Financial Instruments And Investments (Notes)

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Financial Instruments and Investments

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 (including restricted cash), 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): 

	June 30, 2019				December 31, 2018
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Pollution Control Bonds (1)	$	158,214	$	162,471	$	157,769	$	161,917
Senior Notes	1,118,140		1,322,280		1,117,943		1,244,310
RGRT Senior Notes (2)	109,563		114,390		109,507		111,440
RCF (2)	160,773		160,773		49,207		49,207
Total	$	1,546,690	$	1,759,914	$	1,434,426	$	1,566,874

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(1) On February 1, 2019 and April 1, 2019, the Company purchased in lieu of redemption the 2009 Series A 7.25% PCBs with an aggregate principal amount of $63.5 million and the 2009 Series B 7.25% PCBs with an aggregate principal amount of $37.1 million, respectively, utilizing funds borrowed under the RCF. On May 22, 2019, the Company reoffered and sold $63.5 million aggregate principal amount of 2009 Series A 7.25% PCBs and $37.1 million aggregate principal amount of 2009 Series B 7.25% PCBs with a fixed interest rate of 3.60% per annum until the bonds mature on February 1, 2040 and April 1, 2040, respectively. See Part I, Item 1, Financial Statements, Note M of Notes to Financial Statements for further discussion.

(2)

Nuclear fuel financing, as of June 30, 2019 and December 31, 2018, is funded through $110 million RGRT Senior Notes and $27.3 million and $26.2 million, respectively, under the RCF. As of June 30, 2019, $133.5 million was outstanding under the RCF for working capital and general corporate purposes. As of December 31, 2018, $23.0 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 $308.1 million and $276.9 million at June 30, 2019 and December 31, 2018, respectively. The investments in the Company's Palo Verde nuclear decommissioning trust funds ("NDT") are classified as available for sale debt securities, equity securities and temporary cash and cash equivalents restricted solely for investment in the NDT. These investments are recorded at their estimated fair value in accordance with FASB guidance for certain investments in debt and equity securities. On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall, which eliminates the requirements to classify investments in equity securities with readily determinable fair values as trading or available for sale and requires entities to recognize changes in fair value for these securities in net income as reported in the Statements of Operations. ASU 2016-01 requires a modified-retrospective approach and therefore, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The reported fair values include gross unrealized losses on securities classified as available for sale 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, 2019
	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	$	1,021	$	(20	)	$	6,654	$	(96	)	$	7,675	$	(116	)
U.S. Government Bonds	—		—			19,763		(867		)	19,763		(867		)
Municipal Debt Obligations	4,800		(315		)	751		(70		)	5,551		(385		)
Corporate Debt Obligations	777		(2		)	4,706		(154		)	5,483		(156		)
Total	$	6,598	$	(337	)	$	31,874	$	(1,187	)	$	38,472	$	(1,524	)

 

_________________

(1) Includes 67 securities.

	December 31, 2018
	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	$	6,187	$	(36	)	$	14,567	$	(510	)	$	20,754	$	(546	)
U.S. Government Bonds	4,005		(9		)	36,615		(1,663		)	40,620		(1,672		)
Municipal Debt Obligations	3,100		(74		)	9,037		(723		)	12,137		(797		)
Corporate Debt Obligations	22,259		(763		)	11,231		(731		)	33,490		(1,494		)
Total	$	35,551	$	(882	)	$	71,450	$	(3,627	)	$	107,001	$	(4,509	)

 

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(2) Includes 156 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 below recorded cost of debt securities classified as available for sale is considered to be other than temporary. The Company recognizes impairment losses on certain of its available for sale debt 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, six and twelve months ended June 30, 2019 and 2018, the Company did not recognize any other than temporary impairment losses on its available-for-sale securities.

