PG&E 2012 Annual Report Download - page 75

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
economic performance, including the power to design the VIE. An enterprise that has a controlling financial interest
in a VIE is known as the VIE’s primary beneficiary and is required to consolidate the VIE.
In determining whether consolidation of a particular entity is required, PG&E Corporation and the Utility first
evaluate whether the entity is a VIE. If the entity is a VIE, PG&E Corporation and the Utility use a qualitative
approach to determine if either is the primary beneficiary of the VIE.
Some of the counterparties to the Utility’s power purchase agreements are considered VIEs. Each of these VIEs
was designed to own a power plant that would generate electricity for sale to the Utility subject to the terms of a
power purchase agreement. In determining whether the Utility is the primary beneficiary of any of these VIEs, it
assesses whether it absorbs any of the VIE’s expected losses or receives any portion of the VIE’s expected residual
returns under the terms of the power purchase agreement. This assessment includes an evaluation of how the risks
and rewards associated with the power plant’s activities are absorbed by variable interest holders, as well as an
analysis of the variability in the VIE’s gross margin and the impact of the power purchase agreement on the gross
margin. Under each of these power purchase agreements, the Utility is obligated to purchase electricity or capacity,
or both, from the VIE. The Utility does not provide any other support to these VIEs, and the Utility’s financial
exposure is limited to the amount it pays for delivered electricity and capacity. (See Note 15 below.) The Utility does
not have any decision-making rights associated with the design of any VIEs, nor does the Utility have the power to
direct the activities that are most significant to the economic performance of any VIEs such as dispatch rights,
operating and maintenance activities, or re-marketing activities of the power plant after the termination of any VIE’s
power purchase agreement with the Utility. Since the Utility was not the primary beneficiary of any of these VIEs at
December 31, 2012, it did not consolidate any of them.
The Utility continued to consolidate the financial results of PG&E Energy Recovery Funding LLC (‘‘PERF’’), a
VIE, at December 31, 2012, since the Utility is the primary beneficiary of PERF. PERF was formed in 2005 as a
wholly owned subsidiary of the Utility to issue energy recovery bonds (‘‘ERBs’’) in connection with the settlement
agreement entered into among PG&E Corporation, the Utility, and the CPUC in 2003 to resolve the Utility’s
proceeding under Chapter 11 (‘‘Chapter 11 Settlement Agreement’’). The Utility has a controlling financial interest
in PERF since the Utility is exposed to PERF’s losses and returns through the Utility’s 100% equity investment in
PERF and the Utility was involved in the design of PERF, which was an activity that was significant to PERF’s
economic performance. PERF is expected to be dissolved in 2013. (See Note 5 below.) While PERF is a wholly
owned consolidated subsidiary of the Utility, it is legally separate from the Utility. The assets (including the recovery
property) of PERF are not available to creditors of the Utility of PG&E Corporation, and the recovery property is
not legally an asset of the Utility or PG&E Corporation.
At December 31, 2012, PG&E Corporation affiliates had entered into four tax equity agreements to fund
residential and commercial retail solar energy installations with two privately held companies that are considered
VIEs. Under these agreements, PG&E Corporation has agreed to provide lease payments and investment
contributions of up to $396 million to these companies in exchange for the right to receive benefits from local
rebates, federal grants, and a share of the customer payments made to these companies. The majority of these
amounts are recorded in other noncurrent assets—other in PG&E Corporation’s Consolidated Balance Sheets. At
December 31, 2012, PG&E Corporation had made total payments of $361 million under these agreements and
received $228 million in benefits and customer payments. In determining whether PG&E Corporation is the primary
beneficiary of any of these VIEs, PG&E Corporation assesses which of the variable interest holders has control over
these companies’ significant economic activities, such as the design of the companies, vendor selection, construction,
customer selection, and re-marketing activities after the termination of customer leases. PG&E Corporation
determined that these companies control these activities, while its financial exposure from these agreements is
generally limited to its lease payments and investment contributions to these companies. Since PG&E Corporation
was not the primary beneficiary of any of these VIEs at December 31, 2012, it did not consolidate any of them.
71