Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Liabilities

Fair Value of Financial Assets and Liabilities

Fair Value Measurements

The accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires certain disclosures about assets and liabilities measured at fair value.  SPS had no assets or liabilities measured at fair value on a recurring basis as of Sept. 30, 2013 and Dec. 31, 2012.

Derivative Instruments

SPS may enter into derivative instruments, including forward contracts, futures, swaps and options, to manage risk in connection with changes in interest rates and electric utility commodity prices.

At Sept. 30, 2013 and Dec. 31, 2012, derivative instruments presented on SPS’ balance sheets consist of amounts related to long-term purchased power agreements.  In 2003, as a result of implementing new guidance on the normal purchase exception for derivative accounting, SPS began recording several long-term purchased power agreements at fair value due to accounting requirements related to underlying price adjustments.  As these purchases are recovered through normal regulatory recovery mechanisms in the respective jurisdictions, the changes in fair value for these contracts were offset by regulatory assets and liabilities.  During 2006, SPS qualified these contracts under the normal purchase exception.  Based on this qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts will be amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.

Interest Rate Derivatives — SPS may enter into various instruments that effectively fix the interest payments on certain floating rate debt obligations or effectively fix the yield or price on a specified benchmark interest rate for an anticipated debt issuance for a specific period.  These derivative instruments are generally designated as cash flow hedges for accounting purposes.

At Sept. 30, 2013, accumulated other comprehensive losses related to interest rate derivatives included $0.2 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings.

Pre-tax losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings during the three months ended Sept. 30, 2013 and 2012 were $0.1 million. Pre-tax losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings during the nine months ended Sept. 30, 2013 and 2012 were $0.2 million.

Wholesale and Commodity Trading Risk — SPS conducts various wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy and energy-related instruments.  SPS’ risk management policy allows management to conduct these activities within guidelines and limitations as approved by its risk management committee, which is made up of management personnel not directly involved in the activities governed by this policy.

Commodity Derivatives — SPS may enter into derivative instruments to manage variability of future cash flows from changes in commodity prices in its electric utility operations.  This could include the purchase or sale of energy or energy-related products.  At Sept. 30, 2013 and Dec. 31, 2012, SPS held no commodity derivatives.  Changes in the fair value of non-trading commodity derivative instruments are recorded in other comprehensive income or deferred as a regulatory asset or liability.  The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.

Consideration of Credit Risk and Concentrations — SPS continuously monitors the creditworthiness of the counterparties to its interest rate and commodity derivative contracts prior to settlement, and assesses each counterparty’s ability to perform on the transactions set forth in the contracts.

SPS employs additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees, standardized master netting agreements and termination provisions that allow for offsetting of positive and negative exposures.  Credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided.

SPS’ most significant concentrations of credit risk with particular entities or industries are contracts with counterparties to its wholesale activities.  At Sept. 30, 2013, two of SPS’ 10 most significant counterparties for these activities, comprising $21.5 million or 20 percent of this credit exposure at Sept. 30, 2013, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings.  Seven of the 10 most significant counterparties, comprising $59.0 million or 54 percent of this credit exposure at Sept. 30, 2013, were not rated by these agencies, but based on SPS’ internal analysis, had credit quality consistent with investment grade.  Another of these significant counterparties, comprising $9.4 million or 9 percent of this credit exposure at Sept. 30, 2013, had credit quality less than investment grade, based on SPS’ internal analysis.  All 10 of these significant counterparties are municipal or cooperative electric entities, or other utilities.

Financial Impact of Qualifying Cash Flow Hedges — The impact of qualifying interest rate cash flow hedges on SPS’ accumulated other comprehensive loss, included as a component of common stockholder’s equity and in the statement of comprehensive income, is detailed in the following table:

	Three Months Ended Sept. 30
(Thousands of Dollars)	2013			2012
Accumulated other comprehensive loss related to cash flow hedges at July 1	$	(1,247	)	$	(1,418	)
After-tax net realized losses on derivative transactions reclassified into earnings	44			43
Accumulated other comprehensive loss related to cash flow hedges at Sept. 30	$	(1,203	)	$	(1,375	)

	Nine Months Ended Sept. 30
(Thousands of Dollars)	2013			2012
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1	$	(1,332	)	$	(1,504	)
After-tax net realized losses on derivative transactions reclassified into earnings	129			129
Accumulated other comprehensive loss related to cash flow hedges at Sept. 30	$	(1,203	)	$	(1,375	)

Fair Value of Long-Term Debt

As of Sept. 30, 2013 and Dec. 31, 2012, other financial instruments for which the carrying amount did not equal fair value were as follows:

	Sept. 30, 2013				Dec 31, 2012
(Thousands of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	1,199,783	$	1,325,672	$	1,103,684	$	1,327,538

The fair value of SPS’ long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities.  The fair value estimates are based on information available to management as of Sept. 30, 2013 and Dec. 31, 2012, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.