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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2020
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 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 — Other significant observable inputs, including 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). Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity. Instruments in this category may 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. Certain instruments have been valued using the concept of Net Asset Value ("NAV"), as a practical expedient. These instruments are typically structured as investment companies offering shares or units to multiple investors for the purpose of providing a return. These instruments are similar to mutual funds; however, their NAV is generally not published and publicly available, nor are these instruments traded on an exchange. Instruments valued using NAV, as a practical expedient are included in our fair value disclosures; however, in accordance with GAAP are not classified within the fair value hierarchy levels. Recurring Fair Value Measurements We apply recurring fair value measurements to cash equivalents, derivative instruments, and investments held in the Nuclear Decommissioning Trusts and other special use funds. On an annual basis we apply fair value measurements to plan assets held in our retirement and other benefit plans. See Note 8 in the 2019 Form 10-K for fair value discussion of plan assets held in our retirement and other benefit plans. Cash Equivalents Cash equivalents represent certain investments in 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. When the unobservable portion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3. Investments Held in Nuclear Decommissioning Trusts and Other Special Use Funds The Nuclear Decommissioning Trusts and other special use funds invest in fixed income and equity securities. Other special use funds include the coal reclamation escrow account and the active union employee medical account. See Note 12 for additional discussion about our investment accounts. We value investments in fixed income and equity securities using information provided by our trustees and escrow agent. Our trustees and escrow agent use pricing services that utilize the valuation methodologies described below 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 trustees’ and escrow agent's internal operating controls and valuation processes. Fixed Income Securities Fixed income securities issued by the U.S. Treasury 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 fixed income 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. Fixed income securities may also include short-term investments in certificates of deposit, variable rate notes, time deposit accounts, U.S. Treasury and Agency obligations, U.S. Treasury repurchase agreements, commercial paper, and other short-term instruments. These instruments are valued using active market prices or utilizing observable inputs described above. Equity Securities The Nuclear Decommissioning Trusts's equity security investments are held indirectly through commingled funds. The commingled funds are valued using the funds' NAV as a practical expedient. The funds' NAV is primarily derived from the quoted active market prices of the underlying equity securities held by the funds. We may transact in these commingled funds on a semi-monthly basis at the NAV. The commingled 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 funds' shares are offered to a limited group of investors, they are not considered to be traded in an active market. As these instruments are valued using NAV, as a practical expedient, they have not been classified within the fair value hierarchy. The Nuclear Decommissioning Trusts and other special use funds may also hold equity securities that include exchange traded mutual funds and money market accounts for short-term liquidity purposes. These short-term, highly-liquid, investments are valued using active market prices. Fair Value Tables The following table presents the fair value at June 30, 2020 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):
| Level 1 |  | Level 2 |  | Level 3 |  | Other |  |  |  | Total
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk management activities — derivative instruments: |  |  |  |  |  |  |  |  |  |  |
Commodity contracts | $ | — |  |  | $ | 3,165 |  |  | $ | 365 |  |  | $ | (2,790 | ) |  | (a) |  | $ | 740 |
Nuclear decommissioning trust: |  |  |  |  |  |  |  |  |  |  |
Equity securities | 15,985 |  |  | — |  |  | — |  |  | (6,130 | ) |  | (b) |  | 9,855 |
U.S. commingled equity funds | — |  |  | — |  |  | — |  |  | 502,251 |  |  | (c) |  | 502,251 |
U.S. Treasury debt | 143,673 |  |  | — |  |  | — |  |  | — |  |  |  |  | 143,673 |
Corporate debt | — |  |  | 149,672 |  |  | — |  |  | — |  |  |  |  | 149,672 |
Mortgage-backed securities | — |  |  | 99,407 |  |  | — |  |  | — |  |  |  |  | 99,407 |
Municipal bonds | — |  |  | 106,971 |  |  | — |  |  | — |  |  |  |  | 106,971 |
Other fixed income | — |  |  | 12,204 |  |  | — |  |  | — |  |  |  |  | 12,204 |
Subtotal nuclear decommissioning trust | 159,658 |  |  | 368,254 |  |  | — |  |  | 496,121 |  |  |  |  | 1,024,033 |
Other special use funds: |  |  |  |  |  |  |  |  |  |  |
Equity securities | 8,955 |  |  | — |  |  | — |  |  | 526 |  |  | (b) |  | 9,481 |
U.S. Treasury debt | 229,858 |  |  | — |  |  | — |  |  | — |  |  |  |  | 229,858 |
Municipal bonds | — |  |  | 13,993 |  |  | — |  |  | — |  |  |  |  | 13,993 |
Subtotal other special use funds | 238,813 |  |  | 13,993 |  |  | — |  |  | 526 |  |  |  |  | 253,332 |
Total assets | $ | 398,471 |  |  | $ | 385,412 |  |  | $ | 365 |  |  | $ | 493,857 |  |  |  |  | $ | 1,278,105 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk management activities — derivative instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts | $ | — |  |  | $ | (61,974 | ) |  | $ | (10,617 | ) |  | $ | 1,605 |  |  | (a) |  | $ | (70,986 | )
(a) | Represents counterparty netting, margin, and collateral. See Note 7.
