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55
PART II
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Matters
The Utility’s operations are subject to extensive federal,
state, and local laws and permits relating to the protection
of the environment and the safety and health of the Utility’s
personnel and the public. These laws and requirements
relate to a broad range of the Utility’s activities, including
the remediation of hazardous wastes; the reporting
and reduction of CO
2
and other GHG emissions; the
discharge of pollutants into the air, water, and soil; and the
transportation, handling, storage, and disposal of spent
nuclear fuel. (See Item 1A. Risk Factors and “Environmental
Regulation” in Item 1.)
Natural Gas Compressor Station Sites
The Utility is legally responsible for remediating
groundwater contamination caused by hexavalent
chromium used in the past at the Utility’s natural gas
compressor stations. The Utility is also required to take
measures to abate the eects of the contamination on
the environment. At December 31, 2015, $140 million and
$300 million was accrued in the Consolidated Balances
Sheets for estimated undiscounted remediation costs
associated with the Hinkley site and the Topock site,
respectively. Costs associated with the Hinkley site are not
recovered through rates. (See “Environmental Remediation
Contingencies” in Note 13 of the Notes to the Consolidated
Financial Statements in Item 8.)
Risk Management Activities
The Utility and PG&E Corporation, mainly through its
ownership of the Utility, are exposed to risks associated
with adverse changes in commodity prices, interest rates,
and counterparty credit.
The Utility actively manages market risk through risk
management programs designed to support business
objectives, discourage unauthorized risk-taking, reduce
commodity cost volatility, and manage cash flows. The
Utility uses derivative instruments only for non-speculative
purposes (i.e., risk mitigation). The Utility’s risk management
activities include the use of energy and financial instruments
such as forward contracts, futures, swaps, options, and
other instruments and agreements, most of which are
accounted for as derivative instruments. Some contracts
are accounted for as leases.
Commodity Price Risk
The Utility is exposed to commodity price risk as a result
of its electricity and natural gas procurement activities,
including the procurement of natural gas and nuclear
fuel necessary for electricity generation and natural gas
procurement for core customers. As long as the Utility can
conclude that it is probable that its reasonably incurred
wholesale electricity procurement costs and natural gas
costs are recoverable, fluctuations in electricity and natural
gas prices will not aect earnings. Such fluctuations,
however, may impact cash flows. The Utility’s natural gas
transportation and storage costs for core customers are
also fully recoverable through a ratemaking mechanism.
The Utility’s current authorized revenue requirement for
natural gas transportation and storage service to non-core
customers is not balancing account protected. The Utility
recovers these costs through fixed reservation charges and
volumetric charges from long-term contracts, resulting
in price and volumetric risk. (See “2015 Gas Transmission
and Storage Rate Case” above.)
The Utility uses value-at-risk to measure its shareholders’
exposure to these risks. The Utility’s value-at-risk was
approximately $2 million and $1 million at December 31,
2015 and 2014, respectively. During 2015, the Utility’s
approximate high, low, and average values-at-risk were
$2 million, $1 million and $2 million, respectively. During
2014, the value-at-risk amounts were $9 million, $1 million
and $5 million, respectively. (See Note 9 of the Notes
to the Consolidated Financial Statements in Item 8 for
further discussion of price risk management activities.)
Interest Rate Risk
Interest rate risk sensitivity analysis is used to measure
interest rate risk by computing estimated changes in cash
flows as a result of assumed changes in market interest
rates. At December 31, 2015 and 2014, if interest rates
changed by 1% for all PG&E Corporation and Utility variable
rate long-term debt, short-term debt, and cash investments,