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Fair Value Disclosures
9 Months Ended
Sep. 30, 2011
Fair Value Disclosures [Line Items] 
Fair Value Disclosures

8.       FAIR VALUE DISCLOSURES

A.       DEBT AND INVESTMENTS

PROGRESS ENERGY

DEBT

The carrying amount of our long-term debt, including current maturities, was $12.940 billion and $12.642 billion at September 30, 2011 and December 31, 2010, respectively. The estimated fair value of this debt, as obtained from quoted market prices for the same or similar issues, was $15.1 billion and $14.0 billion at September 30, 2011 and December 31, 2010, respectively.

INVESTMENTS

Certain investments in debt and equity securities that have readily determinable market values are accounted for as available-for-sale securities at fair value. Our available-for-sale securities include investments in stocks, bonds and cash equivalents held in trust funds, pursuant to NRC requirements, to fund certain costs of decommissioning the Utilities' nuclear plants as discussed in Note 4C of the 2010 Form 10-K. Nuclear decommissioning trust (NDT) funds are presented on the Consolidated Balance Sheets at fair value. In addition to the NDT funds, we hold other debt investments in certain benefit trusts classified as available-for-sale, which are included in miscellaneous other property and investments on the Consolidated Balance Sheets at fair value.

The following table summarizes our available-for-sale securities at September 30, 2011 and December 31, 2010:

(in millions)Fair Value Unrealized Losses Unrealized Gains
September 30, 2011        
Common stock equity $ 925 $ 41 $ 313
Preferred stock and other equity  50   1   8
Corporate debt  90   1   6
U.S. state and municipal debt   121   2   6
U.S. and foreign government debt  289   -   17
Money market funds and other  89   -   2
 Total$ 1,564 $ 45 $ 352
          
December 31, 2010        
Common stock equity $ 1,021 $ 13 $ 408
Preferred stock and other equity   28   -   11
Corporate debt  90   -   6
U.S. state and municipal debt   132   4   3
U.S. and foreign government debt  264   2   10
Money market funds and other   52   -   1
 Total$ 1,587 $ 19 $ 439
          

The NDT funds and other available-for-sale debt investments held in certain benefit trusts are managed by third-party investment managers who have a right to sell securities without our authorization. Net unrealized gains and losses of the NDT funds that would be recorded in earnings or other comprehensive income by a nonregulated entity are recorded as regulatory assets and liabilities pursuant to ratemaking treatment. Therefore, the preceding table includes the unrealized gains and losses for the NDT funds based on the original cost of the trust investments. All of the unrealized losses and unrealized gains for 2011 and 2010 relate to the NDT funds.

The aggregate fair value of investments that related to the September 30, 2011 and December 31, 2010 unrealized losses was $266 million and $195 million, respectively.

At September 30, 2011, the fair value of our available-for-sale debt securities by contractual maturity was:

 (in millions)   
 Due in one year or less$ 35 
 Due after one through five years  212 
 Due after five through 10 years  127 
 Due after 10 years  140 
 Total$ 514 
     

The following table presents selected information about our sales of available-for-sale securities during the three and nine months ended September 30, 2011 and 2010. Realized gains and losses were determined on a specific identification basis.

 Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Proceeds$ 1,062 $ 2,051 $ 4,254 $ 5,743
Realized gains  9   7   24   17
Realized losses  11   5   20   20
            

Proceeds were primarily related to NDT funds. Some of our benefit investment trusts are managed by third-party investment managers who have the right to sell securities without our authorization. Losses for investments in those benefit investment trusts were not material. Other securities are evaluated on an individual basis to determine if a decline in fair value below the carrying value is other-than-temporary. At September 30, 2011 and December 31, 2010, our other securities had no investments in a continuous loss position for greater than 12 months.

PEC

DEBT

The carrying amount of PEC's long-term debt, including current maturities, was $4.193 billion and $3.693 billion at September 30, 2011 and December 31, 2010, respectively. The estimated fair value of this debt, as obtained from quoted market prices for the same or similar issues, was $4.7 billion and $4.0 billion at September 30, 2011 and December 31, 2010, respectively.

INVESTMENTS

Certain investments in debt and equity securities that have readily determinable market values are accounted for as available-for-sale securities at fair value. PEC's available-for-sale securities include investments in stocks, bonds and cash equivalents held in trust funds, pursuant to NRC requirements, to fund certain costs of decommissioning PEC's nuclear plants as discussed in Note 4C of the 2010 Form 10-K. NDT funds are presented on the Consolidated Balance Sheets at fair value.

