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Fair Value of Derivative and Other Financial Instruments | 9 Months Ended
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Sep. 30, 2023
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 9 of the Notes to Consolidated Financial Statements in the 2022 Annual Reports on Form 10-K. Fair value is defined 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 customers. PNM may be exposed to market risk for the needs of its customers not covered under the FPPAC. PNM entered into several agreements to purchase power from third parties in order to ensure that customer demand during the 2023 summer peak load was met. Agreements for purchases totaling 85 MW from June 1, 2023 through September 30, 2023 were not considered derivatives because there was either no notional amount due to their unit-contingent nature or qualified for a normal purchase, normal sale scope exception. Agreements totaling 375 MW were accounted for as derivative agreements and are considered economic hedges. In 2021, PNM entered into three agreements to purchase power from third parties at a fixed price in order to ensure that customer demand during the 2022 summer peak load period was met. Two of the agreements, the purchase of 85 MW from June through September 2022 and the purchase of 40 MW for the full year of 2022, were not considered derivatives because there were no notional amounts due to the unit-contingent nature of the agreements. The third agreement for the purchase of 150 MW firm power in June and September 2022 were accounted for as derivative agreements and are considered economic hedges. PNM was exposed to market risk for its 65 MW interest in SJGS Unit 4, which was held as merchant plant as ordered by the NMPRC from January 1, 2018 until September 30, 2022. PNM entered into agreements to sell 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 was obligated to deliver 36 MW of power only when SJGS Unit 4 was operating. In May 2022, PNM executed a new agreement to sell 50 MW of that capacity to a third party for the period from July 1, 2022 through September 30, 2022 on a system-contingent basis. These agreements were not considered derivatives because there was no notional amount due to the unit-contingent nature of the transactions. PNM and Tri-State had a hazard sharing agreement that expired in May 2022. Under this agreement, each party sold the other party 100 MW of capacity and energy from a designated generation resource on a unit contingent basis, subject to certain performance guarantees. The agreement was accounted for as a commodity derivative. In May 2022, PNM and Tri-State entered into another hazard sharing agreement that existed on a unit contingent basis through September 30, 2022, however this agreement did not include a performance guarantee. As a result, this agreement was not considered a derivative. Both the purchases and sales were made at the same market index price. This agreement served to reduce the magnitude of each party’s single largest generating hazard and assist in enhancing the reliability and efficiency of their respective operations. PNM passed the sales and purchases through to customers under PNM’s 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. 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. PNM monitors the market risk of its commodity contracts 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, 2023 and the year ended December 31, 2022, PNM was not hedging its exposure to the variability in future cash flows from commodity derivatives through designated cash flow 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 on the Condensed Consolidated Statements of Earnings and are classified between Electric operating revenues and Cost of energy according to the intent of the hedge. PNM also uses such instruments under an NMPRC approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. Changes in the fair value of instruments covered by its FPPAC are recorded as Regulatory assets and Regulatory liabilities on the Condensed Consolidated Balance Sheets. The cash impacts of settled derivatives are recorded as operating activities or financing activities on the Condensed Consolidated Statement of Cash Flows consistent with the classification of the hedged transaction. 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 and considered Level 2 fair value measurements, are presented in the following line items on the Condensed Consolidated Balance Sheets:
| Economic Hedges
| September 30, 2023 |  | December 31, 2022
| (In thousands)
Other current assets | $ | 603 |  |  | $ | 9,780 |
Other current liabilities | (3,514) |  |  | (19,209) |
Net | $ | (2,911) |  |  | $ | (9,429) |
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. As discussed above, PNM has NMPRC-approved guidelines for hedging arrangements to manage fuel and purchased power costs related to customers covered by its FPPAC. The table above includes $0.6 million of current assets and $3.5 million of current liabilities related to these arrangements at September 30, 2023 and $9.8 million of current assets and $19.2 million of current liabilities at December 31, 2022 with changes in fair value recorded as regulatory assets and regulatory liabilities. At September 30, 2023 and December 31, 2022, PNM had no amounts recognized for the legal right to reclaim cash collateral. However, amounts posted as cash collateral under margin arrangements were $1.0 million at September 30, 2023 and $10.5 million at December 31, 2022. These amounts are included in other current assets on the Condensed Consolidated Balance Sheets. At September 30, 2023 and December 31, 2022, obligations to return cash collateral were $0.2 million, which is included in other current liabilities on the Condensed Consolidated Balance Sheets. The changes in the fair value of commodity derivative instruments that are considered economic hedges had no impact on PNM’s net earnings during the nine months ended September 30, 2023 and 2022. Commodity derivatives had no impact on OCI for any of the periods presented. 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, 2023 | — |  | 290,295
December 31, 2022 | — |  | 432,200
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. The table below presents information about PNM’s contingent requirement to provide collateral under certain commodity contracts having an objectively determinable collateral provision, that are in net liability positions, and that are not fully collateralized with cash. Contractual liability represents those 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. Cash collateral posted under these contracts does not reflect letters of credit under the Company’s revolving credit facilities that may have been issued as collateral. Net exposure is the net contractual liability for all contracts, including those designated as normal purchase and normal sale, offset by existing collateral and by any offsets available under master netting agreements, including both assets and liability positions.
