PG&E 2008 Annual Report Download - page 97

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entity’s equity instruments lack the essential characteristics
of a controlling fi nancial interest. FIN 46R requires that
the holder subject to the majority of the risk of loss from
a VIE’s activities must consolidate the VIE. However, if no
holder has the majority of the risk of loss, then a holder
entitled to receive a majority of the entity’s residual returns
would consolidate the entity.
The majority of the Utility’s involvement with VIEs is
through power purchase agreements. The Utility could have
a signifi cant variable interest in a power purchase agreement
counterparty if that entity is a VIE owning one or more
plants that sell substantially all of their output to the Utility.
The Utility performs a quantitative assessment of power pur-
chase agreements under FIN 46R, which includes performing
an analysis considering the term of the contract compared
to the remaining useful life of the plant, as well as perform-
ing an analysis of the absorption of the expected risks and
rewards of the project including production risk, commodity
price risk, credit risk, and tax attributes.
At December 31, 2008 there was one signifi cant VIE.
In 2007, the Utility entered into a 25-year agreement to
purchase as-available electric generation output from an
approximately 554-megawatt (“MW”) solar trough facility
in which the Utility has a signifi cant variable interest.
Activities of this facility consist of renewable energy pro-
duction from a single facility for sale to third parties. The
VIE is a subsidiary of a privately held company, and its
activities are fi nanced primarily through equity from investors
and proceeds from non-recourse project-specifi c debt fi nancing.
The Utility is not considered the primary benefi ciary for
this VIE, as it will not absorb the majority of the entity’s
expected losses or residual returns. Accordingly, the Utility
has not consolidated this VIE in its consolidated fi nancial
statements. This project is expected to become operational
in 2011 and no payments for energy have been made to this
facility as of December 31, 2008.
The Utility is generally not subject to risk of loss from
power purchase agreements as the primary obligation,
according to the terms of the agreements, is to purchase
as-available energy that is produced by the facility. Future
payments to this facility are made based on the energy pro-
duced and are expected to be recoverable through customer
rates. Additionally, no fi nancial or other support was pro-
vided by the Utility to this VIE as of December 31, 2008.
REGULATION AND SFAS NO. 71
The Utility accounts for the fi nancial effects of regulation
in accordance with SFAS No. 71. SFAS No. 71 applies to
regulated entities whose rates are designed to recover the
costs of providing service. SFAS No. 71 applies to all of
the Utility’s operations.
Under SFAS No. 71, incurred costs that would otherwise
be charged to expense may be capitalized and recorded as
regulatory assets if it is probable that the incurred costs will
be recovered in rates in the future. The regulatory assets are
amortized over future periods consistent with the inclusion
of those costs in authorized customer rates. If costs that a
regulated enterprise expects to incur in the future are cur-
rently being recovered through rates, SFAS No. 71 requires
that the regulated enterprise record those expected future
costs as regulatory liabilities. In addition, amounts that are
probable of being credited or refunded to customers in the
future must be recorded as regulatory liabilities.
INTANGIBLE ASSETS
Intangible assets primarily consist of hydroelectric facility
licenses and other agreements, with lives ranging from 19
to 40 years. The gross carrying amount of the hydroelectric
facility licenses and other agreements was approximately
$95 million at December 31, 2008 and $97 million at
December 31, 2007. The accumulated amortization was
approximately $35 million at December 31, 2008 and
$32 million at December 31, 2007. In December 2008, the
Utility obtained intangible assets related to the acquisition
of development rights of the Tesla Generating Station. The
value of these intangible assets, including permit and licenses,
was approximately $23 million at December 31, 2008. These
intangible assets have indefi nite lives and will not be amor-
tized, but an impairment test will be performed annually.
The Utility’s amortization expense related to intangible
assets was approximately $4 million in 2008 and $3 million
in both 2007 and 2006. The estimated annual amortization
expense for 2009 through 2013 based on the December 31,
2008 intangible asset balance is approximately $4 million
each year. Intangible assets are recorded to Other Noncurrent
Assets — Other in the Consolidated Balance Sheets.
CONSOLIDATION OF
VARIABLE INTEREST ENTITIES
The Financial Accounting Standards Board (“FASB”) Inter-
pretation No. 46 (revised December 2003), “Consolidation
of Variable Interest Entities” (“FIN 46R”), provides that an
entity is a variable interest entity (“VIE”) if it does not have
suffi cient equity investment at risk, or if the holders of the