Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2020

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 net asset value.

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 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, with changes in fair value prior to settlement recorded as other comprehensive income.

At Sept. 30, 2020, accumulated other comprehensive loss related to settled interest rate derivatives included $1.2 million of net losses expected to be reclassified into earnings during the next 12 months as the hedged 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. The classification as a regulatory asset or liability, if applicable, is based on approved regulatory recovery mechanisms.

As of Sept. 30, 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)	Sept. 30, 2020	Dec. 31, 2019
Megawatt hours of electricity	18.1	9.3
Million British thermal units of natural gas	92.8	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 on 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 Sept. 30, 2020, five of PSCo’s 10 most significant counterparties for these activities, comprising $108.3 million, or 74%, of this credit exposure, had investment grade credit ratings from S&P Global Ratings, Moody’s Investor Services or Fitch Ratings. Four of the 10 most significant counterparties, comprising $22.6 million, or 15%, 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 $2.9 million, or 2%, 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, Regional Transmission Organizations or other utilities.

The impact of derivative activity:


	Pre-Tax Fair Value Gains (Losses) Recognized During the Period in:
(Millions of Dollars)	Accumulated Other Comprehensive Loss		Regulatory (Assets) and Liabilities
Three Months Ended Sept. 30, 2020
Other derivative instruments
Natural gas commodity	$	—	$	0.6
Total	$	—	$	0.6

Nine Months Ended Sept. 30, 2020
Other derivative instruments
Natural gas commodity	$	—	$	(2.2)
Total	$	—	$	(2.2)

Three Months Ended Sept. 30, 2019
Other derivative instruments
Natural gas commodity	$	—	$	(2.2)
Total	$	—	$	(2.2)

Nine Months Ended Sept. 30, 2019
Other derivative instruments
Natural gas commodity	$	—	$	(3.7)
Total	$	—	$	(3.7)


	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 Sept. 30, 2020
Derivatives designated as cash flow hedges
Interest rate	$	0.4	(a)	$	—		$	—
Total	$	0.4		$	—		$	—
Other derivative instruments
Commodity trading	$	—		$	—		$	3.2	(b)
Total	$	—		$	—		$	3.2

Nine Months Ended Sept. 30, 2020
Derivatives designated as cash flow hedges
Interest rate	$	1.2	(a)	$	—		$	—
Total	$	1.2		$	—		$	—
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 and nine months ended Sept. 30, 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 and nine months ended Sept. 30, 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 Sept. 30, 2019
Derivatives designated as cash flow hedges
Interest rate	$	0.4	(a)	$	—		$	—
Total	$	0.4		$	—		$	—
Other derivative instruments
Commodity trading	$	—		$	—		$	0.6	(b)
Total	$	—		$	—		$	0.6

Nine Months Ended Sept. 30, 2019
Derivatives designated as cash flow hedges
Interest rate	$	1.2	(a)	$	—		$	—
Total	$	1.2		$	—		$	—
Other derivative instruments
Commodity trading	$	—		$	—		$	5.3	(b)
Natural gas commodity	—			(1.3)		(c)	(2.1)		(c)
Total	$	—		$	(1.3)		$	3.2

(a) Amounts are recorded to interest charges.

(c) Amounts for the three and nine months ended Sept. 30, 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 and nine months ended Sept. 30, 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 and nine months ended Sept. 30, 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 Sept. 30, 2020 and Dec. 31, 2019, there were $0.1 million and no derivative instruments in a liability position with such underlying contract provisions, respectively.

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 Sept. 30, 2020 and Dec. 31, 2019.