(b) | Represents net pending securities sales and purchases.
(c) | Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.
The following table presents the fair value at December 31, 2019 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):
| Level 1 |  | Level 2 |  | Level 3 |  | Other |  |  |  | Total
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk management activities — derivative instruments: |  |  |  |  |  |  |  |  |  |  |
Commodity contracts | $ | — |  |  | $ | 551 |  |  | $ | 33 |  |  | $ | (69 | ) |  | (a) |  | $ | 515 |
Nuclear decommissioning trust: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities | 10,872 |  |  | — |  |  | — |  |  | 2,401 |  |  | (b) |  | 13,273 |
U.S. commingled equity funds | — |  |  | — |  |  | — |  |  | 518,844 |  |  | (c) |  | 518,844 |
U.S. Treasury debt | 160,607 |  |  | — |  |  | — |  |  | — |  |  |  |  | 160,607 |
Corporate debt | — |  |  | 115,869 |  |  | — |  |  | — |  |  |  |  | 115,869 |
Mortgage-backed securities | — |  |  | 118,795 |  |  | — |  |  | — |  |  |  |  | 118,795 |
Municipal bonds | — |  |  | 73,040 |  |  | — |  |  | — |  |  |  |  | 73,040 |
Other fixed income | — |  |  | 10,347 |  |  | — |  |  | — |  |  |  |  | 10,347 |
Subtotal nuclear decommissioning trust | 171,479 |  |  | 318,051 |  |  | — |  |  | 521,245 |  |  |  |  | 1,010,775 |
Other special use funds: |  |  |  |  |  |  |  |  |  |  |
Equity securities | 7,142 |  |  | — |  |  | — |  |  | 474 |  |  | (b) |  | 7,616 |
U.S. Treasury debt | 232,848 |  |  | — |  |  | — |  |  | — |  |  |  |  | 232,848 |
Municipal bonds | — |  |  | 4,631 |  |  | — |  |  | — |  |  |  |  | 4,631 |
Subtotal other special use funds | 239,990 |  |  | 4,631 |  |  | — |  |  | 474 |  |  |  |  | 245,095 |
Total assets | $ | 411,469 |  |  | $ | 323,233 |  |  | $ | 33 |  |  | $ | 521,650 |  |  |  |  | $ | 1,256,385 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk management activities — derivative instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts | $ | — |  |  | $ | (67,992 | ) |  | $ | (3,429 | ) |  | $ | (711 | ) |  | (a) |  | $ | (72,132 | )
(a) | Represents counterparty netting, margin, and collateral. See Note 7.
(b) | Represents net pending securities sales and purchases.
(c) | Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.
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 or other characteristics of the product. 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 4). 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. 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. Financial Instruments Not Carried at Fair Value The carrying value of our short-term borrowings approximate fair value and are classified within Level 2 of the fair value hierarchy. See Note 3 for our long-term debt fair values. The NTEC note receivable related to the sale of 4CA’s interest in Four Corners bears interest at 3.9% per annum and has a book value of $39 million as of June 30, 2020 and $44 million as of December 31, 2019, as presented on the Condensed Consolidated Balance Sheets. The carrying amount is not materially different from the fair value of the note receivable and is classified within Level 3 of the fair value hierarchy. See Note 8 for more information on 4CA matters.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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