PG&E 2010 Annual Report Download - page 74

Utility does not assume customer credit risk nor take title
to the electricity being delivered to the customer.
Therefore, the Utility presents the electricity revenues for
amounts delivered to customers net of the cost of
electricity delivered by the DWR.
INCOME TAXES
PG&E Corporation and the Utility use the liability method
of accounting for income taxes. Income tax provision
(benefit) includes current and deferred income taxes
resulting from operations during the year. Investment tax
credits are deferred and amortized to income over time.
The Utility amortizes its investment tax credits over the life
of the related property in accordance with regulatory
treatment. PG&E Corporation amortizes its investment tax
credits over the projected investment recovery period or
the life of the arrangement for its tax equity arrangements.
(See Note 9 below.)
PG&E Corporation and the Utility recognize a tax
benefit if it is more likely than not that a tax position taken
or expected to be taken in a tax return will be sustained
upon examination by taxing authorities based on the
merits of the position. The tax benefit recognized in the
financial statements is measured based on the largest
amount of benefit that is greater than 50% likely of being
realized upon settlement. The difference between a tax
position taken or expected to be taken in a tax return and
the benefit recognized and measured pursuant to this
guidance represents an unrecognized tax benefit.
PG&E Corporation files a consolidated U.S. federal
income tax return that includes domestic subsidiaries in
which its ownership is 80% or more. In addition, PG&E
Corporation files a combined state income tax return in
California. PG&E Corporation and the Utility are parties
to a tax-sharing agreement under which the Utility
determines its income tax provision (benefit) on a stand-
alone basis.
NUCLEAR DECOMMISSIONING TRUSTS
The Utility’s nuclear power facilities consist of two units at
Diablo Canyon and the retired facility at Humboldt Bay.
Nuclear decommissioning requires the safe removal of
nuclear facilities from service and the reduction of residual
radioactivity to a level that permits termination of the
Nuclear Regulatory Commission (“NRC”) license and
release of the property for unrestricted use. The Utility’s
nuclear decommissioning costs are recovered from
customers through rates.
The Utility classifies its investments held in the nuclear
decommissioning trust as “available-for-sale.” As the
Utility’s nuclear decommissioning trust assets are managed
by external investment managers, the Utility does not have
the ability to sell its investments at their discretion.
Therefore, all unrealized losses are considered other-than-
temporary impairments. Gains or losses on the nuclear
decommissioning trust investments are refundable or
recoverable, respectively, from customers. Therefore, trust
earnings are deferred and included in the regulatory
liability for recoveries in excess of the ARO. There is no
impact on the Utility’s earnings or accumulated other
comprehensive income. The cost of debt and equity
securities sold is determined by specific identification.
ACCOUNTING FOR DERIVATIVES AND HEDGING
ACTIVITIES
Derivative instruments are recorded in PG&E
Corporation’s and the Utility’s Consolidated Balance
Sheets at fair value, unless they qualify for the normal
purchase and sales exception. Changes in the fair value of
derivative instruments are recorded in earnings or, to the
extent that they are recoverable through regulated rates, are
deferred and recorded in regulatory accounts. Derivative
instruments may be designated as cash flow hedges when
they are entered into in order to hedge variable price risk
associated with the purchase of commodities. For cash flow
hedges, fair value changes are deferred in accumulated
other comprehensive income and recognized in earnings as
the hedged transactions occur, unless they are recovered in
rates, in which case they are recorded in regulatory
accounts.
As of September 30, 2009, the Utility de-designated all
cash flow hedge relationships. Due to the regulatory
accounting treatment described above, the de-designation
of cash flow hedge relationships had no impact on net
income or the Consolidated Balance Sheets.
The normal purchase and sales exception to derivative
accounting requires, among other things, physical delivery
of quantities expected to be used or sold over a reasonable
period in the normal course of business. Transactions for
which the normal purchase and sales exception is elected
are not reflected in the Consolidated Balance Sheets at fair
value. They are accounted for under the accrual method of
accounting. Therefore, expenses are recognized as incurred.
PG&E Corporation and the Utility 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 where the right of offset exists and
where PG&E Corporation and the Utility intends to set off.
(See Note 10 below.)
70