Edgar Filing: PG&E Corp

form10q.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C., 20549 FORM 10-Q
(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013 OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to __________

Commission File Number _______________		Exact Name of Registrant as Specified in its Charter _______________		State or Other Jurisdiction of Incorporation ______________		IRS Employer Identification Number ___________

1-12609		PG&E Corporation		California		94-3234914
1-2348		Pacific Gas and Electric Company		California		94-0742640

Pacific Gas and Electric Company 77 Beale Street P.O. Box 770000 San Francisco, California 94177 ______________________________________				PG&E Corporation 77 Beale Street P.O. Box 770000 San Francisco, California 94177 ______________________________________
Address of principal executive offices, including zip code
Pacific Gas and Electric Company (415) 973-7000 ________________________________________				PG&E Corporation (415) 973-1000 ______________________________________
Registrant's telephone number, including area code

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
PG&E Corporation:				[X] Yes [ ] No
Pacific Gas and Electric Company:				[X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
PG&E Corporation:			[X] Large accelerated filer		[ ] Accelerated filer
			[ ] Non-accelerated filer		[ ] Smaller reporting company
Pacific Gas and Electric Company:			[ ] Large accelerated filer		[ ] Accelerated filer
			[X] Non-accelerated filer		[ ] Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
PG&E Corporation:				[ ] Yes [X] No
Pacific Gas and Electric Company:				[ ] Yes [X] No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common stock outstanding as of July 22, 2013:
PG&E Corporation:				445,151,814
Pacific Gas and Electric Company:				264,374,809

PG&E CORPORATION AND

PACIFIC GAS AND ELECTRIC COMPANY

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

TABLE OF CONTENTS

				PAGE
GLOSSARY				ii

PART I.	FINANCIAL INFORMATION
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			1
	PG&E Corporation
		Condensed Consolidated Statements of Income		1
		Condensed Consolidated Statements of Comprehensive Income		2
		Condensed Consolidated Balance Sheets		3
		Condensed Consolidated Statements of Cash Flows		5
	Pacific Gas and Electric Company
		Condensed Consolidated Statements of Income		6
		Condensed Consolidated Statements of Comprehensive Income		7
		Condensed Consolidated Balance Sheets		8
		Condensed Consolidated Statements of Cash Flows		10
	NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	NOTE 1:		Organization and Basis of Presentation	11
	NOTE 2:		Significant Accounting Policies	12
	NOTE 3:		Regulatory Assets, Liabilities, and Balancing Accounts	14
	NOTE 4:		Debt	15
	NOTE 5:		Equity	15
	NOTE 6:		Earnings Per Share	16
	NOTE 7:		Derivatives	16
	NOTE 8:		Fair Value Measurements	18
	NOTE 9:		Resolution of Remaining Chapter 11 Disputed Claims	24
	NOTE 10:		Commitments and Contingencies	24

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Overview			29
	Cautionary language regarding forward-looking statements			30
	Results of Operations			32
	Liquidity and Financial Resources			36
	Contractual Commitments			39
	Natural Gas Matters			40
	Regulatory Matters			43
	Environmental Matters			45
	Off-Balance Sheet Arrangements			45
	Risk Management Activities			45
	Critical Accounting Policies			45

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			46
ITEM 4.	CONTROLS AND PROCEDURES			46

PART II.	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS			47
ITEM 1A.	RISK FACTORS			48
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			48
ITEM 5.	OTHER INFORMATION			48
ITEM 6.	EXHIBITS			49

SIGNATURES				50

GLOSSARY

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.

2012 Annual Report	PG&E Corporation's and Pacific Gas and Electric Company's combined Annual Report on Form 10-K for the year ended December 31, 2012
AFUDC	allowance for funds used during construction
ALJ	administrative law judge
ASU	accounting standards update
CAISO	California Independent System Operator
CARB	California Air Resources Board
CCSF	City and County of San Francisco
CPUC	California Public Utilities Commission
CRRs	congestion revenue rights
DRA	Division of Ratepayer Advocates
DTSC	California Department of Toxic Substances Control
EPA	Environmental Protection Agency
EPS	earnings per common share
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
GAAP	generally accepted accounting principles
GHG	greenhouse gas
GRC	general rate case
GT&S	gas transmission and storage
IRS	Internal Revenue Service
NEIL	Nuclear Electric Insurance Limited
NRC	Nuclear Regulatory Commission
NTSB	National Transportation Safety Board
PSEP	pipeline safety enhancement plan
ROE	return on equity
SED	Safety and Enforcement Division of the CPUC, formerly known as the Consumer Protection and Safety Division or the CPSD
TO	transmission owner
TURN	The Utility Reform Network
Utility	Pacific Gas and Electric Company
VIE(s)	variable interest entity(ies)

