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 December 31, 2015 and 2014, 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.

Level 1 – The fair value of Edison International's 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, U.S. treasury securities, mutual funds and money market funds.

Level 2 – Edison International's and SCE's Level 2 assets and liabilities include fixed income securities, primarily consisting of U.S. government and agency bonds, municipal bonds and corporate bonds, 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.

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 other power agreements. Edison International Parent and Other does not have any Level 3 assets and liabilities.

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. See Note 6 for a discussion of fair value of derivative instruments.

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:



	December 31, 2015
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral¹			Total
Assets at fair value
Derivative contracts	$	—	$	—	$	163		$	—		$	163
Other	28		—		—			—			28
Nuclear decommissioning trusts:
Stocks²	1,460		—		—			—			1,460
Fixed income³	947		1,776		—			—			2,723
Short-term investments, primarily cash equivalents	91		81		—			—			172
Subtotal of nuclear decommissioning trusts⁴	2,498		1,857		—			—			4,355
Total assets	2,526		1,857		163			—			4,546
Liabilities at fair value
Derivative contracts	—		22		1,311			(15		)	1,318
Total liabilities	—		22		1,311			(15		)	1,318
Net assets (liabilities)	$	2,526	$	1,835	$	(1,148	)	$	15		$	3,228



	December 31, 2014
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral¹			Total
Assets at fair value
Derivative contracts	$	—	$	—	$	321		$	—		$	321
Other	33		—		—			—			33
Nuclear decommissioning trusts:
Stocks²	2,031		—		—			—			2,031
Fixed income³	703		1,350		—			—			2,053
Short-term investments, primarily cash equivalents	606		166		—			—			772
Subtotal of nuclear decommissioning trusts⁴	3,340		1,516		—			—			4,856
Total assets	3,373		1,516		321			—			5,210
Liabilities at fair value
Derivative contracts	—		86		1,223			(61		)	1,248
Total liabilities	—		86		1,223			(61		)	1,248
Net assets (liabilities)	$	3,373	$	1,430	$	(902	)	$	61		$	3,962


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 73% of SCE's equity investments were located in the United States at December 31, 2015 and 2014, respectively.


³	Includes corporate bonds, which were diversified and included collateralized mortgage obligations and other asset backed securities of $111 million and $49 million at December 31, 2015 and 2014, respectively.


⁴	Excludes net payables of $24 million and $57 million at December 31, 2015 and 2014, which consist 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

Edison International Parent and Other assets measured at fair value consisted of money market funds of $29 million and $30 million at December 31, 2015 and 2014, 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:



	December 31,
(in millions)	2015			2014
Fair value of net liabilities at beginning of period	$	(902	)	$	(805	)
Total realized/unrealized gains (losses):
Included in regulatory assets and liabilities¹	(246		)	(97		)
Purchases	—			27
Settlements	—			(27		)
Fair value of net liabilities at end of period	$	(1,148	)	$	(902	)
Change during the period in unrealized gains and losses related to assets and liabilities held at the end of the period	$	(311	)	$	(166	)


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 significant transfers between any levels during 2015 and 2014.

Valuation Techniques Used to Determine Fair Value

The process of determining fair value is the responsibility of SCE's risk management department, which report 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 significant Level 3 assets and liabilities:



	Fair Value (in millions)					Significant	Range
	Assets		Liabilities		Valuation Technique(s)	Unobservable Input	(Weighted Average)
Congestion revenue rights
December 31, 2015	$	152	$	—	Market simulation model and auction prices	Load forecast	6,289 MW - 24,349 MW
						Power prices¹	$0 - $110.44
						Gas prices²	$1.98 - $5.72
December 31, 2014	317		—		Market simulation model and auction prices	Load forecast	7,630 MW - 25,431 MW
						Power prices¹	$1.65 - $109.95
						Gas prices²	$3.65 - $6.53
Tolling
December 31, 2015	10		1,297		Option model	Volatility of gas prices	15% - 58% (20%)
						Volatility of power prices	26% - 38% (30%)
						Power prices	$24.15 - $46.93 ($34.80)
December 31, 2014	4		1,207		Option model	Volatility of gas prices	13% - 53% (20%)
						Volatility of power prices	25% - 42% (30%)
						Power prices	$30.60 - $61.40 ($44.60)

¹ Prices are in dollars per megawatt-hour.

² Prices are in dollars per million British thermal units.

Level 3 Fair Value Sensitivity

Congestion Revenue Rights

For CRRs, 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.

Tolling Arrangements

The fair values of SCE's 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 option model for tolling arrangements reflects plant specific information such as operating and start-up costs.

For tolling arrangements 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 tolling arrangements tends to increase. The valuation of tolling arrangements is also impacted by the correlation between gas and power prices. As the correlation increases, the fair value of tolling arrangements tends to decline.

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.

SCE's investment policies and CPUC requirements place limitations on the types and investment grade ratings of the securities that may be held by the nuclear decommissioning trust funds. These policies restrict the trust funds from holding alternative investments and limit the trust funds' exposures to investments in highly illiquid markets. With respect to equity and fixed income securities, the trustee obtains prices from third-party pricing services which SCE is able to independently corroborate as described below. A primary price source is identified by the trustee based on asset type, class or issue for each security. The trustee monitors prices supplied by pricing services and may use a supplemental price source or change the primary price source of a given security if the trustee or SCE's investment managers challenge an assigned price and determine that another price source is considered to be preferable. Parameters and predetermined tolerance thresholds are established by asset class based on past experience and an understanding of valuation process techniques. The trustee "scrubs" prices against defined parameters' tolerances and performs research and resolves variances beyond the set parameters. SCE reviewed the process/procedures of both the pricing services and the trustee to gain an understanding of the inputs/assumptions and valuation techniques used to price each asset type/class and to reach a conclusion that their pricing controls are satisfactory. This consisted of SCE's review of their written detailed process/procedures and service organization control reports, as well as follow-up conversations based on our written questions. This assists SCE in determining if the valuations represent exit price fair value and that investments are appropriately classified in the fair value hierarchy. Additionally, SCE corroborates the fair values of securities by comparison to other market-based price sources obtained by SCE's investment managers. Differences outside established thresholds are followed-up with the trustee and resolved. The results of this process have demonstrated that vendor and trustee pricing controls are satisfactory. For each reporting period, SCE reviews the trustee determined fair value hierarchy and overrides the trustee level classification when appropriate.

Fair Value of Debt Recorded at Carrying Value

The carrying value and fair value of Edison International's and SCE's long-term debt (including current portion of long-term debt) are as follows:



	December 31, 2015				December 31, 2014
(in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Edison International	$	11,259	$	12,252	$	10,738	$	12,319
SCE	10,616		11,592		9,924		11,479

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