable inputs include forward electricity prices. Historical prices include CRR auction 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.)

 

(in millions)    Fair Value at
March 31, 2012
   

Valuation Technique

  

Unobservable Input

  

Range

Fair Value Measurement

   Assets      Liabilities          

Congestion revenue rights

     $ 67        $ (8   Market approach    CRR auction prices    $ (6.30) - $ 5.10

Power purchase agreements

     $ -         $ (158   Discounted cash flow    Forward prices    $ 2.00 - $ 61.05

Level 3 Reconciliation

The following table presents the reconciliation for Level 3 price risk management instruments for the three months ended March 31, 2012 and 2011.

 

     Price Risk Management Instruments  
(in millions)    2012     2011  

Liability balance as of January 1

     $ (74     $ (399

Realized and unrealized gains (losses):

    

Included in regulatory assets and liabilities or balancing accounts (1)

     (25     87  
  

 

 

   

 

 

 

Liability balance as of March 31

     $ (99     $ (312
  

 

 

   

 

 

 

(1) Price risk management activity is recoverable through customer rates. Therefore, net income was not impacted by realized amounts. 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, and the Utility's variable rate pollution control bond loan agreements approximate their carrying values at March 31, 2012 and December 31, 2011, 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 bond loan agreements, PG&E Corporation's fixed rate senior notes, and the ERBs issued by PERF were based on quoted market prices at March 31, 2012 and December 31, 2011.

 

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):

 

     March 31, 2012      December 31, 2011  
(in millions)    Carrying
Amount
     Level 2
Fair Value
     Carrying
Amount
     Level 2
Fair Value
 

Debt (Note 4)

           

PG&E Corporation

     $ 349         $ 382         $ 349         $ 380   

Utility

     10,546         12,412         10,545         12,543   

Energy recovery bonds (Note 4)

     321         327         423         433   

Nuclear Decommissioning Trust Investments

The Utility classifies its investments held in the nuclear decommissioning trust as "available-for-sale." As the day-to-day investing activities of the trusts are managed by external investment managers, the Utility does not have the ability to sell its investments at its discretion. Therefore, all unrealized losses are considered other-than-temporary impairments. Gains or losses on the nuclear decommissioning trust investments are refundable or recoverable, respectively, through customer rates. Therefore, trust earnings are deferred and included in the regulatory liability for recoveries in excess of ARO. There is no impact on the Utility's earnings or accumulated other comprehensive income. (See Note 3 above.)

The following table provides a summary of available-for-sale investments held in the Utility's nuclear decommissioning trusts:

 

(in millions)    Amortized
Cost
     Total
Unrealized
Gains
     Total
Unrealized
Losses
    Total Fair
Value (1)
 

As of March 31, 2012

          

Equity securities

          

U.S.

     $ 319        $ 616        $ (1     $ 934  

Non-U.S.

     197        162         (1     358  

Debt securities

          

U.S. government and agency securities

     787        86         (1     872  

Municipal securities

     66        3         (1     68  

Other fixed-income securities

     147        3         -        150  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     $ 1,516        $ 870        $ (4     $ 2,382  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2011

          

Equity securities

          

U.S.

     $ 334        $ 518        $ (3     $ 849  

Non-U.S.

     194        131        (2     323  

Debt securities

          

U.S. government and agency securities

     798        102        -        900  

Municipal securities

     56        2        -        58  

Other fixed-income securities

     96        3        -        99  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     $ 1,478        $ 756        $ (5     $ 2,229  
  

 

 

    

 

 

    

 

 

   

 

 

 

(1) Excludes $248 million and $188 million at March 31, 2012 and December 31, 2011, respectively, primarily related to deferred taxes on appreciation of investment value.

The debt securities mature on the following schedule:

 

(in millions)    As of March 31, 2012  

Less than 1 year

     $ 29   

1–5 years

     408   

5–10 years

     264   

More than 10 years

     389   
  

 

 

 

Total maturities of debt securities

     $ 1,090   
  

 

 

 

 

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

 

     Three Months Ended  
(in millions)    March 31, 2012     March 31, 2011  

Proceeds from sales and maturities of nuclear decommissioning trust investments

     $ 351       $ 726  

Gross realized gains on sales of securities held as available-for-sale

     7       20  

Gross realized losses on sales of securities held as available-for-sale

     (3     (4 )