Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 20182019

Commission File Name of Registrants, State of Incorporation, I.R.S. Employer
 Number  Address Of Principal Executive Offices and Telephone NumberNumbers  Identification No.
001-32462 PNM Resources, Inc. 85-0468296
  (A New Mexico Corporation)  
  414 Silver Ave. SW  
  Albuquerque, New Mexico 87102-3289  
  (505) 241-2700  
     
001-06986 Public Service Company of New Mexico 85-0019030
  (A New Mexico Corporation)  
  414 Silver Ave. SW  
  Albuquerque, New Mexico 87102-3289  
  (505) 241-2700  
     
002-97230 Texas-New Mexico Power Company 75-0204070
  (A Texas Corporation)  
  577 N. Garden Ridge Blvd.  
  Lewisville, Texas 75067  
  (972) 420-4189  

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 PNM Resources, Inc. (“PNMR”)YESüNO 
 Public Service Company of New Mexico (“PNM”)YESüNO 
 Texas-New Mexico Power Company (“TNMP”)YES NOü

(NOTE: As a voluntary filer, not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 PNMRYESüNO 
 PNMYESüNO 
 TNMPYESüNO 



Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated
filer
 
Accelerated
filer
 
Non-accelerated
filer (Do not check if a smaller reporting company)
 Smaller reporting company Emerging growth company
PNMR ü                         
PNM             ü           
TNMP             ü           

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £

Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES    NO ü

Securities registered pursuant to Section 12(b) of the Act:
RegistrantTitle of each classTrading Symbol(s)Name of exchange on which registered
PNM Resources, Inc.Common Stock, no par valuePNMNew York Stock Exchange

As of April 23, 2018May 3, 2019, 79,653,624 shares of common stock, no par value per share, of PNMR were outstanding.

The total number of shares of common stock of PNM, no par value per share, outstanding as of April 23, 2018May 3, 2019 was 39,117,799 all held by PNMR (and none held by non-affiliates).

The total number of shares of common stock of TNMP, $10 par value per share, outstanding as of April 23, 2018May 3, 2019 was 6,358 all held indirectly by PNMR (and none held by non-affiliates).

PNM AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H) (1) (a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION (H) (2).

This combined Form 10-Q is separately filed by PNMR, PNM, and TNMP.  Information contained herein relating to any individual registrant is filed by such registrant on its own behalf.  Each registrant makes no representation as to information relating to the other registrants.  When this Form 10-Q is incorporated by reference into any filing with the SEC made by PNMR, PNM, or TNMP, as a registrant, the portions of this Form 10-Q that relate to each other registrant are not incorporated by reference therein.



PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

INDEX

 Page No.
GLOSSARY
4
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
 
PNM RESOURCES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Earnings
78
Condensed Consolidated Statements of Comprehensive Income
89
Condensed Consolidated Statements of Cash Flows
910
Condensed Consolidated Balance Sheets
1112
Condensed Consolidated Statement of Changes in Equity
1314
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 
Condensed Consolidated Statements of Earnings
1415
Condensed Consolidated Statements of Comprehensive Income
1516
Condensed Consolidated Statements of Cash Flows
1617
Condensed Consolidated Balance Sheets
1819
Condensed Consolidated Statement of Changes in Equity
2021
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
 
Condensed Consolidated Statements of Earnings
2122
Condensed Consolidated Statements of Cash Flows
2223
Condensed Consolidated Balance Sheets
2324
Condensed Consolidated Statement of Changes in Common Stockholder's Equity
2526
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2627
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
83
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
115116
ITEM 4. CONTROLS AND PROCEDURES
118
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
118
ITEM 1A. RISK FACTORS
118119
ITEM 6. EXHIBITS
119
SIGNATURE
120121


GLOSSARY
Definitions:   
2014 IRP PNM’s 2014 IRP
2017 IRP PNM’s 2017 IRP
ABCWUA Albuquerque Bernalillo County Water Utility Authority
AEP OnSite Partners AEP OnSite Partners, LLC, a subsidiary of American Electric Power, Inc.
Afton  Afton Generating Station
AFUDC Allowance for Funds Used During Construction
AMI Advanced Metering Infrastructure
AMS Advanced Meter System
AOCI  Accumulated Other Comprehensive Income
APS  Arizona Public Service Company, the operator and a co-owner of PVNGS and Four Corners
ARPAlternative Revenue Program
ASU Accounting Standards Update
August 2016 RD Recommended Decision in PNM’s NM 2015 Rate Case issued by the Hearing Examiner on August 4, 2016
BART  Best Available Retrofit Technology
BDT Balanced Draft Technology
BHPBHP Billiton, Ltd
Board  Board of Directors of PNMR
BSERBest system of emission reduction technology
BTMU MUFG Bank Ltd., formerly Thethe Bank of Tokyo-Mitsubishi UFJ, Ltd.
BTMU Term Loan Agreement NM Capital’s $125.0 Million Unsecured Term Loan
BTUBritish Thermal Unit
CAA Clean Air Act
CCBCasa Mesa Wind Coal Combustion ByproductsCasa Mesa Wind Energy Center
CCN Certificate of Convenience and Necessity
CCRCoal Combustion Residuals
CIACContributions in Aid of Construction
CO2
  Carbon Dioxide
CSA Coal Supply Agreement
CTCCompetition Transition Charge
DC Circuit United States Court of Appeals for the District of Columbia Circuit
December 2018 Compliance FilingPNM’s December 31, 2018 filing with the NMPRC regarding SJGS
DOE  United States Department of Energy
DOI  United States Department of Interior
EGU Electric Generating Unit
EIMCalifornia Independent System Operator Western Energy Imbalance Market
EIS Environmental Impact Study
EPA  United States Environmental Protection Agency
ERCOTElectric Reliability Council of Texas
ESA Endangered Species Act
ETAThe New Mexico Energy Transition Act
Exchange Act Securities Exchange Act of 1934
FarmingtonThe City of Farmington, New Mexico
FASB  Financial Accounting Standards Board
FERC  Federal Energy Regulatory Commission
FIPFederal Implementation Plan
Four Corners  Four Corners Power Plant
FPPAC  Fuel and Purchased Power Adjustment Clause
FTY Future Test Year
GAAP  Generally Accepted Accounting Principles in the United States of America
GHG  Greenhouse Gas Emissions
GWh  Gigawatt hours
IRP Integrated Resource Plan

IRS  Internal Revenue Service
ISFSI Independent Spent Fuel Storage Installation
KW  Kilowatt
KWh  Kilowatt Hour
La Luz  La Luz Generating Station

LIBOR  London Interbank Offered Rate
Lightning Dock Geothermal Lightning Dock geothermal power facility, also known as the Dale Burgett Geothermal Plant
Lordsburg  Lordsburg Generating Station
Los AlamosThe Incorporated County of Los Alamos, New Mexico
Luna  Luna Energy Facility
MD&A  Management’s Discussion and Analysis of Financial Condition and Results of Operations
MMBTU  Million BTUs
Moody’s  Moody’s Investor Services, Inc.
MW  Megawatt
MWh  Megawatt Hour
NAAQS National Ambient Air Quality Standards
Navajo Acts  Navajo Nation Air Pollution Prevention and Control Act, Navajo Nation Safe Drinking Water Act, and Navajo Nation Pesticide Act
NDT  Nuclear Decommissioning Trusts for PVNGS
NECNavopache Electric Cooperative, Inc.
NEE New Energy Economy
NEPA National Environmental Policy Act
NERC  North American Electric Reliability Corporation
New Mexico Wind New Mexico Wind Energy Center
NM 2015 Rate Case Request for a General Increase in Electric Rates Filed by PNM on August 27, 2015
NM 2016 Rate Case Request for a General Increase in Electric Rates Filed by PNM on December 7, 2016
NM Capital NM Capital Utility Corporation, an unregulated wholly-owned subsidiary of PNMR
NM District Court United States District Court for the District of New Mexico
NM Supreme Court New Mexico Supreme Court
NMAGNew Mexico Attorney General
NMED  New Mexico Environment Department
NMIEC  New Mexico Industrial Energy Consumers Inc.
NMMMD The Mining and Minerals Division of the New Mexico Energy, Minerals and Natural Resources Department
NMPRC  New Mexico Public Regulation Commission
NMRD NM Renewable Development, LLC, owned 50% each by PNMR Development and AEP OnSite Partners, LLC
NOx  Nitrogen Oxides
NOPR Notice of Proposed Rulemaking
NPDES National Pollutant Discharge Elimination System
NRC  United States Nuclear Regulatory Commission
NSPS  New Source Performance Standards
NSR  New Source Review
NTEC  Navajo Transitional Energy Company, LLC, an entity owned by the Navajo Nation
OCI  Other Comprehensive Income
OPEB  Other Post-Employment Benefits
OSM United States Office of Surface Mining Reclamation and Enforcement
PNM  Public Service Company of New Mexico and Subsidiaries
PNM 2017 New Mexico Credit Facility PNM’s $40.0 Million Unsecured Revolving Credit Facility
PNM 2017 Senior Unsecured Note AgreementPNM’s Agreement for the sale of Senior Unsecured Notes, aggregating $450.0 million
PNM 2017 Term Loan Agreement PNM’s $200.0 Million Unsecured Term Loan
PNM 2018 SUNs2019 Term Loan PNM’s Senior$250.0 Million Unsecured Notes to be issued under the PNM 2017 Senior Unsecured Note AgreementTerm Loan

PNM Revolving Credit Facility PNM’s $400.0 Million Unsecured Revolving Credit Facility
PNMR  PNM Resources, Inc. and Subsidiaries

PNMR 2015 Term
Loan Agreement		 PNMR’s $150.0 Million Three-Year Unsecured Term Loan that matured on March 9, 2018
PNMR 2016 One-Year Term Loan PNMR’s $100.0 Million One-Year Unsecured Term Loan that matured on December 14, 2018
PNMR 2016 Two-Year Term Loan PNMR’s $100.0 Million Two-Year Unsecured Term Loan that matured on December 21, 2018
PNMR 2018 SUNsOne-Year Term Loan PNMR’s $300.0$150.0 Million Aggregate Principal Amount of SeniorOne-Year Unsecured Notes due 2021Term Loan
PNMR 2018 Two-Year Term LoanPNMR’s $50.0 Million Two-Year Unsecured Term Loan
PNMR Development PNMR Development and Management Company, an unregulated wholly-owned subsidiary of PNMR
PNMR Development Revolving Credit Facility PNMR Development’s $24.5 Million$25.0 million Unsecured Revolving Credit Facility
PNMR Development Term LoanPNMR Development’s $90.0 Million Unsecured Term Loan
PNMR Revolving Credit Facility PNMR’s $300.0 Million Unsecured Revolving Credit Facility
PNMR Term LoanPNMR’s $150.0 Million One-Year Unsecured Term Loan that matured on December 21, 2016
PPA  Power Purchase Agreement
PSD  Prevention of Significant Deterioration
PUCT  Public Utility Commission of Texas
PV  Photovoltaic
PVNGS  Palo Verde Nuclear Generating Station
RCRA  Resource Conservation and Recovery Act
RCT  Reasonable Cost Threshold
REA New Mexico’s Renewable Energy Act of 2004
REC  Renewable Energy Certificates
Red Mesa Wind Red Mesa Wind Energy Center
REP  Retail Electricity Provider
RFP Request For Proposal
Rio Bravo Rio Bravo Generating Station, formerly known as Delta
RMC  Risk Management Committee
ROE Return on Equity
RPS  Renewable Energy Portfolio Standard
S&P  Standard and Poor’s Ratings Services
SCRSelective Catalytic Reduction
SEC  United States Securities and Exchange Commission
SIP  State Implementation Plan
SJCC  San Juan Coal Company
SJGS  San Juan Generating Station
SJGS CSA San Juan Generating Station Coal Supply Agreement
SJGS RA San Juan Project Restructuring Agreement
SJPPA San Juan Project Participation Agreement
SNCR Selective Non-Catalytic Reduction
SO2
  Sulfur Dioxide
Tax ActFederal tax reform legislation enacted on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act
TECA  Texas Electric Choice Act
Tenth Circuit United States Court of Appeals for the Tenth Circuit
TNMP  Texas-New Mexico Power Company and Subsidiaries
TNMP 2018 Term LoanTNMP’s $35.0 Million Unsecured Term Loan
TNMP 2019 BondsTNMP’s First Mortgage Bonds issuable under the TNMP 2019 Bond Purchase Agreement

TNMP 2019 Bond Purchase AgreementTNMP’s Agreement to Issue an Aggregate of $305.0 Million in First Mortgage Bonds in 2019
TNMP Revolving Credit Facility  TNMP’s $75.0 Million Secured Revolving Credit Facility
Tri-State  Tri-State Generation and Transmission Association, Inc.
TucsonTucson Electric Power Company
UAMPSUtah Associated Municipal Power Systems
US Supreme Court United States Supreme Court
Valencia  Valencia Energy Facility
VaRValue at Risk
VIE Variable Interest Entity
WACCWeighted Average Cost of Capital
WEG WildEarth Guardians
Westmoreland Westmoreland Coal Company
Westmoreland Loan $125.0 Million of funding provided by NM Capital to WSJ
WSJ Westmoreland San Juan, LLC, formerly an indirect wholly-owned subsidiary of Westmoreland
WSJ LLC

Westmoreland San Juan Mining, LLC, a subsidiary of Westmoreland Mining Holdings, LLC, and
successor entity to SJCC

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands, except per share amounts)(In thousands, except per share amounts)
Electric Operating Revenues:
      
Contracts with customers$303,351
 $297,191
$315,698
 $303,351
Alternative revenue programs924
 4,579
636
 924
Other electric operating revenue13,603
 28,408
33,311
 13,603
Total electric operating revenues317,878
 330,178
349,645
 317,878
Operating Expenses:
 

  
Cost of energy92,556
 102,804
121,626
 92,556
Administrative and general48,283
 45,394
52,336
 48,283
Energy production costs35,350
 31,787
35,072
 35,350
Regulatory disallowances and restructuring costs1,345
 —
Depreciation and amortization58,722
 56,383
65,356
 58,722
Transmission and distribution costs16,955
 16,477
16,678
 16,955
Taxes other than income taxes19,880
 19,235
20,509
 19,880
Total operating expenses271,746
 272,080
312,922
 271,746
Operating income46,132
 58,098
36,723
 46,132
Other Income and Deductions:      
Interest income4,124
 4,881
3,619
 4,124
Gains on investment securities288
 6,661
14,014
 288
Other income3,469
 4,902
3,415
 3,469
Other (deductions)(1,376) (5,621)(3,252) (1,376)
Net other income and deductions6,505
 10,823
17,796
 6,505
Interest Charges33,055
 31,700
31,634
 33,055
Earnings before Income Taxes19,582
 37,221
22,885
 19,582
Income Taxes783
 10,775
1,223
 783
Net Earnings18,799
 26,446
21,662
 18,799
(Earnings) Attributable to Valencia Non-controlling Interest(3,677) (3,452)(2,830) (3,677)
Preferred Stock Dividend Requirements of Subsidiary(132) (132)(132) (132)
Net Earnings Attributable to PNMR$14,990
 $22,862
$18,700
 $14,990
Net Earnings Attributable to PNMR per Common Share:      
Basic$0.19
 $0.29
$0.23
 $0.19
Diluted$0.19
 $0.29
$0.23
 $0.19
Dividends Declared per Common Share$0.2650
 $0.2425
$0.290
 $0.265

The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.



PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Net Earnings$18,799
 $26,446
$21,662
 $18,799
Other Comprehensive Income:      
Unrealized Gains on Available-for-Sale Securities:
      
Unrealized holding gains arising during the period, net of income tax (expense) of $(283) and $(3,030)832
 4,736
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $668 and $1,078(1,961) (1,685)
Unrealized holding gains arising during the period, net of income tax (expense) of $(1,798) and $(283)5,280
 832
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $172 and $668(504) (1,961)
Pension Liability Adjustment:      
Reclassification adjustment for amortization of experience (gains) losses recognized as net periodic benefit cost, net of income tax expense (benefit) of $(480) and $(631)1,411
 987
Reclassification adjustment for amortization of experience (gains) losses recognized as net periodic benefit cost, net of income tax expense (benefit) of $(470) and $(480)1,381
 1,411
Fair Value Adjustment for Cash Flow Hedges:      
Change in fair market value, net of income tax (expense) benefit of $(472) and $721,386
 (113)
Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $13 and $(44)(40) 68
Change in fair market value, net of income tax (expense) benefit of $311 and $(472)(914) 1,386
Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $(68) and $13202
 (40)
Total Other Comprehensive Income1,628
 3,993
5,445
 1,628
Comprehensive Income20,427
 30,439
27,107
 20,427
Comprehensive (Income) Attributable to Valencia Non-controlling Interest(3,677) (3,452)(2,830) (3,677)
Preferred Stock Dividend Requirements of Subsidiary(132) (132)(132) (132)
Comprehensive Income Attributable to PNMR$16,618
 $26,855
$24,145
 $16,618

The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.



PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Cash Flows From Operating Activities:      
Net earnings$18,799
 $26,446
$21,662
 $18,799
Adjustments to reconcile net earnings to net cash flows from operating activities:      
Depreciation and amortization67,748
 65,888
73,946
 67,748
Deferred income tax expense767
 10,787
1,122
 767
Net unrealized (gains) on commodity derivatives(28) (1,345)
(Gains) on investment securities(288) (6,661)(14,014) (288)
Stock based compensation expense2,894
 2,687
3,257
 2,894
Regulatory disallowances and restructuring costs1,345
 —
Allowance for equity funds used during construction(2,487) (1,632)(2,049) (2,487)
Other, net757
 704
444
 729
Changes in certain assets and liabilities:      
Accounts receivable and unbilled revenues18,215
 20,553
15,842
 18,215
Materials, supplies, and fuel stock(2,976) 1,836
3,826
 (2,976)
Other current assets2,345
 11,441
(1,778) 2,345
Other assets(443) 2,753
13,463
 (443)
Accounts payable(26,953) (3,852)(7,642) (26,953)
Accrued interest and taxes13,370
 12,542
6,443
 13,370
Other current liabilities(9,397) (10,009)2,060
 (9,397)
Other liabilities(3,397) (534)(13,243) (3,397)
Net cash flows from operating activities78,926
 131,604
104,684
 78,926
      
Cash Flows From Investing Activities:      
Additions to utility and non-utility plant(117,691) (114,830)
Additions to utility plant(141,986) (117,691)
Proceeds from sales of investment securities626,729
 266,388
74,460
 626,729
Purchases of investment securities(628,999) (267,891)(77,363) (628,999)
Principal repayments on Westmoreland Loan5,649
 9,590
—
 5,649
Investments in NMRD(5,000) —
(7,000) (5,000)
Other, net128
 128
(13) 128
Net cash flows from investing activities(119,184) (106,615)(151,902) (119,184)

The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.


PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Cash Flows From Financing Activities:      
Revolving credit facilities borrowings (repayments), net(66,700) 16,000
(12,100) (66,700)
Long-term borrowings299,652
 —
475,000
 299,652
Repayment of long-term debt(155,026) (9,444)(200,000) (155,026)
Proceeds from stock option exercise802
 1,112
930
 802
Awards of common stock(10,845) (11,032)(8,936) (10,845)
Dividends paid(21,240) (19,448)(23,232) (21,240)
Valencia’s transactions with its owner(4,472) (4,028)(4,263) (4,472)
Other, net(2,104) (388)
Debt issuance costs and other, net(2,215) (2,104)
Net cash flows from financing activities40,067
 (27,228)225,184
 40,067
      
Change in Cash, Restricted Cash, and Equivalents(191) (2,239)177,966
 (191)
Cash, Restricted Cash, and Equivalents at Beginning of Period3,974
 5,522
2,122
 3,974
Cash, Restricted Cash, and Equivalents at End of Period$3,783
 $3,283
$180,088
 $3,783
   
Restricted Cash Included in Other Current Assets on Condensed Consolidated Balance Sheets:   
At beginning of period$—
 $1,000
At end of period$—
 $1,000
      
Supplemental Cash Flow Disclosures:      
Interest paid, net of amounts capitalized$15,305
 $14,951
$20,518
 $15,305
Income taxes paid (refunded), net$(8) $(125)$(235) $(8)
      
Supplemental schedule of noncash investing activities:      
(Increase) decrease in accrued plant additions$16,003
 $10,367
$26,636
 $16,003

The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.



PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
2018		 December 31,
2017		March 31,
2019		 December 31,
2018
(In thousands)(In thousands)
ASSETS      
Current Assets:      
Cash and cash equivalents$3,783
 $3,974
$180,088
 $2,122
Accounts receivable, net of allowance for uncollectible accounts of $1,118 and $1,08184,156
 90,473
Accounts receivable, net of allowance for uncollectible accounts of $1,151 and $1,40694,624
 92,800
Unbilled revenues41,400
 54,055
39,011
 57,092
Other receivables17,891
 17,582
13,849
 11,369
Current portion of Westmoreland Loan4,837
 3,576
Materials, supplies, and fuel stock69,478
 66,502
68,008
 71,834
Regulatory assets1,423
 2,933
—
 4,534
Commodity derivative instruments1,087
 1,088
Income taxes receivable6,855
 6,879
7,630
 7,965
Other current assets46,389
 47,358
53,863
 54,808
Total current assets277,299
 294,420
457,073
 302,524
Other Property and Investments:      
Long-term portion of Westmoreland Loan46,154
 53,064
Investment securities324,003
 323,524
351,563
 328,242
Equity investment in NMRD21,541
 16,510
33,528
 26,564
Other investments375
 503
299
 297
Non-utility property3,404
 3,404
Non-utility property, net6,229
 3,404
Total other property and investments395,477
 397,005
391,619
 358,507
Utility Plant:      
Plant in service and held for future use7,284,727
 7,238,285
7,610,093
 7,548,581
Less accumulated depreciation and amortization2,627,329
 2,592,692
2,641,320
 2,604,177
4,657,398
 4,645,593
4,968,773
 4,944,404
Construction work in progress284,870
 245,933
225,485
 194,427
Nuclear fuel, net of accumulated amortization of $49,905 and $43,52489,262
 88,701
Nuclear fuel, net of accumulated amortization of $48,675 and $42,51195,713
 95,798
Net utility plant5,031,530
 4,980,227
5,289,971
 5,234,629
Deferred Charges and Other Assets:      
Regulatory assets595,398
 600,672
588,266
 598,930
Goodwill278,297
 278,297
278,297
 278,297
Commodity derivative instruments3,277
 3,556
Operating lease right-of-use assets, net of accumulated amortization150,426
 —
Other deferred charges95,115
 91,926
95,106
 92,664
Total deferred charges and other assets972,087
 974,451
1,112,095
 969,891
$6,676,393
 $6,646,103
$7,250,758
 $6,865,551

The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.



PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
2018		 December 31,
2017		March 31,
2019		 December 31,
2018
(In thousands, except share information)(In thousands, except share information)
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current Liabilities:      
Short-term debt$238,700
 $305,400
$223,800
 $235,900
Current installments of long-term debt309,565
 256,895
172,302
 —
Accounts payable78,427
 121,383
77,893
 112,170
Customer deposits11,045
 11,028
10,749
 10,695
Accrued interest and taxes75,703
 62,357
71,264
 65,156
Regulatory liabilities3,159
 2,309
19,245
 9,446
Commodity derivative instruments1,328
 1,182
Operating lease liabilities26,197
 —
Dividends declared21,240
 21,240
23,231
 23,231
Other current liabilities43,586
 53,850
39,452
 55,855
Total current liabilities782,753
 835,644
664,133
 512,453
Long-term Debt, net of Unamortized Premiums, Discounts, and Debt Issuance Costs2,271,984
 2,180,750
2,771,939
 2,670,111
Deferred Credits and Other Liabilities:      
Accumulated deferred income taxes554,022
 547,210
613,989
 600,719
Regulatory liabilities934,053
 933,578
889,342
 891,428
Asset retirement obligations149,453
 146,679
161,685
 158,674
Accrued pension liability and postretirement benefit cost88,840
 94,003
96,374
 100,375
Commodity derivative instruments3,277
 3,556
Operating lease liabilities124,937
 —
Other deferred credits131,468
 131,706
169,372
 167,668
Total deferred credits and other liabilities1,861,113
 1,856,732
2,055,699
 1,918,864
Total liabilities4,915,850
 4,873,126
5,491,771
 5,101,428
Commitments and Contingencies (See Note 11)

 

Commitments and Contingencies (Note 11)

 

Cumulative Preferred Stock of Subsidiary      
without mandatory redemption requirements ($100 stated value; 10,000,000 shares authorized; issued and outstanding 115,293 shares)11,529
 11,529
11,529
 11,529
Equity:      
PNMR common stockholders' equity:      
Common stock (no par value; 120,000,000 shares authorized; issued and outstanding 79,653,624 shares)1,150,516
 1,157,665
1,148,364
 1,153,113
Accumulated other comprehensive income (loss), net of income taxes(105,520) (95,940)(103,239) (108,684)
Retained earnings638,618
 633,528
639,554
 643,953
Total PNMR common stockholders’ equity1,683,614
 1,695,253
1,684,679
 1,688,382
Non-controlling interest in Valencia65,400
 66,195
62,779
 64,212
Total equity1,749,014
 1,761,448
1,747,458
 1,752,594
$6,676,393
 $6,646,103
$7,250,758
 $6,865,551
      

The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.


PNM RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)

Attributable to PNMR 
Non-
controlling
Interest
in Valencia
  Attributable to PNMR 
Non-
controlling
Interest
in Valencia
  
Common
Stock
 AOCI 
Retained
Earnings
 Total PNMR Common Stockholders’ Equity 
Total
Equity
Common
Stock
 AOCI 
Retained
Earnings
 Total PNMR Common Stockholders’ Equity 
Total
Equity
(In thousands)(In thousands)
Balance at December 31, 2017, as originally reported$1,157,665
 $(95,940) $633,528
 $1,695,253
 $66,195
 $1,761,448
Cumulative effect adjustment (Note 7)—
 (11,208) 11,208
 —
 —
 —
Balance at January 1, 2018, as adjusted1,157,665
 (107,148) 644,736
 1,695,253
 66,195
 1,761,448
Balance at December 31, 2018$1,153,113
 $(108,684) $643,953
 $1,688,382
 $64,212
 $1,752,594
Net earnings before subsidiary preferred stock dividends—
 —
 15,122
 15,122
 3,677
 18,799
—
 —
 18,832
 18,832
 2,830
 21,662
Total other comprehensive income—
 1,628
 —
 1,628
 —
 1,628
—
 5,445
 —
 5,445
 —
 5,445
Subsidiary preferred stock dividends—
 —
 (132) (132) —
 (132)—
 —
 (132) (132) —
 (132)
Dividends declared on common stock—
 —
 (21,108) (21,108) —
 (21,108)—
 —
 (23,099) (23,099) —
 (23,099)
Proceeds from stock option exercise802
 —
 —
 802
 —
 802
930
 —
 —
 930
 —
 930
Awards of common stock(10,845) —
 —
 (10,845) —
 (10,845)(8,936) —
 —
 (8,936) —
 (8,936)
Stock based compensation expense2,894
 —
 —
 2,894
 —
 2,894
3,257
 —
 —
 3,257
 —
 3,257
Valencia’s transactions with its owner—
 —
 —
 —
 (4,472) (4,472)—
 —
 —
 —
 (4,263) (4,263)
Balance at March 31, 2018$1,150,516
 $(105,520) $638,618
 $1,683,614
 $65,400
 $1,749,014
Balance at March 31, 2019$1,148,364
 $(103,239) $639,554
 $1,684,679
 $62,779
 $1,747,458

Balance at December 31, 2017, as originally reported$1,157,665
 $(95,940) $633,528
 $1,695,253
 $66,195
 $1,761,448
Cumulative effect adjustment (Note 7)—
 (11,208) 11,208
 —
 —
 —
Balance at January 1, 2018, as adjusted1,157,665
 (107,148) 644,736
 1,695,253
 66,195
 1,761,448
Net earnings before subsidiary preferred stock dividends—
 —
 15,122
 15,122
 3,677
 18,799
Total other comprehensive income—
 1,628
 —
 1,628
 —
 1,628
Subsidiary preferred stock dividends—
 —
 (132) (132) —
 (132)
Dividends declared on common stock—
 —
 (21,108) (21,108) —
 (21,108)
Proceeds from stock option exercise802
 —
 —
 802
 —
 802
Awards of common stock(10,845) —
 —
 (10,845) —
 (10,845)
Stock based compensation expense2,894
 —
 —
 2,894
 —
 2,894
Valencia’s transactions with its owner—
 —
 —
 —
 (4,472) (4,472)
Balance at March 31, 2018$1,150,516
 $(105,520) $638,618
 $1,683,614
 $65,400
 $1,749,014



The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements.



PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Electric Operating Revenues:
      
Contracts with customers$222,564
 $222,063
$235,941
 $222,564
Alternative revenue programs65
 1,087
66
 65
Other electric operating revenue13,603
 28,408
33,311
 13,603
Total electric operating revenues236,232
 251,558
269,318
 236,232
Operating Expenses:      
Cost of energy70,802
 81,317
99,339
 70,802
Administrative and general43,726
 40,909
47,402
 43,726
Energy production costs35,350
 31,787
35,072
 35,350
Regulatory disallowances and restructuring costs1,345
 —
Depreciation and amortization36,627
 36,016
39,224
 36,627
Transmission and distribution costs9,827
 9,919
10,633
 9,827
Taxes other than income taxes11,608
 11,141
12,010
 11,608
Total operating expenses207,940
 211,089
245,025
 207,940
Operating income28,292
 40,469
24,293
 28,292
Other Income and Deductions:      
Interest income2,487
 2,816
3,656
 2,487
Gains on investment securities288
 6,661
14,014
 288
Other income2,391
 3,843
2,632
 2,391
Other (deductions)(1,462) (4,959)(2,288) (1,462)
Net other income and deductions3,704
 8,361
18,014
 3,704
Interest Charges20,830
 21,012
18,360
 20,830
Earnings before Income Taxes11,166
 27,818
23,947
 11,166
Income Taxes (Benefit)(348) 7,708
Income Taxes1,973
 (348)
Net Earnings11,514
 20,110
21,974
 11,514
(Earnings) Attributable to Valencia Non-controlling Interest(3,677) (3,452)(2,830) (3,677)
Net Earnings Attributable to PNM7,837
 16,658
19,144
 7,837
Preferred Stock Dividends Requirements(132) (132)(132) (132)
Net Earnings Available for PNM Common Stock$7,705
 $16,526
$19,012
 $7,705

The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.


PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Net Earnings$11,514
 $20,110
$21,974
 $11,514
Other Comprehensive Income:      
Unrealized Gains on Available-for-Sale Securities:
      
Unrealized holding gains arising during the period, net of income tax (expense) of $(283) and $(3,030)832
 4,736
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $668 and $1,078(1,961) (1,685)
Unrealized holding gains arising during the period, net of income tax (expense) of $(1,798) and $(283)5,280
 832
Reclassification adjustment for (gains) included in net earnings, net of income tax expense of $172 and $668(504) (1,961)
Pension Liability Adjustment:      
Reclassification adjustment for amortization of experience (gains) losses recognized as net periodic benefit cost, net of income tax expense (benefit) of $(480) and $(631)1,411
 987
Reclassification adjustment for amortization of experience (gains) losses recognized as net periodic benefit cost, net of income tax expense (benefit) of $(470) and $(480)1,381
 1,411
Total Other Comprehensive Income282
 4,038
6,157
 282
Comprehensive Income11,796
 24,148
28,131
 11,796
Comprehensive (Income) Attributable to Valencia Non-controlling Interest(3,677) (3,452)(2,830) (3,677)
Comprehensive Income Attributable to PNM$8,119
 $20,696
$25,301
 $8,119

The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.



PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Cash Flows From Operating Activities:      
Net earnings$11,514
 $20,110
$21,974
 $11,514
Adjustments to reconcile net earnings to net cash flows from operating activities:      
Depreciation and amortization45,165
 44,691
47,218
 45,165
Deferred income tax expense (benefit)(253) 7,878
Net unrealized (gains) on commodity derivatives(28) (1,345)
Deferred income tax expense2,063
 (253)
(Gains) on investment securities(288) (6,661)(14,014) (288)
Regulatory disallowances and restructuring costs1,345
 —
Allowance for equity funds used during construction(2,031) (1,461)(1,807) (2,031)
Other, net757
 702
432
 729
Changes in certain assets and liabilities:      
Accounts receivable and unbilled revenues15,100
 17,414
15,212
 15,100
Materials, supplies, and fuel stock(2,247) 2,083
3,671
 (2,247)
Other current assets(248) 12,399
(4,098) (248)
Other assets3,999
 4,399
10,399
 3,999
Accounts payable(18,014) (2,509)(8,257) (18,014)
Accrued interest and taxes17,984
 16,954
14,764
 17,984
Other current liabilities(13,868) 2,946
32,683
 (13,868)
Other liabilities(4,381) (1,325)(13,524) (4,381)
Net cash flows from operating activities53,161
 116,275
108,061
 53,161
      
Cash Flows From Investing Activities:      
Utility plant additions(61,720) (65,781)
Additions to utility plant(75,876) (61,720)
Proceeds from sales of investment securities626,729
 266,388
74,460
 626,729
Purchases of investment securities(628,999) (267,891)(77,363) (628,999)
Other, net128
 128
(48) 128
Net cash flows from investing activities(63,862) (67,156)(78,827) (63,862)

The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.



PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Cash Flows From Financing Activities:      
Revolving credit facilities borrowings (repayments), net(39,800) (44,800)(42,400) (39,800)
Short-term borrowings (repayments) - affiliate, net54,600
 —
Short-term borrowings (repayments) – affiliate, net(19,800) 54,600
Long-term borrowings250,000
 —
Repayment of long-term debt(200,000) —
Dividends paid(132) (132)(132) (132)
Valencia’s transactions with its owner(4,472) (4,028)(4,263) (4,472)
Other, net(584) (389)
Debt issuance costs and other, net(635) (584)
Net cash flows from financing activities9,612
 (49,349)(17,230) 9,612
      
Change in Cash, Restricted Cash, and Equivalents(1,089) (230)12,004
 (1,089)
Cash, Restricted Cash, and Equivalents at Beginning of Period1,108
 1,324
85
 1,108
Cash, Restricted Cash, and Equivalents at End of Period$19
 $1,094
$12,089
 $19
   
Restricted Cash Included in Other Current Assets on Condensed Consolidated Balance Sheets:   
At beginning of period$—
 $1,000
At end of period$—
 $1,000
      
Supplemental Cash Flow Disclosures:      
Interest paid, net of amounts capitalized$9,560
 $9,330
$9,070
 $9,560
Income taxes paid (refunded), net$—
 $—
$—
 $—
      
Supplemental schedule of noncash investing activities:      
(Increase) decrease in accrued plant additions$2,682
 $3,449
$11,407
 $2,682

The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.



PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
2018		 December 31,
2017		March 31,
2019		 December 31,
2018
(In thousands)(In thousands)
ASSETS      
Current Assets:      
Cash and cash equivalents$19
 $1,108
$12,089
 $85
Accounts receivable, net of allowance for uncollectible accounts of $1,118 and $1,08161,908
 67,227
Accounts receivable, net of allowance for uncollectible accounts of $1,151 and $1,40668,724
 68,603
Unbilled revenues33,331
 43,869
31,366
 47,113
Other receivables14,573
 14,541
14,370
 10,650
Affiliate receivables8,859
 9,486
8,854
 15,871
Materials, supplies, and fuel stock63,105
 60,859
63,426
 67,097
Regulatory assets827
 2,139
—
 4,534
Commodity derivative instruments1,087
 1,088
Income taxes receivable3,505
 3,410
12,940
 12,850
Other current assets41,607
 39,904
43,650
 43,516
Total current assets228,821
 243,631
255,419
 270,319
Other Property and Investments:      
Investment securities324,003
 323,524
351,563
 328,242
Other investments155
 283
93
 91
Non-utility property96
 96
Non-utility property, net1,693
 96
Total other property and investments324,254
 323,903
353,349
 328,429
Utility Plant:      
Plant in service and held for future use5,537,638
 5,501,070
5,664,174
 5,623,520
Less accumulated depreciation and amortization2,052,380
 2,029,534
2,033,511
 2,006,266
3,485,258
 3,471,536
3,630,663
 3,617,254
Construction work in progress214,139
 204,079
143,673
 134,221
Nuclear fuel, net of accumulated amortization of $49,905 and $43,52489,262
 88,701
Nuclear fuel, net of accumulated amortization of $48,675 and $42,51195,713
 95,798
Net utility plant3,788,659
 3,764,316
3,870,049
 3,847,273
Deferred Charges and Other Assets:      
Regulatory assets453,912
 459,239
454,987
 460,903
Goodwill51,632
 51,632
51,632
 51,632
Commodity derivative instruments3,277
 3,556
Operating lease right-of-use assets, net of accumulated amortization137,756
 —
Other deferred charges75,186
 75,286
78,847
 77,327
Total deferred charges and other assets584,007
 589,713
723,222
 589,862
$4,925,741
 $4,921,563
$5,202,039
 $5,035,883
      

The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.



PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
2018		 December 31,
2017		March 31,
2019		 December 31,
2018
(In thousands, except share information)(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY      
Current Liabilities:      
Short-term debt$—
 $39,800
$—
 $42,400
Short-term debt - affiliate54,600
 —
—
 19,800
Current installments of long-term debt200,006
 23
Accounts payable56,398
 77,094
55,449
 75,114
Affiliate payables11,543
 22,875
12,627
 164
Customer deposits11,045
 11,028
10,749
 10,695
Accrued interest and taxes52,024
 33,945
50,621
 35,767
Regulatory liabilities934
 784
16,895
 5,975
Commodity derivative instruments1,328
 1,182
Operating lease liabilities22,762
 —
Dividends declared132
 132
132
 132
Other current liabilities28,302
 31,633
26,432
 32,976
Total current liabilities416,312
 218,496
195,667
 223,023
Long-term Debt, net of Unamortized Premiums, Discounts, and Debt Issuance Costs1,458,425
 1,657,887
1,706,873
 1,656,490
Deferred Credits and Other Liabilities:      
Accumulated deferred income taxes454,568
 449,012
513,783
 502,767
Regulatory liabilities749,319
 754,441
708,295
 713,971
Asset retirement obligations148,462
 145,707
160,807
 157,814
Accrued pension liability and postretirement benefit cost81,756
 86,124
89,338
 92,981
Commodity derivative instruments3,277
 3,556
Operating lease liabilities115,436
 —
Other deferred credits106,532
 106,442
215,004
 215,737
Total deferred credits and liabilities1,543,914
 1,545,282
1,802,663
 1,683,270
Total liabilities3,418,651
 3,421,665
3,705,203
 3,562,783
Commitments and Contingencies (See Note 11)

 

Commitments and Contingencies (Note 11)

 

Cumulative Preferred Stock      
without mandatory redemption requirements ($100 stated value; 10,000,000 shares authorized; issued and outstanding 115,293 shares)11,529
 11,529
11,529
 11,529
Equity:      
PNM common stockholder’s equity:      
Common stock (no par value; 40,000,000 shares authorized; issued and outstanding 39,117,799 shares)1,264,918
 1,264,918
1,264,918
 1,264,918
Accumulated other comprehensive income (loss), net of income taxes(108,019) (97,093)(104,265) (110,422)
Retained earnings273,262
 254,349
261,875
 242,863
Total PNM common stockholder’s equity1,430,161
 1,422,174
1,422,528
 1,397,359
Non-controlling interest in Valencia65,400
 66,195
62,779
 64,212
Total equity1,495,561
 1,488,369
1,485,307
 1,461,571
$4,925,741
 $4,921,563
$5,202,039
 $5,035,883

The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
Attributable to PNM    Attributable to PNM    
    
Total PNM
Common
Stockholder’s
Equity
 
Non-
controlling
 Interest in Valencia
      
Total PNM
Common
Stockholder’s
Equity
 
Non-
controlling
 Interest in Valencia
  
          
Common
Stock
 AOCI 
Retained
Earnings
 
Total
Equity
Common
Stock
 AOCI 
Retained
Earnings
 
Total
Equity
 
Total PNM
Common
Stockholder’s
Equity
Non-
controlling
 Interest in Valencia
 
Total PNM
Common
Stockholder’s
Equity
Non-
controlling
 Interest in Valencia
(In thousands)(In thousands)
Balance at December 31, 2017, as originally reported$1,264,918
 $(97,093) $254,349
 $1,422,174
$66,195
$1,488,369
Cumulative effect adjustment (Note 7)—
 (11,208) 11,208
 —
—
—
Balance at January 1, 2018, as adjusted1,264,918
 (108,301) 265,557
 1,422,174
 66,195
 1,488,369
Balance at December 31, 2018$1,264,918
 $(110,422) $242,863
 $1,397,359
 $64,212
 $1,461,571
Net earnings—
 —
 7,837
 7,837
 3,677
 11,514
—
 —
 19,144
 19,144
 2,830
 21,974
Total other comprehensive income—
 282
 —
 282
 —
 282
—
 6,157
 —
 6,157
 —
 6,157
Dividends declared on preferred stock—
 —
 (132) (132) —
 (132)—
 —
 (132) (132) —
 (132)
Valencia’s transactions with its owner—
 —
 —
 —
 (4,472) (4,472)—
 —
 —
 —
 (4,263) (4,263)
Balance at March 31, 2018$1,264,918
 $(108,019) $273,262
 $1,430,161
 $65,400
 $1,495,561
Balance at March 31, 2019$1,264,918
 $(104,265) $261,875
 $1,422,528
 $62,779
 $1,485,307

Balance at December 31, 2017, as originally reported$1,264,918
 $(97,093) $254,349
 $1,422,174
 $66,195
 $1,488,369
Cumulative effect adjustment (Note 7)—
 (11,208) 11,208
 —
 —
 —
Balance at January 1, 2018, as adjusted1,264,918
 (108,301) 265,557
 1,422,174
 66,195
 1,488,369
Net earnings—
 —
 7,837
 7,837
 3,677
 11,514
Total other comprehensive income—
 282
 —
 282
 —
 282
Dividends declared on preferred stock—
 —
 (132) (132) —
 (132)
Valencia’s transactions with its owner—
 —
 —
 —
 (4,472) (4,472)
Balance at March 31, 2018$1,264,918
 $(108,019) $273,262
 $1,430,161
 $65,400
 $1,495,561


The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements.

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Electric Operating Revenues:
      
Contracts with customers$80,787
 $75,128
$79,757
 $80,787
Alternative revenue programs859
 3,492
570
 859
Total Electric Operating Revenues
81,646
 78,620
80,327
 81,646
Operating Expenses:      
Cost of energy21,754
 21,487
22,287
 21,754
Administrative and general10,709
 10,403
11,558
 10,709
Depreciation and amortization16,387
 15,371
20,214
 16,387
Transmission and distribution costs7,128
 6,558
6,045
 7,128
Taxes other than income taxes7,136
 6,836
7,638
 7,136
Total operating expenses63,114
 60,655
67,742
 63,114
Operating income18,532
 17,965
12,585
 18,532
Other Income and Deductions:      
Interest income31
 —
Other income754
 822
717
 754
Other (deductions)331
 (90)(163) 331
Net other income and deductions1,085
 732
585
 1,085
Interest Charges7,729
 7,404
8,800
 7,729
Earnings before Income Taxes11,888
 11,293
4,370
 11,888
Income Taxes2,475
 3,689
272
 2,475
Net Earnings$9,413
 $7,604
$4,098
 $9,413

The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.




TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
(In thousands)(In thousands)
Cash Flows From Operating Activities:      
Net earnings$9,413
 $7,604
$4,098
 $9,413
Adjustments to reconcile net earnings to net cash flows from operating activities:      
Depreciation and amortization16,836
 15,921
20,514
 16,836
Deferred income tax expense (benefit)(953) 2,746
(4,343) (953)
Other, net(456) (168)
Allowance for equity funds used during construction and other, net(231) (456)
Changes in certain assets and liabilities:      
Accounts receivable and unbilled revenues3,115
 3,138
630
 3,115
Materials and supplies(729) (247)155
 (729)
Other current assets331
 (838)581
 331
Other assets(3,055) (2,042)2,712
 (3,055)
Accounts payable(4,400) (788)1,075
 (4,400)
Accrued interest and taxes(1,952) (3,991)(990) (1,952)
Other current liabilities5,874
 134
3,190
 5,874
Other liabilities1,456
 361
(1,536) 1,456
Net cash flows from operating activities25,480
 21,830
25,855
 25,480
Cash Flows From Investing Activities:      
Utility plant additions(49,956) (36,345)
Additions to utility plant(58,624) (49,956)
Net cash flows from investing activities(49,956) (36,345)(58,624) (49,956)
Cash Flow From Financing Activities:      
Revolving credit facilities borrowings (repayments), net21,200
 22,000
(17,500) 21,200
Short-term borrowings (repayments) – affiliate, net2,600
 1,700
(100) 2,600
Long-term borrowings225,000
 —
Dividends paid(1,024) (9,855)(10,713) (1,024)
Debt issuance costs and other, net(1,561) —
Net cash flows from financing activities22,776
 13,845
195,126
 22,776
      
Change in Cash and Cash Equivalents(1,700) (670)162,357
 (1,700)
Cash and Cash Equivalents at Beginning of Period1,700
 671—
 1700
Cash and Cash Equivalents at End of Period$—
 $1
$162,357
 $—
      
Supplemental Cash Flow Disclosures:      
Interest paid, net of amounts capitalized$1,830
 $2,584
$3,829
 $1,830
Income taxes paid (refunded), net$(8) $—
$(235) $(8)
      
Supplemental schedule of noncash investing activities:      
(Increase) decrease in accrued plant additions$9,868
 $2,235
$10,646
 $9,868

The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.




TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
2018		 December 31,
2017		March 31,
2019		 December 31,
2018
(In thousands)(In thousands)
ASSETS      
Current Assets:      
Cash and cash equivalents$—
 $1,700
$162,357
 $—
Accounts receivable22,248
 23,246
25,900
 24,196
Unbilled revenues8,069
 10,186
7,645
 9,979
Other receivables3,062
 2,860
881
 1,721
Affiliate receivables—
 336
—
 164
Materials and supplies6,373
 5,643
4,582
 4,737
Regulatory assets596
 794
Other current assets796
 1,131
1,373
 1,114
Total current assets41,144
 45,896
202,738
 41,911
Other Property and Investments:      
Other investments220
 220
206
 206
Non-utility property2,240
 2,240
Non-utility property, net3,468
 2,240
Total other property and investments2,460
 2,460
3,674
 2,446
Utility Plant:      
Plant in service and plant held for future use1,513,724
 1,504,778
1,702,427
 1,686,119
Less accumulated depreciation and amortization466,976
 460,858
491,776
 487,734
1,046,748
 1,043,920
1,210,651
 1,198,385
Construction work in progress61,695
 34,350
75,332
 51,459
Net utility plant1,108,443
 1,078,270
1,285,983
 1,249,844
Deferred Charges and Other Assets:      
Regulatory assets141,486
 141,433
133,279
 138,027
Goodwill226,665
 226,665
226,665
 226,665
Operating lease right-of-use assets, net of accumulated amortization12,160
 —
Other deferred charges6,236
 6,046
7,281
 6,284
Total deferred charges and other assets374,387
 374,144
379,385
 370,976
$1,526,434
 $1,500,770
$1,871,780
 $1,665,177

The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.


TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
2018		 December 31,
2017		March 31,
2019		 December 31,
2018
(In thousands, except share information)(In thousands, except share information)
LIABILITIES AND STOCKHOLDER’S EQUITY      
Current Liabilities:      
Short-term debt$21,200
 $—
$—
 $17,500
Short-term debt – affiliate2,600
 —
—
 100
Current installments of long-term debt172,302
 —
Accounts payable15,544
 29,812
14,234
 23,804
Affiliate payables4,635
 667
4,771
 1,210
Accrued interest and taxes27,666
 29,619
40,892
 41,882
Regulatory liabilities2,225
 1,525
2,350
 3,471
Operating lease liabilities3,023
 —
Other current liabilities3,320
 2,450
3,556
 2,861
Total current liabilities77,190
 64,073
241,128
 90,828
Long-term Debt, net of Unamortized Premiums, Discounts, and Debt Issuance Costs480,716
 480,620
626,639
 575,398
Deferred Credits and Other Liabilities:      
Accumulated deferred income taxes125,515
 126,415
134,757
 136,238
Regulatory liabilities184,734
 179,137
181,047
 177,458
Asset retirement obligations809
 793
878
 860
Accrued pension liability and postretirement benefit cost7,084
 7,879
7,036
 7,394
Operating lease liabilities9,088
 —
Other deferred credits7,592
 7,448
3,729
 2,908
Total deferred credits and other liabilities325,734
 321,672
336,535
 324,858
Total liabilities883,640
 866,365
1,204,302
 991,084
Commitments and Contingencies (See Note 11)

 

Commitments and Contingencies (Note 11)

 

Common Stockholder's Equity:      
Common stock ($10 par value; 12,000,000 shares authorized; issued and outstanding 6,358 shares)64
 64
64
 64
Paid-in-capital504,166
 504,166
534,166
 534,166
Retained earnings138,564
 130,175
133,248
 139,863
Total common stockholder’s equity642,794
 634,405
667,478
 674,093
$1,526,434
 $1,500,770
$1,871,780
 $1,665,177

The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.


TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
A WHOLLY-OWNED SUBSIDIARY OF PNM RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDER’S EQUITY
(Unaudited)
Common Stock Paid-in Capital Retained Earnings Total Common Stockholder’s EquityCommon Stock Paid-in Capital Retained Earnings Total Common Stockholder’s Equity
(In thousands)(In thousands)
Balance at December 31, 2017$64
 $504,166
 $130,175
 $634,405
Balance at December 31, 2018$64
 $534,166
 $139,863
 $674,093
Net earnings—
 —
 9,413
 9,413
—
 —
 4,098
 4,098
Dividends declared on common stock—
 —
 (1,024) (1,024)—
 —
 (10,713) (10,713)
Balance at March 31, 2018$64
 $504,166
 $138,564
 $642,794
Balance at March 31, 2019$64
 $534,166
 $133,248
 $667,478

Balance at December 31, 2017$64
 $504,166
 $130,175
 $634,405
Net earnings—
 —
 9,413
 9,413
Dividends declared on common stock—
 —
 (1,024) (1,024)
Balance at March 31, 2018$64
 $504,166
 $138,564
 $642,794


The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements.



PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



(1)Significant Accounting Policies and Responsibility for Financial Statements

Financial Statement Preparation

In the opinion of management, the accompanying unaudited interim Condensed Consolidated Financial Statements reflect all normal and recurring accruals and adjustments that are necessary to present fairly the consolidated financial position at March 31, 20182019 and December 31, 20172018, and the consolidated results of operations, comprehensive income, and cash flows for the three months ended March 31, 20182019 and 2017.2018. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could ultimately differ from those estimated. Weather causes the Company’s results of operations to be seasonal in nature and the results of operations presented in the accompanying Condensed Consolidated Financial Statements are not necessarily representative of operations for an entire year.

The Notes to Condensed Consolidated Financial Statements include disclosures for PNMR, PNM, and TNMP. This report uses the term “Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. Discussions regarding only PNMR, PNM, or TNMP are so indicated. Certain amounts in the 20172018 Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 20182019 financial statement presentation.

These Condensed Consolidated Financial Statements are unaudited. Certain information and note disclosures normally included in the annual audited Consolidated Financial Statements have been condensed or omitted, as permitted under the applicable rules and regulations. Readers of these financial statements should refer to PNMR’s, PNM’s, and TNMP’s audited Consolidated Financial Statements and Notes thereto that are included in their respective 20172018 Annual Reports on Form 10-K.

GAAP defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Based on their nature, magnitude, and timing, certain subsequent events may be required to be reflected at the balance sheet date and/or required to be disclosed in the financial statements. The Company has evaluated subsequent events as required by GAAP.

Principles of Consolidation
The Condensed Consolidated Financial Statements of each of PNMR, PNM, and TNMP include their accounts and those of subsidiaries in which that entity owns a majority voting interest. PNM also consolidates Valencia (Note 6). PNM owns undivided interests in several jointly-owned power plants and records its pro-rata share of the assets, liabilities, and expenses for those plants. The agreements for the jointly-owned plants provide that if an owner were to default on its payment obligations, the non-defaulting owners would be responsible for their proportionate share of the obligations of the defaulting owner. In exchange, the non-defaulting owners would be entitled to their proportionate share of the generating capacity of the defaulting owner. There have been no such payment defaults under any of the agreements for the jointly-owned plants.

PNMR shared services’ expenses, which represent costs that are primarily driven by corporate level activities, are charged to the business segments. These services are billed at cost and are reflected as general and administrative expenses in the business segments. Other significant intercompany transactions between PNMR, PNM, and TNMP include interest and income tax sharing payments, as well as equity transactions, and interconnection billings (Note 15). All intercompany transactions and balances have been eliminated.

Dividends on Common Stock

Dividends on PNMR’s common stock are declared by the Board. The timing of the declaration of dividends is dependent on the timing of meetings and other actions of the Board.

TNMP declared and paid cash dividends on common stock to PNMR of $1.0$10.7 million and $9.9$1.0 million in the three months ended March 31, 20182019 and 2017.

2018.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Investment in NM Renewable Development, LLC

As discussed in Note 1 of the 20172018 Annual Reports on Form 10-K, in September 2017, PNMR Development and AEP OnSite Partners created NMRD in September 2017 to pursue the acquisition, development, and ownership of renewable energy generation projects, primarily in the state of New Mexico. NMRD’s current renewable energy capacity in operation is 33.9 MW. PNMR Development and AEP OnSite Partners each have a 50% ownership interest in NMRD. NMRD’s current renewable energy capacity in operation is 21.8 MW. NMRD also has 10 MW of solar PV facilities under construction that will be completed in mid-2018. PNMR accounts for itsThe investment in NMRD is accounted for using the equity method of accounting because PNMR’s ownership interest results in significant influence, but not control, over NMRD and its operations.

In Februarythe three months ended March 31, 2019 and 2018, PNMR Development made cash contributions of $7.0 million and $5.0 million to NMRD to be used primarily for its construction activities. For the three months ended March 31, 2019 and 2018, NMRD had revenues of $0.7 million and $0.4 million and net earnings (losses) of $(0.1) million and $0.1 million. At March 31, 2019 and December 31, 2018, NMRD had $3.9$8.0 million in cash, $0.4and $2.6 million in accounts receivable, $43.3of current assets, $65.2 million and $50.8 million of property, plant, and equipment and other assets, $4.5$6.1 million in accounts payable and accrued expenses,$0.2 million of current liabilities, and $43.1$67.1 million and $53.2 million of owners’ equity.

Cash and Restricted Cash

Additional information concerning the Company’s policy for recording cash and cash equivalents is discussed in Note 1 of the 2017 Annual Reports on Form 10-K. In November 2016, the FASB issued Accounting Standards Update 2016-18 – Statement of Cash Flows (Topic 230), which requires that amounts generally described as restricted cash and restricted cash equivalents (“restricted cash”) be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statements of cash flows and adds disclosures necessary to reconcile such amounts to cash and cash equivalents on the balance sheets. ASU 2016-18 does not require that restricted cash be reflected as cash in the statement of financial position and does not provide a definition of what should be considered restricted cash. Upon adoption, ASU 2016-18 requires the use of a retrospective transition method for the statement of cash flows in each period presented. During 2015, PNM received a deposit of $8.2 million from a third party that was restricted for PNM’s construction of transmission interconnection facilities for that party. During 2016, PNM utilized $7.2 million of such third-party deposits to offset construction costs for the interconnection facilities. The remaining $1.0 million was held as restricted cash until the second quarter of 2017, at which time a refund was made to the third party. The balances of this deposit arrangement were included in Other current assets on the balance sheets of PNMR and PNM. Under the terms of the BTMU Term Loan Agreement (Note 9), all cash of NM Capital is restricted and must be used for payments required under that agreement or for taxes and fees. Cash held by NM Capital is included in Cash and cash equivalents on the balance sheets of PNMR and amounted to $1.4 million at December 31, 2016 and $1.5 million at March 31, 2018, but was less than $0.1 million at March 31, 2017 and December 31, 2017.

The Company adopted ASU 2016-18 as of January 1, 2018, its required effective date. In accordance with the standard, PNM made retrospective adjustments to its Condensed Consolidated Statements of Cash Flows for the three months ending March 31, 2017 to increase beginning cash, restricted cash, and equivalents at January 1, 2017 by $1.0 million and ending cash, restricted cash, and equivalents at March 31, 2017 by $1.0 million. No other changes were made to the Condensed Consolidated Financial Statements in connection with the adoption of ASU 2016-18.

New Accounting Pronouncements

Information concerning recently issued accounting pronouncements that have not been adopted by the Company is presented below. The Company does not expect difficulty in adopting these standards by their required effective dates.

Accounting Standards Update 2016-02 – Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02 to provide guidance on the recognition, measurement, presentation, and disclosure of leases. ASU 2016-02 will require that a liability be recorded on the balance sheet for all leases, based on the present value of future lease obligations. A corresponding right-of-use asset will also be recorded. Amortization of the lease obligation and the right-of-use asset for certain leases, primarily those classified as operating leases, will be on a straight-line basis, which is not expected to have a significant impact on the statements of earnings, whereas other leases will be required to be accounted for as financing arrangements similar to the accounting treatment for capital leases under current GAAP. ASU 2016-02 also revises certain disclosure requirements. At adoption, ASU 2016-02 requires that leases be recognized and measured as of the earliest

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


period presented using a modified retrospective approach with all periods presented being restated and presented under the new guidance. The ASU allows entities to apply certain practical expedients to arrangements that exist upon adoption or that expired during the periods presented.
As further discussed in Note 7 of the Notes to Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K, the Company has operating leases of office buildings, vehicles, and equipment. The Company also routinely enters into land easements and right-of-way agreements. PNM also has operating lease interests in PVNGS Units 1 and 2 that will expire in January 2023 and 2024.

The Company, along with others in the utility industry, is continuing to monitor the activities of the FASB and other non-authoritative groups regarding industry specific issues for further clarification. The Company has formed a project team, conducted outreach activities across its lines of business, and made significant progress in identifying arrangements that may be classified as leases under ASU 2016-02 in addition to its existing operating lease arrangements. It is likely the arrangements currently classified as leases will continue to be recognized as leases under ASU 2016-02. It is possible that other contractual arrangements not previously meeting the lease definition may contain elements that qualify as leases and that previously identified operating leases may be classified as financing leases under ASU 2016-02. The Company is in the process of analyzing each of the identified contractual arrangement to determine if it contains lease elements under the new standard and quantifying the potential impacts of identified lease arrangements. The Company is also evaluating the practical expedients, if any, it will elect upon adoption. The Company anticipates this process will continue throughout 2018. The Company will adopt this standard effective as of January 1, 2019, its required effective date.

In January 2018, the FASB issued ASU 2018-01, which clarifies that land easements are to be evaluated under ASU 2016-02, but provides an additional optional practical expedient to not evaluate existing or expired land easements that were not accounted for as leases under the current guidance. The Company has numerous land easements and right-of-way agreements that would fall under this clarification. The only such agreement that has been accounted for as a lease under current guidance is the right-of-way agreement with the Navajo Nation, which is discussed in Note 7 of the Notes to Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K. The Company anticipates it will elect to use the practical expedient for its existing and expired land easements upon adoption of ASU 2016-02.

Accounting Standards Update 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, which changes the way entities recognize impairment of many financial assets, including accounts receivable and investments in certain debt securities, by requiring immediate recognition of estimated credit losses expected to occur over the remaining lives of the assets. In November 2018, the FASB clarified that receivables arising from operating leases are not within the scope of Topic 326 for assets measured at amortized costs. Instead, impairments of receivables arising from operating leases should be accounted for in accordance with Topic 842. The Company anticipates adopting ASU 2016-13 effective as of January 1, 2020, its required effective date, although early adoption is permitted beginning on January 1, 2019.date. The Company is in the process of analyzing the impacts of this new standard, but does not anticipate it will have a significant impact on its financial statements.

Accounting Standards Update 2017-04 – Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04 to simplify the annual goodwill impairment assessment process. Currently, the first step of a quantitative impairment test requires an entity to compare the fair value of each reporting unit containing goodwill with its carrying value (including goodwill). If as a result of this analysis, the entity concludes there is an indication of impairment in a reporting unit having goodwill, the entity is required to perform the second step of the impairment analysis, determining the amount of goodwill impairment to be recorded. The amount is calculated by comparing the implied fair value of the goodwill to its carrying amount. This exercise requires the entity to allocate the fair value determined in step one to the individual assets and liabilities of the reporting unit. Any remaining fair value would be the implied fair value of goodwill on the testing date. To the extent the recorded amount of goodwill of a reporting unit exceeds the implied fair value determined in step two, an impairment loss would be reflected in results of operations. ASU 2017-04 eliminates the second step of the impairment analysis. Accordingly, if the first step of a quantitative goodwill impairment analysis performed after adoption of ASU 2017-04 indicates that the fair value of a reporting unit is less than its carrying value, the goodwill of that reporting unit would be impaired to the extent of that difference. The Company anticipates it will adopt ASU 2017-04 for impairment testing after January 1, 2020, its required effective

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


date, although early adoption is permitted. However, if there is an indication of potential impairment of goodwill as a result of an impairment assessment prior to 2020, the Company will evaluate the impact of ASU 2017-04 and could elect to early adopt this standard.



PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Accounting Standards Update 2017-12 2018-13 – Derivatives and Hedging Fair Value Measurements (Topic 815): Targeted Improvements820) Disclosure Framework: Changes to Accountingthe Disclosure Requirements for Hedging ActivitiesFair Value Measurements

In August 2017,2018, the FASB issued ASU 2017-122018-13 to better align hedge accounting with an organization’s risk management activitiesimprove fair value disclosures. ASU 2018-13 eliminates certain disclosure requirements related to transfers between Levels 1 and 2 of the fair value hierarchy and the requirement to simplifydisclose the application of hedge accounting guidance.valuation process for Level 3 fair value measurements. ASU 2017-122018-13 also amends certain disclosure requirements for investments measured at net asset value and requires new disclosures for Level 3 investments, including a new requirement to disclose changes in unrealized gains or losses recorded in OCI related to Level 3 fair value measurements. ASU 2018-13 is effective for the Company on January 1, 2019 although early adoption is permitted beginning on January 1, 2018.2020, and permits entities to adopt all or certain elements of the new guidance prior to its effective date. ASU 2018-13 requires retrospective application, except for the new disclosures related to Level 3 investments which are to be applied prospectively. As discussed in Note 69 of the Notes to the Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K and in Note 9, the Company periodically enters into, and designates as cash flow hedges, interest rate swaps to hedge its exposure to changes in interest rates. In addition, as discussed in Note 8 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K and in Note 7, the Company enters into various derivative instruments to economically hedge the risk of changesPNM and TNMP have investment securities in commodity prices,trusts for decommissioning, reclamation, pension benefits, and other postretirement benefits, which are not currently designated as cash flow hedges.measured at fair value. Certain investments in these trusts are measured at net asset value per share. These trusts also hold Level 3 investments. The Company is evaluating the requirements of ASU 2017-12,2018-13, but does not anticipate it will have a significant impact on the Company’s fair value disclosures.

Accounting Standards Update 2018-14 – Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715) Disclosure Framework: Changes to the Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued ASU 2018-14 to improve benefit plan sponsors’ disclosures for defined benefit pension and other post-employment benefit plans. ASU 2018-14 removes the requirement to disclose the amounts in other comprehensive income expected to be recognized as benefit cost over the next fiscal year and the requirement to disclose the impact of a one-percentage-point change in the assumed health care cost trend rate; clarifies the disclosure requirements for plans with assets that are less than their projected benefit, or accumulated benefit obligation; and requires significant gains and losses affecting benefit obligations during the period be disclosed. ASU 2018-14 is effective for the Company on December 31, 2020, although early adoption is permitted, and requires retrospective application. As discussed in Note 11 of the Notes to the Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K and in Note 10, PNM and TNMP maintain qualified defined benefit, other postretirement benefit plans providing medical and dental benefits, and executive retirement programs. The Company is evaluating the requirements of ASU 2018-14 but does not anticipate these changes will have a significant impact on the Company’s defined benefit and other postretirement benefit plan disclosures.

Accounting Standards Update 2018-15 – Intangibles - Goodwill and Other - Internal Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

In August 2018, the FASB issued ASU 2018-15 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for implementation costs incurred to develop or obtain internal-use software. Under ASU 2018-15, entities are required to capitalize implementation costs for hosting arrangements if those costs meet the capitalization requirements for internal-use software arrangements. ASU 2018-15 requires entities to present cash flows, capitalized costs, and amortization expense in the same financial statement line items as other costs incurred for such hosting arrangements. ASU 2018-15 is effective for the Company on January 1, 2020, although early adoption is permitted, and allows entities to apply the new requirements retrospectively or prospectively. The Company is in the process of analyzing the impacts of this new standard.

Accounting Standards Update 2018-18 - Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
In November 2018, the FASB issued ASU 2018-18 to clarify transactions between collaborative arrangement participants that should be recognized as revenue under Topic 606. ASU 2018-18 is effective for the Company on January 1, 2020, although early adoption is permitted, and requires retrospective application. The Company has collaborative arrangements related to its interests in SJGS, Four Corners, PVNGS, and Luna. The Company believes its current accounting treatment for derivative instruments or on its financial statements.practices comply with the requirements of ASU 2018-18 but is in the process of analyzing the impacts of the new standard.

(2)Segment Information

The following segment presentation is based on the methodology that management uses for making operating decisions and assessing performance of its various business activities. A reconciliation of the segment presentation to the GAAP financial statements is provided.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


PNM
PNM includes the retail electric utility operations of PNM that are subject to traditional rate regulation by the NMPRC. PNM provides integrated electricity services that include the generation, transmission, and distribution of electricity for retail electric customers in New Mexico. PNM also includes the generation and sale of electricity into the wholesale market, as well as providing transmission services to third parties. The sale of electricity includes the asset optimization of PNM’s jurisdictional capacity, as well as the capacity excluded from retail rates. FERC has jurisdiction over wholesale power and transmission rates.

TNMP

TNMP is an electric utility providing services in Texas under the TECA. TNMP’s operations are subject to traditional rate regulation by the PUCT. TNMP provides transmission and distribution services at regulated rates to various REPs that, in turn, provide retail electric service to consumers within TNMP’s service area. TNMP also provides transmission services at regulated rates to other utilities that interconnect with TNMP’s facilitiesfacilities.

Corporate and Other

The Corporate and Other segment includes PNMR holding company activities, primarily related to corporate level debt and PNMR Services Company. The activities of PNMR Development, NM Capital, and the equity method investment in NMRD are also included in Corporate and Other. Eliminations of intercompany income and expense transactions are reflected in the Corporate and Other segment.

The following tables present summarized financial information for PNMR by segment. PNM and TNMP each operate in only one segment. Therefore, tabular segment information is not presented for PNM and TNMP.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


PNMR SEGMENT INFORMATION
PNM TNMP 
Corporate
and Other
 ConsolidatedPNM TNMP 
Corporate
and Other
 PNMR Consolidated
(In thousands)(In thousands)
Three Months Ended March 31, 2018       
Three Months Ended March 31, 2019 
Electric operating revenues$236,232
 $81,646
 $—
 $317,878
$269,318
 $80,327
 $—
 $349,645
Cost of energy70,802
 21,754
 —
 92,556
99,339
 22,287
 —
 121,626
Utility margin165,430
 59,892
 —
 225,322
169,979
 58,040
 —
 228,019
Other operating expenses100,511
 24,973
 (5,016) 120,468
106,462
 25,241
 (5,763) 125,940
Depreciation and amortization36,627
 16,387
 5,708
 58,722
39,224
 20,214
 5,918
 65,356
Operating income (loss)28,292
 18,532
 (692) 46,132
24,293
 12,585
 (155) 36,723
Interest income2,487
 —
 1,637
 4,124
3,656
 31
 (68) 3,619
Other income (deductions)1,217
 1,085
 79
 2,381
14,358
 554
 (735) 14,177
Interest charges(20,830) (7,729) (4,496) (33,055)(18,360) (8,800) (4,474) (31,634)
Segment earnings (loss) before income taxes11,166
 11,888
 (3,472) 19,582
23,947
 4,370
 (5,432) 22,885
Income taxes (benefit)(348) 2,475
 (1,344) 783
1,973
 272
 (1,022) 1,223
Segment earnings (loss)11,514
 9,413
 (2,128) 18,799
21,974
 4,098
 (4,410) 21,662
Valencia non-controlling interest(3,677) —
 —
 (3,677)(2,830) —
 —
 (2,830)
Subsidiary preferred stock dividends(132) —
 —
 (132)(132) —
 —
 (132)
Segment earnings (loss) attributable to PNMR$7,705
 $9,413
 $(2,128) $14,990
$19,012
 $4,098
 $(4,410) $18,700
              
At March 31, 2018:       
At March 31, 2019:       
Total Assets$4,925,741
 $1,526,434
 $224,218
 $6,676,393
$5,202,039
 $1,871,780
 $176,939
 $7,250,758
Goodwill$51,632
 $226,665
 $—
 $278,297
$51,632
 $226,665
 $—
 $278,297

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


PNM TNMP 
Corporate
and Other
 ConsolidatedPNM TNMP 
Corporate
and Other
 PNMR Consolidated
(In thousands)(In thousands)
Three Months Ended March 31, 2017       
Three Months Ended March 31, 2018       
Electric operating revenues$251,558
 $78,620
 $—
 $330,178
$236,232
 $81,646
 $—
 $317,878
Cost of energy81,317
 21,487
 —
 102,804
70,802
 21,754
 —
 92,556
Utility margin170,241
 57,133
 —
 227,374
165,430
 59,892
 —
 225,322
Other operating expenses93,756
 23,797
 (4,660) 112,893
100,511
 24,973
 (5,016) 120,468
Depreciation and amortization36,016
 15,371
 4,996
 56,383
36,627
 16,387
 5,708
 58,722
Operating income (loss)40,469
 17,965
 (336) 58,098
28,292
 18,532
 (692) 46,132
Interest income2,816
 —
 2,065
 4,881
2,487
 —
 1,637
 4,124
Other income (deductions)5,545
 732
 (335) 5,942
1,217
 1,085
 79
 2,381
Interest charges(21,012) (7,404) (3,284) (31,700)(20,830) (7,729) (4,496) (33,055)
Segment earnings (loss) before income taxes27,818
 11,293
 (1,890) 37,221
11,166
 11,888
 (3,472) 19,582
Income taxes (benefit)7,708
 3,689
 (622) 10,775
(348) 2,475
 (1,344) 783
Segment earnings (loss)20,110
 7,604
 (1,268) 26,446
11,514
 9,413
 (2,128) 18,799
Valencia non-controlling interest(3,452) —
 —
 (3,452)(3,677) —
 —
 (3,677)
Subsidiary preferred stock dividends(132) —
 —
 (132)(132) —
 —
 (132)
Segment earnings (loss) attributable to PNMR$16,526
 $7,604
 $(1,268) $22,862
$7,705
 $9,413
 $(2,128) $14,990
              
At March 31, 2017:       
At March 31, 2018:       
Total Assets$4,870,201
 $1,396,055
 $211,423
 $6,477,679
$4,925,741
 $1,526,434
 $224,218
 $6,676,393
Goodwill$51,632
 $226,665
 $—
 $278,297
$51,632
 $226,665
 $—
 $278,297

The Company defines utility margin as electric operating revenues less cost of energy. Cost of energy consists primarily of fuel and purchase power costs for PNM and costs charged by third-party transmission providers for TNMP. The Company believes that utility margin provides a more meaningful basis for evaluating operations than electric operating revenues since substantially all such costs are offset in revenues as fuel and purchase power costs are passed through to customers under PNM’s FPPAC and third-party transmission costs are passed on to customers through TNMP’s transmission cost recovery factor. Utility margin is not a financial measure required to be presented under GAAP and is considered a non-GAAP measure.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(3)Accumulated Other Comprehensive Income (Loss)

Information regarding accumulated other comprehensive income (loss) for the three months ended March 31, 20182019 and 20172018 is as follows:
Accumulated Other Comprehensive Income (Loss)Accumulated Other Comprehensive Income (Loss)
PNM PNMRPNM PNMR
Unrealized     Fair Value  Unrealized     Fair Value  
Gains on     Adjustment  Gains on     Adjustment  
Available-for- Pension   for Cash  Available-for- Pension   for Cash  
Sale Liability   Flow  Sale Liability   Flow  
Securities Adjustment Total Hedges TotalSecurities Adjustment Total Hedges Total
(In thousands)(In thousands)
Balance at December 31, 2017, as originally reported$13,169
 $(110,262) $(97,093) $1,153
 $(95,940)
Cumulative effect adjustment (Note 7)(11,208) —
 (11,208) —
 (11,208)
Balance at January 1, 2018, as adjusted1,961
 (110,262) (108,301) 1,153
 (107,148)
Balance at December 31, 2018$1,939
 $(112,361) $(110,422) $1,738
 $(108,684)
Amounts reclassified from AOCI (pre-tax)(2,629) 1,891
 (738) (53) (791)(676) 1,851
 1,175
 270
 1,445
Income tax impact of amounts reclassified668
 (480) 188
 13
 201
172
 (470) (298) (68) (366)
Other OCI changes (pre-tax)1,115
 —
 1,115
 1,858
 2,973
7,078
 —
 7,078
 (1,225) 5,853
Income tax impact of other OCI changes(283) —
 (283) (472) (755)(1,798) —
 (1,798) 311
 (1,487)
Net after-tax change(1,129) 1,411
 282
 1,346
 1,628
4,776
 1,381
 6,157
 (712) 5,445
Balance at March 31, 2018$832
 $(108,851) $(108,019) $2,499
 $(105,520)
Balance at March 31, 2019$6,715
 $(110,980) $(104,265) $1,026
 $(103,239)
 
Balance at December 31, 2016$4,320
 $(96,748) $(92,428) $(23) $(92,451)
Balance at December 31, 2017, as originally reported$13,169
 $(110,262) $(97,093) $1,153
 $(95,940)
Cumulative effect adjustment (Note 7)(11,208) —
 (11,208) —
 (11,208)
Balance at January 1, 2018, as adjusted1,961
 (110,262) (108,301) 1,153
 (107,148)
Amounts reclassified from AOCI (pre-tax)(2,763) 1,618
 (1,145) 112
 (1,033)(2,629) 1,891
 (738) (53) (791)
Income tax impact of amounts reclassified1,078
 (631) 447
 (44) 403
668
 (480) 188
 13
 201
Other OCI changes (pre-tax)7,766
 —
 7,766
 (185) 7,581
1,115
 —
 1,115
 1,858
 2,973
Income tax impact of other OCI changes(3,030) —
 (3,030) 72
 (2,958)(283) —
 (283) (472) (755)
Net after-tax change3,051
 987
 4,038
 (45) 3,993
(1,129) 1,411
 282
 1,346
 1,628
Balance at March 31, 2017$7,371
 $(95,761) $(88,390) $(68) $(88,458)
Balance at March 31, 2018$832
 $(108,851) $(108,019) $2,499
 $(105,520)

Pre-taxThe Condensed Consolidated Statements of Earnings include pre-tax amounts reclassified from AOCI related to Unrealized Gains on Available-for-Sale Securities are included in Gainsgains on investment securities, in the Condensed Consolidated Statements of Earnings. Pre-tax amounts reclassified from AOCI related to Pension Liability Adjustment are reclassified to Other Incomein other (deductions), and Deductions – Other (deductions) in the Condensed Consolidated Statements of Earnings. Pre-tax amounts reclassified from AOCI related to Fair Value Adjustment for Cash Flow Hedges are reclassified to Interest Charges in the Condensed Consolidated Statements of Earnings. An insignificant amount is included in capitalized interest.interest charges. The income tax impacts of all amounts reclassified from AOCI are included in Income Taxesincome taxes in the Condensed Consolidated Statements of Earnings.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(4)Earnings Per Share

In accordance with GAAP, dual presentation of basic and diluted earnings per share is presented in the Condensed Consolidated Statements of Earnings of PNMR. Information regarding the computation of earnings per share is as follows:
Three Months EndedThree Months Ended
March 31,March 31,
2018 20172019 2018
(In thousands, except per share amounts)(In thousands, except per share amounts)
Net Earnings Attributable to PNMR$14,990
 $22,862
$18,700
 $14,990
Average Number of Common Shares:      
Outstanding during period79,654
 79,654
79,654
 79,654
Vested awards of restricted stock
205
 112
239
 205
Average Shares – Basic79,859
 79,766
79,893
 79,859
Dilutive Effect of Common Stock Equivalents:      
Stock options and restricted stock154
 346
78
 154
Average Shares – Diluted80,013
 80,112
79,971
 80,013
Net Earnings Per Share of Common Stock:      
Basic$0.19
 $0.29
$0.23
 $0.19
Diluted$0.19
 $0.29
$0.23
 $0.19

(5)Electric Operating Revenues

PNMR is an investor-owned holding company with two regulated utilities providing electricity and electric services in New Mexico and Texas. PNMR’s electric utilities are PNM and TNMP.

