FAIR VALUE OF FINANCIAL INSTRUMENTS

PGE determines the fair value of financial instruments, both assets and liabilities recognized and not recognized in the Company’s condensed consolidated balance sheets, for which it is practicable to estimate fair value as of September 30, 2015 and December 31, 2014, and then classifies these financial assets and liabilities based on a fair value hierarchy. The fair value hierarchy is utilized to prioritize the inputs to the valuation techniques used to measure fair value. The three levels of the fair value hierarchy 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.


Level 2	Pricing inputs include those that are directly or indirectly observable in the marketplace as of the reporting date.


Level 3	Pricing inputs include significant inputs that are unobservable for the asset or liability.

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.

PGE recognizes transfers between levels in the fair value hierarchy as of the end of the reporting period for all its financial instruments. Changes to market liquidity conditions, the availability of observable inputs, or changes in the economic structure of a security marketplace may require transfer of the securities between levels. There were no significant transfers between levels during the three and nine month periods ended September 30, 2015 and 2014, except those transfers from Level 3 to Level 2 presented in this note.

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):



	As of September 30, 2015
	Level 1		Level 2		Level 3		Total
Assets:
Nuclear decommissioning trust: ⁽¹⁾
Money market funds	$	—	$	17	$	—	$	17
Debt securities:
Domestic government	5		8		—		13
Corporate credit	—		10		—		10
Non-qualified benefit plan trust: ⁽²⁾
Equity securities—domestic	4		2		—		6
Debt securities—domestic government	1		—		—		1
Assets from price risk management activities: ^{(1) (3)}
Electricity	—		5		—		5
Natural gas	—		2		—		2
	$	10	$	44	$	—	$	54
Liabilities from price risk management activities: ^{(1) (3)}
Electricity	$	—	$	31	$	117	$	148
Natural gas	—		99		52		151
	$	—	$	130	$	169	$	299


(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 $26 million, which are recorded at cash surrender value.


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



	As of December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Nuclear decommissioning trust: ⁽¹⁾
Money market funds	$	—	$	65	$	—	$	65
Debt securities:
Domestic government	7		7		—		14
Corporate credit	—		11		—		11
Non-qualified benefit plan trust: ⁽²⁾
Equity securities:
Domestic	4		1		—		5
International	1		—		—		1
Assets from price risk management activities: ^{(1) (3)}
Electricity	—		4		1		5
Natural gas	—		2		—		2
	$	12	$	90	$	1	$	103
Liabilities from price risk management activities: ^{(1) (3)}
Electricity	$	—	$	32	$	80	$	112
Natural gas	—		95		21		116
	$	—	$	127	$	101	$	228


(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 $26 million, which are recorded at cash surrender value.


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

Trust assets held in the Nuclear decommissioning and Non-qualified benefit plan trusts are recorded at fair value in PGE’s condensed consolidated balance sheets and invested in securities that are exposed to interest rate, credit, and market volatility risks. These assets are classified within Level 1, 2, or 3 based on the following factors:

Money market funds—PGE invests in money market funds that seek to maintain a stable net asset value. These funds invest in high-quality, short-term, diversified money market instruments, short-term treasury bills, federal agency securities, certificates of deposits, and commercial paper. Money market funds are classified as Level 2 in the fair value hierarchy as the securities are traded in active markets of similar securities but are not directly valued using quoted market prices.

Debt securities—PGE invests in highly-liquid United States treasury securities to support the investment objectives of the trusts. These domestic government securities are classified as Level 1 in the fair value hierarchy due to the availability of quoted prices for identical assets in an active market as of the reporting date.

Assets classified as Level 2 in the fair value hierarchy include domestic government debt securities, such as municipal debt, and corporate credit securities. Prices are determined by evaluating pricing data such as broker quotes for similar securities and adjusted for observable differences. Significant inputs used in valuation models generally include benchmark yields and issuer spreads. The external credit rating, coupon rate, and maturity of each security are considered in the valuation, as applicable.

Equity securities—Equity mutual fund and common stock securities are primarily classified as Level 1 in the fair value hierarchy due to the availability of quoted prices for identical assets in an active market as of the reporting date. Principal markets for equity prices include published exchanges such as the NASDAQ and the New York Stock Exchange. Certain mutual fund assets included in commingled trusts or separately managed accounts are classified as Level 2 in the fair value hierarchy because pricing inputs are directly or indirectly observable in the marketplace.

Assets and liabilities from price risk management activities are recorded at fair value in PGE’s condensed consolidated balance sheets and consist of derivative instruments entered into by the Company to manage its exposure to commodity price risk and foreign currency exchange rate risk, and reduce volatility in net variable power costs (NVPC) for the Company’s retail customers. For additional information regarding these assets and liabilities, see Note 4, Price Risk Management.

