Fair Value of Financial Assets and Liabilities

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Liabilities

Fair Value Measurements

Accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires disclosures about assets and liabilities measured at fair value. A hierarchical framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance.

• Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices;

• Level 2 — Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reporting date. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs; and

• Level 3 — Significant inputs to pricing have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those valued with models requiring significant management judgment or estimation.

Specific valuation methods include:

Cash equivalents — The fair values of cash equivalents are generally based on cost plus accrued interest; money market funds are measured using quoted NAV.

Interest rate derivatives — The fair values of interest rate derivatives are based on broker quotes that utilize current market interest rate forecasts.

Commodity derivatives — The methods used to measure the fair value of commodity derivative forwards and options utilize forward prices and volatilities, as well as pricing adjustments for specific delivery locations and are generally assigned a Level 2 classification. When contractual settlements relate to inactive delivery locations or extend to periods beyond those readily observable on active exchanges or quoted by brokers, the significance of the use of less observable forecasts of forward prices and volatilities on a valuation is evaluated and may result in Level 3 classification.

Derivative Instruments Fair Value Measurements

PSCo enters into derivative instruments, including forward contracts, futures, swaps and options, for trading purposes and to manage risk in connection with changes in interest rates, utility commodity prices and vehicle fuel prices.

Interest Rate Derivatives — PSCo enters 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 March 31, 2020, accumulated other comprehensive loss related to interest rate derivatives included $1.2 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for unsettled hedges, as applicable.

Wholesale and Commodity Trading Risk — PSCo conducts various wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy, energy-related instruments and natural gas-related instruments, including derivatives. PSCo is allowed to conduct these activities within guidelines and limitations as approved by its risk management committee, comprised of management personnel not directly involved in activities governed by this policy.

Commodity Derivatives — PSCo enters into derivative instruments to manage variability of future cash flows from changes in commodity prices in its electric and natural gas operations, as well as for trading purposes. This could include the purchase or sale of energy or energy-related products, natural gas to generate electric energy, natural gas for resale and vehicle fuel.

PSCo enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers but may not be designated as qualifying hedging transactions. Changes in the fair value of non-trading commodity derivative instruments are recorded as other comprehensive income or deferred as a regulatory asset or liability. The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.

As of March 31, 2020, PSCo had no commodity contracts designated as cash flow hedges.

PSCo enters into commodity derivative instruments for trading purposes not directly related to commodity price risks associated with serving its electric and natural gas customers. Changes in the fair value of these commodity derivatives are recorded in electric operating revenues, net of amounts credited to customers under margin-sharing mechanisms.

Gross notional amounts of commodity forwards and options:

(Amounts in Millions) (a)(b)	March 31, 2020	Dec. 31, 2019
MWh of electricity	9.4	9.3
MMBtu of natural gas	50.4	32.2

^(a)  Amounts are not reflective of net positions in the underlying commodities.

^(b)  Notional amounts for options are included on a gross basis, but are weighted for the probability of exercise.

Consideration of Credit Risk and Concentrations — PSCo continuously monitors the creditworthiness of the counterparties to its interest rate derivatives and commodity derivative contracts prior to settlement and assesses each counterparty’s ability to perform on the transactions set forth in the contracts. The impact of credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the consolidated balance sheets.

PSCo’s most significant concentrations of credit risk with particular entities or industries are contracts with counterparties to its wholesale, trading and non-trading commodity activities. At March 31, 2020, four of PSCo’s 10 most significant counterparties for these activities, comprising $113.3 million, or 77%, of this credit exposure, had investment grade credit ratings from S&P Global Ratings, Moody’s Investor Services or Fitch Ratings. Five of the 10 most significant counterparties, comprising $20.6 million, or 14%, of this credit exposure, were not rated by these external agencies, but based on PSCo’s internal analysis, had credit quality consistent with investment grade. One of these significant counterparties, comprising $2.3 million, or 1%, of this credit exposure, had credit quality less than investment grade, based on external analysis. Eight of these significant counterparties are independent system operators, municipal or cooperative electric entities, RTOs or other utilities.

