
	Fair Value of Derivative and Other Financial Instruments

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. The Company’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. 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 years ended December 31, 2014 and 2013, 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
	December 31,
	2014			2013
	(In thousands)
PNM and PNMR
Current assets	$	11,232		$	4,064
Deferred charges	—			3,002
	11,232			7,066
Current liabilities	(1,209		)	(2,699		)
Long-term liabilities	(477		)	(1,094		)
	(1,686		)	(3,793		)
Net	$	9,546		$	3,273

Included in the above table are $3.0 million of current assets at December 31, 2014 and $3.0 million of current assets and $3.0 million of deferred charges at December 31, 2013 related to contracts, which were entered into in July 2013, for the sale of energy from PVNGS Unit 3 for 2014 and 2015 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 December 31, 2014 and 2013.

At December 31, 2014 and 2013, PNMR and PNM had no amounts recognized for the legal right to reclaim cash collateral. In addition, at December 31, 2014 and 2013, amounts posted as cash collateral under margin arrangements were $3.8 million and $2.8 million for both PNMR and PNM. At December 31, 2014 and 2013, obligations to return cash collateral were $0.2 million and $0.2 million for both PNMR and PNM. Cash collateral amounts are included in other current assets and other current liabilities on the Consolidated Balance Sheets.

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 $0.4 million of current assets and $0.1 million of current liabilities at December 31, 2013 related to this plan. The offsets to these amounts are recorded as regulatory assets and liabilities on the Consolidated Balance Sheets. At December 31, 2014, there were no hedges in place under this plan.

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
	Year Ended December 31,
	2014		2013		2012
	(In thousands)
PNMR and PNM
Electric operating revenues	$	4,491	$	1,727	$	6,168
Cost of energy	593		1,109		(460		)
Total gain	$	5,084	$	2,836	$	5,708

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
December 31, 2014
PNMR and PNM	650,000	(1,919,000	)
December 31, 2013
PNMR and PNM	905,000	(3,343,783	)

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 the Company’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)
December 31, 2014
PNMR and PNM	$	1,686	$	—	$	167
December 31, 2013
PNMR and PNM	$	2,398	$	—	$	2,152

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. Since January 1, 2011, PNM has been selling power from its interest in PVNGS Unit 3 at market prices. As of December 31, 2014, PNM had contracted to sell 100% of PVNGS Unit 3 output through 2015, at market price plus a premium. Through hedging arrangements that are accounted for as economic hedges, PNM has established fixed rates, which average approximately $37 per MWh, for substantially all of these sales.

Non-Derivative Financial Instruments

The carrying amounts reflected on the 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, beginning in August 2012, a trust for PNM’s share of post-term reclamation costs related to the coal mines serving SJGS (Note 16). The fair value and gross unrealized gains of investments in available-for-sale securities are presented in the following table. At December 31, 2014 and 2013, the fair value of available-for-sale securities included $244.6 million and $222.5 million for the NDT and $5.5 million and $4.4 million for the mine reclamation trust.



	December 31, 2014				December 31, 2013
	Unrealized Gains		Fair Value		Unrealized Gains		Fair Value
PNMR and PNM			(In thousands)
Cash and cash equivalents	$	—	$	8,276	$	—	$	3,356
Equity securities:
Domestic value	17,418		45,340		14,523		39,460
Domestic growth	21,354		74,053		25,656		76,292
International and other	156		16,599		1,040		16,633
Fixed income securities:
U.S. Government	903		22,563		158		21,941
Municipals	5,851		68,973		1,018		58,568
Corporate and other	666		14,341		207		10,605
	$	46,348	$	250,145	$	42,602	$	226,855

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 change in realized impairment losses of $(0.7) million, $0.6 million, and $5.2 million.



