Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Recurring Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). Fair value of an asset or liability considers assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk which was not material as of March 31, 2012 and December 31, 2011.

Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The following table sets forth assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:

	March 31, 2012
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral1			Total
Assets at Fair Value
Money market funds2	$	1,222	$	—	$	—		$	—		$	1,222
Derivative contracts:
Electricity	—		144		143			(93		)	194
Natural gas	6		4		—			(10		)	—
Fuel oil	7		—		—			(7		)	—
Tolling	—		—		13			—			13
Subtotal of derivative contracts	13		148		156			(110		)	207
Long-term disability plan	8		—		—			—			8
Nuclear decommissioning trusts:
Stocks3	2,124		—		—			—			2,124
Municipal bonds	—		696		—			—			696
U.S. government and agency securities	481		161		—			—			642
Corporate bonds4	—		369		—			—			369
Short-term investments, primarily cash equivalents5	2		34		—			—			36
Subtotal of nuclear decommissioning trusts	2,607		1,260		—			—			3,867
Total assets6	3,850		1,408		156			(110		)	5,304
Liabilities at Fair Value
Derivative contracts:
Electricity	—		13		99			(28		)	84
Natural gas	—		258		48			(81		)	225
Tolling	—		—		671			—			671
Subtotal of derivative contracts	—		271		818			(109		)	980
Interest rate contracts	—		78		—			—			78
Total liabilities	—		349		818			(109		)	1,058
Net assets (liabilities)	$	3,850	$	1,059	$	(662	)	$	(1	)	$	4,246

	December 31, 2011
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral1			Total
Assets at Fair Value
Money market funds2	$	1,321	$	—	$	—		$	—		$	1,321
Derivative contracts:
Electricity	—		66		218			(62		)	222
Natural gas	4		5		—			(7		)	2
Fuel oil	4		—		—			(4		)	—
Tolling	—		—		10			—			10
Subtotal of commodity contracts	8		71		228			(73		)	234
Long-term disability plan	8		—		—			—			8
Nuclear decommissioning trusts:
Stocks3	1,899		—		—			—			1,899
Municipal bonds	—		756		—			—			756
U.S. government and agency securities	433		147		—			—			580
Corporate bonds4	—		317		—			—			317
Short-term investments, primarily cash equivalents5	—		15		—			—			15
Subtotal of nuclear decommissioning trusts	2,332		1,235		—			—			3,567
Total assets6	3,669		1,306		228			(73		)	5,130
Liabilities at Fair Value
Derivative contracts:
Electricity	—		13		77			(21		)	69
Natural gas	—		234		23			(52		)	205
Tolling	—		—		451			—			451
Subtotal of commodity contracts	—		247		551			(73		)	725
Interest rate contracts	—		90		—			—			90
Total liabilities	—		337		551			(73		)	815
Net assets (liabilities)	$	3,669	$	969	$	(323	)	$	—		$	4,315

¹  Represents the netting of assets and liabilities under master netting agreements and cash collateral across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

²  Money market funds are included in cash and cash equivalents and restricted cash and cash equivalents on Edison International's consolidated balance sheets.

³  Approximately 69% and 70% of the equity investments were located in the United States at March 31, 2012 and December 31, 2011, respectively.

⁴  At March 31, 2012 and December 31, 2011, corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $38 million and $22 million, respectively.

⁵  Excludes net payables of $14 million and net receivables of $25 million at March 31, 2012 and December 31, 2011, respectively, of interest and dividend receivables as well as receivables and payables related to pending securities sales and purchases.

⁶  Excludes $30 million and $31 million at March 31, 2012 and December 31, 2011, respectively, of cash surrender value of life insurance investments for deferred compensation.

The following table sets forth a summary of changes in the fair value of Level 3 net derivative assets and liabilities:

	March 31,
(in millions)	2012				2011
Fair value of net assets (liabilities) at beginning of period	$	(323	)		$	97
Total realized/unrealized gains (losses):
Included in earnings1	(15		)		—
Included in regulatory assets and liabilities2	(293		)	3	(134		)
Included in accumulated other comprehensive income4	2				1
Purchases	27				5
Settlements	(9		)		(11		)
Transfers out of Level 35	(51		)		(2		)
Fair value of net liabilities at end of period	$	(662	)		$	(44	)
Change during the period in unrealized losses related to assets and liabilities held at the end of the period6	$	(295	)		$	(139	)

¹  Reported in "Competitive power generation" revenue on Edison International's consolidated statements of income.

²  Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities.

³  Includes the elimination of the fair value of derivatives with SCE's consolidated affiliates.

⁴  Included in reclassification adjustments in Edison International's consolidated statements of other comprehensive income.

⁵  Transfers out of Level 3 into Level 2 occurred due to significant observable inputs becoming available as the transactions near maturity.

⁶  Amounts reported in "Competitive power generation" revenue on Edison International's consolidated statements of income were $(7) million and $(6) million for the years ended March 31, 2012 and 2011, respectively. The remainder of the unrealized losses relate to SCE. See 2 above.

The fair value for transfers in and transfers out of each level is determined at the end of each reporting period. There were no transfers between Levels 1 and 2 during three months ended March 31, 2012 and 2011.

Valuation Techniques Used to Determine Fair Value

Level 1

The fair value of Level 1 assets and liabilities is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. This level includes exchange-traded equity securities and derivatives, U.S. treasury securities and money market funds.