The following table summarizes PEC's available-for-sale securities at September 30, 2011 and December 31, 2010:

(in millions)Fair Value Unrealized Losses Unrealized Gains
     
September 30, 2011        
Common stock equity$ 599 $ 27 $ 198
Preferred stock and other equity  15   1   5
Corporate debt  72   1   5
U.S. state and municipal debt   53   -   3
U.S. and foreign government debt  213   -   16
Money market funds and other   41   -   1
 Total$ 993 $ 29 $ 228
          
December 31, 2010        
Common stock equity $ 652 $ 10 $ 256
Preferred stock and other equity  14   -   6
Corporate debt  72   -   5
U.S. state and municipal debt   51   1   1
U.S. and foreign government debt   199   1   9
Money market funds and other  42   -   1
 Total$ 1,030 $ 12 $ 278
          

The NDT funds are managed by third-party investment managers who have a right to sell securities without our authorization. Net unrealized gains and losses of the NDT funds that would be recorded in earnings or other comprehensive income by a nonregulated entity are recorded as regulatory assets and liabilities pursuant to ratemaking treatment. Therefore, the preceding table includes the unrealized gains and losses for the NDT funds based on the original cost of the trust investments. All of the unrealized losses and gains for 2011 and 2010 relate to the NDT funds.

The aggregate fair value of investments that related to the September 30, 2011 and December 31, 2010 unrealized losses was $142 million and $104 million, respectively.

At September 30, 2011, the fair value of PEC's available-for-sale debt securities by contractual maturity was:

 (in millions)   
 Due in one year or less$15 
 Due after one through five years 147 
 Due after five through 10 years 77 
 Due after 10 years 110 
 Total$349 
     

The following table presents selected information about PEC's sales of available-for-sale securities during the three and nine months ended September 30, 2011 and 2010. Realized gains and losses were determined on a specific identification basis.

 Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Proceeds$136 $88 $386 $310
Realized gains 4  3  10  9
Realized losses 4  3  9  15
            

PEC's proceeds were primarily related to NDT funds. Other securities are evaluated on an individual basis to determine if a decline in fair value below the carrying value is other-than-temporary. At September 30, 2011 and December 31, 2010, PEC did not have any other securities.

PEF

DEBT

The carrying amount of PEF's long-term debt, including current maturities, was $4.482 billion at September 30, 2011 and December 31, 2010. The estimated fair value of this debt, as obtained from quoted market prices for the same or similar issues, was $5.4 billion and $5.0 billion at September 30, 2011 and December 31, 2010, respectively.

INVESTMENTS

Certain investments in debt and equity securities that have readily determinable market values are accounted for as available-for-sale securities at fair value. PEF's available-for-sale securities include investments in stocks, bonds and cash equivalents held in trust funds, pursuant to NRC requirements, to fund certain costs of decommissioning PEF's nuclear plant as discussed in Note 4C of the 2010 Form 10-K. The NDT funds are presented on the Balance Sheets at fair value.

 

The following table summarizes PEF's available-for-sale securities at September 30, 2011 and December 31, 2010:

(in millions)Fair Value Unrealized Losses Unrealized Gains
     
September 30, 2011        
Common stock equity $ 326 $ 14 $ 115
Preferred stock and other equity  35   -   3
Corporate debt   18   -   1
U.S. state and municipal debt   68   2   3
U.S. and foreign government debt   76   -   1
Money market funds and other  41   -   1
 Total$ 564 $ 16 $ 124
          
December 31, 2010        
Common stock equity $ 369 $ 3 $ 152
Preferred stock and other equity  14   -   5
Corporate debt  14   -   1
U.S. state and municipal debt   81   3   2
U.S. and foreign government debt   62   1   1
Money market funds and other  10   -   -
 Total$ 550 $ 7 $ 161
          

The NDT funds are managed by third-party investment managers who have a right to sell securities without our authorization. Net unrealized gains and losses of the NDT funds that would be recorded in earnings or other comprehensive income by a nonregulated entity are recorded as regulatory assets and liabilities pursuant to ratemaking treatment. Therefore, the preceding table includes unrealized gains and losses for the NDT funds based on the original cost of the trust investments. All of the unrealized losses and gains for 2011 and 2010 relate to the NDT funds.

The aggregate fair value of investments that related to the September 30, 2011 and December 31, 2010 unrealized losses was $124 million and $87 million, respectively.

