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Fair Value of Derivative and Other Financial Instruments | 3 Months Ended
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Mar. 31, 2016
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 Additional information concerning the Company’s energy related derivative contracts and other financial instruments is contained in Note 8 of the Notes to Consolidated Financial Statements in the 2015 Annual Reports on Form 10-K. 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 and fuel used to generate electricity, as well as managing anticipated generation capacity in excess of forecasted demand from existing customers. PNM’s energy related derivative contracts manage commodity risk. PNM is required to meet the demand and energy needs of its retail and firm-requirements wholesale customers. PNM is exposed to market risk for its share of PVNGS Unit 3 and the needs of its firm-requirements wholesale customers not covered under a FPPAC. PNM’s operations are managed primarily through a net asset-backed strategy, whereby PNM’s aggregate net open forward contract position is covered by its forecasted excess generation capabilities or market purchases. PNM could be exposed to market risk if its generation capabilities were to be disrupted or if its load requirements were to be greater than anticipated. If all or a portion of load requirements were required to be covered as a result of such unexpected situations, commitments would have to be met through market purchases. Commodity Risk Marketing and procurement of energy often involve market risks associated with managing energy commodities and establishing open positions in the energy markets, primarily on a short-term basis. PNM routinely enters into various derivative instruments such as forward contracts, option agreements, and price basis swap agreements to economically hedge price and volume risk on power commitments and fuel requirements and to minimize the effect of market fluctuations in wholesale portfolios. PNM monitors the market risk of its commodity contracts using VaR calculations to maintain total exposure within management-prescribed limits in accordance with approved risk and credit policies. Accounting for Derivatives Under derivative accounting and related rules for energy contracts, the Company accounts for its various derivative instruments for the purchase and sale of energy based on the Company’s intent. During the three months ended March 31, 2016 and the year ended December 31, 2015, the Company was not hedging its exposure to the variability in future cash flows from commodity derivatives through designated cash flows hedges. 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. Fair value is defined under GAAP as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is based on current market quotes as available and is supplemented by modeling techniques and assumptions made by the Company to the extent quoted market prices or volatilities are not available. External pricing input availability varies based on commodity location, market liquidity, and term of the agreement. Valuations of derivative assets and liabilities take into account nonperformance risk including the effect of counterparties’ and the Company’s credit risk. The Company regularly assesses the validity and availability of pricing data for its derivative transactions. Although the Company uses its best judgment in estimating the fair value of these instruments, there are inherent limitations in any estimation technique. Commodity Derivatives Commodity derivative instruments that are recorded at fair value, all of which are accounted for as economic hedges, are summarized as follows:
| Economic Hedges
| March 31, 2016 |  | December 31, 2015
PNMR and PNM | (In thousands)
Current assets | $ | 4,356 |  |  | $ | 3,813 |
Deferred charges | 1,986 |  |  | 2,622 |
| 6,342 |  |  | 6,435 |
Current liabilities | (548 | ) |  | (1,859 | )
Long-term liabilities | — |  |  | — |
| (548 | ) |  | (1,859 | )
Net | $ | 5,794 |  |  | $ | 4,576 |
Included in the above table are $2.9 million of current assets and $2.0 million of deferred charges at March 31, 2016 and $3.0 million of current assets and $2.6 million of deferred charges at December 31, 2015 related to contracts for the sale of energy from PVNGS Unit 3 through 2017 at market price plus a premium. Certain of PNM’s commodity derivative instruments in the above table are subject to master netting agreements whereby assets and liabilities could be offset in the settlement process. The Company does not offset fair value, cash collateral, and accrued payable or receivable amounts recognized for derivative instruments under master netting arrangements and the above table reflects the gross amounts of assets and liabilities. The amounts that could be offset under master netting agreements were immaterial at March 31, 2016 and December 31, 2015. At March 31, 2016 and December 31, 2015, PNMR and PNM had no amounts recognized for the legal right to reclaim cash collateral. However, at March 31, 2016 and December 31, 2015, amounts posted as cash collateral under margin arrangements were $2.5 million and $2.7 million for both PNMR and PNM. At March 31, 2016 and December 31, 2015, obligations to return cash collateral were $0.1 million and $0.1 million, for both PNMR and PNM. Cash collateral amounts are included in other current assets and other current liabilities on the Condensed Consolidated Balance Sheets. PNM has a NMPRC approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. At March 31, 2016, there were no hedges in place under this plan. The table above includes $0.4 million of current assets and $0.2 million of current liabilities at December 31, 2015 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 mark-to-market commodity derivative instruments on earnings, excluding income tax effects. Commodity derivatives had no impact on OCI for the periods presented.
