NOTE 11: EMPLOYEE BENEFIT PLANS

Pension Plan and Postretirement Benefits Other than Pensions (“PBOP”)

PG&E Corporation and the Utility sponsor a non-contributory defined benefit pension plan for eligible employees hired before December 31, 2012 and a cash balance plan for those eligible employees hired after this date or who made a one-time election to participate (“Pension Plan”). The trusts underlying certain of these plans are qualified trusts under the Internal Revenue Code of 1986, as amended. If certain conditions are met, PG&E Corporation and the Utility can deduct payments made to the qualified trusts, subject to certain limitations. PG&E Corporation’s and the Utility’s funding policy is to contribute tax-deductible amounts, consistent with applicable regulatory decisions and federal minimum funding requirements. Based upon current assumptions and available information, the Utility’s minimum funding requirements related to its pension plans is zero.

PG&E Corporation and the Utility also sponsor contributory postretirement medical plans for retirees and their eligible dependents, and non-contributory postretirement life insurance plans for eligible employees and retirees. PG&E Corporation and the Utility use a fiscal year-end measurement date for all plans.

Change in Plan Assets, Benefit Obligations, and Funded Status

The following tables show the reconciliation of changes in plan assets, benefit obligations, and the plans’ aggregate funded status for pension benefits and other benefits for PG&E Corporation during 2017 and 2016:

Pension Plan

(in millions)	2017		2016
Change in plan assets:
Fair value of plan assets at beginning of year	$	14,729		$	13,745
Actual return on plan assets		2,380			1,358
Company contributions		335			334
Benefits and expenses paid		(792)			(708)
Fair value of plan assets at end of year	$	16,652		$	14,729

Change in benefit obligation:
Benefit obligation at beginning of year	$	17,305		$	16,299
Service cost for benefits earned		472			453
Interest cost		714			715
Actuarial (gain) loss		1,048			637
Plan amendments		10			(91)
Benefits and expenses paid		(792)			(708)
Benefit obligation at end of year (1)	$	18,757		$	17,305

Funded Status:
Current liability	$	(7)		$	(7)
Noncurrent liability		(2,098)			(2,569)
Net liability at end of year	$	(2,105)		$	(2,576)

(1) PG&E Corporation’s accumulated benefit obligation was $16.8 billion and $15.6 billion at December 31, 2017 and 2016, respectively.

Postretirement Benefits Other than Pensions

(in millions)	2017		2016
Change in plan assets:
Fair value of plan assets at beginning of year	$	2,173		$	2,035
Actual return on plan assets		298			167
Company contributions		33			52
Plan participant contribution		87			85
Benefits and expenses paid		(171)			(166)
Fair value of plan assets at end of year	$	2,420		$	2,173

Change in benefit obligation:
Benefit obligation at beginning of year	$	1,877		$	1,766
Service cost for benefits earned		59			52
Interest cost		77			76
Actuarial (gain) loss		(49)			11
Plan amendments		-			37
Benefits and expenses paid		(157)			(153)
Federal subsidy on benefits paid		3			3
Plan participant contributions		87			85
Benefit obligation at end of year	$	1,897		$	1,877

Funded Status: (1)
Noncurrent asset	$	553		$	368
Noncurrent liability		(30)			(72)
Net asset at end of year	$	523		$	296

(1) At December 31, 2017 and 2016, the postretirement medical plan was in an overfunded position and the postretirement life insurance plan was in an underfunded position.

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

Components of Net Periodic Benefit Cost

Net periodic benefit cost as reflected in PG&E Corporation’s Consolidated Statements of Income was as follows:

Pension Plan

(in millions)	2017		2016			2015
Service cost	$	472		$	453		$	479
Interest cost		714			715			673
Expected return on plan assets		(770)			(828)			(873)
Amortization of prior service cost		(7)			8			15
Amortization of net actuarial loss		22			24			10
Net periodic benefit cost		431			372			304
Less: transfer to regulatory account (1)		(92)			(34)			34
Total expense recognized	$	339		$	338		$	338