Revenue RecognitionAdditional information concerning electric operating revenue is contained in Note 4 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K.

Electric operating revenues are recorded in the period of energy delivery, which includes estimated amounts for service rendered but unbilled at the end of each accounting period. The determination of the energy sales billed to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading and the corresponding unbilled revenue are estimated. Unbilled electric revenue is estimated based on the daily generation volumes, estimated customer usage by class, line losses, and applicable customer rates reflecting historical trends and experience. Amounts billed are generally due within the next month. The Company does not incur incremental costs to obtain contracts for its energy services.

PNM’s wholesale electricity sales are recorded as electric operating revenues and wholesale electricity purchases are recorded as costs of energy sold. In accordance with GAAP, derivative contracts that are subject to unplanned netting are recorded net in earnings. A “book-out” is the planned or unplanned netting of off-setting purchase and sale transactions. A book-out is a transmission mechanism to reduce congestion on the transmission system or administrative burden. For accounting purposes, a book-out is the recording of net revenues upon the settlement of a derivative contract.

Unrealized gains and losses on derivative contracts that are not designated for hedge accounting are classified as economic hedges. Economic hedges are defined as derivative instruments, including long-term power and fuel supply agreements, used to hedge generation assets and purchased power costs. Changes in the fair value of economic hedges are reflected in results of operations, with changes related to economic hedges on sales included in operating revenues and changes related to economic hedges on purchases included in cost of energy sold.

In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also revises the disclosure requirements regarding revenue and requires that revenue from contracts with customers be reported separately from other revenues. ASU 2014-09 provides that it could be applied retrospectively to each prior period presented or on a modified retrospective basis with a cumulative effect adjustment to retained earnings on the date of adoption.

The Company adopted ASU 2014-09 effective as of January 1, 2018, its required effective date, using the modified retrospective method of adoption. The adoption of ASU 2014-09 did not result in changes to the nature, amount, and timing of the Company’s existing revenue recognition processes or information technology infrastructure. Therefore, the adoption of ASU 2014-09 had no effect on the amount of revenue recorded in 2018 compared to the amount that would have been recorded under prior GAAP, no effect on total Electric operating revenues or any other caption within the Company’s financial statements, and no cumulative effect adjustment was recorded. Revenues for 2018 are presented in accordance with the standard on the Condensed Consolidated Statements of Earnings and 2017 revenues are presented on a comparative basis. Additional disclosures to further disaggregate 2018 revenues are also presented.

Under ASU 2014-09, PNM and TNMP recognize revenue as they satisfy performance obligations, which typically occurs as the customer or end-user consumes the electric service provided. Electric services are typically for a bundle of services that are distinct and transferred to the end-user in one performance obligation measured by KWh or KW. Electric operating revenues are recorded in the period of energy delivery, including estimated unbilled amounts. As permitted under GAAP, the Company has elected to exclude all sales and similar taxes from revenue.

Revenue from contracts with customers is recorded based upon the total authorized tariff price at the time electric service is rendered, including amounts billed under arrangements qualifying as an Alternative Revenue Program (“ARP”). ARP arrangements are agreements between PNM or TNMP and its regulator that allows PNM or TNMP to adjust future rates in response to past activities or completed events, if certain criteria are met. GAAP requires that ARP revenues be reported separately from contracts with customers. ARP revenues in a given period include the recognition of “originating” ARP revenues (i.e. when the regulator specific conditions are met) in the period, offset by the reversal of ARP revenues billed to customers in that period.

Sources of Revenue

Additional information about the nature of revenues is provided below.

Revenue from Contracts with Customers

PNM

NMPRC Regulated Retail Electric Service – PNM provides electric generation, transmission, and distribution service to its rate-regulated customers in New Mexico. PNM’s retail electric service territory covers a large area of north central New Mexico, including the cities of Albuquerque, Rio Rancho, and Santa Fe, and certain areas of southern New Mexico. Customer rates for retail electric service are set by the NMPRC and revenue is recognized as energy is delivered to the customer. PNM invoices customers on a monthly basis for electric service and generally collects billed amounts within one month.

Transmission Service to Third Parties – PNM owns or leases transmission lines, interconnected with other utilities in New Mexico, Texas, Arizona, Colorado, and Utah. Transmission customers receive service for the transmission of energy owned by the customer utilizing PNM’s transmission facilities. Customers generally receive transmission services, which are regulated by FERC, from PNM through PNM’s Open Access Transmission Tariff (“OATT”) or a specific contract. Customers are billed based on capacity and energy components on a monthly basis.

TNMP

PUCT Regulated Retail Electric Service – TNMP provides transmission and distribution services in Texas under the provisions of TECA and the Texas Public Utility Regulatory Act. TNMP is subject to traditional cost-of-service regulation with respect to rates and service under the jurisdiction of the PUCT and certain municipalities. TNMP’s transmission and distribution activities are solely within ERCOT, which is the independent system operator responsible for maintaining reliable operations for the bulk electric power supply system in most of Texas. Therefore, TNMP is not subject to traditional rate regulation by FERC.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


TNMP provides transmission and distribution services at regulated rates to various REPs that, in turn, provide retail electric service to consumers within TNMP’s service area. Revenue is recognized as energy is delivered to the consumer. Delivery of service is invoiced as the transaction occurs and is generally paid within a month.

Transmission Cost of Service (“TCOS”) – TNMP is a transmission service provider that is allowed to recover its TCOS through a network transmission rate that is approved by the PUCT. TCOS customers are other utilities that receive service for the transmission of energy owned by the customer utilizing TNMP’s transmission facilities. Historically, TNMP has updated its transmission rates twice per year to reflect changes in its invested capital although updates are not allowed while a general rate case is in progress (Note 12).

Alternative Revenue Programs

ARP revenues, which are discussed above, include recovery or refund provisions under PNM’s renewable energy rider and true-ups to PNM’s formula transmission rates; TNMP’s AMS surcharge, transmission cost recovery factor, and rate impacts of the 2017 change in the corporate income tax rate; and the energy efficiency incentive bonus at both PNM and TNMP. GAAP provides for the recognition of regulatory assets and liabilities for the difference between ARP revenues and amounts billed under those programs. Regulatory assets and liabilities are amortized into earnings as amounts are billed. Accordingly, the Company has deferred certain costs and recorded certain liabilities pursuant to the rate actions of the NMPRC, PUCT, and FERC.

Other Electric Operating Revenues

Other electric operating revenues consist primarily of PNM’s sales for resale meeting the definition of a derivative under GAAP. Derivatives are not considered contracts with customers under ASU 2014-09. PNM engages in activities meeting the definition of derivatives to optimize its existing jurisdictional assets and long-term power agreements through spot market, hour-ahead, day-ahead, week-ahead, month-ahead, and other sales of any excess generation not required to fulfill retail load and contractual commitments. Through December 31, 2017, PNM’s 134 MW share of Unit 3 at PVNGS was excluded from retail rates and was being sold in the wholesale market. In December 2015, the NMPRC approved PNM’s request to include PVNGS Unit 3 as a jurisdictional resource to service New Mexico retail customers beginning in 2018.

Disaggregation of Revenues

A disaggregation of revenues from Contractscontracts with customers for the three months ended March 31, 2018 by the type of customer is presented in the table below. The table also reflects ARPalternative revenue program revenues (“ARP”) and Otherother revenues.
 PNM TNMP Consolidated PNM TNMP PNMR Consolidated
 (In thousands)
Three Months Ended March 31, 2019 (In thousands)
Electric Operating Revenues:            
Contracts with customers:            
Retail electric revenue            
Residential $97,169
 $29,266
 $126,435
 $107,302
 $30,432
 $137,734
Commercial 82,849
 27,152
 110,001
 85,233
 27,429
 112,662
Industrial 13,459
 4,305
 17,764
 14,747
 5,616
 20,363
Public authority 4,635
 1,416
 6,051
 4,711
 1,374
 6,085
Economy energy service 7,288
 —
 7,288
 6,922
 —
 6,922
Transmission 12,482
 16,508
 28,990
 13,385
 14,003
 27,388
Miscellaneous 4,682
 2,140
 6,822
 3,641
 903
 4,544
Total revenues from contracts with customers 222,564
 80,787
 303,351
 235,941
 79,757
 315,698
      
Alternative revenue programs 65
 859
 924
 66
 570
 636
Other electric operating revenues 13,603
 —
 13,603
 33,311
 —
 33,311
Total Electric Operating Revenues $236,232
 $81,646
 $317,878
 $269,318
 $80,327
 $349,645

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


For the three months ended March 31, 2017, ARP revenues and Other electric operating revenues were $1.1 million and $28.4 million for PNM and $3.5 million and none for TNMP.
  PNM TNMP PNMR Consolidated
Three Months Ended March 31, 2018 (In thousands)
Electric Operating Revenues:      
Contracts with customers:      
Retail electric revenue      
Residential $97,169
 $29,266
 $126,435
Commercial 82,849
 27,152
 110,001
Industrial 13,459
 4,305
 17,764
Public authority 4,635
 1,416
 6,051
Economy energy service 7,288
 —
 7,288
Transmission 12,482
 16,508
 28,990
Miscellaneous 4,682
 2,140
 6,822
Total revenues from contracts with customers 222,564
 80,787
 303,351
Alternative revenue programs 65
 859
 924
Other electric operating revenues 13,603
 —
 13,603
Total Electric Operating Revenues $236,232
 $81,646
 $317,878

Contract balances

Performance obligations related to contracts with customers are typically satisfied when the energy is delivered and the customer or end-user utilizes the energy. Accounts receivable from customers represent amounts billed to the customer or end-user, including amounts under ARP programs. For PNM, accounts receivable reflected on the Condensed Consolidated Balance Sheets, net of allowance for uncollectible accounts, includes $58.7$65.2 million at March 31, 20182019 and $62.9$61.7 million at December 31, 20172018 resulting from contracts with customers. All of TNMP’s accounts receivable results from contracts with customers.

Contract assets are an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance). The Company has no contract assets as of March 31, 2019 or December 31, 2018. Contract liabilities arise when consideration is received in advance from a customer before satisfying the performance obligations. Therefore, revenue is deferred and not recognized until the obligation is satisfied. Under its OATT,Open Access Transmission Tariff, PNM accepts upfront consideration for capacity reservations requested by transmission customers, which requires PNM to defer the customer’s transmission capacity rights for a specific period of time. PNM recognizes the revenue of these capacity reservations over the period it defers the customer’s capacity rights.rights have been reserved, which is generally over one year. Other utilities pay PNM and TNMP in advance for the joint-use of their utility poles. These revenues are recognized over the period of time specified in the joint-use contract, typically for one calendar year. Deferred revenues on these arrangements are recorded as contract liabilities. The Company has no other arrangements with remaining performance obligations to which a portion of the transaction price would be required to be allocated.

Changes during the period in the balances of contract liabilities, which are included in Otherother current liabilities on the Condensed Consolidated Balance Sheets, are as follows:
 PNM TNMP Consolidated PNM TNMP PNMR Consolidated
 (In thousands) (In thousands)
Balance at December 31, 2017 $349
 $—

$349
Balance at December 31, 2018 $349
 $—
 $349
Consideration received in advance of service to be provided 3,983
 1,512
 5,495
 3,981
 1,389
 5,370
Deferred revenue earned (1,099) (378) (1,477) (1,349) (371) (1,720)
Balance at March 31, 2018 $3,233
 $1,134

$4,367
Balance at March 31, 2019 $2,981
 $1,018
 $3,999

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(6)Variable Interest Entities

GAAP determines how an enterprise evaluates and accounts for its involvement with variable interest entities, focusing primarily on whether the enterprise has the power to direct the activities that most significantly impact the economic performance of a variable interest entity (“VIE”). GAAP also requires continual reassessment of the primary beneficiary of a VIE. Additional information concerning PNM’s VIEs is contained in Note 910 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K.

Valencia

PNM has a PPA to purchase all of the electric capacity and energy from Valencia, a 158 MW natural gas-fired power plant near Belen, New Mexico, through May 2028. A third-partythird party built, owns, and operates the facility while PNM is the sole purchaser of the electricity generated. PNM is obligated to pay fixed operation and maintenance and capacity charges in addition to variable operation and maintenance charges under this PPA. For the three months ended March 31, 20182019 and 2017,2018, PNM paid $4.9 million and $4.9 million for fixed charges and $0.3less than $0.1 million and $0.1$0.3 million for variable charges. PNM does not have any other financial obligations related to Valencia. The assets of Valencia can only be used to satisfy its obligations and creditors of Valencia do not have any recourse against PNM’s assets. During the term of the PPA, PNM has the option, under certain conditions, to purchase

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


and own up to 50% of the plant or the VIE. The PPA specifies that the purchase price would be the greater of 50% of book value reduced by related indebtedness or 50% of fair market value.

PNM sources fuel for the plant, controls when the facility operates through its dispatch, and receives the entire output of the plant, which factors directly and significantly impact the economic performance of Valencia. Therefore, PNM has concluded that the third-party entity that owns Valencia is a VIE and that PNM is the primary beneficiary of the entity under GAAP since PNM has the power to direct the activities that most significantly impact the economic performance of Valencia and will absorb the majority of the variability in the cash flows of the plant. As the primary beneficiary, PNM consolidates Valencia in its financial statements. Accordingly, the assets, liabilities, operating expenses, and cash flows of Valencia are included in the Condensed Consolidated Financial Statements of PNM although PNM has no legal ownership interest or voting control of the VIE. The assets and liabilities of Valencia set forth below are immaterial to PNM and, therefore, not shown separately on the Condensed Consolidated Balance Sheets. The owner’s equity and net income of Valencia are considered attributable to non-controlling interest.

Summarized financial information for Valencia is as follows:

 
Results of Operations

 Three Months Ended March 31,
 2018 2017
 (In thousands)
Operating revenues$4,768
 $4,927
Operating expenses(1,091) (1,475)
Earnings attributable to non-controlling interest$3,677
 $3,452
Three Months Ended March 31,
20192018
(In thousands)
Operating revenues$4,952
$4,768
Operating expenses(2,122)(1,091)
Earnings attributable to non-controlling interest$2,830
$3,677

 
Financial Position

 March 31, December 31,
 2019 2018
 (In thousands)
Current assets$2,918
 $2,684
Net property, plant, and equipment60,712
 62,066
Total assets63,630
 64,750
Current liabilities851
 538
Owners’ equity – non-controlling interest$62,779
 $64,212

Financial Position
 March 31, December 31,
 2018 2017
 (In thousands)
Current assets$2,981
 $2,688
Net property, plant, and equipment63,400
 64,109
Total assets66,381
 66,797
Current liabilities981
 602
Owners’ equity – non-controlling interest$65,400
 $66,195

Westmoreland San Juan LLC (“WSJ”) and SJCC

As discussed in the subheading Coal Supply in Note 11, PNM purchases coal for SJGS from SJCC under a coal supply agreement (“SJGS CSA”). That section includes information on the acquisition of SJCC by WSJ, a subsidiary of Westmoreland, on January 31, 2016, as well as the $125.0 million loan (the “Westmoreland Loan”) from NM Capital, a subsidiary of PNMR, to WSJ, which loan provided substantially all of the funds required for the SJCC purchase, and the issuance of $30.3 million in letters of credit to facilitate the issuance of reclamation bonds required in order for SJCC to mine coal to be supplied to SJGS. The Westmoreland Loan and the letters of credit support result in PNMR being considered to have a variable interest in WSJ, including its subsidiary, SJCC, since PNMR and NM Capital could be subject to possible loss in the event of a default by WSJ under the Westmoreland Loan and/or performance was required under the letter of credit support.  Principal payments under the Westmoreland Loan began on August 1, 2016 and are required quarterly thereafter. Interest is also paid quarterly beginning on May 3, 2016.

At March 31, 2018, the amount outstanding under the Westmoreland Loan was $51.0 million. In addition, interest receivable of $1.2 million is included in Other receivables. The Westmoreland Loan requires that all cash flows of WSJ, in excess of normal operating expenses, capital additions, and operating reserves, be utilized for principal and interest payments under the loan until it is fully repaid. A principal payment of $0.9 million plus interest of $1.8 million is due on May 1, 2018. As of April 23, 2018,

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


$2.7 million was held in a SJCC bank account that is restricted solely to be used to service the Westmoreland Loan. The Westmoreland Loan is secured by the assets of and the equity interests in SJCC. In the event of a default by WSJ, NM Capital would have the ability to foreclose on the equity of WSJ or the assets used in the mining operations.  In such event, NM Capital would likely engage a third-party mining company to operate SJCC so that operations of the mine are not disrupted. The acquisition of SJCC for approximately $125.0 million on January 31, 2016 was an arm’s-length negotiated transaction between Westmoreland and BHP, which amount should approximate the fair value of SJCC at the date of acquisition.  If WSJ were to default, NM Capital should be able to foreclose on assets of approximately the value of the Westmoreland Loan without a significant loss. Furthermore, PNMR considers the possibility of loss under the letters of credit support to be remote since the purpose of posting the bonds is to provide assurance that SJCC performs the required reclamation of the mine site in accordance with applicable regulations and all reclamation costs are reimbursable under the SJGS CSA. Also, much of the mine reclamation activities will not be performed until after the expiration of the SJGS CSA and the final maturity of the Westmoreland Loan. In addition, each of the SJGS participants has established and funds a trust to meet its future reclamation obligations.

On March 28, 2018, NM Capital executed an extension and waiver agreement with WSJ, which waived a technical event of default by WSJ under the Westmoreland Loan. This waiver relates solely to the required delivery of the financial statements of Westmoreland, WSJ’s parent company, and expires on the earlier of May 1, 2019 or the occurrence of any other event of default. On April 2, 2018, Westmoreland filed its Annual Report on Form 10-K for the year ended December 31, 2017 with the SEC. In the Westmoreland Form 10-K, Westmoreland indicated that it has retained financial advisors and restructuring advisors “to explore strategic alternatives to strengthen the Company’s balance sheet and maximize the value of the Company, which may include, but not limited to, seeking reorganization under Chapter 11 of the U.S. Bankruptcy Code.” As mentioned above, in January 2016, NM Capital made the Westmoreland Loan to WSJ, which is a ring-fenced, bankruptcy remote subsidiary of Westmoreland. The Westmoreland Loan is secured by the equity interests and assets of WSJ. A bankruptcy of Westmoreland would not constitute a default by WSJ under the Westmoreland Loan and WSJ continues to perform as required by the Westmoreland Loan other than the technical default covered by the March 28, 2018 waiver.

Both WSJ and SJCC are considered to be VIEs.  PNMR’s analysis of these arrangements concluded that Westmoreland, as the parent of WSJ, has the ability to direct the SJCC mining operations, which is the factor that most significantly impacts the economic performance of WSJ and SJCC.  NM Capital’s rights under the Westmoreland Loan are the typical protective rights of a lender, but do not give NM Capital any oversight over mining operations unless there is a default under the loan agreement. Other than PNM being able to ensure that coal is supplied in adequate quantities and of sufficient quality to provide the fuel necessary to operate SJGS in a normal manner, the mining operations are solely under the control of Westmoreland and its subsidiaries, including developing mining plans, hiring of personnel, and incurring operating and maintenance expenses. Neither PNMR nor PNM has any ability to direct or influence the mining operation.  PNM’s involvement through the SJGS CSA is a protective right rather than a participating right and Westmoreland has the power to direct the activities that most significantly impact the economic performance of SJCC.  The SJGS CSA requires SJCC to deliver coal required to fuel SJGS in exchange for payment of a set price per ton, which is escalated over time for inflation.  If SJCC is able to mine more efficiently than anticipated, its economic performance will be improved.  Conversely, if SJCC cannot mine as efficiently as anticipated, its economic performance will be negatively impacted.  Accordingly, PNMR believes Westmoreland is the primary beneficiary of WSJ and, therefore, WSJ and SJCC are not consolidated by either PNMR or PNM. The amounts outstanding under the Westmoreland Loan and the letter of credit support constitute PNMR’s maximum exposure to loss from the VIEs.

(7)Fair Value of Derivative and Other Financial Instruments

Additional information concerning energy related derivative contracts and other financial instruments is contained in Note 8 of the Notes to Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K.

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

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Westmoreland San Juan Mining, LLC

As discussed in the subheading Coal Supply in Note 11, PNM purchases coal for SJGS under a coal supply agreement (“SJGS CSA”). That section includes information on the acquisition of SJCC by WSJ, a subsidiary of Westmoreland Coal Company (“Westmoreland”), on January 31, 2016, as well as the $125.0 million loan (the “Westmoreland Loan”) from NM Capital, a subsidiary of PNMR, to WSJ, which loan provided substantially all of the funds required for the purchase of SJCC. On May 22, 2018, the full principal outstanding under the Westmoreland Loan of $50.1 million was repaid. NM Capital used a portion of the proceeds to repay all remaining amounts owed under the BTMU Term Loan. These payments effectively terminated the loan agreements and PNMR’s guarantee of NM Capital’s obligations under the BTMU Term Loan. Prior to its repayment, the Westmoreland Loan resulted in PNMR being considered to have a variable interest in WSJ, including its subsidiary, SJCC, since PNMR and NM Capital were subject to possible loss in the event of default of WSJ.

On October 9, 2018, Westmoreland filed a Current Report on Form 8-K with the SEC announcing it had filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. On March 15, 2019, Westmoreland emerged from Chapter 11 bankruptcy as a privately held company owned and operated by a group of its former creditors. Under the reorganization, the assets of SJCC were sold to Westmoreland San Juan Mining, LLC (“WSJ LLC”), a subsidiary of Westmoreland Mining Holdings, LLC. The March 15, 2019 announcement indicated that mining operations will continue in the normal course of business. As successor entity to SJCC, WSJ LLC assumed all rights and obligations of WSJ including obligations to PNM under the SJGS CSA and to PNMR for the letters of credit support agreement. See (Note 11).

PNMR issued $30.3 million in letters of credit to facilitate the issuance of reclamation bonds required in order for SJCC to mine coal to be supplied to SJGS. As discussed above, WSJ LLC assumed the rights and obligations of SJCC, including obligations to PNMR for the letters of credit. The letters of credit support results in PNMR being considered to have a variable interest in WSJ LLC since PNMR is subject to possible loss in the event performance by PNMR is required under the letters of credit support. PNMR considers the possibility of loss under the letters of credit support to be remote since the purpose of posting the bonds is to provide assurance that WSJ LLC performs the required reclamation of the mine site in accordance with applicable regulations and all reclamation costs are reimbursable under the SJGS CSA. Also, much of the mine reclamation activities will not be performed until after the expiration of the SJGS CSA. In addition, each of the SJGS participants has established and funds a trust to meet its future reclamation obligations.
WSJ LLC is considered to be a VIE.  PNMR’s analysis of its arrangements with WSJ LLC concluded that WSJ LLC has the ability to direct its mining operations, which is the factor that most significantly impacts the economic performance of WSJ LLC.  Other than PNM being able to ensure that coal is supplied in adequate quantities and of sufficient quality to provide the fuel necessary to operate SJGS in a normal manner, the mining operations are solely under the control of WSJ LLC, including developing mining plans, hiring of personnel, and incurring operating and maintenance expenses. Neither PNMR nor PNM has any ability to direct or influence the mining operation.  PNM’s involvement through the SJGS CSA, which was assumed by WSJ LLC pursuant to the March 15, 2019 purchase of the assets owned by SJCC by WSJ LLC, is a protective right rather than a participating right and WSJ LLC has the power to direct the activities that most significantly impact the economic performance of WSJ LLC.  The SJGS CSA requires WSJ LLC to deliver coal required to fuel SJGS in exchange for payment of a set price per ton, which is escalated over time for inflation.  If WSJ LLC is able to mine more efficiently than anticipated, its economic performance will be improved.  Conversely, if WSJ LLC cannot mine as efficiently as anticipated, its economic performance will be negatively impacted.  Accordingly, PNMR believes WSJ LLC is the primary beneficiary and, therefore, WSJ LLC is not consolidated by either PNMR or PNM. The amounts outstanding under the letter of credit support constitute PNMR’s maximum exposure to loss from the VIE at March 31, 2019.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(7)Fair Value of Derivative and Other Financial Instruments

Additional information concerning energy related derivative contracts and other financial instruments is contained in Note 9 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K.

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.

Energy Related Derivative Contracts

Overview

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.

PNM was exposed to market risk for its share of PVNGS Unit 3 through December 31, 2017, at which time PVNGS Unit 3 became a jurisdictional resource to serve New Mexico retail customers. 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 (Note 11).NMPRC. PNM has 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 to reduce the magnitude of each party’s single largest generating hazard and assists in enhancing the reliability and efficiency of their respective operations. PNM passes the sales and purchases through to customers under PNM’s FPPAC.

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.
Commodity Risk
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 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, 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 three months ended March 31, 20182019 and the year ended December 31, 2017,2018, PNM was not hedging its exposure to the variability in future cash flows

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Commodity Derivatives

PNM’s commodity derivative instruments that are recorded at fair value, all of which are accounted for as economic hedges, are summarized as follows:
Economic HedgesEconomic Hedges
March 31,
2018		 December 31,
2017		March 31,
2019		 December 31,
2018
(In thousands)(In thousands)
Current assets$1,087
 $1,088
$1,086
 $1,083
Deferred charges3,277
 3,556
2,265
 2,511
4,364
 4,644
3,351
 3,594
Current liabilities(1,328) (1,182)(1,150) (1,177)
Long-term liabilities(3,277) (3,556)(2,265) (2,511)
(4,605) (4,738)(3,415) (3,688)
Net$(241) $(94)$(64) $(94)

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 $4.4$3.3 million at March 31, 20182019 and $4.6$3.6 million at December 31, 2017, which result2018 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 March 31, 20182019 and December 31, 2017,2018, PNM had no amounts recognized for the legal right to reclaim cash collateral. However, at March 31, 20182019 and December 31, 2017,2018, amounts posted as cash collateral under margin arrangements were $0.5$1.0 million and $0.8 million.$1.0 million. At March 31, 20182019 and December 31, 2017,2018, obligations to return cash collateral were $0.9 million and $0.9$1.0 million. Cash collateral amounts are included in Otherother current assets and Otherother current liabilities on the Condensed 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 $0.2 millionThere were insignificant amounts hedged under this plan as of current liabilities at March 31, 2018 related to this plan. The offset to this amount is recorded as a regulatory asset on the Condensed Consolidated Balance Sheets. There were2019 and no amounts were hedged under this plan as of December 31, 2017.2018.
 
The following table presents the effect of mark-to-market commodity derivative instruments on PNM’s earnings, excluding income tax effects. Commodity derivatives had no impact on OCI for the periods presented.
Economic HedgesEconomic Hedges
Three Months EndedThree Months Ended
March 31,March 31,
2018 20172019 2018
(In thousands)(In thousands)
Electric operating revenues$(10) $3,341
$28
 $(10)
Cost of energy12
 11
(28) 12
Total gain$2
 $3,352
$—
 $2

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Commodity contract volume positions are presented in MMBTU for gas related contracts and in MWh for power related contracts. The table below presents PNM’s net buy (sell) volume positions:
  Economic Hedges
  MMBTU MWh
     
March 31, 2018 405,000
 (40,800)
December 31, 2017 100,000
 —
  Economic Hedges
  MMBTU MWh
March 31, 2019 100,000
 (400)
December 31, 2018 100,000
 —
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 March 31, 20182019 and December 31, 2017,2018, PNM had $0.1 million and zero ofno such contracts in a net liability position.

Non-Derivative Financial Instruments

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 (Note 11). At March 31, 20182019 and December 31, 2017,2018, the fair value of investment securities included $294.0$308.0 million and $293.7$287.1 million for the NDT and $30.0$43.6 million and $29.8$41.1 million for the mine reclamation trusts.

InAs discussed in Note 9 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K, on January 2016,1, 2018 the FASB issuedCompany adopted Accounting Standards Update 2016-01 – Financial Instruments (Subtopic 825-10). Accordingly, which makes targeted improvements to GAAP regarding financial instruments. ASU 2016-01 eliminates the requirement to classify investments in equity securities with readily determinable fair values into trading or available-for-sale categories and requires those equity securities to be measured at fair value with changes in fair value recognized in net income rather than in OCI. Under ASU 2016-01, the accounting for available-for-sale debt securities remains essentially unchanged. The accounting required by ASU 2016-01 is to be applied prospectively with a cumulative effect adjustment recorded as of the beginning of the year of adoption. ASU 2016-01 also revises certain presentation and disclosure requirements. Accordingly, the following information for 2018 is presented under ASU 2016-01 and the information for 2017 is presented under prior GAAP.

Prior to 2018, PNM classified all debt and equity investments held in the NDT and coal mine reclamation trusts as available-for-sale securities. Unrealized losses on these securities were recorded immediately through earnings and unrealized gains were recorded in AOCI until the securities were sold.

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.

Gains and losses recognized on the Condensed Consolidated Statements of Earnings related to investment securities in the NDT and reclamation trusts are presented in the following table.
  Three Months Ended March 31,
  2019 2018
  (In thousands)
Equity securities:    
Net gains from equity securities sold $1,387
 $2,828
Net gains from equity securities still held 9,602
 136
Total net gains on equity securities 10,989
 2,964
Available-for-sale debt securities:    
Net gains (losses) on debt securities 3,025
 (2,676)
Net gains on investment securities $14,014
 $288


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Gains and losses recognized on the Condensed Consolidated Statements of Earnings related to investment securities in the NDT and reclamation trusts are presented in the following table.
  Three Months Ended March 31, 2018
  (In thousands)
Equity securities:  
Net gains from equity securities sold $2,828
Net gains from equity securities still held 136
Total net gains on equity securities 2,964
   
Available-for-sale debt securities:  
Net gains (losses) on debt securities (2,676)
   
Net gains on investment securities $288

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 ($1.2)$3.4 million and $1.1$(1.2) million for the three months ended March 31, 20182019 and 2017.2018.
 Three Months Ended
 March 31,
 2018 2017
 (In thousands)
Proceeds from sales$626,729
 $266,388
Gross realized gains$6,021
 $8,645
Gross realized (losses)$(4,677) $(3,085)
Held-to-maturity securities are those investments in debt securities that the Company has the ability and intent to hold until maturity. At March 31, 2018 and December 31, 2017, PNMR’s held-to-maturity securities consist of the Westmoreland Loan.
 Three Months Ended
 March 31,
 2019 2018
 (In thousands)
Proceeds from sales$74,460
 $626,729
Gross realized gains$4,189
 $6,021
Gross realized (losses)$(3,170) $(4,677)

The Company has no available-for-sale debt securities or held-to-maturity debt 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 March 31, 20182019, the available-for-sale and held-to-maturity debt securities held by PNM, had the following final maturities:
 Fair Value
 Available-for-Sale Held-to-Maturity
 PNMR and PNM PNMR
 (In thousands)
Within 1 year$8,562
 $—
After 1 year through 5 years53,094
 57,486
After 5 years through 10 years66,603
 —
After 10 years through 15 years9,735
 —
After 15 years through 20 years10,061
 —
After 20 years36,263
 —
 $184,318
 $57,486

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 Fair Value
 (In thousands)
Within 1 year$13,996
After 1 year through 5 years68,108
After 5 years through 10 years68,904
After 10 years through 15 years9,485
After 15 years through 20 years12,174
After 20 years45,695
 $218,362

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. 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 three months ended March 31, 20182019 or the year ended December 31, 2017.2018.

For investment securities, Level 2 and Level 3 fair values are provided by fund managers utilizing a pricing service. For levelLevel 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 as of year-end.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. For the Westmoreland Loan, fair values were determined using an internal valuation model of discounted cash flows that takes 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.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Items recorded at fair value by PNM on the Condensed Consolidated Balance Sheets are presented below by level of the fair value hierarchy along with gross unrealized gains on investments in available-for-sale debt securities. Under ASU 2016-01, PNM does not classify it investments in equity instruments as available-for-sale securities beginning January 1, 2018.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



  GAAP Fair Value Hierarchy    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 GainsTotal 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)(In thousands)
March 31, 2018         
March 31, 2019         
Cash and cash equivalents$22,810
 $22,810
 $—
 $—
  $10,339
 $10,339
 $—
 $—
  
Equity securities:                  
Corporate stocks, common35,185
 35,185
 —
 —
  36,025
 36,025
 —
 —
  
Corporate stocks, preferred6,714
 865
 5,849
 —
  8,138
 1,854
 6,284
 —
  
Mutual funds and other74,976
 74,976
 —
 —
  78,699
 78,688
 11
 —
  
Available-for-sale debt securities:                  
U.S. Government23,829
 23,829
 —
 —
 $271
36,153
 25,074
 11,079
 —
 $1,489
International Government9,894
 —
 9,894
 —
 61
11,577
 46
 11,531
 —
 345
Municipals35,782
 —
 35,782
 —
 103
49,160
 —
 49,160
 —
 1,337
Corporate and other114,813
 —
 112,462
 2,351
 680
121,472
 842
 118,543
 2,087
 5,831
$324,003
 $157,665
 $163,987
 $2,351
 $1,115
$351,563
 $152,868
 $196,608
 $2,087
 $9,002
                  
Commodity derivative assets$4,364
 $—
 $4,364
 $—
  $3,351
 $—
 $3,351
 $—
  
Commodity derivative liabilities(4,605) —
 (4,605) —
  (3,415) —
 (3,415) —
  
Net$(241) $—
 $(241) $—
  $(64) $—
 $(64) $—
  
         
December 31, 2017         
Available-for-sale securities
        
December 31, 2018         
Cash and cash equivalents$52,636
 $52,636
 $—
 $—
  $11,472
 $11,472
 $—
 $—
  
Equity securities:
        
        
Domestic value40,032
 40,032
 —
 —
 $4,011
Domestic growth35,456
 35,456
 —
 —
 3,995
International and other45,867
 42,332
 3,535
 —
 6,810
Fixed income securities:         
Corporate stocks, common32,997
 32,997
 —
 —
 
Corporate stocks, preferred7,258
 1,654
 5,604
 —
 
Mutual funds and other70,777
 70,777
 —
 —
 
Available-for-sale debt securities:         
U.S. Government34,317
 33,645
 672
 —
 273
29,503
 18,662
 10,841
 —
 $1,098
International Government8,435
 —
 8,435
 —
 90
Municipals48,076
 —
 48,076
 —
 1,225
53,642
 —
 53,642
 —
 489
Corporate and other67,140
 —
 67,140
 —
 1,714
114,158
 588
 111,414
 2,156
 923
$323,524
 $204,101
 $119,423
 $—
 $18,028

        $328,242
 $136,150
 $189,936
 $2,156
 $2,600
Commodity derivative assets$4,644
 $—
 $4,644
 $—
  $3,594
 $—
 $3,594
 $—
  
Commodity derivative liabilities(4,738) —
 (4,738) —
  (3,688) —
 (3,688) —
  
Net$(94) $—
 $(94) $—
  $(94) $—
 $(94) $—
  


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


A reconciliation of the changes in Level 3 fair value measurements is as follows:
Corporate DebtCorporate Debt
(In thousands)
Balance at December 31, 2018$2,156
Actual return on assets sold during the period(49)
Actual return on assets still held at period end54
Purchases414
Sales(488)
Balance at March 31, 2019$2,087
(In thousands) 
Balance at December 31, 2017$—
$—
Actual return on assets sold during the period(3)(3)
Actual return on assets still held at period end(11)(11)
Purchases2,724
2,724
Sales(359)(359)
Balances at March 31, 2018$2,351
Balance at March 31, 2018$2,351

The carrying amounts and fair values of investments in the Westmoreland Loan, other investments and long-term debt, which are not recorded at fair value on the Condensed Consolidated Balance Sheets, are presented below:
    GAAP Fair Value Hierarchy    GAAP Fair Value Hierarchy
Carrying Amount Fair Value Level 1 Level 2 Level 3Carrying Amount Fair Value Level 1 Level 2 Level 3
March 31, 2018(In thousands)
March 31, 2019(In thousands)
PNMR                  
Long-term debt$2,581,549
 $2,661,283
 $—
 $2,661,283
 $—
$2,944,241
 $3,023,159
 $—
 $3,023,159
 $—
Westmoreland Loan$50,991
 $57,486
 $—
 $—
 $57,486
Other investments$375
 $375
 $375
 $—
 $—
$299
 $299
 $299
 $—
 $—
PNM                  
Long-term debt$1,658,431
 $1,703,098
 $—
 $1,703,098
 $—
$1,706,873
 $1,744,864
 $—
 $1,744,864
 $—
Other investments$155
 $155
 $155
 $—
 $—
$93
 $93
 $93
 $—
 $—
TNMP                  
Long-term debt$480,716
 $513,690
 $—
 $513,690
 $—
$798,941
 $838,705
 $—
 $838,705
 $—
Other investments$220
 $220
 $220
 $—
 $—
$206
 $206
 $206
 $—
 $—
                  
December 31, 2017         
December 31, 2018         
PNMR                  
Long-term debt$2,437,645
 $2,554,836
 $—
 $2,554,836
 $—
$2,670,111
 $2,703,810
 $—
 $2,703,810
 $—
Westmoreland Loan$56,640
 $66,588
 $—
 $—
 $66,588
Other investments$503
 $503
 $503
 $—
 $—
$297
 $297
 $297
 $—
 $—
PNM                  
Long-term debt$1,657,910
 $1,727,135
 $—
 $1,727,135
 $—
$1,656,490
 $1,668,736
 $—
 $1,668,736
 $—
Other investments$283
 $283
 $283
 $—
 $—
$91
 $91
 $91
 $—
 $—
TNMP                  
Long-term debt$480,620
 $527,563
 $—
 $527,563
 $—
$575,398
 $597,236
 $—
 $597,236
 $—
Other investments$220
 $220
 $220
 $—
 $—
$206
 $206
 $206
 $—
 $—


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(8)Stock-Based Compensation

PNMR has various stock-based compensation programs, including stock options, restricted stock, and performance shares granted under the Performance Equity Plan (“PEP”). Although certain PNM and TNMP employees participate in the PNMR plans, PNM and TNMP do not have separate employee stock-based compensation plans. In 2011, theThe Company changed its approach to awarding stock-based compensation. As a result, nohas not awarded stock options have been granted since 2010 and awards of restricted stock have increased.2010. Certain restricted stock awards are subject to achieving performance or market targets. Other awards of restricted stock are only subject to time vesting requirements. Additional information concerning stock-based compensation under the PEP is contained in Note 1312 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Restricted stock under the PEP refers to awards of stock subject to vesting, performance, or market conditions rather than to shares with contractual post-vesting restrictions. Generally, awards to employees vest ratably over three years from the grant date of the award. However, awards with performance or market conditions vest upon satisfaction of those conditions. In addition, plan provisions provide that upon retirement, participants become 100% vested in certain stock awards. Awards of restricted stock to non-employee members of the Board are expensed over a one yearone-year vesting period.

The stock-based compensation expense related to restricted stock awards without performance or market conditions to participants that are retirement eligible on the grant date is recognized immediately at the grant date and is not amortized. Compensation expense for other such awards is amortized to compensation expense over the shorter of the requisite vesting period or the period until the participant becomes retirement eligible. Compensation expense for performance-based shares is recognized over the performance period as required service is provided and is adjusted periodically to reflect the level of achievement expected to be attained. Compensation expense related to market-based shares is recognized ratably over the measurement period, regardless of the actual level of achievement, provided the employees meet their service requirements. At March 31, 2018 and December 31, 20172019, PNMR had unrecognized expense related to stock awards of $5.8$6.5 million, and $3.8 million, which areis expected to be recognized over an average of 2.04 and 1.531.74 years.

PNMR receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the price at which the options are sold over the exercise prices of the options, and a tax deduction for the value of restricted stock at the vesting date. GAAP requires that all excess tax benefits and deficiencies be recorded to tax expense and classified as operating cash flows from operating activities. When excess tax benefits arewhen used to reduce income taxes payable, the benefits are reflected in cash flows from operating activities.payable.

The grant date fair value for restricted stock and stock awards with Company internal performance targets is determined based on the market price of PNMR common stock on the date of the agreements reduced by the present value of future dividends, which will not be received prior to vesting, applied to the total number of shares that are anticipated to vest, although the number of performance shares that ultimately vest cannot be determined until after the performance periods end. The grant date fair value of stock awards with market targets is determined using Monte Carlo simulation models, which provide grant date fair values that include an expectation of the number of shares to vest at the end of the measurement period.

The following table summarizes the weighted-average assumptions used to determine the awards grant date fair value:
 Three Months Ended March 31, Three Months Ended March 31,
Restricted Shares and Performance Based Shares 2018 2017 2019 2018
Expected quarterly dividends per share $0.2650
 $0.2425
 $0.2900
 $0.2650
Risk-free interest rate 2.39% 1.58% 2.50% 2.39%
        
Market-Based Shares        
Dividend yield 2.96% 2.67% 2.59% 2.96%
Expected volatility 19.12% 20.80% 19.55% 19.12%
Risk-free interest rate 2.36% 1.54% 2.51% 2.36%


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes activity in restricted stock awards, including performance-based and market-based shares, and stock options, for the three months ended March 31, 20182019:
Restricted Stock Stock OptionsRestricted Stock Stock Options
Shares 
Weighted-
Average
Grant Date Fair Value
 Shares 
Weighted-
Average
Exercise Price
Shares 
Weighted-
Average
Grant Date Fair Value
 Shares 
Weighted-
Average
Exercise Price
Outstanding at December 31, 2017189,045
 $31.11
 193,441
 $9.98
Outstanding at December 31, 2018166,651
 $32.93
 81,000
 $11.94
Granted204,654
 $29.03
 —
 $—
114,611
 $36.48
 —
 $—
Exercised(201,162) $27.68
 (97,941) $8.19
(118,427) $30.97
 (78,000) $11.92
Forfeited(3,562) $30.58
 —
 $—
—
 $—
 —
 $—
Expired—
 $—
 —
 $—
—
 $—
 —
 $—
Outstanding at March 31, 2018188,975
 $32.52
 95,500
 $11.81
Outstanding at March 31, 2019162,835
 $36.86
 3,000
 $12.38

PNMR’s stock-based compensation program provides for performance and market targets through 2020.2021. In February 2019, the Board approved amendments to exclude certain impacts of the Tax Act on performance metrics for the performance periods ending in 2018 and 2019. These amendments did not impact the Company’s calculation of grant date fair values under the plans, but did increase actual achievement levels for the performance period ending in 2018 from below “threshold” levels to below “target” levels and anticipated achievement levels for the performance period ending in 2019 from below “target” levels to the “maximum” level. Included as granted and as exercised in the table above table are 97,69747,279 previously awarded shares that were earned for the 20152016 through 20172018 performance measurement period and ratified by the Board in February 20182019 (based upon achieving market targets at “target”below “threshold” levels, weighted at 60%40%, and performance targets at belowabove “target” levels, together weighted at 40%60%). Excluded from the table above table are maximums of 134,219, 155,291,130,302, 146,941, and 152,750135,678 shares for the three-year performance periods ending in 2018, 2019, 2020, and 20202021 that would be awarded if all performance and market criteria are achieved at maximum levels and all executives remain eligible.

Effective as of January 1, 2015, the Company entered into a retention award agreement with its Executive Vice President and Chief Financial Officer under which he would receive awards of restricted stock if PNMR met specific performance targets at the end of 2016 and 2017 and he remained an employee of the Company. If PNMR achieved the specified performance target for the period from January 1, 2015 through December 31, 2016, he was to receive $100,000 of PNMR common stock based on the market value per share on the grant date in early 2017. The specified market target was achieved at the end of 2016 and the Board ratified him receiving $100,000 of PNMR common stock in February 2017 based on a market per share value of $36.30 on the grant date of March 3, 2017, or 2,754 shares. Similarly, if PNMR achieved the specified performance target for the period from January 1, 2015 through December 31, 2017, he was to receive $275,000 of PNMR common stock based on the market value per share on the grant date in early 2018. The specified performance target was achieved at the end of 2017 and the Board ratified him receiving $275,000 of PNMR common stock in February 2018 based on the market value per share of $35.85 on the grant date of March 2, 2018, or 7,670 shares, which are included in the above table. The retention award was made under the PEP and was approved by the Board on December 9, 2014.

In March 2015, the Company entered into a retention award agreement with its Chairman, President, and Chief Executive Officer under which she would receive 53,859 shares of PNMR’s common stock if PNMR meets certain performance targets at the end of 2019 and she remains an employee of the Company. Under the agreement, she was to receive 17,953 of the total shares if PNMR achieved specific performance targets at the end of 2017. The specified performance target was achieved at the end of 2017 and the Board ratified her receiving the 17,953 shares in February 2018, which are included in the above table.2018. The retention award was made under the PEP and was approved by the Board on February 26, 2015. The above table does not include the restricted stock shares that remain unvested under this retention award agreement.     
At March 31, 20182019, the aggregate intrinsic value of stock options outstanding, all of which are exercisable, was $2.5$0.1 million with a weighted-average remaining contract life of 1.81.0 years. At March 31, 20182019, no outstanding stock options had an exercise price greater than the closing price of PNMR common stock on that date.

The following table provides additional information concerning restricted stock activity, including performance-based and market-based shares, and stock options:
  Three Months Ended March 31,
Restricted Stock 2019 2018
Weighted-average grant date fair value $36.48
 $29.03
Total fair value of restricted shares that vested (in thousands) $5,314
 $7,162
     
Stock Options    
Weighted-average grant date fair value of options granted $—
 $—
Total fair value of options that vested (in thousands) $—
 $—
Total intrinsic value of options exercised (in thousands) $2,582
 $2,711

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table provides additional information concerning restricted stock activity, including performance-based and market-based shares, and stock options:
  Three Months Ended March 31,
Restricted Stock 2018 2017
Weighted-average grant date fair value $29.03
 $22.12
Total fair value of restricted shares that vested (in thousands) $7,162
 $5,024
     
Stock Options    
Weighted-average grant date fair value of options granted $—
 $—
Total fair value of options that vested (in thousands) $—
 $—
Total intrinsic value of options exercised (in thousands) $2,711
 $945

(9)Financing

The Company’s financing strategy includes both short-term and long-term borrowings. The Company utilizes short-term revolving credit facilities, as well as cash flows from operations, to provide funds for both construction and operating expenditures. Depending on market and other conditions, the Company will periodically sell long-term debt or enter into term loan arrangements and use the proceeds to reduce borrowings under the revolving credit facilities or refinance other debt. Each of the Company’s revolving credit facilities and term loans containscontain a single financial covenant whichthat requires the maintenance of a debt-to-capitaldebt-to-capitalization ratio. For the PNMR and PNMR Development agreements, this ratio ofmust be maintained at less than or equal to 65%70%, and for the PNM and TNMP agreements, this ratio must be maintained at less than or equal to 65%. The Company’s revolving credit facilities and term loans generally also includecontain customary covenants, events of default, cross defaultcross-default provisions, and change of controlchange-of-control provisions. PNM must obtain NMPRC approval for any financing transaction having a maturity of more than 18 months. In addition, PNM files its annual short-term financing plan with the NMPRC. Additional information concerning financing activities is contained in Note 67 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K.

Financing Activities

As discussed in Note 11, NM Capital, a wholly-owned subsidiary of PNMR, entered into a $125.0 million term loan agreement (the “BTMU Term Loan Agreement”) with BTMU, as lender and administrative agent, as of February 1, 2016. The BTMU Term Loan Agreement has a maturity of February 1, 2021 and bears interest at a rate based on LIBOR plus a customary spread, which aggregated 4.41% at March 31, 2018. PNMR, as parent company of NM Capital, has guaranteed NM Capital’s obligations to BTMU. NM Capital utilized the proceeds of the BTMU Term Loan Agreement to provide funding of $125.0 million (the “Westmoreland Loan”) to a ring-fenced, bankruptcy-remote, special-purpose entity that is a subsidiary of Westmoreland Coal Company to finance Westmoreland’s purchase of SJCC. See Note 6. The BTMU Term Loan Agreement requires that NM Capital utilize all amounts, less taxes and fees, it receives under the Westmoreland Loan to repay the BTMU Term Loan Agreement. The principal balance outstanding under the BTMU Term Loan Agreement was $45.1 million at March 31, 2018. Based on scheduled payments on the Westmoreland Loan, NM Capital estimates it will make principal payments of $10.0 million on the BTMU Term Loan Agreement in the twelve months ended March 31, 2019.

On October 21, 2016, PNMR entered into letter of credit arrangements with JPMorgan Chase Bank, N.A. (the “JPM LOC Facility”) under which letters of credit aggregating $30.3 million were issued to facilitate the posting of reclamation bonds, which SJCC iswas required to post in connection with permits relating to the operation of the San Juan minemine. On March 15, 2019, WSJ LLC acquired the assets of SJCC following the bankruptcy of Westmoreland. WSJ LLC assumed the obligations to PNMR under the letters of credit support (Note 11).

On July 28, 2017,April 9, 2018, PNMR Development deposited $68.2 million with PNM related to potential transmission network interconnections, which was classified as a cash inflow from financing activities on PNM’s Condensed Consolidated Statements of Cash Flows in the second quarter of 2018. PNM used the deposit to repay intercompany borrowings. PNM is required to pay interest to PNMR Development to the extent work under the interconnections has not been performed. During the three months ended March 31, 2019, PNM recognized $0.9 million of interest expense under the agreement. At March 31, 2019, PNM’s remaining obligation under the interconnection agreement with PNMR Development of $68.2 million, excluding unpaid interest, is reflected in other deferred credits on PNM’s Condensed Consolidated Balance Sheets. As required by GAAP, all intercompany transactions related to this deposit have been eliminated on PNMR’s Condensed Consolidated Financial Statements.

On January 18, 2019, PNM entered into ana $250.0 million term loan agreement (the “PNM 2019 Term Loan”) among PNM, the lenders identified therein, and U.S. Bank N.A., as administrative agent. PNM used the proceeds of the PNM 2019 Term Loan to repay the PNM 2017 Senior Unsecured Note Agreement”)Term Loan, to reduce short-term borrowings under the PNM Revolving Credit Facility, and for general corporate purposes. The PNM 2019 Term Loan bears interest at a variable rate and must be repaid on or before July 17, 2020.

On February 26, 2019, TNMP entered into the TNMP 2019 Bond Purchase Agreement with institutional investors for the sale of $450.0$305.0 million aggregate principal amount of Senior Unsecured Notesfour series of TNMP first mortgage bonds (the “PNM 2018 SUNs”“TNMP 2019 Bonds”) offered in private placement transactions. Under the PNM 2017 Senior Unsecured Note Agreement, PNM has agreed to issue $350.0TNMP issued $225.0 million of TNMP 2019 Bonds on March 29, 2019 and used the PNM 2018 SUNsproceeds to repay TNMP’s $172.3 million 9.50% first mortgage bonds at their maturity on April 1, 2019, as well as to repay borrowings under the TNMP Revolving Credit Facility and for other general corporate purposes. TNMP will issue the remaining $80.0 million of TNMP 2019 Bonds on or about May 15, 2018before July 1, 2019 and $100.0 millionwill use the proceeds from that issuance to repay borrowings under the TNMP Revolving Credit Facility and for other general corporate purposes. The issuance of the PNM 2018 SUNs on or about August 1, 2018. The issuances of the PNM 2018 SUNs areremaining TNMP 2019 Bonds is subject to the satisfaction of customary conditions. PNM will useconditions, and the gross proceeds fromTNMP 2019 Bonds are subject to continuing compliance with the PNM 2018 SUNs to repay $350.0 millionrepresentations, warranties and covenants of PNM’s 7.95% Senior Unsecured Notes that mature on May 15, 2018 and $100.0 million of PNM’s 7.50% Senior Unsecured Notes that mature on August 1, 2018.the TNMP 2019 Bond Purchase Agreement. The terms of the PNM 2017 SeniorTNMP 2019 Bond Purchase Agreement include customary covenants, including a covenant that requires TNMP to maintain a debt-to-capitalization ratio of less than or equal to 65%, customary events of default, a cross-default provision, and a change-of-control provision. TNMP will have the right to redeem any or all of the TNMP 2019 Bonds prior to their respective maturities, subject to payment of a customary make-whole premium. In accordance with GAAP, borrowings under the $172.3 million 9.50% TNMP first mortgage bonds are reflected as being long-term in the Condensed Consolidated Balance Sheets at December 31, 2018 since TNMP demonstrated its intent and ability to re-finance the agreement on a long-term basis. These bonds are reflected in current maturities of long-term debt on the Condensed Consolidated Balance Sheets at March 31, 2019 since the proceeds from the issuance of $225.0 million of TNMP 2019 Bonds, net of amounts used to repay short-term debt, are reflected in cash and cash equivalents.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Unsecured Note Agreement include customary covenants, including a covenant that requires the maintenance of a debt-to-capital ratio of less than or equal to 65%, customary events of default, including a cross default provision, and covenants regarding parity of financial covenants, liens and guarantees with respect to PNM’s material credit facilities. In the event of a change of control, PNM will be required to offer to prepay the PNM 2018 SUNs at par. PNM will have the right to redeem any or all of the PNM 2018 SUNs prior to their respective maturities, subject to payment of a customary make-whole premium. In accordance with GAAP, aggregate borrowings of $450.0 million under PNM’s Senior Unsecured Notes due on May 15, 2018 and August 1, 2018, are reflected as being long-term in the Condensed Consolidated Balance Sheet at March 31, 2018 since the PNM 2017 Senior Unsecured Note Agreement demonstrates PNM’s ability and intent to re-finance the aggregate $450.0 million Senior Unsecured Notes on a long-term basis. Information concerning the funding dates, maturities and interest rates on the PNM 2018 SUNsTNMP 2019 Bonds issued in March 2019 and to be issued in May 2018 and August 2018on or before July 1, 2019 is as follows:
Scheduled      
Funding Maturity Principal Interest
Date Date Amount Rate
    (In millions)  
       
May 15, 2018 May 15, 2023 $55.0
 3.15%
May 15, 2018 May 15, 2025 104.0
 3.45%
May 15, 2018 May 15, 2028 88.0
 3.68%
May 15, 2018 May 15, 2033 38.0
 3.93%
May 15, 2018 May 15, 2038 45.0
 4.22%
May 15, 2018 May 15, 2048 20.0
 4.50%
    350.0
  
August 1, 2018 August 1, 2028 15.0
 3.78%
August 1, 2018 August 1, 2048 85.0
 4.60%
    100.0
  
    $450.0
  
.

On March 9, 2018, PNMR issued $300.0 million aggregate principal amount of 3.250% Senior Unsecured Notes (the “PNMR 2018 SUNs”), which mature on March 9, 2021. The proceeds from the offering were used to repay the $150.0 million PNMR 2015 Term Loan Agreement, and to reduce borrowings under the PNMR Revolving Credit Facility.
Funding Date Maturity Date Principal Amount Interest Rate
    (In millions)  
March 29, 2019 March 29, 2034 $75.0
 3.79%
March 29, 2019 March 29, 2039 75.0 3.92%
March 29, 2019 March 29, 2044 75.0 4.06%
    225.0
  
July 1, 2019 July 1, 2029 80.0
 3.60%
    $305.0
  

At March 31, 2018,2019, variable interest rates were 2.64%3.29% on the $100.0$50.0 million PNMR 20162018 Two-Year Term Loan, which matures in December 2018, and 2.61%2020, 3.13% on the $200.0$250.0 million PNM 20172019 Term Loan, Agreement, which matures in January 2019.July 2020, 3.20% on the $35.0 million TNMP 2018 Term Loan, which matures in July 2020, and 3.30% on the $90.0 million PNMR Development Term Loan, which matures in November 2020.

Short-term Debt and Liquidity

Currently, theThe PNMR Revolving Credit Facility has a financing capacity of $300.0$300.0 million and the PNM Revolving Credit Facility has a financing capacity of $400.0 million. PNMR and PNM have entered into agreements$400.0 million. Both facilities currently expire on October 22, 2023 but contain options to extendbe extended through October 2024, subject to approval by a majority of the maturities of both facilities to October 31, 2022. However, onelenders. One lender whose current commitment iswas $10.0 million under the PNMR Revolving Credit Facility and $40.0 million under the PNM Revolving Credit Facility did not agree to extend its commitments beyond October 31, 2020. Unless one or more of the other current lenders orOn April 25, 2019, a new lender assumesassumed the commitments of the non-extending lender the financing capacities will be reduced to $290.0 million forunder the PNMR Revolving Credit Facility and $360.0 million for the PNM Revolving Credit Facility from November 1, 2020 through October 31, 2022.Facilities. PNM also has the $40.0 million PNM 2017 New Mexico Credit Facility that expires on December 12, 2022. The TNMP Revolving Credit Facility is a $75.0$75.0 million revolving credit facility secured by $75.0$75.0 million aggregate principal amount of TNMP first mortgage bonds and matures on September 23, 2022.

On February 26, 2018,22, 2019, PNMR Development entered into aamended its $24.5 million revolving credit facility with Wells Fargo Bank, National Association, as lender, which allowsto increase the capacity to $25.0 million and to extend the term until February 24, 2020. The PNMR Development to borrow up to $24.5 million on a revolving credit basis and also provides for the issuance of letters of credit. The facility expires on February 25, 2019,Revolving Credit Facility bears interest at a variable rate and contains terms similar to the PNMR Revolving Credit Facility. PNMR has guaranteed the obligations of PNMR Development under the facility. PNMR Development uses the facility to finance its participation in NMRD and for other activities.

Short-term debt outstanding consisted of:
  March 31, December 31,
Short-term Debt 2019 2018
  (In thousands)
PNM:    
PNM Revolving Credit Facility $—
 $32,400
PNM 2017 New Mexico Credit Facility —
 10,000
  —
 42,400
TNMP Revolving Credit Facility —
 17,500
PNMR:    
PNMR Revolving Credit Facility 62,200
 20,000
PNMR 2018 One-Year Term Loan 150,000
 150,000
     PNMR Development Revolving Credit Facility 11,600
 6,000
  $223,800
 $235,900


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Short-term debt outstanding consisted of:
  March 31, December 31,
Short-term Debt 2018 2017
  (In thousands)
PNM:    
PNM Revolving Credit Facility $—
 $39,800
PNM 2017 New Mexico Credit Facility —
 —
  —
 39,800
TNMP Revolving Credit Facility 21,200
 —
PNMR:    
PNMR Revolving Credit Facility 96,000
 165,600
PNMR 2016 One-Year Term Loan (as extended) 100,000
 100,000
     PNMR Development Revolving Credit Facility 21,500
 —
  $238,700
 $305,400

At March 31, 2018,2019, the weighted average interest rate was 3.05%3.74% for the PNMR Revolving Credit Facility, 2.54%3.24% for the TNMP Revolving Credit Facility, 2.72%PNMR 2018 One-Year Term Loan, and 3.49% for the PNMR Development Revolving Credit Facility, and 2.63% for the PNMR 2016 One-Year Term Loan (as extended), which matures in December 2018.Facility.

In addition to the above borrowings, PNMR, PNM, and TNMP had letters of credit outstanding of $6.4$4.7 million, $2.5 million, and $0.1$0.7 million at March 31, 20182019 that reduce the available capacity under their respective revolving credit facilities. The above table excludes intercompany debt. As of March 31, 20182019 and December 31, 2017,2018, TNMP had zero and $0.1 million of intercompany borrowings from PNMR, PNM had $54.6 million and zero and TNMP$19.8 million of intercompany borrowings from PNMR, and PNMR Development had $2.6$3.1 million and zero of intercompany borrowings from PNMR. On April 9, 2018, PNMR Development deposited $68.2 million with PNM related to transmission network interconnection studies. PNM used the deposit to repay intercompany borrowings.

In 2017, PNMR entered into three separate four-year hedging agreements whereby it effectively established fixed interest rates of 1.926%, 1.823%, and 1.629%, plus customary spreads over LIBOR subject to change if there is a change in PNMR’s credit rating, for three separate tranches, each of $50.0 million, of its variable rate debt. These hedge agreements are accounted for as cash flow hedges. These hedge agreements had fair value gains totaling $3.1values aggregating $1.4 million at March 31, 2019 that is included in other deferred charges and $1.0 million at December 31, 2018 that is included in Other deferred charges and $1.4 million at December 31, 2017 that is included in Otherother current assets on the Condensed Consolidated Balance Sheets. As discussed in Note 3, changes in the fair value of the cash flow hedge are deferred in AOCI and amounts reclassified to the Condensed Consolidated Statement of Earnings are recorded in interest charges. The fair values were determined using Level 2 inputs under GAAP, including using forward LIBOR curves under the mid-market convention to discount cash flows over the remaining term of the agreement. On January 1, 2019, the Company adopted Accounting Standards Update 2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Adoption of the updated standard did not have a significant impact on these cash flow hedges.

At April 23, 2018,May 3, 2019, PNMR, PNM, TNMP, and PNMR Development had availability of $197.4239.4 million, $397.5 million, $34.545.7 million, and none$9.9 million under their respective revolving credit facilities, including reductions of availability due to outstanding letters of credit, and PNM had $40.0 million of availability under the PNM 2017 New Mexico Credit Facility. Total availability at April 23, 2018,May 3, 2019, on a consolidated basis, was $669.4732.5 million for PNMR. As of April 23, 2018,May 3, 2019, PNM and TNMP had no borrowings from PNMR under their intercompany loan agreements. At April 23, 2018,May 3, 2019, PNMR, PNM, and TNMP had invested cash of $0.9 million, $8.6$9.0 million, and none.

The Company’s debt arrangements have various maturities and expiration dates. As describeddiscussed above, PNMon February 26, 2019 TNMP entered into the PNM 2017 Senior Unsecured NoteTNMP 2019 Bond Purchase Agreement on July 28, 2017 to issue $450.0providing for the issuance of an aggregate of $305.0 million of TNMP 2019 Bonds. TNMP issued $225.0 million of the PNM 2018 SUNsTNMP 2019 Bonds on May 15, 2018March 29, 2019 and August 1, 2018,used a portion of the proceeds from which will be usedthat issuance to repay like amountsTNMP’s $172.3 million 9.50% first mortgage bonds at their maturity on April 1, 2019. TNMP will issue the remaining $80.0 million of PNM Senior Unsecured Notes maturingTNMP 2019 Bonds on those dates.or before July 1, 2019 and will use the proceeds from that issuance to repay borrowings under the TNMP Revolving Credit Facility and for other general corporate purposes. In addition, the $150.0 million PNMR 2018 One-Year term loan will mature in December 2019. The $200.0 million PNM 2017 Term Loan Agreement matures on January 18, 2019. PNMCompany has no other long-term debt due through March 31, 2019. The $100.0 million PNMR 2016 One-Year Term Loan (as extended) matures on December 14, 2018 and the $100.0 million PNMR 2016 Two-Year Term Loan matures on December 21, 2018. PNMR also anticipates repayments on the BTMU Term Loan Agreement of $10.0 million in the period from April 1, 2018 through March 31, 2019 and $9.4 million in the remainder of 2019. TNMP has $172.3 million of first mortgage bonds that are due in April 2019. The $24.5 million PNMR Development revolving credit facility expires on February 25, 2019.2020. Additional information on debt maturities is contained in Note 67 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



(10)Pension and Other Postretirement Benefit Plans

PNMR and its subsidiaries maintain qualified defined benefit pension plans, postretirement benefit plans providing medical and dental benefits, and executive retirement programs (collectively, the “PNM Plans” and “TNMP Plans”). PNMR maintains the legal obligation for the benefits owed to participants under these plans. The periodic costs or income of the PNM Plans and TNMP Plans are included in regulated rates to the extent attributable to regulated operations. In accordance with GAAP, the Company presents the service cost component of its net periodic benefit costs in administrative and general expenses and the non-service costs components in other income (deductions), net of amounts capitalized or deferred to regulatory assets and liabilities, on the Condensed Consolidated Statements of Earnings. PNM and TNMP receive a regulated return on the amounts funded for pension and OPEB plans in excess of theaccumulated periodic cost or income to the extent included in retail rates (a “prepaid pension asset”).

Additional information concerning pension and OPEB plans is contained in Note 1211 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K. Annual net periodic benefit cost for the plans is actuarially determined using the methods and assumptions set forth in that note and is recognized ratably throughout the year.

In March 2017, the FASB issued Accounting Standards Update 2017-07 – Compensation - Retirement Benefits (Topic 715) to improve the presentation of net periodic pension and other postretirement benefit costs. Prior to ASU 2017-07, the Company presented all of its net periodic benefit costs, net of amounts capitalized to construction and other accounts, as Administrative and general expenses on its statements of earnings. ASU 2017-07 requires the service cost component of net benefit costs be presented in the same line item or items as employees’ compensation. The other components of net periodic benefit cost (the “non-service cost components”) are required to be presented separately from the service cost component and outside of operating income. ASU 2017-07 also limits capitalization of net periodic benefit costs to only the service cost component. ASU 2017-07 requires retrospective presentation of the service and non-service cost components of net periodic benefit costs in the income statement and prospective application regarding the capitalization of only the service cost component of net periodic benefit costs. The Company adopted ASU 2017-07 as of January 1, 2018, its required effective date. In accordance with the standard, the PNM and PNMR Condensed Consolidated Statements of Earnings for the three months ended March 31, 2017 reflect a reclassification of Administrative and general expenses to Other deductions for the non-service cost components of net periodic benefit costs in the amount of $2.1 million, net of amounts capitalized prior to the adoption of the standard. The non-service components of TNMP’s net periodic benefit costs in 2017 were insignificant. The Company believes PNM and TNMP can continue to capitalize the non-service cost components of net periodic benefit costs as regulatory assets and liabilities to the extent attributable to regulated operations. During the three months ended March 31, 2018, PNM recorded $0.9 million of non-service cost as Other deductions, which is net of $0.3 million deferred as regulatory assets, and TNMP recorded $0.1 million of non-service cost to Other income, which is net of less than $0.1 million deferred as regulatory liabilities.RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



PNM Plans

The following table presents the components of the PNM Plans’ net periodic benefit cost:
Three Months Ended March 31,Three Months Ended March 31,
Pension Plan OPEB Plan Executive Retirement ProgramPension Plan OPEB Plan Executive Retirement Program
2018 2017 2018 2017 2018 20172019 2018 2019 2018 2019 2018
(In thousands)(In thousands)
Components of Net Periodic Benefit Cost                      
Service cost$—
 $—
 $21
 $24
 $—
 $—
$—
 $—
 $13
 $21
 $—
 $—
Interest cost6,068
 6,727
 860
 1,006
 155
 174
6,294
 6,068
 829
 860
 162
 155
Expected return on plan assets(8,672) (8,451) (1,353) (1,308) —
 —
(8,527) (8,672) (1,318) (1,353) —
 —
Amortization of net (gain) loss4,087
 4,001
 588
 921
 90
 78
3,880
 4,087
 169
 588
 79
 90
Amortization of prior service cost(241) (241) (416) (416) —
 —
(241) (241) (99) (416) —
 —
Net periodic benefit cost$1,242
 $2,036
 $(300) $227
 $245
 $252
$1,406
 $1,242
 $(406) $(300) $241
 $245

PNM did not make any contributions to its pension plan trust in the three months ended March 31, 20182019 and 20172018 and does not anticipate making any contributions to the pension plan in 20182019-2021, but expects to contribute $5.1$1.3 million in 2022 and $22.9 million in 2023, based on current law, including recent amendments to funding requirements, and estimates of portfolio performance. The funding

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


assumptions were developed using discount rates of 4.0%4.2% to 5.1%4.6%. Actual amounts to be funded in the future will be dependent on the actuarial assumptions at that time, including the appropriate discount rate. PNM may make additional contributions at its discretion. PNM made no contributions to the OPEB trust in the three months ended March 31, 20182019 and 2017.2018. PNM does not expect to make any contributions to the OPEB trust in 2018-2022.2019-2023.  Disbursements under the executive retirement program, which are funded by PNM and considered to be contributions to the plan, were $0.50.4 million and $0.5 million in the three months ended March 31, 20182019 and 20172018 and are expected to total $1.5 million during 20182019 and $5.7$5.6 million for 2019-2022.2020-2023.

TNMP Plans

The following table presents the components of the TNMP Plans’ net periodic benefit cost:
Three Months Ended March 31,Three Months Ended March 31,
Pension Plan OPEB Plan Executive Retirement ProgramPension Plan OPEB Plan Executive Retirement Program
2018 2017 2018 2017 2018 20172019 2018 2019 2018 2019 2018
(In thousands)(In thousands)
Components of Net Periodic Benefit Cost                      
Service cost$—
 $—
 $33
 $36
 $—
 $—
$—
 $—
 $13
 $33
 $—
 $—
Interest cost656
 722
 119
 139
 7
 8
672
 656
 113
 119
 8
 7
Expected return on plan assets(991) (945) (135) (114) —
 —
(967) (991) (129) (135) —
 —
Amortization of net (gain) loss272
 231
 (56) (20) 4
 2
235
 272
 (110) (56) 4
 4
Amortization of prior service cost—
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
Net Periodic Benefit Cost$(63) $8
 $(39) $41
 $11
 $10
$(60) $(63) $(113) $(39) $12
 $11

TNMP did not make any contributions to its pension plan trust in the three months ended March 31, 20182019 and 20172018 and does not anticipate making any contributions in 20182019-2022,-2023, based on current law, including recent amendments to funding requirements, and estimates of portfolio performance. The funding assumptions were developed using discount rates of 4.0%4.2% to 5.1%4.6%. Actual amounts to be funded in the future will depend on the actuarial assumptions at that time, including the appropriate discount rate. TNMP may make additional contributions at its discretion. TNMP made contributions of $0.3 millionzero and $0.7$0.3 million to the OPEB trust in the three months ended March 31, 20182019 and 2017.2018. TNMP expectsdoes not expect to make no additional contributions to the OPEB

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


trust induring the period 20182019 and $1.4 million for 2019-2022.-2023. Disbursements under the executive retirement program, which are funded by TNMP and considered to be contributions to the plan, were less than $0.1 million in the three months ended March 31, 20182019 and 20172018 and are expected to total $0.1 million during 20182019 and $0.4$0.3 million in 2019-2022.2020-2023.

