Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Federal Income Tax Reform

In 2017, comprehensive changes in U.S. federal income taxes were enacted through legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made many significant modifications to the tax laws, including reducing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also eliminated federal bonus depreciation for utilities, limited interest deductibility for non-utility businesses and limited the deductibility of officer compensation. During 2020, the IRS issued final regulations related to certain officer compensation and, in January 2021, issued final regulations on interest deductibility that provide a 10% “de minimis” exception that allows entities with predominantly regulated activities to fully deduct interest expenses. In addition, in 2019, the IRS issued proposed regulations interpreting Tax Act amendments to depreciation provisions of the IRC that allow the Company to claim a bonus depreciation deduction on certain construction projects placed in service subsequent to the third quarter of 2017.

As a result of the change in the federal income tax rate, the Company re-measured and adjusted its deferred tax assets and liabilities as of December 31, 2017. The portion of that adjustment not related to PNM’s and TNMP’s regulated activities was recorded as a reduction in net deferred tax assets and an increase in income tax expense. The portion related to PNM’s and TNMP’s regulated activities was recorded as a reduction in net deferred tax liabilities and an increase in regulatory liabilities.

Beginning February 2018, PNM’s NM 2016 Rate Case reflects the reduction in the federal corporate income tax rate, including amortization of excess deferred federal and state income taxes. In accordance with the order in that case, PNM is returning the protected portion of excess deferred federal income taxes to customers over the average remaining life of plant in service as of December 31, 2017, the unprotected portion of excess deferred federal income taxes to customers over a period of approximately twenty-three years, and excess deferred state income taxes to customers over a period of three years. The approved settlement in the TNMP 2018 Rate Case includes a reduction in customer rates to reflect the impacts of the Tax Act beginning on January 1, 2019. See additional discussion of PNM’s NM 2016 Rate Case and TNMP’s 2018 Rate Case in Note 17.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance to address the application of GAAP to reflect the Tax Act in circumstances where all information and analysis was not yet available or complete. This bulletin provided for a one-year period in which to complete the required analyses and accounting for the impacts of the Tax Act. In accordance with SAB 118, the Company completed its analysis of the impacts of the Tax Act in 2018.

The adjustments to deferred income taxes resulting from completion of the Company’s analysis, which resulted primarily from differences between the estimated amounts recorded as of December 31, 2017 and the actual amounts reflected

in the Company’s 2017 tax return filing, including adjustments resulting from additional guidance and interpretations to the Tax Act issued in 2018 related to bonus depreciation, certain incentive compensation, and other items are presented below:

	PNM		TNMP		Corporate and Other		Consolidated
	(In thousands)
Net increase (decrease) in regulatory liabilities	$	11,244	$	(4,069)	$	—	$	7,175
Net decrease in deferred income tax liabilities (deferred income tax assets)	(2,175)		(9,784)		13,869		1,910
Net increase in affiliate receivables (affiliate payables)	12,300		4,042		(16,342)		—
Net deferred income tax expense	$	1,119	$	1,673	$	2,473	$	5,265

As discussed in Note 17, the NM Supreme Court issued a decision in May 2019 on the appeal of the NM 2015 Rate Case resulting in pre-tax impairments of $150.6 million in the year ending December 31, 2019. The impairments were recognized as discrete items within regulatory disallowances and restructuring costs resulting in tax benefits of $45.7 million, which is reflected in income taxes on the Company’s Consolidated Statements of Earnings for the year ended December 31, 2019.

PNMR

PNMR’s income taxes (benefits) consist of the following components:

	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Current federal income tax	$	—	$	60	$	—
Current state income tax	231		43		(244)
Deferred federal income tax	17,574		(20,372)		7,716
Deferred state income tax	3,721		(4,491)		648
Amortization of accumulated investment tax credits	(890)		(522)		(345)
Total income taxes (benefits)	$	20,636	$	(25,282)	$	7,775

PNMR’s provision for income taxes (benefits) differed from the federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the following factors:

