PG&E Corporation and the Utility have substantial financial commitments in connection with agreements entered into to support the Utility's operating activities. PG&E Corporation and the Utility also have significant contingencies arising from their operations, including contingencies related to regulatory proceedings, investigations, nuclear liability, legal matters and environmental remediation.

In the ordinary course of business, the Utility enters into various agreements to purchase power and electric capacity; natural gas supply, transportation, and storage; nuclear fuel supply and services; and various other commitments. The Utility disclosed its commitments at December 31, 2012 in Note 15 of the Notes to the Consolidated Financial Statements in the 2012 Annual Report. During the six months ended June 30, 2013, the Utility entered into seven renewable energy power purchase agreements, resulting in a total commitment of $1.1 billion over the next five to twenty-five years. These agreements have been approved by the CPUC and have completed major milestones with respect to construction.

PG&E Corporation and the Utility are subject to various laws and regulations and, in the normal course of business, are named as parties in a number of claims and lawsuits. In addition, penalties may be incurred for failure to comply with federal, state, or local laws and regulations. PG&E Corporation and the Utility record a provision for a loss contingency when it is both probable that a loss has been incurred and the amount of the loss can be reasonably estimated. PG&E Corporation and the Utility evaluate the range of reasonably estimated losses and record a provision based on the lower end of the range, unless an amount within the range is a better estimate than any other amount. The assessment of whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. Loss contingencies are reviewed quarterly and estimates are adjusted to reflect the impact of all known information, such as negotiations, discovery, settlements and payments, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. PG&E Corporation's and the Utility's policy is to exclude anticipated legal costs.

Accruals for legal and regulatory contingencies (excluding amounts related to natural gas matters below) totaled $31 million at June 30, 2013 and $34 million at December 31, 2012. These amounts are included in current liabilities - other in the Condensed Consolidated Balance Sheets. Except as discussed below, PG&E Corporation and the Utility do not believe that losses associated with legal and regulatory contingencies would have a material impact on their financial condition, results of operations, or cash flows.

On September 9, 2010, a natural gas transmission pipeline owned and operated by the Utility ruptured in San Bruno, California. The ensuing explosion and fire resulted in the deaths of eight people, numerous personal injuries, and extensive property damage. Following the San Bruno accident, various regulatory proceedings, investigations, and lawsuits were commenced. The NTSB, an independent review panel appointed by the CPUC, and the SED completed investigations with respect to the San Bruno accident, placing the blame primarily on the Utility. As part of a rulemaking proceeding to consider the adoption of new natural gas safety regulations, the CPUC ordered all natural gas operators in California to submit proposed plans to modernize and upgrade their natural gas transmission systems as well as associated cost forecast and ratemaking proposals.

On December 28, 2012, the CPUC issued a decision that approved most of the Utility's proposed pipeline safety enhancement plan, but disallowed the Utility's request for rate recovery of a significant portion of costs the Utility forecasted it would incur over the first phase of the plan through 2014. The CPUC decision limited the Utility's recovery of capital costs to $1.0 billion of the total $1.4 billion requested and limited recovery of expenses to $165 million of the total $751 million requested. Disallowed costs are charged to net income in the period incurred. The CPUC stated that the Utility's recovery of the amounts authorized in its decision are subject to refund, noting the possibility that further ratemaking adjustments may be made in the pending CPUC investigations discussed below. In addition, the Utility is required to file an update to its plan on or before October 29, 2013 regarding the results of its pipeline records search and validation work, which may result in further adjustments to the Utility's authorized revenue requirements.

There are three CPUC investigative enforcement proceedings pending against the Utility that relate to (1) the Utility's safety recordkeeping for its natural gas transmission system, (2) the Utility's operation of its natural gas transmission pipeline system in or near locations of higher population density, and (3) the Utility's pipeline installation, integrity management, recordkeeping and other operational practices, and other events or courses of conduct, that could have led to or contributed to the San Bruno accident. Evidentiary hearings and briefing on the issue of alleged violations have been completed in each of these investigations. (See Note 15 of the Notes to the Consolidated Financial Statements of the 2012 Annual Report for additional information regarding each investigative proceeding.) The CPUC has stated that it is prepared to impose significant penalties on the Utility if the CPUC determines that the Utility violated applicable laws, rules, and orders.

