Fair Value Measurements

We classify our assets and liabilities that are carried at fair value within the fair value hierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The three levels of the fair value hierarchy are:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide information on an ongoing basis. This category includes exchange traded equities, exchange traded derivative instruments, exchange traded mutual funds, cash equivalents, and investments in U.S. Treasury securities.

Level 2 — Utilizes quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable (such as yield curves). This category includes non-exchange traded contracts such as forwards, options, swaps and certain investments in fixed income securities.

Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity. Instruments in this category include long-dated derivative transactions where valuations are unobservable due to the length of the transaction, options, and transactions in locations where observable market data does not exist. The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, a valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable. We maximize the use of observable inputs and minimize the use of unobservable inputs. We rely primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities. If market data is not readily available, inputs may reflect our own assumptions about the inputs market participants would use. Our assessment of the inputs and the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities as well as their placement within the fair value hierarchy levels. We assess whether a market is active by obtaining observable broker quotes, reviewing actual market activity, and assessing the volume of transactions. We consider broker quotes observable inputs when the quote is binding on the broker, we can validate the quote with market activity, or we can determine that the inputs the broker used to arrive at the quoted price are observable.

Certain instruments have been valued using the concept of Net Asset Value (“NAV”), as a practical expedient. These instruments are typically structured as investment companies offering shares or units to multiple investors for the purpose of providing a return. These instruments are similar to mutual funds; however, they are not traded on an exchange. During the first quarter of 2016 we retrospectively adopted new accounting guidance that requires instruments valued using NAV, as a practical expedient, to no longer be classified within the fair value hierarchy. As such, instruments valued using NAV, as a practical expedient, are included in our fair value disclosures and tables in a separate column; however, these investments are not classified within any of the fair value hierarchy levels. Prior to the adoption of this guidance these instruments were typically reported within Level 2 or Level 3. The adoption of this guidance changes our fair value disclosures, but does not impact the methodology for valuing these instruments, or our financial statement results.

Recurring Fair Value Measurements

We apply recurring fair value measurements to certain cash equivalents, derivative instruments, investments held in our nuclear decommissioning trust and plan assets held in our retirement and other benefit plans. See Note 7 in the 2015 Form 10-K for the fair value discussion of plan assets held in our retirement and other benefit plans.

Cash Equivalents

Cash equivalents represent short-term investments with original maturities of three months or less in exchange traded money market funds that are valued using quoted prices in active markets.

Risk Management Activities — Derivative Instruments

Exchange traded commodity contracts are valued using unadjusted quoted prices. For non-exchange traded commodity contracts, we calculate fair value based on the average of the bid and offer price, discounted to reflect net present value. We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments. These include valuation adjustments for liquidity and credit risks. The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed out or hedged. The credit valuation adjustment represents estimated credit losses on our net exposure to counterparties, taking into account netting agreements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio. We maintain credit policies that management believes minimize overall credit risk.

Certain non-exchange traded commodity contracts are valued based on unobservable inputs due to the long-term nature of contracts, characteristics of the product, or the unique location of the transactions. Our long-dated energy transactions consist of observable valuations for the near-term portion and unobservable valuations for the long-term portions of the transaction. We rely primarily on broker quotes to value these instruments. When our valuations utilize broker quotes, we perform various control procedures to ensure the quote has been developed consistent with fair value accounting guidance. These controls include assessing the quote for reasonableness by comparison against other broker quotes, reviewing historical price relationships, and assessing market activity. When broker quotes are not available, the primary valuation technique used to calculate the fair value is the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at more illiquid delivery points.

Option contracts are primarily valued using a Black-Scholes option valuation model, which utilizes both observable and unobservable inputs such as broker quotes, interest rates and price volatilities.

When the unobservable portion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3. Our classification of instruments as Level 3 is primarily reflective of the long-term nature of our energy transactions and the use of option valuation models with significant unobservable inputs.

Our energy risk management committee, consisting of officers and key management personnel, oversees our energy risk management activities to ensure compliance with our stated energy risk management policies. We have a risk control function that is responsible for valuing our derivative commodity instruments in accordance with established policies and procedures. The risk control function reports to the chief financial officer’s organization.

Investments Held in our Nuclear Decommissioning Trust

The nuclear decommissioning trust invests in fixed income securities and equity securities. Equity securities are held indirectly through commingled funds. The commingled funds are valued using the funds' NAV as a practical expedient. The funds' NAV is primarily derived from the quoted active market prices of the underlying equity securities held by the funds. We may transact in these commingled funds on a semi-monthly basis at the NAV. The commingled funds are maintained by a bank and hold investments in accordance with the stated objective of tracking the performance of the S&P 500 Index. Because the commingled funds' shares are offered to a limited group of investors, they are not considered to be traded in an active market. As these instruments are valued using NAV, as a practical expedient, they have not been classified within the fair value hierarchy.