	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Federal income tax at statutory rates	$	43,670	$	14,038	$	22,902
Amortization of accumulated investment tax credits	(890)		(522)		(345)
Amortization of excess deferred income tax (Note 17)	(30,723)		(37,799)		(19,779)
Flow-through of depreciation items	1,368		1,136		712
Earnings attributable to non-controlling interest in Valencia	(2,943)		(2,991)		(3,173)
State income tax, net of federal benefit	6,961		298		1,358
Impairment of state net operating loss carryforwards	—		—		—
Allowance for equity funds used during construction	(2,363)		(1,990)		(2,185)
Impairment of charitable contribution carryforward	—		—		—
Regulatory recovery of prior year impairments of state net operating loss carryforward, including amortization	1,367		1,367		1,367
Federal income tax rate change	—		—		2,914
Tax expense (benefit) related to stock compensation awards	(392)		(795)		4,647
Non-deductible compensation	2,630		1,156		891
Other	1,951		820		(1,534)
Total income taxes (benefits)	$	20,636	$	(25,282)	$	7,775

Effective tax rate 9.92  % (37.82) % 7.13  %

The components of PNMR’s net accumulated deferred income tax liability were:

	December 31,
	2020		2019
	(In thousands)
Deferred tax assets:
Net operating loss	$	41,419	$	59,488
Regulatory liabilities related to income taxes	148,961		145,087
Federal tax credit carryforwards	121,354		101,231
Regulatory disallowances	38,531		34,639
Other	42,885		54,199
Total deferred tax assets	393,150		394,644
Deferred tax liabilities:
Depreciation and plant related	(738,342)		(787,928)
Investment tax credit	(98,669)		(81,186)
Regulatory assets related to income taxes	(61,330)		(58,495)
CTC	—		(1,466)
Pension	(37,099)		(35,029)
Regulatory asset for shutdown of SJGS Units 2 and 3	(27,237)		(28,831)
Other	(124,985)		(27,767)
Total deferred tax liabilities	(1,087,662)		(1,020,702)
Net accumulated deferred income tax liabilities	$	(694,512)	$	(626,058)

The following table reconciles the change in PNMR’s net accumulated deferred income tax liability to the deferred income tax (benefit) included in the Consolidated Statement of Earnings:

	Year Ended
	December 31, 2020
	(In thousands)
Net change in deferred income tax liability per above table	$	68,454
Change in tax effects of income tax related regulatory assets and liabilities	(11,602)
Amortization of excess deferred income tax	(30,723)
Tax effect of mark-to-market adjustments	(3,206)
Tax effect of excess pension liability	(3,670)
Adjustment for uncertain income tax positions	2,459
Reclassification of unrecognized tax benefits	(2,459)
Amortization of state net operating loss recovered in prior years	1,367
Refundable alternative minimum tax credit carryforward reclassified to receivable	—
Other	(215)
Deferred income taxes (benefits)	$	20,405

PNM

PNM’s income taxes (benefit) consist of the following components:

	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Current federal income tax	$	—	$	(6,266)	$	(6,644)
Current state income tax	(585)		449		(2,661)
Deferred federal income tax	20,125		(12,308)		5,661
Deferred state income tax	2,560		(7,590)		(2,080)
Amortization of accumulated investment tax credits	(243)		(247)		(247)
Total income taxes (benefit)	$	21,857	$	(25,962)	$	(5,971)

PNM’s provision for income taxes (benefit) differed from the federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the following factors:

	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Federal income tax at statutory rates	$	38,193	$	6,187	$	13,514
Amortization of accumulated investment tax credits	(243)		(247)		(247)
Amortization of excess deferred income tax (Note 17)	(21,609)		(28,923)		(19,779)
Flow-through of depreciation items	1,279		1,077		674
Earnings attributable to non-controlling interest in Valencia	(2,943)		(2,991)		(3,173)
State income tax, net of federal benefit	7,111		92		1,323
Impairment of state net operating loss carryforwards	—		—		—
Allowance for equity funds used during construction	(1,461)		(1,398)		(1,716)
Regulatory recovery of prior year impairment of state net operating loss carryforward, net of amortization	1,367		1,367		1,367
Federal income tax rate change	—		—		(683)
Allocation of tax expense (benefit) related to stock compensation awards	(279)		(559)		3,967
Non-deductible compensation	1,554		683		612
Other	(1,112)		(1,250)		(1,830)
Total income taxes (benefit)	$	21,857	$	(25,962)	$	(5,971)

Effective tax rate 12.02  % (88.13) % (9.28) %

The components of PNM’s net accumulated deferred income tax liability were:

