PG&E 2007 Annual Report Download - page 67

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65
ENVIRONMENTAL REMEDIATION LIABILITIES
Given the complexities of the legal and regulatory environ-
ment regarding environmental laws, the process of estimating
environmental remediation liabilities is a subjective one.
The Utility records a liability associated with environmental
remediation activities when it is determined that remediation
is probable, as defi ned in SFAS No. 5, and the cost can be
estimated in a reasonable manner. The liability can be based
on many factors, including site investigations, remediation,
operations, maintenance, monitoring, and closure. This
liability is recorded at the lower range of estimated costs,
unless a more objective estimate can be achieved. The
recorded liability is re-examined every quarter.
At December 31, 2007, the Utility’s accrual for undis-
counted and gross environmental liabilities was approxi-
mately $528 million. The Utility’s undiscounted future costs
could increase to as much as $834 million if other poten-
tially responsible parties are not able to contribute to the
settlement of these costs or the extent of contamination or
necessary remediation is greater than anticipated.
The accrual for undiscounted and gross environmental
liabilities is representative of future events that are likely to
occur. In determining maximum undiscounted future costs,
events that are possible but not probable are included in
the estimation.
ASSET RETIREMENT OBLIGATIONS
The Utility accounts for its long-lived assets under SFAS
No. 143, “Accounting for Asset Retirement Obligations”
(“SFAS No. 143”), and FASB Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations
— An Interpretation of SFAS No. 143” (“FIN 47”). SFAS
No. 143 and FIN 47 require that an asset retirement obliga-
tion be recorded at fair value in the period in which it is
incurred if a reasonable estimate of fair value can be made.
In the same period, the associated asset retirement costs are
capitalized as part of the carrying amount of the related
long-lived asset. Rate-regulated entities may recognize regu-
latory assets or liabilities as a result of timing differences
between the recognition of costs as recorded in accordance
with SFAS No. 143 and FIN 47 and costs recovered through
the ratemaking process.
The fair value of asset retirement obligations (“ARO”)
is dependent upon the following components:
• Decommissioning costs — The estimated costs for labor,
equipment, material, and other disposal costs;
• Infl ation adjustment — The estimated cash fl ows are
adjusted for infl ation estimates;
• Discount rate — The fair value of the obligation is based
on a credit-adjusted risk-free rate that refl ects the risk
associated with the obligation; and
• Third-party mark-up adjustments — Internal labor costs
included in the cash fl ow calculation were adjusted for
costs that a third party would incur in performing the
tasks necessary to retire the asset in accordance with
SFAS No. 143.
Changes in these factors could materially affect the
obligation recorded to refl ect the ultimate cost associated
with retiring the assets under SFAS No. 143 and FIN 47.
For example, if the infl ation adjustment increased 25 basis
points, this would increase the balance for ARO by approxi-
mately 1.26%. Similarly, an increase in the discount rate
by 25 basis points would decrease ARO by 0.95%. At
December 31, 2007, the Utility’s estimated cost of retiring
these assets is approximately $1.6 billion.
ACCOUNTING FOR INCOME TAXES
PG&E Corporation and the Utility account for income taxes
in accordance with SFAS No. 109, “Accounting for Income
Taxes,” which requires judgment regarding the potential tax
effects of various transactions and ongoing operations to
determine obligations owed to tax authorities. Amounts of
deferred income tax assets and liabilities, as well as current
and noncurrent accruals, involve estimates of the timing
and probability of recognition of income and deductions.
Actual income taxes could vary from estimated amounts
due to the future impacts of various items, including
changes in tax laws, PG&E Corporation’s fi nancial condition
in future periods, and the fi nal review of fi led tax returns by
taxing authorities.
On January 1, 2007, PG&E Corporation and the
Utility adopted the provisions of FIN 48. (See Note 2 of
the Notes to the Consolidated Financial Statements for
further discussion.)