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PG&E CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions, except per share amounts)	2013			2012			2013			2012
Operating Revenues
Electric	$	3,059		$	2,931		$	5,858		$	5,703
Natural gas		717			662			1,590			1,531
Total operating revenues		3,776			3,593			7,448			7,234
Operating Expenses
Cost of electricity		1,189			962			2,172			1,821
Cost of natural gas		179			132			525			475
Operating and maintenance		1,256			1,426			2,594			2,794
Depreciation, amortization, and decommissioning		516			606			1,019			1,190
Total operating expenses		3,140			3,126			6,310			6,280
Operating Income		636			467			1,138			954
Interest income		2			3			4			4
Interest expense		(177	)		(176	)		(353	)		(350	)
Other income, net		24			32			52			58
Income Before Income Taxes		485			326			841			666
Income tax provision		153			87			267			191
Net Income		332			239			574			475
Preferred stock dividend requirement of subsidiary		4			4			7			7
Income Available for Common Shareholders	$	328		$	235		$	567		$	468
Weighted Average Common Shares Outstanding, Basic		442			423			438			419
Weighted Average Common Shares Outstanding, Diluted		443			425			439			421
Net Earnings Per Common Share, Basic	$	0.74		$	0.56		$	1.29		$	1.12
Net Earnings Per Common Share, Diluted	$	0.74		$	0.55		$	1.29		$	1.11
Dividends Declared Per Common Share	$	0.46		$	0.46		$	0.91		$	0.91

See accompanying Notes to the Condensed Consolidated Financial Statements.

PG&E CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2013			2012			2013			2012
Net Income	$	332		$	239		$	574		$	475
Other Comprehensive Income, net of income tax
Pension and other postretirement benefit plans
Unrecognized prior service credit		6			6			12			12
Unrecognized net gain		17			19			34			40
Unrecognized net transition obligation		-			4			-			8
Transfer to regulatory account		(19	)		(21	)		(38	)		(42	)
Other investments		16			-			22			-
Total other comprehensive income, net of income tax		20			8			30			18
Comprehensive Income		352			247			604			493
Preferred stock dividend requirement of subsidiary		4			4			7			7
Comprehensive Income Attributable to Common Shareholders	$	348		$	243		$	597		$	486

See accompanying Notes to the Condensed Consolidated Financial Statements.

PG&E CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	Balance At
	June 30,			December 31,
(in millions)	2013			2012
ASSETS
Current Assets
Cash and cash equivalents	$	281		$	401
Restricted cash		305			330
Accounts receivable:
Customers (net of allowance for doubtful accounts of $80 and $87
at respective dates)		1,034			937
Accrued unbilled revenue		766			761
Regulatory balancing accounts		1,205			936
Other		272			365
Regulatory assets		508			564
Inventories:
Gas stored underground and fuel oil		148			135
Materials and supplies		327			309
Income taxes receivable		365			211
Other		231			172
Total current assets		5,442			5,121
Property, Plant, and Equipment
Electric		41,227			39,701
Gas		13,162			12,571
Construction work in progress		2,030			1,894
Other		1			1
Total property, plant, and equipment		56,420			54,167
Accumulated depreciation		(17,353	)		(16,644	)
Net property, plant, and equipment		39,067			37,523
Other Noncurrent Assets
Regulatory assets		6,786			6,809
Nuclear decommissioning trusts		2,214			2,161
Income taxes receivable		126			176
Other		689			659
Total other noncurrent assets		9,815			9,805
TOTAL ASSETS	$	54,324		$	52,449

See accompanying Notes to the Condensed Consolidated Financial Statements.