(11)Commitments and Contingencies

Overview
There are various claims and lawsuits pending against the Company. TheIn addition, the Company also is subject to federal, state, and local environmental laws and regulations and periodically participates in the investigation and remediation of various sites. In addition, the Company periodically enters into financial commitments in connection with its business operations. Also, the Company is involved in various legal and regulatory (Note 12) proceedings in the normal course of its business. It is not possible at this time for the Company to determine fully the effect of all litigation and other legal and regulatory proceedings on its financial position, results of operations, or cash flows.
With respect to some of the items listed below, the Company has determined that a loss is not probable or that, to the extent probable, cannot be reasonably estimated. In some cases, the Company is not able to predict with any degree of certainty the range of possible loss that could be incurred. The Company assesses legal and regulatory matters based on current information and makes judgments concerning their potential outcome, giving due consideration to the nature of the claim, the amount and nature of any damages sought, and the probability of success. Such judgments are made with the understanding that the outcome of any litigation, investigation, or other legal proceeding is inherently uncertain. In accordance with GAAP, the Company records liabilities for matters where it is probable a loss has been incurred and the amount of loss is reasonably estimable. The actual outcomes of the items listed below could ultimately differ from the judgments made and the differences could be material. The Company

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


cannot make any assurances that the amount of reserves or potential insurance coverage will be sufficient to cover the cash obligations that might be incurred as a result of litigation or regulatory proceedings. Except as otherwise disclosed, the Company does not expect that any known lawsuits, environmental costs, and commitments will have a material effect on its financial condition, results of operations, or cash flows.
Additional information concerning commitments and contingencies is contained in Note 16 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K.

Commitments and Contingencies Related to the Environment

Nuclear Spent Fuel and Waste Disposal

Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE that require the DOE to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Policy Act required the DOE to develop a permanent repository for the storage and disposal of spent nuclear fuel by 1998, the DOE announced that it would not be able to open the repository by 1998 and sought to excuse its performance of these requirements. In November 1997, the DC Circuit issued a decision preventing the DOE from excusing its own delay but refused to order the DOE to begin accepting spent nuclear fuel. Based on this decision and the DOE’s delay, a number of utilities, including APS (on behalf of itself and the other PVNGS owners, including PNM), filed damages actions against the DOE in the Court of Federal Claims. The lawsuits filed by APS alleged that damages were incurred due to DOE’s continuing failure to remove spent nuclear fuel and high-level waste from PVNGS. In August 2014, APS and the DOE entered into a settlement agreement which establishedthat establishes a process for the payment of claims for costs incurred through December 31, 2016. The settlement agreement has been extended to December 31, 2019. Under the settlement agreement, APS must submit claims annually for payment of allowable costs. PNM records estimated claims on a quarterly basis. The benefit from the claims is passed through to customers under the FPPAC to the extent applicable to NMPRC regulated operations.

PNM estimates that it will incur approximately $57.7 million (in 2016 dollars) for its share of the costs related to the on-site interim storage of spent nuclear fuel at PVNGS during the term of the operating licenses. PNM accrues these costs as a component of fuel expense as the nuclear fuel is consumed. At March 31, 20182019 and December 31, 2017,2018, PNM had a liability for interim storage costs of $12.212.5 million and $12.312.4 million, which is included in other deferred credits.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


PVNGS has sufficient capacity at its on-site ISFSI to store all of the nuclear fuel that will be irradiated during the initial operating license period, which ends in December 2027.  Additionally, PVNGS has sufficient capacity at its on-site ISFSI to store a portion of the fuel that will be irradiated during the period of extended operation, which ends in November 2047.  If uncertainties regarding the United States government’s obligation to accept and store spent fuel are not favorably resolved, APS will evaluate alternative storage solutions that may obviate the need to expand the ISFSI to accommodate all of the fuel that will be irradiated during the period of extended operation.

The Energy Transition Act

On March 22, 2019, the Governor signed into New Mexico state law Senate Bill 489, known as the Energy Transition Act (“ETA”). The ETA becomes effective as of June 8, 2012,14, 2019 and sets a statewide standard that requires investor-owned electric utilities to have specified percentages of their electric-generating portfolios be provided from renewable and zero-carbon generating resources. Prior to the DC Circuit issued its decision on a challenge by several states and environmental groupsenactment of the NRC’s rulemaking regarding temporary storageETA, the REA established a mandatory RPS requiring utilities to acquire a renewable energy portfolio equal to 10% of retail electric sales by 2011, 15% by 2015, and permanent disposal20% by 2020. The ETA amends the REA and requires utilities operating in New Mexico to have renewable portfolios equal to 20% by 2020, 40% by 2025, 50% by 2030, 80% by 2040, and 100% zero-carbon energy by 2045. The ETA also amends sections of high level nuclear wastethe REA to allow for the recovery of undepreciated investments and spent nuclear fuel.decommissioning costs related to qualifying EGUs that the NMPRC has required be removed from retail jurisdictional rates, provided replacement resources to be included in retail rates have lower or zero-carbon emissions. The petitioners had challengedETA requires the NRC’s 2010 updateNMPRC to review and approve utilities’ annual renewable portfolio plans to ensure compliance with the RPS. The ETA also directs the New Mexico Environmental Improvement Board to adopt standards of performance that limit CO2 emissions to no more than 1,100 lbs. per MWh beginning January 1, 2023 for new or existing coal-fired EGUs with original installed capacities exceeding 300 MWs.

The ETA provides for a transition from fossil-fuel generation resources to renewable and other carbon-free resources through certain provisions relating to the agency’s Waste Confidence Decisionabandonment of coal-fired generating facilities. These provisions include the use of “energy transition bonds,” which are designed to be highly rated bonds that can be issued by qualifying utilities to finance certain costs of abandoning coal-fired facilities that are retired prior to January 1, 2023, for facilities operated by a “qualifying utility,” or prior to January 1, 2032 for facilities that are not operated by the qualifying utility. The amount of energy transition bonds that can be issued to recover abandonment costs is limited to the lesser of $375.0 million or 150% of the undepreciated investment of the facility as of the abandonment date. Proceeds provided by energy transition bonds must be used only for purposes related to providing utility service to customers and temporaryto pay “financing costs” (as defined by the ETA). These costs may include plant decommissioning and coal mine reclamation costs provided those costs have not previously been recovered from customers or disallowed by the NMPRC or by a court order. Proceeds from energy transition bonds may also be used to fund severances for employees of the retired facility and related coal mine and to promote economic development, education and job training in areas impacted by the retirement of the coal-fired facilities. Energy transition bonds must be issued under an NMPRC approved financing order, are secured by “energy transition property,” are non-recourse to the issuing utility, and must be repaid by a non-bypassable charge paid by all customers of the issuing utility. These customer charges are subject to an adjustment mechanism designed to provide for timely and complete payment of principal and interest due under the energy transition bonds.

The ETA also provides that utilities must obtain NMPRC approval of competitively procured replacement resources. In determining whether to approve replacement resources, the NMPRC must give preference to resources with the least environmental impacts, those with higher ratios of capital costs to fuel costs, and those able to reduce the cost of reclamation and use for lands previously mined within the county of the EGU to be abandoned. Replacement resources will be subject to local taxes or equivalent payments in lieu of taxes and are defined to mean up to 450 MW of nameplate capacity, provided such resources are located in the same school district as the abandoned facility, are necessary to maintain reliable service, and are in the public interest as determined by the NMPRC. The ETA also provides for the procurement of energy storage rule (the “Waste Confidence Decision”). facilities and gives utilities discretion to maintain and control these systems to ensure reliable and efficient service.

The DC Circuit found thateffectiveness of the Waste Confidence Decision update constitutedETA will have a major federal action, which, consistent with NEPA, requires either an environmental impact statement or a finding of no significant impact fromon PNM’s future generation portfolio, including PNM’s planned retirement of SJGS in 2022. See December 2018 Compliance Filing below. PNM cannot predict the NRC’s actions. The DC Circuit found that the NRC’s evaluationfull impact of the environmental risks from spent nuclear fuel was deficientETA or the outcome of its potential future financing and therefore, remandedgenerating resource abandonment and replacement resource filings with the Waste Confidence Decision update for further action consistent with NEPA. On September 6, 2012, the NRC commissioners issued a directive to the NRC staff to proceed with development of a generic EIS to support an updated Waste Confidence Decision, which was issued in September 2013. On August 26, 2014, the NRC approved a final rule on the environmental effects of continued storage of spent nuclear fuel.  The continued storage rule adopted the findings of the generic EIS regarding the environmental impacts of storing spent fuel at any reactor site after the reactor’s licensed period of operations. As a result, those generic impacts do not need to be re-analyzed in the environmental reviews for individual licenses. The August 2014 final rule has been subject to continuing legal challenges before the NRC and the United States Court of Appeals. On May 19, 2016, the NRC denied petitions filed by multiple petitioners to revise the August 2014 rule. The DC Circuit issued an order upholding the August 2014 rule on June 3, 2016 and denied a subsequent petition for rehearing on August 8, 2016.NMPRC.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In 2011, the National Association of Regulatory Utility Commissioners and the Nuclear Energy Institute challenged, in the DC Circuit, DOE’s 2010 determination of the adequacy of the one tenth of a cent per KWh fee (the “one-mill fee”) paid by the nation’s commercial nuclear power plant owners pursuant to their individual contracts with the DOE. On January 3, 2014, the DOE notified Congress of its intention to suspend collection of the one-mill fee, subject to Congress’ disapproval, as ordered by the DC Circuit. On May 16, 2014, the DOE adjusted the fee to zero. PNM cannot predict if there will be challenges to this action or the potential outcome of such challenges.

The Clean Air Act

Regional Haze

In 1999, EPA developed a regional haze program and regional haze rules under the CAA. The rule directs each of the 50 states to address regional haze. Pursuant to the CAA, states have the primary role to regulate visibility requirements by promulgating SIPs. States are required to establish goals for improving visibility in national parks and wilderness areas (also known as Class I areas) and to develop long-term strategies for reducing emissions of air pollutants that cause visibility impairment in their own states and for preventing degradation in other states. States must establish a series of interim goals to ensure continued progress by adopting a new SIP every ten years. In the first SIP planning period, states were required to conduct BART determinations for certain covered facilities, including utility boilers, built between 1962 and 1977 that have the potential to emit more than 250 tons per year of visibility impairing pollution. If it was demonstrated that the emissions from these sources caused or contributed to visibility impairment in any Class I area, then BART must have been installed by the beginning of 2018. For all future SIP planning periods, states must evaluate whether additional emissions reduction measures may be needed to continue making reasonable progress toward natural visibility conditions.

On January 10, 2017, EPA published in the Federal Register revisions to the regional haze rule. EPA also provided a companion draft guidance document for public comment. The new rule delayed the due date for the next cycle of SIPs from 2019 to 2021, altered the planning process that states must employ in determining whether to impose “reasonable progress” emission reduction measures, and gave new authority to federal land managers to seek additional emission reduction measures outside of the states’ planning process. Finally, the rule made several procedural changes to the regional haze program, including changes to the schedule and process for states to file 5-year progress reports. EPA’s new rule was challenged by numerous parties. On January 19, 2018, EPA filed a motion to hold the case in abeyance in light of several letters issued by EPA on January 17, 2018 to grant various petitions for reconsideration of the 2017 rule revisions. On January 30,December 20, 2018, EPA released a new guidance document on tracking visibility progress for the court placedsecond planning period. EPA is allowing states discretion to develop SIPs that may differ from EPA’s guidance as long as they are consistent with the caseCAA and other applicable regulations. SIPs for the second compliance period are due in abeyance and directed EPA to file status reports on 90-day intervals beginning April 30, 2018. AlthoughJuly 2021. EPA’s decision to revisit the 2017 rule is not a determination on the merits of the issues raised in those petitions, EPA is likely to propose and take comment on additional revisions to the regional haze rules in the near future.petitions. PNM is evaluating the potential impacts of this rule.these matters.

SJGS

BARTDecember 2018 Compliance Filing – SJGS is a source that is subject to the statutory obligations of the CAA to reduce visibility impacts.As discussed in Note 16 of the Notes to the Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K, contains detailed information concerning the BART compliance process, including interactions with governmental agencies responsible for environmental oversight and the NMPRC approval process. Inin December 2015 PNM received NMPRC approval for thea plan to comply with the EPA regional haze rule at SJGS. UnderAmong other things, the approved plan,NMPRC’s December 2015 order required that, no later than December 31, 2018, PNM make a filing with the installation of selective non-catalytic reduction technology (“SNCR”) onNMRPC to determine the extent to which SJGS Units 1should continue serving PNM’s customers’ needs after June 30, 2022, including PNM’s recommendation and 4 was completed in early 2016supporting testimony and Units 2 and 3 were retired inexhibits (the “December 2018 Compliance Filing”). The December 2017. In addition to the required SNCR equipment, the NSR permit, which2018 Compliance Filing was required to be obtained in ordermade before PNM entered into a binding commitment for post-2022 coal supply but after PNM received firm pricing and other terms for the supply of coal at SJGS, unless PNM did not intend to install the SNCRs, specified that SJGS Units 1 and 4 be converted to balanced draft technology (“BDT”). See Note 12pursue an agreement for information concerning thepost-2022 coal supply at SJGS. The NMPRC’s treatment of BDT in PNM’s NM 2015 Rate Case.
The December 2015 NMPRC order also provided, among other things, that:

indicated that, if SJGS Unit 4 is abandoned with undepreciated investment on PNM’s books, PNM was granted a CCN to acquire an additionalis prohibited from recovering the undepreciated investment of its 132 MW interest and required that PNM’s 65 MW interest in SJGS Unit 4 effective January 1, 2018be treated as excluded merchant plant. PNM is currently depreciating all its investments in SJGS through 2053, which reflects the period of time over which the NMPRC has authorized PNM to recover its investment in SJGS from New Mexico retail customers.

PNM was grantedsubmitted the December 2018 Compliance Filing to the NMPRC on December 31, 2018 indicating that, consistent with the conclusions reached in PNM’s 2017 IRP (Note 12), PNM’s customers would benefit from the retirement of PNM’s share of SJGS after the current SJGS CSA expires in mid-2022. The December 2018 Compliance Filing also indicates that, pursuant to the terms of the agreements governing SJGS, all of the SJGS owners except for Farmington have provided written notice that they do not intend to extend the SJGS operating agreements beyond their June 30, 2022 expiration dates, and that PNM has provided written notice to SJCC that PNM does not intend to extend the SJGS CSA beyond June 30, 2022 or to negotiate a CCN for 134 MWnew coal supply agreement on behalf of PVNGS Unit 3the other SJGS participants. The December 2018 Compliance Filing also requested the NMPRC accept the filing as compliant with the December 2015 order and indicated that PNM anticipates it will have sufficient information by the end of the second quarter of 2019 to support a jurisdictional resourceconsolidated application seeking NMPRC approval to serve New Mexico customers beginning January 1, 2018retire PNM’s share of

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


No later than December 31, 2018,SJGS in 2022 and before entering intofor approval of CCNs, PPAs, or other applicable approvals, for replacement capacity resources. On January 10, 2019, the NMPRC opened a binding agreement for post-2022 coal supply for SJGS, PNM will file its position in a NMPRC casedocket to determine whether the extentNMPRC should grant PNM’s request to which SJGSaccept 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 continue servingimmediately establish a formal procedural schedule regarding the abandonment of SJGS. The NMPRC received responses from parties regarding the initial order and, on January 30, 2019, approved an order initiating a proceeding and requiring PNM to submit an application for the abandonment of PNM’s retail customers’ needs after mid-2022; all parties to the stipulation agree to support this case being decided within six months (see Other SJGS Matters below and Note 12)
PNM was authorized to acquire 65 MWshare of SJGS Unit 4 as merchant plant

NEEby March 1, 2019. On February 7, 2019, PNM filed a noticemotion requesting the NMPRC vacate the January 30, 2019 order and extend the deadline for PNM’s abandonment filing until the end of appealthe second quarter of 2019, which was deemed denied. On February 27, 2019, PNM filed a petition with the NM Supreme Court stating that the requirements of the January 30, 2019 order exceed the NMPRC’s December 2015 order allegingauthority by, among other things, mandating PNM to make a filing that is legally voluntary, and that the NMPRC’s decision violated New Mexico statutes andorder is contrary to NMPRC regulations because PNM did not adequately considerprecedent which requires abandonment applications to also include identified replacement resources and other than those proposedinformation that would not be available to PNM by PNM, the NMPRC did not require PNM to adequately address and mitigate ratepayer risk, the NMPRC unlawfully shifted the burden of proof, and the NMPRC’s decision was arbitrary and capricious.  The parties presented oral argument to the court on January 25, 2017. On March 5, 2018,1, 2019. PNM’s petition also requested the NM Supreme Court issuedstay the January 30, 2019 order until after June 14, 2019. On March 1, 2019, the NM Supreme Court granted a temporary stay of the NMPRC’s order to consider the merits of PNM’s petition after receiving responses.  On March 19, 2019, the NMPRC and NEE filed responses supporting the NMPRC’s authority to order PNM to initiate a proceeding. Other parties to the case filed responses supporting a stay of the NMPRC’s order and indicating that the abandonment filing should be subject to recently enacted changes in New Mexico state law. See additional discussion of the ETA above. PNM cannot predict the outcome of this matter.

GAAP requires that long-lived assets be tested for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. The test must consider only those cash flows that are directly associated with the long-lived asset, or group of assets, and requires the evaluation be performed at the lowest level for which identifiable cash flows are largely independent of other cash flows within the asset group. As of December 31, 2018, PNM evaluated the events surrounding its opinion affirmingfuture participation in SJGS and determined that it is more likely than not that PNM’s share of SJGS will be retired in 2022. As a result, PNM performed an impairment analysis that assumed SJGS would not continue to operate through 2053, as previously approved by the NMPRC. PNM’s impairment analysis indicated that, pursuant to the NMPRC’s December 16, 2015 order, thereby denying NEE’s appeal. A requestPNM’s undepreciated 132 MW interest in SJGS Unit 4 at June 30, 2022 will not be recovered from customers; that the estimated future cash flows expected to result from the operation of SJGS Unit 4 through June 30, 2022 are not sufficient to provide for rehearingrecovery of PNM’s 65 MW merchant interest in the facility; and that it is unlikely PNM will be able to sell or transfer its interests in SJGS to third parties at amounts sufficient to provide for their recovery. As a result, as of December 31, 2018, PNM recorded a pre-tax impairment of its investment in SJGS of approximately $35.0 million, which is reflected as regulatory disallowances and restructuring costs on the Consolidated Statements of Earnings in the 2018 Annual Reports on Form 10-K. This amount includes the entire $11.9 million carrying value of PNM’s 65 MW interest in SJGS Unit 4 as of December 31, 2018 and $23.1 million of estimated undepreciated investments in PNM’s 132 MW jurisdictional interest as of June 30, 2022 that will not be recovered from customers. The carrying value of PNM’s remaining undepreciated investments in SJGS, which PNM will seek to recover from customers in the event of an early retirement of the NM Supreme Court’s decision wasfacility, is $371.6 million as of March 31, 2019. See additional discussion regarding the increase in PNM’s estimated liability for coal mine reclamation below.

The December 2018 Compliance Filing and the 2017 IRP are not filedfinal determinations of PNM’s future generation portfolio.  Retiring PNM’s share of SJGS will require future NMPRC approval. PNM will also be required to obtain NMPRC approval of replacement power resources through CCN, PPA, or other applicable filings. The financial impact of an early retirement of SJGS and the NMPRC approval process are influenced by many factors outside of PNM’s control, including the economic impact of a potential SJGS abandonment filing on the area surrounding that plant and the related mine, as well as the overall political and economic conditions of New Mexico. Other items that impact the economic viability of SJGS include the financial impact of climate change regulation or legislation, other environmental regulations, the result of litigation, and other business considerations or the ability or willingness of individual participants to continue participation in the plant. Furthermore, PNM’s application for the abandonment of SJGS, related financing, and for associated replacement resources would be significantly influenced by the statutory deadline. This matter is now concluded.requirements of the ETA. PNM will seek full recovery of its remaining undepreciated investments and other costs necessary to retire the facility and for replacement resources in that filing.

NEE Complaint – On March 31, 2016, NEE filed a complaint with the NMPRC against PNM regarding the financing provided by NM Capital to facilitate the sale of SJCC (seeSJCC. See Coal Supply below).below. The complaint alleges that PNM failed to comply with its discovery obligation in the SJGS abandonment case and requests the NMPRC investigate whether the financing transactions could adversely affect PNM’s ability to provide electric service to its retail customers. PNM responded to the complaint on May 4, 2016. On January 31, 2018, NEE filed a motion

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


asking the NMPRC to investigate whether PNM’s relationship with WSJ, in light of Westmoreland’s financial condition, could be harmful to PNM’s customers. PNM responded requesting the NMPRC deny the motion and that NEE’s prior complaint be dismissed. On May 23, 2018, PNM filed its response to the NMPRC staff’s comments requesting additional information about the financing and noting that the Westmoreland Loan was paid in full on May 22, 2018. On October 11, 2018, PNM filed a supplemental response notifying the NMPRC that Westmoreland had filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on October 9, 2018. PNM’s supplemental response indicated Westmoreland had agreed to terms with its secured creditors that allowed it to continue to fund normal-course operations and to continue to serve its customers during the course of the bankruptcy case. As discussed in Note 6, on March 15, 2019, Westmoreland announced that it had emerged from Chapter 11 bankruptcy as a privately held company owned and operated by a group of its former creditors. Under the reorganization, all the assets of SJCC were sold to WSJ LLC. The March 15, 2019 announcement indicated that mining operations will continue in the normal course of business. As successor entity to SJCC, WSJ LLC assumed all rights and obligations of Westmoreland including obligations to PNM under the SJGS CSA. The NMPRC has taken no further action on these matters.NEE’s complaints. PNM cannot currently predict the outcome of these matters.

SJGS Ownership Restructuring Matters – As discussed in Note 16 of the Notes to Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K, SJGS was jointly owned by PNM and eight other entities. The SJPPA that governs the operation of SJGS expires on July 1, 2022. In connection with the plan to comply with EPA regional haze rules at SJGS, some of the SJGS participants expressed a desire to exit their ownership in the plant. As a result, the SJGS participants negotiated a restructuring of the ownership in SJGS and addressed the obligations of the exiting participants for plant decommissioning, mine reclamation, environmental matters, and certain future operating costs, among other items.

On July 31, 2015, the SJGS participants executed the San Juan Project Restructuring Agreement (“SJGS RA”). The SJGS RA provides the essential terms of restructured ownership and addresses other related matters, including that the exiting participants remain obligated for their proportionate shares of environmental, mine reclamation, and certain other legacy liabilities that are attributable to activities that occurred prior to their exit. The SJGS RA became effective contemporaneously with the effectiveness of the new SJGS CSA. The effectiveness of the new SJGS CSA was dependent on the closing of the purchase of the existing coal mine operation by a new mine operator, which occurred on January 31, 2016 as discussed in Coal Supply below.

Other SJGS Matters – Although the SJGS RA results in an agreement among the SJGS participants enabling compliance with current CAA requirements, it is possible that the financial impact of climate change regulation or legislation, other environmental regulations, the result of litigation, and other business considerations, could jeopardize the economic viability of SJGS or the ability or willingness of individual participants to continue participation in the plant. PNM’s 2017 IRP (Note 12) filed with the NMPRC on July 3, 2017 presented resource portfolio plans for scenarios that assumed SJGS will operate beyond the end of the current coal supply agreement that runs through June 30, 2022 and for scenarios that assumed SJGS will cease operations after mid-2022. The 2017 IRP data shows that retiring SJGS in 2022 would provide long-term cost benefits to PNM’s customers.

Four Corners

On August 6, 2012, EPA issued its Four Corners FIP with a final BART determination for Four Corners. The rule included two compliance alternatives. On December 30, 2013, APS notified EPA that the Four Corners participants selected the alternative that required APS to permanently close Units 1, 2, and 3 by January 1, 2014 and install SCR post-combustion NOx controls on each of Units 4 and 5 by July 31, 2018. Installation of SCRs on Four Corners Unit 5 was completed in March 2018 and the installation on Unit 4 is anticipated to be completed in May 2018. PNM owns a 13% interest in Units 4 and 5, but had no ownership interest in Units 1, 2, and 3, which were shut down by APS on December 30, 2013. For particulate matter emissions, EPA is

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


requiring Units 4 and 5 to meet an emission limit of 0.015 lbs/MMBTU and the plant to meet a 20% opacity limit, both of which are achievable through operation of the existing baghouses. Although unrelated to BART, the final BART rule also imposes a 20% opacity limitation on certain fugitive dust emissions from Four Corners’ coal and material handling operations.
PNM estimates its share of costs for post-combustion controls at Four Corners Units 4 and 5 to be up to $89.0 million, including amounts incurred through March 31, 2018 and PNM’s AFUDC. See Note 17 of the Notes to Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K and Note 12 for a discussion of the treatment of these costs in PNM’s NM 2016 Rate Case.

The Four Corners participants’ obligations to comply with EPA’s final BART determinations, coupled with the financial impact of climate change regulation or legislation, other environmental regulations, and other business or regulatory considerations, could jeopardize the economic viability of Four Corners or the ability of individual participants to continue their participation in Four Corners.

Four Corners Federal Agency Lawsuit – On April 20, 2016, several environmental groups filed a lawsuit against OSM and other federal agencies in the United States District Court for the District of Arizona in connection with their issuance of the approvals that extended the life of Four Corners and the adjacent mine. The lawsuit alleges that these federal agencies violated both the ESA and NEPA in providing the federal approvals necessary to extend operations at Four Corners and the adjacent mine past July 6, 2016.  The court granted an APS motion to intervene in the litigation on August 3, 2016. On September 15, 2016, NTEC, the current owner of the mine providing coal to Four Corners, filed a motion to intervene for the limited purpose of seeking dismissal of the lawsuit based on NTEC’s tribal sovereign immunity. On September 11, 2017, the court granted NTEC’s motion and dismissed the case with prejudice, terminating the proceedings. The environmental group plaintiffs filed a Notice of Appeal of the dismissed orderdismissal in the United States Court of Appeals for the Ninth Circuit on November 9, 2017.2017, and the court granted their subsequent motion to expedite the appeal. Oral arguments for the appeal were held on March 7, 2019. PNM cannot predict if such appeal will be successful and, if it is successful, the outcome of further district court proceedings.

Carbon Dioxide Emissions
On August 3, 2015, EPA established final standards to limit CO2 emissions from power plants. EPA took three separate but related actions in which it: (1) established the final carbon pollution standards for new, modified, and reconstructed power plants; (2) established the final Clean Power Plan to set standards for carbon emission reductions from existing power plants; and (3) released a proposed federal plan associated with the final Clean Power Plan. The Clean Power Plan was published on October 23, 2015.

Multiple states, utilities, and trade groups filed petitions for review in the DC Circuit to challenge both the Carbon Pollution Standards for new sources and the Clean Power Plan for existing sources. Numerous parties also simultaneously filed motions to stay the Clean Power Plan during the litigation. On January 21, 2016, the DC Circuit denied petitions to stay the Clean Power Plan, but 29 states and state agencies successfully petitioned the US Supreme Court for a stay, which was granted on February 9, 2016. The decision means the Clean Power Plan is not in effect and neither states nor sources are obliged to comply with its requirements. With the US Supreme Court stay in place, the DC Circuit heard oral arguments on the merits of the Clean Power Plan on September 27, 2016 in front of a ten judge en banc panel. However, before the DC Circuit could issue an opinion, the Trump Administration asked that the case be held in abeyance while the rule is re-evaluated, which was granted.

On March 28, 2017, President Trump issued an Executive Order on Energy Independence. The order puts forth two general policies: promote clean and safe development of energy resources, while avoiding regulatory burdens, and ensure electricity is affordable, reliable, safe, secure, and clean.  The order directs the EPA Administrator to immediately review and, if appropriate and consistent with law, suspend, revise, or rescind (1) the Clean Power Plan, (2) the NSPS for GHG from new, reconstructed, or modified electric generating units, (3) the Proposed Clean Power Plan Model Trading Rules, and (4) the Legal Memorandum supporting the Clean Power Plan. It also directs the EPA Administrator to notify the US Attorney General of his intent to review rules subject to pending litigation so that the US Attorney General may notify the court and, in his discretion, request that the court delay further litigation pending completion of the reviews. In response to the Executive Order, EPA filed a petition with the DC

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Circuit requesting the cases challenging the Clean Power Plan be held in abeyance until 30 days after the conclusion of EPA’s review and any subsequent rulemaking, which was granted. In addition, the DC Circuit issued a similar order in connection with a motion filed by EPA to hold cases challenging the NSPS in abeyance.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



On October 10, 2017, EPA issued a NOPR proposing to repeal the Clean Power Plan and filed its status report with the court requesting the case be held in abeyance until the completion of the rulemaking on the proposed repeal. The NOPR proposes a legal interpretation concluding that the Clean Power Plan exceeds EPA’s statutory authority. Under the proposed interpretation, Section 111(d) limits EPA’s authority to adopt performance standards to only those physical and operational changes that can be implemented within an individual source. Therefore, measures in the Clean Power Plan that would require power generators to change their energy portfolios by shifting generation from coal to gas and from fossil fuel to renewable energy exceed EPA’s statutory authority. The NOPR was published in the Federal Register on October 16, 2017 and comments were due by April 26, 2018. Any final rule will be subject to judicial review. In a separate but related action, on December 28,18, 2017, EPA released an advanced NOPR addressing GHG guidelines for existing electric utility generating units. On August 31, 2018, EPA published a proposed rule, which is informally known as the Advance Notice of Proposed Rulemaking for replacement ofAffordable Clean Energy rule, to replace the Clean Power Plan. The proposed Affordable Clean Energy rule, among other things, would establish guidelines that replace the “outside-the-fenceline” control measures and specific numerical emission rates for existing EGUs. These measures are replaced with a list of “candidate technologies” for heat rate improvement measures, which include both technologies and operational changes that EPA indicated it has identified as Best System of Emission Reduction (“BSER”). States would determine which of the candidate technologies to apply to each coal-fired unit and establish standards of performance based on the degree of emission reduction achievable through application of the selected BSER.  States will have three years from when the rule is finalized to submit a plan to EPA. EPA will then have one year to determine if each proposed plan is acceptable. If states do not determined whether itsubmit a plan, or if a state’s plan is not acceptable, EPA will promulgatedevelop a new rule under section 111(d) or what form a new rulefederal plan for the state to implement.  EPA is also proposing revisions to the NSR program that would take.provide coal-fired power plants more latitude to make efficiency improvements consistent with BSER without triggering NSR permit requirements. Comments to EPA’s newon the proposed Affordable Clean Energy rule were due to EPA by February 26,October 31, 2018.

The proposed Affordable Clean Energy rule and the proposed 2015 federal plan released concurrently with the Clean Power Plan isare important to Four Corners and the Navajo Nation. Since the Navajo Nation does not have primacy over its air quality program, EPA would be the regulatory authority responsible for implementing the proposed Affordable Clean Power Plan on the Navajo Nation ifEnergy rule or the Clean Power Plan, isshould it ultimately sustained. In addition, the proposed rule recommended that EPA determine it is “necessary or appropriate” for EPA to regulate CO2 emissionsbe sustained, on the Navajo Nation. The comment period forIn addition, in the proposed rule closed on January 21, 2016.2015 federal plan, EPA included a finding “that it is necessary or appropriate” to implement a section 111(d) federal plan for affected EGUs located in Native American lands. APS and PNM filed separate comments with EPA on EPA’s draft 2015 federal plan and model trading rules, advocating that such a federal plan is neither necessary nor appropriate to protect air quality on the Navajo Nation. PNM is unable to predict the financial or operational impacts on Four Corners operations if the Affordable Clean Energy rule, the Clean Power Plan, isor other future GHG reduction rulemaking are ultimately implemented as proposed and EPA determines that a federal plan is necessary or appropriate for the Navajo Nation.

PNM’s review ofOn December 20, 2018, EPA published in the Federal Register a proposed rule that would revise the carbon pollution standards rule published in October 2015 for fossil fueled power plants. The proposed rule would revise the standards for coal-fired EGUs based on a revised BSER determination that would result in less stringent CO2 emission performance standards for new, reconstructed, and modified fossil-fueled power plants. EPA is not proposing any changes nor reopening the standards of performance for newly constructed or reconstructed stationary combustion turbines. Comments on the proposal were due on March 18, 2019.

PNM’s review of the GHG emission reductions standards under the proposed Affordable Clean Energy rule, the revised proposed Carbon Pollution Standards rule, and the Clean Power Plan is ongoing and the assessment of its impacts will depend on the proposed repeal of the Clean Power Plan, promulgation of the Affordable Clean Energy rule and the revised proposed Carbon Pollution Standards rule, other future GHG reduction rulemaking, litigation of any final rule, and other actions the Trump Administration is taking through judicial and regulatory proceedings. Accordingly,As discussed above, SJGS and Four Corners may also be required to comply with additional GHG restrictions issued by the New Mexico Environmental Improvement Board pursuant to the recently enacted ETA. PNM cannot predict the impact these standards may have on its operations or a range of the potential costs of compliance, if any.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


National Ambient Air Quality Standards (“NAAQS”)
The CAA requires EPA to set NAAQS for pollutants considered harmfulreasonably anticipated to endanger public health and the environment.or welfare. EPA has set NAAQS for certain pollutants, including NOx, SO2, ozone, and particulate matter. In 2010, EPA updated the primary NOx and SO2 NAAQS to include a 1-hour maximum standard while retaining the annual standards for NOx and SO2 and the 24-hour SO2 standard. New Mexico EPA also updated the final particulate matter standard in 2012 and updated the ozone standard in 2015.

NOx Standard – On April 18, 2018, EPA published the final rule to retain the current primary health-based NOx standards of which NO2 is in attainmentthe constituent of greatest concern and is the indicator for the primary NAAQS. EPA concluded that the current 1-hour NOx NAAQS.and annual primary NO2 standards are requisite to protect public health with an adequate margin of safety. The rule became effective on May 18, 2018.

SO2 Standard – On May 13, 2014, EPA released the draft data requirements rule for the 1-hour SO2 NAAQS, which directs state and tribal air agencies to characterize current air quality in areas with large SO2 sources to identify maximum 1-hour SO2 concentrations. The proposed rule also describes the process and timetable by which air regulatory agencies would characterize air quality around large SO2 sources through ambient monitoring or modeling. This characterization willwould result in these areas being designated as attainment, nonattainment, or unclassifiedunclassifiable for compliance with the 1-hour SO2 NAAQS.  On March 2, 2015, the United States District Court for the Northern District of California approved a settlement that imposesimposed deadlines for EPA to identify areas that violate the NAAQS standards for 1-hour SO2 emissions. The settlement resultsresulted from a lawsuit brought by Earthjustice on behalf of the Sierra Club and the Natural Resources Defense Council under the CAA. The consent decree requires the following: (1) within 16 months of the consent decree entry, EPA must issue area designations for areas containing non-retiring facilitiesrequired, among other things, that either emitted more than 16,000 tons of SO2 in 2012 or emitted more than 2,600 tons with an emission rate of 0.45 lbs/MMBTU or higher in 2012; (2) by December 2017, EPA must issue designations for areas for which states have not adopted a new monitoring network under the proposed data requirements rule; and (3) by December 2020, EPA must issue designations for areas for which states have adopted a new monitoring network under the proposed data requirements rule.  SJGS and Four Corners SO2 emissions are below the thresholds set forth in (1) above.rule by December 2020.  EPA regions sent letters to state environmental agencies explaining how EPA plans to implement the consent decree.  The letters outline the schedule that EPA expects states to follow in moving forward with new SO2 non-attainment designations. NMED did not receive a letter.

On August 11, 2015, EPA released the Data Requirements Rule for SO2, telling states how to model or monitor to determine attainment or nonattainment with the new 1-hour SO2 NAAQS.  On June 3, 2016, NMED notified PNM that air quality modeling results indicated that SJGS was in compliance with the standard. In January 2017, NMED submitted theirits formal modeling report

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


regarding attainment status to EPA. The modeling indicated that no area in New Mexico exceeds the 1-hour SO2 standard. In July of each year,On June 27, 2018, NMED will submit ansubmitted the first annual report for SJGS as required by the Data Requirements Rule. The report recommends that no further modeling is warranted at this time due to EPA documenting annualdecreased SO2 emissions from SJGSemissions.

On February 25, 2019, EPA announced its final decision to retain without changes the primary health-based NAAQS for SOx. Specifically, EPA will retain the current 1-hour standard for SO2, which is 75 parts per billion (“ppb”), based on the 3-year average of the 99th percentile of daily maximum 1-hour SO2 concentrations.  SO2 is the most prevalent SOx compound and is used as the associated compliance status.indicator for the primary SOx NAAQS.

On May 14, 2015, PNM received an amendment to its NSR air permit for SJGS, which reflects the revised state implementation plan for regional haze BART and requiresrequired the installation of SNCRs as described above.SNCRs. The revised permit also requires the reduction of SO2 emissions to 0.10 pound per MMBTU on SJGS Units 1 and 4 and the installation of BDT equipment modifications for the purpose of reducing fugitive emissions, including NOx, SO2, and particulate matter. These reductions should help SJGS meet the NAAQS for these constituents. The BDT equipment modifications were installed at the same time as the SNCRs, in order to most efficiently and cost effectively conduct construction activities at SJGS. See Regional Haze – SJGS above.

Ozone Standard – On October 1, 2015, EPA finalized the new ozone NAAQS and lowered both the primary and secondary 8-hour standard from 75 parts per billion (“ppb”) to 70 ppb. With ozone standards becoming more stringent, fossil-fueled generation units will come under increasing pressure to reduce emissions of NOx and volatile organic compounds, and to generate emission offsets for new projects or facility expansions located in nonattainment areas.

On November 10, 2015, EPA proposed a rule revising its Exceptional Events Rule, which outlines the requirements for excluding air quality data (including ozone data) from regulatory decisions if the data is affected by events outside an area’s control. The proposed rule is important in light of the new more stringent ozone NAAQS final rule since western states like New Mexico and Arizona are particularly subject to elevated background ozone transport from natural local sources, such as wildfires, and transported via winds from distant sources, such as the stratosphere or another region or country.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



On February 25, 2016, EPA released guidance on area designations for ozone, which states used to determine their initial designation recommendations by October 1, 2016. EPA recommended that states and tribes use the three most recent years of quality assured monitoring data available (e.g., 2013 to 2015) to recommend designations. In their submittals, states and tribes were also able to use preliminary 2016 data. EPA was expected to release final designations of attainment/nonattainment for areas by October 1, 2017. On June 6, 2017, the EPA Administrator sent letters to state governors announcing that EPA was extending, by one year, the deadline for promulgating area designations. However, on August 2, 2017, the Trump Administration reversed the decision to extend the deadline to issue area designations, thereby requiring EPA to issue designations for ozone attainment areas by October 1, 2017.

NMED published its 2015 Ozone NAAQS Designation Recommendation Report on September 2, 2016. In New Mexico, NMEDEPA is designating only a small area in southern Dona Ana County as non-attainment for ozone. NMED will have responsibility for bringing this non-attainment area into compliance and will look at all sources of NOx and volatile organic compounds since these are the pollutants that form ground-level ozone. According to NMED’s website, “If emissions from Mexico keep New Mexico from meeting the standards, the New Mexico area could remain non-attainment but would not face more stringent requirements over time.”

On November 6, 2017, EPA released a final rule establishing some, but not all, initial area designations.  In that final rule, EPA designated 2,646 counties (representing about 85% of the counties in the United States) as attainment/unclassifiable, and three counties in Washington as unclassifiable.  San Juan County, New Mexico, where SJGS and Four Corners are located, is designated as attainment/unclassifiable. EPA designated a small area in Dona Ana County as marginal non-attainment.  On December 21, 2017,April 30, 2018, EPA issued a notice of availability of its intendedcompleted additional area designations for the remaining undesignated areas. EPA stated that it intended to address the remaining areas in a separate future action, but did not specify a time frame for doing so.  Under the CAA, EPA was required to promulgate area designations no later than October 1, 2017. The notice announces the availability of “120-day letters,” which were sent directly to states and tribes on December 20, 2017, and contain EPA’s intended air quality designations for the remaining areas. The only county in New Mexico designated as non-attainment is Dona Ana County.  States and tribes were required to provide EPA any additional information they would like EPA to consider by February 28, 2018.  EPA intends to make final designations for all areas addressed in the 120-day letters no later than April 30, 2018.2015 ozone standards. In a related matter, EPA published a final rule on March 9, 2018 that establishesestablishing air quality thresholds whichthat define the classifications assigned to all nonattainmentnon-attainment areas for ozone NAAQS. The final rule also establishes the timing of attainment dates for each nonattainmentnon-attainment area classification, which are marginal, moderate, serious, severe, or extreme. The rule becomesbecame effective May 8, 2018.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NMED is required to submit an infrastructure and transport SIP that provides the basic air quality management program to implement the revised ozone standard. This plan is generally due within 36 months from the date the NAAQS is promulgated and is expected to be submittedpromulgated. The NMED has published a proposed certification that New Mexico currently has an adequate, federally-approved SIP that addresses elements of the CAA Section 110(a)(2) infrastructure SIP, as applicable to the 2015 ozone NAAQS. The purpose of the proposed certification is to confirm to EPA that New Mexico has the required “infrastructure” in place under the current SIP to implement, maintain, and enforce the revised 2015 ozone NAAQS. Comments on the proposed certification were due by October 1,29, 2018. State ozone attainment plans are generally due within five to six years from the date of the ozone NAAQS promulgation and are planned for submittal in 2020 and 2021.

PNM does not believe there will be material impacts to its facilities as a result of NMED’s nonattainmentnon-attainment designation of the small area within Dona Ana County. Until EPA approves attainment designations for the Navajo Nation and releases a proposal to implement the revised ozone NAAQS, APSPNM is unable to predict what impact the adoption of these standards may have on Four Corners. PNM cannot predict the outcome of this matter.

WEG v. OSM NEPA Lawsuit

In February 2013, WEG filed a Petition for Review in the United States District Court of Colorado against OSM challenging federal administrative decisions affecting seven different mines in four states issued at various times from 2007 through 2012.  In its petition, WEG challenged several unrelated mining plan modification approvals, which were each separately approved by OSM.  WEG alleged various NEPA violations against OSM, including, but not limited to, OSM’s alleged failure to provide requisite public notice and participation, alleged failure to analyze certain environmental impacts, and alleged reliance on outdated and insufficient documents.  WEG’s petition sought various forms of relief, including a finding that the federal defendants violated NEPA by approving the mine plans; voiding, reversing, and remanding the various mining modification approvals; enjoining the federal defendants from re-issuing the mining plan approvals for the mines until compliance with NEPA has been demonstrated; and enjoining operations at the seven mines.

Of the fifteen claims for relief in the WEG Petition, two concerned SJCC’s San Juan mine. WEG’s allegations concerning the San Juan mine arise from OSM administrative actions in 2008. SJCC intervened in this matter. The court granted SJCC’s motion to sever its claims from the lawsuit and transfer venue to the United StatesNM District Court for the District of New Mexico.Court. In July 2016, OSM filed a Motion for Voluntary Remand to allow the agency to conduct a new environmental analysis. On August 31, 2016, the court entered an order remanding the matter to OSM for the completion of an EIS by August 31, 2019. The court ruled that mining operations may continue in the interim and the litigation is administratively closed. If OSM does not complete the EIS within the time frame provided, the court will order immediate vacatur of the mining plan at issue absent a further court order based on good cause shown. On March 22, 2017, OSM issued its Notice of Intent to initiate the public scoping process and prepare an EIS for the project. The Notice of Intent provided that, in addition to analyzing the environmental effects of the mining project, the EIS will also analyze the indirect effects of coal combustion at SJGS. The public comment period ended on May 8, 2017 and the EIS

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


resource data submittal phase was completed in November 2017. The draft EIS is expectedwas made available in May 2018 and was subject to be available fora public comment period that ended on July 9, 2018. The Notice of Availability for the final EIS was published in mid-2018.the Federal Register and became available on the OSM website on March 15, 2019. NEPA requires OSM to identify a preferred alternative in the final EIS and prepare a recommendation to the Assistant Secretary of Land and Minerals Management. OSM has selected a plan that would allow for continued mining that would extend beyond 2022 as the preferred alternative based on the impact analysis in the EIS. On May 1, 2019, OSM published its Record of Decision, which would allow for continued mining in the underground mine in annual quantities similar to those being currently being provided.  The OSM’s Record of Decision is subject to additional review and approval.  PNM cannot currently predict the outcome of this matter.
Navajo Nation Environmental Issues
Four Corners is located on the Navajo ReservationNation and is held under an easementeasements granted by the federal government, as well as a lease fromagreements with the Navajo Nation.Nation which grant each of the owners the right to operate on the site. The Navajo Acts purport to give the Navajo Nation Environmental Protection Agency authority to promulgate regulations covering air quality, drinking water, and pesticide activities, including those activities that occur at Four Corners. In October 1995, the Four Corners participants filed a lawsuit in the District Court of the Navajo Nation challenging the applicability of the Navajo Acts to Four Corners. In May 2005, APS and the Navajo Nation signed an agreement resolving the dispute regarding the Navajo Nation’s authority to adopt operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. As a result of this agreement, APS sought, and the court granted, dismissal of the pending litigation in the Navajo Nation Supreme Court and the Navajo Nation District Court, to the extent the claims relate to the CAA. The agreement does not address or resolve any dispute relating to other aspects of the Navajo Acts. PNM cannot currently predict the outcome of these matters or the range of their potential impacts.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Cooling Water Intake Structures
EPA signed its final cooling water intake structures rule on May 16, 2014, which establishes national standards for certain cooling water intake structures at existing power plants and other facilities under the Clean Water Act to protect fish and other aquatic organisms by minimizing impingement mortality (the capture of aquatic wildlife on intake structures or against screens) and entrainment mortality (the capture of fish or shellfish in water flow entering and passing through intake structures). The final rule was published on August 15, 2014 and became effective October 14, 2014.
The final rule allows multiple compliance options and considerations for site specific conditions and the permit writer is granted a significant amount of discretion in determining permit requirements, schedules, and conditions. To minimize impingement mortality, the rule provides operators of facilities, such as SJGS and Four Corners, seven options for meeting Best Technology Available (“BTA”) standards for reducing impingement. SJGS has a closed-cycle recirculating cooling system, which is a listed BTA and may also qualify for the “de minimis rate of impingement” based on the design of the intake structure. To minimize entrainment mortality, the permitting authority must establish the BTA for entrainment on a site-specific basis, taking into consideration an array of factors, including endangered species and social costs and benefits. Affected sources must submit source water baseline characterization data to the permitting authority to assist in the determination. Compliance deadlines under the rule are tied to permit renewal and will be subject to a schedule of compliance established by the permitting authority.
The rule is not clear as to how it applies and what the compliance timelines are for facilities like SJGS that have a cooling water intake structure and only a multi-sector general stormwater permit. PNM is working with EPA regarding this issue. However, PNM does not expect material changes as a result of any requirements that may be imposed upon SJGS.
On May 23, 2018, several environmental groups sued EPA Region IX in the United States Court of Appeals for the Ninth Circuit Court over EPA’s failure to timely reissue the Four Corners NPDES permit. The requirementspetitioners asked the court to issue a writ of mandamus compelling EPA Region IX to take final action on the pending NPDES permit by a reasonable date. EPA subsequently reissued the NPDES permit on June 12, 2018. The permit did not contain conditions related to the cooling water intake structure rule as EPA determined that the facility has achieved BTA for both impingement and entrainment by operating a closed-cycle recirculation system and no additional conditions are necessary. On July 16, 2018, several environmental groups filed a petition for review with the EPA’s Environmental Appeals Board concerning the reissued permit. The environmental groups alleged that the permit was reissued in contravention of several requirements under the Clean Water Act and did not contain required provisions concerning certain revised effluent limitation guidelines, existing-source regulations governing cooling-water intake structures, and effluent limits for surface seepage and subsurface discharges from coal-ash disposal facilities. On December 19, 2018, EPA

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


withdrew the Four Corners NPDES permit in order to examine issues raised by the environmental groups. Withdrawal of the permit moots the appeal pending before the Environmental Appeals Board. The EPA’s Environmental Appeals Board thereafter dismissed the environmental groups’ appeal. EPA has indicated that, depending on the amount of public comments received concerning the permit proposal, it anticipates taking final action on a new NPDES permit by August 2019. Four Corners will be addressed incontinue to operate under the 2001 NPDES permit. PNM cannot predict the outcome of this matter or whether reconsideration will have a subsequent NPDES permitting cycle that will determine APS’s costs to comply with the rule. PNM does not expect such costs to be material.material impact on PNM’s financial position, results of operations or cash flows.

Effluent Limitation Guidelines

On June 7, 2013, EPA published proposed revised wastewater effluent limitation guidelines establishing technology-based wastewater discharge limitations for fossil fuel-fired electric power plants.  EPA’s proposal offered numerous options that target metals and other pollutants in wastewater streams originating from fly ash and bottom ash handling activities, scrubber activities, and non-chemical metal cleaning waste operations.  All proposed alternatives establish a “zero discharge” effluent limit for all pollutants in fly ash transport water. Requirements governing bottom ash transport water differ depending on which alternative EPA ultimately chooses and could range from effluent limits based on Best Available Technology Economically Achievable to “zero discharge” effluent limits.

EPA signed the final Steam Electric Effluent Guidelines rule on September 30, 2015. The final rule, which became effective on January 4, 2016, phases in the new, more stringent requirements in the form of effluent limits for arsenic, mercury, selenium, and nitrogen for wastewater discharged from wet scrubber systems and zero discharge of pollutants in ash transport water that must be incorporated into plants’ NPDES permits. Each plant must comply between 2018 and 2023 depending on when it needs a new/new or revised NPDES permit.

On April 14, 2017, EPA filed a motion with the United States Court of Appeals for the Fifth Circuit relating to ongoing litigation of the 2016 Steam Electric Effluent Guidelines rule. EPA asked the court to hold all proceedings in the case in abeyance until August 12, 2017 while EPA reconsiders the rule. EPA also asked to be allowed to file a motion on August 12, 2017 to inform the court if EPA wishes to seek a remand of any provisions of the rule so that EPA may conduct further rulemaking, if appropriate. The motion referred to the notice signed by the EPA Administrator on April 12, 2017, which announced EPA’s intent to reconsider this rule, as well as EPA’s administrative stay of the compliance deadlines. On August 22, 2017, the court granted the government’s motion and the litigation is held in abeyance until EPA’s further rulemaking has concluded.

On April 25, 2017, EPA published in the Federal Register a notice of postponement of certain compliance dates for the 2016 Steam Electric Effluent Guidelines rule, consistent with the EPA’s decision to grant reconsideration of the rule. Specifically, the deadlines that will be postponed are the “best available technology” limitations and pretreatment standards for certain waste streams.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


On September 18, 2017, EPA published thea final rule for postponement of certain compliance dates, which have not yet passed for the Effluent Limitations Guidelines rule, consistent with the EPA’s decision to grant reconsideration of that rule. The final rule postponed the earliest date on which compliance with the effluent limitation guidelines for these waste streams would be required from November 1, 2018 until November 1, 2020.2020, although the new deadlines have been challenged in court.

The Effluent Limitations Guidelines rule was challenged in the U.S. Court of Appeals for the Fifth Circuit by numerous parties. On April 12, 2017, EPA signed a notice indicating its intent to reconsider portions of the rule and, on August 22, 2017, the Fifth Circuit issued an order severing the issues under reconsideration and holding the case in abeyance as to those issues. However, the court allowed challenges to other portions of the rule to proceed. On April 12, 2019, the Fifth Circuit granted those challenges and issued an opinion vacating several portions of the rule, specifically those related to legacy wastewater and leachate, for which the court deemed the standards selected by the EPA arbitrary and capricious.

Because SJGS is zero discharge for wastewater and is not required to hold a NPDES permit, it is expected that minimal to no requirements will be imposed. Reeves Station, a PNM-owned gas-fired generating station, discharges cooling tower blowdown to a publicly owned treatment worksplant and holds an NPDES permit. It is expected that minimal to no requirements will be imposed at Reeves Station.

EPA reissued an NPDES permit for Four Corners on June 12, 2018. EPA had determined that the guidelines in the 2015 rule are not applicable to this permit because the effective dates of the 2015 effluent guidelines rule were extended. On December 19, 2018, EPA withdrew the Four Corners NPDES permit in order to examine issues raised by several environmental groups. Four Corners will continue to operate under the 2001 NPDES permit. See Cooling Water Intake Structures above. Four Corners may be required to change equipment and operating practices affecting boilers and ash handling systems, as well as change its waste disposal techniques. Until a drafttechniques, during the next NPDES permit is proposedrenewal for Four Corners, APS is uncertain whatwhich will be required to comply with the revised effluent limitations during the revised compliance timeframe (from November 1, 2020 through December 31, 2023).in 2023. PNM is unable to predict the outcome of this matterthese matters or a range of the potential costs of compliance.
Santa Fe Generating Station
PNM and the NMED are parties to agreements under which PNM installed a remediation system to treat water from a City of Santa Fe municipal supply well, an extraction well, and monitoring wells to address gasoline contamination in the groundwater at the site of PNM’s former Santa Fe Generating Station and service center. PNM believes the observed groundwater contamination

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


originated from off-site sources but agreed to operate the remediation facilities until the groundwater meets applicable federal and state standards or until the NMED determines that additional remediation is not required, whichever is earlier. The City of Santa Fe has indicated that since the City no longer needs the water from the well, the City would prefer to discontinue its operation and maintain it only as a backup water source. However, for PNM’s groundwater remediation system to operate, the water well must be in service. Currently, PNM is not able to assess the duration of this project or estimate the impact on its obligations if the City of Santa Fe ceases to operate the water well.

The Superfund Oversight Section of the NMED also has conducted multiple investigations into the chlorinated solvent plume in the vicinity of the site of the former Santa Fe Generating Station. In February 2008, a NMED site inspection report was submitted to EPA, which states that neither the source nor extent of contamination has been determined and that the source may not be the former Santa Fe Generating Station. Results of tests conducted by NMED in April 2012 and April 2013 showed elevated concentrations of nitrate in three monitoring wells and an increase in free-phase hydrocarbons in another well. PNM conducted similar site-wide sampling activities in April 2014 and obtained results similar to the 2013 data. As part of this effort, PNM also collected a sample of hydrocarbon product for “fingerprint” analysis from a monitoring well located on the northeastern corner of the property.  This analysis indicated that the hydrocarbon product was a mixture of newer and older fuels, and the location of the monitoring well suggests that the hydrocarbon product is likely from offsite sources. PNM does not believe the former generating station is the source of the increased levels of free-phase hydrocarbons, but no conclusive determinations have been made. However, it is possible that PNM’s prior activities to remediate hydrocarbon contamination, as conducted under an NMED-approved plan, may have resulted in increased nitrate levels.  Therefore, PNM has agreed to monitor nitrate levels in a limited number of wells under the terms of the renewed discharge permit for the former generating station.  However, the renewed discharge permit requires that PNM conduct more frequent monitoring than originally anticipated, which resulted in an insignificant increase to the project cost estimate as of December 31, 2018.

Effective December 22, 2015, PNM and NMED entered into a memorandum of understanding to address changing groundwater quality conditions at the site. Under the memorandum, PNM will continue hydrocarbon investigation of the site under the supervision of NMED and qualified costs of the work will be eligible for payment through the New Mexico Corrective Action Fund (“CAF”), which is administered by the NMED Petroleum Storage Tank Bureau. Among other things, money in the CAF is available to NMED to make payments to or on behalf of owners and operators for corrective action taken in accordance with statutory and regulatory requirements to investigate, minimize, eliminate, or clean up a release. PNM’s work plan and cost estimates for specific groundwater investigation tasks were approved by the Petroleum Storage Tank Bureau. PNM submitted a monitoring plan consisting of a compilation of the data associated with monitoring activities conducted under the CAF to NMED on October 3, 2016. PNM completed all CAF-related work associated with the monitoring plan and received NMED’s approval. Under the next phase, PNM’s contractor prepared a scope of work, which PNM and NMED approved, for the installation of additional monitoring wells and additional sampling of certain existing monitoring wells at the site. These activities were completed in June 2018. PNM’s contractor has commenced the next phase of work which includes the installation of up to 38 additional monitoring wells. Work commencedis expected to be completed in March 2018.mid-2019. Qualified costs of this work are eligible for payment through the CAF.

On March 28, 2019, PNM received notice from NMED that an abatement plan is required with respect to the site to address concentrations of previously identified compounds found in the groundwater. The abatement plan would include an investigation to define site conditions and provide data necessary to select and design an abatement option. PNM must submit its abatement plan to NMED by May 27, 2019 but has requested an extension to June 25, 2019. Under NMED regulations, NMED and PNM are required to publish information summarizing the source and magnitude of the pollution. NMED may also hold a public hearing if there is sufficient public interest.

PNM is unable to predict the outcome of these matters.
Coal Combustion Residuals Waste Disposal
CCRs consisting of fly ash, bottom ash, and gypsum generated from coal combustion and emission control equipment at SJGS are currently disposed of in the surface mine pits adjacent to the plant. SJGS does not operate any CCR impoundments or landfills. The NMMMD currently regulates mine reclamation activities at the San Juan mine, including placement of CCRs in the surface mine pits, with federal oversight by the OSM. APS disposes of CCRs in ponds and dry storage areas at Four Corners.  Ash management at Four Corners is regulated by EPA and the New Mexico State Engineer’s Office.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



PNM is unable to predict the outcome of these matters.
Coal Combustion Byproducts Waste Disposal
CCBs consisting of fly ash, bottom ash, and gypsum generated from coal combustion at SJGS are currently disposed of in the surface mine pits adjacent to the plant. SJGS does not operate any CCB impoundments or landfills. The NMMMD currently regulates placement of ash in the San Juan mine with federal oversight by the OSM. APS disposes of CCBs in ash ponds and dry storage areas at Four Corners.  Ash management at Four Corners is regulated by EPA and the New Mexico State Engineer’s Office.
In June 2010, EPA published a proposed rule that included two options for waste designation of coal ash. One option was to regulate CCBs as a hazardous waste, which would allow EPA to create a comprehensive federal program for waste management and disposal of CCBs. The other option was to regulate CCBs as a non-hazardous waste, which would provide EPA with the authority to develop performance standards for waste management facilities handling CCBs and would be enforced primarily by state authorities or through citizen suits. Both options allow for continued use of CCBs in beneficial applications. 

On December 19, 2014, EPA issued itsEPA’s final coal ash rule, which became effective on October 19, 2015, included a non-hazardous waste determination for coal ash. Coal ash will be regulated as a solid waste under Subtitle D of RCRA. The rule sets minimum criteria for existing and new CCBCCR landfills and existing and new CCBCCR surface impoundments and all lateral expansions consisting of location restrictions, design and operating criteria; groundwater monitoring and corrective action; closure requirements and post closure care; and recordkeeping, notification, and internet posting requirements.

Because the rule is promulgated under Subtitle D of RCRA, it does not require regulated facilities to obtain permits, does not require the states to adopt and implement the new rules, and is not within EPA’s enforcement jurisdiction. Instead, the rule’s compliance mechanism is for a state or citizen group to bring a RCRA citizen suit in federal district court against any facility that is alleged to be in non-compliance with the new requirements. EPA published the final CCB rule in the Federal Register on April 17, 2015, with an effective date of October 19, 2015. Based upon the requirements of the final rule, PNM conducted a CCB assessment at SJGS and made minor modifications at the plant to ensure that there are no facilities which would be considered impoundments or landfills under the rule. PNM does not expect the rule to have a material impact on operations, financial position, or cash flows.

As indicated above, CCBs at Four Corners are currently disposed of in ash ponds and dry storage areas. The CCB rule requires ongoing, phased groundwater monitoring. By October 17, 2017, utilities that own or operate CCB disposal units, such as those at Four Corners must have collected sufficient groundwater sampling data to initiate a detection monitoring program.  To the extent that certain threshold constituents are identified through this initial detection monitoring at levels above the CCB rule’s standards, the rule required the initiation of an assessment monitoring program by April 15, 2018.  If this assessment monitoring program reveals concentrations of certain constituents above the CCB rule standards that trigger remedial obligations, a corrective measures evaluation must be completed by January 2019. Depending upon the results of such groundwater monitoring and data evaluations, Four Corners may be required to take corrective actions, the costs of which cannot be reasonably estimated at this time.

Pursuant to a June 24, 2016 order by the DC Circuit in litigation by industry and environmental groups challenging EPA’s CCB regulations, EPA is required to complete a rulemaking proceeding by June 2019 to address specific technical issues related to the handling of CCBs.  EPA was not required to take final action approving the inclusion of boron, but EPA was required to consider its inclusion.  In March 2018, EPA issued a proposed rule amending the CCB rule, which proposes, among other things, to add boron to the list of constituents that trigger corrective action. Should EPA take final action adding boron to the list of groundwater constituents, corrective action may be required. Any resulting corrective action measures may increase costs of compliance with the CCB rule at coal-fired generating facilities.  At this time, PNM cannot predict if the EPA will ultimately amend the CCB rule or the eventual impacts of those amendments.

On December 16, 2016, the Water Infrastructure Improvements for the Nation Act (the “WIIN Act”) was signed into law to address critical water infrastructure needs in the United States. The WIIN Act contains a number of provisions requiring EPA to modify the self-implementing provisions of the current CCBCCR rules under Subtitle D. Among other things, the WIIN Act provides for the establishment of state and EPA permit programs for CCBs,CCRs, provides flexibility for states to incorporate the EPA final rule for CCBsCCRs or develop other criteria that are at least as protective as the EPA’s final rule, and requires EPA to approve state permit

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


programs within 180 days of submission by the state for approval. As a result, the CCBCCR rule is no longer self-implementing and there will either be a state or federal permit program. Subject to Congressional appropriated funding, EPA will implement the permit program in states that choose not to implement a program. Until permit programs are in effect, EPA has authority to directly enforce the self-implementing CCBCCR rule. For facilities located within the boundaries of Native American tribal reservations, such as the Navajo Nation where Four Corners is located, EPA is required to develop a federal permit program regardless of appropriated funds. EPA has yet to undertake rulemaking proceedings to implement the CCBCCR provisions of the WIIN Act. There is no time linetimeline for establishing either state or federal permitting programs. APS recently filed a comment letter with EPA seekinghas sought clarification as to when and how EPA would be initiating permit proceedings for facilities on tribal reservations, including Four Corners. PNM is unable to predict when EPA will be issuing permits for Four Corners.

On September 13, 2017, EPA agreed to evaluate whether to revise the CCBCCR regulations based upon utility industry petitions for EPA to reconsider the RCRA Subtitle D regulations for CCBs,CCRs, which were premised in part on the provisions of the WIIN Act. In light of the WIIN Act and the petitions for rulemaking, the EPA is considering making additional changes to the CCBCCR rule to provide flexibility to state programs consistent with the WIIN Act. With respect to ongoing litigation initiated by industry and environmental groups challenging the legality of the CCBCCR regulations and pursuant to an order issued by the DC Circuit, EPA filed a status report on November 15, 2017 on the challenges to the CCB rule identifying provisions it intends to reconsider. On November 20, 2017, the DC Circuit heard oral arguments from industry groups, environmentalists, and EPA. EPA and the industry groups argued the court should postpone adjudication until EPA completes the reconsideration process for the affected provision.

Pursuant to a June 24, 2016 order by the DC Circuit in litigation by industry and environmental groups challenging EPA’s CCR regulations, EPA is required to complete a rulemaking proceeding by June 2019 to address specific technical issues. On March 15, 2018, EPA proposed its Phase I Remand Rule that includes potential revisions to provide site-specific, risk-based tailoring of groundwater monitoring, corrective action and location restriction requirements of the CCR rule. EPA published the final rule on July 30, 2018. According to EPA, the July 30, 2018 rule constitutes “Phase One, Part One” of its ongoing reconsideration and revision of the April 17, 2015 coal ash rule. The final rule includes two types of revisions. The first revision extends the deadline to allow EGUs with unlined impoundments or that fail to meet the uppermost aquifer requirement to continue to receive coal ash until October 31, 2020. The second revision authorizes a “Participating State Director” or EPA, in lieu of a professional engineer, to approve suspension of groundwater monitoring and to issue certifications related to the location restrictions, design criteria, groundwater monitoring, remedy selection and implementation. The revisions also modify groundwater protection standards for certain constituents, which include cobalt, molybdenum, lithium, and lead without a maximum contamination level. EPA indicated that provisions in the March 2018 rule that are not addressed in the July 2018 final rule will be addressed in a subsequent rulemaking.

On August 21, 2018, the DC Circuit Court of Appeals issued its decision in the CCR litigation. The court denied EPA’s request to hold the case in abeyance; remanded the industry group’s challenges to the regulation of certain on-site CCR piles; denied relief for the remaining industry group’s claims, including the challenge to EPA’s authority to regulate inactive surface impoundments; and found for the environmental groups on their challenges to the ability of unlined impoundments to continue operating, the classification of certain unlined impoundments as “lined” units, and EPA’s failure to regulate legacy ponds. It

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


remains unclear how the DC Circuit Court of Appeals decision will impact Four Corners as EPA has not yet taken regulatory action on remand to revise its CCR regulations consistent with the court’s order.

Based on this decision, on December 20, 2017,17, 2018, certain environmental groups filed an emergency motion with the D.C. Circuit to stay or summarily vacate EPA’s July 17, 2018 final rule extending the closure-initiation deadline for certain unlined CCR surface impoundments until October 2020. In response, EPA filed a proposalmotion to remand but not vacate that deadline extension regulation. On March 13, 2019, the CCBcourt granted EPA’s motion for a voluntary remand without vacatur. As a result, the “Phase One, Part One” rule was transmittedwill remain in place while EPA reconsiders the rule on remand and continues its ongoing revisions to the OfficeCCR rule. This means that the October 31, 2020 deadline to initiate closure for unlined CCR impoundments and impoundments that fail the aquifer location restriction will remain in place while EPA completes a new rulemaking to reaffirm or establish a new deadline for initiating closure. PNM cannot predict the outcome of Managementthe D.C. Circuit’s consideration of these competing motions, and Budget for interagency review.whether or how such a ruling would affect operations at Four Corners.

The CCBCCR rule does not cover mine placement of coal ash. OSM is expected to publish a proposed rule covering mine placement in the future and will likely be influenced by EPA’s rule.rule and the determination by EPA that CCRs are non-hazardous. PNM cannot predict the outcome of OSM’s proposed rulemaking regarding CCBCCR regulation, including mine placement of CCBs,CCRs, or whether OSM’s actions will have a material impact on PNM’s operations, financial position, or cash flows. Based upon the requirements of the final rule, PNM conducted a CCR assessment at SJGS and made minor modifications at the plant to ensure that there are no facilities which would be considered impoundments or landfills under the rule. PNM would seek recovery from its ratepayers of all CCBCCR costs for retail jurisdictional assets that are ultimately incurred. PNM does not expect the rule to have a material impact on operations, financial position, or cash flows.

As indicated above, CCRs at Four Corners are currently disposed of in ash ponds and dry storage areas. The CCR rule requires ongoing, phased groundwater monitoring. Utilities that own or operate CCR disposal units, such as those at Four Corners were required to collect sufficient groundwater sampling data to initiate a detection monitoring program.  To the extent that certain threshold constituents are identified through this initial detection monitoring at levels above the CCR rule’s standards, the rule required the initiation of an assessment monitoring program by April 15, 2018.  If this assessment monitoring program reveals concentrations of certain constituents above the CCR rule standards that trigger remedial obligations, a corrective measures evaluation must be completed. Four Corners completed an analysis that determined several of its CCR disposal units will need corrective action or will need to cease operations and initiate closure by October 2020. Four Corners anticipates it will complete its evaluation of these matters, including gathering additional groundwater data, soliciting public comment, and selecting potential actions, by the summer of 2019. At this time, PNM does not anticipate its share of the cost to complete these corrective actions or to close the CCR disposal units at Four Corners will have a significant impact on its operations, financial position, or cash flows.
 
Other Commitments and Contingencies
Coal Supply
SJGS
The coal requirements for SJGS are supplied by SJCC. SJCC holds certain federal, state, and private coal leases. In addition to coal delivered to meet the current needs of SJGS, PNM has prepaid SJCC for certain coal mined but not yet delivered to the plant site. At March 31, 20182019 and December 31, 2017,2018, prepayments for coal, (including amounts purchased from the existing SJGS participants discussed below), which are included in other current assets, amounted to$26.3 million and $26.3 million. Additional information concerning the coal supply for SJGS is contained in Note 16 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K.
In conjunction with the activities undertaken to comply with the CAA for SJGS, as discussed above, PNM and the other owners of SJGS evaluated alternatives for the supply of coal to SJGS. On July 1, 2015, PNM and Westmoreland Coal Company (“Westmoreland”) entered into a new coal supply agreement (“SJGS(the “SJGS CSA”), pursuant to which Westmoreland isagreed to supply all of the coal requirements of SJGS through June 30, 2022. PNM and Westmoreland also entered into agreements under which Westmoreland isagreed to provide CCBCCR disposal and mine reclamation services for SJGS. Contemporaneous with the entry into the coal-related agreements, Westmoreland entered into a stock purchase agreement (the “Stock Purchase Agreement”) on July 1, 2015 to acquire all of the capital stock of SJCC.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The SJGS CSA became effective as of 11:59 PM on January 31, 2016, upon the closing under the Stock Purchase Agreement. Upon closing under the Stock Purchase Agreement, Westmoreland’s rights and obligations under the SJGS CSA and the agreements for CCBCCR disposal and mine reclamation services were assigned to SJCC. Westmoreland has guaranteed SJCC’s performanceAs discussed in Note 6, with the closing of the sale of the assets of SJCC on March 15, 2019, WSJ LLC assumed the rights and obligations of SJCC under the SJGS CSA.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CSA and the agreements for CCR disposal and mine reclamation services. Pricing under the SJGS CSA is primarily fixed, adjustedwith adjustments to reflect changes in general inflation. The pricing structure takes into account that SJCCWSJ LLC has been paid for coal mined but not delivered, as discussed above. delivered.

PNM hashad the option to extend the SJGS CSA, subject to negotiation of the term of the extension and compensation to the miner. In order to extend, the SJGS CSA provides that PNM must givehave given written notice of that intent by July 1, 2018 and the parties must agreehave agreed to the terms of the extension by January 1, 2019. However, as discussed in Note 12, PNM’s 2017 IRP shows that retirement of PNM’sIn addition, the SJPPA obligates each SJGS capacity in 2022 would be cost-effective for customers. If retirement of SJGS is approved byparticipant to provide notice to the NMPRC, there will be no needother participants whether they wish to extend the SJGS CSA.

The SJGS RA sets forth terms under which PNM acquired the coal inventory, including coal mined but not delivered, of the exiting SJGS participants as of January 1, 2016SJPPA and supplied coal to the SJGS exiting participants forCSA beyond June 30, 2022. In 2018, PNM, Los Alamos, UAMPS, and Tucson provided notice of their intent to exit SJGS in 2022 and Farmington gave notice that it wishes to continue SJGS operations and to extend the period from January 1, 2016 through December 31, 2017 and is supplying coalterms of both agreements. On November 30, 2018, PNM provided notice to the SJGS remaining participants overWestmoreland that PNM does not intend to extend the term of the SJGS CSA. Coal costs underCSA or to negotiate a new coal supply agreement for SJGS, which will result in the SJGS CSA are significantly less than under the previous arrangement with SJCC. Since substantially all of PNM’s coal costs are passed through the FPPAC, the benefit of the reduced costs and the economic benefits of the coal inventory arrangement with the exiting owners are passed through to PNM’s customers.

In support of the closing under the Stock Purchase Agreement and to facilitate PNM customer savings, NM Capital, a wholly-owned subsidiary of PNMR, provided funding of $125.0 million (the “Westmoreland Loan”) to Westmoreland San Juan, LLC (“WSJ”), a ring-fenced, bankruptcy-remote, special-purpose entity that is a subsidiary of Westmoreland, to finance WSJ’s purchase of the stock of SJCC (including an insignificant affiliate) under the Stock Purchase Agreement. NM Capital was able to provide the $125.0 million financing to WSJ by first entering into a $125.0 million term loancurrent agreement (the “BTMU Term Loan Agreement”) with BTMU, as lender and administrative agent. The BTMU Term Loan Agreement became effective as of February 1, 2016, maturesexpiring on February 1, 2021, and bears interest at a rate basedits own terms on LIBOR plus a customary spread. In connection with the BTMU Term Loan Agreement, PNMR, as parent company of NM Capital, has guaranteed NM Capital’s obligations to BTMU. The balance outstanding under the BTMU Term Loan Agreement was $45.1 million at March 31, 2018.