Level 2

The fair value of Level 2 assets and liabilities is determined using the income approach by obtaining quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the instrument. This level includes fixed-income securities, over-the-counter derivatives and interest rate swaps. For further discussion on fixed-income securities, see "—Nuclear Decommissioning Trusts" below.

Over-the-counter derivative contracts are valued using standard pricing models to determine the net present value of estimated future cash flows. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. A primary price source that best represents trade activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes, prices from exchanges or comparison to executed trades are used to validate and corroborate the primary price source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity.

Level 3

The fair value of Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. This level includes over-the-counter options, tolling arrangements and derivative contracts that trade infrequently such as congestion revenue rights ("CRRs") and long-term power agreements.

Assumptions are made in order to value derivative contracts in which observable inputs are not available. Changes in fair value are based on changes to forward market prices, including extrapolation of short-term observable inputs into forecasted prices for illiquid forward periods. In circumstances where fair value cannot be verified with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. Modeling methodologies, inputs and techniques are reviewed and assessed as markets continue to develop and more pricing information becomes available and the fair value is adjusted when it is concluded that a change in inputs or techniques would result in a new valuation that better reflects the fair value of those derivative contracts.

Level 3 Valuation Process

The process of determining fair value is the responsibility of the risk department which reports to the chief financial officer. This department obtains observable and unobservable inputs through broker quotes, exchanges and internal valuation techniques that use both standard and proprietary models to determine fair value. Each reporting period, the risk and key finance departments collaborate to determine the appropriate fair value methodologies and classifications for each derivative. Inputs are validated for reasonableness by comparison against prior prices, other broker quotes and volatility fluctuation thresholds. Inputs used and valuations are reviewed period-over-period and compared with market conditions to determine reasonableness.

The following table sets forth the valuation techniques and significant unobservable inputs used to determine fair value for Level 3 assets and liabilities:

March 31, 2012				Quantitative Information About Level 3 Fair Value Measurements
	Fair Value (in millions)								Range
	Assets			Liabilities			Valuation Technique(s)	Unobservable Input	(Weighted Average)
Electricity:
Options	$	12		$	86		Option model	Volatility of gas prices	25% – 48% (38%)
								Volatility of power prices	29% – 60% (43%)
								Power prices	$24.50 – $52.30 ($35.40)
Forwards	37			56			Discounted cash flow	Power prices	$2.10 – $54.00 ($30.96)
Congestion contracts	101			—			Market simulation model	Load forecast	7,645 MW – 26,334 MW
								Power prices	$(46.19) – $240.30
								Gas prices	$3.79 – $9.32
Congestion contracts	49			13			Discounted cash flow	Congestion prices	$(8.20) – $10.32 ($0.21)
Gas options	—			48			Option model	Volatility of gas prices	26% – 48% (41%)
Tolling	13			671			Option model	Volatility of gas prices	18% – 48% (23%)
								Volatility of power prices	26% – 60% (30%)
								Power prices	$20.00 – $89.50 ($53.40)
Netting	(56		)	(56		)
Total derivative contracts	$	156		$	818

Level 3 Fair Value Sensitivity

Gas Options, Power Options, and Tolling Arrangements

The fair values of option contracts and tolling arrangements contain intrinsic value and time value. Intrinsic value is the difference between the market price and strike price of the underlying commodity. Time value is made up of several components, including volatility, time to expiration, and interest rates. The fair value of option contracts changes as the underlying commodity price moves away or towards the strike price. The option model for tolling arrangements reflects plant specific information such as operating and start-up costs.

For tolling arrangements and certain gas and power option contracts where Edison International subsidiaries are the buyer, increases in volatility of the underlying commodity prices would result in increases to fair value as it represents greater price movement risk. As power and gas prices increase, the fair value of the option contracts and tolling arrangements tends to increase. The valuation of power option contracts and tolling arrangements is also impacted by the correlation between gas and power prices. As the correlation increases, the fair value of power option contracts and tolling arrangements tends to decline.

Forward Power Contracts

Generally, an increase (decrease) in long term forward power prices at illiquid locations where Edison International subsidiaries are the seller relative to the contract price will decrease (increase) fair value. Inversely as a buyer, an increase (decrease) in long term forward power prices at illiquid locations relative to the contract price will increase (decrease) fair value.

Congestion Contracts

When valuation is based on a discounted cash flow model and Edison International subsidiaries are the buyer, generally an increase (decrease) in congestion prices in the last auction relative to the contract price will increase (decrease) fair value.

When valuation is based on a market simulation model and Edison International subsidiaries are the buyer, generally increases (decreases) in forecasted load would result in increases (decreases) to fair value. In general, an increase (decreases) in electricity and gas prices at illiquid locations tends to result in increases (decreases) to fair value; however, changes in electricity and gas prices in opposite directions may have varying results on fair value.

Nuclear Decommissioning Trusts

SCE's nuclear decommissioning trust investments include equity securities, U.S. treasury securities and other fixed-income securities. Equity and treasury securities are classified as Level 1 as fair value is determined by observable market prices in active or highly liquid and transparent markets. The remaining fixed-income securities are classified as Level 2. The fair value of these financial instruments is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes, issuer spreads, bids, offers and relevant credit information.

Fair Value of Long-Term Debt Recorded at Carrying Value

The carrying value and fair value of long-term debt are:

	March 31, 2012				December 31, 2011
(in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current portion	$	14,192	$	14,194	$	13,746	$	14,264

Fair value of short-term and long-term debt is classified as Level 2 and is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit information.

The carrying value of trade receivables, payables and short-term debt approximates fair value.