PG&E 2008 Annual Report Download - page 72

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applied retrospectively. See Note 11 of the Notes to the
Consolidated Financial Statements for further discussion
and fi nancial statement impact of the implementation
of FIN 39-1.
FAIR VALUE OPTION
On January 1, 2008, PG&E Corporation and the Utility
adopted the provisions of SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”). SFAS No. 159 establishes a fair value
option under which entities can elect to report certain
fi nancial assets and liabilities at fair value with changes in
fair value recognized in earnings. PG&E Corporation and
the Utility have not elected the fair value option for any
assets or liabilities as of and during the three and twelve
months ended December 31, 2008; therefore, the adoption of
SFAS No. 159 did not impact the Condensed Consolidated
Financial Statements.
DISCLOSURES BY PUBLIC ENTITIES
(ENTERPRISES) ABOUT TRANSFERS
OF FINANCIAL ASSETS AND INTERESTS
IN VARIABLE INTEREST ENTITIES
On December 31, 2008, PG&E Corporation and the Utility
adopted the provisions of FASB Staff Position (“FSP”)
FAS 140-4 and FIN 46R-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities” (“FSP FAS 140-4 and
FIN 46R-8”). This FSP amends FASB No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extin-
guishment of Liabilities” to require public companies to
provide additional qualitative disclosures about transfers
of fi nancial assets. This guidance also amended FIN 46R
to require public enterprises to provide additional disclo-
sures about their involvement with variable interest entities
(“VIEs”) when they are the primary benefi ciary of the
VIE, hold a signifi cant variable interest in the VIE, or
are sponsors of and hold a variable interest in the VIE.
Although PG&E Corporation and the Utility were
not impacted by the amendment to FASB No. 140 as of
December 31, 2008, they were impacted by the amendment
to FIN 46R, primarily through the Utility’s power purchase
agreements, which may be considered signifi cant variable
interests. Accordingly, when the Utility has a signifi cant
variable interest in a VIE, FSP FAS 140-4 and FIN 46R-8
require additional disclosures about the entity, the extent
of the Utility’s involvement with the entity, and the Utility’s
methodology for evaluating these entities under FIN 46R. See
“Consolidation of Variable Interest Entities” within Note 2
to the Consolidated Financial Statements for expanded dis-
closures required by FSP FAS 140-4 and FIN 46R-8.
The remaining Level 3 price risk management instruments
are OTC derivative instruments that are valued using pricing
models based on the net present value of estimated future
cash fl ows based on broker quotations. The Utility receives
multiple non-binding broker quotes for certain locations,
which are generally averaged for valuation purposes. In
certain circumstances, broker quotes may be interpolated
or extrapolated to fi t the terms of a contract, such as
frequency of settlement or tenor. These instruments are
classifi ed within Level 3 of the fair value hierarchy.
Dividend Participation Rights
The dividend participation rights of the Convertible
Subordinated Notes are embedded derivative instruments in
accordance with SFAS No. 133 and, therefore, are bifurcated
from the Convertible Subordinated Notes and recorded
at fair value in PG&E Corporation’s Consolidated Balance
Sheets. The dividend participation rights are valued based
on the net present value of estimated future cash fl ows
using internal estimates of common stock dividends.
These rights are recorded as Current Liabilities — Other
and Noncurrent Liabilities — Other in PG&E Corporation’s
Consolidated Balance Sheets. (See Note 4 of the Notes to
the Consolidated Financial Statements for further discussion
of these instruments.)
NONPERFORMANCE RISK
In accordance with SFAS No. 157, PG&E Corporation and
the Utility incorporate the risk of nonperformance into the
valuation of their fair value measurements. Nonperformance
risk adjustments on the Utility’s price risk management
instruments are based on current market inputs when
available, such as credit default swaps spreads. When such
information is not available, internal models may be used.
The nonperformance risk adjustment for the net price risk
management instruments contributed less than 5% of the
value on December 31, 2008. As the Utility’s contracts are
used within the regulatory framework, the nonperformance
risk adjustments are recorded to regulatory accounts and
do not impact earnings.
See Note 12 of the Notes to the Consolidated Financial
Statements for further discussion on fair value measurements.
AMENDMENT OF FASB
INTERPRETATION NO. 39
On January 1, 2008, PG&E Corporation and the Utility
adopted the provisions of FASB Staff Position on FASB
Interpretation 39, “Amendment of FASB Interpretation
No. 39” (“FIN 39-1”). Under FIN 39-1, a reporting entity is
required to offset the cash collateral paid or cash collateral
received against the fair value amounts recognized for
derivative instruments executed with the same counterparty
under a master netting arrangement when reporting those
amounts on a net basis. The provisions of FIN 39-1 are