At September 30, 2011, the fair value of PEF's available-for-sale debt securities by contractual maturity was:

 (in millions)   
 Due in one year or less$ 20 
 Due after one through five years  65 
 Due after five through 10 years  50 
 Due after 10 years  30 
 Total$ 165 
     

The following table presents selected information about PEF's sales of available-for-sale securities during the three and nine months ended September 30, 2011 and 2010. Realized gains and losses were determined on a specific identification basis.

 Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Proceeds$ 926 $ 1,891 $ 3,861 $ 5,305
Realized gains  5   3   14   7
Realized losses  7   2   11   5
            

PEF's proceeds were related to NDT funds. Other securities are evaluated on an individual basis to determine if a decline in fair value below the carrying value is other-than-temporary. At September 30, 2011 and December 31, 2010, PEF did not have any other securities.

B.       FAIR VALUE MEASUREMENTS

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Fair value measurements require the use of market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, corroborated by market data, or generally unobservable. Valuation techniques are required to maximize the use of observable inputs and minimize the use of unobservable inputs. A midmarket pricing convention (the midpoint price between bid and ask prices) is permitted for use as a practical expedient.

GAAP also establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, and requires fair value measurements to be categorized based on the observability of those inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The three levels of the fair value hierarchy are as follows:

Level 1 – The pricing inputs are unadjusted quoted prices 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.

Level 2 – The pricing inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 includes 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, swaps and options; certain marketable debt securities; and financial instruments traded in less than active markets.

Level 3 – The pricing inputs include significant inputs 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 may include longer-term instruments that extend into periods in which quoted prices or other observable inputs are not available.

Certain assets and liabilities, including long-lived assets, were measured at fair value on a nonrecurring basis. There were no significant fair value measurement losses recognized for such assets and liabilities in the periods reported. These fair value measurements fall within Level 3 of the hierarchy discussed above.

The following tables set forth, by level within the fair value hierarchy, our and the Utilities' financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. Financial assets and liabilities are classified in their entirety based on the lowest level of input 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 the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

PROGRESS ENERGY           
(in millions) Level 1  Level 2  Level 3  Total
September 30, 2011           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 925 $ - $ - $ 925
  Preferred stock and other equity  23   27   -   50
  Corporate debt  -   90   -   90
  U.S. state and municipal debt  1   118   -   119
  U.S. and foreign government debt  100   188   -   288
  Money market funds and other  -   40   -   40
 Total nuclear decommissioning trust funds  1,049   463   -   1,512
 Derivatives           
  Commodity forward contracts  -   7   -   7
 Other marketable securities           
  Money market and other  18   7   -   25
  Total assets$ 1,067 $ 477 $ - $ 1,544
              

              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 426 $ 43 $ 469
  Interest rate contracts  -   86   -   86
  Contingent value obligations  -   -   74   74
  Total liabilities$ - $ 512 $ 117 $ 629
              

            
(in millions) Level 1  Level 2  Level 3  Total
December 31, 2010           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 1,021 $ - $ - $ 1,021
  Preferred stock and other equity  22   6   -   28
  Corporate debt  -   86   -   86
  U.S. state and municipal debt  -   132   -   132
  U.S. and foreign government debt  79   182   -   261
  Money market funds and other  1   42   -   43
 Total nuclear decommissioning trust funds  1,123   448   -   1,571
 Derivatives           
  Commodity forward contracts  -   15   -   15
  Interest rate contracts  -   4   -   4
 Other marketable securities           
  Corporate debt  -   4   -   4
  U.S. and foreign government debt  -   3   -   3
  Money market and other  18   -   -   18
  Total assets$ 1,141 $ 474 $ - $ 1,615
              

              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 458 $ 36 $ 494
  Interest rate contracts  -   39   -   39
  Contingent value obligations  -   15   -   15
  Total liabilities$ - $ 512 $ 36 $ 548
              

PEC           
(in millions) Level 1  Level 2  Level 3  Total
September 30, 2011           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 599 $ - $ - $ 599
  Preferred stock and other equity  15   -   -   15
  Corporate debt  -   72   -   72
  U.S. state and municipal debt  1   52   -   53
  U.S. and foreign government debt  89   124   -   213
  Money market funds and other  -   40   -   40
 Total nuclear decommissioning trust funds  704   288   -   992
 Other marketable securities  3   -   -   3
  Total assets$ 707 $ 288 $ - $ 995
              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 92 $ 42 $ 134
  Interest rate contracts  -   43   -   43
  Total liabilities$ - $ 135 $ 42 $ 177
              
