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.

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 is exposed to market risk for the needs of its customers not covered under a FPPAC.

Beginning January 1, 2018, PNM is exposed to market risk for its 65 MW interest in SJGS Unit 4, which is held as merchant plant as ordered by the NMPRC. 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 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.

PNM and Tri-State have a hazard sharing agreement, which expires on May 31, 2022. Under this agreement, each party sells the other party 100 MW of capacity and energy from a designated generation resource on a unit contingent basis, subject to certain performance guarantees. Both the purchases and sales are made at the same market index price. This agreement serves

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.

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.

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, 2019 and the year ended December 31, 2018, 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.

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 $2.9 million at September 30, 2019 and $3.6 million at December 31, 2018 resulting from PNM’s hazard sharing arrangements with Tri-State. The hazard sharing arrangements are net-settled upon delivery. Other amounts that could be offset under master netting agreements were immaterial.

At September 30, 2019 and December 31, 2018, PNM had no amounts recognized for the legal right to reclaim cash collateral. However, at September 30, 2019 and December 31, 2018, amounts posted as cash collateral under margin arrangements were $0.5 million and $1.0 million. At September 30, 2019 and December 31, 2018, obligations to return cash collateral were $0.9 million and $1.0 million. Cash collateral amounts are included in other current assets and other current liabilities on the Condensed Consolidated Balance Sheets.

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, 2019 and December 31, 2018, PNM had no such contracts in a net liability position.

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 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, 2019 and December 31, 2018, the fair value of investment securities included $322.2 million and $287.1 million for the NDT and $46.8 million and $41.1 million for the mine reclamation trusts.

As discussed in Note 9 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K, on January 1, 2018 the Company adopted Accounting Standards Update 2016-01 – Financial Instruments (Subtopic 825-10). Accordingly, on January 1, 2018 PNM recorded an after-tax cumulative effect adjustment of $11.2 million to reclassify unrealized holding gains on equity securities held in the NDT and coal mine reclamation trusts from AOCI to retained earnings on the Condensed Consolidated Balance Sheets. After January 1, 2018, all gains and losses resulting from sales and changes in the fair value of equity securities are recognized in earnings. Under ASU 2016-01, the accounting for available-for-sale debt securities remains essentially unchanged. See discussion of New Accounting Pronouncements in Note 1 regarding ASU 2016-13.



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019		2018			2019		2018
	(In thousands)
Equity securities:
Net gains from equity securities sold	$	514	$	113		$	4,675	$	5,443
Net gains from equity securities still held	1,011		2,943			10,916		2,636
Total net gains on equity securities	1,525		3,056			15,591		8,079
Available-for-sale debt securities:
Net gains (losses) on debt securities	161		(593		)	4,708		(6,998		)
Net gains on investment securities	$	1,686	$	2,463		$	20,299	$	1,081

The proceeds and gross realized gains and losses on the disposition of securities held in the NDT 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 $0.2 million and $2.8 million for the three and nine months ended September 30, 2019 and $(0.8) million and $(4.6) million for the three and nine months ended September 30, 2018.

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. The Company records any

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 value 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. Level 3 investments are comprised of corporate term loans. 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 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. Management of the Company independently verifies the information provided by pricing services.



				GAAP Fair Value Hierarchy
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Unrealized Gains
	(In thousands)
September 30, 2019
Cash and cash equivalents	$	1,455		$	1,455	$	—		$	—
Equity securities:
Corporate stocks, common	58,820			58,820		—			—
Corporate stocks, preferred	8,877			2,014		6,863			—
Mutual funds and other	63,711			63,694		17			—
Available-for-sale debt securities:
U.S. Government	40,959			15,458		25,501			—		$	832
International Government	12,975			—		12,975			—		819
Municipals	44,706			—		44,706			—		1,896
Corporate and other	137,514			946		133,772			2,796		9,591
	$	369,017		$	142,387	$	223,834		$	2,796	$	13,138

Commodity derivative assets	$	2,927		$	—	$	2,927		$	—
Commodity derivative liabilities	(2,867		)	—		(2,867		)	—
Net	$	60		$	—	$	60		$	—



	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Unrealized Gains
	(In thousands)
December 31, 2018
Cash and cash equivalents	$	11,472		$	11,472	$	—		$	—
Equity securities:
Corporate stocks, common	32,997			32,997		—			—
Corporate stocks, preferred	7,258			1,654		5,604			—
Mutual funds and other	70,777			70,777		—			—
Available-for-sale debt securities:
U.S. Government	29,503			18,662		10,841			—		$	1,098
International Government	8,435			—		8,435			—		90
Municipals	53,642			—		53,642			—		489
Corporate and other	114,158			588		111,414			2,156		923
	$	328,242		$	136,150	$	189,936		$	2,156	$	2,600

Commodity derivative assets	$	3,594		$	—	$	3,594		$	—
Commodity derivative liabilities	(3,688		)	—		(3,688		)	—
Net	$	(94	)	$	—	$	(94	)	$	—



	Corporate Debt
	(In thousands)
Balance at December 31, 2018	$	2,156
Actual return on assets sold during the period	(54		)
Actual return on assets still held at period end	41
Purchases	2,090
Sales	(1,437		)
Balance at September 30, 2019	$	2,796

Balance at December 31, 2017	$	—
Actual return on assets sold during the period	(6		)
Actual return on assets still held at period end	16
Purchases	5,234
Sales	(2,190		)
Balance at September 30, 2018	$	3,054



					GAAP Fair Value Hierarchy
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2019	(In thousands)
PNMR	$	2,852,229	$	3,030,720	$	—	$	3,030,720	$	—
PNM	$	1,707,637	$	1,787,761	$	—	$	1,787,761	$	—
TNMP	$	705,756	$	799,425	$	—	$	799,425	$	—

December 31, 2018
PNMR	$	2,670,111	$	2,703,810	$	—	$	2,703,810	$	—
PNM	$	1,656,490	$	1,668,736	$	—	$	1,668,736	$	—
TNMP	$	575,398	$	597,236	$	—	$	597,236	$	—