Rates charged to wholesale electric transmission customers are based on a formula rate mechanism pursuant to which rates for wholesale transmission service are calculated annually in accordance with an approved formula. The formula includes updating cost of service components, including investment in plant and operating expenses, based on information contained in PNM’s annual financial report filed with FERC, as well as including projected large transmission capital projects to be placed into service in the following year. The projections included are subject to true-up in the formula rate for the following year. Certain items, including changes to return on equity and depreciation rates, require a separate filing to be made with FERC before being included in the formula rate.

The low natural gas price environment has resulted in market prices for power being substantially lower thatthan what PNM has beenis able to offer wholesale generation customers under the cost of service model that FERC requires PNM to use.  Consequently, PNM requested FERC approval to enter into arrangements to sell electricity at wholesale prices within PNM’s balance authority area using rates based on market conditions. In October 2015, FERC denied PNM’s request. Accordingly, PNM has decided to stop pursuing wholesale generation contracts.contracts and currently has no full-requirements wholesale generation customers.

As discussed in Note 1, PNMR Development and AEP OnSite Partners created NMRD on September 22, 2017 to pursue the acquisition, development, and ownership of renewable energy generation projects primarily in the State of New Mexico. PNMR Development and AEP OnSite Partners each have a 50% ownership interest in NMRD, a limited liability company. In December 2017, PNMR Development made a contribution to NMRD of its interest in three 10 MW solar facilities and assigned its interests in several agreements related to those facilities to NMRD. AEP OnSite Partners made a cash contribution to NMRD equal to 50% of the value of the 30 MW solar capacity, which cash was then distributed from NMRD to PNMR Development.  Power from the 30 MWs of solar capacity will beis being sold to PNM under 25-year PPAs to supply renewable energy to a new data center being constructed in PNM’s service territory by Facebook, Inc. (Note 17). At January 1, 2018, the first 10 MW of solar capacity was in commercial operation and the remaining capacity is expected to begin commercial operation by mid-2018.territory.

In late 2017, PNM enteredMarch 2018, the NMPRC approved PNM’s request to enter into three separate 25-year PPAs to purchase renewable energy and RECs to be used by PNM to supply additional renewable power to Facebook, Inc. These PPAs are subject to NMPRC approval and PNM made a filing requesting approval on January 17, 2018 (Note 17). These PPAs include the purchase of the power and RECs from:from an aggregate of 266 MW of wind and solar-PV generation facilities to be located in New Mexico. In November 2018, the 50 MW of capacity from Casa Mesa Wind was placed in commercial operation. PNM expects the remaining 216 MW of wind and solar-PV generating facilities will be in commercial operation by December 2021. In October 2018, the NMPRC approved PNM’s request to enter into two 25-year PPAs to purchase renewable energy and RECs from an aggregate of approximately 100 MW of capacity from two solar-PV facilities to be owned and operated by NMRD, which will also be used to supply power and RECs to Facebook. NMRD is required to obtain FERC approval of the PPAs. Subject to FERC approval, the first 50 MW of these facilities is expected to be in commercial operation by December 2019 and the remaining capacity is expected to be in

The business and financial results of PNMR, PNM, and TNMP are subject to a number of risks and uncertainties, many of which are beyond their control, including those set forth below and in MD&A, Note 16, and Note 17. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement contained in this report, see Disclosure Regarding Forward Looking Statements in Item 1. Business. TNMP provides transmission and distribution services to REPs that provide electric service to consumers in TNMP’s service territories. References to customers in the risk factors discussed below also encompass the customers of these REPs who are the ultimate consumers of electricity transmitted and distributed through TNMP’s facilities.

 

At the same time costs are increasing, there are factors placing downward pressures on the demand for power, thereby reducing load growth and customer usage. These factors include:

  

Under New Mexico law, utilities may propose the use of a future test year (“FTY”)FTY in establishing rates. As with any forward looking financial information, a FTY presents challenges that are inherent in the forecasting process. Forecasts of both operating and capital expenditures necessitate reliance on many assumptions concerning future conditions and operating results. Accordingly, if rate requests based on a FTY cannot be successfully supported, cash flows and results of operations may be negatively impacted. This could result from not being able to withstand challenges from regulators and intervenors regarding the utility’s capability to make reasonable forecasts.