	December 31,
	2020		2019
	(In thousands)
Deferred tax assets:
Net operating loss	$	—	$	25,889
Regulatory liabilities related to income taxes	121,569		114,849
Federal tax credit carryforwards	84,719		82,983
Shutdown of SJGS Units 2 and 3	—		—
Regulatory disallowance	38,531		34,639
Other	46,444		38,735
Total deferred tax assets	291,263		297,095
Deferred tax liabilities:
Depreciation and plant related	(576,079)		(630,293)
Investment tax credit	(74,424)		(74,667)
Regulatory assets related to income taxes	(51,493)		(49,479)
Pension	(32,413)		(30,609)
Regulatory asset for shutdown of SJGS Units 2 and 3	(27,237)		(28,831)
Other	(108,767)		(5,206)
Total deferred tax liabilities	(870,413)		(819,085)
Net accumulated deferred income tax liabilities	$	(579,150)	$	(521,990)

The following table reconciles the change in PNM’s net accumulated deferred income tax liability to the deferred income tax (benefit) included in the Consolidated Statement of Earnings:

	Year Ended
	December 31, 2020
	(In thousands)
Net change in deferred income tax liability per above table	$	57,160
Change in tax effects of income tax related regulatory assets and liabilities	(7,936)
Amortization of excess deferred income tax	(21,609)
Tax effect of mark-to-market adjustments	(3,325)
Tax effect of excess pension liability	(3,670)
Adjustment for uncertain income tax positions	2,454
Reclassification of unrecognized tax benefits	(1,999)
Amortization of state net operating loss recovered in prior years	1,367
Other	—
Deferred income taxes (benefits)	$	22,442

TNMP

TNMP’s income taxes consist of the following components:

	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Current federal income tax	$	12,048	$	10,792	$	13,347
Current state income tax	2,033		1,904		1,753
Deferred federal income tax	(7,744)		(7,621)		(540)
Deferred state income tax	(29)		(29)		2,320
Total income taxes	$	6,308	$	5,046	$	16,880

TNMP’s provision for income taxes differed from the federal income tax computed at the statutory rate for each of the periods shown. The differences are attributable to the following factors:

	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Federal income tax at statutory rates	$	13,628	$	12,778	$	14,379
Amortization of excess deferred income tax	(9,113)		(8,876)		—
State income tax, net of federal benefit	1,625		1,532		1,454
Allocation of tax expense (benefit) related to stock compensation awards	(112)		(236)		735
Officer compensation	1,071		471		277
Other	(791)		(623)		35
Total income taxes	$	6,308	$	5,046	$	16,880

Effective tax rate 9.71  % 8.29  % 24.65  %

The components of TNMP’s net accumulated deferred income tax liability at December 31, were:

	December 31,
	2020		2019
	(In thousands)
Deferred tax assets:
Regulatory liabilities related to income taxes	$	27,392	$	30,238
Other	4,548		3,788
Total deferred tax assets	31,940		34,026
Deferred tax liabilities:
Depreciation and plant related	(148,279)		(142,791)
CTC	—		(1,466)
Regulatory assets related to income taxes	(9,836)		(9,016)
Loss on reacquired debt	(6,072)		(6,345)
Pension	(4,685)		(4,420)
AMS	(6,915)		(8,473)
Other	(1,522)		(1,666)
Total deferred tax liabilities	(177,309)		(174,177)
Net accumulated deferred income tax liabilities	$	(145,369)	$	(140,151)

The following table reconciles the change in TNMP’s net accumulated deferred income tax liability to the deferred income tax (benefit) included in the Consolidated Statement of Earnings:

	Year Ended
	December 31, 2020
	(In thousands)
Net change in deferred income tax liability per above table	$	5,218
Change in tax effects of income tax related regulatory assets and liabilities	(3,666)
Amortization of excess deferred income tax	(9,113)
Other	(212)
Deferred income taxes (benefits)	$	(7,773)

Other Disclosures

The Company is required to recognize only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. A reconciliation of unrecognized tax benefits is as follows:

	PNMR		PNM		TNMP
	(In thousands)
Balance at December 31, 2017	$	9,429	$	6,563	$	63
Additions based on tax positions related to 2018	543		543		—
Additions (reductions) for tax positions of prior years	222		182		40
Settlement payments	—		—		—
Balance at December 31, 2018	10,194		7,288		103
Additions based on tax positions related to 2019	329		329		—
Additions (reductions) for tax positions of prior years	170		159		11
Settlement payments	—		—		—
Balance at December 31, 2019	10,693		7,776		114
Additions based on tax positions related to 2020	2,286		2,286		—
Additions (reductions) for tax positions of prior years	173		168		5
Settlement payments	—		—		—
Balance at December 31, 2020	$	13,152	$	10,230	$	119

Included in the balance of unrecognized tax benefits at December 31, 2020 are $10.7 million, $7.8 million, and $0.1 million that, if recognized, would affect the effective tax rate for PNMR, PNM, and TNMP. The Company does not anticipate that any unrecognized tax expenses or unrecognized tax benefits will be reduced or settled in 2021.

