PG&E 2012 Annual Report Download - page 95

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11: FAIR VALUE MEASUREMENTS (Continued)
60 days or less. PG&E Corporation’s and the Utility’s investments in these money market funds are valued using
unadjusted prices for identical assets in an active market and are thus classified as Level 1. Money market funds are
recorded as cash and cash equivalents in PG&E Corporation’s and the Utility’s Consolidated Balance Sheets.
Trust Assets
The assets held by the nuclear decommissioning trusts, the rabbi trusts related to the non-qualified deferred
compensation plans, and the long-term disability trust are composed primarily of equity securities, debt securities,
and life insurance policies. In general, investments held in the trusts are exposed to various risks, such as interest
rate, credit, and market volatility risks.
Equity securities primarily include investments in common stock, which are valued based on unadjusted prices
for identical securities in active markets and are classified as Level 1. Equity securities also include commingled
funds composed of equity securities traded publicly on exchanges across multiple industry sectors in the U.S. and
other regions of the world, which are classified as Level 2. Price quotes for the assets held by these funds are readily
observable and available.
Debt securities are primarily composed of U.S. government and agency securities, municipal securities, and other
fixed-income securities, including corporate debt securities. U.S. government and agency securities primarily consist
of U.S. Treasury securities that are classified as Level 1 because the fair value is determined by observable market
prices in active markets. A market approach is generally used to estimate the fair value of debt securities classified as
Level 2. Under a market approach, fair values are determined based on evaluated pricing data, such as broker
quotes, for similar securities adjusted for observable differences. Significant inputs used in the valuation model
generally include benchmark yield curves and issuer spreads. The external credit ratings, coupon rate, and maturity
of each security are considered in the valuation model, as applicable.
Price Risk Management Instruments
Price risk management instruments include physical and financial derivative contracts, such as power purchase
agreements, forwards, swaps, options, and CRRs that are traded either on an exchange or over-the-counter. (See
Note 10 above.)
Power purchase agreements, forwards, and swaps are valued using a discounted cash flow model. Exchange-
traded forwards and swaps that are valued using observable market forward prices for the underlying commodity are
classified as Level 1. Over-the-counter forwards and swaps that are identical to exchange-traded forwards and swaps
or are valued using forward prices from broker quotes that are corroborated with market data are classified as
Level 2. Long-dated power purchase agreements that are valued using significant unobservable data are classified as
Level 3. These Level 3 contracts are valued using either estimated basis adjustments from liquid trading points or
techniques, including extrapolation from observable prices, when a contract term extends beyond a period for which
market data is available.
Exchange-traded options are valued using observable market data and market-corroborated data and are
classified as Level 2. Over-the-counter options are classified as Level 3 and are valued using a standard option
pricing model, which includes forward prices for the underlying commodity, time value at a risk-free rate, and
volatility. For periods where market data is not available, the Utility extrapolates observable data using internal
models.
The Utility holds CRRs to hedge the financial risk of CAISO-imposed congestion charges in the day-ahead
market. CRRs are valued based on prices observed in the CAISO auction, which are discounted at the risk-free rate.
Limited market data is available in the CAISO auction and between auction dates; therefore, the Utility uses models
to forecast CRR prices for those periods not covered in the auctions. CRRs are classified as Level 3.
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