As of March 31, 2020, PSCo had no activity for natural gas commodity derivatives that were recognized in regulatory (assets) and liabilities.

The impact of derivative activity for Dec. 31, 2019, is as follows:

	Pre-Tax Fair Value Gains Recognized During the Period in:
(Millions of Dollars)	Accumulated Other Comprehensive Loss		Regulatory (Assets) and Liabilities
Three Months Ended March 31, 2019
Other derivative instruments
Natural gas commodity	$	—	$	3.3
Total	$	—	$	3.3

	Pre-Tax Losses Reclassified into Income During the Period from:						Pre-Tax Losses Recognized During the Period in Income
(Millions of Dollars)	Accumulated Other Comprehensive Loss			Regulatory Assets and (Liabilities)
Three Months Ended March 31, 2020
Derivatives designated as cash flow hedges
Interest rate	$	0.4	(a)	$	—		$	—
Total	0.4			—			—
Other derivative instruments
Commodity trading	—			—			(2.1		)	(b)
Natural gas commodity	—			3.4		(c)	(3.4		)	(c)
Total	$	—		$	3.4		$	(5.5	)

^(a)  Amounts are recorded to interest charges.

^(b)  Amounts are recorded to electric operating revenues. Portions of these gains and losses are subject to sharing with electric customers through margin-sharing mechanisms and deducted from gross revenue as appropriate.

^(c)  Amounts for the three months ended March 31, 2020, included no settlement gain or losses on derivatives entered to mitigate natural gas price risk for electric generation recorded to electric fuel and purchased power, subject to cost-recovery mechanisms and reclassified to a regulatory asset, as appropriate. Remaining derivative settlement losses for the three months ended March 31, 2020, relate to natural gas operations and are recorded to cost of natural gas sold and transported. These gains and losses are subject to cost-recovery mechanisms and reclassified out of income to a regulatory asset or liability, as appropriate.

	Pre-Tax (Gains) Losses Reclassified into Income During the Period from:							Pre-Tax Gains (Losses) Recognized During the Period in Income
(Millions of Dollars)	Accumulated Other Comprehensive Loss			Regulatory Assets and (Liabilities)
Three Months Ended March 31, 2019
Derivatives designated as cash flow hedges
Interest rate	$	0.4	(a)	$	—			$	—
Total	0.4			—				—
Other derivative instruments
Commodity trading	—			—				0.9			(b)
Natural gas commodity	—			(1.3		)	(c)	(2.0		)	(c)
Total	$	—		$	(1.3	)		$	(1.1	)

^(a)  Amounts are recorded to interest charges.

^(b)  Amounts are recorded to electric operating revenues. Portions of these gains and losses are subject to sharing with electric customers through margin-sharing mechanisms and deducted from gross revenue as appropriate.

^(c)  Amounts for the three months ended March 31, 2019, included no settlement gain or losses on derivatives entered to mitigate natural gas price risk for electric generation recorded to electric fuel and purchased power, subject to cost-recovery mechanisms and reclassified to a regulatory asset, as appropriate. Remaining derivative settlement losses for the three months ended March 31, 2019, relate to natural gas operations and are recorded to cost of natural gas sold and transported. These gains and losses are subject to cost-recovery mechanisms and reclassified out of income to a regulatory asset or liability, as appropriate.

PSCo had no derivative instruments designated as fair value hedges during the three months ended March 31, 2020 and 2019.

Credit Related Contingent Features — Contract provisions for derivative instruments that PSCo enters into, including those accounted for as normal purchase-normal sale contracts and therefore not reflected on the consolidated balance sheets, may require the posting of collateral or settlement of the contracts for various reasons, including if PSCo’s credit ratings are downgraded below its investment grade credit rating by any of the major credit rating agencies, or for cross-default contractual provisions if there was a failure under other financing arrangements related to payment terms or other covenants. At March 31, 2020 and Dec. 31, 2019, there were no derivative instruments in a liability position with such underlying contract provisions.

