Fair Value Measurement

9 Months Ended

Sep. 30, 2012

Fair Value Measurement

Fair Value Measurement

(B)

Fair Value Measurement.    Authoritative guidance regarding fair value measurements for financial and non-financial assets and liabilities defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.

• The guidance establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

  • •

    Level 1.  Quoted prices from active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Quoted prices in active markets provide the most reliable evidence of fair value and are used to measure fair value whenever available. Level 1 primarily consists of financial instruments that are exchange-traded.

    •

    Level 2.  Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Level 2 primarily consists of financial instruments that are non-exchange-traded but have significant observable inputs.

    •

    Level 3.  Pricing inputs that include significant inputs which are generally less observable from objective sources. These inputs may include internally developed methodologies that result in management's best estimate of fair value. Level 3 financial instruments are those whose fair value is based on significant unobservable inputs.

• As required by the guidance, assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:

  • 1.    Market approach.    The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business) and deriving fair value based on these inputs.

    2.    Income approach.    The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts.

    3.    Cost approach.    The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost). This approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset or comparable utility, adjusted for obsolescence.

  The tables below detail assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011.

				Fair Value Measurements at Reporting Date Using
		September 30, 2012			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
		(dollars in thousands)
Decommissioning funds:
Domestic equity	$	117,995		$	117,995	$	—		$	—
International equity		45,610			45,610		—			—
Corporate bonds		51,269			—		51,269			—
US Treasury and government agency securities		49,638			49,638		—			—
Agency mortgage and asset backed securities		25,725			—		25,725			—
Other		6,386			6,386		—			—
Bond, reserve and construction funds		197			197		—			—
Long-term investments:
Corporate bonds		6,076			6,076		—			—
US Treasury and government agency securities		6,811			6,811		—			—
Agency mortgage and asset backed securities		2,828			2,828		—			—
Mutual funds		59,970			59,970		—			—
Other		225			225		—			—
Interest rate options		29,921			—		—			29,921	(1)
Natural gas swaps		(13	)		—		(13	)		—

				Fair Value Measurements at Reporting Date Using
		December 31, 2011			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
		(dollars in thousands)
Decommissioning funds:
Domestic equity	$	102,285		$	102,285	$	—		$	—
International equity		39,618			39,618		—			—
Corporate bonds		41,338			—		41,338			—
US Treasury and government agency securities		41,697			41,697		—			—
Agency mortgage and asset backed securities		28,519			—		28,519			—
Derivative instruments		(982	)		—		—			(982	)
Other		16,122			16,122		—			—
Bond, reserve and construction funds		2,720			2,720		—			—
Long-term investments		80,055			72,342		—			7,713	(2)
Interest rate options		69,446			—		—			69,446	(1)
Natural gas swaps		(7,220	)		—		(7,220	)		—

⁽¹⁾

Interest rate options as reflected on the unaudited condensed Balance Sheet includes the fair value of the interest rate options offset by $7,810,000 and $43,070,000 of collateral received by the counterparties at September 30, 2012 and December 31, 2011, respectively.

⁽²⁾

Represents auction rate securities investments we held.

• The following tables present the changes in our Level 3 assets and liabilities measured at fair value on a recurring basis during the three and nine months ended September 30, 2012 and 2011.

		Three Months Ended September 30, 2012
	Interest rate options
		(dollars in thousands)
Assets (Liabilities):
Balance at June 30, 2012	$	39,215
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		(9,294	)
Balance at September 30, 2012	$	29,921

		Three Months Ended September 30, 2011
		Decommissioning funds			Long-term investments
		(dollars in thousands)
Assets (Liabilities):
Balance at June 30, 2011	$	(505	)	$	8,048
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		(527	)
Impairment included in other comprehensive deficit					50
Liquidations					(400	)
Balance at September 30, 2011	$	(1,032	)	$	7,698

		Nine Months Ended September 30, 2012
		Decommissioning funds			Long-term investments			Interest rate options
		(dollars in thousands)
Assets (Liabilities):
Balance at December 31, 2011	$	(982	)	$	7,713		$	69,446
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		982			—			(39,525	)
Impairment included in other comprehensive margin (deficit)		—			887			—
Liquidations		—			(8,600	)		—
Balance at September 30, 2012	$	—		$	—		$	29,921

		Nine Months Ended September 30, 2011
		Decommissioning funds			Long-term investments
		(dollars in thousands)
Assets (Liabilities):
Balance at December 31, 2010	$	(452	)	$	8,671
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		(580	)		127
Liquidations		—			(1,100	)
Balance at September 30, 2011	$	(1,032	)	$	7,698

• On February 15, 2012, we sold $8,600,000 of our auction rate securities, which resulted in a loss of $1,075,000. The loss was recorded as a regulatory asset and is being charged to income over a period of four years.