Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Measurements Disclosure [Abstract]

Fair Value Measurements

(12)  Fair Value Measurements

ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.  Level 1 primarily consists of financial instruments such as exchange-traded derivatives and listed equities.  Equity securities that are also classified as cash equivalents are considered Level 1 if there are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.  Level 2 includes those financial instruments that are valued using models or other valuation methodologies.  These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, 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.  Instruments in this category include non-exchange-traded derivatives such as over-the-counter forwards and options.

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources.  These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.  Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs.  At each balance sheet date, the Company performs an analysis of all instruments subject to ASC 820 and includes in Level 3 all of those instruments 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.  If a fair value measurement relies on inputs from different levels of the hierarchy, the entire measurement must be placed based on the lowest level input that is significant to the fair value measurement.  The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  On a daily basis, the Company obtains quoted forward prices for the electric and natural gas market from an independent external pricing service.  Those forward price quotes are then used in addition to other various inputs to determine the reported fair value.  Some of the inputs include the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests), assumptions for time value and also the impact of the Company's nonperformance risk on its liabilities.

As of December 31, 2011, the Company considered the markets for its electric and natural gas Level 2 derivative instruments to be actively traded.  Management's assessment is based on the trading activity volume in real-time and forward electric and natural gas markets.  The Company regularly confirms the validity of pricing service quoted prices (e.g. Level 2 in the fair value hierarchy) used to value commodity contracts to the actual prices of commodity contracts entered into during the most recent quarter.

The following tables set forth, by level within the fair value hierarchy, the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis and the reconciliation of the changes in the fair value of derivatives classified as Level 3 in the fair value hierarchy as of December 31, 2011 and 2010:

Puget Energy	Fair Value Measurement At December 31, 2011								Fair Value Measurement At December 31, 2010
(Dollars in Thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	14,809	$	1,958	$	--	$	16,767	$	15,184	$	5,450	$	--	$	20,634
Restricted cash		2,043		735		--		2,778		3,246		--		--		3,246
Electric derivative instruments		--		2,340		8,380		10,720		--		1,874		7,888		9,762
Gas derivative instruments		--		--		6,011		6,011		--		1,487		4,484		5,971
Interest rate derivative instruments		--		--		--		--		--		--		--		--
Total assets	$	16,852	$	5,033	$	14,391	$	36,276	$	18,430	$	8,811	$	12,372	$	39,613
Liabilities:
Electric derivative instruments	$	--	$	165,643	$	98,691	$	264,334	$	--	$	147,257	$	95,324	$	242,581
Gas derivative instruments		--		195,852		11,052		206,904		--		147,308		8,343		155,651
Interest rate derivative instruments		--		52,409		--		52,409		--		58,003		--		58,003
Total liabilities	$	--	$	413,904	$	109,743	$	523,647	$	--	$	352,568	$	103,667	$	456,235

	Successor									Predecessor
Puget Energy Level 3 Roll-Forward Net (Liability) (Dollars in Thousands)	Year Ended December 31, 2011			Year Ended December 31, 2010			February 6, 2009 - December 31, 2009			January 1, 2009 - February 5, 2009
Balance at beginning of period	$	(91,295	)	$	(100,333	)	$	(185,813	) 1	$	(132,256	)
Changes during period:
Realized and unrealized energy derivatives
- included in earnings		(56,499	)		(112,180	)		(14,832	)		(627	)
- included in other comprehensive income		--			--			(17,429	)		(14,821	)
- included in regulatory assets/liabilities		(250	)		(2,665	)		(4,345	)		(1,410	)
Settlements 2		37,482			29,832			26,374			2,154
Transferred into Level 3		(306	)		225			(8,611	)		--
Transferred out of Level 3		15,516			93,826			104,323			8,560
Balance at end of period	$	(95,352	)	$	(91,295	)	$	(100,333	)	$	(138,400	)

_________________

1	The beginning balance for the Successor period was adjusted to reflect the impact of certain fair value adjustments from the merger transaction.
2	There were no purchases or issuances for 2011 or prior years.

Puget Sound Energy	Fair Value measurement At December 31, 2011								Fair Value Measurement At December 31, 2010
(Dollars in Thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	9,200	$	1,958	$	--	$	11,158	$	15,184	$	5,450	$	--	$	20,634
Restricted cash		2,043		735		--		2,778		3,246		--		--		3,246
Electric derivative instruments		--		2,340		8,380		10,720		--		1,874		7,888		9,762
Gas derivative instruments		--		--		6,011		6,011		--		1,487		4,484		5,971
Total assets	$	11,243	$	5,033	$	14,391	$	30,667	$	18,430	$	8,811	$	12,372	$	39,613
Liabilities:
Electric derivative instruments	$	--	$	165,643	$	98,691	$	264,334	$	--	$	147,257	$	95,324	$	242,581
Gas derivative instruments		--		195,852		11,052		206,904		--		147,308		8,343		155,651
Total liabilities	$	--	$	361,495	$	109,743	$	471,238	$	--	$	294,565	$	103,667	$	398,232

Puget Sound Energy  Level 3 Roll-Forward Net (Liability)	Year Ended December 31,
(Dollars in Thousands)	2011			2010			2009
Balance at beginning of period	$	(91,295	)	$	(100,333	)	$	(132,256	)
Changes during period:
Realized and unrealized energy derivatives
- included in earnings		(56,499	)		(112,180	)		(776	)
- included in other comprehensive income		--			--			(38,047	)
- included in regulatory assets/liabilities		(250	)		(2,665	)		(7,824	)
Settlements 1		37,482			29,832			28,779
Transferred into Level 3		(306	)		225			(6,778	)
Transferred out of Level 3		15,516			93,826			56,569
Balance at end of period	$	(95,352	)	$	(91,295	)	$	(100,333	)

_________________

1 There were no purchases or issuances for 2011 or prior years.

Realized gains and losses on energy derivatives for Level 3 recurring items are included in energy costs in the Company's consolidated statements of income under purchased electricity, electric generation fuel or purchased natural gas when settled.

Unrealized gains and losses on energy derivatives for Level 3 recurring items are included in the net unrealized (gain) loss on derivative instruments section in the Company's consolidated statements of income.

Certain energy derivative instruments are classified as Level 3 in the fair value hierarchy because Level 3 inputs are significant to their fair value measurement.  Energy derivatives transferred out of Level 3 represent existing assets or liabilities that were classified as Level 3 at the start of the reporting period for which the lowest significant input became observable during the current reporting period and were transferred into Level 2.  Conversely, energy derivatives transferred into Level 3 from Level 2 represent scenarios in which the lowest significant input became unobservable during the current reporting period.  The Company had no transfers between Level 2 and Level 1 during the year ended December 31, 2011, 2010 or 2009.