XML 28 R11.htm IDEA: XBRL DOCUMENT v2.3.0.15
Fair Value Measurements
9 Months Ended
Sep. 30, 2011
Fair Value Measurements Disclosure [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 should consider assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk.
SCE categorizes financial assets and liabilities into a 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:
 
As of September 30, 2011
(in millions)
Level 1
 
Level 2
 
Level 3
 
Collateral
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Money market funds1
$
15

 
$
—

 
$
—

 
$
—

 
$
15

Derivative contracts2:
 
 
 
 
 
 
 
 
 
Electricity
—

 
—

 
34

 
—

 
34

Natural gas
—

 
61

 
10

 
(4
)
 
67

CRRs
—

 
—

 
95

 
—

 
95

Tolling
—

 
—

 
4

 
—

 
4

Subtotal of derivative contracts
—

 
61

 
143

 
(4
)
 
200

Long-term disability plan
9

 
—

 
—

 
—

 
9

Nuclear decommissioning trusts:
 
 
 
 
 
 
 
 
 
Stocks3
1,721

 
—

 
—

 
—

 
1,721

Municipal bonds
—

 
767

 
—

 
—

 
767

U.S. government and agency securities
378

 
123

 
—

 
—

 
501

Corporate bonds4
—

 
318

 
—

 
—

 
318

Short-term investments, primarily cash equivalents5
2

 
151

 
—

 
—

 
153

Sub-total of nuclear decommissioning trusts
2,101

 
1,359

 
—

 
—

 
3,460

Total assets6
2,125

 
1,420

 
143

 
(4
)
 
3,684

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivative contracts2:
 
 
 
 
 
 
 
 
 
Electricity
—

 
6

 
80

 
(6
)
 
80

Natural gas
—

 
240

 
12

 
(12
)
 
240

Tolling
—

 
—

 
521

 
—

 
521

Subtotal of derivative contracts
—

 
246

 
613

 
(18
)
 
841

Total liabilities
—

 
246

 
613

 
(18
)
 
841

Net assets (liabilities)
$
2,125

 
$
1,174

 
$
(470
)
 
$
14

 
$
2,843

 
As of December 31, 2010
(in millions)
Level 1
 
Level 2
 
Level 3
 
Collateral
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Money market funds1
$
243

 
$
—

 
$
—

 
$
—

 
$
243

Derivative contracts2:
 
 
 
 
 
 
 
 
 
Electricity
—

 
—

 
119

 
—

 
119

Natural gas
—

 
69

 
11

 
—

 
80

CRRs
—

 
—

 
137

 
—

 
137

Tolling
—

 
—

 
118

 
—

 
118

Subtotal of derivative contracts
—

 
69

 
385

 
—

 
454

Long-term disability plan
9

 
—

 
—

 
—

 
9

Nuclear decommissioning trusts
 
 
 
 
 
 
 
 
 
Stocks3
2,029

 
—

 
—

 
—

 
2,029

Municipal bonds
—

 
790

 
—

 
—

 
790

Corporate bonds4
—

 
346

 
—

 
—

 
346

U.S. government and agency securities
215

 
73

 
—

 
—

 
288

Short-term investments, primarily cash equivalents5
1

 
31

 
—

 
—

 
32

Sub-total of nuclear decommissioning trusts
2,245

 
1,240

 
—

 
—

 
3,485

Total assets6
2,497

 
1,309

 
385

 
—

 
4,191

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivative contracts2:
 
 
 
 
 
 
 
 
 
Electricity
—

 
1

 
24

 
—

 
25

Natural gas
—

 
285

 
11

 
(4
)
 
292

Tolling
—

 
—

 
344

 
—

 
344

Subtotal of derivative contracts
—

 
286

 
379

 
(4
)
 
661

Total liabilities
—

 
286

 
379

 
(4
)
 
661

Net assets
$
2,497

 
$
1,023

 
$
6

 
$
4

 
$
3,530

1 
Money market funds are included in cash and cash equivalents on SCE's consolidated balance sheets.
2 
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.
3 
Approximately 69% and 67% of the equity investments were located in the United States at September 30, 2011 and December 31, 2010, respectively.
4 
At September 30, 2011 and December 31, 2010, corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $21 million and $27 million, respectively.
5 
Excludes net liabilities of $67 million and $5 million at September 30, 2011 and December 31, 2010, respectively, of interest and dividend receivables and receivables related to pending securities sales and payables related to pending securities purchases.
6 
Excludes $31 million at both September 30, 2011 and December 31, 2010, 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 assets and liabilities:
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
2011
 
