~~RESULTS OF OPERATIONS~~

~~Segment Information~~requirements from mines near the plants. An agreement for coal supply for SJGS, which expires on June 30, 2022, became effective on January 31, 2016. At that same time, an agreement to restructure the ownership in SJGS became effective. The restructuring agreement provided for certain participants in SJGS to exit ownership at December 31, 2017, by which time SJGS Units 2 and 3 were required to be permanently shut down. See Note 16 for a discussion of the restructuring of SJGS ownership. In December 2013, a coal supply arrangement for Four Corners that runs through July 6, 2031 was executed. As described above, Four Corners is situated on land under a lease from the Navajo Nation. Portions of PNM’s interests in PVNGS Units 1 and 2 are held under leases. See Nuclear Plant above and Note 7 regarding PNM’s actions related to these leases.

It is possible that other participants in the joint projects have circumstances and objectives that have changed from those existing at the time of becoming participants. The status of these joint projects is further complicated by the uncertainty surrounding the form of potential legislation and/or regulation of GHG, other air emissions, and CCBs, as well as the impacts of the costs of compliance and operational viability of all or certain units within the joint projects. It is unclear how these factors will enter into discussion and negotiations concerning the status of the joint projects as the expiration of basic operational agreements approaches.

PNM’s 2017 IRP, which was filed on July 3, 2017, indicates 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. See additional discussion of PNM’s 2017 IRP and PNM’s regulatory recovery of certain investments in Four Corners under the NM 2016 Rate Case, in Note 17. PNM can provide no assurance that its participation in the joint projects will continue in the manner that currently exists.

PPAs

In addition to generating its own power, PNM purchases power under long-term PPAs. PNM also purchases power in the forward, day-ahead, and real-time markets.

In 2002, PNM entered into a 25-year agreement to purchase all of the power and RECs generated by New Mexico Wind. PNM began receiving power from the project in June 2003. FPL owns and operates New Mexico Wind, which currently consists of 136 wind-powered turbines having an aggregate capacity of 204 MW on a site in eastern New Mexico. PNM also has a 20-year agreement to purchase energy and RECs from the Lightning Dock Geothermal facility built near Lordsburg, New Mexico. The current capacity of the facility is 4 MW. PNM’s 2018 renewable plan filing, which was approved by the NMPRC on November 15, 2017, included requests to procure an additional 80 GWh in 2019 and 105 GWh in 2020 from a re-powering of New Mexico Wind and an additional 55 GWh in 2019 and 77 GWh in 2020 from a re-powering of Lightning Dock Geothermal. The PPAs now expire in 2044 for New Mexico Wind and 2042 for Lightning Dock Geothermal.

In June 2013, PNM entered into a 20-year PPA with Red Mesa Wind, LLC, a subsidiary of NextEra Energy Resources, LLC, to purchase all of the power and RECs produced by Red Mesa Wind beginning on January 1, 2015. Red Mesa Wind, LLC owns and operates the facility, which consists of 64 wind-powered turbines having an aggregate capacity of 102 MW on a site west of Albuquerque.

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. See Note 17 for details related to purchases and sales. Since PNM purchases and sells approximately the same amount of energy under the hazard sharing agreement, it is not included as a capacity resource in the above table.

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

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Casa Mesa Wind, LLC, a subsidiary of NextEra Energy Resources, LLC., which is expected to be located near House, New Mexico, have a total capacity of 50 MW, and be operational at December 31, 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

A summary of purchased power, excluding Valencia, is as follows:



	Year Ended December 31,
	2017		2016		2015
Purchased under long-term PPAs
MWh	1,574,716		1,211,852		599,562
Cost per MWh	$	29.02	$	28.26	$	22.18
Other purchased power
Total MWh	445,464		502,893		729,895
Cost per MWh	$	31.74	$	27.78	$	28.94

TNMP

TNMP provides only transmission and distribution services and does not sell power.

FUEL AND WATER SUPPLY

PNM

The percentages (on the basis of KWh) of PNM’s generation of electricity, including Valencia, fueled by coal, nuclear fuel, and gas and oil, and the average costs to PNM of those fuels per MMBTU were as follows:



	Coal				Nuclear				Gas and Oil
	Percent of Generation		Average Cost		Percent of Generation		Average Cost		Percent of Generation		Average Cost
2017	56.5	%	$	2.16	31.9	%	$	0.64	9.2	%	$	3.02
2016	54.1	%	$	2.34	31.6	%	$	0.71	11.8	%	$	2.80
2015	53.3	%	$	2.88	32.6	%	$	0.70	12.6	%	$	2.91

In 2017, 2016, and 2015, 2.4%, 2.5%, and 1.5% of PNM’s generation was from utility-owned solar, which has no fuel cost. In December 2017, SJGS Units 2 and 3 were retired and PNM assumed a greater interest in SJGS Unit 4, which results in a lower percentage of PNM’s electric generation capacity being fueled by coal. The generation mix for 2018 is expected to be 44.3% coal, 29.4% nuclear, 23.8% gas and oil, and 2.5% utility-owned solar. Due to locally available natural gas and oil supplies, the utilization of locally available coal deposits, and the generally adequate supply of nuclear fuel, PNM believes that adequate sources of fuel are available for its generating stations into the foreseeable future. See Sources of Power – PNM – PPAs for information concerning the cost of purchased power. PNM recovers substantially all of it fuel and purchased power costs through the FPPAC.

Coal

A coal supply contract for SJGS, which expires on June 30, 2022, became effective on January 31, 2016. Substantially all of the benefits of lower coal pricing under the new contract are being passed through to PNM’s customers under the FPPAC. Coal supply has not been arranged for periods after the existing contract expires. PNM believes there is adequate availability of coal resources to continue to operate SJGS. In 2018 and before entering into a binding agreement for post-2022 coal supply for SJGS, PNM must file its position in a NMPRC case to determine the extent to which SJGS should continue serving PNM’s retail customers’ needs after mid-2022.

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In late December 2013, a fifteen-year coal supply contract for Four Corners, which began in July 2016, was executed. 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 disputed amounts discussed in Note 16. The contract provides for pricing adjustments over its term based on economic indices.

See Note 16 for additional information about PNM’s coal supply. As discussed in Note 17, PNM’s 2017 IRP indicated retiring PNM’s remaining interest in SJGS in 2022 after the expiration of the current operating and coal supply agreements and exiting ownership in Four Corners after the end of its current coal supply agreement in 2031 would provide long-term cost savings to PNM’s customers.

Natural Gas

The natural gas used as fuel for the electric generating plants is procured on the open market and delivered by third party transportation providers. The supply of natural gas can be subject to disruptions due to extreme weather events and/or pipeline or facility outages. PNM has contracted for firm gas transmission capacity to minimize the potential for disruptions due to extreme weather events. Certain of PNM’s natural gas plants are generally used as peaking resources that are highly relied upon during periods of extreme weather, which also may be the times natural gas has the highest demand from other users. It is likely PNM’s reliance on its natural gas generating resources will increase with the December 2017 retirement of SJGS Units 2 and 3, which will increase PNM’s exposure to fluctuations in natural gas prices although substantially all gas costs are recovered through the FPPAC.

Nuclear Fuel and Waste

PNM is one of several participants in PVNGS. The PVNGS participants are continually identifying their future nuclear fuel resource needs and negotiating arrangements to fill those needs. The PVNG participants have contracted for 100% of PVNGS’s requirements for uranium concentrates through 2023 and 50% of its requirements for 2024 and 2025. Additionally, PVNGS has contracts in various phases of negotiation to procure an additional 1.5 years supply of uranium concentrates, which would result in 100% of uranium concentrate requirements being assured through 2026. The PVNGS participants have also contracted for 100% of the requirements for conversion services through 2021 and 46% of its requirements for 2022 through 2025. Additional contracts are being negotiated for 4.3 years supply of conversion services, which would result in 100% of those services being assured through 2027. The PVNGS participants have also contracted for 100% of the requirements for enrichment services through 2020 and 20% of its enrichment services for 2021 through 2026. Additionally, PVNGS has several contracts in negotiation to procure an additional 4.3 years supply of enrichment services, which would result in 100% of those services being assured through 2021, 90% in 2022 and 80% in 2023 through 2026. All of PVNGS’s fuel assembly fabrication services are contracted through 2024.

The Nuclear Waste Policy Act of 1982 required the DOE to begin to accept, transport, and dispose of spent nuclear fuel and high level waste generated by the nation’s nuclear power plants by 1998. The DOE’s obligations are reflected in a contract with each nuclear power plant. The DOE failed to begin accepting spent nuclear fuel by 1998. APS (on behalf of itself and the other PVNGS participants) pursued legal actions for which settlements were reached. See Note 16 for information concerning these actions.

The DOE had planned to meet its disposal obligations by designing, licensing, constructing, and operating a permanent geologic repository at Yucca Mountain, Nevada. In March 2010, the DOE filed a motion to dismiss with prejudice its Yucca Mountain construction authorization application that was pending before the NRC. Several interested parties have intervened in the NRC proceeding. Additionally, a number of interested parties have filed a variety of lawsuits in different jurisdictions around the country challenging the DOE’s authority to withdraw the Yucca Mountain construction authorization application. None of these lawsuits has been conclusively decided by the courts. However, in August 2013, the DC Circuit ordered the NRC to resume its review of the application with available appropriated funds.

On October 16, 2014, the NRC issued Volume 3 of the safety evaluation report developed as part of the Yucca Mountain construction authorization application. This volume addresses repository safety after permanent closure, and its issuance is a key milestone in the Yucca Mountain licensing process. Volume 3 contains the NRC staff’s finding that the DOE’s repository design meets the requirements that apply after the repository is permanently closed, including but not limited to the post-closure performance objectives in NRC’s regulations. On December 18, 2014, the NRC issued Volume 4 of the safety evaluation report developed as part of the Yucca Mountain construction authorization application. This volume covers administrative and programmatic requirements for the repository and documents the staff’s evaluation of whether the DOE’s research and development and performance confirmation programs, as well as other administrative controls and systems, meet applicable NRC requirements. Volume 4 contains the staff’s finding that most administrative and programmatic requirements in NRC regulations are met, except

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for certain requirements relating to ownership of land and water rights. Publication of Volumes 3 and 4 does not signal whether or when the NRC might authorize construction of the repository.

All spent nuclear fuel from PVNGS is being stored on-site. 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 periods, which end in November 2027. Additionally, PVNGS has sufficient capacity at its on-site ISFSI to store a portion of the fuel that will be irradiated during the extended license periods, which end in November 2047. If uncertainties regarding the United States government’s obligation to accept and store spent fuel are not favorably resolved, the PVNGS participants will evaluate alternative storage solutions. These may obviate the need to expand the ISFSI to accommodate all of the fuel that will be irradiated during the extended license periods.

Water Supply

See Note 16 for information about PNM’s water supply.

