PG&E 2012 Annual Report Download - page 70

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant, and Equipment
Property, plant, and equipment are reported at their original cost. These original costs include labor and
materials, construction overhead, and allowance for funds used during construction (‘‘AFUDC’’). The Utility’s
estimated useful lives and balances of its property, plant, and equipment were as follows:
Balance at
December 31,
Estimated Useful
Lives (years) 2012 2011
(in millions, except estimated useful lives)
Electricity generating facilities(1) ............ 10 to 100 $ 8,253 $ 6,488
Electricity distribution facilities ............. 10 to 55 23,767 22,395
Electricity transmission ................... 10 to 70 7,681 6,968
Natural gas distribution facilities ............ 20 to 53 8,257 7,832
Natural gas transportation and storage ....... 5 to 48 4,314 4,099
Construction work in progress .............. 1,894 1,770
Total property, plant, and equipment ......... 54,166 49,552
Accumulated depreciation ................. (16,643) (15,898)
Net property, plant, and equipment .......... $ 37,523 $ 33,654
(1) Balance includes nuclear fuel inventories. Stored nuclear fuel inventory is stated at weighted average cost. Nuclear fuel in the
reactor is expensed as it is used based on the amount of energy output. (See Note 15 below.)
Depreciation
The Utility depreciates property, plant, and equipment using the composite, or group, method of depreciation,
in which a single depreciation rate is applied to the gross investment in a particular class of property. This method
approximates the straight line method of depreciation over the useful lives of property, plant, and equipment. The
Utility’s composite depreciation rates were 3.63% in 2012, 3.67% in 2011, and 3.38% in 2010.
The useful lives of the Utility’s property, plant, and equipment are authorized by the CPUC and the FERC, and
the depreciation expense is recovered through rates charged to customers. Depreciation expense includes a
component for the original cost of assets and a component for estimated cost of future removal, net of any salvage
value at retirement. Upon retirement, the original cost of the retired assets, net of salvage value, is charged against
accumulated depreciation. The cost of repairs and maintenance, including planned major maintenance activities and
minor replacements of property, is charged to operating and maintenance expense as incurred.
AFUDC
AFUDC is a method used to compensate the Utility for the estimated cost of debt (i.e., interest) and equity
funds used to finance regulated plant additions and is capitalized as part of the cost of construction. AFUDC is
recoverable from customers through rates over the life of the related property once the property is placed in service.
AFUDC related to the cost of debt is recorded as a reduction to interest expense. AFUDC related to the cost of
equity is recorded in other income. The Utility recorded AFUDC of $49 million and $107 million during 2012,
$40 million and $87 million during 2011, and $50 million and $110 million during 2010, related to debt and equity,
respectively.
Regulation and Regulated Operations
As a regulated entity, the Utility’s rates are designed to recover the costs 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 in which
the costs are recovered. If costs expected to be incurred in the future are currently being recovered through rates,
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