PG&E CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	Balance At
	June 30,			December 31,
(in millions, except share amounts)	2013			2012
LIABILITIES AND EQUITY
Current Liabilities
Short-term borrowings	$	952		$	492
Long-term debt, classified as current		1,288			400
Accounts payable:
Trade creditors		1,155			1,241
Disputed claims and customer refunds		156			157
Regulatory balancing accounts		1,002			634
Other		456			444
Interest payable		877			870
Income taxes payable		17			6
Deferred income taxes		106			-
Other		1,373			2,012
Total current liabilities		7,382			6,256
Noncurrent Liabilities
Long-term debt		11,917			12,517
Regulatory liabilities		5,226			5,088
Pension and other postretirement benefits		3,665			3,575
Asset retirement obligations		2,932			2,919
Deferred income taxes		6,988			6,748
Other		2,092			2,020
Total noncurrent liabilities		32,820			32,867
Commitments and Contingencies (Note 10)
Equity
Shareholders' Equity
Preferred stock		-			-
Common stock, no par value, authorized 800,000,000 shares,
444,717,704 and 430,718,293 shares outstanding at respective dates		9,032			8,428
Reinvested earnings		4,909			4,747
Accumulated other comprehensive loss		(71	)		(101	)
Total shareholders' equity		13,870			13,074
Noncontrolling Interest - Preferred Stock of Subsidiary		252			252
Total equity		14,122			13,326
TOTAL LIABILITIES AND EQUITY	$	54,324		$	52,449

See accompanying Notes to the Condensed Consolidated Financial Statements.

PG&E CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Six Months Ended June 30,
(in millions)	2013			2012
Cash Flows from Operating Activities
Net income	$	574		$	475
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization, and decommissioning		1,019			1,190
Allowance for equity funds used during construction		(52	)		(53	)
Deferred income taxes and tax credits, net		346			234
Other		157			137
Effect of changes in operating assets and liabilities:
Accounts receivable		(22	)		13
Inventories		(31	)		5
Accounts payable		28			(125	)
Income taxes receivable/payable		(143	)		153
Other current assets and liabilities		(367	)		74
Regulatory assets, liabilities, and balancing accounts, net		(192	)		(115	)
Other noncurrent assets and liabilities		142			186
Net cash provided by operating activities		1,459			2,174
Cash Flows from Investing Activities
Capital expenditures		(2,521	)		(2,219	)
Decrease (increase) in restricted cash		25			(1	)
Proceeds from sales and maturities of nuclear decommissioning
trust investments		795			666
Purchases of nuclear decommissioning trust investments		(786	)		(716	)
Other		16			64
Net cash used in investing activities		(2,471	)		(2,206	)
Cash Flows from Financing Activities
Borrowings under revolving credit facilities		140			-
Net issuances (repayments) of commercial paper, net of discount of $1 and $2
at respective dates		321			(566	)
Proceeds from issuance of long-term debt, net of premium, discount, and issuance
costs of $8 and $6 at respective dates		742			394
Long-term debt matured or repurchased		(461	)		(50	)
Energy recovery bonds matured		-			(200	)
Common stock issued		562			561
Common stock dividends paid		(386	)		(368	)
Other		(26	)		40
Net cash provided by (used in) financing activities		892			(189	)
Net change in cash and cash equivalents		(120	)		(221	)
Cash and cash equivalents at January 1		401			513
Cash and cash equivalents at June 30	$	281		$	292
Supplemental disclosures of cash flow information
Cash received (paid) for:
Interest, net of amounts capitalized	$	(312	)	$	(319	)
Income taxes, net		(65	)		114
Supplemental disclosures of noncash investing and financing activities
Common stock dividends declared but not yet paid	$	202		$	194
Capital expenditures financed through accounts payable		253			256
Noncash common stock issuances		11			12
Terminated capital leases		-			136

See accompanying Notes to the Condensed Consolidated Financial Statements.

PACIFIC GAS AND ELECTRIC COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2013			2012			2013			2012
Operating Revenues
Electric	$	3,057		$	2,930		$	5,855		$	5,701
Natural gas		718			662			1,591			1,531
Total operating revenues		3,775			3,592			7,446			7,232
Operating Expenses
Cost of electricity		1,189			962			2,172			1,821
Cost of natural gas		179			132			525			475
Operating and maintenance		1,256			1,425			2,592			2,791
Depreciation, amortization, and decommissioning		516			606			1,019			1,190
Total operating expenses		3,140			3,125			6,308			6,277
Operating Income		635			467			1,138			955
Interest income		3			2			4			3
Interest expense		(171	)		(171	)		(341	)		(339	)
Other income, net		22			22			46			45
Income Before Income Taxes		489			320			847			664
Income tax provision		160			93			281			206
Net Income		329			227			566			458
Preferred stock dividend requirement		4			4			7			7
Income Available for Common Stock	$	325		$	223		$	559		$	451

See accompanying Notes to the Condensed Consolidated Financial Statements.