ENVIRONMENTAL MATTERS

Electric utilities are subject to stringent laws and regulations for protection of the environment by local, state, federal, and tribal authorities. In addition, PVNGS is subject to the jurisdiction of the NRC, which has the authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radioactive hazards and to conduct environmental reviews. The liabilities under these laws and regulations can be material. In some instances, liabilities may be imposed without regard to fault, or may be imposed for past acts, whether or not such acts were lawful at the time they occurred. The construction expenditure projection (Note 14) includes the environmental upgrades at Four Corners discussed in Note 16 of $7.9 million in 2018. See MD&A – Other Issues Facing the Company – Climate Change Issues for information on GHG. In addition, Note 16 contains information related to the following ~~discussion~~matters, incorporated in this item by reference:

PVNGS Decommissioning Funding

Nuclear Spent Fuel and Waste Disposal

Environmental Matters under the caption “The Clean Air Act”

WEG v. OSM NEPA Lawsuit

Navajo Nation Environmental Issues

Cooling Water Intake Structures

Effluent Limitation Guidelines

Santa Fe Generating Station

Environmental Matters under the caption “Coal Combustion Byproducts Waste Disposal”

Environmental Matters under the caption “Coal Supply”

COMPETITION

Regulated utilities are generally not subject to competition from other utilities in areas that are under the jurisdiction of state regulatory commissions. In New Mexico, PNM does not have direct competition for services provided to its retail electric customers. In Texas, TNMP is not currently in any direct retail competition with any other regulated electric utility. However, PNM and TNMP are subject to customer conservation and energy efficiency activities, as well as initiatives to utilize alternative energy sources, including self-generation, or otherwise bypass the PNM and TNMP systems.

PNM is subject to varying degrees of competition in certain territories adjacent to or within the areas it serves. This competition comes from other utilities in its region as well as rural electric cooperatives and municipal utilities. PNM is involved in the generation and sale of electricity into the wholesale market although PNM has decided to stop pursuing wholesale generation contracts. PNM is subject to competition from regional utilities and merchant power suppliers with similar opportunities to generate and sell energy at market-based prices and larger trading entities that do not own or operate generating assets.

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EMPLOYEES

The following table sets forth the number of employees of PNMR, PNM, and TNMP as of December 31, 2017:



	PNMR	PNM	TNMP
Corporate ⁽¹⁾	396	—	—
PNM	938	938	—
TNMP	365	—	365
Total	1,699	938	365

(1)Represents employees of PNMR Services Company.

As of December 31, 2017, PNM had 495 employees in its power plant and operations areas that are currently covered by a collective bargaining agreement with the IBEW Local 611 that is in effect through April 30, 2020. As of December 31, 2017, TNMP had 198 employees represented by IBEW Local 66 covered by a collective bargaining agreement that is in effect through August 31, 2019. The wages and benefits for PNM and TNMP employees who are members of the IBEW are typically included in the rates charged to electric customers and consumers, subject to approval of the NMPRC and PUCT.

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 and NM 2016 Rate Case, appeals of those orders, the deferral of the issue of PNM’s prudence of continuation of participation in Four Corners to PNM’s next rate case and recovery of PNM’s investments in that plant, and any actions resulting from PNM’s 2017 IRP 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 2018 and supporting forecasts utilized in future test year rate 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, and other changes in supply and demand

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 2018 required NMPRC filing to determine the extent to which SJGS should continue serving PNM’s retail customers beyond mid-2022 and any actions resulting from PNM’s 2017 IRP, including regulatory recovery of undepreciated investments in the event the NMPRC orders generating facilities to be retired before currently estimated

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 expiration of the lease terms in 2023 and 2024, as well as the related treatment of the NMPRC for ratemaking purposes

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 Case and NM 2016 Rate Case, including appeals

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The potential unavailability of cash from PNMR’s subsidiaries due to regulatory, statutory, or contractual restrictions or subsidiary earnings or cash flows

State and federal regulation or legislation relating to environmental matters, 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, including the impacts and related uncertainties of tax reform enacted in 2017, 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 performance 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 events

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

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

For information about the risks associated with the use of derivative financial instruments see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

SECURITIES ACT DISCLAIMER

Certain securities described 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-K does not constitute an offer to sell or the solicitation of an offer to buy any securities.

ITEM 1A.RISK FACTORS

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

Regulatory Factors

The profitability of PNMR’s utilities depends on being able to recover their costs through regulated rates and earn a fair return on invested capital, including investments in its generating plants. PNM and TNMP are in a period of significant capital expenditures, including costs of replacing generating capacity as coal-fired plants are retired. While increased capital investments and other costs are placing upward pressure on rates, energy efficiency initiatives and a sluggish New Mexico economy are reducing usage by customers.

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The rates PNM charges its customers are regulated by the NMPRC and FERC. TNMP is regulated by the PUCT. The Company is in a period requiring significant capital investment and is projecting total construction expenditures for the years 2018-2022 to be $2,712.1 million. See Note 14. PNM and TNMP anticipate a trend toward increasing costs, for which it will have to seek regulatory recovery. These costs include or are related to:

Costs of asset construction for generation, transmission, and distribution systems necessary to provide electric service, including new generation and transmission resources, as well as the cost to remove and retire existing assets

Environmental compliance expenditures

The regulatory mandate to acquire power from renewable resources

Increased regulation related to nuclear safety

Increased interest costs to finance capital investments

Depreciation

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

Changing customer behaviors, including increased emphasis on energy efficiency measures and utilization of alternative sources of power

Rate design that is not driven by economics, which could influence customer behavior

Unfavorable economic conditions

Reductions in costs of self-generation energy resources and energy efficiency technology

Reduced new sources of demand

Unpredictable weather patterns

In 2017 and 2016, PNM experienced decreases in weather-normalized retail sales of 0.9% and 0.7%. The sales decreases reflect a continued sluggish economy in New Mexico. However, economic conditions in Albuquerque appear to have stabilized. The Albuquerque metro area is showing employment growth, although it continues to be lower than the national average. The economy in New Mexico continues to have mixed indicators and experience softness.

The combination of costs increasing relatively rapidly and the slowing of customer usage places upward pressure on the per unit prices that must be charged to recover costs. This upward pressure on unit prices could result in additional efforts by customers to reduce consumption through energy efficiency or to pursue self-generation or other alternative sources of power. Without timely cost recovery and the authorization to earn a reasonable return on invested capital, the Company’s liquidity and results of operations could be negatively impacted.

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

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

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

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including the shutdown of Units 2 and 3 of SJGS, recovery of 50% of the net book value of those units, and the inclusion in retail rates of PVNGS Unit 3 as replacement power (Note 16). The requested increase also reflected new infrastructure investments, including the installation of SCRs at Four Corners, and declines in forecasted energy sales as a result of PNM’s successful energy efficiency programs and other economic factors. PNM also proposed changes in rate design to better align electric rates with the actual costs to serve customers and encourage continued energy efficiency while proposing a rate mechanism that eliminates the disincentives associated with energy efficiency and load management ~~uses~~programs. On May 23, 2017, PNM and several signatories filed a revised comprehensive stipulation, which reduced the non-fuel revenue increase to $62.3 million and provided that PNM would only earn a debt return on its investments in SCR technology at Four Corners. In January 2018, the NMPRC issued an order, which approved many aspects of the revised comprehensive stipulation with several modifications. These modifications include a requirement for ~~making~~PNM to reflect the impacts of recently enacted federal tax reform in rates beginning in 2018, a disallowance of 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 additional capital improvements at Four Corners, and a requirement that PNM reduce the $62.3 million non-fuel revenue requested increase by $4.4 million. The NMPRC deferred further consideration regarding the prudency of PNM’s continuation of participation in Four Corners to PNM’s next rate case. 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.

As discussed in Note 17, PNM filed its 2017 IRP on July 3, 2017. Key findings of the 2017 IRP include that retiring PNM’s share of SJGS in 2022 after the expiration of the current operating ~~decisions~~ and ~~assessing performance~~coal supply agreements would provide long-term cost savings for PNM’s customers and that 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. 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. NMPRC approval of new generation resources through CCN filings would also be required. The NMPRC has issued regulatory orders requiring depreciation (and resultant regulatory recovery) of significant portions of these resources through estimated lives of 2053 for SJGS and 2041 for Four Corners. If the NMPRC approves the retirement of SJGS in 2022 and exiting Four Corners in 2031, PNM will have significant un-recovered investments in those plants. PNM would seek NMPRC approval to recover those investments from ratepayers. At December 31, 2017, the net book values of PNM’s investments in SJGS and Four Corners were $406.7 million and $165.3 million.

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

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

PNM’s regulatory approvals from the NMPRC, which are necessary for PNM to comply with the regional haze requirements of the CAA pertaining to SJGS, have been appealed to the NM Supreme Court. Furthermore, the NMPRC approval requires PNM to make a filing in 2018 to determine the extent to which SJGS should continue to serve PNM’s retail customers after June 30, 2022, on which date the SJPPA and the current coal supply agreement will expire. PNMR has counterparty credit risk in connection with financial support provided to facilitate the coal supply arrangement for SJGS. Adverse developments from these factors could have a negative impact on the business, ~~activities. See~~financial condition, results of operations, and cash flows of PNM and PNMR.

SJGS, which currently comprises 26.7% of PNM’s owned and leased generation capacity and is its largest generation resource, is subject to the CAA. As discussed in Note 16, in December 2015, the NMPRC approved a plan enabling SJGS to comply with the CAA (the “BART Approval”). The plan required the shutdown of SJGS Units 2 ~~for more information~~and 3 by December 31, 2017 and the shutdown was completed by that date. NEE, an intervenor in the NMPRC proceeding regarding the approval of the plan, has appealed the BART Approval to the NM Supreme Court. NEE has also filed a complaint with the NMPRC against PNM regarding the financing provided by NM Capital, a subsidiary of PNMR, to facilitate the sale of SJCC, which is discussed below and described under Coal Supply in Note 16. The complaint alleges that PNM failed to comply with its discovery obligation in

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the SJGS abandonment case and requests the NMPRC to investigate whether the financing transactions could adversely affect PNM’s ability to provide electric service to its retail customers. The NMPRC has taken no action on ~~PNMR’s operating segments.~~this matter. If the NM Supreme Court were to negate the BART Approval, it is unclear what the impact would be since SJGS Units 2 and 3 have been retired and ownership of SJGS has been restructured.

The BART Approval also requires PNM to make a filing with the NMPRC no later than December 31, 2018, and before entering into an agreement for post-2022 coal supply for SJGS, setting forth its position in a case to determine the extent to which SJGS should continue serving PNM’s retail customers’ needs after mid-2022. The existing SJPPA among the SJGS participants, which governs the operations of SJGS, expires on July 1, 2022 and the new SJGS CSA for coal supply at SJGS described in Note 16 expires on June 30, 2022. PNM has 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, PNM must give written notice of that intent to the miner by July 1, 2018 and the parties must agree to the terms of the extension by January 1, 2019.

As discussed in Note 17, PNM’s 2017 IRP indicates that retiring PNM’s share of SJGS in 2022 after the expiration of the current operating and coal supply agreements and exiting ownership in Four Corners after the current coal supply agreement expires in 2031 would provide long-term cost savings for PNM’s customers. The 2017 IRP addresses a 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 ~~discussion~~its filing.

The restructuring of SJGS ownership and obtaining the new coal supply for SJGS were integral components of the process to achieve compliance with the CAA at SJGS. 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. In support of the closing of the mine purchase, NM Capital provided a loan of $125.0 million to the purchaser, which has been organized to be a bankruptcy-remote entity. In addition, PNMR has an arrangement with a bank under which the bank has issued $30.3 million of letters of credit in favor of sureties in order for the sureties to post reclamation bonds that are required under the mine’s operating permit. See Note 6 and Note 16.