On July 16, 2013, the SED filed an amended reply brief in these proceedings to recommend that the CPUC impose what the SED characterized as a penalty of $2.25 billion on the Utility, allocated as follows: (1) $300 million as a fine to the State General Fund, (2) $435 million for a portion of PSEP costs that were previously disallowed by the CPUC and funded by shareholders, and (3) $1.515 billion to perform PSEP work that was previously approved by the CPUC, implement operational remedies, and for future PSEP costs. The SED's recommendation superseded the SED's prior briefs of May 6, 2013 and June 5, 2013 in which it recommended that the entirety of the penalty be in the form of shareholder-funded safety investments in the Utility's natural gas transmission and distribution system and none should be paid as a fine to the State General Fund.

Briefs also were filed during the second quarter of 2013 by the City of San Bruno, TURN, the CPUC's DRA, and the City and County of San Francisco. All parties recommend total penalties of at least $2.25 billion, including fines payable to the State General Fund of differing amounts. The City of San Bruno also recommended that the Utility provide $150 million for a Peninsula Emergency Response Consortium, spend $100 million ($5 million per year for 20 years) to fund an independent advocacy trust (the California Pipeline Safety Trust), and provide funding for an independent monitor to oversee the implementation of the recommended remedial operational measures. TURN also recommended that the Utility bear expenses of $50 million to implement remedial measures and to pay for an independent monitor.

On July 18, 2013, the Utility filed a request to re-open the evidentiary record and extend the procedural schedule in the investigations in order to allow the Utility to present additional evidence to respond to the SED's latest penalty recommendation. As permitted by the ALJs, the SED and other parties responded to the Utility on July 26, 2013 objecting to the request. Although the ALJs have not yet ruled on the Utility's request, on July 30, 2013, the ALJs issued a ruling requesting the Utility to provide answers to questions about its financing plans, how it intends to treat fines or disallowed costs, for regulatory accounting and tax purposes, and the impact on rates. The Utility's response is due on August 14, 2013. The ALJs have asked all parties to file comments to address the impact that fines and disallowances would have on the Utility's ability to raise capital and otherwise remain financially viable, including the tax treatment of amounts disallowed. The parties' comments are due on September 13, 2013 and reply comments are due on September 23, 2013. The Utility is uncertain when the ALJs will act on the Utility's request to re-open the record.

After the briefing process has been completed, it is anticipated that the CPUC ALJs will issue one or more presiding officer's decisions to address the violations that they have determined the Utility committed and to impose penalties. Based on the CPUC's rules, the presiding officer's decisions would become the final decisions of the CPUC 30 days after issuance unless the Utility or another party filed an appeal with the CPUC, or a CPUC commissioner requested that the CPUC review the decision, within such time. If an appeal or review request were filed, other parties would have 15 days to provide comments but the CPUC could act before considering any comments.

As discussed above, various parties have recommended that the CPUC impose total penalties on the Utility of at least $2.25 billion, including fines payable to the State General Fund of differing amounts. At June 30, 2013 and December 31, 2012, PG&E Corporation's and the Utility's financial statements included an accrual of $200 million for the minimum amount of fines deemed probable that the Utility will pay to the State General Fund. The Utility is unable to make a better estimate due to the many variables that could affect the final outcome of these pending investigations. These variables include how the total number and duration of violations will be determined; how the SED's and other parties' recommendations on the amount and form of penalties will be considered; whether and how the financial impact of unrecoverable costs the Utility has incurred, and will continue to incur, to improve the safety and reliability of its pipeline system, will be considered; whether the Utility's costs to perform any required remedial actions will be considered; and how the CPUC responds to public pressure. Future changes in these estimates or the assumptions on which they are based could have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, and cash flows. The CPUC may impose fines on the Utility that are materially higher than the amount accrued and disallow PSEP costs that were previously authorized for recovery. Disallowed costs would be charged to net income in the period incurred. At June 30, 2013, capitalized PSEP costs of approximately $200 million are included in Property, Plant, and Equipment on the Condensed Consolidated Balance Sheets. A final decision on these investigations could be issued before the end of 2013.

