Income Taxes

Federal Income Tax Reform

On December 22, 2017, comprehensive changes in United States federal income taxes were enacted through legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes 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 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.

Although most of the provisions of the Tax Act are not effective until 2018, GAAP requires that some effects must be recognized in 2017. Under the asset and liability method of accounting for income taxes used by the Company, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. At the date of enactment of the Tax Act, the Company had net deferred tax liabilities for its regulated activities and net deferred tax assets for non-regulated activities. As a result of the change in the federal income tax rate, the Company re-measured and adjusted its deferred tax assets and liabilities as of December 31, 2017. The portion of that adjustment not related to PNM’s and TNMP’s regulated activities was recorded as a reduction in net deferred tax assets and an increase in income tax expense. The portion related to PNM’s and TNMP’s regulated activities was recorded as a reduction in net deferred tax liabilities and an increase in regulatory liabilities, based on the assumption that PNM and TNMP will be required to return the benefit to ratepayers over time. PNM’s NM 2016 Rate Case (Note 17) reflects that assumption by including an amortization of the estimated benefit of the reduction in existing deferred federal income taxes as a reduction to customer rates over a twenty-one year period beginning in 2018. In addition, in January 2018, the PUCT issued an order requiring Texas utilities, including TNMP, to begin recording regulatory liabilities for the effects of the Tax Act with the stated purpose of reflecting those effects in the utility bills of Texas ratepayers.

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. The Company believes it has made reasonable estimates of the effects of the Tax Act and reflected the impacts in the Consolidated Financial Statements. However, the reported effects on the Company’s deferred tax assets and liabilities, regulatory assets and liabilities, and income tax expense are provisional and it is possible that changes to 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 these estimates to change.

The adjustments to deferred income taxes recorded as increases in regulatory liabilities and income tax expense as a result of the enactment of the Tax Act are presented below:



	PNM		TNMP		Corporate and Other			Consolidated
	(In thousands)
Net increase in regulatory liabilities	$	402,501	$	146,451	$	—		$	548,952
Net decrease in deferred income tax liabilities (deferred income tax assets)	372,895		138,586		(19,990		)	491,491
Net deferred income tax expense	$	29,606	$	7,865	$	19,990		$	57,461

GAAP requires that the impacts of adjusting existing deferred tax assets and liabilities for a change in an income tax rate be recognized in income tax expense during the period of enactment, including impacts that are reflected in AOCI. This results in the tax effects of items within AOCI not reflecting the appropriate tax rate and being stranded in AOCI. In February 2018, the FASB issued Accounting Standards Update 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income to address this issue by allowing entities to reclassify the income tax effects of the Tax Act on items within AOCI to retained earnings. The Company records in AOCI, net of income taxes, unamortized gains and losses related to PNM’s defined benefit pension plans to the extent not attributed to regulated operations, unrealized gains on PNM’s available-for-sale securities, and unrealized gains and losses on cash flow hedges related to PNMR’s interest rate swaps. When amounts are reclassified from AOCI to the Consolidated Statement of Earnings, the Company recognizes the related income tax expense (benefit) at the tax rate in effect at that time. As permitted by ASU 2018-02, as of December 31, 2017, the Company reclassified the stranded federal income tax effects of the Tax Act on items recorded in AOCI, resulting in a net increase in retained earnings of $17.6 million. See Note 19.

PNMR

PNMR’s income taxes consist of the following components:



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Current federal income tax	$	—		$	—		$	—
Current state income tax	(188		)	(527		)	(1,376		)
Deferred federal income tax	119,182			60,892			5,488
Deferred state income tax	11,632			3,886			12,305
Amortization of accumulated investment tax credits	(286		)	(973		)	(1,342		)
Total income taxes	$	130,340		$	63,278		$	15,075

PNMR’s provision for income taxes 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,
	2017			2016			2015
	(In thousands)
Federal income tax at statutory rates	$	79,016		$	68,311		$	16,154
Amortization of accumulated investment tax credits	(286		)	(973		)	(1,342		)
Flow-through of depreciation items	1,147			1,227			1,485
Earnings attributable to non-controlling interest in Valencia	(5,256		)	(5,082		)	(5,218		)
State income tax, net of federal benefit	5,398			4,537			(1,781		)
Impairment of state net operating loss carryforwards	819			(311		)	5,278
Impairment of state production tax credits	—			—			3,092
Allowance for equity funds used during construction	(3,331		)	(1,732		)	(3,650		)
Reversal of deferred items related to BART at SJGS	—			—			1,826
Impairment of charitable contribution carryforward	909			—			2,042
Regulatory recovery of prior year impairments of state net operating loss carryforward, net of amortization	(2,225		)	(1,877		)	—
Federal income tax rate change	57,461			—			—
Excess tax benefits related to stock compensation awards	(2,324		)	—			—
Other	(988		)	(822		)	(2,811		)
Total income taxes	$	130,340		$	63,278		$	15,075
Effective tax rate	57.73		%	32.42		%	32.66		%

