ITEM 1A. RISK FACTORS

PG&E Corporation’s an d the Utility’s financial results can be affected by many factors, including estimates and assumptions used in the critical accounting policies described in MD&A, that can cause their actual financial results to differ materially from historical results or from anticipated future financial results.  The following discussion of key risk factors should be considered in evaluating an investment in PG&E Corporation and the Utility and should be read in conjunction with MD&A and the Consolidated Financial Statem ents and related N otes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.  Any of these factors, in whole or in part, could materially affect PG&E Corporation’s and the Utility’s business, financial condition, results of o perations, liquidity, cash flows, and stock price.

Risks Related to Wildfires

PG&E Corporation’s and the Utility’s financial condition, results of operations, liquid ity, and cash flows could be materially affected by potential losses resulting from the impact of the Northern California wildfires. PG&E Corporation and the Utility also expect to be the subject of additional lawsuits and could be the subject of additiona l investigations, citations, fines or enforcement actions.

PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows could be materially affected by potential losses resulting from the impact of the multip le wildfires that spread through Northern California, including Napa, Sonoma, Butte, Humboldt, Mendocino, Del Norte, Lake, Nevada, and Yuba Counties, as well as in the area surrounding Yuba City, beginning on October 8, 2017 (the “Northern California wildf ires”).  According to the Cal Fire California Statewide Fire Summary dated October   30, 2017, at the peak of the wildfires, there were 21 major wildfires in California that, in total, burned over 245,000 acres, resulted in 43 fatalities, and destroyed an es timated 8,900 structures.  Subsequently, the number of fatalities increased to 44.

The Utility incurred $219 million in costs for service restoration and repair to the Utility’s facilities (including $97 million in capital expenditures) through December 3 1, 2017 in connection with these fires.  While the Utility believes that such costs are recoverable through CEMA, its CEMA requests are subject to CPUC approval.  The Utility’s financial condition, results of operations, liquidity, and cash flows could be materially affected if the Utility is unable to recover such costs.

The fires are being investigated by Cal Fire and the CPUC, including the possible role of the Utility’s power lines and other facilities.  The Utility expects that Cal Fire will issue a report or reports stating its conclusions as to the sources of ignition of the fires and the ways that they progressed.  The CPUC’s SED also is conducting investigations to assess the compliance of electric and communication companies’ facilities with appl icable rules and regulations in fire impacted areas.  According to information made available by the CPUC, investigation topics include, but are not limited to, maintenance of facilities, vegetation management, and emergency preparedness and response.  Var ious other entities, including fire departments, may also be investigating certain of the fires.  (For example, on February 3, 2018, it was reported that investigators with the Santa Rosa Fire Department had completed their investigation of two small fires that reportedly destroyed two homes and damaged one outbuilding and had concluded that the Utility’s facilities, along with high wind and other factors, contributed to those fires.)  It is uncertain when the investigations will be complete and whether Cal Fire will release any preliminary findings before its investigation is complete. 

As of January 31, 2018, the Utility had submitted 22 electric incident reports to the CPUC associated with the Northern California wildfires where Cal Fire has identified a site as potentially involving the Utility’s facilities in its investigation and the property damage associated with each incident exceeded $50,000.  The information contained in these reports is factual and preliminary, and does not reflect a determinati on of the causes of the fires.  The investigations into the fires are ongoing.

If the Utility’s facilities, such as its electric distribution and transmission lines, are determined to be the cause of one or more fires, and the doctrine of inverse condemna tion applies, the Utility could be liable for property damage, interest, and attorneys’ fees without having been found negligent, which liability, in the aggregate, could be substantial and have a material adverse effect on PG&E Corporation and the Utility .  (See “The doctrine of inverse condemnation, if applied by courts in litigation to which PG&E Corporation or the Utility are subject, could significantly expand the potential liabilities from such litigation and materially negatively affect PG&E Corporat ion’s and the Utility’s financial condition, results of operations, and cash flows” below.)  In addition to such claims for property damage, interest and attorneys’ fees, the Utility could be liable for fire suppression costs, evacuation costs, medical expe nses, personal injury damages, and other damages under other theories of liability, including if the Utility were found to have been negligent, which liability, in the aggregate, could be substantial and have a material adverse effect on PG&E Corporation a nd the Utility.  Further, the Utility could be subject to material fines or penalties if the CPUC or any other law enforcement agency brought an enforcement action and determined that the Utility failed to comply with applicable laws and regulations.

Give n the preliminary stages of investigations and the uncertainty as to the causes of the fires, PG&E Corporation and the Utility do not believe a loss is probable at this time.  However, it is reasonably possible that facts could emerge through the course of the various investigations that lead PG&E Corporation and the Utility to believe that a loss is probable, resulting in an accrued liability in the future, the amount of which could be material.   PG&E Corporation and the Utility currently are unable to re asonably estimate the amount of losses (or range of amounts) that they could incur, given the preliminary stages of the investigations and the uncertainty regarding the extent and magnitude of potential damages.  On January 31, 2018, the California Departm ent of Insurance issued a press release announcing an update on property losses in connection with the October and December wildfires in California, stating that, as of such date, “insurers have received nearly 45,000 insurance claims totaling more than $1 1.79 billion in losses,” of which approximately $10 billion relates to statewide claims from the October 2017 wildfires.  The remaining amount relates to claims from the Southern California December 2017 wildfires.  According to the California Department o f Insurance, as of the date of the press release, more than 21,000 homes, 3,200 businesses, and more than 6,100 vehicles, watercraft, farm vehicles, and other equipment were damaged or destroyed by the October 2017 wildfires.  PG&E Corporation and the Util ity have not independently verified these estimates.  The California Department of Insurance did not state in its press release whether it intends to provide updated estimates of losses in the future.

If the Utility’s facilities are determined to be the c ause of one or more of the Northern California wildfires, PG&E Corporation and the Utility could be liable for the related property losses and other damages.  The California Department of Insurance January 31, 2018 press release reflects insured property l osses only.  The press release does not account for uninsured losses, interest, attorneys’ fees, fire suppression costs, evacuation costs, medical expenses, personal injury and wrongful death damages or other costs.  If the Utility were to be found liable f or certain or all of such other costs and expenses, the amount of PG&E Corporation’s and the Utility’s liability could be higher than the approximately $10 billion estimated in respect of the wildfires that occurred in October 2017, depending on the extent of the damage in connection with such fire or fires.  As a result, PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows could be materially affected.

PG&E Corporation and t he Utility also are the subj ect of a still increasing number of lawsuits that have been filed against PG&E Corporation and the Utility in Sonoma, Napa and San Francisco Counties’ Superior Courts, several of which seek to be certified as class actions.  The lawsuits allege, among other things, negligence, inverse condemnation, trespass, and private nuisance.  They principally assert that PG&E Corporation’s and the Utility’s alleged failure to maintain and repair their distribution and transmission lines and failure to properly maintain the vegetation surrounding such lines were the causes of the fires.  The plaintiffs seek damages that include wrongful death, personal injury, property damage, evacuation costs, medical expenses, punitive damages, attorneys’ fees, and other damages.  In ad dition, two derivative lawsuits for breach of fiduciary duties and unjust enrichment were filed in the San Francisco County Superior Court on November 16, 2017 and November 20, 2017, respectively. PG&E Corporation and the Utility expect to be the subject o f additional lawsuits in connection with the Northern California wildfires.  The wildfire litigation could take a number of years to be resolved because of the complexity of the matters, including the ongoing investigation into the causes of the fires and the growing number of parties and claims involved.  The Utility has liability insurance from various insurers, which provides coverage for third-party liability attributable to the Northern California wildfires in an aggregate amount of approximately $800 million.  If the Utility were to be found liable for one or more fires, the Utility’s insurance could be insufficient to cover that liability, depending on the extent of the damage in connection with such fire or fires.

