NOTE 2: NEW AND SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used by PG&E Corporation and the Utility are discussed in Note 2 of the Notes to the Consolidated Financial Statements in the 2011 Annual Report.

Pension and Other Postretirement Benefits

PG&E Corporation and the Utility provide a non-contributory defined benefit pension plan for eligible employees and retirees (referred to collectively as “pension benefits”) and contributory postretirement medical plans for eligible employees and retirees and their eligible dependents and non-contributory postretirement life insurance plans for eligible employees and retirees (referred to collectively as “other benefits”). PG&E Corporation and the Utility have elected that certain of the trusts underlying these plans be treated under the Internal Revenue Code of 1986, as amended (“Code”), as qualified trusts. If certain conditions are met, PG&E Corporation and the Utility can deduct payments made to the qualified trusts, subject to certain Code limitations. PG&E Corporation and the Utility use a December 31 measurement date for all plans.

The net periodic benefit costs reflected in PG&E Corporation’s Condensed Consolidated Financial Statements for the three and six months ended June 30, 2012 and 2011 were as follows:


	Pension Benefits				Other Benefits
	Three Months Ended June 30,				Three Months Ended June 30,
(in millions)	2012		2011		2012		2011
Service cost for benefits earned		$ 98		$ 82		$ 11		$ 11
Interest cost		165		164		21		23
Expected return on plan assets		(150)		(167)		(20)		(20)
Amortization of transition obligation		-		-		6		6
Amortization of prior service cost		5		9		6		6
Amortization of unrecognized loss		32		12		2		1

Net periodic benefit cost		150		100		26		27
Less: transfer to regulatory account ⁽¹⁾		(75)		(36)		-		-

Total		$ 75		$ 64		$ 26		$ 27



⁽¹⁾ The Utility recorded these amounts to a regulatory account since they are probable of recovery from customers in future rates.


	Pension Benefits				Other Benefits
	Six Months Ended June 30,				Six Months Ended June 30,
(in millions)	2012		2011		2012		2011
Service cost for benefits earned		$ 197		$ 164		$ 23		$ 22
Interest cost		329		328		42		46
Expected return on plan assets		(299)		(334)		(39)		(40)
Amortization of transition obligation		-		-		12		12
Amortization of prior service cost		10		18		12		12
Amortization of unrecognized loss		63		24		3		2

Net periodic benefit cost		300		200		53		54
Less: transfer to regulatory account ⁽¹⁾		(150)		(72)		-		-

Total		$ 150		$ 128		$ 53		$ 54



⁽¹⁾ The Utility recorded these amounts to a regulatory account since they are probable of recovery from customers in future rates.

There was no material difference between PG&E Corporation and the Utility for the information disclosed above.

During 2012, the Pacific Gas and Electric Company Retirement Plan was amended to offer a new cash balance benefit formula. Eligible employees hired after December 31, 2012 will be covered by the new formula. Eligible employees hired before January 1, 2013 will have a one-time opportunity to elect to be covered by the new formula going forward, beginning on January 1, 2014. As long as pension benefit costs continue to be recoverable through customer rates, PG&E Corporation and the Utility anticipate that this amendment will have no impact on net income.

Variable Interest Entities

PG&E Corporation and the Utility are required to consolidate the financial results of any entities that they control. In most cases, control can be determined based on majority ownership or voting interests. However, there are certain entities known as variable interest entities (“VIE”s) for which control is difficult to discern based on ownership or voting interests alone. A VIE is an entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, or whose equity investors lack any characteristics of a controlling financial interest. An enterprise has a controlling financial interest in a VIE if it has the obligation to absorb expected losses or the right to receive expected gains that could potentially be significant to the VIE and if it has any decision-making rights associated with the activities that are most significant to the VIE’s economic performance, including the power to design the VIE. An enterprise that has a controlling financial interest in a VIE is known as the VIE’s primary beneficiary and is required to consolidate the VIE.

In determining whether consolidation of a particular entity is required, PG&E Corporation and the Utility first evaluate whether the entity is a VIE. If the entity is a VIE, PG&E Corporation and the Utility use a qualitative approach to determine if either is the primary beneficiary of the VIE.

