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Fair Value of Derivative and Other Financial Instruments | 9 Months Ended
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Sep. 30, 2017
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 energy related derivative contracts and other financial instruments is contained in Note 8 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. 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. Energy Related Derivative Contracts Overview The primary objective for the use of commodity derivative instruments, including energy contracts, options, swaps, 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 wholesale customers. PNM is exposed to market risk for its share of PVNGS Unit 3 and the needs of its wholesale customers not covered under a FPPAC. However, as discussed below, PNM has hedging arrangements for the output of PVNGS Unit 3 through December 31, 2017, at which time PVNGS Unit 3 will be included as a jurisdictional resource to serve New Mexico retail customers. Beginning January 1, 2018, PNM will be exposed to market risk for the 65 MW of SJGS Unit 4 that will be transferred to PNM from PNMR Development (Note 11) on December 31, 2017. In anticipation of the transfer of ownership, PNM entered into agreements to sell the power from 36 MW of that capacity to a third party at a fixed price for the period January 1, 2018 through June 30, 2022, subject to certain conditions. Under these agreements, PNM is obligated to deliver 36 MW of power only when SJGS Unit 4 is operating. These agreements are not considered derivatives because there is no notional amount due to the unit-contingent nature of the transactions. Therefore, these agreements are not recorded at fair value. 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. TNMP does not enter into energy related derivative contracts. Commodity Risk Marketing and procurement of energy often involve market risks associated with managing energy commodities and establishing 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 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, PNM accounts for its various instruments for the purchase and sale of energy, which meet the definition of a derivative, based on PNM’s intent. During the nine months ended September 30, 2017 and the year ended December 31, 2016, PNM was not hedging its exposure to the variability in future cash flows from commodity derivatives through designated cash flows hedges. The derivative 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. PNM has no trading transactions. Commodity Derivatives PNM’s commodity derivative instruments that are recorded at fair value, all of which are accounted for as economic hedges, are summarized as follows:
| Economic Hedges
| September 30, 2017 |  | December 31, 2016
| (In thousands)
Current assets | $ | 3,093 |  |  | $ | 5,224 |
Deferred charges | 3,846 |  |  | — |
| 6,939 |  |  | 5,224 |
Current liabilities | (1,279 | ) |  | (2,339 | )
Long-term liabilities | (3,846 | ) |  | — |
| (5,125 | ) |  | (2,339 | )
Net | $ | 1,814 |  |  | $ | 2,885 |
Included in the above table are $0.7 million and $2.7 million of current assets at September 30, 2017 and December 31, 2016 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. PNM does not offset fair value and cash collateral for derivative instruments under master netting arrangements and the above table reflects the gross amounts of fair value assets and liabilities for commodity derivatives. Included in the above table are equal amounts of assets and liabilities aggregating $4.9 million at September 30, 2017 and $0.5 million at December 31, 2016, which result from PNM’s hazard sharing arrangements with Tri-State (Note 12). The hazard sharing arrangements are net-settled upon delivery. Other amounts that could be offset under master netting agreements were immaterial. At September 30, 2017 and December 31, 2016, PNM had no amounts recognized for the legal right to reclaim cash collateral. However, at September 30, 2017 and December 31, 2016, amounts posted as cash collateral under margin arrangements were $1.2 million and $2.6 million. PNM has a NMPRC-approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. The table above includes $0.1 million of current assets and $0.2 million of current liabilities at September 30, 2017 and $0.2 million of current assets and $0.1 million of current liabilities at December 31, 2016 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 PNM’s earnings, excluding income tax effects. Commodity derivatives had no impact on OCI for the periods presented.