Certain derivative instruments are also subject to contract provisions that contain adequate assurance clauses. These provisions allow counterparties to seek performance assurance, including cash collateral, in the event that PSCo’s ability to fulfill its contractual obligations is reasonably expected to be impaired. PSCo had no collateral posted related to adequate assurance clauses in derivative contracts as of March 31, 2020 and Dec. 31, 2019.

Recurring Fair Value Measurements — PSCo’s derivative assets and liabilities measured at fair value on a recurring basis:

	March 31, 2020													Dec. 31, 2019
	Fair Value						Fair Value Total		Netting (a)					Fair Value						Fair Value Total		Netting (a)
(Millions of Dollars)	Level 1		Level 2		Level 3							Total		Level 1		Level 2		Level 3							Total
Current derivative assets
Other derivative instruments:
Commodity trading	$	4.7	$	14.8	$	0.6	$	20.1	$	(15.1	)	$	5.0	$	1.9	$	11.1	$	0.9	$	13.9	$	(10.1	)	$	3.8
Natural gas commodity	—		—		—		—		—			—		—		3.4		—		3.4		—			3.4
Total current derivative assets	$	4.7	$	14.8	$	0.6	$	20.1	$	(15.1	)	$	5.0	$	1.9	$	14.5	$	0.9	$	17.3	$	(10.1	)	$	7.2
Noncurrent derivative assets
Other derivative instruments:
Commodity trading	$	0.3	$	6.8	$	0.4	$	7.5	$	(7.5	)	$	—	$	0.4	$	8.1	$	1.1	$	9.6	$	(9.6	)	$	—
Total noncurrent derivative assets	$	0.3	$	6.8	$	0.4	$	7.5	$	(7.5	)	$	—	$	0.4	$	8.1	$	1.1	$	9.6	$	(9.6	)	$	—

	March 31, 2020													Dec. 31, 2019
	Fair Value						Fair Value Total		Netting (a)					Fair Value						Fair Value Total		Netting (a)
(Millions of Dollars)	Level 1		Level 2		Level 3							Total		Level 1		Level 2		Level 3							Total
Current derivative liabilities
Other derivative instruments:
Commodity trading	$	4.1	$	20.2	$	—	$	24.3	$	(15.6	)	$	8.7	$	1.7	$	16.7	$	—	$	18.4	$	(13.1	)	$	5.3
Natural gas commodity	—		—		—		—		—			—		—		3.4		—		3.4		—			3.4
Total current derivative liabilities	$	4.1	$	20.2	$	—	$	24.3	$	(15.6	)	$	8.7	$	1.7	$	20.1	$	—	$	21.8	$	(13.1	)	$	8.7
Noncurrent derivative liabilities
Other derivative instruments:
Commodity trading	$	0.3	$	44.9	$	15.6	$	60.8	$	(12.6	)	$	48.2	$	0.4	$	47.0	$	14.7	$	62.1	$	(9.6	)	$	52.5
Total noncurrent derivative liabilities	$	0.3	$	44.9	$	15.6	$	60.8	$	(12.6	)	$	48.2	$	0.4	$	47.0	$	14.7	$	62.1	$	(9.6	)	$	52.5

^(a)  PSCo nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at March 31, 2020 and Dec. 31, 2019. At both March 31, 2020 and Dec. 31, 2019, derivative liabilities include no obligations to return cash collateral and the right to reclaim cash collateral of $5.6 million and $3.0 million, respectively. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

There were $1.0 million of losses and $0.7 million of gains recognized in earnings for Level 3 commodity trading derivatives in the three months ended March 31, 2020 and 2019, respectively.

PSCo recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three months ended March 31, 2020 and 2019.

Fair Value of Long-Term Debt

Other financial instruments for which the carrying amount did not equal fair value:

	March 31, 2020				Dec. 31, 2019
(Millions of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	5,385.7	$	5,891.1	$	5,384.7	$	6,039.3

Fair value of PSCo’s long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. Fair value estimates are based on information available to management as of March 31, 2020 and Dec. 31, 2019, and given the observability of the inputs, fair values presented for long-term debt were assigned as Level 2.