Fair Value

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value

Fair Value

The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value.  Each fair value measurement must be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety.

The three broad levels of inputs defined by the fair value hierarchy are as follows:

• Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

• Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and

• Level 3 Inputs—unobservable inputs for the asset or liability.  These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).

Fair Value of Derivative Contracts

The following two tables summarize the fair value measurements of our (i) energy commodity derivative contracts and (ii) interest rate swap agreements as of June 30, 2012 and December 31, 2011, based on the three levels established by the Codification (in millions).  The fair value measurements in the tables below do not include cash margin deposits made by our counterparties, which are reported within “Accrued other current liabilities” in our accompanying consolidated balance sheets.

	Asset fair value measurements using
	Total		Quoted prices in active markets for identical  assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable  inputs (Level 3)
As of June 30, 2012
Energy commodity derivative contracts(a)	$	267	$	27	$	187	$	53
Interest rate swap agreements	$	690	$	—	$	690	$	—
As of December 31, 2011
Energy commodity derivative contracts(a)	$	108	$	34	$	47	$	27
Interest rate swap agreements	$	662	$	—	$	662	$	—

	Liability fair value measurements using
	Total			Quoted prices in  active markets for identical liabilities (Level 1)			Significant other  observable inputs (Level 2)			Significant unobservable  inputs (Level 3)
As of June 30, 2012
Energy commodity derivative contracts(a)	$	(366	)	$	(9	)	$	(84	)	$	(273	)
Interest rate swap agreements	$	(13	)	$	—		$	(13	)	$	—
As of December 31, 2011
Energy commodity derivative contracts(a)	$	(160	)	$	(15	)	$	(125	)	$	(20	)
Interest rate swap agreements	$	—		$	—		$	—		$	—

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(a) Level 1 consists primarily of NYMEX natural gas futures.  Level 2 consists primarily of OTC West Texas Intermediate swaps and OTC natural gas swaps that are settled on NYMEX.  Level 3 consists primarily of West Texas Intermediate options and power derivative contracts.

The table below provides a summary of changes in the fair value of our Level 3 energy commodity derivative contracts for each of the three and six months ended June 30, 2012 and 2011 (in millions):

Significant unobservable inputs (Level 3)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Derivatives-net asset (liability)
Beginning of Period	$	(3	)	$	(3	)	$	7		$	19
Total gains or (losses)
Included in earnings	(3		)	3			(1		)	3
Included in other comprehensive income	28			7			6			(16		)
Purchases (a)	(246		)	—			(243		)	5
Settlements	4			—			11			(4		)
End of Period	$	(220	)	$	7		$	(220	)	$	7
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets held at the reporting date	$	(4	)	$	(4	)	$	(3	)	$	1

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(a) 2012 purchases include a net liability of $246 million of Level 3 energy commodity derivative contracts associated with the EP acquisition.

As of June 30, 2012, our West Texas Intermediate options and power-related derivatives were reported at fair value using Level 3 inputs due to such derivatives not having observable market prices.  Fair value of West Texas Intermediate options is determined using the Black Scholes option valuation methodology after giving consideration to a range of factors, including the price at which the option was acquired, local market conditions, implied volatility, and trading values on public exchanges. Power-related derivatives are primarily in the Pennsylvania-New Jersey-Maryland (PJM) markets and valued based upon price quotes from third-party service providers.

The significant unobservable input used in the fair value measurement of our West Texas Intermediate options is implied volatility.  Implied volatility of our West Texas Intermediate options is obtained from a third-party service provider.  As of June 30, 2012, this volatility ranged from 29% - 32% based on both historical market data and future estimates of market fluctuation.  The significant unobservable inputs used in the fair value measurement of our power-related derivatives are illiquid pricing points. As the delivery points in our power contracts are in an illiquid market and not actively traded, we adjust the PJM forward curves by the difference between the 12-month rolling average of actual settled prices at delivery points in the PJM East region. As of June 30, 2012, the adjusted prices over the contract term ranged from $24.14 per MW/h to $57.13 per MW/h. However, we have entered into offsetting positions that eliminate the price risks associated with our PJM power contracts. Significant increases (decreases) in these inputs in isolation would result in a significantly lower (higher) fair value measurement.

Fair Value of Financial Instruments

The estimated fair value of our outstanding debt balance as of June 30, 2012 and December 31, 2011 (both short-term and long-term, but excluding debt fair value adjustments), is disclosed below (in millions):

	June 30, 2012				December 31, 2011
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Total debt	$	34,324	$	37,607	$	16,136	$	17,616

Our accompanying consolidated balance sheets at June 30, 2012 and December 31, 2011 include “Debt fair value adjustments” of $2,780 million and $1,119 million, respectively, representing fair value adjustments to our outstanding debt balances. These fair value adjustments included (i) increases to our debt balances of $1,206 million and $1,151 million at June 30, 2012 and December 31, 2011, respectively, associated with our interest rate swaps (see Note 5), and (ii) an increase of $1,574 million and a decrease of $32 million to our debt balances at June 30, 2012 and December 31, 2011, respectively, associated with purchase accounting on our debt balances.