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Fair Value of Derivative and Other Financial Instruments | 3 Months Ended
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Mar. 31, 2012
Fair Value of Derivative and Other Financial Instruments [Abstract] |
Fair Value of Derivative and Other Financial Instruments | Fair Value of Derivative and Other Financial Instruments Energy Related Derivative Contracts Overview The primary objective for the use of derivative instruments, including energy contracts, options, and futures, is to manage price risk associated with forecasted purchases of energy or fuel used to generate electricity, or to manage anticipated generation capacity in excess of forecasted demand from existing customers. The Company's energy related derivative contracts are designed to manage commodity risk. Additional information concerning the Company's energy related derivative contracts, including how commodity risk is managed, is contained in Note 8 of the Notes to Consolidated Financial Statements in the 2011 Annual Reports on Form 10-K. On November 1, 2011, PNMR completed the sale of First Choice. See Note 14. Accordingly, First Choice information after October 31, 2011 is not included. The difference between PNMR and PNM amounts represents First Choice. Accounting for Derivatives Energy contracts that meet the definition of a derivative under GAAP and do not qualify, or are not designated, for the normal sales and purchases exception are recorded on the balance sheet at fair value at each period end. The changes in fair value are recognized in earnings unless specific hedge accounting criteria are met and elected. Normal sales and purchases are not marked to market and are reflected in results of operations when the underlying transactions settle. The Company had no designated cash flow or fair value hedges related to commodity derivatives in the year ended December 31, 2011 and the three months ended March 31, 2012. The contracts recorded at fair value that do not qualify or are not designated for cash flow hedge accounting are classified as economic hedges. Economic hedges are defined as derivative instruments, including long-term power agreements, used to economically hedge generation assets, purchased power and fuel costs, and customer load requirements. Changes in the fair value of economic hedges are reflected in results of operations and are classified between operating revenues and cost of energy according to the intent of the hedge. The Company has no trading transactions. The Company does not offset fair value, cash collateral, and accrued payable or receivable amounts recognized for derivative instruments under master netting arrangements. At March 31, 2012 and December 31, 2011, amounts posted as cash collateral under margin arrangements were $3.5 million and $1.8 million for both PNMR and PNM. Cash collateral amounts are included in other current assets on the Condensed Consolidated Balance Sheets. At March 31, 2012 and December 31, 2011, PNMR and PNM had no legal right to reclaim cash collateral or obligations to return cash collateral. Commodity Derivatives Commodity derivative instruments are summarized as follows:
| Economic Hedges
| March 31, 2012 |  | December 31, 2011
PNMR and PNM | (In thousands)
Current assets | $ | 7,003 |  |  | $ | 3,713 |
Deferred charges | 799 |  |  | — |
| 7,802 |  |  | 3,713 |
Current liabilities | (2,169 | ) |  | (1,632 | )
Long-term liabilities | (2,568 | ) |  | (2,437 | )
| (4,737 | ) |  | (4,069 | )
Net | $ | 3,065 |  |  | $ | (356 | )
In April 2010, PNM received NMPRC approval of a hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. The table above includes $0.8 million of current assets and current liabilities at March 31, 2012, and $0.5 million of current assets and current liabilities at December 31, 2011 related to this plan. The offsets to these amounts are recorded as regulatory assets and liabilities on the Condensed Consolidated Balance Sheets. The following table presents the effect of commodity derivative instruments on earnings, excluding income tax effects.