The Westmoreland Loan is a $125.0 million loan agreement among NM Capital, as lender, WSJ, as borrower, SJCC and its affiliate, as guarantors, BTMU, as administrative agent, and MUFG Union Bank, N.A., as depository bank. The Westmoreland Loan became effective as of February 1, 2016 and matures on February 1, 2021. The interest rate on the Westmoreland Loan escalates over time and was initially a rate of 7.25% plus LIBOR. Such rate was 9.25% plus LIBOR for the period from February 1, 2017 through January 31,June 30, 2022. See December 2018 and is 12.25% plus LIBOR for the period from February 1, 2018 through January 31, 2019. WSJ must pay principal and interest quarterly to NM Capital in accordance with an amortization schedule. In addition, the Westmoreland Loan requires that all cash flows of WSJ, in excess of normal operating expenses, capital additions, and operating reserves, be utilized for principal and interest payments under the loan until it is fully repaid. At March 31, 2018, the amount outstanding under the Westmoreland Loan was $51.0 million. The next principal payment of $0.9 million plus interest of $1.8 million is due on May 1, 2018. As of April 23, 2018, $2.7 million was held in a SJCC restricted bank account that is to be used solely to service the Westmoreland Loan. The Westmoreland Loan is secured by the assets of and the equity interests in SJCC and its affiliate. The Westmoreland Loan also includes customary representations and warranties, covenants, and events of default. There are no prepayment penalties. On March 28, 2018, NM Capital executed an extension and waiver agreement with WSJ, which waived a technical event of default by WSJ under the Westmoreland Loan. This waiver related to the required delivery of the financial statements of WSJ’s parent company and expires on the earlier of May 1, 2019 or the occurrence of any other event of default. See Note 6.Compliance Filing above.

In connection with certain mining permits relating to the operation of the San Juan mine, SJCC iswas required to post reclamation bonds of $118.7 million with the NMMMD. In order to facilitate the posting of reclamation bonds by sureties on behalf of SJCC, PNMR entered into letter of credit arrangements with a bank under which letters of credit aggregating $30.3 million have been issued. As discussed in Note 6, on March 15, 2019, the assets owned by SJCC were sold to WSJ LLC, a subsidiary of Westmoreland Mining Holdings, LLC. Under the sale agreement, WSJ LLC assumed the rights and obligations of SJCC, including obligations to PNMR under the outstanding letters of credit.

Four Corners
APS purchases all of Four Corners’ coal requirements from NTEC, an entity owned by the Navajo Nation, under a coal supply contract (the “Four Corners CSA”) that expires in 2031. The coal comes from reserves located within the Navajo Nation. NTEC has contracted with Bisti Fuels Company, LLC, a subsidiary of The North American Coal Corporation, for management and operation of the mine. The average coal price per ton under the new contract was approximately 51% higher in the twelve months ended June 30, 2017 than in the twelve months ended June 30, 2016, excluding the disputed amounts discussed below. The contract provides for pricing adjustments over its term based on economic indices. PNM’s shareSee additional discussion of the costs is being recovered

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


through the FPPAC.
Four Corners Coal Supply Arbitration – The owners of Four Corners are obligated to purchase a specified minimum amount of coal each contract year and to pay for any shortfall below the minimum amount, except when caused by “uncontrollable forces” as defined in the Four Corners CSA.  On June 13, 2017, APS received a demand for arbitration from NTECCSA in connection withNote 17 of the Four Corners CSA.  NTEC originally sought a declaratory judgmentNotes to support its interpretation of a provision regarding uncontrollable forcesConsolidated Financial Statements in the agreement relating to the annual minimum quantities of coal to be purchased by the Four Corners owners. NTEC also alleged a shortfall in those purchases for the initial contract year, which ended June 30, 2017, of which PNM’s share is estimated to be approximately $6.5 million.  On September 20, 2017, NTEC amended its demand for arbitration removing the request for a declaratory judgment. PNM’s share of the total estimated alleged shortfall through March 31, 2018 is estimated to be $11.6 million. An arbitration regarding the alleged shortfall in the first contract year is scheduled for May 21, 2018. PNM anticipates that substantially all of any amount it ultimately is required to pay would be collected through the FPPAC. Although PNM cannot predict the timing or outcome of the arbitration, the outcome is not expected to have a material impactAnnual Reports on its financial position, results of operations, or cash flows.Form 10-K.
Coal Mine Reclamation
As indicated under Coal Combustion ByproductsResiduals Waste Disposal above, SJGS currently disposes of CCBsCCRs in the surface mine pits adjacent to the plant and Four Corners disposes of CCBsCCRs in ash ponds and dry storage areas. As discussed in Note 16 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K, in conjunction with the shutdown of SJGS Units 2 and 3 to comply with the BART requirements of the CAA, the SJGS participants requested that the coal mine reclamation study for SJGS be updated as of December 31, 2016. Thatperiodically. The SJGS RA required PNM to complete an update to the reclamation cost estimate reflectsafter the termsDecember 31, 2017 shutdown of the newSJGS Units 2 and 3. This reclamation services agreement with Westmorelandcost estimate was completed in October 2018 and assumed continuation of mining operations through 2053,2053. The 2018 study indicated a decrease in reclamation costs primarily driven by lower inflationary factors used to determine the estimated future cost of reclamation activities. PNM recorded its $2.5 million share of this decrease as wellof September 30, 2018 as regulatory disallowances and restructuring costs in the anticipated impactsCondensed Consolidated Statements of the shutdown of SGS Units 2 and 3Earnings.
As discussed above, on December 31, 2017. The current estimate for decommissioning2018, PNM submitted the mine serving Four Corners reflectsDecember 2018 Compliance Filing to the operation ofNMPRC indicating that, consistent with the mine through 2031, the term of the new agreement for coal supply.
Based on the 2016 estimates andconclusions reached in PNM’s current ownership2017 IRP (Note 12), PNM expects to retire its share of SJGS PNM’s remaining payments as of March 31,after the current SJGS CSA expires in mid-2022. PNM determined that recent events and circumstances regarding SJGS, including the December 2018 for mine reclamation, in future dollars, are estimated to be $99.7 million for the surface mines at both SJGS and Four Corners and $127.1 million for the underground mine at SJGS. At March 31, 2018 and December 31, 2017, liabilities, in current dollars, of $41.2 million and $41.4 million for surface mine reclamation and $15.1 million and $14.7 million for underground mine reclamation were recorded in other deferred credits.
As discussed in Note 12, PNM filed its 2017 IRP on July 3, 2017. The conclusions contained in the 2017 IRPCompliance Filing, indicate that it would be cost beneficial to PNM’s customers for PNM to retire its SJGS capacity in 2022 and for PNM to exit its ownership interest in Four Corners in 2031. The 2017 IRP is more likely than not a final determination of PNM’s future generation portfolio. Retiringthat PNM’s share of SJGS capacity and exiting Four Corners would require NMPRC approval of abandonment filings, whichwill be retired in 2022. As a result, in December 2018 PNM would make at appropriate times in the future. If the NMPRC orders the abandonment of those facilities, PNM would be required to remeasureagain remeasured its liability for coal mine reclamation for the mine that serves SJGS to reflect that reclamation activities wouldmay occur soonerbeginning in 2022, rather than currentlyin 2053 as previously anticipated. The remeasurement would likely resultThis estimate resulted in a significantan increase in PNM’s liability for SJGS mineoverall reclamation costs due to an increase in the amount of fill dirt required to remediate the mine areas thereby increasing the overall reclamation costs. PNM would record an additional amount when it is determined that the increase to the liability is probable and can be reasonably estimated, which would be dependent on receiving the NMPRC approvals indicated above. The amount of the increase in the liability would depend on the timing of those approvals and other regulatory actions, as well estimates made at that time of the costs to perform the future reclamation activities, including the then current inflation and discount rates. Preliminary calculations indicate the increase in PNM’s liability for SJGS mine reclamation as of December 31, 2017 would be approximately $35 million for the surface mine and $5 million for the underground mine. PNM would record a regulatory asset for amounts recoverable from ratepayers under existing or future orders of the NMPRC and amounts not recoverable would be expensed. PNM cannot predict what actions the NMPRC might take.

Under the terms of the SJGS CSA, PNM and the other SJGS owners are obligated to compensate SJCC for all reclamation costs associated with the supply of coal from the San Juan mine. The SJGS owners entered into a reclamation trust funds agreement to provide funding to compensate SJCC for post-term reclamation obligations. As part of the restructuring of SJGS ownership (see SJGS Ownership Restructuring Matters above), the SJGS owners negotiated the terms of an amended agreement to fund post-term reclamation obligations under the CSA. The trust funds agreement requires each owner to enter into an individual trust

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


the timing of activities necessary to reclaim the mine that serves SJGS. This remeasurement increased PNM’s liability for coal mine reclamation as of December 31, 2018 by $39.2 million, which reflects the increase in PNM’s obligation for both the underground and surface mines that serve SJGS. PNM recovers from retail customers reclamation costs associated with the underground mine. However, the NMPRC has capped the amount that can be collected from retail customers for final reclamation of the surface mines at $100.0 million. As a result, PNM recorded $9.4 million of the increase in the liability at December 31, 2018 related to the underground mine in regulatory assets on the Consolidated Balance Sheets and recorded the remaining $29.8 million associated with the surface mine as regulatory disallowances and restructuring costs on the Consolidated Statements of Earnings. PNM’s estimate of the costs necessary to reclaim the mine that serves SJGS is subject to many assumptions, including the timing of reclamation, generally accepted practices at the time reclamation activities occur, and then current inflation and discount rates. In addition, PNM may be exposed to additional loss if the cost of reclamation activities are not approved by the NMPRC in connection with the NMPRC approvals indicated above.
The current estimate for decommissioning the mine serving Four Corners reflects the operation of the mine through 2031, the term of the Four Corners CSA.
Based on the 2018 estimates and PNM’s ownership share of SJGS, PNM’s remaining payments as of March 31, 2019 for mine reclamation, in future dollars, are estimated to be $102.6 million for the surface mines at both SJGS and Four Corners and $40.0 million for the underground mine at SJGS. At March 31, 2019 and December 31, 2018, liabilities, in current dollars, of $70.4 million and $70.1 million for surface mine reclamation and $23.8 million and $23.2 million for underground mine reclamation were recorded in other deferred credits.

Under the terms of the SJGS CSA, PNM and the other SJGS owners are obligated to compensate WSJ LLC for all reclamation costs associated with the supply of coal from the San Juan mine. The SJGS owners entered into a reclamation trust funds agreement to provide funding to compensate WSJ LLC for post-term reclamation obligations. As discussed in Note 16 of the Notes to the Consolidated Financial Statements on Form 10-K, as part of the restructuring of SJGS ownership the SJGS owners negotiated the terms of an amended agreement to fund post-term reclamation obligations under the CSA. The trust funds agreement requires each owner to enter into an individual trust agreement with a financial institution as trustee, create an irrevocable reclamation trust, and periodically deposit funds into the reclamation trust for the owner’s share of the mine reclamation obligation. Deposits, which are based on funding curves, must be made on an annual basis. As part of the restructuring of SJGS ownership discussed above, the SJGS participants agreed to adjusted interim trust funding levels. PNM funded $5.8$10.0 million in 2017.December 2018. Based on PNM’s reclamation trust fund balance at March 31, 2018,2019, the current funding curves indicate PNM’s required contributions to its reclamation trust fund would be $7.5 million in 2018, $8.7$6.5 million in 2019, and $9.2$10.2 million in 2020.2020, and $10.9 million in 2021.
Under the Four Corners CSA, which became effective on July 7, 2016, PNM is required to fund its ownership share of estimated final reclamation costs in thirteen annual installments, beginning on August 1, 2016, into an irrevocable escrow account solely dedicated to the final reclamation cost of the surface mine at Four Corners. PNM contributed $2.3 million to the escrow account in 20172018 and anticipates providing additional funding of $2.3 million in each of 2018 and 2019.the years from 2019 through 2021.
PNM collects a provision for surface and underground mine reclamation costs in its rates. The NMPRC has capped the amount that can be collected from retail customers for final reclamation of the surface mines at $100.0 million. Previously, PNM recorded a regulatory asset for the $100.0 million and recovers the amortization of this regulatory asset in rates. If future estimates increase the liability for surface mine reclamation, the excess would be expensed at that time. RegulatoryThe impacts of changes in New Mexico state law as a result of the enactment of the ETA and regulatory determinations made by the NMPRC may also affect the impact on PNM.PNM’s financial position, results of operations, and cash flows. PNM is currently unable to determine the outcome of these matters or the range of possible impacts.

Continuous Highwall Mining Royalty Rate

In August 2013, the DOI Bureau of Land Management (“BLM”) issued a proposed rulemaking that would retroactively apply the surface mining royalty rate of 12.5% to continuous highwall mining (“CHM”).  Comments regarding the rulemaking were due on October 11, 2013 and PNM submitted comments in opposition to the proposed rule. There is no legal deadline for adoption of the final rule.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


SJCC utilized the CHM technique from 2000 to 2003 and, with the approval of the Farmington, New Mexico Field Office of BLM to reclassify the final highwall as underground reserves, applied the 8.0% underground mining royalty rate to coal mined using CHM and sold to SJGS.  In March 2001, SJCC learned that the DOI Minerals Management Service (“MMS”) disagreed with the application of the underground royalty rate to CHM.  In August 2006, SJCC and MMS entered into an agreement tolling the statute of limitations on any administrative action to recover unpaid royalties until BLM issued a final, non-appealable determination as to the proper rate for CHM-mined coal.  The proposed BLM rulemaking has the potential to terminate the tolling provision of the settlement agreement. Underpaid royalties of approximately $5 million for SJGS would become due if the proposed BLM rule is adopted as proposed.  PNM’s share of any amount that is ultimately paid would be approximately 46.3%, none of which would be passed through PNM’s FPPAC. PNM is unable to predict the outcome of this matter.

PVNGS Liability and Insurance Matters
Public liability for incidents at nuclear power plants is governed by the Price-Anderson Nuclear Industries Indemnity Act, which limits the liability of nuclear reactor owners to the amount of insurance available from both commercial sources and an industry-wide retrospective payment plan. In accordance with this act, the PVNGS participants are insured against public liability exposure for a nuclear incident up to $13.214.1 billion per occurrence. PVNGS maintains the maximum available nuclear liability insurance in the amount of $450 million, which is provided by American Nuclear Insurers. The remaining $12.713.6 billion is provided through a mandatory industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, PNM could be assessed retrospective premium adjustments. Based on PNM’s 10.2% interest in each of the three PVNGS units, PNM’s maximum potential retrospective premium assessment per incident for all three units is $38.941.6 million, with a maximum annual payment limitation of $5.86.2 million, to be adjusted periodically for inflation.

The PVNGS participants maintain insurance for damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. These coverages are provided by Nuclear Electric Insurance Limited (“NEIL”). The primary policy offered by NEIL contains a sublimit of $2.25 billion for non-nuclear property damage. If NEIL’s losses in any policy year exceed accumulated funds, PNM is subject to retrospective premium adjustments of $5.4 million for each retrospective premium assessment declared by NEIL’s Board of

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Directors due to losses. The insurance coverages discussed in this and the previous paragraph are subject to certain policy conditions, sublimits, and exclusions.
Water Supply
Because of New Mexico’s arid climate and periodic drought conditions, there is concern in New Mexico about the use of water, including that used for power generation. Although PNM does not believe that its operations will be materially affected by drought conditions at this time, it cannot forecast long-term weather patterns. Public policy, local, state and federal regulations, and litigation regarding water could also impact PNM operations. To help mitigate these risks, PNM has secured permanent groundwater rights for the existing plants at Reeves Station, Rio Bravo, Afton, Luna, Lordsburg, and La Luz. Water availability is not an issue for these plants at this time. However, prolonged drought, ESA activities, and a federal lawsuit by the State of Texas (suing the State of New Mexico over water deliveries) could pose a threat of reduced water availability for these plants.
For SJGS and Four Corners, PNM and APS have negotiated an agreement with the more senior water rights holders (tribes, municipalities, and agricultural interests) in the San Juan basin to mutually share the impacts of water shortages with tribes and other water users in the San Juan basin. The agreement to share shortages in 20172018 through 20202021 has been negotiated and awaits endorsementendorsed by the parties and is being reviewed by the New Mexico Office of the State Engineer.
In April 2010, APS signed an agreement on behalf of the PVNGS participants with five cities to provide cooling water essential to power production at PVNGS for 40 years.
PVNGS Water Supply Litigation
In 1986, an action commenced regarding the rights of APS and the other PVNGS participants to the use of groundwater and effluent at PVNGS. APS filed claims that dispute the court’s jurisdiction over PVNGS’ groundwater rights and their contractual rights to effluent relating to PVNGS and, alternatively, seek confirmation of those rights. In 1999, the Arizona Supreme Court issued a decision finding that certain groundwater rights may be available to the federal government and Indian tribes. In addition,

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


the Arizona Supreme Court issued a decision in 2000 affirming the lower court’s criteria for resolving groundwater claims. Litigation on these issues has continued in the trial court. No trial dates have been set in these matters. PNM does not expect that this litigation will have a material impact on its results of operation, financial position, or cash flows.
San Juan River Adjudication
In 1975, the State of New Mexico filed an action in New MexicoNM District Court to adjudicate all water rights in the San Juan River Stream System, including water used at Four Corners and SJGS. PNM was made a defendant in the litigation in 1976. In March 2009, then President Obama signed legislation confirming a 2005 settlement with the Navajo Nation. Under the terms of the settlement agreement, the Navajo Nation’s water rights would be settled and finally determined by entry by the court of two proposed adjudication decrees.  The court issued an order in August 2013 finding that no evidentiary hearing was warranted in the Navajo Nation proceeding and, on November 1, 2013, issued a Partial Final Judgment and Decree of the Water Rights of the Navajo Nation approving the proposed settlement with the Navajo Nation. Several parties filed a joint motion for a new trial, which was denied by the court. A number of parties subsequently appealed to the New Mexico Court of Appeals. PNM entered its appearance in the appellate case.case and supported the settlement agreement in the NM District Court. On April 3, 2018, the New Mexico Court of Appeals issued an order affirming the decision of the New MexicoNM District Court. Several parties filed motions requesting a rehearing with the New Mexico Court of Appeals seeking clarification of the order.order, which were denied. The court has not yet taken any action in response to these motions.State of New Mexico and various other appellants filed a Writ of Certiorari with the NM Supreme Court. The NM Supreme Court granted the State of New Mexico’s petition and denied the other parties’ requests. The issues regarding the Navajo Nation settlement have been briefed and are awaiting a decision by the NM Supreme Court. Adjudication of non-Indian water rights is ongoing.
PNM is participating in this proceeding since PNM’s water rights in the San Juan Basin may be affected by the rights recognized in the settlement agreement and adjudicated to the Navajo Nation, which comprise a significant portion of water available from sources on the San Juan River and in the San Juan Basin and which have priority in times of shortages. PNM is unable to predict the ultimate outcome of this matter or estimate the amount or range of potential loss and cannot determine the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners. Final resolution of the case cannot be expected for several years. An agreement reached with the Navajo Nation in 1985, however, provides that if Four Corners loses a portion of its rights in the adjudication, the Navajo Nation will provide, for an agreed upon cost, sufficient water from its allocation to offset the loss.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Rights-of-Way Matter

On January 28, 2014, the County Commission of Bernalillo County, New Mexico passed an ordinance requiring utilities to enter into a use agreement and pay a yet-to-be-determined fee as a condition to installing, maintaining, and operating facilities on county rights-of-way. The fee is purported to compensate the county for costs of administering and maintaining the rights-of-way, as well as for capital improvements. On February 27, 2014, PNM and other utilities filed a Complaint for Declaratory and Injunctive Relief in the United States District Court for the District of New Mexico challenging the validity of the ordinance. The court denied the utilities’ motion for judgment. The court further granted the County’s motion to dismiss the state law claims. The utilities filed an amended complaint reflecting the two federal claims remaining before the federal court. The utilities also filed a complaint in Bernalillo County, New Mexico District Court reflecting the state law countsmatters dismissed by the federal court. In subsequent briefing in federal court, the Countycounty filed a motion for judgment on one of the utilities’ claims, which was granted by the court, leaving a claim regarding telecommunications service as the remaining federal claim. On January 4, 2016, the utilities filed an Application for Interlocutory Appeal from the state court, which was denied. On March 28, 2017, the utilities filed a Writ of Certiorari with the NM Supreme Court, which was denied. The matter will proceedis proceeding in New MexicoNM District Court. The utilities and Bernalillo County reached a standstill agreement whereby the County would not take any enforcement action against the utilities pursuant to the ordinance during the pendency of the litigation, but not including any period for appeal of a judgment, or upon 30 days written notice by either the Countycounty or the utilities of their intention to terminate the agreement. Mediation was held on January 23, 2019. Discussions are continuing but the matter remains unresolved. If the challenges to the ordinance are unsuccessful, PNM believes any fees paid pursuant to the ordinance would be considered franchise fees and would be recoverable from customers. PNM is unable to predict the outcome of this matter or its impact on PNM’s operations.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Navajo Nation Allottee Matters
A putative class action was
In September 2012, 43 landowners filed againsta notice of appeal with the Bureau of Indian Affairs (“BIA”) appealing a March 2011 decision of the BIA Regional Director regarding renewal of a right-of-way for a PNM and other utilities in February 2009 in the United States District Court for the District of New Mexico. Plaintiffstransmission line. The landowners claim to be allottees, members of the Navajo Nation, who pursuant to the Dawes Act of 1887, were allotted ownership in land carved out of the Navajo Nation and allege that defendants, including PNM areis a rights-of-way granteesgrantee with rights-of-way across the allotted lands and are either in trespass or have paid insufficient fees for the grant of rights-of-way or both.  In March 2010, the court ordered that the entirety of the plaintiffs’ case be dismissed. The court did not grant plaintiffs leave to amend their complaint, finding that they instead must pursue and exhaust their administrative remedies before seeking redress in federal court.  In May 2010, plaintiffs filed a notice of appeal with the Bureau of Indian Affairs (“BIA”), which was denied by the BIA Regional Director. In May 2011, plaintiffs appealed the Regional Director’s decision to the DOI, Office of Hearings and Appeals, Interior Board of Indian Appeals. Following briefing on the merits, on August 20, 2013, that board issued a decision upholding the Regional Director’s decision that the allottees had failed to perfect their appeals, and dismissed the allottees’ appeals, without prejudice.  The allottees have not refiled their appeals. Although this matter was dismissed without prejudice, PNM considers the matter concluded. However, PNM continues to monitor this matter in order to preserve its interests regarding any PNM-acquired rights-of-way.
In a separate matter, in September 2012, 43 landowners claiming to be Navajo allottees filed a notice of appeal with the BIA appealing a March 2011 decision of the BIA Regional Director regarding renewal of a right-of-way for a PNM transmission line. The allottees, many of whom are also allottees in the above matter, generally allege that they were not paid fair market value for the right-of-way, that they were denied the opportunity to make a showing as to their view of fair market value, and thus denied due process. On January 6, 2014, PNM received notice that the BIA, Navajo Region, requested a review of an appraisal report on 58 allotment parcels. After review, the BIA concluded it would continue to rely on the values of the original appraisal. On March 27, 2014, while this matter was stayed, theThe allottees filed a motion to dismiss their appeal with prejudice.  Onprejudice, which was granted in April 2, 2014, the allottees’ appeal was dismissed with prejudice.2014. Subsequent to the dismissal, PNM received a letter from counsel on behalf of what appears to be a subset of the 43 landowner allottees involved in the appeal, notifying PNM that the specified allottees were revoking their consents for renewal of right of way on six specific allotments.  On January 22, 2015, PNM received a letter from the BIA Regional Director identifying ten allotments with rights-of-way renewals that were previously contested. The letter indicated that the renewals were not approved by the BIA because the previous consent obtained by PNM was later revoked, prior to BIA approval, by the majority owners of the allotments. It is the BIA Regional Director’s position that PNM must re-obtain consent from these landowners. On July 13, 2015, PNM filed a condemnation action in the NM District Court regarding the approximately 15.49 acres of land at issue. On December 1, 2015, the court ruled that PNM could not condemn two of the five allotments at issue based on the Navajo Nation’s fractional interest in the land. PNM filed a motion for reconsideration of this ruling, which was denied. On March 31, 2016, the Tenth Circuit granted PNM’s petition to appeal the December 1, 2015 ruling. On September 18, 2015, the allottees filed a separate complaint against PNM for federal trespass. Both matters have been

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


consolidated. On June 27, 2016, PNM filed its opening brief in the Tenth Circuit. Amicus briefs were filed in support of PNM’s position. On October 5, 2016, the United States, the Navajo Nation, and individual allottees filed their response briefs. After the response briefs were filed, other entities requested leave to file amicus briefs addressing arguments raised in the United States’ response brief. Oral argument before the Tenth Circuit was heard on January 17, 2017. On May 26, 2017, the Tenth Circuit affirmed the district court. On July 8, 2017, PNM filed a Motion for Reconsideration en banc with the Tenth Circuit. On July 21, 2017, the court denied PNM’s Motion for Reconsideration. On July 26, 2017, PNM filed a motion to stay implementation of the court’s decision,Circuit, which was denied. The NM District Court has stayed the case until May 15, 2018 based on the Navajo Nation’s acquisition of interests in two additional allotments and the unresolved ownership of the fifth allotment due to the owner’s death. On November 20, 2017, PNM filed its Petition for Writ of Certiorari with the US Supreme Court. On December 22, 2017, amicus briefs supporting PNM’s Petition for Writ of Certiorari were filed with the US Supreme Court. On March 23,April 30, 2018, responsesthe US Supreme Court declined to hear PNM’s petition were filed. On April 5, PNM filed its reply brief in support of its Petition for Writ of Certiorari.
The underlying litigation continues in the NM District Court. The NM District Court has not issued an updated scheduling order in the case due to the unresolved ownership of the fifth allotment. On March 27, 2019, several individual allottees filed a motion for partial summary judgment on the issue of trespass. Briefing is underway. PNM cannot predict the outcome of these matters.

Sales Tax Audits

In November 2011, PNMR completed the sale of its retail electric provider, which operated in Texas under the name First Choice Power (“First Choice”). Under the sale agreement, PNMR is contractually obligated for First Choice’s taxes relating to periods prior to the sale.

The Texas Comptroller of Public Accounts (“Comptroller”) has initiated audits of First Choice’s sales and use tax filings and miscellaneous gross receipts tax filings for periods prior to the sale. During the course of the audits, PNMR accrued an immaterial liability for items identified in the audits for which PNMR believed an unfavorable resolution was probable. The Comptroller has issued notifications of audit results indicating additional tax due of $5.0 million, plus penalties and interest. The primary issue in dispute is the disallowance by the auditor of the tax benefits of bad debt charge-offs and billing credits. On behalf of First Choice, PNMR filed requests for redetermination for both audits.

PNMR has engaged in continued discussions with the Comptroller, as well as supplying additional documentation in support of PNMR’s positions. If PNMR and the Comptroller do not reach agreement, this matter will go to hearing with the Texas State Office of Administrative Hearings. Although PNMR believes its positions are correct, it is unable to predict the outcome of this matter.

(12)Regulatory and Rate Matters

The Company is involved in various regulatory matters, some of which contain contingencies that are subject to the same uncertainties as those described in Note 11. Additional information concerning regulatory and rate matters is contained in Note 17 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K.
PNM

New Mexico General Rate Cases

New Mexico 2015 General Rate Case (“NM 2015 Rate Case”)

On August 27, 2015, PNM filed an application with the NMPRC for a general increase in retail electric rates. The application proposed a revenue increase of $123.5 million, including base non-fuel revenues of $121.7 million. PNM’s application was based on a future test year (“FTY”) period beginning October 1, 2015 and proposed a ROE of 10.5%. The primary drivers of PNM’s identified revenue deficiency were the cost of infrastructure investments, including depreciation expense based on an updated depreciation study, and a decline in energy sales as a result of PNM’s successful energy efficiency programs and other economic factors. The application included several proposed changes in rate design to establish fair and equitable pricing across rate classes and to better align cost recovery with cost causation. Specific rate design proposals included higher customer and demand charges, a revenue decoupling pilot program applicable to residential and small commercial customers, a re-allocation of revenue among PNM’s customer classes, a new economic development rate, and continuation of PNM’s renewable energy rider. PNM requested that the proposed new rates become effective beginning in July 2016. A public hearing on the proposed new rates was held in

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


April 2016. Subsequent to this hearing, the NMPRC ordered PNM to file additional testimony regarding PNM’s interests in PVNGS, including the 64.1 MW of PVNGS Unit 2 that PNM repurchased in January 2016, pursuant to the terms of the initial

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


sales-leaseback transactions (Note 13). A subsequent public hearing was held in June 2016. After the June hearing, PNM and other parties were ordered to file supplemental briefs and to provide final recommended revenue requirements that incorporated fuel savings that PNM implemented effective January 1, 2016 from PNM’s SJGS coal supply agreement (“SJGS CSA”)CSA (Note 11).  PNM’s filing indicated that recovery for fuel related costs would be reduced by approximately $42.9 million reflecting the current SJGS CSA, which also reduced the request for base non-fuel related revenues by $0.2 million to $121.5 million.

On August 4, 2016, the Hearing Examiner in the case issued a recommended decision (the “August 2016 RD”).  The August 2016 RD proposed an increase in non-fuel revenues of $41.3 million compared to the $121.5 million increase requested by PNM. Major components of the difference in the increase in non-fuel revenues proposed in the August 2016 RD, included:

A ROE of 9.575% compared to the 10.5% requested by PNM
Disallowing recovery of the entire $163.3 million purchase price for the January 15, 2016 purchases of the assets underlying three leases of portions of PVNGS Unit 2 (Note 13); the August 2016 RD proposed that power from the previously leased assets, aggregating 64.1 MW of capacity, be dedicated to serving New Mexico retail customers with those customers being charged for the costs of fuel and operating and maintenance expenses (other than property taxes, which were $0.8 million per year at that time)when the August 2016 RD was issued), but the customers would not bear any capital or depreciation costs other than those related to improvements made after the date of the original leases
Disallowing recovery from retail customers of the rent expense, which aggregates $18.1 million per year, under the four leases of capacity in PVNGS Unit 1 that were extended for eight years beginning January 15, 2015 and the one lease of capacity in PVNGS Unit 2 that was extended for eight years beginning January 15, 2016 (Note 13) and related property taxes, which were $1.5 million per year at that time;when the August 2016 RD was issued; the August 2016 RD proposed that power from the leased assets, aggregating 114.6 MW of capacity, be dedicated to serving New Mexico retail customers with those customers being charged for the costs of fuel and operating and maintenance expense, except that customers would not bear rental costs or property taxes
Disallowing recovery of the costs of converting SJGS Units 1 and 4 to BDT, which is required by the NSR permit for SJGS, (Note 11); PNM’s share of the costs of installing the BDT equipment was $52.3 million of which $40.0 million was included in rate base in PNM’s rate request
Disallowing recovery of $4.5 million of amounts recorded as regulatory assets and deferred charges

The August 2016 RD recommended that the NMPRC find PNM was imprudent in the actions taken to purchase the previously leased 64.1 MW of capacity in PVNGS Unit 2, extending the leases for 114.6 MW of capacity of PVNGS Units 1 and 2, and installing the BDT equipment on SJGS Units 1 and 4. The August 2016 RD also proposed that all fuel costs be removed from base rates and be recovered through the FPPAC. In addition, the August 2016 RD would remove recovery of the costs of power obtained from New Mexico Wind from the FPPAC and include recovery of those costs through PNM’s renewable energy rider discussed below. The August 2016 RD recommended continuation of the renewable energy rider and certain aspects of PNM’s proposals regarding rate design but would not approve certain other rate design proposals or PNM’s request for a revenue decoupling pilot program. The August 2016 RD proposed approving PNM’s proposals for revised depreciation rates (except the August 2016 RD would requirefor requiring depreciation on Four Corners be calculated based on a 2041 life rather than the 2031 life proposed by PNM), the inclusion of construction work in progress in rate base, and ratemaking treatment of the “prepaid pension asset.” The August 2016 RD would creditproposed retail customers withreceive 100% of the New Mexico jurisdictional portion of revenues from “refined coal” (a third-party pre-treatment process) at SJGS. The August 2016 RD did not preclude PNM from supporting the prudence of the PVNGS purchases and lease renewals in its next general rate case and seeking recovery of those costs. PNM disagreed with many of the key conclusions reached by the Hearing Examiner in the August 2016 RD and filed exceptions to defend its prudent utility investments. Other parties also filed exceptions to the August 2016 RD.  

On September 28, 2016, the NMPRC issued an order that authorized PNM to implement an increase in non-fuel rates of $61.2 million, effective for bills sent to customers after September 30, 2016. The order generally approved the August 2016 RD, but with certain significant modifications. The modifications to the August 2016 RD included:

Inclusion of the January 2016 purchase of the assets underlying three leases of capacity, aggregating 64.1 MW, of PVNGS Unit 2 at an initial rate base value of $83.7 million; and disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW was being leased by PNM, which aggregated $43.8 million when the order was issued

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


capitalized improvements made during the period the 64.1 MW was being leased by PNM, which aggregated $43.8 million when the order was issued
Allowing full recovery of the rent expense and property taxes associated with the extended leases for capacity, aggregating 114.6 MW, in Palo Verde Units 1 and 2
Disallowance of the recovery of any future contributions for PVNGS decommissioning costs related to the 64.1 MW of capacity purchased in January 2016 and the 114.6 MW of capacity under the extended leases
Recovery of assumed operating and maintenance expense savings of $0.3 million annually related to BDT

On September 30, 2016, PNM filed a notice of appeal with the NM Supreme Court regarding the order in the NM 2015 Rate Case. Subsequently, NEE, NMIEC, and ABCWUA filed notices of cross-appeal to PNM’s appeal. On October 26, 2016, PNM filed a statement of issues related to its appeal with the NM Supreme Court, which stated PNM is appealing the NMPRC’s determination that PNM was imprudent in the actions taken to purchase the previously leased 64.1 MW of capacity in PVNGS Unit 2, extending the leases for 114.6 MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. Specifically,In addition, PNM’s statement indicated it is appealing the following specific elements of the NMPRC’s order:

Disallowance of recovery of the full purchase price, representing fair market value, of the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016
Disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity was leased by PNM
Disallowance of recovery of future contributions for PVNGS decommissioning attributable to the 64.1 MW of purchased capacity and the 114.6 MW of capacity under the extended leases
Disallowance of recovery of the costs of converting SJGS Units 1 and 4 to BDT

The issues that are being appealed by the various cross-appellants include:

The NMPRC allowing PNM to recover the costs of the lease extensions for the 114.6 MW of PVNGS Units 1 and 2 and any of the purchase price for the 64.1 MW in PVNGS Unit 2
The NMPRC allowing PNM to recover the costs incurred under the new coal supply contract for Four Corners CSA
The revised method to collect PNM’s fuel and purchased power costs under the FPPAC
The final rate design
The NMPRC allowing PNM to include the “prepaid pension asset” in rate base

NEE subsequently filed a motion for a partial stay of the order at the NM Supreme Court. This motion was denied. The NM Supreme Court orally stated that the court’s intent was to request that PNM reimburse ratepayers for any amount overcharged should the cross-appellants prevail on the merits.

On February 17, 2017, PNM filed its Brief in Chief, and pursuant to the court’s rules, the briefing schedule was completed on July 21, 2017. Oral argument at the NM Supreme Court was held on October 30, 2017. Although appeals of regulatory actions of the NMPRC have a priority at the NM Supreme Court under New Mexico law, there is no required time frame for the court to act on the appeals.

GAAP requires a loss to be recognized when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. When there is a range of the amount of the probable loss, the minimum amount of the range is to be accrued unless an amount within the range is a better estimate than any other amount. As of September 30, 2016, PNM evaluated the accounting consequences of the order in the NM 2015 Rate Case and the likelihood of being successful on the issues it is appealing in the NM Supreme Court as required under GAAP. The evaluation indicated it is reasonably possible that PNM will be successful on the issues it is appealing. If the NM Supreme Court rules in PNM’s favor on some or all of the issues, those issues would be remanded back to the NMPRC for further action. As of September 30, 2016, PNM estimated it would take a minimum of 15 months from the date PNM filed its appeal for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues. During such time, the rates specified in the order would remain in effect. PNM concluded that a range of probable loss resulted from the NMPRC order in the NM 2015 Rate Case; that the minimum amount of loss was 15 months of capital cost recovery that the order disallowed for PNM’s investments in the PVNGS Unit 2 purchases, PVNGS Unit 2 capitalized improvements, and BDT; and that no amount within the range of possible loss was a better estimate than any other amount.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Accordingly, PNM recorded a pre-tax regulatory disallowance of $6.8 million at September 30, 2016 for the capital costs that willwould not be coveredrecovered during that 15 month15-month appeal period. In addition, PNM recorded a pre-tax regulatory disallowance for $4.5 million of costs recorded as regulatory assets and deferred charges (which the order disallowed and which PNM did not challenge in its appeal) since PNM could no longer assert that those assets were probable of being recovered through the ratemaking process.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



PNM also evaluated the accounting consequences of the issues that are being appealed by the cross-appellants. PNM does not believe the issues raised in the cross-appeals have substantial merit. Accordingly, PNM does not believe that the likelihood of the cross-appeals being successful is probable and, therefore, no loss washas been recorded in 2016 related to the issues subject to the cross-appeals.

Since theThe NM Supreme Court did not issue a decision on the appeals related to the NM 2015 Rate Case by December 31, 2017, which was 15 months from the date of the NMPRC’s order in that case,case. As a result, PNM reevaluated the accounting consequences of the order in the NM 2015 Rate Case.Case resulting in an additional pre-tax loss of $3.1 million, which represented seven months of capital cost recovery that the order disallowed and was not expected to be recovered through July 31, 2018.

During the second half of 2018, PNM continues to believeupdated its evaluation of the estimated time frame it would take for resolution of the matter resulting in additional pre-tax losses of $4.0 million, representing capital cost recovery that it is reasonably possiblethe order disallowed and that PNM willestimated would not be successful on the issues it is appealing and that it is not probable the cross appeals will be successful. However, based on the proceedings to date in the appeal process and other actions byrecovered through April 30, 2019.

Since the NM Supreme Court did not issue a decision on the appeals by March 31, 2019, PNM again reevaluated the accounting consequences of the order in the NM 2015 Rate Case. As of March 31, 2019, PNM estimates that it will take seven months from December 31, 2017the most likely period for the NM Supreme Court to issue a decision in the case and for the NMPRC to take any on any remanded issues to be addressed by the NMPRC. Accordingly,is four months. As a result, PNM recorded an additional pre-tax loss of $3.1$1.3 million at Decemberas of March 31, 2017,2019, representing an additional disallowance of seven months of capital cost recovery that the order disallowed.disallowed and will not be recovered through July 31, 2019. Further losses will be recorded if the currently estimated time frame for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues is extended.

PNM continues to believe that the disallowed investments, which are the subject of PNM’s appeal, were prudent and that PNM is entitled to full recovery of those investments through the ratemaking process. Although PNM believes it is reasonably possible that its appeals will be successful, it cannot predict what decision the NM Supreme Court will reach or what further actions the NMPRC will take on any issues remanded to it by the court. If PNM’s appeal is unsuccessful, PNM would record further pre-tax losses related to the capitalized costs for any unsuccessful issues. The impacts of not recovering future contributions for decommissioning would be recognized in future periods reflecting that rates charged to customers would not recover those costs as they are incurred. The amounts of any such losses to be recorded would depend on the ultimate outcome of the appeal and NMPRC process, as well as the actual amounts reflected on PNM books at the time of the resolution. However, based on the book values recorded by PNM as of March 31, 2018,2019, such losses could include:

The remaining costs to acquire the assets previously leased under three leases aggregating 64.1 MW of PVNGS Unit 2 capacity in excess of the recovery permitted under the NMPRC’s order; the net book value of such excess amount was $75.3$72.6 million, after considering the losses recorded in 2016 and 2017to date
The undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity in PVNGS Unit 2 purchased by PNM in January 2016 was being leased by PNM; the net book value of these improvements was $39.1$37.6 million, after considering the losses recorded in 2016 and 2017to date
The remaining costs to convert SJGS Units 1 and 4 to BDT; the net book value of these assets was $49.4$49.7 million, after considering the losses recorded in 2016 and 2017to date

Although PNM does not believe that the likelihood of the cross-appeals being successful is probable, it is unable to predict what decision the NM Supreme Court will reach. If the NM Supreme Court were to overturn all of the issues subject to the cross-appeals and, upon remand, the NMPRC did not provide any cost recovery of those items, PNM would write-off all of the costs to acquire the assets previously leased under three leases, aggregating 64.1 MW of PVNGS Unit 2 capacity, totaling $150.4$144.7 million (which amount includes $75.3$72.6 million that is the subject of PNM’s appeal discussed above) at March 31, 2018,2019, after considering the losses recorded in 2016 and 2017.to date. The impacts of not recovering costs for the lease extensions, new coal supply contract for Four Corners, and “prepaid pension asset” in rate base would be recognized in future periods reflecting that rates charged to customers would not recover those costs as they are incurred. The outcomes of the cross-appeals regarding the FPPAC and rate design should not have a financial impact to PNM.

PNM is unable to predict the outcome of this matter.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


New Mexico 2016 General Rate Case (“NM 2016 Rate Case”)

On December 7, 2016, PNM filed an application with the NMPRC for a general increase in retail electric rates. PNM did not include any of the costs disallowed in the NM 2015 Rate Case that are at issue in its pending appeal to the NM Supreme Court. Key aspects of PNM’s request were:

Anoriginal application used a FTY beginning January 1, 2018 and requested an increase in base non-fuel revenues of $99.2 million
based on an ROE of 10.125%. The primary drivers of PNM’s revenue deficiency included implementation of modifications to PNM’s resource portfolio, which were approved by the NMPRC in December 2015 as part of the SJGS regional haze compliance plan, infrastructure investments, including environmental upgrades at Four Corners, declines in forecasted energy sales due to successful energy efficiency programs and other economic factors, and updates to FERC/retail jurisdictional allocations.
Based on
After extensive settlement negotiations and public proceedings, the NMPRC issued a FTY beginningRevised Order Partially Adopting Certification of Stipulation dated January 1,10, 2018 (the NMPRC’s rules specify that a FTY is a 12 month period beginning up to 13 months after the filing of a rate case application)
ROE of 10.125%
Drivers of revenue deficiency
◦Implementation of the modifications in PNM’s resource portfolio, which were previously approved by the NMPRC as part of the SJGS regional haze compliance plan (Note 11)
◦Infrastructure investments, including environmental upgrades at Four Corners
◦Declines in forecasted energy sales due to successful energy efficiency programs and other economic factors
◦Updates in the FERC/retail jurisdictional allocations
Proposed changes to rate design to establish fair and equitable pricing across rate classes and to better align cost recovery with cost causation
◦Increased customer and demand charges
◦A “lost contribution to fixed cost” mechanism applicable to residential and small commercial customers to address the regulatory disincentive associated with PNM’s energy efficiency programs

“Revised Order”). The NMPRC scheduled a public hearing to begin on June 5, 2017, ordered that a settlement conference be held, and that any resulting stipulation should be filed by March 27, 2017. Settlement discussions were held, but no agreements were reached by March 27, 2017, after which the date for filing a stipulation was extended. In early May 2017, PNM and thirteen intervenors (the “Signatories”) entered into a comprehensive stipulation. On May 12, 2017, the Hearing Examiners issued an order rejecting the stipulation in its then current form, but allowed the Signatories to revise the stipulation. On May 23, 2017, the Signatories filed a revised stipulation that addressed the issues raised by the Hearing Examiners. NEE was the sole party opposing the revised stipulation. Thekey terms of the revised stipulation, which required NMPRC approval in order to take effect, included:Revised Order include:

A revenueAn increase in base non-fuel revenues totaling $62.3$10.3 million, withwhich includes a reduction to reflect the impact of the decrease in the federal corporate income tax rate and updates to PNM’s cost of debt (aggregating an initial increase of $32.3estimated $47.6 million beginning January 1, 2018 and the remaining increase beginning January 1, 2019annually)
A ROE of 9.575%
Full recoveryReturning to customers over a three-year period the benefit of the reduction in the New Mexico corporate income tax rate (Note 14) to the extent attributable to PNM’s retail operations
Disallowing PNM’s ability to collect an equity return on its $90.1 million investment in SCRs at Four Corners and on $58.0 million of then projected capital improvements during the period July 1, 2016 through December 31, 2018, but allowing recovery of the total $148.1 million of investments with a debt-only return
An agreement to not implement non-fuel base rate changes, other than changes related to PNM’s rate riders, with an effective date prior to January 1, 2020
An agreementA requirement to adjust the January 2019 increase for certain changes in federal corporate tax laws enacted prior to November 1, 2018 and effective and applicable to PNM by January 1, 2019 and to true-up PNM’s cost of debt for refinancing transactions through 2018
Returning to customers over a three-year period the benefit of the reduction in the New Mexico corporate income tax rate (Note 14) to the extent attributable to PNM’s retail operations
PNM would withdraw its proposal for a “lost contribution to fixed cost” mechanism with the issue to be addressed in a future docket
PNM would perform a cost benefit analysis in its 2020 IRP of the impact of a possible early exit from Four Corners in 2024 and 2028

A hearing on the revised stipulation was held in August 2017. On October 31, 2017, the Hearing Examiners issued a Certification of Stipulation recommending a Modified Revised Stipulation. The significant changes to the revised stipulation in the Hearing Examiners’ Modified Revised Stipulation included:

Identifying PNM’s decision to continue its participation in Four Corners as imprudent
Disallowing PNM’s ability to collect a debt or equity return on its $90.1 million investment in SCRs at Four Corners and on $58.0 million of projected capital improvements during the period July 1, 2016 through December 31, 2018

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recommending a temporary disallowance of $36.8 million of PNM’s projected capital improvements at SJGS through December 31, 2018

On December 20, 2017, the NMPRC issued anOrder Partially Adopting Certification of Stipulation, which approved the Hearing Examiners’ Certification of Stipulation with certain changes. Substantive changes from the Certification of Stipulation included requiring the impacts of changes related to the reduction in the federal corporate income tax rate be implemented effective January 1, 2018 rather than January 1, 2019 and deferring further consideration regardingconsider the prudency of PNM’s decision to continue its participation in Four Corners toin a future proceeding.proceeding

On December 28, 2017 PNM filed a Motion for Rehearing and Request for Oral ArgumentaskingIn accordance with the NMPRC to vacate their December 20, 2017 order and allow the parties to present oral argument. Additionally, several Signatories to the revised stipulation filed a Joint Motion for Partial Rehearing asking that the NMPRC approve the revised stipulation without modification. On January 2, 2018, NEE filed a response urging the NMPRC to reject PNM’s Motion.

On January 3, 2018, the NMPRC vacated its December 20, 2017 order and granted the motions for rehearing. The rehearing was held on January 10, 2018.

The NMPRC issued a Revised Order Partially Adopting Certification of Stipulation dated January 10, 2018 (the “Revised Order”). The Revised Order approved the Hearing Examiners’ Certification of Stipulation with certain changes including:

Requiring the impacts of changes related to the reduction in the federal corporate income tax rate and PNM’s cost of debt (aggregating an estimated $47.6 million) be implemented in 2018 rather than January 1, 2019
Deferring further consideration regarding the prudency of PNM’s decision to continue its participation in Four Corners to PNM’s next rate case
Disallowing PNM’s ability to collect an equity return on its $90.1 million investment in SCRs at Four Corners and on $58.0 million of projected capital improvements during the period July 1, 2016 through December 31, 2018, but allowed recovery of the total $148.1 million of investments with a debt-only return
Requiring PNM to reduce the requested $62.3 million increase in non-fuel revenue by $9.1 million
Implementation of the first phase of the rate increase for services rendered, rather than bills rendered, beginning February 1, 2018 and of the second for services rendered beginning January 1, 2019

On January 16, 2018, PNM requested clarifying changes to the Revised Order to adjust the $9.1 million reduction to $4.4 million, asserting that $4.7 million of the reduction was duplicative. On January 17, 2018, the NMPRC issued an order approving the adjustment requested by PNM. On January 19, 2018, PNMsettlement agreement and the Signatories filed a Joint Notice of All Signatories of Acceptance of the Order on Notice of Acceptance. On January 31, 2018, the NMPRC issued an order closing the docket in the NM 2016 Rate Case. After implementation of changes to the federal corporate income tax rate and cost of debt, theNMPRC’s final order, results in a net increase to PNM’s non-fuel revenue requirement of $10.3 million. PNM implemented 50% of the approved increase for service rendered beginning February 1, 2018 and will implementimplemented the rest of the increase for service rendered beginning January 1, 2019.

GAAP required PNM to recognize a loss to reflect that PNM will not earn an equity return on $148.1 million of investments at Four Corners. As of December 31, 2017, PNM recorded a pre-tax regulatory disallowance of $27.9 million. The amount of the loss was calculated by determining the present value of disallowed cash flows, which equals the difference between the cash flows resulting from recovery of those investments at PNM’s embedded cost of debt and the cash flows with a full return on investment (including an equity component), and discounting the differences at PNM’s WACC.

On February 7, 2018, NEE filed a notice of appeal with the NM Supreme Court asking the court to review the NMPRC’s decisions in the NM 2016 Rate Case. On March 7, 2018, NEE filed its statement of issues with the NM Supreme Court requesting, among other things, that the NMPRC be required to identify PNM’s decision to continue its participation in Four Corners as imprudent and to deny any recovery related to PNM’s $148.1 million investments in that facility. Although PNM does not believe it is probable that NEE’s appeal will be successful, it is unable to predict what decision the NM Supreme Court will reach. If the NM Supreme Court were to remand the case to the NMPRC and the NMPRC identified PNM’s continued involvement in Four Corners as imprudent with no recovery of the $148.1 million of investments in Four Corners, PNM would be required to record

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


additional losses for the remaining amount of those investments (after considering the $27.9 million disallowance recorded in 2017). In addition, PNM’s future investments in Four Corners, which could be required under the participation agreement governing that facility, could also be subject to disallowance. PNM cannot predict the outcome of this matter.

Investigation/Rulemaking Concerning NMPRC Ratemaking Policies

On March 22, 2017, the NMPRC issued an order opening an investigation and rulemaking to simplify and increase “the transparency of NMPRC rate cases by reducing the number of issues litigated in rate cases,” and provide a “more level playing field among intervenors and NMPRC staff on the one hand, and the utilities on the other.” The order posed the following questions: whether a standardized method should be established for determining ROE; should the ROE be subject to reward or penalty based on utilities meeting or failing to meet certain metrics, which could include customer complaints, outages, peak demand reductions, and RPS and energy efficiency compliance; whether recovery of utility rate case expenses should be limited to 50% unless the case is settled; whether intervenors should be allowed to recover their expenses if the NMPRC accepts their position; whether parties should have access to software used by utilities to support their positions; and how regulatory assets should be authorized and recovered. Initial comments were filed in July 2017 and several public workshops have been held. To date, no agreement has been reached. PNM cannot predict the outcome of this proceeding.

Renewable Portfolio Standard
ThePrior to the enactment of the ETA, the REA establishesestablished a mandatory RPS requiring a utility to acquire a renewable energy portfolio equal to 10% of retail electric sales by 2011, 15% by 2015, and 20% by 2020. PNM files annualAs discussed in Note 11, the ETA was signed into law on March 22, 2019. The ETA amends the REA and requires utilities operating in New Mexico to have renewable portfolios equal to 20% by 2020, 40% by 2025, 50% by 2030, 80% by 2040, and 100% zero-carbon energy procurement plans for approval by the NMPRC.2045. The NMPRC requires renewable energy portfolios to be “fully diversified.” The currentETA also removes diversity requirements which are subjectand certain customer caps and exemptions relating to the limitationapplication of the RCT, are minimums of RPS under the REA.30% wind, 20% solar, 3% distributed generation, and 5% other.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The REA provides for streamlined proceedings for approval of utilities’ renewable energy procurement plans, assures that utilities recover costs incurred consistent with approved procurement plans, and requires the NMPRC to establish a RCT for the procurement of renewable resources to prevent excessive costs being added to rates. Currently, the RCT is set at 3% of customers’ annual electric charges. The ETA sets a new threshold based on average annual levelized resource cost basis. PNM makes renewable procurements consistent with the NMPRC approved plans. PNM recovers certain renewable procurement costs from customers through a rate rider. See Renewable Energy Rider below.

Included in PNM’s approved procurement plans are the following renewable energy resources:
107157 MW of PNM-owned solar PVsolar-PV facilities, including 40 MW constructed in 2015 that were identified as a cost-effective resource in PNM’s application to retire SJGS Units 2 and 3 (Note 11) and are being recovered in the base rates provided in the NM 2015 Rate Case discussed above rather than through PNM’s renewable energy rider; and an additional procurement of 1.550 MW of PNM-owned solar PVsolar-PV facilities to supplyapproved by the energy sold underNMPRC in PNM’s voluntary2018 renewable energy tariffprocurement plan and are expected to be placed in commercial operation by the end of 2019
A PPA through 2044 for the output of New Mexico Wind, having a current aggregate capacity of 204 MW, and a PPA through 2035 for the output of Red Mesa Wind, an existing wind generator having an aggregate capacity of 102 MW
A PPA through 2042 for the output of the Lightning Dock Geothermal facility; the geothermal facility began providing power to PNM in January 2014; the current capacity of the facility is 415 MW
Solar distributed generation, aggregating 86.2106.8 MW at March 31, 2018,2019, owned by customers or third parties from whom PNM purchases any net excess output and RECs
Solar and wind RECs as needed to meet the RPS requirements

PNM filed its 2016 renewable energy procurement plan on June 1, 2015. The plan met RPS and diversity requirements within the RCT in 2016 and 2017 using existing resources and did not propose any significant new procurements. The NMPRC approved the plan in November 2015, and, after granting a rehearing motion to consider issues regarding the rate treatment of certain customers eligible for a cap on, or an exemption from, RPS procurement, the NMPRC again approved the plan in an order issued on February 3, 2016. The NMPRC deferred issues related to capped and exempt customers to PNM’s NM 2015 Rate Case and to a new case, which the NMPRC subsequently initiated through issuance of an order to show cause. The NM 2015 Rate Case and show cause proceeding were to examine whether PNM miscalculated the FPPAC factor and base fuel costs in its treatment of renewable energy costs and application of the renewable procurement cost caps and exemptions. The show cause proceeding was

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


stayed pending the outcome of the NM 2015 Rate Case. The September 28, 2016 order in the NM 2015 Rate Case directed that the cost of New Mexico Wind be recovered through PNM’s renewable rider, rather than the FPPAC, and ordered certain other modifications regarding the accounting for renewable energy in PNM’s FPPAC. These modifications do not affect the amount of fuel and purchased power or renewable costs that PNM will collect. No action has been taken in the show cause proceeding and PNM cannot predict its outcome.

PNM filed its 2017 renewable energy procurement plan on June 1, 2016. The plan met RPS and diversity requirements for 2017 and 2018 using existing resources and PNM did not propose any significant new procurements. PNM projected that its plan would slightly exceed the RCT in 2017 and would be within the RCT in 2018. PNM requested a variance from the RCT in 2017 to the extent the NMPRC determined a variance was necessary. A public hearing was held on September 26, 2016. On October 21, 2016, the Hearing Examiner issued a recommended decision recommending that the plan be approved as filed and also found that a variance from the RCT was not required. The NMPRC approved the recommended decision on November 23, 2016.

On June 1, 2017, PNM filed its 2018 renewable energy procurement plan. PNM requested approval to procure an additional 80 GWh in 2019 and 105 GWh in 2020 from a re-powering of New Mexico Wind; approval to procure an additional 55 GWh in 2019 and 77 GWh in 2020 from a re-powering of Lightning Dock Geothermal; approval to procure 50 MW of new solar facilities to be constructed beginning in 2018, and continuation of customer REC purchase programs and other purchases of RECs to ensure annual compliance with the RPS. PNM’s proposed procurement cost for 2018 and 2019 will be within the RCT. The plan also sought a variance from the “other” diversity category in 2018 due to a revised production forecast of the Lightning Dock Geothermal facility in 2018. A public hearing on the application was held in September 2017. On October 17, 2017, the Hearing Examiner issued a recommended decision that PNM’s 2018 renewable energy procurement plan be approved by the NMPRC, except for the re-powering of Lightning Dock Geothermal and PNM’s request to procure 50 MW of new solar facilities. The Hearing Examiner recommended that the PPA for the output of energy from Lightning Dock Geothermal be terminated effective January 1, 2018. The Hearing Examiner also recommended that PNM be required to issue another all-renewables RFP allowing developers to utilize PNM-owned sites to construct facilities, the output from which facilities would be sold to PNM through PPAs. PNM strongly disagreed with the Hearing Examiner’s recommendations and filed exceptions contesting the Hearing Examiner’s proposals. On November 15, 2017, the NMPRC issued an order approving PNM’s plan and rejecting the Hearing Examiner’s recommendations. On November 29, 2017, NMIEC filed an appeal with the NM Supreme Court objecting to the fuel allocation methodology. On December 14, 2017, NEE filed a motion to intervene and cross-appeal objecting to the approval of the 50 MW of new solar facilities. On December 18, 2017, PNM filed a motion to intervene, which was granted. NMIEC filed a motion for a partial stay of the NMPRC order, and PNM filed a response opposingwhich was denied. Briefing on NMIEC’s appeal of the request.fuel allocation methodology is complete. On February 27,June 20, 2018, the court issued an order denying the motion for stay. On April 9, 2018, NMIECNEE filed its Brief in Chief.Chief with the NM Supreme Court stating, among other things, that PNM’s process favored ownership of the 50 MW solar facilities compared to PPAs. PNM and the NMPRC each filed Answer briefs are dueBriefs on September 4, 2018 stating there is substantial evidence in the case record to support the NMPRC’s decision and that PNM’s RFP process was reasonable, complied with RPS requirements, and consistent with industry standards. NEE’s Reply Brief was filed on October 15, 2018. On May 29, 2018.6, 2019, the NM Supreme Court heard oral arguments on the issues of the fuel allocation methodology and the reasonableness of the RFP process. PNM cannot predict the outcome of this matter.

On June 1, 2018, PNM filed its 2019 renewable energy procurement plan. The plan meets RPS and diversity requirements for 2019 and 2020 using resources already approved by the NMPRC and did not propose any significant new procurements. PNM projects that the plan will be within the RCT in 2019 and will slightly exceed the current RCT in 2020. Public hearings were held on the case in September and October 2018. The NMPRC approved PNM’s 2019 renewable energy procurement plan on November 28, 2018.
As discussed above, the ETA removes certain customer caps and exemptions relating to the application of the RPS under the REA. As a result of these changes, PNM will be required to procure additional energy from renewable resources to meet the 20% by 2020 requirement under the RPS. PNM expects to request NMPRC approval of a PPA for wind generation capacity, which

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


would utilize the BB2 Line to deliver the power, to meet this requirement. See additional discussion below under Application For a New 345 KV Transmission Line. PNM cannot predict the outcome of this matter.
Renewable Energy Rider
The NMPRC has authorized PNM to recover certain renewable procurement costs through a rate rider billed on a per KWh basis. In PNM’s NM 2015 Rate Case, the NMPRC authorized continuation of the renewable rider. In its 20182019 renewable energy procurement plan case, which was approved by the NMPRC on November 28, 2018, PNM proposed to collect $43.5$49.6 million for the year. The 20182019 renewable energy procurement plan became effective on January 1, 2018.2019. PNM recorded revenues from the rider of $10.9$12.7 million and $12.2$10.9 million in the three months ended March 31, 20182019 and 2017.2018.
Under the renewable rider, if PNM’s earned rate of return on jurisdictional equity in a calendar year, adjusted for weather and other items not representative of normal operations, exceeds the NMPRC-approved rate by 0.5%, PNM is required to refund the excess to customers during May through December of the following year. PNM’s annual compliance filings with the NMPRC show that its rate of return on jurisdictional equityPNM did not exceed thesuch limitation through 2017.in 2018.

Energy Efficiency and Load Management

Program Costs and Incentives/Disincentives

The New Mexico Efficient Use of Energy Act (“EUEA”) requires public utilities to achieve specified levels of energy savings and to obtain NMPRC approval to implement energy efficiency and load management programs. The EUEA requires the

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NMPRC to remove utility disincentives to implementing energy efficiency and load management programs and to provide incentives for such programs. The NMPRC has adopted a rule to implement this act. The EUEA sets an annual program budget equal to 3% of an electric utility’s annual revenue. PNM’s costs to implement approved programs are recovered through a rate rider.

On April 15, 2016, PNM filed an application for energy efficiency and load management programs to be offered in 2017. The proposed program portfolio consisted of ten programs with a total budget of $28.0 million. The application also sought approval of an incentive of $2.4 million based on targeted savings of 75 GWh. The actual incentive would be based on actual savings achieved. On January 11, 2017, the NMPRC approved an unopposed stipulation that established a method to ensure that funding of PNM’s energy efficiency program is equal to 3% of retail revenues, with an estimated 2017 energy efficiency funding level of $26.0 million, and approved a sliding scale profit incentive with a base level of 7.1% of program costs, equal to $1.8 million, if PNM achieves a minimum proscribed level of energy savings, increasing to a maximum of 9.0% depending on actual energy savings achieved above the minimum. On April 13, 2018, PNM filed its reconciliation of 2017 program costs and incentives, which indicated the incentive earned in 2017 is $2.3 million. The reconciliation filing and related incentive is subject to NMPRC approval. PNM expects the NMPRC will rule on this matter by mid-2018.

On April 14, 2017, PNM filed an application for energy efficiency and load management programs to be offered in 2018. The proposed program portfolio consists of a continuation of the ten programs approved in the 2016 application with a total budget of $25.1 million. The application also sought approval of a sliding scale incentive with a base incentive of $1.9 million if PNM is able to achieve savings of 53 GWh in 2018. As proposed, PNM would have earned an incentive of $2.1 million based on targeted savings of 70 GWh. The actual incentive would be based on actual savings achieved. PNM proposed to continue the same ten programs and a similar incentive mechanism in 2019, with a proposed budget of $28.2 million and a base level incentive of $2.1 million. On July 26, 2017, PNM, NMPRC staff, and other parties filed a stipulation that would resolve all issues in the case if approved by the NMPRC. Under the settlement, all of PNM’s proposed programs would be approved with limited modifications and PNM’s base level incentive would be $1.7 million in 2018. PNM would earn an incentive of $1.9 million based on targeted savings of 69 GWh. A public hearing was held in September 2017. On November 8, 2017, the Hearing Examiner issued a Certification of Stipulation recommending approval of the stipulation with various modifications, including adoption of a discount rate equal to the tax-adjusted WACC of 9.59% rather than the 7.71% proposed in the stipulation and modifying the program budgets to $23.6 million for 2018 and $24.9 million for 2019. On January 31, 2018, the NMPRC issued an order that largely accepted the certification with certain exceptions concerning the measurement and verification of the approved load management programs.

Petition for Energy Efficiency Disincentive

As discussed above, PNM’s December 2016 application in the NM 2016 Rate Case had requested a “lost contribution to fixed cost” mechanism to address the disincentives associated with PNM’s energy efficiency programs. In the revised stipulation to that case, PNM agreed to withdraw its proposal for such a mechanism and to address energy efficiency disincentives in a future docket. On March 2, 2018, PNM filed a petition proposing a “lost contribution to fixed cost mechanism” with substantially the same terms as those proposed in the NM 2016 Rate Case application. The Hearing Examiner for this matter has issued a procedural order that includesincluded a public hearing to begin on October 30, 2018.
Energy Efficiency Rulemaking
In July 2012, Subsequently, the Hearing Examiner extended the deadline to file response testimony until December 19, 2018 and vacated the hearing schedule. On December 19, 2018, the Hearing Examiner approved a joint motion filed by PNM and other parties in the case to hold the proceedings in abeyance until mid-March 2019. During the 2019 New Mexico legislative session, the EUEA was amended to, among other things, include a decoupling mechanism for disincentives, preclude a reduction to a utility’s ROE based on approval of disincentive or incentive mechanisms, and to establish savings targets for the period 2021 through 2025. On May 6, 2019, PNM submitted a request to the NMPRC opened an energy efficiency rulemaking docket to potentiallydismiss this matter and indicating that PNM will propose a mechanism to address decoupling and incentives. Workshops to developdisincentives in accordance with the amended EUEA in a proposed rule have been held, but no order proposing a rule has been issued.future general rate case filing. PNM is unable tocannot predict the outcome of this matter.
On January 25, 2017, the NMPRC opened another energy efficiency rulemaking docket to consider whether applications for approval of energy efficiency and load management programs should be filed every two years rather than annually. On June 21, 2017, the NMPRC issued an order that modifies the filing frequency for utility energy efficiency plans to every three years.
Also on June 21, 2017, the NMPRC issued a new notice of proposed rulemaking to consider possible changes affecting a utility’s ability to modify NMPRC approved funding levels by up to 10% between energy efficiency program applications. This rulemaking is in response to consensus changes proposed by parties in the January 25, 2017 rulemaking. On September 13, 2017, the NMPRC approved the proposed rule. Under the new rule, PNM’s next application for energy efficiency and load management programs will be made in 2020 for programs to be offered beginning in 2021.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


FPPAC Continuation Application
NMPRC rules require public utilities to file an application to continue using their FPPAC every four years. On April 23, 2018, PNM filed the required continuation application and requested that its FPPAC be continued without modification.

Integrated Resource Plans
NMPRC rules require that investor owned utilities file an IRP every three years. The IRP is required to cover a 20-year planning period and contain an action plan covering the first four years of that period.
2014 IRP
PNM filed its 2014 IRP on July 1, 2014. The four-year action plan was consistent with the replacement resources identified in PNM’s application to retire SJGS Units 2 and 3. PNM indicated that it planned to meet its anticipated long-term resource needs with a combination of additional renewable energy resources, energy efficiency, and natural gas-fired facilities. Consistent with statute and NMPRC rule, PNM incorporated a public advisory process into the development of its 2014 IRP. On July 31, 2014, several parties requested the NMPRC to not accept the 2014 IRP as compliant with NMPRC rule because to do so could affect the then pending proceeding on PNM’s application to abandon SJGS Units 2 and 3 and for CCNs for certain replacement resources (Note 11) and because they asserted that the 2014 IRP did not conform to the NMPRC’s IRP rule. Certain parties also asked that further proceedings on the 2014 IRP be held in abeyance until the conclusion of the SJGS abandonment/CCN proceeding. The NMPRC issued an order in August 2014 that docketed a case to determine whether the 2014 IRP complied with applicable NMPRC rules. The order also held the case in abeyance pending the issuance of final, non-appealable orders in PNM’s 2015 renewable energy procurement plan case and its application to retire SJGS Units 2 and 3. The order regarding PNM’s application to abandon SJGS Units 2 and 3 states that the NMPRC will issue a Notice of Proposed Dismissal in the 2014 IRP docket. On May 4, 2016, the NMPRC issued thea Notice of Proposed Dismissal, stating that the docket would be closed with prejudice within thirty days unless good cause was shown why the docket should remain open. On May 31, 2016, NEE filed a request to hold the protests filed against PNM’s 2014 IRP in abeyance or to dismiss those protests without prejudice. PNM responded on June 13, 2016 and requested that the NMPRC dismiss the case with prejudice. The NMPRC has not yet acted on its Notice of Proposed Dismissal or the request filed on May 31, 2016. PNM cannot predict the outcome of this matter.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


2017 IRP

PNM filed its 2017 IRP on July 3, 2017. The 2017 IRP addresses athe 20-year planning period from 2017 through 2036 and includes an action plan describing PNM’s plan to implement the 2017 IRP in the four-year period following its filing. PNM held its initial public advisory meeting on the 2017 IRP on June 30, 2016 and hosted 17 meetings statewide to present details of the process and receive public comment. The NMPRC’s order concerning SJGS’ compliance with the BART requirements of the CAA discussed in Note 11 requires PNM to make a filing in 2018 to determine the extent to which SJGS Units 1 and 4 should continue serving PNM’s retail customers’ needs after June 30, 2022. The 2017 IRP analyzed several scenarios utilizing assumptions that PNM continues service from its SJGS capacity beyond mid-2022 and that PNM retires its capacity after mid-2022. Key findings of the 2017 IRP include:

Retiring PNM’s share of SJGS in 2022 after the expiration of the current operating and coal supply agreements would provide long-term cost savings for PNM’s customers
PNM exiting its ownership interest in Four Corners after its current coal supply agreement expires in 2031 would also save customers money
The best mix of new resources to replace the retired coal generation would include solar energy and flexible natural gas-fired peaking capacity; the mix could include energy storage, if the economics support it, and wind energy provided additional transmission capacity becomes available
Significant increases in future wind energy supplies will likely require new transmission capacity to be built from eastern New Mexico to PNM’s service territory
PNM should retain the currently leased capacity in PVNGS, which would avoid replacement with carbon-emitting generation
PNM should continue to develop and implement energy efficiency and demand management programs
PNM should assess the costs and benefits of participating in the California Independent System Operator Western Energy Imbalance Market

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


PNM should analyze its current Reeves Generating Station to consider possible technology improvements to phase out the older generators and replace them with new, more flexible supplies or energy storage

Protests to the 2017 IRP were filed by several parties. The issues addressed in the protests included the future of PNM’s interests in SJGS, Four Corners, and PVNGS and the timing of future procurement of renewable resources. The NMPRC has assigned the case to a Hearing Examiner. On January 16, 2018, the Hearing Examiner issued an order setting the scope of the proceedings as the 2017 IRP’s compliance with the applicable statute and NMPRC rules. Hearings were held in June 2018. On October 26, 2018, the Hearing Examiner issued a recommended decision recommending that the NMPRC accept PNM’s 2017 IRP as compliant with the applicable statute and NMPRC rules. On February 22,December 19, 2018, PNM provided certain underlying informationthe NMPRC issued a final order accepting the Hearing Examiner’s recommended decision. On January 18, 2019, the Board of the County of Commissioners for San Juan County, New Mexico, the City of Farmington, New Mexico, and clarified how costs, transmission constraints, energy storage, and public input were consideredother parties filed a Notice of Appeal with the NM Supreme Court regarding the NMPRC’s final order in developing thePNM’s 2017 IRP. Hearings are scheduledThe due date for Statements of Issues in the appeal has been extended to beginMay 10, 2019 at the request of appellants in the case. On January 18, 2019, NEE submitted a motion requesting the NMPRC reconsider its acceptance of PNM’s 2017 IRP and alleging informational inadequacy and deficiencies in PNM’s filing. On January 29, 2019, PNM submitted a filing to the NMPRC in response to NEE’s motion for reconsideration. In its response, PNM stated that the issues raised by NEE had already been considered and rejected by the NMPRC in its December 19, 2018 final order and that the NMPRC lacks jurisdiction over the matters because the NMPRC’s final order has been appealed to the NM Supreme Court. The NMPRC did not take action on June 4, 2018.NEE’s motion for reconsideration. On February 19, 2019, NEE filed a motion with the NM Supreme Court to intervene in the appeal and to seek remand of the matter to the NMPRC. On March 11, 2019, PNM filed its response with the NM Supreme Court stating that the NMPRC has already considered and, by operation of law, denied NEE’s motion for reconsideration. PNM cannot predict the outcome of this matter.

The NMPRC’s order concerning SJGS’ compliance with the BART requirements of the CAA required PNM to make a filing in 2018 to determine the extent to which SJGS Units 1 and 4 should continue serving PNM’s retail customers’ needs after June 30, 2022. PNM submitted its December 2018 Compliance Filing to the NMPRC on December 31, 2018 indicating that, consistent with the conclusions reached in the 2017 IRP, isPNM’s customers would benefit from the retirement of PNM’s share of SJGS in 2022. The December 2018 Compliance Filing and the 2017 IRP are not a final determinationdeterminations of PNM’s future generation portfolio. Retiring PNM’s share of SJGS capacity and exiting Four Corners wouldwill require future NMPRC approval. PNM will also be required to obtain NMPRC approval of abandonment filings,an exit from Four Corners, which PNM would makewill seek at an appropriate timestime in the future. Likewise, NMPRC approval of new generation resources through CCNCCNs, PPAs, or other applicable filings, would be required. The outcome of these future abandonment filings and the related impact on PNM’s generation portfolio will also be significantly influenced by the recent enactment of the ETA. See Note 11. PNM cannot predict the ultimate outcome of the 2017 IRP process or whether the NMPRC will approve subsequent filings that would encompass actions to implement the conclusions of the 2017 IRP.these matters.

San Juan Generating Station Units 2 and 3 Retirement
On December 16, 2015, the NMPRC issued an order approving PNM’s retirement of SJGS Units 2 and 3 on December 31, 2017. On January 14, 2016, NEE filed an appeal of the order with the NM Supreme Court. SJGS Units 2 and 3 were retired in December 2017. On March 5, 2018, the NM Supreme Court rendered a decision affirming the NMPRC’s ruling, thereby denying NEE’s appeal. A request for rehearing of the NM Supreme Court’s decision was not filed by the statutory deadline. This matter is now concluded. Additional information concerning the NMPRC filing and related proceedings is set forth in Note 11.
San Juan Generating Station Unit 1 Outage
On March 17, 2018, a coal silo used to supply fuel to SJGS Unit 1 collapsed resulting in an outage. PNM promptly contacted the staff of the NMPRC to inform them of the event and has initiated a review of its cause. PNM currently anticipates inspections of the facility and a determination of estimated repair costs will be completed by the end of May 2018 and that the unit will be returned to service shortly after that date. PNM anticipates the damages to the facility will be reimbursed under an existing property insurance policy that covers SJGS, subject to a deductible of $2.0 million.  PNM’s exposure to the cost of repairs is $1.0 million, reflecting PNM’s 50% ownership interest in SJGS Unit 1.
On April 12, 2018, NEE filed a petition (jointly with certain other organizations) requesting that the NMPRC order an investigation into the SJGS Unit 1 event.  The petition requests that the NMPRC order PNM to respond to the petition, that proceedings be set on this matter, and that PNM be required to provide a narrative explanation, cost/benefit analysis, and alternatives assessment used to determine that Unit 1 should be repaired rather than utilizing alternative resources.  On April 25, 2018, the NMPRC issued an order requiring PNM to provide a factual statement of the nature and cause of the event, as well as the anticipated need for and schedule of repairs required. PNM must also address the necessity and appropriateness of the request for a cost/benefit analysis, alternatives assessment, and request for further proceedings.

