PG&E 2010 Annual Report Download - page 95

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Cash inflows and outflows associated with the
settlement of all derivative instruments are included in
operating cash flows on PG&E Corporation’s and the
Utility’s Consolidated Statements of Cash Flows.
The majority of the Utility’s commodity risk-related
derivative instruments contain collateral posting provisions
tied to the Utility’s credit rating from each of the major
credit rating agencies. If the Utility’s credit rating were to
fall below investment grade, the Utility would be required
to immediately post additional cash to fully collateralize its
net liability derivative positions.
At December 31, 2010, the additional cash collateral
that the Utility would be required to post if its credit risk-
related contingency features were triggered was as follows:
(in millions)
Derivatives in a liability position with credit risk-related
contingencies that are not fully collateralized $ (518)
Related derivatives in an asset position –
Collateral posting in the normal course of business
related to these derivatives 7
Net position of derivative contracts/additional
collateral posting requirements (1) $ (511)
(1) This calculation excludes the impact of closed but unpaid positions, as
their settlement is not impacted by any of the Utility’s credit risk-
related contingencies.
NOTE 11: FAIR VALUE
MEASUREMENTS
PG&E Corporation and the Utility measure their cash
equivalents, trust assets, and price risk management
instruments at fair value. Fair value is an exit price,
representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-
based measurement that should be determined based on
assumptions that market participants would use in pricing
an asset or a liability. A three-tier fair value hierarchy is
established as a basis for considering such assumptions and
for inputs used in the valuation methodologies in
measuring fair value:
Level 1—Observable inputs that reflect quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
Level 2—Other inputs that are directly or indirectly
observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or
no market activities.
The fair value hierarchy requires an entity to maximize
the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.
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