As discussed in Note 17, PNM filed an application for a general rate increase in December 2014, which the NMPRC dismissed in May 2015, based on the Hearing Examiners recommendation, which cited procedural defects in the filing. In August 2015, PNM filed a newan application (the “NM 2015 Rate Case”) with the NMPRC for a general rate increase, including base non-fuel revenues of $121.5 million. The primary drivers of PNM’s identified revenue deficiency were infrastructure investments and the recovery of those investment dollars, including depreciation based on an updated depreciation study, and declines in forecasted energy sales as a result of PNM’s successful energy efficiency programs and other economic factors. The NMPRC issued an order authorizing an increase in non-fuel revenues of $61.2 million effective beginning in October 2016. The NMPRC disallowed recovery of PNM’s capital investment in BDT equipment installed on SJGS Units 1 and 4, which is required by the NSR permit for SJGS (Note 16), and a portion of the acquisition costs for PNM’s January 15, 2016 purchase of 64.1 MW of PVNGS Unit 2, which were previously leased to PNM, as well as the undepreciated costs of capitalized improvements made during the period that capacity was leased. PNM filed an appeal of these disallowances with the NM Supreme Court. Other parties to that rate case have filed cross-appeals to PNM’s appeal in order to appeal other decisions of the NMPRC regarding issues in the rate case.NM 2015 Rate Case. On October 30, 2017, the NM Supreme Court heard oral argument on the case but has not yet rendered a decision on the appealed matters and there is no required time frame for a decision to be issued.

In December 2016, PNM filed a request (the “NMin the NM 2016 Rate Case”)Case for a general increase in rates of $99.2 million. The primary drivers of PNM’s identified revenue deficiency were implementation of the plan for SJGS to comply with the CAA,

As discussedThe NMPRC’s December 16, 2015 order required that, no later than December 31, 2018, PNM shall make a filing with the NMRPC setting forth PNM’s recommendation and supporting testimony and exhibits to determine the extent to which SJGS should continue serving PNM’s retail customers’ needs after June 30, 2022. On December 31, 2018, PNM submitted the required filing (the “December 2018 Compliance Filing”) to the NMPRC indicating that, consistent with the conclusions reached in Note 17, PNM filed itsPNM’s 2017 IRP, PNM’s customers would benefit from the retirement of PNM’s share of SJGS (subject to future NMPRC approval) after the current SGJS CSA expires in mid-2022. On January 10, 2019, the NMPRC opened a docket to determine whether the NMPRC should grant PNM’s request to accept the December 2018 Compliance Filing and take no further action pending PNM submitting a formal consolidated abandonment and replacement resources application, or whether the NMPRC should immediately establish a formal procedural schedule regarding the abandonment of SJGS. The NMPRC received responses from parties regarding the initial order and, on July 3, 2017. Key findingsJanuary 30, 2019, approved an order initiating a proceeding and requiring PNM to submit an application for the abandonment of the 2017 IRP include that retiring PNM’s share of SJGS in 2022 afterby March 1, 2019. On February 7, 2019, PNM filed a motion requesting the expirationNMPRC vacate the January 30, 2019 order and extend the deadline for PNM’s abandonment filing until the end of the current operatingsecond

PNM’s 2017 IRP also indicates PNM’s customers and that PNM exiting its ownership interest inwould benefit from PNM’s exit from participation from Four Corners after its current coal supply agreement expires in 2031 would also provide long-term cost savings for customers.2031. The December 2018 Compliance Filing and the 2017 IRP are not final determinations of PNM’s future generation portfolio.  Retiring PNM’s share of SJGS capacity and exiting Four Corners would require NMPRC approval of abandonment filings, which PNM would make at appropriate times in the future.filings. NMPRC approval of new generation resources through CCN, PPA, or other applicable filings, would also be required. The NMPRC has issued regulatory orders requiring depreciation (and resultant regulatory recovery) of significant portions of these resources through estimated lives of 2053 for SJGS and 2041 for Four Corners. If the NMPRC approves the retirement of SJGS in 2022 and exiting Four Corners in 2031, PNM will have significant un-recovered investments in those plants. PNM would seek NMPRC approval to recover those investments from ratepayers. At December 31, 2017, the net book values of PNM’s investments in SJGS and Four Corners were $406.7 million and $165.3 million.