PACIFIC GAS AND ELECTRIC COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2013			2012			2013			2012
Net Income	$	329		$	227		$	566		$	458
Other Comprehensive Income, net of income tax
Pension and other postretirement benefit plans
Unrecognized prior service credit		6			6			12			12
Unrecognized net gain		17			19			35			40
Unrecognized net transition obligation		-			4			-			8
Transfer to regulatory account		(19	)		(21	)		(38	)		(42	)
Total other comprehensive income, net of income tax		4			8			9			18
Comprehensive Income	$	333		$	235		$	575		$	476

See accompanying Notes to the Condensed Consolidated Financial Statements.

PACIFIC GAS AND ELECTRIC COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	Balance At
	June 30,			December 31,
(in millions)	2013			2012
ASSETS
Current Assets
Cash and cash equivalents	$	61		$	194
Restricted cash		305			330
Accounts receivable:
Customers (net of allowance for doubtful accounts of $80 and $87
at respective dates)		1,034			937
Accrued unbilled revenue		766			761
Regulatory balancing accounts		1,205			936
Other		275			366
Regulatory assets		508			564
Inventories:
Gas stored underground and fuel oil		148			135
Materials and supplies		327			309
Income taxes receivable		361			186
Other		169			160
Total current assets		5,159			4,878
Property, Plant, and Equipment
Electric		41,227			39,701
Gas		13,162			12,571
Construction work in progress		2,030			1,894
Total property, plant, and equipment		56,419			54,166
Accumulated depreciation		(17,352	)		(16,643	)
Net property, plant, and equipment		39,067			37,523
Other Noncurrent Assets
Regulatory assets		6,786			6,809
Nuclear decommissioning trusts		2,214			2,161
Income taxes receivable		122			171
Other		417			381
Total other noncurrent assets		9,539			9,522
TOTAL ASSETS	$	53,765		$	51,923

See accompanying Notes to the Condensed Consolidated Financial Statements.

PACIFIC GAS AND ELECTRIC COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	Balance At
	June 30,			December 31,
(in millions, except share amounts)	2013			2012
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings	$	692		$	372
Long-term debt, classified as current		938			400
Accounts payable:
Trade creditors		1,155			1,241
Disputed claims and customer refunds		156			157
Regulatory balancing accounts		1,002			634
Other		471			419
Interest payable		872			865
Income taxes payable		25			12
Deferred income taxes		85			-
Other		1,155			1,794
Total current liabilities		6,551			5,894
Noncurrent Liabilities
Long-term debt		11,917			12,167
Regulatory liabilities		5,226			5,088
Pension and other postretirement benefits		3,583			3,497
Asset retirement obligations		2,932			2,919
Deferred income taxes		7,191			6,939
Other		2,031			1,959
Total noncurrent liabilities		32,880			32,569
Commitments and Contingencies (Note 10)
Shareholders' Equity
Preferred stock		258			258
Common stock, $5 par value, authorized 800,000,000 shares, 264,374,809
shares outstanding at respective dates		1,322			1,322
Additional paid-in capital		5,346			4,682
Reinvested earnings		7,492			7,291
Accumulated other comprehensive loss		(84	)		(93	)
Total shareholders' equity		14,334			13,460
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	53,765		$	51,923

See accompanying Notes to the Condensed Consolidated Financial Statements.

PACIFIC GAS AND ELECTRIC COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Six Months Ended June 30,
(in millions)	2013			2012
Cash Flows from Operating Activities
Net income	$	566		$	458
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization, and decommissioning		1,019			1,190
Allowance for equity funds used during construction		(52	)		(53	)
Deferred income taxes and tax credits, net		337			242
Other		126			108
Effect of changes in operating assets and liabilities:
Accounts receivable		(24	)		(50	)
Inventories		(31	)		5
Accounts payable		68			(107	)
Income taxes receivable/payable		(162	)		216
Other current assets and liabilities		(317	)		78
Regulatory assets, liabilities, and balancing accounts, net		(192	)		(115	)
Other noncurrent assets and liabilities		126			202
Net cash provided by operating activities		1,464			2,174
Cash Flows from Investing Activities
Capital expenditures		(2,521	)		(2,219	)
Decrease (increase) in restricted cash		25			(1	)
Proceeds from sales and maturities of nuclear decommissioning
trust investments		795			666
Purchases of nuclear decommissioning trust investments		(786	)		(716	)
Other		8			11
Net cash used in investing activities		(2,479	)		(2,259	)
Cash Flows from Financing Activities
Net issuances (repayments) of commercial paper, net of discount of $1 and $2
at respective dates		321			(566	)
Proceeds from issuance of long-term debt, net of premium, discount, and issuance
costs of $8 and $6 at respective dates		742			394
Long-term debt matured or repurchased		(461	)		(50	)
Energy recovery bonds matured		-			(200	)
Preferred stock dividends paid		(7	)		(7	)
Common stock dividends paid		(358	)		(358	)
Equity contribution		665			565
Other		(20	)		48
Net cash provided by (used in) financing activities		882			(174	)
Net change in cash and cash equivalents		(133	)		(259	)
Cash and cash equivalents at January 1		194			304
Cash and cash equivalents at June 30	$	61		$	45
Supplemental disclosures of cash flow information
Cash received (paid) for:
Interest, net of amounts capitalized	$	(300	)	$	(309	)
Income taxes, net		(86	)		111
Supplemental disclosures of noncash investing and financing activities
Capital expenditures financed through accounts payable	$	253		$	256
Terminated capital leases		-			136