PNMR, PNM, and TNMP had no estimated interest income or expense for the years ended December 31, 2020, 2019, and 2018. There was no accumulated accrued interest receivable or payable related to income taxes as of December 31, 2020 and 2019.

The Company files a federal consolidated and several consolidated and separate state income tax returns. The tax years prior to 2017 are closed to examination by either federal or state taxing authorities other than Arizona. The tax years prior to 2016 are closed to examination by Arizona taxing authorities. Other tax years are open to examination by federal and state taxing authorities and net operating loss carryforwards are open to examination for the years in which the carryforwards are utilized. At December 31, 2020, the Company has $222.1 million of federal net operating loss carryforwards that expire beginning in 2031 and $121.4 million of federal tax credit carryforwards that expire beginning in 2023. State net operating losses expire beginning in 2035 and vary from federal due to differences between state and federal tax law. The proposed Merger may impact the Company’s ability to utilize its federal net operating loss and tax credit carryforwards.

In 2008, fifty percent bonus tax depreciation was enacted as a temporary two-year stimulus measure as part of the Economic Stimulus Act of 2008. Bonus tax depreciation in various forms has been extended since that time, including by the Protecting Americans from Tax Hikes Act of 2015. The 2015 act extended and phased-out bonus tax depreciation through 2019. As discussed above the Tax Act eliminated bonus depreciation for utilities effective September 28, 2017. However, in 2018 the IRS issued proposed regulations interpreting Tax Act amendments to depreciation provisions of the IRC which allowed the Company to claim a bonus depreciation deduction on certain construction projects placed in service after the third quarter of 2017. As a result of the net operating loss carryforwards for income tax purposes created by bonus depreciation, certain tax carryforwards were not expected to be utilized before their expiration. In addition, as a result of Tax Act changes to the deductibility of officer compensation, certain deferred tax benefits related to compensation are not expected to be realized. The Company has impaired the deferred tax assets for tax carryforwards which are not expected to be utilized and for compensation that is not expected to be deductible.

The Company earns investment tax credits for construction or purchase of eligible property. The Company uses the deferral method of accounting for these investment tax credits.

The impairments after reflecting the expiration of carryforwards under applicable tax laws, net of federal tax benefit, for 2018 through 2020 are as follows:

	PNMR		PNM		TNMP
	(In thousands)
December 31, 2020:
State tax credit carryforwards	$	(425)	$	—	$	—
State net operating loss carryforwards	$	—	$	—	$	—
Charitable contribution carryforwards	$	—	$	—	$	—
Compensation expense	$	96	$	61	$	35
December 31, 2019:
State tax credit carryforwards	$	425	$	—	$	—
State net operating loss carryforwards	$	—	$	—	$	—
Charitable contribution carryforwards	$	—	$	—	$	—
Compensation expense	$	(99)	$	(100)	$	2
December 31, 2018:
State tax credit carryforwards	$	—	$	—	$	—
State net operating loss carryforwards	$	—	$	—	$	—
Charitable contribution carryforwards	$	—	$	—	$	—
Compensation expense	$	410	$	298	$	111

The impairments of unexpired state tax credits, state net operating loss, and charitable contribution carryforwards are reflected as a valuation allowance against deferred tax assets. The reserve balances, after reflecting expiration of carryforwards under applicable tax laws, at December 31, 2020 and 2019 are as follows:

	PNMR		PNM		TNMP
	(In thousands)
December 31, 2020:
State tax credit carryforwards	$	—	$	—	$	—
State net operating loss carryforwards	$	—	$	—	$	—
Charitable contribution carryforwards	$	—	$	—	$	—
Compensation expense	$	407	$	259	$	148
December 31, 2019:
State tax credit carryforwards	$	425	$	—	$	—
State net operating loss carryforwards	$	—	$	—	$	—
Charitable contribution carryforwards	$	—	$	—	$	—
Compensation expense	$	311	$	198	$	113