Advanced Metering Infrastructure Application

On February 26, 2016, PNM filed an application with the NMPRC requesting approval of a project to replace its existing customer metering equipment with Advanced Metering Infrastructure (“AMI”). The application asked the NMPRC to authorize the recovery of the cost of the project, up to $87.2 million, in future ratemaking proceedings, as well as to approve the recovery of the remaining undepreciated investment in existing metering equipment estimated to be approximately $33 million at the date of implementation, the costs of customer education, and severances for affected employees. Hearings in this matter were held in February and March 2017. During the March 2017 hearing, it was disclosed that the proposed meter contractor may not have complied with certain New Mexico contractor licensing requirements. PNM subsequently filed testimony regarding that matter as ordered by the Hearing Examiner. On May 12, 2017, PNM requested a new procedural schedule to allow it to issue a new RFP for contracting work related to the meter installation and to update its cost-benefit analysis. PNM subsequently updated the amount of the requested recovery for the anticipated cost of the project to $95.1 million. An additional hearing was held on October 25-26, 2017. On March 19, 2018, the Hearing Examiner issued a recommended decision finding that PNM had not proven a net public

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


benefitCost Recovery Related to Joining the EIM

The California Independent System Operator (“CAISO”) developed the Western Energy Imbalance Market (“EIM”) as a real-time wholesale energy trading market that enables participating electric utilities to buy and sell energy. The EIM aggregates the variability of electricity generation and load for multiple balancing authority areas and utility jurisdictions. In addition, the EIM facilitates greater integration of renewable resources through the aggregation of flexible resources by capturing diversity benefits from the expanded geographic footprint and the expanded potential uses for those resources.

In 2018, PNM completed a cost-benefit analysis of participating in the EIM. PNM’s analysis indicated participation in the EIM would provide substantial benefits to retail customers. On August 22, 2018, PNM filed an application with the NMPRC requesting, among other things, to recover an estimated $20.9 million of initial capital investments and authorization to establish a regulatory asset to recover an estimated $7.4 million of other expenses that would be incurred in order to join the EIM. PNM’s application proposed the regulatory asset be adjusted to provide for full recovery of such costs, including carrying charges, until the effective date of new rates in PNM’s next general rate case. PNM’s application also proposed the benefits of participating in the EIM be credited to retail customers through PNM’s existing FPPAC and that PNM would seek recovery of its costs in a future proceeding. A public hearing was held on December 12, 2018. On December 19, 2018, the NMPRC issued an order approving the establishment of a regulatory asset to recover PNM’s cost of joining the EIM. On January 17, 2019, ABCWUA filed a motion to reopen the case and recommendingto reconsider the NMPRC’s order approving the establishment of a regulatory asset. PNM submitted its response opposing reconsideration of the case on January 28, 2019. On February 6, 2019, the NMPRC issued an order granting rehearing and vacating the December 19, 2018 order. On February 27, 2019, the NMPRC issued a procedural order appointing a Hearing Examiner and requiring the Hearing Examiner to report to the NMPRC on whether the matter should be reopened. On March 18, 2019, the Hearing Examiner issued a recommended decision recommending approval of the establishment of a regulatory asset but deferring certain rate making issues, including but not approvelimited to issues related to implementation and ongoing EIM costs and savings, the application. On April 2, 2018,prudence and reasonableness of costs to be included in the regulatory asset, and the period over which costs would be charged to customers. PNM filed a statement onlimited exceptions to the recommended decision indicating, among other things, thatrelated to the deferral of certain reasonableness findings. The NMPRC issued a final order adopting the Hearing Examiner’s recommended decision on March 27, 2019. On April 12, 2019, PNM disagreed with the finding that the record did not demonstrate a net public benefit to customers, but that PNM would not take exception to a recommendation to not approve the application. Noand other parties filed exceptionsa joint motion requesting the NMPRC clarify that the quarterly benefits reports prepared by CAISO be used to determine the recommended decision bybenefits of participating in the required deadline.EIM, as well as to support the prudence of costs incurred to join the EIM. On April 11, 2018,24, 2019, the NMPRC adoptedissued an order acceptinggranting the recommended decisionjoint motion for clarification and disapproving PNM’s application. The order indicated PNM’s next energy efficiency plan filing should includeindicating the CAISO quarterly benefits reports may be used in a proposal for an AMI pilot project.future rate case. PNM anticipates it will begin participating in the EIM in April 2021.

Facebook, Inc. Data Center Project

As discussed in Note 17 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K, in 2016, the NMPRC approved a PNM application for arrangements in connection with services to be provided to Facebook, Inc. for a new data center to bebeing constructed in PNM’s service area. The approvals included:

Two new electric service rates
A PPA under which PNM would purchase renewable energy from PNMR Development
A special service contract to provide electric service
Facebook’s service requirements include the acquisition by PNM of a sufficient amount of new renewable energy resources and RECs to match the energy and capacity requirements of the data center. PNM’s initial procurement was to be through a PPA with PNMR Development for the energy production from 30 MW of new solar capacity that PNMR Development was to construct. As discussed in Note 1, PNMR Development transferred its interests in the solar capacity and the PPA to NMRD in December 2017. The cost of the PPArenewable energy procured is passed through to Facebook under a new rate rider. The newA special service rate is applied to Facebook’s energy consumption in those hours of the month when their consumption exceeds the energy production from the renewable resources. The first 10In late 2017, PNM’s executed its initial procurement for the energy production from 30 MW of solarsolar-PV capacity began commercial operation on January 1, 2018, the secondfrom NMRD, a 50% equity method of investee PNMR Development. Of this capacity, 10 MW began commercial operation in each of January 2018, March 2018, and the remaining capacity is anticipated to be completed by mid-2018.May 2018.

In late 2017, PNM enteredobtained NMPRC approval to enter into three separateadditional 25-year PPAs to purchase renewable energy and RECs to be used by PNM to supply additional renewable powerenergy to Facebook. These PPAs were subject to NMPRC approval and PNM made a filing requesting approval on January 17, 2018. A NMPRC hearing on PNM’s filing was held on March 7, 2018 and the NMPRC approved the PPAs on March 21, 2018. These PPAs include the purchase of the power and RECs from:

Casa Mesa Wind, LLC, a subsidiary of NextEra Energy Resources, LLC.,LLC, which is expected to be located near House, New Mexico, havehas a total capacity of 50 MW, and bebecame operational on December 31,in November 2018
A 166 MW portion of the La Joya Wind Project, owned by Avangrid Renewables, LLC, which is expected to be located near Estancia, New Mexico and be operational in November 2020
Route 66 Solar Energy Center, LLC, a subsidiary of NextEra Energy Resources, LLC., which is expected to be located west of Albuquerque, New Mexico, have a total capacity of 50 MW, and be operational in December 2021
TNMP
Advanced Meter System Deployment
In July 2011, the PUCT approved a settlementTwo PPAs to purchase renewable energy and authorizedRECs from an AMS deployment plan that permits TNMP to collect $113.4 million in deployment costs through a surcharge over a 12-year period. TNMP began collecting the surcharge on August 11, 2011. Deploymentaggregate of advanced meters began in September 2011. TNMP completed its mass deployment in 2016 and has installed more than 242,000 advanced meters. In connection with TNMP’s deploymentapproximately 100 MW of AMS, TNMP committed to file a general rate case no later than September 1, 2018. TNMP will include a reconciliation of AMS costs in the 2018 filing.
The PUCT adopted a rule creating a non-standard metering service for retail customers choosing to decline standard metering service via an advanced meter. The cost of providing non-standard metering service iscapacity from two solar-PV facilities to be borneowned and operated by opt-out customers through an initial fee and ongoing monthly charge. As approved byNMRD. NMRD is required to obtain FERC approval of the PUCT, TNMP is recovering $0.2 million in costs through initial fees ranging from $63.97 to $168.61 and ongoing annual expenses of $0.5 million through a $36.78 monthly fee. These amounts presume up to 1,081 consumers will elect the non-standard meter service, but TNMP has the right to adjust the fees if the number of anticipated consumers differs from that estimate. As of April 23, 2018, 98 consumers have made the election.PPAs. Subject

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


TNMP does not expectto FERC approval, the implementationfirst 50 MW of non-standard metering servicethese facilities is expected to have a material impact on its financial position, results of operations, or cash flows.begin commercial operation in December 2019 and the remaining capacity is expected to begin commercial operation in June 2020.

On March 15, 2019, PNM participated with NMRD in an application requesting FERC approval of the two PPAs aggregating approximately 100 MW of capacity. PNM cannot predict if the FERC will approve this filing.

Application For a New 345 KV Transmission Line

On August 10, 2018, PNM filed an application seeking NMPRC approval of a CCN to construct and operate a 345 KV transmission line and associated facilities (the “BB2 Line”), and to determine the rate making treatment to apply to the BB2 line and related rights-of-way. In the application, PNM states that the BB2 line would run adjacent to one of PNM’s existing transmission lines and is necessary to serve additional renewable generating resources to be located in eastern New Mexico. PNM’s use of the BB2 line would benefit all customers and would include delivery of approximately 166 MW of renewable energy and RECs under a PPA, which had previously been approved by the NMPRC, from La Joya Wind. The energy and RECs from the La Joya Wind PPA would be used to a serve the needs of a data center being constructed in PNM’s service territory and the capacity and energy from the PPA will also be used to meet the system needs of all PNM customers. See additional discussion in Facebook, Inc. Data Center Project above. PNM’s application requested that the NMPRC apply standard ratemaking treatment to the estimated $85 million cost of the project resulting in a jurisdictional allocation of costs to all of PNM’s transmission and retail customers. NMPRC staff supported PNM’s proposed ratemaking treatment of the BB2 project and indicated that the capacity and energy of the La Joya PPA and related network upgrades to PNM’s transmission system would benefit all of PNM’s customers. On March 11, 2019, the Hearing Examiner assigned to the application issued a recommended decision recommending approval of the CCN and related rights-of-way but recommending the NMPRC deny PNM’s request to allocate a portion of cost of the BB2 Line to retail customers. The Hearing Examiner’s recommendation indicated the costs not recovered from retail customers be directly reimbursed to PNM by Facebook, Inc. As a result, Facebook, Inc. would be responsible for approximately 46 percent, or $39.0 million, of the estimated cost of the project. On March 20, 2019, PNM filed exceptions to the recommended decision and requested oral argument. In its filing, PNM refuted the proposed finding that the BB2 Line is not part of PNM’s overall transmission system, opposed the recommendation that approximately 46 percent of the estimated cost of the project be directly assigned to Facebook, Inc. and presented legal arguments in support of PNM’s originally proposed ratemaking treatment. On April 16, 2019, the NMPRC issued an order approving the Hearing Examiner’s recommended decision, including the requirement that PNM be directly reimbursed by Facebook, Inc. In late April 2019, PNM and other parties submitted filings with the NMPRC requesting rehearing and seeking reconsideration of the NMPRC’s decision to deny standard ratemaking treatment of the cost of the BB2 Line and associated facilities. PNM cannot predict the outcome of this matter.

TNMP

TNMP 2018 Rate Case

On May 30, 2018, TNMP filed a general rate proceeding with the PUCT (the “TNMP 2018 Rate Case”) requesting an annual increase to base rates of $25.9 million based on a requested ROE of 10.5%, a cost of debt of 7.2%, and a capital structure comprised of 50% debt and 50% equity. TNMP’s application included a request to establish new rate riders to recover Hurricane Harvey restoration, rate case, and additional vegetation management costs. The application also included the integration of revenues previously recorded under the AMS rider and collection of other unrecovered AMS investments into base rates. In 2018, TNMP recorded revenues of $20.2 million under the AMS rider. The TNMP 2018 Rate Case application also proposed to return the regulatory liability recorded at December 31, 2017 related to federal tax reform to customers and to reduce the federal corporate income tax rate to 21%.

On December 20, 2018, the PUCT approved an unopposed settlement agreement in the case. The PUCT’s final order results in a $10.0 million annual increase to base rates. The key elements of the approved settlement include a ROE of 9.65%, a cost of debt of 6.44%, and a capital structure comprised of 55% debt and 45% equity. As stated by the settlement agreement, the PUCT’s final order excludes certain items from rate base that were requested in TNMP’s original filing, including approximately $10.6 million of transmission investments that TNMP included in its January 2019 transmission cost of service filing, which was approved by the PUCT in March 2019. In addition, the PUCT’s final order requires TNMP to refund approximately $37.8 million of the regulatory liability recorded at December 31, 2017 related to federal tax reform to customers over a period of five years and the remaining amount over the estimated useful lives of plant in service as of December 31, 2017; approves TNMP’s request to integrate revenues historically recorded under TNMP’s AMS rider, as well as other unrecovered AMS investments, into base rates;

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


approves TNMP’s request for new depreciation rates; and approves a new rider to recover Hurricane Harvey restoration costs, net of amounts to be refunded to customers resulting from the reduction in the federal income tax rate in 2018. See Note 14. The TNMP 2018 Rate Case also resulted in a reallocation of costs between TNMP’s transmission and retail customers and other rate design changes that reallocated costs between certain demand-based customers and customers billed on a volumetric basis. New rates under the TNMP 2018 Rate Case were effective beginning January 1, 2019.

Transmission Cost of Service Rates
TNMP can update its transmission cost of service (“TCOS”) rates twice per year to reflect changes in its invested capital.capital although updates are not allowed while a general rate case is in process. Updated rates reflect the addition and retirement of transmission facilities, including appropriate depreciation, federal income tax and other associated taxes, and the approved rate of return on such facilities. The following sets forth TNMP’s recent interim transmission cost rate increases:
Effective Date Approved Increase in Rate Base Annual Increase in Revenue
  (In millions)
March 23, 2016 $25.8
 $4.3
September 8, 2016 9.5
 1.8
March 14, 2017 30.2
 4.8
September 13, 2017 27.5
 4.7
March 27, 2018 32.0
 0.6

Periodic Distribution Rate Adjustment

PUCT rules permit interim rate adjustments to reflect changes in investments in distribution assets. Distribution utilities may file for a periodic rate adjustment between April 1 and April 8 of each year as long as the electric utility is not earning more than its authorized rate of return using weather-normalized data. However, TNMP has not made a filing to adjust rates for additional investments in distribution assets. In connection with TNMP’s deployment of its advanced meter system discussed above, TNMP committed to file a general rate case no later than September 1, 2018. TNMP has also committed that it would not file a request for an increase in rates to reflect changes in investments in distribution assets until after the 2018 general rate case.
Effective Date Approved Increase in Rate Base Annual Increase in Revenue
  (In millions)
September 8, 2016 $9.5
 $1.8
March 14, 2017 30.2
 4.8
September 13, 2017 27.5
 4.7
March 27, 2018 32.0
 0.6
March 21, 2019 111.8
 14.3

Order Related to Changes in Federal Income Tax Rates

On January 25, 2018, the PUCT issued an accounting order that addresses the change in the federal corporate income tax rates on investor-owned utilities in the state of Texas. The order requiresrequired investor-owned utilities to record a regulatory liability equal to the reduction in accumulated federal deferred income tax balances at the end of 2017 due to the change in the federal corporate income tax rate.

In addition, the order requiresrequired that a regulatory liability be recorded to reflect the difference between revenues collected under existing rates and those that would have been collected had those rates been set reflecting federal income tax reform beginning on the date of the order. As discussed in Note 11 of the Notes to the Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K, at December 31, 2017, TNMP recorded a regulatory liability for deferred income taxes of $146.5 million to reflect the change in federal income tax rates that will be refunded to customers in future periods.order (Note 14). In compliance with the PUCT order, during the three months ended March 31, 2018, TNMP recorded a regulatory liability ofreduced revenues by $1.5 million which amount representsto reflect the impact of the reduction in the federal corporate income tax rate on revenues collected frombeginning January 25, 2018. As discussed above, the total amount owed for the year ended 2018 of $5.4 million was offset against TNMP’s Hurricane Harvey restoration costs as of December 31, 2018 and is being refunded to customers as a component of a new rate rider over a period of no more than five years beginning on January 1, 2019.

Energy Efficiency

TNMP recovers the costs of its energy efficiency programs through March 31, 2018.an energy efficiency cost recovery factor (“EECRF”), which includes projected program costs, under and over collected costs from prior years, rate case expenses, and performance bonuses (if programs exceed mandated savings goals). On May 30, 2018, TNMP filed its request to adjust the EECRF to reflect changes in costs for 2019. The total amount requested was $5.7 million, which included a performance bonus of $0.9 million based on TNMP’s energy efficiency achievements in the 2017 plan year. On June 21, 2018, the PUCT issued a declaratory order announcing the PUCT’s interpretation of the bonus calculation in its rule. The order provides that these regulatory liabilities will be considereddoes not affect cost recovery but reduces the bonus calculation as filed by utilities in their current EECRF proceedings. Accordingly, in June of 2018, TNMP reduced its estimated performance bonus for the 2017 plan year to $0.8 million. On August 6, 2018, TNMP and other parties to the case reached a unanimous settlement stipulation to provide $5.6 million of EECRF recovery, which includes a performance bonus of $0.8 million. On October 12, 2018, the PUCT in each utility’s next rate proceeding, which for TNMP is anticipatedapproved the settlement stipulation with rates to be filed in May 2018. TNMP is evaluating whether the PUCT order constitutes retroactive ratemaking and whether to advocate such a position in future rate proceedings. TNMP cannot predict the outcome of this matter.become effective on March 1, 2019.

(13)Lease Commitments

The Company enters into various lease agreements to meet its business needs and to satisfy the needs of its customers. Historically, the Company’s leases office buildings, vehicles, and other equipment. In addition, PNMwere classified as operating leases interests inwhich included leases for generating capacity from PVNGS Units 1 and 2, of PVNGScertain rights-of-way agreements for transmission lines and certain right-of-way agreements are classified as leases. All of the Company’sfacilities, vehicle and equipment leases are currently accounted for as operating leases. See New Accounting Pronouncements in Note 1. Additional information concerning the Company’s lease commitments is contained in Note 7 of the Notesnecessary to Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K, including PNM’s actions with regard to renewal and purchase options under the PVNGS leases.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


construct and maintain the Company’s assets and building and office equipment leases. In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842) to provide guidance on the recognition, measurement, presentation, and disclosure of leases. Among other things, ASU 2016-02 requires that all leases be recorded on the balance sheets by recognizing a present value liability for future cash flows of the lease agreement and a corresponding right-of-use asset. The Company adopted Topic 842 on January 1, 2019, its required effective date. The Company elected to use many of the practical expedients available upon adoption of the standard. As a result, the Company will continue to classify its leases existing as of December 31, 2018 as operating leases until they expire or are modified. In addition, the Company elected the practical expedient to not reevaluate the accounting for land easements and rights-of-way agreements existing at December 31, 2018. The Company also elected the use of the practical expedient to apply the requirements of the new standard on its effective date and has not restated prior periods to conform to the new guidance. Adoption of the lease standard has a material impact on the Company’s Condensed Consolidated Balance Sheets but does not have a material impact on the Condensed Consolidated Statements of Earnings or the Condensed Consolidated Statements of Cash Flows.

Effective January 1, 2019, the Company accounts for contracts that convey the use and control of identified assets for a period of time as leases. The Company classifies leases as operating or financing by evaluating the terms of the lease agreement. Agreements under which the Company is likely to utilize substantially all of the economic value or life of the asset or which the Company is likely to own at the end of the lease term, either through purchase or transfer of ownership, are classified as financing leases. Leases not meeting these criteria are accounted for as operating leases. Agreements under which the Company is a lessor are insignificant. Leases with terms that are expected to exceed one year are recognized on the Company’s Condensed Consolidated Balance sheet by recording a lease liability and corresponding right-of-use asset. PNMR, PNM, and TNMP determine present value for their leases using their incremental borrowing rates at the commencement date of the lease or, when readily available, the rate implicit in the agreement. However, in most cases the implicit interest rate is not available in the Company’s lease agreements. Operating lease expense is recognized within operating expenses according to the use of the asset on a straight-line basis. Financing lease costs are recognized by amortizing the right-of-use asset on a straight-line basis and by recording interest expense on the lease liability. Financing lease right-of-use assets amortization is reflected in depreciation and amortization and interest on financing lease liabilities is reflected as interest charges on the Company’s Condensed Consolidated Statements of Earnings.

PVNGS

PNM leases interests in Units 1 and 2 of PVNGS. The PVNGS leases were entered into in 1985 and 1986 and initially were scheduled to expire on January 15, 2015 for the four Unit 1 leases and January 15, 2016 for the four Unit 2 leases. TheFollowing procedures set forth in the PVNGS leases, PNM notified four of the lessors under the Unit 1 leases have been extended to expire on January 15, 2023 and one oflessor under the Unit 2 leases has been extendedlease that it would elect to expire on January 15, 2024. For the other three PVNGS Unit 2 leases, PNM exercised its fair market value options to purchase the assets underlyingrenew those leases on the expiration date of the original leases. The four Unit 1 leases now expire on January 15, 2023 and the one Unit 2 lease now expires on January 15, 2024. The annual lease payments during the renewal periods aggregate $16.5 million for PVNGS Unit 1 and $1.6 million for Unit 2.

The terms of each of the extended leases do not provide for additional renewal options beyond their currently scheduled expiration dates. PNM has the option to purchase the assets underlying each of the extended leases at their fair market value or to return the lease interests to the lessors on the expiration dates. Under the terms of the extended leases, PNM has until January 15, 2020 for the Unit 1 leases and January 15, 2021 for the Unit 2 lease to provide notices to the lessors of PNM’s intent to exercise the purchase options or to return the leased assets to the lessors. PNM’s elections are independent for each lease and are irrevocable. In the proceeding addressing PNM’s 2017 IRP (Note 12), PNM agreed to promptly notify the NMPRC of a decision to extend the Unit 1 or 2 leases, or to exercise its option to purchase the leased assets at fair market value upon the expiration of leases. If PNM elects to exercise its purchase option under any of the leases, the leases provide an appraisal process to determine fair market value. If PNM elects to return the assets underlying the extended leases, PNM will retain certain obligations related to PNVGS, including costs to decommission the facility. PNM would seek to recover its undepreciated investments at the end of the PVNGS leases as well as any future obligations related to PNM’s leased capacity from NM retail customers. Any transfer of the assets underlying the leases will be required to comply with NRC licensing requirements.

On April 22, 2019, NEE and other parties, which consist primarily of environmental not-for-profit organizations, filed a joint petition for expedited investigation with the NMPRC. The joint petition requests the NMPRC open an investigation regarding PNM’s option to purchase the assets underlying the PVNGS Unit 1 and 2 leases that will expire in January 2023 and 2024. PNM cannot predict the outcome of this matter.

PNM elected to purchase the assets underlying the other three PVNGS Unit 2 leases at the end of their original lease terms. PNM and the lessors under those leases entered into agreements that established the purchase price, representing the fair market value, to be paid by PNM. On January 15, 2016, PNM paid $78.1 million to the lessor under one lease for 31.25 MW of the

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


entitlement from PVNGS Unit 2 and $85.2 million to the lessors under the other two leases for 32.76 MW of the entitlement from PVNGS Unit 2. See Note 12 for information concerning the NMPRC’s treatment of the purchased assets and extended leases in PNM’s NM 2015 Rate Case, including PNM’s pending appeal to the NM Supreme Court of certain matters in the NM 2015 Rate Case.

Covenants in PNM’s PVNGS Units 1 and 2 lease agreements limit PNM’s ability, without consent of the owner participants in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets in any single transaction or series of related transactions. PNM is exposed to losses under the PVNGS lease arrangements upon the occurrence of certain events that PNM does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to PVNGS or the occurrence of specified nuclear events), PNM would be required to make specified payments to the lessors, and take title to the leased interests. If such an event had occurred as of March 31, 2018,2019, amounts due to the lessors under the circumstances described above would be up to $166.8$161.2 million, payable on July 15, 20182019 in addition to the scheduled lease payments due on July 15, 2018.2019. In such event, PNM would record the acquired assets at the lower of their fair value or the amount paid.

Land Easements and Rights-of-Ways

Many of PNM’s electric transmission and distribution facilities are located on lands that require the grant of rights-of-way from governmental entities, Native American tribes, or private parties. PNM has completed several renewals of rights-of-way, the largest of which is a renewal with the Navajo Nation. PNM is obligated to pay the Navajo Nation annual payments of $6.0 million, subject to adjustment each year based on the Consumer Price Index, through 2029. PNM’s April 2018 payment for the amount due under the Navajo Nation right-of-way lease was $6.9 million, which included amounts due under the Consumer Price Index adjustment, and was used to determine PNM’s operating lease liability as of January 1, 2019 and is included in the table of future lease payments shown below. Changes in the Consumer Price Index subsequent to January 1, 2019 are considered variable lease payments.

Fleet Vehicles and Equipment

As of December 31, 2018, all of the Company’s leases of fleet vehicles and equipment are classified as operating leases. Historically, the Company has utilized substantially all of the economic value of its fleet and equipment leases by the end of the lease term. The Company generally has the contractual ability to return its fleet vehicle and equipment leases to the lessor after one-year provided the lessor can recover remaining amounts owed under the agreement from third-parties or through make-whole provisions in the contract but does not typically exercise this right. As a result, fleet vehicle and equipment leases commencing on or after January 1, 2019 are classified as financing leases. The Company’s fleet vehicle and equipment lease agreements include non-lease components for insignificant administrative and other costs that are billed over the life of the agreement. The Company has elected to combine these fees with the lease components of the agreement. Certain of the Company’s fleet vehicle and equipment leases contain residual value guarantees. At March 31, 2019, residual value guarantees on fleet vehicle and equipment leases are $0.5 million, $1.1 million, and $1.6 million for PNM, TNMP, and PNMR.

Other

The Company holds a number of office space and office equipment leases. The Company’s current office space leases, all of which existed as of December 31, 2018, are classified as operating leases. These agreements include non-lease components for costs such as common area maintenance fees, which the Company has elected to combine with the lease component of the agreements. Certain of the Company’s office space leases are held between the Company’s consolidated subsidiaries and have been eliminated on consolidation. See Note 15. The Company’s office equipment leases are primarily for copiers and other graphics equipment. The Company classifies its office equipment leases existing as of December 31, 2018 as operating leases. Office equipment leases commencing on or after January 1, 2019 are classified as financing leases.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Information related to the Company’s operating leases recorded on the Condensed Consolidated Balance Sheets, including amounts recognized upon adoption of ASU 2016-02, is presented below:
 March 31, 2019 January 1, 2019
 PNM TNMP PNMR Consolidated PNM TNMP PNMR Consolidated
 (In thousands)
Operating leases:           
Operating lease assets, net of amortization$137,756
 $12,160
 $150,426
 $143,816
 $12,942
 $157,440
Current portion of operating lease liabilities22,762
 3,023
 26,197
 21,589
 3,132
 25,189
Long-term portion of operating lease liabilities115,436
 9,088
 124,937
 124,891
 9,787
 135,174

As discussed above, the Company classifies its fleet vehicle and equipment leases and its office equipment leases commencing on or after January 1, 2019 as financing leases. Information related to the Company’s financing leases recorded on the Condensed Consolidated Balance Sheets is presented below:
 March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Financing leases:     
Non-utility property$1,635
 $1,268
 $2,904
Accumulated depreciation(37) (40) (78)
Non-utility property, net$1,598
 $1,228
 $2,826
      
Other current liabilities$233
 $217
 $450
Other deferred credits1,083
 1,006
 2,089

Information concerning the weighted average remaining lease terms and the weighted average discount rates used to determine the Company’s lease liabilities is presented below:
 March 31, 2019
 PNM TNMP PNMR Consolidated
Weighted average remaining lease term (In years):     
Operating leases7.18
 4.67
 6.95
Financing leases5.72
 5.75
 5.74
      
Weighted average discount rate:     
Operating leases3.88% 3.88% 3.88%
Financing leases4.34% 4.55% 4.43%


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Information for the components of lease expense is as follows:
 Three Months Ended March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Total operating lease expense$7,231
 $241
 $7,611
      
Financing lease expense:     
Amortization of right-of-use assets66
 58
 125
Interest on lease liabilities16
 17
 32
Total financing lease expense82
 75
 157
      
Variable lease expense—
 —
 —
Short-term lease expense74
 3
 94
Total lease expense for the period$7,387
 $319
 $7,862

Supplemental cash flow information related to the Company’s leases is as follows:
 Three Months Ending March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases$9,452
 $284
 $9,891
Operating cash flows from financing leases16
 17
 32
Finance cash flows from financing leases25
 33
 58
      
Non-cash information related to right-of-use assets obtained in exchange for lease obligations:     
Operating leases$143,816
 $12,942
 $157,440
Financing leases1,635
 1,268
 2,904

Excluded from the lease expense and cash flow information tables above are $0.4 million, $0.7 million, and $1.1 million of capitalized operating lease costs, and less than $0.1 million of capitalized financing lease costs at PNM, TNMP, and PNMR. These capitalized costs are reflected as investing activities on the Company’s Condensed Consolidated Statements of Cash Flows.

Future expected lease payments as of March 31, 2019 and December 31, 2018 are shown below:
 As of March 31, 2019
 PNM TNMP PNMR Consolidated
 Financing Operating Financing Operating Financing Operating
 (In thousands)
Remainder of 2019$266
 $17,917
 $209
 $2,622
 $475
 $20,980
2020344
 27,045
 269
 2,993
 613
 30,555
2021332
 26,505
 259
 2,398
 591
 29,158
2022319
 26,235
 249
 1,846
 568
 28,255
2023307
 17,457
 181
 1,281
 488
 18,879
Later years224
 42,328
 214
 1,151
 438
 43,490
Total minimum lease payments1,792
 157,487
 1,381
 12,291
 3,173
 171,317
Less: Imputed interest476
 19,289
 158
 180
 634
 20,183
Lease liabilities as of March 31, 2019$1,316
 $138,198
 $1,223
 $12,111
 $2,539
 $151,134

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



 As of December 31, 2018
 Operating leases
 PNM TNMP PNMR Consolidated
 (In thousands)
Remainder of 2019$27,691
 $3,664
 $31,772
202027,000
 3,102
 30,404
202126,462
 2,324
 29,012
202226,217
 1,795
 28,175
202317,447
 1,279
 18,868
Later years42,329
 1,150
 43,489
Total minimum lease payments167,146
 13,314
 181,720

The above tables include $9.9 million, $12.2 million, and $22.1 million for PNM, TNMP, and PNMR at March 31, 2019 and $7.5 million, $11.0 million, and $18.5 million for PNM, TNMP, and PNMR at December 31, 2018 for expected future payments on fleet vehicle and equipment leases that could be avoided if the leases were returned and the lessor is able to recover estimated market value for the equipment from third parties. The Company’s contractual commitments for leases that have not yet commenced are insignificant.

(14)Income Taxes

On December 22, 2017, comprehensive changes in United States federal income taxes were enacted through legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makesmade many significant modifications to the tax laws, including reducing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also eliminateseliminated federal bonus depreciation for utilities, effective September 28, 2017 and, effective January 1, 2018, limitslimited interest deductibility for non-utility businesses and limitslimited the deductibility of officer compensation. During 2018, the IRS issued additional guidance related to certain officer compensation.

Although mostcompensation, as well as proposed regulations on interest deductibility that provide a 10% “de minimis” exception that allows entities with predominantly regulated activities to fully deduct interest expenses. In addition, the IRS issued proposed regulations interpreting Tax Act amendments to depreciation provisions of the provisionsInternal Revenue Code that allow the Company to claim a bonus depreciation deduction on certain construction projects placed in service subsequent to the third quarter of 2017. See additional discussion of the impacts of the Tax Act are not effective untilin Note 18 of the Notes to Consolidated Financial Statements in the 2018 GAAP required that some effects be recognized in 2017. Under the asset and liability method of accounting for income taxes used by the Company, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts ofAnnual Reports on Form 10-K.

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. At the date of enactment of the Tax Act, the Company had net deferred tax liabilities for its regulated activities and net deferred tax assets for non-regulated activities. As a result of the change in the federal income tax rate, the Company re-measured and adjusted its deferred tax assets and liabilities as of December 31, 2017. The portion of that adjustment not related to PNM’s and TNMP’s regulated activities was recorded as a reduction in net deferred tax assets and an increase in income tax expense. The portion related to PNM’s and TNMP’s regulated activities was recorded as a reduction in net deferred tax liabilities and an increase in regulatory liabilities, based on the assumption that PNM and TNMP will be required to return the benefit to ratepayers over time.Beginning February 2018, PNM’s NM 2016 Rate Case (Note 12) reflects that assumption by including an amortization of the estimated benefit of the reduction in existingthe federal corporate income rate, including amortization of excess deferred federal income taxes as a reductionthat are being returned to customer ratescustomers over a twenty-one year period beginningperiod; and reductions in 2018. Inthe New Mexico corporate tax rate, including amortization of excess deferred state income taxes that are being returned to customers over a three-year period. On January 25, 2018, the PUCT issued an order requiring Texas utilities, including TNMP, to begin recording regulatory liabilities for the effects of the Tax Act with the stated purpose of reflecting those effects in the utility bills of Texas ratepayers. During the three months ended March 31, 2018, TNMP reduced revenue and recorded a regulatory liability of $1.5 million in accordance with the PUCT’s order (Note 12).

In December 2017,order. The approved settlement in the SEC issued Staff Accounting Bulletin No. 118, which provides guidanceTNMP 2018 Rate Case includes a reduction in customer rates to address the application of GAAP to reflect the Tax Act in circumstances where all information and analysis of the Tax Act is not yet available or complete. This bulletin provides for up to a one-year period in which to complete the required analyses and accounting for the impacts of the Tax Act. The Company believes it made reasonable estimatesAct beginning on January 1, 2019. See additional discussion of the effects of the Tax Act and reflected the impacts in the Consolidated Financial Statements included in the 2017 Annual Reports on Form 10-K. However, the reported effects on the Company’s deferred tax assets and liabilities, regulatory assets and liabilities, and income tax expense are provisional and it is possible that changes to United States Treasury regulations, IRS interpretations of the provisions of the Tax Act, actions by the NMPRC, PUCT, and FERC, or the Company’s further analysis of historical records could cause these estimates to change. Through March 31, 2018, no significant adjustments to the impacts reflected in the 2017 Consolidated Financial Statements included in the 2017 Annual Reports on Form 10-K have been identified.

In 2013, New Mexico House Bill 641 reduced the New Mexico corporate income tax rate from 7.6% to 5.9%. The rate reduction is being phased-in from 2014 to 2018. In accordance with GAAP, PNMR and PNM adjusted accumulated deferred income taxes to reflect the tax rate at which the balances are expected to reverse during the period that includes the date of enactment, which was in the year ended December 31, 2013. At that time, the portion of the adjustment related to PNM’s regulated activities was recorded as a reduction in deferred tax liabilities and an increase in a regulatory liability, based on the assumption that PNM would be required to return the benefit to customers over time. PNM’s NM 2016 Rate Case (Note 12) reflects that assumption. In addition, the portion of the adjustment that was not related to PNM’s regulated activities was recorded as a reductionand TNMP’s 2018 Rate Case in deferred tax assets and an increase in income tax expense. Changes in the estimated timing of reversals of deferred tax assets and liabilities resulted in refinements of the impacts of this change in tax rates being recorded periodically through December 31, 2017, at which time the impacts of the rate reduction were fully phased in. In the three months ended March 31, 2017, PNM’s regulatory liability was reduced by $4.8 million, which increased deferred tax liabilities. Deferred tax assets not related to PNM’s regulatory activities were reduced by $0.1 million in the three months ended March 31, 2017, increasing income tax expense by less than $0.1 million for PNM and $0.1 million for the Corporate and Other segment. The benefit of the lower New Mexico corporate income tax rate is being returned to customers over a three-year period beginning February 1, 2018 as ordered in PNM’s NM 2016 Rate Case.Note 12.

As required under GAAP, the Company makes an estimate of its anticipated effective tax rate for the year as of the end of each quarterly period within its fiscal year. In interim periods, income tax expense is calculated by applying the anticipated annual effective tax rate to year-to-date earnings before income taxes, which includes the earnings attributable to the Valencia non-controlling interest. GAAP also provides that certain unusual or infrequently occurring items, including excess tax benefits related to stock awards, be excluded from the estimated annual effective tax rate calculation. At March 31, 2018,2019, PNMR, PNM, and TNMP estimated their effective income tax rates for the year ended December 31, 20182019 would be 12.11%9.42%, 8.07%11.89%, and 23.47%8.41%. These rates reflect the reduced federal corporate income tax rate of 21%, which rates are adjusted to reflect permanent differences between earnings determined in accordance with GAAP and taxable income, as well as state income taxes. The primary permanent difference is the reduction in income tax expense resulting from the amortization of excess deferred federal and state income taxes ordered by the NMPRC in PNM’s NM 2016 Rate Case and the amortization of excess deferred federal income taxes as ordered by the PUCT in TNMP’s 2018 Rate Case. During the three months ended March 31, 2018,2019, income tax expense calculated by applying the expected annual effective income tax rate to earnings before income taxes for PNMR, PNM, and TNMP was further reduced

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


by excess tax benefits related to stock awards of $1.3$0.7 million $1.0for PNMR, of which $0.5 million was allocated to PNM and $0.3 million.

$0.2 million was allocated to TNMP.

(15)Related Party Transactions

PNMR, PNM, TNMP, and NMRD are considered related parties as defined under GAAP, as is PNMR Services Company, a wholly-owned subsidiary of PNMR that provides corporate services to PNMR and its subsidiaries in accordance with shared services agreements. These services are billed at cost on a monthly basis to the business units. In addition, PNMR provides construction and operations and maintenance services to NMRD, a 50% owned subsidiary of PNMR Development (Note 1), and PNM purchases renewable energy from certain NMRD-owned facilities at a fixed price per MWh of energy produced. PNM also provides interconnection services to PNMR Development (Note 9) and NMRD.

The table below summarizes the nature and amount of related party transactions of PNMR, PNM, TNMP, and NMRD:
Three Months EndedThree Months Ended
March 31,March 31,
2018 20172019 2018
(In thousands)(In thousands)
Services billings:      
PNMR to PNM$23,679
 $24,402
$26,826
 $23,679
PNMR to TNMP8,365
 8,137
10,058
 8,365
PNM to TNMP86
 85
75
 86
TNMP to PNMR35
 35
35
 35
PNMR to NMRD78
 —
41
 78
Renewable energy purchases:      
PNM from NMRD370
 —
625
 370
Interconnection billings:   
PNM to NMRD—
 —
PNM to PNMR—
 —
Interest billings:      
PNMR to PNM62
 —
933
 62
PNM to PNMR66
 43
72
 66
PNMR to TNMP8
 31
32
 8
Income tax sharing payments:      
PNMR to PNM—
 —
—
 —
PNMR to TNMP—
 —
TNMP to PNMR—
 —
—
 —


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is presented as permitted by Form 10-Q General Instruction H(2). This report uses the term “Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. A reference to a “Note” in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified. Certain of the tables below may not appear visually accurate due to rounding.

MD&A FOR PNMR

EXECUTIVE SUMMARY
Overview and Strategy    

PNMR is a holding company with two regulated utilities serving approximately 776,000784,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. PNMR’s electric utilities are PNM and TNMP.
Strategic Goals
PNMR is focused on achieving three key strategic goals:

Earning authorized returns on regulated businesses
Delivering at or above industry-average earnings and dividend growth
Maintaining solid investment grade credit ratings

In conjunction with these goals, PNM and TNMP are dedicated to:

Maintaining strong employee safety, plant performance, and system reliability
Delivering a superior customer experience
•
Demonstrating environmental stewardship in business operations, including reducing CO2 emissions
Demonstrating environmental stewardship in business operations, including transitioning to an emissions-free generating portfolio by 2040
Supporting the communities in their service territories

Earning Authorized Returns on Regulated Businesses

PNMR’s success in accomplishing its strategic goals is highly dependent on two key factors: fair and timely regulatory treatment for its utilities and the utilities’ strong operating performance. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: safety, operational excellence, and customer satisfaction, while engaging stakeholders to build productive relationships. Both PNM and TNMP seek cost recovery for their investments through general rate cases and various rate riders.

Fair and timely rate treatment from regulators is crucial to PNM and TNMP in earning their allowed returns and critical for PNMR to achieve its strategic goals. PNMR believes that earning allowed returns is viewed positively by credit rating agencies and that improvements in the Company’s ratings could lower costs to utility customers.

Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K and in Note 12.

State Regulation

New Mexico 2015 Rate Case – On September 28, 2016, the NMPRC issued an order that authorized PNM to implement an increase in base non-fuel rates of $61.2 million for New Mexico retail customers, effective for bills sent after September 30, 2016. This order was on PNM’s application for a general increase in retail electric rates (the “NM 2015 Rate Case”) filed in August 2015. PNM’s application requested an increase in base non-fuel revenues of $121.5 million based on a future test year

(“FTY”) beginning October 1, 2015. The primary drivers of the revenue deficiency were infrastructure investments and declines in forecasted energy sales due to successful energy efficiency programs and other economic factors.

Following public hearings, the Hearing Examiner in the case issued a recommended decision in August 2016 proposing an increase in non-fuel revenues of $41.3 million (the “August 2016 RD”). The NMPRC’s September 26,28, 2016 order approved many aspects of the August 2016 RD, including theincluded a determination that PNM was imprudent in purchasing 64.1 MW of previously leased capacity in PVNGS Unit 2, extending the leases for 114.6 MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. However, the order also made certain significant modifications to the August 2016 RD. Major components of the difference between the increase in non-fuel revenues approved in the order and PNM’s request, include:

A ROE of 9.575%, compared to the 10.5% requested by PNM
Inclusion of the January 2016 purchase of the assets underlying three leases of capacity, totaling 64.1 MW of PVNGS Unit 2 (Note 13) at an initial rate base value of $83.7 million, compared to PNM’s request for recovery of the fair market value purchase price of $163.3 million; and disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW was being leased by PNM, which costs totaled $43.8 million when the order was issued
Disallowance of the recovery of any future contributions for PVNGS decommissioning costs related to the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016 and the 114.6 MW of the leased capacity in PVNGS Units 1 and 2 that were extended for eight years beginning January 15, 2015 and 2016 (Note 13)
Disallowance of recovery of the costs associated with converting SJGS Units 1 and 4 to BDT, which is required by the NSR permit for SJGS (Note 12);SJGS; PNM’s share of the costs of installing the BDT equipment was $52.3 million, $40.0 million of which PNM requested be included in rate base in the NM 2015 Rate Case

On September 30, 2016, PNM filed a notice of appeal with the NM Supreme Court regarding the order in the NM 2015 Rate Case. PNM is appealing the NMPRC’s determination that PNM was imprudent in the actions taken to purchase the previously leased 64.1 MW of capacity in PVNGS Unit 2, extending the leases for 114.6 MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. PNM’s appeal includes the following specific elements of the NMPRC’s order:

Disallowance of recovery of the full fair market value purchase price of the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016
Disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity was leased by PNM
Disallowance of recovery of future contributions for PVNGS decommissioning attributable to 64.1 MW of purchased capacity and the 114.6 MW of capacity under the extended leases
Disallowance of recovery of the costs of converting SJGS Units 1 and 4 to BDT

NEE, NMIEC, and ABCWUA filed notices of cross appeal to PNM’s appeal. The issues that are being appealed by the various cross-appellants are:

The NMPRC allowing PNM to recover the costs of the lease extensions for the 114.6 MW of PVNGS Units 1 and 2 and any of the purchase price for the 64.1 MW in PVNGS Unit 2
The NMPRC allowing PNM to recover the costs incurred under the new coal supply contract for Four Corners
The revised method to collect PNM’s fuel and purchased power costs under the FPPAC
The final rate design
The NMPRC allowing PNM to include the “prepaid pension asset” in rate base

The NM Supreme Court has orally stated that the court’s intent would be to request that PNM reimburse ratepayers for any amount overcharged should the cross-appellants prevail on the merits. Oral argument at the NM Supreme Court was held on October 30, 2017. Although appeals of regulatory actions of the NMPRC have a priority at the NM Supreme Court under New Mexico law, there is no required time frame for the court to act on the appeals.

PNM evaluated the accounting consequences of the order in the NM 2015 Rate Case and the likelihood of being successful on the issues it is appealing in the NM Supreme Court as required under GAAP. The evaluation indicated it is reasonably possible that PNM will be successful on the issues it is appealing. If the NM Supreme Court rules in PNM’s favor on some or all of the issues, those issues would be remanded back to the NMPRC for further action. PNM currently estimatesoriginally estimated that it willwould take a minimum of seven15 months from December 31, 2017September 30, 2016 for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues. During such time, the rates specified in the order remain in effect.Accordingly, PNM recorded pre-tax regulatory disallowances in 2016 and 2017 aggregating $14.4of $11.3 million representing capital cost recovery for the period October 1, 2016

through JulyDecember 31, 20182017 on its investments that the order disallowed, and as well as

amounts recorded as regulatory assets and deferred charges that the order disallowed, and which PNM did not challenge in its appeal. PNM has periodically updated its estimate of the time frame necessary to resolve these matters resulting in additional pre-tax disallowances of $3.1 million and $4.0 million being recorded in December 2017 and in the second half of 2018. Since the NM Supreme Court did not issue a decision by March 31, 2019, PNM again reevaluated its estimate of the time frame necessary to resolve the matter. As of March 31, 2019, PNM recorded additional pre-tax disallowances of $1.3 million representing additional cost recovery the order disallowed and will not be recovered from customers. PNM’s aggregate pre-tax losses of $19.7 million assumes the NM Supreme Court will issue a decision and that any remanded issues will be addressed by the NMPRC by July 31, 2019. Additional losses will be recorded if the currently estimated time frame for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues is further extended.

PNM continues to believe that the disallowed investments, which are the subject of PNM’s appeal, were prudently incurred and that PNM is entitled to full recovery of those investments through the ratemaking process. If PNM’s appeal is unsuccessful, PNM would record additional pre-tax losses related to any unsuccessful issues. The March 31, 20182019 book values of PNM’s investments that the order disallowed, after considering the losses recorded through December 31, 2017,to date, were $75.3$72.6 million for the 64.1 MW of purchased capacity in PVNGS Unit 2, $39.1$37.6 million for the PVNGS Unit 2 disallowed capital improvements, and $49.4$49.7 million for the BDT equipment.

PNM does not believe that the likelihood of the cross-appeals being successful is probable. However, if the NM Supreme Court were to overturn all of the issues subject to the cross-appeals and, upon remand, the NMPRC did not provide any cost recovery of those items, PNM would write-off all of the costs to acquire the assets previously leased under three leases aggregating 64.1 MW of PVNGS Unit 2 capacity, totaling $150.4$144.7 million at March 31, 20182019 (which amount includes $75.3$72.6 million that is the subject of PNM’s appeal discussed above) after considering the losses recorded through December 31, 2017.to date. The impacts of not recovering costs for the lease extensions, new coal supply contract for Four Corners, and “prepaid pension asset” in rate base would be recognized in future periods reflecting that rates charged to customers would not recover those costs as they are incurred. The outcomes of the cross-appeals regarding the FPPAC and rate design should not have a financial impact to PNM.

New Mexico 2016 Rate Case – On December 7, 2016,January 16, 2018, the NMPRC issued an order that authorized PNM filedto implement an application withincrease in base non-fuel rates of $10.3 million. PNM implemented 50% of the NMPRCapproved increase for service rendered, rather than bills sent, beginning February 1, 2018 and implemented the rest of the increase for service rendered beginning January 1, 2019. This order was on PNM’s application for a general increase in retail electric rates (the “NM 2016 Rate Case”) filed in December 2016. PNM’s December 2016 application requested an increase in base non-fuel revenues of $99.2 million based on a FTY beginning January 1, 2018 and an ROE of 10.125%. PNMPNM’s December 2016 application did not include a request to recover any of the costs disallowed in the NM 2015 Rate Case that are at issue in PNM’s pending appeal to the NM Supreme Court. PNM’s application requested an increase in base non-fuel revenues of $99.2 million based on a FTY beginning January 1, 2018. The primary drivers of thePNM’s revenue deficiency were:

Implementationincluded implementation of the modifications into PNM’s resource portfolio, which were previously approved by the NMPRC in December 2015 as part of the SJGS regional haze compliance plan, (see below and Note 11)
Infrastructureinfrastructure investments, including environmental upgrades at Four Corners,
Declines declines in forecasted energy sales due to successful energy efficiency programs and other economic factors,
Updates in the and updates to FERC/retail jurisdictional allocationsallocations.

After extensive settlement negotiations and public proceedings, the NMPRC ordered settlement discussions were held, PNM and representativesissued a Revised Order Partially Adopting Certification of several intervenors reached an agreement on the parameters for a settlement in this proceeding. In May 2017, PNM and thirteen intervenors entered into a comprehensive stipulation, which was subsequently revised to address issues raised by the Hearing Examiners in the case. NEE was the sole party opposing the revised stipulation.Stipulation dated January 10, 2018 (the “Revised Order”). The key terms of the revised stipulation included:Revised Order include:

A revenue increase totaling $62.3$10.3 million, withwhich includes a reduction to reflect the impact of the decrease in the federal corporate income tax rate and updates to PNM’s cost of debt (aggregating an initial increase of $32.3estimated $47.6 million beginning January 1, 2018 and the remaining increase beginning January 1, 2019annually)
A ROE of 9.575%, compared
Returning to customers over a three-year period the benefit of the reduction in the New Mexico corporate income tax rate (Note 14) to the 10.125% requested by PNMextent attributable to PNM’s retail operations
Full recovery ofDisallowing PNM’s ability to collect an equity return on its $90.1 million investment in SCRs at Four Corners and on $58.0 million of projected capital improvements during the period July 1, 2016 through December 31, 2018, but allowing recovery of the total $148.1 million of investments with a debt-only return
An agreement to not implement non-fuel base rate changes, other than changes related to PNM’s rate riders, with an effective date prior to January 1, 2020
An agreementA decision to adjustdefer future consideration regarding the January 2019 increase for certain changes in federal corporate tax laws and to true-up PNM’s costprudency of debt
Returning to customers over a three-year period the benefit of the reduction in the New Mexico corporate income tax rate to the extent attributable to PNM’s retail operations
PNM would perform a cost benefit analysis in its 2020 IRP of the impact of a possible early exit from Four Corners in 2024 and 2028

A public hearing on the revised stipulation was held in August 2017. On October 31, 2017, the Hearing Examiners issued a Certification of Stipulation recommending modifications to the revised stipulation that would identify PNM’s decision to continue its participation in Four Corners as imprudent, not allow PNM to collect a debt or equity return on $148.1 million of investments in SCRs and other projects at Four Corners, and to temporarily disallow recovery of $36.8 of PNM’s projected capital improvements at SJGS.future proceeding


Extensive proceedings before the NMPRC were conducted in December 2017 and January 2018 as described in Note 12. Ultimately, the NMPRC issued an order on January 16, 2018 that approved the Certification of Stipulation with certain changes, which included allowing PNM to recover its $148.1 million of investments in SCR and other projects at Four Corners with a debt-only return (but maintaining the recommended disallowance of an equity return), deferring further consideration regarding the prudency of PNM’s decisions to continue its participation in Four Corners to PNM’s next general rate case, requiring the impacts of changes related to the reduction in the federal corporate income tax rate and PNM’s cost of debt (aggregating an estimated $47.6 million) be implemented in 2018 rather than January 1, 2019, and requiring PNM to reduce its requested $62.3 million increase in non-fuel revenues by $4.4 million.

After implementation of changes to the federal corporate income tax rate and cost of debt, the order results in a net increase to PNM’s non-fuel revenue requirement of $10.3 million. PNM implemented 50% of the approved increase for service rendered rather than bills rendered, beginning February 1, 2018 and will implementimplemented the rest of the increase for service rendered beginning January 1, 2019. GAAP required PNM to recognize a loss reflecting that it will earn a debt-only return on $148.1 million of investments at Four Corners rather than a full return. Accordingly, PNM recorded a pre-tax regulatory disallowance of $27.9 million as of December 31, 2017.

On February 7, 2018, NEE filed a notice of appeal with the NM Supreme Court asking the court to review the NMPRC’s decisions in the NM 2016 Rate Case. On March 7, 2018, NEE filed its statement of issues with the NM Supreme Court requesting, among other things, that the NMPRC be required to identify PNM’s decision to continue its participation in Four Corners as imprudent and to deny any recovery related to PNM’s $148.1 million of investments in Four Corners. Although PNM does not believe it is probable that NEE’s appeal will be successful, it is unable to predict what decision the NM Supreme Court will reach. If the NM Supreme Court were to remand the case to the NMPRC and the NMPRC identified PNM’s continued involvement in Four Corners as imprudent with no recovery of the $148.1 million of investments in Four Corners, PNM would be required to record additional losses for the remaining amount of those investments (after considering the $27.9 million regulatory disallowance recorded in 2017). In addition, PNM’s future investments in Four Corners, which could be required under the participation agreement governing that facility, could also be subject to disallowance. PNM cannot predict the outcome of this matter.
 
San Juan Generating Station Unit 1 OutageTNMP 2018 Rate Case – – On March 17,December 20, 2018, the PUCT approved a coal silo usedsettlement stipulation allowing TNMP to supply fuel to SJGS Unit 1 collapsed resulting in an outage. PNM promptly contacted the staffincrease annual base rates by $10.0 million based on a ROE of the NMPRC to inform them9.65%, a cost of the event and has initiated a reviewdebt of its cause. PNM currently anticipates inspections of the facility6.44%, and a determinationcapital structure comprised of estimated repair costs will be completed by55% debt and 45% equity. Under the end of May 2018 and thatapproved settlement stipulation TNMP was granted authority to integrate revenues previously recorded under the unit will be returned to service shortly after that date. PNM anticipates the damages to the facility will be reimbursed under an existing property insurance policy that covers SJGS, subject to a deductible of $2.0 million.  PNM’s exposure to the cost of repairs is $1.0 million, reflecting PNM’s 50% ownership interest in SJGS Unit 1. To minimize the operational and financial impacts of this event, PNM has accelerated the fall 2018 planned maintenance outage on Unit 1 to be performed while the unit is out of service for this event.
On April 12, 2018, NEE filed a petition (jointly with certain other organizations) requesting that the NMPRC order an investigation into the SJGS Unit 1 event.  The petition requests that the NMPRC order PNM to respond to the petition, that proceedings be set on this matter, and that PNM be required to provide a narrative explanation, cost/benefit analysis, and alternatives assessment used to determine that Unit 1 should be repaired rather than utilizing alternative resources.  On April 25, 2018, the NMPRC issued an order requiring PNM to provide a factual statement of the nature and cause of the event,AMS rider, as well as the anticipated need for and scheduleother unrecorded AMS costs, into base rates; establish a new rider to recover Hurricane Harvey restoration costs, net of repairs required. PNM must also address the necessity and appropriatenessamounts owed to customers as a result of the request forreduction in the federal corporate income tax rate in 2018; and to update depreciation rates. In addition, the approved settlement stipulation allows TNMP to refund the regulatory liability recorded at December 31, 2017 related to federal tax reform to customers and reflects the reduction in the federal corporate income tax rate to 21%. New rates under the TNMP 2018 Rate Case became effective January 1, 2019.

TNMP’s original application, which was filed with the PUCT on May 30, 2018 (the “TNMP 2018 Rate Case”), requested an annual increase to base rates of $25.9 million based on a cost/benefit analysis, alternatives assessment,ROE of 10.5%, a cost of debt of 7.2%, and request for further proceedings.a capital structure comprised of 50% debt and 50% equity.

Advanced Metering – In September 2011, TNMP begancompleted its mass deployment of advanced meters for homes and businesses across its service area. TNMP completed its mass deploymentterritory in 2016 and has installed more than 242,000 advanced meters. As part ofdiscussed above, beginning in 2019 the State of Texas’ long-term initiative to create an advanced electric grid, installation of advanced meters will ultimately give consumers more data about their energy consumption and help them make more informed decisions. In addition, TNMP has completed installation of a new outage management system that will leverage capabilities of the advanced metering infrastructure to enhancecosts associated with TNMP’s responsiveness to outages.AMS program are being recovered through base rates.

OnIn February 26, 2016, PNM filed an application with the NMPRC requesting approval of a project to replace its existing customer metering equipment with Advanced Metering Infrastructure (“AMI”). The application also asked, which was denied. As ordered by the NMPRC, to authorize the recovery, in future ratemaking proceedings, of the cost of the project, as well as to approve the recovery of the remaining undepreciated investment in existing metering equipment, the costs of customer education, and severance for any affected employees. On March 19, 2018, the Hearing Examiner issued a recommended decision finding that PNM had not proven a net

public benefit in the case and recommending the NMPRC not approve the application. On April 2, 2018 PNM filed a statement on exceptions to the recommended decision indicating, among other things, that PNM disagreed with the finding that the record did not demonstrate a net public benefit to customers, but that PNM would not take exception to a recommendation to not approve the application. No other parties filed exceptions to the recommended decision by the required deadline. On April 11, 2018, the NMPRC adopted an order accepting the recommended decision and disapproving PNM’s application. The order indicated PNM’s next energy efficiency plan filing shouldwill include a proposal for an AMI pilot project.

Rate Riders and Interim Rate Relief – The PUCT has approved mechanisms that allow TNMP to recover capital invested in transmission and distribution projects without having to file a general rate case. This permits more timely recovery of investments. The PUCT has also approved riders that allow TNMP to recover amounts related to AMS, energy efficiency, third-party transmission costs, and the CTC. The NMPRC has approved PNM recovering fuel costs through the FPPAC, as well as rate riders for renewable energy and energy efficiency that allow for more timely recovery of investments and improve PNM’s ability to earn its authorized return.

TNMP General Rate CaseCost Recovery Related to Joining the EIM – – TNMP’s lastIn 2018, PNM completed a cost-benefit analysis that indicated PNM’s participation in the California Independent System Operator (“CAISO”) Western Energy Imbalance Market (“EIM”) would provide substantial benefits to retail customers. In August 2018, PNM filed an application with the NMPRC requesting, among other things, to recover the cost of initial capital investments and authorization to establish a regulatory asset to recover other expenses that would be incurred in order to join the EIM. PNM’s application proposes recovery of the costs incurred to join the EIM would be recovered beginning on the effective date of new rates in PNM’s next general rate case and that the benefits of participating in the EIM be credited to retail customers through PNM’s existing FPPAC. A public hearing was held on December 12, 2018. On December 19, 2018, the NMPRC issued an order approving the establishment of a regulatory asset to recover PNM’s cost of joining the EIM. On January 17, 2019, ABCWUA filed a motion to reopen the case and to reconsider the NMPRC’s order approving the establishment of a regulatory asset. On February 6, 2019, the NMPRC issued an order granting rehearing and vacating the December 19, 2018 order. On February 24, 2019, Western Resource Advocates, and the Coalition for Clean and Affordable Energy filed a motion for an expedited final order, which was supported by PNM and other parties and opposed by ABCWUA.  On February 27, 2019, the NMPRC issued a procedural order requiring the Hearing Examiner to report to the NMPRC whether the matter should be reopened. On March 18, 2019, the Hearing Examiner recommended that all rate making issues, including but not limited to implementation and ongoing EIM costs and savings, the prudence and reasonableness of costs included in 2010 with new rates becoming effectivea regulatory asset, and the period over which costs would be charged to customers be deferred until a future case. PNM filed limited exceptions to the recommended decision. The NMPRC issued a final order adopting the Hearing Examiner’s recommended decision on February 1, 2011. In connection with TNMP’s deploymentMarch 27, 2019. On April 12, 2019, PNM and other parties filed a joint motion requesting the NMPRC clarify that the quarterly benefits reports prepared by CAISO be used to determine the benefits of its AMS, TNMP has committedparticipating in the EIM, as well as to filesupport the prudence of costs incurred to join the EIM. On April 24, 2019, the NMPRC issued an order granting the joint motion for clarification and indicating the CAISO quarterly benefits reports may be used in a generalfuture rate case no later than September 1, 2018. TNMP currentlycase. PNM anticipates filing its general rate caseit will begin participating in May 2018 using a 2017 calendar year test period.  New rates are anticipated to become effective during January 2019. the EIM in April 2021.

FERC Regulation

Rates PNM charges wholesale transmission customers and wholesale generation customers are subject to traditional rate regulation by FERC. 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 following year formula rate.true-up. 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 than what PNM is able to offer wholesale generation customers under the cost of service model that FERC requires PNM to use.  Consequently, PNM decided to stop pursuing wholesale generation contracts and currently has no full-requirements wholesale generation customers.
Delivering At or Above Industry-Average Earnings and Dividend Growth
PNMR’s strategic goal to deliver at or above industry-average earnings and dividend growth enables investors to realize the value of their investment in the Company’s business. PNMR’s current target is 5% to 6% earnings and dividend growth for the period 20182019 through 2021.2022. Earnings growth is based on ongoing earnings, which is a non-GAAP financial measure that excludes from GAAP earnings certain non-recurring, infrequent, and other items that are not indicative of fundamental changes in the earnings capacity of the Company’s operations. PNMR uses ongoing earnings to evaluate the operations of the Company and to establish goals, including those used for certain aspects of incentive compensation, for management and employees.
PNMR targets a dividend payout ratio ofin the 50% to 60% range of its ongoing earnings. PNMR expects to provide at or above industry-average dividend growth in the near-term and to manage the payout ratio to meet its long-term target. The Board will continue to evaluate the dividend on an annual basis, considering sustainability and growth, capital planning, and industry standards. The Board approved the following increases in the indicated annual common stock dividend:
Approval Date Percent Increase
February 201216%
February 201314%
December 201312%
December 20148%
December 2015 10%
December 2016 10%
December 20179%
December 2018 9%

Maintaining Solid Investment Grade Credit Ratings
The Company is committed to maintaining solid investment grade credit ratings in order to reduce the cost of debt financing and to help ensure access to credit markets, when required. See the subheading Liquidity included in the full discussion of Liquidity and Capital Resources below for the specific credit ratings for PNMR, PNM, and TNMP. Currently, all of the credit ratings issued by both Moody’s and S&P on the Company’s debt are investment grade. In January 2018, S&P changed the outlook for PNMR, PNM, and TNMP from stable to negative. In June 2018, Moody’s changed the outlook for PNMR and PNM from positive to stable and maintained a stable outlook for TNMP.

Business and Strategic Focus

PNMR strives to create enduring value for customers, communities, and shareholders. PNMR’s strategy and decision-making are focused on safely providing reliable, affordable, and environmentally responsible power. The Company works closely with customers, stakeholders, legislators, and regulators to ensure that resource plans and infrastructure investments benefit from robust public dialogue and balance the diverse needs of our communities. Equally important is the focus of PNMR’s utilities on customer satisfaction and community engagement.

Reliable and Affordable Power
PNMR and its utilities are aware of the important roles they play in enhancing economic vitality in their service territories. Management believes that maintaining strong and modern electric infrastructure is critical to ensuring reliability and supporting economic growth. When contemplating expanding or relocating their operations, businesses consider energy affordability and reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability and to deliver a superior customer experience. Investing in PNM’s and TNMP’s infrastructure is critical to ensuring reliability and meeting future energy needs. Both utilities have long-established records of providing customers with reliable electric service.


Utility Plant and Strategic Investments

Utility Plant Investments – During the 20152016 to 20172018 period, PNM and TNMP together invested $1,552.0$1,501.7 million in utility plant, including substations, power plants, nuclear fuel, and transmission and distribution systems. PNM completed the 40 MW natural gas-fired La Luz peaking generating station located near Belen, New Mexico in December 2015. PNM also completed installation of SNCR and BDT equipment on SJGS Units 1 and 4 in early 2016 and the addition of 40 MW of PNM-owned solar PV facilities in 2015. In addition, on2016. On January 15, 2016, PNM completed the $163.3 million acquisition of 64.1 MW of capacity in PVNGS Unit 2 that had previously been leased to PNM. During 2018 and 2019, PNM will construct an additional 50 MW of PNM-owned PV facilities, which were approved by the NMPRC in PNM’s 2018 renewable energy procurement plan. The 50 MW PV facilities are expected to be placed in commercial operations by December 2019 at a cost not to exceed $73.0 million. In late 2018, PNM became the first utility to install a new type of protective relay on its high-voltage transmission lines, which help to ensure the reliability of PNM’s electrical system. On May 1, 2019, PNM executed an agreement to purchase a 165-mile 345 kV transmission line and to construct associated facilities (the “Western Spirit Line”), subject to NMPRC and FERC approval. PNM anticipates the Western Spirit line will be used to serve approximately 800 MW of new wind generation facilities in eastern New Mexico beginning in 2021. See the subheading Capital Requirements included in the full discussion of Liquidity and Capital Resources below for additional discussion of the Company’s projected capital requirements.

Strategic Investments – In 2017, PNMR Development and AEP OnSite Partners created NM Renewable Development, LLC (“NMRD”)NMRD to pursue the acquisition, development, and ownership of renewable energy generation projects, primarily in the state of New Mexico. Abundant renewable resources, large tracts of affordable land, and strong government and community support make New Mexico a favorable location for renewable generation. New Mexico has the 2nd highest technical potential of the 48 contiguous states for utility scale solar photovoltaics as noted in 2015 by the National Renewable Energy Laboratory, while New Mexico is 6th for technical potential for land-based wind. PNMR Development and AEP OnSite Partners each have a 50% ownership interest in NMRD. Through NMRD, PNMR anticipates being able to provide additional renewable generation solutions to customers within and surrounding its regulated jurisdictions through partnering with a subsidiary of one of the United States’ largest electric utilities. The formation of this joint venture provides a more efficient use of PNMR’s capital to support new renewable investment opportunities while maintaining the necessary capital to support investments required by regulated jurisdictions. NMRD’s current renewable energy capacity in operation is 21.833.9 MW, which includes 2030 MW of solar PVsolar-PV facilities required to supply energy to the new Facebook data center located within PNM’s service territory, and 1.81.9 MW to supply energy to Columbus Electric Cooperative located in southwest New Mexico. At March 31,Mexico, and 2.0 MW to supply energy to the Central New Mexico Electric Cooperative. In August 2018, NMRD also had 10the NMPRC approved PNM’s request to enter into two additional 25-year PPAs to purchase renewable energy and RECs from an aggregate of approximately 100 MW of solar PVcapacity from two solar-PV facilities under construction that willto be completed in mid-2018 and will be usedconstructed by NMRD to supply the Facebook data center.power to Facebook. NMRD is required to obtain FERC approval of the PPAs. Subject to FERC approval, these facilities are expected to be in commercial operation by June 2020.See Note 12. NMRD actively exploringexplores opportunities for additional renewable projects. In addition, NMRD will evaluate potential bid opportunities for future renewable projects, including large-scale projects to serve future data centercenters and other customer needs.


Integrated Resource Plan

NMPRC rules require that investor-owned utilities file an IRP every three years. The IRP is required to cover a 20-year planning period and contain an action plan covering the first four years of that period. PNM filed its 2014 IRP on July 1, 2014. The four-year action plan was consistent with the replacement resources identified in PNM’s application to retire SJGS Units 2 and 3. PNM indicated that it planned to meet its anticipated energy demand with a combination of additional renewable energy resources, energy efficiency, and natural gas-fired facilities.

PNM filed its 2017 IRP on July 3, 2017. Under the NMPRC’s order concerning SJGS’ compliance with the BART requirements of the CAA discussed in Note 11, PNM is required to make a filing in 2018 to determine the extent to which SJGS should continue serving PNM’s retail customers’ needs after June 30, 2022. The 2017 IRP analyzed several scenarios utilizing assumptions that PNM continues service from its SJGS capacity beyond mid-2022 and that PNM retires its capacity after mid-2022. Key findings of the 2017 IRP include:

Retiring PNM’s share of SJGS in 2022 after the expiration of the current operating and coal supply agreements would provide long-term cost savings for PNM’s customers
PNM exiting its ownership interest in Four Corners after its current coal supply agreement expires in 2031 would also provide long-term cost savings for customers
The best mix of new resources to replace the retired coal generation would include solar energy and flexible natural gas-fired peaking capacity; the mix could include energy storage if the economics support it, and wind energy provided additional transmission capacity becomes available
Significant increases in future wind energy supplies will likely require new transmission capacity to be built from eastern New Mexico to PNM’s service territory
PNM should retain the currently leased capacity in PVNGS, which would avoid replacement with carbon-emitting generation
PNM should continue to develop and implement energy efficiency and demand management programs

PNM should assess the costs and benefits of participating in the California Independent System Operator Western Energy Imbalance Market
PNM should analyze its current Reeves Generating Station to consider possible technology improvements to phase out the older generators and replace them with new, more flexible supplies or energy storage

SeveralOn October 26, 2018, the Hearing Examiner issued a recommended decision recommending that the NMPRC accept PNM’s 2017 IRP as compliant with the applicable statute and NMPRC rules. On December 19, 2018, the NMPRC issued a final order accepting the Hearing Examiner’s recommended decision. On January 18, 2019, The Board of the County of Commissioners for San Juan County, New Mexico, the City of Farmington, New Mexico, and other parties filed protests toa Notice of Appeal with the NM Supreme Court regarding the NMPRC’s final order in PNM’s 2017 IRP. The issues addresseddue date for Statements of Issues in the protests includeappeal has been extended to May 10, 2019 at the request of appellants in the case. On January 18, 2019, NEE submitted a motion requesting the NMPRC reconsider its acceptance of PNM’s future interest in SJGS, Four Corners, and PVNGS and the timing of future procurement of renewable resources. The 2017 IRP isfiling alleging informational inadequacy and deficiencies in PNM’s filing. On January 29, 2019, PNM submitted a filing to the NMPRC in response to NEE’s motion for reconsideration. In its response, PNM stated that the issues raised by NEE had already been considered and rejected by the NMPRC in its December 19, 2018 final order and that the NMPRC lacks jurisdiction over the matters because the NMPRC’s final order has been appealed to the NM Supreme Court. The NMPRC did not take action on NEE’s motion for reconsideration. On February 19, 2019, NEE filed a final determination 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 timesmotion with the NM Supreme Court to intervene in the future. Likewise,appeal and to seek remand of the matter to the NMPRC. On March 11, 2019, PNM filed its response to the NM Supreme Court stating that the NMPRC approvalhad already considered and, by operation of new generation resources through CCN filings would be required.law, denied NEE’s motion for reconsideration. PNM cannot predict the ultimate outcome of thethis matter.

See additional discussion of PNM’s 2017 IRP process or whether the NMPRC will approve subsequent filings that would encompass actions to implement the conclusions of the 2017 IRP.and PNM’s December 2018 Compliance Filing regarding SJGS below and in Notes 11 and 12.
Environmentally Responsible Power
PNMR has a long-standing record of environmental stewardship. PNM’s environmental focus is in three key areas:Energy Efficiency

TNMP recovers the costs of its energy efficiency programs through an energy efficiency cost recovery factor (“EECRF”), which includes projected program costs, under and over collected costs from prior years, rate case expenses, and performance bonuses (if programs exceed mandated savings goals). On May 30, 2018, TNMP filed its request to adjust the EECRF to reflect changes in costs for 2019. The total amount requested was $5.7 million, which included a performance bonus of $0.9 million based on TNMP’s energy efficiency achievements in the 2017 plan year. On June 21, 2018, the PUCT issued a declaratory order announcing the PUCT’s interpretation of the bonus calculation in its rule. The order does not affect cost recovery but reduces the bonus calculation as filed by utilities in their current EECRF proceedings. Accordingly, in June of 2018, TNMP reduced its estimated performance bonus for the 2017 plan year to $0.8 million. On August 6, 2018, TNMP and other parties to the case reached a unanimous settlement stipulation to provide $5.6 million of EECRF recovery, which includes a performance bonus of $0.8 million. On October 12, 2018, the PUCT approved the settlement stipulation with rates to become effective on March 1, 2019.

•(13)
Developing strategies to provide reliable and affordable power, while transforming PNM’s generation resources to a cleaner energy portfolio by reducing CO2 emissions
Lease Commitments
Preparing PNM’s system
The Company enters into various lease agreements to meet New Mexico’s increasing renewable energy resourcesits business needs and to satisfy the needs of its customers. Historically, the Company’s leases were classified as cost-effectively as possible
Increasing energy efficiency participation

PNMR’s Sustainability Portal provides key environmental and sustainability information related to PNM’s and TNMP’s operations and is available at http://www.pnmresources.com/about-us/sustainability-portal.aspx. The portal also contains a Climate Change Report,operating leases which outlines plans to be coal-free by 2031 (subject to regulatory approval). This could enable an 87% reduction in CO2 emissions in 2040 compared to 2012 levels, which is a significantly greater reduction than that required of New Mexico under EPA’s Clean Power Plan. As discussed below, in December 2017 the Company shutdown SJGS Units 2 and 3, which is expected to result in a 40% reduction in CO2 emissions in 2018 compared to 2012 levels.

SJGS

Regional Haze Rule Compliance Plan – In December 2015, PNM received NMPRC approvalincluded leases for the plan to comply with the EPA regional haze rule at SJGS that minimizes the cost impact to customers while still achieving broad environmental benefits.

