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):



	June 30, 2014				December 31, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Pollution Control Bonds	$	193,135	$	207,424	$	193,135	$	193,990
Senior Notes	696,530		856,280		696,485		734,515
RGRT Senior Notes (1)	110,000		117,385		110,000		115,850
RCF (1)	97,772		97,772		14,352		14,352
Total	$	1,097,437	$	1,278,861	$	1,013,972	$	1,058,707

_______________

(1)

Nuclear fuel financing as of June 30, 2014 and December 31, 2013 is funded through the $110 million RGRT Senior Notes and $16.8 million and $14.4 million, respectively under the RCF. As of June 30, 2014, $81.0 million was outstanding under the RCF for working capital or general corporate purposes. As of December 31, 2013, no amount was outstanding under the RCF for working capital or general corporate purposes. The interest rate on the Company's borrowings under the RCF is reset throughout the quarter reflecting current market rates. Consequently, the carrying value approximates 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 $225.7 million and $214.1 million at June 30, 2014 and December 31, 2013, 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):



	June 30, 2014
	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	$	—	$	—		$	2,422	$	(110	)	$	2,422	$	(110	)
U.S. Government Bonds	—		—			15,900		(792		)	15,900		(792		)
Municipal Obligations	2,520		(46		)	14,608		(621		)	17,128		(667		)
Corporate Obligations	500		(4		)	1,814		(54		)	2,314		(58		)
Total Debt Securities	3,020		(50		)	34,744		(1,577		)	37,764		(1,627		)
Common Stock	517		(6		)	410		(33		)	927		(39		)
Total Temporarily Impaired Securities	$	3,537	$	(56	)	$	35,154	$	(1,610	)	$	38,691	$	(1,666	)

_________________


(1)	Includes approximately 97 securities.



	December 31, 2013
	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	$	6,444	$	(169	)	$	1,421	$	(119	)	$	7,865	$	(288	)
U.S. Government Bonds	8,114		(245		)	10,866		(840		)	18,980		(1,085		)
Municipal Obligations	12,286		(335		)	7,782		(479		)	20,068		(814		)
Corporate Obligations	3,284		(96		)	901		(54		)	4,185		(150		)
Total Debt Securities	30,128		(845		)	20,970		(1,492		)	51,098		(2,337		)
Common Stock	2,305		(126		)	—		—			2,305		(126		)
Total Temporarily Impaired Securities	$	32,433	$	(971	)	$	20,970	$	(1,492	)	$	53,403	$	(2,463	)

_________________


(2)	Includes approximately 122 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 does not anticipate expending 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):



	June 30, 2014				December 31, 2013
	Fair Value		Unrealized Gains		Fair Value		Unrealized Gains
Description of Securities:
Federal Agency Mortgage Backed Securities	$	14,602	$	676	$	9,929	$	433
U.S. Government Bonds	12,929		285		6,258		126
Municipal Obligations	13,639		625		8,783		450
Corporate Obligations	11,791		874		9,188		506
Total Debt Securities	52,961		2,460		34,158		1,515
Common Stock	111,783		48,088		103,808		43,145
Common Collective Trust-Equity Funds	17,542		498		—		—
Equity Mutual Funds	—		—		16,802		3,081
Cash and Cash Equivalents	4,736		—		5,924		—
Total	$	187,022	$	51,046	$	160,692	$	47,741

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 ten years or more. The mortgage-backed securities have an estimated weighted average maturity which generally range from three years to eight years and reflects anticipated future prepayments. The contractual year for maturity of these available-for-sale securities as of June 30, 2014 is as follows (in thousands):



	Total		2014		2015 through 2018		2019 through 2023		2024 and Beyond
Municipal Debt Obligations	$	30,767	$	401	$	12,787	$	13,939	$	3,640
Corporate Debt Obligations	14,105		—		3,311		6,422		4,372
U.S. Government Bonds	28,829		1,202		14,341		6,524		6,762

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. The Company did not recognize other than temporary impairment losses on its available-for-sale securities in the three, six and twelve month periods ending June 30, 2014. The Company did not recognize other than temporary impairment losses on its available-for-sale securities in the three and six month periods ending June 30, 2013, however for the twelve months ended June 30, 2013 a $0.3 million other than temporary impairment losses was recognized.

