PG&E 2008 Annual Report Download - page 66

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On January 13, 2009, PG&E Corporation, upon request
by an investor, converted $28 million of Convertible
Subordinated Notes into 1,855,865 shares at the conversion
price of $15.09 per share. Total outstanding Convertible
Subordinated Notes after the conversion is approximately
$252 million.
In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS No. 133”),
the dividend participation rights of the Convertible
Subordinated Notes are considered to be embedded deriva-
tive instruments and, therefore, must be bifurcated from the
Convertible Subordinated Notes and recorded at fair value
in PG&E Corporation’s Consolidated Financial Statements.
The payment of pass-through dividends is recognized as an
operating cash fl ow in PG&E Corporation’s Consolidated
Statements of Cash Flows. Changes in the fair value are
recognized in PG&E Corporation’s Consolidated State-
ments of Income as a non-operating expense or income
(in Other income (expense), net). At December 31, 2008
and December 31, 2007, the total estimated fair value
of the dividend participation rights, on a pre-tax basis,
was approximately $42 million and $62 million, respectively,
of which $28 million and $25 million, respectively, was
classifi ed as a current liability (in Current Liabilities —
Other) and $14 million and $37 million, respectively, was
classifi ed as a noncurrent liability (in Noncurrent Liabilities
— Other) in the accompanying Consolidated Balance Sheets.
The discount factor used to value these rights was adjusted
on January 1, 2008 in order to comply with the provisions of
SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),
resulting in a $6 million increase in the liability. (See Note
12 of the Notes to the Consolidated Financial Statements for
further discussion of the implementation of SFAS No. 157.)
INTEREST RATE RISK
Interest rate risk sensitivity analysis is used to measure
interest rate risk by computing estimated changes in cash
fl
ows as a result of assumed changes in market interest rates.
At December 31, 2008, if interest rates changed by 1% for
all current variable rate debt issued by PG&E Corporation
and the Utility, the change would affect net income for the
twelve months ended December 31, 2008 by approximately
$0.1 million, based on net variable rate debt and other
interest rate-sensitive instruments outstanding.
CREDIT RISK
The Utility manages credit risk associated with its wholesale
customers and counterparties by assigning credit limits
based on evaluations of their fi
nancial conditions, net worth,
credit ratings, and other credit criteria as deemed appropriate.
Credit limits and credit quality are monitored periodically
and a detailed credit analysis is performed at least annually.
Natural Gas Transportation and Storage
The Utility uses value-at-risk to measure the shareholders’
exposure to price and volumetric risks resulting from
variability in the price of, and demand for, natural gas
transportation and storage services that could impact
revenues due to changes in market prices and customer
demand. Value-at-risk measures this exposure over a rolling
12-month forward period and assumes that the contract
positions are held through expiration. This calculation is
based on a 95% confi dence level, which means that there
is a 5% probability that the impact to revenues on a pre-tax
basis, over the rolling 12-month forward period, will be at
least as large as the reported value-at-risk. Value-at-risk uses
market data to quantify the Utility’s price exposure. When
market data is not available, the Utility uses historical data
or market proxies to extrapolate the required market data.
Value-at-risk as a measure of portfolio risk has several limita-
tions, including, but not limited to, inadequate indication
of the exposure to extreme price movements and the use of
historical data or market proxies that may not adequately
capture portfolio risk.
The Utility’s value-at-risk calculated under the method-
ology described above was approximately $16 million at
December 31, 2008. The Utility’s high, low, and average values-
at-risk during the twelve months ended December 31, 2008
were approximately $34 million, $16 million, and $25 mil-
lion, respectively.
Convertible Subordinated Notes
At December 31, 2008, PG&E Corporation had outstand-
ing approximately $280 million of 9.50% Convertible
Subordinated Notes that are scheduled to mature on June 30,
2010. These Convertible Subordinated Notes may be converted
(at the option of the holder) at any time prior to maturity
into 18,558,059 shares of PG&E Corporation common stock,
at a conversion price of $15.09 per share. The conversion
price is subject to adjustment for signifi cant changes in
the number of outstanding shares of PG&E Corporation’s
common stock. In addition, holders of the Convertible
Subordinated Notes are entitled to receive “pass-through
dividends” determined by multiplying the cash dividend
paid by PG&E Corporation per share of common stock by
a number equal to the principal amount of the Convertible
Subordinated Notes divided by the conversion price. During
2008, PG&E Corporation paid approximately $28 million
of pass-through dividends to the holders of Convertible
Subordinated Notes. On January 15, 2009, PG&E Corporation
paid approximately $7 million of pass-through dividends.