NOTE 2: 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 2015 Form 10-K.

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 that has a controlling financial interest in a VIE is a primary beneficiary and is required to consolidate 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. To determine whether the Utility was the primary beneficiary of any of these VIEs at June 30, 2016, it assessed 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, analyzed the variability in the VIE’s gross margin, and considered whether it had any decision-making rights associated with the activities that are most significant to the VIE’s performance, such as dispatch rights and operating and maintenance activities. The Utility’s financial obligation is limited to the amount the Utility pays for delivered electricity and capacity. The Utility did not have any decision-making rights associated with any of the activities that are most significant to the economic performance of any of these VIEs. Since the Utility was not the primary beneficiary of any of these VIEs at June 30, 2016, it did not consolidate any of them.

Asset Retirement Obligations

Detailed studies of the cost to decommission the Utility’s nuclear generation facilities are conducted every three years in conjunction with the Nuclear Decommissioning Cost Triennial Proceedings. On March 1, 2016, the Utility submitted its updated decommissioning cost estimate with the CPUC. As a result, the estimated undiscounted cost to decommission the Utility’s nuclear power plants increased by approximately $1.4 billion at March 30, 2016. The change in total estimated cost resulted in an $818 million adjustment to the ARO recognized on the Condensed Consolidated Balance Sheets. The adjustment was a result of increased estimated costs related to spent fuel storage, staffing, and out-of-state waste disposal. Actual decommissioning costs may vary from these estimates as a result of changes in assumptions such as decommissioning dates; regulatory requirements; technology; and costs of labor, materials, and equipment. The Utility recovers its revenue requirements for decommissioning costs from customers through a non-bypassable charge that the Utility expects will continue until those costs are fully recovered. The Utility requested that the CPUC authorize the collection of increased annual revenue requirements beginning on January 1, 2017 based on these updated cost estimates.

On June 20, 2016, the Utility entered into a joint proposal with certain parties to retire Diablo Canyon Nuclear Power Plant at the expiration of its current operating licenses in 2024 (Unit 1) and 2025 (Unit 2), subject to certain approvals, resulting in a $115 million increase to the ARO recognized on the Condensed Consolidated Balance Sheets at June 30, 2016.

The estimated total nuclear decommissioning cost of $4.8 billion is discounted for GAAP purposes and recognized as an ARO on the Condensed Consolidated Balance Sheets. The total nuclear decommissioning obligation accrued in accordance with GAAP was $3.4 billion at June 30, 2016 and $2.5 billion at December 31, 2015. Changes in these estimates could materially affect the amount of the recorded ARO for these assets.

Pension and Other Postretirement Benefits

PG&E Corporation and the Utility sponsor a non-contributory defined benefit pension plan and cash balance plan. Both plans are included in “Pension Benefits” below. Post-retirement medical and life insurance plans are included in “Other Benefits” below.

The net periodic benefit costs reflected in PG&E Corporation’s Condensed Consolidated Financial Statements for the three and six months ended June 30, 2016 and 2015 were as follows:

	Pension Benefits				Other Benefits
	Three Months Ended June 30,
(in millions)	2016		2015		2016		2015
Service cost for benefits earned	$	113	$	118	$	13	$	14
Interest cost		179		169		19		18
Expected return on plan assets		(207)		(218)		(27)		(28)
Amortization of prior service cost		2		3		4		5
Amortization of net actuarial loss		6		3		1		1
Net periodic benefit cost		93		75		10		10
Regulatory account transfer (1)		(8)		9		-		-
Total	$	85	$	84	$	10	$	10

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

	Pension Benefits				Other Benefits
	Six Months Ended June 30,
(in millions)	2016		2015		2016		2015
Service cost for benefits earned	$	226	$	237	$	26	$	27
Interest cost		358		337		38		36
Expected return on plan assets		(414)		(436)		(54)		(56)
Amortization of prior service cost		4		7		8		10
Amortization of net actuarial loss		12		6		2		2
Net periodic benefit cost		186		151		20		19
Regulatory account transfer (1)		(17)		18		-		-
Total	$	169	$	169	$	20	$	19

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

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

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Loss)

The changes, net of income tax, in PG&E Corporation’s accumulated other comprehensive income (loss) are summarized below:

	Pension		Other
	Benefits		Benefits		Total
(in millions, net of income tax)	Three Months Ended June 30, 2016
Beginning balance	$	(23)	$	16	$	(7)
Amounts reclassified from other comprehensive income: (1)
Amortization of prior service cost
(net of taxes of $1 and $1, respectively)		1		3		4
Amortization of net actuarial loss
(net of taxes of $2 and $1, respectively)		4		-		4
Regulatory account transfer
(net of taxes of $3 and $2, respectively)		(5)		(3)		(8)
Net current period other comprehensive gain (loss)		-		-		-
Ending balance	$	(23)	$	16	$	(7)

(1) These components are included in the computation of net periodic pension and other postretirement benefit costs. (See the “Pension and Other Postretirement Benefits” table above for additional details.)

