Financial Instruments and Investments

The 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 estimated 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):



	September 30, 2016				December 31, 2015
	Carrying Amount (1)		Estimated Fair Value		Carrying Amount (1)		Estimated Fair Value
Pollution Control Bonds	$	190,706	$	211,050	$	190,499	$	212,624
Senior Notes	993,004		1,207,162		837,475		829,864
RGRT Senior Notes (2)	94,768		100,465		94,686		100,345
RCF (2)	55,192		55,192		141,738		141,738
Total	$	1,333,670	$	1,573,869	$	1,264,398	$	1,284,571

_______________

(1)

The Company implemented ASU 2015-03, Interest - Imputation of Interest, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The impact of ASU 2015-03 on the Company's Balance Sheet was to reclassify $11.6 million of other deferred charges to long-term debt, net of current portion at December 31, 2015.

(2)

Nuclear fuel financing, as of September 30, 2016 and December 31, 2015, is funded through the $95 million RGRT Senior Notes and $36.2 million and $33.7 million, respectively under the RCF. As of September 30, 2016, $19.0 million was outstanding under the RCF for working capital or general corporate purposes. As of December 31, 2015, $108.0 million 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 $254.6 million and $239.0 million at September 30, 2016 and December 31, 2015, respectively. These securities are classified as available for sale and recorded at their estimated fair value using the FASB guidance for certain investments in debt and equity 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):



	September 30, 2016
	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	$	1,028	$	(9	)	$	—	$	—		$	1,028	$	(9	)
U.S. Government Bonds	8,728		(151		)	12,300		(526		)	21,028		(677		)
Municipal Obligations	4,692		(43		)	8,171		(515		)	12,863		(558		)
Corporate Obligations	3,380		(50		)	2,381		(138		)	5,761		(188		)
Total Debt Securities	17,828		(253		)	22,852		(1,179		)	40,680		(1,432		)
Common Stock	1,393		(124		)	—		—			1,393		(124		)
Institutional Equity Funds-International Equity	22,847		(249		)	—		—			22,847		(249		)
Total Temporarily Impaired Securities	$	42,068	$	(626	)	$	22,852	$	(1,179	)	$	64,920	$	(1,805	)

_________________


(1)	Includes 104 securities.



	December 31, 2015
	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	$	9,383	$	(97	)	$	1,113	$	(47	)	$	10,496	$	(144	)
U.S. Government Bonds	24,094		(310		)	14,272		(623		)	38,366		(933		)
Municipal Obligations	8,286		(160		)	7,388		(446		)	15,674		(606		)
Corporate Obligations	6,058		(722		)	2,307		(228		)	8,365		(950		)
Total Debt Securities	47,821		(1,289		)	25,080		(1,344		)	72,901		(2,633		)
Common Stock	3,584		(344		)	—		—			3,584		(344		)
Institutional Equity Funds-International Equity	22,454		(768		)	—		—			22,454		(768		)
Total Temporarily Impaired Securities	$	73,859	$	(2,401	)	$	25,080	$	(1,344	)	$	98,939	$	(3,745	)

_________________


(2)	Includes 133 securities.

The Company monitors the length of time specific securities trade below their 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. The Company recognizes impairment losses on certain of its securities deemed to be other than temporary. In accordance with the FASB guidance, these impairment losses are recognized in net income, and a lower cost basis is established for these securities. In addition, the Company will research the future prospects of individual securities as necessary. The Company does not anticipate expending monies held in trust before 2044 or a later period when decommissioning of Palo Verde begins.

For the three, nine and twelve months ended September 30, 2016 and 2015, the Company recognized other than temporary impairment losses on its available-for-sale securities as follow (in thousands):



	Three Months Ended					Nine Months Ended					Twelve Months Ended
	September 30,					September 30,					September 30,
	2016			2015		2016			2015		2016			2015
Unrealized holding losses included in pre-tax income	$	(196	)	$	—	$	(352	)	$	—	$	(690	)	$	—

The reported securities 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):



	September 30, 2016				December 31, 2015
	Fair Value		Unrealized Gains		Fair Value		Unrealized Gains
Description of Securities:
Federal Agency Mortgage Backed Securities	$	16,772	$	701	$	9,589	$	438
U.S. Government Bonds	35,711		1,285		12,033		136
Municipal Obligations	9,273		398		8,671		332
Corporate Obligations	18,368		1,347		10,110		368
Total Debt Securities	80,124		3,731		40,403		1,274
Common Stock	66,055		34,418		72,636		37,001
Equity Mutual Funds	35,552		1,995		18,853		91
Cash and Cash Equivalents	7,975		—		8,204		—
Total	$	189,706	$	40,144	$	140,096	$	38,366

