PG&E 2007 Annual Report Download - page 117

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Balance Sheet. The total nuclear decommissioning obliga-
tion accrued in accordance with GAAP was approximately
$1.3 billion at December 31, 2007 and $1.2 billion at
December 31, 2006. The primary difference between the
Utility’s estimated nuclear decommissioning obligation as
recorded in accordance with GAAP and the estimate pre-
pared in accordance with the CPUC requirements is that
GAAP incorporates various potential settlement dates for the
obligation and includes an estimated amount for third-party
labor costs in the fair value calculation. Differences between
amounts collected in rates for decommissioning the Utility’s
nuclear power facilities and the decommissioning obligation
recorded in accordance with GAAP are refl ected in regula-
tory accounts. (See Note 3 of the Notes to the Consolidated
Financial Statements.)
Decommissioning costs recovered in rates are placed in
nuclear decommissioning trusts. The Utility has three decom-
missioning trusts for its Diablo Canyon and Humboldt Bay
Unit 3 nuclear facilities. The Utility has elected that two of
these trusts be treated under the Code as qualifi ed trusts. If
certain conditions are met, the Utility is allowed a deduction
for the payments made to the qualifi ed trusts. The qualifi ed
trusts are subject to a lower tax rate on income and capital
gains, thereby increasing the trusts’ after-tax returns. Among
other requirements, in order to maintain the qualifi ed trust
status, the IRS must approve the amount to be contributed
to the qualifi ed trusts for any taxable year. The remaining
non-qualifi ed trust is exclusively for decommissioning
Humboldt Bay Unit 3. The Utility cannot deduct amounts
contributed to the non-qualifi ed trust until such decommis-
sioning costs are actually incurred.
The funds in the decommissioning trusts, along with
accumulated earnings, will be used exclusively for decom-
missioning and dismantling the Utility’s nuclear facilities.
The trusts maintain substantially all of their investments in
debt and equity securities. The CPUC has authorized the
qualifi ed trust to invest a maximum of 60% of its funds in
publicly-traded equity securities, of which up to 20% may be
invested in publicly-traded non-U.S. equity securities. For the
non-qualifi ed trust, no more than 60% may be invested in
publicly-traded equities, of which up to 20% may be invested
in publicly-traded non-U.S. equity securities. The allocation
of the trust funds is monitored monthly. To the extent that
market movements cause the asset allocation to move out-
side these ranges, the investments are rebalanced toward the
target allocation.
The Utility estimates after-tax annual earnings, including
realized gains and losses, in the qualifi ed trusts to be 5.33%
and in the non-qualifi ed trusts to be 4.22%. Trust earnings
are included in the nuclear decommissioning trust assets and
the corresponding asset retirement costs regulatory liability.
There is no impact on the Utility’s earnings. Annual returns
decrease in later years as higher portions of the trusts are
dedicated to fi xed income investments leading up to and
during the entire course of decommissioning activities.
During 2007, the trusts earned approximately $77 mil-
lion in interest and dividends. All earnings on the assets
held in the trusts, net of authorized disbursements from
the trusts and investment management and administrative
fees, are reinvested. Amounts may not be released from the
decommissioning trusts until authorized by the CPUC. At
December 31, 2007, the Utility had accumulated nuclear
decommissioning trust funds with an estimated fair value of
approximately $2.0 billion, based on quoted market prices
and net of deferred taxes on unrealized gains.
In general, investment securities are exposed to various
risks, such as interest rate, credit, and market volatility risks.
Due to the level of risk associated with certain investment
securities, it is reasonably possible that changes in the market
values of investment securities could occur in the near term,
and such changes could materially affect the trusts’ fair value.
The Utility records unrealized gains and losses on
investments held in the trusts in other comprehensive
income in accordance with SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities.” Realized
gains and losses are recognized as additions or reductions
to trust asset balances. The Utility, however, accounts for
its nuclear decommissioning obligations in accordance with
SFAS No. 71; therefore, both realized and unrealized gains
and losses are ultimately recorded as regulatory assets
or liabilities.
In 2007, total unrealized losses on the investments held
in the trusts were $7 million. SFAS Nos. 115-1 and 124-1
state that an investment is impaired if the fair value of the
investment is less than its cost and if the impairment is
concluded to be other-than-temporary, an impairment loss
is recognized. Since the day-to-day investing activities of
the trusts are managed by external investment managers, the
Utility is unable to conclude that the $7 million impairment
is not other-than-temporary. As a result, an impairment loss
was recognized and the Utility recorded a $7 million reduc-
tion to the nuclear decommissioning trusts assets and the
asset retirement costs regulatory liability.