In addition, it could take a number of years before the Utility’s final liability is known and the Utility could apply for cost recovery.  The Utility may be unable to recover costs in excess of insurance through regulatory mechanisms and, even if such recovery is possible, it could take a number of years to resolve and a number of years thereafter to collect.  Further, SB 819, introduced in the California Senate in January 2018, if it becomes law, would prohibit utilities from recovering costs in excess of insurance resulting from damages c aused by such utilities’ facilities, if the CPUC determines that the utility did not reasonably construct, maintain, manage, control, or operate the facilities.  PG&E Corporation and the Utility have considered certain actions that might be taken to attemp t to address liquidity needs of the business in such circumstances, but the inability to recover costs in excess of insurance through increases in rates and by collecting such rates in a timely manner, or any negative assessment by the Utility of the likel ihood or timeliness of such recovery and collection, could have a material adverse effect on PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows.  (See “If the Utility is unable to recover all or a sign ificant portion of its excess costs in connection with the Northern California wildfires and the Butte fire through ratemaking mechanisms, PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows could be m aterially affected” below.)

Losses in connection with the wildfires would likely require PG&E Corporation and the Utility to seek financing, which may not be available on terms acceptable to PG&E Corporation or the Utility, or at all, when required.  (See “Risks Related to Liquidity and Capital Requirements” below.)

As of December 31, 2017, neither PG&E Corporation nor the Utility has accrued a liability with respect to the Northern California wildfires. If PG&E Corporation and the Utility were to determi ne that it is both probable that a loss has occurred and the amount of loss can be reasonably estimated, a liability would be recorded consistent with applicable accounting principles and as described in Note 13 of the Notes to the Consolidated Financial S tatements in Item 8.  As noted above, to the extent that such determination is made and a liability is accrued with respect to the Northern California wildfires, the amount of such liability accrual may be substantial. To the extent not offset by insurance recoveries determined to be similarly probable and estimable, the liability would reduce the balance sheet equity of PG&E Corporation and the Utility, which could adversely impact the Utility’s ability to maintain its CPUC-authorized capital structure of 5 2% equity and 48% debt and preferred stock, and which could also adversely impact PG&E Corporation’s and the Utility’s credit ratings and their ability to declare and pay dividends, efficiently raise capital, comply with financial covenants, and meet finan cial obligations.  (See “PG&E Corporation’s and the Utility’s financial results will be affected by their ability to continue accessing the capital markets and by the terms of debt and equity financings” below.)

Uncertainties relating to and market percept ion of these matters and the disclosure of findings regarding these matters over time, also could continue or increase volatility in the market for PG&E Corporation’s common stock and other securities, and for the securities of the Utility, and materially affect the price of such securities.

PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows could be materially affected by the ultimate amount of third-party liability that the Utility incurs in connect ion with the Butte fire.

In September 2015, a wildfire (known as the “Butte fire”) ignited and spread in Amador and Calaveras Counties in Northern California.   On April 28, 2016, Cal Fire   released its report of the investigation of the origin and cause of the wildfire.  According to Cal Fire’s report, the fire burned 70,868 acres, resulted in two fatalities, destroyed 549 homes, 368 outbuildings and four commer cial properties, and damaged 44 structures.  Cal Fire’s   report concluded that the wildfire was caused when a gray pine tree contacted   the Utility’s   electric line which ignited portions of the tree, and determined that the failure by the Utility   and/or its vegetation management contractors, ACRT Inc. and Trees, Inc.,   to identify certain potential hazards during its vegetation management program ultimately led to the failure of the tree.

In connection with the Butte fire, complaints have been filed against t he Utility, currently involving approximately 3,770 individual plaintiffs representing approximately 2,030 households and their insurance companies.  Plaintiffs seek to recover damages and other costs, principally based on the doctrine of inverse condemnati on and negligence theory of liability.  Plaintiffs also seek punitive damages.  The number of individual complaints and plaintiffs may still increase in the future , because the statute of limitations for property damages in connection with the Butte fire h as not yet expired.   (The statute of limitations for personal injury in connection with the Butte fire has expired.)   The Utility continues mediating and settling cases.

In addition, on April 13, 2017, Cal Fire filed a complaint seeking to recover $87 milli on for its costs incurred in connection with the Butte fire , and in May 2017, the OES indicated that it intends to bring a claim against the Utility that the OES estimated in the approximate amount of $190 million.  Also, in June 2017, the County of Calave ras indicated that it intends to bring a claim against the Utility that it estimates in the approximate amount of $85 million. 

In connection with th is matter, the Utility may be liable for property damages, interest, and attorneys’ fees without having been found negligent, through the doctrine of inverse condemnation.  In addition, the Utility may be liable for fire suppression costs, personal injury damages, and other damages if the Utility were found to have been negligent.  While the Utility believes it was not negligent, there can be no assurance that a court or jury would agree with the Utility. 

The Utility currently believes that it is probabl e that it will incur a loss of at least $1.1 billion , increased from the $750 million previously estimated as of December 31, 2016 in connection with the Butte fire.  W hile this amount includes the Utility’s assumptions about fire suppression costs (includ ing its assessment of the Cal Fire loss), it does not include any significant portion of the estimated claims from the OES and the County of Calaveras.  The Utility still does not have sufficient information to reasonably estimate the probable loss it may have for these additional claims.   A change in management’s estimates or assumptions could result in an adjustment that could have a material impact on PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flo ws.   (See Note 13 to the Consolidated Financial Statements in Item 8.)

If the Utility is unable to recover all or a significant portion of its e xcess costs in connection with the Northern California wildfires and the Butte Fire through ratemaking mechanis ms, PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows could be materially affected.

Through December 31, 2017, the amounts accrued in connection with claims relating to the Butte fire have exceeded the Utility’s liability insurance coverage.  While the Utility filed an application with the CPUC requesting approval to establish a WEMA to track wildfire expenses and to preserve the opportunity for the Utility to request recovery of wildfire costs that have not otherwise been recovered through insurance or other mechanisms, the Utility cannot predict the outcome of this proceeding.  (See “ Regulatory Matters – Application   to Establish a Wildfire Expense Memorandum Account” in Item 7. MD&A.)

In addition, there can be no assurance that the Utility will be allowed to recover costs recorded in WEMA, if approved, in the future. While the CPUC previously approved WEMA tracking accounts for San Diego Gas & Electric Company in 2010, in December 2017, the CPUC den ied recovery of costs that San Diego Gas & Electric Company stated it incurred as a result of the doctrine of inverse condemnation, holding that the inverse condemnation principles of strict liability are not relevant to the CPUC’s prudent manager standard .  That determination is being challenged by San Diego Gas & Electric as well as by the Utility and Southern California Edison. 

Additionally, SB 819 introduced in the California Senate in January 2018, i f it becomes law, would prohibit utilities’ recover y of costs in excess of insurance resulting from damages caused by such utilities’ facilities, if the CPUC determines that the U tility did not reasonably construct, maintain, manage, control, or operate the facilities.

PG&E Corporation and the Utility hav e considered certain actions that might be taken to attempt to address liquidity needs of the business in such circumstances, but the inability to recover all or a significant portion of costs in excess of insurance through increases in rates and by collec ting such rates in a timely manner, or any negative assessment by the Utility of the likelihood or timeliness of such recovery and collection, could have a material effect on PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows.