              
(in millions) Level 1  Level 2  Level 3  Total
December 31, 2010           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 652 $ - $ - $ 652
  Preferred stock and other equity  14   -   -   14
  Corporate debt  -   72   -   72
  U.S. state and municipal debt  -   51   -   51
  U.S. and foreign government debt  76   123   -   199
  Money market funds and other  1   28   -   29
 Total nuclear decommissioning trust funds  743   274   -   1,017
 Derivatives           
  Commodity forward contracts  -   2   -   2
  Interest rate contracts  -   3   -   3
 Other marketable securities  4   -   -   4
  Total assets$ 747 $ 279 $ - $ 1,026
              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 87 $ 36 $ 123
  Interest rate contracts  -   11   -   11
  Total liabilities$ - $ 98 $ 36 $ 134
              

PEF           
(in millions) Level 1  Level 2  Level 3  Total
September 30, 2011           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 326 $ - $ - $ 326
  Preferred stock and other equity  8   27   -   35
  Corporate debt  -   18   -   18
  U.S. state and municipal debt  -   66   -   66
  U.S. and foreign government debt  11   64   -   75
 Total nuclear decommissioning trust funds  345   175   -   520
 Derivatives           
  Commodity forward contracts  -   7   -   7
 Other marketable securities  1   -   -   1
  Total assets$ 346 $ 182 $ - $ 528
              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 334 $ 1 $ 335
  Interest rate contracts  -   8   -   8
  Total liabilities$ - $ 342 $ 1 $ 343
              
              
(in millions) Level 1  Level 2  Level 3  Total
December 31, 2010           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 369 $ - $ - $ 369
  Preferred stock and other equity  8   6   -   14
  Corporate debt  -   14   -   14
  U.S. state and municipal debt  -   81   -   81
  U.S. and foreign government debt  3   59   -   62
  Money market funds and other  -   14   -   14
 Total nuclear decommissioning trust funds  380   174   -   554
 Derivatives           
  Commodity forward contracts  -   13   -   13
 Other marketable securities  1   -   -   1
  Total assets$ 381 $ 187 $ - $ 568
              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 371 $ - $ 371
  Interest rate contracts  -   7   -   7
  Total liabilities$ - $ 378 $ - $ 378
              

The determination of the fair values in the preceding tables incorporates various factors, including risks of nonperformance by us or our counterparties. Such risks consider not only the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits or letters of credit), but also the impact of our and the Utilities' credit risk on our liabilities.

Commodity forward contract derivatives and interest rate contract derivatives reflect positions held by us and the Utilities. Most over-the-counter commodity forward contract derivatives and interest rate contract derivatives are valued using financial models which utilize observable inputs for similar instruments and are classified within Level 2. Other derivatives are valued utilizing inputs that are not observable for substantially the full term of the contract, or for which the impact of the unobservable period is significant to the fair value of the derivative. Such derivatives are classified within Level 3. See Note 12 for discussion of risk management activities and derivative transactions.

NDT funds reflect the assets of the Utilities' nuclear decommissioning trusts. The assets of the trusts are invested primarily in exchange-traded equity securities (classified within Level 1) and marketable debt securities, most of which are valued using Level 1 inputs for similar instruments and are classified within Level 2.

Other marketable securities primarily represent available-for-sale debt securities used to fund certain employee benefit costs.

Contingent Value Obligations (CVOs), which are derivatives, are discussed further in Note 10. At September 30, 2011, we determined the fair value of the CVOs based on the purchase price in a negotiated settlement agreement (a Level 3 input) and we have classified CVOs as Level 3. The CVOs were previously recorded at fair value based on quoted prices from a less-than-active market and classified as Level 2.

Transfers in (out) of Levels 1, 2 or 3 represent existing assets or liabilities previously categorized as a higher Level for which the inputs to the estimate became less observable or assets and liabilities that were previously classified as Level 2 or 3 for which the lowest significant input became more observable during the period. There were no significant transfers in (out) of Levels 1, 2 and 3 during the period other than the CVO transfer previously discussed. Transfers into and out of each Level are measured at the end of the period.