Under the approved plan, the installation of SNCRs on SJGSgenerating capacity from PVNGS Units 1 and 4 was completed in early 20162, certain rights-of-way agreements for transmission lines and Units 2facilities, vehicle and 3 were retired in December 2017. The plan provides for similar visibility improvements, but at a lower costequipment leases necessary to PNM customers than a previous EPA ruling that would have required the installation of more expensive SCRs on all four units at SJGS. The plan has the added advantage of reducing other emissions in addition to NOx, including SO2, particulate matter, CO2, and mercury, as well as significantly reducing water usage. Additional information is contained in Note 16 of the Notes to Consolidated Financial Statements in the 2017 Annual Reports on Form 10-K and in Note 11.

The December 2015 order also provided, among other things, that:

PNM was granted a CCN to acquire an additional 132 MW in SJGS Unit 4 effective January 1, 2018RESOURCES, INC. AND SUBSIDIARIES
PNM was granted a CCN for 134 MW of PVNGS Unit 3 as a jurisdictional resource to serve New Mexico customers beginning January 1, 2018PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
PNM was authorized to acquire 65 MW of SJGS Unit 4 as merchant utility plantTEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
No later than December 31, 2018, and before entering into a binding coal supply agreement for SJGS, PNM will make a NMPRC filing to determine the extent that SJGS should continue serving PNM’s customers’ needs after mid-2022NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NEE filed a notice of appeal with the NM Supreme Court of the NMPRC’s December 2015 order. On March 5, 2018, the NM Supreme Court issued its opinion affirming the NMPRC’s December 2015 order, thereby denying NEE’s appeal. A request for rehearing of the NM Supreme Court’s decision was not filed by the statutory deadline. This matter is now concluded.

On March 31, 2016, NEE filed a complaint against PNM with the NMPRC regarding the financing provided by NM Capital to facilitate the sale of SJCC. The complaint alleges that PNM failed to comply with its discovery obligation in the SJGS abandonment case and requests the NMPRC investigate whether the financing transactions could adversely affect PNM’s ability to provide electric service to its retail customers. PNM responded to the complaint on May 4, 2016. On January 31, 2018, NEE filed a motion asking the NMPRC to investigate whether PNM’s relationship with WSJ, in light of Westmoreland’s financial condition, could be harmful to PNM’s customers. PNM responded requesting the NMPRC deny the motion and that NEE’s prior compliant be dismissed. The NMPRC has taken no action on these matters.

SJGS Ownership Restructuringconstruct and maintain the Company’s assets and building and office equipment leases. In February 2016, the FASB issued ASU 2016-02 - –Leases (Topic 842)In connection with to provide guidance on the plan to comply with EPA regional haze rules at SJGS, somerecognition, measurement, presentation, and disclosure of leases. Among other things, ASU 2016-02 requires that all leases be recorded on the balance sheets by recognizing a present value liability for future cash flows of the SJGS participants expressedlease agreement and a desirecorresponding right-of-use asset. The Company adopted Topic 842 on January 1, 2019, its required effective date. The Company elected to exit their ownership inuse many of the plant.practical expedients available upon adoption of the standard. As a result, the SJGS participants negotiated a restructuringCompany will continue to classify its leases existing as of December 31, 2018 as operating leases until they expire or are modified. In addition, the Company elected the practical expedient to not reevaluate the accounting for land easements and rights-of-way agreements existing at December 31, 2018. The Company also elected the use of the ownership in SJGS and addressedpractical expedient to apply the obligations of the exiting participants for plant decommissioning, mine reclamation, environmental matters, and certain future operating costs, among other items. The San Juan Project Restructuring Agreement (“SJGS RA”) sets forth the agreement among the SJGS owners regarding ownership restructuring and addresses other related matters, including that the exiting participants remain obligated for their proportionate shares of environmental, mine reclamation, and certain other legacy liabilities that are attributable to activities that occurred prior to their exit. The SJGS RA became effective contemporaneously with the effectivenessrequirements of the new SJGS CSAstandard on its effective date and has not restated prior periods to conform to the new guidance. Adoption of the lease standard has a material impact on the Company’s Condensed Consolidated Balance Sheets but does not have a material impact on the Condensed Consolidated Statements of Earnings or the Condensed Consolidated Statements of Cash Flows.

Effective January 1, 2019, the Company accounts for contracts that convey the use and control of identified assets for a period of time as leases. The Company classifies leases as operating or financing by evaluating the terms of the lease agreement. Agreements under which the Company is likely to utilize substantially all of the economic value or life of the asset or which the Company is likely to own at the end of the lease term, either through purchase or transfer of ownership, are classified as financing leases. Leases not meeting these criteria are accounted for as operating leases. Agreements under which the Company is a lessor are insignificant. Leases with terms that are expected to exceed one year are recognized on the Company’s Condensed Consolidated Balance sheet by recording a lease liability and corresponding right-of-use asset. PNMR, PNM, and TNMP determine present value for their leases using their incremental borrowing rates at the commencement date of the lease or, when readily available, the rate implicit in the agreement. However, in most cases the implicit interest rate is not available in the Company’s lease agreements. Operating lease expense is recognized within operating expenses according to the use of the asset on a straight-line basis. Financing lease costs are recognized by amortizing the right-of-use asset on a straight-line basis and by recording interest expense on the lease liability. Financing lease right-of-use assets amortization is reflected in depreciation and amortization and interest on financing lease liabilities is reflected as interest charges on the Company’s Condensed Consolidated Statements of Earnings.

PVNGS

PNM leases interests in Units 1 and 2 of PVNGS. The PVNGS leases were entered into in 1985 and 1986 and initially were scheduled to expire on January 31, 2016. See Note 11.15, 2015 for the four Unit 1 leases and January 15, 2016 for the four Unit 2 leases. Following procedures set forth in the PVNGS leases, PNM notified four of the lessors under the Unit 1 leases and one lessor under the Unit 2 lease that it would elect to renew those leases on the expiration date of the original leases. The four Unit 1 leases now expire on January 15, 2023 and the one Unit 2 lease now expires on January 15, 2024. The annual lease payments during the renewal periods aggregate $16.5 million for PVNGS Unit 1 and $1.6 million for Unit 2.
Other SJGS Environmental Matters –In addition
The terms of each of the extended leases do not provide for additional renewal options beyond their currently scheduled expiration dates. PNM has the option to purchase the assets underlying each of the extended leases at their fair market value or to return the lease interests to the regional haze rule, SJGS islessors on the expiration dates. Under the terms of the extended leases, PNM has until January 15, 2020 for the Unit 1 leases and January 15, 2021 for the Unit 2 lease to provide notices to the lessors of PNM’s intent to exercise the purchase options or to return the leased assets to the lessors. PNM’s elections are independent for each lease and are irrevocable. In the proceeding addressing PNM’s 2017 IRP (Note 12), PNM agreed to promptly notify the NMPRC of a decision to extend the Unit 1 or 2 leases, or to exercise its option to purchase the leased assets at fair market value upon the expiration of leases. If PNM elects to exercise its purchase option under any of the leases, the leases provide an appraisal process to determine fair market value. If PNM elects to return the assets underlying the extended leases, PNM will retain certain obligations related to PNVGS, including costs to decommission the facility. PNM would seek to recover its undepreciated investments at the end of the PVNGS leases as well as any future obligations related to PNM’s leased capacity from NM retail customers. Any transfer of the assets underlying the leases will be required to comply with other rules currently being developed or implemented that affect coal-fired generating units, including rules regarding GHG under Section 111(d) of the CAA. Implementation of the Clean Power Plan, which was published by EPA in October 2015, is currently stayed by order of the US Supreme Court pending further proceedings before the DC Circuit. Oral argument was heard by the DC Circuit in September 2016, but the court has taken no action. On March 28, 2017, President Trump issued an Executive Order on Energy Independence.  The order sets out two general policies: promote clean and safe development of energy resources, while avoiding regulatory burdens, and ensure electricity is affordable, reliable, safe, secure, and clean.  The order rescinds various actions undertaken by the previous administration and directs the EPA Administrator to review and if appropriate suspend, revise, or rescind the Clean Power Plan, as well as other environmental regulations. On October 10, 2017, EPA issued a proposal to repeal the Clean Power Plan based on a legal interpretation of the CAA under which the Clean Power Plan exceeds EPA’s statutory authority. EPA published the proposed repeal rule on October 16, 2017 and accepted public comments through April 26, 2018. In addition, EPA published an advanced NOPR on December 28, 2017 to take comment on whether EPA should adopt a rule to replace the Clean Power Plan and what such a replacement rule might include, for which public comments were due February 26, 2018.
PNM estimates that implementation of the BART plan at SJGS, as well as potentially exiting ownership in the remaining units at SJGS (as well as Four Corners), as discussed above, should provide significant steps for New Mexico to meet its ultimate compliance with Section 111(d) under the Clean Power Plan or any replacement rule. PNM is unable to predict the impact of this rule on its generation portfolio.NRC licensing requirements.

BecauseOn April 22, 2019, NEE and other parties, which consist primarily of environmental upgrades completed in 2009, SJGS hasnot-for-profit organizations, filed a mercury removal efficiency of 98% and mercury emissions are well belowjoint petition for expedited investigation with the mercury limit imposed by EPA inNMPRC. The joint petition requests the 2011 Mercury and Air Toxics Standards. Major environmental upgrades on each of the units at SJGS have significantly reduced emissions of NOx, SO2, particulate matter, and mercury. Between 2006 and 2017, SJGS has reduced NOx emissions by 41%, SO2 by 70%, particulate matter by 61%, and mercury by 98%.
Renewable Energy
NMPRC open an investigation regarding PNM’s renewable procurement strategy includes utility-owned solar capacity, as well as wind and geothermal energy purchased under PPAs. As of December 31, 2017, PNM had 107 MW of utility-owned solar capacity. In addition, PNM purchases power from a customer-owned distributed solar generation program that had an installed capacity of 86.2 MW at March 31, 2018. PNM also owns the 500 KW PNM Prosperity Energy Storage Project, which uses advanced batteries to store solar power and dispatch the energy either during high-use periods or when solar production is limited. The project was one of the first combinations of battery storage and PV energy in the nation and involved extensive research and development of advanced grid concepts. The facility also was the nation’s first solar storage facility fully integrated into a utility’s power grid. Since 2003, PNM has purchased the output from New Mexico Wind, a 204 MW wind facility, and began purchasing the output of Red Mesa Wind, an existing 102 MW wind energy center, on January 1, 2015. PNM has a 20-year agreementoption to purchase energy from the Lightning Dock Geothermal facility built near Lordsburg, New Mexico. The geothermal facility, which has a current capacity of 4 MW, began providing power to PNMassets underlying the PVNGS Unit 1 and 2 leases that will expire in January 2014. PNM also purchases RECs as necessary to meet the RPS.
The majority of these renewable resources are key means for PNM to meet the RPS2023 and related regulations that require PNM to achieve prescribed levels of energy sales from renewable sources, if that can be accomplished without exceeding the RCT limit set by the NMPRC. PNM makes renewable procurements consistent with the plans approved by the NMPRC. PNM’s 2017 renewable energy procurement plan meets RPS and diversity requirements for 2017 and 2018 using existing resources and does not propose any significant new procurements. PNM’s 2018 renewable energy procurement plan requested approval to procure an additional 80 GWh in 2019 and 105 GWh in 2020 from a re-powering of New Mexico Wind; approval to procure an additional 55 GWh in 2019 and 77 GWh in 2020 from a re-powering of Lightning Dock Geothermal; approval to procure 50 MW of new solar facilities to be constructed beginning in 2018; continuation of customer REC purchase programs; and other purchases of RECs to ensure annual compliance with the RPS. On November 15, 2017, the NMPRC issued an order approving PNM’s plan. NMIEC filed an appeal with the NM Supreme Court objecting to the fuel allocation methodology. NEE filed a motion to intervene and cross-appeal objecting to the approval of the 50 MW of new solar facilities. PNM filed a motion to intervene. The NM Supreme Court granted the motions to intervene. NMIEC filed a motion for a partial stay and PNM filed a response opposing the request. On February 27, 2018, the court issued an order denying the motion for stay.2024. PNM cannot predict the outcome of this matter.

PNM is currently purchasingelected to purchase the outputassets underlying the other three PVNGS Unit 2 leases at the end of 20their original lease terms. PNM and the lessors under those leases entered into agreements that established the purchase price, representing the fair market value, to be paid by PNM. On January 15, 2016, PNM paid $78.1 million to the lessor under one lease for 31.25 MW of solarthe

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


entitlement from PVNGS Unit 2 and $85.2 million to the lessors under the other two leases for 32.76 MW of the entitlement from PVNGS Unit 2. See Note 12 for information concerning the NMPRC’s treatment of the purchased assets and extended leases in PNM’s NM 2015 Rate Case, including PNM’s pending appeal to the NM Supreme Court of certain matters in the NM 2015 Rate Case.

Covenants in PNM’s PVNGS Units 1 and 2 lease agreements limit PNM’s ability, without consent of the owner participants in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets in any single transaction or series of related transactions. PNM is exposed to losses under the PVNGS lease arrangements upon the occurrence of certain events that PNM does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to PVNGS or the occurrence of specified nuclear events), PNM would be required to make specified payments to the lessors, and take title to the leased interests. If such an event had occurred as of March 31, 2019, amounts due to the lessors under the circumstances described above would be up to $161.2 million, payable on July 15, 2019 in addition to the scheduled lease payments due on July 15, 2019. In such event, PNM would record the acquired assets at the lower of their fair value or the amount paid.

Land Easements and Rights-of-Ways

Many of PNM’s electric transmission and distribution facilities are located on lands that require the grant of rights-of-way from governmental entities, Native American tribes, or private parties. PNM has completed several renewals of rights-of-way, the largest of which is a renewal with the Navajo Nation. PNM is obligated to pay the Navajo Nation annual payments of $6.0 million, subject to adjustment each year based on the Consumer Price Index, through 2029. PNM’s April 2018 payment for the amount due under the Navajo Nation right-of-way lease was $6.9 million, which included amounts due under the Consumer Price Index adjustment, and was used to determine PNM’s operating lease liability as of January 1, 2019 and is included in the table of future lease payments shown below. Changes in the Consumer Price Index subsequent to January 1, 2019 are considered variable lease payments.

Fleet Vehicles and Equipment

As of December 31, 2018, all of the Company’s leases of fleet vehicles and equipment are classified as operating leases. Historically, the Company has utilized substantially all of the economic value of its fleet and equipment leases by the end of the lease term. The Company generally has the contractual ability to return its fleet vehicle and equipment leases to the lessor after one-year provided the lessor can recover remaining amounts owed under the agreement from third-parties or through make-whole provisions in the contract but does not typically exercise this right. As a result, fleet vehicle and equipment leases commencing on or after January 1, 2019 are classified as financing leases. The Company’s fleet vehicle and equipment lease agreements include non-lease components for insignificant administrative and other costs that are billed over the life of the agreement. The Company has elected to combine these fees with the lease components of the agreement. Certain of the Company’s fleet vehicle and equipment leases contain residual value guarantees. At March 31, 2019, residual value guarantees on fleet vehicle and equipment leases are $0.5 million, $1.1 million, and $1.6 million for PNM, TNMP, and PNMR.

Other

The Company holds a number of office space and office equipment leases. The Company’s current office space leases, all of which existed as of December 31, 2018, are classified as operating leases. These agreements include non-lease components for costs such as common area maintenance fees, which the Company has elected to combine with the lease component of the agreements. Certain of the Company’s office space leases are held between the Company’s consolidated subsidiaries and have been eliminated on consolidation. See Note 15. The Company’s office equipment leases are primarily for copiers and other graphics equipment. The Company classifies its office equipment leases existing as of December 31, 2018 as operating leases. Office equipment leases commencing on or after January 1, 2019 are classified as financing leases.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Information related to the Company’s operating leases recorded on the Condensed Consolidated Balance Sheets, including amounts recognized upon adoption of ASU 2016-02, is presented below:
 March 31, 2019 January 1, 2019
 PNM TNMP PNMR Consolidated PNM TNMP PNMR Consolidated
 (In thousands)
Operating leases:           
Operating lease assets, net of amortization$137,756
 $12,160
 $150,426
 $143,816
 $12,942
 $157,440
Current portion of operating lease liabilities22,762
 3,023
 26,197
 21,589
 3,132
 25,189
Long-term portion of operating lease liabilities115,436
 9,088
 124,937
 124,891
 9,787
 135,174

As discussed above, the Company classifies its fleet vehicle and equipment leases and its office equipment leases commencing on or after January 1, 2019 as financing leases. Information related to the Company’s financing leases recorded on the Condensed Consolidated Balance Sheets is presented below:
 March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Financing leases:     
Non-utility property$1,635
 $1,268
 $2,904
Accumulated depreciation(37) (40) (78)
Non-utility property, net$1,598
 $1,228
 $2,826
      
Other current liabilities$233
 $217
 $450
Other deferred credits1,083
 1,006
 2,089

Information concerning the weighted average remaining lease terms and the weighted average discount rates used to determine the Company’s lease liabilities is presented below:
 March 31, 2019
 PNM TNMP PNMR Consolidated
Weighted average remaining lease term (In years):     
Operating leases7.18
 4.67
 6.95
Financing leases5.72
 5.75
 5.74
      
Weighted average discount rate:     
Operating leases3.88% 3.88% 3.88%
Financing leases4.34% 4.55% 4.43%


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Information for the components of lease expense is as follows:
 Three Months Ended March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Total operating lease expense$7,231
 $241
 $7,611
      
Financing lease expense:     
Amortization of right-of-use assets66
 58
 125
Interest on lease liabilities16
 17
 32
Total financing lease expense82
 75
 157
      
Variable lease expense—
 —
 —
Short-term lease expense74
 3
 94
Total lease expense for the period$7,387
 $319
 $7,862

Supplemental cash flow information related to the Company’s leases is as follows:
 Three Months Ending March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases$9,452
 $284
 $9,891
Operating cash flows from financing leases16
 17
 32
Finance cash flows from financing leases25
 33
 58
      
Non-cash information related to right-of-use assets obtained in exchange for lease obligations:     
Operating leases$143,816
 $12,942
 $157,440
Financing leases1,635
 1,268
 2,904

Excluded from the lease expense and cash flow information tables above are $0.4 million, $0.7 million, and $1.1 million of capitalized operating lease costs, and less than $0.1 million of capitalized financing lease costs at PNM, TNMP, and PNMR. These capitalized costs are reflected as investing activities on the Company’s Condensed Consolidated Statements of Cash Flows.

Future expected lease payments as of March 31, 2019 and December 31, 2018 are shown below:
 As of March 31, 2019
 PNM TNMP PNMR Consolidated
 Financing Operating Financing Operating Financing Operating
 (In thousands)
Remainder of 2019$266
 $17,917
 $209
 $2,622
 $475
 $20,980
2020344
 27,045
 269
 2,993
 613
 30,555
2021332
 26,505
 259
 2,398
 591
 29,158
2022319
 26,235
 249
 1,846
 568
 28,255
2023307
 17,457
 181
 1,281
 488
 18,879
Later years224
 42,328
 214
 1,151
 438
 43,490
Total minimum lease payments1,792
 157,487
 1,381
 12,291
 3,173
 171,317
Less: Imputed interest476
 19,289
 158
 180
 634
 20,183
Lease liabilities as of March 31, 2019$1,316
 $138,198
 $1,223
 $12,111
 $2,539
 $151,134

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



 As of December 31, 2018
 Operating leases
 PNM TNMP PNMR Consolidated
 (In thousands)
Remainder of 2019$27,691
 $3,664
 $31,772
202027,000
 3,102
 30,404
202126,462
 2,324
 29,012
202226,217
 1,795
 28,175
202317,447
 1,279
 18,868
Later years42,329
 1,150
 43,489
Total minimum lease payments167,146
 13,314
 181,720

The above tables include $9.9 million, $12.2 million, and $22.1 million for PNM, TNMP, and PNMR at March 31, 2019 and $7.5 million, $11.0 million, and $18.5 million for PNM, TNMP, and PNMR at December 31, 2018 for expected future payments on fleet vehicle and equipment leases that could be avoided if the leases were returned and the lessor is able to recover estimated market value for the equipment from third parties. The Company’s contractual commitments for leases that have not yet commenced are insignificant.

(14)Income Taxes

On December 22, 2017, comprehensive changes in United States federal income taxes were enacted through legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made many significant modifications to the tax laws, including reducing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also eliminated federal bonus depreciation for utilities, limited interest deductibility for non-utility businesses and limited the deductibility of officer compensation. During 2018, the IRS issued additional guidance related to certain officer compensation, as well as proposed regulations on interest deductibility that provide a 10% “de minimis” exception that allows entities with predominantly regulated activities to fully deduct interest expenses. In addition, the IRS issued proposed regulations interpreting Tax Act amendments to depreciation provisions of the Internal Revenue Code that allow the Company to claim a bonus depreciation deduction on certain construction projects placed in service subsequent to the third quarter of 2017. See additional discussion of the impacts of the Tax Act in Note 18 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K.

Beginning February 2018, PNM’s NM 2016 Rate Case reflects the reduction in the federal corporate income rate, including amortization of excess deferred federal income taxes that are being returned to customers over a twenty-one year period; and reductions in the New Mexico corporate tax rate, including amortization of excess deferred state income taxes that are being returned to customers over a three-year period. On January 25, 2018, the PUCT issued an order requiring Texas utilities, including TNMP, to begin recording regulatory liabilities for the effects of the Tax Act with the stated purpose of reflecting those effects in the utility bills of Texas ratepayers. During the three months ended March 31, 2018, TNMP reduced revenue and recorded a regulatory liability of $1.5 million in accordance with the PUCT’s order. The approved settlement in the TNMP 2018 Rate Case includes a reduction in customer rates to reflect the impacts of the Tax Act beginning on January 1, 2019. See additional discussion of PNM’s NM 2016 Rate Case and TNMP’s 2018 Rate Case in Note 12.

As required under GAAP, the Company makes an estimate of its anticipated effective tax rate for the year as of the end of each quarterly period within its fiscal year. In interim periods, income tax expense is calculated by applying the anticipated annual effective tax rate to year-to-date earnings before income taxes, which includes the earnings attributable to the Valencia non-controlling interest. GAAP also provides that certain unusual or infrequently occurring items, including excess tax benefits related to stock awards, be excluded from the estimated annual effective tax rate calculation. At March 31, 2019, PNMR, PNM, and TNMP estimated their effective income tax rates for the year ended December 31, 2019 would be 9.42%, 11.89%, and 8.41%. The primary permanent difference is the reduction in income tax expense resulting from the amortization of excess deferred federal and state income taxes ordered by the NMPRC in PNM’s NM 2016 Rate Case and the amortization of excess deferred federal income taxes as ordered by the PUCT in TNMP’s 2018 Rate Case. During the three months ended March 31, 2019, income tax expense calculated by applying the expected annual effective income tax rate to earnings before income taxes was further reduced

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


by excess tax benefits related to stock awards of $0.7 million for PNMR, of which $0.5 million was allocated to PNM and $0.2 million was allocated to TNMP.

(15)Related Party Transactions

PNMR, PNM, TNMP, and NMRD are considered related parties as defined under GAAP, as is PNMR Services Company, a wholly-owned subsidiary of PNMR that provides corporate services to PNMR and its subsidiaries in accordance with shared services agreements. These services are billed at cost on a monthly basis to the business units. In addition, PNMR provides construction and operations and maintenance services to NMRD, a 50% owned subsidiary of PNMR Development (Note 1), and PNM purchases renewable energy from certain NMRD-owned facilities at a fixed price per MWh of energy produced. PNM also provides interconnection services to PNMR Development (Note 9) and NMRD.

The table below summarizes the nature and amount of related party transactions of PNMR, PNM, TNMP, and NMRD:
 Three Months Ended
 March 31,
 2019 2018
 (In thousands)
Services billings:   
PNMR to PNM$26,826
 $23,679
PNMR to TNMP10,058
 8,365
PNM to TNMP75
 86
TNMP to PNMR35
 35
PNMR to NMRD41
 78
Renewable energy purchases:   
PNM from NMRD625
 370
Interconnection billings:   
PNM to NMRD—
 —
PNM to PNMR—
 —
Interest billings:   
PNMR to PNM933
 62
PNM to PNMR72
 66
PNMR to TNMP32
 8
Income tax sharing payments:   
PNMR to PNM—
 —
TNMP to PNMR—
 —


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is presented as permitted by Form 10-Q General Instruction H(2). This report uses the term “Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. A reference to a “Note” in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified. Certain of the tables below may not appear visually accurate due to rounding.

MD&A FOR PNMR

EXECUTIVE SUMMARY
Overview and Strategy

PNMR is a holding company with two regulated utilities serving approximately 784,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. PNMR’s electric utilities are PNM and TNMP.
Strategic Goals
PNMR is focused on achieving three key strategic goals:

Earning authorized returns on regulated businesses
Delivering at or above industry-average earnings and dividend growth
Maintaining solid investment grade credit ratings

In conjunction with these goals, PNM and TNMP are dedicated to:

Maintaining strong employee safety, plant performance, and system reliability
Delivering a superior customer experience
Demonstrating environmental stewardship in business operations, including transitioning to an emissions-free generating portfolio by 2040
Supporting the communities in their service territories

Earning Authorized Returns on Regulated Businesses

PNMR’s success in accomplishing its strategic goals is highly dependent on two key factors: fair and timely regulatory treatment for its utilities and the utilities’ strong operating performance. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: safety, operational excellence, and customer satisfaction, while engaging stakeholders to build productive relationships. Both PNM and TNMP seek cost recovery for their investments through general rate cases and various rate riders.

Fair and timely rate treatment from regulators is crucial to PNM and TNMP in earning their allowed returns and critical for PNMR to achieve its strategic goals. PNMR believes that earning allowed returns is viewed positively by credit rating agencies and that improvements in the Company’s ratings could lower costs to utility customers.

Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K and in Note 12.

State Regulation

New Mexico 2015 Rate Case – On September 28, 2016, the NMPRC issued an order that authorized PNM to implement an increase in base non-fuel rates of $61.2 million for New Mexico retail customers, effective for bills sent after September 30, 2016. This order was on PNM’s application for a general increase in retail electric rates (the “NM 2015 Rate Case”) filed in August 2015. PNM’s application requested an increase in base non-fuel revenues of $121.5 million based on a future test year

(“FTY”) beginning October 1, 2015. The primary drivers of the revenue deficiency were infrastructure investments and declines in forecasted energy sales due to successful energy efficiency programs and other economic factors.

The NMPRC’s September 28, 2016 order included a determination that PNM was imprudent in purchasing 64.1 MW of previously leased capacity in PVNGS Unit 2, extending the leases for 114.6 MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. Major components of the difference between the increase in non-fuel revenues approved in the order and PNM’s request, include:

A ROE of 9.575%, compared to the 10.5% requested by PNM
Inclusion of the January 2016 purchase of the assets underlying three leases of capacity, totaling 64.1 MW of PVNGS Unit 2 (Note 13) at an initial rate base value of $83.7 million, compared to PNM’s request for recovery of the fair market value purchase price of $163.3 million; and disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW was being leased by PNM, which costs totaled $43.8 million when the order was issued
Disallowance of the recovery of any future contributions for PVNGS decommissioning costs related to the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016 and the 114.6 MW of the leased capacity in PVNGS Units 1 and 2 that were extended for eight years beginning January 15, 2015 and 2016 (Note 13)
Disallowance of recovery of the costs associated with converting SJGS Units 1 and 4 to BDT, which is required by the NSR permit for SJGS; PNM’s share of the costs of installing the BDT equipment was $52.3 million, $40.0 million of which PNM requested be included in rate base in the NM 2015 Rate Case

On September 30, 2016, PNM filed a notice of appeal with the NM Supreme Court regarding the order in the NM 2015 Rate Case. PNM is appealing the NMPRC’s determination that PNM was imprudent in the actions taken to purchase the previously leased 64.1 MW of capacity in PVNGS Unit 2, extending the leases for 114.6 MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. PNM’s appeal includes the following specific elements of the NMPRC’s order:

Disallowance of recovery of the full fair market value purchase price of the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016
Disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity was leased by PNM
Disallowance of recovery of future contributions for PVNGS decommissioning attributable to 64.1 MW of purchased capacity and the 114.6 MW of capacity under the extended leases
Disallowance of recovery of the costs of converting SJGS Units 1 and 4 to BDT

NEE, NMIEC, and ABCWUA filed notices of cross appeal to PNM’s appeal. The issues that are being appealed by the various cross-appellants are:

The NMPRC allowing PNM to recover the costs of the lease extensions for the 114.6 MW of PVNGS Units 1 and 2 and any of the purchase price for the 64.1 MW in PVNGS Unit 2
The NMPRC allowing PNM to recover the costs incurred under the new coal supply contract for Four Corners
The revised method to collect PNM’s fuel and purchased power costs under the FPPAC
The final rate design
The NMPRC allowing PNM to include the “prepaid pension asset” in rate base

The NM Supreme Court has orally stated that the court’s intent would be to request that PNM reimburse ratepayers for any amount overcharged should the cross-appellants prevail on the merits. Oral argument at the NM Supreme Court was held on October 30, 2017. Although appeals of regulatory actions of the NMPRC have a priority at the NM Supreme Court under New Mexico law, there is no required time frame for the court to act on the appeals.

PNM evaluated the accounting consequences of the order in the NM 2015 Rate Case and the likelihood of being successful on the issues it is appealing in the NM Supreme Court as required under GAAP. The evaluation indicated it is reasonably possible that PNM will be successful on the issues it is appealing. If the NM Supreme Court rules in PNM’s favor on some or all of the issues, those issues would be remanded back to the NMPRC for further action. PNM originally estimated that it would take a minimum of 15 months from NMRDSeptember 30, 2016 for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues. Accordingly, PNM recorded pre-tax regulatory disallowances of $11.3 million representing capital cost recovery for the period October 1, 2016 through December 31, 2017 on its investments that the order disallowed, as well as

amounts recorded as regulatory assets and deferred charges that the order disallowed, and which PNM did not challenge in its appeal. PNM has periodically updated its estimate of the time frame necessary to resolve these matters resulting in additional pre-tax disallowances of $3.1 million and $4.0 million being recorded in December 2017 and in the second half of 2018. Since the NM Supreme Court did not issue a decision by March 31, 2019, PNM again reevaluated its estimate of the time frame necessary to resolve the matter. As of March 31, 2019, PNM recorded additional pre-tax disallowances of $1.3 million representing additional cost recovery the order disallowed and will not be recovered from customers. PNM’s aggregate pre-tax losses of $19.7 million assumes the NM Supreme Court will issue a decision and that any remanded issues will be addressed by the NMPRC by July 31, 2019. Additional losses will be recorded if the currently estimated time frame for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues is further extended.

PNM continues to believe that the disallowed investments, which are the subject of PNM’s appeal, were prudently incurred and that PNM is entitled to full recovery of those investments through the ratemaking process. If PNM’s appeal is unsuccessful, PNM would record additional pre-tax losses related to any unsuccessful issues. The March 31, 2019 book values of PNM’s investments that the order disallowed, after considering the losses recorded to date, were $72.6 million for the 64.1 MW of purchased capacity in PVNGS Unit 2, $37.6 million for the PVNGS Unit 2 disallowed capital improvements, and $49.7 million for the BDT equipment.

PNM does not believe that the likelihood of the cross-appeals being successful is probable. However, if the NM Supreme Court were to overturn all of the issues subject to the cross-appeals and, upon remand, the NMPRC did not provide any cost recovery of those items, PNM would write-off all of the costs to acquire the assets previously leased under three leases aggregating 64.1 MW of PVNGS Unit 2 capacity, totaling $144.7 million at March 31, 2019 (which includes $72.6 million that is the subject of PNM’s appeal discussed above) after considering the losses recorded to date. The impacts of not recovering costs for the lease extensions, new coal supply contract for Four Corners, and “prepaid pension asset” in rate base would be recognized in future periods reflecting that rates charged to customers would not recover those costs as they are incurred. The outcomes of the cross-appeals regarding the FPPAC and rate design should not have a financial impact to PNM.

New Mexico 2016 Rate Case – On January 16, 2018, the NMPRC issued an order that authorized PNM to implement an increase in base non-fuel rates of $10.3 million. PNM implemented 50% of the approved increase for service rendered, rather than bills sent, beginning February 1, 2018 and implemented the rest of the increase for service rendered beginning January 1, 2019. This order was on PNM’s application for a general increase in retail electric rates (the “NM 2016 Rate Case”) filed in December 2016. PNM’s December 2016 application requested an increase in base non-fuel revenues of $99.2 million based on a FTY beginning January 1, 2018 and an ROE of 10.125%. PNM’s December 2016 application did not include a request to recover any of the costs disallowed in the NM 2015 Rate Case that are at issue in PNM’s pending appeal to the NM Supreme Court. The primary drivers of PNM’s revenue deficiency included implementation of modifications to PNM’s resource portfolio, which were approved by the NMPRC in December 2015 as part of the SJGS regional haze compliance plan, infrastructure investments, including environmental upgrades at Four Corners, declines in forecasted energy sales due to successful energy efficiency programs and other economic factors, and updates to FERC/retail jurisdictional allocations.

After extensive settlement negotiations and public proceedings, the NMPRC issued a Revised Order Partially Adopting Certification of Stipulation dated January 10, 2018 (the “Revised Order”). The key terms of the Revised Order include:

A revenue increase totaling $10.3 million, which includes a reduction to reflect the impact of the decrease in the federal corporate income tax rate and updates to PNM’s cost of debt (aggregating an estimated $47.6 million annually)
A ROE of 9.575%
Returning to customers over a three-year period the benefit of the reduction in the New Mexico corporate income tax rate (Note 14) to the extent attributable to PNM’s retail operations
Disallowing PNM’s ability to collect an equity return on its $90.1 million investment in SCRs at Four Corners and on $58.0 million of projected capital improvements during the period July 1, 2016 through December 31, 2018, but allowing recovery of the total $148.1 million of investments with a debt-only return
An agreement to not implement non-fuel base rate changes, other than changes related to PNM’s rate riders, with an effective date prior to January 1, 2020
A decision to defer future consideration regarding the prudency of PNM’s decision to continue its participation in Four Corners to a future proceeding

PNM implemented 50% of the approved increase for service rendered beginning February 1, 2018 and implemented the rest of the increase for service rendered beginning January 1, 2019.

TNMP 2018 Rate Case – On December 20, 2018, the PUCT approved a settlement stipulation allowing TNMP to increase annual base rates by $10.0 million based on a ROE of 9.65%, a cost of debt of 6.44%, and a capital structure comprised of 55% debt and 45% equity. Under the approved settlement stipulation TNMP was granted authority to integrate revenues previously recorded under the AMS rider, as well as other unrecorded AMS costs, into base rates; establish a new rider to recover Hurricane Harvey restoration costs, net of amounts owed to customers as a result of the reduction in the federal corporate income tax rate in 2018; and to update depreciation rates. In addition, the approved settlement stipulation allows TNMP to refund the regulatory liability recorded at December 31, 2017 related to federal tax reform to customers and reflects the reduction in the federal corporate income tax rate to 21%. New rates under the TNMP 2018 Rate Case became effective January 1, 2019.

TNMP’s original application, which was filed with the PUCT on May 30, 2018 (the “TNMP 2018 Rate Case”), requested an annual increase to base rates of $25.9 million based on a ROE of 10.5%, a cost of debt of 7.2%, and a capital structure comprised of 50% debt and 50% equity.

Advanced Metering –TNMP completed its mass deployment of advanced meters across its service territory in 2016 and has installed more than 242,000 advanced meters. As discussed above, beginning in 2019 the costs associated with TNMP’s AMS program are being recovered through base rates.

In February 2016, PNM filed an application with the NMPRC requesting approval of a project to replace its existing customer metering equipment with Advanced Metering Infrastructure (“AMI”), which was denied. As ordered by the NMPRC, PNM’s next energy efficiency plan filing will include a proposal for an AMI pilot project.

Rate Riders and Interim Rate Relief –The PUCT has approved mechanisms that allow TNMP to recover capital invested in transmission and distribution projects without having to file a general rate case. This permits more timely recovery of investments. The NMPRC has approved PNM recovering fuel costs through the FPPAC, as well as rate riders for renewable energy and energy efficiency that allow for more timely recovery of investments and improve PNM’s ability to earn its authorized return.

Cost Recovery Related to Joining the EIM – In 2018, PNM completed a cost-benefit analysis that indicated PNM’s participation in the California Independent System Operator (“CAISO”) Western Energy Imbalance Market (“EIM”) would provide substantial benefits to retail customers. In August 2018, PNM filed an application with the NMPRC requesting, among other things, to recover the cost of initial capital investments and authorization to establish a regulatory asset to recover other expenses that would be incurred in order to join the EIM. PNM’s application proposes recovery of the costs incurred to join the EIM would be recovered beginning on the effective date of new rates in PNM’s next general rate case and that the benefits of participating in the EIM be credited to retail customers through PNM’s existing FPPAC. A public hearing was held on December 12, 2018. On December 19, 2018, the NMPRC issued an order approving the establishment of a regulatory asset to recover PNM’s cost of joining the EIM. On January 17, 2019, ABCWUA filed a motion to reopen the case and to reconsider the NMPRC’s order approving the establishment of a regulatory asset. On February 6, 2019, the NMPRC issued an order granting rehearing and vacating the December 19, 2018 order. On February 24, 2019, Western Resource Advocates, and the Coalition for Clean and Affordable Energy filed a motion for an expedited final order, which was supported by PNM and other parties and opposed by ABCWUA.  On February 27, 2019, the NMPRC issued a procedural order requiring the Hearing Examiner to report to the NMPRC whether the matter should be reopened. On March 18, 2019, the Hearing Examiner recommended that all rate making issues, including but not limited to implementation and ongoing EIM costs and savings, the prudence and reasonableness of costs included in a regulatory asset, and the period over which costs would be charged to customers be deferred until a future case. PNM filed limited exceptions to the recommended decision. The NMPRC issued a final order adopting the Hearing Examiner’s recommended decision on March 27, 2019. On April 12, 2019, PNM and other parties filed a joint motion requesting the NMPRC clarify that the quarterly benefits reports prepared by CAISO be used to determine the benefits of participating in the EIM, as well as to support the prudence of costs incurred to join the EIM. On April 24, 2019, the NMPRC issued an order granting the joint motion for clarification and indicating the CAISO quarterly benefits reports may be used in a future rate case. PNM anticipates it will begin participating in the EIM in April 2021.

FERC Regulation

Rates PNM charges wholesale transmission customers and wholesale generation customers are subject to traditional rate regulation by FERC. 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 transmission capital projects to be placed into service in the following year. The projections included are subject to true-up. 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 resulted in market prices for power being substantially lower than what PNM is able to offer wholesale generation customers under the cost of service model that FERC requires PNM to use.  Consequently, PNM decided to stop pursuing wholesale generation contracts and currently has no full-requirements wholesale generation customers.
Delivering At or Above Industry-Average Earnings and Dividend Growth
PNMR’s strategic goal to deliver at or above industry-average earnings and dividend growth enables investors to realize the value of their investment in the Company’s business. PNMR’s current target is 5% to 6% earnings and dividend growth for the period 2019 through 2022. Earnings growth is based on ongoing earnings, which is a non-GAAP financial measure that excludes from GAAP earnings certain non-recurring, infrequent, and other items that are not indicative of fundamental changes in the earnings capacity of the Company’s operations. PNMR uses ongoing earnings to evaluate the operations of the Company and to establish goals, including those used for certain aspects of incentive compensation, for management and employees.
PNMR targets a dividend payout ratio in the 50% to 60% range of its ongoing earnings. PNMR expects to provide at or above industry-average dividend growth in the near-term and to manage the payout ratio to meet its long-term target. The Board will continue to evaluate the dividend on an annual basis, considering sustainability and growth, capital planning, and industry standards. The Board approved the following increases in the indicated annual common stock dividend:
Approval DatePercent Increase
December 201510%
December 201610%
December 20179%
December 20189%

Maintaining Solid Investment Grade Credit Ratings
The Company is committed to maintaining solid investment grade credit ratings in order to reduce the cost of debt financing and to help ensure access to credit markets, when required. See the subheading Liquidity included in the full discussion of Liquidity and Capital Resources below for the specific credit ratings for PNMR, PNM, and TNMP. Currently, all of the credit ratings issued by both Moody’s and S&P on the Company’s debt are investment grade. In January 2018, S&P changed the outlook for PNMR, PNM, and TNMP from stable to negative. In June 2018, Moody’s changed the outlook for PNMR and PNM from positive to stable and maintained a stable outlook for TNMP.

Business and Strategic Focus

PNMR strives to create enduring value for customers, communities, and shareholders. PNMR’s strategy and decision-making are focused on safely providing reliable, affordable, and environmentally responsible power. The Company works closely with customers, stakeholders, legislators, and regulators to ensure that resource plans and infrastructure investments benefit from robust public dialogue and balance the diverse needs of our communities. Equally important is the focus of PNMR’s utilities on customer satisfaction and community engagement.

Reliable and Affordable Power
PNMR and its utilities are aware of the important roles they play in enhancing economic vitality in their service territories. Management believes that maintaining strong and modern electric infrastructure is critical to ensuring reliability and supporting economic growth. When contemplating expanding or relocating their operations, businesses consider energy affordability and reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability and to deliver a superior customer experience. Investing in PNM’s and TNMP’s infrastructure is critical to ensuring reliability and meeting future energy needs. Both utilities have long-established records of providing customers with reliable electric service.


Utility Plant and Strategic Investments

Utility Plant Investments – During the 2016 to 2018 period, PNM and TNMP together invested $1,501.7 million in utility plant, including substations, power plants, nuclear fuel, and transmission and distribution systems. PNM completed installation of SNCR and BDT equipment on SJGS Units 1 and 4 in early 2016. On January 15, 2016, PNM completed the $163.3 million acquisition of 64.1 MW of capacity in PVNGS Unit 2 that had previously been leased to PNM. During 2018 and 2019, PNM will construct an additional 50 MW of PNM-owned PV facilities, which were approved by the NMPRC in PNM’s 2018 renewable energy procurement plan. The 50 MW PV facilities are expected to be placed in commercial operations by December 2019 at a cost not to exceed $73.0 million. In late 2018, PNM became the first utility to install a new type of protective relay on its high-voltage transmission lines, which help to ensure the reliability of PNM’s electrical system. On May 1, 2019, PNM executed an agreement to purchase a 165-mile 345 kV transmission line and to construct associated facilities (the “Western Spirit Line”), subject to NMPRC and FERC approval. PNM anticipates the Western Spirit line will be used to serve approximately 800 MW of new wind generation facilities in eastern New Mexico beginning in 2021. See the subheading Capital Requirements included in the full discussion of Liquidity and Capital Resources below for additional discussion of the Company’s projected capital requirements.

Strategic Investments – In 2017, PNMR Development and AEP OnSite Partners created NMRD to pursue the acquisition, development, and ownership of renewable energy generation projects, primarily in the state of New Mexico. Abundant renewable resources, large tracts of affordable land, and strong government and community support make New Mexico a favorable location for renewable generation. New Mexico has the 2nd highest technical potential of the 48 contiguous states for utility scale solar photovoltaics as noted in 2015 by the National Renewable Energy Laboratory, while New Mexico is 6th for technical potential for land-based wind. PNMR Development and AEP OnSite Partners each have a 50% ownership interest in NMRD. Through NMRD, PNMR anticipates being able to provide additional renewable generation solutions to customers within and surrounding its regulated jurisdictions through partnering with a subsidiary of one of the United States’ largest electric utilities. The formation of this joint venture provides a more efficient use of PNMR’s capital to support new renewable investment opportunities while maintaining the necessary capital to support investments required by regulated jurisdictions. NMRD’s current renewable energy capacity in operation is 33.9 MW, which includes 30 MW of solar-PV facilities required to supply energy to the Facebook data center. See Strategic Investments above.center located within PNM’s service territory, 1.9 MW to supply energy to Columbus Electric Cooperative located in southwest New Mexico, and 2.0 MW to supply energy to the Central New Mexico Electric Cooperative. In late 2017, PNM enteredAugust 2018, the NMPRC approved PNM’s request to enter into three separatetwo additional 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 usedconstructed by PNMNMRD to supply power to Facebook. NMRD is required to obtain FERC approval of the PPAs. Subject to FERC approval, these facilities are expected to be in commercial operation by June 2020.See Note 12. NMRD actively explores opportunities for additional renewable powerprojects, including large-scale projects to serve future data centers and other customer needs.

Integrated Resource Plan

NMPRC rules require that investor-owned utilities file an IRP every three years. The IRP is required to cover a 20-year planning period and contain an action plan covering the first four years of that period.

PNM filed its 2017 IRP on July 3, 2017. The 2017 IRP analyzed several scenarios utilizing assumptions that PNM continues service from its SJGS capacity beyond mid-2022 and that PNM retires its capacity after mid-2022. Key findings of the 2017 IRP include:

Retiring PNM’s share of SJGS in 2022 after the expiration of the current operating and coal supply agreements would provide long-term cost savings for PNM’s customers
PNM exiting its ownership interest in Four Corners after its current coal supply agreement expires in 2031 would also provide long-term cost savings for customers
The best mix of new resources to replace the retired coal generation would include solar energy and flexible natural gas-fired peaking capacity; the mix could include energy storage if the economics support it, and wind energy provided additional transmission capacity becomes available
Significant increases in future wind energy supplies will likely require new transmission capacity to be built from eastern New Mexico to PNM’s service territory
PNM should retain the currently leased capacity in PVNGS, which would avoid replacement with carbon-emitting generation
PNM should continue to develop and implement energy efficiency and demand management programs

PNM should assess the costs and benefits of participating in the California Independent System Operator Western Energy Imbalance Market
PNM should analyze its current Reeves Station to consider possible technology improvements to phase out the older generators and replace them with new, more flexible supplies or energy storage

On October 26, 2018, the Hearing Examiner issued a recommended decision recommending that the NMPRC accept PNM’s 2017 IRP as compliant with the applicable statute and NMPRC rules. On December 19, 2018, the NMPRC issued a final order accepting the Hearing Examiner’s recommended decision. On January 18, 2019, The Board of the County of Commissioners for San Juan County, New Mexico, the City of Farmington, New Mexico, and other parties filed a Notice of Appeal with the NM Supreme Court regarding the NMPRC’s final order in PNM’s 2017 IRP. The due date for Statements of Issues in the appeal has been extended to May 10, 2019 at the request of appellants in the case. On January 18, 2019, NEE submitted a motion requesting the NMPRC reconsider its acceptance of PNM’s 2017 IRP filing alleging informational inadequacy and deficiencies in PNM’s filing. On January 29, 2019, PNM submitted a filing to the Facebook data center. These PPAs includeNMPRC in response to NEE’s motion for reconsideration. In its response, PNM stated that the purchaseissues raised by NEE had already been considered and rejected by the NMPRC in its December 19, 2018 final order and that the NMPRC lacks jurisdiction over the matters because the NMPRC’s final order has been appealed to the NM Supreme Court. The NMPRC did not take action on NEE’s motion for reconsideration. On February 19, 2019, NEE filed a motion with the NM Supreme Court to intervene in the appeal and to seek remand of the powermatter to the NMPRC. On March 11, 2019, PNM filed its response to the NM Supreme Court stating that the NMPRC had already considered and, RECs from a 50 MW wind project to be operational atby operation of law, denied NEE’s motion for reconsideration. PNM cannot predict the outcome of this matter.

See additional discussion of PNM’s 2017 IRP and PNM’s December 31, 2018 a 166 MW wind project to be operationalCompliance Filing regarding SJGS below and in November 2020,Notes 11 and a 50 MW solar project to be operational in December 2021. The NMPRC approved these PPAs on March 21, 2018 (Note 12).12.
PNM will continue to procure renewable resources while balancing the impact to customers’ electricity costs in order to meet New Mexico’s escalating RPS requirements.
Energy Efficiency

TNMP recovers the costs of its energy efficiency programs through an energy efficiency cost recovery factor (“EECRF”), which includes projected program costs, under and over collected costs from prior years, rate case expenses, and performance bonuses (if programs exceed mandated savings goals). On May 30, 2018, TNMP filed its request to adjust the EECRF to reflect changes in costs for 2019. The total amount requested was $5.7 million, which included a performance bonus of $0.9 million based on TNMP’s energy efficiency achievements in the 2017 plan year. On June 21, 2018, the PUCT issued a declaratory order announcing the PUCT’s interpretation of the bonus calculation in its rule. The order does not affect cost recovery but reduces the bonus calculation as filed by utilities in their current EECRF proceedings. Accordingly, in June of 2018, TNMP reduced its estimated performance bonus for the 2017 plan year to $0.8 million. On August 6, 2018, TNMP and other parties to the case reached a unanimous settlement stipulation to provide $5.6 million of EECRF recovery, which includes a performance bonus of $0.8 million. On October 12, 2018, the PUCT approved the settlement stipulation with rates to become effective on March 1, 2019.

(13)Lease Commitments

The Company enters into various lease agreements to meet its business needs and to satisfy the needs of its customers. Historically, the Company’s leases were classified as operating leases which included leases for generating capacity from PVNGS Units 1 and 2, certain rights-of-way agreements for transmission lines and facilities, vehicle and equipment leases necessary to

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


construct and maintain the Company’s assets and building and office equipment leases. In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842) to provide guidance on the recognition, measurement, presentation, and disclosure of leases. Among other things, ASU 2016-02 requires that all leases be recorded on the balance sheets by recognizing a present value liability for future cash flows of the lease agreement and a corresponding right-of-use asset. The Company adopted Topic 842 on January 1, 2019, its required effective date. The Company elected to use many of the practical expedients available upon adoption of the standard. As a result, the Company will continue to classify its leases existing as of December 31, 2018 as operating leases until they expire or are modified. In addition, the Company elected the practical expedient to not reevaluate the accounting for land easements and rights-of-way agreements existing at December 31, 2018. The Company also elected the use of the practical expedient to apply the requirements of the new standard on its effective date and has not restated prior periods to conform to the new guidance. Adoption of the lease standard has a material impact on the Company’s Condensed Consolidated Balance Sheets but does not have a material impact on the Condensed Consolidated Statements of Earnings or the Condensed Consolidated Statements of Cash Flows.

Effective January 1, 2019, the Company accounts for contracts that convey the use and control of identified assets for a period of time as leases. The Company classifies leases as operating or financing by evaluating the terms of the lease agreement. Agreements under which the Company is likely to utilize substantially all of the economic value or life of the asset or which the Company is likely to own at the end of the lease term, either through purchase or transfer of ownership, are classified as financing leases. Leases not meeting these criteria are accounted for as operating leases. Agreements under which the Company is a lessor are insignificant. Leases with terms that are expected to exceed one year are recognized on the Company’s Condensed Consolidated Balance sheet by recording a lease liability and corresponding right-of-use asset. PNMR, PNM, and TNMP determine present value for their leases using their incremental borrowing rates at the commencement date of the lease or, when readily available, the rate implicit in the agreement. However, in most cases the implicit interest rate is not available in the Company’s lease agreements. Operating lease expense is recognized within operating expenses according to the use of the asset on a straight-line basis. Financing lease costs are recognized by amortizing the right-of-use asset on a straight-line basis and by recording interest expense on the lease liability. Financing lease right-of-use assets amortization is reflected in depreciation and amortization and interest on financing lease liabilities is reflected as interest charges on the Company’s Condensed Consolidated Statements of Earnings.

PVNGS

PNM leases interests in Units 1 and 2 of PVNGS. The PVNGS leases were entered into in 1985 and 1986 and initially were scheduled to expire on January 15, 2015 for the four Unit 1 leases and January 15, 2016 for the four Unit 2 leases. Following procedures set forth in the PVNGS leases, PNM notified four of the lessors under the Unit 1 leases and one lessor under the Unit 2 lease that it would elect to renew those leases on the expiration date of the original leases. The four Unit 1 leases now expire on January 15, 2023 and the one Unit 2 lease now expires on January 15, 2024. The annual lease payments during the renewal periods aggregate $16.5 million for PVNGS Unit 1 and $1.6 million for Unit 2.

The terms of each of the extended leases do not provide for additional renewal options beyond their currently scheduled expiration dates. PNM has the option to purchase the assets underlying each of the extended leases at their fair market value or to return the lease interests to the lessors on the expiration dates. Under the terms of the extended leases, PNM has until January 15, 2020 for the Unit 1 leases and January 15, 2021 for the Unit 2 lease to provide notices to the lessors of PNM’s intent to exercise the purchase options or to return the leased assets to the lessors. PNM’s elections are independent for each lease and are irrevocable. In the proceeding addressing PNM’s 2017 IRP (Note 12), PNM agreed to promptly notify the NMPRC of a decision to extend the Unit 1 or 2 leases, or to exercise its option to purchase the leased assets at fair market value upon the expiration of leases. If PNM elects to exercise its purchase option under any of the leases, the leases provide an appraisal process to determine fair market value. If PNM elects to return the assets underlying the extended leases, PNM will retain certain obligations related to PNVGS, including costs to decommission the facility. PNM would seek to recover its undepreciated investments at the end of the PVNGS leases as well as any future obligations related to PNM’s leased capacity from NM retail customers. Any transfer of the assets underlying the leases will be required to comply with NRC licensing requirements.

On April 22, 2019, NEE and other parties, which consist primarily of environmental not-for-profit organizations, filed a joint petition for expedited investigation with the NMPRC. The joint petition requests the NMPRC open an investigation regarding PNM’s option to purchase the assets underlying the PVNGS Unit 1 and 2 leases that will expire in January 2023 and 2024. PNM cannot predict the outcome of this matter.

PNM elected to purchase the assets underlying the other three PVNGS Unit 2 leases at the end of their original lease terms. PNM and the lessors under those leases entered into agreements that established the purchase price, representing the fair market value, to be paid by PNM. On January 15, 2016, PNM paid $78.1 million to the lessor under one lease for 31.25 MW of the

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


entitlement from PVNGS Unit 2 and $85.2 million to the lessors under the other two leases for 32.76 MW of the entitlement from PVNGS Unit 2. See Note 12 for information concerning the NMPRC’s treatment of the purchased assets and extended leases in PNM’s NM 2015 Rate Case, including PNM’s pending appeal to the NM Supreme Court of certain matters in the NM 2015 Rate Case.

Covenants in PNM’s PVNGS Units 1 and 2 lease agreements limit PNM’s ability, without consent of the owner participants in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets in any single transaction or series of related transactions. PNM is exposed to losses under the PVNGS lease arrangements upon the occurrence of certain events that PNM does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to PVNGS or the occurrence of specified nuclear events), PNM would be required to make specified payments to the lessors, and take title to the leased interests. If such an event had occurred as of March 31, 2019, amounts due to the lessors under the circumstances described above would be up to $161.2 million, payable on July 15, 2019 in addition to the scheduled lease payments due on July 15, 2019. In such event, PNM would record the acquired assets at the lower of their fair value or the amount paid.

Land Easements and Rights-of-Ways

Many of PNM’s electric transmission and distribution facilities are located on lands that require the grant of rights-of-way from governmental entities, Native American tribes, or private parties. PNM has completed several renewals of rights-of-way, the largest of which is a renewal with the Navajo Nation. PNM is obligated to pay the Navajo Nation annual payments of $6.0 million, subject to adjustment each year based on the Consumer Price Index, through 2029. PNM’s April 2018 payment for the amount due under the Navajo Nation right-of-way lease was $6.9 million, which included amounts due under the Consumer Price Index adjustment, and was used to determine PNM’s operating lease liability as of January 1, 2019 and is included in the table of future lease payments shown below. Changes in the Consumer Price Index subsequent to January 1, 2019 are considered variable lease payments.

Fleet Vehicles and Equipment

As of December 31, 2018, all of the Company’s leases of fleet vehicles and equipment are classified as operating leases. Historically, the Company has utilized substantially all of the economic value of its fleet and equipment leases by the end of the lease term. The Company generally has the contractual ability to return its fleet vehicle and equipment leases to the lessor after one-year provided the lessor can recover remaining amounts owed under the agreement from third-parties or through make-whole provisions in the contract but does not typically exercise this right. As a result, fleet vehicle and equipment leases commencing on or after January 1, 2019 are classified as financing leases. The Company’s fleet vehicle and equipment lease agreements include non-lease components for insignificant administrative and other costs that are billed over the life of the agreement. The Company has elected to combine these fees with the lease components of the agreement. Certain of the Company’s fleet vehicle and equipment leases contain residual value guarantees. At March 31, 2019, residual value guarantees on fleet vehicle and equipment leases are $0.5 million, $1.1 million, and $1.6 million for PNM, TNMP, and PNMR.

Other

The Company holds a number of office space and office equipment leases. The Company’s current office space leases, all of which existed as of December 31, 2018, are classified as operating leases. These agreements include non-lease components for costs such as common area maintenance fees, which the Company has elected to combine with the lease component of the agreements. Certain of the Company’s office space leases are held between the Company’s consolidated subsidiaries and have been eliminated on consolidation. See Note 15. The Company’s office equipment leases are primarily for copiers and other graphics equipment. The Company classifies its office equipment leases existing as of December 31, 2018 as operating leases. Office equipment leases commencing on or after January 1, 2019 are classified as financing leases.


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Information related to the Company’s operating leases recorded on the Condensed Consolidated Balance Sheets, including amounts recognized upon adoption of ASU 2016-02, is presented below:
 March 31, 2019 January 1, 2019
 PNM TNMP PNMR Consolidated PNM TNMP PNMR Consolidated
 (In thousands)
Operating leases:           
Operating lease assets, net of amortization$137,756
 $12,160
 $150,426
 $143,816
 $12,942
 $157,440
Current portion of operating lease liabilities22,762
 3,023
 26,197
 21,589
 3,132
 25,189
Long-term portion of operating lease liabilities115,436
 9,088
 124,937
 124,891
 9,787
 135,174

As discussed above, the Company classifies its fleet vehicle and equipment leases and its office equipment leases commencing on or after January 1, 2019 as financing leases. Information related to the Company’s financing leases recorded on the Condensed Consolidated Balance Sheets is presented below:
 March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Financing leases:     
Non-utility property$1,635
 $1,268
 $2,904
Accumulated depreciation(37) (40) (78)
Non-utility property, net$1,598
 $1,228
 $2,826
      
Other current liabilities$233
 $217
 $450
Other deferred credits1,083
 1,006
 2,089

Information concerning the weighted average remaining lease terms and the weighted average discount rates used to determine the Company’s lease liabilities is presented below:
 March 31, 2019
 PNM TNMP PNMR Consolidated
Weighted average remaining lease term (In years):     
Operating leases7.18
 4.67
 6.95
Financing leases5.72
 5.75
 5.74
      
Weighted average discount rate:     
Operating leases3.88% 3.88% 3.88%
Financing leases4.34% 4.55% 4.43%


PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Information for the components of lease expense is as follows:
 Three Months Ended March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Total operating lease expense$7,231
 $241
 $7,611
      
Financing lease expense:     
Amortization of right-of-use assets66
 58
 125
Interest on lease liabilities16
 17
 32
Total financing lease expense82
 75
 157
      
Variable lease expense—
 —
 —
Short-term lease expense74
 3
 94
Total lease expense for the period$7,387
 $319
 $7,862

Supplemental cash flow information related to the Company’s leases is as follows:
 Three Months Ending March 31, 2019
 PNM TNMP PNMR Consolidated
 (In thousands)
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases$9,452
 $284
 $9,891
Operating cash flows from financing leases16
 17
 32
Finance cash flows from financing leases25
 33
 58
      
Non-cash information related to right-of-use assets obtained in exchange for lease obligations:     
Operating leases$143,816
 $12,942
 $157,440
Financing leases1,635
 1,268
 2,904

Excluded from the lease expense and cash flow information tables above are $0.4 million, $0.7 million, and $1.1 million of capitalized operating lease costs, and less than $0.1 million of capitalized financing lease costs at PNM, TNMP, and PNMR. These capitalized costs are reflected as investing activities on the Company’s Condensed Consolidated Statements of Cash Flows.

Future expected lease payments as of March 31, 2019 and December 31, 2018 are shown below:
 As of March 31, 2019
 PNM TNMP PNMR Consolidated
 Financing Operating Financing Operating Financing Operating
 (In thousands)
Remainder of 2019$266
 $17,917
 $209
 $2,622
 $475
 $20,980
2020344
 27,045
 269
 2,993
 613
 30,555
2021332
 26,505
 259
 2,398
 591
 29,158
2022319
 26,235
 249
 1,846
 568
 28,255
2023307
 17,457
 181
 1,281
 488
 18,879
Later years224
 42,328
 214
 1,151
 438
 43,490
Total minimum lease payments1,792
 157,487
 1,381
 12,291
 3,173
 171,317
Less: Imputed interest476
 19,289
 158
 180
 634
 20,183
Lease liabilities as of March 31, 2019$1,316
 $138,198
 $1,223
 $12,111
 $2,539
 $151,134

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



 As of December 31, 2018
 Operating leases
 PNM TNMP PNMR Consolidated
 (In thousands)
Remainder of 2019$27,691
 $3,664
 $31,772
202027,000
 3,102
 30,404
202126,462
 2,324
 29,012
202226,217
 1,795
 28,175
202317,447
 1,279
 18,868
Later years42,329
 1,150
 43,489
Total minimum lease payments167,146
 13,314
 181,720

The above tables include $9.9 million, $12.2 million, and $22.1 million for PNM, TNMP, and PNMR at March 31, 2019 and $7.5 million, $11.0 million, and $18.5 million for PNM, TNMP, and PNMR at December 31, 2018 for expected future payments on fleet vehicle and equipment leases that could be avoided if the leases were returned and the lessor is able to recover estimated market value for the equipment from third parties. The Company’s contractual commitments for leases that have not yet commenced are insignificant.

(14)Income Taxes

On December 22, 2017, comprehensive changes in United States federal income taxes were enacted through legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made many significant modifications to the tax laws, including reducing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also eliminated federal bonus depreciation for utilities, limited interest deductibility for non-utility businesses and limited the deductibility of officer compensation. During 2018, the IRS issued additional guidance related to certain officer compensation, as well as proposed regulations on interest deductibility that provide a 10% “de minimis” exception that allows entities with predominantly regulated activities to fully deduct interest expenses. In addition, the IRS issued proposed regulations interpreting Tax Act amendments to depreciation provisions of the Internal Revenue Code that allow the Company to claim a bonus depreciation deduction on certain construction projects placed in service subsequent to the third quarter of 2017. See additional discussion of the impacts of the Tax Act in Note 18 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K.

Beginning February 2018, PNM’s NM 2016 Rate Case reflects the reduction in the federal corporate income rate, including amortization of excess deferred federal income taxes that are being returned to customers over a twenty-one year period; and reductions in the New Mexico corporate tax rate, including amortization of excess deferred state income taxes that are being returned to customers over a three-year period. On January 25, 2018, the PUCT issued an order requiring Texas utilities, including TNMP, to begin recording regulatory liabilities for the effects of the Tax Act with the stated purpose of reflecting those effects in the utility bills of Texas ratepayers. During the three months ended March 31, 2018, TNMP reduced revenue and recorded a regulatory liability of $1.5 million in accordance with the PUCT’s order. The approved settlement in the TNMP 2018 Rate Case includes a reduction in customer rates to reflect the impacts of the Tax Act beginning on January 1, 2019. See additional discussion of PNM’s NM 2016 Rate Case and TNMP’s 2018 Rate Case in Note 12.

As required under GAAP, the Company makes an estimate of its anticipated effective tax rate for the year as of the end of each quarterly period within its fiscal year. In interim periods, income tax expense is calculated by applying the anticipated annual effective tax rate to year-to-date earnings before income taxes, which includes the earnings attributable to the Valencia non-controlling interest. GAAP also provides that certain unusual or infrequently occurring items, including excess tax benefits related to stock awards, be excluded from the estimated annual effective tax rate calculation. At March 31, 2019, PNMR, PNM, and TNMP estimated their effective income tax rates for the year ended December 31, 2019 would be 9.42%, 11.89%, and 8.41%. The primary permanent difference is the reduction in income tax expense resulting from the amortization of excess deferred federal and state income taxes ordered by the NMPRC in PNM’s NM 2016 Rate Case and the amortization of excess deferred federal income taxes as ordered by the PUCT in TNMP’s 2018 Rate Case. During the three months ended March 31, 2019, income tax expense calculated by applying the expected annual effective income tax rate to earnings before income taxes was further reduced

PNM RESOURCES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


by excess tax benefits related to stock awards of $0.7 million for PNMR, of which $0.5 million was allocated to PNM and $0.2 million was allocated to TNMP.

(15)Related Party Transactions

PNMR, PNM, TNMP, and NMRD are considered related parties as defined under GAAP, as is PNMR Services Company, a wholly-owned subsidiary of PNMR that provides corporate services to PNMR and its subsidiaries in accordance with shared services agreements. These services are billed at cost on a monthly basis to the business units. In addition, PNMR provides construction and operations and maintenance services to NMRD, a 50% owned subsidiary of PNMR Development (Note 1), and PNM purchases renewable energy from certain NMRD-owned facilities at a fixed price per MWh of energy produced. PNM also provides interconnection services to PNMR Development (Note 9) and NMRD.

The table below summarizes the nature and amount of related party transactions of PNMR, PNM, TNMP, and NMRD:
 Three Months Ended
 March 31,
 2019 2018
 (In thousands)
Services billings:   
PNMR to PNM$26,826
 $23,679
PNMR to TNMP10,058
 8,365
PNM to TNMP75
 86
TNMP to PNMR35
 35
PNMR to NMRD41
 78
Renewable energy purchases:   
PNM from NMRD625
 370
Interconnection billings:   
PNM to NMRD—
 —
PNM to PNMR—
 —
Interest billings:   
PNMR to PNM933
 62
PNM to PNMR72
 66
PNMR to TNMP32
 8
Income tax sharing payments:   
PNMR to PNM—
 —
TNMP to PNMR—
 —


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is presented as permitted by Form 10-Q General Instruction H(2). This report uses the term “Company” when discussing matters of common applicability to PNMR, PNM, and TNMP. A reference to a “Note” in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified. Certain of the tables below may not appear visually accurate due to rounding.

MD&A FOR PNMR

EXECUTIVE SUMMARY
Overview and Strategy

PNMR is a holding company with two regulated utilities serving approximately 784,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. PNMR’s electric utilities are PNM and TNMP.
Strategic Goals
PNMR is focused on achieving three key strategic goals:

Earning authorized returns on regulated businesses
Delivering at or above industry-average earnings and dividend growth
Maintaining solid investment grade credit ratings

In conjunction with these goals, PNM and TNMP are dedicated to:

Maintaining strong employee safety, plant performance, and system reliability
Delivering a superior customer experience
Demonstrating environmental stewardship in business operations, including transitioning to an emissions-free generating portfolio by 2040
Supporting the communities in their service territories

Earning Authorized Returns on Regulated Businesses

PNMR’s success in accomplishing its strategic goals is highly dependent on two key factors: fair and timely regulatory treatment for its utilities and the utilities’ strong operating performance. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: safety, operational excellence, and customer satisfaction, while engaging stakeholders to build productive relationships. Both PNM and TNMP seek cost recovery for their investments through general rate cases and various rate riders.

Fair and timely rate treatment from regulators is crucial to PNM and TNMP in earning their allowed returns and critical for PNMR to achieve its strategic goals. PNMR believes that earning allowed returns is viewed positively by credit rating agencies and that improvements in the Company’s ratings could lower costs to utility customers.

Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K and in Note 12.

State Regulation

New Mexico 2015 Rate Case – On September 28, 2016, the NMPRC issued an order that authorized PNM to implement an increase in base non-fuel rates of $61.2 million for New Mexico retail customers, effective for bills sent after September 30, 2016. This order was on PNM’s application for a general increase in retail electric rates (the “NM 2015 Rate Case”) filed in August 2015. PNM’s application requested an increase in base non-fuel revenues of $121.5 million based on a future test year

(“FTY”) beginning October 1, 2015. The primary drivers of the revenue deficiency were infrastructure investments and declines in forecasted energy sales due to successful energy efficiency programs and other economic factors.

The NMPRC’s September 28, 2016 order included a determination that PNM was imprudent in purchasing 64.1 MW of previously leased capacity in PVNGS Unit 2, extending the leases for 114.6 MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. Major components of the difference between the increase in non-fuel revenues approved in the order and PNM’s request, include:

A ROE of 9.575%, compared to the 10.5% requested by PNM
Inclusion of the January 2016 purchase of the assets underlying three leases of capacity, totaling 64.1 MW of PVNGS Unit 2 (Note 13) at an initial rate base value of $83.7 million, compared to PNM’s request for recovery of the fair market value purchase price of $163.3 million; and disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW was being leased by PNM, which costs totaled $43.8 million when the order was issued
Disallowance of the recovery of any future contributions for PVNGS decommissioning costs related to the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016 and the 114.6 MW of the leased capacity in PVNGS Units 1 and 2 that were extended for eight years beginning January 15, 2015 and 2016 (Note 13)
Disallowance of recovery of the costs associated with converting SJGS Units 1 and 4 to BDT, which is required by the NSR permit for SJGS; PNM’s share of the costs of installing the BDT equipment was $52.3 million, $40.0 million of which PNM requested be included in rate base in the NM 2015 Rate Case

On September 30, 2016, PNM filed a notice of appeal with the NM Supreme Court regarding the order in the NM 2015 Rate Case. PNM is appealing the NMPRC’s determination that PNM was imprudent in the actions taken to purchase the previously leased 64.1 MW of capacity in PVNGS Unit 2, extending the leases for 114.6 MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. PNM’s appeal includes the following specific elements of the NMPRC’s order:

Disallowance of recovery of the full fair market value purchase price of the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016
Disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity was leased by PNM
Disallowance of recovery of future contributions for PVNGS decommissioning attributable to 64.1 MW of purchased capacity and the 114.6 MW of capacity under the extended leases
Disallowance of recovery of the costs of converting SJGS Units 1 and 4 to BDT

NEE, NMIEC, and ABCWUA filed notices of cross appeal to PNM’s appeal. The issues that are being appealed by the various cross-appellants are:

The NMPRC allowing PNM to recover the costs of the lease extensions for the 114.6 MW of PVNGS Units 1 and 2 and any of the purchase price for the 64.1 MW in PVNGS Unit 2
The NMPRC allowing PNM to recover the costs incurred under the new coal supply contract for Four Corners
The revised method to collect PNM’s fuel and purchased power costs under the FPPAC
The final rate design
The NMPRC allowing PNM to include the “prepaid pension asset” in rate base

The NM Supreme Court has orally stated that the court’s intent would be to request that PNM reimburse ratepayers for any amount overcharged should the cross-appellants prevail on the merits. Oral argument at the NM Supreme Court was held on October 30, 2017. Although appeals of regulatory actions of the NMPRC have a priority at the NM Supreme Court under New Mexico law, there is no required time frame for the court to act on the appeals.

PNM evaluated the accounting consequences of the order in the NM 2015 Rate Case and the likelihood of being successful on the issues it is appealing in the NM Supreme Court as required under GAAP. The evaluation indicated it is reasonably possible that PNM will be successful on the issues it is appealing. If the NM Supreme Court rules in PNM’s favor on some or all of the issues, those issues would be remanded back to the NMPRC for further action. PNM originally estimated that it would take a minimum of 15 months from September 30, 2016 for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues. Accordingly, PNM recorded pre-tax regulatory disallowances of $11.3 million representing capital cost recovery for the period October 1, 2016 through December 31, 2017 on its investments that the order disallowed, as well as

amounts recorded as regulatory assets and deferred charges that the order disallowed, and which PNM did not challenge in its appeal. PNM has periodically updated its estimate of the time frame necessary to resolve these matters resulting in additional pre-tax disallowances of $3.1 million and $4.0 million being recorded in December 2017 and in the second half of 2018. Since the NM Supreme Court did not issue a decision by March 31, 2019, PNM again reevaluated its estimate of the time frame necessary to resolve the matter. As of March 31, 2019, PNM recorded additional pre-tax disallowances of $1.3 million representing additional cost recovery the order disallowed and will not be recovered from customers. PNM’s aggregate pre-tax losses of $19.7 million assumes the NM Supreme Court will issue a decision and that any remanded issues will be addressed by the NMPRC by July 31, 2019. Additional losses will be recorded if the currently estimated time frame for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues is further extended.

PNM continues to believe that the disallowed investments, which are the subject of PNM’s appeal, were prudently incurred and that PNM is entitled to full recovery of those investments through the ratemaking process. If PNM’s appeal is unsuccessful, PNM would record additional pre-tax losses related to any unsuccessful issues. The March 31, 2019 book values of PNM’s investments that the order disallowed, after considering the losses recorded to date, were $72.6 million for the 64.1 MW of purchased capacity in PVNGS Unit 2, $37.6 million for the PVNGS Unit 2 disallowed capital improvements, and $49.7 million for the BDT equipment.

PNM does not believe that the likelihood of the cross-appeals being successful is probable. However, if the NM Supreme Court were to overturn all of the issues subject to the cross-appeals and, upon remand, the NMPRC did not provide any cost recovery of those items, PNM would write-off all of the costs to acquire the assets previously leased under three leases aggregating 64.1 MW of PVNGS Unit 2 capacity, totaling $144.7 million at March 31, 2019 (which includes $72.6 million that is the subject of PNM’s appeal discussed above) after considering the losses recorded to date. The impacts of not recovering costs for the lease extensions, new coal supply contract for Four Corners, and “prepaid pension asset” in rate base would be recognized in future periods reflecting that rates charged to customers would not recover those costs as they are incurred. The outcomes of the cross-appeals regarding the FPPAC and rate design should not have a financial impact to PNM.