The doctrine of inverse condemnation, if applied by courts in litigation to which PG&E Corporation or the Utility are subject, could significantly expand the potential liabilities from such litigation and materially affect PG&E Corporation ’s and the Utility ’s financial condition, results of operations, liquidity and cash flows.

California law includes a doctrine of inverse condemnation that is routinely invoked in California for wildfire damages. Inverse condemnation imposes strict liability (including liability for attorneys’ fees) for damages as a result of the design, construction and maintenance of utility facilities, including utilities’ electric transmission lines.  Courts have imposed liability under the doctrine of inv erse condemnation in legal actions brought by property holders against utilities on the grounds that losses borne by the person whose property was damaged through a public use undertaking should be spread across the community that benefitted from such unde rtaking , and based on the assumption that utilities have the ability to recover these costs from their customers.  Plaintiffs have asserted the doctrine of inverse condemnation in lawsuits related to the Northern California and Butte fires, and it is possib le that plaintiffs could be successful in convincing courts to apply this doctrine in these or other litigations. For example, o n June 22, 2017, the Superior Court for the County of Sacramento found that the doctrine of inverse condemnation applies to the Utility with respect to the Butte fire.  Although the Utility has filed a renewed motion for a legal determination of inverse condemnation liability , there can be no assurance that the Utility will be successful in its arguments that the doctrine of invers e condemnation does not apply in the Butte fire or other litigation against PG&E Corporation or the Utility.

Furthermore, a court could determine that the doctrine of inverse condemnation applies even in the absence of an open CPUC proceeding for cost recovery, or before a potential cost recovery decision is issued by the CPUC.  Although the imposition of liability is premised on the assumption that utilities have the ability to automatically recover these costs from their customers, there can be no guar antee that the CPUC would authorize cost recovery whether or not a previous court decision imposes liability on a utility under the doctrine of inverse condemnation.  I n December 2017, the CPUC denied recovery of costs that San Diego Gas & Electric Company stated it incurred as a result of the doctrine of inverse condemnation, holding that the inverse condemnation principles of strict liability are not relevant to the CPUC’s prudent manager standard. That determination is being challenged by San Diego Gas & Electric as well as by the Utility and Southern California Edison.

I f PG&E Corporation or the Utility were to be found liable for damage under the doctrine of inverse condemnation, but is unable to secure a cost recovery decision from the CPUC to pay for such costs through increases in rates , the financial condition, results of operations, liquidity and cash flows of PG&E Corporation and the Utility would be materially affected by potential losses resulting from the impact of the Northern California wildf ires.  (See “ PG&E Corporation and the Utility also expect to be the subject of additional lawsuits and could be the subject of additional investigations, citations, fines or enforcement actions” and “PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity and cash flows could be materially affected by the ultimate amount of third-party liability that the Utility incurs in connection with the Butte fire” above.)

30

The Utility is subje ct to extensive regulations, including federal, state and local energy, environmental and other laws and regulations, and the risk of enforcement proceedings in connection with such regulations.  The Utility could incur material charges, including fines an d other penalties, in connection with the ex parte OII, safety culture OII, and the CPUC’s SED investigations, including the SED’s investigations of the Yuba City incident, which arose from a residential structure fire in Yuba City, California, in January 2017, that resulted in the collapse of a house and injuries to two persons inside the house, or other current and future investigations.   The SED could launch investigations at any time on any issue it deems appropriate.

The SED has discretion whether to issue a penalty for each violation, but if it assesses a penalty for a violation, it is required to impose the maximum statutory penalty of $50,000, with an administrative limit of $8 million per citation issued.  The SED may, at its discretion, impose pen alties on a daily basis, or on less than a daily basis, for violations that continued for more than one day.  The SED also has wide discretion to determine the amount of penalties based on the totality of the circumstances, including such factors as the gr avity of the violations; the type of harm caused by the violations and the number of persons affected; and the good faith of the entity charged in attempting to achieve compliance, after notification of a violation.  The SED also is required to consider th e appropriateness of the amount of the penalty to the size of the entity charged.  Historically, the SED has exercised broad discretion in determining whether violations are continuing and the amount of penalties to be imposed.   While it is uncertain how th e CPUC will calculate the number of violations or the penalty for any violations, such fines or penalties could be significant and materially affect PG&E Corporation’s and the Utility’s liquidity and results of operations.  (See Note 13 to the Consolidated Financial Statements in Item 8.)

The Utility also is a target of a number of investigations.  In 2014, both the U.S. Attorney's Office in San Francisco and the California Attorney General's office opened investigations into matters related to allegedly improper communication between the Utility and CPUC personnel.  The Utility also is unable to predict the outcome of, or costs and expenses associate with, pending investigations, including whether any charges will be brought against the Utility.

If these investigations result in enforcement action against the Utility, the Utility could incur additional fines or penalt ies and, in the event of a judg ment against the Utility, suffer further ongoing negative consequences.  For example, on April 9, 2015, the CP UC issued a decision in its investigative enforcement proceedings against the Utility to impose total penalties of $1.6 billion on the Utility after determining that the Utility had committed numerous violations of laws and regulations related to its natur al gas transmission operations (the “San Bruno Penalty Decision”).  The San Bruno Penalty Decision requires the SED to review the Utility’s gas transmission operations (including the Utility’s compliance with the remedies ordered by the San Bruno Penalty De cision) and to perform annual audits of the Utility’s record-keeping practices for a minimum of ten years.  The SED could impose fines on the Utility or require the Utility to incur unrecoverable costs, or both, based on the outcome of these future audits.   Furthermore, a negative outcome in any of these investigations, or future enforcement actions, could negatively affect the outcome of future ratemaking and regulatory proceedings to which the Utility may be subject; for example, by enabling parties to ch allenge the Utility’s request to recover costs that the parties allege are somehow related to the Utility’s violations.  (See also “PG&E Corporation’s and the Utility’s future financial results could be materially affected by the conviction of the Utility i n the federal criminal proceeding and by the debarment proceeding” below.)

The Utility could be subject to additional regulatory or governmental enforcement action in the future with respect to compliance with federal, state or local laws, regulations or orders that could result in additional fines, penalties or customer refunds, including those regarding renewable energy and resource adequacy requirements; customer billing; customer service; affiliate transactions; vegetation management; design, construct ion, operating and maintenance practices; safety and inspection practices; compliance with CPUC general orders or other applicable CPUC decisions or regulations; federal electric reliability standards; and environmental compliance.  For example, despite th e Utility’s system-wide survey of its transmission pipelines, carried out in an effort to address a self-reported violation whereby the Utility did not properly identify encroachments (such as building structures and vegetation overgrowth) on the Utility’s pipeline rights-of-way, the SED could impose fines on the Utility in the future based on the Utility’s failure to continuously survey its system and remove encroachments. CPUC staff could also impose penalties on the Utility in the future in accordance wi th its authority under the gas and electric safety citation programs.  The amount of such fines, penalties, or customer refunds could have a material effect on PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows.  

On August 9, 2016, the jury in the federal criminal trial against the Utility in the United States District Court for the Northern District of California, in San Francisco, found the Utility guilty on one count of obstructing a federal agency proceedin g and five counts of violations of pipeline integrity management regulations of the Natural Gas Pipeline Safety Act.  On January 26, 2017, the court issued a judgment of conviction against the Utility.  The court sentenced the Utility to a five- year corpor ate probation period, oversight by a third-party monitor for a period of five years, with the ability to apply for early termination after three years , a fine of $3 million to be paid to the federal government, certain advertising requirements, and communi ty service.

The probation includes a requirement that the Utility not commit any local, state, or federal crimes during the probation period.  As part of the probation, the Utility has retained a third-party monitor at the Utility’s expense.  The goal of the monitor is to help ensure that the Utility takes reasonable and appropriate steps to maintain the safety of its gas and electric operations, and to maintain effective ethics, compliance and safety related incentive programs on a Utility-wide basis.

