Financial Instruments and Investments (Notes)

12 Months Ended

Dec. 31, 2012

Financial Instruments And Investments [Abstract]

Financial Instruments and Investments

Financial Instruments and Investments

FASB guidance requires the Company to disclose estimated fair values for its financial instruments. The Company has determined that cash and temporary investments, investment in debt securities, accounts receivable, decommissioning trust funds, long-term debt, short-term borrowings under the RCF, accounts payable and customer deposits meet the definition of financial instruments. The carrying amounts of cash and temporary investments, accounts receivable, accounts payable and customer deposits approximate fair value because of the short maturity of these items. Investments in debt securities and decommissioning trust funds are carried at fair value.

Long-Term Debt and Short-Term Borrowings Under the RCF. The fair values of the Company's long-term debt and short-term borrowings under the RCF are based on estimated market prices for similar issues and are presented below (in thousands):

	December 31,
	2012				2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Pollution Control Bonds	$	193,135	$	215,228	$	193,135	$	206,756
Senior Notes	696,400		823,497		546,662		700,371
RGRT Senior Notes (1)	110,000		120,985		110,000		116,985
RCF (1)	22,155		22,155		33,379		33,379
Total	$	1,021,690	$	1,181,865	$	883,176	$	1,057,491

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(1) Nuclear fuel financing as of December 31, 2012 and December 31, 2011 is funded through the $110 million RGRT Senior Notes and $22.2 million and $13.4 million, respectively under the RCF. As of December 31, 2012, there was no amount outstanding under the RCF for working capital or general corporate purposes. As of December 31, 2011, $20.0 million was outstanding under the RCF for working capital and general corporate purposes. The interest rate on the Company’s borrowings under the RCF is reset throughout the period reflecting current market rates. Consequently, the carrying value approximates fair value.

Treasury Rate Locks. The Company entered into treasury rate lock agreements in 2005 to hedge against potential movements in the treasury reference interest rate pending the issuance of the 6% Senior Notes. The treasury rate lock agreements met the criteria for hedge accounting and were designated as a cash flow hedge. In accordance with cash flow hedge accounting, the Company recorded the loss associated with the fair value of the cash flow hedge, net of tax, as a component of accumulated other comprehensive loss and amortizes the accumulated comprehensive loss to earnings as interest expense over the life of the 6% Senior Notes. In 2013, approximately $0.4 million of this accumulated other comprehensive loss item will be reclassified to interest expense.

Contracts and Derivative Accounting. The Company uses commodity contracts to manage its exposure to price and availability risks for fuel purchases and power sales and purchases and these contracts generally have the characteristics of derivatives. The Company does not trade or use these instruments with the objective of earning financial gains on the commodity price fluctuations. The Company has determined that all such contracts outstanding at December 31, 2012, except for certain natural gas commodity contracts with optionality features, that had the characteristics of derivatives met the “normal purchases and normal sales” exception provided in FASB guidance for accounting for derivative instruments and hedging activities, and, as such, were not required to be accounted for as derivatives.

The Company determined that certain of its natural gas commodity contracts with optionality features are not eligible for the normal purchases exception and, therefore, are required to be accounted for as derivative instruments pursuant to FASB guidance for accounting for derivative instruments and hedging activities. However, as of December 31, 2012, the variable, market-based pricing provisions of existing gas contracts are such that these derivative instruments have no significant fair value.

Marketable Securities. The Company’s marketable securities, included in decommissioning trust funds in the balance sheets, are reported at fair value which was $187.1 million and $168.0 million at December 31, 2012 and 2011, respectively. These securities are classified as available for sale under FASB guidance for certain investments in debt and equity securities and are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. The reported fair values include gross unrealized losses on marketable securities whose impairment the Company has deemed to be temporary. The tables below present the gross unrealized losses and the fair value of these securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

	December 31, 2012
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Description of Securities (1):
Federal Agency Mortgage Backed Securities	$	1,792	$	(5	)	$	416	$	(9	)	$	2,208	$	(14	)
U.S. Government Bonds	6,633		(79		)	4,457		(114		)	11,090		(193		)
Municipal Obligations	5,306		(39		)	5,760		(241		)	11,066		(280		)
Corporate Obligations	452		(11		)	—		—			452		(11		)
Total Debt Securities	14,183		(134		)	10,633		(364		)	24,816		(498		)
Common Stock	3,603		(409		)	—		—			3,603		(409		)
Total Temporarily Impaired Securities	$	17,786	$	(543	)	$	10,633	$	(364	)	$	28,419	$	(907	)

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(1) Includes approximately 65 securities.