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 two years to six years and reflects anticipated future prepayments. The contractual year for maturity of these available-for-sale securities as of September 30, 2016 is as follows (in thousands):



	Total		2016		2017 through 2020		2021 through 2025		2026 and Beyond
Municipal Debt Obligations	$	22,136	$	417	$	7,909	$	12,730	$	1,080
Corporate Debt Obligations	24,129		—		5,501		9,941		8,687
U.S. Government Bonds	56,739		—		29,297		14,542		12,900

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 from accumulated other comprehensive income into net income. The proceeds from the sale of these securities during the three, nine, and twelve months ended September 30, 2016 and 2015 and the related effects on pre-tax income are as follows (in thousands):



	Three Months Ended						Nine Months Ended						Twelve Months Ended
	September 30,						September 30,						September 30,
	2016			2015			2016			2015			2016			2015
Proceeds from sales or maturities of available-for-sale securities	$	19,453		$	26,618		$	60,165		$	63,776		$	98,956		$	124,732
Gross realized gains included in pre-tax income	$	2,446		$	4,515		$	6,687		$	8,330		$	10,736		$	12,467
Gross realized losses included in pre-tax income	(178		)	(191		)	(765		)	(443		)	(1,249		)	(1,021		)
Gross unrealized losses included in pre-tax income	(196		)	—			(352		)	—			(690		)	—
Net gains included in pre-tax income	$	2,072		$	4,324		$	5,570		$	7,887		$	8,797		$	11,446
Net unrealized holding gains (losses) included in accumulated other comprehensive income	$	4,313		$	(8,092	)	$	9,293		$	(8,641	)	$	15,028		$	(5,779	)
Net gains reclassified from accumulated other comprehensive income	(2,072		)	(4,324		)	(5,570		)	(7,887		)	(8,797		)	(11,446		)
Net gains (losses) in other comprehensive income	$	2,241		$	(12,416	)	$	3,723		$	(16,528	)	$	6,231		$	(17,225	)

Fair Value Measurements. The 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 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. The Institutional Funds are valued using the 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. During the third quarter of 2016, the Company re-evaluated the decommissioning trust funds investments as to whether they have a readily determinable fair value. Based on that re-evaluation, certain accounting policy, and NAV disclosures have been revised and now the investments in the Institutional Funds are categorized as Level 1.

•

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 analysis. 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. The 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 September 30, 2016 and December 31, 2015, and the level within the three levels of the fair value hierarchy defined by the FASB guidance are presented in the table below (in thousands):



Description of Securities	Fair Value as of September 30, 2016		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	$	1,398	$	—	$	—	$	1,398
Available for sale:
U.S. Government Bonds	$	56,739	$	56,739	$	—	$	—
Federal Agency Mortgage Backed Securities	17,800		—		17,800		—
Municipal Bonds	22,136		—		22,136		—
Corporate Asset Backed Obligations	24,129		—		24,129		—
Subtotal Debt Securities	120,804		56,739		64,065		—
Common Stock	67,448		67,448		—		—
Equity Mutual Funds	35,552		35,552		—		—
Institutional Funds-International Equity	22,847		22,847		—		—
Cash and Cash Equivalents	7,975		7,975		—		—
Total Available for Sale	$	254,626	$	190,561	$	64,065	$	—



Description of Securities	Fair Value as of December 31, 2015		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	$	1,543	$	—	$	—	$	1,543
Available for sale:
U.S. Government Bonds	$	50,399	$	50,399	$	—	$	—
Federal Agency Mortgage Backed Securities	20,085		—		20,085		—
Municipal Bonds	24,345		—		24,345		—
Corporate Asset Backed Obligations	18,475		—		18,475		—
Subtotal Debt Securities	113,304		50,399		62,905		—
Common Stock	76,220		76,220		—		—
Equity Mutual Funds	18,853		18,853		—		—
Institutional Funds-International Equity	22,454		22,454		—		—
Cash and Cash Equivalents	8,204		8,204		—		—
Total Available for Sale	$	239,035	$	176,130	$	62,905	$	—

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, nine and twelve month periods ended September 30, 2016 and 2015. There were no purchases, sales, issuances, and settlements related to the assets in the Level 3 fair value measurement category during the three, nine and twelve months ended September 30, 2016 and 2015.