Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Recurring Fair Value Measurements

Fair value is defined 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 (referred to as an “exit price”). Fair value of an asset or liability considers assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk. As of June 30, 2013 and December 31, 2012, nonperformance risk was not material for Edison International and SCE.

Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

SCE

The following table sets forth assets and liabilities of SCE that were accounted for at fair value by level within the fair value hierarchy:

	June 30, 2013
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral1			Total
Assets at Fair Value
Money market funds	$	10	$	—	$	—		$	—		$	10
Mutual funds	28		—		—			—			28
Derivative contracts:
Congestion Revenue Rights	—		—		137			—			137
Electricity	—		—		17			(10		)	7
Natural gas	—		13		—			(1		)	12
Tolling	—		—		8			—			8
Subtotal of derivative contracts	—		13		162			(11		)	164
Long-term disability plan	8		—		—			—			8
Nuclear decommissioning trusts:
Stocks2	2,085		—		—			—			2,085
U.S. government and agency securities	881		144		—			—			1,025
Municipal bonds	—		592		—			—			592
Corporate bonds3	—		347		—			—			347
Short-term investments, primarily cash equivalents4	168		112		—			—			280
Subtotal of nuclear decommissioning trusts	3,134		1,195		—			—			4,329
Total assets	3,180		1,208		162			(11		)	4,539
Liabilities at Fair Value
Derivative contracts:
Electricity	—		2		6			(1		)	7
Natural gas	—		68		—			(31		)	37
Tolling	—		—		1,123			—			1,123
Subtotal of derivative contracts	—		70		1,129			(32		)	1,167
Total liabilities	—		70		1,129			(32		)	1,167
Net assets (liabilities)	$	3,180	$	1,138	$	(967	)	$	21		$	3,372

	December 31, 2012
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral1			Total
Assets at Fair Value
Money market funds	$	5	$	—	$	—		$	—		$	5
Derivative contracts:
Congestion Revenue Rights	—		—		186			—			186
Electricity	—		—		31			(13		)	18
Natural gas	—		8		—			(2		)	6
Tolling	—		—		4			—			4
Subtotal of derivative contracts	—		8		221			(15		)	214
Long-term disability plan	8		—		—			—			8
Nuclear decommissioning trusts:
Stocks2	2,271		—		—			—			2,271
Municipal bonds	—		644		—			—			644
U.S. government and agency securities	477		126		—			—			603
Corporate bonds3	—		410		—			—			410
Short-term investments, primarily cash equivalents4	121		—		—			—			121
Subtotal of nuclear decommissioning trusts	2,869		1,180		—			—			4,049
Total assets	2,882		1,188		221			(15		)	4,276
Liabilities at Fair Value
Derivative contracts:
Electricity	—		2		5			(2		)	5
Natural gas	—		113		2			(60		)	55
Tolling	—		—		1,005			—			1,005
Subtotal of derivative contracts	—		115		1,012			(62		)	1,065
Total liabilities	—		115		1,012			(62		)	1,065
Net assets (liabilities)	$	2,882	$	1,073	$	(791	)	$	47		$	3,211

¹  Represents the netting of assets and liabilities under master netting agreements and cash collateral across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

²  Approximately 70% and 66% of SCE's equity investments were located in the United States at June 30, 2013 and December 31, 2012, respectively.

³  At June 30, 2013 and December 31, 2012, SCE's corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $58 million and $56 million, respectively.

⁴  Excludes net payables of $148 million and $1 million at June 30, 2013 and December 31, 2012, respectively, of interest and dividend receivables as well as receivables and payables related to SCE's pending securities sales and purchases.

Edison International Parent and Other

Assets measured at fair value consisted of money market funds of $72 million and $107 million at June 30, 2013 and December 31, 2012, respectively, classified as Level 1.

SCE Fair Value of Level 3

The following table sets forth a summary of changes in SCE's fair value of Level 3 net derivative assets and liabilities:

	Three months ended June 30,						Six months ended June 30,
(in millions)	2013			2012			2013			2012
Fair value of net liabilities at beginning of period	$	(882	)	$	(1,097	)	$	(791	)	$	(754	)
Total realized/unrealized gains (losses):
Included in regulatory assets and liabilities1	(76		)	341			(158		)	(23		)
Purchases	20			29			38			50
Settlements	(29		)	(12		)	(56		)	(12		)
Fair value of net liabilities at end of period	$	(967	)	$	(739	)	$	(967	)	$	(739	)
Change during the period in unrealized losses related to assets and liabilities held at the end of the period	$	(43	)	$	335		$	(125	)	$	(8	)

¹  Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities.

Edison International and SCE recognize the fair value for transfers in and transfers out of each level at the end of each reporting period. There were no transfers between any levels during 2013 and 2012.

Valuation Techniques Used to Determine Fair Value

Level 1

The fair value of Edison International and SCE's Level 1 assets and liabilities is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. This level includes exchange-traded equity securities and derivatives, U.S. treasury securities, mutual funds and money market funds.

Level 2

SCE's Level 2 assets and liabilities include fixed income securities and over-the-counter derivatives. The fair value of fixed income securities is determined using a market approach by obtaining quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the instrument. For further discussion on fixed income securities, see "—Nuclear Decommissioning Trusts" below.

The fair value of SCE's over-the-counter derivative contracts is determined using an income approach. SCE uses standard pricing models to determine the net present value of estimated future cash flows. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. A primary price source that best represents trade activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes, prices from exchanges or comparison to executed trades are used to validate and corroborate the primary price source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity.