| Economic Hedges
| Three Months Ended March 31,
| 2012 |  | 2011
PNMR | (In thousands)
Electric operating revenues | $ | 5,218 |  |  | $ | 1,144 |
Cost of energy | (604 | ) |  | 4,680 |
Total gain | $ | 4,614 |  |  | $ | 5,824 |
PNM |  |  |
Electric operating revenues | $ | 5,218 |  |  | $ | 1,144 |
Cost of energy | (604 | ) |  | 443 |
Total gain | $ | 4,614 |  |  | $ | 1,587 |
Commodity contract volume positions are presented in Decatherms for gas related contracts and in MWh for power related contracts. The table below presents PNMR’s and PNM’s net buy (sell) volume positions:
| Economic Hedges
| Decatherms |  | MWh
March 31, 2012 |  |  |
PNMR and PNM | 1,275,000 |  |  | (1,390,722 | )
December 31, 2011 |  |  |
PNMR and PNM | 1,499,000 |  |  | (366,448 | )
In connection with managing its commodity risks, the Company enters into master agreements with certain counterparties. If the Company is in a net liability position under an agreement, some agreements provide that the counterparties can request collateral from the Company if the Company’s credit rating is downgraded; other agreements provide that the counterparty may request collateral to provide it with “adequate assurance” that the Company will perform; and others have no provision for collateral. The table below presents information about the Company’s contingent requirements to provide collateral under commodity contracts having an objectively determinable collateral provision that are in net liability positions and are not fully collateralized with cash. Contractual liability represents commodity derivative contracts recorded at fair value on the balance sheet, determined on an individual contract basis without offsetting amounts for individual contracts that are in an asset position and could be offset under master netting agreements with the same counterparty. The table only reflects cash collateral that has been posted under the existing contracts and does not reflect letters of credit under the Company’s revolving credit facilities that have been issued as collateral. Net exposure is the net contractual liability for all contracts, including those designated as normal purchases and sales, offset by existing cash collateral and by any offsets available under master netting agreements, including both asset and liability positions.
Contingent Feature – Credit Rating Downgrade |  | Contractual Liability |  | Existing Cash Collateral |  | Net Exposure
|  | (In thousands)
March 31, 2012 |  |  |  |  |  |
PNMR and PNM |  | $ | 4,613 |  |  | $ | — |  |  | $ | 4,613 |
December 31, 2011 |  |  |  |  |  |
PNMR and PNM |  | $ | 4,036 |  |  | $ | — |  |  | $ | 4,036 |
Sale of Power from PVNGS Unit 3 Since January 1, 2011, PNM has been selling power from its interest in PVNGS Unit 3 daily at market prices. PNM has established fixed rates for the majority of these sales through the end of 2012 through hedging arrangements that are accounted for as economic hedges, and is partially hedged into 2013. Non-Derivative Financial Instruments The carrying amounts reflected on the Condensed Consolidated Balance Sheets approximate fair value for cash, receivables, and payables due to the short period of maturity. Available-for-sale securities are carried at fair value. Available-for-sale securities for PNMR and PNM consist of PNM assets held in the NDT for its share of decommissioning costs of PVNGS. PNMR and PNM do not have any unrealized losses on available-for-sale securities. The fair value and gross unrealized gains of investments in available-for-sale securities are presented in the following table.
| March 31, 2012 |  | December 31, 2011
| Unrealized Gains |  | Fair Value |  | Unrealized Gains |  | Fair Value
|  |  | (In thousands) |  |
Equity securities: |  |  |  |  |  |  |
Domestic value | $ | 4,712 |  |  | $ | 27,974 |  |  | $ | 3,549 |  |  | $ | 25,143 |
Domestic growth | 24,998 |  |  | 63,261 |  |  | 16,714 |  |  | 52,187 |
International and other | 1,014 |  |  | 13,026 |  |  | 662 |  |  | 12,754 |
Fixed income securities: |  |  |  |  |  |  |
Municipals | 3,081 |  |  | 41,723 |  |  | 2,861 |  |  | 41,463 |
U.S. Government | 954 |  |  | 24,675 |  |  | 1,353 |  |  | 25,367 |
Corporate and other | 892 |  |  | 10,347 |  |  | 742 |  |  | 9,171 |
Cash investments | — |  |  | 2,705 |  |  | — |  |  | 2,766 |
| $ | 35,651 |  |  | $ | 183,711 |  |  | $ | 25,881 |  |  | $ | 168,851 |
The proceeds and gross realized gains and losses on the disposition of available-for-sale securities for PNMR and PNM are shown in the following table. Realized gains and losses are determined by specific identification of costs of securities sold.
