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Fair Value Measurements | 6 Months Ended
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Jun. 30, 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 June 30, 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:
| June 30, 2012
(in millions) | Level 1 |  | Level 2 |  | Level 3 |  | Netting and Collateral 1 |  | Total
Assets at Fair Value |  |  |  |  |  |  |  |  |
Money market funds 2 | $ | 5 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 5 |
Derivative contracts: |  |  |  |  |  |  |  |  |
Electricity | — |  |  | 2 |  |  | 21 |  |  | (11 | ) |  | 12 |
CRRs | — |  |  | — |  |  | 92 |  |  |  |  |  | 92 |
Subtotal of derivative contracts | — |  |  | 2 |  |  | 113 |  |  | (11 | ) |  | 104 |
Long-term disability plan | 8 |  |  | — |  |  | — |  |  | — |  |  | 8 |
Nuclear decommissioning trusts: |  |  |  |  |  |  |  |  |
Stocks 3 | 2,090 |  |  | — |  |  | — |  |  | — |  |  | 2,090 |
Municipal bonds | — |  |  | 714 |  |  | — |  |  | — |  |  | 714 |
U.S. government and agency securities | 389 |  |  | 160 |  |  | — |  |  | — |  |  | 549 |
Corporate bonds 4 | — |  |  | 382 |  |  | — |  |  | — |  |  | 382 |
Short-term investments, primarily cash equivalents 5 | 2 |  |  | 90 |  |  | — |  |  | — |  |  | 92 |
Subtotal of nuclear decommissioning trusts | 2,481 |  |  | 1,346 |  |  | — |  |  | — |  |  | 3,827 |
Total assets 6 | 2,494 |  |  | 1,348 |  |  | 113 |  |  | (11 | ) |  | 3,944 |
Liabilities at Fair Value |  |  |  |  |  |  |  |  |
Derivative contracts: |  |  |  |  |  |  |  |  |
Electricity | — |  |  | — |  |  | 21 |  |  | (11 | ) |  | 10 |
Natural gas | — |  |  | 194 |  |  | 28 |  |  | (66 | ) |  | 156 |
Tolling | — |  |  | — |  |  | 803 |  |  | — |  |  | 803 |
Subtotal of derivative contracts | — |  |  | 194 |  |  | 852 |  |  | (77 | ) |  | 969 |
Total liabilities | — |  |  | 194 |  |  | 852 |  |  | (77 | ) |  | 969 |
Net assets (liabilities) | $ | 2,494 |  |  | $ | 1,154 |  |  | $ | (739 | ) |  | $ | 66 |  |  | $ | 2,975 |
| December 31, 2011
(in millions) | Level 1 |  | Level 2 |  | Level 3 |  | Netting and Collateral 1 |  | Total
Assets at Fair Value |  |  |  |  |  |  |  |  |
Money market funds 2 | $ | 21 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 21 |
Derivative contracts: |  |  |  |  |  |  |  |  |
Electricity | — |  |  | — |  |  | 1 |  |  | — |  |  | 1 |
Natural gas | — |  |  | 5 |  |  | — |  |  | (3 | ) |  | 2 |
CRRs | — |  |  | — |  |  | 122 |  |  | — |  |  | 122 |
Tolling | — |  |  | — |  |  | 10 |  |  | — |  |  | 10 |
Subtotal of derivative contracts | — |  |  | 5 |  |  | 133 |  |  | (3 | ) |  | 135 |
Long-term disability plan | 8 |  |  | — |  |  | — |  |  | — |  |  | 8 |
Nuclear decommissioning trusts: |  |  |  |  |  |  |  |  |
Stocks 3 | 1,899 |  |  | — |  |  | — |  |  | — |  |  | 1,899 |
Municipal bonds | — |  |  | 756 |  |  | — |  |  | — |  |  | 756 |
U.S. government and agency securities | 433 |  |  | 147 |  |  | — |  |  | — |  |  | 580 |
Corporate bonds 4 | — |  |  | 317 |  |  | — |  |  | — |  |  | 317 |
Short-term investments, primarily cash equivalents 5 | — |  |  | 15 |  |  | — |  |  | — |  |  | 15 |
Subtotal of nuclear decommissioning trusts | 2,332 |  |  | 1,235 |  |  | — |  |  | — |  |  | 3,567 |
Total assets 6 | 2,361 |  |  | 1,240 |  |  | 133 |  |  | (3 | ) |  | 3,731 |
Liabilities at Fair Value |  |  |  |  |  |  |  |  |
Derivative contracts: |  |  |  |  |  |  |  |  |
Electricity | — |  |  | 5 |  |  | 65 |  |  | (2 | ) |  | 68 |
Natural gas | — |  |  | 234 |  |  | 23 |  |  | (53 | ) |  | 204 |
Tolling | — |  |  | — |  |  | 799 |  |  | — |  |  | 799 |
Subtotal of derivative contracts | — |  |  | 239 |  |  | 887 |  |  | (55 | ) |  | 1,071 |
Total liabilities | — |  |  | 239 |  |  | 887 |  |  | (55 | ) |  | 1,071 |
Net assets (liabilities) | $ | 2,361 |  |  | $ | 1,001 |  |  | $ | (754 | ) |  | $ | 52 |  |  | $ | 2,660 |
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 on SCE's consolidated balance sheets.