Cash equivalents reported within Level 1 represent investments held in a short-term investment exchange-traded mutual fund, which invests in certificates of deposit, variable rate notes, time deposit accounts, U.S. Treasury and Agency obligations, U.S. Treasury repurchase agreements, and commercial paper.

Fixed income securities issued by the U.S. Treasury held directly by the nuclear decommissioning trust are valued using quoted active market prices and are typically classified as Level 1. Fixed income securities issued by corporations, municipalities, and other agencies, including mortgage-backed instruments, are valued using quoted inactive market prices, quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield curves and spreads relative to such yield curves. These instruments are classified as Level 2. Whenever possible, multiple market quotes are obtained which enables a cross-check validation. A primary price source is identified based on asset type, class, or issue of securities.

We price securities using information provided by our trustee for our nuclear decommissioning trust assets. Our trustee uses pricing services that utilize the valuation methodologies described to determine fair market value. We have internal control procedures designed to ensure this information is consistent with fair value accounting guidance. These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the trustee’s internal operating controls and valuation processes. See Note 11 for additional discussion about our nuclear decommissioning trust.

Fair Value Tables

The following table presents the fair value at March 31, 2016, of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (a) (Level 3)			Other				Balance at March 31, 2016
Assets
Risk management activities — derivative instruments:
Commodity contracts	$	—	$	12,613		$	23,847		$	(11,759	)	(b)	$	24,701
Nuclear decommissioning trust:
U.S. commingled equity funds	—		—			—			319,971			(c)	319,971
Fixed income securities:
Cash and cash equivalent funds	11,535		—			—			(1,898		)	(d)	9,637
U.S. Treasury	107,698		—			—			—				107,698
Corporate debt	—		101,687			—			—				101,687
Mortgage-backed securities	—		109,298			—			—				109,298
Municipal bonds	—		80,344			—			—				80,344
Other	—		23,319			—			—				23,319
Subtotal nuclear decommissioning trust	119,233		314,648			—			318,073				751,954
Total	$	119,233	$	327,261		$	23,847		$	306,314			$	776,655
Liabilities
Risk management activities — derivative instruments:
Commodity contracts	$	—	$	(140,554	)	$	(63,354	)	$	25,022		(b)	$	(178,886	)


(a)	Primarily consists of heat rate options and other long-dated electricity contracts.


(b)	Represents counterparty netting, margin and collateral. See Note 6.


(c)	Valued using NAV as a practical expedient, and therefore not classified in the fair value hierarchy.


(d)	Represents nuclear decommissioning trust net pending securities sales and purchases.

The following table presents the fair value at December 31, 2015, of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (a) (Level 3)			Other				Balance at December 31, 2015
Assets
Risk management activities — derivative instruments:
Commodity contracts	$	—	$	22,992		$	30,364		$	(25,345	)	(b)	$	28,011
Nuclear decommissioning trust:
U.S. commingled equity funds	—		—			—			314,957			(c)	314,957
Fixed income securities:
Cash and cash equivalent funds	12,260		—			—			(335		)	(d)	11,925
U.S. Treasury	117,245		—			—			—				117,245
Corporate debt	—		96,243			—			—				96,243
Mortgage-backed securities	—		99,065			—			—				99,065
Municipal bonds	—		72,206			—			—				72,206
Other	—		23,555			—			—				23,555
Subtotal nuclear decommissioning trust	129,505		291,069			—			314,622				735,196
Total	$	129,505	$	314,061		$	30,364		$	289,277			$	763,207
Liabilities
Risk management activities — derivative instruments:
Commodity contracts	$	—	$	(144,044	)	$	(63,343	)	$	39,698		(b)	$	(167,689	)


(a)	Primarily consists of heat rate options and other long-dated electricity contracts.


(b)	Represents counterparty netting, margin and collateral. See Note 6.


(c)	Valued using NAV as a practical expedient, and therefore not classified in the fair value hierarchy.


(d)	Represents nuclear decommissioning trust net pending securities sales and purchases.

Fair Value Measurements Classified as Level 3

The significant unobservable inputs used in the fair value measurement of our energy derivative contracts include broker quotes that cannot be validated as an observable input primarily due to the long-term nature of the quote and option model inputs. Significant changes in these inputs in isolation would result in significantly higher or lower fair value measurements. Changes in our derivative contract fair values, including changes relating to unobservable inputs, typically will not impact net income due to regulatory accounting treatment (see Note 3).