A reconciliation of changes in the fair value of our and the Utilities' derivative liabilities for CVOs and commodities, as applicable, classified as Level 3 in the fair value hierarchy for the periods ended September 30 follows:

PROGRESS ENERGY
  Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Derivatives, net at beginning of period$ 37 $ 62 $ 36 $ 39
Total losses, realized and unrealized - commodities           
 deferred as regulatory assets and liabilities, net  6   23   7   46
Transfers in (out) of Level 3, net - CVOs  74   -   74   -
Derivatives, net at end of period$ 117 $ 85 $ 117 $ 85
             

PEC
  Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Derivatives, net at beginning of period$ 37 $ 42 $ 36 $ 27
Total losses, realized and unrealized - commodities           
 deferred as regulatory assets and liabilities, net  5   13   6   28
Derivatives, net at end of period$ 42 $ 55 $ 42 $ 55
             

PEF
  Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Derivatives, net at beginning of period$ - $ 20 $ - $ 12
Total losses, realized and unrealized - commodities           
 deferred as regulatory assets and liabilities, net  1   10   1   18
Derivatives, net at end of period$ 1 $ 30 $ 1 $ 30
             

Substantially all unrealized gains and losses on the Utilities' derivatives are deferred as regulatory liabilities or assets consistent with ratemaking treatment. Unrealized losses on the change in fair value of our CVOs are discussed in Note 12. There were no Level 3 purchases, sales, issuances or settlements during the period.

 

PEC
 
Fair Value Disclosures [Line Items] 
Fair Value Disclosures

8.       FAIR VALUE DISCLOSURES

A.       DEBT AND INVESTMENTS

PEC

DEBT

The carrying amount of PEC's long-term debt, including current maturities, was $4.193 billion and $3.693 billion at September 30, 2011 and December 31, 2010, respectively. The estimated fair value of this debt, as obtained from quoted market prices for the same or similar issues, was $4.7 billion and $4.0 billion at September 30, 2011 and December 31, 2010, respectively.

INVESTMENTS

Certain investments in debt and equity securities that have readily determinable market values are accounted for as available-for-sale securities at fair value. PEC's available-for-sale securities include investments in stocks, bonds and cash equivalents held in trust funds, pursuant to NRC requirements, to fund certain costs of decommissioning PEC's nuclear plants as discussed in Note 4C of the 2010 Form 10-K. NDT funds are presented on the Consolidated Balance Sheets at fair value.

The following table summarizes PEC's available-for-sale securities at September 30, 2011 and December 31, 2010:

(in millions)Fair Value Unrealized Losses Unrealized Gains
     
September 30, 2011        
Common stock equity$ 599 $ 27 $ 198
Preferred stock and other equity  15   1   5
Corporate debt  72   1   5
U.S. state and municipal debt   53   -   3
U.S. and foreign government debt  213   -   16
Money market funds and other   41   -   1
 Total$ 993 $ 29 $ 228
          
December 31, 2010        
Common stock equity $ 652 $ 10 $ 256
Preferred stock and other equity  14   -   6
Corporate debt  72   -   5
U.S. state and municipal debt   51   1   1
U.S. and foreign government debt   199   1   9
Money market funds and other  42   -   1
 Total$ 1,030 $ 12 $ 278
          

The NDT funds are managed by third-party investment managers who have a right to sell securities without our authorization. Net unrealized gains and losses of the NDT funds that would be recorded in earnings or other comprehensive income by a nonregulated entity are recorded as regulatory assets and liabilities pursuant to ratemaking treatment. Therefore, the preceding table includes the unrealized gains and losses for the NDT funds based on the original cost of the trust investments. All of the unrealized losses and gains for 2011 and 2010 relate to the NDT funds.

The aggregate fair value of investments that related to the September 30, 2011 and December 31, 2010 unrealized losses was $142 million and $104 million, respectively.

At September 30, 2011, the fair value of PEC's available-for-sale debt securities by contractual maturity was:

 (in millions)   
 Due in one year or less$15 
 Due after one through five years 147 
 Due after five through 10 years 77 
 Due after 10 years 110 
 Total$349 
     

The following table presents selected information about PEC's sales of available-for-sale securities during the three and nine months ended September 30, 2011 and 2010. Realized gains and losses were determined on a specific identification basis.

 Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Proceeds$136 $88 $386 $310
Realized gains 4  3  10  9
Realized losses 4  3  9  15
            

PEC's proceeds were primarily related to NDT funds. Other securities are evaluated on an individual basis to determine if a decline in fair value below the carrying value is other-than-temporary. At September 30, 2011 and December 31, 2010, PEC did not have any other securities.

B.       FAIR VALUE MEASUREMENTS

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Fair value measurements require the use of market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, corroborated by market data, or generally unobservable. Valuation techniques are required to maximize the use of observable inputs and minimize the use of unobservable inputs. A midmarket pricing convention (the midpoint price between bid and ask prices) is permitted for use as a practical expedient.