The inability to operate SJGS or Four Corners or their early retirement would require approval of the NMPRC and would require PNM to obtain power from other sources in order to serve the needs of its customers. There can be no assurance that the NMPRC would approve early retirement or that recovery of any undepreciated investments through rates charged to customers would be authorized. In addition, there can be no assurance that adequate sources of replacement power would be available, that adequate transmission capabilities would be available to bring that power into PNM’s service territory, or whether the cost of obtaining those resources would be economic. Any such events would negatively impact PNM’s financial position, results of operation, and cash flows unless the NMPRC authorized the collection from customers of any un-recovered costs related to SJGS and Four Corners, as well as costs of obtaining replacement power.

It is also possible that unsatisfactory outcomes of these matters, the financial impact of climate change regulation or legislation, other environmental regulations, the result of litigation, the adequacy and timeliness of cost recovery mechanisms, and other business considerations, could jeopardize the economic viability of SJGS and/or Four Corners or the ability of individual participants to continue participation in them.

PNMR’s utilities are subject to numerous federal, state, and local environmental laws and regulations, including those related to climate change, which may impose significant compliance costs and may significantly limit or affect their operations and financial results.

Environmental policies and regulations remain significant concerns for PNMR. Compliance with federal, state, and local environmental laws and regulations, including those addressing climate change, air quality, CCBs, discharges of wastewater originating from fly ash and bottom ash handling facilities, cooling water, and other matters, may result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emission obligations. These costs could include remediation, containment, civil liability, and monitoring expenses. The Company cannot predict how it would be affected if existing environmental laws and regulations were to be repealed, revised, or reinterpreted, or if new environmental statutes and rules were to be adopted. See Note 16 and the Climate Change Issues subsection of the Other Issues Facing the Company section of MD&A.

Under the Obama Administration, EPA’s Clean Power Plan mandated standards of performance that would limit carbon dioxide emissions from existing power plants. Individual states would develop and implement plans to ensure compliance with the proposed standards. Currently, the Clean Power Plan is stayed and under review. The Trump Administration has also proposed to repeal the Clean Power Plan and is considering a possible replacement rule. In addition, on June 1, 2017, President Trump announced that the United States would withdraw from the Paris Agreement. Therefore, PNMR is dealing with an uncertain regulatory and policy environment. While EPA and other federal agencies may be seeking to reduce climate change regulations,

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some state agencies, environmental advocacy groups, and other organizations have been focusing considerable attention on GHG from power generation facilities. PNM currently depends on fossil-fueled generation for a significant portion of its electricity. As discussed under Climate Change Issues, this type of generation could be subject to future EPA or state regulations requiring GHG reductions. This includes new, existing, and modified or reconstructed EGUs. The uncertainty regarding climate change regulation presents challenges and represents a possible shift of greater authority to the states to make decisions and issue and enforce regulations. Federal and/or state regulations could result in additional operating restrictions on facilities and increased generation and compliance costs.

CCBs from the operation of SJGS are currently being used in the reclamation of a surface coal mine. These CCBs consist of fly ash, bottom ash, and gypsum. Any new regulation that would affect the reclamation process, including mine use of CCBs being classified as hazardous waste, could significantly increase the costs of the disposal of CCBs and the costs of mine reclamation. See Note 16.

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

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

PNMR, PNM, and TNMP are subject to complex government regulation unrelated to the environment, which may have a negative impact on their businesses, financial position and results of operations.

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

Operational Factors

Customer electricity usage could be reduced by increases in prices charged and other factors. This could result in underutilization of PNM’s generating capacity, as well as underutilization of the capacities of PNM’s and TNMP’s transmission and distribution systems. Should this occur, operating and capital costs might not be fully recovered, and financial performance could be negatively impacted.

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

Rates charged by PNM and TNMP

Rates charged by REPs utilizing TNMP’s facilities to deliver power

Energy efficiency initiatives

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Availability and cost of alternative sources of power

National, regional, or local economic conditions

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

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

Federally-mandated base closures or significant curtailment of the activities at the bases or national laboratories

Closure of industrial facilities or significant curtailment of their activities

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

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

Advances in technology could make electric generating facilities less competitive.

Research and development activities are ongoing for new technologies that produce power or reduce power consumption. These technologies include renewable energy, customer-oriented generation, energy storage, and energy efficiency. PNM generates power at central station power plants to achieve economies of scale and produce power at a cost that is competitive with rates established through the regulatory process. There are distributed generation technologies that produce power, including fuel cells, microturbines, wind turbines, and solar cells, which have become increasingly cost competitive. It is possible that advances in technology will continue to reduce the costs of these alternative methods of producing power to a level that is competitive with that of central station power production. Advances in the capabilities for energy storage could also have impacts on power production by PNM as it would be increasingly simple to reduce peak usage by dispatching battery systems. This could result in demand reduction that could negatively impact revenue and/or result in underutilized assets that had been built to serve peak usage. If these technologies become cost competitive and achieve economies of scale, PNM’s energy sales could be eroded, and the value of its generating facilities could be reduced. Advances in technology could also change the channels through which electric customers purchase or use power, which could reduce the Company’s sales and revenues or increase expenses. These advances can also create more uncertainty in load shapes and forecasts, which could have implications for generation and system planning.

Costs of decommissioning, remediation, and restoration of nuclear and fossil-fueled power plants, as well as reclamation of related coal mines, could exceed the estimates of PNMR and PNM as well as the amounts PNM recovers from its ratepayers, which could negatively impact results of operations and liquidity.

PNM has interests in a nuclear power plant, two coal-fired power plants, and several natural gas-fired power plants. PNM is obligated to pay for the costs of decommissioning its share of the power plants. PNM is also obligated to pay for its share of the costs of reclamation of the mines that supply coal to the coal-fired power plants. Likewise, other owners or participants are responsible for their shares of the decommissioning and reclamation obligations and it is important to PNM that those parties fulfill their obligations. Rates charged by PNM to its customers, as approved by the NMPRC, include a provision for recovery of certain costs of decommissioning, remediation, reclamation, and restoration. The NMPRC has established a cap on the amount of costs for the final reclamation of the surface coal mines that may be recovered from customers. PNM records estimated liabilities for its share of the legal obligations for decommissioning and reclamation in accordance with GAAP. These estimates include many assumptions about future events and are inherently imprecise. As discussed in Note 17, PNM’s 2017 IRP indicates that retiring PNM’s share of SJGS in 2022 and exiting PNM’s ownership interest in Four Corners in 2031 would provide long-term cost savings for customers. Should those events occur, the costs of reclamation for the coal mines serving those plants would increase and the increases could be significant. In the event any of these costs exceed current estimates, results of operations could be negatively impacted unless the NMPRC authorizes recovery of the additional costs from ratepayers. In addition, the NMPRC’s order in the NM 2015 Rate Case (Note 17) disallows recovery of future contributions for the decommissioning of certain portions of PVNGS. PNM has appealed the NMPRC decision in the NM 2015 Rate Case, oral argument has been held, and the appeal is

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pending before the NM Supreme Court. An adverse outcome of the appeal could negatively impact PNM’s future results of operations, cash flows, and liquidity.

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

The financial performance of PNMR, PNM, and TNMP may be adversely affected if power plants and transmission and distribution systems do not operate reliably and efficiently.

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

PNMR, PNM, and TNMP are subject to information security breaches and risks of unauthorized access to their information and operational technology systems as well as physical threats to assets.

The Company faces the risk of physical and cybersecurity attacks, both threatened and actual, against generation facilities, transmission and distribution infrastructure used to transport power, information technology systems, and network infrastructure, which could negatively impact the ability of the Company to generate, transport, and deliver power, or otherwise operate facilities in the most efficient manner or at all.

The utility industry in which the Company operates is a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure, some of which are deemed to be critical infrastructure under NERC guidelines. Certain of the Company’s systems are interconnected with external networks. In the regular course of business, the utilities handle a range of sensitive security and customer information. PNM and TNMP are subject to the rules of various agencies concerning safeguarding and maintaining the confidentiality of this information. Despite steps the Company may take to detect, mitigate and/or eliminate cybersecurity threats and respond to data security incidents, the techniques used by those who wish to obtain unauthorized access, and possibly disable or sabotage systems and/or abscond with confidential information and data, change frequently and the Company may not be able to protect against such actions.

In the event a party desires to disrupt the bulk power or transmission systems in the United States, the Company’s computer and operating systems could be subject to physical or cybersecurity attack. Although the Company has implemented security measures, critical infrastructure, including information and operational technology systems, are vulnerable to disability, failures, or unauthorized access, which could occur as a result of malicious compromise, employee error, and/or employee misconduct. A successful physical or cybersecurity attack or other similar failure of the systems could impact the reliability of PNM’s generation and PNM’s and TNMP’s transmission and distribution systems, including the possible unauthorized shutdown of facilities. Such an event could lead to significant disruptions of business operations, including the Company’s ability to generate, transport, and deliver power to serve customers, to bill customers, and to process other financial information. Moreover, a breach of the Company’s information technology systems could also lead to the loss and destruction of confidential and proprietary data, customer and employee data (which may include personally identifiable information such as names, addresses, phone numbers, email addresses

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and payment account information), trade secrets, intellectual property and supplier data, and could disrupt business operations which could harm the Company’s reputation and financial results, as well as potential increased regulatory oversight, litigation, fines, and other remedial action. The costs incurred to investigate and remediate a physical or cybersecurity attack could be significant. A physical or cybersecurity attack on the Company’s critical infrastructure could have a material adverse impact on the operations and financial condition of PNMR, PNM, and TNMP.

There are inherent risks in the ownership and operation of nuclear facilities.

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

The ability to obtain adequate supplies of nuclear fuel and water

The ability to dispose of spent nuclear fuel

Decommissioning of the plant (see above)

Securing the facilities against possible terrorist attacks

Unscheduled outages due to equipment failures

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

In the event of noncompliance with its requirements, the NRC has the authority to impose a progressively increasing inspection regime that could ultimately result in the shutdown of a unit, civil penalties, or both, depending upon the NRC’s assessment of the severity of the situation, until compliance is achieved. Increased costs resulting from penalties, a heightened level of scrutiny, and/or implementation of plans to achieve compliance with NRC requirements could adversely affect the financial condition, results of operations, and cash flows of PNMR and PNM. Although PNM has no reason to anticipate a serious nuclear incident at PVNGS, if an incident did occur, it could materially and adversely affect PNM’s results of operations and financial condition.

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

Demand for power could exceed supply capacity, resulting in increased costs for purchasing capacity in the open market or building additional generation facilities.

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

General Economic and Weather Factors

General economic conditions of the nation and/or specific areas can affect the Company’s customers and suppliers. Economic recession or downturn may result in decreased consumption by customers and increased bad debt expense, and could also negatively impact suppliers, all of which could negatively impact the Company.

Economic activity in the service territories of PNMR subsidiaries is a key factor in their performance. Decreased economic activity can lead to declines in energy consumption, which could adversely affect future revenues, earnings, and growth. Higher unemployment rates, both in the Company’s service territories and nationwide, could result in commercial customers ceasing operations and lower levels of income for residential customers. These customers might then be unable to pay their bills on time,

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which could increase bad debt expense and negatively impact results of operations and cash flows. Economic conditions also impact the supply and/or cost of commodities and materials needed to construct or acquire utility assets or make necessary repairs.