Investments categorized as available for sale securities also include gross unrealized gains 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, 2019				December 31, 2018
	Fair Value		Unrealized Gains		Fair Value		Unrealized Gains
Description of Securities:
Federal Agency Mortgage Backed Securities	$	21,809	$	466	$	9,959	$	176
U.S. Government Bonds	32,620		1,071		6,987		149
Municipal Debt Obligations	4,476		341		1,952		120
Corporate Debt Obligations	41,866		2,052		8,283		222
Total Debt Securities	$	100,771	$	3,930	$	27,181	$	667

The Company's marketable securities include investments in mortgage backed securities, municipal, corporate and federal debt obligations. The contractual year of maturity for these available-for-sale debt securities as of June 30, 2019, is as follows (in thousands): 

	Total		2019		2020 through 2023		2024 through 2028		2029 and Beyond
Federal Agency Mortgage Backed Securities	$	29,484	$	—	$	11	$	483	$	28,990
U.S. Government Bonds	52,383		2,355		22,697		21,866		5,465
Municipal Debt Obligations	10,027		378		3,725		3,472		2,452
Corporate Debt Obligations	47,349		—		19,676		14,243		13,430
Total Available for Sale Debt Securities	$	139,243	$	2,733	$	46,109	$	40,064	$	50,337

The Company's available for sale securities in the NDT are sold from time to time and the Company uses the specific identification basis to determine the amount to reclassify from AOCI into net income. The proceeds from the sale of these securities during the three, six and twelve months ended June 30, 2019 and 2018, 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,
	2019			2018			2019			2018			2019			2018
Proceeds from sales or maturities of available-for-sale securities	$	7,116		$	2,608		$	22,887		$	14,365		$	34,477		$	48,871
Gross realized gains included in pre-tax income	$	55		$	—		$	113		$	9		$	121		$	3,873
Gross realized losses included in pre-tax income	(196		)	(147		)	(1,083		)	(674		)	(1,871		)	(1,269		)
Net gains (losses) included in pre-tax income	$	(141	)	$	(147	)	$	(970	)	$	(665	)	$	(1,750	)	$	2,604

Upon the adoption of ASU 2016-01, Financial Instruments - Overall, on January 1, 2018, the Company records, on a modified-retrospective basis, changes in fair market value for equity securities held in the NDT in the Statements of Operations. The unrealized gains and losses recognized during the three and six months ended June 30, 2019 and 2018, and related effects on pre-tax income are as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net gains recognized on equity securities	$	5,367	$	3,249	$	22,185	$	1,258
Less: Net gains recognized on equity securities sold	158		2,266		286		4,056
Unrealized gains and (losses) recognized on equity securities still held at reporting date	$	5,209	$	983	$	21,899	$	(2,798	)

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 NDT 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 - International Equity investments 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. The NAV used for determining the fair value of the Institutional Funds-International Equity investments have readily determinable fair values. Accordingly, such fund values 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 NDT 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 NDT 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 NDT and investments in debt securities at June 30, 2019 and December 31, 2018, 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 June 30, 2019		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	$	1,622	$	—	$	—	$	1,622
Equity Securities:
Domestic	$	132,183	$	132,183	$	—	$	—
International	27,462		27,462		—		—
Total Equity Securities	159,645		159,645		—		—
Available for Sale Debt Securities:
Federal Agency Mortgage Backed Securities	29,484		—		29,484		—
U.S. Government Bonds	52,383		52,383		—		—
Municipal Debt Obligations	10,027		—		10,027		—
Corporate Debt Obligations	47,349		—		47,349		—
Total Available for Sale Debt Securities	139,243		52,383		86,860		—
Cash and Cash Equivalents	9,176		9,176		—		—
Total	$	308,064	$	221,204	$	86,860	$	—

Description of Securities	Fair Value as of December 31, 2018		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	$	1,656	$	—	$	—	$	1,656
Equity Securities:
Domestic	$	111,325	$	111,325	$	—	$	—
International	24,540		24,540		—		—
Total Equity Securities	135,865		135,865		—		—
Available for Sale Debt Securities:
Federal Agency Mortgage Backed Securities	30,713		—		30,713		—
U.S. Government Bonds	47,607		47,607		—		—
Municipal Debt Obligations	14,089		—		14,089		—
Corporate Debt Obligations	41,773		—		41,773		—
Total Available for Sale Debt Securities	134,182		47,607		86,575		—
Cash and Cash Equivalents	6,858		6,858		—		—
Total	$	276,905	$	190,330	$	86,575	$	—

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 months ended June 30, 2019 and 2018. 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, 2019 and 2018.