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 nine months ended September 30, 2013, the Utility entered into several renewable energy and other power purchase agreements, resulting in a total commitment of $1.9 billion over the next one 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 from the provision for loss.

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 National Transportation Safety Board, 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.

The Utility's pipeline safety enhancement plan is a multi-year program to modernize and upgrade its natural gas transmission system. In December 2012, the CPUC approved most of the projects proposed in the PSEP but disallowed the Utility's request for rate recovery of a significant portion of costs the Utility forecasted it would incur through 2014. The CPUC authorized the Utility to recover costs, subject to the adopted capital and expense amounts, for activities including pipeline strength testing, pipeline replacement, in-line inspection, and the installation of automated valves. The CPUC prohibited the Utility from recovering the costs of pressure testing pipeline placed into service after January 1, 1956 for which the Utility is unable to produce pressure test records. The CPUC ordered the Utility to file an update PSEP application after the Utility completes its search and review of records relating to pipeline pressure validation for all 6,750 miles of the Utility's natural gas transmission pipelines.

On October 29, 2013, the Utility submitted its update application to present the results of its completed records search and review and to request approval of adjusted revenue requirements. Based on the information obtained through the records search and review, the Utility has proposed to change the scope and prioritization of PSEP work, including deferring some projects to after 2014 and accelerating other projects. The Utility has proposed net reductions to authorized costs for both its strength testing program (to test 658 miles rather than 783 miles) and its pipeline replacement program (to replace 143 miles rather than 186 miles). In August 2013, in anticipation of the Utility's update application, TURN and the CPUC's DRA requested the assigned ALJ for an order limiting the scope of the revenue requirement changes that the Utility could request in the update application to only those changes resulting from the records search and subsequent pressure validation based on those records, which could result in a disallowance of costs associated with the acceleration of projects. The ALJ has not yet addressed their request and it is uncertain how the information presented in the Utility's update application about accelerating or changing the scope of PSEP projects will be considered. The Utility has requested that the CPUC issue a final decision by August 2014 to approve the revised scope of PSEP projects and the net reduction in authorized costs.

Based on the proposed changes in the scope of PSEP projects through 2014, the Utility forecasts that total unrecoverable costs to complete this work will significantly exceed the amount previously forecasted primarily due to higher anticipated unit costs to replace pipeline segments. As a result, for the three months ended September 30, 2013, the Utility recorded a charge of $196 million, reflecting the increase in forecasted capital expenditures through 2014 that are expected to exceed the amount to be recovered. At September 30, 2013, the Utility has recorded cumulative charges of $549 million for disallowed PSEP-related capital expenditures, including $353 million recorded at December 31, 2012.

At September 30, 2013, capitalized PSEP costs of approximately $170 million are included in Property, Plant, and Equipment on the Condensed Consolidated Balance Sheets. The Utility could record additional charges if the CPUC does not approve the adjusted revenue requirements requested in the Utility's PSEP update application or if cost forecasts increase in the future. The CPUC also could make ratemaking adjustments to recovery of PSEP costs in connection with the pending CPUC investigations discussed below.

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 have been completed in each of these investigations.

The SED has recommended that the CPUC impose what the SED characterizes 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. Other parties, including the City of San Bruno, TURN, the CPUC's DRA, and the City and County of San Francisco, have recommended 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.

The record for the proceedings was closed on October 15, 2013. The CPUC's rules call for the CPUC ALJs to issue one or more presiding officers' decisions within 60 days of this date. The decisions will become the final decisions of the CPUC 30 days after issuance unless the Utility or another party files an appeal with the CPUC, or a CPUC commissioner requests that the CPUC review the decision, within such time. If an appeal or review request is filed, other parties have 15 days to provide comments but the CPUC could act before considering any comments.

At September 30, 2013 and December 31, 2012, PG&E Corporation's and the Utility's Condensed Consolidated Balance Sheets included an accrual of $200 million in other current liabilities 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, including how the total number and duration of violations will be determined; how the various penalty recommendations made by the SED and other parties will be considered; how the financial and tax 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 may disallow PSEP costs that were previously authorized for recovery or other future costs. Disallowed costs would be charged to net income in the period incurred.

In addition to the investigations that are pending against the Utility related to its natural gas operations and the San Bruno accident, the CPUC and/or SED are also considering the following matters. PG&E Corporation and the Utility are unable to estimate the amount or range of reasonably possible losses that may be incurred in connection with these matters.

California gas corporations are required to provide notice to the SED of any self-identified or self-corrected violations of certain state and federal regulations related to the safety of natural gas facilities and the corporations' natural gas operating practices. The SED is authorized to issue citations and impose fines for violations of certain state and federal regulations. In September 2013, the SED published a document explaining the internal procedures the SED staff intends to follow in assessing gas safety violations and determining appropriate enforcement action. The SED can consider several factors in exercising its discretion to impose fines or take other enforcement action based on the totality of the circumstances. Such factors include how the SED assesses the severity of the safety risk associated with each violation; how the SED determines the number of violations; how the SED determines the duration of the violations; how the SED considers other factors such as whether the violation was self-reported, and whether any corrective actions were taken. The SED's internal procedures also include a schedule of potential fine amounts that vary based on the severity of the safety risk posed by the violation.

In October 2013, the SED issued a citation related to one of the Utility's self-reports and imposed a fine of $140,000. The Utility has filed 58 self-reports with the SED, plus additional follow-up reports, that the SED has not yet addressed. The SED could issue additional citations and impose fines associated with these self-reports.