	Year Ended December 31,
	2014			2013			2012
	(In thousands)
Proceeds from sales	$	117,989		$	271,140		$	167,330
Gross realized gains	$	15,162		$	14,308		$	15,907
Gross realized (losses)	$	(3,964	)	$	(4,298	)	$	(8,170	)

Held-to-maturity securities are those investments in debt securities that the Company has the ability and intent to hold until maturity. Held-to-maturity securities consist of the investment in PVNGS lessor notes 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 December 31, 2014, 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		PNM
	(In thousands)
Within 1 year	$	3,946	$	8,019	$	8,019
After 1 year through 5 years	20,275		25,430		24,817
After 5 years through 10 years	13,422		—		—
After 10 years through 15 years	10,367		—		—
After 15 years through 20 years	11,539		—		—
After 20 years	46,328		—		—
	$	105,877	$	33,449	$	32,836

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 years ended December 31, 2014 and 2013.

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 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 Consolidated Balance Sheets are presented below by level of the fair value hierarchy. There were no Level 3 fair value measurements at December 31, 2014 and 2013 for items recorded at fair value.



				GAAP Fair Value Hierarchy
	Total			Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
December 31, 2014				(In thousands)
PNMR and PNM
Available-for-sale securities
Cash and cash equivalents	$	8,276		$	8,276	$	—
Equity securities:
Domestic value	45,340			45,340		—
Domestic growth	74,053			74,053		—
International and other	16,599			16,599		—
Fixed income securities:
U.S. Government	22,563			20,808		1,755
Municipals	68,973			—		68,973
Corporate and other	14,341			4,843		9,498
	$	250,145		$	169,919	$	80,226

Commodity derivative assets	$	11,232		$	—	$	11,232
Commodity derivative liabilities	(1,686		)	—		(1,686		)
Net	$	9,546		$	—	$	9,546



				GAAP Fair Value Hierarchy
	Total			Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
December 31, 2013				(In thousands)
PNMR and PNM
Available-for-sale securities
Cash and cash equivalents	$	3,356		$	3,356	$	—
Equity securities:
Domestic value	39,460			39,460		—
Domestic growth	76,292			76,292		—
International and other	16,633			16,633		—
Fixed income securities:
U.S. Government	21,941			20,194		1,747
Municipals	58,568			—		58,568
Corporate and other	10,605			2,245		8,360
	$	226,855		$	158,180	$	68,675

Commodity derivative assets	$	7,066		$	—	$	7,066
Commodity derivative liabilities	(3,793		)	—		(3,793		)
Net	$	3,273		$	—	$	3,273

The carrying amounts and fair values of investments in PVNGS lessor notes, other investments, and long-term debt are presented below:



					GAAP Fair Value Hierarchy
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
December 31, 2014	(In thousands)
PNMR
Long-term debt	$	1,975,090	$	2,173,117	$	—	$	2,173,117	$	—
Investment in PVNGS lessor notes	$	31,232	$	32,836	$	—	$	—	$	32,836
Other investments	$	1,762	$	2,375	$	639	$	—	$	1,736
PNM
Long-term debt	$	1,490,657	$	1,624,222	$	—	$	1,624,222	$	—
Investment in PVNGS lessor notes	$	31,232	$	32,836	$	—	$	—	$	32,836
Other investments	$	397	$	397	$	397	$	—	$	—
TNMP
Long-term debt	$	365,667	$	427,356	$	—	$	427,356	$	—
Other investments	$	242	$	242	$	242	$	—	$	—

December 31, 2013
PNMR
Long-term debt	$	1,745,420	$	1,905,230	$	—	$	1,905,230	$	—
Investment in PVNGS lessor notes	$	52,958	$	57,279	$	—	$	—	$	57,279
Other investments	$	1,835	$	3,196	$	690	$	—	$	2,506
PNM
Long-term debt	$	1,290,618	$	1,382,938	$	—	$	1,382,938	$	—
Investment in PVNGS lessor notes	$	52,958	$	57,279	$	—	$	—	$	57,279
Other investments	$	445	$	445	$	445	$	—	$	—
TNMP
Long-term debt	$	336,036	$	390,814	$	—	$	390,814	$	—
Other investments	$	245	$	245	$	245	$	—	$	—

