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Derivative Instruments
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
Derivative financial instruments are used to manage exposure to commodity price risk. These risks are managed in part by entering into forward commodity transactions, including options, swaps and futures. To mitigate credit risk from counterparties in the event of nonperformance, master netting agreements are used whenever possible and counterparties may be required to pledge collateral depending on the creditworthiness of each counterparty and the risk associated with the transaction.
Commodity Price Risk
Commodity price risk represents the potential impact that can be caused by a change in the market value of a particular commodity. SCE's electricity price exposure arises from energy purchased from and sold to wholesale markets as a result of differences between SCE's load requirements and the amount of energy delivered from its generating facilities and power purchase agreements. SCE's natural gas price exposure arises from natural gas purchased for the Mountainview power plant and peaker plants, QF contracts where pricing is based on a monthly natural gas index and power purchase agreements in which SCE has agreed to provide the natural gas needed for generation, referred to as tolling arrangements.
Credit and Default Risk
Credit and default risk represent the potential impact that can be caused if a counterparty were to default on its contractual obligations and SCE would be exposed to spot markets for buying replacement power or selling excess power. In addition, SCE would be exposed to the risk of non-payment of accounts receivable, primarily related to the sales of excess power and realized gains on derivative instruments.
Certain power contracts contain master netting agreements or similar agreements, which generally allow counterparties subject to the agreement to setoff amounts when certain criteria are met, such as in the event of default. The objective of netting is to reduce credit exposure. Additionally, to reduce SCE's risk exposures counterparties may be required to pledge collateral depending on the creditworthiness of each counterparty and the risk associated with the transaction.
Certain power contracts contain a provision that requires SCE to maintain an investment grade rating from each of the major credit rating agencies, referred to as a credit-risk-related contingent feature. If SCE's credit rating were to fall below investment grade, SCE may be required to post additional collateral to cover derivative liabilities and the related outstanding payables. The net fair value of all derivative liabilities with these credit-risk-related contingent features was $38 million and $53 million as of December 31, 2015 and 2014, respectively, for which SCE has posted no collateral and $13 million of collateral to its counterparties at December 31, 2015 and 2014, respectively. If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2015, SCE would be required to post $22 million of additional collateral of which $8 million is related to outstanding payables that are net of collateral already posted.
Fair Value of Derivative Instruments
SCE presents its derivative assets and liabilities on a net basis on its consolidated balance sheets when subject to master netting agreements or similar agreements. Derivative positions are offset against margin and cash collateral deposits. In addition, SCE has provided collateral in the form of letters of credit. Collateral requirements can vary depending upon the level of unsecured credit extended by counterparties, changes in market prices relative to contractual commitments and other factors. See Note 4 for a discussion of fair value of derivative instruments. The following table summarizes the gross and net fair values of SCE's commodity derivative instruments:
 
 
December 31, 2015
 
 
 
 
Derivative Assets
 
Derivative Liabilities
 
Net Liability
(in millions)
 
Short-Term
 
Long-Term
 
Subtotal
 
Short-Term
 
Long-Term
 
Subtotal
 
Commodity derivative contracts
 
 
 
 
 
 
 
 
 
 
 
 
Gross amounts recognized
 
$
81

 
$
84

 
$
165

 
$
235

 
$
1,100

 
$
1,335

 
$
1,170

Gross amounts offset in consolidated balance sheets
 
(2
)
 
—

 
(2
)
 
(2
)
 
—

 
(2
)
 
—

Cash collateral posted1
 
—

 
—

 
—

 
(15
)
 
—

 
(15
)
 
(15
)
Net amounts presented in the consolidated balance sheets
 
$
79

 
$
84

 
$
163

 
$
218

 
$
1,100

 
$
1,318

 
$
1,155


 
 
December 31, 2014
 
 
 
 
Derivative Assets
 
Derivative Liabilities
 
Net Liability
(in millions)
 
Short-Term
 
Long-Term
 
Subtotal
 
Short-Term
 
Long-Term
 
Subtotal
 
Commodity derivative contracts
 
 
 
 
 
 
 
 
 
 
 
 
Gross amounts recognized
 
$
104

 
$
219

 
$
323

 
$
259

 
$
1,052

 
$
1,311

 
$
988

Gross amounts offset in consolidated balance sheets
 
(2
)
 
—

 
(2
)
 
(2
)
 
—

 
(2
)
 
—

Cash collateral posted1
 
—

 
—

 
—

 
(61
)
 
—

 
(61
)
 
(61
)
Net amounts presented in the consolidated balance sheets
 
$
102

 
$
219

 
$
321

 
$
196

 
$
1,052

 
$
1,248

 
$
927

1 
In addition, at December 31, 2015 and 2014, SCE had posted $31 million and $36 million, respectively, of collateral that is not offset against derivative liabilities and is reflected in "Other current assets" on the consolidated balance sheets.
Income Statement Impact of Derivative Instruments
SCE recognizes realized gains and losses on derivative instruments as purchased power expense and expects that such gains or losses will be part of the purchase power costs recovered from customers. As a result, realized gains and losses do not affect earnings, but may temporarily affect cash flows. Due to expected future recovery from customers, unrealized gains and losses are recorded as regulatory assets and liabilities and therefore also do not affect earnings. The remaining effects of derivative activities and related regulatory offsets are recorded in cash flows from operating activities in the consolidated statements of cash flows.
The following table summarizes the components of SCE's economic hedging activity:
 
 
Years ended December 31,
(in millions)
 
2015
 
2014
 
2013
Realized losses
 
$
(148
)
 
$
(57
)
 
$
(56
)
Unrealized (losses) gains
 
(182
)
 
(147
)
 
93


Notional Volumes of Derivative Instruments
The following table summarizes the notional volumes of derivatives used for SCE hedging activities:
 
 
Economic Hedges
 
Unit of
December 31,
Commodity
Measure
2015
 
2014
Electricity options, swaps and forwards
GWh
6,221

 
3,618
Natural gas options, swaps and forwards
Bcf
32

 
83
Congestion revenue rights
GWh
109,740

 
122,859
Tolling arrangements
GWh
70,663

 
79,989