An adverse outcome in the NM 2015 Rate Case, or the NM 2016 Rate Case, including the pending appealsappeal of those ordersthat order before the NM Supreme Court, or adverse decisions of the decisionNMPRC regarding the potential retirement of PNM’s share of SJGS in PNM’s next rate case on the issue regardinga formal abandonment proceeding, and/or the prudency of PNM’s continued participation in Four Corners in PNM’s next rate case could negatively impact PNM’s financial position, results of operation, and cash flows. Likewise, if the NMPRC does not authorize appropriate recovery of any remaining investments in SJGS and Four Corners at the time those resources cease to be used to provide service to New Mexico ratepayers, including required future investments, and does not authorize recovery of the costs of obtaining power to replace those resources, PNM’s financial position, results of operation, and cash flows could be negatively impacted.

 

PNM currently recovers the cost of fuel for its generation facilities through its FPPAC. A new coal supply contract for SJGS, which expires on June 30, 2022, became effective on January 31, 2016 and provides for lower coal pricing than under the prior contract. In December 2013, a new fifteen-year coal supply contract for Four Corners beginning in July 2016 was executed. The average coal price per MMBTU under the new contract for Four Corners was approximately 51% higher in the twelve months ended June 30, 2017 thancompared to the twelve months ended June 30, 2016 and 6.9% higher in the twelve months ended June 30, 2016.2018 compared to the twelve months ended June 30, 2017. The contracts provide for pricing adjustments over their terms based on economic indices. Although PNM believes substantially all costs under coal supply arrangements would continue to be recovered through the FPPAC, there can be no assurance that full recovery will be allowed.

CCBsCCRs from the operation of SJGS are currently being used in the reclamation of a surface coal mine. These CCBsCCRs consist of fly ash, bottom ash, and gypsum. Any new regulation that would affect the reclamation process, including mine useany future decision regarding classification of CCBs being classifiedCCRs as hazardous waste or non-hazardous waste, could significantly increase the costs of the disposal of CCBsCCRs and the costs of mine reclamation. See Note 16.

A regulatory body may identify a site requiring environmental cleanup and designate PNM or TNMP as a responsible party. There is also uncertainty in quantifying exposure under environmental laws that impose joint and several liability on all potentially responsible parties. Failure to comply with environmental laws and regulations, even if such non-compliance is caused by factors beyond PNM’s or TNMP’s control, may result in the assessment of civil or criminal penalties and fines.

BART determinations have been made for both SJGS and Four Corners under the program to address regional haze in the “four corners” area, which would reduce the levels of several emissions, including NOx, emitted at both plants. Significant capital expenditures have been made at SJGS and are continuing at Four Corners for the installation of control technology resulting in operating costs increases. PNMR and its operating subsidiaries may underestimate the costs of environmental compliance, liabilities, and litigation due to the uncertainty inherent in these matters. Although there is uncertainty about the timing and form of the implementation of EPA’s regulations regarding climate change, including the Clean Power Plan, how CCBs used for mine reclamation will be regulated,CCRs and regulation of other power plant emissions, including changes to the ambient air quality standards, the promulgation and implementation of such regulations could have a material impact on operations. The Company is unable to estimate these costs due to the many uncertainties associated with, among other things, the nature and extent of future regulations and changes in existing regulations, including the changes in regulatory policy under the Trump Administration. Timely regulatory recovery of costs associated with any environmental-related regulations would be needed to maintain a strong financial and operational profile. The above factors could adversely affect the Company’s business, financial position, results of operations, and liquidity.

To operate their businesses, PNMR, PNM, and TNMP are required to have numerous permits and approvals from a variety of regulatory agencies. Regulatory bodies with jurisdiction over the utilities include the NMPRC, NMED, PUCT, TCEQ, ERCOT, FERC, NRC, EPA, and NERC. Oversight by these agencies covers many aspects of the Company’s utility operations including, but not limited to: location, construction, and operation of facilities; the purchase of power under long-term contracts; conditions of service; the issuance of securities; and rates charged to customers. FERC has issued a number of rules pertaining to preventing undue discrimination in transmission services and electric reliability standards. The significant level of regulation imposes restrictions on the operations of the Company and causes the incurrence of substantial compliance costs. PNMR and its subsidiaries are unable to predict the impact on their business and operating results from future actions of any agency regulating the Company. Changes in existing regulations or the adoption of new ones could result in additional expenses and/or changes in business operations. Failure to comply with any applicable rules, regulations or decisions may lead to customer refunds, fines, penalties, and other payments, which could materially and adversely affect the results of operations and financial condition of PNMR and its subsidiaries. 