| Economic Hedges
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
| (In thousands)
Electric operating revenues | $ | (2,237 | ) |  | $ | 1,652 |  |  | $ | 5,697 |  |  | $ | 214 |
Cost of energy | (14 | ) |  | (1 | ) |  | (5,289 | ) |  | (1,113 | )
Total gain (loss) | $ | (2,251 | ) |  | $ | 1,651 |  |  | $ | 408 |  |  | $ | (899 | )
Commodity contract volume positions are presented in MMBTU for gas related contracts and in MWh for power related contracts. The table below presents PNM’s net buy (sell) volume positions:
|  | Economic Hedges
|  | MMBTU |  | MWh
September 30, 2017 |  | 100,000 |  |  | (630,933 | )
December 31, 2016 |  | 254,100 |  |  | (2,471,600 | )
PNM has 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. In connection with managing its commodity risks, PNM enters into master agreements with certain counterparties. If PNM is in a net liability position under an agreement, some agreements provide that the counterparties can request collateral if PNM’s credit rating is downgraded; other agreements provide that the counterparty may request collateral to provide it with “adequate assurance” that PNM will perform; and others have no provision for collateral. At September 30, 2017 and December 31, 2016, PNM had no such contracts in a net liability position. 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. PVNGS Unit 3 will be included as a jurisdictional resource to serve New Mexico retail customers beginning on January 1, 2018. As of September 30, 2017, PNM had contracted to sell substantially all 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 for substantially all of the sales through 2017, which average approximately $29 per MWh. 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 consist of PNM assets held in the NDT for its share of decommissioning costs of PVNGS and trusts for PNM’s share of final reclamation costs related to the coal mines serving SJGS and Four Corners (Note 11). At September 30, 2017 and December 31, 2016, the fair value of available-for-sale securities included $283.0 million and $253.9 million for the NDT and $23.4 million and $19.1 million for the mine reclamation trusts. The fair value and gross unrealized gains of investments in available-for-sale securities are presented in the following table.
| September 30, 2017 |  | December 31, 2016
| Unrealized Gains |  | Fair Value |  | Unrealized Gains |  | Fair Value
|  |  | (In thousands) |  |
Cash and cash equivalents | $ | — |  |  | $ | 8,151 |  |  | $ | — |  |  | $ | 23,683 |
Equity securities: |  |  |  |  |  |  |
Domestic value | 5,252 |  |  | 72,162 |  |  | 1,135 |  |  | 34,796 |
Domestic growth | 5,775 |  |  | 73,345 |  |  | 3,032 |  |  | 47,595 |
International and other | 4,865 |  |  | 43,167 |  |  | 2,029 |  |  | 27,481 |
Fixed income securities: |  |  |  |  |  |  |
U.S. Government | 307 |  |  | 28,960 |  |  | 115 |  |  | 40,962 |
Municipals | 998 |  |  | 41,131 |  |  | 585 |  |  | 43,789 |
Corporate and other | 1,434 |  |  | 39,528 |  |  | 553 |  |  | 54,671 |
| $ | 18,631 |  |  | $ | 306,444 |  |  | $ | 7,449 |  |  | $ | 272,977 |
The proceeds and gross realized gains and losses on the disposition of available-for-sale securities 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 (increase)/decrease in realized impairment losses of $0.1 million and $1.1 million for the three and nine months ended September 30, 2017 and $0.1 million and $1.0 million for the three and nine months ended September 30, 2016.
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
| (In thousands)
Proceeds from sales | $ | 98,532 |  |  | $ | 86,975 |  |  | $ | 456,577 |  |  | $ | 280,989 |
Gross realized gains | $ | 8,128 |  |  | $ | 7,026 |  |  | $ | 24,745 |  |  | $ | 27,273 |
Gross realized (losses) | $ | (2,829 | ) |  | $ | (2,565 | ) |  | $ | (8,150 | ) |  | $ | (12,913 | )
Held-to-maturity securities are those investments in debt securities that the Company has the ability and intent to hold until maturity. At September 30, 2017 and December 31, 2016, PNMR’s held-to-maturity securities consist of the Westmoreland Loan. 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 September 30, 2017, 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 | $ | 3,913 |  |  | $ | — |