| Economic Hedges
| Three Months Ended
| March 31,
| 2016 |  | 2015
PNMR and PNM | (In thousands)
Electric operating revenues | $ | 2,684 |  |  | $ | (472 | )
Cost of energy | (145 | ) |  | (50 | )
Total gain (loss) | $ | 2,539 |  |  | $ | (522 | )
Commodity contract volume positions are presented in MMBTU 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
|  | MMBTU |  | MWh
PNMR and PNM |  |  |  |
March 31, 2016 |  | 4,355,000 |  |  | (2,850,460 | )
December 31, 2015 |  | 577,481 |  |  | (3,405,843 | )
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 PNM’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 normal 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)
PNMR and PNM |  |  |  |  |  |
March 31, 2016 |  | $ | 360 |  |  | $ | — |  |  | $ | 360 |
December 31, 2015 |  | $ | 839 |  |  | $ | — |  |  | $ | 839 |
Sale of Power from PVNGS Unit 3 Because PNM’s 134 MW share of Unit 3 at PVNGS is not currently included in retail rates, that unit’s power is being sold in the wholesale market. PNM sells power from its interest in PVNGS Unit 3 at market prices. As of March 31, 2016, PNM had contracted to sell 100% of PVNGS Unit 3 output through 2017, at market price plus a premium. Through hedging arrangements that are accounted for as economic hedges, PNM has established fixed rates, which average approximately $26 per MWh, for substantially all of the sales through 2016. There are currently no such hedging arrangements in place for the 2017 sales. 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 and a trust for PNM’s share of post-term reclamation costs related to the coal mines serving SJGS (Note 11). At March 31, 2016 and December 31, 2015, the fair value of available-for-sale securities included $250.5 million and $249.1 million for the NDT and $10.1 million and $9.9 million for the mine reclamation trust. The fair value and gross unrealized gains of investments in available-for-sale securities are presented in the following table.
| March 31, 2016 |  | December 31, 2015
| Unrealized Gains |  | Fair Value |  | Unrealized Gains |  | Fair Value
PNMR and PNM |  |  | (In thousands) |  |
Cash and cash equivalents | $ | — |  |  | $ | 8,810 |  |  | $ | — |  |  | $ | 10,700 |
Equity securities: |  |  |  |  |  |  |
Domestic value | 10,862 |  |  | 62,427 |  |  | 11,610 |  |  | 44,505 |
Domestic growth | 5,164 |  |  | 43,714 |  |  | 11,163 |  |  | 61,078 |
International and other | 2,034 |  |  | 27,937 |  |  | 1,569 |  |  | 27,961 |
Fixed income securities: |  |  |  |  |  |  |
U.S. Government | 563 |  |  | 37,203 |  |  | 178 |  |  | 27,880 |
Municipals | 2,839 |  |  | 50,276 |  |  | 3,672 |  |  | 58,576 |
Corporate and other | 1,518 |  |  | 30,261 |  |  | 628 |  |  | 28,342 |
| $ | 22,980 |  |  | $ | 260,628 |  |  | $ | 28,820 |  |  | $ | 259,042 |
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. Gross realized losses shown below exclude the net decrease in realized impairment losses of $1.6 million and $0.4 million for the three months ended March 31, 2016 and 2015.
| Three Months Ended
| March 31,
| 2016 |  | 2015
| (In thousands)
Proceeds from sales | $ | 124,900 |  |  | $ | 31,852 |
Gross realized gains | $ | 10,716 |  |  | $ | 5,135 |
Gross realized (losses) | $ | (6,116 | ) |  | $ | (1,541 | )
Held-to-maturity securities are those investments in debt securities that the Company has the ability and intent to hold until maturity. At March 31, 2016, held-to-maturity securities consist of the Westmoreland Loan and certain items within other investments. 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, 2016, 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
| (In thousands)
Within 1 year | $ | 3,068 |  |  | $ | — |
After 1 year through 5 years | 31,853 |  |  | 135,189 |
After 5 years through 10 years | 22,561 |  |  | — |
After 10 years through 15 years | 8,991 |  |  | — |
After 15 years through 20 years | 10,214 |  |  | — |
After 20 years | 41,053 |  |  | — |
| $ | 117,740 |  |  | $ | 135,189 |
Fair Value Disclosures The Company determines the fair values of its derivative and other financial 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 has the ability to 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. 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, 2016 and the year ended December 31, 2015. For available-for-sale securities, 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 the Company’s 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, including the Westmoreland Loan, PVNGS lessor notes, and certain items in other investments, fair values were determined by discounted cash flow models that take into consideration discount rates that are observable for similar types of assets and liabilities. Management of the Company independently verifies the information provided by pricing services. Items recorded at fair value on the Condensed Consolidated Balance Sheets are presented below by level of the fair value hierarchy. There were no Level 3 fair value measurements at March 31, 2016 and December 31, 2015 for items recorded at fair value.
