Fair Value

6 Months Ended

Jun. 30, 2013

Fair Value

Fair Value

(B)

Fair Value.    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 at June 30, 2013 and December 31, 2012.

				Fair Value Measurements at Reporting Date Using
		June 30, 2013			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
		(dollars in thousands)
Nuclear decommissioning trust funds:
Domestic equity	$	134,766		$	134,766	$	—		$	—
International equity		47,471			47,471		—			—
Corporate bonds		37,981			—		37,981			—
US Treasury and government agency securities		49,787			49,787		—			—
Agency mortgage and asset backed securities		27,904			—		27,904			—
Municipal Bonds		655			—		655			—
Other		13,026			13,026		—			—
Long-term investments:
Corporate bonds		4,856			—		4,856			—
US Treasury and government agency securities		7,096			7,096		—			—
Agency mortgage and asset backed securities		3,226			—		3,226			—
International equity		8,287			8,287		—			—
Mutual funds		53,761			53,761		—			—
Other		408			408		—			—
Interest rate options		43,680			—		—			43,680	(1)
Natural gas swaps		(3,114	)		—		(3,114	)		—

				Fair Value Measurements at Reporting Date Using
		December 31, 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)
Nuclear decommissioning trust funds:
Domestic equity	$	118,329		$	118,329	$	—		$	—
International equity		48,105			48,105		—			—
Corporate bonds		53,172			—		53,172			—
US Treasury and government agency securities		46,626			46,626		—			—
Agency mortgage and asset backed securities		21,273			—		21,273			—
Other		13,280			13,280		—			—
Long-term investments:
Corporate bonds		5,762			—		5,762			—
US Treasury and government agency securities		7,387			7,387		—			—
Agency mortgage and asset backed securities		2,526			—		2,526			—
Mutual funds		60,972			60,972		—			—
Other		375			375		—			—
Bond, reserve and construction funds		1			1		—			—
Interest rate options		25,783			—		—			25,783	(1)
Natural gas swaps		(1,085	)		—		(1,085	)		—

⁽¹⁾

Interest rate options as reflected on the unaudited condensed Balance Sheet include the fair value of the interest rate options offset by $36,070,000 and $8,950,000 of collateral received from the counterparties at June 30, 2013 and December 31, 2012, respectively.

• The Level 2 investments above in corporate bonds and agency mortgage and asset backed securities may not be exchanged traded. The fair value measurements for these investments are based on a market approach, including the use of observable inputs. Common inputs include reported trades and broker/dealer bid/ask prices.
  

  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 six months ended June 30, 2013 and 2012.

		Three Months Ended June 30, 2013
	Interest rate options
		(dollars in thousands)
Assets (Liabilities):
Balance at March 31, 2013	$	26,539
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		17,141
Balance at June 30, 2013	$	43,680

		Three Months Ended June 30, 2012
		Interest rate options
		(dollars in thousands)
Assets (Liabilities):
Balance at March 31, 2012	$	66,860
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		(27,645	)
Balance at June 30, 2012	$	39,215

		Six Months Ended June 30, 2013
		Interest rate options
		(dollars in thousands)
Assets (Liabilities):
Balance at December 31, 2012	$	25,783
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		17,897
Balance at June 30, 2013	$	43,680

		Six Months Ended June 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			—			(30,231	)
Impairment included in other comprehensive margin (deficit)		—			887			—
Liquidations		—			(8,600	)		—
Balance at June 30, 2012	$	—		$	—		$	39,215

• The estimated fair values of our long-term debt, including current maturities at June 30, 2013 and December 31, 2012 were as follows (in thousands):

		2013				2012
		Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt	$	6,207,299	$	6,788,908	$	5,930,449	$	7,213,365

• The fair value of long-term debt is Level 2 and is estimated based on observed or quoted market prices for the same or similar issues or on the current rates offered to us for debt of similar maturities. Our three primary sources of long-term debt consist of first mortgage bonds, pollution control revenue bonds and long-term debt issued by the Federal Financing Bank. We also have small amounts of long-term debt provided by National Rural Utilities Cooperative Finance Corporation (CFC) and by CoBank, ACB in addition to a multi-year term loan with Bank of Tokyo. The valuations for the first mortgage bonds and the pollution control revenue bonds were obtained from a third party subscription service and are based on secondary market trading of our debt. Valuations for debt issued by the Federal Financing Bank are based on U.S. Treasury rates as of June 30, 2013 plus 1/8 percent, which reflects our borrowing rate for new loans of this type from the Federal Financing Bank. We use an interest rate quote sheet provided by CoBank for valuation of the CoBank debt, which reflects current rates for a similar loan. The rates on the CFC debt are fixed and the valuation is based on rate quotes provided by CFC. The rate in effect at June 30, 2013 for our term loan, which resets each month and is based on a spread to LIBOR, was used for valuation of the term loan.

  We use the methods and assumptions described above to estimate the fair value of each class of financial instruments. For cash and cash equivalents, restricted cash and receivables, the carrying amount approximates fair value because of the short-term maturity of those instruments.