PG&E 2010 Annual Report Download - page 43

calculation is based on a 95% confidence 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 limitations,
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
methodology described above was approximately $11
million at December 31, 2010. The Utility’s high, low,
and average values-at-risk during the 12 months ended
December 31, 2010 were approximately $20 million, $10
million, and $14 million, respectively. (See Note 10 of the
Notes to the Consolidated Financial Statements for
further discussion of price risk management activities.)
INTEREST RATE RISK
Interest rate risk sensitivity analysis is used to measure
interest rate risk by computing estimated changes in cash
flows as a result of assumed changes in market interest
rates. At December 31, 2010, if interest rates changed by
1% for all current PG&E Corporation and the Utility
variable rate and short-term debt and investments, the
change would affect net income for the next 12 months
by $6 million, based on net variable rate debt and other
interest rate-sensitive instruments outstanding.
CREDIT RISK
The Utility conducts business with counterparties mainly
in the energy industry, including other California
investor-owned electric utilities, municipal utilities,
energy trading companies, financial institutions, and oil
and natural gas production companies located in the
United States and Canada. If a counterparty fails to
perform on its contractual obligation to deliver electricity
or gas, then the Utility may find it necessary to procure
electricity or gas at current market prices, which may be
higher than the contract prices.
The Utility manages credit risk associated with its
counterparties by assigning credit limits based on
evaluations of their financial conditions, net worth, credit
ratings, and other credit criteria as deemed appropriate.
Credit limits and credit quality are monitored periodically.
The Utility ties many energy contracts to master
commodity enabling agreements that may require security
(referred to as “Credit Collateral” in the table below).
Credit Collateral may be in the form of cash or letters of
credit. The Utility may accept other forms of performance
assurance in the form of corporate guarantees of acceptable
credit quality or other eligible securities (as deemed
appropriate by the Utility). Credit Collateral or
performance assurance may be required from counterparties
when current net receivables and replacement cost exposure
exceed contractually specified limits.
The following table summarizes the Utility’s net credit risk exposure to its counterparties, as well as the Utility’s credit
risk exposure to counterparties accounting for greater than 10% net credit exposure, as of December 31, 2010 and 2009:
(in millions)
Gross Credit
Exposure
Before Credit
Collateral (1)
Credit
Collateral Net Credit Exposure(2)
Number of
Wholesale
Customers or
Counterparties
>10%
Net
Exposure to
Wholesale
Customers or
Counterparties
>10%
December 31, 2010 $ 269 $ 17 $ 252 2 $ 187
December 31, 2009 $ 202 $ 24 $ 178 3 $ 154
(1) Gross credit exposure equals mark-to-market value on physically and financially settled contracts, notes receivable, and net receivables (payables)
where netting is contractually allowed. Gross and net credit exposure amounts reported above do not include adjustments for time value or liquidity.
(2) Net credit exposure is the Gross Credit Exposure Before Credit Collateral minus Credit Collateral (cash deposits and letters of credit). For purposes
of this table, parental guarantees are not included as part of the calculation.
CRITICAL ACCOUNTING POLICIES
The preparation of Consolidated Financial Statements in
accordance with GAAP involves the use of estimates and
assumptions that affect the recorded amounts of assets
and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. The accounting policies
described below are considered to be critical accounting
policies due, in part, to their complexity and because their
application is relevant and material to the financial
position and results of operations of PG&E Corporation
and the Utility, and because these policies require the use
of material judgments and estimates. Actual results may
differ substantially from these estimates. These policies
and their key characteristics are outlined below.
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