Contingent Feature - Credit Rating Downgrade |  | Contractual Liability |  | Existing Cash Collateral |  | Net Exposure
|  | (In thousands)
September 30, 2023 |  | $ | 3,514 |  |  | $ | — |  |  | $ | 3,514 |
December 31, 2022 |  | $ | 15,288 |  |  | $ | — |  |  | $ | 13,087 |
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. Investment securities are carried at fair value. Investment securities consist of PNM assets held in the NDT for its share of decommissioning costs of PVNGS, a trust for PNM’s share of decommissioning costs at SJGS, and trusts for PNM’s share of final reclamation costs related to the coal mines serving SJGS and Four Corners. See Note 11. At September 30, 2023 and December 31, 2022, the fair value of investment securities included $334.0 million and $325.3 million for the NDT, $15.3 million and $14.7 million for the SJGS decommissioning trust, and $72.1 million and $77.5 million for the coal mine reclamation trusts. PNM records a realized loss as an impairment for any available-for-sale debt security that has a fair value that is less than its carrying value. At September 30, 2023 and December 31, 2022, PNM had no available-for-sale debt securities for which carrying value exceeds fair value and there are no impairments considered to be “other than temporary” that are included in AOCI and not recognized in earnings. All gains and losses resulting from sales and changes in the fair value of equity securities are recognized immediately in earnings. Gains and losses recognized on the Condensed Consolidated Statements of Earnings related to investment securities in the NDT, SJGS decommissioning, and coal mine reclamation trusts are presented in the following table:
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
| (In thousands)
Equity securities: |  |  |  |  |  |  |
Net gains (losses) from equity securities sold | $ | (189) |  |  | $ | (2,210) |  |  | $ | 1,758 |  |  | $ | 1,735 |
Net gains (losses) from equity securities still held | (4,946) |  |  | (4,061) |  |  | 3,673 |  |  | (52,320) |
Total net gains (losses) on equity securities | (5,135) |  |  | (6,271) |  |  | 5,431 |  |  | (50,585) |
Available-for-sale debt securities: |  |  |  |  |  |  |
Net (losses) on debt securities | (3,269) |  |  | (9,465) |  |  | (3,616) |  |  | (33,519) |
Net gains (losses) on investment securities | $ | (8,404) |  |  | $ | (15,736) |  |  | $ | 1,815 |  |  | $ | (84,104) |
The proceeds and gross realized gains and losses on the disposition of securities held in the NDT, SJGS decommissioning trust, and coal mine reclamation trusts 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 $(0.6) million and $2.8 million for the three and nine months ended September 30, 2023 and $(7.1) million and $(28.7) million for the three and nine months ended September 30, 2022.
