UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q

Transcription

1 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2017 Commission File Name of Registrants, State of Incorporation, I.R.S. Employer Number Address and Telephone Number Identification No PNM Resources, Inc (A New Mexico Corporation) 414 Silver Ave. SW Albuquerque, New Mexico (505) Public Service Company of New Mexico (A New Mexico Corporation) 414 Silver Ave. SW Albuquerque, New Mexico (505) Texas-New Mexico Power Company (A Texas Corporation) 577 N. Garden Ridge Blvd. Lewisville, Texas (972) Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. PNM Resources, Inc. ( PNMR ) YES ü NO Public Service Company of New Mexico ( PNM ) YES ü NO Texas-New Mexico Power Company ( TNMP ) YES NO ü (NOTE: As a voluntary filer, not subject to the filing requirements, TNMP filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.) Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). PNMR YES ü NO PNM YES ü NO TNMP YES ü NO

2 Table of Contents Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. Large accelerated filer PNMR ü Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) PNM ü TNMP ü Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO ü As of July 25, 2017, 79,653,624 shares of common stock, no par value per share, of PNMR were outstanding. The total number of shares of common stock of PNM outstanding as of July 25, 2017 was 39,117,799 all held by PNMR (and none held by non-affiliates). The total number of shares of common stock of TNMP outstanding as of July 25, 2017 was 6,358 all held indirectly by PNMR (and none held by non-affiliates). PNM AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H) (1) (a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION (H) (2). This combined Form 10-Q is separately filed by PNMR, PNM, and TNMP. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. When this Form 10-Q is incorporated by reference into any filing with the SEC made by PNMR, PNM, or TNMP, as a registrant, the portions of this Form 10-Q that relate to each other registrant are not incorporated by reference therein. 2

3 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES INDEX Page No. GLOSSARY 4 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) PNM RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings 8 Condensed Consolidated Statements of Comprehensive Income 9 Condensed Consolidated Statements of Cash Flows 10 Condensed Consolidated Balance Sheets 12 Condensed Consolidated Statement of Changes in Equity 14 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES Condensed Consolidated Statements of Earnings 15 Condensed Consolidated Statements of Comprehensive Income 16 Condensed Consolidated Statements of Cash Flows 17 Condensed Consolidated Balance Sheets 19 Condensed Consolidated Statement of Changes in Equity 21 TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Earnings 22 Condensed Consolidated Statements of Cash Flows 23 Condensed Consolidated Balance Sheets 24 Condensed Consolidated Statement of Changes in Common Stockholder's Equity 26 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 27 ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 81 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 121 ITEM 4. CONTROLS AND PROCEDURES 124 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 125 ITEM 1A. RISK FACTORS 125 ITEM 5. OTHER INFORMATION 125 ITEM 6. EXHIBITS 126 SIGNATURE 127 3

4 Table of Contents GLOSSARY Definitions: 2014 IRP PNM s 2014 IRP 2017 IRP PNM s 2017 IRP ABCWUA Albuquerque Bernalillo County Water Utility Authority Afton Afton Generating Station AFUDC Allowance for Funds Used During Construction AMI Advanced Metering Infrastructure AMS Advanced Meter System AOCI Accumulated Other Comprehensive Income APS Arizona Public Service Company, the operator and a co-owner of PVNGS and Four Corners ASU Accounting Standards Update BACT Best Available Control Technology BART Best Available Retrofit Technology BDT Balanced Draft Technology BHP BHP Billiton, Ltd Board Board of Directors of PNMR BTMU The Bank of Tokyo-Mitsubishi UFJ, Ltd. BTMU Term Loan Agreement NM Capital s $125.0 Million Unsecured Term Loan BTU British Thermal Unit CAA Clean Air Act CCB Coal Combustion Byproducts CCN Certificate of Convenience and Necessity CIAC Contributions in Aid of Construction CO 2 Carbon Dioxide CSA Coal Supply Agreement CTC Competition Transition Charge DC Circuit United States Court of Appeals for the District of Columbia Circuit DOE United States Department of Energy DOI United States Department of Interior EGU Electric Generating Unit EIS Environmental Impact Study EPA United States Environmental Protection Agency ERCOT Electric Reliability Council of Texas ESA Endangered Species Act Exchange Act Securities Exchange Act of 1934 Farmington The City of Farmington, New Mexico FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission FIP Federal Implementation Plan Four Corners Four Corners Power Plant FPPAC Fuel and Purchased Power Adjustment Clause FTY Future Test Year GAAP Generally Accepted Accounting Principles in the United States of America GHG Greenhouse Gas Emissions 4