Uncertainties regarding the impacts and implementation of recent United States tax reform legislation may negatively impact PNMR’s, PNM’s, and TNMP’s businesses, financial position, results of operations, and cash flows.

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”). Among other things, the Tax Act reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018, eliminates federal bonus depreciation for utilities effective September 28, 2017, and, effective January 1, 2018, limits interest deductibility for non-utility businesses and limits the deductibility of certain officer compensation. In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which provides guidance 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.

In accordance with GAAP, the Company adjusted its deferred tax assets and liabilities as of December 31, 2017 resulting in increases in regulatory liabilities related to adjustments of net deferred tax liabilities associated with regulated activities, which will be returned to PNM’s and TNMP’s ratepayers over time, and increases in income tax expense related to adjustments of net deferred tax assets related to items excluded from regulated activities. The Company believes it has made reasonable estimates of the effects of the Tax Act as of December 31, 2017 and reflected the impacts in the Consolidated Financial Statements.

The Company currently believes that the impacts of the Tax Act will not significantly impact the future earnings of regulated activities due to the ratemaking process. However, cash flows will be reduced in the near term due to less cash being received from customer billings as the benefits of the reduced corporate income tax are passed on to ratepayers, but without a corresponding reduction in income taxes paid due to the Company having a net operating loss carryforward for income taxes purposes. In addition, the income tax benefit of net losses for the unregulated activities of PNMR, primarily interest expense on holding company debt, will be negatively impacted by the reduced rate. Furthermore, there is uncertainty regarding the interpretation of the provision of the Tax Act that limits the deductibility of interest for non-utility businesses under the interest expense allocation methodology that is generally used by the utility industry.

It is possible that changes to U.S. 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 the estimates of the impacts recorded as of December 31, 2017 to change or cause the Company’s current assessment of future impacts to change. Any such change could adversely affect the Company’s financial position, results of operations, and cash flows.

The operating results of PNMR and its operating subsidiaries fluctuate on a seasonal and quarterly basis, as well as being affected by weather conditions, including regional drought.

Electric generation, transmission, and distribution are generally seasonal businesses that vary with the demand for power. With power consumption typically peaking during the hot summer months, revenues traditionally peak during that period. As a result, quarterly operating results of PNMR and its operating subsidiaries vary throughout the year. In addition, PNMR and its operating subsidiaries have historically had lower revenues resulting in lower earnings when weather conditions are milder. Unusually mild weather in the future could reduce the revenues, net earnings, and cash flows of the Company.

Drought conditions in New Mexico, especially in the “four corners” region, where SJGS and Four Corners are located, may affect the water supply for PNM’s generating plants. If inadequate precipitation occurs in the watershed that supplies that region, PNM may have to decrease generation at these plants. This would require PNM to purchase power to serve customers and/or reduce the ability to sell excess power on the wholesale market and reduce revenues. Drought conditions or actions taken by the court system, regulators, or legislators could limit PNM’s supply of water, which would adversely impact PNM’s business. Although SJGS and Four Corners participate in voluntary shortage sharing agreements with tribes and other water users in the “four corners” region, PNM cannot be certain these contracts will be enforceable in the event of a major drought or that it will be able to renew these contracts in the future.

TNMP’s service areas are exposed to extreme weather, including high winds, drought, flooding, ice storms, and periodic hurricanes. Extreme weather conditions, particularly high winds and severe thunderstorms, also occur periodically in PNM’s service areas. These severe weather events can physically damage facilities owned by TNMP and PNM. Any such occurrence both disrupts the ability to deliver energy and increases costs. Extreme weather can also reduce customers’ usage and demand for energy. These factors could negatively impact results of operations and cash flows.

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Financial Factors

PNMR may be unable to meet its ongoing and future financial obligations and to pay dividends on its common stock if its subsidiaries are unable to pay dividends or distributions to PNMR.

PNMR is a holding company and has no operations of its own. PNMR’s ability to meet its financial obligations and to pay dividends on its common stock primarily depends on the net income and cash flows of PNM and TNMP and their capacity to pay upstream dividends or distributions. Prior to providing funds to PNMR, PNM and TNMP have financial and regulatory obligations that must be satisfied, including among others, debt service and, in the case of PNM, preferred stock dividends.

The NMPRC has placed certain restrictions on the ability of PNM to pay dividends to PNMR, including that PNM cannot pay dividends that cause its debt rating to fall below investment grade. The NMPRC has also restricted PNM from paying dividends in any year, as determined on a rolling four-quarter basis, in excess of net earnings without prior NMPRC approval. PNM is permitted to pay dividends to PNMR from prior equity contributions made by PNMR. Additionally, the Company’s financing agreements generally include a covenant to maintain a debt-to-capital ratio that does not exceed 65%, PNM has various financial covenants that limit the transfer of assets, through dividends or other means and the Federal Power Act imposes certain restrictions on dividends paid by public utilities, including that dividends cannot be paid from paid-in capital.

Further, the ability of PNMR to declare dividends depends upon:

The extent to which cash flows will support dividends

The Company’s financial circumstances and performance

Decisions of the NMPRC and PUCT in various regulatory cases currently pending or that may be docketed in the future, including the outcome of appeals of those decisions

Conditions imposed by the NMPRC, PUCT, or Federal Power Act

The effect of federal regulatory decisions and legislative acts

Economic conditions in the United States and in the Company’s service areas

Future growth plans and the related capital requirements

Other business considerations

Disruption in the credit and capital markets may impact the Company’s strategy and ability to raise capital.

As discussed in MD&A – Liquidity and Capital Resources, PNMR and its subsidiaries rely on access to both short-term and longer-term capital markets as sources of liquidity for any capital requirements not satisfied by cash flow from operations. In general, the Company relies on its short-term credit facilities as the initial source to finance construction expenditures. This results in increased borrowings under the facilities over time. The Company is currently projecting total construction expenditures for the years 2018-2022 to be $2,712.1 million. If PNMR or its operating subsidiaries are not able to access capital at competitive rates, or at all, PNMR’s ability to finance capital requirements and implement its strategy will be limited. Disruptions in the credit markets, which could negatively impact the Company’s access to capital, could be caused by:

An economic recession

Declines in the health of the banking sector generally, or the failure of specific banks who are parties to the Company’s credit facilities

Deterioration in the overall health of the utility industry

The bankruptcy of an unrelated energy company

War, terrorist attacks, or cybersecurity attacks, or threatened attacks

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

Reduction in credit ratings or changing rating agency requirements could materially and adversely affect the Company’s growth, strategy, business, financial position, results of operations, and liquidity.

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PNMR, PNM, and TNMP cannot be sure that any of their current credit ratings will remain in effect for any given period of time or that a rating will not be put under review for a downgrade, lowered, or withdrawn entirely by a rating agency. On January 16, 2018, S&P changed the outlook for PNMR, PNM and TNMP from stable to negative while affirming the investment grade ratings of each entity. Downgrades or changing requirements could result in increased borrowing costs due to higher interest rates on current borrowings or future financings, a smaller potential pool of investors, and decreased funding sources. Such conditions also could require the provision of additional support in the form of letters of credit and cash or other collateral to various counterparties.

Declines in values of marketable securities held in trust funds for pension and other postretirement benefits and in the NDT and mine reclamation trusts could result in sustained increases in costs and funding requirements for those obligations, which may affect operational results.

Through 2017, the Company targeted 21% of its pension trust funds and 70% of its trust funds for other postretirement benefits to be invested in marketable equity securities. Historically, over one-half of funds held in the NDT and mine reclamation trusts have been invested in marketable equity securities. Due to the current funded status of the NDT and recent overall market performance, PNM began re-balancing the NDT investment portfolio with a target of 85% fixed income (debt) securities. The re-balancing was completed in January 2018 and increases the exposure of the NDT investment portfolio to interest rate risk. The Company is also contemplating decreasing its allocation target beginning in 2018 for liability matching fixed-income securities in the pension trusts from 65% to 50%. Declines in market values could result in increased funding of the trusts, the recognition of losses as impairments for the NDT and mine reclamation trusts, and additional expense for the benefit plans. In addition, a change in GAAP requires that all changes in the fair value of equity securities recorded on the Company’s balance sheet be reflected in earnings beginning in 2018, which could result in increased volatility in earnings.

Impairments of goodwill and long-lived assets of PNMR, PNM, and TNMP could adversely affect the Company’s business, financial position, liquidity, and results of operations.

The Company annually evaluates recorded goodwill for impairment. See Note 18 and the Critical Accounting Policies and Estimates section of MD&A. Long-lived assets are also assessed whenever indicators of impairment exist. Factors that affect the long-term value of these assets, including treatment by regulators in ratemaking proceedings, as well as other economic and market conditions, could result in impairments. Significant impairments could adversely affect the Company’s business, financial position, liquidity, and results of operations.

PNM’s PVNGS leases describe certain events, including “Events of Loss” and “Deemed Loss Events”, the occurrence of which could require PNM to take ownership of the underlying assets and pay the lessors for the assets.

The “Events of Loss” generally relate to casualties, accidents, and other events at PVNGS, including the occurrence of specified nuclear events, which would severely adversely affect the ability of the operating agent, APS, to operate, and the ability of PNM to earn a return on its interests in PVNGS. The “Deemed Loss Events” consist primarily of legal and regulatory changes (such as issuance by the NRC of specified violation orders, changes in law making the sale and leaseback transactions illegal, or changes in law making the lessors liable for nuclear decommissioning obligations). PNM believes that the probability of such “Events of Loss” or “Deemed Loss Events” occurring is remote for the following reasons: (1) to a large extent, prevention of “Events of Loss” and some “Deemed Loss Events” is within the control of the PVNGS participants through the general PVNGS operational and safety oversight process; and (2) other “Deemed Loss Events” would involve a significant change in current law and policy. PNM is unaware of any proposals pending or being considered for introduction in Congress, or in any state legislative or regulatory body that, if adopted, would cause any of those events. See Note 7.

Governance Factors

Provisions of PNMR’s organizational documents, as well as several other statutory and regulatory factors, will limit another party’s ability to acquire PNMR and could deprive PNMR’s shareholders of the opportunity to receive a takeover premium for shares of PNMR’s common stock.

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

Authorization for the Board to issue PNMR’s preferred stock in series and to fix rights and preferences of the series (including, among other things, voting rights and preferences with respect to dividends and other matters)

Advance notice procedures with respect to any proposal other than those adopted or recommended by the Board

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Provisions specifying that only a majority of the Board, the chairman of the Board, the chief executive officer, or holders of at least one-tenth of all of PNMR’s shares entitled to vote may call a special meeting of stockholders

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


ITEM 1B.	UNRESOLVED STAFF COMMENTS

None.


ITEM 2.	PROPERTIES

PNMR

The significant properties owned by PNMR include those owned by PNM and TNMP and are disclosed below.

PNM

See Sources of Power in Part I, Item. 1 Business above for information on PNM’s owned and leased capacity in electric generating stations. As of December 31, 2017, PNM owned, or jointly owned, 3,200 miles of electric transmission lines, 6,063 miles of distribution overhead lines, 5,828 miles of underground distribution lines (excluding street lighting), and 254 substations. PNM’s electric transmission and distribution lines are generally located within easements and rights-of-way on public, private, and Native American lands. PNM owns and leases interests in PVNGS Units 1 and 2 and related property, data processing, communication, office and other equipment, office space, vehicles, and real estate. PNM also owns and leases service and office facilities in Albuquerque and in other areas throughout its service territory. See Note 7 for additional information concerning leases, including PNM’s renewal of certain of the PVNGS leases and exercise of its option to purchase the assets underlying certain other leases at the expiration of the original lease terms. See Note 9 for additional information about Valencia.