See accompanying Notes to the Condensed Consolidated Financial Statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

PG&E Corporation is a holding company that conducts its business through Pacific Gas and Electric Company, a public utility operating in northern and central California. The Utility generates revenues mainly through the sale and delivery of electricity and natural gas to customers. The Utility is primarily regulated by the CPUC and the FERC. In addition, the NRC oversees the licensing, construction, operation, and decommissioning of the Utility’s nuclear generation facilities. The Utility’s accounts for electric and gas operations are maintained in accordance with the Uniform System of Accounts prescribed by the FERC.

This quarterly report on Form 10-Q is a combined report of PG&E Corporation and the Utility that includes separate Condensed Consolidated Financial Statements for each company. The Notes to the Condensed Consolidated Financial Statements apply to both PG&E Corporation and the Utility. PG&E Corporation’s Condensed Consolidated Financial Statements include the accounts of PG&E Corporation, the Utility, and other wholly owned and controlled subsidiaries. The Utility’s Condensed Consolidated Financial Statements include the accounts of the Utility and its wholly owned and controlled subsidiaries. All intercompany transactions have been eliminated. PG&E Corporation and the Utility operate in one segment.

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial statements and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission and therefore do not contain all of the information and footnotes required by GAAP and the U.S. Securities and Exchange Commission for annual financial statements. PG&E Corporation’s and the Utility’s Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair presentation of their financial condition, results of operations, and cash flows for the periods presented. The information at December 31, 2012 in the Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets incorporated by reference into the 2012 Annual Report. This quarterly report should be read in conjunction with the 2012 Annual Report.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on a wide range of factors, including future regulatory decisions and economic conditions, that are difficult to predict. Some of the more critical estimates and assumptions relate to the Utility’s regulatory assets and liabilities, legal and regulatory contingencies, environmental remediation liabilities, asset retirement obligations, and pension and other postretirement benefit plans obligations. Management believes that its estimates and assumptions reflected in the Condensed Consolidated Financial Statements are appropriate and reasonable. Actual results could differ materially from those estimates.

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 2012 Annual Report.

Pension and Other Postretirement Benefits

PG&E Corporation and the Utility provide a non-contributory defined benefit pension plan for eligible employees, as well as contributory postretirement medical plans for retirees and their eligible dependents, and non-contributory postretirement life insurance plans for eligible employees and retirees.

The net periodic benefit costs reflected in PG&E Corporation’s Condensed Consolidated Financial Statements for the three and six months ended June 30, 2013 and 2012 were as follows:

	Pension Benefits						Other Benefits
	Three Months Ended June 30,
(in millions)	2013			2012			2013			2012
Service cost for benefits earned	$	115		$	98		$	13		$	11
Interest cost		156			165			18			21
Expected return on plan assets		(163	)		(150	)		(20	)		(20	)
Amortization of transition obligation		-			-			-			6
Amortization of prior service cost		5			5			5			6
Amortization of unrecognized loss		28			32			2			2
Net periodic benefit cost		141			150			18			26
Less: transfer to regulatory account (1)		(56	)		(75	)		-			-
Total	$	85		$	75		$	18		$	26

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

	Pension Benefits						Other Benefits
	Six Months Ended June 30,
(in millions)	2013			2012			2013			2012
Service cost for benefits earned	$	230		$	197		$	26		$	23
Interest cost		312			329			37			42
Expected return on plan assets		(325	)		(299	)		(40	)		(39	)
Amortization of transition obligation		-			-			-			12
Amortization of prior service cost		10			10			11			12
Amortization of unrecognized loss		55			63			3			3
Net periodic benefit cost		282			300			37			53
Less: transfer to regulatory account (1)		(113	)		(150	)		-			-
Total	$	169		$	150		$	37		$	53

(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.