Investments Held by Employee Benefit Plans

As discussed in Note 12, PNM and TNMP have trusts that hold investment assets for their pension and other postretirement benefit plans. The fair value of the assets held by the trusts impacts the determination of the funded status of each plan, but the assets are not reflected on the Company’s Consolidated Balance Sheets. Both the PNM Pension Plan and the TNMP Pension Plan hold units of participation in the PNM Resources, Inc. Master Trust (the “PNMR Master Trust”), which was established for the investment of assets of the pension plans. Level 2 and Level 3 fair values are provided by fund managers utilizing a pricing service. For level 2 fair values, the pricing provider predominately uses the market approach using bid side market value based upon a hierarchy of information for specific securities or securities with similar characteristics. Level 2 investments in mutual funds are measured at net asset value as year-end. Level 3 investments are comprised of alternative investments, which are measured at net asset value at year-end and include private equity funds, hedge funds, and real estate funds. The private equity funds are not voluntarily redeemable. These investments are realized through periodic distributions occurring over a 10 to 15-year term after the initial investment. The real estate funds and hedge funds may be voluntarily redeemed, but are subject to redemption provisions that may result in the funds not being able to be redeemed in the near term. Audited financial statements are received for each fund and are reviewed by the Company annually.

The valuation of alternative investments 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 significant unobservable inputs include the trading multiples of public companies that are considered comparable to the company being valued, company specific issues, estimates of liquidation value, current operating performance and future expectations of performance, changes in market outlook and the financing environment, capitalization rates, discount rates and cash flows. The fair values of investments held by the employee benefit plans are as follows:



			GAAP Fair Value Hierarchy
	Total		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2014			(In thousands)
PNM Pension Plan
Participation in PNMR Master Trust Total Plan Investments	$	588,112	$	123,668	$	398,819	$	65,625
TNMP Pension Plan
Participation in PNMR Master Trust Total Plan Investments	$	69,207	$	14,823	$	44,425	$	9,959
PNM OPEB Plan
Cash and cash equivalents	$	1,242	$	1,242	$	—	$	—
Equity securities:
International funds	10,332		—		10,332		—
Domestic value	8,365		8,365		—		—
Domestic growth	5,960		5,960		—		—
Other funds	30,997		—		30,997		—
Fixed income securities:
Mutual funds	22,122		22,122		—		—
	$	79,018	$	37,689	$	41,329	$	—
TNMP OPEB Plan
Cash and cash equivalents	$	168	$	168	$	—	$	—
Equity securities:
International funds	1,277		—		1,277		—
Domestic value	403		403		—		—
Domestic growth	1,024		1,024		—		—
Other funds	3,790		—		3,790		—
Fixed income securities:
Mutual funds	3,549		3,549		—		—
	$	10,211	$	5,144	$	5,067	$	—



			GAAP Fair Value Hierarchy
	Total		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2013	(In thousands)
PNM Pension Plan
Participation in PNMR Master Trust	$	557,258	$	145,364	$	330,903	$	80,991
TNMP Pension Plan
Participation in PNMR Master Trust	$	66,285	$	18,657	$	32,620	$	15,008
PNM OPEB Plan
Cash and cash equivalents	$	1,152	$	1,152	$	—	$	—
Equity securities:
International funds	11,634		—		11,634		—
Domestic value	6,388		6,388		—		—
Domestic growth	24,135		7,094		17,041		—
Other funds	14,028		—		14,028		—
Fixed income securities:
Mutual funds	16,796		16,796		—		—
	$	74,133	$	31,430	$	42,703	$	—
TNMP OPEB Plan
Cash and cash equivalents	$	302	$	302	$	—	$	—
Equity securities:
International funds	1,334		—		1,334		—
Domestic value	381		381		—		—
Domestic growth	4,171		1,848		2,323		—
Other funds	1,844		—		1,844		—
Fixed income securities:
Mutual funds	1,702		1,702		—		—
	$	9,734	$	4,233	$	5,501	$	—