5 Table of Contents GWh Gigawatt hours IBEW International Brotherhood of Electrical Workers IRP Integrated Resource Plan IRS Internal Revenue Service ISFSI Independent Spent Fuel Storage Installation KW Kilowatt KWh Kilowatt Hour La Luz La Luz Generating Station LIBOR London Interbank Offered Rate Lightning Dock Geothermal Lightning Dock geothermal power facility, also known as the Dale Burgett Geothermal Plant Lordsburg Lordsburg Generating Station Luna Luna Energy Facility MD&A Management s Discussion and Analysis of Financial Condition and Results of Operations MMBTU Million BTUs Moody s Moody s Investor Services, Inc. MW Megawatt MWh Megawatt Hour NAAQS National Ambient Air Quality Standards Navajo Acts Navajo Nation Air Pollution Prevention and Control Act, Navajo Nation Safe Drinking Water Act, and Navajo Nation Pesticide Act NDT Nuclear Decommissioning Trusts for PVNGS NEC Navopache Electric Cooperative, Inc. NEE New Energy Economy NEPA National Environmental Policy Act NERC North American Electric Reliability Corporation New Mexico Wind New Mexico Wind Energy Center NM 2015 Rate Case Request for a General Increase in Electric Rates Filed by PNM on August 27, 2015 NM 2016 Rate Case Request for a General Increase in Electric Rates Filed by PNM on December 7, 2016 NM Capital NM Capital Utility Corporation, an unregulated wholly-owned subsidiary of PNMR NM Supreme Court New Mexico Supreme Court NMAG New Mexico Attorney General NMED New Mexico Environment Department NMIEC New Mexico Industrial Energy Consumers Inc. NMMMD The Mining and Minerals Division of the New Mexico Energy, Minerals and Natural Resources Department NMPRC New Mexico Public Regulation Commission NOx Nitrogen Oxides NOPR Notice of Proposed Rulemaking NPDES National Pollutant Discharge Elimination System NRC United States Nuclear Regulatory Commission NSPS New Source Performance Standards NSR New Source Review NTEC Navajo Transitional Energy Company, LLC, an entity owned by the Navajo Nation OCI Other Comprehensive Income OPEB Other Post Employment Benefits OSM United States Office of Surface Mining Reclamation and Enforcement 5

6 Table of Contents PCRBs Pollution Control Revenue Bonds PNM Public Service Company of New Mexico and Subsidiaries, a wholly-owned subsidiary of PNMR PNM 2016 Term Loan Agreement PNM s $175.0 Million Unsecured Term Loan PNM 2017 Senior Unsecured Note Agreement PNM s Agreement for the sale of Senior Unsecured Notes, aggregating $450.0 million PNM 2017 Term Loan Agreement PNM s $200.0 Million Unsecured Term Loan PNM 2018 SUNs PNM s Senior Unsecured Notes to be issued under the PNM 2017 Senior Unsecured Note Agreement PNM Multi-draw Term Loan PNM s $125.0 Million Unsecured Multi-draw Term Loan Facility PNM New Mexico Credit Facility PNM s $50.0 Million Unsecured Revolving Credit Facility PNM Revolving Credit Facility PNM s $400.0 Million Unsecured Revolving Credit Facility PNMR PNM Resources, Inc. and Subsidiaries PNMR 2015 Term Loan Agreement PNMR s $150.0 Million Three-Year Unsecured Term Loan PNMR 2016 One-Year Term Loan PNMR s $100.0 Million One-Year Unsecured Term Loan PNMR 2016 Two-Year Term Loan PNMR s $100.0 Million Two-Year Unsecured Term Loan PNMR Development PNMR Development and Management Company, an unregulated wholly-owned subsidiary of PNMR PNMR Revolving Credit Facility PNMR s $300.0 Million Unsecured Revolving Credit Facility PPA Power Purchase Agreement PSA Power Sales Agreement PSD Prevention of Significant Deterioration PUCT Public Utility Commission of Texas PV Photovoltaic PVNGS Palo Verde Nuclear Generating Station RA San Juan Project Restructuring Agreement RCRA Resource Conservation and Recovery Act RCT Reasonable Cost Threshold REA New Mexico s Renewable Energy Act of 2004 REC Renewable Energy Certificates Red Mesa Wind Red Mesa Wind Energy Center REP Retail Electricity Provider Rio Bravo Rio Bravo Generating Station RMC Risk Management Committee ROE Return on Equity RPS Renewable Energy Portfolio Standard S&P Standard and Poor s Ratings Services SCR Selective Catalytic Reduction SEC United States Securities and Exchange Commission SIP State Implementation Plan SJCC San Juan Coal Company SJGS San Juan Generating Station 6