As of June 30, 2013, the Utility has submitted 55 self-reports with the SED, plus additional follow-up reports, to provide notice about self-identified and self-corrected violations of certain state and federal regulations related to the safety of natural gas facilities and natural gas operating practices. The SED is authorized to issue citations and impose penalties on the Utility associated with these or future reports that the Utility may file. The SED may consider the same factors as the CPUC in exercising its discretion to impose penalties, except that if a penalty is assessed, the SED is required to impose the maximum daily statutory penalty per violation. The SED has scheduled a workshop in early August to elicit feedback from the California gas utilities and other stakeholders on the gas citation program and to consider future changes to the program. PG&E Corporation and the Utility are uncertain whether the SED will issue citations and impose penalties on the Utility based on the self-reports the Utility has already submitted.

In 2012, the Utility also notified the CPUC and the SED that the Utility is undertaking a system-wide effort to survey its transmission pipelines and identify and remove encroachments from pipeline rights-of-way over a multi-year period. PG&E Corporation and the Utility are uncertain whether this matter will result in the imposition of penalties on the Utility.

Since June 2011, the U.S. Department of Justice, the California Attorney General's Office, and the San Mateo County District Attorney's Office have been conducting an investigation of the San Bruno accident and have indicated that the Utility is a target of the investigation. The Utility is cooperating with the investigation. PG&E Corporation and the Utility believe that criminal charges, including charges based on claims that the Utility violated the federal Pipeline Safety Act, may be brought against PG&E Corporation or the Utility. It is uncertain whether any criminal charges will be brought against any of PG&E Corporation's or the Utility's current or former employees. A criminal charge or finding would further harm the Utility's reputation. PG&E Corporation and the Utility are unable to estimate the amount or range of reasonably possible losses associated with any civil or criminal penalties that could be imposed and such penalties could have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, and cash flows. In addition, the Utility's business or operations could be negatively affected by any remedial measures imposed on the Utility, such as the appointment of an independent monitor.

Since the San Bruno accident, approximately 160 lawsuits involving third-party claims for personal injury and property damage, including two class action lawsuits, have been filed against PG&E Corporation and the Utility in connection with the accident on behalf of approximately 500 plaintiffs. These lawsuits seek compensation for personal injury and property damage, and other relief, including punitive damages. All cases were coordinated and assigned to one judge in the San Mateo County Superior Court. The Utility has entered into settlement agreements to resolve the claims of approximately 150 plaintiffs and other claimants. In the second quarter of 2013, all class action allegations were dismissed by the court.

As reflected in the table below, the Utility has recorded cumulative charges of $455 million for estimated third-party claims, including personal injury, property damage, damage to infrastructure, and other damage claims. At June 30, 2013, the Utility has made cumulative payments of $388 million for settlements. The Utility estimates it is reasonably possible that it may incur as much as an additional $145 million for unresolved claims, for a total possible loss of $600 million since the San Bruno accident. The Utility and most of the plaintiffs with unresolved claims are engaged in settlement discussions with the assistance of mediators. Settlement discussions with some plaintiffs may conclude in the third quarter of 2013. PG&E Corporation and the Utility are unable to estimate the amount or range of reasonably possible losses associated with punitive damages, if any, related to these matters.

The Utility has liability insurance from various insurers who provide coverage at different policy limits that are triggered in sequential order or “layers.” Generally, as the policy limit for a layer is exhausted the next layer of insurance becomes available. The aggregate amount of insurance coverage for third-party liability attributable to the San Bruno accident is approximately $992 million in excess of a $10 million deductible. Through June 30, 2013, the Utility has recognized cumulative insurance recoveries of $329 million for third-party claims and related legal expenses. (The Utility has incurred cumulative legal expenses of $81 million in addition to the $455 million charge above). Insurance recoveries for the three and six months ended June 30, 2013 were $45 million. These amounts were recorded as a reduction to operating and maintenance expense in PG&E Corporation's and the Utility's Condensed Consolidated Statements of Income. Although the Utility believes that a significant portion of costs incurred for third-party claims relating to the San Bruno accident will ultimately be recovered through its insurance, it is unable to predict the amount and timing of additional insurance recoveries.