3 | Approximately 67% and 70% of the equity investments were located in the United States at June 30, 2012 and December 31, 2011, respectively.
4 | At June 30, 2012 and December 31, 2011, corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $44 million and $22 million, respectively.
5 | Excludes net payables of $17 million and net receivables of $25 million at June 30, 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 other investments of $98 million and $81 million at June 30, 2012 and December 31, 2011, respectively, primarily related to the cash surrender value of company owned life insurance investments which are used to fund certain executive benefits including deferred compensation.
The following table sets forth a summary of changes in the fair value of Level 3 net derivative assets and liabilities:
| Three months ended June 30, |  | Six months ended June 30,
(in millions) | 2012 |  | 2011 |  | 2012 |  | 2011
Fair value of net assets (liabilities) at beginning of period | $ | (1,097 | ) |  | $ | (127 | ) |  | $ | (754 | ) |  | $ | 6 |
Total realized/unrealized gains (losses), net: |  |  |  |  |  |  |
Included in regulatory assets 1 | 341 |  |  | (247 | ) |  | (23 | ) |  | (382 | )
Purchases | 29 |  |  | 16 |  |  | 50 |  |  | 17 |
Settlements | (12 | ) |  | (1 | ) |  | (12 | ) |  | — |
Transfers into Level 3 | — |  |  | — |  |  | — |  |  | — |
Transfers out of Level 3 | — |  |  | — |  |  | — |  |  | — |
Fair value of net liabilities at end of period | $ | (739 | ) |  | $ | (359 | ) |  | $ | (739 | ) |  | $ | (359 | )
Change during the period in unrealized gains (losses) related to assets and liabilities held at the end of the period | $ | 335 |  |  | $ | (240 | ) |  | $ | (8 | ) |  | $ | (376 | )
1 | Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities.
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- and six-months ended June 30, 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, 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 and over-the-counter derivatives. 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 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:
June 30, 2012 |  |  | Quantitative Information About Level 3 Fair Value Measurements
| Fair Value (in millions) |  | Significant | Range
| Assets |  | Liabilities | Valuation Technique(s) | Unobservable Input | (Weighted Average)
Electricity: |  |  |  |  |  |
Options | $ | 42 |  |  | $ | 40 |  | Option model | Volatility of gas prices | 24% – 57% (41%)
|  |  |  |  | Volatility of power prices | 30% – 97% (54%)
|  |  |  |  | Power prices | $34.17 – $56.92 ($42.70)
Forwards | 2 |  |  | 4 |  | Discounted cash flow | Power prices | $13.00 – $47.10 ($28.70)
Gas Options | — |  |  | 28 |  | Option model | Volatility of gas prices | 27% – 57% (47%)
CRRs | 92 |  |  | — |  | Market simulation model | Load forecast | 7,645 MW – 26,334 MW
|  |  |  |  | Power prices | $(46.19) – $240.30
|  |  |  |  | Gas prices | $3.79 – $9.32
Tolling | — |  |  | 803 |  | Option model | Volatility of gas prices | 18% – 57% (23%)
|  |  |  |  | Volatility of power prices | 26% – 97% (31%)
|  |  |  |  | Power prices | $29.89 – $88.04 ($57.30)
Netting | (23 | ) |  | (23 | ) |  |  |
Total derivative contracts | $ | 113 |  |  | $ | 852 |  |  |  |
Level 3 Fair Value Sensitivity Gas Options, Electricity 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 SCE is 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 SCE is the buyer relative to the contract price will increase (decrease) the fair value. CRRs Where SCE is the buyer, generally increases (decreases) in forecasted load in isolation would result in increases (decreases) to the fair value. In general, an increase (decrease) 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:
| June 30, 2012 |  | December 31, 2011
(in millions) | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Long-term debt, including current portion | $ | 8,827 |  |  | $ | 10,368 |  |  | $ | 8,431 |  |  | $ | 10,129 |
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 and payables, other investments, and short-term debt approximates fair value.

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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 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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=7491637&loc=d3e13433-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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