7 Table of Contents SNCR Selective Non-Catalytic Reduction SO 2 Sulfur Dioxide TECA Texas Electric Choice Act Tenth Circuit United States Court of Appeals for the Tenth Circuit TNMP Texas-New Mexico Power Company and Subsidiaries, a wholly-owned subsidiary of TNP TNMP Revolving Credit Facility TNMP s $75.0 Million Secured Revolving Credit Facility TNP TNP Enterprises, Inc. and Subsidiaries, a wholly-owned subsidiary of PNMR Tri-State Tri-State Generation and Transmission Association, Inc. Tucson Tucson Electric Power Company UG-CSA Underground Coal Sales Agreement US Supreme Court Supreme Court of the United States Valencia Valencia Energy Facility VaR Value at Risk VIE Variable Interest Entity WACC Weighted Average Cost of Capital WEG WildEarth Guardians Westmoreland Westmoreland Coal Company Westmoreland Loan NM Capital s $125.0 million loan to WSJ WSJ Westmoreland San Juan, LLC, an indirect wholly-owned subsidiary of Westmoreland 7

8 Table of Contents PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands, except per share amounts) Electric Operating Revenues $ 362,320 $ 315,391 $ 692,498 $ 626,352 Operating Expenses: Cost of energy 104,267 81, , ,732 Administrative and general 45,122 45,160 92,655 92,270 Energy production costs 34,393 37,881 66,180 80,567 Regulatory disallowances and restructuring costs 774 Depreciation and amortization 57,625 50, , ,784 Transmission and distribution costs 17,031 17,315 33,508 33,909 Taxes other than income taxes 18,777 17,895 38,012 37,987 Total operating expenses 277, , , ,023 Operating income 85,105 64, , ,329 Other Income and Deductions: Interest income 3,885 10,194 8,766 13,815 Gains on available-for-sale securities 5,663 4,631 12,324 10,849 Other income 3,450 4,265 8,351 8,530 Other (deductions) (2,904) (4,105) (6,387) (7,104) Net other income and deductions 10,094 14,985 23,054 26,090 Interest Charges 32,332 33,221 64,031 64,712 Earnings before Income Taxes 62,867 46, ,088 67,707 Income Taxes 21,636 15,634 32,411 22,790 Net Earnings 41,231 30,952 67,677 44,917 (Earnings) Attributable to Valencia Non-controlling Interest (3,544) (3,744) (6,996) (7,031) Preferred Stock Dividend Requirements of Subsidiary (132) (132) (264) (264) Net Earnings Attributable to PNMR $ 37,555 $ 27,076 $ 60,417 $ 37,622 Net Earnings Attributable to PNMR per Common Share: Basic $ 0.47 $ 0.34 $ 0.76 $ 0.47 Diluted $ 0.47 $ 0.34 $ 0.75 $ 0.47 Dividends Declared per Common Share $ $ $ $ The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements. 8

9 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands) Net Earnings $ 41,231 $ 30,952 $ 67,677 $ 44,917 Other Comprehensive Income (Loss): Unrealized Gains on Available-for-Sale Securities : Unrealized holding gains (losses) arising during the period, net of income tax (expense) benefit of $(2,777), $2,791, $(5,783) and $661 4,378 (4,362) 9,120 (1,034) Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $1,629, $(2,404), $2,701 and $1,970 (2,569) 3,757 (4,260) (3,079) Pension Liability Adjustment: Reclassification adjustment for amortization of experience (gains) losses recognized as net periodic benefit cost, net of income tax expense (benefit) of $(626), $(537), $(1,252) and $(1,074) ,974 1,678 Fair Value Adjustment for Cash Flow Hedges: Change in fair market value, net of income tax (expense) benefit of $40, $178, $112 and $681 (63) (279) (176) (1,065) Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $(82), $(88), $(125) and $(145) Total Other Comprehensive Income (Loss) 2, ,856 (3,274) Comprehensive Income 44,094 31,044 74,533 41,643 Comprehensive (Income) Attributable to Valencia Non-controlling Interest (3,544) (3,744) (6,996) (7,031) Preferred Stock Dividend Requirements of Subsidiary (132) (132) (264) (264) Comprehensive Income Attributable to PNMR $ 40,418 $ 27,168 $ 67,273 $ 34,348 The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements. 9