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

Postretirement Benefits Other than Pensions

(in millions)	2017		2016			2015
Service cost	$	59		$	52		$	55
Interest cost		77			76			71
Expected return on plan assets		(97)			(107)			(112)
Amortization of prior service cost		15			15			19
Amortization of net actuarial loss		4			4			4
Net periodic benefit cost	$	58		$	40		$	37

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

Components of Accumulated Other Comprehensive Income

PG&E Corporation and the Utility record unrecognized prior service costs and unrecognized gains and losses related to pension and post-retirement benefits other than pension as components of accumulated other comprehensive income, net of tax. In addition, regulatory adjustments are recorded in the Consolidated Statements of Income and Consolidated Balance Sheets to reflect the difference between expense or income calculated in accordance with GAAP for accounting purposes and expense or income for ratemaking purposes, which is based on authorized plan contributions. For pension benefits, a regulatory asset or liability is recorded for amounts that would otherwise be recorded to accumulated other comprehensive income. For post-retirement benefits other than pension, the Utility generally records a regulatory liability for amounts that would otherwise be recorded to accumulated other comprehensive income. As the Utility is unable to record a regulatory asset for these other benefits, the charge remains in accumulated other comprehensive income (loss).

The estimated amounts that will be amortized into net periodic benefit costs for PG&E Corporation in 2018 are as follows:


(in millions)	Pension Plan		PBOP Plans
Unrecognized prior service cost	$	(6)	$	14
Unrecognized net loss		5		(5)
Total	$	(1)	$	9

There were no material differences between the estimated amounts that will be amortized into net periodic benefit costs for PG&E Corporation and the Utility.

Valuation Assumptions

The following actuarial assumptions were used in determining the projected benefit obligations and the net periodic benefit costs. The following weighted average year-end assumptions were used in determining the plans’ projected benefit obligations and net benefit cost.

	Pension Plan						PBOP Plans
	December 31,						December 31,
	2017		2016		2015		2017		2016		2015
Discount rate	3.64	%	4.11	%	4.37	%	3.60- 3.67	%	4.05 - 4.19	%	4.27 - 4.48	%
Rate of future compensation
increases	3.90	%	4.00	%	4.00	%	-		-		-
Expected return on plan
assets	6.20	%	5.30	%	6.10	%	3.30 - 7.10	%	2.80 - 6.00	%	3.20 - 6.60	%

The assumed health care cost trend rate as of December 31, 2017 was 6.8%, decreasing gradually to an ultimate trend rate in 2025 and beyond of approximately 4.5%. A one-percentage-point change in assumed health care cost trend rate would have the following effects:

	One-Percentage-Point		One-Percentage-Point
(in millions)	Increase		Decrease
Effect on postretirement benefit obligation	$	128	$	(129)
Effect on service and interest cost		9		(10)

Expected rates of return on plan assets were developed by determining projected stock and bond returns and then applying these returns to the target asset allocations of the employee benefit plan trusts, resulting in a weighted average rate of return on plan assets. Returns on fixed-income debt investments were projected based on real maturity and credit spreads added to a long-term inflation rate. Returns on equity investments were estimated based on estimates of dividend yield and real earnings growth added to a long-term inflation rate. For the pension plan, the assumed return of 6.2% compares to a ten-year actual return of 7.8%. The rate used to discount pension benefits and other benefits was based on a yield curve developed from market data of over approximately 623 Aa-grade non-callable bonds at December 31, 2017. This yield curve has discount rates that vary based on the duration of the obligations. The estimated future cash flows for the pension benefits and other benefit obligations were matched to the corresponding rates on the yield curve to derive a weighted average discount rate.

Investment Policies and Strategies

The financial position of PG&E Corporation’s and the Utility’s funded status is the difference between the fair value of plan assets and projected benefit obligations. Volatility in funded status occurs when asset values change differently from liability values and can result in fluctuations in costs in financial reporting, as well as the amount of minimum contributions required under the Employee Retirement Income Security Act of 1974, as amended. PG&E Corporation’s and the Utility’s investment policies and strategies are designed to increase the ratio of trust assets to plan liabilities at an acceptable level of funded status volatility.

