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Assets and Liabilities with Recurring Fair Value Measurements | 6 Months Ended
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Jun. 30, 2014
Fair Value Measurements [Abstract] |
Assets and Liabilities with Recurring Fair Value Measurements | Assets and Liabilities with Recurring Fair Value Measurements Cash Equivalents — Highly liquid investments which meet the definition of cash equivalents, primarily investments in money market accounts, are included in both our cash and cash equivalents and our restricted cash on our Consolidated Condensed Balance Sheets. Certain of our money market accounts invest in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Our cash equivalents are classified within level 1 of the fair value hierarchy. Margin Deposits and Margin Deposits Posted with Us by Our Counterparties — Margin deposits and margin deposits posted with us by our counterparties represent cash collateral paid between our counterparties and us to support our commodity contracts. Our margin deposits and margin deposits posted with us by our counterparties are generally cash and cash equivalents and are classified within level 1 of the fair value hierarchy. Derivatives — The primary factors affecting the fair value of our derivative instruments at any point in time are the volume of open derivative positions (MMBtu, MWh and $ notional amounts); changing commodity market prices, primarily for power and natural gas; our credit standing and that of our counterparties for energy commodity derivatives; and prevailing interest rates for our interest rate swaps. Prices for power and natural gas and interest rates are volatile, which can result in material changes in the fair value measurements reported in our financial statements in the future. We utilize market data, such as pricing services and broker quotes, and assumptions that we believe market participants would use in pricing our assets or liabilities including assumptions about the risks inherent to the inputs in the valuation technique. These inputs can be either readily observable, market corroborated or generally unobservable. The market data obtained from broker pricing services is evaluated to determine the nature of the quotes obtained and, where accepted as a reliable quote, used to validate our assessment of fair value. We use other qualitative assessments to determine the level of activity in any given market. We primarily apply the market approach and income approach for recurring fair value measurements and utilize what we believe to be the best available information. We utilize valuation techniques that seek to maximize the use of observable inputs and minimize the use of unobservable inputs. We classify fair value balances based on the observability of those inputs. The fair value of our derivatives includes consideration of our credit standing, the credit standing of our counterparties and the impact of credit enhancements, if any. We have also recorded credit reserves in the determination of fair value based on our expectation of how market participants would determine fair value. Such valuation adjustments are generally based on market evidence, if available, or our best estimate. Our level 1 fair value derivative instruments primarily consist of power and natural gas swaps, futures and options traded on the NYMEX or Intercontinental Exchange. Our level 2 fair value derivative instruments primarily consist of interest rate swaps and OTC power and natural gas forwards for which market-based pricing inputs are observable. Generally, we obtain our level 2 pricing inputs from market sources such as the Intercontinental Exchange and Bloomberg. To the extent we obtain prices from brokers in the marketplace, we have procedures in place to ensure that prices represent executable prices for market participants. In certain instances, our level 2 derivative instruments may utilize models to measure fair value. These models are industry-standard models that incorporate various assumptions, including quoted interest rates, correlation, volatility, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Our level 3 fair value derivative instruments may consist of OTC power and natural gas forwards and options where pricing inputs are unobservable, as well as other complex and structured transactions. Complex or structured transactions are tailored to our or our customers’ needs and can introduce the need for internally-developed model inputs which might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in level 3. Our valuation models may incorporate historical correlation information and extrapolate available broker and other information to future periods. OTC options are valued using industry-standard models, including the Black-Scholes option-pricing model. At each balance sheet date, we perform an analysis of all instruments subject to fair value measurement and include in level 3 all of those whose fair value is based on significant unobservable inputs. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect our estimate of the fair value of our assets and liabilities and their placement within the fair value hierarchy levels. The following tables present our financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, by level within the fair value hierarchy:
| Assets and Liabilities with Recurring Fair Value Measures as of June 30, 2014
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (in millions)
Assets: |  |  |  |  |  |  |
Cash equivalents(1) | $ | 636 |  |  | $ | — |  |  | $ | — |  |  | $ | 636 |
Margin deposits | 239 |  |  | — |  |  | — |  |  | 239 |
Commodity instruments: |  |  |  |  |  |  |
Commodity exchange traded futures and swaps contracts | 681 |  |  | — |  |  | — |  |  | 681 |
Commodity forward contracts(2) | — |  |  | 256 |  |  | 40 |  |  | 296 |
Interest rate swaps | — |  |  | 5 |  |  | — |  |  | 5 |
Total assets | $ | 1,556 |  |  | $ | 261 |  |  | $ | 40 |  |  | $ | 1,857 |
Liabilities: |  |  |  |  |  |  |
Margin deposits posted with us by our counterparties | $ | 184 |  |  | $ | — |  |  | $ | — |  |  | $ | 184 |
Commodity instruments: |  |  |  |  |  |  |
Commodity exchange traded futures and swaps contracts | 640 |  |  | — |  |  | — |  |  | 640 |
Commodity forward contracts(2) | — |  |  | 135 |  |  | 49 |  |  | 184 |
Interest rate swaps | — |  |  | 130 |  |  | — |  |  | 130 |
Total liabilities | $ | 824 |  |  | $ | 265 |  |  | $ | 49 |  |  | $ | 1,138 |
| Assets and Liabilities with Recurring Fair Value Measures as of December 31, 2013
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (in millions)
Assets: |  |  |  |  |  |  |
Cash equivalents(1) | $ | 1,134 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,134 |
Margin deposits | 261 |  |  | — |  |  | — |  |  | 261 |
Commodity instruments: |  |  |  |  |  |  |
Commodity exchange traded futures and swaps contracts | 434 |  |  | — |  |  | — |  |  | 434 |
Commodity forward contracts(2) | — |  |  | 75 |  |  | 32 |  |  | 107 |
Interest rate swaps | — |  |  | 9 |  |  | — |  |  | 9 |
Total assets | $ | 1,829 |  |  | $ | 84 |  |  | $ | 32 |  |  | $ | 1,945 |
Liabilities: |  |  |  |  |  |  |
Margin deposits posted with us by our counterparties | $ | 5 |  |  | $ | — |  |  | $ | — |  |  | $ | 5 |
Commodity instruments: |  |  |  |  |  |  |
Commodity exchange traded futures and swaps contracts | 495 |  |  | — |  |  | — |  |  | 495 |
Commodity forward contracts(2) | — |  |  | 52 |  |  | 18 |  |  | 70 |
Interest rate swaps | — |  |  | 129 |  |  | — |  |  | 129 |
Total liabilities | $ | 500 |  |  | $ | 181 |  |  | $ | 18 |  |  | $ | 699 |
___________
(1) | As of June 30, 2014 and December 31, 2013, we had cash equivalents of $406 million and $889 million included in cash and cash equivalents and $230 million and $245 million included in restricted cash, respectively.