GAAP also establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, and requires fair value measurements to be categorized based on the observability of those inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The three levels of the fair value hierarchy are as follows:

Level 1 – The pricing inputs are unadjusted quoted prices 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.

Level 2 – The pricing inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 includes 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, swaps and options; certain marketable debt securities; and financial instruments traded in less than active markets.

Level 3 – The pricing inputs include significant inputs 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 may include longer-term instruments that extend into periods in which quoted prices or other observable inputs are not available.

Certain assets and liabilities, including long-lived assets, were measured at fair value on a nonrecurring basis. There were no significant fair value measurement losses recognized for such assets and liabilities in the periods reported. These fair value measurements fall within Level 3 of the hierarchy discussed above.

The following tables set forth, by level within the fair value hierarchy, our and the Utilities' financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. Financial assets and liabilities are classified in their entirety based on the lowest level of input 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 the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

PEC           
(in millions) Level 1  Level 2  Level 3  Total
September 30, 2011           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 599 $ - $ - $ 599
  Preferred stock and other equity  15   -   -   15
  Corporate debt  -   72   -   72
  U.S. state and municipal debt  1   52   -   53
  U.S. and foreign government debt  89   124   -   213
  Money market funds and other  -   40   -   40
 Total nuclear decommissioning trust funds  704   288   -   992
 Other marketable securities  3   -   -   3
  Total assets$ 707 $ 288 $ - $ 995
              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 92 $ 42 $ 134
  Interest rate contracts  -   43   -   43
  Total liabilities$ - $ 135 $ 42 $ 177
              
              
(in millions) Level 1  Level 2  Level 3  Total
December 31, 2010           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 652 $ - $ - $ 652
  Preferred stock and other equity  14   -   -   14
  Corporate debt  -   72   -   72
  U.S. state and municipal debt  -   51   -   51
  U.S. and foreign government debt  76   123   -   199
  Money market funds and other  1   28   -   29
 Total nuclear decommissioning trust funds  743   274   -   1,017
 Derivatives           
  Commodity forward contracts  -   2   -   2
  Interest rate contracts  -   3   -   3
 Other marketable securities  4   -   -   4
  Total assets$ 747 $ 279 $ - $ 1,026
              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 87 $ 36 $ 123
  Interest rate contracts  -   11   -   11
  Total liabilities$ - $ 98 $ 36 $ 134
              

The determination of the fair values in the preceding tables incorporates various factors, including risks of nonperformance by us or our counterparties. Such risks consider not only the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits or letters of credit), but also the impact of our and the Utilities' credit risk on our liabilities.

Commodity forward contract derivatives and interest rate contract derivatives reflect positions held by us and the Utilities. Most over-the-counter commodity forward contract derivatives and interest rate contract derivatives are valued using financial models which utilize observable inputs for similar instruments and are classified within Level 2. Other derivatives are valued utilizing inputs that are not observable for substantially the full term of the contract, or for which the impact of the unobservable period is significant to the fair value of the derivative. Such derivatives are classified within Level 3. See Note 12 for discussion of risk management activities and derivative transactions.

NDT funds reflect the assets of the Utilities' nuclear decommissioning trusts. The assets of the trusts are invested primarily in exchange-traded equity securities (classified within Level 1) and marketable debt securities, most of which are valued using Level 1 inputs for similar instruments and are classified within Level 2.

Other marketable securities primarily represent available-for-sale debt securities used to fund certain employee benefit costs.

Contingent Value Obligations (CVOs), which are derivatives, are discussed further in Note 10. At September 30, 2011, we determined the fair value of the CVOs based on the purchase price in a negotiated settlement agreement (a Level 3 input) and we have classified CVOs as Level 3. The CVOs were previously recorded at fair value based on quoted prices from a less-than-active market and classified as Level 2.

Transfers in (out) of Levels 1, 2 or 3 represent existing assets or liabilities previously categorized as a higher Level for which the inputs to the estimate became less observable or assets and liabilities that were previously classified as Level 2 or 3 for which the lowest significant input became more observable during the period. There were no significant transfers in (out) of Levels 1, 2 and 3 during the period other than the CVO transfer previously discussed. Transfers into and out of each Level are measured at the end of the period.

A reconciliation of changes in the fair value of our and the Utilities' derivative liabilities for CVOs and commodities, as applicable, classified as Level 3 in the fair value hierarchy for the periods ended September 30 follows:

PEC
  Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Derivatives, net at beginning of period$ 37 $ 42 $ 36 $ 27
Total losses, realized and unrealized - commodities           
 deferred as regulatory assets and liabilities, net  5   13   6   28
Derivatives, net at end of period$ 42 $ 55 $ 42 $ 55
             

Substantially all unrealized gains and losses on the Utilities' derivatives are deferred as regulatory liabilities or assets consistent with ratemaking treatment. Unrealized losses on the change in fair value of our CVOs are discussed in Note 12. There were no Level 3 purchases, sales, issuances or settlements during the period.