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


	Sept. 30, 2020												Dec. 31, 2019
	Fair Value						Fair Value Total		Netting (a)		Total		Fair Value						Fair Value Total		Netting (a)		Total
(Millions of Dollars)	Level 1		Level 2		Level 3								Level 1		Level 2		Level 3
Current derivative assets
Other derivative instruments:
Commodity trading	$	7.0	$	27.6	$	1.0	$	35.6	$	(27.0)	$	8.6	$	1.9	$	11.1	$	0.9	$	13.9	$	(10.1)	$	3.8
Natural gas commodity	—		10.4		—		10.4		—		10.4		—		3.4		—		3.4		—		3.4
Total current derivative assets	$	7.0	$	38.0	$	1.0	$	46.0	$	(27.0)	$	19.0	$	1.9	$	14.5	$	0.9	$	17.3	$	(10.1)	$	7.2
Noncurrent derivative assets
Other derivative instruments:
Commodity trading	$	1.6	$	9.1	$	2.5	$	13.2	$	(10.1)	$	3.1	$	0.4	$	8.1	$	1.1	$	9.6	$	(9.6)	$	—
Total noncurrent derivative assets	$	1.6	$	9.1	$	2.5	$	13.2	$	(10.1)	$	3.1	$	0.4	$	8.1	$	1.1	$	9.6	$	(9.6)	$	—


	Sept. 30, 2020												Dec. 31, 2019
	Fair Value						Fair Value Total		Netting (a)		Total		Fair Value						Fair Value Total		Netting (a)		Total
(Millions of Dollars)	Level 1		Level 2		Level 3								Level 1		Level 2		Level 3
Current derivative liabilities
Other derivative instruments:
Commodity trading	$	7.0	$	31.6	$	6.3	$	44.9	$	(27.0)	$	17.9	$	1.7	$	16.7	$	—	$	18.4	$	(13.1)	$	5.3
Natural gas commodity	—		2.9		—		2.9		—		2.9		—		3.4		—		3.4		—		3.4
Total current derivative liabilities	$	7.0	$	34.5	$	6.3	$	47.8	$	(27.0)	$	20.8	$	1.7	$	20.1	$	—	$	21.8	$	(13.1)	$	8.7
Noncurrent derivative liabilities
Other derivative instruments:
Commodity trading	$	0.9	$	21.4	$	35.5	$	57.8	$	(15.3)	$	42.5	$	0.4	$	47.0	$	14.7	$	62.1	$	(9.6)	$	52.5
Total noncurrent derivative assets	$	0.9	$	21.4	$	35.5	$	57.8	$	(15.3)	$	42.5	$	0.4	$	47.0	$	14.7	$	62.1	$	(9.6)	$	52.5

(a)PSCo nets derivative instruments and related collateral on its consolidated balance sheets when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Sept. 30, 2020 and Dec. 31, 2019. At Sept. 30, 2020 and Dec. 31, 2019, derivative liabilities include no obligations to return cash collateral and the right to reclaim cash collateral of $5.2 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.

Changes in Level 3 commodity derivatives:


	Three Months Ended Sept. 30
(Millions of Dollars)	2020		2019
Balance at July 1	$	(17.1)	$	0.2
Settlements	0.5		(0.5)
Net transactions recorded during the period:
(Losses) gains recognized in earnings (a)	(21.7)		0.5
Balance at Sept. 30	$	(38.3)	$	0.2

	Nine Months Ended Sept. 30
(Millions of Dollars)	2020		2019
Balance at Jan. 1	$	(12.7)	$	0.1
Settlements	(0.6)		(1.4)
Net transactions recorded during the period:
(Losses) gains recognized in earnings (a)	(25.0)		1.5
Balance at Sept. 30	$	(38.3)	$	0.2

(a)Amounts relate to commodity derivatives held at the end of the period.

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 and nine months ended Sept. 30, 2020 and 2019.

Fair Value of Long-Term Debt

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


	Sept. 30, 2020				Dec. 31, 2019
(Millions of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	5,722.7	$	6,932.2	$	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 Sept. 30, 2020 and Dec. 31, 2019 and given the observability of the inputs, fair values presented for long-term debt were assigned as Level 2.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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