TNMP

TNMP’s facilities consist primarily of transmission and distribution facilities located in its service areas. TNMP also owns and leases vehicles, service facilities, and office locations throughout its service territory. As of December 31, 2017, TNMP owned 978 miles of overhead electric transmission lines, 7,119 miles of overhead distribution lines, 1,241 miles of underground distribution lines, and 116 substations. Substantially all of TNMP’s property is pledged to secure its first mortgage bonds. See Note 6.

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ITEM 3.	LEGAL PROCEEDINGS

See Note 16 and Note 17 for information related to the following matters for PNMR, PNM, and TNMP, incorporated in this item by reference.

Note 16

The Clean Air Act – Regional Haze – SJGS

The Clean Air Act – Regional Haze – Four Corners – Four Corners Federal Agency Lawsuit

WEG v. OSM NEPA 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 Nation Allottee Matters

Sales Tax Audits

Note 17

PNM – New Mexico General Rate Cases

PNM – Renewable Portfolio Standard

PNM – Renewable Energy Rider

PNM – Energy Efficiency and Load Management

PNM – Integrated Resource Plans

PNM – San Juan Generating Station Units 2 and 3 Retirement

PNM – Advanced Metering Infrastructure Application

TNMP – Transmission Cost of Service Rates

TNMP – Order Related to Changes in Federal Income Tax Rates


ITEM 4.	MINE SAFETY DISCLOSURES

Not Applicable.

SUPPLEMENTAL ITEM – EXECUTIVE OFFICERS OF PNM RESOURCES, INC.

All officers are elected annually by the Board of PNMR. Executive officers, their ages as of February 23, 2018 and offices held with PNMR for the past five years are as follows:



Name	Age	Office	Initial Effective Date
P. K. Collawn	59	Chairman, President, and Chief Executive Officer	January 2012
C. N. Eldred	64	Executive Vice President and Chief Financial Officer	July 2007
P. V. Apodaca	66	Senior Vice President, General Counsel, and Secretary	January 2010
R. N. Darnell	60	Senior Vice President, Public Policy	January 2012
J. D. Tarry	47	Vice President, Finance and Controller	February 2017
		Vice President, Corporate Controller, and Chief Information Officer	April 2015
		Vice President, Customer Service and Chief Information Officer	May 2012
C. M. Olson	60	Senior Vice President, Utility Operations	February 2018
		Vice President, Utility Operations	December 2016
		Vice President, Generation – PNM	November 2012

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PART II


ITEM 5.	MARKET FOR PNMR’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

PNMR’s common stock is traded on the New York Stock Exchange (Symbol: PNM). Ranges of sales prices of PNMR’s common stock, reported as composite transactions, and dividends declared on the common stock for 2017 and 2016, by quarter, are as follows:



Quarter Ended	Range of Sales Prices				Dividends Declared Per Share
	High		Low		Dividends Declared Per Share
2017
March 31	$	37.60	$	33.45	$	0.2425
June 30	40.00		36.30		0.2425
September 30	42.95		37.35		0.2425
December 31	45.50		40.20		0.2650
Fiscal Year	45.50		33.45		0.9925
2016
March 31	$	34.07	$	29.22	$	0.2200
June 30	35.46		30.62		0.2200
September 30	36.15		31.20		0.2200
December 31	34.53		30.95		0.2425
Fiscal Year	36.15		29.22		0.9025

Dividends on PNMR’s common stock are declared by its Board. The timing of the declaration of dividends is dependent on the timing of meetings and other actions of the Board. This has historically resulted in dividends considered to be attributable to the second quarter of each year being declared through actions of the Board during the third quarter of the year. The Board declared dividends on common stock considered to be for the second quarter of $0.22 per share in July 2016 and $0.2425 per share in July 2017, which are reflected as being in the second quarter above. The Board declared dividends on common stock considered to be for the third quarter of $0.22 per share in September 2016 and $0.2425 per share in September 2017, which are reflected as being in the third quarter above. On February 23, 2018, the Board declared a quarterly dividend of $0.2650 per share. PNMR targets a long-term dividend payout ratio of 50% to 60% of ongoing earnings, which is a non-GAAP financial measure that excludes from earnings determined in accordance with GAAP 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.

On February 20, 2018, there were 8,946 holders of record of PNMR’s common stock. All of the outstanding common stock of PNM and TNMP is held by PNMR.

See Note 5 for a discussion on limitations on the payments of dividends and the payment of future dividends, as well as dividends paid by PNM and TNMP.

See Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Preferred Stock

PNM is not aware of any active trading market for its cumulative preferred stock. Quarterly cash dividends were paid on PNM’s outstanding cumulative preferred stock at the stated rates during 2017 and 2016. PNMR and TNMP do not have any preferred stock outstanding.

Sales of Unregistered Securities

None.

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ITEM 6.	SELECTED FINANCIAL DATA

The selected financial data and comparative operating statistics for PNMR should be read in conjunction with the Consolidated Financial Statements and Notes ~~thereto. Trends~~thereto and ~~contingencies of a material nature are discussed to the extent known. Refer also to Disclosure Regarding Forward Looking Statements in Part I, Item 1 and to Part II, Item 7A. Risk Factors.~~

~~PNM~~

~~The table below summarizes operating results for PNM:~~MD&A.

Year Ended December 31, Change
2014 2013 2012 2014/2013 2013/2012
(In millions)
Electric operating revenues $ 1,147.9
$ 1,116.3
$ 1,092.3
$ 31.6
$ 24.0
Cost of energy 403.6
374.7
353.6
28.9
21.1
Margin 744.3
741.6
738.6
2.7
3.0
Operating expenses 422.1
428.6
435.4
(6.5 ) (6.8 )
Depreciation and amortization 109.5
103.8
97.3
5.7
6.5
Operating income 212.7
209.2
205.9
3.5
3.3
Other income (deductions) 20.8
21.5
26.5
(0.7 ) (5.0 )
Interest charges (79.4 ) (79.2 ) (76.1 ) (0.2 ) (3.1 )
Segment earnings before income taxes 154.1
151.5
156.3
2.6
(4.8 )
Income (taxes) (52.6 ) (48.8 ) (50.7 ) (3.8 ) 1.9
Valencia non-controlling interest (14.1 ) (14.5 ) (14.1 ) 0.4
(0.4 )
Preferred stock dividend requirements (0.5 ) (0.5 ) (0.5 ) —
—
Segment earnings $ 86.8
$ 87.6
$ 91.0
$ (0.8 ) $ (3.4 )



PNM RESOURCES, INC. AND SUBSIDIARIES
	2017			2016			2015			2014			2013
	(In thousands except per share amounts and ratios)
Total Operating Revenues	$	1,445,003		$	1,362,951		$	1,439,082		$	1,435,853		$	1,387,923
Net Earnings	$	95,419		$	131,896		$	31,078		$	130,909		$	115,556
Net Earnings Attributable to PNMR	$	79,874		$	116,849		$	15,640		$	116,254		$	100,507
Net Earnings Attributable to PNMR per Common Share
Basic	$	1.00		$	1.47		$	0.2		$	1.46		$	1.26
Diluted	$	1.00		$	1.46		$	0.2		$	1.45		$	1.25
Cash Flow Data
Net cash flows from operating activities	$	524,462		$	415,454		$	386,874		$	414,876		$	386,587
Net cash flows from investing activities	$	(466,163	)	$	(699,375	)	$	(544,528	)	$	(485,329	)	$	(331,446	)
Net cash flows from financing activities	$	(58,847	)	$	242,392		$	175,431		$	96,194		$	(61,593	)
Total Assets	$	6,646,103		$	6,471,080		$	6,009,328		$	5,790,237		$	5,426,858
Long-Term Debt, including current installments	$	2,437,645		$	2,392,712		$	2,091,948		$	1,962,385		$	1,730,749
Common Stock Data
Market price per common share at year end	$	40.45		$	34.30		$	30.57		$	29.63		$	24.12
Book value per common share at year end	$	21.28		$	21.04		$	20.78		$	21.61		$	21.01
Tangible book value per share at year end	$	17.79		$	17.55		$	17.28		$	18.12		$	17.52
Average number of common shares outstanding – diluted	80,141			80,132			80,139			80,279			80,431
Dividends declared per common share	$	0.9925		$	0.9025		$	0.8200		$	0.7550		$	0.6800
Capitalization
PNMR common stockholders’ equity	40.9		%	41.1		%	44.0		%	46.6		%	49.0		%
Preferred stock of subsidiary, without mandatory redemption requirements	0.3			0.3			0.3			0.3			0.3
Long-term debt	58.8			58.6			55.7			53.1			50.7
	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

~~The table below summarizes the significant changes to total revenues, cost of energy, and margin:~~

2014/2013 Change 2013/2012 Change

Total
Revenues

Cost of
Energy

Margin

Total
Revenues

Cost of
Energy

Margin
(In millions)
Customer usage/load $ (10.9 ) $ —
$ (10.9 ) $ (8.6 ) $ —
$ (8.6 )
Weather (11.0 ) —
(11.0 ) (3.3 ) —
(3.3 )
Transmission 2.0
0.9
1.1
(1.6 ) 1.0
(2.6 )
FPPAC 23.0
23.0
—
6.8
6.8
—
Economy energy service 6.2
6.0
0.2
7.6
7.3
0.3
Wholesale contracts (1.2 ) (1.6 ) 0.4
2.9
—
2.9
Rio Bravo purchase —
(3.3 ) 3.3
—
—
—
Unregulated margins 5.3
(1.8 ) 7.1
2.8
(2.7 ) 5.5
Energy efficiency rider 3.8
—
3.8
(2.1 ) —
(2.1 )
Renewable energy rider 10.2
3.7
6.5
14.7
6.3
8.4
Net unrealized economic hedges 5.7
1.1
4.6
(0.6 ) (0.9 ) 0.3
Other (1.5 ) 0.9
(2.4 ) 5.4
3.3
2.2
Net change $ 31.6
$ 28.9
$ 2.7
$ 24.0
$ 21.1
$ 3.0

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~~The following table shows PNM operating revenues by customer class and average number of customers:~~