On August 23, 2012, a complaint was filed in the San Francisco Superior Court against PG&E Corporation and the Utility (and other unnamed defendants) by individuals who seek certification of a class consisting of all California residents who were customers of the Utility between 1997 and 2010, with certain exceptions. The plaintiffs allege that the Utility collected more than $100 million in customer rates from 1997 through 2010 for the purpose of various safety measures and operations projects but instead used the funds for general corporate purposes such as executive compensation and bonuses. The plaintiffs allege that PG&E Corporation and the Utility engaged in unfair business practices in violation of California state law. The plaintiffs seek restitution and disgorgement, as well as compensatory and punitive damages.

PG&E Corporation and the Utility contest the plaintiffs' allegations. On May 23, 2013, the court granted PG&E Corporation's and the Utility's request to dismiss the complaint on the grounds that the CPUC has exclusive jurisdiction to adjudicate the issues raised by the plaintiffs' allegations. PG&E Corporation and the Utility are unable to estimate the amount or range of reasonably possible losses, if any, that may be incurred in connection with this matter.

The Utility is a member of NEIL, which is a mutual insurer owned by utilities with nuclear facilities. NEIL provides insurance coverage for property damages and business interruption losses incurred by the Utility if a nuclear event were to occur at the Utility's two nuclear generating units at Diablo Canyon and the retired Humboldt Bay Unit 3. NEIL provides property damage and business interruption coverage of up to $3.2 billion per nuclear incident and $1.8 billion per non-nuclear incident for Diablo Canyon. Humboldt Bay Unit 3 has up to $131 million of coverage for nuclear and non-nuclear property damages. NEIL also provides coverage for damages caused by acts of terrorism at nuclear power plants.

Under the Price-Anderson Act, public liability claims that arise from nuclear incidents that occur at Diablo Canyon, and that occur during the transportation of material to and from Diablo Canyon are limited to $12.6 billion. The Utility purchased the maximum available public liability insurance of $375 million for Diablo Canyon. The balance is provided under a loss-sharing program among utilities owning nuclear reactors. The Price-Anderson Act does not apply to claims that arise from nuclear incidents that occur during shipping of nuclear material from the nuclear fuel enricher to a fuel fabricator or that occur at the fuel fabricator's facility. The Utility has a separate policy that provides coverage for claims arising from some of these incidents up to a maximum of $375 million per incident. In addition, the Utility has $53 million of liability insurance for Humboldt Bay Unit 3 and has a $500 million indemnification from the NRC for public liability arising from nuclear incidents, covering liabilities in excess of the liability insurance. (See Note 15 of the Notes to the Consolidated Financial Statements of the 2012 Annual Report for additional information on the Utility's insurance coverage and premiums.)

The Utility has been, and may be required to pay for environmental remediation at sites where it has been, or may be, a potentially responsible party under federal and state environmental laws. These sites include former manufactured gas plant sites, power plant sites, gas gathering sites, sites where natural gas compressor stations are located, and sites used by the Utility for the storage, recycling, or disposal of potentially hazardous substances. Under federal and California laws, the Utility may be responsible for remediation of hazardous substances even if it did not deposit those substances on the site.

Given the complexities of the legal and regulatory environment and the inherent uncertainties involved in the early stages of a remediation project, the process for estimating remediation liabilities is subjective and requires significant judgment. The Utility records an environmental remediation liability when site assessments indicate that remediation is probable and the Utility can reasonably estimate the loss or a range of probable amounts. The Utility records an environmental remediation liability based on the lower end of the range of estimated probable costs, unless an amount within the range is a better estimate than any other amount. Amounts recorded are not discounted to their present value.

At June 30, 2013, the Utility expected to recover $587 million of its environmental remediation liability through various ratemaking mechanisms authorized by the CPUC. One of these mechanisms allows the Utility rate recovery for 90% of its hazardous substance remediation costs for certain approved sites (including the Topock site) without a reasonableness review. The Utility may incur environmental remediation costs that it does not seek to recover in rates, such as the costs associated with the Hinkley site.