10 Table of Contents Cash Flows From Operating Activities: PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (In thousands) Net earnings $ 67,677 $ 44,917 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 131, ,785 Deferred income tax expense 32,443 22,869 Net unrealized (gains) losses on commodity derivatives 939 5,219 Realized (gains) on available-for-sale securities (12,324) (10,849) Stock based compensation expense 4,561 3,543 Regulatory disallowances and restructuring costs 774 Allowance for equity funds used during construction and other, net (2,409) (207) Changes in certain assets and liabilities: Accounts receivable and unbilled revenues (12,204) 3,770 Materials, supplies, and fuel stock 969 (1,382) Other current assets 2,613 (27,342) Other assets 3, Accounts payable (2,052) (3,984) Accrued interest and taxes (6,802) (4,283) Other current liabilities (2,498) (23,255) Other liabilities (4,341) (5,419) Net cash flows from operating activities 201, ,041 Cash Flows From Investing Activities: Additions to utility and non-utility plant (230,882) (378,574) Proceeds from sales of available-for-sale securities 358, ,014 Purchases of available-for-sale securities (359,853) (195,619) Return of principal on PVNGS lessor notes 8,547 Investment in Westmoreland Loan (122,250) Principal repayments on Westmoreland Loan 19,180 Other, net Net cash flows from investing activities (213,367) (493,715) The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements. 10

11 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (In thousands) Cash Flows From Financing Activities: Revolving credit facilities borrowings, net 86, ,800 Long-term borrowings 57, ,500 Repayment of long-term debt (77,447) (126,156) Proceeds from stock option exercise 1,574 6,569 Awards of common stock (13,166) (14,367) Dividends paid (38,896) (35,312) Valencia s transactions with its owner (7,731) (7,394) Other, net 1,685 (1,077) Net cash flows from financing activities 9, ,563 Change in Cash and Cash Equivalents (2,329) (41,111) Cash and Cash Equivalents at Beginning of Period 4,522 46,051 Cash and Cash Equivalents at End of Period $ 2,193 $ 4,940 Supplemental Cash Flow Disclosures: Interest paid, net of amounts capitalized $ 59,982 $ 57,492 Income taxes paid (refunded), net $ 625 $ 850 Supplemental schedule of noncash investing activities: (Increase) decrease in accrued plant additions $ 1,279 $ 25,488 The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements. 11

12 Table of Contents Current Assets: PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS June 30, 2017 (In thousands) December 31, 2016 Cash and cash equivalents $ 2,193 $ 4,522 Accounts receivable, net of allowance for uncollectible accounts of $1,086 and $1,209 86,598 87,012 Unbilled revenues 69,849 58,284 Other receivables 25,282 28,245 Current portion of Westmoreland Loan 20,968 38,360 Materials, supplies, and fuel stock 67,007 73,027 Regulatory assets 5,720 3,855 Commodity derivative instruments 3,847 5,224 Income taxes receivable 6,723 6,066 Other current assets 65,400 73,444 Total current assets 353, ,039 Other Property and Investments: Long-term portion of Westmoreland Loan 54,852 56,640 Available-for-sale securities 295, ,977 Other investments Non-utility property 3,713 3,404 Total other property and investments 353, ,568 Utility Plant: Plant in service, held for future use, and to be abandoned 7,081,606 6,944,534 Less accumulated depreciation and amortization 2,395,590 2,334,938 4,686,016 4,609,596 Construction work in progress 252, ,206 Nuclear fuel, net of accumulated amortization of $43,196 and $43,905 88,586 86,913 Net utility plant 5,027,361 4,904,715 Deferred Charges and Other Assets: Regulatory assets 490, ,223 Goodwill 278, ,297 Commodity derivative instruments 4,106 Other deferred charges 76,645 75,238 Total deferred charges and other assets 849, ,758 $ 6,584,445 $ 6,471,080 The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements. 12

