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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2015
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 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 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, swaps and certain investments in fixed income securities. This category also includes investments that are redeemable and valued based on NAV, such as common and collective trusts and commingled funds. 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 valuations are unobservable 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. 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. We rely primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities. If market data is not readily available, inputs may reflect our own assumptions about the inputs market participants would use. Our assessment of the inputs and 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 activity, 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 activity, 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 7 in the 2014 Form 10-K for the fair value discussion of plan assets held in our retirement and other benefit plans. Cash Equivalents Cash equivalents represent short-term investments with original maturities of three months or less in exchange traded money market funds that are valued using quoted prices in active markets. Risk Management Activities — Derivative Instruments Exchange traded commodity contracts are valued using unadjusted quoted prices. For non-exchange traded commodity contracts, we calculate fair 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. 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 commodity contracts are valued based on unobservable inputs due to the long-term nature of contracts, characteristics of the product, 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. We rely primarily on broker quotes to value these instruments. When our valuations utilize broker quotes, we perform various control procedures to ensure the quote has been developed consistent with fair value accounting guidance. These controls include assessing the quote for reasonableness by comparison against other broker quotes, reviewing historical price relationships, and assessing market activity. When broker quotes are not available, the primary valuation technique used to calculate the fair value is the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at more illiquid delivery points. Option contracts are primarily valued using a Black-Scholes option valuation model, which utilizes both observable and unobservable inputs such as broker quotes, interest rates and price volatilities. 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 the use of option valuation models with significant unobservable inputs. Our energy risk management committee, consisting of officers and key management personnel, oversees our energy risk management activities to ensure compliance with our stated energy risk management policies. We have a risk control function that is responsible for valuing our derivative commodity instruments in accordance with established policies and procedures. The risk control function reports to the chief financial officer’s organization. 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 concept of Net Asset Value ("NAV"), which is a value primarily derived from the quoted active market prices of the underlying equity securities. We may transact in these commingled funds on a semi-monthly basis at the NAV, and accordingly classify these investments as Level 2. The commingled funds, which are similar to mutual funds, are maintained by a bank and hold investments in accordance with the stated objective of tracking the performance of the S&P 500 Index. Because the commingled fund shares are offered to a limited group of investors, they are not considered to be traded in an active market. Cash equivalents reported within Level 2 represent investments held in a short-term investment commingled fund, valued using NAV, which invests in certificates of deposit, variable rate notes, time deposit accounts, U.S. Treasury and Agency obligations, U.S. Treasury repurchase agreements, and commercial paper. We may transact in this commingled fund on a daily basis at the NAV. Fixed income securities issued by the U.S. Treasury held directly by the nuclear decommissioning trust are valued using quoted active market prices and are typically classified as Level 1. Fixed income securities issued by corporations, municipalities, and other agencies, including mortgage-backed instruments, are valued using quoted inactive market prices, quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield curves and spreads relative to such yield curves. These instruments are classified as Level 2. Whenever possible, multiple market quotes are obtained which enables a cross-check validation. A primary price source is identified based on asset type, class, or issue of securities. We price securities using information provided by our trustee for our nuclear decommissioning trust assets. Our trustee uses pricing services that utilize the valuation methodologies described to determine fair market value. We have internal control procedures designed to ensure this information is consistent with fair value accounting guidance. These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the trustee’s internal operating controls and valuation processes. See Note 12 for additional discussion about our nuclear decommissioning trust. Fair Value Tables The following table presents the fair value at September 30, 2015, 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, 2015
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk management activities — derivative instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts | $ | — |  |  | $ | 22 |  |  | $ | 29 |  |  | $ | (22 | ) |  | (b) |  | $ | 29 |
Nuclear decommissioning trust: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. commingled equity funds | — |  |  | 294 |  |  | — |  |  | — |  |  |  |  | 294 |
Cash and cash equivalent funds | — |  |  | 11 |  |  | — |  |  | — |  |  |  |  | 11 |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury | 99 |  |  | 2 |  |  | — |  |  | — |  |  |  |  | 101 |
Corporate debt | — |  |  | 114 |  |  | — |  |  | — |  |  |  |  | 114 |
Mortgage-backed securities | — |  |  | 88 |  |  | — |  |  | — |  |  |  |  | 88 |
Municipal bonds | — |  |  | 85 |  |  | — |  |  | — |  |  |  |  | 85 |
Other | — |  |  | 19 |  |  | — |  |  | — |  |  |  |  | 19 |
Subtotal nuclear decommissioning trust | 99 |  |  | 613 |  |  | — |  |  | — |  |  |  |  | 712 |
Total | $ | 99 |  |  | $ | 635 |  |  | $ | 29 |  |  | $ | (22 | ) |  |  |  | $ | 741 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk management activities — derivative instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts | $ | — |  |  | $ | (130 | ) |  | $ | (70 | ) |  | $ | 29 |  |  | (b) |  | $ | (171 | )
(a) | Primarily consists of heat rate options and other long-dated electricity contracts.