Variable Interest Entities

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 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. To determine whether the Utility was the primary beneficiary of any of these VIEs at June 30, 2013, 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 exposure 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, 2013, it did not consolidate any of them.

PG&E Corporation affiliates have 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 made cumulative lease payments and investment contributions of $363 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. At June 30, 2013 and December 31, 2012, the carrying amount of PG&E Corporation’s investment in these agreements was $143 million and $166 million, respectively. PG&E Corporation determined that it does not have control over the companies’ significant economic activities, such as the design of the companies, vendor selection, construction, and the ongoing operations of the companies. PG&E Corporation has no material remaining commitment to fund these agreements. Since PG&E Corporation was not the primary beneficiary of any of these VIEs at June 30, 2013, it did not consolidate any of them.

Adoption of New Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities

In January 2013, the FASB issued an ASU that clarifies the scope of disclosures about offsetting assets and liabilities. The guidance requires an entity to disclose gross and net information about derivatives that are offset in the balance sheet or subject to an enforceable master-netting arrangement or similar agreement. The ASU became effective for PG&E Corporation and the Utility on January 1, 2013. (See Note 7 below.)

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued an ASU that requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income. The ASU became effective for PG&E Corporation and the Utility on January 1, 2013.

The changes, net of income tax, in PG&E Corporation’s other comprehensive income for the three and six months ended June 30, 2013 consist of the following:

		Pension and
		Other
		Postretirement			Other
		Benefit Plans			Investments			Total
(in millions, net of income tax)	Three Months Ended June 30, 2013
Beginning balance		$	(101	)		$	10		$	(91	)
Other comprehensive income before reclassifications			(19	)			16			(3	)
Amounts reclassified from other comprehensive income:
Amortization of prior service cost (1)			6				-			6
Amortization of actuarial gains (1)			17				-			17
Net current period other comprehensive income			4				16			20
Ending balance		$	(97	)		$	26		$	(71	)

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

		Pension and
		Other
		Postretirement			Other
		Benefit Plans			Investments			Total
(in millions, net of income tax)	Six Months Ended June 30, 2013
Beginning balance		$	(105	)		$	4		$	(101	)
Other comprehensive income before reclassifications			(38	)			22			(16	)
Amounts reclassified from other comprehensive income:
Amortization of prior service cost (1)			12				-			12
Amortization of actuarial gains (1)			34				-			34
Net current period other comprehensive income			8				22			30
Ending balance		$	(97	)		$	26		$	(71	)

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.

NOTE 3: REGULATORY ASSETS, LIABILITIES, AND BALANCING ACCOUNTS

Regulatory Assets

Long-Term Regulatory Assets

Long-term regulatory assets are composed of the following:

	Balance at
(in millions)	June 30, 2013		December 31, 2012
Pension benefits	$	3,324	$	3,275
Deferred income taxes		1,700		1,627
Utility retained generation		527		552
Environmental compliance costs		604		604
Price risk management		163		210
Electromechanical meters		165		194
Unamortized loss, net of gain, on reacquired debt		146		141
Other		157		206
Total long-term regulatory assets	$	6,786	$	6,809

Regulatory Liabilities

Long-Term Regulatory Liabilities

Long-term regulatory liabilities are composed of the following:

	Balance at
	June 30,		December 31,
(in millions)	2013		2012
Cost of removal obligations	$	3,763	$	3,625
Recoveries in excess of asset retirement obligations		633		620
Public purpose programs		571		590
Other		259		253
Total long-term regulatory liabilities	$	5,226	$	5,088

Regulatory Balancing Accounts

The Utility’s recovery of a significant portion of revenue requirements and costs is decoupled from the volume of sales. The Utility records (1) differences between actual customer billings and the Utility’s authorized revenue requirement, and (2) differences between incurred costs and customer billings. To the extent these differences are probable of recovery or refund, the Utility records a regulatory balancing account receivable or payable. Regulatory balancing accounts receivable and payable will fluctuate during the year based on seasonal electric and gas usage and the timing of when costs are incurred and customer revenues are collected.