PNM RESOURCES, INC. AND SUBSIDIARIES													PNM RESOURCES, INC. AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS													COMPARATIVE OPERATING STATISTICS
	Year Ended December 31,						Change						2017		2016			2015			2014		2013
	2014		2013		2012		2014/2013			2013/2012			(In thousands)
	(In millions, except customers)
PNM Revenues
Residential	$	411.4	$	411.6	$	409.0	$	(0.2	)	$	2.6		$	419,105	$	395,490		$	427,958		$	411,412	$	411,579
Commercial	428.1		415.6		413.3		12.5			2.3			408,354		394,150			437,279			428,085		415,621
Industrial	73.0		74.6		78.6		(1.6		)	(4.0		)	58,851		56,650			75,308			73,002		74,552
Public authority	25.3		25.7		25.5		(0.4		)	0.2			23,604		23,174			26,202			25,278		25,745
Economy energy service	39.1		32.9		25.4		6.2			7.5
Economy service													30,645		31,121			35,132			39,123		32,909
Transmission	38.3		38.2		39.4		0.1			(1.2		)	45,932		34,267			33,216			38,284		38,228
Firm-requirements wholesale	38.3		42.4		39.4		(4.1		)	3.0			4,468		22,497			31,263			38,313		42,370
Other sales for resale	82.5		67.5		47.4		15.0			20.1
Other sales for resale ⁽¹⁾													101,897		70,375			63,195			82,508		67,538
Mark-to-market activity	6.0		0.3		0.9		5.7			(0.6		)	1,317		(1,645		)	(5,270		)	5,996		293
Other	5.9		7.5		13.4		(1.6		)	(5.9		)	10,057		9,834			6,912			5,913		7,477
	$	1,147.9	$	1,116.3	$	1,092.3	$	31.6		$	24.0
Average retail customers (thousands)	511.2		508.2		505.6		3.0			2.6
Total PNM Revenues													$	1,104,230	$	1,035,913		$	1,131,195		$	1,147,914	$	1,116,312
TNMP Revenues
Residential													$	126,587	$	124,462		$	120,771		$	114,826	$	111,373
Commercial													106,503		103,174			102,956			99,701		95,098
Industrial													18,140		17,427			16,316			15,049		13,084
Other													89,543		81,975			67,844			58,363		52,056
Total TNMP Revenues													$	340,773	$	327,038		$	307,887		$	287,939	$	271,611

~~TNMP~~

~~The table below summarizes the operating results for TNMP:~~Environmentally Responsible Power

PNMR has a long-standing record of environmental stewardship. PNM’s environmental focus has been in three key areas:

Year Ended December 31, Change
2014 2013 2012 2014/2013 2013/2012
(In millions)
Electric operating revenues $ 287.9
$ 271.6
$ 250.1
$ 16.3
$ 21.5
Cost of energy 67.9
57.6
46.2
10.3
11.4
Margin 220.0
214.0
203.9
6.0
10.1
Operating expenses 84.4
91.6
87.1
(7.2 ) 4.5
Depreciation and amortization 50.1
50.2
49.3
(0.1 ) 0.9
Operating income 85.6
72.2
67.5
13.4
4.7
Other income (deductions) 2.1
1.9
2.7
0.2
(0.8 )
Interest charges (27.4 ) (27.4 ) (28.2 ) —
0.8
Segment earnings before income taxes 60.3
46.7
42.1
13.6
4.6
Income (taxes) (22.5 ) (17.6 ) (15.4 ) (4.9 ) (2.2 )
Segment earnings $ 37.8
$ 29.1
$ 26.7
$ 8.7
$ 2.4


•	Developing strategies to meet regional haze rules at the coal-fired SJGS as cost-effectively as possible while providing broad environmental benefits that also demonstrate progress in addressing CO₂ emissions from existing power plants

Preparing 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 ~~table below summarizes the significant changes~~portal also contains a Climate Change Report, which outlines plans to ~~total revenues, cost~~be coal-free by 2031 (subject to regulatory approval). This could enable an 87% reduction in CO₂ emissions in 2040 compared to 2012 levels. This is a significantly greater reduction than that required of ~~energy, and margin:~~

2014/2013 Change 2013/2012 Change

Total
Revenues

Cost of
Energy

Margin

Total
Revenues

Cost of
Energy

Margin
(In millions)
Rate increases $ 6.3
$ —
$ 6.3
$ 4.8
$ —
$ 4.8
Customer usage/load 0.9
—
0.9
2.0
—
2.0
Customer growth 1.7
—
1.7
1.5
—
1.5
Demand based customers (0.4 ) —
(0.4 ) 3.6
—
3.6
Weather (2.0 ) —
(2.0 ) (0.7 ) —
(0.7 )
Recovery of third-party transmission costs 10.3
10.3
—
11.8
11.4
0.4
AMS surcharge 4.0
—
4.0
2.7
—
2.7
CTC surcharge 0.3
—
0.3
(3.4 ) —
(3.4 )
Hurricane Ike surcharge (4.8 ) —
(4.8 ) (0.6 ) —
(0.6 )
Energy efficiency incentive 0.8
—
0.8
0.5
—
0.5
1999 rate settlement —
—
—
(1.6 ) —
(1.6 )
Other (0.8 ) —
(0.8 ) 0.9
—
0.9
Net change $ 16.3
$ 10.3
$ 6.0
$ 21.5
$ 11.4
$ 10.1
New Mexico under EPA’s Clean Power Plan.

SJGS

Regional Haze Rule Compliance Plan – In December 2015, PNM received NMPRC approval 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 SJGS Units 1 and 4 was completed in early 2016 and Units 2 and 3 were retired in December 2017. The plan provides for similar visibility improvements, but at a lower cost 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 reducing water usage. Additional information is contained in Note 16.

Under the key provisions of the order approving the compliance plan, PNM:

Retired SJGS Units 2 and 3 (PNM’s ownership interest was 418 MW) in December 2017 and will recover, over 20 years, 50% ($125.5 million) of their undepreciated net book value at that date and earn a regulated return on those costs

Acquired an additional 132 MW in SJGS Unit 4 under an approved CCN, with an initial book value of zero plus SNCR costs and whatever portion of BDT costs the NMPRC determines to be reasonable and prudent to be allowed for recovery in rates (an aggregate of $20.7 million) (see New Mexico Rate Cases above and Note 17)

Was granted a CCN for 134 MW of PVNGS Unit 3 with an initial rate base value equal to the book value as of December 31, 2017 ($154.9 million)

Acquired 65 MW of SJGS Unit 4 as merchant utility plant, which will not be included in rates charged to retail customers

Will accelerate recovery of SNCR costs on SJGS Units 1 and 4 so that the costs are fully recovered by July 1, 2022

Is required to make a NMPRC filing in 2018 to determine the extent that SJGS should continue serving PNM’s customers’ needs after mid-2022


•	Will acquire and retire one MWh of RECs that include a zero-CO₂ emission attribute beginning January 1, 2020 for every MWh produced by 197 MW of coal-fired generation from PNM’s ownership share of SJGS (the cost of these RECs would be capped at $7.0 million per year and recovered in rates)

Did not recover approximately $20 million of increased operations and maintenance expenses and other costs incurred in connection with CAA compliance

At December 31, 2015, PNM recorded pre-tax losses aggregating $165.7 million to reflect the write-off of the 50% of the estimated December 31, 2017 net book value of SJGS Units 2 and 3 that will not be recovered, the other unrecoverable costs, and the increase in the estimated liability recorded for coal mine reclamation resulting from the new coal mine reclamation arrangement entered into in conjunction with the new coal supply agreement (“SJGS CSA”). PNM recorded additional pre-tax losses of $3.7 million in 2016 and reversed previously recorded losses of $4.0 million in 2017 resulting from revised estimates of these items. Additional information about the SJGS CSA is discussed below and in Note 16.

On January 14, 2016, NEE filed a notice of appeal with the NM Supreme Court of the NMPRC’s December 2015 order. The NM Supreme Court has taken no action on the appeal and there is no required time frame for the court to act on the appeal. 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. The NMPRC has taken no action on this matter.

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~~The following table shows TNMP~~SJGS Ownership Restructuring –In connection with the proposed retirement of SJGS Units 2 and 3, 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 ~~revenues by retail tariff consumer class, including intersegment revenues, and average number of consumers:~~

Year Ended December 31, Change
2014 2013 2012 2014/2013 2013/2012
(In millions, except customers)
Residential $ 114.8
$ 111.3
$ 103.3
$ 3.5
$ 8.0
Commercial 99.7
95.1
88.3
4.6
6.8
Industrial 15.0
13.1
13.4
1.9
(0.3 )
Other 58.4
52.1
45.1
6.3
7.0
$ 287.9
$ 271.6
$ 250.1
$ 16.3
$ 21.5
Average consumers (thousands) ⁽¹⁾
238.2
235.1
233.0
3.1
2.1


⁽¹⁾costs, among other items.	TNMP provides transmission and distribution services to REPs that provide electric service to 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.

~~The following table shows TNMP GWh sales by retail tariff consumers class:~~

Year Ended December 31, Change
2014 2013 2012 2014/2013 2013/2012
(Gigawatt hours)
Residential 2,802.8
2,796.7
2,714.5
6.1
82.2
Commercial 2,564.8
2,451.3
2,353.1
113.5
98.2
Industrial 2,727.1
2,598.4
2,727.1
128.7
(128.7 )
Other 102.1
104.5
103.9
(2.4 ) 0.6
8,196.7
7,950.9
7,898.6
245.9
52.3

~~Implementation~~The San Juan Project Restructuring Agreement (“SJGS RA”) sets forth the agreement among the SJGS owners regarding ownership restructuring. Key provisions of rate increases in March 2013, September 2013, March 2014, and September 2014 increased revenues and margins by $6.3 million in 2014 compared to 2013. See Note 17. Higher weather normalized load increased revenues and margin by $0.9 million in 2014 compared to 2013. TNMP's weather normalized retail KWh sales increased 3.2% for the year ended 2014 compared to 2013. Milder weather in 2014 compared to 2013, decreased revenues and margins by $2.0 million. Cooling degree days were 2.2% lower than 2013 and heating degree days were 2.0% higher than in 2013. Due to the climate in TNMP’s service territories, variances in cooling degree days have a much larger impact than variances in heating degree days. TNMP experienced average customer growth of 1.3% in 2014, increasing revenues and margins by $1.7 million. Rate increases implemented in September 2012, March 2013, and September 2013 increased revenues and margins by $4.8 million in 2013 compared to 2012. Higher weather normalized and leap-year adjusted usage per customer increased margin $2.0 million in 2013. TNMP's weather normalized and leap-year adjusted retail KWh sales increased 2.6% in 2013. Customer growth in TNMP’s service areas increased revenues and margin $1.5 million in 2013. Milder weather in 2013 compared to 2012, decreased revenues and margins by $0.7 million.SJGS RA include:

~~Differences between revenues~~Capacity acquisition – On December 31, 2017, PNM was to acquire 132 MW and PNMR Development was to acquire 65 MW of the exiting owners’ capacity in SJGS Unit 4. PNMR Development assigned the rights and obligations related to the 65 MW to PNM effective on December 31, 2017, to facilitate dispatch of power from that capacity. As ordered by the NMPRC, PNM will treat the 65 MW as merchant utility plant that will be excluded from retail rates. In anticipation of the transfer of ownership, PNM entered into agreements to sell the 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.

Coal inventory – The SJGS RA also sets forth the terms under which PNM acquired the coal inventory of the exiting SJGS participants as of January 1, 2016 and supplied coal to the exiting participants during the period from January 1, 2016 through December 31, 2017, which arrangement provided economic benefits that were passed on to PNM’s customers through the FPPAC.

Coal supply – 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. In support of the closing of the mine purchase and to facilitate PNM customer savings, NM Capital, a wholly-owned subsidiary of PNMR, provided funding of $125.0 million to Westmoreland San Juan, LLC (“WSJ”), a ring-fenced, bankruptcy-remote, special-purpose entity that is a subsidiary of Westmoreland Coal Company to finance the purchase price. NM Capital was able to provide the $125.0 million financing to WSJ by first entering into a $125.0 million term loan agreement with a commercial bank. PNMR guarantees NM Capital’s obligations to the bank. The Westmoreland Loan matures on February 1, 2021 and had an initial interest rate of 7.25% plus LIBOR, which escalates over time. Such rate 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. As of February 20, 2018, the balance of the Westmoreland Loan was $51.0 million.