Because our forward commodity contracts classified as Level 3 are currently in a net purchase position, we would expect price increases of the underlying commodity to result in increases in the net fair value of the related contracts. Conversely, if the price of the underlying commodity decreases, the net fair value of the related contracts would likely decrease.

Our option contracts classified as Level 3 primarily relate to purchase heat rate options. The significant unobservable inputs at March 31, 2016 for these instruments include electricity prices, and volatilities. The significant unobservable inputs at December 31, 2015 for these instruments include electricity prices, gas prices and volatilities. If electricity prices and electricity price volatilities increase, we would expect the fair value of these options to increase, and if these valuation inputs decrease, we would expect the fair value of these options to decrease. If natural gas prices and natural gas price volatilities increase, we would expect the fair value of these options to decrease, and if these inputs decrease, we would expect the fair value of the options to increase. The commodity prices and volatilities do not always move in corresponding directions. The options’ fair values are impacted by the net changes of these various inputs.

Other unobservable valuation inputs include credit and liquidity reserves which do not have a material impact on our valuations; however, significant changes in these inputs could also result in higher or lower fair value measurements.

The following tables provide information regarding our significant unobservable inputs used to value our risk management derivative Level 3 instruments at March 31, 2016 and December 31, 2015:



	March 31, 2016 Fair Value (thousands)				Valuation Technique	Significant Unobservable Input		Weighted-Average
Commodity Contracts	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Range	Weighted-Average
Electricity:
Forward Contracts (a)	$	21,606	$	51,305	Discounted cash flows	Electricity forward price (per MWh)	$13.97 - $39.61	$	26.45
Option Contracts (b)	—		5,880		Option model	Electricity forward price (per MWh)	$19.46 - $37.93	$	29.39
						Electricity price volatilities	47% - 72%	63		%
						Natural gas price volatilities	38% - 45%	41		%
Natural Gas:
Forward Contracts (a)	2,241		6,169		Discounted cash flows	Natural gas forward price (per MMBtu)	$1.65 - $3.11	$	2.67
Total	$	23,847	$	63,354


(a)	Includes swaps and physical and financial contracts.


(b)	Electricity and natural gas price volatilities are estimated based on historical forward price movements due to lack of market quotes for implied volatilities.



	December 31, 2015 Fair Value (thousands)				Valuation Technique	Significant Unobservable Input		Weighted-Average
Commodity Contracts	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Range	Weighted-Average
Electricity:
Forward Contracts (a)	$	24,543	$	54,679	Discounted cash flows	Electricity forward price (per MWh)	$15.92 - $40.73	$	26.86
Option Contracts (b)	—		5,628		Option model	Electricity forward price (per MWh)	$23.87 - $44.13	$	33.91
						Electricity price volatilities	40% - 59%	52		%
						Natural gas price volatilities	32% - 40%	35		%
Natural Gas:
Forward Contracts (a)	5,821		3,036		Discounted cash flows	Natural gas forward price (per MMBtu)	$2.18 - $3.14	$	2.61
Total	$	30,364	$	63,343


(a)	Includes swaps and physical and financial contracts.


(b)	Electricity and natural gas price volatilities are estimated based on historical forward price movements due to lack of market quotes for implied volatilities.

The following table shows the changes in fair value for our risk management activities' assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the three months ended March 31, 2016 and 2015 (dollars in thousands):



	Three Months Ended March 31,
Commodity Contracts	2016			2015
Net derivative balance at beginning of period	$	(32,979	)	$	(41,386	)
Total net gains (losses) realized/unrealized:
Included in OCI	—			(262		)
Deferred as a regulatory asset or liability	(9,103		)	(10,747		)
Settlements	1,765			310
Transfers into Level 3 from Level 2	262			(402		)
Transfers from Level 3 into Level 2	548			3,673
Net derivative balance at end of period	$	(39,507	)	$	(48,814	)

Net unrealized gains included in earnings related to instruments still held at end of period	$	—		$	—

Amounts included in earnings are recorded in either operating revenues or fuel and purchased power depending on the nature of the underlying contract.

Transfers reflect the fair market value at the beginning of the period and are triggered by a change in the lowest significant input as of the end of the period. We had no significant Level 1 transfers to or from any other hierarchy level. Transfers in or out of Level 3 are typically related to our long-dated energy transactions that extend beyond available quoted periods.

Financial Instruments Not Carried at Fair Value

The carrying value of our net accounts receivable, accounts payable and short-term borrowings approximate fair value. Our short-term borrowings are classified within Level 2 of the fair value hierarchy. See Note 2 for our long-term debt fair values.