13 Table of Contents Current Liabilities: PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND STOCKHOLDERS EQUITY June 30, 2017 December 31, 2016 (In thousands, except share information) Short-term debt $ 373,500 $ 287,100 Current installments of long-term debt 174, ,348 Accounts payable 78,324 86,705 Customer deposits 11,023 11,374 Accrued interest and taxes 55,726 61,871 Regulatory liabilities 5,265 3,609 Commodity derivative instruments 1,990 2,339 Dividends declared ,448 Other current liabilities 66,353 59,314 Total current liabilities 766, ,108 Long-term Debt, net of Unamortized Premiums, Discounts, and Debt Issuance Costs 2,199,105 2,119,364 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 971, ,650 Regulatory liabilities 454, ,649 Asset retirement obligations 132, ,519 Accrued pension liability and postretirement benefit cost 119, ,844 Commodity derivative instruments 4,106 Other deferred credits 129, ,545 Total deferred credits and other liabilities 1,811,796 1,790,207 Total liabilities 4,777,471 4,714,679 Commitments and Contingencies (See Note 11) Cumulative Preferred Stock of Subsidiary without mandatory redemption requirements ($100 stated value; 10,000,000 shares authorized; issued and outstanding 115,293 shares) 11,529 11,529 Equity: PNMR common stockholders equity: Common stock (no par value; 120,000,000 shares authorized; issued and outstanding 79,653,624 shares) 1,156,630 1,163,661 Accumulated other comprehensive income (loss), net of income taxes (85,595) (92,451) Retained earnings 656, ,742 Total PNMR common stockholders equity 1,727,260 1,675,952 Non-controlling interest in Valencia 68,185 68,920 Total equity 1,795,445 1,744,872 $ 6,584,445 $ 6,471,080 The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements. 13

14 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) Common Stock AOCI (In thousands) Attributable to PNMR Non- Total PNMR Retained Common Earnings Stockholders Equity controlling Interest in Valencia Balance at December 31, 2016, as originally reported $ 1,163,661 $ (92,451) $ 604,742 $ 1,675,952 $ 68,920 $ 1,744,872 Cumulative effect adjustment (Note 8) 10,382 10,382 10,382 Balance at January 1, 2017, as adjusted 1,163,661 (92,451) 615,124 1,686,334 68,920 1,755,254 Net earnings before subsidiary preferred stock dividends 60,681 60,681 6,996 67,677 Total other comprehensive income 6,856 6,856 6,856 Subsidiary preferred stock dividends (264) (264) (264) Dividends declared on common stock (19,316) (19,316) (19,316) Proceeds from stock option exercise 1,574 1,574 1,574 Awards of common stock (13,166) (13,166) (13,166) Stock based compensation expense 4,561 4,561 4,561 Valencia s transactions with its owner (7,731) (7,731) Balance at June 30, 2017 $ 1,156,630 $ (85,595) $ 656,225 $ 1,727,260 $ 68,185 $ 1,795,445 Total Equity The accompanying notes, as they relate to PNMR, are an integral part of these condensed consolidated financial statements. 14

15 Table of Contents PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands) Electric Operating Revenues $ 276,097 $ 233,346 $ 527,655 $ 468,952 Operating Expenses: Cost of energy 82,952 61, , ,811 Administrative and general 41,936 39,152 84,984 81,181 Energy production costs 34,393 37,881 66,180 80,567 Regulatory disallowances and restructuring costs 774 Depreciation and amortization 36,448 32,602 72,464 64,466 Transmission and distribution costs 10,175 10,241 20,094 20,557 Taxes other than income taxes 11,029 10,343 22,169 22,540 Total operating expenses 216, , , ,896 Operating income 59,164 41,760 97,496 65,056 Other Income and Deductions: Interest income 1,858 5,518 4,675 7,040 Gains on available-for-sale securities 5,663 4,631 12,324 10,849 Other income 2,665 2,953 6,508 6,339 Other (deductions) (2,428) (3,202) (5,250) (4,863) Net other income and deductions 7,758 9,900 18,257 19,365 Interest Charges 20,931 22,690 41,943 44,281 Earnings before Income Taxes 45,991 28,970 73,810 40,140 Income Taxes 15,515 9,177 23,223 12,788 Net Earnings 30,476 19,793 50,587 27,352 (Earnings) Attributable to Valencia Non-controlling Interest (3,544) (3,744) (6,996) (7,031) Net Earnings Attributable to PNM 26,932 16,049 43,591 20,321 Preferred Stock Dividends Requirements (132) (132) (264) (264) Net Earnings Available for PNM Common Stock $ 26,800 $ 15,917 $ 43,327 $ 20,057 The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements. 15