 

PEF
 
Fair Value Disclosures [Line Items] 
Fair Value Disclosures

8.       FAIR VALUE DISCLOSURES

A.       DEBT AND INVESTMENTS

PEF

DEBT

The carrying amount of PEF's long-term debt, including current maturities, was $4.482 billion at September 30, 2011 and December 31, 2010. The estimated fair value of this debt, as obtained from quoted market prices for the same or similar issues, was $5.4 billion and $5.0 billion at September 30, 2011 and December 31, 2010, respectively.

INVESTMENTS

Certain investments in debt and equity securities that have readily determinable market values are accounted for as available-for-sale securities at fair value. PEF's available-for-sale securities include investments in stocks, bonds and cash equivalents held in trust funds, pursuant to NRC requirements, to fund certain costs of decommissioning PEF's nuclear plant as discussed in Note 4C of the 2010 Form 10-K. The NDT funds are presented on the Balance Sheets at fair value.

The following table summarizes PEF's available-for-sale securities at September 30, 2011 and December 31, 2010:

(in millions)Fair Value Unrealized Losses Unrealized Gains
     
September 30, 2011        
Common stock equity $ 326 $ 14 $ 115
Preferred stock and other equity  35   -   3
Corporate debt   18   -   1
U.S. state and municipal debt   68   2   3
U.S. and foreign government debt   76   -   1
Money market funds and other  41   -   1
 Total$ 564 $ 16 $ 124
          
December 31, 2010        
Common stock equity $ 369 $ 3 $ 152
Preferred stock and other equity  14   -   5
Corporate debt  14   -   1
U.S. state and municipal debt   81   3   2
U.S. and foreign government debt   62   1   1
Money market funds and other  10   -   -
 Total$ 550 $ 7 $ 161
          

The NDT funds are managed by third-party investment managers who have a right to sell securities without our authorization. Net unrealized gains and losses of the NDT funds that would be recorded in earnings or other comprehensive income by a nonregulated entity are recorded as regulatory assets and liabilities pursuant to ratemaking treatment. Therefore, the preceding table includes unrealized gains and losses for the NDT funds based on the original cost of the trust investments. All of the unrealized losses and gains for 2011 and 2010 relate to the NDT funds.

The aggregate fair value of investments that related to the September 30, 2011 and December 31, 2010 unrealized losses was $124 million and $87 million, respectively.

At September 30, 2011, the fair value of PEF's available-for-sale debt securities by contractual maturity was:

 (in millions)   
 Due in one year or less$ 20 
 Due after one through five years  65 
 Due after five through 10 years  50 
 Due after 10 years  30 
 Total$ 165 
     

The following table presents selected information about PEF's sales of available-for-sale securities during the three and nine months ended September 30, 2011 and 2010. Realized gains and losses were determined on a specific identification basis.

 Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Proceeds$ 926 $ 1,891 $ 3,861 $ 5,305
Realized gains  5   3   14   7
Realized losses  7   2   11   5
            

PEF's proceeds were related to NDT funds. Other securities are evaluated on an individual basis to determine if a decline in fair value below the carrying value is other-than-temporary. At September 30, 2011 and December 31, 2010, PEF did not have any other securities.

B.       FAIR VALUE MEASUREMENTS

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Fair value measurements require the use of market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, corroborated by market data, or generally unobservable. Valuation techniques are required to maximize the use of observable inputs and minimize the use of unobservable inputs. A midmarket pricing convention (the midpoint price between bid and ask prices) is permitted for use as a practical expedient.

GAAP also establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, and requires fair value measurements to be categorized based on the observability of those inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The three levels of the fair value hierarchy are as follows:

Level 1 – The pricing inputs are unadjusted quoted prices 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.

Level 2 – The pricing inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 includes 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, swaps and options; certain marketable debt securities; and financial instruments traded in less than active markets.

Level 3 – The pricing inputs include significant inputs 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 may include longer-term instruments that extend into periods in which quoted prices or other observable inputs are not available.

Certain assets and liabilities, including long-lived assets, were measured at fair value on a nonrecurring basis. There were no significant fair value measurement losses recognized for such assets and liabilities in the periods reported. These fair value measurements fall within Level 3 of the hierarchy discussed above.