The trusts’ asset allocations are meant to manage volatility, reduce costs, and diversify its holdings. Interest rate, credit, and equity risk are the key determinants of PG&E Corporation’s and the Utility’s funded status volatility. In addition to affecting the trusts’ fixed income portfolio market values, interest rate changes also influence liability valuations as discount rates move with current bond yields. To manage volatility, PG&E Corporation’s and the Utility’s trusts hold significant allocations in long maturity fixed-income investments. Although they contribute to funded status volatility, equity investments are held to reduce long-term funding costs due to their higher expected return. Real assets and absolute return investments are held to diversify the trust’s holdings in equity and fixed-income investments by exhibiting returns with low correlation to the direction of these markets. Real assets include commodities futures, global REITS, and global listed infrastructure equities. Absolute return investments include hedge fund portfolios.

Derivative instruments such as equity index futures are used to meet target equity exposure. Derivative instruments, such as equity index futures and U.S. treasury futures, are also used to rebalance the fixed income/equity allocation of the pension’s portfolio. Foreign currency exchange contracts are used to hedge a portion of the non U.S. dollar exposure of global equity investments.

The target asset allocation percentages for major categories of trust assets for pension and other benefit plans are as follows:

	Pension Plan								PBOP Plans
	2018		2017			2016			2018			2017			2016
Global equity	29	%		27	%		25	%		33	%		32	%		32	%
Absolute return	5	%		5	%		5	%		3	%		3	%		3	%
Real assets	8	%		10	%		10	%		6	%		7	%		7	%
Fixed income	58	%		58	%		60	%		58	%		58	%		58	%
Total	100	%		100	%		100	%		100	%		100	%		100	%

PG&E Corporation and the Utility apply a risk management framework for managing the risks associated with employee benefit plan trust assets. The guiding principles of this risk management framework are the clear articulation of roles and responsibilities, appropriate delegation of authority, and proper accountability and documentation. Trust investment policies and investment manager guidelines include provisions designed to ensure prudent diversification, manage risk through appropriate use of physical direct asset holdings and derivative securities, and identify permitted and prohibited investments.

Fair Value Measurements

The following tables present the fair value of plan assets for pension and other benefits plans by major asset category at December 31, 2017 and 2016.

	Fair Value Measurements
	At December 31,
	2017												2016
(in millions)	Level 1			Level 2			Level 3			Total				Level 1			Level 2			Level 3			Total
Pension Plan:
Short-term investments	$	287	$		424	$		-	$		711	$			364	$		369	$		-	$		733
Global equity		1,292			-			-			1,292				996			-			-			996
Real assets		499			-			-			499				610			-			-			610
Fixed-income		1,916			5,520			4			7,440				1,754			4,774			5			6,533
Assets measured at NAV		-			-			-			6,818				-			-			-			5,950
Total	$	3,994	$		5,944	$		4	$		16,760	$			3,724	$		5,143	$		5	$		14,822
PBOP Plans:
Short-term investments	$	31	$		-	$		-	$		31	$			33	$		-	$		-	$		33
Global equity		141			-			-			141				115			-			-			115
Real assets		55			-			-			55				70			-			-			70
Fixed-income		163			757			-			920				150			656			-			806
Assets measured at NAV		-			-			-			1,281				-			-			-			1,153
Total	$	390	$		757	$		-	$		2,428	$			368	$		656	$		-	$		2,177
Total plan assets at fair value									$		19,188											$		16,999

In addition to the total plan assets disclosed at fair value in the table above, the trusts had other net assets of $116 million and $97 million at December 31, 2017 and 2016, respectively, comprised primarily of cash, accounts receivable, deferred taxes, and accounts payable.

Valuation Techniques

The following describes the valuation techniques used to measure the fair value of the assets and liabilities shown in the table above. All investments that are valued using a NAV per share can be redeemed quarterly with a notice not to exceed 90 days.

Short-Term Investments

Short-term investments consist primarily of commingled funds across government, credit, and asset-backed sectors. These securities are categorized as Level 1 and Level 2 assets.