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



	December 31,
	2017			2016
	(In thousands)
Deferred tax assets:
Net operating loss	$	98,301		$	160,901
Regulatory liabilities related to income taxes	189,501			64,657
Federal tax credit carryforwards	71,849			78,675
Shutdown of SJGS Units 2 and 3	2,204			53,434
Other	45,656			75,805
Total deferred tax assets	407,511			433,472
Deferred tax liabilities:
Depreciation and plant related	(690,909		)	(1,102,458		)
Investment tax credit	(55,731		)	(56,017		)
Regulatory assets related to income taxes	(61,956		)	(66,378		)
CTC	(5,670		)	(12,715		)
Pension	(56,070		)	(57,287		)
Regulatory asset for shutdown of SJGS Units 2 and 3	(31,887		)	—
Other	(52,498		)	(79,267		)
Total deferred tax liabilities	(954,721		)	(1,374,122		)
Net accumulated deferred income tax liabilities	$	(547,210	)	$	(940,650	)

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, 2017
	(In thousands)
Net change in deferred income tax liability per above table	$	(393,440	)
Change in tax effects of income tax related regulatory assets and liabilities	(16,444		)
Tax effect of mark-to-market adjustments	(4,724		)
Tax effect of excess pension liability	(3,421		)
Adjustment for uncertain income tax positions	2,677
Reclassification of unrecognized tax benefits	(2,677		)
Regulatory recovery of prior year impairments of state net operating loss carryforward, net of amortization	(2,225		)
Federal income tax rate change	548,952
Cumulative effect adjustment for excess tax benefit related to stock compensation awards	10,382
Alternative minimum tax carryforward reclassified to receivable	(8,336		)
Other	(216		)
Deferred income taxes	$	130,528

PNM

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



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Current federal income tax	$	118		$	(10,290	)	$	(7,934	)
Current state income tax	(1,112		)	(1,907		)	(1,988		)
Deferred federal income tax	73,308			49,123			(6,827		)
Deferred state income tax	9,527			4,969			5,333
Amortization of accumulated investment tax credits	(286		)	(973		)	(1,342		)
Total income taxes (benefit)	$	81,555		$	40,922		$	(12,758	)

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,
	2017			2016			2015
	(In thousands)
Federal income tax (benefit) at statutory rates	$	59,139		$	46,501		$	(4,579	)
Amortization of accumulated investment tax credits	(286		)	(973		)	(1,342		)
Flow-through of depreciation items	1,103			1,185			1,465
Earnings attributable to non-controlling interest in Valencia	(5,256		)	(5,082		)	(5,218		)
State income tax, net of federal benefit	4,926			3,921			(2,162		)
Impairment of state net operating loss carryforwards	627			(213		)	3,619
Allowance for equity funds used during construction	(3,032		)	(1,457		)	(3,650		)
Reversal of deferred items related to BART at SJGS	—			—			1,826
Regulatory recovery of prior year impairment of state net operating loss carryforward, net of amortization	(2,225		)	(1,877		)	—
Federal income tax rate change	29,606			—			—
Allocation of excess tax benefit related to stock compensation awards	(1,708		)	—			—
Other	(1,339		)	(1,083		)	(2,717		)
Total income taxes (benefit)	$	81,555		$	40,922		$	(12,758	)
Effective tax rate	48.27		%	30.80		%	97.52		%

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



	December 31,
	2017			2016
	(In thousands)
Deferred tax assets:
Net operating loss	$	67,719		$	117,922
Regulatory liabilities related to income taxes	152,059			60,940
Federal tax credit carryforwards	60,085			59,156
Shutdown of SJGS Units 2 and 3	2,204			53,434
Other	23,801			41,700
Total deferred tax assets	305,868			333,152
Deferred tax liabilities:
Depreciation and plant related	(544,270		)	(891,578		)
Investment tax credit	(55,731		)	(56,017		)
Regulatory assets related to income taxes	(52,392		)	(56,577		)
Pension	(51,774		)	(50,134		)
Regulatory asset for shutdown of SJGS Units 2 and 3	(31,887		)	—
Other	(18,826		)	(27,512		)
Total deferred tax liabilities	(754,880		)	(1,081,818		)
Net accumulated deferred income tax liabilities	$	(449,012	)	$	(748,666	)