The following tables set forth, by level within the fair value hierarchy, our and the Utilities' financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. Financial assets and liabilities are classified in their entirety based on the lowest level of input 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 the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

PEF           
(in millions) Level 1  Level 2  Level 3  Total
September 30, 2011           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 326 $ - $ - $ 326
  Preferred stock and other equity  8   27   -   35
  Corporate debt  -   18   -   18
  U.S. state and municipal debt  -   66   -   66
  U.S. and foreign government debt  11   64   -   75
 Total nuclear decommissioning trust funds  345   175   -   520
 Derivatives           
  Commodity forward contracts  -   7   -   7
 Other marketable securities  1   -   -   1
  Total assets$ 346 $ 182 $ - $ 528
              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 334 $ 1 $ 335
  Interest rate contracts  -   8   -   8
  Total liabilities$ - $ 342 $ 1 $ 343
              
              
(in millions) Level 1  Level 2  Level 3  Total
December 31, 2010           
Assets           
 Nuclear decommissioning trust funds           
  Common stock equity$ 369 $ - $ - $ 369
  Preferred stock and other equity  8   6   -   14
  Corporate debt  -   14   -   14
  U.S. state and municipal debt  -   81   -   81
  U.S. and foreign government debt  3   59   -   62
  Money market funds and other  -   14   -   14
 Total nuclear decommissioning trust funds  380   174   -   554
 Derivatives           
  Commodity forward contracts  -   13   -   13
 Other marketable securities  1   -   -   1
  Total assets$ 381 $ 187 $ - $ 568
              
Liabilities           
 Derivatives           
  Commodity forward contracts$ - $ 371 $ - $ 371
  Interest rate contracts  -   7   -   7
  Total liabilities$ - $ 378 $ - $ 378
              

The determination of the fair values in the preceding tables incorporates various factors, including risks of nonperformance by us or our counterparties. Such risks consider not only the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits or letters of credit), but also the impact of our and the Utilities' credit risk on our liabilities.

Commodity forward contract derivatives and interest rate contract derivatives reflect positions held by us and the Utilities. Most over-the-counter commodity forward contract derivatives and interest rate contract derivatives are valued using financial models which utilize observable inputs for similar instruments and are classified within Level 2. Other derivatives are valued utilizing inputs that are not observable for substantially the full term of the contract, or for which the impact of the unobservable period is significant to the fair value of the derivative. Such derivatives are classified within Level 3. See Note 12 for discussion of risk management activities and derivative transactions.

NDT funds reflect the assets of the Utilities' nuclear decommissioning trusts. The assets of the trusts are invested primarily in exchange-traded equity securities (classified within Level 1) and marketable debt securities, most of which are valued using Level 1 inputs for similar instruments and are classified within Level 2.

Other marketable securities primarily represent available-for-sale debt securities used to fund certain employee benefit costs.

Contingent Value Obligations (CVOs), which are derivatives, are discussed further in Note 10. At September 30, 2011, we determined the fair value of the CVOs based on the purchase price in a negotiated settlement agreement (a Level 3 input) and we have classified CVOs as Level 3. The CVOs were previously recorded at fair value based on quoted prices from a less-than-active market and classified as Level 2.

Transfers in (out) of Levels 1, 2 or 3 represent existing assets or liabilities previously categorized as a higher Level for which the inputs to the estimate became less observable or assets and liabilities that were previously classified as Level 2 or 3 for which the lowest significant input became more observable during the period. There were no significant transfers in (out) of Levels 1, 2 and 3 during the period other than the CVO transfer previously discussed. Transfers into and out of each Level are measured at the end of the period.

A reconciliation of changes in the fair value of our and the Utilities' derivative liabilities for CVOs and commodities, as applicable, classified as Level 3 in the fair value hierarchy for the periods ended September 30 follows:

PEF
  Three months ended September 30 Nine months ended September 30
(in millions) 2011  2010  2011  2010
Derivatives, net at beginning of period$ - $ 20 $ - $ 12
Total losses, realized and unrealized - commodities           
 deferred as regulatory assets and liabilities, net  1   10   1   18
Derivatives, net at end of period$ 1 $ 30 $ 1 $ 30
             

Substantially all unrealized gains and losses on the Utilities' derivatives are deferred as regulatory liabilities or assets consistent with ratemaking treatment. Unrealized losses on the change in fair value of our CVOs are discussed in Note 12. There were no Level 3 purchases, sales, issuances or settlements during the period.