New Mexico 2016 Rate Case – On January 16, 2018, the NMPRC issued an order that authorized PNM to implement an increase in base non-fuel rates of $10.3 million. PNM implemented 50% of the approved increase for service rendered, rather than bills sent, beginning February 1, 2018 and implemented the rest of the increase for service rendered beginning January 1, 2019. This order was on PNM’s application for a general increase in retail electric rates (the “NM 2016 Rate Case”) filed in December 2016. PNM’s December 2016 application requested an increase in base non-fuel revenues of $99.2 million based on a FTY beginning January 1, 2018 and an ROE of 10.125%. PNM’s December 2016 application did not include a request to recover any of the costs disallowed in the NM 2015 Rate Case that are at issue in PNM’s pending appeal to the NM Supreme Court. The primary drivers of PNM’s revenue deficiency included implementation of modifications to PNM’s resource portfolio, which were approved by the NMPRC in December 2015 as part of the SJGS regional haze compliance plan, infrastructure investments, including environmental upgrades at Four Corners, declines in forecasted energy sales due to successful energy efficiency programs and other economic factors, and updates to FERC/retail jurisdictional allocations.

After extensive settlement negotiations and public proceedings, the NMPRC issued a Revised Order Partially Adopting Certification of Stipulation dated January 10, 2018 (the “Revised Order”). The key terms of the Revised Order include:

A revenue increase totaling $10.3 million, which includes a reduction to reflect the impact of the decrease in the federal corporate income tax rate and updates to PNM’s cost of debt (aggregating an estimated $47.6 million annually)
A ROE of 9.575%
Returning to customers over a three-year period the benefit of the reduction in the New Mexico corporate income tax rate (Note 14) to the extent attributable to PNM’s retail operations
Disallowing PNM’s ability to collect an equity return on its $90.1 million investment in SCRs at Four Corners and on $58.0 million of projected capital improvements during the period July 1, 2016 through December 31, 2018, but allowing recovery of the total $148.1 million of investments with a debt-only return
An agreement to not implement non-fuel base rate changes, other than changes related to PNM’s rate riders, with an effective date prior to January 1, 2020
A decision to defer future consideration regarding the prudency of PNM’s decision to continue its participation in Four Corners to a future proceeding

PNM implemented 50% of the approved increase for service rendered beginning February 1, 2018 and implemented the rest of the increase for service rendered beginning January 1, 2019.

TNMP 2018 Rate Case – On December 20, 2018, the PUCT approved a settlement stipulation allowing TNMP to increase annual base rates by $10.0 million based on a ROE of 9.65%, a cost of debt of 6.44%, and a capital structure comprised of 55% debt and 45% equity. Under the approved settlement stipulation TNMP was granted authority to integrate revenues previously recorded under the AMS rider, as well as other unrecorded AMS costs, into base rates; establish a new rider to recover Hurricane Harvey restoration costs, net of amounts owed to customers as a result of the reduction in the federal corporate income tax rate in 2018; and to update depreciation rates. In addition, the approved settlement stipulation allows TNMP to refund the regulatory liability recorded at December 31, 2017 related to federal tax reform to customers and reflects the reduction in the federal corporate income tax rate to 21%. New rates under the TNMP 2018 Rate Case became effective January 1, 2019.

TNMP’s original application, which was filed with the PUCT on May 30, 2018 (the “TNMP 2018 Rate Case”), requested an annual increase to base rates of $25.9 million based on a ROE of 10.5%, a cost of debt of 7.2%, and a capital structure comprised of 50% debt and 50% equity.

Advanced Metering –TNMP completed its mass deployment of advanced meters across its service territory in 2016 and has installed more than 242,000 advanced meters. As discussed above, beginning in 2019 the costs associated with TNMP’s AMS program are being recovered through base rates.

In February 2016, PNM filed an application with the NMPRC requesting approval of a project to replace its existing customer metering equipment with Advanced Metering Infrastructure (“AMI”), which was denied. As ordered by the NMPRC, PNM’s next energy efficiency plan filing will include a proposal for an AMI pilot project.

Rate Riders and Interim Rate Relief –The PUCT has approved mechanisms that allow TNMP to recover capital invested in transmission and distribution projects without having to file a general rate case. This permits more timely recovery of investments. The NMPRC has approved PNM recovering fuel costs through the FPPAC, as well as rate riders for renewable energy and energy efficiency that allow for more timely recovery of investments and improve PNM’s ability to earn its authorized return.

Cost Recovery Related to Joining the EIM – In 2018, PNM completed a cost-benefit analysis that indicated PNM’s participation in the California Independent System Operator (“CAISO”) Western Energy Imbalance Market (“EIM”) would provide substantial benefits to retail customers. In August 2018, PNM filed an application with the NMPRC requesting, among other things, to recover the cost of initial capital investments and authorization to establish a regulatory asset to recover other expenses that would be incurred in order to join the EIM. PNM’s application proposes recovery of the costs incurred to join the EIM would be recovered beginning on the effective date of new rates in PNM’s next general rate case and that the benefits of participating in the EIM be credited to retail customers through PNM’s existing FPPAC. A public hearing was held on December 12, 2018. On December 19, 2018, the NMPRC issued an order approving the establishment of a regulatory asset to recover PNM’s cost of joining the EIM. On January 17, 2019, ABCWUA filed a motion to reopen the case and to reconsider the NMPRC’s order approving the establishment of a regulatory asset. On February 6, 2019, the NMPRC issued an order granting rehearing and vacating the December 19, 2018 order. On February 24, 2019, Western Resource Advocates, and the Coalition for Clean and Affordable Energy filed a motion for an expedited final order, which was supported by PNM and other parties and opposed by ABCWUA.  On February 27, 2019, the NMPRC issued a procedural order requiring the Hearing Examiner to report to the NMPRC whether the matter should be reopened. On March 18, 2019, the Hearing Examiner recommended that all rate making issues, including but not limited to implementation and ongoing EIM costs and savings, the prudence and reasonableness of costs included in a regulatory asset, and the period over which costs would be charged to customers be deferred until a future case. PNM filed limited exceptions to the recommended decision. The NMPRC issued a final order adopting the Hearing Examiner’s recommended decision on March 27, 2019. On April 12, 2019, PNM and other parties filed a joint motion requesting the NMPRC clarify that the quarterly benefits reports prepared by CAISO be used to determine the benefits of participating in the EIM, as well as to support the prudence of costs incurred to join the EIM. On April 24, 2019, the NMPRC issued an order granting the joint motion for clarification and indicating the CAISO quarterly benefits reports may be used in a future rate case. PNM anticipates it will begin participating in the EIM in April 2021.

FERC Regulation

Rates PNM charges wholesale transmission customers and wholesale generation customers are subject to traditional rate regulation by FERC. 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 transmission capital projects to be placed into service in the following year. The projections included are subject to true-up. 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 resulted in market prices for power being substantially lower than what PNM is able to offer wholesale generation customers under the cost of service model that FERC requires PNM to use.  Consequently, PNM decided to stop pursuing wholesale generation contracts and currently has no full-requirements wholesale generation customers.
Delivering At or Above Industry-Average Earnings and Dividend Growth
PNMR’s strategic goal to deliver at or above industry-average earnings and dividend growth enables investors to realize the value of their investment in the Company’s business. PNMR’s current target is 5% to 6% earnings and dividend growth for the period 2019 through 2022. Earnings growth is based on ongoing earnings, which is a non-GAAP financial measure that excludes from GAAP earnings certain non-recurring, infrequent, and other items that are not indicative of fundamental changes in the earnings capacity of the Company’s operations. PNMR uses ongoing earnings to evaluate the operations of the Company and to establish goals, including those used for certain aspects of incentive compensation, for management and employees.
PNMR targets a dividend payout ratio in the 50% to 60% range of its ongoing earnings. PNMR expects to provide at or above industry-average dividend growth in the near-term and to manage the payout ratio to meet its long-term target. The Board will continue to evaluate the dividend on an annual basis, considering sustainability and growth, capital planning, and industry standards. The Board approved the following increases in the indicated annual common stock dividend:
Approval DatePercent Increase
December 201510%
December 201610%
December 20179%
December 20189%

Maintaining Solid Investment Grade Credit Ratings
The Company is committed to maintaining solid investment grade credit ratings in order to reduce the cost of debt financing and to help ensure access to credit markets, when required. See the subheading Liquidity included in the full discussion of Liquidity and Capital Resources below for the specific credit ratings for PNMR, PNM, and TNMP. Currently, all of the credit ratings issued by both Moody’s and S&P on the Company’s debt are investment grade. In January 2018, S&P changed the outlook for PNMR, PNM, and TNMP from stable to negative. In June 2018, Moody’s changed the outlook for PNMR and PNM from positive to stable and maintained a stable outlook for TNMP.

Business and Strategic Focus

PNMR strives to create enduring value for customers, communities, and shareholders. PNMR’s strategy and decision-making are focused on safely providing reliable, affordable, and environmentally responsible power. The Company works closely with customers, stakeholders, legislators, and regulators to ensure that resource plans and infrastructure investments benefit from robust public dialogue and balance the diverse needs of our communities. Equally important is the focus of PNMR’s utilities on customer satisfaction and community engagement.

Reliable and Affordable Power
PNMR and its utilities are aware of the important roles they play in enhancing economic vitality in their service territories. Management believes that maintaining strong and modern electric infrastructure is critical to ensuring reliability and supporting economic growth. When contemplating expanding or relocating their operations, businesses consider energy affordability and reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability and to deliver a superior customer experience. Investing in PNM’s and TNMP’s infrastructure is critical to ensuring reliability and meeting future energy needs. Both utilities have long-established records of providing customers with reliable electric service.


Utility Plant and Strategic Investments

Utility Plant Investments – During the 2016 to 2018 period, PNM and TNMP together invested $1,501.7 million in utility plant, including substations, power plants, nuclear fuel, and transmission and distribution systems. PNM completed installation of SNCR and BDT equipment on SJGS Units 1 and 4 in early 2016. On January 15, 2016, PNM completed the $163.3 million acquisition of 64.1 MW of capacity in PVNGS Unit 2 that had previously been leased to PNM. During 2018 and 2019, PNM will construct an additional 50 MW of PNM-owned PV facilities, which were approved by the NMPRC in PNM’s 2018 renewable energy procurement plan. The 50 MW PV facilities are expected to be placed in commercial operations by December 2019 at a cost not to exceed $73.0 million. In late 2018, PNM became the first utility to install a new type of protective relay on its high-voltage transmission lines, which help to ensure the reliability of PNM’s electrical system. On May 1, 2019, PNM executed an agreement to purchase a 165-mile 345 kV transmission line and to construct associated facilities (the “Western Spirit Line”), subject to NMPRC and FERC approval. PNM anticipates the Western Spirit line will be used to serve approximately 800 MW of new wind generation facilities in eastern New Mexico beginning in 2021. See the subheading Capital Requirements included in the full discussion of Liquidity and Capital Resources below for additional discussion of the Company’s projected capital requirements.

Strategic Investments – In 2017, PNMR Development and AEP OnSite Partners created NMRD to pursue the acquisition, development, and ownership of renewable energy generation projects, primarily in the state of New Mexico. Abundant renewable resources, large tracts of affordable land, and strong government and community support make New Mexico a favorable location for renewable generation. New Mexico has the 2nd highest technical potential of the 48 contiguous states for utility scale solar photovoltaics as noted in 2015 by the National Renewable Energy Laboratory, while New Mexico is 6th for technical potential for land-based wind. PNMR Development and AEP OnSite Partners each have a 50% ownership interest in NMRD. Through NMRD, PNMR anticipates being able to provide additional renewable generation solutions to customers within and surrounding its regulated jurisdictions through partnering with a subsidiary of one of the United States’ largest electric utilities. The formation of this joint venture provides a more efficient use of PNMR’s capital to support new renewable investment opportunities while maintaining the necessary capital to support investments required by regulated jurisdictions. NMRD’s current renewable energy capacity in operation is 33.9 MW, which includes 30 MW of solar-PV facilities required to supply energy to the Facebook data center located within PNM’s service territory, 1.9 MW to supply energy to Columbus Electric Cooperative located in southwest New Mexico, and 2.0 MW to supply energy to the Central New Mexico Electric Cooperative. In August 2018, the NMPRC approved PNM’s request to enter into two additional 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 constructed by NMRD to supply power to Facebook. NMRD is required to obtain FERC approval of the PPAs. Subject to FERC approval, these facilities are expected to be in commercial operation by June 2020.See Note 12. NMRD actively explores opportunities for additional renewable projects, including large-scale projects to serve future data centers and other customer needs.

Integrated Resource Plan

NMPRC rules require that investor-owned utilities file an IRP every three years. The IRP is required to cover a 20-year planning period and contain an action plan covering the first four years of that period.

PNM filed its 2017 IRP on July 3, 2017. The 2017 IRP analyzed several scenarios utilizing assumptions that PNM continues service from its SJGS capacity beyond mid-2022 and that PNM retires its capacity after mid-2022. Key findings of the 2017 IRP include:

Retiring PNM’s share of SJGS in 2022 after the expiration of the current operating and coal supply agreements would provide long-term cost savings for PNM’s customers
PNM exiting its ownership interest in Four Corners after its current coal supply agreement expires in 2031 would also provide long-term cost savings for customers
The best mix of new resources to replace the retired coal generation would include solar energy and flexible natural gas-fired peaking capacity; the mix could include energy storage if the economics support it, and wind energy provided additional transmission capacity becomes available
Significant increases in future wind energy supplies will likely require new transmission capacity to be built from eastern New Mexico to PNM’s service territory
PNM should retain the currently leased capacity in PVNGS, which would avoid replacement with carbon-emitting generation
PNM should continue to develop and implement energy efficiency and demand management programs

PNM should assess the costs and benefits of participating in the California Independent System Operator Western Energy Imbalance Market
PNM should analyze its current Reeves Station to consider possible technology improvements to phase out the older generators and replace them with new, more flexible supplies or energy storage

On October 26, 2018, the Hearing Examiner issued a recommended decision recommending that the NMPRC accept PNM’s 2017 IRP as compliant with the applicable statute and NMPRC rules. On December 19, 2018, the NMPRC issued a final order accepting the Hearing Examiner’s recommended decision. On January 18, 2019, The Board of the County of Commissioners for San Juan County, New Mexico, the City of Farmington, New Mexico, and other parties filed a Notice of Appeal with the NM Supreme Court regarding the NMPRC’s final order in PNM’s 2017 IRP. The due date for Statements of Issues in the appeal has been extended to May 10, 2019 at the request of appellants in the case. On January 18, 2019, NEE submitted a motion requesting the NMPRC reconsider its acceptance of PNM’s 2017 IRP filing alleging informational inadequacy and deficiencies in PNM’s filing. On January 29, 2019, PNM submitted a filing to the NMPRC in response to NEE’s motion for reconsideration. In its response, PNM stated that the issues raised by NEE had already been considered and rejected by the NMPRC in its December 19, 2018 final order and that the NMPRC lacks jurisdiction over the matters because the NMPRC’s final order has been appealed to the NM Supreme Court. The NMPRC did not take action on NEE’s motion for reconsideration. On February 19, 2019, NEE filed a motion with the NM Supreme Court to intervene in the appeal and to seek remand of the matter to the NMPRC. On March 11, 2019, PNM filed its response to the NM Supreme Court stating that the NMPRC had already considered and, by operation of law, denied NEE’s motion for reconsideration. PNM cannot predict the outcome of this matter.

See additional discussion of PNM’s 2017 IRP and PNM’s December 2018 Compliance Filing regarding SJGS below and in Notes 11 and 12.
Environmentally Responsible Power
PNMR has a long-standing record of environmental stewardship. PNM’s environmental focus is in three key areas:

Developing strategies to provide reliable and affordable power while transitioning to a 100% emissions-free generating portfolio by 2040
Preparing PNM’s system to meet New Mexico’s increasing renewable energy requirements as cost-effectively as possible
Increasing energy efficiency participation

PNMR’s Sustainability Portal provides key environmental and sustainability information related to PNM’s and TNMP’s operations and is available at http://www.pnmresources.com/about-us/sustainability-portal.aspx. The portal also contains a Climate Change Report, which outlines plans to be coal-free by 2031 (subject to regulatory approval). This would further PNM’s goal to achieve a 100% emissions-free generating portfolio by 2040.

The Energy Transition Act (“ETA”)

On March 22, 2019, Senate Bill 489, known as the ETA, was signed into New Mexico state law and becomes effective on June 14, 2019. Prior to the enactment of the ETA, the REA established a mandatory RPS requiring utilities to acquire a renewable energy portfolio equal to 10% of retail electric sales by 2011, 15% by 2015, and 20% by 2020. The ETA amends the REA and requires utilities operating in New Mexico to have renewable portfolios equal to 20% by 2020, 40% by 2025, 50% by 2030, 80% by 2040, and 100% zero-carbon energy by 2045. The ETA also amends sections of the REA to allow for the recovery of undepreciated investments and decommissioning costs related to qualifying EGUs that the NMPRC has required be removed from retail jurisdictional rates, provided replacement resources to be included in retail rates have lower or zero-carbon emissions. The ETA provides for a transition from fossil-fueled generating resources to renewable and other carbon-free resources by allowing utilities to issue securitized bonds, or “energy transition bonds,” related to the retirement of certain coal-fired generating facilities to qualified investors. Proceeds from the energy transition bonds must be used for purposes related to providing utility service to customers and to pay “financing costs” (as defined by the ETA). These costs may include coal mine decommissioning, plant decommissioning, and other costs that have not yet been charged to customers. Proceeds from energy transition bonds may also be used to fund severances for employees of the retired facility and related coal mine, and to promote economic development, education and job training in areas impacted by the retirement of the coal-fired facilities. The ETA requires the NMPRC to prioritize replacement resources in a manner intended to mitigate the economic impact to communities affected by these plant retirements. See additional discussion of the ETA in Note 11.


The ETA will have a significant impact on PNM’s future generation portfolio, including PNM’s planned retirement of SJGS in 2022. PNM cannot predict the full impact of the ETA or the outcome of its potential future generating resource abandonment and replacement filings with the NMPRC.

SJGS

December 2018 Compliance Filing –As discussed in Note 16 of the Notes to the Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K, the NMPRC’s December 2015 approval for a plan to comply with the EPA’s regional haze rule at SJGS required PNM to make a filing setting forth PNM’s recommendation, along with supporting testimony and exhibits, to determine the extent to which SJGS should continue serving PNM’s retail customers’ needs after June 30, 2022 (the “December 2018 Compliance Filing”). The December 2018 Compliance Filing was required to be made before PNM entered into a binding commitment for post-2022 coal supply, but after PNM had received firm pricing and other terms for the supply of coal, unless PNM did not intend to pursue an agreement for post-2022 coal supply at SJGS.

PNM submitted the December 2018 Compliance Filing to the NMPRC on December 31, 2018 indicating that, consistent with the conclusions reached in PNM’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 SJGS CSA expires in mid-2022. The December 2018 Compliance Filing also indicates that all of the SJGS owners except for Farmington have provided written notice that they do not intend to extend the SJGS operating agreements beyond their June 30, 2022 expiration dates and that PNM has provided written notice that PNM does not intend to extend the SJGS CSA beyond June 30, 2022. The December 2018 Compliance Filing also requested the NMPRC’s December 2015 order remain closed, and that PNM anticipates it will have sufficient information by the end of the second quarter of 2019 to support a consolidated application seeking NMPRC approval to retire PNM’s share of SJGS in 2022 and for approval of CCNs, PPAs, or other applicable approvals, for resources to replace PNM’s capacity in SJGS. On January 30, 2019, the NMPRC approved an order initiating a proceeding and requiring PNM to submit an application for the abandonment of PNM’s share of SJGS in 2022 by March 1, 2019. On February 7, 2019, PNM filed a motion requesting the NMPRC vacate the January 30, 2019 order and extend the deadline for PNM’s abandonment filing until the end of the second quarter of 2019, which was deemed denied. On February 27, 2019, PNM filed a petition with the NM Supreme Court stating that the requirements of the January 30, 2019 order exceeded the NMPRC’s authority by, among other things, mandating PNM to make a filing that is legally voluntary, and that the order is contrary to NMPRC precedent which requires abandonment applications to also include identified replacement resources and other information that would not be available to PNM by March 1, 2019. PNM’s petition also requested the NM Supreme Court stay the January 30, 2019 order until after June 14, 2019. On March 1, 2019, the NM Supreme Court granted a temporary stay of the NMPRC’s order to consider the merits of PNM’s petition after receiving responses.  The NMPRC and NEE filed responses supporting the NMPRC’s authority to order PNM to initiate a proceeding. Other parties to the case filed responses supporting a stay of the NMPRC’s order and indicating that the abandonment filing should be subject to recently enacted changes in New Mexico state law. See additional discussion of the ETA above, and PNM’s December 2018 Compliance Filing in Note 11. PNM cannot predict the outcome of this matter.

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 would require future NMPRC approval.  PNM will also be required to obtain NMPRC approval of replacement power resources through CCN, PPA, or other applicable filings. The financial impact of an early retirement of SJGS and the NMPRC approval process are influenced by many factors outside of PNM’s control, including the economic impact of a potential SJGS abandonment on the area surrounding the plant and related mine, as well as overall political and economic conditions in New Mexico. Furthermore, PNM’s application for the abandonment of SJGS and for associated replacement resources would be significantly influenced by the requirements of the ETA. PNM will seek full recovery of its remaining undepreciated investments and other costs necessary to retire the SJGS and for replacement resources but, due to the uncertainty in obtaining the required approvals, PNM is unable to predict the outcome of this matter.
Other Environmental Matters –In addition to the regional haze rule, SJGS is required to comply with other rules currently being developed or implemented that affect coal-fired generating units. Implementation of the Clean Power Plan, which was published by EPA in October 2015, is currently stayed by order of the US Supreme Court pending further proceedings before the DC Circuit. Oral argument was heard by the DC Circuit in September 2016, but the court has taken no action. On March 28, 2017, President Trump issued an Executive Order on Energy Independence.  The order sets out two general policies: promote clean and safe development of energy resources, while avoiding regulatory burdens, and ensure electricity is affordable, reliable, safe, secure, and clean.  The order rescinds various actions undertaken by the previous administration and directs the EPA Administrator to review and if appropriate suspend, revise, or rescind the Clean Power Plan, as well as other environmental regulations. On October 10, 2017, EPA issued a proposal to repeal the Clean Power Plan based on a legal interpretation of the

CAA under which the Clean Power Plan exceeds EPA’s statutory authority. EPA published the proposed repeal rule on October 16, 2017 and accepted public comments through April 26, 2018. On August 31, 2018, EPA published a proposed rule, informally known as the Affordable Clean Energy rule, to replace the Clean Power Plan. The Affordable Clean Energy rule proposes GHG reductions be achieved through heat-rate improvement technologies identified as Best System of Emission Reduction (“BSER”). Under the proposed rule, states would determine and propose to EPA which technologies to apply to each coal-fired EGU and establish performance standards based on the degree of emission reduction achievable through application of the selected BSER (Note 11). Also, on December 20, 2018, EPA published in the Federal Register a proposed rule that would revise the carbon pollution standards rule issued in October 2015 for certain fossil fueled power plants. The proposal would revise the emissions standards for new, reconstructed, or modified coal-fired EGUs to make them less stringent. PNM estimates that implementation of the BART plan at SJGS, along with potentially exiting ownership in the remaining units at SJGS (as well as Four Corners), as discussed above, should provide significant steps for New Mexico to meet its ultimate compliance with Section 111(d) under the Clean Power Plan, the proposed Affordable Clean Energy rule, or any similar rule. PNM does not expect SJGS or Four Corners will be subject to the carbon pollution standards rule that EPA has proposed to revise. As discussed above and in Note 11, recent changes in New Mexico state law related to GHG emissions under the ETA may have significant impacts on SJGS and Four Corners as well as PNM’s other fossil-fueled generating resources. PNM is unable to predict the impact of these matters on its generation portfolio.
Major environmental upgrades on each of the units at SJGS have significantly reduced emissions of NOx, SO2, particulate matter, and mercury. Because of environmental upgrades completed in 2009, SJGS has a mercury removal efficiency of 98% and mercury emissions are well below the mercury limit imposed by EPA in the 2012 Mercury and Air Toxics Standards. Although EPA published a proposal on February 7, 2019 to reconsider some of the determinations underlying those standards, EPA has not proposed to alter the standards themselves. On the contrary, EPA determined that no more stringent standards are warranted because any residual risk remaining is acceptable within the margin of safety. Therefore, EPA’s 2019 proposal should not impact SJGS. Between 2006 and 2018, SJGS has reduced emissions of NOx by 77%, SO2 by 92%, particulate matter by 88%, and mercury by 99%.
Renewable Energy
PNM’s renewable procurement strategy includes utility-owned solar capacity, as well as wind and geothermal energy purchased under PPAs. As discussed above, PNM is also considering the use of additional energy storage capacity in the event of an early retirement of SJGS. As of March 31, 2019, PNM has 117 MW of utility-owned solar capacity. In addition, PNM purchases power from a customer-owned distributed solar generation program that had an installed capacity of 106.8 MW at March 31, 2019. PNM also owns the 500 KW PNM Prosperity Energy Storage Project, which uses advanced batteries to store solar power and dispatch the energy either during high-use periods or when solar production is limited. The project was one of the first combinations of battery storage and PV energy in the nation and involved extensive research and development of advanced grid concepts. The facility also was the nation’s first solar storage facility fully integrated into a utility’s power grid. Since 2003, PNM has purchased the output from New Mexico Wind, a 204 MW wind facility, and began purchasing the output of Red Mesa Wind, an existing 102 MW wind energy center, on January 1, 2015. PNM has a 20-year agreement to purchase energy from the Lightning Dock Geothermal facility built near Lordsburg, New Mexico, which has a current capacity of 15 MW. PNM also purchases RECs as necessary to meet the RPS.
The majority of these renewable resources are key means for PNM to meet the RPS and related regulations that require PNM to achieve prescribed levels of energy sales from renewable sources, including those set by the recently enacted ETA, without exceeding cost requirements. PNM makes renewable procurements consistent with the plans approved by the NMPRC. PNM’s 2018 renewable energy procurement plan meets RPS and diversity requirements for 2018 and 2019 and includes additional procurements of wind, geothermal, and solar-PV capacity. PNM’s 2019 renewable energy procurement plan meets RPS and diversity requirements for 2019 and 2020 and does not include any significant new procurements. As discussed in Note 12, the ETA removes diversity requirements and certain customer caps and exemptions relating to the application of the RPS. As a result, PNM will be required to procure additional renewable resources to meet the 20% by 2020 requirement under the RPS, which would likely be obtained through PPAs with third-parties.

As discussed in Strategic Investments above, PNM is currently purchasing the output of 30 MW of solar capacity from NMRD that is used to serve the Facebook data center. PNM entered into three separate 25-year PPAs to purchase renewable energy and RECs to be used by PNM to supply additional renewable power to the Facebook data center. These PPAs include the purchase of the power and RECs from a 50 MW wind project, which was placed in commercial operation in November 2018, a 166 MW wind project to be operational in November 2020, and a 50 MW solar project to be operational in December 2021. In August 2018, the NMPRC approved PNM’s request to enter into two additional 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 constructed by NMRD to supply power to Facebook. NMRD is required to obtain FERC approval of the PPAs. Subject to FERC approval, these facilities are expected to begin commercial operation by June 2020. See Note 12.
The ETA removes certain customer caps and exemptions relating to the application of the RPS. As a result of these changes, PNM will be required to procure additional energy from renewable resources to meet the 20% by 2020 requirement under the RPS. PNM expects to request NMPRC approval of a PPA for wind generation capacity, which would utilize the BB2 Line to deliver the power, to meet this requirement. See additional discussion of these matters in Note 12.
PNM will continue to procure renewable resources while balancing the impact to customers’ electricity costs in order to meet New Mexico’s escalating RPS and carbon-free resource requirements.
Energy Efficiency
Energy efficiency also plays a significant role in helping to keep customers’ electricity costs low while meeting their energy needs.needs and is one of the Company’s approaches to supporting environmentally responsible power. PNM’s and TNMP’s energy efficiency and load management portfolios continue to achieve robust results. In 2017,2018, incremental energy saved as a result of new participation in PNM’s portfolio of energy efficiency programs was approximately 7472 GWh. This is equivalent to the annual consumption of approximately 11,00010,300 homes in PNM’s service territory. PNM’s load management and annual energy efficiency programs also help lower peak demand requirements. In 2017,2018, TNMP’s incremental energy saved as a result of new participation in TNMP’s energy efficiency programs was approximately 2117 GWh. This is equivalent to the annual consumption of approximately 2,3001,500 homes in TNMP’s service territory. In April 2016 and again in April 2017, TNMP was recognized by Energy Star for TNMP’s successful energy efficiency efforts.2018, TNMP received the “Partner of the Year Energy Efficiency Delivery Award” for its High-Performance Homes Program.
Water Conservation and Solid Waste Reduction

PNM continues its efforts to reduce the amount of fresh water used to make electricity (about 20% more efficient than in 2007). Continued growth in PNM’s fleet of solar and wind energy sources, energy efficiency programs, and innovative uses of gray water and air-cooling technology have contributed to this reduction. Water usage will continuehas continued to decline as PNM substituteshas substituted less fresh-water-intensive generation resources to replace SJGS Units 2 and 3 starting in 2018, as water consumption at that plant has been reduced by approximately 50%. Focusing on responsible stewardship of New Mexico’s scarce water resources improves PNM’s water-resilience in the face of persistent drought and ever-increasing demands for water to spur the growth of New Mexico’s economy.
In addition to the above areas of focus, the Company is working to reduce the amount of solid waste going to landfills through increased recycling and reduction of waste. In 2017, 182018, 19 of the Company’s 23 facilities met the solid waste diversion goal of a 60%65% diversion rate, while recycling at least the same number of waste streams as 2016.rate. The Company expects to continue to do well in this area in the future.

Customer, Stakeholder, and Community Engagement

The Company strives to deliver a superior customer experience. Through outreach, collaboration, and various community-oriented programs, the Company has a demonstrated commitment to buildbuilding productive relationships with stakeholders, including customers, community partners, regulators, intervenors, legislators, and shareholders. PNM continues to focus its efforts to enhance the customer experience through customer service improvements, including billing and paymentcustomer service options, strategic customer engagement, and improved communications. These efforts are supported by market research to understand the varying needs of customers, identifying and establishing valued services and programs, and proactively communicating and engaging with customers at regional and community levels.customers.
The Company has leveraged a number of communications channels and strategic content to better serve and engage its many stakeholders. PNM’s website, www.pnm.com, provides the details of major regulatory filings, including general rate requests, as well as the background on PNM’s efforts to maintain reliability, keep prices affordable, and protect the environment. The Company’s website is also a resource for information about PNM’s operations and community outreach efforts, including plans for building a sustainable energy future for New Mexico. PNM has also leveraged social media in communications with customers on various topics such as education, outage alerts, safety, customer service, and PNM’s community partnerships in philanthropic projects. In May 2017, a chat function was added to PNM’s website to allowprovide customers options when communicating with customer service representatives and an online management system was launched to expedite applications for solar interconnections. The website continuesIn 2018, a program was implemented to be a resource for the facts about PNM’s operationsincrease communication and community support efforts, including plans for building a sustainable energy future for New Mexico. In September 2016, collaboration with large commercial and industrial customers.

PNMR launchedalso has a dedicated sustainability portalSustainability Portal on its corporate website www.pnmresources.com to provide additional information regarding the Company’s environmental and other sustainability efforts. The site provides the key corporate governance and sustainability information related to the operations of PNM and TNMP. In January 2018, PNM added a Climate Change Report to this portal. The portal also includes information is presented under four mainthe additional headings: Environment, Generation Portfolio, Social, Economic, and Governance.
With reliability being the primary role of a transmission and distribution service provider in Texas’ deregulated market, TNMP continues to focus on keeping end-users updated about interruptions and to encourage consumer preparation when severe weather is forecasted. In August 2017, Hurricane Harvey made landfall in the gulf coast region and TNMP employees worked diligently to restore power safely and efficiently for affected customers. In addition, PNMR made donations to support relief and restoration efforts in the gulf coast region. TNMP employees who were impacted by Hurricane Harvey were provided emergency crisis funds supported by the PNM Resources Foundation and other employee donations.
Local relationships and one-on-one communications remain two of the most valuable ways both PNM and TNMP connect with their stakeholders. Both companies maintain long-standing relationships with governmental representatives and key electricity consumers to ensure that these stakeholders are updated on company investments and initiatives. Key electricity consumers also have dedicated Company contacts that support their important service needs.

PNMR has a long tradition of supporting the communities it serves in New Mexico and Texas. The Company demonstrates its core value of caring through the PNM Resources Foundation, corporate giving, widespread employee volunteerism, and PNM’s low-income assistance programs. In addition to the extensive engagement both PNM and TNMP have with nonprofit organizations in their communities, the PNM Resources Foundation provides more than $1 million in grant funding each year across New Mexico and Texas. These grants help nonprofits collaborate more efficientlyinnovate or sustain programs to grow and support community projects such as providing software coding camps to underserved youths, helping small businesses,develop business, develop and by providingimplement environmental programs, and provide educational opportunities. PNMR also provides employee matching and volunteer grants.grants for various purposes. In 2017, “A New Century of Service” grants, which celebrate PNM’s 100th anniversary, funded 62 community projects to build a better future for local communities. In December 2017, PNM announced an additional $1.0 million in donations toearly 2018, the PNM Resources Foundation to support future economic and educational programs in New Mexico. In March 2018, the PNM Resources

Foundation awarded a totalfive grants of $0.2 million each, to be paid over two years, to a number of not-for-profit organizations to support their efforts in areas such as assisting businesses, supporting education, and other economic development efforts. Recipients included the New Mexico State University College of Engineering, to support education for professional surveyors.surveyors, Central New Mexico Community College, and other local economic organizations to support workforce and small business education programs.

PNM provides fundsOver the past six years, the Company has contributed a total of more than $7.0 million to civic, educational, environmental, low income, and economic development organizations. PNMR is proud to support nonprofitsprograms and organizations that enrich the quality of life for the people in New Mexico focused in the areas of economic development, education,its service territories and the environment.communities. One of PNM’s most important outreach programs is tailored for low-income customers. In 2017,2018, PNM hosted 4450 community events throughout its service territory to connect low-income customers with nonprofit community service providers offering support and help with such needs as water and gas utility bills, food, clothing, medical programs, and services for seniors. Additionally, through its Good Neighbor Fund, PNM provided $0.5 million of assistance with electric bills to 3,8043,811 families in 20172018 and offered financial literacy training to further support customers.

Volunteerism is an important facet of the PNMR culture. The mission of the PNMR Corporate Volunteer Group is to help make the communities in which PNMR serves safer, stronger, smarter, and more vibrant. In 2017, more than 8002018, PNM and TNMP employees and retirees contributed approximately 10,80011,500 volunteer hours serving their local communities. Company volunteers also actively participate on nonprofit boards, in educational, economic, and environmental forums, as well as safety seminars. PNMR employees are, in large part, responsible for the success of the Company’s customer, stakeholder, and community outreach.
Economic Factors
PNM – In the three months ended March 31, 20182019, PNM experienced a decreasean increase in weather-normalized retail load of 0.9%1.2% compared to 2017, reflecting a2018. Economic conditions in Albuquerque have continued sluggish economyto improve in the first quarter of 2019 and PNM continues to experience load growth in its service areas, particularly in the industrial customer class. In 2018, Netflix, Inc., announced plans to make significant investments in production in New Mexico, along with PNM’s successful energy efficiency programs and increases in distributed generation. New Mexico economic conditions continueactivities related to be stable. The twelve-month rolling average employment growth has been consistent for nearly a year, although it remains lower than the national average. Also, someconstruction of the previously announced successful economic development efforts, such as the selection of a site within PNM’s New Mexico service territory for a data center by Facebook, Inc., continue their hiring processes. Construction activity has increased and there has been commercial expansion in retail and other support businesses. PNM’s customer growth of 0.7% in the three months ended March 31, 2018 reflects this activity.are continuing to progress.
TNMP – In the three months ended March 31, 2018,2019, TNMP experienced an increasea decrease in volumetric weather normalizedweather-normalized retail load of 3.8%1.9% compared to 2017. Most of TNMP’s industrial and larger commercial customers are billed based on their peak demand.2018. Demand-based load, excluding retail transmission customers, increased 5.4%4.7% in the three months ended March 31, 2019 compared to 2018. Revised rates implemented in January 2019 re-balance charges between wholesale transmission and retail distribution customers and other changes to rate design allocate more revenues to customers billed on a volumetric basis, resulting in lower earnings in the first quarter 2019 when compared to 2018. The Texas economy continues to grow primarily due to its diverse base. Economic growth in Texas continues to outpace the rest of the country. The relocation of some national and global corporate headquarters to the Dallas-Fort Worth area has led to growth in commercial customers and also contributes to growth in residential and small business customers. TNMP continues to see strong demand innew requests to interconnect to its service territories, particularly with new transmission interconnection requests in the West Texas region where oil and gas production continues to grow.system.

Results of Operations
Net earnings attributable to PNMR were $15.0$18.7 million, or $0.19$0.23 per diluted share in the three months ended March 31, 20182019 compared to $22.9$15.0 million, or $0.29$0.19 per diluted share, in 2017.2018. Among other things, earnings in the three months ended March 31, 20182019 benefited from additional revenues due to the rate increaseincreases approved in thePNM’s NM 2016 Rate Case at PNM,and TNMP’s 2018 Rate Case, higher revenues from new transmission customers andunder FERC formula transmission rates and new transmission customers at PNM, rate increasesincreased weather and increased load at TNMP, colder weatherPNM, higher income from investment securities held in the NDT and coal mine reclamation trusts, and lower interest expense at PNM. These increases were offset by additional regulatory disallowances related to PNM’s appeal of the NMPRC’s decisions in the NM 2015 Rate Case, reduced revenues at PNM under its rate riders, lower transmission cost of service revenues as a result of a reallocation of costs in TNMP’s 2018 Rate Case, higher employee related expenses at PNM and TNMP, and reduced income tax expense due to the reduced corporate income tax rate and the amortization of excess deferred income taxes as ordered by the NMPRC and PUCT. These increases were more than offset by decreased load at PNM, reduced revenues at PNM due to power from PVNGS Unit 3 not being sold into the wholesale market, higher plant maintenance costs at PNM, increased operating expense due to the additional 197 MW of ownership in SJGS Unit 4 (offset by reduced expenses from the shutdown of SJGS Units 2 and 3), increased depreciation and property taxes due to increased plant in service at PNM and TNMP, as well as increased depreciation rates resulting from TNMP’s 2018 Rate Case, higher interest expense at TNMP as a result of debt issued in the second half of 2018, and lower gainsinterest income on the sales of investment securities.Westmoreland Loan at PNMR. Additional information on factors impacting results of operation for each segment is discussed below under Results of Operations below.Operations.
Liquidity and Capital Resources

PNMR and PNM have revolving credit facilities that expire in October 2022. The PNMR and PNM facilities havewith capacities of $300.0 million and $400.0 million throughand currently expire in October 2020 and $290.0 million and $360.0 million from November 2020 through October 2022.2023. Both facilities provide for short-term borrowings and letters of credit.credit and can be extended through October 2024, subject to approval by a majority of the lenders. In addition, PNM has a $40.0 million revolving credit facility, which expires in December 2022, with banks having a significant presence in New Mexico and TNMP has a $75.0 million revolving credit facility, which expires in September 2022. On February 26, 2018,22, 2019, PNMR Development entered into a $24.5 millionamended its revolving credit facility that matures onto increase the capacity to $25.0 million and to extend its expiration date to February 25, 2019.24, 2020. The PNMR Development Revolving Credit Facility bears interest at a variable rate and contains terms similar to the PNMR Revolving Credit Facility. Total availability for PNMR on a consolidated basis was $669.4$732.5 million at April 23, 2018.May 3, 2019. The Company utilizes these credit facilities and cash flows from operations

to provide funds for both construction and operational expenditures. PNMR also has intercompany loan agreements with each of its subsidiaries.

PNMR projects that its consolidated capital requirements, consisting of construction expenditures, capital contributions for PNMR Development’s 50% ownership interest in NMRD, and dividends, will total $3,136.3$3,627.7 million for 2018-2022,2019-2023, including amounts expended through March 31, 2018.2019. The construction expenditures include estimated amounts for environmental upgrades at Four Corners, 50 MW of new solar facilities included in PNM’s 2018 renewable energy procurement plan, and an anticipated expansion of PNM’s transmission system, and the initial costs of replacement resources related to the potential shutdown of SJGS Units 1 and 4 in 2022.system.

In July 2017,On January 18, 2019, PNM entered into the $250.0 million PNM 2017 Senior Unsecured Note Agreement, under2019 Term Loan, which $450.0 million of the PNM 2018 SUNs are tobears interest at a variable rate and must be issued in 2018 and the proceeds will be used to repay $450.0 million of currently outstanding Senior Unsecured Notesrepaid on their maturity dates in 2018. In March 2018, PNMR issued $300.0 million of 3.25% Senior Unsecured Notes (the “PNMR 2018 SUNs”), which will mature on March 9, 2021.or before July 17, 2020. Proceeds from thethis issuance of the PNMR 2018 SUNs were used to repay a $150.0 million term loan andthe PNM 2017 Term Loan, short-term borrowings under the PNMRPNM Revolving Credit Facility. Facility, and for other general corporate purposes. On February 26, 2019, TNMP entered into the TNMP 2019 Bond Purchase Agreement which provides for the sale of $305.0 million aggregate principal amount of TNMP 2019 Bonds. TNMP issued $225.0 million of TNMP 2019 Bonds on March 29, 2019 (at fixed annual interest rates ranging from 3.79% to 4.06% for terms ranging from 15 to 25 years) and used a portion of the proceeds to repay TNMP’s $172.3 million 9.50% first mortgage bonds at their maturity on April 1, 2019. TNMP will issue the remaining $80.0 million of TNMP 2019 Bonds on or before July 1, 2019 (at a fixed annual interest rate of 3.60% for a term of ten years) and will use the proceeds to repay borrowings under the TNMP Revolving Credit Facility and for other general corporate purposes.

After considering the effects of thosethese financings, PNMR has consolidated maturities and other repayments of short-term and long-term debt aggregating $410.0$150.0 million in the period from April 1, 20182019 through March 31, 20192020, and $9.4an additional $525.3 million in the remainder of 2019. Furthermore, TNMP has $172.3 million of first mortgage bonds that are due in April 2019 and the $24.5 million PNMR Development revolving credit facility expires in February 2019.will mature by December 31, 2020. In addition to internal cash generation, the Company anticipates that it will be necessary to obtain additional long-term financing in the form of debt refinancing, new debt issuances, and/or new equity in order to fund its capital requirements during the 2018-20222019-2023 period. The Company currently believes that its internal cash generation, existing credit arrangements, and access to public and private capital markets will provide sufficient resources to meet the Company’s capital requirements for at least the next twelve months. The Company is in compliance with its debt covenants.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Trends and contingencies of a material nature are discussed to the extent known. Refer also to Disclosure Regarding Forward Looking Statements and to Part II, Item 1A. Risk Factors.


A summary of net earnings attributable to PNMR is as follows:
Three Months Ended March 31,Three Months Ended March 31,
2018 2017 Change2019 2018 Change
(In millions, except per share amounts)(In millions, except per share amounts)
Net earnings attributable to PNMR$15.0
 $22.9
 $(7.9)$18.7
 $15.0
 $3.7
Average diluted common and common equivalent shares80.0
 80.1
 (0.1)80.0
 80.0
 —
Net earnings attributable to PNMR per diluted share$0.19
 $0.29
 $(0.10)$0.23
 $0.19
 $0.04

The components of the change in net earnings attributable to PNMR are:
Three Months EndedThree Months Ended
March 31, 2018March 31, 2019
(In millions)(In millions)
PNM$(8.8)$11.3
TNMP1.8
(5.3)
Corporate and Other(0.8)(2.3)
Net change$(7.9)$3.7

Information regarding the factors impacting PNMR’s operating results by segment are set forth below.


Segment Information

The following discussion is based on the segment methodology that PNMR’s management uses for making operating decisions and assessing performance of its various business activities. See Note 2 for more information on PNMR’s operating segments.

PNM

PNM defines utility margin as electric operating revenues less cost of energy, which consists primarily of fuel and purchase power costs. PNM believes that utility margin provides a more meaningful basis for evaluating operations than electric operating revenues since substantially all fuel and purchase power costs are offset in revenues as those costs are passed through to customers under PNM’s FPPAC. Utility margin is not a financial measure required to be presented under GAAP and is considered a non-GAAP measure.

The following table summarizes the operating results for PNM:
Three Months Ended March 31,Three Months Ended March 31,
2018 2017 Change2019 2018 Change
(In millions)(In millions)
Electric operating revenues$236.2
 $251.6
 $(15.4)$269.3
 $236.2
 $33.1
Cost of energy70.8
 81.3
 (10.5)99.3
 70.8
 28.5
Utility margin165.4
 170.2
 (4.8)170.0
 165.4
 4.6
Operating expenses100.5
 93.8
 6.7
106.5
 100.5
 6.0
Depreciation and amortization36.6
 36.0
 0.6
39.2
 36.6
 2.6
Operating income28.3
 40.5
 (12.2)24.3
 28.3
 (4.0)
Other income (deductions)3.7
 8.4
 (4.7)18.0
 3.7
 14.3
Interest charges(20.8) (21.0) 0.2
(18.4) (20.8) 2.4
Segment earnings before income taxes11.2
 27.8
 (16.6)23.9
 11.2
 12.7
Income (taxes) benefit0.3
 (7.7) 8.1
(2.0) 0.3
 (2.3)
Valencia non-controlling interest(3.7) (3.5) (0.2)(2.8) (3.7) 0.9
Preferred stock dividend requirements(0.1) (0.1) —
(0.1) (0.1) —
Segment earnings$7.7
 $16.5
 $(8.8)$19.0
 $7.7
 $11.3



The following table shows total GWh sales, including the impacts of weather, by customer class and average number of customers:
Three Months Ended March 31,Three Months Ended March 31,
    Percentage    Percentage
2018 2017 Change2019 2018 Change
(Gigawatt hours, except customers)(Gigawatt hours, except customers)
Residential751.7
 749.5
 0.3 %795.5
 751.7
 5.8 %
Commercial834.4
 826.6
 0.9
828.2
 834.4
 (0.7)
Industrial205.7
 207.9
 (1.1)250.0
 205.7
 21.5
Public authority50.3
 53.3
 (5.6)49.6
 50.3
 (1.4)
Economy energy service (1)
170.7
 186.8
 (8.6)156.9
 170.7
 (8.1)
Firm-requirements wholesale (2)
—
 21.6
 (100.0)
Other sales for resale (3)
681.0
 1,085.4
 (37.3)
Other sales for resale874.7
 681.0
 28.4
2,693.8
 3,131.1
 (14.0)%2,954.9
 2,693.8
 9.7 %
Average retail customers (thousands)524.7
 520.9
 0.7 %529.1
 524.7
 0.8 %

(1) PNM purchases energy for a large customer on the customer’s behalf and delivers the energy to the customer’s location through PNM’s transmission system. PNM charges the customer for the cost of the energy as a direct pass through to the customer with only a minor impact in utility margin resulting from providing ancillary services.

(2) Decrease in 2018 reflects the loss of NEC as a wholesale generation customer.

(3) Decrease in 2018 reflects that PVNGS Unit 3 is included as a New Mexico jurisdictional resource beginning January 1, 2018 rather than as merchant plant in 2017 (Note 11).

Operating Results – Three months ended March 31, 20182019 compared to 20172018

The following table summarizes the significant changes to utility margin:
   Three Months Ended
March 31, 2018
   Change
Utility margin: (In millions)
    
 
Rate relief – Additional revenue due to rate increase approved by the NMPRC effective February 1, 2018 (Note 12)
 $0.5
 
Retail Customer usage/load – Weather normalized KWh sales decreased 0.9% due to decreased sales in residential, industrial, and other customers
 (1.6)
 
Weather – Colder weather in 2018; heating degree days were 19.0% higher
 2.1
 
Transmission – The addition of new customers and higher revenues under formula transmission rates
 2.8
 
Wholesale contracts – Loss of NEC as a wholesale generation customer
 (0.3)
 
Unregulated margin – Loss of PVNGS Unit 3 wholesale power sales
 (6.3)
 
Third party transmission cost – Transmission of power from PVNGS Unit 3 to serve New Mexico retail customers
 (1.9)
 
Rate riders – Includes renewable energy and energy efficiency riders, which are partially offset in operating expenses, depreciation and amortization, and interest charges
 0.7
 
Net unrealized economic hedges – Primarily related to 2017 hedges of PVNGS Unit 3 power sales and sales to NEC
 (1.3)
 Other 0.5
 Net Change $(4.8)
   Three Months Ended
March 31, 2019
   Change
Utility margin: (In millions)
    
 
Rate relief – Additional revenue due to rate increase approved by the NMPRC effective February 1, 2018 (Note 12)
 $1.7
 
Retail customer usage/load – Weather normalized KWh sales increased 1.2% due to increased sales to residential and industrial customers
 1.6
 
Weather – Colder weather in 2019; heating degree days were 23.8% higher
 2.8
 
Transmission – Increase primarily due to the addition of new customers
 1.1
 
Rate riders – Includes renewable energy, fuel clause and energy efficiency riders
 (2.8)
 Other 0.2
 Net Change $4.6


The following tables summarize the primary drivers for changes in operating expenses, depreciation and amortization, other income (deductions), interest charges, and income taxes:
   Three Months Ended
March 31, 2018
   Change
Operating expenses: (In millions)
   
 Higher plant maintenance costs at SJGS, Four Corners, and gas-fired plants $5.1
 Increased costs associated with additional 132 MW of SJGS Unit 4 and accelerated recovery of SNCRs on SJGS Units 1 and 4 3.3
 Increased costs associated with 65 MW of SJGS Unit 4 held as merchant plant beginning January 1, 2018 (Note 11) 1.4
 Higher property taxes due to increases in utility plant in service and higher assessed values 0.8
 Higher employee medical expenses due to unfavorable claims experience 0.7
 Higher allocated corporate depreciation, primarily related to computer software 0.5
 Lower capitalized administrative and general expenses due to lower construction spending in 2018 0.4
 Cost savings realized from the retirement of SJGS Units 2 and 3 (5.2)
 2017 training costs associated with new software implementation (0.8)
 Other 0.5
 Net Change $6.7

   Three Months Ended
March 31, 2019
   Change
Operating expenses: (In millions)
   
 Lower plant maintenance costs at Four Corners and PVNGS, offset by higher costs at SJGS and gas-fired plants $(0.3)
 Accelerated recovery of SNCR technology on SJGS Units 1 and 4��0.3
 Regulatory disallowance resulting from the NMPRC’s September 28, 2016 order in PNM’s NM 2015 Rate Case (Note 12) 1.3
 Higher property taxes due to increases in utility plant in service 0.4
 Higher employee related, outside service, and vegetation management expenses 3.9
 Other 0.4
 Net Change $6.0
   Three Months Ended
March 31, 2018
   Change
Depreciation and amortization: (In millions)
   
 Increased utility plant in service $2.2
 Lower depreciation resulting from the retirement of SJGS Units 2 and 3, partially offset by amortization of the associated regulatory asset (Note 11) (1.6)
 Net Change $0.6

Depreciation and amortization:  
   
 Increased utility plant in service $1.7
 Higher depreciation resulting from amortization of stranded costs associated with the retirement of SJGS Units 2 and 3 0.5
 Other 0.4
 Net Change $2.6
Other income (deductions):  
   
 Lower gains on investment securities in the NDT and coal mine reclamation trusts $(6.4)
 Higher equity AFUDC 0.6
 2017 interest income from third-party transmission service provider due to FERC ruling (1.0)
 Lower non-service components of pension and OPEB expense 1.3
 Higher interest income and lower trust expenses related to investment securities in the NDT and coal mine reclamation trusts 0.8
 Net Change $(4.7)
Other income (deductions):  
   
 Higher gains in 2019 compared to 2018 on investment securities in the NDT and coal mine reclamation trusts $13.7
 Lower equity AFUDC (0.2)
 Higher interest income related to investment securities in the NDT and coal mine reclamation trusts, partially offset by higher trust expenses 0.6
 Other 0.2
 Net Change $14.3
Interest charges:  
   
 Higher debt AFUDC $0.4
 Other (0.2)
 Net Change $0.2
Interest charges:  
   
 Lower interest on $350.0 million of SUNs refinanced in May 2018 $3.9
 Lower interest on $100.0 million of SUNs refinanced in August 2018 0.8
 Lower debt AFUDC (0.7)
 Higher interest on term loan agreements (0.7)
 Interest on deposit by PNMR Development for potential transmission interconnections, which is offset in Corporate and Other (Note 9) (0.9)
 Net Change $2.4
Income taxes:  
   
 Decrease due to reduction in corporate income tax rate and lower segment earnings before income taxes $(7.6)
 Amortization of excess deferred income taxes, as ordered by the NMPRC in PNM’s NM 2016 Rate Case (1.2)
 Increase due to lower excess tax benefits related to stock compensation awards (Note 8) 0.4
 Other 0.3
 Net Change $(8.1)
Income taxes:  
   
 Increase due to higher segment earnings before income taxes $(3.6)
 Decrease due to higher amortization of excess deferred income taxes due to higher pre-tax earnings 1.9
 Increase due to lower excess tax benefits related to stock compensation awards (Note 8) (0.5)
 Other (0.1)
 Net Change $(2.3)


TNMP

TNMP defines utility margin as electric operating revenues less cost of energy, which consists of costs charged by third-party transmission providers. TNMP believes that utility margin provides a more meaningful basis for evaluating operations than electric operating revenues since all third-party transmission costs are passed on to consumers through a transmission cost recovery factor. Utility margin is not a financial measure required to be presented under GAAP and is considered a non-GAAP measure.

The following table summarizes the operating results for TNMP:
Three Months Ended March 31,Three Months Ended March 31,
2018 2017 Change2019 2018 Change
(In millions)(In millions)
Electric operating revenues$81.6
 $78.6
 $3.0
$80.3
 $81.6
 $(1.3)
Cost of energy21.8
 21.5
 0.3
22.3
 21.8
 0.5
Utility margin59.9
 57.1
 2.8
58.0
 59.9
 (1.9)
Operating expenses25.0
 23.8
 1.2
25.2
 25.0
 0.2
Depreciation and amortization16.4
 15.4
 1.0
20.2
 16.4
 3.8
Operating income18.5
 18.0
 0.5
12.6
 18.5
 (5.9)
Other income (deductions)1.1
 0.7
 0.4
0.6
 1.1
 (0.5)
Interest charges(7.7) (7.4) (0.3)(8.8) (7.7) (1.1)
Segment earnings before income taxes11.9
 11.3
 0.6
4.4
 11.9
 (7.5)
Income (taxes)(2.5) (3.7) 1.2
(0.3) (2.5) 2.2
Segment earnings$9.4
 $7.6
 $1.8
$4.1
 $9.4
 $(5.3)

The following table shows total sales, including the impacts of weather, by retail tariff consumer class and average number of consumers:
Three Months Ended March 31,Three Months Ended March 31,
    Percentage    Percentage
2018 2017 Change2019 2018 Change
Volumetric load (1) (GWh)
  
Residential656.8
 577.0
 13.8 %618.7
 656.8
 (5.8)%
Commercial and other8.0
 9.2
 (13.0)7.9
 8.0
 (1.3)
Total volumetric load664.8
 586.2
 13.4 %626.6
 664.8
 (5.7)%
Demand-based load (2) (MW)
4,310.2
 3,871.7
 11.3 %4,721.9
 4,310.2
 9.6 %
Average retail consumers (thousands) (3)
250.1
 246.8
 1.3 %253.8
 250.1
 1.5 %

(1) Volumetric load consumers are billed on KWh usage.

(2) Demand-based load includes consumers billed on monthly KW peak and also includes retail transmission customers that are primarily billed under TNMP’s rate riders.

(3) TNMP provides transmission and distribution services to REPs that provide electric service to their customers in TNMP’s service territories. The number of consumers above represents the customers of these REPs. Under TECA, consumers in Texas have the ability to choose any REP to provide energy.


Operating Results – Three months ended March 31, 20182019 compared to 20172018

The following table summarizes the significant changes to utility margin:
   Three Months Ended
March 31, 2018
   Change
Utility margin: (In millions)
    
 
Rate relief – Transmission cost of service rate increases in March 2017, September 2017, and March 2018
 $1.7
 
Retail customer usage/load – Weather normalized KWh sales increased 3.8%; the average number of retail consumers increased 1.3%
 0.4
 
Demand based customer usage/load – Higher demand-based revenues for large commercial and industrial retail consumers; billed demand, excluding retail transmission customers, increased 5.4%
 0.9
 
Weather – Colder weather in 2018; heating degree days were 72.2% higher in 2018
 1.3
 
Revenue subject to refund – Amounts deferred as regulatory liability for the impact of the reduction in the federal corporate income tax rate (Note 12)
 (1.5)
 Net Change $2.8
   Three Months Ended
March 31, 2019
   Change
Utility margin: (In millions)
    
 
Retail rate relief – TNMP 2018 Rate Case retail rate increase effective January 1, 2019, including integration of amounts previously recovered in the AMS rate rider and the impact of rate design changes between customer classes (Note 12)
 $1.2
 
Transmission rate relief - Decrease in transmission cost of service rates primarily resulting from the TNMP 2018 Rate Case
 (2.5)
 
Retail customer usage/load – Weather normalized KWh sales decreased 1.9%; the average number of retail consumers increased 1.5%
 (0.4)
 
Demand-based customer usage/load - Higher demand-based revenues for large commercial and industrial customers; billed demand excluding retail transmission customers increased 4.7%.
 0.7
 
Weather – Milder weather in 2019; heating degree days were 18.6% lower in January 2019 resulting from unusually cold weather in January 2018
 (0.9)
 Net Change $(1.9)

The following tables summarize the primary drivers for changes in operating expenses, depreciation and amortization, other income (deductions), interest charges, and income taxes:
   Three Months Ended
March 31, 2018
   Change
Operating expenses: (In millions)
   
 Higher employee related expenses $0.3
 Higher outside consulting costs, including vegetation management 0.4
 Training costs associated with new software implementation in 2017 (0.2)
 Higher costs associated with rate riders, primarily the AMS surcharge 0.4
 Higher property taxes due to increased utility plant in service 0.4
 Other (0.1)
 Net Change $1.2
   Three Months Ended
March 31, 2019
   Change
Operating expenses: (In millions)
   
 Higher employee related expenses $0.9
 Higher capitalization of administrative and general expenses due to higher construction expenditures (0.7)
 Higher property taxes due to increased utility plant in service 0.4
 Lower vegetation management expenses (0.3)
 Other (0.1)
 Net Change $0.2
Depreciation and amortization:  
   
 Primarily due to increased utility plant in service $1.0
Depreciation and amortization:  
   
 Increased utility plant in service $1.1
 Higher depreciation rates approved in the TNMP 2018 Rate Case 2.3
 Higher amortization of AMS and Hurricane Harvey regulatory assets approved in the TNMP 2018 Rate Case (Note 12) 0.5
 Other (0.1)
 Net Change $3.8
Other income (deductions):  
   
 Higher equity AFUDC $0.3
 Other 0.1
 Net Change $0.4
Interest charges:  
   
 Increase due to issuance of $60.0 million of long-term debt in August 2017 $(0.5)
 Higher debt AFUDC 0.2
 Net Change $(0.3)
Other income (deductions):  
   
 Lower equity AFUDC $(0.2)
 Lower CIAC (0.1)
 Other (0.2)
 Net Change $(0.5)

   Three Months Ended
March 31, 2018
   Change
Income taxes: (In millions)
   
 Decrease due to reduction in corporate income tax rate, partially offset by tax on higher segment earnings $1.5
 Increase due to lower excess tax benefits related to stock compensation awards (Note 8) (0.2)
 Other (0.1)
 Net Change $1.2
   Three Months Ended
March 31, 2019
   Change
Interest charges: (In millions)
   
 Increase due to issuance of $60.0 million of long-term debt in June 2018 $(0.6)
 Increase due to issuance of $20.0 million term loan in July 2018 and $15.0 million in December 2018 (0.3)
 Other (0.2)
 Net Change $(1.1)
Income taxes:  
   
 Decrease due to lower segment earnings before income taxes $1.6
 Decrease due to amortization of excess deferred federal income taxes (Note 14) 0.7
 Increase due to lower excess tax benefits related to stock compensation awards (0.1)
 Net Change $2.2


Corporate and Other

The table below summarizes the operating results for Corporate and Other:
Three Months Ended March 31,Three Months Ended March 31,
2018 2017 Change2019 2018 Change
(In millions)(In millions)
Total revenues$—
 $—
 $—
Electric operating revenues$—
 $—
 $—
Cost of energy—
 —
 —
—
 —
 —
Utility margin—
 —
 —
—
 —
 —
Operating expenses(5.0) (4.7) (0.3)(5.8) (5.0) (0.8)
Depreciation and amortization5.7
 5.0
 0.7
5.9
 5.7
 0.2
Operating income (loss)(0.7) (0.3) (0.4)(0.2) (0.7) 0.5
Other income (deductions)1.7
 1.7
 —
(0.8) 1.7
 (2.5)
Interest charges(4.5) (3.3) (1.2)(4.5) (4.5) —
Segment earnings (loss) before income taxes(3.5) (1.9) (1.6)(5.4) (3.5) (1.9)
Income (taxes) benefit1.3
 0.6
 0.7
1.0
 1.3
 (0.3)
Segment earnings (loss)$(2.1) $(1.3) $(0.8)$(4.4) $(2.1) $(2.3)

Corporate and Other operating expenses shown above are net of amounts allocated to PNM and TNMP under shared services agreements. The amounts allocated include certain expenses shown aschange in depreciation and amortization and other income (deductions) in the table above. The change in depreciation expense primarily relates to additions to computer software. Substantially all depreciation and amortization expense isand other income (deductions) are offset in operating expenses as a result of allocation of these costs to other business segments.


Operating Results – Three months ended March 31, 20182019 compared to 20172018
 
The following tables summarize the primary drivers for changes in other income (deductions), interest charges, and income taxes:
   Three Months Ended
March 31, 2018
   Change
Other income (deductions): (In millions)
   
 Decrease in interest income on the Westmoreland Loan (Note 11) $(0.4)
 Other 0.4
 Net Change $—

   Three Months Ended
March 31, 2019
   Change
Other income (deductions): (In millions)
   
 Decrease in interest income on the Westmoreland Loan $(1.7)
 Increase in donations and other contributions (0.5)
 Other (0.3)
 Net Change $(2.5)
   Three Months Ended
March 31, 2018
   Change
Interest charges: (In millions)
   
 Higher short term borrowings and interest rates $(0.8)
 Issuance of $300.0 million of PNMR 2018 SUNs in March 2018 (Note 9) (0.8)
 Decrease in interest expense on the BTMU Loan Agreement (Note 9) 0.4
 Net Change $(1.2)
Interest charges:  
   
 Issuance of $300.0 million PNMR 2018 SUNs in March 2018 $(1.8)
 Issuance of $90.0 million PNMR Development Term Loan in November 2018 (0.8)
 Lower short-term borrowings 0.5
 Repayment of $150.0 million PNMR 2015 Term Loan in March 2018 0.7
 Repayment of the BTMU Term Loan in May 2018 0.6
 Elimination of intercompany interest (Note 9) 0.9
 Other (0.1)
 Net Change $—
Income taxes:  
   
 Decrease due to reduction in corporate income tax rate and lower segment earnings before income taxes $0.1
 
Impact of phased-in reduction in New Mexico corporate income tax rates

 0.1
 Impact of difference in effective tax rates used by PNMR and its subsidiaries in the calculation of income taxes in interim periods 0.7
 Other (0.2)
 Net Change $0.7
Income taxes:  
   
 Impact of difference in effective tax rates used by PNMR and its subsidiaries in the calculation of income taxes in interim periods $(1.0)
 Decrease due to larger segment loss before income taxes 0.5
 Other 0.2
 Net Change $(0.3)


LIQUIDITY AND CAPITAL RESOURCES

Statements of Cash Flows

The changes in PNMR’s cash flows for the three months ended March 31, 20182019 compared to March 31, 20172018 are summarized as follows:
Three Months Ended March 31,Three Months Ended March 31,
2018 2017 Change2019 2018 Change
(In millions)(In millions)
Net cash flows from:          
Operating activities$78.9
 $131.6
 $(52.7)$104.7
 $78.9
 $25.8
Investing activities(119.2) (106.6) (12.6)(151.9) (119.2) (32.7)
Financing activities40.1
 (27.2) 67.3
225.2
 40.1
 185.1
Net change in cash and cash equivalents$(0.2) $(2.2) $2.0
$178.0
 $(0.2) $178.2
Cash Flows from Operating Activities
Changes in PNMR’s cash flow from operating activities result from net earnings, adjusted for items impacting earnings that do not provide or use cash. See Results of Operations above. Certain changes in assets and liabilities resulting from normal operations, including the effects of the seasonal nature of the Company’s operations, also impact operating cash flows.    

Cash Flows from Investing Activities
The changes in PNMR’s cash flows from investing activities relate primarily to changes in utility plant additions. Cash flows from investing activities also include purchases and sales of investment securities in the NDT and coal mine reclamation trusts, including activity to rebalance the investment portfolio in early 2018. In addition, cash flows from investing activities include activity related to the Westmoreland Loan, which was paid in full in May 2018, and NMRD. Major components of PNMR’s cash inflows and (outflows) from investing activities are shown below:

Three Months Ended March 31,Three Months Ended March 31,
2018 2017 Change2019 2018 Change
Cash (Outflows) for Utility Plant Additions(In millions)(In millions)
PNM:          
Generation$(18.0) $(16.4) $(1.6)$(40.6) $(18.0) $(22.6)
Transmission and distribution(33.0) (34.3) 1.3
(29.2) (33.0) 3.8
Four Corners SCRs(3.8) (8.2) 4.4
—
 (3.8) 3.8
Nuclear fuel(6.9) (6.9) —
(6.1) (6.9) 0.8
(61.7) (65.8) 4.1
(75.9) (61.7) (14.2)
     
TNMP:          
Transmission(23.2) (22.5) (0.7)(27.5) (23.2) (4.3)
Distribution(26.8) (12.8) (14.0)(31.1) (26.8) (4.3)
AMS—
 (1.0) 1.0
(50.0) (36.3) (13.7)
     (58.6) (50.0) (8.6)
Corporate and Other:          
Computer hardware and software(6.0) (10.1) 4.1
(7.4) (6.0) (1.4)
PNMR Development utility plant additions—
 (2.6) 2.6
(6.0) (12.7) 6.7
(7.4) (6.0) (1.4)
Total cash (outflows) for additions to utility plant$(141.9) $(117.7) $(24.2)
$(117.7) $(114.8) $(2.9)     
     
Cash Inflows on the Westmoreland Loan     
Principal payments$5.6
 $9.6
 $(4.0)
     
Cash Inflows (Outflows) Related to NMRD     
Other Cash Flows from Investing Activities     
Proceeds from sales of investment securities$74.5
 $626.7
 $(552.2)
Purchases of investment securities(77.4) (628.9) 551.5
Principal payments on the Westmoreland Loan—
 5.6
 (5.6)
Investments in NMRD$(5.0) $—
 $(5.0)(7.0) (5.0) (2.0)
Other, net(0.1) 0.1
 (0.2)
Total cash (outflows) from investing activities$(151.9) $(119.2) $(32.7)

Cash Flow from Financing Activities
The changes in PNMR’s cash flows from financing activities include:
Short-term borrowings decreased $12.1 million in 2019 compared to a decrease of $66.7 million in 2018, compared to an increase of $16.0 million in 2017, resulting in a net decreaseincrease in cash flows from financing activities of $82.7$54.6 million
In 2018, PNMR issued $300.02019, PNM borrowed $250.0 million aggregate principle amount of 3.250% Senior Unsecured Notes utilizingunder the PNM 2019 Term Loan and used the proceeds to repay the $150.0$200.0 million PNMR 2015PNM 2017 Term Loan Agreement
In accordance with the BTMU Term Loan Agreement, NM Capital made principal payments2019, TNMP issued $225.0 million of $5.0 million in 2018 compared to $9.4 million in 2017TNMP 2019 Bonds

Financing Activities

See Note 67 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K and Note 9 for additional information concerning the Company’s financing activities. PNM must obtain NMPRC approval for any financing transaction having a maturity of more than 18 months. In addition, PNM files its annual short-term financing plan with the NMPRC. The Company’s ability to access the credit and capital markets at a reasonable cost is largely dependent upon its:
Ability to earn a fair return on equity
Results of operations
Ability to obtain required regulatory approvals
Conditions in the financial markets
Credit ratings


Each of the Company’s revolving credit facilities and term loans containscontain a single financial covenant whichthat requires the maintenance of debt-to-capital ratios ofa debt-to-capitalization ratio. For the PNMR and PNMR Development agreements, this ratio must be maintained at less than or equal to 65%70%, and for the PNM and TNMP agreements this ratio must be maintained at less than or equal to 65%. The Company’s revolving credit facilities and term loans generally includealso contain customary covenants, events of default, cross defaultcross-default provisions, and change of controlchange-of-control provisions. The Company is in compliance with its debt covenants.

As discussed in Note 11, NM Capital, a wholly-owned subsidiary of PNMR, entered into the $125.0 million BTMU Term Loan Agreement with BTMU, as lender and administrative agent. The BTMU Term Loan Agreement has a maturity of February 1, 2021 and bears interest at a rate based on LIBOR plus a customary spread, which aggregated 4.41% at March 31, 2018. The principal balance outstanding under the BTMU Term Loan Agreement was $45.1 million at March 31, 2018. PNMR, as parent company of NM Capital, has guaranteed NM Capital’s obligations to BTMU. NM Capital utilized the proceeds of the BTMU Term Loan Agreement to provide funding for the $125.0 million Westmoreland Loan to a ring-fenced, bankruptcy-remote, special-purpose entity, which is a subsidiary of Westmoreland, to finance Westmoreland’s purchase of SJCC. The principal balance outstanding under the Westmoreland Loan was $51.0 million at March 31, 2018. On March 28, 2018, NM Capital executed an extension and waiver agreement with WSJ, which waived a technical event of default by WSJ under the Westmoreland Loan. This waiver relates solely to the required delivery of the financial statements of WSJ’s parent company and expires on the earlier of May 1, 2019 or the occurrence of any other event of default. See Note 6.

On October 21, 2016, PNMR entered into letter of credit arrangements with JPMorgan Chase Bank, N.A. (the “JPM LOC Facility”) under which letters of credit aggregating $30.3 million were issued to facilitate the posting of reclamation bonds, which SJCCWSJ LLC is required to post in connection with permits relating to the operation of the San Juan mine (Note 11).

On July 28, 2017,January 18, 2019, PNM entered into a $250.0 million term loan agreement (the “PNM 2019 Term Loan”) among PNM, the lenders identified therein, and U.S. Bank N.A., as administrative agent. PNM used the proceeds of the PNM 2019 Term Loan to repay the PNM 2017 Senior Unsecured NoteTerm Loan, to reduce short-term borrowings under the PNM Revolving Credit Facility, and for general corporate purposes. The PNM 2019 Term Loan bears interest at a variable rate and must be repaid on or before July 17, 2020.

On February 26, 2019, TNMP entered into the TNMP 2019 Bond Purchase Agreement with institutional investors for the sale of $450.0$305.0 million aggregate principal amount of eightfour series of Senior Unsecured NotesTNMP first mortgage bonds (the “PNM 2018 SUNs”“TNMP 2019 Bonds”) offered in private placement transactions. PNM has agreed to issue $350.0Under the TNMP 2019 Bond Purchase Agreement, TNMP issued $225.0 million of the PNM 2018 SUNsTNMP 2019 Bonds on March 29, 2019 (at fixed annual interest rates ranging from 3.15%3.79% to 4.50%4.06% for terms between 5ranging from 15 to 25 years) and 30 years)used the proceeds to repay TNMP’s $172.3 million 9.50% first mortgage bonds at their maturity on or about May 15, 2018April 1, 2019, as well as to repay borrowings under the TNMP Revolving Credit Facility and $100.0for general corporate purposes. TNMP will issue the remaining $80.0 million of the PNM 2018 SUNsTNMP 2019 Bonds on or before July 1, 2019 (at a fixed annual interest ratesrate of 3.78%3.60% for a term of ten years) and 4.60%will use the proceeds to repay borrowings under the TNMP Revolving Credit Facility and for terms of 10 and 30 years) on or about August 1, 2018.other general corporate purposes. The issuancesissuance of the PNM 2018 SUNs areremaining TNMP 2019 Bonds is subject to the satisfaction of customary conditions. PNMconditions, and the TNMP 2019 Bonds are subject to continuing compliance with the representations, warranties and covenants of the TNMP 2019 Bond Purchase Agreement. The terms of the TNMP 2019 Bonds contain customary covenants, including a covenant that requires TNMP to maintain a debt-to-capitalization ratio of less than or equal to 65%, customary events of default, a cross-default provision, and a change-of-control provision. TNMP will usehave the grossright to redeem any or all of the TNMP 2019 Bonds prior to their respective maturities, subject to payment of a customary make-whole premium. In accordance with GAAP, borrowings under the $172.3 million 9.50% TNMP first mortgage bonds are reflected as being long-term in the Condensed Consolidated Balance Sheets at December 31, 2018 since TNMP demonstrated its intent and ability to re-finance the agreement on a long-term basis. These bonds are reflected in current maturities of long-term debt on the Condensed Consolidated Balance Sheets at March 31, 2019 since the proceeds from the PNM 2018 SUNs to pay $350.0issuance of $225.0 million of PNM’s 7.95% Senior Unsecured Notes that mature on May 15, 2018 and $100.0 millionTNMP 2019 Bonds, net of PNM’s 7.50% Senior Unsecured Notes that mature on August 1, 2018.