The Utility's remediation and abatement efforts at the Hinkley site are subject to the regulatory authority of the California Regional Water Quality Control Board, Lahontan Region. The Regional Board has issued several orders directing the Utility to implement interim remedial measures to reduce the mass of the underground plume of hexavalent chromium, monitor and control movement of the plume, and provide replacement water to affected residents. As of June 30, 2013, approximately 350 residential households located near the chromium plume boundary were covered by the Utility's whole house water replacement program and the majority have opted to accept the Utility's offer to purchase their properties. On July 17, 2013, the Regional Board certified a final environmental impact report evaluating the Utility's proposed remedial methods to contain and remediate the chromium plume and the potential environmental impacts. The Regional Board is expected to develop preliminary cleanup standards later this year and issue final cleanup standards in 2014.

The Utility's environmental remediation liability at June 30, 2013 reflects the Utility's best estimate of probable future costs associated with its final remediation plan and whole house water program. Future costs will depend on many factors, including the levels of hexavalent chromium the Utility is required to use as the standard for remediation, the required time period by which those standards must be met, the extent of the chromium plume boundary, and adoption of a final drinking water standard currently under development by the State of California. As more information becomes known regarding these factors, the Utility's cost estimates and the assumptions on which they are based regarding the amount of liability incurred may be subject to further changes. Future changes in estimates or assumptions may have a material impact on PG&E Corporation's and the Utility's future financial condition, results of operations, and cash flows.

The Utility's remediation and abatement efforts are subject to the regulatory authority of the California Department of Toxic Substances Control and the U.S. Department of the Interior. The Utility has implemented interim remediation measures, including a system of extraction wells and a treatment plant designed to prevent movement of a hexavalent chromium plume toward the Colorado River. The DTSC has certified the final environmental impact report and approved the Utility's final remediation plan for the groundwater plume, under which the Utility will implement an in-situ groundwater treatment system to convert hexavalent chromium into a non-toxic and non-soluble form of chromium. On April 5, 2013, the Utility submitted its intermediate design plan for implementing the final groundwater remedy to the DTSC and the U.S. Department of the Interior. The Utility's intermediate plan reflects its evaluation of input received from regulatory agencies and other stakeholders, potential sources of fresh water to be used as part of the remedy, and performing other engineering activities necessary to complete the remedial design. The Utility expects to submit its final plan for approval in 2014.

The Utility's environmental remediation liability at June 30, 2013 reflects its best estimate of probable future costs associated with these developments. Future costs will depend on many factors, including the extent of work to be performed to implement the final groundwater remedy and the Utility's required time frame for remediation. As more information becomes known regarding these factors, the Utility's cost estimates and the assumptions on which they are based regarding the amount of liability incurred may be subject to further changes. Future changes in estimates or assumptions could have a material impact on PG&E Corporation's and the Utility's future financial condition and cash flows.

Although the Utility has provided for known environmental obligations that are probable and reasonably estimable, the Utility's undiscounted future costs could increase to as much as $1.7 billion (including amounts related to the Hinkley and Topock sites described above) if the extent of contamination or necessary remediation is greater than anticipated or if the other potentially responsible parties are not financially able to contribute to these costs, and could increase further if the Utility chooses to remediate beyond regulatory requirements. The Utility may incur actual costs in the future that are materially different than this estimate and such costs could have a material impact on PG&E Corporation's and the Utility's results of operations during the period in which they are recorded.

The IRS has withheld several matters pertaining to the 2008, 2010, and 2011 tax returns for further review. The most significant of these matters relates to the repairs accounting method changes made by the Utility with the filing of the 2008 and 2011 tax returns. Additionally, the IRS has been working with the utility industry to provide guidance concerning the deductibility of repairs. PG&E Corporation and the Utility expect the IRS to issue guidance with respect to repairs made in the natural gas transmission and distribution businesses by the end of 2013. PG&E Corporation's and the Utility's unrecognized tax benefits may change significantly within the next 12 months depending on the guidance to be issued by the IRS and the resolution of the IRS audits. As of June 30, 2013, PG&E Corporation and the Utility were unable to estimate the amount of the future change in unrecognized tax benefits.