The Utility could incur material costs and additional penalties , not recoverable through rates, in the event of non-compliance with the terms of its probation and in connection with the monitorship (including but not limited to costs resulting from recomme ndations of the monitor).

Since 2015, the Utility has also been the subject of a DOI inquiry into whether the Utility should be suspended or debarred from entering into federal procurement and non-procurement contracts and programs , citing the San Bruno e xplosion , and indicating, as the basis for the inquiry, alleged poor record-keeping, poor identification and evaluation of threats to gas lines and obstruction of the NTSB’s investigation.  On December 21, 2016, the Utility and the DOI entered into an inter im administrative agreement that reflects the DOI’s determination that the Utility remains eligible to contract with federal government agencies while the DOI determines whether any further action is necessary to protect the federal government’s business i nterests.  If the DOI determines that the Utility’s compliance and ethics program is not generally effective in preventing and detecting criminal conduct, the Utility may be required to enter into an amended administrative agreement and implement remedial a nd other measures, such as a requirement that the Utility’s natural gas operations and/or compliance and eth ics programs be supervised by one or more independent third- party monitor (s) .

The Utility’s conviction and the outcome of probation and the debarme nt proceeding could harm the Utility’s relationships with regulators, legislators, communities, business partners, or other constituencies and make it more difficult to recruit qualified personnel and senior management.   Further, they could negatively affe ct the outcome of future ratemaking and regulatory proceedings, for example, by enabling parties to argue that the Utility should not be allowed to recover costs that the parties allege are somehow related to the criminal charges on which the Utility was f ound guilty.  They could also result in increased regulatory or legislative scrutiny with respect to various aspects of how the Utility’s business is conducted or organized.  (See “Enforcement and Litigation Matters ” in Item 7. MD&A.) 

PG&E Corporation’s and the Utility’s financial results primarily depend on the outcomes of  regulatory and ratemaking proceedings and the Utility’s ability to manage its operating expenses and capital expenditures so that it is able to earn its authorized rate of return in a timely manner.

As a regulated entity, the Utility’s rates are set by the CPUC or the FERC on a prospective basis and are generally designed to allow the Utility to collect sufficient revenues to recover reasonable costs of providing service, including a return on its capital investments.  PG&E Corporation’s and the Utility’s financial results could be materially affected if the CPUC or the FERC does not authorize sufficient revenues for the Utility to safely and reliably serve its customers and earn its authorized ROE.  The outcome of the Utility’s ratemaking proceedings can be affected by many factors, including the level of opposition by intervening parties; potential rate impacts; increasing levels of regulatory review; changes in the political, regula tory, or legislative environments; and the opinions of the Utility’s regulators, consumer and other stakeholder organizations, and customers, about the Utility’s ability to provide safe, reliable, and affordable electric and gas services.   Further, the inc reasing amount of Reliability Must Run ( “ RMR ” ) electric generation in the CAISO could increase the Utility’s costs of procuring capacity needed for reliable service to its customers .

In addition, increasing levels of self-generation of electricity by customers (primarily solar installations) and the use of customer NEM, which allows self-generating customers to receive bill credits for surplus power at the full retail rate, puts upward rate pressure on remaining customers.  New rules and rates became effective for new NEM customers of the Utility in December 2016.  New NEM customers are required to pay an interconnection fee, comply with time of use rates, and are required to pay certain non-bypassable charges to help fund some of the cos ts of low income, energy efficiency, and other programs that other customers pay.  Remaining customers may incur significantly higher bills due to an increase in customers seeking alternative energy providers .   The CPUC has indicated that it intends to revi sit these rules in 2019.

A confluence of technology-related cost declines and sustained federal or state subsidies could make a combination of distributed generation and energy storage a viable, cost-effective alternative to the Utility’s bundled electric service which could further threaten the Utility’s ability to recover its generation, transmission, and distribution investments.  If the number of the Utility’s customers decreases or grows at a slower rate than anticipated, the Utility’s level of author ized capital investment could decline as well, leading to a slower growth in rate base and earnings.  Reduced energy demand or significantly slowed growth in demand due to customer migration to other energy providers, adoption of energy efficient technolog y, conservation, increasing levels of distributed generation and self-generation, unless substantially offset through regulatory cost allocations, could materially affect PG&E Corporation’s and the Utility’s business, financial condition, results of operat ions, liquidity, and cash flows.

The CPUC has begun to implement rate reform to allow residential electric rates to more closely reflect the utilities’ actual costs of providing service and decrease cross -subsidization among customer classes.  Many aspe cts of rate reform are not yet finalized, including time-of-use rates and whether the utilities can impose a fixed charge on certain customers. 

Further, c hanges in commodity prices also may have an adverse effect on the Utility’s ability to timely recov er its operating costs and earn its authorized ROE.   Although the Utility generally recovers its electricity and natural gas procurement costs from customers as “pass-through” costs, a significant and sustained rise in commodity prices could create overall rate pressures that make it more difficult for the Utility to recover its costs that are not categorized as “pass-through” costs.   To relieve some of this upward rate pressure, the CPUC could authorize lower revenues than the Utility requested or disallow full cost recovery. 

If the Utility is unable to recover a material portion of its procurement costs and/or if the CPUC fails to adjust the Utility’s rates to reflect the impact of changing loads, the wide deployment of distributed generation, and the d evelopment of new electricity generation and energy storage technologies, PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows could be materially affected . 

Risks Related to Liquidity and Capital Re quirements

The outcome or market perception of the investigations and litigation in connection with the Northern California wildfires, and the outcome or market perception of other litigation and enforcement matters, could reduce or eliminate PG&E Corpora tion’s and the Utility’s access to the capital markets and other sources of financing, which could have a material adverse effect on PG&E Corporation and the Utility.

PG&E Corporation’s and the Utility’s liquidity is dependent on many factors, including a ccess to the capital markets and availability under their revolving credit facilities and commercial paper program s .  PG&E Corporation’s and the Utility’s ability to access the capital markets, t he ability t o borrow under their loan financing arrangements, including their revolving credit facilities, and the terms and rates of future financings, as well as the credit ratings of PG&E Corporation and the Utility and their respective debt facilities, could be materially affected by the outcome or market percep tion of the matters discussed in this 2017 Form 10-K under “Northern California Wildfires” in Note 13 of the Notes to the Consolidated Financial Statements in Item 8 .  Liabilities that could be incurred as a result of the Northern California wildfires could adversely affect their ability to comply with the covenants in their financing arrangements, which could adversely affect the ability to borrow under the applicable facility or program.

Access by PG&E Corporation to the equity capital markets is also critical to maintaining the Utility’s CPUC-authorized capital structure. PG&E Corporation contributes equity to t he Utility as needed to maintain the Utility’s CPUC-author ized capital structure.   In the fiscal year ended December 31, 2017, PG&E Corporation issued $ 416 million in common stock and made equity contributions of $ 455 million to the Utility .   PG&E Corporatio n forecasts it will need a material am ount of equity in future years, including to support the Utility’s capital expenditures.   PG&E Corporation may also seek to issue additional equity to fund unrecoverable operating expenses and to pay claims, losses, fin es and penalties that may be   required by the outcome of enforcement matters and litigation, including in connection with the Northern California wildfires, and the outcome of the related CPUC and Cal Fire investigations.

If either PG&E Corporation or the Utility is unable to access the capital markets or to borrow under their respective loan financing arrangements or commercial paper program s , PG&E Corporation and the Utility’s financial condition, results of operations, liquidity, and cash flows, could be materially affected.