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, 2017
	(In thousands)
Net change in deferred income tax liability per above table	$	(299,654	)
Change in tax effects of income tax related regulatory assets and liabilities	(16,332		)
Tax effect of mark-to-market adjustments	(4,110		)
Tax effect of excess pension liability	(3,421		)
Adjustment for uncertain income tax positions	2,614
Reclassification of unrecognized tax benefits	(2,614		)
Regulatory recovery of prior year impairment of state net operating loss carryforward, net of amortization	(2,225		)
Federal income tax rate change	402,501
Allocation of cumulative effect adjustment for excess tax benefit related to stock compensation awards	7,770
Other	(1,980		)
Deferred income taxes	$	82,549

TNMP

TNMP’s income taxes consist of the following components:



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Current federal income tax	$	2,472		$	9,445		$	1,603
Current state income tax	1,765			1,729			1,639
Deferred federal income tax	27,304			12,690			20,904
Deferred state income tax	(29		)	(28		)	(21		)
Total income taxes	$	31,512		$	23,836		$	24,125

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,
	2017			2016			2015
	(In thousands)
Federal income tax at statutory rates	$	23,475		$	22,928		$	23,131
State income tax, net of federal benefit	1,198			1,132			1,065
Federal income tax rate change	7,865			—			—
Allocation of excess tax benefit related to stock compensation awards	(616		)	—			—
Other	(410		)	(224		)	(71		)
Total income taxes	$	31,512		$	23,836		$	24,125
Effective tax rate	46.98		%	36.39		%	36.5		%

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



	December 31,
	2017			2016
	(In thousands)
Deferred tax assets:
Regulatory liabilities related to income taxes	$	43,103		$	3,718
Other	3,762			6,016
Total deferred tax assets	46,865			9,734
Deferred tax liabilities:
Depreciation and plant related	(135,647		)	(201,017		)
CTC	(5,670		)	(12,715		)
Regulatory assets related to income taxes	(9,564		)	(9,800		)
Loss on reacquired debt	(6,890		)	(11,937		)
Pension	(4,296		)	(7,153		)
AMS	(7,707		)	(8,928		)
Other	(3,506		)	(3,969		)
Total deferred tax liabilities	(173,280		)	(255,519		)
Net accumulated deferred income tax liabilities	$	(126,415	)	$	(245,785	)

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, 2017
	(In thousands)
Net change in deferred income tax liability per above table	$	(119,370	)
Change in tax effects of income tax related regulatory assets and liabilities	(112		)
Federal income tax rate change	146,451
Other	306
Deferred income taxes	$	27,275

Other Disclosures

GAAP requires that the Company 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 (expenses) is as follows:



	PNMR			PNM			TNMP
	(In thousands)
Balance at December 31, 2014	$	15,031		$	12,228		$	—
Additions based on tax positions related to 2015	1,214			1,214			—
Additions (reductions) for tax positions of prior years	(9,790		)	(9,790		)	—
Settlement payments	—			—			—
Balance at December 31, 2015	6,455			3,652			—
Additions based on tax positions related to 2016	242			242			—
Additions (reductions) for tax positions of prior years	55			55			—
Settlement payments	—			—			—
Balance at December 31, 2016	6,752			3,949			—
Additions based on tax positions related to 2017	262			262			—
Additions (reductions) for tax positions of prior years	2,415			2,352			63
Settlement payments	—			—			—
Balance at December 31, 2017	$	9,429		$	6,563		$	63

Included in the balance of unrecognized tax benefits at December 31, 2017 are $8.9 million, $6.1 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 2018.

In 2016, the Company undertook an analysis of interest income and interest expense applicable to federal income tax matters. The analysis encompassed the impacts of IRS examinations, amended income tax returns, and filings for carrybacks of tax matters to previous taxable years applicable to all years not closed under the IRS rules. As a result of this effort, PNMR received net refunds from the IRS of $6.5 million. Of the refunds, $2.1 million was recorded as a reduction of the net interest receivable and $5.1 million was recorded as interest income, which was partially offset by $0.7 million of interest expense. In addition, PNMR incurred $0.9 million in professional fees related to the analysis. Of the net pre-tax impacts aggregating $3.5 million, $2.6 million is reflected in the PNM segment, $0.3 million in the TNMP segment, and $0.6 million in the Corporate and Other segment.

Estimated interest income related to refunds the Company expects to receive is included in Other income and estimated interest expense and penalties related to potential cash settlements are included in Interest Charges in the Consolidated Statements of Earnings. Interest income (expense) related to income taxes was as follows:



	PNMR		PNM		TNMP
	(In thousands)
2017	$	—	$	—	$	—
2016	$	4,398	$	3,625	$	345
2015	$	—	$	—	$	—

There was no accumulated accrued interest receivable or payable related to income taxes as of December 31, 2017 and 2016.