Global Equity

The global equity category includes investments in common stock and equity-index futures. Equity investments in common stock are actively traded on public exchanges and are therefore considered Level 1 assets. These equity investments are generally valued based on unadjusted prices in active markets for identical securities. Equity-index futures are valued based on unadjusted prices in active markets and are Level 1 assets.

Real Assets

The real asset category includes portfolios of commodity futures, global REITS and global listed infrastructure equities. The commodity futures, global REITS, and global listed infrastructure equities are actively traded on a public exchange and are therefore considered Level 1 assets.

Fixed-Income

Fixed-income 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 using 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.

Assets Measured at NAV Using Practical Expedient

Investments in the trusts that are measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy tables above. The fair value amounts are included in the tables above in order to reconcile to the amounts presented in the Consolidated Balance Sheets. These investments include commingled funds that are composed of equity securities traded publicly on exchanges as well as fixed-income securities that are composed primarily of U.S. government securities, asset-backed securities, and private real estate funds. There are no restrictions on the terms and conditions upon which the investments may be redeemed.

Transfers Between Levels

Any transfers between levels in the fair value hierarchy are recognized as of the end of the reporting period. No material transfers between levels occurred in the years ended December 31, 2017 and 2016.

Level 3 Reconciliation

The following table is a reconciliation of changes in the fair value of instruments for the pension plan that have been classified as Level 3 for the years ended December 31, 2017 and 2016:


(in millions)	Fixed-
For the year ended December 31, 2017	Income
Balance at beginning of year	$	5
Actual return on plan assets:
Relating to assets still held at the reporting date		(1)
Relating to assets sold during the period		-
Purchases, issuances, sales, and settlements:
Purchases		3
Settlements		(3)
Balance at end of year	$	4


(in millions)	Fixed-
For the year ended December 31, 2016	Income
Balance at beginning of year	$	3
Actual return on plan assets:
Relating to assets still held at the reporting date		3
Relating to assets sold during the period		-
Purchases, issuances, sales, and settlements:
Purchases		-
Settlements		(1)
Balance at end of year	$	5

There were no material transfers out of Level 3 in 2017 and 2016.

Cash Flow Information

Employer Contributions

PG&E Corporation and the Utility contributed $335 million to the pension benefit plans and $33 million to the other benefit plans in 2017. These contributions are consistent with PG&E Corporation’s and the Utility’s funding policy, which is to contribute amounts that are tax-deductible and consistent with applicable regulatory decisions and federal minimum funding requirements. None of these pension or other benefits were subject to a minimum funding requirement requiring a cash contribution in 2017. The Utility’s pension benefits met all the funding requirements under the Employee Retirement Income Security Act. PG&E Corporation and the Utility expect to make total contributions of approximately $327 million and $24 million to the pension plan and other postretirement benefit plans, respectively, for 2018.

Benefits Payments and Receipts

As of December 31, 2017, the estimated benefits expected to be paid and the estimated federal subsidies expected to be received in each of the next five fiscal years, and in aggregate for the five fiscal years thereafter, are as follows:

	Pension		PBOP			Federal
(in millions)	Plan		Plans			Subsidy
2018	$	712		$	83		$	(8)
2019		811			87			(9)
2020		850			91			(9)
2021		886			95			(10)
2022		920			100			(3)
Thereafter in the succeeding five years		5,002			508			(15)

There were no material differences between the estimated benefits expected to be paid by PG&E Corporation and paid by the Utility for the years presented above. There were also no material differences between the estimated subsidies expected to be received by PG&E Corporation and received by the Utility for the years presented above.

Retirement Savings Plan

PG&E Corporation sponsors a retirement savings plan, which qualifies as a 401(k) defined contribution benefit plan under the Internal Revenue Code 1986, as amended. This plan permits eligible employees to make pre-tax and after-tax contributions into the plan, and provide for employer contributions to be made to eligible participants. Total expenses recognized for defined contribution benefit plans reflected in PG&E Corporation’s Consolidated Statements of Income were $103 million, $97 million, and $89 million in 2017, 2016, and 2015, respectively.

There were no material differences between the employer contribution expense for PG&E Corporation and the Utility for the years presented above.