After 1 year through 5 years | 22,766 |  |  | 76,353 |
After 5 years through 10 years | 25,456 |  |  | — |
After 10 years through 15 years | 5,178 |  |  | — |
After 15 years through 20 years | 10,692 |  |  | — |
After 20 years | 41,614 |  |  | — |
| $ | 109,619 |  |  | $ | 76,353 |
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 nine months ended September 30, 2017 or the year ended December 31, 2016. 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, primarily the Westmoreland Loan, 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 by PNM 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 September 30, 2017 and December 31, 2016 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)
| (In thousands)
September 30, 2017 |  |  |  |  |
Available-for-sale securities |  |  |  |  |
Cash and cash equivalents | $ | 8,151 |  |  | $ | 8,151 |  |  | $ | — |
Equity securities: |  |  |  |  |
Domestic value | 72,162 |  |  | 72,162 |  |  | — |
Domestic growth | 73,345 |  |  | 73,345 |  |  | — |
International and other | 43,167 |  |  | 39,931 |  |  | 3,236 |
Fixed income securities: |  |  |  |  |
U.S. Government | 28,960 |  |  | 28,273 |  |  | 687 |
Municipals | 41,131 |  |  | — |  |  | 41,131 |
Corporate and other | 39,528 |  |  | — |  |  | 39,528 |
| $ | 306,444 |  |  | $ | 221,862 |  |  | $ | 84,582 |
Commodity derivative assets | $ | 6,939 |  |  | $ | — |  |  | $ | 6,939 |
Commodity derivative liabilities | (5,125 | ) |  | — |  |  | (5,125 | )
Net | $ | 1,814 |  |  | $ | — |  |  | $ | 1,814 |
December 31, 2016 |  |  |  |  |
Available-for-sale securities |  |  |  |  |
Cash and cash equivalents | $ | 23,683 |  |  | $ | 23,683 |  |  | $ | — |
Equity securities: |  |  |  |  |
Domestic value | 34,796 |  |  | 34,796 |  |  | — |
Domestic growth | 47,595 |  |  | 47,595 |  |  | — |
International and other | 27,481 |  |  | 27,481 |  |  | — |
Fixed income securities: |  |  |  |  |
U.S. Government | 40,962 |  |  | 39,723 |  |  | 1,239 |
Municipals | 43,789 |  |  | — |  |  | 43,789 |
Corporate and other | 54,671 |  |  | 23,158 |  |  | 31,513 |
| $ | 272,977 |  |  | $ | 196,436 |  |  | $ | 76,541 |
Commodity derivative assets | $ | 5,224 |  |  | $ | — |  |  | $ | 5,224 |
Commodity derivative liabilities | (2,339 | ) |  | — |  |  | (2,339 | )
Net | $ | 2,885 |  |  | $ | — |  |  | $ | 2,885 |
The carrying amounts and fair values of investments in the Westmoreland Loan, 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
September 30, 2017 | (In thousands)
PNMR |  |  |  |  |  |  |  |  |
Long-term debt | $ | 2,447,702 |  |  | $ | 2,564,887 |  |  | $ | — |  |  | $ | 2,564,887 |  |  | $ | — |
Westmoreland Loan | $ | 66,230 |  |  | $ | 76,353 |  |  | $ | — |  |  | $ | — |  |  | $ | 76,353 |
Other investments | $ | 386 |  |  | $ | 386 |  |  | $ | 386 |  |  | $ | — |  |  | $ | — |
PNM |  |  |  |  |  |  |  |  |
Long-term debt | $ | 1,657,396 |  |  | $ | 1,736,026 |  |  | $ | — |  |  | $ | 1,736,026 |  |  | $ | — |
Other investments | $ | 166 |  |  | $ | 166 |  |  | $ | 166 |  |  | $ | — |  |  | $ | — |
TNMP |  |  |  |  |  |  |  |  |
Long-term debt | $ | 480,589 |  |  | $ | 517,977 |  |  | $ | — |  |  | $ | 517,977 |  |  | $ | — |
Other investments | $ | 220 |  |  | $ | 220 |  |  | $ | 220 |  |  | $ | — |  |  | $ | — |
December 31, 2016 |  |  |  |  |  |  |  |  |
PNMR |  |  |  |  |  |  |  |  |
Long-term debt | $ | 2,392,712 |  |  | $ | 2,540,693 |  |  | $ | — |  |  | $ | 2,540,693 |  |  | $ | — |
Westmoreland Loan | $ | 95,000 |  |  | $ | 100,893 |  |  | $ | — |  |  | $ | — |  |  | $ | 100,893 |
Other investments | $ | 547 |  |  | $ | 1,164 |  |  | $ | 547 |  |  | $ | — |  |  | $ | 617 |
PNM |  |  |  |  |  |  |  |  |
Long-term debt | $ | 1,631,369 |  |  | $ | 1,730,157 |  |  | $ | — |  |  | $ | 1,730,157 |  |  | $ | — |
Other investments | $ | 316 |  |  | $ | 316 |  |  | $ | 316 |  |  | $ | — |  |  | $ | — |
TNMP |  |  |  |  |  |  |  |  |
Long-term debt | $ | 420,875 |  |  | $ | 468,329 |  |  | $ | — |  |  | $ | 468,329 |  |  | $ | — |
Other investments | $ | 231 |  |  | $ | 231 |  |  | $ | 231 |  |  | $ | — |  |  | $ | — |

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