Our activities in the regulated energy sector expose us to a number of risks in the normal operations of our businesses. Depending on the activity, we are exposed to varying degrees of market risk and credit risk.

Market risk is the potential loss that may occur as a result of an adverse change in market price, rate or supply. We are exposed to the following market risks, including, but not limited to:

•Commodity price risk associated with our purchased power costs which include market fluctuations due to unpredictable factors such as weather, market speculation, transmission constraints, and other factors that may impact electric power supply and demand; and

•Interest rate risk associated with future debt, including reduced access to liquidity during periods of extreme capital markets volatility, such as the 2008 financial crisis and the COVID-19 pandemic.

We attempt to mitigate our credit exposure by conducting business primarily with high credit quality entities, setting tenor and credit limits commensurate with counterparty financial strength, obtaining master netting agreements, and mitigating credit exposure with less creditworthy counterparties through parental guarantees, cash collateral requirements, letters of credit, and other security agreements.

We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and the customers’ current creditworthiness, as determined by review of their current credit information. We maintain a provision for estimated credit losses based upon historical experience, changes in current market conditions, expected losses and any specific customer collection issue that is identified.

We continue to monitor COVID-19 impacts and changes to customer load, consistency in customer payments, requests for deferred or discounted payments, and requests for changes to credit limits to quantify estimated future financial impacts to the allowance for credit losses. During the three and nine months ended September 30, 2020, the potential economic impact of the COVID-19 pandemic was considered in forward looking projections related to write-off and recovery rates, and resulted in increases to the allowance for credit losses and bad debt expense of $0.1 million and $0.2 million, respectively. See Note 3 for further information.

We have wholesale power purchase and sale contracts used to manage purchased power costs and customer load requirements associated with serving our electric customers that are considered derivative instruments due to not qualifying for the normal purchase and normal sales exception to derivative accounting. Changes in the fair value of these commodity derivatives are recorded in Fuel and purchased power.

The contract or notional amounts and terms of the derivative commodity instruments held at our utility are composed of both long and short positions. We were in a net long position as of:

September 30, 2020

December 31, 2019

MWh

Maximum
Term
(months)

MWh

Maximum
Term
(months)

Wholesale power contracts (a)

55,225

—

From time to time we utilize risk management contracts including interest rate swaps to fix the interest on variable rate debt or to lock in the Treasury yield component associated with anticipated issuance of senior notes. For swaps that settled in connection with the issuance of senior debt, the loss is deferred as a component in AOCI and recognized as interest expense over the life of the senior note. As of September 30, 2020, we had no outstanding interest rate swap agreements.

As required by accounting standards for derivatives and hedges, fair values within the following tables are presented on a gross basis aside from the netting of asset and liability positions. Netting of positions is permitted in accordance with accounting standards for offsetting and under terms of our master netting agreements that allow us to settle positive and negative positions.

The following table presents the fair value and balance sheet classification of our derivative instruments (in thousands) as of:


	Balance Sheet Location	September 30, 2020		December 31, 2019

Derivatives not designated as hedges:


Liability derivative instruments:
Current commodity derivatives	Accrued liabilities	$	228	$	—
Total derivatives not designated as hedges		$	228	$	—

The impacts of cash flow hedges on our Condensed Statements of Comprehensive Income are presented below for the three and nine months ended September 30, 2020 and 2019. Derivatives designated as cash flow hedges relate to a treasury lock entered into in August 2002 to hedge $50 million of our First Mortgage Bonds due on August 15, 2032. The treasury lock cash settled on August 8, 2002, the bond pricing date, and resulted in a $1.8 million loss. The treasury lock is treated as a cash flow hedge and the resulting loss is carried in Accumulated other comprehensive loss and is being amortized over the life of the related bonds.


		Three Months Ended September 30,			Nine Months Ended September 30,
			2020		2019		2020		2019
Derivatives in Cash Flow Hedging Relationships	Income Statement Location	Amount of Gain/(Loss) Reclassified from AOCI into Income
		(in thousands)			(in thousands)
Interest rate swaps		Interest expense	$	(16)	$	(16)	$	(48)	$	(48)
Total			$	(16)	$	(16)	$	(48)	$	(48)

The following table summarizes the impacts of derivative instruments not designated as hedge instruments on our Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019. Note that this presentation does not reflect gains or losses arising from the underlying physical transactions; therefore, it is not indicative of the economic profit or loss we realized when the underlying physical and financial transactions were settled.


		Three Months Ended September 30,
		2020		2019
Derivatives Not Designated as Hedging Instruments	Income Statement Location	Amount of Gain/(Loss) on Derivatives Recognized in Income
		(in thousands)
Commodity derivatives	Fuel and purchased power	$	(1,386)	$	—
Commodity derivatives	Other income (expense), net	—		142
		$	(1,386)	$	142


		Nine Months Ended September 30,
		2020		2019
Derivatives Not Designated as Hedging Instruments	Income Statement Location	Amount of Gain/(Loss) on Derivatives Recognized in Income
		(in thousands)
Commodity derivatives	Fuel and purchased power	$	(228)	$	—
Commodity derivatives	Other income (expense), net	—		142
		$	(228)	$	142

As discussed above, financial instruments used to manage lowest cost resources for our customers are not designated as cash flow hedges. The unrealized gains and losses arising from these derivatives are recognized in the Condensed Statements of Comprehensive Income.

We use the following fair value hierarchy for determining inputs for our financial instruments. Our assets and liabilities for financial instruments are classified and disclosed in one of the following fair value categories:

Level 1 — Unadjusted quoted prices available in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities. Level 1 instruments primarily consist of highly liquid and actively traded financial instruments with quoted pricing information on an ongoing basis.

Level 2 — Pricing inputs include quoted prices for identical or similar assets and liabilities in active markets other than quoted prices in Level 1, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 — Pricing inputs are generally less observable from objective sources. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels. We record transfers, if necessary, between levels at the end of the reporting period for all of our financial instruments.

Transfers into Level 3, if any, occur when significant inputs used to value the derivative instruments become less observable, such as a significant decrease in the frequency and volume in which the instrument is traded, negatively impacting the availability of observable pricing inputs. Transfers out of Level 3, if any, occur when the significant inputs become more observable, such as when the time between the valuation date and the delivery date of a transaction becomes shorter, positively impacting the availability of observable pricing inputs. We currently do not have any Level 3 financial instruments.

Our commodity contracts are valued using the market approach and include wholesale power contracts that do not meet the normal purchases and normal sales exception. For these derivative instruments, the fair value is obtained by utilizing a nationally recognized service that obtains observable inputs to compute the fair value.


	As of September 30, 2020
	Level 1		Level 2		Level 3		Cash Collateral and Counterparty Netting		Total
	(in thousands)
Liabilities:
Commodity derivatives	$	—	$	228	$	—	$	—	228

As of December 31, 2019

Level 1

Level 2

Level 3

Cash Collateral and Counterparty
Netting

Total

(in thousands)

Liabilities:

Commodity derivatives

—

Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about the fair value measurements of their assets of a defined benefit pension or other postretirement plan. The fair value of these assets was presented in Note 12 to the Financial Statements included in our 2019 Annual Report on Form 10-K.

The Company has concluded that the market volatility associated with COVID-19 does not require interim re-measurement of our pension plan assets or defined benefit obligations.


	September 30, 2020				December 31, 2019
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current maturities (a)	$	337,426	$	497,565	$	340,176	$	458,286

(a) Long-term debt is valued based on observable inputs available either directly or indirectly for similar liabilities in active markets and therefore is classified in Level 2 in the fair value hierarchy. Carrying amount of long-term debt is net of deferred financing costs.