PG&E 2014 Annual Report Download - page 69

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the site. Remediation efforts for a particular site generally extend over a period of several years. During this period, the laws
governing the remediation process may change, as well as site conditions, thereby possibly affecting the cost of the remediation
effort.
At December 31, 2014 and 2013, the Utility’s accruals for undiscounted gross environmental liabilities were $954 million
and $900 million, respectively. The Utility’s undiscounted future costs could increase to as much as $1.8 billion if the extent of
contamination or necessary remediation is greater than anticipated or if the other potentially responsible parties are not financially
able to contribute to these costs, and could increase further if the Utility chooses to remediate beyond regulatory requirements.
Although the Utility has provided for known environmental obligations that are probable and reasonably estimable, estimated costs
may vary significantly from actual costs, and the amount of additional future costs may be material to results of operations in the
period in which they are recognized.
Legal and Regulatory Matters
PG&E Corporation and the Utility are subject to various laws and regulations and, in the normal course of business,
PG&E Corporation and the Utility are subject to claims or named as parties in lawsuits. In addition, the Utility can incur penalties
for failure to comply with federal, state, or local laws and regulations. PG&E Corporation and the Utility record a provision
for a loss when it is both probable that a loss has been incurred and the amount of the loss can be reasonably estimated. PG&E
Corporation and the Utility evaluate the range of reasonably estimated losses and record a provision based on the lower end of
the range, unless an amount within the range is a better estimate than any other amount. These accruals, and the estimates of any
additional reasonably possible losses (or reasonably possible losses in excess of the amounts accrued), are reviewed quarterly
and are adjusted to reflect the impacts of negotiations, discovery, settlements and payments, rulings, advice of legal counsel, and
other information and events pertaining to a particular matter. In assessing the amount of such losses, PG&E Corporation’s and
the Utility’s policy is to exclude anticipated legal costs. (See “Enforcement and Litigation Matters” and “Legal and Regulatory
Contingencies” in Note 14 of the Notes to the Consolidated Financial Statements in Item 8.)
Asset Retirement Obligations
PG&E Corporation and the Utility account for an ARO at fair value in the period during which the legal obligation is
incurred if a reasonable estimate of fair value and its settlement date can be made. At the time of recording an ARO, the associated
asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset. The Utility recognizes a
regulatory asset or liability for the timing differences between the recognition of expenses and costs recovered through the
ratemaking process. (See Notes 2 and 3 of the Notes to the Consolidated Financial Statements in Item 8.)
To estimate its liability, the Utility uses a discounted cash flow model based upon significant estimates and assumptions
about future decommissioning costs, inflation rates, and the estimated date of decommissioning. The estimated future cash flows
are discounted using a credit-adjusted risk-free rate that reflects the risk associated with the decommissioning obligation.
At December 31, 2014, the Utility’s recorded ARO for the estimated cost of retiring these long-lived assets was $3.6
billion. Changes in these estimates and assumptions could materially affect the amount of the recorded ARO for these assets.
For example, a premature shutdown of the nuclear facilities at Diablo Canyon would increase the likelihood of an earlier start to
decommissioning and cause an increase in the ARO. Additionally, if the inflation adjustment increased 25 basis points, the amount
of the ARO would increase by approximately 1.70%. Similarly, an increase in the discount rate by 25 basis points would decrease
the amount of the ARO by 1.70%.
Pension and Other Postretirement Benefit Plans
PG&E Corporation and the Utility sponsor a non-contributory defined benefit pension plan for eligible employees as
well as contributory postretirement health care and medical plans for eligible retirees and their eligible dependents, and non-
contributory postretirement life insurance plans for eligible employees and retirees. Pension and other benefit expense is based
on the differences between actuarial assumptions and actual plan results and is deferred in accumulated other comprehensive
income (loss) and amortized into income on a gradual basis. The differences between pension benefit expense recognized in
accordance with GAAP and amounts recognized for ratemaking purposes are recorded as regulatory assets or liabilities as amounts
are probable of recovery from customers. To the extent the other benefits are in an overfunded position, the Utility records a
regulatory liability for a portion of the credit balance in accumulated other comprehensive income. (See Note 3 of the Notes to the
Consolidated Financial Statements in Item 8.)
The pension and other postretirement benefit obligations are calculated using actuarial models as of the December 31
measurement date. The significant actuarial assumptions used in determining pension and other benefit obligations include the