The Company's marketable securities in its decommissioning trust funds are sold from time to time and the Company uses the specific identification basis to determine the amount to reclassify out of accumulated other comprehensive income and into net income. The proceeds from the sale of these securities and the related effects on pre-tax income are as follows (in thousands):



	Three Months Ended						Six Months Ended						Twelve Months Ended
	June 30,						June 30,						June 30,
	2014			2013			2014			2013			2014			2013
Proceeds from sales or maturities of available-for-sale securities	$	7,547		$	11,455		$	36,374		$	22,362		$	70,160		$	61,391
Gross realized gains included in pre-tax income	$	249		$	342		$	3,263		$	381		$	3,868		$	780
Gross realized losses included in pre-tax income	(147		)	(96		)	(296		)	(293		)	(436		)	(187		)
Gross unrealized losses included in pre-tax income	—			—			—			—			—			(313		)
Net gains in pre-tax income	$	102		$	246		$	2,967		$	88		$	3,432		$	280
Net unrealized holding gains (losses) included in accumulated other comprehensive income	$	6,070		$	(2,232	)	$	7,068		$	4,561		$	20,206		$	8,671
Net gains reclassified out of accumulated other comprehensive income	(102		)	(246		)	(2,967		)	(88		)	(3,432		)	(280		)
Net gains (losses) in other comprehensive income	$	5,968		$	(2,478	)	$	4,101		$	4,473		$	16,774		$	8,391

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 investment in debt securities which are included in deferred charges and other assets on the 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. The Common Collective Trusts are valued using the net asset value ("NAV") provided by the administrator of the fund. The NAV price is quoted on a restrictive market although the underlying investments are traded on active markets.


•	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 are the Company's investment 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.

During the first quarter of 2014, the Company sold its nuclear decommissioning trust investments in equity mutual funds, classified as Level 1, and invested those assets in common collective trusts which are classified as Level 2. The fair value of the Company's decommissioning trust funds and investment in debt securities, at June 30, 2014 and December 31, 2013, 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 June 30, 2014		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	$	1,621	$	—	$	—	$	1,621
Available for sale:
U.S. Government Bonds	$	28,829	$	28,829	$	—	$	—
Federal Agency Mortgage Backed Securities	17,024		—		17,024		—
Municipal Obligations	30,767		—		30,767		—
Corporate Obligations	14,105		—		14,105		—
Subtotal, Debt Securities	90,725		28,829		61,896		—
Common Stock	112,710		112,710		—		—
Common Collective Trust-Equity Funds	17,542		—		17,542		—
Cash and Cash Equivalents	4,736		4,736		—		—
Total available for sale	$	225,713	$	146,275	$	79,438	$	—



Description of Securities	Fair Value as of December 31, 2013		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	$	1,555	$	—	$	—	$	1,555
Available for sale:
U.S. Government Bonds	$	25,238	$	25,238	$	—	$	—
Federal Agency Mortgage Backed Securities	17,794		—		17,794		—
Municipal Obligations	28,851		—		28,851		—
Corporate Obligations	13,373		—		13,373		—
Subtotal, Debt Securities	85,256		25,238		60,018		—
Common Stock	106,113		106,113		—		—
Equity Mutual Funds	16,802		16,802		—		—
Cash and Cash Equivalents	5,924		5,924		—		—
Total available for sale	$	214,095	$	154,077	$	60,018	$	—

There were no transfers in or out of Level 1 and Level 2 fair value measurements categories due to changes in observable inputs during the three, six and twelve month periods ending June 30, 2014 and 2013. There were no purchases, sales, issuances, and settlements related to the assets in the Level 3 fair value measurement category during the three, six and twelve months ended June 30, 2014 and 2013.