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Fair Value of Financial Assets and Liabilities
12 Months Ended
Dec. 31, 2011
Fair Value of Financial Assets and Liabilities [Abstract]  
Fair Value of Financial Assets and Liabilities
9. 
Fair Value of Financial Assets and Liabilities

Fair Value Measurements

SPS had no derivative instruments measured at fair value on a recurring basis as of Dec. 31, 2011 and Dec. 31, 2010.

Derivative Instruments

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

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 Dec. 31, 2011, 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.
Accumulated other comprehensive losses related to interest rate derivatives reclassified into earnings during the years ended Dec. 31, 2011 and Dec. 31, 2010 were $0.3 million.

During the fourth quarter of 2009, SPS settled a $25 million notional value interest rate swap.  The interest rate swap was not designated as a hedging instrument, and as such, $2.5 million of changes in fair value of the swap were recorded to earnings for the swap during the year ended Dec. 31, 2009.

Short-Term Wholesale and Commodity Trading Risk - SPS conducts an immaterial amount of short-term 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 the 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 Dec. 31, 2011 and Dec. 31, 2010, 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.
 
The following table shows the major components of derivative instruments valuation in the balance sheets:

   
Dec. 31, 2011
  
Dec. 31, 2010
 
   
Derivative
  
Derivative
  
Derivative
  
Derivative
 
   
Instruments -
  
Instruments -
  
Instruments -
  
Instruments -
 
(Thousands of Dollars)
 
Assets
  
Liabilities
  
Assets
  
Liabilities
 
Long-term purchased power agreements
 $64,733  $44,992  $72,626  $48,592 

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.

Financial Impact of Qualifying Cash Flow Hedges - The impact of qualifying interest rate cash flow hedges on SPS' accumulated other comprehensive income, included in the statements of common stockholder's equity and comprehensive income, is detailed in the following table:

(Thousands of Dollars)
 
2011
  
2010
  
2009
 
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1
 $(1,675) $(1,847) $(5,559)
After-tax net realized losses on derivative transactions reclassified into earnings
  171   172   3,712 
Accumulated other comprehensive loss related to cash flow hedges at Dec. 31
 $(1,504) $(1,675) $(1,847)

Fair Value of Long-Term Debt

As of Dec. 31, 2011 and 2010, other financial instruments for which the carrying amount did not equal fair value were as follows:

   
2011
  
2010
 
(Thousands of Dollars)
 
Carrying
Amount
  
Fair Value
  
Carrying
Amount
  
Fair Value
 
Long-term debt, including current portion
 $993,314  $1,176,020  $897,767  $989,789 

The fair value of SPS' long-term debt is estimated based on the quoted market prices for the same or similar issues, or the current rates for debt of the same remaining maturities and credit quality.  The fair value estimates presented are based on information available to management as of Dec. 31, 2011 and 2010.  These fair value estimates have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair values may differ significantly.