PG&E 2008 Annual Report Download - page 125

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During 2008, the trusts earned $76 million in interest
and dividends. All earnings on the assets held in the trusts,
net of authorized disbursements from the trusts and invest-
ment management and administrative fees, are reinvested.
Amounts may not be released from the decommissioning
trusts until authorized by the CPUC. All of the Utility’s
investment securities in the trust are classifi ed as “Available
for Sale” in accordance with SFAS No. 115. At December 31,
2008, the Utility had accumulated nuclear decommissioning
trust funds with an estimated fair value of approximately
$1.7 billion, 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. (See Note 12 of the Notes to the
Consolidated Financial Statements.)
The Utility records unrealized gains and losses on
investments held in the trusts in other comprehensive
income. 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.
At December 31, 2008, total unrealized losses on
the investments held in the trusts were $39 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 $39 mil-
lion impairment is not other-than-temporary. As a result,
an impairment loss was recognized and the Utility recorded
a $39 million reduction to the nuclear decommissioning
trusts assets and the corresponding regulatory liability asset
retirement costs.
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 Internal Revenue 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 decom-
missioning Humboldt Bay Unit 3. The Utility cannot deduct
amounts contributed to the non-qualifi ed trust until such
decommissioning 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 and non-qualifi ed trusts to invest a maximum
of 60% of their funds in publicly-traded equity securities, 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 outside these ranges, the
investments are rebalanced toward the target allocation.
Trust earnings are included in the nuclear decommis-
sioning trust assets and the corresponding regulatory liability
for asset retirement costs. There is no impact on the Utility’s
earnings. Annual returns decrease in later years as higher por-
tions of the trusts are dedicated to fi xed income investments
leading up to and during the entire course of decommis-
sioning activities.