16 Table of Contents PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands) Net Earnings $ 30,476 $ 19,793 $ 50,587 $ 27,352 Other Comprehensive Income (Loss): Unrealized Gains on Available-for-Sale Securities : Unrealized holding gains (losses) arising during the period, net of income tax (expense) benefit of $(2,777), $2,791, $(5,783), and $661 4,378 (4,362) 9,120 (1,034) Reclassification adjustment for (gains) losses included in net earnings, net of income tax expense (benefit) of $1,629, $(2,404), $2,701, and $1,970 (2,569) 3,757 (4,260) (3,079) Pension Liability Adjustment: Reclassification adjustment for amortization of experience (gains) losses recognized as net periodic benefit cost, net of income tax expense (benefit) of $(626), $(537), $(1,252), and $(1,074) ,974 1,678 Total Other Comprehensive Income (Loss) 2, ,834 (2,435) Comprehensive Income 33,272 20,027 57,421 24,917 Comprehensive (Income) Attributable to Valencia Non-controlling Interest (3,544) (3,744) (6,996) (7,031) Comprehensive Income Attributable to PNM $ 29,728 $ 16,283 $ 50,425 $ 17,886 The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements. 16

17 Table of Contents Cash Flows From Operating Activities: PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (In thousands) Net earnings $ 50,587 $ 27,352 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 88,864 80,688 Deferred income tax expense 23,685 13,180 Net unrealized (gains) losses on commodity derivatives 939 5,219 Realized (gains) on available-for-sale securities (12,324) (10,849) Regulatory disallowances and restructuring costs 774 Allowance for equity funds used during construction and other, net (2,278) (221) Changes in certain assets and liabilities: Accounts receivable and unbilled revenues (8,846) 8,572 Materials, supplies, and fuel stock 1,591 (4,924) Other current assets 5,623 (18,964) Other assets 8,539 6,582 Accounts payable (754) 822 Accrued interest and taxes (1,520) 736 Other current liabilities 9,220 (15,511) Other liabilities (6,949) (6,871) Net cash flows from operating activities 156,377 86,585 Cash Flows From Investing Activities: Utility plant additions (125,698) (302,721) Proceeds from sales of available-for-sale securities 358, ,014 Purchases of available-for-sale securities (359,853) (195,619) Return of principal on PVNGS lessor notes 8,547 Other, net Net cash flows from investing activities (127,363) (295,612) The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements. 17

18 Table of Contents PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (In thousands) Cash Flows From Financing Activities: Revolving credit facilities borrowings, net (23,000) 126,000 Long-term borrowings 57, ,000 Repayment of long-term debt (57,000) (125,000) Equity contribution from parent 4,142 Dividends paid (264) (4,406) Valencia s transactions with its owner (7,731) (7,394) Other, net 1,683 (369) Net cash flows from financing activities (29,312) 167,973 Change in Cash and Cash Equivalents (298) (41,054) Cash and Cash Equivalents at Beginning of Period ,138 Cash and Cash Equivalents at End of Period $ 26 $ 2,084 Supplemental Cash Flow Disclosures: Interest paid, net of amounts capitalized $ 39,584 $ 40,838 Income taxes paid (refunded), net $ $ Supplemental schedule of noncash investing activities: (Increase) decrease in accrued plant additions $ (5,392) $ 21,157 The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements. 18

19 Table of Contents Current Assets: PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS June 30, 2017 (In thousands) December 31, 2016 Cash and cash equivalents $ 26 $ 324 Accounts receivable, net of allowance for uncollectible accounts of $1,086 and $1,209 62,368 65,003 Unbilled revenues 58,717 48,289 Other receivables 22,925 25,514 Affiliate receivables 10,643 8,886 Materials, supplies, and fuel stock 62,810 64,401 Regulatory assets 1,880 3,442 Commodity derivative instruments 3,847 5,224 Income taxes receivable 26,269 25,807 Other current assets 59,357 67,355 Total current assets 308, ,245 Other Property and Investments: Available-for-sale securities 295, ,977 Other investments Non-utility property Utility Plant: Total other property and investments 295, ,389 Plant in service, held for future use, and to be abandoned 5,420,475 5,359,211 Less accumulated depreciation and amortization 1,854,466 1,809,528 3,566,009 3,549,683 Construction work in progress 201, ,122 Nuclear fuel, net of accumulated amortization of $43,196 and $43,905 88,586 86,913 Net utility plant 3,856,038 3,794,718 Deferred Charges and Other Assets: Regulatory assets 354, ,413 Goodwill 51,632 51,632 Commodity derivative instruments 4,106 Other deferred charges 68,608 68,149 Total deferred charges and other assets 479, ,194 $ 4,939,407 $ 4,867,546 The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements. 19