(b) | Represents counterparty netting, margin and collateral (see Note 7).
The following table presents the fair value at December 31, 2014, 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, 2014
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk management activities — derivative instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts | $ | — |  |  | $ | 21 |  |  | $ | 33 |  |  | $ | (23 | ) |  | (b) |  | $ | 31 |
Nuclear decommissioning trust: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. commingled equity funds | — |  |  | 310 |  |  | — |  |  | — |  |  |  |  | 310 |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury | 119 |  |  | — |  |  | — |  |  | — |  |  |  |  | 119 |
Cash and cash equivalent funds | — |  |  | 11 |  |  | — |  |  | (7 | ) |  | (c) |  | 4 |
Corporate debt | — |  |  | 109 |  |  | — |  |  | — |  |  |  |  | 109 |
Mortgage-backed securities | — |  |  | 89 |  |  | — |  |  | — |  |  |  |  | 89 |
Municipal bonds | — |  |  | 69 |  |  | — |  |  | — |  |  |  |  | 69 |
Other | — |  |  | 14 |  |  | — |  |  | — |  |  |  |  | 14 |
Subtotal nuclear decommissioning trust | 119 |  |  | 602 |  |  | — |  |  | (7 | ) |  |  |  | 714 |
Total | $ | 119 |  |  | $ | 623 |  |  | $ | 33 |  |  | $ | (30 | ) |  |  |  | $ | 745 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk management activities — derivative instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts | $ | — |  |  | $ | (95 | ) |  | $ | (74 | ) |  | $ | 59 |  |  | (b) |  | $ | (110 | )
(a) | Primarily consists of heat rate options and other long-dated electricity contracts.
(b) | Represents counterparty netting, margin and collateral (see Note 7).
(c) | Represents nuclear decommissioning trust net pending securities sales and purchases.
Fair Value Measurements Classified as Level 3 The significant unobservable inputs used in the fair value measurement of our energy derivative contracts include broker quotes that cannot be validated as an observable input primarily due to the long-term nature of the quote and option model inputs. Significant changes in these inputs in isolation would result in significantly higher or lower fair value measurements. Changes in our derivative contract fair values, including changes relating to unobservable inputs, typically will not impact net income due to regulatory accounting treatment (see Note 3). Because our forward commodity contracts classified as Level 3 are currently in a net purchase position, we would expect price increases of the underlying commodity to result in increases in the net fair value of the related contracts. Conversely, if the price of the underlying commodity decreases, the net fair value of the related contracts would likely decrease. Our option contracts classified as Level 3 primarily relate to purchase heat rate options. The significant unobservable inputs at September 30, 2015 for these instruments include electricity prices, and volatilities. The significant unobservable inputs at December 31, 2014 for these instruments include electricity prices, gas prices and volatilities. If electricity prices and electricity price volatilities increase, we would expect the fair value of these options to increase, and if these valuation inputs decrease, we would expect the fair value of these options to decrease. If natural gas prices and natural gas price volatilities increase, we would expect the fair value of these options to decrease, and if these inputs decrease, we would expect the fair value of the options to increase. The commodity prices and volatilities do not always move in corresponding directions. The options’ fair values are impacted by the net changes of these various inputs. Other unobservable valuation inputs include credit and liquidity reserves which do not have a material impact on our valuations; however, significant changes in these inputs could also result in higher or lower fair value measurements. The following tables provide information regarding our significant unobservable inputs used to value our risk management derivative Level 3 instruments at September 30, 2015 and December 31, 2014:
| September 30, 2015 Fair Value (millions) |  | Valuation Technique |  | Significant Unobservable Input |  |  |  | Weighted-Average
Commodity Contracts | Assets |  | Liabilities |  |  |  | Range |
Electricity: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward Contracts (a) | $ | 27 |  |  | $ | 56 |  |  | Discounted cash flows |  | Electricity forward price (per MWh) |  | $17.37 - $40.62 |  | $ | 28.25 |
Option Contracts (b) | — |  |  | 7 |  |  | Option model |  | Electricity forward price (per MWh) |  | $28.36 - $46.50 |  | $ | 35.55 |
|  |  |  |  |  |  |  |  | Electricity price volatilities |  | 48% -61% |  | 55 | %
|  |  |  |  |  |  |  |  | Natural gas price volatilities |  | 30% - 47% |  | 34 | %
Natural Gas: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward Contracts (a) | 2 |  |  | 7 |  |  | Discounted cash flows |  | Natural gas forward price (per MMBtu) |  | $2.32 - $3.17 |  | $ | 2.73 |
Total | $ | 29 |  |  | $ | 70 |  |  |  |  |  |  |  |  |  |
(a) | Includes swaps and physical and financial contracts.