Some of the counterparties to the Utility’s power purchase agreements are considered VIEs. Each of these VIEs was designed to own a power plant that would generate electricity for sale to the Utility subject to the terms of a power purchase agreement. In determining whether the Utility is the primary beneficiary of any of these VIEs, it assesses whether it absorbs any of the VIE’s expected losses or receives any portion of the VIE’s expected residual returns under the terms of the power purchase agreement. This assessment includes an evaluation of how the risks and rewards associated with the power plant’s activities are absorbed by variable interest holders, as well as an analysis of the variability in the VIE’s gross margin and the impact of the power purchase agreement on the gross margin. Under each of these power purchase agreements, the Utility is obligated to purchase electricity or capacity, or both, from the VIE. The Utility does not provide any other support to these VIEs, and the Utility’s financial exposure is limited to the amount it pays for delivered electricity and capacity. (See Note 10 below.) The Utility does not have any decision-making rights associated with the design of these VIEs, nor does the Utility have the power to direct the activities that are most significant to the economic performance of these VIEs such as dispatch rights, operating and maintenance activities, or re-marketing activities of the power plant after the termination of the VIEs’ respective power purchase agreement with the Utility. Since the Utility was not the primary beneficiary of any of these VIEs at June 30, 2012, it did not consolidate any of them.

The Utility continued to consolidate the financial results of PG&E Energy Recovery Funding LLC (“PERF”), another VIE, at June 30, 2012, since the Utility is the primary beneficiary of PERF. PERF was formed in 2005 as a wholly owned subsidiary of the Utility to issue energy recovery bonds (“ERB”s) in connection with the settlement agreement entered into among PG&E Corporation, the Utility, and the CPUC in 2003 to resolve the Utility’s proceeding under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11 Settlement Agreement”). The Utility has a controlling financial interest in PERF since the Utility is exposed to PERF’s losses and returns through the Utility’s 100% equity investment in PERF and the Utility was involved in the design of PERF, which was an activity that was significant to PERF’s economic performance. The assets of PERF were $279 million at June 30, 2012 and primarily consisted of assets related to ERBs, which are included in other current assets – regulatory assets in the Condensed Consolidated Balance Sheets. The liabilities of PERF were $223 million at June 30, 2012 and consisted of ERBs, which are included in current liabilities in the Condensed Consolidated Balance Sheets. PERF is expected to be dissolved in 2013, after the ERBs mature. (See Note 4 below.)

At June 30, 2012, PG&E Corporation affiliates had entered into four tax equity agreements to fund residential and commercial retail solar energy installations with two privately held companies that are considered VIEs. Under these agreements, PG&E Corporation has agreed to provide lease payments and investment contributions of up to $396 million to these companies in exchange for the right to receive benefits from local rebates, federal grants, and a share of the customer payments made to these companies. The majority of these amounts are recorded in other noncurrent assets – other in PG&E Corporation’s Condensed Consolidated Balance Sheets. At June 30, 2012, PG&E Corporation had made total payments of $360 million under these agreements and received $191 million in benefits and customer payments. In determining whether PG&E Corporation is the primary beneficiary of any of these VIEs, it assesses which of the variable interest holders has control over these companies’ significant economic activities, such as the design of the companies, vendor selection, construction, customer selection, and re-marketing activities after the termination of customer leases. PG&E Corporation determined that these companies control these activities, while its financial exposure from these agreements is generally limited to its lease payments and investment contributions to these companies. Since PG&E Corporation was not the primary beneficiary of any of these VIEs at June 30, 2012, it did not consolidate any of them.

Adoption of New Accounting Standards

Amendments to Fair Value Measurement Requirements

On January 1, 2012, PG&E Corporation and the Utility adopted an accounting standards update (“ASU”) that requires additional fair value measurement disclosures. For fair value measurements that use significant unobservable inputs, quantitative disclosures of the inputs and qualitative disclosures of the valuation processes are required. For items not measured at fair value in the balance sheet but whose fair value is disclosed, disclosures of the fair value hierarchy level, the fair value measurement techniques used, and the inputs used in the fair value measurements are required. In addition, the ASU permits an entity to measure the fair value of a portfolio of financial instruments based on the portfolio’s net position, if the portfolio has met certain criteria. Furthermore, the ASU refines when an entity should, and should not, apply certain premiums and discounts to a fair value measurement. The adoption of the ASU is reflected in Note 8 below and did not have a material impact on PG&E Corporation’s or the Utility’s Condensed Consolidated Financial Statements.

Presentation of Comprehensive Income

On January 1, 2012, PG&E Corporation and the Utility adopted ASUs that require an entity to present either (1) a single statement of comprehensive income or loss or (2) a separate statement of comprehensive income or loss that immediately follows a statement of income or loss. A single statement of comprehensive income or loss is comprised of a statement of income or loss with other comprehensive income and losses, total other comprehensive income or loss, and total comprehensive income or loss appended. A separate statement of comprehensive income or loss is comprised of net income or loss, other comprehensive income and losses, total other comprehensive income or loss, and total comprehensive income or loss. Furthermore, the ASUs prohibit an entity from presenting other comprehensive income and losses in a statement of equity only. The adoption of the ASUs resulted in the addition of the Condensed Consolidated Statements of Comprehensive Income to PG&E Corporation’s and the Utility’s Condensed Consolidated Financial Statements.