Fair Value
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Jun. 30, 2012
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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:
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.
__________
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)
__________ (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):
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. |