On March 9, 2018, PNMR issued $300.0 million aggregate principal amount of 3.250% Senior Unsecured Notes (the “PNMR 2018 SUNs”), which mature on March 9, 2021. The proceeds from the offering wereamounts used to repay the $150.0 million PNMR 2015 Term Loan Agreementshort-term debt, are reflected in cash and to reduce borrowings under the PNMR Revolving Credit Facility.

On February 26, 2018, PNMR Development entered into a $24.5 million revolving credit facility with Wells Fargo Bank, National Association, as lender. The facility allows PNMR Development to borrow on a revolving credit basis and also provides for the issuance of letters of credit. The facility expires on February 25, 2019. The facility bears interest at a variable rate and contains terms similar to the PNMR Revolving Credit Facility. PNMR has guaranteed the obligations of PNMR Development under the facility. PNMR Development uses the facility to finance its participation in NMRD and other activities.

At March 31, 2018, variable interest rates were 2.64% for the $100.0 million PNMR 2016 Two-Year Term Loan and 2.61% for the $200.0 million PNM 2017 Term Loan Agreement.cash equivalents.

In 2017, PNMR entered into three separate four-year hedging agreements whereby it effectively established fixed interest rates on three separate tranches, each of $50.0 million, of its variable rate debt. The hedging agreements effectively fix interest rates on the aggregate $150.0 million of short-term debt at rates of 1.926%, 1.823%, and 1.629%, plus customary spreads over LIBOR, and are subject to changes if there is a change in PNMR’s credit rating.

Capital Requirements

PNMR’s total capital requirements consist of construction expenditures, and cash dividend requirements for PNMR common stock and PNM preferred stock.stock, and capital contributions for PNMR Development’s 50% ownership interest in NMRD. Key activities in PNMR’s current construction program include:

Upgrading generation resources, including expenditures for compliance with environmental requirements and for renewable energy resources
Expanding the electric transmission and distribution systems
Purchasing nuclear fuel


Projected capital requirements, including amounts expended through March 31, 20182019, are:
2018 2019-2022 Total2019 2020-2023 Total
(In millions)(In millions)
Construction expenditures$500.8
 $2,210.8
 $2,711.6
$604.5
 $2,495.1
 $3,099.6
Capital contributions to NMRD29.9
 33.6
 63.5
Dividends on PNMR common stock84.4
 337.7
 422.1
92.4
 369.6
 462.0
Dividends on PNM preferred stock0.5
 2.1
 2.6
0.5
 2.1
 2.6
Total capital requirements$585.7
 $2,550.6
 $3,136.3
$727.3
 $2,900.4
 $3,627.7
The construction expenditure estimates are under continuing review and subject to ongoing adjustment, as well as to Board review and approval. The construction expenditures above include environmental upgrades of $7.9 million at Four Corners, $72.9$60.0 million for 50 MW of new solar facilities included in PNM’s 2018 renewable energy procurement plan, and approximately $170$125.0 million in 2018-20202019-2020 for an anticipated expansionexpansions of PNM’s transmission system, andsystem. Also included in the table above is a net amount of approximately $100$285 million in 2021 for PNM’s May 1, 2019 agreement to purchase a 165-mile 345 kV transmission line and $300 millionto construct associated facilities (the “Western Spirit Line”), subject to NMPRC and FERC approval. PNM anticipates the Western Spirit line will be used to serve approximately 800 MW of new wind generation facilities in 2022eastern New Mexico. Not included in the table above are potential incremental expenditures for the costs of replacement resources related to the potentialplanned shutdown of SJGS Units 1 and 4 in 2022. Expenditures for the expansion of PNM’s transmission system and SJGS replacement resources are subject to obtaining necessary approvals of the NMPRC. PNM will be required to file CCN applications or submit other filings with the NMPRC for approval to obtain those approvals. Expendituresshut down SJGS and for environmental upgrades are estimated to be $7.9 million in 2018.related replacement resources. See Note 11 and 12. The ability of PNMR to pay dividends on its common stock is dependent upon the ability of PNM and TNMP to be able to pay dividends to PNMR. Note 5 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K describes regulatory and contractual restrictions on the payment of dividends by PNM and TNMP.
During the three months ended March 31, 20182019, PNMR met its capital requirements and construction expenditures through cash generated from operations, as well as its liquidity arrangements and the borrowings discussed in Financing Activities above.
 
In addition to the capital requirements for construction expenditures and dividends, the Company has long-term debt and term loans that must be paid or refinanced at maturity. The $100.0 million PNMR 2016 One-Year Term Loan (as extended) maturesAs discussed above, on December 14, 2018, the $100.0 million PNMR 2016 Two-Year Term Loan matures on December 21, 2018, and the $200.0 million PNM 2017 Term Loan matures on January 18, 2019. Also, $350.0 million of PNM Senior Unsecured Notes mature on May 15, 2018 and $100.0 million of PNM Senior Unsecured Notes mature on August 1, 2018. As described above, PNMFebruary 26, 2019 TNMP entered into the PNM 2017 Senior Unsecured NoteTNMP 2019 Bond Purchase Agreement on July 28, 2017. Proceeds fromproviding for the $450.0issuance of an aggregate of $305.0 million of TNMP 2019 Bonds. TNMP issued $225.0 million of the PNM 2018 SUNs to be issued underTNMP 2019 Bonds on March 29, 2019 and used a portion of the proceeds from that agreement will be usedissuance to repay the senior unsecured notes that mature on May 15, 2018 and August 1, 2018. The BTMU Term Loan Agreement requires that NM Capital utilize all amounts, less taxes and fees, it receives under the Westmoreland Loan to repay the BTMU Term Loan Agreement. Based on scheduled payments on the Westmoreland Loan, NM Capital estimates it will make principal payments of $10.0 million on the BTMU Term Loan Agreement in the twelve months ended March 31, 2019. TNMP hasTNMP’s $172.3 million of9.50% first mortgage bonds that are due inat their maturity on April 1, 2019. TNMP will issue the remaining $80.0 million of TNMP 2019 Bonds on or before July 1, 2019 and will use the $24.5proceeds from that issuance to repay borrowings under the TNMP Revolving Credit Facility and for other general corporate purposes. In addition, the $150.0 million PNMR Development revolving credit facility expires2018 One-Year term loan will mature in FebruaryDecember 2019. Note 67 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K contains additional information about the maturities of long-term debt. PNMR and PNM anticipateThe Company anticipates that funds to repay these long-term debt maturities and term loans will come from entering into new arrangements similar to the existing agreements, borrowing under theirthe revolving credit facilities, issuance of new long-term debt or equity in the public or private capital markets, or a combination of these sources. The Company has from time to time refinanced or repurchased portions of its outstanding debt before scheduled maturity. Depending on market conditions, the Company may refinance other debt issuances or make additional debt repurchases in the future.
Liquidity
PNMR’s liquidity arrangements include the PNMR Revolving Credit Facility, the PNM Revolving Credit Facility, and the TNMP Revolving Credit Facility. The PNMR and PNM facilities have capacities of $300.0 million and $400.0 millioncurrently expire on October 22, 2023 but can be extended through October 2020 and $290.0 million and $360.0 million from November 2020 through October 2022.2024, subject to approval by a majority of the lenders. The $75.0 million TNMP Revolving Credit Facility matures in September 2022. PNM also has the $40.0 million PNM 2017 New Mexico Credit Facility which expires in December 2022. PNMR Development has a $24.5 million revolving credit facility that expires in February 2019.on December 12, 2022. The Company believes the terms and conditions of these facilities are consistent with those of other investment grade revolving credit facilities in the utility industry.  The Company expects that it will be able to extend or replace these credit facilities under similar terms and conditions prior to their expirations.

On February 22, 2019 PNMR Development amended its revolving credit facility to increase the capacity to $25.0 million and to extend the term until February 24, 2020. The facility bears interest at a variable rate and contains terms similar to the PNMR Revolving Credit Facility. PNMR has guaranteed the obligations of PNMR Development under the facility. PNMR Development uses the facility to finance its participation in NMRD and for other activities (Note 1).

The revolving credit facilities and the PNM 2017 New Mexico Credit Facility provide short-term borrowing capacity. The revolving credit facilities also allow letters of credit to be issued. Letters of credit reduce the available capacity under the facilities. The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational

expenditures. The Company’s business is seasonal with more revenues and cash flows from operations being generated in the summer months. In general, the Company relies on the credit facilities to be the initial funding source for construction expenditures. Accordingly, borrowings under the facilities may increase over time. Depending on market and other conditions, the Company will periodically sell long-term debt and use the proceeds to reduce the borrowings under the credit facilities. Information regarding the range of borrowings for each facility is as follows:
 Three Months Ended March 31, 2018 Three Months Ended March 31, 2019
Range of Borrowings Low High Low High
 (In millions) (In millions)
PNM:        
PNM Revolving Credit Facility $—
 $64.2
 $—
 $40.0
PNM 2017 New Mexico Credit Facility —
 20.0
 —
 10.0
TNMP Revolving Credit Facility —
 24.4
 —
 45.5
PNMR Revolving Credit Facility 29.1
 210.0
 20.0
 71.1
PNMR Development Revolving Credit Facility —
 21.5
 6.0
 11.6
At March 31, 2018,2019, the average interest rate was 3.05%rates were 3.74% for the PNMR Revolving Credit Facility, 2.63%3.24% for the PNMR 20162018 One-Year Term Loan, (as extended), 2.54% for the TNMP Revolving Credit Facility, and 2.72%3.49% for the PNMR Development revolving credit facility. There were no borrowings outstanding under the PNM Revolving Credit Facility or the PNM 2017 New Mexico Credit Facility at March 31, 2018.Facility.
The Company currently believes that its capital requirements for at least the next twelve months can be met through internal cash generation, existing, extended, or new credit arrangements, and access to public and private capital markets. The Company anticipates that it will be necessary to obtain additional long-term financing to fund its capital requirements during the 2018-20222019-2023 period. This could include new debt and/or equity issuances. The Company currently anticipates utilizing a three-yearan at-the-market equity issuance program, or other program such as mandatory convertible securities, to raise equity beginning in 2020 to partially fund capital requirements. This at-the-market program should provide a flexible, efficient, and low-cost way to issue equity as needed. The Company also expects to issue new debt periodically to fund capital investments. To cover the difference in the amounts and timing of internal cash generation and cash requirements, the Company intends to use short-term borrowings under its current and future liquidity arrangements. However, if difficult market conditions return, the Company may not be able to access the capital markets or renew credit facilities when they expire. Should that occur, the Company would seek to improve cash flows by reducing capital expenditures and exploring other available alternatives. Also, PNM could consider seeking authorization for the issuance of first mortgage bonds to improve access to the capital markets.
Information concerning the credit ratings for PNMR, PNM, and TNMP was set forth under the heading Liquidity in the MD&A contained in the 20172018 Annual Reports on Form 10-K. As of April 23, 2018,May 3, 2019, ratings on the Company’s securities were as follows:
 PNMR PNM TNMP
S&P     
Corporate ratingBBB+ BBB+ BBB+
Senior secured debt* * A
Senior unsecured debtBBB BBB+ *
Preferred stock* BBB- *
Moody’s     
Issuer ratingBaa3 Baa2 A3
Senior secured debt* * A1
Senior unsecured debtBaa3 Baa2 *
* Not applicable     

Currently, all of the credit ratings issued by both Moody’s and S&P on the Company’s debt are investment grade. On January 16, 2018, S&P changed the outlook for PNMR, PNM, and TNMP from stable to negative while affirming the ratings above for all the entities. On June 29, 2018, Moody’s changed the ratings outlook for PNMR and PNM from positive to stable, maintained the stable outlook for TNMP, and affirmed the long-term credit ratings of each entity. The ultimate outcomes from PNM’s NM 2015 Rate Case, and NM 2016 Rate Case, including the pending

appeals appeal before the NM Supreme Court, as discussed in Note 12, could affect both the outlook and credit ratings. Investors are cautioned that a security rating is not a recommendation to buy, sell, or hold

securities, that each rating is subject to revision or withdrawal at any time by the assigning rating organization, and that each rating should be evaluated independently of any other rating.

A summary of liquidity arrangements as of April 23, 2018May 3, 2019 is as follows:
PNM TNMP 
PNMR
Separate
 
PNMR
Development
 ConsolidatedPNM TNMP 
PNMR
Separate
 
PNMR
Development
 PNMR Consolidated
(In millions)(In millions)
Financing capacity:                  
Revolving credit facility$400.0
 $75.0
 $300.0
 $24.5
 $799.5
$400.0
 $75.0
 $300.0
 $25.0
 $800.0
PNM 2017 New Mexico Credit Facility40.0
 —
 —
 —
 40.0
40.0
 —
 —
 —
 40.0
Total financing capacity$440.0
 $75.0
 $300.0
 $24.5
 $839.5
$440.0
 $75.0
 $300.0
 $25.0
 $840.0
                  
Amounts outstanding as of April 23, 2018:         
Amounts outstanding as of May 3, 2019:         
Revolving credit facility$—
 $40.4
 $96.2
 $24.5
 $161.1
$—
 $29.2
 $55.9
 $15.1
 $100.2
PNM New Mexico Credit Facility—
 —
 —
 —
 —
PNM 2017 New Mexico Credit Facility—
 —
 —
 —
 —
Letters of credit2.5
 0.1
 6.4
 —
 9.0
2.5
 0.1
 4.7
 —
 7.3
Total short-term debt and letters of credit2.5
 40.5
 102.6
 24.5
 170.1
2.5
 29.3
 60.6
 15.1
 107.5
                  
Remaining availability as of April 23, 2018$437.5
 $34.5
 $197.4
 $—
 $669.4
Invested cash as of April 23, 2018$8.6
 $—
 $0.9
 $—
 $9.5
Remaining availability as of May 3, 2019$437.5
 $45.7
 $239.4
 $9.9
 $732.5
Invested cash as of May 3, 2019$9.0
 $—
 $0.9
 $—
 $9.9
In addition to the above, PNMR hadhas $30.3 million of letters of credit outstanding under the JPM LOC Facility. The above table excludes intercompany debt. On April 9, 2018, PNMR Development deposited $68.2 million with PNM related to transmission network interconnection studies. PNM used the deposit to repay intercompany borrowings. As of April 23, 2018,May 3, 2019, PNM and TNMP had no intercompany borrowings from PNMR. The remaining availability under the revolving credit facilities at any point in time varies based on a number of factors, including the timing of collections of accounts receivables and payments for construction and operating expenditures.

For offeringsPNMR has an automatic shelf registration that provides for the issuance of various types of debt orand equity securities registered with the SEC, PNMR has a shelf registration statement expiring in March 2021. This shelf registration statement has unlimited availability and can be amended to include additional securities, subject to certain restrictions and limitations. PNMR can also offer new shares of common stock through the PNM Resources Direct Plan under a SEC shelf registration statement that expires in August 2018.March 2021. PNM has a shelf registration statement for up to $475.0 million of Senior Unsecured Notessenior unsecured notes that expires in May 2020.
Off-Balance Sheet Arrangements
PNMR’s off-balance sheet arrangements include PNM’s operating leases for portions of PVNGS Units 1 and 2. These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers. See MD&A – Off-Balance Sheet Arrangements and Notes 7 and 9 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K, as well as Note 13.
Commitments and Contractual Obligations
PNMR, PNM, and TNMP have contractual obligations for long-term debt, operating leases, construction expenditures, purchase obligations, and certain other long-term obligations. See MD&A – Commitments and Contractual Obligations in the 20172018 Annual Reports on Form 10-K.


Contingent Provisions of Certain Obligations
As discussed in the 20172018 Annual Reports on Form 10-K, PNMR, PNM, and TNMP have a number of debt obligations and other contractual commitments that contain contingent provisions. Some of these, if triggered, could affect the liquidity of the Company. In the unlikely event that the contingent requirements were to be triggered, PNMR, PNM, or TNMP could be required to provide security, immediately pay outstanding obligations, or be prevented from drawing on unused capacity under certain credit agreements. The contingent provisions also include contractual increases in the interest rate charged on certain of the Company’s short-term debt obligations in the event of a downgrade in credit ratings. The Company believes its financing arrangements are sufficient to meet the requirements of the contingent provisions. No conditions have occurred that would result in any of the above contingent provisions being implemented.


Capital Structure
The capitalization tables below include the current maturities of long-term debt, but do not include short-term debt and do not include operating lease obligations as debt.
March 31,
2018		 December 31,
2017		March 31,
2019		 December 31,
2018
PNMR      
PNMR common equity39.4% 40.9%36.3% 38.6%
Preferred stock of subsidiary0.3% 0.3%0.2
 0.3
Long-term debt60.3% 58.8%63.5
 61.1
Total capitalization100.0% 100.0%100.0% 100.0%
   
PNM      
PNM common equity46.1% 46.0%45.3% 45.6%
Preferred stock0.4% 0.4%0.4
 0.4
Long-term debt53.5% 53.6%54.3
 54.0
Total capitalization100.0% 100.0%100.0% 100.0%
   
TNMP      
Common equity57.2% 56.9%45.5% 53.9%
Long-term debt42.8% 43.1%54.5
 46.1
Total capitalization100.0% 100.0%100.0% 100.0%

OTHER ISSUES FACING THE COMPANY
Climate Change Issues

Background
For the past several years, management has identified multiple risks and opportunities related to climate change, including potential environmental regulation, technological innovation, and availability of fuel and water for operations, as among the most significant risks facing the Company. Accordingly, these risks are overseen by the full Board in order to facilitate more integrated risk and strategy oversight and planning. Board oversight includes understanding the various challenges and opportunities presented by these risks, including the financial consequences that might result from enacted and potential federal and/or state regulation of GHG; plans to mitigate thethese risks; and the impacts these risks may have on the Company’s strategy. In addition, the Board approves certain PNM investments inprocurements of environmental equipment, and grid modernization technologies.technologies, and replacement generation resources.

Management is also responsible for assessing significant risks, developing and executing appropriate responses, and reporting to the Board on the status of risk activities. For example, management periodically updates the Board on the implementation of the corporate environmental policy, and the Company’s environmental management systems, including the promotion of energy efficiency programs, and the use of renewable resources.  The Board is also advisedinformed of the Company’s practices and procedures to assess the sustainability impacts of operations on the environment. Management has recently published, with Board oversight, a Climate Change Report available at http://www.pnmresources.com/about-us/sustainability-portal.aspx, that details PNM’s efforts to transition to a coal-free generation portfolio. The Board considers issues

associated with climate change, the Company’s GHG exposures, and the financial consequences that might result from enacted and potential federal and/or state regulation of GHG. Management has published, with Board oversight, a Climate Change Report available at http://www.pnmresources.com/about-us/sustainability-portal.aspx, that details PNM’s efforts to transition to an emissions-free generating portfolio by 2040.

Changes in the climate are generally not expectedAs part of management’s continuing effort to have material consequences tomonitor climate-related risks and opportunities, the Company is evaluating different climate change disclosure frameworks, including the framework created by the Task Force on Climate-related Financial Disclosures and a framework created by Edison Electric Institute. The Company is also participating in the near-term. an Electric Power Research Institute project that is analyzing climate change scenarios and GHG goal setting.

The Company cannot anticipate or predict the potential long-term effects of climate change or climate change related regulation on its assets and operations.

Greenhouse Gas Emissions (“GHG”) Exposures

In 2017,2018, GHG associated with PNM’s interests in its fossil-fueled generating plants included approximately 6.95.1 million metric tons of CO2, which comprises the vast majority of PNM’s GHG.  By comparison, the total GHG in the United States in 2016, the latest year for which EPA has published final data, were approximately 6.5 billion metric tons (in CO2 equivalents), of which approximately 5.3 billion metric tons were CO2.

As of January 1,December 31, 2018, approximately 67.9%66% of PNM’s generating capacity, including resources owned, leased, and under PPAs, all of which is located within the United States, consisted of coal or gas-fired generation that produces GHG. This reflects the retirement of SJGS Units 2 and 3 that occurred in December 2017 and the restructuring of ownership in SJGS Unit 4. These events reduced PNM’s entitlement in SJGS from 783 MW to 562 MW and will causecaused the Company’s output of GHG to decrease in 2018when compared to 2017. Many factors affect the amount of GHG emitted, including plant performance, economic dispatch, and the availability of renewable resources. For example, between 2007 and 2017,2018, production from New Mexico Wind has varied from a high of 580 GWh in 2011 to a low of 405 GWh in 2014. Variations are primarily due to how much and how often the wind blows. In addition, if PVNGS experienced prolonged outages or if PNM’s entitlement from PVNGS were reduced, PNM might be required to utilize other power supply resources such as gas-fired generation, which could increase GHG.

PNM has several programs underway to reduce or offset GHG from its generation resource portfolio, thereby reducing its exposure to climate change regulation. See Note 12. As described in Note 11,16 of the Notes to Consolidated Financial Statements in the 2018 Annual Reports on Form 10-K, PNM received approval for the December 31, 2017 shutdown of SJGS Units 2 and 3 as part of its strategy to address the regional haze requirements of the CAA. The shutdown of SJGS Units 2 and 3 is expected to resultresulted in a reduction of GHG for the entire station of approximately 50%54%, including an overallreflecting a reduction of approximately 40%41% of GHG from the Company’s owned interests.interests in SJGS, below 2005 levels. On December 31, 2018, PNM submitted a compliance filing notifying the NMPRC that, consistent with the conclusions reached in the 2017 IRP, PNM’s customers would benefit from the retirement of SJGS in 2022. In addition, as discussed in Note 12, PNM’s 2017 IRP also indicates exiting ownership in the remaining SJGS units in 2022 and Four Corners in 2031 would provide long-term cost savings to its customerscustomers. If approved by the NMPRC, retiring PNM’s share of SJGS and exiting participation in Four Corners would further reduce PNM’s GHG. PNM owns utility-scale solar generation in commercial operation with a total generation capacity of 107 MW.117 MW as of March 31, 2019. Since 2003, PNM has purchased the entire output of New Mexico Wind, which has an aggregatea contract capacity of 204 MW, and, since January 2015, has purchased the full output of Red Mesa Wind, which has an aggregate capacity of 102 MW. PNM has a 20-year PPA for the output of Lightning Dock Geothermal, which began providing power to PNM in January 2014. The current capacity of the geothermal facility is 415 MW. On November 15, 2017 the NMPRC approved PNM’s 2018 renewable energy procurement plan (Note 12).plan. As a result, PNM will acquire an additional 80 GWh in 2019 and 105 GWh in 2020 from a re-powering of New Mexico Wind; an additional 55 GWh in 2019 and 77 GWh in 2020 from a re-powering of Lightning Dock Geothermal; and PNM will construct 50 MW of new solar facilities in 2018.2018 and 2019. Additionally, PNM began purchasing renewable energy from 30 MW of solar-PV facilities owned by NMRD in 2018 and, subject to FERC approval, will purchase an additional 100 MW of capacity from solar-PV facilities to be owned by NMRD in 2019 and 2020 to supply power to a data center being constructed in PNM’s service territory (Note 12). In December 2018, PNM began purchasing 50 MW of renewable energy from Casa Mesa Wind, which is also being used to support the data center in PNM’s service territory. PNM also has a customer distributed solar generation program that represented 86.2106.8 MW at March 31, 2018.2019. PNM’s distributed solar programs will reduce PNM’s annual production from fossil-fueled electricity generation by about 200213.6 GWh. PNM has offered its customers a comprehensive portfolio of energy efficiency and load management programs since 2007, with a budget of $23.6 million for the 2018 program year.2007. PNM’s cumulative annual savings from these programs were approximately 622653 GWh of electricity in 2017.2018. Over the next 20 years, PNM projects energy efficiency and load management programs will provide the equivalent of approximately 8,0007,700 GWh of electricity, which will avoid at least 4.34.2 million metric tons of CO2 based upon projected emissions from PNM’s system-wide resources. These estimates are subject to change because of the uncertainty of many of the underlying variables, including changes in demand for electricity, and complex relationships between those variables.

Because of PNM’s dependence on fossil-fueled generation, legislation or regulation that imposes a limit or cost on GHG could impact the cost at which electricity is produced. While PNM expects to recover any such costs through rates, the timing and outcome of proceedings for cost recovery are uncertain. In addition, to the extent that any additional costs are recovered through rates, customers may reduce their usage, relocate facilities to other areas with lower energy costs, or take other actions that ultimately willcould adversely impact PNM.


Other Climate Change Risks

PNM’s generating stations are located in the arid southwest. Access to water for cooling for some of these facilities is critical to continued operations. Forecasts for the impacts of climate change on water supply in the southwest range from reduced precipitation to changes in the timing of precipitation. In either case, PNM’s generating facilities requiring water for cooling will

need to mitigate the impacts of climate change through adaptive measures. Current measures employed by PNM generating stations such as air cooling, use of grey water, improved reservoir operations, and shortage sharing arrangements with other water users will continue to be important to sustain operations.

PNM’s service areas occasionally experience periodic high winds, forest fires, and severe thunderstorms. TNMP has operations in the Gulf Coast area of Texas, which experiences periodic hurricanes and droughtother extreme weather conditions. In addition to potentially causing physical damage to Company-owned facilities, which disrupts the ability to transmit and/or distribute energy, weather and other events of nature can temporarily reduce customers’ usage and demand for energy. DuringIn addition, other events influenced by climate change, such as wildfires, could disrupt Company operations or result in third-party claims against the third quarter of 2017, Hurricane Harvey had significant impacts on the Gulf Coast region, including certain areas serviced by TNMP. While Hurricane Harvey did not have a significant impact on TNMP’s facilities, the hurricane impacted customer usage and could impact future usage or create resource constraints that could delay or disrupt the supply of materials necessary to maintain historical levels of system reliability.

Company.
EPA Regulation

In April 2007, the US Supreme Court held that EPA has the authority to regulate GHG under the CAA.  This decision heightened the importance of this issue for the energy industry.  In December 2009, EPA released its endangerment finding for emissionsGHG from new motor vehicles, stating that the atmospheric concentrations of six key greenhouse gases (CO2, methane, nitrous oxides, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) endanger the public health and welfare of current and future generations. In May 2010, EPA released the final PSD and Title V Greenhouse Gas Tailoring Rule (the “Tailoring Rule”) to address GHG from stationary sources under the CAA permitting programs. The purpose of the rule was to “tailor” the applicability of two programs, the PSD construction permit and Title V operating permit programs, to avoid impacting millions of small GHG emitters. On June 23, 2014, the US Supreme Court found EPA lacked authority to “tailor” the CAA’s unambiguous numerical thresholds of 100 or 250 tons per year, and thus held EPA may not require a source to obtain a PSD permit solely on the basis of its potential GHG emissions.GHG. However, the court upheld EPA’s authority to apply the PSD program for GHGsGHG to “anyway” sources –- those sources that have to comply with the PSD program for other non-GHG pollutants.

On June 25, 2013, then President Obama announced his Climate Action Plan, which outlined how his administration planned to cut GHG in the United States, prepare the country for the impacts of climate change, and lead international efforts to combat and prepare for global warming. The plan proposed actions that would lead to the reduction of GHG by 17% below 2005 levels by 2020.

On August 3, 2015, EPA responded to the Climate Action Plan by issuing three separate but related actions:actions, which were published in October 2015: (1) the final Carbon Pollution Standards for new, modified, and reconstructed power plants (under Section 111(b)); (2) the final Clean Power Plan for existing power plants (under Section 111(d)); and (3) a proposed federal plan associated with the final Clean Power Plan.

EPA’s Carbon Pollution Standards for new sources (those constructed after January 8, 2014) established separate standards for gas-gas and coal-fired units. The standards reflect the degree of emission limitation achievable through the application of what EPA determined to be the best system of emission reduction (“BSER”)BSER demonstrated for each type of unit. For newly constructed and reconstructed base load natural gas-fired stationary combustion turbines, EPA finalized a standard based on efficient natural gas combined cycle technology. The final standards for coal-fired power plants vary depending on whether the unit is new, modified, or reconstructed.

reconstructed, but the new unit standards were based on EPA’s determination that the BSER for new units was partial carbon recapture and sequestration. The final Clean Power Plan established numeric “emission standards” for existing electric generating units –- one for “fossil-steam” units (coal-(coal and oil-fired units) and one for natural gas-fired units (combined cycle only). The emission standards are based on emission reduction opportunities that EPA deemed achievable using technical assumptions for three “building blocks”: efficiency improvements at coal-fired EGUs, displacement of affected EGUs with renewable energy, and displacement of coal-fired generation with natural gas-fired generation.

Multiple states, utilities, and trade groups filed petitions for review in the DC Circuit to challenge both the Carbon Pollution Standards for new sources and the Clean Power Plan for existing sources. Numerous parties also simultaneously filed motions to stay the Clean Power Plan during the litigation. The DC Circuit refused to stay the rule, but 29 states and state agencies successfully

petitioned the US Supreme Court for a stay, which was granted on February 9, 2016. As a result, the Clean Power Plan is not in effect and neither states nor sources are obliged to comply with its requirements. With the US Supreme Court stay in place, the DC Circuit heard oral arguments on the merits of the Clean Power Plan on September 27, 2016 in front of a 10-judge en banc panel. However, before the DC Circuit could issue an opinion, President Trump took office and his administration asked the court to hold the case in abeyance while the rule is re-evaluated, which the court granted.

On March 28, 2017, President Trump issued an Executive Order titled “Promoting Energy Independence and Economic Growth.” Among its goals are to “promote clean and safe development of our Nation’s vast energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production, constrain economic growth, and prevent job creation.” The order rescinds several key pieces of the Obama Administration’s climate agenda, including the Climate Action Plan and the Final Guidance on Consideration of Climate Change in NEPA Reviews. It directs agencies to review and suspend, revise or rescind any regulations or agency actions that potentially burden the development or use of domestically produced energy resources.

Most notably, the order directs EPA to immediately review and, if appropriate and consistent with law, suspend, revise, or rescind (1) the Carbon Pollution Standards for new, reconstructed or modified electric utilities, (2) the Clean Power Plan, (3) the Proposed Clean Power Plan Model Trading Rules, and (4) the Legal Memorandum supporting the Clean Power Plan. In response, the EPA signed a NOPR to repeal the Clean Power Plan on October 10, 2017. The notice proposes a legal interpretation concluding that the Clean Power Plan exceeds EPA’s statutory authority. EPA accepted comments on that proposed interpretation through April 26, 2018. Any final rule will likely be subject to judicial review. On December 18, 2017, EPA indicated itreleased an advanced NOPR addressing GHG guidelines for existing electric utility generating units. On August 31, 2018, EPA published a proposed rule, which is informally known as the Affordable Clean Energy rule, to replace the Clean Power Plan. The proposed Affordable Clean Energy rule, among other things, would establish guidelines that replace the “outside-the-fenceline” control measures and specific numerical emission rates for existing EGUs with a list of “candidate technologies” for heat rate improvement measures that EPA has identified as BSER. States would determine which of the candidate technologies to apply to each coal-fired unit and establish standards of performance based on the degree of emission reduction achievable once BSER is applied. States will have three years from when the rule is finalized to submit a plan to EPA and EPA will have one year to determine if each proposed plan is acceptable. If states do not determined whether itsubmit a plan, or if their submitted plan is not acceptable, EPA will promulgatehave two years to develop a federal plan. EPA is also proposing revisions to NSR program that would provide coal-fired power plants more latitude to make efficiency improvements consistent with BSER without triggering NSR permit requirements. Comments on the proposed Affordable Clean Energy rule were due to EPA by October 31, 2018.
On December 20, 2018, EPA published in the Federal Register a proposed rule that would revise the Carbon Pollution Standards rule published in October 2015 for new, rule under section 111(d)reconstructed, or what form a newmodified coal-fired EGUs. The proposed rule would take, but it did seek commentrevise the standards for new coal-fired EGUs based on that questionthe revised BSER as the most efficient demonstrated steam cycle (e.g., supercritical steam conditions for large units and subcritical steam conditions for small units), instead of partial carbon recapture and sequestration, which results in a separate advanced noticeless stringent CO2 emission performance standards for new units. EPA has also proposed revisions to the standards for reconstructed and modified fossil-fueled power plants to align with the proposed standards for new units. EPA is not proposing any changes nor reopening the standards of proposed rulemaking published December 28, 2017.performance for newly constructed or reconstructed stationary combustion turbines. Comments on the proposal were due by February 26, 2018.

on March 18, 2019.
PNM is unable to predict the impact to the Company of this Executive Order or the potential repeal of the Clean Power Plan. It is uncertain the direction EPA will take, if any, to replace the existing rule.these proposed rulemakings. If a future regulation limiting or otherwise reducing GHG from fossil-fueled EGUs is adopted, such regulations could impact PNM’s existing and future fossil-fueled EGUs. The existingproposed Carbon Pollution Standards covering new sourcesrule could also impact PNM’s generation fleet to the extent any EGUs qualify as new, reconstructed, or modified, although that rule remains under review by EPA and the DC Circuit.

Federal Legislation

Prospects for enactment in Congress of legislation imposing a new or enhanced regulatory program to address climate change are highly unlikely in 2018.  

2019.  Although the new democratic leadership in the U.S. House of Representatives may soon begin to reconsider proposals for legislation aimed at addressing climate change, such legislation is unlikely to pass the republican controlled U.S. Senate or be signed by the President.
State and Regional Activity

Pursuant to New Mexico law, each utility must submit an IRP to the NMPRC every three years to evaluate renewable energy, energy efficiency, load management, distributed generation, and conventional supply-side resources on a consistent and comparable basis.  The IRP is required to take into consideration risk and uncertainty of fuel supply, price volatility, and costs of anticipated environmental regulations when evaluating resource options to meet supply needs of the utility’s customers.  The NMPRC requires that New Mexico utilities factor a standardized cost of carbon emissions into their IRPs using prices ranging between $8 and $40 per metric ton of CO2 emitted and escalating these costs by 2.5% per year.  Under the NMPRC order, each utility must analyze these standardized prices as projected operating costs.  Reflecting the developing nature of this issue, the NMPRC order states that these prices may be changed in the future to account for additional information or changed circumstances.  Although these prices may not reflect the costs that ultimately will be incurred, PNM is required to use these prices for purposes of its IRP.  As discussed in Note 12, inIn its 2017 IRP, PNM analyzed resource portfolio plans for scenarios that assumed SJGS will operate

beyond the end of the current coal supply agreement that runs through June 30, 2022 and for scenarios that assumed SJGS will cease operations by the end of 2022.2022 as discussed in Note 12. The key findings of the 2017 IRP include that exiting SJGS in 2022 would provide long-term costeconomic benefits to PNM’s customers and that PNM exiting its ownership interest in Four Corners in 2031 would also save customers money. The materials presented in the IRP process are available at www.pnm.com\irp. See additional discussion of PNM’s December 2018 Compliance filing in Note 11, which indicates PNM plans to retire SJGS after the SJGS CSA expires in mid-2022.

On August 30, 2017, Western Resource Advocates providedMarch 22, 2019, Senate Bill 489, known as the NMPRC withEnergy Transition Act (“ETA”) was signed into New Mexico state law and becomes effective on June 14, 2019. The ETA, among other things, requires that investor-owned utilities obtain specified percentages of their energy from renewable and carbon-free resources. Prior to the enactment of the ETA, the REA established a presentation onmandatory RPS requiring utilities to acquire a proposed rulemaking forrenewable energy portfolio equal to 10% of retail electric sales by 2011, 15% by 2015, and 20% by 2020. The ETA amends the adoption of a clean energy standardREA and requires utilities operating in New Mexico to have renewable portfolios equal to 20% by 2020, 40% by 2025, 50% by 2030, 80% by 2040, and 100% zero-carbon energy by 2045. The ETA provides for a suggestiontransition from coal-fired generating resources to carbon-free resources by allowing investor-owned utilities to issue securitized bonds, or “energy transition bonds,” related to the retirement of coal-fired generating facilities to qualified investors. Proceeds from the energy transition bonds must be used only for purposes related to providing utility service to customers and to pay “financing costs” (as defined by the ETA). These costs may include coal mine decommissioning, plant decommissioning, and other costs that have not yet been charged to customers or disallowed by the NMPRC or by a court order. Proceeds provided by energy transition bonds may also be used to pay for severances for employees of the retired coal-fired generating facility and related coal mine, as well as to pay for job training, education, and economic development. Energy transition bonds must be issued under an NMPRC financing order and are paid by a non-bypassable charge paid by all customers of the issuing utility. The ETA also amends sections of the REA to allow for the recovery of undepreciated investments and decommissioning costs related to qualifying EGUs that the NMPRC issuehas required be removed from retail jurisdictional rates, provided replacement resource to be included in retail rates have lower or zero-carbon emissions. The ETA requires the NMPRC to prioritize replacement resources in a NOPR. The NMAG’s office and Prosperity Works joined inmanner intended to mitigate the petition. The proposed clean energy standard, if adopted, would require utilitieseconomic impact to reduce carbon emissionscommunities affected by four percent per year for the next 20 years. The NMPRC has convened a series of workshops to develop a clean energy standard rule that could be proposed for a future rulemaking proceeding. The major topic areas discussed at the

workshops are: jurisdictional and other legal issues; selectionthese plant retirements. See additional discussion of the timeframe forETA in Note 11. The effectiveness of the emissions baseline year to be used, unspecified power, and electric vehicle credits; and cost responsibilities, benefits, reasonable cost threshold,ETA will have a significant impact on rates, compliance issues, reliability impacts, and unintended consequences. Workshops are scheduled to continuePNM’s future generation portfolio, including PNM’s planned retirement of SJGS in 2018.2022. PNM cannot predict the full impact of the ETA or the outcome of its potential future generating resource abandonment filings with the NMPRC.

International Accords

The United Nations Framework Convention on Climate Change (“UNFCCC”) is an international environmental treaty that was negotiated at the 1992 United Nations Conference on Environment and Development (informally known as the Earth Summit) and entered into force in March 1994. The objective of the treaty is to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”  Parties to the UNFCCC, including the United States, have been meeting annually in Conferences of the Parties (“COP”) to assess progress in meeting the objectives of the UNFCCC. 

On December 12, 2015, the Paris Agreement was finalized during the 2015 COP. The aim of the Paris Agreement is to limit global temperature rise to two degrees Celsius above pre-industrial levels. The agreement, which was agreed to by more than 190 nations,197 parties, requires that countries submit Intended Nationally Determined Contributions (“NDCs”INDCs”). NDCsINDCs reflect national targets and actions that arise out of national policies and elements relating to oversight, guidance and coordination of actions to reduce emissions by all countries. In November 2014, then President Obama announced the United States’ commitment to reduce GHG, on an economy-wide basis, by 26%-28% from 2005 levels by the year 2025. The United States NDCINDC is part of an overall effort by the former administration to have the United States achieve economy-wide reductions of around 80% by 2050.  The former administration’s GHG reduction target for the electric utility industry is a key element of its NDCINDC and is based on EPA’s final GHG regulations for new, existing, and modified and reconstructed sources. The United States wasis one of 189several nations that offered intended NDCs.INDCs.  Thresholds for the number of countries necessary to ratify or accede to the Paris Agreement and total global GHG percentage were achieved on October 5, 2016 and the Paris Agreement entered into force on November 4, 2016.  To date, 175 countries have ratified the Paris Agreement.  On June 1, 2017, President Trump announced that the United States would withdraw from the Paris Agreement. In his public statement, he indicated that the United States would “begin negotiations to reenter either the Paris Accord or a .... new transaction on terms that are fair to the United States, its businesses, its workers, its people, its taxpayers.” ToThe United States continues to hold the position that it will withdraw from the Paris Agreement unless it can negotiate better terms. The earliest date there have been no specific detailsthat the United States could give formal notification of its withdrawal is November 4, 2020. In the interim, the United States continues to participate in international climate negotiations. It is uncertain if the United States will choose to pursue a transition to a low-carbon economy using a pathway that aligns with the Paris Agreement to keep global temperature rise to below two degrees Celsius (the “2 Degree Scenario”) above pre-industrial levels or in connection with other regulation or legislation. PNM has not conducted a 2 Degree Scenario analysis

but is participating in the Electric Power Research Institute program, “Understanding Climate Change Scenarios and Goal-setting Activities”. PNM has also calculated GHG reductions that would result from implementation of the 2017 IRP scenarios that assume PNM would retire its share of the SJGS in 2022 and would exit from Four Corners in 2031. In addition, as to how thisan investor-owned utility operating in the state of New Mexico, PNM will be accomplished.

required to comply with the recently enacted ETA, which requires utilities’ generating portfolio be 100% carbon-free by 2045. As discussed above, PNM has set a goal to have a 100% emissions-free generating portfolio by 2040. The requirements of the ETA and the Company’s goal compare favorably to the 26% - 28% by 2025 United States INDC and the former administration’s effort to achieve an 80% reduction in carbon emissions by 2050. As discussed in Note 16, 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.
PNM will continue to monitor the United States’ and other parties’ involvement in international accords, but the potential impact that such accords may have on the Company cannot be determined at this time.

Assessment of Legislative/Regulatory Impacts

The Company has assessed, and continues to assess, the impacts of climate change legislation and regulation on its business.  This assessment is ongoing and future changes arising out of the legislative or regulatory process could impact the assessment significantly.  PNM’s assessment includes assumptions regarding specific GHG limits; the timing of implementation of these limits; the possibility of a market-based trading program, including the associated costs and the availability of emission credits or allowances; the development of emission reduction and/or renewable energy technologies; and provisions for cost containment. Moreover, the assessment assumes various market reactions such as the price of coal and gas and regional plant economics.  These assumptions are, at best, preliminary and speculative. However, based upon these assumptions, the enactment of climate change legislation or regulation could, among other things, result in significant compliance costs, including large capital expenditures by PNM, and could jeopardize the economic viability of certain generating facilities. See Note 11.  In turn, theseWhile PNM currently expects the planned retirement of SJGS in 2022 (subject to NMPRC approval) will provide savings to customers, the ultimate consequences of climate change and environmental regulation could lead to increased costs to customers and affect results of operations, cash flows, and financial condition if the incurred costs are not fully recovered through regulated rates. Higher rates could also contribute to reduced usage of electricity.  PNM’s assessment process is too preliminary and speculative at this time for a meaningful prediction of the long-term financial impact.

Transmission Issues

At any given time, FERC has various notices of inquiry and rulemaking dockets related to transmission issues pending. Such actions may lead to changes in FERC administrative rules or ratemaking policy but have no time frame in which action must be taken or a docket closed with no further action. Further, such notices and rulemaking dockets do not apply strictly to PNM but will have industry-wide effects in that they will apply to all FERC-regulated entities. PNM monitors and often submits comments taking a position in such notices and rulemaking dockets or may join in larger group responses. PNM often cannot determine the full impact of a proposed rule and policy change until the final determination is made by FERC and PNM is unable to predict the outcome of these matters.


On November 24, 2009, FERC issued Order 729 approving two Modeling, Data, and Analysis Reliability Standards (“Reliability Standards”) submitted by NERC – MOD-001-1 (Available Transmission System Capability) and MOD-029-1 (Rated System Path Methodology). Both MOD-001-1 and MOD-029-1 require a consistent approach, provided for in the Reliability Standards, to measuring the total transmission capability (“TTC”) of a transmission path. The TTC level established using the two Reliability Standards could result in a reduction in the available transmission capacity currently used by PNM to deliver generation resources necessary for its jurisdictional load and for fulfilling its obligations to third-party users of the PNM transmission system.

During the first quarter of 2011, at the request of PNM and other southwestern utilities, NERC advised all transmission owners and transmission service providers that the implementation of portions of the MOD-029 methodology for “Flow Limited” paths has been delayed until such time as a modification to the standard can be developed that will mitigate the technical concerns identified by the transmission owners and transmission service providers. PNM and other western utilities filed a Standards Action Request with NERC in the second quarter of 2012.


NERC initiated an informal development process to address directives in Order 729 to modify certain aspects of the MOD standards, including MOD-001 and MOD-029. The modifications to this standard would retire MOD-029 and require each transmission operator to determine and develop methodology for TTC values for MOD-001.

A final ballot for MOD-001-2 concluded on December 20, 2013 and received sufficient affirmative votes for approval. On February 10, 2014, NERC filed with FERC a petition for approval of MOD-001-2 and retirement of reliability standards MOD-001-1a, MOD-004-1, MOD-008-1, MOD-028-2, MOD-029-1a, and MOD-030-2. On June 19, 2014, FERC issued a NOPR to approve a new reliability standard. The MOD-001-2 standard will become effective on the first day of the calendar quarter that is 18 months after the date the standard is approved by FERC. MOD-001-2 will replace multiple existing reliability standards and will remove the risk of reduced TTC for PNM and other western utilities.

Financial Reform Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Reform Act”), enacted in July 2010, includes provisions that will require certain over-the-counter derivatives, or swaps, to be centrally cleared and executed through an exchange or other approved trading facility. It also includes provisions related to swap transaction reporting and record keeping and may impose margin requirements on swaps that are not centrally cleared. The United States Commodity Futures Trading Commission (“CFTC”) has published final rules defining several key terms related to the act and has set compliance dates for various types of market participants. The Dodd-Frank Reform Act provides exemptions from certain requirements, including an exception to the mandatory clearing and swap facility execution requirements for commercial end-users that use swaps to hedge or mitigate commercial risk.  PNM has elected the end-user exception to the mandatory clearing requirement. PNM expects to be in compliance with the Dodd-Frank Reform Act and related rules within the time frames required by the CFTC. However, as a result of implementing and complying with the Dodd-Frank Reform Act and related rules, PNM’s swap activities could be subject to increased costs, including from higher margin requirements. The Trump Administration has indicated that the provisions of the Dodd-Frank Reform Act will be reviewed, and certain regulations may be rolled back, but no formal action has been taken yet. At this time, PNM cannot predict the ultimate impact the Dodd-Frank Reform Act may have on PNM’s financial condition, results of operations, cash flows, or liquidity.

Other Matters

See Notes 11 and 12 herein and Notes 16 and 17 of the Notes to Consolidated Financial Statements in the 20172018 Annual Reports on Form 10-K for a discussion of commitments and contingencies and rate and regulatory matters. See Note 1 for a discussion of accounting pronouncements that have been issued but are not yet effective and have not been adopted by the Company.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires Company management to select and apply accounting policies that best provide the framework to report the results of operations and financial position for PNMR, PNM, and TNMP. The selection and application of those policies requires management to make difficult, subjective, and/or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions.



As of March 31, 20182019, there have been no significant changes with regard to the critical accounting policies disclosed in PNMR’s, PNM’s, and TNMP’s 20172018 Annual Reports on Forms 10-K. The policies disclosed included unbilled revenues, regulatory accounting, impairments, decommissioning and reclamation costs, pension and other postretirement benefits, accounting for contingencies, and income taxes.

MD&A FOR PNM

RESULTS OF OPERATIONS

PNM operates in only one reportable segment, as presented above in Results of Operations for PNMR.

MD&A FOR TNMP

RESULTS OF OPERATIONS

TNMP operates in only one reportable segment, as presented above in Results of Operations for PNMR.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements made in this filing that relate to future events or PNMR’s, PNM’s, or TNMP’s expectations, projections, estimates, intentions, goals, targets, and strategies are made pursuant to the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements are based upon current expectations and estimates. PNMR, PNM, and TNMP assume no obligation to update this information.
 
Because actual results may differ materially from those expressed or implied by these forward-looking statements, PNMR, PNM, and TNMP caution readers not to place undue reliance on these statements. PNMR’s, PNM’s, and TNMP’s business, financial condition, cash flows, and operating results are influenced by many factors, which are often beyond their control, that can cause actual results to differ from those expressed or implied by the forward-looking statements. These factors include:

The ability of PNM and TNMP to recover costs and earn allowed returns in regulated jurisdictions, including the impacts of the NMPRC orders in PNM’s NM 2015 Rate Case, andthe appeal of that order, the NM 2016 Rate Case appeals of those orders, theand related deferral of the issue of PNM’sthe prudence of continuation ofPNM’s decision to continue participation in Four Corners to PNM’s next general rate case and recovery of PNM’s investments in that plant, and any actions resulting from PNM’s December 2018 Compliance Filing, which indicates PNM intends to retire its share of SJGS in 2022 (subject to future NMPRC approval), including the impacts of the recently signed ETA, and/or the conclusions reached in PNM’s 2017 IRP (collectively, the “Regulatory Proceedings”) and the impact on service levels for PNM customers if the ultimate outcomes do not provide for the recovery of costs of operating and capital expenditures, as well as other impacts of federal or state regulatory and judicial actions
The ability of the Company to successfully forecast and manage its operating and capital expenditures, including aligning expenditures with the revenue levels resulting from the ultimate outcomes in PNM’s NM 2015 Rate Case and NM 2016 Rate Case, including appeals, and TNMP’s rate case anticipated to be filed in May 2018of the Regulatory Proceedings and supporting forecasts utilized in future test year rate proceedings
The impacts onUncertainty regarding what actions PNM may take with respect to the electricity usagegenerating capacity in PVNGS Units 1 and 2 that is under lease at the expiration of customersthe lease terms in 2023 and consumers due to performance2024, or upon the occurrence of state, regional, and national economies, energy efficiency measures, weather, seasonality, alternative sources of power, and other changes in supply and demandcertain specific events, as well as the related treatment for ratemaking purposes by the NMPRC
Uncertainty surrounding the status of PNM’s participation in jointly-owned generation projects, including the 2022 scheduled expiration of the operational and fuel supply agreements for SJGS, as well as the outcome of PNM’s December 2018 required NMPRCCompliance Filing, including the impacts of the recently signed ETA, the results of PNM’s 2017 IRP filing, to determine the extent to which SJGS should continue servingindicates that PNM’s retail customers beyond mid-2022 and any actions resultingwould benefit from PNM’s 2017 IRP,exit from Four Corners in 2031, including regulatory recovery of undepreciated investments in the event the NMPRC orders generating facilities to be retired before currently scheduled
Uncertainty regarding the requirements and related costs of decommissioning power plants and reclamation of coal mines supplying certain power plants, as well as the ability to recover those costs from customers, including the potential impacts of the order in the NM 2015 Rate Case and NM 2016 Rate Case, appeals of those orders, and PNM’s 2017 IRP
Uncertainty regarding what actions PNM may take with respect to the generating capacity in PVNGS Units 1 and 2, which is under lease, at the expirationultimate outcomes of the lease termsRegulatory Proceedings
The impacts on the electricity usage of customers and consumers due to performance of state, regional, and national economies, energy efficiency measures, weather, seasonality, alternative sources of power, advances in 2023technology, and 2024, as well as the related treatment of the NMPRC for ratemaking purposesother changes in supply and demand
The Company’s ability to access the financial markets in order to provide financing to repay or refinance debt as it comes due, as well as for ongoing operations and construction expenditures, including disruptions in the capital or credit markets, actions by ratings agencies, and fluctuations in interest rates, including any negative impacts that could result from the ultimate outcome in PNM’s NM 2015 Rate Caseoutcomes of the Regulatory Proceedings
The risks associated with completion of generation, transmission, distribution, and NM 2016 Rate Case, including appealsother projects
The potential unavailability of cash from PNMR’s subsidiaries due to regulatory, statutory, or contractual restrictions or subsidiary earnings or cash flows

The performance of generating units, transmission systems, and distribution systems, which could be negatively affected by operational issues, fuel quality and supply issues, unplanned outages, extreme weather conditions, wildfires, terrorism, cybersecurity breaches, and other catastrophic events, as well the costs the Company may incur to repair its facilities and/or the liabilities the Company may incur to third parties in connection with such issues
State and federal regulation or legislation relating to environmental matters and renewable energy requirements, the resultant costs of compliance, and other impacts on the operations and economic viability of PNM’s generating plants
State and federal regulatory, legislative, executive, and judicial decisions and actions on ratemaking, tax,and taxes, including pending guidance related to the impacts and related uncertainties of tax reform enacted in 2017,Tax Act, and other matters
Risks related to climate change, including potential financial risks resulting from climate change litigation and legislative and regulatory efforts to limit GHG,
Uncertainty surrounding counterparty credit risk, including financial support provided to facilitate the coal supply and ownership restructuring at SJGS
The performanceimpacts of generating units, transmission systems, and distribution systems, which could be negatively affected by operational issues, fuel quality, unplanned outages, extreme weather conditions, terrorism, cybersecurity breaches, and other catastrophic eventsthe recently signed ETA
Employee workforce factors, including cost control efforts and issues arising out of collective bargaining agreements and labor negotiations with union employees
Variability of prices and volatility and liquidity in the wholesale power and natural gas markets
Changes in price and availability of fuel and water supplies, including the ability of the mines supplying coal to PNM’s coal-fired generating units and the companies involved in supplying nuclear fuel to provide adequate quantities of fuel
The risks associated with completion of generation, transmission, distribution, and other projects
Regulatory, financial, and operational risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainties

The risk that FERC rulemakings or lack of additional capacity during peak hours may negatively impact the operation of PNM’s transmission system
The impacts of decreases in the values of marketable securities maintained in trusts to provide for decommissioning, reclamation, pension benefits, and other postretirement benefits, including potential increased volatility resulting from international developments
Uncertainty surrounding counterparty performance and credit risk, including the ability of counterparties to supply fuel and perform reclamation activities and impacts to financial support provided to facilitate the coal supply at SJGS
The effectiveness of risk management regarding commodity transactions and counterparty risk
The outcome of legal proceedings, including the extent of insurance coverage
Changes in applicable accounting principles or policies

Any material changes to risk factors occurring after the filing of PNMR’s, PNM’s, and TNMP’s 20172018 Annual Reports on Form 10-K are disclosed in Item 1A, Risk Factors, in Part II of this Form 10-Q.

For information about the risks associated with the use of derivative financial instruments, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk.”

SECURITIES ACT DISCLAIMER

Certain securities described or cross-referenced in this report have not been registered under the Securities Act of 1933, as amended, or any state securities laws and may not be reoffered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. This Form 10-Q does not constitute an offer to sell or the solicitation of an offer to buy any securities.

WEBSITES
The PNMR website, www.pnmresources.com, is an important source of Company information. New or updated information for public access is routinely posted.  PNMR encourages analysts, investors, and other interested parties to register on the website to automatically receive Company information by e-mail. This information includes news releases, notices of webcasts, and filings with the SEC. Participants will not receive information that was not requested and can unsubscribe at any time.
Our corporate Internetinternet addresses are:
 
PNMR: www.pnmresources.com
PNM: www.pnm.com
TNMP: www.tnmp.com
 
The PNMR website includes a link to PNMR’s Sustainability Portal, www.pnmresources.com/about-us/sustainability-portal.aspx. This portal provides access to key sustainability information, including a Climate Change Report, related to the operations of PNM and TNMP and reflects PNMR’s commitment to do business in an ethical, open, and transparent manner.manner, and outlines PNM’s plans (subject to NMPRC approval) to exit all coal-fired generation by 2031, reach 70% emissions-free generation by 2032, and reach 100% emissions-free generation by 2040.



The contents of these websites are not a part of this Form 10-Q. The SEC filings of PNMR, PNM, and TNMP, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are accessible free of charge on the PNMR website as soon as reasonably practicable after they are filed with, or furnished to, the SEC. Reports filed with the SEC are available on its website, www.sec.gov. These reports are also available in print upon request from PNMR free of charge.
 
Also available on the Company’s website at http://www.pnmresources.com/corporate-governance.aspx and in print upon request from any shareholder are PNMR’s:
 
Corporate Governance Principles
Code of Ethics (Do the Right Thing – Principles of Business Conduct)
Charters of the Audit and Ethics Committee, Nominating and Governance Committee, Compensation and Human Resources Committee, and Finance Committee
Restated Articles of Incorporation and Bylaws
 
The Company will post amendments to or waivers from its code of ethics (to the extent applicable to the Company’s executive officers and directors) on its website.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages the scope of its various forms of market risk through a comprehensive set of policies and procedures with oversight by senior level management through the RMC.Risk Management Committee (“RMC”). The Board’s Finance Committee sets the risk limit parameters. The RMC has oversight over the risk control organization. The RMC is assigned responsibility for establishing and enforcing the policies, procedures, and limits and evaluating the risks inherent in proposed transactions on an enterprise-wide basis. The RMC’s responsibilities include:

Establishing policies regarding risk exposure levels and activities in each of the business segments
Approving the types of derivatives entered into for hedging
Reviewing and approving hedging risk activities
Establishing policies regarding counterparty exposure and limits
Authorizing and delegating transaction limits
Reviewing and approving controls and procedures for derivative activities
Reviewing and approving models and assumptions used to calculate mark-to-market and market risk exposure
Proposing risk limits to the Board’s Finance Committee for its approval
Reporting to the Board’s Audit and Finance Committees on these activities

To the extent an open position exists, fluctuating commodity prices, interest rates, equity prices, and economic conditions can impact financial results and financial position, either favorably or unfavorably. As a result, the Company cannot predict with certainty the impact that its risk management decisions may have on its businesses, operating results, or financial position.
Commodity Risk
Information concerning accounting for derivatives and the risks associated with commodity contracts is set forth in Note 7, including a summary of the fair values of mark-to-market energy related derivative contracts included in the Condensed Consolidated Balance Sheets. During the three months ended March 31, 20182019 and the year ended December 31, 2017,2018, the Company had no commodity derivative instruments designated as cash flow hedging instruments.
Commodity contracts, other than those that do not meet the definition of a derivative under GAAP, are recorded at fair value on the Condensed Consolidated Balance Sheets. The following table details the changes in the net asset or liability balance sheet position for mark-to-market energy transactions.

Three Months EndedThree Months Ended
March 31,March 31,
2018 20172019 2018
Economic Hedges(In thousands)(In thousands)
Sources of fair value gain (loss):      
Net fair value at beginning of period$(94) $2,885
$(94) $(94)
Amount realized on contracts delivered during period26
 (2,007)28
 26
Changes in fair value2
 3,352
—
 2
Net mark-to-market change recorded in earnings28
 1,345
28
 28
Net change recorded as regulatory assets and liabilities(175) (4)2
 (175)
Net fair value at end of period$(241) $4,226
$(64) $(241)
All of the fair values as of March 31, 20182019 were determined based on prices provided by external sources other than actively quoted market prices. All of theThe net mark-to-market amounts will settle in 2018.2019.

PNM is exposed to changes in the market prices of electricity and natural gas for the positions in its wholesale portfolio not covered by the FPPAC. The Company manages risks associated with these market fluctuations by utilizing various commodity instruments that may qualify as derivatives, including futures, forwards, options, and swaps. PNM uses such instruments to hedge its exposure to changes in the market prices of electricity and natural gas. PNM also uses such instruments under an NMPRC approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC.

Prior to 2018, PNM measured the market risk of its wholesale activities not covered by the FPPAC using a Monte Carlo VaR simulation model to report the possible loss in value from price movements. In January 2018, PNM’s interest in PVNGS Unit 3 became a jurisdictional resource to serve New Mexico Customers and PNM began selling 36 MW of its 65 MW merchant interest in SJGS Unit 4 to a third party at a fixed price. These events significantly reduced PNM’s exposure to commodity risk and, beginning in February 2018, the Company no longer uses VaR as a risk metric. VaR limits were not exceeded during the year ended December 31, 2017.

Credit Risk

The Company is exposed to credit risk from its retail and wholesale customers, as well as the counterparties to derivative instruments. The Company conducts counterparty risk analysis across business segments and uses a credit management process to assess the financial conditions of counterparties. The following table provides information related to credit exposure by the credit worthiness (credit rating) and concentration of credit risk for wholesale counterparties, all of which will mature in less than two years.
Schedule of Credit Risk Exposure
March 31, 2018
Schedule of Credit Risk ExposureSchedule of Credit Risk Exposure
March 31, 2019March 31, 2019
Rating (1)
Credit Risk Exposure(2)
 Number of Counter-parties >10% Net Exposure of Counter-parties >10%
Credit Risk Exposure(2)
 Number of Counter-parties >10% Net Exposure of Counter-parties >10%
(Dollars in thousands)(Dollars in thousands)
External ratings:      
Investment grade$3,141
 1 $1,281
$2,644
 1 $773
Non-investment grade273
 — —
—
 — —
Split ratings130
 — —
—
 — —
Internal ratings:      
Investment grade46
 — —
2,100
 3 1,755
Non-investment grade769
 1 648
—
 — —
Total$4,359
 $1,929
$4,744
 $2,528
(1) 
The rating “Investment Grade” is for counterparties, or a guarantor, with a minimum S&P rating of BBB- or Moody’s rating of Baa3. The category “Internal Ratings – Investment Grade” includes those counterparties that are internally rated as investment grade in accordance with the guidelines established in the Company’s credit policy.

(2) 
The Credit Risk Exposure is the gross credit exposure, including long-term contracts (other than firm-requirements wholesale customers and the Tri-State hazard sharing agreement), forward sales, and short-term sales. The gross exposure captures the amounts from receivables/payables for realized transactions, delivered and unbilled revenues, and mark-to-market gains/losses. Gross exposures can be offset according to legally enforceable netting arrangements but are not reduced by posted credit collateral. At March 31, 2019, PNMR held $0.9 million of cash collateral to offset its credit exposure.

exposure captures the amounts from receivables/payables for realized transactions, delivered and unbilled revenues, and mark-to-market gains/losses. Gross exposures can be offset according to legally enforceable netting arrangements, but are not reduced by posted credit collateral. At March 31, 2018, PNMR held $0.9 million of cash collateral to offset its credit exposure.
Net credit risk for the Company’s largest counterparty as of March 31, 20182019 was $1.3$0.8 million.

As discussed in Note 11, PNMR’s subsidiary, NM Capital, entered into the Westmoreland Loan to facilitate the acquisition of SJCC by WSJ, a subsidiary of Westmoreland, and PNMR has arranged for letters of credit to be issued to support the coal mining operations of SJCC. PNMR is exposed to credit risk under these arrangements in the event of default by WSJ. As of April 23, 2018, remaining required principal payments under the Westmoreland Loan are $2.7 million in 2018, $8.6 million in 2019, $23.3 million in 2020, and $16.4 million in 2021. As of April 23, 2018, $2.7 million was held in a SJCC restricted bank account that will be used solely to make the May 1, 2018 scheduled principal payment of $0.9 million and interest of $1.8 million on the Westmoreland Loan. In addition, the Westmoreland Loan requires that all cash flows of WSJ, in excess of normal operating expenses, capital additions, and operating reserves, be utilized for principal and interest payments under the loan until it is fully repaid. The Westmoreland Loan is secured by the assets of and the equity interests in SJCC. In the event of a default by WSJ, NM Capital would have the ability to foreclose on the equity of WSJ or the assets used in the mining operations, the value of which PNMR believes approximates the amount outstanding under the Westmoreland Loan.  Furthermore, PNMR considers the possibility of loss under the letters of credit to be remote. Accordingly, PNMR does not consider its credit risk under these arrangements to be material. See Note 6.

Other investments have no significant counterparty credit risk.

Interest Rate Risk

The majority of the Company’s long-term debt is fixed-rate debt and does not expose earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of PNMR’s consolidated long-term debt instruments would increase by 1.6%2.4%, or $42.6$72.6 million if interest rates were to decline by 50 basis points from their levels at March 31, 2018.2019. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if all or a portion of debt instruments were acquired in the open market prior to their maturity. At April 23, 2018,May 3, 2019, PNMR, PNM, TNMP, and PNMR Development had short-term debt outstanding of $96.2$55.9 million, none, $40.4zero, $29.2 million, and $24.5$15.1 million under their revolving credit facilities, which allow for a maximum aggregate borrowing capacity of $300.0 million for PNMR, $400.0 million for PNM, $75.0 million for TNMP, and $24.5$25.0 million for PNMR Development. PNM had no borrowings under the $40.0 million PNM 2017 New Mexico Credit Facility at April 23, 2018.May 3, 2019. The revolving credit facilities, the PNM 2017 New Mexico Credit Facility, the $100.0$150.0 million PNMR 20162018 One-Year Term Loan, Agreement (as extended), the $100.0$50.0 million PNMR 20162018 Two-Year Term Loan, Agreement, the $200.0$90.0 million PNMR Development Term Loan, the $250.0 million PNM 20172019 Term Loan, Agreement, and the $125.0$35.0 million BTMUTNMP 2018 Term Loan Agreement bear interest at variable rates. On April 23, 2018,May 3, 2019, interest rates on borrowings averaged 3.15%3.73% for the PNMR Revolving Credit Facility, 4.64% for the BTMU Term Loan Agreement, 2.70%3.23% for the PNMR 20162018 One-Year Term Loan, Agreement, 2.68%3.29% for the PNMR 20162018 Two-Year Term Loan, Agreement, 2.61%3.28% for the PNMR Development Term Loan, 3.14% for the PNM 20172019 Term Loan, Agreement, 2.64%3.23% for the TNMP Revolving Credit Facility, 3.18% for the TNMP 2018 Term Loan, and 2.90%3.48% for the PNMR Development Revolving Credit Facility. The Company is exposed to interest rate risk to the extent of future increases in variable interest rates. However, as discussed in Note 9, PNMR has entered into hedging arrangements to effectively establish fixed interest rates on $150.0 million of variable rate debt.

The investments held by PNM in trusts for decommissioning and reclamation had an estimated fair value of $324.0$351.6 million at March 31, 2018,2019, of which 56.9%62.1% were fixed-rate debt securities that subject PNM to risk of loss of fair value with increases in market interest rates. If interest rates were to increase by 50 basis points from their levels at March 31, 2018,2019, the decrease in the fair value of the fixed-rate securities would be 3.0%2.9%, or $5.5$6.3 million.

PNM does not directly recover or return through rates any losses or gains on the securities, including equity investments discussed below, in the trusts for decommissioning and reclamation. However, the overall performance of these trusts does enter into the periodic determinations of expense and funding levels, which are factored into the rate making process to the extent applicable to regulated operations. However, as described in Note 12, the NMPRC has ruled that PNM would not be able to include future contributions made by PNM for decommissioning of PVNGS, to the extent applicable to certain capacity previously leased by PNM, in rates charged to retail customers. PNM has appealed the NMPRC’s ruling to the NM Supreme Court. PNM is at risk for shortfalls in funding of obligations due to investment losses, including those from the equity market risks discussed below, to the extent not ultimately recovered through rates charged to customers.


Equity Market Risk

The investments held by PNM in trusts for decommissioning and reclamation include certain equity securities at March 31, 2018.2019. These equity securities expose PNM to losses in fair value should the market values of the underlying securities decline. Equity securities comprised 36.1%34.9% of the securities held by the trusts as of March 31, 2018.2019. A hypothetical 10% decrease in equity prices would reduce the fair values of these funds by $11.7$12.3 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of the end of the period covered by this quarterly report, each of PNMR, PNM, and TNMP conducted an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer of each of PNMR, PNM, and TNMP concluded that the disclosure controls and procedures are effective.

Changes in internal controls over financial reporting

There have been no changes in each of PNMR’s, PNM’s, and TNMP’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 20182019 that have materially affected, or are reasonably likely to materially affect, each of PNMR’s, PNM’s, and TNMP’s internal control over financial reporting. PNMR, PNM, and TNMP adopted ASU 2016-02 – Leases (“ASC 842”) effective January 1, 2019. The Company updated certain policies and procedures and implemented a new software system related to the adoption of the new standard. However, the adoption of this standard did not result in significant changes to PNMR’s, PNM’s, and TNMP’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Notes 11 and 12 for information related to the following matters, for PNMR, PNM, and TNMP, incorporated in this item by reference.
Note 11

The Energy Transition Act
The Clean Air Act – Regional Haze – SJGSNEE Complaint
The Clean Air Act – Regional Haze – Four Corners – Four Corners Federal Agency Lawsuit
Navajo Nation Environmental Issues
Santa Fe Generating Station
Coal Supply – Four Corners – Four Corners Coal Supply Arbitration
Continuous Highwall Mining Royalty Rate
PVNGS Water Supply Litigation
San Juan River Adjudication
Rights-of-Way Matter
Navajo Nations Allottee Matters
Sales Tax Audits
Note 12

PNM – New Mexico General Rate Cases
PNM – Renewable Portfolio Standard
PNM – Energy Efficiency and Load Management
PNM – FPPAC Continuation ApplicationPetition for Energy Efficiency Disincentives
PNM – Integrated Resource Plans
PNM – San Juan Generating Station Unit 1 Outage
PNM – Cost Recovery Related to Joining the EIM
PNM – Facebook, Inc. Data Center Project
PNM – Application For a New 345 KV Transmission Line
TNMP – TNMP 2018 Rate Case
TNMP – Order Related to Changes in Federal Income Tax Rates
TNMP – Energy Efficiency



ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes with regard to the Risk Factors disclosed in PNMR’s, PNM’s, and TNMP’s Annual Reports on Form 10-K for the year ended December 31, 2017.2018.

ITEM 6. EXHIBITS
3.1PNMR
Articles of Incorporation of PNMR, as amended to date (incorporated by reference to Exhibit 3.1 to PNMR’s Current Report on Form 8-K filed November 21, 2008)
   
3.2PNM
Restated Articles of Incorporation of PNM, as amended through May 31, 2002 (incorporated by reference to Exhibit 3.1.1 to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)
   
3.3TNMP
Articles of Incorporation of TNMP, as amended through July 7, 2005 (incorporated by reference to Exhibit 3.1.2 to TNMP’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)
   
3.4PNMR
Bylaws of PNMR, with all amendments to and including October 24, 2017 (incorporated by reference to Exhibit 3.1 to PNMR’s Current Report on Form 8-K filed October 25, 2017)
   
3.5PNM
Bylaws of PNM, with all amendments to and including May 31, 2002 (incorporated by reference to Exhibit 3.1.2 to PNM’s Report on Form 10-Q for the fiscal quarter ended June 30, 2002)
   
3.6TNMP
Bylaws of TNMP, with all amendments to and including June 18, 2013 (incorporated by reference to Exhibit 3.6 to TNMP’s Current Report on Form 8-K filed June 20, 2013)
   
4.1TNMP
Tenth Supplemental Indenture dated March 29, 2019 between TNMP and MUFG Union Bank, N.A., as trustee (filed as Exhibit 4.1 to TNMP’s Current Report on Form 8-K filed March 29, 2019)
10.1PNMR
2018PNMR 2019 Officer Annual Incentive Plan dated March 28, 20182019
   
10.2PNMR
2018PNMR 2019 Long-Term Incentive Plan dated March 28, 20182019
   
10.3PNMR
ThirdPNMR First Amendment to PNMR Executive Spending Account2016 Long-Term Incentive Plan effectivedated February 22, 2018 (changing the name of the plan to Executive Choice Account Plan)27, 2019
   
12.110.4PNMR
Ratio of EarningsPNMR First Amendment to Fixed ChargesPNMR 2017 Long-Term Incentive Plan dated February 27, 2019
   
12.210.5PNMPNMR
Ratio of Earnings to Fixed ChargesDiscretionary Credit Award Agreement between PNMR and Charles N. Eldred effective February 21, 2019
   
12.310.6TNMP
RatioTNMP First Amendment to Third Amended and Restated Credit Agreement dated April 19, 2019 among TNMP, the lenders party thereto, and KeyBank National Association, as administrative agent
10.7PNMR
Form of EarningsFirst Amendment to Fixed Chargesthe PNMR Indemnity Agreement executed in March 2019 by PNMR officers
10.8PNM
Term Loan Agreement entered into January 18, 2019 among PNM, the lenders party thereto and U.S. Bank National Association, as administrative agent (filed as Exhibit 10.1 to PNM’s Current Report on Form 8-K filed January 18, 2019)
10.9TNMP
Bond Purchase Agreement dated February 26, 2019 between TNMP and the purchasers named therein (filed as Exhibit 10.3 to PNM’s Annual Report on Form 10-K for the year ended December 31, 2018)
   
31.1PNMR
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2PNMR
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.3PNM
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.4PNM
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.5TNMP
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.6TNMP
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1PNMR
Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2PNM
Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   

32.3TNMP
Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INSPNMR, PNM, and TNMPXBRL Instance Document
   
101.SCHPNMR, PNM, and TNMPXBRL Taxonomy Extension Schema Document
   
101.CALPNMR, PNM, and TNMPXBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEFPNMR, PNM, and TNMPXBRL Taxonomy Extension Definition Linkbase Document
   
101.LABPNMR, PNM, and TNMPXBRL Taxonomy Extension Label Linkbase Document
   
101.PREPNMR, PNM, and TNMPXBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
  
PNM RESOURCES, INC.
PUBLIC SERVICE COMPANY OF NEW MEXICO
TEXAS-NEW MEXICO POWER COMPANY
  (Registrants)
   
   
Date:April 30, 2018May 7, 2019/s/ Joseph D. Tarry
  Joseph D. Tarry
  Vice President, FinanceController and ControllerTreasurer
  (Officer duly authorized to sign this report)

120121