PG&E Corporation is a holding company with no revenue generating operations of its own.   The Utility must use its resources to satisfy its own obligations, including the Utility’s obligation to serve customers, to pay principal and interest on outstanding debt, to pay preferred stock dividends , unless suspended, and meet its obligations to employees and creditors, before it can distribute cash to PG&E Corporation . Under the CPUC’s rules applicable to utility holding companies, the Utility’s dividend policy must be established by the Utility’s Board of Directors as though the Utility were a stand-alone utility company and PG&E Corporation’s Board of Directors must give “first priority” to the Utility’s capital requirements, as determined to be necessary and prudent to meet the Utility’s obligation to serve or to operate the Utility in a prudent and efficient manner.  The CPUC has interpreted this “first priority” obl igation to include the requirement that PG&E Corp oration “infuse the Utility with all types of capital necessary for the Utility to fulfill its obligation to serve . ”  In addition, before the Utility can pay common stock dividends to PG&E Corp oration , the U tility must maintain its authorized capital structure with an average 52% equity component.

If the Utility were required to pay a material amount of fines or incur material unrecoverable costs in connection with the Northern California wildfires , the Butt e fire , the pending CPUC investigations, the terms of probation or monitorship, or other liabilities or enforcement matters, it would require incremental equity contributions from PG&E Corporation to restore its capital structure.  PG&E Corp oration common s tock issuances used to fund such equity contributions could materially dilute earnings per share. (See “Liquidity and Financ ial Resources” in Item 7. MD&A ).  Further, if PG&E Corp oration were required to infuse the Utility with significant capital or if the Utility w ere unable to distribute cash to PG&E Corporation , or both, PG&E Corporation may be unable to pay principal and interest on its outstanding debt, pay its common stock dividend or meet other obligations.

In December 2017, the Boards of Directors of PG&E Corporation and the Utility suspended dividends on common stock of PG&E Corporation and preferred stock of the Utility due to uncertainty related to the causes and potential liabilities associated with the Northern California wildfires.  The suspens ion of dividends could continue to materially affect the price of PG&E Corporation’s common stock and adversely affect the ability of PG&E Corporation to raise additional equity capital.  There can be no assurances as to when, if at all, the Board of Direct ors of PG&E Corporation and the Utility will determine to re-instate quarterly cash dividends on PG&E Corporation’s common stock or the Utility’s preferred stock.

PG&E Corporation’s and the Utility’s financial results will be affected by their ability to continue accessing the capital markets and by the terms of debt and equity financings.

PG&E Corporation and the Utility will continue to seek funds in the capital and credit markets to enable the Utility to make capital investments, and to pay fines that may be imposed in the future, as well as costs related to rights-of-way and legal and regulatory costs.  PG&E Corporation’s and the Utility’s ability to access the capital and credit markets and the costs and terms of available financing depend primarily o n PG&E Corporation’s and the Utility’s credit ratings and outlook.  Their credit ratings and outlook can be affected by many factors, including pending or anticipated litigation, the pending Cal Fire and CPUC investigations and CPUC ratemaking proceedings, and by the December 20, 2017 decision of the Boards of Directors of PG&E Corporation and the Utility to suspend dividends, as well as the perceived impact of all such matters on PG&E Corporation’s and the Utility’s financial condition, whether or not such perception is accurate.  On December 21, 2017, Moody's Investor Services and on December 22, 2017, S tandard & P oor’s Global Ratings, each placed all of the ratings of PG&E Corporation and the Utility under review for downgrade , and Standard & Poor’s Globa l Ratings additionally lowered its ratings on the Utility’s preferred stock .  If PG&E Corporation’s or the Utility’s credit ratings were to be downgraded or the ratings on the Utility’s preferred stock are further downgraded, in particular to below investm ent grade, their ability to access the capital and credit markets would be negatively affected and could result in higher borrowing costs, fewer financing options, including reduced, or lack of, access to the commercial paper market and additional collater al posting requirements, which in turn could affect liquidity and lead to an increased financing need.  Other factors can affect the availability and terms of debt and equity financing, including changes in the federal or state regulatory environment affec ting energy companies generally or PG&E Corporation and the Utility in particular, the overall health of the energy industry, an increase in interest rates by the Federal Reserve Bank, and general economic and financial market conditions.

The reputations of PG&E Corporation and the Utility continue to suffer from the negative publicity about matters discussed under “Enforcement and Litigation Matters” in Item 3. Legal Proceedings and Note 13 of the Notes to the Consolidated Financial Statements in Item 8 .  The negative publicity and the uncertainty about the outcomes of these matters may undermine confidence in management’s ability to execute its business strategy and restore a constructive regulatory environment, which could adversely impact PG&E Corporati on’s stock price.  Further, the market price of PG&E Corporation common stock could decline materially depending on the outcome of these matters.   The amount and timing of future share issuances also could affect the stock price.

Risks Related to Operatio ns and Information Technology

The Utility’s electricity and natural gas operations are inherently hazardous and involve significant risks which, if they materialize, can adversely affect PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows.  

The Utility owns and operates extensive electricity and natural gas facilities, including two nuclear generation units and an extensive hydroelectric generating system .  (See “Electric Utility Operations” and “Nat ural Gas Utility Operations” in Item 1. Business.)  The Utility’s ability to earn its authorized ROE depends on its ability to efficiently maintain, operate, and protect its facilities, and provide electricity and natural gas services safely and reliably. The Utility undertakes substantial capital investment projects to construct, replace, and improve its electricity and natural gas facilities.  In addition, the Utility is obligated to decommission its electricity generation facilities at the end of their useful operating lives , and the CPUC approved retirement of Diablo Canyon by 2024 and 2025 .  The Utility’s ability to safely and reliably operate, maintain, construct and decommission its facilities is subject to numerous risks, many of which are beyond th e Utility’s control, including those that arise from: 

• the breakdown or failure of equipment, electric transmission or distribution lines, or natural gas transmission and distribution pipelines, that can cause explosions, fires, or other catastrophic eve nts;

• an overpressure event occurring on natural gas facilities due to equipment failure, incorrect operating procedures or failure to follow correct operating procedures, or welding or fabrication-related defects, that results in the failure of downstream transmission pipelines or distribution assets and uncontained natural gas flow;

• the failure to maintain adequate capacity to meet customer demand on the gas system that results in customer curtailments, controlled/uncontrolled gas outages, gas surges back into homes, serious personal injury or loss of life;

• a prolonged statewide electric al black-out that results  in damage to the Utility’s equipment or damage to property owned by customers or other third parties;

• the failure to fully identify, evaluate, and control workplace hazards that result in serious injury or loss of life for emplo yees or the public, environmental damage, or reputational damage;

• the release of radioactive materials caused by a nuclear accident, seismic activity, natural disaster, or terrorist act;

• the failure of a large dam or other major hydroelectric facility, o r the failure of one or more levees that protect land on which the Utility’s assets are built;

• the failure to take expeditious or sufficient action to mitigate operating conditions, facilities, or equipment, that the Utility has identified, or reasonably should have identified, as unsafe, which failure then leads to a catastrophic event (such as a wild land fire or natural gas explosion) ;

• inadequate emergency preparedness plans and the failure to respond effectively to a catastrophic event that can lead to public or employee harm or extended outages;

• operator or other human error;

• an ineffective records management program that results in the failure to construct, operate and maintain

a utility system safely and prudently;

• construction performed by thir d parties that damage s the Utility’s underground or overhead facilities, including, for example, ground excavations or “dig-ins” that damage the Utility’s underground pipelines;

• the release of hazardous or toxic substances into the air, water, or soil, in cluding, for example, gas leaks from natural gas storage facilities; flaking lead-based paint from the Utility’s facilities, and leaking or spilled insulating fluid from electrical equipment; and

• attacks by third parties, including cyber-attacks, acts of terrorism, vandalism, or war.