Coal mine reclamation – Under the terms of the SJGS CSA, PNM and the other SJGS owners are obligated to compensate SJCC for all reclamation costs ~~charged~~associated with the supply of coal from the San Juan mine. In connection with certain mining permits relating to the operation of the San Juan mine, SJCC is required to post reclamation bonds, which currently aggregate $118.7 million, with the NMMMD. PNMR has arrangements under which a bank has issued $30.3 million in letters of credit to facilitate posting of the required reclamation bonds. See Note 16.

Other SJGS 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, including rules regarding GHG under Section 111(d) of the CAA. Implementation of the Clean Power Plan, which was published by ~~third-party transmission providers are deferred~~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 ~~recovered through a transmission cost recovery factor. Higher transmission cost~~safe development of energy ~~resulting from rate increases from~~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 ~~transmission service providers within ERCOT increased cost~~environmental regulations. On October 10, 2017, EPA issued a proposal to repeal the Clean Power Plan based on a legal interpretation of ~~energy $10.3 million~~the CAA under which the Clean Power Plan exceeds EPA’s statutory authority. EPA published the proposed repeal rule on October 16, 2017 and is accepting public comments until 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 ~~2014 and $11.4 million in 2013. These increases in cost~~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 ~~energy resulted in TNMP rate increases for the recovery of third party transmission costs increasing revenue $10.3 million in 2014 and $11.8 million in 2013.~~this rule on its fossil-fueled generation.

~~On August 11, 2011, TNMP implemented a surcharge for its AMS deployment. The surcharge will recover TNMP’s investment~~Because of environmental upgrades completed in ~~AMS over a 12 year period. The surcharge~~2009, SJGS has a ~~true-up mechanism, which allows TNMP to match revenues collected against~~mercury removal efficiency of 98% and mercury emissions are well below the ~~expenses incurred~~mercury limit imposed by EPA in the 2011 Mercury and ~~allows for a return to be earned~~Air Toxics Standards. Major environmental upgrades on ~~its investments. AMS revenues increased by $4.0 million in 2014~~each of the four units at SJGS have significantly reduced emissions of NOx, SO₂, particulate matter, and ~~$2.7 million in 2013, which offset increases in operating expenses and depreciation.~~mercury.

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~~Increased revenues~~Between 2006 and margins from demand based customers of $3.6 million in 2013 compared to 2012 primarily resulting from TNMP, under a PUCT approved tariff, lowering the power factor billing threshold from 700 KW to 300 KW. Such revenues2017, SJGS has reduced NOx emissions by 41%, SO₂ by 70%, particulate matter by 61%, and ~~margins decreased slightly in 2014. In 2012, TNMP received a $1.6 million settlement related to ERCOT transmission rates charged from the fourth quarter of 1999, which did not recur in 2014 or 2013.~~mercury by 98%.

TNMP earned energy efficiency incentive bonuses for having achieved demand savings for the 2013 and 2012 program years that exceeded its goals. These incentives were approved by the PUCT on September 11, 2014 for the 2013 program year and November 4, 2013 for the 2012 program year, which increased revenues and margin by $0.8 million in 2014 and $0.5 million in 2013.

The CTC surcharge increased revenues and margin by $0.3 million in 2014 compared to 2013, but decreased $3.4 million in 2013 compared to 2012 due to a rate rider decrease implemented in January 2013. The Hurricane Ike surcharge decreased revenues and margin by $4.8 million in 2014 and $0.6 in 2013. The Hurricane Ike surcharge was terminated in November of 2013 due to full recovery of costs associated with this item. Other changes in revenue include recovery of current energy efficiency program costs collected through the energy efficiency cost recovery factor surcharge and rate case expenses collected through the rate case expense surcharge. Changes in revenues and margins from these surcharges are offset by changes in operating expenses and depreciation and amortization.

Operating expenses decreased $7.2 million in 2014 compared to 2013. Lower employee healthcare claims of $2.1 million decreased operating expense in 2014. Higher capitalization of administrative and general expenses related to higher levels of construction expenditures decreased operating expenses by $2.9 million further decrease operating expenses in 2014. Lower energy efficiency program expenses of $0.3 million and lower rate case expense amortization of $0.7 million decreased operating expense in 2014, which amounts are offset by decreases in revenue under TNMP’s energy efficiency and rate case expense surcharges. Other decreases to operating expenses include both a $0.5 million write-off of costs incurred in exploring the possibility of securitizing the remaining CTC costs and the allocation of the contributions to the PNM Resources Foundation of $0.7 million in 2013, which did not recur in 2014.

Operating expenses increased $4.5 million in 2013 compared to 2012. Higher energy efficiency program costs of $1.5 million increased operating expenses, which are offset by increases in revenue under TNMP’s energy efficiency cost recovery factor. Increased property and sales taxes of $1.1 million, primarily due to increased utility plant in service and higher assessed values, higher expenses for incentive compensation of $0.9 million, higher employee healthcare claims of $0.8 million and higher pension and retiree medical expense of $0.8 million increased operating expenses in 2013 compared to 2012. These increases and the increases due CTC securitization and allocated contributions discussed above were offset by lower vegetation management expenses of $1.1 million in 2013 due to additional vegetation management expenditures in 2012 and the 2012 lease abandonment loss of $1.2 million, which did not recur in 2013.

Depreciation expense associated with AMS deployment, which is recovered through the AMS surcharge, increased $2.2 million in 2014. Increases in utility plant in service and amortization expense associated with the CTC regulatory asset increased depreciation and amortization $1.6 million and $0.7 million in 2014. These increases were offset by lower amortization of Hurricane Ike costs of $4.7 million compared to 2013. In 2013, depreciation and amortization expense increased due to higher utility plant in service and AMS deployment, which was partially offset by lower amortization of the CTC regulatory asset.

Other income (deductions) increased in 2014 primarily due to an increase in contributions in aid of construction. Other income (deductions) decreased in 2013 due to higher AFUDC on equity funds of $0.6 million in 2012 and a gain on the sale of property of $0.3 million in 2012, which did not recur in 2013.

Interest charges were flat in 2014 compared to 2013. The issuance of $80.0 million of long-term debt under the TNMP 2013 Bond Purchase Agreement on June 27, 2014 increased interest charges $2.0 million, which is offset by lower interest charges due to the maturity of $50.0 million of debt under the TNMP 2011 Term Loan Agreement and the April 2013 exchange of $93.2 million of TNMP’s 9.5% First Mortgage Bonds for an equal amount of a new series of 6.95% First Mortgage Bonds. Interest charges in 2013 decreased compared to 2012 primarily due to this First Mortgage Bond exchange.

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Renewable Energy

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 81.6 MW at December 31, 2017. 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. The geothermal facility, which has a current capacity of 4 MW, began providing power to PNM 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 RPS 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. The NMPRC approved the plan 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; continuation of customer REC purchase programs; and other purchases of RECs to ensure annual compliance with the RPS. 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 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. 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. A briefing schedule has not been determined. PNM cannot predict the outcome of this matter.

In late 2017, 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 Facebook, Inc. These PPAs are subject to NMPRC approval and PNM made a filing requesting approval on January 17, 2018 (Note 17). These PPAs include the purchase of the power and RECs from a 50 MW wind project to be operational at December 31, 2018, a 166 MW wind project to be operational in November 2020, and a 50 MW solar project to be operational in December 2021.

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

Energy efficiency also plays a significant role in helping to keep customers’ electricity costs low while meeting their energy needs. PNM’s and TNMP’s energy efficiency and load management portfolios continue to achieve robust results. In 2017, annual energy saved as a result of PNM’s portfolio of energy efficiency programs was approximately 78 GWh. This is equivalent to the annual consumption of approximately 11,500 homes in PNM’s service territory. PNM’s load management and annual energy efficiency programs also help lower peak demand requirements. TNMP’s energy efficiency programs in 2017 resulted in energy savings totaling an estimated 21 GWh. This is equivalent to the annual consumption of approximately 2,300 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. TNMP received the “Partner of the Year Energy Efficiency Delivery Award” for its High-Performance Homes Program.

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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 continue to decline as PNM substitutes less fresh-water-intensive generation resources to replace SJGS Units 2 and 3 starting in 2018, when water consumption at that plant will be reduced by around 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, 18 of the Company’s 23 facilities met the solid waste diversion goal of a 60% diversion rate, while recycling at least the same number of waste streams as 2016. 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 build 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 payment 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.

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. In May 2017, a chat function was added to PNM’s website to allow customers options when communicating with its customer service representatives and an online management system was launched to expedite solar interconnection applications from retail customers. The website continues to be a resource for the facts about PNM’s operations and community support efforts, including plans for building a sustainable energy future for New Mexico. In September 2016, PNMR launched a dedicated sustainability portal on its corporate website www.pnmresources.comto 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 information is presented under four main headings: Environment, 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 customer preparation when severe weather is forecasted. In August 2017, Hurricane Harvey made landfall in the gulf coast region and TNMP 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 customers to ensure that these stakeholders are updated on company investments and initiatives. Key stakeholders 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 efficiently and support community projects such as providing software coding camps to underserved youths, funding murals in neighborhoods, and by providing employee matching and volunteer grants. 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 to the PNM Resources Foundation to support future economic and educational programs in New Mexico.

PNM provides funds to support nonprofits in New Mexico focused in the areas of economic development, education, and the environment. One of PNM’s most important outreach programs is tailored for low-income customers. In 2017, PNM hosted

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44 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 3,804 families in 2017 and offered financial literacy training to further support customers.

Volunteerism is an important facet of the PNMR culture. In 2017, more than 800 PNM and TNMP employees and retirees contributed approximately 10,800 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 2017 and 2016, PNM experienced decreases in weather-normalized retail load of 0.9% and 0.7%, reflecting a continued sluggish economy in New Mexico. However, economic conditions in Albuquerque appear to have stabilized. The Albuquerque metro area is showing employment growth, but continues to be lower than the national average. Also, some 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., appear to have started their hiring process. There also have been some expansions of existing businesses, particularly in healthcare, education, and professional services. The economy in New Mexico continues to have mixed indicators and experience softness.

TNMP – In 2017 and 2016, TNMP experienced increases in volumetric weather normalized retail load of 1.2% and 3.0%. Most of TNMP’s industrial and larger commercial customers are billed based on their peak demand. Demand-based load, excluding retail transmission customers, increased 4.0% and 2.4% in 2017 and 2016. The Texas economy continues to grow, primarily due to its diverse base, which offsets some of the impacts of Hurricane Harvey. Because TNMP’s service territory is geographically dispersed and was largely on the edges of the storm, a smaller percentage of customers were impacted by the hurricane as compared to some other utilities. 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 add new transmission customers in its West Texas service territory where oil and gas production continues to grow.

