Fair Value of Financial Instruments (Notes)

9 Months Ended

Sep. 30, 2011

Fair Value of Financial Instruments Note [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company determines the fair value of financial instruments, both assets and liabilities recognized and not recognized in PGE’s condensed consolidated balance sheets, for which it is practicable to estimate fair value based on the following inputs as of September 30, 2011 and December 31, 2010:

• Derivative instruments are recorded at fair value and are based on published market indices, which may be adjusted for market variables such as location pricing differences and/or the effects of liquidity at different locations. The Company also values certain derivative instruments using either standardized or internally developed models;

• Certain trust assets, consisting of money market funds and fixed income securities included in the Nuclear decommissioning trust and marketable securities included in the Non-qualified benefit plan trust, are recorded at fair value and are based on quoted market prices; and

• The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to PGE for debt of similar remaining maturities. As of September 30, 2011, the estimated aggregate fair value of PGE’s long-term debt was $2,028 million, compared to its $1,798 million carrying amount. As of December 31, 2010, the estimated aggregate fair value of PGE’s long-term debt was $1,968 million, compared to its $1,808 million carrying amount.

A fair value hierarchy is used to prioritize the inputs to the valuation techniques used to measure fair value. The three broad levels and application to the Company are discussed below.

Level 1 — Quoted prices are available 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 listed debt and equity securities and U.S. government treasury securities, as well as exchange-traded derivatives from time to time.

Level 2 — Pricing inputs are other than quoted market prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date, and include quoted market prices for similar, but not identical, assets or liabilities. Level 2 includes those 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 and swaps, and debt securities other than U.S. government treasury securities.

Level 3 — Pricing inputs include significant inputs that are generally less observable than objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to meet the Company’s retail energy requirements. At each balance sheet date, the Company performs an analysis of all instruments subject to fair value measurement and includes in Level 3 all of those instruments whose fair value is based on significant unobservable inputs.

The Company’s financial assets and liabilities whose values were recognized at fair value are as follows by level within the fair value hierarchy (in millions):

	September 30, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Nuclear decommissioning trust (1):
Money market funds	$	—	$	15	$	—	$	15
Debt securities:
U.S. treasury securities	6		—		—		6
Corporate debt securities	—		6		—		6
Mortgage-backed securities	—		5		—		5
Municipal securities	—		3		—		3
Asset-backed securities	—		2		—		2
Non-qualified benefit plan trust (2):
Equity securities:
Mutual funds	9		1		—		10
Common stocks	2		—		—		2
Debt securities - mutual funds	2		—		—		2
Assets from price risk management activities (1) (3):
Electricity	—		2		—		2
Natural gas	—		7		—		7
	$	19	$	41	$	—	$	60
Liabilities - Liabilities from price risk management activities (1) (3):
Electricity	$	—	$	90	$	36	$	126
Natural gas	—		104		113		217
	$	—	$	194	$	149	$	343

(1) Activities are subject to regulation, with certain gains and losses deferred pursuant to regulatory accounting and included in Regulatory assets or Regulatory liabilities as appropriate.

(2) Excludes insurance policies of $22 million, which are recorded at cash surrender value.

(3) For further information, see Note 4, Price Risk Management.

	As of December 31, 2010
	Level 1		Level 2		Level 3		Total
Assets:
Nuclear decommissioning trust (1):
Money market funds	$	—	$	13	$	—	$	13
Debt securities:
U.S. treasury securities	3		—		—		3
Corporate debt securities	—		6		—		6
Mortgage-backed securities	—		7		—		7
Municipal securities	—		4		—		4
Asset-backed securities	—		1		—		1
Non-qualified benefit plan trust (2):
Equity securities:
Mutual funds	16		1		—		17
Common stocks	2		—		—		2
Debt securities - mutual funds	2		—		—		2
Assets from price risk management activities (1) (3):
Electricity	—		4		1		5
Natural gas	—		11		—		11
	$	23	$	47	$	1	$	71
Liabilities - Liabilities from price risk management activities (1) (3):
Electricity	$	—	$	102	$	17	$	119
Natural gas	—		153		104		257
	$	—	$	255	$	121	$	376

(1) Activities are subject to regulation, with certain gains and losses deferred pursuant to regulatory accounting and included in Regulatory assets or Regulatory liabilities as appropriate.

(2) Excludes insurance policies of $23 million, which are recorded at cash surrender value.

(3) For further information, see Note 4, Price Risk Management.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s 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.

Nuclear decommissioning trust assets reflect the assets held in trust to fund general decommissioning costs and operation of the Independent Spent Fuel Storage Installation (ISFSI) and consist of money market funds and fixed income securities. Non-qualified benefit plan trust reflects the assets held in trust to fund a portion of the obligations of PGE’s non-qualified benefit plans and consist primarily of marketable securities.

Assets and liabilities from price risk management activities represent derivative transactions entered into by PGE to manage its exposure to commodity price risk and reduce exposure to volatility in net power costs for service to the Company’s retail customers. These transactions may consist of forward, swap, and option contracts for electricity, natural gas, oil, and foreign currency, and futures contracts for natural gas and oil. PGE applies a market-based approach to the fair value measurement of its derivative transactions. Inputs into the valuation of derivative activities include forward commodity and foreign exchange pricing, interest rates, volatility and correlation. PGE utilizes the Black-Scholes and Monte Carlo pricing models for commodity option contracts. Forward pricing, which employs the mid-point of the market’s bid-ask spread, is derived using observed transactions in active markets, as well as historical experience as a participant in those markets, and is validated against quotes from brokers with whom the Company transacts. Interest rates used to calculate the present value of derivative valuations incorporate PGE’s borrowing ability. The Company also considers the liquidity of delivery points of executed transactions when determining where in the fair value hierarchy a transaction should be classified. PGE considers its creditworthiness and the creditworthiness of its counterparties when determining the appropriateness of a particular transaction’s assigned Level in the fair value hierarchy.

Changes in the fair value of net liabilities from price risk management activities (net of assets from price risk management activities) classified as Level 3 in the fair value hierarchy were as follows (in millions):

	Three Months Ended September 30, 2011		Nine Months Ended September 30, 2011
Net liabilities from price risk management activities as of beginning of period	$	127	$	120
Realized and unrealized losses, net (1)	21		29
Purchases	1		1
Settlements	—		(1		)
Net liabilities from price risk management activities as of end of period	$	149	$	149
	Three Months Ended September 30, 2010		Nine Months Ended September 30, 2010
Net liabilities from price risk management activities as of beginning of period	$	225	$	154
Realized and unrealized losses, net (1)	69		128
Purchases, issuances and settlements, net	1		13
Net liabilities from price risk management activities as of end of period	$	295	$	295

(1) Contains nominal amounts of realized losses, net.

The Level 3 net unrealized losses presented in the preceding table are recorded in Purchased power and fuel expense in the condensed consolidated statements of income and have been fully offset by the effects of regulatory accounting. Transfers into Level 3 occur when significant inputs used to value the Company’s derivative instruments become less observable, such as a delivery location becoming significantly less liquid. Transfers out of Level 3 occur when the significant inputs become more observable, such as the time between the valuation date and the delivery term of a transaction becomes shorter. PGE records transfers in and transfers out of Level 3 at the end of the reporting period for all of its financial instruments.