Fair Value Measurements, Including Derivatives

6 Months Ended

Jun. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements, Including Derivatives

8. FAIR VALUE MEASUREMENTS, INCLUDING DERIVATIVES

DESC’s fair value measurements are made in accordance with the policies discussed in Note 9 to the Consolidated Financial Statements in DESC’s Annual Report on Form 10-K for the year ended December 31, 2021. See Note 7 in this report for further information about DESC’s derivatives and hedge accounting activities. DESC applies fair value measurements to certain assets and liabilities including commodity and interest rate derivative instruments.

The following table presents DESC’s quantitative information about Level 3 fair value measurements at June 30, 2022. The range and weighted average are presented in dollars for market price inputs.

	Fair Value (millions)		Valuation Techniques	Unobservable Input		Range	Weighted Average(1)
Assets
Physical forwards:
Electricity	$	295	Discounted cash flow	Market price (per MWh)	(2)	30-141		53
Total assets	$	295
(1)   Averages weighted by volume.
(2)   Represents market prices beyond defined terms for Levels 1 and 2.

Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows:

Significant Unobservable Inputs	Position	Change to Input	Impact on Fair Value Measurement
Market price	Buy	Increase (decrease)	Gain (loss)
Market price	Sell	Increase (decrease)	Loss (gain)

Recurring Fair Value Measurements

The following table presents DESC’s assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions:

(millions)	Level 1		Level 2		Level 3		Total
At June 30, 2022
Assets
Commodity	$	—	$	—	$	295	$	295
Total assets	$	—	$	—	$	295	$	295
Liabilities
Interest rate	$	—	$	6	$	—	$	6
Total liabilities	$	—	$	6	$	—	$	6
At December 31, 2021
Assets
Commodity	$	—	$	—	$	148	$	148
Total assets	$	—	$	—	$	148	$	148
Liabilities
Interest rate	$	—	$	19	$	—	$	19
Total liabilities	$	—	$	19	$	—	$	19

The following table presents the net change in DESC's assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
(millions)
Beginning balance	$	225		$	—		$	148		$	—
Total realized and unrealized gains (losses):
Included in earnings:
Purchased power		15			—			18			—
Included in regulatory assets/liabilities		70			(13	)		147			(13	)
Settlements		(15	)		—			(18	)		—
Ending balance	$	295		$	(13	)	$	295		$	(13	)

There are no unrealized gains and losses included in earnings in the Level 3 fair value category related to assets/liabilities still held at the reporting date for the three and six months ended June 30, 2022 and 2021.

Fair Value of Financial Instruments

Substantially all of DESC’s financial instruments are recorded at fair value, with the exception of the instruments described below, which are reported at historical cost. Estimated fair values have been determined using available market information and valuation methodologies considered appropriate by management. The carrying amount of financial instruments classified within current assets and current liabilities are representative of fair value because of the short-term nature of these instruments. For financial instruments that are not recorded at fair value, the carrying amounts and estimated fair values are as follows:

	June 30, 2022				December 31, 2021
(millions)	Carrying Amount		Estimated Fair Value(1)		Carrying Amount		Estimated Fair Value(1)
Long-term debt(2)	$	3,725	$	3,832	$	3,724	$	4,831
Affiliated long-term debt		230		230		230		230

(1) Fair value is estimated using market prices, where available, and interest rates currently available for issuance of debt with similar terms and remaining maturities. All fair value measurements are classified as Level 2. The carrying amount of debt issuances with short-term maturities and variable rates refinanced at current market rates is a reasonable estimate of their fair value.

(2) Carrying amount includes current portions included in securities due within one year and amounts which represent the unamortized debt issuance costs and discount or premium.