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. As of December 31, 2018 and 2017, nonperformance risk was not material for Edison International and SCE.

Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value.

Level 1 – The fair value of Edison International's and SCE's 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, U.S. treasury securities, mutual funds and money market funds.

Level 2 – Edison International's and SCE's Level 2 assets and liabilities include fixed income securities, primarily consisting of U.S. government and agency bonds, municipal bonds and corporate bonds, and over-the-counter derivatives. The fair value of fixed income securities is determined using a market 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.

The fair value of SCE's over-the-counter derivative contracts is determined using an income approach. SCE uses 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 an exchange (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 SCE's Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. This level includes derivative contracts that trade infrequently such as congestion revenue rights ("CRRs"). Edison International Parent and Other does not have any Level 3 assets and liabilities.

Assumptions are made in order to value derivative contracts in which observable inputs are not available. 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. See Note 6 for a discussion of derivative instruments.

SCE

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



	December 31, 2018
(in millions)	Level 1		Level 2		Level 3		Netting and Collateral¹			Total
Assets at fair value
Derivative contracts	$	—	$	32	$	141	$	—		$	173
Other	9		21		—		—			30
Nuclear decommissioning trusts:
Stocks²	1,382		—		—		—			1,382
Fixed Income³	1,001		1,665		—		—			2,666
Short-term investments, primarily cash equivalents	120		95		—		—			215
Subtotal of nuclear decommissioning trusts⁴	2,503		1,760		—		—			4,263
Total assets	2,512		1,813		141		—			4,466
Liabilities at fair value
Derivative contracts	—		13		—		(7		)	6
Total liabilities	—		13		—		(7		)	6
Net assets	$	2,512	$	1,800	$	141	$	7		$	4,460



	December 31, 2017
(in millions)	Level 1		Level 2		Level 3		Netting and Collateral¹			Total
Assets at fair value
Derivative contracts	$	—	$	9	$	102	$	(1	)	$	110
Money market funds and other	495		—		—		—			495
Nuclear decommissioning trusts:
Stocks²	1,596		—		—		—			1,596
Fixed Income³	1,065		1,665		—		—			2,730
Short-term investments, primarily cash equivalents	101		72		—		—			173
Subtotal of nuclear decommissioning trusts⁴	2,762		1,737		—		—			4,499
Total assets	3,257		1,746		102		(1		)	5,104
Liabilities at fair value
Derivative contracts	—		2		1		(2		)	1
Total liabilities	—		2		1		(2		)	1
Net assets	$	3,257	$	1,744	$	101	$	1		$	5,103


¹	Represents the netting of assets and liabilities under master netting agreements and cash collateral.


²	Approximately 71% and 69% of SCE's equity investments were located in the United States at December 31, 2018 and 2017, respectively.


³	Includes corporate bonds, which were diversified and included collateralized mortgage obligations and other asset backed securities of $67 million and $102 million at December 31, 2018 and 2017, respectively.


⁴	Excludes net payables of $143 million and $59 million at December 31, 2018 and 2017, respectively, which consist of interest and dividend receivables as well as receivables and payables related to SCE's pending securities sales and purchases.

Edison International Parent and Other

Edison International Parent and Other assets measured at fair value consisted of money market funds of $115 million and $541 million at December 31, 2018 and 2017, respectively, classified as Level 1.

SCE Fair Value of Level 3

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



	December 31,
(in millions)	2018		2017
Fair value of net assets (liabilities) at beginning of period	$	101	$	(1,089	)
Total realized/unrealized gains:
Included in regulatory assets and liabilities¹	40		133
Contract amendment²	—		143
Normal purchase and normal sale designation³	—		914
Fair value of net assets at end of period	$	141	$	101
Change during the period in unrealized gains and losses related to assets and liabilities held at the end of the period	$	138	$	100


¹	Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities.

² Represents a tolling contract that was amended during the second quarter of 2017, which was no longer accounted for as a derivative as of December 31, 2017.


³	During the third quarter of 2017, SCE designated certain derivative contracts as normal purchase and normal sale contracts, which resulted in a reclassification of $914 million from derivative liabilities to other liabilities. These liabilities are amortized over the remaining contract terms.

Edison International and SCE recognize the fair value for transfers in and transfers out of each level at the end of each reporting period. There were no material transfers between any levels during 2018 and 2017.

Valuation Techniques Used to Determine Fair Value

The process of determining fair value is the responsibility of SCE's risk management department, which reports to SCE's 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 finance departments collaborate to determine the appropriate fair value methodologies and classifications for each derivative. Inputs used and valuations are reviewed period-over-period and compared with market conditions to determine reasonableness.

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



	Fair Value (in millions)					Significant
	Assets		Liabilities		Valuation Technique(s)	Unobservable Input	Range
Congestion revenue rights
December 31, 2018	$	141	$	—	Auction prices	CAISO CRR auction clearing prices	$(7.41) - $41.52
December 31, 2017	102		—		Auction prices	CAISO CRR auction clearing prices	$(9.41) - $8.66

Level 3 Fair Value Sensitivity

For CRRs, increases or decreases in CAISO auction price would result in higher or lower fair value, respectively.

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. There are no securities classified as Level 3 in the nuclear decommissioning trusts.

SCE's investment policies and CPUC requirements place limitations on the types and investment grade ratings of the securities that may be held by the nuclear decommissioning trust funds. These policies restrict the trust funds from holding alternative investments and limit the trust funds' exposures to investments in highly illiquid markets. With respect to equity and fixed income securities, the trustee obtains prices from third-party pricing services which SCE is able to independently corroborate as described below. The trustee monitors prices supplied by pricing services, including reviewing prices against defined parameters' tolerances and performs research and resolves variances beyond the set parameters. SCE corroborates the fair values of securities by comparison to other market-based price sources obtained by SCE's investment managers. Differences outside established thresholds are followed-up with the trustee and resolved. For each reporting period, SCE reviews the trustee determined fair value hierarchy and overrides the trustee level classification when appropriate.

Nonrecurring Fair Value Measurements

Edison International assesses goodwill through an annual goodwill impairment test, at the reporting unit level as of October 1st of each year. The fair value of the Edison Energy reporting unit is classified as Level 3 and is estimated using the income approach. In October 2018, Edison International evaluated the recoverability of goodwill and recorded an impairment charge of Edison Energy's goodwill totaling $19 million ($13 million after-tax) during the fourth quarter of 2018. See Note 1 for further details.

Fair Value of Debt Recorded at Carrying Value

The carrying value and fair value of Edison International's and SCE's long-term debt (including current portion of long-term debt) are as follows:



	December 31, 2018				December 31, 2017
(in millions)	Carrying Value¹		Fair Value²		Carrying Value¹		Fair Value²
Edison International	$	14,711	$	14,844	$	12,123	$	13,760
SCE	12,971		13,180		10,907		12,547


¹	Carrying value is net of debt issuance costs.


²	The fair value of Edison International's and SCE's short-term and long-term debt is classified as Level 2.