Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements

Fair Value Measurements

14.          Fair Value Measurements

We classify our assets and liabilities that are carried at fair value within the fair value hierarchy.  This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories.  The three levels of the fair value hierarchy are:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide information on an ongoing basis.  This category includes exchange-traded equities, exchange-traded derivative instruments, cash equivalents, and nuclear decommissioning trust investments in U.S. Treasury securities.

Level 2 — Utilizes quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable (such as yield curves).  This category includes non-exchange traded contracts such as forwards, options, and swaps.  This category also includes investments in common and commingled funds that are redeemable and valued based on the funds’ net asset values (“NAV”).

Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity.  Instruments in this category include long-dated derivative transactions where models are required due to the length of the transaction, options, and transactions in locations where observable market data does not exist.  The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices.  The primary valuation technique we use to calculate the fair value of contracts where price quotes are not available is based on the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at the more illiquid delivery points.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Thus, a valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable.  We maximize the use of observable inputs and minimize the use of unobservable inputs.  If market data is not readily available, inputs may reflect our own assumptions about the inputs market participants would use.  Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities as well as their placement within the fair value hierarchy levels.  We assess whether a market is active by obtaining observable broker quotes, reviewing actual market transactions, and assessing the volume of transactions. We consider broker quotes observable inputs when the quote is binding on the broker, we can validate the quote with market transactions, or we can determine that the inputs the broker used to arrive at the quoted price are observable.

Recurring Fair Value Measurements

We apply recurring fair value measurements to certain cash equivalents, derivative instruments, investments held in our nuclear decommissioning trust and plan assets held in our retirement and other benefit plans. See Note 8 in the 2010 Form 10-K for fair value discussion of plan assets held in our retirement and other benefit plans.

Cash Equivalents

Cash equivalents represent short-term investments in exchange traded money market funds that are valued using quoted prices in active markets.

Risk Management Activities - Derivative Instruments

Exchange traded contracts are valued using quoted prices in active markets. For non-exchange traded contracts, we calculate fair market value based on the average of the bid and offer price, discounted to reflect net present value.  We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments.  These include valuation adjustments for liquidity and credit risks based on the financial condition of counterparties.  The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed out or hedged.  The credit valuation adjustment represents estimated credit losses on our net exposure to counterparties, taking into account netting agreements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio.  We maintain credit policies that management believes minimize overall credit risk.

Certain non-exchange traded contracts are valued based on unobservable inputs due to the long-term nature of contracts or the unique location of the transactions.  Our long-dated energy transactions consist of observable valuations for the near term portion and unobservable valuations for the long-term portions of the transaction.  When the unobservable portion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3.  Our classification of instruments as Level 3 is primarily reflective of the long-term nature of our energy transactions and heat rate options, and is not reflective of material inactive markets.

Investments Held in our Nuclear Decommissioning Trust

The nuclear decommissioning trust invests in fixed income securities and equity securities. Equity securities are held indirectly through commingled funds.  The commingled funds are valued based on the fund’s NAV and are classified within Level 2.  We may transact in these commingled funds on a semi-monthly basis.  Cash equivalents reported within Level 2 represent investments held in a short-term investment commingled fund, valued using NAV, which invests in U.S. government fixed income securities. We may transact in this commingled fund on a daily basis at the NAV. Our trustee provides valuation of our nuclear decommissioning trust assets by using pricing services to determine fair market value.  We assess these valuations and verify that pricing can be supported by actual recent market transactions.  See Note 17 for additional discussion about our nuclear decommissioning trust.

Fair Value Tables

The following table presents the fair value at September 30, 2011 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (a) (Level 3)			Other			Balance at September 30, 2011
Assets
Cash Equivalents	$	401	$	—		$	—		$	—		$	401
Risk management activities-derivative instruments:
Commodity contracts	—		59			54			(53		)(b)	60
Nuclear decommissioning trust:
U.S. commingled equity funds	—		154			—			—			154
Fixed income securities:
U.S. Treasury	80		—			—			—			80
Cash and cash equivalent funds	—		12			—			2		(c)	14
Corporate debt	—		64			—			—			64
Mortgage-backed securities	—		76			—			—			76
Municipality bonds	—		81			—			—			81
Other	—		20			—			—			20
Subtotal nuclear decommissioning trust	80		407			—			2			489
Total	$	481	$	466		$	54		$	(51	)	$	950
Liabilities
Risk management activities - derivative instruments:
Commodity contracts	$	—	$	(189	)	$	(92	)	$	162	(b)	$	(119	)

(a) Primarily consists of heat rate options and long-dated electricity contracts.

(b) Represents counterparty netting, margin and collateral (see Note 8).

(c) Represents nuclear decommissioning trust net pending securities sales and purchases.

The following table presents the fair value at December 31, 2010 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (a) (Level 3)			Other			Balance at December 31, 2010
Assets
Cash equivalents	$	35		$	—		$	—		$	—		$	35
Risk management activities-derivative instruments:
Commodity contracts	—			80			61			(28		)(b)	113
Nuclear decommissioning trust:
U.S. commingled equity funds	—			168			—			—			168
Fixed income securities:
U.S. Treasury	50			—			—			—			50
Cash and cash equivalent funds	—			22			—			—			22
Corporate debt	—			60			—			—			60
Mortgage-backed securities	—			81			—			—			81
Municipality bonds	—			79			—			—			79
Other	—			20			—			(10		)(c)	10
Subtotal nuclear decommissioning trust	50			430			—			(10		)	470
Total	$	85		$	510		$	61		$	(38	)	$	618
Liabilities
Risk management activities — derivative instruments:
Commodity contracts	$	(1	)	$	(280	)	$	(99	)	$	256	(b)	$	(124	)

(a) Primarily consists of heat rate options and long-dated electricity contracts.

(b) Represents counterparty netting, margin and collateral (see Note 8).

(c) Represents nuclear decommissioning trust net pending securities sales and purchases.

The following table shows the changes in fair value for assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the three and nine months ended September 30, 2011 and 2010 (dollars in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
Commodity Contracts	2011			2010			2011			2010
Net derivative balance at beginning of period	$	(47	)	$	(42	)	$	(38	)	$	(10	)
Total net gains (losses) realized/unrealized:
Included in earnings	1			1			2			(1		)
Included in other comprehensive income (“OCI”)	2			(11		)	1			(20		)
Deferred as a regulatory asset or liability	2			(15		)	(4		)	(39		)
Settlements	6			12			10			15
Transfers into Level 3 from Level 2	—			(2		)	(4		)	6
Transfers from Level 3 into Level 2	(2		)	8			(5		)	—
Net derivative balance at end of period	$	(38	)	$	(49	)	$	(38	)	$	(49	)
Net unrealized gains included in earnings related to instruments still held at end of period	$	—		$	1		$	1		$	—

Amounts included in earnings are recorded in either regulated electricity segment revenue or regulated electricity segment fuel and purchased power depending on the nature of the underlying contract.

Transfers reflect the fair market value at the beginning of the period and are triggered by a change in the lowest significant input as of the end of the period. We had no significant Level 1 transfers to or from any other hierarchy level.  Transfers in or out of Level 3 are typically related to our heat rate options and long-dated energy transactions that extend beyond available quoted periods.

Nonrecurring Fair Value Measurements

For the periods ended September 30, 2011 and 2010, we had no assets or liabilities measured at fair value on a nonrecurring basis.

Other Financial Instruments

The carrying value of our net accounts receivable, accounts payable and short-term borrowings approximate fair value.  For our long-term debt fair values, see Note 2.