Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2011

Fair Value of Financial Assets and Liabilities [Abstract]

Fair Value of Financial Assets and Liabilities

8. Fair Value of Financial Assets and Liabilities

Fair Value Measurements

SPS had no assets or liabilities measured at fair value on a recurring basis as of Sept. 30, 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 Sept. 30, 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 each of the three months ended Sept. 30, 2011 and Sept. 30, 2010 were $0.1 million.  Accumulated other comprehensive losses related to interest rate derivatives reclassified into earnings during each of the nine months ended Sept. 30, 2011 and Sept. 30, 2010 were $0.2 million.

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 products.  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 Sept. 30, 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 the commission approved regulatory recovery mechanisms.

At Sept. 30, 2011 and Dec. 31, 2010, derivative instruments presented on SPS' balance sheets consists 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.

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

	Three Months Ended Sept. 30,
(Thousands of Dollars)	2011				2010
Accumulated other comprehensive loss related to cash flow hedges at July 1		$	(1,589	)		$	(1,762	)
After-tax net realized losses on derivative transactions reclassified into earnings			42				44
Accumulated other comprehensive loss related to cash flow hedges at Sept. 30		$	(1,547	)		$	(1,718	)

	Nine Months Ended Sept. 30,
(Thousands of Dollars)	2011				2010
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1		$	(1,675	)		$	(1,847	)
After-tax net realized losses on derivative transactions reclassified into earnings			128				129
Accumulated other comprehensive loss related to cash flow hedges at Sept. 30		$	(1,547	)		$	(1,718	)

Fair Value of Long-Term Debt

The historical cost and fair value of SPS' long-term debt are as follows:

	Sept. 30, 2011				Dec. 31, 2010
	Historical				Historical
(Thousands of Dollars)	Cost		Fair Value		Cost		Fair Value
Long-term debt, including current portion	$	993,208	$	1,153,366	$	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 Sept. 30, 2011 and Dec. 31, 2010.  These fair value estimates have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly.

As of Sept. 30, 2011 and Dec. 31, 2010, the historical cost of cash and cash equivalents, accounts receivable, accounts payable and short-term debt are representative of fair value because of the short-term nature of these instruments.