20 Table of Contents Current Liabilities: PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND STOCKHOLDER S EQUITY June 30, 2017 December 31, 2016 (In thousands, except share information) Short-term debt $ 38,000 $ 61,000 Current installments of long-term debt 231,880 Accounts payable 60,205 55,566 Affiliate payables 38,178 23,183 Customer deposits 11,023 11,374 Accrued interest and taxes 33,761 34,819 Regulatory liabilities 5,265 3,517 Commodity derivative instruments 1,990 2,339 Dividends declared Other current liabilities 46,784 33,551 Total current liabilities 235, ,361 Long-term Debt, net of Unamortized Premiums, Discounts, and Debt Issuance Costs 1,631,912 1,399,489 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 773, ,666 Regulatory liabilities 421, ,701 Asset retirement obligations 131, ,601 Accrued pension liability and postretirement benefit cost 109, ,427 Commodity derivative instruments 4,106 Other deferred credits 104, ,980 Total deferred credits and liabilities 1,544,410 1,532,375 Total liabilities 3,411,660 3,389,225 Commitments and Contingencies (See Note 11) Cumulative Preferred Stock without mandatory redemption requirements ($100 stated value; 10,000,000 shares authorized; issued and outstanding 115,293 shares) 11,529 11,529 Equity: PNM common stockholder s equity: Common stock (no par value; 40,000,000 shares authorized; issued and outstanding 39,117,799 shares) 1,264,918 1,264,918 Accumulated other comprehensive income (loss), net of income taxes (85,594) (92,428) Retained earnings 268, ,382 Total PNM common stockholder s equity 1,448,033 1,397,872 Non-controlling interest in Valencia 68,185 68,920 Total equity 1,516,218 1,466,792 $ 4,939,407 $ 4,867,546 The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements. 20

21 Table of Contents PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) Attributable to PNM Common Stock AOCI Retained Earnings (In thousands) Total PNM Common Stockholder s Equity Noncontrolling Interest in Valencia Balance at December 31, 2016 $ 1,264,918 $ (92,428) $ 225,382 $ 1,397,872 $ 68,920 $ 1,466,792 Net earnings 43,591 43,591 6,996 50,587 Total other comprehensive income 6,834 6,834 6,834 Dividends declared on preferred stock (264) (264) (264) Valencia s transactions with its owner (7,731) (7,731) Balance at June 30, 2017 $ 1,264,918 $ (85,594) $ 268,709 $ 1,448,033 $ 68,185 $ 1,516,218 Total Equity The accompanying notes, as they relate to PNM, are an integral part of these condensed consolidated financial statements. 21

22 Table of Contents TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands) Electric Operating Revenues $ 86,223 $ 82,045 $ 164,843 $ 157,400 Operating Expenses: Cost of energy 21,315 19,996 42,802 39,921 Administrative and general 9,235 10,204 19,638 19,794 Depreciation and amortization 15,597 14,897 30,968 29,406 Transmission and distribution costs 6,856 7,074 13,414 13,352 Taxes other than income taxes 6,934 6,499 13,770 12,998 Total operating expenses 59,937 58, , ,471 Operating income 26,286 23,375 44,251 41,929 Other Income and Deductions: Other income 541 1,031 1,363 1,624 Other (deductions) (109) (354) (198) (339) Net other income and deductions ,165 1,285 Interest Charges 7,510 7,473 14,915 14,841 Earnings before Income Taxes 19,208 16,579 30,501 28,373 Income Taxes 7,004 6,071 10,693 10,408 Net Earnings $ 12,204 $ 10,508 $ 19,808 $ 17,965 The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements. 22