The fair values of investments in the PNMR Master Trust are as follows:



			GAAP Fair Value Hierarchy
	Total		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2014	(In thousands)
PNMR Master Trust
Cash and cash equivalents	$	15,645	$	15,645	$	—	$	—
Equity securities:
International	23,282		—		23,282		—
Domestic value	41,778		41,778		—		—
Domestic growth	28,370		28,370		—		—
Other funds	29,719		—		29,719		—
Fixed income securities:
Corporate	242,742		—		242,015		727
U.S. Government	106,634		52,537		54,097		—
Municipals	20,156		—		20,156		—
Other funds	74,136		161		73,975		—
Alternative investments:
Private equity funds	37,220		—		—		37,220
Hedge funds	23,876		—		—		23,876
Real estate funds	13,761		—		—		13,761
	$	657,319	$	138,491	$	443,244	$	75,584
December 31, 2013
PNMR Master Trust
Cash and cash equivalents	$	16,281	$	16,281	$	—	$	—
Equity securities:
International	24,471		24,471		—		—
Domestic value	41,451		41,451		—		—
Domestic growth	36,805		36,805		—		—
Other funds	22,522		—		22,522		—
Fixed income securities:
Corporate	202,897		363		202,358		176
U.S. Government	99,748		44,541		55,207		—
Municipals	17,259		—		17,259		—
Other funds	66,286		109		66,177		—
Alternative investments:
Private equity funds	39,122		—		—		39,122
Hedge funds	34,912		—		—		34,912
Real estate funds	21,789		—		—		21,789
	$	623,543	$	164,021	$	363,523	$	95,999

A reconciliation of the changes in Level 3 fair value measurements is as follows:



	Year Ended December 31,
	2014			2013
Level 3 Fair Value Assets and Liabilities	(In thousands)
PNM Pension	Master Trust			Master Trust
Balance at beginning of period	$	80,991		$	79,017
Actual return on assets sold during the period	10,376			3,303
Actual return on assets still held at period end	(5,731		)	3,361
Purchases	8,832			15,110
Sales	(28,843		)	(19,800		)
Balance at end of period	65,625			80,991
TNMP Pension
Balance at beginning of period	$	15,008		$	14,171
Actual return on assets sold during the period	3,409			1,400
Actual return on assets still held at period end	(1,883		)	1,425
Purchases	2,902			6,408
Sales	(9,477		)	(8,396		)
Balance at end of period	9,959			15,008
Total	$	75,584		$	95,999

Additional information concerning changes in Level 3 fair value measurements for the PNMR Master Trust is as follows:

Level 3 Fair Value Assets and Liabilities



PNMR Master Trust	Private equity funds			Hedge funds			Real estate funds			Fixed income - corporate			Total
				(In thousands)
Balance at December 31, 2012	$	38,212		$	31,277		$	23,699		$	—		$	93,188
Actual return on assets sold during the period	4,677			135			(109		)	1			4,704
Actual return on assets still held at period end	1,162			3,500			123			—			4,785
Purchases	3,117			16,151			2,076			175			21,519
Sales	(8,046		)	(16,151		)	(4,000		)	—			(28,197		)
Balance at December 31, 2013	39,122			34,912			21,789			176			95,999
Actual return on assets sold during the period	5,355			8,667			(236		)	—			13,786
Actual return on assets still held at period end	(296		)	(7,536		)	237			(20		)	(7,615		)
Purchases	3,656			5,500			1,971			608			11,735
Sales	(10,617		)	(17,667		)	(10,000		)	(37		)	(38,321		)
Balance at December 31, 2014	$	37,220		$	23,876		$	13,761		$	727		$	75,584