The Company files a federal consolidated and several consolidated and separate state income tax returns. The tax years prior to 2013 are closed to examination by either federal or state taxing authorities other than Arizona. The tax years prior to 2012 are closed to examination by Arizona taxing authorities. Other tax years are open to examination by federal and state taxing authorities. At December 31, 2017, the Company has $410.4 million of federal net operating loss carryforwards that expire beginning in 2030 and $71.8 million of federal tax credit carryforwards that expire beginning in 2023. State net operating losses expire beginning in 2017 and vary from federal due to differences between state and federal tax law.

In 2013, New Mexico House Bill 641 reduced the New Mexico corporate income tax rate from 7.6% to 5.9%. The rate reduction is being phased-in from 2014 to 2018. In accordance with GAAP, PNMR and PNM adjusted accumulated deferred income taxes to reflect the tax rate at which the balances are expected to reverse during the period that includes the date of enactment, which was in the year ended December 31, 2013. At that time, the portion of the adjustment related to PNM’s regulated activities was recorded as a reduction in deferred tax liabilities and an increase in a regulatory liability, based on the assumption that PNM will be required to return the benefit to customers over time. PNM’s NM 2016 Rate Case (Note 17) reflects that assumption. In addition, the portion of the adjustment that was not related to PNM’s regulated activities was recorded as a reduction in deferred tax assets and an increase in income tax expense. Changes in the estimated timing of reversals of deferred tax assets and liabilities resulted in refinements of the impacts of this change in tax rates being recorded periodically until the rate reduction was fully phased-in. Adjustments to deferred income taxes recorded as increases (decreases) in the regulatory liability and income tax expense are as follows:



	PNMR			PNM			TNMP
	(In thousands)
December 31, 2017:
Regulatory liability	$	(10,109	)	$	(10,109	)	$	—
Income tax expense	$	(1,259	)	$	(1,179	)	$	—
December 31, 2016:
Regulatory liability	$	(7,132	)	$	(7,132	)	$	—
Income tax expense	$	712		$	804		$	—
December 31, 2015:
Regulatory liability	$	(1,903	)	$	(1,903	)	$	—
Income tax expense	$	(674	)	$	(470	)	$	—

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 was continuously 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. As a result of the net operating loss carryforwards for income tax purposes created by bonus depreciation and reduced future income taxes payable resulting from New Mexico House Bill 641, certain tax carryforwards are not expected to be utilized before their expiration. In accordance with GAAP, PNMR and PNM have impaired the tax carryforwards which were not expected to be utilized prior to their expiration. The impairments, net of federal tax benefit, for 2015 through 2017 are as follows:



	PNMR			PNM			TNMP
	(In thousands)
December 31, 2017:
State tax credit carryforwards	$	—		$	—		$	—
State net operating loss carryforwards	$	819		$	627		$	—
Charitable contribution carryforwards	$	909		$	—		$	—
December 31, 2016:
State tax credit carryforwards	$	—		$	—		$	—
State net operating loss carryforwards	$	(311	)	$	(213	)	$	—
Charitable contribution carryforwards	$	—		$	—		$	—
December 31, 2015:
State tax credit carryforwards	$	3,092		$	—		$	—
State net operating loss carryforwards	$	5,278		$	3,619		$	—
Charitable contribution carryforwards	$	2,042		$	—		$	—

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, 2017 and 2016 are as follows:



	PNMR		PNM		TNMP
	(In thousands)
December 31, 2017:
State tax credit carryforwards	$	2,487	$	—	$	—
State net operating loss carryforwards	$	1,131	$	839	$	—
Charitable contribution carryforwards	$	952	$	—	$	—
December 31, 2016:
State tax credit carryforwards	$	3,986	$	—	$	—
State net operating loss carryforwards	$	361	$	248	$	—
Charitable contribution carryforwards	$	659	$	—	$	—

The NMPRC’s order in the NM 2015 Rate Case (Note 17) approved PNM’s request to record a regulatory asset, which net of federal income taxes, amounted to $2.1 million, to recover a 2014 impairment of PNM’s New Mexico net operating loss carryforward resulting from an extension of the income tax provision for fifty percent bonus depreciation. The regulatory asset is being recovered through rates over two years. The settlement of the NM 2016 Rate Case (Note 17) included $3.3 million, net of federal tax, resulting from impairment of a 2015 New Mexico net operating loss as an addition to the remaining unamortized balance of the regulatory asset from the NM 2015 Rate Case. The total balance will be recovered over three years beginning in 2018. These impacts, net of amortization, are reflected in income tax expense on the Consolidated Statement of Earnings.