	Pension		Other
	Benefits		Benefits		Total
(in millions, net of income tax)	Three Months Ended June 30, 2015
Beginning balance	$	(21)	$	15	$	(6)
Amounts reclassified from other comprehensive income: (1)
Amortization of prior service cost
(net of taxes of $1 and $2, respectively)		2		3		5
Amortization of net actuarial loss
(net of taxes of $2, and $1, respectively)		1		1		2
Regulatory account transfer
(net of taxes of $3 and $3, respectively)		(3)		(4)		(7)
Net current period other comprehensive gain (loss)		-		-		-
Ending balance	$	(21)	$	15	$	(6)

	Pension			Other
	Benefits			Benefits			Total
(in millions, net of income tax)	Six Months Ended June 30, 2016
Beginning balance	$	(23)	$		16	$		(7)
Amounts reclassified from other comprehensive income: (1)
Amortization of prior service cost
(net of taxes of $2 and $3, respectively)		2			5			7
Amortization of net actuarial loss
(net of taxes of $4 and $1, respectively)		8			1			9
Regulatory account transfer
(net of taxes of $6 and $4, respectively)		(10)			(6)			(16)
Net current period other comprehensive gain (loss)		-			-			-
Ending balance	$	(23)	$		16	$		(7)

	Pension		Other			Other
	Benefits		Benefits			Investments			Total
(in millions, net of income tax)	Six Months Ended June 30, 2015
Beginning balance	$	(21)		$	15		$	17		$	11
Amounts reclassified from other comprehensive income:
Amortization of prior service cost
(net of taxes of $3, $4, and $0, respectively) (1)		4			6			-			10
Amortization of net actuarial loss
(net of taxes of $3, $1, and $0, respectively) (1)		3			1			-			4
Regulatory account transfer
(net of taxes of $6, $5, and $0, respectively) (1)		(7)			(7)			-			(14)
Change in investments
(net of taxes of $0, $0, and $12, respectively)		-			-			(17)			(17)
Net current period other comprehensive gain (loss)		-			-			(17)			(17)
Ending balance	$	(21)		$	15		$	-		$	(6)

There was no material difference between PG&E Corporation and the Utility for the information disclosed above, with the exception of other investments which are held by PG&E Corporation.

Recently Adopted Accounting Guidance

Fair Value Measurement

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which standardizes reporting practices related to the fair value hierarchy for all investments for which fair value is measured using the net asset value per share. PG&E Corporation and the Utility adopted this guidance effective January 1, 2016 and applied the requirements retrospectively for all periods presented. The adoption of this standard did not impact their Condensed Consolidated Financial Statements. All prior periods presented in these Condensed Consolidated financial statements reflect the retrospective adoption of this guidance (See Note 8 below.)

Accounting for Fees Paid in a Cloud Computing Arrangement

In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which adds guidance to help entities evaluate the accounting treatment for cloud computing arrangements. PG&E Corporation and the Utility adopted this guidance effective January 1, 2016. The adoption of this guidance did not have a material impact on their Condensed Consolidated Financial Statements.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which amends the existing guidance relating to the presentation of debt issuance costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. PG&E Corporation and the Utility adopted this guidance effective January 1, 2016 and applied the requirements retrospectively for all periods presented. The adoption of this guidance did not have a material impact on their Condensed Consolidated Financial Statements. PG&E Corporation and the Utility reclassified $105 million and $103 million, respectively, of debt issuance costs as of December 31, 2015 with no impact to net income or total shareholders’ equity previously reported. All prior periods presented in these Condensed Consolidated Financial Statements reflect the retrospective adoption of this guidance.

Accounting Standards Issued But Not Yet Adopted

Share-based Payment Accounting

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718), which amends the existing guidance relating to the accounting for share-based payment awards issued to employees, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU will be effective for PG&E Corporation and the Utility on January 1, 2017. PG&E Corporation and the Utility will early adopt this guidance in the fourth quarter of 2016 and do not expect this ASU to have a material impact on their Condensed Consolidated Financial Statements and related disclosures.

Recognition of Lease Assets and Liabilities

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the existing guidance relating to the recognition of lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU will be effective for PG&E Corporation and the Utility on January 1, 2019 with retrospective application. PG&E Corporation and the Utility are currently evaluating the impact the guidance will have on their Condensed Consolidated Financial Statements and related disclosures.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the existing guidance relating to the recognition and measurement of financial instruments. The ASU will be effective for PG&E Corporation and the Utility on January 1, 2018. PG&E Corporation and the Utility are currently evaluating the impact the guidance will have on their Condensed Consolidated Financial Statements and related disclosures.

Revenue Recognition Standard

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which amends the existing revenue recognition guidance. In August 2015, the FASB deferred the effective date of this amendment for public companies by one year to January 1, 2018, with early adoption permitted as of the original effective date of January 1, 2017. (See ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.) PG&E Corporation and the Utility are currently evaluating the impact the guidance will have on their Condensed Consolidated Financial Statements and related disclosures.