Fair Value:

12 Months Ended

Dec. 31, 2012

Fair Value:

Fair Value:

2. 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.

    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 table below details assets and liabilities measured at fair value on a recurring basis for the periods ending December 31, 2012 and 2011, respectively.

		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)	Valuation Technique
		(dollars in thousands)
Nuclear decommissioning trust funds:
Domestic equity	$	118,329		$	118,329	$	–		$	–	(1)
International equity		48,105			48,105		–			–	(1)
Corporate bonds		53,172			–		53,172			–	(1)
U.S. Treasury and government agency securities		46,626			46,626		–			–	(1)
Agency mortgage and asset backed securities		21,273			–		21,273			–	(1)
Other		13,280			13,280		–			–	(1)
Long-term investments:
Corporate bonds		5,762			–		5,762			–	(1)
U.S. Treasury and government agency securities		7,387			7,387		–			–	(1)
Agency mortgage and asset backed securities		2,526			–		2,526			–	(1)
Mutual funds		60,972			60,972		–			–	(1)
Other		375			375		–			–	(1)
Interest rate options		25,783	(1)		–		–			25,783	(3)
Natural gas swaps		(1,085	)		–		(1,085	)		–	(1)

		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)		Valuation Technique
		(dollars in thousands)
Nuclear Decommissioning trust funds:
Domestic equity	$	102,285		$	102,285	$	–		$	–		(1)
International equity		39,618			39,618		–			–		(1)
Corporate bonds		41,338			–		41,338			–		(1)
U.S. Treasury and government agency securities		41,697			41,697		–			–		(1)
Agency mortgage and asset backed securities		28,519			–		28,519			–		(1)
Derivative instruments		(982	)		–		–			(982	)	(3)
Other		16,122			16,122		–			–		(1)
Long-term investments:												(1)
Mutual funds		75,062			75,062		–			–		(1)
Auction rate securities		7,713			–		–			7,713	(2)	(3)
Interest rate options		69,446	(1)		–		–			69,446		(3)
Natural gas swaps		(7,220	)		–		(7,220	)		–		(1)

(1)

Interest rate options as reflected on the Consolidated Balance Sheet includes the fair value of the interest rate options offset by $8,950,000 and $43,070,000 of collateral received by the counterparties at December 31, 2012 and 2011, respectively.

(2)

Represents auction rate securities investments we held.

    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 Level 3 assets measured at fair value on a recurring basis during the years ended December 31, 2012 and 2011, respectively.

		Year Ended December 31, 2012
		Nuclear decommissioning trust funds			Long-term investments			Interest rate options
		(dollars in thousands)
Assets:
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			887			(43,663	)
Purchases, issuances, liquidations		–			(8,600	)		–
Balance at December 31, 2012	$	–		$	–		$	25,783

		Year Ended December 31, 2011
		Nuclear decommissioning trust funds			Long-term investments			Interest rate options
		(dollars in thousands)
Assets:
Balance at December 31, 2010	$	(452	)	$	8,671		$	–
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		(530	)		142			(30,554	)
Purchases, issuances, liquidations		–			(1,100	)		100,000
Balance at December 31, 2011	$	(982	)	$	7,713		$	69,446

    The assets included in the "Long-term investments" column in each of the Level 3 tables above are auction rate securities. On February 15, 2012, we sold our remaining $8,600,000 of 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. As a result of market conditions, including the failure of auctions for the auction rate securities in which we had invested, the fair value of these auction rate securities in prior periods were determined using an income approach based on a discounted cash flow model. The discounted cash flow model utilized projected cash flows at current rates, which was adjusted for illiquidity premiums based on discussions with market participants.

    The estimated fair values of our long-term debt, including current maturities at December 31, 2012 and 2011 were as follows (in thousands):

		2012				2011
		Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt	$	5,930,449	$	7,213,365	$	5,692,504	$	6,908,763

    The fair value of long-term debt is primarily level 2 and is estimated based on 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 are provided by a third-party investment banking firms. These valuations are based on market prices for similar debt in active markets. Valuations for debt issued by the Federal Financing Bank are based on U.S. Treasury rates as of December 31, 2012 (plus a spread of ¹/8 percent). The additional spread of ¹/8 percent is reflective of the "cost" the Rural Utilities Service attributes to making these loans. We use an interest rate quote sheet provided by CoBank for valuation of the CoBank debt. The quotes contained in CoBank's rate sheet are adjusted for our "A" credit rating. The rates on the CFC debt are fixed and the valuation is based on rate quotes provided by CFC. The rate in effect at December 31, 2012 for our term loan, which resets each month and is based on a 1.25% 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.