2010
 
2011
 
2010
Fair value of derivative contracts, net assets (liabilities) at beginning of period
$
(359
)
 
$
(869
)
 
$
6

 
$
(111
)
Total realized/unrealized losses, net:
 
 
 
 
 
 
 
Included in regulatory assets and liabilities1
(128
)
 
(142
)
 
(510
)
 
(924
)
Purchases
19

 
9

 
35

 
33

Settlements
(2
)
 
3

 
(1
)
 
3

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
(16
)
 
—

 
(16
)
Fair value of derivative contracts, net liabilities at end of period
$
(470
)
 
$
(1,015
)
 
$
(470
)
 
$
(1,015
)
Change during the period in unrealized losses related to assets and liabilities held at the end of period
$
(135
)
 
$
(160
)
 
$
(502
)
 
$
(883
)
1 
Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities.
SCE determines the fair value for transfers in and transfers out of each level at the end of each reporting period. There were no significant transfers between levels during 2011 and 2010.
Valuation Techniques Used to Determine Fair Value
Level 1
Includes financial assets and liabilities where fair value is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. Financial assets and liabilities classified as Level 1 include exchange-traded equity securities, exchange traded derivatives, U.S. treasury securities and money market funds.
Level 2
Pricing inputs include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the derivative instrument. Financial assets and liabilities utilizing Level 2 inputs include fixed-income securities and over-the-counter derivatives.
Derivative contracts that are over-the-counter traded are valued using pricing models to determine the net present value of estimated future cash flows and are generally classified as Level 2. 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 source that best represents traded activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes or prices from exchanges are used to validate and corroborate the primary 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. Broker quotes are incorporated when corroborated with other information which may include a combination of prices from exchanges, other brokers and comparison to executed trades.
Level 3
Includes financial assets and liabilities where fair value is determined using techniques that require significant unobservable inputs. Over-the-counter options, bilateral contracts, capacity contracts, QF contracts, derivative contracts that trade infrequently (such as congestion revenue rights ("CRRs") in the California market), long-term power agreements, and derivative contracts with counterparties that have significant nonperformance risks are generally valued using pricing models that incorporate unobservable inputs and are classified as Level 3. Assumptions are made in order to value derivative contracts in which observable inputs are not available. In circumstances where SCE cannot verify fair value with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. As markets continue to develop and more pricing information becomes available, SCE continues to assess valuation methodologies used to determine fair value.
For derivative contracts that trade infrequently (CRRs), changes in fair value are based on models forecasting the value of those contracts. The models' inputs are reviewed and the fair value is adjusted when it is concluded that a change in inputs would result in a new valuation that better reflects the fair value of those derivative contracts. For illiquid long-term power agreements, fair value is based upon the discounting of future electricity and natural gas prices derived from a proprietary model using the risk free discount rate for a similar duration contract, adjusted for credit risk and market liquidity. Changes in fair value are based on changes to forward market prices, including forecasted prices for illiquid forward periods. The fair value of the majority of SCE's derivatives that are classified as Level 3 is determined using uncorroborated non-binding broker quotes and models which may require SCE to extrapolate short-term observable inputs in order to calculate fair value. Broker quotes are obtained from several brokers and compared against each other for reasonableness.
Nonperformance Risk
The fair value of the derivative assets and liabilities are adjusted for nonperformance risk. To assess nonperformance risks, SCE considers the probability of and the estimated loss incurred if a party to the transaction were to default. SCE also considers collateral, netting agreements, guarantees and other forms of credit support when assessing nonperformance. The nonperformance risk adjustment represented an insignificant amount at both September 30, 2011 and December 31, 2010.
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:
 
September 30, 2011
 
December 31, 2010
(in millions)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt, including current portion
$
8,032

 
$
9,826

 
$
7,627

 
$
8,285

Fair values of long-term debt are 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.