|  |  | GAAP Fair Value Hierarchy
| Total |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2)
March 31, 2016 | (In thousands)
PNMR and PNM |  |  |  |  |
Available-for-sale securities |  |  |  |  |
Cash and cash equivalents | $ | 8,810 |  |  | $ | 8,810 |  |  | $ | — |
Equity securities: |  |  |  |  |
Domestic value | 62,427 |  |  | 62,427 |  |  | — |
Domestic growth | 43,714 |  |  | 43,714 |  |  | — |
International and other | 27,937 |  |  | 27,937 |  |  | — |
Fixed income securities: |  |  |  |  |
U.S. Government | 37,203 |  |  | 35,919 |  |  | 1,284 |
Municipals | 50,276 |  |  | — |  |  | 50,276 |
Corporate and other | 30,261 |  |  | 6,630 |  |  | 23,631 |
| $ | 260,628 |  |  | $ | 185,437 |  |  | $ | 75,191 |
Commodity derivative assets | $ | 6,342 |  |  | $ | — |  |  | $ | 6,342 |
Commodity derivative liabilities | (548 | ) |  | — |  |  | (548 | )
Net | $ | 5,794 |  |  | $ | — |  |  | $ | 5,794 |
December 31, 2015 |  |  |  |  |
PNMR and PNM |  |  |  |  |
Available-for-sale securities |  |  |  |  |
Cash and cash equivalents | $ | 10,700 |  |  | $ | 10,700 |  |  | $ | — |
Equity securities: |  |  |  |  |
Domestic value | 44,505 |  |  | 44,505 |  |  | — |
Domestic growth | 61,078 |  |  | 61,078 |  |  | — |
International and other | 27,961 |  |  | 27,961 |  |  | — |
Fixed income securities: |  |  |  |  |
U.S. Government | 27,880 |  |  | 26,608 |  |  | 1,272 |
Municipals | 58,576 |  |  | — |  |  | 58,576 |
Corporate and other | 28,342 |  |  | 6,500 |  |  | 21,842 |
| $ | 259,042 |  |  | $ | 177,352 |  |  | $ | 81,690 |
Commodity derivative assets | $ | 6,435 |  |  | $ | — |  |  | $ | 6,435 |
Commodity derivative liabilities | (1,859 | ) |  | — |  |  | (1,859 | )
Net | $ | 4,576 |  |  | $ | — |  |  | $ | 4,576 |
The carrying amounts and fair values of investments in the Westmoreland Loan, 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
| Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
March 31, 2016 | (In thousands)
PNMR |  |  |  |  |  |  |  |  |
Long-term debt | $ | 2,274,481 |  |  | $ | 2,469,956 |  |  | $ | — |  |  | $ | 2,469,956 |  |  | $ | — |
Westmoreland Loan | $ | 122,696 |  |  | $ | 134,615 |  |  | $ | — |  |  | $ | — |  |  | $ | 134,615 |
Other investments | $ | 456 |  |  | $ | 1,030 |  |  | $ | 456 |  |  | $ | — |  |  | $ | 574 |
PNM |  |  |  |  |  |  |  |  |
Long-term debt | $ | 1,581,131 |  |  | $ | 1,717,445 |  |  | $ | — |  |  | $ | 1,717,445 |  |  | $ | — |
Other investments | $ | 218 |  |  | $ | 218 |  |  | $ | 218 |  |  | $ | — |  |  | $ | — |
TNMP |  |  |  |  |  |  |  |  |
Long-term debt | $ | 420,690 |  |  | $ | 477,511 |  |  | $ | — |  |  | $ | 477,511 |  |  | $ | — |
Other investments | $ | 238 |  |  | $ | 238 |  |  | $ | 238 |  |  | $ | — |  |  | $ | — |
December 31, 2015 |  |  |  |  |  |  |  |  |
PNMR |  |  |  |  |  |  |  |  |
Long-term debt | $ | 2,091,948 |  |  | $ | 2,264,869 |  |  | $ | — |  |  | $ | 2,264,869 |  |  | $ | — |
Investment in PVNGS lessor notes | $ | 8,587 |  |  | $ | 8,947 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,947 |
Other investments | $ | 604 |  |  | $ | 1,269 |  |  | $ | 604 |  |  | $ | — |  |  | $ | 665 |
PNM |  |  |  |  |  |  |  |  |
Long-term debt | $ | 1,580,677 |  |  | $ | 1,703,209 |  |  | $ | — |  |  | $ | 1,703,209 |  |  | $ | — |
Investment in PVNGS lessor notes | $ | 8,587 |  |  | $ | 8,947 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,947 |
Other investments | $ | 366 |  |  | $ | 366 |  |  | $ | 366 |  |  | $ | — |  |  | $ | — |
TNMP |  |  |  |  |  |  |  |  |
Long-term debt | $ | 361,411 |  |  | $ | 411,661 |  |  | $ | — |  |  | $ | 411,661 |  |  | $ | — |
Other investments | $ | 238 |  |  | $ | 238 |  |  | $ | 238 |  |  | $ | — |  |  | $ | — |

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