Current Regulatory Balancing Accounts, Net

	Receivable (Payable)
	Balance at
	June 30,		December 31,
(in millions)	2013		2012
Distribution revenue adjustment mechanism	$	407	$	219
Utility generation		267		117
Hazardous substance		75		56
Public purpose programs		(151)		(83)
Gas fixed cost		25		44
Energy recovery bonds		(181)		(43)
Energy procurement		13		77
U.S. Department of Energy Settlement		(279)		(250)
GHG allowance auction proceeds (1)		(199)		-
Other		226		165
Total regulatory balancing accounts, net	$	203	$	302

(1) The CARB has adopted regulations that established a state-wide, “cap-and-trade” program (effective January 1, 2013) that sets a gradually declining limit on the amount of GHGs that may be emitted each year. This balancing account is used to record proceeds collected by the Utility for GHG emission allowances associated with the cap-and-trade program. These amounts will be refunded to customers in future periods.

NOTE 4: DEBT

Senior Notes

In June 2013, the Utility issued $375 million principal amount of 3.25% Senior Notes due June 15, 2023 and $375 million principal amount of 4.60% Senior Notes due June 15, 2043. The proceeds were used to repurchase $461 million principal amount, net of $21 million of premiums and accrued interest, of the Utility’s $1.0 billion outstanding 4.80% Senior Notes due March 1, 2014, to repay a portion of outstanding commercial paper, and for general corporate purposes.

Revolving Credit Facilities

In April 2013, PG&E Corporation and the Utility amended and restated their revolving credit facilities to extend their termination dates from May 31, 2016 to April 1, 2018. These agreements contain substantially similar terms as their original 2011 credit agreements.

At June 30, 2013, PG&E Corporation had $260 million of cash borrowings and no letters of credit outstanding under its $300 million revolving credit facility.

At June 30, 2013, the Utility had no cash borrowings and $91 million of letters of credit outstanding under its $3.0 billion revolving credit facility.

Pollution Control Bonds

At June 30, 2013, the interest rates on the $614 million principal amount of pollution control bonds Series 1996 C, E, F, and 1997 B and the related loan agreements ranged from 0.04% to 0.06%. At June 30, 2013, the interest rates on the $309 million principal amount of pollution control bonds Series 2009 A-D and the related loan agreements ranged from 0.01% to 0.05%.

Commercial Paper Program

At June 30, 2013, the Utility had $692 million of commercial paper outstanding under its revolving credit facility.

NOTE 5: EQUITY

PG&E Corporation’s and the Utility’s changes in equity for the six months ended June 30, 2013 were as follows:


	PG&E Corporation			Utility
	Total			Total
(in millions)	Equity			Shareholders' Equity
Balance at December 31, 2012	$	13,326		$	13,460
Comprehensive income		604			575
Common stock issued		573			-
Share-based compensation expense		31			(1	)
Common stock dividends declared		(405	)		(358	)
Preferred stock dividend requirement		-			(7	)
Preferred stock dividend requirement of subsidiary		(7	)		-
Equity contributions		-			665
Balance at June 30, 2013	$	14,122		$	14,334

In May 2013, PG&E Corporation entered into a new Equity Distribution Agreement providing for the sale of PG&E Corporation common stock having an aggregate gross sales price of up to $400 million. As of June 30, 2013, PG&E Corporation common stock having an aggregate gross sales price of $50 million had been sold under this equity distribution agreement.

During the six months ended June 30, 2013, PG&E Corporation issued 14 million shares of its common stock for aggregate net cash proceeds of $562 million in the following transactions:

·	7 million shares were sold in an underwritten public offering for cash proceeds of $300 million, net of fees and commissions;

·	4 million shares were issued for cash proceeds of $149 million under the PG&E Corporation 401(k) plan, the Dividend Reinvestment and Stock Purchase Plan, and share-based compensation plans; and

·	3 million shares were sold for cash proceeds of $113 million, net of commissions paid of $1 million, under the equity distribution agreements.

During the six months ended June 30, 2013, PG&E Corporation contributed equity of $665 million to the Utility to maintain the Utility’s CPUC-authorized capital structure, which consists of 52% common equity and 48% debt and preferred stock.

NOTE 6: EARNINGS PER SHARE

PG&E Corporation’s basic EPS is calculated by dividing the income available for common shareholders by the weighted average number of common shares outstanding. PG&E Corporation applies the treasury stock method of reflecting the dilutive effect of outstanding share-based compensation in the calculation of diluted EPS. The following is a reconciliation of PG&E Corporation’s income available for common shareholders and weighted average common shares outstanding for calculating diluted EPS:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions, except per share amounts)	2013		2012		2013		2012
Income available for common shareholders	$	328	$	235	$	567	$	468
Weighted average common shares outstanding, basic		442		423		438		419
Add incremental shares from assumed conversions:
Employee share-based compensation		1		2		1		2
Weighted average common share outstanding, diluted		443		425		439		421
Total earnings per common share, diluted	$	0.74	$	0.55	$	1.29	$	1.11

For each of the periods presented above, the calculation of weighted average common shares outstanding on a diluted basis excluded an insignificant amount of options and securities that were antidilutive.