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
| (In thousands)
Proceeds from sales | $ | 137,797 |  |  | $ | 92,371 |  |  | $ | 412,574 |  |  | $ | 323,251 |
Gross realized gains | 4,022 |  |  | 2,366 |  |  | 14,464 |  |  | 20,089 |
Gross realized (losses) | (6,876) |  |  | (6,908) |  |  | (19,088) |  |  | (23,109) |
At September 30, 2023, the available-for-sale debt securities held by PNM, had the following final maturities:
| Fair Value
| (In thousands)
Within 1 year | $ | 34,601 |  |  |  |  |
After 1 year through 5 years | 67,254 |  |  |  |  |
After 5 years through 10 years | 67,273 |  |  |  |  |
After 10 years through 15 years | 18,916 |  |  |  |  |
After 15 years through 20 years | 13,634 |  |  |  |  |
After 20 years | 43,825 |  |  |  |  |
| $ | 245,503 |  |  |  |  |
Fair Value Disclosures The Company determines the fair values of its derivative and other financial instruments based on the hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are 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. For investment securities, Level 2 and Level 3 fair values are provided by fund managers utilizing a pricing service. For Level 2 fair values, the pricing provider predominantly uses the market approach using bid side market values based upon a hierarchy of information for specific securities or securities with similar characteristics. Fair values of Level 2 investments in mutual funds are equal to net asset value. 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. The valuation of Level 3 investments, when applicable, requires significant judgment by the pricing provider due to the absence of quoted market values, changes in market conditions, and the long-term nature of the assets. The Company has no Level 3 investments as of September 30, 2023 and December 31, 2022. 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 along with gross unrealized gains on investments in available-for-sale debt securities:
|  |  | GAAP Fair Value Hierarchy |  |
| Total |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  |  |  | Unrealized Gains
| (In thousands)
September 30, 2023 |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 37,930 |  |  | $ | 37,930 |  |  | $ | — |  |  |  |  |
Equity securities: |  |  |  |  |  |  |  |  |
Corporate stocks, common | 71,359 |  |  | 71,359 |  |  | — |  |  |  |  |
Corporate stocks, preferred | 4,523 |  |  | 509 |  |  | 4,014 |  |  |  |  |
Mutual funds and other | 62,062 |  |  | 62,062 |  |  | — |  |  |  |  |
Available-for-sale debt securities: |  |  |  |  |  |  |  |  |
U.S. government | 40,256 |  |  | 37,987 |  |  | 2,269 |  |  |  |  | $ | 1,637 |
International government | 10,498 |  |  | — |  |  | 10,498 |  |  |  |  | 738 |
Municipals | 48,364 |  |  | — |  |  | 48,364 |  |  |  |  | 139 |
Corporate and other | 146,385 |  |  |  |  | 146,385 |  |  |  |  | 5,853 |
| $ | 421,377 |  |  | $ | 209,847 |  |  | $ | 211,530 |  |  |  |  | $ | 8,367 |
December 31, 2022 |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 66,843 |  |  | $ | 66,843 |  |  | $ | — |  |  |  |  |
Equity securities: |  |  |  |  |  |  |  |  |
Corporate stocks, common | 40,103 |  |  | 40,103 |  |  | — |  |  |  |  |
Corporate stocks, preferred | 5,191 |  |  | 790 |  |  | 4,401 |  |  |  |  |
Mutual funds and other | 66,359 |  |  | 66,359 |  |  | — |  |  |  |  |
Available-for-sale debt securities: |  |  |  |  |  |  |  |  |
U.S. government | 45,905 |  |  | 45,645 |  |  | 260 |  |  |  |  | $ | 1,334 |
International government | 9,762 |  |  | — |  |  | 9,762 |  |  |  |  | 1,117 |
Municipals | 43,136 |  |  | — |  |  | 43,136 |  |  |  |  | 1,062 |
Corporate and other | 140,177 |  |  | — |  |  | 140,177 |  |  |  |  | 6,473 |
| $ | 417,476 |  |  | $ | 219,740 |  |  | $ | 197,736 |  |  |  |  | $ | 9,986 |
The carrying amounts and fair values of long-term debt, all of which are considered Level 2 fair value measurements and are not recorded at fair value on the Condensed Consolidated Balance Sheets, are presented below:
| Carrying Amount |  | Fair Value |  |  |  |  |  |
September 30, 2023 | (In thousands)
PNMR | $ | 4,405,121 |  |  | $ | 3,933,137 |  |  |  |  |  |  |
PNM | 2,145,200 |  |  | 1,868,133 |  |  |  |  |  |  |
TNMP | 1,260,864 |  |  | 1,065,003 |  |  |  |  |  |  |
December 31, 2022 |  |  |  |  |  |  |  |  |
PNMR | $ | 4,077,387 |  |  | $ | 3,726,195 |  |  |  |  |  |  |
PNM | 2,000,900 |  |  | 1,789,186 |  |  |  |  |  |  |
TNMP | 1,076,875 |  |  | 937,009 |  |  |  |  |  |  |
The carrying amount and fair value of the Company’s other investments presented on the Condensed Consolidated Balance Sheets are not material and not shown in the above table.

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