v3.7.0.1
Assets and Liabilities with Recurring Fair Value Measurements
 6 Months Ended
Jun. 30, 2017
Fair Value, Assets, Liabilities and Stockholders' Equity Measured on Recurring Basis [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 and other interest-bearing 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. We do not have any cash equivalents invested in institutional prime money market funds which require use of a floating net asset value and are subject to liquidity fees and redemption restrictions. Certain of our cash equivalents 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 and customers for energy commodity derivatives; and prevailing interest rates for our interest rate hedging instruments. 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 customers and the effect 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 hedging instruments and OTC power and natural gas forwards for which market-based pricing inputs in the principal or most advantageous market are representative of executable prices for market participants. These inputs are observable at commonly quoted intervals for substantially the full term of the instruments. 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 primarily for the sale and purchase of power and natural gas to both wholesale counterparties and retail customers. Complex or structured transactions are tailored to 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 effect 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, 2017 and December 31, 2016, by level within the fair value hierarchy:
 
Assets and Liabilities with Recurring Fair Value Measures as of June 30, 2017
 
Level 1    
 
Level 2    
 
Level 3    
 
Total    
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents(1)
$
128

 
$
—

 
$
—

 
$
128

Commodity instruments:
 
 
 
 
 
 
 
Commodity exchange traded futures and swaps contracts
932

 
—

 
—

 
932

Commodity forward contracts(2)
—

 
285

 
351

 
636

Interest rate hedging instruments
—

 
21

 
—

 
21

Total assets
$
1,060

 
$
306

 
$
351

 
$
1,717

Liabilities:
 
 
 
 
 
 
 
Commodity instruments:
 
 
 
 
 
 
 
Commodity exchange traded futures and swaps contracts
975

 
—

 
—

 
975

Commodity forward contracts(2)
—

 
361

 
57

 
418

Interest rate hedging instruments
—

 
57

 
—

 
57

Total liabilities
$
975

 
$
418

 
$
57

 
$
1,450

 
Assets and Liabilities with Recurring Fair Value Measures as of December 31, 2016
 
Level 1    
 
Level 2    
 
Level 3    
 
Total    
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents(1)
$
153

 
$
—

 
$
—

 
$
153

Commodity instruments:
 
 
 
 
 
 
 
Commodity exchange traded futures and swaps contracts
1,542

 
—

 
—

 
1,542

Commodity forward contracts(2)
—

 
231

 
466

 
697

Interest rate hedging instruments
—

 
29

 
—

 
29

Total assets
$
1,695

 
$
260

 
$
466

 
$
2,421

Liabilities:
 
 
 
 
 
 
 
Commodity instruments:
 
 
 
 
 
 
 
Commodity exchange traded futures and swaps contracts
1,570

 
—

 
—

 
1,570

Commodity forward contracts(2)
—

 
411

 
67

 
478

Interest rate hedging instruments
—

 
58

 
—

 
58

Total liabilities
$
1,570

 
$
469

 
$
67

 
$
2,106

___________
(1)
As of June 30, 2017 and December 31, 2016, we had cash equivalents of $29 million and $26 million included in cash and cash equivalents and $99 million and $127 million included in restricted cash, respectively.
(2)
Includes OTC swaps and options and retail contracts.
At June 30, 2017 and December 31, 2016, 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. The following table presents quantitative information for the unobservable inputs used in our most significant level 3 fair value measurements at June 30, 2017 and December 31, 2016:
 
 
Quantitative Information about Level 3 Fair Value Measurements
 
 
 
June 30, 2017
 
 
 
Fair Value, Net Asset
 
 
 
Significant Unobservable
 
 
 
 
 
 
 
(Liability)
 
Valuation Technique
 
Input
 
Range
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Power Contracts
 
$
245

 
Discounted cash flow
 
Market price (per MWh)
 
$
7.40

—
$93.77
/MWh
Power Congestion Products
 
$
12

 
Discounted cash flow
 
Market price (per MWh)
 
$
(7.92
)
—
$5.13
/MWh
Natural Gas Contracts
 
$
37

 
Discounted cash flow
 
Market price (per MMBtu)
 
$
1.62

—
$6.15
/MMBtu
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
Fair Value, Net Asset
 
 
 
Significant Unobservable
 
 
 
 
 
 
 
(Liability)
 
Valuation Technique
 
Input
 
Range
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Power Contracts
 
$
360

 
Discounted cash flow
 
Market price (per MWh)
 
$
9.60

—
$86.34
/MWh
Power Congestion Products
 
$
12

 
Discounted cash flow
 
Market price (per MWh)
 
$
(7.52
)
—
$13.62
/MWh
Natural Gas Contracts
 
$
17

 
Discounted cash flow
 
Market price (per MMBtu)
 
$
1.95

—
$5.66
/MMBtu

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,
 
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
 
$
342

 
$
(65
)
 
$
399

 
$
(46
)
Realized and mark-to-market gains (losses):
 
 
 
 
 
 
 
 
Included in net loss:
 
 
 
 
 
 
 
 
Included in operating revenues(1)
 
28

 
(174
)
 
104

 
(181
)
Included in fuel and purchased energy expense(2)
 
(14
)
 
165

 
1

 
155

Purchases and settlements:
 
 
 
 
 
 
 
 
Purchases
 
3

 
4

 
3

 
5

Settlements
 
(67
)
 
(1
)
 
(97
)
 
(4
)
Transfers in and/or out of level 3(3):
 
 
 
 
 
 
 
 
Transfers into level 3(4)
 
2

 
—

 
(3
)
 
—

Transfers out of level 3(5)
 
—

 
8

 
(113
)
 
8

Balance, end of period
 
$
294

 
$
(63
)
 
$
294

 
$
(63
)
Change in unrealized gains (losses) relating to instruments still held at end of period
 
$
14

 
$
(9
)
 
$
105

 
$
(26
)
___________
(1)
For power contracts and other power-related products, included on our Consolidated Condensed Statements of Operations.
(2)
For natural gas and power 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, 2017 and 2016.
(4)
There were $(2) million and nil in gains transferred out of level 2 into level 3 for each of the three months ended June 30, 2017 and 2016, and $3 million and nil in losses transferred out of level 2 into level 3 for the six months ended June 30, 2017 and 2016, respectively, due to changes in market liquidity in various power markets.
(5)
We had nil and $(8) million in losses transferred out of level 3 into level 2 for the three months ended June 30, 2017 and 2016, respectively, and $113 million in gains and $(8) million in losses transferred out of level 3 into level 2 for the six months ended June 30, 2017 and 2016, respectively, due to changes in market liquidity in various power markets.