PG&E 2012 Annual Report Download - page 40

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, 2012
and December 31, 2011:
Net Credit
Number of Exposure to
Gross Credit Wholesale Wholesale
Exposure Customers or Customers or
Before Credit Credit Net Credit Counterparties Counterparties
Collateral(1) Collateral Exposure(2) >10% >10%
(in millions)
December 31, 2012 ............ $ 94 $ (9) $ 85 2 62
December 31, 2011 ............ 151 (13) 138 2 106
(1) Gross credit exposure equals mark-to-market value on physically and financially settled contracts, 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 accounting principles generally
accepted in the United States of America (‘‘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.
Regulatory Assets and Liabilities
The Utility’s rates are primarily set by the CPUC and the FERC and are designed to recover the cost of
providing service. The Utility capitalizes and records, as regulatory assets, costs that would otherwise be charged to
expense if it is probable that the incurred costs will be recovered in future rates. Regulatory assets are amortized
over the future periods that the costs are expected to be recovered. If costs expected to be incurred in the future are
currently being recovered through rates, the Utility records those expected future costs as regulatory liabilities. In
addition, the Utility records regulatory liabilities when the CPUC or the FERC requires a refund to be made to
customers or has required that a gain or other reduction of net allowable costs be given to customers over future
periods.
Determining probability requires significant judgment by management and includes, but is not limited to,
consideration of testimony presented in regulatory hearings, proposed regulatory decisions, final regulatory orders,
and the strength or status of applications for rehearing or state court appeals. For some of the Utility’s regulatory
assets, including utility retained generation, the Utility has determined that the costs are recoverable based on
specific approval from the CPUC. The Utility also records a regulatory asset when a mechanism is in place to
recover current expenditures and historical experience indicates that recovery of incurred costs is probable, such as
the regulatory assets for pension benefits; deferred income tax; price risk management; and unamortized loss, net of
gain, on reacquired debt. The CPUC has not denied during 2012, 2011, and 2010, the recovery of any material costs
previously recognized by the Utility as regulatory assets.
If the Utility determined that it is no longer probable that regulatory assets would be recovered or reflected in
future rates, or if the Utility ceased to be subject to rate regulation, the regulatory assets would be charged against
income in the period in which that determination was made. At December 31, 2012, PG&E Corporation and the
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