Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Measurements

Fair Value Measurements

14.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, 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.  This category also includes investments in common and collective trusts and commingled funds that are redeemable and valued based on NAV.

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 models are required 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.  The primary valuation technique we use to calculate the fair value of contracts where price quotes are not available is based on the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at the more illiquid delivery points.  Option contracts are valued using a Black-Scholes option pricing model that incorporates commodity prices, volatilities, and correlation factors.

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 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 transactions, 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 transactions, or we can determine that the inputs the broker used to arrive at the quoted price are observable.

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 8 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 market 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 based on the financial condition of counterparties.  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 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.  Certain option contracts are valued using option valuation models which utilize both observable and unobservable inputs such as volatility rates and correlation factors.  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.

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 based on NAV, which is primarily derived from the quoted active market prices of the underlying equity securities.  We may transact in these commingled funds on a semi-monthly basis at the NAV, and accordingly classify these investments as Level 2.  The commingled funds, which are similar to mutual 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 fund shares are offered to a limited group of investors, they are not considered to be traded in an active market.

Cash equivalents reported within Level 2 represent investments held in a short-term investment commingled fund, valued using NAV, which invests in U.S. government fixed income securities.  We may transact in this commingled fund on a daily basis at the NAV.

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 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 and interest rate 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.

Our trustee provides valuation of our nuclear decommissioning trust assets by using pricing services that utilize the valuation methodologies described to determine fair market value.  We assess these valuations and verify that pricing can be supported by actual recent market transactions.  Additionally, we obtain and review independent audit reports on the trustee’s operating controls and valuation processes.  See Note 23 for additional discussion about our nuclear decommissioning trust.

Fair Value Tables

The following table presents the fair value at December 31, 2011 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):

	Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)		SignificantOtherObservable Inputs(Level 2)			SignificantUnobservableInputs (a)(Level 3)			Other			Balance atDecember 31, 2011
Assets
Risk management activities-derivative instruments:
Commodity contracts	$	—	$	70		$	74		$	(64	)(b)	$	80
Nuclear decommissioningtrust:
U.S. commingledequity funds	—		175			—			—			175
Fixed income securities:
U.S. Treasury	69		—			—			—			69
Cash and cashequivalent funds	—		9			—			(1		)(c)	8
Corporate debt	—		73			—			—			73
Mortgage-backed securities	—		78			—			—			78
Municipality bonds	—		90			—			—			90
Other	—		21			—			—			21
Subtotal nucleardecommissioning trust	69		446			—			(1		)	514
Total	$	69	$	516		$	74		$	(65	)	$	594
Liabilities
Risk management activities - derivative instruments:
Commodity contracts	$	—	$	(241	)	$	(125	)	$	229	(b)	$	(137	)

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

(b)Represents counterparty netting, margin and collateral.  See Note 18.

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

The following table presents the fair value at December 31, 2010 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):

	Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)			SignificantOtherObservable Inputs(Level 2)			SignificantUnobservableInputs (a)(Level 3)			Other			Balance atDecember 31, 2010
Assets
Cash equivalents	$	35		$	—		$	—		$	—		$	35
Risk management activities-derivative instruments:
Commodity contracts	—			80			61			(28		)(b)	113
Nuclear decommissioningtrust:
U.S. commingledequity funds	—			168			—			—			168
Fixed income securities:
U.S. Treasury	50			—			—			—			50
Cash and cashequivalent funds	—			22			—			—			22
Corporate debt	—			60			—			—			60
Mortgage-backed securities	—			81			—			—			81
Municipality bonds	—			79			—			—			79
Other	—			20			—			(10)		(c)	10
Subtotal nucleardecommissioning trust	50			430			—			(10		)	470
Total	$	85		$	510		$	61		$	(38	)	$	618
Liabilities
Risk management activities - derivative instruments:
Commodity contracts	$	(1	)	$	(280	)	$	(99	)	$	256	(b)	$	(124	)

(a)Primarily consists of long-dated electricity contracts.

(b)Represents counterparty netting, margin and collateral.  See Note 18.

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

The following table shows the changes in fair value for assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2011 and 2010 (dollars in millions):

	Year EndedDecember 31,
	2011			2010
Net risk management activities at beginning of period	$	(38	)	$	(10	)
Total net gains (losses) realized/unrealized:
Included in earnings	2			(1		)
Included in OCI	(5		)	(14		)
Deferred as a regulatory asset or liability	(10		)	(38		)
Settlements	11			19
Transfers into Level 3 from Level 2	(4		)	5
Transfers from Level 3 into Level 2	(7		)	1
Net risk management activities at end of period	$	(51	)	$	(38	)
Net unrealized gains (losses) included in earnings related to instruments still held at end of period	$	1		$	(1	)

Amounts included in earnings are recorded in either regulated electricity segment revenue or regulated electricity segment 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 generally related to changes in the significance of reserves applied to derivative instruments.  Transfers out of Level 3 may also be related to our long-dated energy transactions as they move closer to delivery and quoted prices become available.

Nonrecurring Fair Value Measurements

For the periods ended December 31, 2011 and 2010, we had no assets or liabilities measured at fair value on a nonrecurring basis.

Financial Instruments Not Carried at Fair Value

The carrying value of our net accounts receivable, accounts payable and short-term borrowings approximate fair value.  For our long-term debt fair values see Note 6.