On August 19, 2013, the CPUC issued two OSCs related to a document submitted by the Utility on July 3, 2013 as “errata” to correct information about some segments in Lines 101 and 147 (two of the Utility's natural gas transmission pipelines that serve the San Francisco peninsula) that had been previously provided to the CPUC in October 2011 to allow the Utility to restore operating pressure on these pipelines. The first OSC directed the Utility to show why all orders issued by the CPUC to authorize increased operating pressure on the Utility's gas transmission pipelines should not be immediately suspended pending competent demonstration that the Utility's natural gas system records are reliable. It is uncertain when the CPUC will issue a decision on the first OSC. The second OSC ordered the Utility to show why it should not be penalized for violating CPUC rules that prohibit any person from misleading the CPUC, in connection with the errata submission. Among other recommendations submitted by intervening parties related to the second OSC, the DRA and TURN have recommended that the CPUC impose penalties of $12.7 million on the Utility. The CPUC is expected to issue a decision on the second OSC before the end of 2013. The CPUC could impose penalties on the Utility or take other enforcement action in connection with the OSCs.

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 (such as building structures and vegetation overgrowth) from pipeline rights-of-way over a multi-year period. The SED could impose penalties on the Utility or take other enforcement action in connection with this matter.

In June 2011, the U.S. Department of Justice, the California Attorney General's Office, and the San Mateo County District Attorney's Office began an investigation of the San Bruno accident and indicated that the Utility is a target of the investigation. Although the San Mateo County District Attorney's Office has publicly indicated that they will not pursue state criminal charges, the U.S. Department of Justice may still bring criminal charges, including charges based on claims that the Utility violated the federal Pipeline Safety Act, 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. The Utility is continuing to cooperate with federal investigators. 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 that the Utility may undertake, such as operating its natural gas transmission business subject to the supervision and oversight of an independent monitor.

In September 2013, the Utility agreed to settle the claims of substantially all of the remaining plaintiffs who sought compensation for personal injury and property damage, and other relief, including punitive damages, following the San Bruno accident. Approximately 165 lawsuits on behalf of approximately 525 plaintiffs have been filed against the Utility. For the three and nine months ended September 30, 2013, the Utility recorded a charge of $110 million to reflect its best estimate of probable loss for settlements reached in September 2013 and remaining third-party claims for personal injury, property damage, and damage to infrastructure, including claims by government entities. At September 30, 2013, the Utility has recorded cumulative charges of $565 million for third-party claims related to the San Bruno accident and has made cumulative payments of $389 million for settlements.

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 September 30, 2013, the Utility has recognized cumulative insurance recoveries of $354 million for third-party claims and related legal expenses. (The Utility has incurred cumulative legal expenses of $84 million in addition to the $565 million charges above). Insurance recoveries for the three and nine months ended September 30, 2013 were $25 million and $70 million, respectively. These amounts were recorded as a reduction to operating and maintenance expense in the Condensed Consolidated Statements of Income. Although the Utility believes that a significant portion of costs incurred for third-party claims (and associated legal expenses) 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. The plaintiffs have appealed the court's ruling to the California Court of Appeal. 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.

Accruals for other legal and regulatory contingencies (excluding amounts related to natural gas matters above) totaled $36 million at September 30, 2013 and $34 million at December 31, 2012. These amounts are included in other current liabilities in the Condensed Consolidated Balance Sheets. The resolution of these matters is not expected to have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, or cash flows.

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 $2 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 $13.6 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 September 30, 2013, the Utility expected to recover $581 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 is legally responsible for remediating groundwater contamination caused by hexavalent chromium used in the past at the Utility's natural gas compressor sites near Hinkley, California and Topock, Arizona. The Utility is also required to take measures to abate the effects of the contamination on the environment.

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. On July 17, 2013, the Regional Board certified a final environmental report evaluating the Utility's proposed remedial methods to contain and remediate the underground plume of hexavalent chromium and the potential environmental impacts. The Regional Board is expected to issue waste discharge permits in 2014 to allow for continued treatment of hexavalent chromium and issue a final clean-up order in 2015.

The Utility has implemented interim remediation measures to reduce the mass of the chromium plume, monitor and control movement of the plume, and provided replacement water to affected residents. As of September 30, 2013, approximately 350 residential households located near the 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. The Utility is required to maintain and operate the program for five years or until the State of California has adopted a drinking water standard specifically for hexavalent chromium at which time the program will be evaluated. The State of California recently proposed draft regulations for hexavalent chromium and is expected to issue a final standard in 2014.

The Utility's environmental remediation liability at September 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 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 at the Topock site are subject to the regulatory authority of the California Department of Toxic Substances Control and the U.S. Department of the Interior. The California Department of Toxic Substances Control has approved the Utility's final remediation plan to contain and remediate the underground plume of hexavalent chromium, 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. The Utility expects to submit its final remedial design plan in 2014 for approval to begin construction of the groundwater treatment system. The Utility has implemented interim remediation measures, including a system of extraction wells and a treatment plant designed to prevent movement of the chromium plume toward the Colorado River.

The Utility's environmental remediation liability at September 30, 2013 reflects its best estimate of probable future costs associated with its final remediation plan. 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 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 within the next six months. 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 related to the 2008, 2010, 2011, and 2012 tax returns. As of September 30, 2013, PG&E Corporation and the Utility believe that it is reasonably possible that unrecognized tax benefits will decrease by approximately $350 million within the next 12 months as a result of audit settlements.