Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2014

Schedule of assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis consisted of the following:



June 30, 2014
	Level 1		Level 2		Level 3 (a)		Total
Assets:
Commodity contracts	$	118	$	64	$	58	$	240
Nuclear decommissioning trust – equity securities (b)	354		204		—		558
Nuclear decommissioning trust – debt securities (b)	—		287		—		287
Total assets	$	472	$	555	$	58	$	1,085
Liabilities:
Commodity contracts	$	193	$	37	$	13	$	243
Total liabilities	$	193	$	37	$	13	$	243



December 31, 2013
	Level 1		Level 2		Level 3 (a)		Total
Assets:
Commodity contracts	$	161	$	570	$	57	$	788
Nuclear decommissioning trust – equity securities (b)	330		191		—		521
Nuclear decommissioning trust – debt securities (b)	—		270		—		270
Total assets	$	491	$	1,031	$	57	$	1,579
Liabilities:
Commodity contracts	$	231	$	14	$	18	$	263
Interest rate swaps	—		—		1,012		1,012
Total liabilities	$	231	$	14	$	1,030	$	1,275

_______________


(a)	See table below for description of Level 3 assets and liabilities.


(b)	The nuclear decommissioning trust investment is included in the investments line in the condensed consolidated balance sheets. See Note 14.

Schedule of fair value of the Level 3 assets and liabilities by major contract type (all related to commodity contracts) and the significant unobservable inputs used in the valuations

The following tables present the fair value of the Level 3 assets and liabilities by major contract type and the significant unobservable inputs used in the valuations at June 30, 2014 and December 31, 2013:



June 30, 2014
	Fair Value
Contract Type (a)	Assets		Liabilities			Total			Valuation Technique	Significant Unobservable Input	Range (b)
Electricity purchases and sales	$	4	$	(2	)	$	2		Valuation Model	Illiquid pricing locations (c)	$35 to $50/MWh
										Hourly price curve shape (d)	$20 to $70/MWh

Electricity spread options	7		(2		)	5			Option Pricing Model	Gas to power correlation (e)	40% to 90%
										Power volatility (f)	10% to 40%

Electricity congestion revenue rights	40		(3		)	37			Market Approach (g)	Illiquid price differences between settlement points (h)	$0.00 to $25.00

Coal purchases	3		(5		)	(2		)	Market Approach (g)	Illiquid price variances between mines (i)	$0.00 to $1.00
										Probability of default (j)	0% to 40%
										Recovery rate (k)	0% to 40%
										Illiquid pricing variances between heat content (l)	$0.30 to $0.40
Other (n)	4		(1		)	3

Total	$	58	$	(13	)	$	45



December 31, 2013
	Fair Value
Contract Type (a)	Assets		Liabilities			Total			Valuation Technique	Significant Unobservable Input	Range (b)
Electricity purchases and sales	$	2	$	(2	)	$	—		Valuation Model	Illiquid pricing locations (c)	$25 to $45/MWh
										Hourly price curve shape (d)	$20 to $70/MWh

Electricity spread options	15		(2		)	13			Option Pricing Model	Gas to power correlation (e)	45% to 95%
										Power volatility (f)	10% to 30%

Electricity congestion revenue rights	35		(2		)	33			Market Approach (g)	Illiquid price differences between settlement points (h)	$0.00 to $25.00

Coal purchases	—		(11		)	(11		)	Market Approach (g)	Illiquid price variances between mines (i)	$0.00 to $1.00
										Probability of default (j)	0% to 40%
										Recovery rate (k)	0% to 40%

Interest rate swaps	—		(1,012		)	(1,012		)	Valuation Model	Nonperformance risk adjustment (m)	25% to 35%

Other (n)	5		(1		)	4

Total	$	57	$	(1,030	)	$	(973	)

____________

(a)

Electricity purchase and sales contracts include hedging positions in the ERCOT West, North and Houston regions, as well as power contracts, the valuations of which include unobservable inputs related to the hourly shaping of the price curve. Electricity spread option contracts consist of physical electricity call options. Electricity congestion revenue rights contracts consist of forward purchase contracts (swaps and options) used to hedge electricity price differences between settlement points within ERCOT. Coal purchase contracts relate to western (Powder River Basin) coal. TCEH used interest rate swaps to hedge exposure to its variable rate debt (see Note 12).


(b)	The range of the inputs may be influenced by factors such as time of day, delivery period, season and location.


(c)	Based on the historical range of forward average monthly ERCOT Hub and load zone prices.


(d)	Based on the historical range of forward average hourly ERCOT North Hub prices.


(e)	Estimate of the historical range based on forward natural gas and on-peak power prices for the ERCOT hubs most relevant to our spread options.


(f)	Based on historical forward price changes.


(g)	While we use the market approach, there is either insufficient market data to consider the valuation liquid or the significance of credit reserves or non-performance risk adjustments results in a Level 3 designation.


(h)	Based on the historical price differences between settlement points within the ERCOT Hubs and load zones.


(i)	Based on the historical range of price variances between mine locations.


(j)	Estimate of the range of probabilities of default based on past experience and the length of the contract as well as our and counterparties' credit ratings.


(k)	Estimate of the default recovery rate based on historical corporate rates.


(l)	Based on historical ranges of forward average prices between different heat contents.


(m)

Schedule of changes in fair value of the Level 3 assets and liabilities (all related to commodity contracts)

The following table presents the changes in fair value of the Level 3 assets and liabilities for the three and six months ended June 30, 2014 and 2013.



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net asset (liability) balance at beginning of period	$	(897	)	$	59		$	(973	)	$	29
Total unrealized valuation losses	(9		)	(26		)	(94		)	(17		)
Purchases, issuances and settlements (a):
Purchases	20			56			29			60
Issuances	(1		)	(6		)	(2		)	(6		)
Settlements/terminations	933			1			1,084			17
Transfers into Level 3 (b)	—			—			—			1
Transfers out of Level 3 (b)	(1		)	4			1			4
Net change (c)	942			29			1,018			59
Net asset balance at end of period	$	45		$	88		$	45		$	88
Unrealized valuation losses relating to instruments held at end of period	$	(9	)	$	(20	)	$	(5	)	$	(7	)

____________


(a)	Settlement amounts in 2014 reflect termination of TCEH interest rate swaps and include the nonperformance risk adjustment as discussed in Note 12. Settlements for all periods presented reflect reversals of unrealized mark-to-market valuations previously recognized in net income. Purchases and issuances reflect option premiums paid or received.


(b)	Includes transfers due to changes in the observability of significant inputs. Transfers in and out occur at the end of each quarter, which is when the assessments are performed. Transfers out during 2013 were driven by a decrease in nonperformance risk adjustments. All Level 3 transfers in the periods presented are in and out of Level 2.

(c)

Substantially all changes in values of commodity contracts are reported in the condensed statements of consolidated income (loss) in net gain (loss) from commodity hedging and trading activities. Changes in values of interest rate swaps transferred into Level 3 in third quarter 2013 are reported in the condensed statements of consolidated income (loss) in interest expense and related charges (see Note 12). Activity excludes changes in fair value in the month the positions settled as well as amounts related to positions entered into and settled in the same month.

Energy Future Competitive Holdings Co LLC 10-Q