v3.20.1

Assets and Liabilities with Recurring Fair Value Measurements | 3 Months Ended
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Mar. 31, 2020
Fair Value Disclosures [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, including the Black-Scholes option-pricing model, 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. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement at period end. 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 assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, by level within the fair value hierarchy:
| Assets and Liabilities with Recurring Fair Value Measures as of March 31, 2020
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (in millions)
Assets: |  |  |  |  |  |  |
Cash equivalents(1) | $ | 444 |  |  | $ | — |  |  | $ | — |  |  | $ | 444 |
Commodity instruments: |  |  |  |  |  |  |
Commodity exchange traded derivatives contracts | 1,198 |  |  | — |  |  | — |  |  | 1,198 |
Commodity forward contracts(2) | — |  |  | 383 |  |  | 366 |  |  | 749 |
Interest rate hedging instruments | — |  |  | — |  |  | — |  |  | — |
Effect of netting and allocation of collateral(3)(4) | (1,198 | ) |  | (235 | ) |  | (25 | ) |  | (1,458 | )
Total assets | $ | 444 |  |  | $ | 148 |  |  | $ | 341 |  |  | $ | 933 |
Liabilities: |  |  |  |  |  |  |
Commodity instruments: |  |  |  |  |  |  |
Commodity exchange traded derivatives contracts | $ | 1,233 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,233 |
Commodity forward contracts(2) | — |  |  | 379 |  |  | 117 |  |  | 496 |
Interest rate hedging instruments | — |  |  | 150 |  |  | — |  |  | 150 |
Effect of netting and allocation of collateral(3)(4) | (1,233 | ) |  | (243 | ) |  | (25 | ) |  | (1,501 | )
Total liabilities | $ | — |  |  | $ | 286 |  |  | $ | 92 |  |  | $ | 378 |
| Assets and Liabilities with Recurring Fair Value Measures as of December 31, 2019
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (in millions)
Assets: |  |  |  |  |  |  |
Cash equivalents(1) | $ | 784 |  |  | $ | — |  |  | $ | — |  |  | $ | 784 |
Commodity instruments: |  |  |  |  |  |  |
Commodity exchange traded derivatives contracts | 872 |  |  | — |  |  | — |  |  | 872 |
Commodity forward contracts(2) | — |  |  | 245 |  |  | 294 |  |  | 539 |
Interest rate hedging instruments | — |  |  | 12 |  |  | — |  |  | 12 |
Effect of netting and allocation of collateral(3)(4) | (872 | ) |  | (131 | ) |  | (18 | ) |  | (1,021 | )
Total assets | $ | 784 |  |  | $ | 126 |  |  | $ | 276 |  |  | $ | 1,186 |
Liabilities: |  |  |  |  |  |  |
Commodity instruments: |  |  |  |  |  |  |
Commodity exchange traded derivatives contracts | $ | 984 |  |  | $ | — |  |  | $ | — |  |  | $ | 984 |
Commodity forward contracts(2) | — |  |  | 285 |  |  | 123 |  |  | 408 |
Interest rate hedging instruments | — |  |  | 31 |  |  | — |  |  | 31 |
Effect of netting and allocation of collateral(3)(4) | (984 | ) |  | (133 | ) |  | (18 | ) |  | (1,135 | )
Total liabilities | $ | — |  |  | $ | 183 |  |  | $ | 105 |  |  | $ | 288 |
___________
(1) | At March 31, 2020 and December 31, 2019, we had cash equivalents of $222 million and $573 million included in cash and cash equivalents and $222 million and $211 million included in restricted cash, respectively.
(2) | Includes OTC swaps and options.
(3) | We offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement for financial statement presentation; therefore, amounts recognized for the right to reclaim, or the obligation to return, cash collateral are presented net with the corresponding derivative instrument fair values. See Note 6 for further discussion of our derivative instruments subject to master netting arrangements.