| Three Months Ended
| March 31,
| 2012 |  | 2011
| (In thousands)
Proceeds from sales | $ | 26,760 |  |  | $ | 48,120 |
Gross realized gains | $ | 2,332 |  |  | $ | 4,790 |
Gross realized (losses) | $ | (738 | ) |  | $ | (1,728 | )
Held-to-maturity securities are those investments in debt securities that the Company has the ability and intent to hold until maturity. Held-to-maturity securities consist of the investment in PVNGS lessor notes and certain items within other investments, including the EIP lessor note. The Company has no available-for-sale or held-to-maturity securities for which carrying value exceeds fair value. There are no impairments considered to be “other than temporary” that are included in AOCI and not recognized in earnings. At March 31, 2012, the available-for-sale and held-to-maturity debt securities had the following final maturities:
| Fair Value
| Available-for-Sale |  | Held-to-Maturity
| PNMR and PNM |  | PNMR |  | PNM
| (In thousands)
Within 1 year | $ | 2,057 |  |  | $ | 2,342 |  |  | $ | 2,342 |
After 1 year through 5 years | 21,281 |  |  | 100,387 |  |  | 93,340 |
After 5 years through 10 years | 12,185 |  |  | 2,088 |  |  | — |
Over 10 years | 41,222 |  |  | — |  |  | — |
| $ | 76,745 |  |  | $ | 104,817 |  |  | $ | 95,682 |
Fair Value Disclosures The Company determines the fair values of its derivative and other instruments based on the hierarchy established in GAAP, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Level 3 inputs used in determining fair values for the Company consist of internal valuation models. For NDT investments, Level 2 fair values are provided by the trustee utilizing a pricing service. The pricing provider predominantly uses the market approach using bid side market value based upon a hierarchy of information for specific securities or securities with similar characteristics. For commodity derivatives, Level 2 fair values are determined based on market observable inputs, which are validated using multiple broker quotes, including forward price, volatility, and interest rate curves to establish expectations of future prices. Credit valuation adjustments are made for estimated credit losses based on the overall exposure to each counterparty. For long-term debt, Level 2 fair values are provided by an external pricing service. The pricing service primarily utilizes quoted prices for similar debt in active markets when determining fair value. For investments categorized as Level 3, primarily the PVNGS lessor notes and other investments, fair values were determined by discounted cash flow models that take into consideration discount rates that are observable for similar type assets and liabilities. The Company records any transfers between fair value hierarchy levels as of the end of each calendar quarter. There were no transfers between levels during the three months ended March 31, 2012 and 2011. Items recorded at fair value on the Condensed Consolidated Balance Sheets are presented below:
|  |  | GAAP Fair Value Hierarchy
| Fair Value |  | Level 1 |  | Level 2 |  | Level 3
March 31, 2012 |  |  | (In thousands) |  |
PNMR and PNM |  |  |  |  |  |  |
NDT investments |  |  |  |  |  |  |
Cash and equivalents | $ | 2,705 |  |  | $ | 2,705 |  |  | $ | — |  |  | $ | — |
Equity securities: |  |  |  |  |  |  |
Domestic value | 27,974 |  |  | 27,974 |  |  | — |  |  | — |
Domestic growth | 63,261 |  |  | 63,261 |  |  | — |  |  | — |
International and other | 13,026 |  |  | 13,026 |  |  | — |  |  | — |
Fixed income securities: |  |  |  |  |  |  |
U.S. government | 24,675 |  |  | 20,714 |  |  | 3,961 |  |  | — |
Municipals | 41,723 |  |  | — |  |  | 41,723 |  |  | — |
Corporate and other | 10,347 |  |  | — |  |  | 10,347 |  |  | — |
Total NDT investments | $ | 183,711 |  |  | $ | 127,680 |  |  | $ | 56,031 |  |  | $ | — |
Commodity derivative assets | $ | 7,802 |  |  | $ | — |  |  | $ | 7,802 |  |  | $ | — |
Commodity derivative liabilities | (4,737 | ) |  | — |  |  | (4,737 | ) |  | — |
Net | $ | 3,065 |  |  | $ | — |  |  | $ | 3,065 |  |  | $ | — |
December 31, 2011 |  |  |  |  |  |  |
PNMR and PNM |  |  |  |  |  |  |
NDT investments |  |  |  |  |  |  |
Cash and equivalents | $ | 2,766 |  |  | $ | 2,766 |  |  | $ | — |  |  | $ | — |
Equity securities: |  |  |  |  |  |  |
Domestic value | 25,143 |  |  | 25,143 |  |  | — |  |  | — |
Domestic growth | 52,187 |  |  | 52,187 |  |  | — |  |  | — |
International and other | 12,754 |  |  | 12,754 |  |  | — |  |  | — |
Fixed income securities: |  |  |  |  |  |  |
U.S. government | 25,367 |  |  | 21,409 |  |  | 3,958 |  |  | — |
Municipals | 41,463 |  |  | — |  |  | 41,463 |  |  | — |
Corporate and other | 9,171 |  |  | — |  |  | 9,171 |  |  | — |
Total NDT investments | $ | 168,851 |  |  | $ | 114,259 |  |  | $ | 54,592 |  |  | $ | — |
Commodity derivative assets | $ | 3,713 |  |  | $ | — |  |  | $ | 3,713 |  |  | $ | — |
Commodity derivative liabilities | (4,069 | ) |  | — |  |  | (4,069 | ) |  | — |
Net | $ | (356 | ) |  | $ | — |  |  | $ | (356 | ) |  | $ | — |
A reconciliation of the changes in Level 3 fair value measurements for PNMR is as follows. PNM had no Level 3 fair value measurements during the three months ended March 31, 2012 and 2011.