Level 3

The fair value of SCE's Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. This level includes over-the-counter options, tolling arrangements and derivative contracts that trade infrequently such as congestion revenue rights ("CRRs") and long-term power agreements.

Assumptions are made in order to value derivative contracts in which observable inputs are not available. Changes in fair value are based on changes to forward market prices, including extrapolation of short-term observable inputs into forecasted prices for illiquid forward periods. In circumstances where fair value cannot be verified with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. Modeling methodologies, inputs and techniques are reviewed and assessed as markets continue to develop and more pricing information becomes available and the fair value is adjusted when it is concluded that a change in inputs or techniques would result in a new valuation that better reflects the fair value of those derivative contracts.

Level 3 Valuation Process

The process of determining fair value is the responsibility of SCE's risk management department, which reports to SCE's chief financial officer. This department obtains observable and unobservable inputs through broker quotes, exchanges and internal valuation techniques that use both standard and proprietary models to determine fair value. Each reporting period, the risk and finance departments collaborate to determine the appropriate fair value methodologies and classifications for each derivative. Inputs are validated for reasonableness by comparison against prior prices, other broker quotes and volatility fluctuation thresholds. Inputs used and valuations are reviewed period-over-period and compared with market conditions to determine reasonableness.

The following table sets forth SCE's valuation techniques and significant unobservable inputs used to determine fair value for Level 3 assets and liabilities:

	Fair Value (in millions)							Significant	Range
June 30, 2013	Assets			Liabilities			Valuation Technique(s)	Unobservable Input	(Weighted Average)
Electricity:
Options	$	22		$	7		Option model	Volatility of gas prices	23% - 32% (29%)
								Volatility of power prices	28% - 81% (44%)
								Power prices	$45.20 - $55.50 ($49.60)
Forwards	1			5			Discounted cash flow	Power prices	$23.90 - $49.30 ($40.20)
CRRs	137			—			Market simulation model	Load forecast	7,597 MW - 26,612 MW
								Power prices	$(13.90) - $226.75
								Gas prices	$2.95 - $7.78
Tolling	8			1,123			Option model	Volatility of gas prices	15% - 32% (20%)
								Volatility of power prices	25% - 81% (29%)
								Power prices	$39.70 - $71.20 ($51.90)
Netting	(6		)	(6		)
Total derivative contracts	$	162		$	1,129

	Fair Value (in millions)							Significant	Range
December 31, 2012	Assets			Liabilities			Valuation Technique(s)	Unobservable Input	(Weighted Average)
Electricity:
Options	$	40		$	12		Option model	Volatility of gas prices	25% - 36% (33%)
								Volatility of power prices	29% - 64% (42%)
								Power prices	$41.70 - $59.20 ($47.00)
Forwards	2			4			Discounted cash flow	Power prices	$23.10 - $44.90 ($31.10)
CRRs	186			—			Market simulation model	Load forecast	7,597 MW - 26,612 MW
								Power prices	$(13.90) - $226.75
								Gas prices	$2.95 - $7.78
Gas options	—			2			Option model	Volatility of gas prices	28% - 36% (34%)
Tolling	4			1,005			Option model	Volatility of gas prices	17% - 36% (22%)
								Volatility of power prices	26% - 64% (29%)
								Power prices	$35.00 - $84.10 ($55.40)
Netting	(11		)	(11		)
Total derivative contracts	$	221		$	1,012

Level 3 Fair Value Sensitivity

Gas Options, Electricity Options, and Tolling Arrangements

The fair values of SCE's option contracts and tolling arrangements contain intrinsic value and time value. Intrinsic value is the difference between the market price and strike price of the underlying commodity. Time value is made up of several components, including volatility, time to expiration, and interest rates. The fair value of option contracts changes as the underlying commodity price moves away or towards the strike price. The option model for tolling arrangements reflects plant specific information such as operating and start-up costs.

For tolling arrangements and certain gas and power option contracts where SCE is the buyer, increases in volatility of the underlying commodity prices would result in increases to fair value as it represents greater price movement risk. As power and gas prices increase, the fair value of the option contracts and tolling arrangements tends to increase. The valuation of power option contracts and tolling arrangements is also impacted by the correlation between gas and power prices. As the correlation increases, the fair value of power option contracts and tolling arrangements tends to decline.

Forward Power Contracts

Generally, an increase (decrease) in long-term forward power prices at illiquid locations where SCE is the buyer relative to the contract price will increase (decrease) fair value.

Congestion Revenue Rights

Where SCE is the buyer, generally increases (decreases) in forecasted load in isolation would result in increases (decreases) to the fair value. In general, an increase (decrease) in electricity and gas prices at illiquid locations tends to result in increases (decreases) to fair value; however, changes in electricity and gas prices in opposite directions may have varying results on fair value.

Nuclear Decommissioning Trusts

SCE's nuclear decommissioning trust investments include equity securities, U.S. treasury securities and other fixed income securities. Equity and treasury securities are classified as Level 1 as fair value is determined by observable market prices in active or highly liquid and transparent markets. The remaining fixed income securities are classified as Level 2. The fair value of these financial instruments is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes, issuer spreads, bids, offers and relevant credit information.

Fair Value of Long-Term Debt Recorded at Carrying Value

The carrying value and fair value of Edison International and SCE's long-term debt is as follows:

	June 30, 2013				December 31, 2012
(in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
SCE	$	9,227	$	10,168	$	8,828	$	10,505
Edison International	9,630		10,593		9,231		10,944

Fair value of Edison International and SCE's short-term and long-term debt is classified as Level 2 and is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit information.

The carrying value of Edison International and SCE's trade receivables and payables, other investments, and short-term debt approximates fair value.