(4) | Cash collateral posted with (received from) counterparties allocated to level 1, level 2 and level 3 derivative instruments totaled $35 million, $8 million and nil, respectively, at March 31, 2020. Cash collateral posted with (received from) counterparties allocated to level 1, level 2 and level 3 derivative instruments totaled $112 million, $2 million and nil, respectively, at December 31, 2019.
At March 31, 2020 and December 31, 2019, the derivative instruments classified as level 3 primarily included commodity contracts. 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 March 31, 2020 and December 31, 2019:
|  | Quantitative Information about Level 3 Fair Value Measurements
|  | March 31, 2020
|  | Fair Value, Net Asset |  |  |  | Significant Unobservable |  |  |  |  |  |  |
|  | (Liability) |  | Valuation Technique |  | Input |  | Range |  | Average(2)
|  | (in millions) |  |  |  |  |  |  |  |  |  |  |
Power Contracts(1) |  | $ | 211 |  |  | Discounted cash flow |  | Market price (per MWh) |  | $ | 3.47 |  | — | $159.64 | /MWh |  | $ | 27.96 |
Power Congestion Products |  | $ | 11 |  |  | Discounted cash flow |  | Market price (per MWh) |  | $ | (6.48 | ) | — | $42.00 | /MWh |  | $ | 3.48 |
Natural Gas Contracts |  | $ | 10 |  |  | Discounted cash flow |  | Market price (per MMBtu) |  | $ | 1.13 |  | — | $4.77 | /MMBtu |  | $ | 2.60 |
|  | December 31, 2019
|  | Fair Value, Net Asset |  |  |  | Significant Unobservable |  |  |  |  |  |  |
|  | (Liability) |  | Valuation Technique |  | Input |  | Range |  |
|  | (in millions) |  |  |  |  |  |  |  |  |  |  |
Power Contracts(1) |  | $ | 158 |  |  | Discounted cash flow |  | Market price (per MWh) |  | $ | 4.85 |  | — | $184.15 | /MWh |  |
Power Congestion Products |  | $ | 17 |  |  | Discounted cash flow |  | Market price (per MWh) |  | $ | (10.32 | ) | — | $20 | /MWh |  |
Natural Gas Contracts |  | $ | (20 | ) |  | Discounted cash flow |  | Market price (per MMBtu) |  | $ | 1.73 |  | — | $6.45 | /MMBtu |  |
___________
(1) | Power contracts include power and heat rate instruments classified as level 3 in the fair value hierarchy.
(2) | Amount represents the arithmetic average of the significant unobservable input based on the range disclosed.
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 March 31,
|  | 2020 |  | 2019
Balance, beginning of period |  | $ | 171 |  |  | $ | (8 | )
Realized and mark-to-market gains (losses): |  |  |  |
Included in net income: |  |  |  |
Included in operating revenues(1) |  | 81 |  |  | 50 |
Included in fuel and purchased energy expense(2) |  | (4 | ) |  | 2 |
Change in collateral |  | — |  |  | 2 |
Purchases, Issuances and settlements: |  |  |  |
Purchases |  | — |  |  | 2 |
Settlements |  | — |  |  | 58 |
Transfers in and/or out of level 3: |  |  |  |
Transfers into level 3(3) |  | 3 |  |  | (1 | )
Transfers out of level 3(4) |  | (2 | ) |  | — |
Balance, end of period |  | $ | 249 |  |  | $ | 105 |
Change in unrealized gains (losses) included in net income relating to instruments still held at end of period |  | $ | 77 |  |  | $ | 52 |
___________
(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 had $3 million in gains and $(1) million in losses transferred out of level 2 into level 3 for the three months ended March 31, 2020 and 2019, respectively, due to changes in market liquidity in various power markets.
(4) | We had $2 million in gains and nil transferred out of level 3 into level 2 for the three months ended March 31, 2020 and 2019, 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/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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