Results of Operations

Net earnings attributable to PNMR were $79.9 million, or $1.00 per diluted share in the year ended December 31, 2017 compared to $116.8 million, or $1.46 per diluted share in 2016. Among other things, earnings in 2017 benefited from additional revenues due to the rate increase approved in the NM 2015 Rate Case at PNM, higher revenues under FERC formula transmission rates and new transmission customers at PNM, rate increases and increased load at TNMP, lower plant maintenance costs at PNM, higher gains on available-for-sale securities, higher AFUDC due to higher levels of construction expenditures at PNM, and excess tax benefits related to stock compensation recognized under a new accounting standard (Note 13). These increases were more than offset by decreased load at PNM, milder weather at PNM and TNMP, lower revenue from NEC at PNM, greater regulatory disallowances at PNM, increased depreciation and property taxes due to increased plant in service at PNM and TNMP and higher depreciation rates approved in PNM’s NM 2015 Rate Case, and lower interest income on the Westmoreland Loan and from the IRS, as well as the additional income taxes resulting from the reduction in the federal corporate income tax rate (Note 11) and increased pre-tax earnings. Additional information on factors impacting results of operation for each segment is discussed under Results of Operations below.

Corporate and Other

The Corporate and Other segment includes PNMR holding company activities, primarily related to corporate level debt and the activities of PNMR Services Company. PNMR Services Company provides corporate services through shared services agreements to PNMR and all of PNMR’s business units, including PNM and TNMP. These services are charged and billed at cost on a monthly basis to the business units. The activities of PNMR Development, NM Capital, and NMRD are also included in Corporate and Other.

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SOURCES OF POWER

PNM

Generation Capacity

As of January 1, 2018, the total net generation capacity of facilities owned or leased by PNM was 2,102 MW. PNM also obtains power under long-term PPAs for the power produced by Valencia, New Mexico Wind, Red Mesa Wind, the Lightning Dock Geothermal facility, and the NMRD-owned solar facility.

PNM’s capacity in electric generating facilities, which are owned, leased, or under PPAs, in commercial service as of January 1, 2018 is:



			Generation
			Capacity
Type	Name	Location	(MW)
Coal	SJGS	Waterflow, New Mexico	562
Coal	Four Corners	Fruitland, New Mexico	200
Gas	Reeves Station	Albuquerque, New Mexico	154
Gas	Afton (combined cycle)	La Mesa, New Mexico	230
Gas	Lordsburg	Lordsburg, New Mexico	80
Gas	Luna (combined cycle)	Deming, New Mexico	189
Gas/Oil	Rio Bravo	Albuquerque, New Mexico	138
Gas	Valencia	Belen, New Mexico	158
Gas	La Luz	Belen, New Mexico	40
Nuclear	PVNGS	Wintersburg, Arizona	402
Solar	PNM-owned solar	Fifteen sites in New Mexico	107
Solar	NMRD-owned solar	Los Lunas, New Mexico	10
Wind	New Mexico Wind	House, New Mexico	204
Wind	Red Mesa Wind	Seboyeta, New Mexico	102
Geothermal	Lightning Dock Geothermal	Lordsburg, New Mexico	4
			2,580

Fossil‑Fueled Plants

SJGS is operated by PNM and, until December 2017, consisted of four units. As discussed in Note 16, SJGS Units 2 and 3 were retired in December 2017 and the ownership interests in SJGS Unit 4 were restructured as of December 31, 2017. The table below presents the rated capacities and ownership interests of each participant in each unit of SJGS before and after these events:



	Unit MW Capacity and Ownership Interests
	Prior to Restructuring								After Restructuring
	Unit 1		Unit 2		Unit 3		Unit 4		Unit 1		Unit 4
Capacity (MW)	340		340		497		507		340		507

PNM⁽¹⁾	50.000	%	50.000	%	50.000	%	38.457	%	50.000	%	77.297	%
Tucson	50.000		50.000		—		—		50.000		—
SCPPA	—		—		41.800		—		—		—
Tri-State	—		—		8.200		—		—		—
MSR	—		—		—		28.800		—		—
Anaheim	—		—		—		10.040		—		—
Farmington	—		—		—		8.475		—		8.475
Los Alamos	—		—		—		7.200		—		7.200
UAMPS	—		—		—		7.028		—		7.028
Total	100.000	%	100.000	%	100.000	%	100.000	%	100.000	%	100.000	%

⁽¹⁾ After restructuring includes a 12.8% interest held as a merchant plant .

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Four Corners Units 4 and 5 are 13% owned by PNM. These units are jointly owned with APS, an APS affiliate, SRP, and Tucson and are operated by APS. PNM had no ownership interest in Four Corners Units 1, 2, or 3, which were shut down by APS on December 30, 2013. The Four Corners plant site is leased from the Navajo Nation and is also subject to an easement from the federal government. APS, on behalf of the Four Corners participants, negotiated amendments to an existing facility lease with the Navajo Nation, which extends the Four Corners leasehold interest from 2016 to 2041. The Navajo Nation approved these amendments in March 2011. The effectiveness of the amendments also required the approval of the DOI, as did a related federal rights-of-way grant, which was received in July 2015. An affiliate of APS acquired the 7% interest formerly owned by EPE on July 7, 2016. NTEC, an entity owned by the Navajo Nation, has the option to purchase the 7% interest. NTEC provided notice of its intent to exercise the option, but has not yet acquired the 7% interest. APS and NTEC are currently in discussions as to the future of the option transaction. See Note 16 for additional information about Four Corners.

PNM owns 100% of Reeves, Afton, Rio Bravo, Lordsburg, and La Luz and one-third of Luna. The remaining interests in Luna are owned equally by Tucson and Samchully Power & Utilities 1, LLC. PNM is entitled to the entire output of Valencia under a PPA. Reeves, Lordsburg, Rio Bravo, La Luz, and Valencia are used primarily for peaking power and transmission support. As discussed in Note 9, Valencia is a variable interest entity and is consolidated by PNM as required by GAAP.

Nuclear Plant

PNM is participating in the three units of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), SRP, EPE, SCE, SCPPA, and the Department of Water and Power of the City of Los Angeles. PNM is entitled to 10.2%, including portions that are leased to PNM, of the power and energy generated by PVNGS. See Note 7 for additional information concerning the PVNGS leases, including the renewal of the four PVNGS Unit 1 leases and one of the PVNGS Unit 2 leases and the purchase of the assets underlying the other three Unit 2 leases. Currently, PNM has ownership interests of 2.3% in Unit 1, 9.4% in Unit 2, and 10.2% in Unit 3 and has leasehold interests of 7.9% in Unit 1 and 0.8% in Unit 2. The lease payments for the leased portions of PVNGS are recovered through retail rates approved by the NMPRC. See Note 16 for information on other PVNGS matters, including the NMPRC’s approval for PNM to include PVNGS Unit 3 as a jurisdictional resource to serve New Mexico retail customers beginning in 2018 and Note 17 for information concerning the NMPRC’s treatment of the purchased assets and extended leases in PNM’s NM 2015 Rate Case.

Solar

PNM completed several utility-owned solar PV facilities between 2011 and 2015. In addition, PNM completed its solar-storage demonstration project, which has a generation capacity of 0.5 MW. At December 31, 2017, PNM owns a total of 107 MW of solar facilities. PNMR Development began construction of 30 MW of new solar capacity in 2017. In December 2017, interest in that 30 MW of solar capacity was transferred to NMRD, which is 50% owned by PNMR Development. As discussed in Note 17, PNM’s 2018 renewable energy procurement plan includes the addition of 50 MW of PNM-owned solar PV facilities to be constructed in 2018 and 2019. In January 2018, the United States imposed a 30% tariff on certain imported solar panels. PNM is currently unable to predict the impact, if any, of this tariff on these projects. The NMPRC has approved a voluntary tariff that allows PNM retail customers to buy renewable electricity for a small monthly premium. Power from 1.5 MW of PNM’s solar capacity is used to service load under the voluntary tariff.

Plant Operating Statistics

Equivalent availability of PNM’s major base-load generating stations was:



Plant	Operator	2017	2016	2015
SJGS	PNM	84.1%	76.5%	67.4%
Four Corners	APS	50.6%	62.0%	77.8%
PVNGS	APS	91.9%	91.4%	94.2%

Joint Projects

SJGS, PVNGS, Four Corners, and Luna are joint projects each owned or leased by several different entities. Some participants in the joint projects are investor-owned entities, while others are privately, municipally, or co-operatively owned. Furthermore, participants in SJGS have varying percentage interests in different generating units within the project. The primary operating or participation agreements for the joint projects expire in July 2022 for SJGS, July 2041 for Four Corners, December 2046 for Luna, and November 2047 for PVNGS. SJGS and Four Corners are coal-fired generating plants that obtain their coal

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requirements from mines near the plants. An agreement for coal supply for SJGS, which expires on June 30, 2022, became effective on January 31, 2016. At that same time, an agreement to restructure the ownership in SJGS became effective. The restructuring agreement provided for certain participants in SJGS to exit ownership at December 31, 2017, by which time SJGS Units 2 and 3 were required to be permanently shut down. See Note 16 for a discussion of the restructuring of SJGS ownership. In December 2013, a coal supply arrangement for Four Corners that runs through July 6, 2031 was executed. As described above, Four Corners is situated on land under a lease from the Navajo Nation. Portions of PNM’s interests in PVNGS Units 1 and 2 are held under leases. See Nuclear Plant above and Note 7 regarding PNM’s actions related to these leases.

PPAs

In addition to generating its own power, PNM purchases power under long-term PPAs. PNM also purchases power in the forward, day-ahead, and real-time markets.

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Casa Mesa Wind, LLC, a subsidiary of NextEra Energy Resources, LLC., which is expected to be located near House, New Mexico, have a total capacity of 50 MW, and be operational at December 31, 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

A summary of purchased power, excluding Valencia, is as follows:



	Year Ended December 31,
	2017		2016		2015
Purchased under long-term PPAs
MWh	1,574,716		1,211,852		599,562
Cost per MWh	$	29.02	$	28.26	$	22.18
Other purchased power
Total MWh	445,464		502,893		729,895
Cost per MWh	$	31.74	$	27.78	$	28.94

TNMP

TNMP provides only transmission and distribution services and does not sell power.

FUEL AND WATER SUPPLY

PNM



	Coal				Nuclear				Gas and Oil
	Percent of Generation		Average Cost		Percent of Generation		Average Cost		Percent of Generation		Average Cost
2017	56.5	%	$	2.16	31.9	%	$	0.64	9.2	%	$	3.02
2016	54.1	%	$	2.34	31.6	%	$	0.71	11.8	%	$	2.80
2015	53.3	%	$	2.88	32.6	%	$	0.70	12.6	%	$	2.91

Coal

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Natural Gas

Nuclear Fuel and Waste

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for certain requirements relating to ownership of land and water rights. Publication of Volumes 3 and 4 does not signal whether or when the NRC might authorize construction of the repository.

Water Supply

See Note 16 for information about PNM’s water supply.

ENVIRONMENTAL MATTERS

PVNGS Decommissioning Funding

Nuclear Spent Fuel and Waste Disposal

Environmental Matters under the caption “The Clean Air Act”

WEG v. OSM NEPA Lawsuit

Navajo Nation Environmental Issues

Cooling Water Intake Structures

Effluent Limitation Guidelines

Santa Fe Generating Station

Environmental Matters under the caption “Coal Combustion Byproducts Waste Disposal”

Environmental Matters under the caption “Coal Supply”

COMPETITION

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EMPLOYEES

The following table sets forth the number of employees of PNMR, PNM, and TNMP as of December 31, 2017:



	PNMR	PNM	TNMP
Corporate ⁽¹⁾	396	—	—
PNM	938	938	—
TNMP	365	—	365
Total	1,699	938	365