36

The occurrence of any of these events could interrupt fuel supplies; affect demand for electricity or natural gas; cause unplanned outages or reduce generating output; damage the Utility’s assets or operations; damage the assets or operations of third parties on which the Utility relies; damage property owned by customers or others; and cause personal injury or death.  As a result, the Utility could incur costs to purchase replacement power, to repair assets and restore se rvice, and to compensate third parties.  

Further, although the Utility often enters into agreements for third-party contractors to perform work, such as patrolling and inspection of facilities or the construction or demolition or facilities, the Utility may retain liability for the quality and completion of the contractor’s work and can be subject to penalties or other enforcement action if the contractor violates applicable laws, rules, regulations, or orders.  The Utility may also be subject to liability, penalties or other enforcement action as a result of personal injury or death caused by third-party contractor actions. 

Insurance, equipment warranties, or other contractual indemnification requi rements may not be sufficient or effective to provide full or even partial recovery under all circumstances or against all hazards or liabilities to which the Utility may become subject.  An uninsured loss could have a material effect on PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows. 

The Utility’s insurance coverage may not be sufficient to cover losses caused by an operating failure or catastrophic events, including severe weather events, or m ay not be available at a reasonable cost, or available at all.

The Utility has experienced increased costs and difficulties in obtaining insurance coverage for wildfires that could arise from the Utility’s ordinary operations. PG&E Corporation, the Utilit y or its contractors and customers may experience coverage reductions and/or increased wildfire insurance costs in future years.  No assurance can be given that future losses will not exceed the limits of the Utility’s insurance coverage.  Uninsured losses a nd increases in the cost of insurance may not be recoverable in customer rates.  A loss which is not fully insured or cannot be recovered in customer rates could materially affect PG&E Corporation’s and the Utility’s financial condition, results of operatio ns, liquidity, and cash flows .

As a result of the potential application of a strict liability standard under the doctrine of inverse condemnation , recent losses recorded by insurance companies, the risk of increase of wildfires including as a result of t he ongoing drought, the Northern California wildfires, and the Butte fire, the Utility may not be able to obtain sufficient insurance coverage in the future at comparable cost and terms as the Utility’s current insurance coverage, or at all.  In addition, the Utility is unable to predict whether it would be allowed to recover in rates the increased costs of insurance or the costs of any uninsured losses.

Future insurance coverage may not be available at rates and on terms as favorable as the Utility’s cur rent insurance coverage or may not be available at all.   If the amount of insurance is insufficient or otherwise unavailable, or if the Utility is unable to recover in rates the costs of any uninsured losses, PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows could be materially affected.

The electric power industry is undergoing significant change driven by technological advancements and a decarbonized economy, which could materially impact the Utili ty’s operations, financial condition, and results of operations.

The electric power industry is undergoing transformative change driven by technological advancements enabling customer choice (for example, customer-owned generation and energy storage) and state climate policy supporting a decarbonized economy.  California's environmental policy objectives are accelerating the pace and scope of the industry change.  The electric grid is a critical enabler of the adoption of new energy technologies that suppo rt California's climate change and GHG reduction objectives, which continue to be publicly supported by California policymakers notwithstanding a recent change in the federal approach to such matters.  California utilities are experiencing increasing deplo yment by customers and third parties of DERs, such as on-site solar generation, energy storage, fuel cells, energy efficiency, and demand response technologies.  This growth will require modernization of the electric distribution grid to, among other thing s, accommodate two-way flows of electricity, increase the grid's capacity, and interconnect DERs.

In order to enable the California clean energy economy, sustained investments are required in grid modernization, renewable integration projects, energy effi ciency programs, energy storage options, EV infrastructure and s tate infrastructure modernization (e.g. rail and water project s ).

In addition, the CPUC has held discussions on potential changes to California’s electricity market.  On May 19, 2017, California energy companies, along with other stakeholders , discussed customer choice and the future of the state’s electricity industry at a CPUC “en banc” meeting.   Specifically, the goal of the “en banc” was to frame a discussion on the trends that are driving change wit hin California’s electricity sector and overall clean-energy economy and to lay out elements of a path forward to ensure that California achieves its reliability, affordability, equity, and carbon reduction imperatives while recognizing the important role that technology and customer preferences wil l play in shaping this future.  While the CPUC had indicated its intent to open a proceeding related to customer choice, the Utility is unable to predict whether that remains the CPUC’s intent or the timing of an y such proceeding.

The industry change, costs associated with complying with new regulatory developments an d initiatives and with technological advancements, or the Utility’s inability to successful ly ada pt to changes in the electric industry, could mater ially affect the Utility’s operations, financial condition , and results of operations.

A cyber inciden t, cyber security breach , severe natural event or physical attack on the Utility’s operational networks and information technology systems could have a material effect on its business, financial condition, results of operations, liquidity, and cash flows.

The Utility’s electricity and natural gas sys tems rely on a complex, interconnected network of generation, transmission, distribution, control, and communication technologies, which can be damaged by natural events—such as severe weather or seismic events—and by malicious events, such as cyber and ph ysical   attacks.  Private and public entities, such as the North American Electric Reliability Corporation , and U.S. Government Departments, including the Departments of Defense, Homeland Security and Energy, and the White House, have noted that cyber-attac ks targeting utility systems are increasing in sophistication, magnitude, and frequency.  The Utility’s operational networks also may face new cyber security risks due to modernizing and interconnecting the existing infrastructure with new technologies and control systems.  Any failure or decrease in the functionality of the Utility’s operational networks could cause harm to the public or employees, significantly disrupt operations, negatively impact the Utility’s ability   to safely generate, transport, deli ver and store energy and gas or otherwise operate in the most safe and efficient manner or at all, and damage the Utility’s assets or operations or those of third parties. 

The Utility also relies on complex information technology systems that allow it t o create, collect, use, disclose, store and otherwise process sensitive information, including the Utility’s financial information, customer energy usage and billing information, and personal information regarding customers, employees and their dependents, contractors, and other individuals. In addition, the Utility often relies on third-party vendors to host, maintain, modify, and update its systems , and to provide other services to the Utility or the Utility’s customers.  These third-party vendors could c ease to exist,   fail to establish adequate processes to protect the Utility’s systems and information, or experience security incidents or inadequate security measures .   Any incidents or disruptions in the Utility’s information technology systems could impa ct the Utility’s ability to track or collect revenues and to maintain effective internal controls over financial reporting .

The Utility and its third party vendors have been subject to, and will likely continue to be subject to attempts to gain unauthori zed access to the Utility’s information technology systems or confidential data (including information about customers and employees), or to disrupt the Utility’s operations.   None of these attempts or breaches has individually or in the aggregate resulted in a security incident with a material impact on PG&E Corporation’s and the Utility’s financial condition and results of operations.   Despite implementation of security and control measures, there can be no assurance that the Utility will be able to preve nt the unauthorized access to its operational networks, information technology systems or data, or the disruption of its operations.  Such events could subject the Utility to significant expenses, claims by customers or third parties, government inquiries, penalties for violation of applicable privacy laws, investigations, and regulatory actions that could result in fines and penalties, loss of customers and harm to PG&E Corporation’s and the Utility’s reputation, any of which could have a material adverse effect on PG&E Corporation’s and the Utility’s financial condition and results of operations.