 

A number of factors influence customers’ electricity usage.  These factors include, but are not limited to:

These factors and others may prompt customers to institute additional energy efficiency measures or take other actions that would result in lower power consumption. If customers bypass or underutilize PNM’s and TNMP’s facilities through self-generation, renewable, or other energy resources, technological change, or other measures, revenues would be negatively impacted.

PNM’s and TNMP’s service territories include several military bases and federally funded national laboratories, as well as large industrial customers that have significant direct and indirect impacts on the local economies where they operate.  The Company does not directly provide service to any of the military bases or national laboratories but does provide service to large industrial customers. The Company’s business could be hurt from the impacts on the local economies associated with these customer groups, as well as directly from the large industrial customers, for a number of reasons, including:

Another factor that could negatively impact the Company is that proposals are periodically advanced in various localities to municipalize, or otherwise take over PNM’s facilities, which PNM believes would require state legislative action to implement, or to establish new municipal utilities in areas currently served by PNM.  If any such initiative is successful, the result could be a material reduction in the usage of the facilities, a reduction in rate base, and reduced earnings.

Should any of the above factors result in facilities being underutilized, the Company’s financial position, operational results, and cash flows could be significantly impacted.

PNM has interests in a nuclear power plant, two coal-fired power plants, and several natural gas-fired power plants. PNM is obligated to pay for the costs of decommissioning its share of the power plants. PNM is also obligated to pay for its share of the costs of reclamation of the mines that supply coal to the coal-fired power plants. Likewise, other owners or participants are responsible for their shares of the decommissioning and reclamation obligations and it is important to PNM that those parties fulfill their obligations. Rates charged by PNM to its customers, as approved by the NMPRC, include a provision for recovery of certain costs of decommissioning, remediation, reclamation, and restoration. The NMPRC has established a cap on the amount of costs for the final reclamation of the surface coal mines that may be recovered from customers. PNM records estimated liabilities for its share of the legal obligations for decommissioning and reclamation in accordance with GAAP. These estimates include many assumptions about future events and are inherently imprecise. As discussed above, on December 31, 2018, PNM submitted its December 2018 Compliance Filing to the NMPRC indicating that, consistent with the conclusions reached in Note 17, PNM’s 2017 IRP, indicates that retiringPNM’s customers would benefit from the retirement of PNM’s share of SJGS (subject to future NMPRC approval) after the current coal supply agreement expires in 2022 andmid-2022. In addition, PNM’s 2017 IRP also indicates that exiting PNM’s ownership interest

The costs of decommissioning any nuclear power plant are substantial. PNM is responsible for all decommissioning obligations related to its entire interest in PVNGS, including portions under lease both during and after termination of the leases. PNM maintains trust funds designed to provide adequate financial resources for decommissioning PVNGS and for reclamation of the coal mines serving SJGS and Four Corners at the end of their expected lives. However, if the PVNGS units are decommissioned before their planned date or the coal mines are shut down sooner than expected, these funds may prove to be insufficient.

The Company’s financial performance depends on the successful operation of PNM’s generation assets, as well as the transmission and distribution systems of PNM and TNMP. As indicated above, SJGS Units 2 and 3 were shut down in December 2017. Also, PNM’s 2017 IRPDecember 2018 Compliance Filing indicates that PNM’s customers would benefit from retiring PNM’s share of SJGS (subject to future NMPRC approval) after the coal supply agreement for that facility expires in 2022 andmid-2022. PNM’s 2017 IRP also indicates that PNM exiting its ownership interest in Four Corners in 2031 would also provide long-term cost savings for customers. These actions will increase PNM’s dependency on other generation resources, particularly PVNGS, and will reduce PNM’s flexibility in managing those resources. Unscheduled or longer than expected maintenance outages, breakdown or failure of equipment or processes due to aging infrastructure, temporary or permanent shutdowns to achieve environmental compliance, other performance problems with the electric generation assets, severe weather conditions, accidents and other catastrophic events, acts of war or terrorism, cybersecurity attacks, wildfires, disruptions in the supply, quality, and delivery of fuel and water supplies, and other factors could result in PNM’s load requirements being larger than available system generation capacity. Assured supplies of water are important for PNM’s generating plants. Water in the southwestern United States is limited and there are conflicting claims regarding water rights. In addition, the “four corners” region where SJGS and Four Corners are located is prone to drought conditions, which could potentially affect the plants’ water supplies. Unplanned outages of generating units and extensions of scheduled outages occur from time to time and are an inherent risk of the Company’s business. If these were to occur, PNM would be required to purchase electricity in either the wholesale market or spot market at the then-current market price. There can be no assurance that sufficient electricity would be available at reasonable prices, or available at all. The failure of transmission or distribution facilities may also affect PNM’s and TNMP’s ability to deliver power. These potential generation, distribution, and transmission problems, and any service interruptions related to them, could result in lost revenues and additional costs.