	December 31, 2011
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Description of Securities (2):
Federal Agency Mortgage Backed Securities	$	515	$	(8	)	$	1,233	$	(23	)	$	1,748	$	(31	)
U.S. Government Bonds	100		(1		)	2,413		(38		)	2,513		(39		)
Municipal Obligations	2,275		(31		)	4,731		(144		)	7,006		(175		)
Corporate Obligations	3,525		(118		)	1,234		(43		)	4,759		(161		)
Total Debt Securities	6,415		(158		)	9,611		(248		)	16,026		(406		)
Common stock	10,688		(2,065		)	1,740		(489		)	12,428		(2,554		)
Total Temporarily Impaired Securities	$	17,103	$	(2,223	)	$	11,351	$	(737	)	$	28,454	$	(2,960	)

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(2) Includes approximately 96 securities.

The Company monitors the length of time the security trades below its cost basis along with the amount and percentage of the unrealized loss in determining if a decline in fair value of marketable securities below recorded cost is considered to be other than temporary. In addition, the Company will research the future prospects of individual securities as necessary. As a result of these factors, as well as the Company’s intent and ability to hold these securities until their market price recovers, these securities are considered temporarily impaired. The Company will not have a requirement to expend monies held in trust before 2044 or a later period when the Company begins to decommission Palo Verde.

The reported fair values also include gross unrealized gains on marketable securities which have not been recognized in the Company’s net income. The table below presents the unrecognized gross unrealized gains and the fair value of these securities, aggregated by investment category (in thousands):

	December 31, 2012				December 31, 2011
	Fair Value		Unrealized Gains		Fair Value		Unrealized Gains
Description of Securities:
Federal Agency Mortgage Backed Securities	$	17,289	$	1,036	$	25,077	$	1,220
U.S. Government Bonds	13,295		678		10,263		972
Municipal Obligations	22,797		1,531		30,310		1,792
Corporate Obligations	12,378		1,134		7,641		459
Total Debt Securities	65,759		4,379		73,291		4,443
Common Stock	73,210		22,839		62,479		15,681
Mutual Funds - Equity	15,194		1,821		—		—
Cash and Cash Equivalents	4,471		—		3,739		—
Total	$	158,634	$	29,039	$	139,509	$	20,124

The Company’s marketable securities include investments in municipal, corporate and federal debt obligations. Substantially all of the Company’s mortgage-backed securities, based on contractual maturity, are due in 10 years or more. The mortgage-backed securities have an estimated weighted average maturity which generally range from 3 years to 7 years and reflects anticipated future prepayments. The contractual year for maturity for these available-for-sale securities as of December 31, 2012 is as follows (in thousands):

	Total		2013		2014 through 2017		2018 through 2022		2023 and Beyond
Municipal Debt Obligations	$	33,863	$	2,326	$	12,223	$	14,483	$	4,831
Corporate Debt Obligations	12,830		432		4,653		3,991		3,754
U.S. Government Bonds	24,385		3,174		7,287		8,605		5,319

The Company recognizes impairment losses on certain of its securities deemed to be other than temporary. In accordance with FASB guidance, these impairment losses are recognized in net income, and a lower cost basis is established for these securities. For the twelve months ended December 31, 2012, 2011, and 2010 the Company recognized other than temporary impairment losses on its available-for-sale securities as follows (in thousands):

	2012			2011			2010
Gross unrealized holding losses included in pre-tax income	$	(479	)	$	(2,116	)	$	(263	)

The Company’s marketable securities in its decommissioning trust funds are sold from time to time, and the Company uses the specific identification basis on which to determine the amount to reclassify out of accumulated other comprehensive income and into net income. The proceeds from the sale of these securities during the twelve months ended December 31, 2012, 2011, and 2010 and the related effects on pre-tax income are as follows (in thousands):