For those assets and liabilities from price risk management activities classified as Level 2, fair value is derived using present value formulas that utilize inputs such as forward commodity prices and interest rates. Substantially all of these inputs 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 commodity forwards, futures, and swaps.

Assets and liabilities from price risk management activities classified as Level 3 consist of instruments for which fair value is derived using one or more significant inputs that are not observable for the entire term of the instrument. These instruments consist of longer term commodity forwards, futures, and swaps.

Quantitative information regarding the significant, unobservable inputs used in the measurement of Level 3 assets and liabilities from price risk management activities is presented below:



	Fair Value				Valuation Technique	Significant Unobservable Input	Price per Unit
Commodity Contracts	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low		High		Weighted Average
	(in millions)
As of September 30, 2015:
Electricity physical forward	$	—	$	117	Discounted cash flow	Electricity forward price (per MWh)	$	11.00	$	71.77	$	29.82
Natural gas financial swaps	—		52		Discounted cash flow	Natural gas forward price (per Decatherm)	2.06		3.83		2.56
Electricity financial futures	—		—		Discounted cash flow	Electricity forward price (per MWh)	21.07		31.00		27.21
	$	—	$	169
As of December 31, 2014:
Electricity physical forward	$	—	$	77	Discounted cash flow	Electricity forward price (per MWh)	$	11.97	$	122.72	$	37.43
Natural gas financial swaps	—		21		Discounted cash flow	Natural gas forward price (per Decatherm)	2.88		4.86		3.41
Electricity financial futures	1		3		Discounted cash flow	Electricity forward price (per MWh)	11.97		39.26		27.88
	$	1	$	101

The significant unobservable inputs used in the Company’s fair value measurement of price risk management assets and liabilities are long-term forward prices for commodity derivatives. For shorter term contracts, the Company employs the mid-point of the bid-ask spread of the market and these inputs are derived using observed transactions in active markets, as well as historical experience as a participant in those markets. These price inputs are validated against independent market data aggregated from multiple sources. For certain long term contracts, observable, liquid market transactions are not available for the duration of the delivery period. In such instances, the Company uses internally developed price curves, which derive longer term prices and utilize observable data when available. When not available, regression techniques are used to estimate unobservable future prices. In addition, changes in the fair value measurement of price risk management assets and liabilities are analyzed and reviewed on a monthly basis by the Company. This process includes analytical review of changes in commodity prices as well as procedures to analyze and identify the reasons for the changes over specific reporting periods.

The Company’s Level 3 assets and liabilities from price risk management activities are sensitive to market price changes in the respective underlying commodities. The significance of the impact is dependent upon the magnitude of the price change and the Company’s position as either the buyer or seller of the contract. Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows:

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,						Nine Months Ended September 30,
	2015			2014			2015			2014
Balance as of the beginning of the period	$	168		$	89		$	100		$	139
Net realized and unrealized losses (gains)^*	15			9			85			(45		)
Settlements	—			(1		)	—			(1		)
Transfers out of Level 3 to Level 2	(14		)	1			(16		)	5
Balance as of the end of the period	$	169		$	98		$	169		$	98


*	Contains nominal amounts of realized losses. Both realized and unrealized losses (gains), of which the unrealized portion is fully offset by the effects of regulatory accounting until settlement of the underlying transactions, are recorded in Purchased power and fuel expense in the condensed consolidated statements of income.

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. During the three and nine months ended September 30, 2015 and 2014, there were no transfers into Level 3 from Level 2. Transfers out of Level 3 occur when the significant inputs become more observable, such as when 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. Transfers from Level 2 to Level 1 for the Company’s price risk management assets and liabilities do not occur as quoted prices are not available for identical instruments. As such, the Company’s assets and liabilities from price risk management activities mature and settle as Level 2 fair value measurements.

Long-term debt is recorded at amortized cost in PGE’s condensed consolidated balance sheets. The fair value of the Company’s FMBs and Pollution Control Bonds is classified as a Level 2 fair value measurement and 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. The fair value of PGE’s unsecured term bank loans, which were fully repaid in July 2015, was classified as Level 3 based on the terms of the loans and the Company’s creditworthiness. These significant unobservable inputs to the Level 3 fair value measurement included the interest rate and the length of the loan. The estimated fair value of the Company’s unsecured term bank loans approximated their carrying value.

As of September 30, 2015, the carrying amount of PGE’s long-term debt was $2,204 million and its estimated aggregate fair value was $2,530 million, classified as Level 2 in the fair value hierarchy. As of December 31, 2014, the carrying amount of PGE’s long-term debt was $2,501 million and its estimated aggregate fair value was $2,901 million, consisting of $2,596 million and $305 million classified as Level 2 and Level 3, respectively, in the fair value hierarchy.

Significant Unobservable Input

Change to Input

Impact on Fair Value Measurement

Market price

Increase (decrease)

Gain (loss)

Market price

Increase (decrease)

Loss (gain)