(2) | Includes OTC swaps and options.
At June 30, 2014, the derivative instruments classified as level 3 primarily included commodity contracts which are classified as level 3 because the contract terms relate to a delivery location or tenor for which observable market rate information is not available. The fair value of the net derivative position classified as level 3 is predominantly driven by market commodity prices; however, given the nature of our net derivative position, we do not believe that a significant change in market commodity prices would have a material impact on our level 3 net fair value. The following table presents quantitative information for the unobservable inputs used in our most significant level 3 fair value measurements at June 30, 2014 and December 31, 2013:
|  | Quantitative Information about Level 3 Fair Value Measurements
|  | June 30, 2014
|  | Fair Value, Net Asset |  |  |  | Significant Unobservable |  |
|  | (Liability) |  | Valuation Technique |  | Input |  | Range
|  | (in millions) |  |  |  |  |  |
Power Contracts |  | $ | (22 | ) |  | Discounted cash flow |  | Market price (per MWh) |  | $21.41 — $169.45/MWh
Power Congestion Products |  | $ | 7 |  |  | Discounted cash flow |  | Market price (per MWh) |  | $(24.07) — $77.80/MWh
|  | December 31, 2013
|  | Fair Value, Net Asset |  |  |  | Significant Unobservable |  |
|  | (Liability) |  | Valuation Technique |  | Input |  | Range
|  | (in millions) |  |  |  |  |  |
Power Contracts |  | $ | 7 |  |  | Discounted cash flow |  | Market price (per MWh) |  | $28.92 — $53.15/MWh
Power Congestion Products |  | $ | 7 |  |  | Discounted cash flow |  | Market price (per MWh) |  | $(8.79) — $11.53/MWh
The following table sets forth a reconciliation of changes in the fair value of our net derivative assets (liabilities) classified as level 3 in the fair value hierarchy for the periods indicated (in millions):
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Balance, beginning of period | $ | 8 |  |  | $ | 13 |  |  | $ | 14 |  |  | $ | 16 |
Realized and mark-to-market gains (losses): |  |  |  |  |  |  |
Included in net income (loss): |  |  |  |  |  |  |
Included in operating revenues(1) | (7 | ) |  | 3 |  |  | (15 | ) |  | 4 |
Included in fuel and purchased energy expense(2) | — |  |  | — |  |  | 6 |  |  | — |
Purchases, issuances and settlements: |  |  |  |  |  |  |
Purchases | — |  |  | 1 |  |  | — |  |  | 1 |
Issuances | — |  |  | — |  |  | — |  |  | (1 | )
Settlements | (3 | ) |  | (3 | ) |  | (6 | ) |  | (5 | )
Transfers in and/or out of level 3(3): |  |  |  |  |  |  |
Transfers into level 3(4) | 2 |  |  | — |  |  | — |  |  | — |
Transfers out of level 3(5) | (9 | ) |  | (1 | ) |  | (8 | ) |  | (2 | )
Balance, end of period | $ | (9 | ) |  | $ | 13 |  |  | $ | (9 | ) |  | $ | 13 |
Change in unrealized gains (losses) relating to instruments still held at end of period | $ | (7 | ) |  | $ | 3 |  |  | $ | (9 | ) |  | $ | 4 |
___________
(1) | For power contracts and other power-related products, included on our Consolidated Condensed Statements of Operations.
(2) | For natural gas contracts, swaps and options, included on our Consolidated Condensed Statements of Operations.
(3) | We transfer amounts among levels of the fair value hierarchy as of the end of each period. There were no transfers into or out of level 1 for each of the three and six months ended June 30, 2014 and 2013.
(4) | We had $2 million in gains transferred out of level 2 into level 3 for the three months ended June 30, 2014 due to changes in market liquidity in various power markets. There were no transfers out of level 2 into level 3 for the three months ended June 30, 2013 and for each of the six months ended June 30, 2014 and 2013.
(5) | We had $9 million and $1 million in gains transferred out of level 3 into level 2 for the three months ended June 30, 2014 and 2013, respectively, and $8 million and $2 million in gains transferred out of level 3 into level 2 for the six months ended June 30, 2014 and 2013, respectively, due to changes in market liquidity in various power markets.

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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 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: 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=28364263&loc=d3e13433-108611 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 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: 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 6: 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=28364263&loc=d3e13504-108611 + Details
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