| PNMR
| Three Months Ended March 31,
| 2012 |  | 2011
| (In thousands)
Balance at beginning of period | $ | — |  |  | $ | (822 | )
Total gains (losses) included in earnings | — |  |  | 1,550 |
Purchases | — |  |  | 118 |
Settlements | — |  |  | 48 |
Balance at end of period | $ | — |  |  | $ | 894 |
Total gains (losses) included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the end of the period | $ | — |  |  | $ | 1,716 |
The above gains and losses (realized and unrealized) for Level 3 fair value measurements included in earnings are reported in cost of energy. The carrying amounts and fair values of investments in PVNGS lessor notes, other investments, and long-term debt, which are not recorded at fair value on the Condensed Consolidated Balance Sheets are presented below:
|  |  |  |  | GAAP Fair Value Hierarchy(1)
| Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
March 31, 2012 | (In thousands)
PNMR |  |  |  |  |  |  |  |  |
Long-term debt | $ | 1,674,179 |  |  | $ | 1,910,127 |  |  | $ | — |  |  | $ | 1,905,073 |  |  | $ | 5,054 |
Investment in PVNGS lessor notes | $ | 89,530 |  |  | $ | 93,340 |  |  | $ | — |  |  | $ | — |  |  | $ | 93,340 |
Other investments | $ | 10,612 |  |  | $ | 13,547 |  |  | $ | 864 |  |  | $ | — |  |  | $ | 12,683 |
PNM |  |  |  |  |  |  |  |  |
Long-term debt | $ | 1,215,550 |  |  | $ | 1,346,094 |  |  | $ | — |  |  | $ | 1,346,094 |  |  | $ | — |
Investment in PVNGS lessor notes | $ | 89,530 |  |  | $ | 93,340 |  |  | $ | — |  |  | $ | — |  |  | $ | 93,340 |
Other investments | $ | 2,734 |  |  | $ | 2,889 |  |  | $ | 546 |  |  | $ | — |  |  | $ | 2,343 |
TNMP |  |  |  |  |  |  |  |  |
Long-term debt | $ | 311,120 |  |  | $ | 401,697 |  |  | $ | — |  |  | $ | 401,697 |  |  | $ | — |
Other investments | $ | 267 |  |  | $ | 267 |  |  | $ | 267 |  |  | $ | — |  |  | $ | — |
December 31, 2011 |  |  |  |  |  |  |  |  |
PNMR |  |  |  |  |  |  |  |  |
Long-term debt | $ | 1,674,013 |  |  | $ | 1,873,002 |  |  |  |  |  |  |
Investment in PVNGS lessor notes | $ | 107,094 |  |  | $ | 108,742 |  |  |  |  |  |  |
Other investments | $ | 12,207 |  |  | $ | 14,208 |  |  |  |  |  |  |
PNM |  |  |  |  |  |  |  |  |
Long-term debt | $ | 1,215,540 |  |  | $ | 1,294,846 |  |  |  |  |  |  |
Investment in PVNGS lessor notes | $ | 107,094 |  |  | $ | 108,742 |  |  |  |  |  |  |
Other investments | $ | 2,900 |  |  | $ | 3,052 |  |  |  |  |  |  |
TNMP |  |  |  |  |  |  |  |  |
Long-term debt | $ | 310,963 |  |  | $ | 413,966 |  |  |  |  |  |  |
Other investments | $ | 271 |  |  | $ | 271 |  |  |  |  |  |  |
(1) GAAP does not require disclosure of the fair value hierarchy information prior to 2012.

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