(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 September 30, 2014 and December 31, 2013.


	Fair Value Measurements at Reporting Date Using
		September 30, 2014			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	$	151,485		$	151,485	$	—		$	—
International equity trust		72,518			—		72,518			—
Corporate bonds		39,713			—		39,713			—
US Treasury and government agency securities		62,440			62,440		—			—
Agency mortgage and asset backed securities		16,736			—		16,736			—
Other		12,940			12,940		—			—
Long-term investments:
International equity trust		11,166			—		11,166			—
Corporate bonds		6,558			—		6,558			—
US Treasury and government agency securities		13,933			13,933		—			—
Agency mortgage and asset backed securities		570			—		570			—
Mutual funds		51,045			51,045		—			—
Other		417			417		—			—
Interest rate options		13,110			—		—			13,110	(1)
Natural gas swaps		(1,764	)		—		(1,764	)		—


	Fair Value Measurements at Reporting Date Using
		December 31, 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	$	143,929	$	143,929	$	—	$	—
International equity trust		72,466		—		72,466		—
Corporate bonds		39,863		—		39,863		—
US Treasury and government agency securities		44,846		44,846		—		—
Agency mortgage and asset backed securities		30,133		—		30,133		—
Municipal Bonds		641		—		641		—
Other		11,820		11,820		—		—
Long-term investments:
Corporate bonds		6,487		—		6,487		—
US Treasury and government agency securities		8,563		8,563		—		—
Agency mortgage and asset backed securities		3,679		—		3,679		—
International equity trust		11,148		—		11,148		—
Mutual funds		51,559		51,559		—		—
Other		284		284		—		—
Interest rate options		63,471		—		—		63,471	(1)
Natural gas swaps		1,011		—		1,011		—

(1)Interest rate options as reflected on the unaudited condensed Balance Sheet include the fair value of the interest rate options offset by $0 and $34,970,000 of collateral received from the counterparties at September 30, 2014 and December 31, 2013, respectively.

The Level 2 investments above in corporate bonds and agency mortgage and asset backed securities may not be exchange 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 fair value of the Level 2 investments above in international equity trust are calculated based on the net asset value per share of the fund. There are no unfunded commitments for the international equity trust and redemption may occur daily with a 3-day redemption notice period.

The following tables present the changes in Level 3 assets measured at fair value on a recurring basis during the three and nine months ended September 30, 2014 and 2013.


		Three Months Ended September 30, 2014

		Interest rate options

		(dollars in thousands)
Assets (Liabilities):
Balance at June 30, 2014	$	18,535
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		(5,425	)

Balance at September 30, 2014	$	13,110


		Three Months Ended September 30, 2013

		Interest rate options

		(dollars in thousands)
Assets (Liabilities):
Balance at June 30, 2013	$	43,680
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		(149	)

Balance at September 30, 2013	$	43,531


		Nine Months Ended September 30, 2014

		Interest rate options

		(dollars in thousands)
Assets (Liabilities):
Balance at December 31, 2013	$	63,471
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		(50,361	)

Balance at September 30, 2014	$	13,110


		Nine Months Ended September 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)		17,748

Balance at September 30, 2013	$	43,531

We estimate the value of the interest rate options as the sum of time value and any intrinsic value minus a counterparty credit adjustment. Intrinsic value is the value of the underlying swap, which we are able to calculate based on the forward LIBOR swap rates, the fixed rate on the underlying swap, the time to expiration, the term of the underlying swap and discount rates, all of which we are able to effectively observe. Time value is the additional value of the swaption due to the fact that it is an option. We estimate the time value using an option pricing model which, in addition to the factors used to calculate intrinsic value, also takes into account option volatility, which we estimate based on option valuations we obtain from various sources. We estimate the counterparty credit adjustment by observing credit attributes, including the credit default swap spread of entities similar to the counterparty and the amount of credit support that is available for each swaption. Since the primary component of the LIBOR swaptions' value is time value, which is based on estimated option volatility derived from valuations of comparable instruments that are generally not publicly available, we have categorized these LIBOR swaptions as Level 3. We believe the estimated fair values for the LIBOR swaptions we hold are based on the most accurate information available for these types of derivative contracts. For additional information regarding our interest rate options, see Note C.

The estimated fair values of our long-term debt, including current maturities at September 30, 2014 and December 31, 2013 were as follows (in thousands):


		2014				2013

		Carrying Value		Fair Value		Carrying Value		Fair Value

Long-term debt	$	7,157,870	$	7,983,009	$	6,954,293	$	7,317,476

The estimated fair value of long-term debt is classified as Level 2 and is estimated based on observed or quoted market prices for the same or similar issues or on current rates offered to us for debt of similar maturities. The primary sources of our long-term debt consist of first mortgage bonds, pollution control revenue bonds and long-term debt issued by the Federal Financing Bank that is guaranteed by the Rural Utilities Service or the U.S. Department of Energy. We also have small amounts of long-term debt provided by National Rural Utilities Cooperative Finance Corporation (CFC) and by CoBank, ACB. The valuations for the first mortgage bonds and the pollution control revenue bonds were obtained from third party investment banking firms and 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 September 30, 2014 plus an applicable spread, 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.

For cash and cash equivalents, restricted cash and receivables, the carrying amount approximates fair value because of the short-term maturity of those instruments.