The Utility maintains cyber liability insurance that covers certain damages caused by cyber incidents .  However, there is no guarantee that adequate insurance wi ll continue to be available at rates the Utility believes are reasonable or that the costs of responding to and recovering from a cyber incident will be covered by insurance or recoverable in rates.

The operation and decommissioning of the Utility’s nucle ar generation facilities expose it to potentially significant liabilities and the Utility may not be able to fully recover its costs if regulatory requirements change or the plant ceases operations before the licenses expire.

The operation of the Utilit y’s nuclear generation facilities exposes it to potentially significant liabilities from environmental, health and financial risks, such as risks relating to the storage, handling and disposal of spent nuclear fuel, and the release of radioactive materials caused by a nuclear accident, seismic activity, natural disaster, or terrorist act.  If the Utility incurs losses that are either not covered by insurance or exceed the amount of insurance available, such losses could have a material effect on PG&E Corpor ation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows .  In addition, the Utility may be required under federal law to pay up to $255 million of liabilities arising out of each nuclear incident occurring not only at the Utility’s Diablo Canyon facility but at any other nuclear power plant in the United States.   (See Note 13 of the Notes to the Consolidated Financial Statements in Item 8.)    

On January 11, 2018, the CPUC approved the retirement of Diablo Canyon un its by 2024 and 2025.  However, the Utility continues to face public concern about the safety of nuclear generation and nuclear fuel.  Some of these nuclear opposition groups regularly file petitions at the NRC and in other forums challenging the actions o f the NRC and urging governmental entities to adopt laws or policies in opposition to nuclear power.  Although an action in opposition may ultimately fail, regulatory proceedings may take longer to conclude and be more costly to complete.  It is also possi ble that public pressure could grow leading to adverse changes in legislation, regulations, orders, or their interpretation.  As a result, operations at the Utility’s two nuclear generation units at Diablo Canyon could cease before the ir respective license s expire in 2024 and 2025.  In such an instance, the Utility could be required to record a charge for the remaining amount of its unrecovered investment and such charge could have a material effect on PG&E Corporation and the Utility’s financial condition, results of operations, liquidity, and cash flows.

In addition, in order to retain highly skilled personnel necessary to safely operate Diablo Canyon during the remaining years of operations, the Utility will incur costs in connection with (i) an employe e retention program to ensure adequate staffing levels at Diablo Canyon, and (ii) an employee retraining and development program,   to facilitate redeployment of a portion of Diablo Canyon personnel to the decommissioning project and elsewhere in the company .   In its January 11, 2018 decision, the CPUC authorized rate recovery up to $211.3 million (compared with the $352.1 million requested by the Utility) for an employee retention program , but there can be no assurance that the Utility will be successful in retaining highly skilled personnel under such program .

The Utility has incurred, and may continue to incur, substantial costs to comply with NRC regulations and orders.   (See “Regulatory Environment” in Item 1. Business.)   If the Utility were unable to re cover these costs, PG&E Corporation’s and the Utility’s financial results could be materially affected.   The Utility may determine that it cannot comply with the new regulations or orders in a feasible and economic manner and voluntarily cease operations; alternatively, the NRC may order the Utility to cease operations until the Utility can comply with new regulations, orders, or decisions.   The Utility may incur a material charge if it ceases operations at Diablo Canyon’s two nuclear generation units befor e their respective licenses expire in 2024 and 2025.  At December 31, 2017, the Utility’s unrecovered investment in Diablo Canyon was $1.7 billion.

On June 28, 2016 the California State Lands Commission approved an extension of the Utility’s leases of c oastal land occupied by the water intake and discharge structures for the nuclear generation units at Diablo Canyon, to run concurrently with Diablo Canyon’s current operating licenses.  The Utility will be required to obtain an additional lease extension from the State Lands Commission to cover the period of time necessary to decommission the facility.  The State Lands Commission and California Coastal Commission will evaluate appropriate environmental mitigation and development conditions associated with the decommissioning project, the costs of which could be substantial.

The Utility also has an obligation to decommission its electricity generation facilities, including its nuclear facilities, as well as gas transmission system assets, at the end of the ir useful lives.   (See Note 2: Summary of Significant Accounting Policies – Asset Retirement Obligations of the Notes to the Consolidated Financial Statement in Item 8.)   The CPUC authorizes the Utility to recover its estimated costs to decommission its nu clear facilities through nuclear decommissioning charges that are collected from customers and held in nuclear decommissioning trusts to be used for the eventual decommissioning of each nuclear unit.   If the Utility’s actual decommissioning costs, includin g the amounts held in the nuclear decommissioning trusts, exceed estimated costs, PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows could be materially affected.

The Utility purchases its nuclear fuel assemblies from a sole source, Westinghouse.   If Westinghouse experiences business disruptions as a result of Chapter 11 proceedings or its pending acquisition by Brookfield, the Utility could experience disruptions in nuclear fuel supply,   and delays in connection with   its   Diablo Canyon outages   and refuelings.

The   Utility   purchases its nuclear fuel assemblies   for Diablo Canyon   from a sole source, W estinghouse.   The   Utility   also stores nuclear fuel inventory   at   the   Westinghouse   fuel fabrication facilit y.   In addition,   Westinghouse   provides the   Utility   with   Diablo Canyon   outage support services, nuclear fuel analysis, original equipment manufacturer engineering and parts support.     On March 29, 2017, Westinghouse filed for Chapter 11 protection in the Unit ed States Bankruptcy Court, Southern District of New York.   On January 4, 2018, Westinghouse announced that it has agreed to be acquired by Brookfield Business Partners L.P. Westinghouse also indicated that its acquisition by Brookfield is expected to clos e in the third quarter of 2018, subject to Bankruptcy Court approval and customary closing conditions including, among others, regulatory approvals.   In the event   that   Westinghouse experiences business disruptions   in its nuclear fuel business as a result o f bankruptcy proceedings, its pending acquisition by Brookfield, or otherwise, the Utility could experience issues with its nuclear fuel supply and   delays in connection with   Diablo Canyon refueling   outages.  

Diablo Canyon’s Unit 2 refueling outage will oc cur in the first quarter of 2018 and the required fuel for that outage has been delivered.   The next Unit 1 refueling outage is expected to occur in the first quarter of 2019 and the fuel for that outage has not yet been fabricated.   If Westinghouse were t o fail to deliver nuclear fuel or provide   outage support to the Utility, the   Utility’s operation of   Diablo Canyon   would be adversely affected.   PG&E Corporation and the Utility   also could experience additional costs, including decreased electricity market revenues, in the event that   one or both   Diablo Canyon   units are unable to operate.   There can be no assurance that any such additional costs would be recoverable in the rates the   Utility   is permitted to recover from its customers.     Furthermore, the   Utility currently is not able to   estimate the nature or amount of additional costs and expenses that it might incur in connection with the uncertainties surrounding   Westinghouse but such costs and expenses could be material.

For certain critical technologies, pr oducts and services, the Utility relies on a limited number of suppliers and, in some cases, sole suppliers.   In the event these suppliers are unable to perform, the Utility could experience delays and disruptions in its operations while it transitions to alternative plans or suppliers.

The Utility relies on a limited number of sole source suppliers for certain of its technologies, products and services.   Although the Utility has long-term agreements with such suppliers, if the suppliers are unable to deliver these technologies, products or services, the Utility could experience delays and disruptions while it implements alternative plans and makes arrangements with acceptable substitute suppliers.   As a result, the Utility’s business, financial conditi on, and results of operations could be significantly affected.   As an example, the Utility relies on Silver Spring Networks, Inc. and Aclara Technologies LLC as suppliers of proprietary SmartMeter™   devices and software, and of managed services, utilized in its advanced metering system that collects electric and natural gas usage data from customers.     If these suppliers encounter performance difficul ties or are unable to supply these devices or maintain and update their software, or provide other services to maintain these systems, the Utility’s metering, billing, and electric network operations could be impacted and disrupted.