In the event a capable party desiresattempts to disrupt the bulk powergeneration, transmission, or transmissiondistribution systems in the United States, the Company’s computer and operating systems could be subject to physical or cybersecurity attack.  Although the Company has implemented security measures to identify, prevent, detect, respond to, and recover from cyber and physical security events, critical infrastructure, including information and operational technology systems, are vulnerable to disability, failures, or unauthorized

 

PNM has a 10.2% undivided interest in PVNGS, including interests in Units 1 and 2 held under leases. PVNGS represents 19.1% of PNM’s total owned and leased generating capacity. PVNGS is subject to environmental, health, and financial risks, including, but not limited to:

 

The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. Events at nuclear facilities of other operators or which impact the industry generally may lead the NRC to impose additional requirements and regulations on all nuclear generation facilities, including PVNGS. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit and to promulgate new regulations that could require significant capital expenditures and/or increase operating costs.

 

PNM has external insurance coverage to minimize its financial exposure to some risks. However, it is possible that liabilities associated with nuclear operations could exceed the amount of insurance coverage. See Note 16.

 

PNM is obligated to supply power to retail customers and certain wholesale customers. At peak times, power demand could exceed PNM’s available generation capacity, particularly if PNM’s power plants are not performing as anticipated. In addition, SJGS unitsUnits 2 and 3 were shut down in December 2017 and PNM has provided notice to the NMPRC that PNM’s customers would benefit from the retirement of PNM’s remaining share of SJGS in mid-2022 (subject to future NMPRC approval). In addition, PNM’s 2017 IRP indicates that it would also save customers money for PNM to shut down the remaining two units of SJGS in 2022 and to exit ownership in Four Corners in 2031. SJGS and Four Corners comprise a significant portion of PNM’s base load generation capacity and their retirement would increase reliance on other existing or new generating and/or battery storage resources. Market forces, competitive forces, or adverse regulatory actions may require PNM to purchase capacity on the open market or build additional generation capabilities.resources to meet customers’ energy needs. Regulators or market conditions may not permit PNM to pass all of these purchases or construction costs on to customers. If that occurs, PNM may not be able to fully recover these costs or there may be a lag between when costs are incurred and when regulators permit recovery in customers’ rates. These situations could have negative impacts on results of operations and cash flows.

 

 

If the Company’s cash flow and credit and capital resources are insufficient to fund capital expenditure plans, the Company may be forced to delay important capital investments, sell assets, seek additional equity or debt capital, or restructure debt. In addition, insufficient cash flows and capital resources may result in reductions of credit ratings. This could negatively impact the Company’s ability to incur additional indebtedness on acceptable terms and would result in an increase in the interest rates applicable under the Company’s credit facilities. The Company’s cash flow and capital resources may be insufficient to pay interest and principal on debt in the future. If that should occur, the Company’s capital raising or debt restructuring measures may be unsuccessful or inadequate to meet scheduled debt service obligations. This could cause the Company to default on its obligations and further impair liquidity.

PNMR’s restated articles of incorporation and by-laws include a number of provisions that may have the effect of discouraging persons from acquiring large blocks of PNMR’s common stock or delaying or preventing a change in control of PNMR. The material provisions that may have such an effect include:

 

Under the New Mexico Public Utility Act, NMPRC approval is required for certain transactions that may result in PNMR’s change in control or exercise of control, including ownership of 10% or more of PNMR’s voting stock. PUCT approval is required for changes to the ownership of TNMP or its parent and certain other transactions relating to TNMP. Certain acquisitions of PNMR’s outstanding voting securities also require FERC approval.