	2012			2011			2010
Proceeds from sales or maturities of available-for-sale securities	$	98,542		$	82,926		$	61,656
Gross realized gains included in pre-tax income	$	1,478		$	1,479		$	1,030
Gross realized losses included in pre-tax income	(2,041		)	(721		)	(889		)
Gross unrealized losses included in pre-tax income	(479		)	(2,116		)	(263		)
Net losses in pre-tax income	$	(1,042	)	$	(1,358	)	$	(122	)
Net unrealized holding gains included in accumulated other comprehensive income	$	9,927		$	1,570		$	6,665
Net losses reclassified out of accumulated other comprehensive income	1,042			1,358			122
Net gains in other comprehensive income	$	10,969		$	2,928		$	6,787

Fair Value Measurements. FASB guidance requires the Company to provide expanded quantitative disclosures for financial assets and liabilities recorded on the balance sheet at fair value. Financial assets carried at fair value include the Company's decommissioning trust investments and investments in debt securities which are included in deferred charges and other assets on the consolidated balance sheets. The Company has no liabilities that are measured at fair value on a recurring basis. The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

• Level 1 - Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Financial assets utilizing Level 1 inputs include the nuclear decommissioning trust investments in active exchange-traded equity securities, mutual funds and U.S. Treasury securities that are in a highly liquid and active market.

• Level 2 - Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Financial assets utilizing Level 2 inputs include the nuclear decommissioning trust investments in fixed income securities. The fair value of these financial instruments is based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences.

• Level 3 - Unobservable inputs using data that is not corroborated by market data and primarily based on internal Company analysis using models and various other analyses. Financial assets utilizing Level 3 inputs include the Company's investments in debt securities.

The securities in the Company’s decommissioning trust funds are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. FASB guidance identifies this valuation technique as the “market approach” with observable inputs. The Company analyzes available-for-sale securities to determine if losses are other than temporary.

The fair value of the Company’s decommissioning trust funds and investments in debt securities, at December 31, 2012 and 2011, and the level within the three levels of the fair value hierarchy defined by FASB guidance are presented in the table below (in thousands):

Description of Securities	Fair Value as  of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Trading Securities:
Investments in Debt Securities	$	1,295	$	—	$	—	$	1,295
Available for sale:
U.S. Government Bonds	$	24,385	$	24,385	$	—	$	—
Federal Agency Mortgage Backed Securities	19,497		—		19,497		—
Municipal Bonds	33,863		—		33,863		—
Corporate Asset Backed Obligations	12,830		—		12,830		—
Subtotal, Debt Securities	90,575		24,385		66,190		—
Common Stock	76,813		76,813		—		—
Mutual Funds - Equity	15,194		15,194		—		—
Cash and Cash Equivalents	4,471		4,471		—		—
Total available for sale	$	187,053	$	120,863	$	66,190	$	—

Description of Securities	Fair Value as  of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Trading Securities:
Investments in Debt Securities	$	1,120	$	—	$	—	$	1,120
Available for sale:
U.S. Government Bonds	$	12,776	$	12,776	$	—	$	—
Federal Agency Mortgage Backed Securities	26,825		—		26,825		—
Municipal Bonds	37,316		—		37,316		—
Corporate Asset Backed Obligations	12,400		—		12,400		—
Subtotal, Debt Securities	89,317		12,776		76,541		—
Common Stock	74,907		74,907		—		—
Cash and Cash Equivalents	3,739		3,739		—		—
Total available for sale	$	167,963	$	91,422	$	76,541	$	—

Below is a reconciliation of the beginning and ending balance of the fair value of the investment in debt securities (in thousands):

	2012		2011
Balance at January 1	$	1,120	$	2,909
Sale of debt security	—		(2,000		)
Realized gain on sale of debt security (a)	—		431
Net unrealized gains (losses) in fair value recognized in income on debt securities still held (a)	175		(220		)
Balance at December 31	$	1,295	$	1,120

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(a) These amounts are reflected in the Company's consolidated statement of operations as investment and interest income.

There were no transfers in and out of Level 1 and Level 2 fair value measurements categories during the twelve month periods ending December 31, 2012 and 2011. There were no purchases, issuances, and settlements related to the assets in the Level 3 fair value measurement category during the twelve month periods ending December 31, 2012 and 2011.