Risks Related to Environmental Factors

Severe weather conditions, extended dro ught and shifting climate patter ns could materially a ffect PG&E Corporation’s and the Utility’s business, financial condition, results of operations, liquidity, and cash flows.

Extreme weather, extended drought and shifting climate patterns have intensified the challenges associated with wildfire management in California. Environmental extremes, such as drought conditions followed by periods of wet weather, can drive additional vegetation growth ( which then fuel any fires ) and influence both the likelihood and severity of extraordinary wildfire events.   In Ca lifornia, over the past five years, inconsistent and extreme precipitation, coupled with more hot summer days, have increased the wildfire risk and made wildfire outbreaks increasingly difficult to manage.   In particular, the risk posed by wildfires has inc reased in the Utility’s service area (the Utility has approximately 82,000 distribution overhead circuit miles and 18,000 transmis sion overhead circuit miles) as a result of an extended period of drought, bark beetle infestations in the California forest a nd wildfire fuel increases due to record rainfall following the drought, among other environmental factors. Other contributing factors include local land use policies and historical forestry management practices.  The combined effects of extreme weather and climate change also impact this risk.

Severe weather events , including wildfires and other fires, storms, tornadoes, floods, drought, earthquakes, tsunamis, pandemics, solar events, electromagnetic events, or other natural disasters such as wildfires, c ould result in severe business disruptions, prolonged power outages, property damage, injuries or loss of life, significant decreases in revenues and earnings, and/or significant additional costs to PG&E Corporation and the Utility.  Any such event could ha ve a material effect on PG&E Corporation’s and the Utility’s business , financial condition, results of operations, liquidity, and cash flows .   If the Utility is unable to recover its wildfire costs, due to the reasons described in the risk factors related t o the Northern California fires, Butte fire, the doctrine of inverse condemnation, and insurance limitations above, or for other reasons, its financial condition, results of operations, liquidity, and cash flows could be materially affected.

Further, the Utility has been studying the potential effects of climate change (increased temperatures, changing precipitation patterns, rising sea levels) on the Utility’s operations and is developing contingency plans to adapt to those events and conditions that the Utility believes are most significant.  Scientists project that climate change will increase electricity demand due to more extreme, persistent and hot weather.  As a result, the Utility’s hydroelectric generation could change and the Utility would need t o consider managing or acquiring additional generation.   If the Utility increases its reliance on conventional generation resources to replace hydroelectric generation and to meet increased customer demand, it may become more costly for the Utility to comp ly with GHG emissions limits. In addition, flooding caused by rising sea levels could damage the Utility’s facilities, including generation and electric transmission and distribution assets.  The Utility could incur substantial costs to repair or replace f acilities, restore service, or compensate customers and other third parties for damages or injuries.  The Utility anticipates that the increased costs would be recovered through rates, but as rate pressures increase, the likelihood of disallowance or non-r ecovery may increase. 

Events or conditions caused by climate change could have a greater impact on the Utility’s operations than the Utility’s studies suggest and could result in lower revenues or incr eased expenses, or both.  If the CPUC fails to adjust the Utility’s rates to reflect the impact of events or conditions caused by climate change, PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows cou ld be materially affected.

The Utility’s operations are subject to extensive environmental laws and changes in or liabilities under these laws could adversely affect PG&E Corporation’s and the Utility’s financial results.

The Utility’s operations are su bject to extensive federal, state, and local environmental laws, regulations, and orders, relating to air quality, water quality and usage, remediation of hazardous wastes, and the protection and conservation of natural resources and wildlife.  The Utility incurs significant capital, operating, and other costs associated with compliance with these environmental statutes, rules, and regulations.  The Utility has been in the past, and may be in the future, required to pay for environmental remediation costs a t sites where it is identified as a potentially responsible party under federal and state environmental laws.  Although the Utility has recorded liabilities for known environmental obligations, these costs can be difficult to estimate due to uncertainties about the extent of contamination, remediation alternatives, the applicable remediation levels, and the financial ability of other pote ntially responsible parties.  (For more information, s ee Note 13 of the Notes to the Consolidated Financial Statements in Item 8.)

Environmental remediation costs could increase in the future as a result of new legislation, the current trend toward more stringent standards, and stricter and more expansive application of existing environmental regulations.  Failure to compl y with these laws and regulations, or failure to comply with the terms of licenses or permits issued by environmental or regulatory agencies, could expose the Utility to claims by third parties or the imposition of civil or criminal fines or other sanction s. 

The CPUC has authorized the Utility to recover its environmental remediation costs for certain sites through various ratemaking mechanisms.  One of these mechanisms allows the Utility rate recovery for 90% of its hazardous substance remediation costs for certain approved sites without a reasonableness review.  The CPUC may discontinue or change these ratemaking mechanisms in the future or the Utility may incur environmental costs that exceed amounts the CPUC has authorized the Utility to recover in ra tes.

Some of the Utility’s environmental costs, such as the remediation costs associated with the Hinkley natural gas compressor site, are not recoverable through rates or insurance.  (See “Environmental Regulation” in Item 1. and Note 13 of the Notes to the Consolidated Financial Statements in Item 8.)  The Utility’s costs to remediate groundwater contamination near the Hinkley natural gas compressor site and to abate the effects of the contamination have had, and may continue to have, a material effect o n PG&E Corporation’s and the Utility’s financial results.  Their financial results also can be materially affected by changes in estimated costs and by the extent to which actual remediation costs differ from recorded liabilities.

State climate policy requires reductions in greenhouse gases of 40% by 2030 and 80% by 2050.   Various proposals for addressing these reductions have the potential to reduce natural gas usage and increase natural gas costs. The future recovery of the increased costs associated with compliance is uncertain.

The CARB is the state’s primary regulator for GHG emission reduction programs.   Natural gas providers have been subject to compliance with CARB’s Cap-and-Trade Program since 2015, and natural gas end-use customers have an inc reasing exposure to carbon costs under the Program through 2030 when the full cost will be reflected in customer bills.  CARB’s Scoping Plan also proposes various methods of reducing GHG emissions from natural gas.   These include more aggressive energy eff iciency programs to reduce natural gas end use, increased renewable portfolio standards generation in the electric sector reducing noncore gas load, and replacement of natural gas appliances with electric appliances, leading to further reduced demand.   The se natural gas load reductions may be partially offset by CARB’s proposals to deploy natural gas to replace wood fuel in home heating and diesel in transportation applications.   CARB also proposes a displacement of some conventional natural gas with above- market renewable natural gas.   The combination of reduced load and increased costs could result in higher natural gas customer bills and a potential mandate to deliver renewable natural gas could lead to cost recovery risk.

PG&E Corporation and the Utility also may face challenges in attracting and retaining senior management talent especially if they are unable to restore the reputational harm generated by the negative publicity stemming from the ongoing enforcement proceed ings.  Any such occurrences could negatively impact PG&E Corporation’s and the Utility’s financial condition and results of operations.

The Utility’s business activities are concentrated in one region, as a result of which, its future performance may be a ffected by events and factors unique to California.

The Utility’s business act ivities are concentrated in Northern California.  As a result, the Utility’s future performance may be affected by events and e conomic factors unique to California or by regional regulation or legislation , for example the doctrine of inverse condemnation .   (See “ The doctrine of inverse condemnation, if applied by courts in litigation to which PG&E Corporation and the Utility are s ubject, could significantly expand the potential liabilities from such litigation and materially affect PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity and cash flows ” above.)