Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements (EME, Midwest Generation)

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, which was not material as of June 30, 2013 and December 31, 2012 for both EME and Midwest Generation.

Valuation Techniques Used to Determine Fair Value

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). The fair value of transfers in and out of each level is determined at the end of each reporting period.

Level 1

The fair value of 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 derivatives and money market funds.

Level 2

The fair value of Level 2 assets and liabilities is determined using the income 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. This level includes over-the-counter derivatives and interest rate swaps.

Over-the-counter derivative contracts are valued using 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 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 and derivative contracts that trade infrequently, such as congestion revenue rights 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. 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.

EME

The following table sets forth EME's assets and liabilities 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 funds2	$	856	$	—	$	—	$	—		$	856
Derivative contracts
Electricity	—		41		32		(10		)	63
Natural gas	1		—		—		(1		)	—
Total assets	$	857	$	41	$	32	$	(11	)	$	919
Liabilities at Fair Value
Derivative contracts
Electricity	$	—	$	5	$	6	$	(11	)	$	—
Interest rate	—		68		—		—			68
Total liabilities	$	—	$	73	$	6	$	(11	)	$	68

	December 31, 2012
(in millions)	Level 1		Level 2		Level 3		Netting and Collateral1			Total
Assets at Fair Value
Money market funds2	$	615	$	—	$	—	$	—		$	615
Derivative contracts
Electricity	—		41		52		(3		)	90
Total assets	$	615	$	41	$	52	$	(3	)	$	705
Liabilities at Fair Value
Derivative contracts
Electricity	$	—	$	6	$	1	$	(7	)	$	—
Natural gas	3		—		—		(3		)	—
Interest rate	—		118		—		—			118
Total liabilities	$	3	$	124	$	1	$	(10	)	$	118

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

²  Money market funds are included in cash and cash equivalents on EME's consolidated balance sheets.

Level 3 Valuation Process

The process of determining fair value of commodity derivative contracts is the responsibility of the risk department, which reports to the chief financial officer. This department obtains observable and unobservable inputs through broker quotes, exchanges, and internal valuation techniques and uses both standard and proprietary models to determine fair value. Each reporting period, the risk and key 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 the valuation techniques and significant unobservable inputs used to determine fair value for EME's Level 3 assets and liabilities:

	June 30, 2013
	Fair Value (in millions)						Valuation Techniques	Significant Unobservable Input	Range	Weighted Average
	Assets			Liabilities
Electricity
Congestion contracts	$	50		$	18		Latest auction pricing	Congestion prices	$(8.94) - $13.88	$0.11
Power contracts	14			20			Discounted cash flows	Power prices	$34.24 - $73.00	$41.79
Netting	(32		)	(32		)
Total	$	32		$	6

	December 31, 2012
	Fair Value (in millions)						Valuation Techniques	Significant Unobservable Input	Range	Weighted Average
	Assets			Liabilities
Electricity
Congestion contracts	$	71		$	20		Latest auction pricing	Congestion prices	$(8.93) - $18.03	$0.19
Power contracts	2			2			Discounted cash flows	Power prices	$22.54 - $48.85	$39.62
Netting	(21		)	(21		)
Total	$	52		$	1

Level 3 Fair Value Sensitivity

For congestion contracts, generally, an increase (decrease) in congestion prices in the last auction relative to the contract price will increase (decrease) fair value. For power contracts, generally, an increase (decrease) in long-term forward power prices at illiquid locations relative to the contract price will increase (decrease) fair value.

The following table sets forth a summary of changes in the fair value of EME's 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 assets at beginning of period	$	41		$	24		$	51		$	83
Total realized/unrealized gains (losses)
Included in earnings1	(25		)	23			(19		)	8
Included in AOCI2	—			—			—			2
Purchases	10			13			19			19
Settlements	—			(19		)	(25		)	(20		)
Transfers out of Level 3	—			—			—			(51		)
Fair value of net assets at end of period	$	26		$	41		$	26		$	41
Change during the period in unrealized gains (losses) related to assets and liabilities held at end of period1	$	(11	)	$	14		$	(17	)	$	8

¹  Reported in operating revenues on EME's consolidated statements of operations.

²  Included in reclassification adjustments in EME's consolidated statement of OCI.

There were no transfers between levels during the six months ended June 30, 2013 and no transfers between Level 1 and Level 2 during the six months ended June 30, 2012. Significant transfers out of Level 3 into Level 2 occurred in the first quarter of 2012 due to significant observable inputs becoming available as the transactions neared maturity.

Fair Value of Long-term Debt

The carrying amounts and fair values of EME's long-term debt were as follows:

	June 30, 2013				December 31, 2012
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	1,522	$	1,517	$	1,056	$	1,057

In assessing the fair value of EME's long-term debt, EME primarily uses quoted market prices, except for floating-rate debt for which the carrying amounts were considered a reasonable estimate of fair value. The fair value of EME's long-term debt is classified as Level 2.

The carrying amount of short-term debt at December 31, 2012 approximates fair value.

Midwest Generation

The following table sets forth Midwest Generation's assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:

	June 30, 2013
(in millions)	Level 1		Level 2		Netting1		Total
Assets at Fair Value
Money market funds2	$	99	$	—	$	—	$	99
Derivative contracts
Electricity	—		1		—		1
Total assets	$	99	$	1	$	—	$	100
Liabilities at Fair Value
Derivative contracts
Electricity	$	—	$	5	$	—	$	5
Total liabilities	$	—	$	5	$	—	$	5
	December 31, 2012
(in millions)	Level 1		Level 2		Netting1		Total
Assets at Fair Value
Money market funds2	$	75	$	—	$	—	$	75
Derivative contracts
Electricity	—		2		—		2
Total assets	$	75	$	2	$	—	$	77
Liabilities at Fair Value
Derivative contracts
Electricity	$	—	$	3	$	—	$	3
Total liabilities	$	—	$	3	$	—	$	3

¹  Represents the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

²  Money market funds are included in cash and cash equivalents on Midwest Generation's consolidated balance sheets.

Midwest Generation does not have any Level 3 assets and liabilities. There were no transfers between levels during the six months ended June 30, 2013 and 2012.