(b) | Electricity and natural gas price volatilities are estimated based on historical forward price movements due to lack of market quotes for implied volatilities.
| December 31, 2014 Fair Value (millions) |  | Valuation Technique |  | Significant Unobservable Input |  |  |  | Weighted-Average
Commodity Contracts | Assets |  | Liabilities |  |  |  | Range |
Electricity: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward Contracts (a) | $ | 30 |  |  | $ | 56 |  |  | Discounted cash flows |  | Electricity forward price (per MWh) |  | $19.51 - $56.72 |  | $ | 35.27 |
Option Contracts (b) | — |  |  | 15 |  |  | Option model |  | Electricity forward price (per MWh) |  | $32.14 - $66.09 |  | $ | 45.83 |
|  |  |  |  |  |  |  |  | Natural gas forward price (per MMBtu) |  | $3.18 - $3.29 |  | $ | 3.25 |
|  |  |  |  |  |  |  |  | Electricity price volatilities |  | 23% - 63% |  | 41 | %
|  |  |  |  |  |  |  |  | Natural gas price volatilities |  | 23% - 41% |  | 31 | %
Natural Gas: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward Contracts (a) | 3 |  |  | 3 |  |  | Discounted cash flows |  | Natural gas forward price (per MMBtu) |  | $2.98 - $4.13 |  | $ | 3.45 |
Total | $ | 33 |  |  | $ | 74 |  |  |  |  |  |  |  |  |  |
(a) | Includes swaps and physical and financial contracts.
(b) | Electricity and natural gas price volatilities are estimated based on historical forward price movements due to lack of market quotes for implied volatilities.
The following table shows the changes in fair value for our risk management activities' 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, 2015 and 2014 (dollars in millions):
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
Commodity Contracts |  | 2015 |  | 2014 |  | 2015 |  | 2014
Net derivative balance at beginning of period |  | $ | (43 | ) |  | $ | (41 | ) |  | $ | (41 | ) |  | $ | (49 | )
Total net gains (losses) realized/unrealized: |  |  |  |  |  |  |  |  |  |  |  |
Deferred as a regulatory asset or liability |  | (6 | ) |  | (3 | ) |  | (11 | ) |  | 4 |
Settlements |  | 8 |  |  | 6 |  |  | 12 |  |  | 10 |
Transfers into Level 3 from Level 2 |  | (1 | ) |  | — |  |  | (5 | ) |  | (2 | )
Transfers from Level 3 into Level 2 |  | 1 |  |  | (1 | ) |  | 4 |  |  | (2 | )
Net derivative balance at end of period |  | $ | (41 | ) |  | $ | (39 | ) |  | $ | (41 | ) |  | $ | (39 | )
Net unrealized gains included in earnings related to instruments still held at end of period |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Amounts included in earnings are recorded in either operating revenues or 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 long-dated energy transactions that extend beyond available quoted periods. Financial Instruments Not Carried at Fair Value The carrying value of our net accounts receivable, accounts payable and short-term borrowings approximate fair value. Our short-term borrowings are classified within Level 2 of the fair value hierarchy. For our long-term debt fair values, see Note 2.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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