NOTE 7: DERIVATIVES

The Utility uses both derivative and non-derivative contracts in managing its exposure to commodity-related price risk, including forward contracts, swap agreements, futures contracts, and option contracts.

These instruments are not held for speculative purposes and are subject to certain regulatory requirements. Customer rates are designed to recover the Utility’s reasonable costs of providing services, including the costs related to price risk management activities.

Price risk management activities that meet the definition of derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets. As long as the current ratemaking mechanism remains in place and the Utility’s price risk management activities are carried out in accordance with CPUC directives, the Utility expects to recover fully, in rates, all costs related to derivatives. Therefore, all unrealized gains and losses associated with the change in fair value of these derivatives are deferred and recorded within the Utility’s regulatory assets and liabilities. (See Note 3 above.) Net realized gains or losses on commodity derivatives are recorded in the cost of electricity or the cost of natural gas with corresponding increases or decreases to regulatory balancing accounts for recovery from or refund to customers.

The Utility elects the normal purchase and sale exception for eligible derivatives. Derivatives that require physical delivery in quantities that are expected to be used by the Utility over a reasonable period in the normal course of business, and do not contain pricing provisions unrelated to the commodity delivered are eligible for the normal purchase and sale exception. The fair value of derivatives that are eligible for the normal purchase and sales exception are not reflected in the Condensed Consolidated Balance Sheets.

Presentation of Derivative Instruments in the Financial Statements

In the Condensed Consolidated Balance Sheets, derivatives are presented on a net basis by counterparty where the right and the intention to offset exists under a master netting agreement. All derivatives that are subject to a master netting arrangement have been netted. The net balances include outstanding cash collateral associated with derivative positions.

At June 30, 2013, PG&E Corporation’s and the Utility’s outstanding derivative balances were as follows:

	Commodity Risk
	Gross											Total
(in millions)	Balance				Netting				Cash Collateral			Balance
Current assets – other		$	31			$	(11	)		$	28		$	48
Other noncurrent assets – other			71				(5	)			-			66
Current liabilities – other			(188	)			11				133			(44	)
Noncurrent liabilities – other			(168	)			5				40			(123	)
Total commodity risk		$	(254	)		$	-			$	201		$	(53	)

At December 31, 2012, PG&E Corporation’s and the Utility’s outstanding derivative balances were as follows:

	Commodity Risk
	Gross											Total
(in millions)	Balance				Netting				Cash Collateral			Balance
Current assets – other		$	48			$	(25	)		$	36		$	59
Other noncurrent assets – other			99				(11	)			-			88
Current liabilities – other			(255	)			25				115			(115	)
Noncurrent liabilities – other			(221	)			11				14			(196	)
Total commodity risk		$	(329	)		$	-			$	165		$	(164	)

Gains and losses associated with price risk management activities were recorded as follows:

	Commodity Risk
	Three Months Ended								Six Months Ended
	June 30,								June 30,
(in millions)	2013				2012				2013				2012
Unrealized gain/(loss) - regulatory assets and liabilities (1)		$	(23	)		$	219			$	75			$	165
Realized loss - cost of electricity (2)			(31	)			(125	)			(79	)			(275	)
Realized loss - cost of natural gas (2)			(4	)			(5	)			(12	)			(27	)
Total commodity risk		$	(58	)		$	89			$	(16	)		$	(137	)

(1) Unrealized gains and losses on commodity risk-related derivative instruments are recorded to regulatory assets or liabilities, rather than being recorded to the Condensed Consolidated Statements of Income. These amounts exclude the impact of cash collateral postings.
(2) These amounts are fully passed through to customers in rates. Accordingly, net income was not impacted by realized amounts on these instruments.

Volume of Derivative Activity

At June 30, 2013, the volumes of PG&E Corporation’s and the Utility’s outstanding derivatives were as follows:

Contract Volume (1)

1 Year or

3 Years or

Greater but

Less Than 1

Less Than 3

Less Than 5

5 Years or

Underlying Product

Instruments

Year

Years

Greater (2)

Natural Gas (3)

Forwards and

(MMBtus (4))

Swaps

290,542,776

86,670,000

6,900,000

Options

209,492,494

136,515,176

4,950,000

Electricity

Forwards and