23 Table of Contents Cash Flows From Operating Activities: TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (In thousands) Net earnings $ 19,808 $ 17,965 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 31,877 30,270 Deferred income tax expense 4,894 (22) Allowance for equity funds used during construction and other, net (130) 14 Changes in certain assets and liabilities: Accounts receivable and unbilled revenues (3,358) (4,802) Materials and supplies (622) 3,542 Other current assets (3,897) (6,941) Other assets (5,747) (6,297) Accounts payable 138 (2,986) Accrued interest and taxes (308) 5,275 Other current liabilities 1,957 1,279 Other liabilities 717 (6) Net cash flows from operating activities 45,329 37,291 Cash Flows From Investing Activities: Utility plant additions (78,940) (59,795) Net cash flows from investing activities (78,940) (59,795) Cash Flow From Financing Activities: Revolving credit facilities borrowings (repayments), net 47,000 (29,000) Short-term borrowings (repayments) affiliate, net 3,400 (300) Long-term borrowings 60,000 Dividends paid (17,459) (7,456) Other, net (740) Net cash flows from financing activities 32,941 22,504 Change in Cash and Cash Equivalents (670) Cash and Cash Equivalents at Beginning of Period Cash and Cash Equivalents at End of Period $ 1 $ 1 Supplemental Cash Flow Disclosures: Interest paid, net of amounts capitalized $ 13,999 $ 13,118 Income taxes paid (refunded), net $ 750 $ 850 Supplemental schedule of noncash investing activities: (Increase) decrease in accrued plant additions $ 1,700 $ 2,681 The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements. 23

24 Table of Contents Current Assets: TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS June 30, 2017 (In thousands) December 31, 2016 Cash and cash equivalents $ 1 $ 671 Accounts receivable 24,230 22,009 Unbilled revenues 11,132 9,995 Other receivables 1,747 2,090 Materials and supplies 4,197 8,626 Regulatory assets 3, Other current assets 1,841 1,031 Total current assets 46,988 44,835 Other Property and Investments: Other investments Non-utility property 2,549 2,240 Total other property and investments 2,780 2,471 Utility Plant: Plant in service and plant held for future use 1,425,439 1,380,584 Less accumulated depreciation and amortization 445, , , ,187 Construction work in progress 40,196 16,978 Net utility plant 1,019, ,165 Deferred Charges and Other Assets: Regulatory assets 135, ,810 Goodwill 226, ,665 Other deferred charges 5,811 5,277 Total deferred charges and other assets 368, ,752 $ 1,437,547 $ 1,383,223 The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements. 24

25 Table of Contents Current Liabilities: TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND STOCKHOLDER S EQUITY June 30, 2017 December 31, 2016 (In thousands, except share information) Short-term debt $ 47,000 $ Short-term debt affiliate 8,000 4,600 Accounts payable 10,096 16,709 Affiliate payables 4,347 3,793 Accrued interest and taxes 45,274 45,581 Regulatory liabilities 92 Other current liabilities 3,628 2,134 Total current liabilities 118,345 72,909 Long-term Debt, net of Unamortized Premiums, Discounts, and Debt Issuance Costs 421, ,875 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 250, ,785 Regulatory liabilities 33,005 31,948 Asset retirement obligations Accrued pension liability and postretirement benefit cost 10,220 11,417 Other deferred credits 7,798 6,300 Total deferred credits and other liabilities 302, ,204 Total liabilities 841, ,988 Commitments and Contingencies (See Note 11) Common Stockholder s Equity: Common stock ($10 par value; 12,000,000 shares authorized; issued and outstanding 6,358 shares) Paid-in-capital 454, ,166 Retained earnings 141, ,005 Total common stockholder s equity 595, ,235 $ 1,437,547 $ 1,383,223 The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements. 25

26 Table of Contents TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDER S EQUITY (Unaudited) Common Stock Paid-in Capital Retained Earnings (In thousands) Total Common Stockholder s Equity Balance at December 31, 2016 $ 64 $ 454,166 $ 139,005 $ 593,235 Net earnings 19,808 19,808 Dividends declared on common stock (17,459) (17,459) Balance at June 30, 2017 $ 64 $ 454,166 $ 141,354 $ 595,584 The accompanying notes, as they relate to TNMP, are an integral part of these condensed consolidated financial statements. 26

27 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Significant Accounting Policies and Responsibility for Financial Statements Financial Statement Preparation In the opinion of management, the accompanying unaudited interim Condensed Consolidated Financial Statements reflect all normal and recurring accruals and adjustments that are necessary to present fairly the consolidated financial position at June 30, 2017 and December 31, 2016, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016, and cash flows for the six months ended June 30, 2017 and The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could ultimately differ from those estimated. Weather causes the Company s results of operations to be seasonal in nature and the results of operations presented in the accompanying Condensed Consolidated Financial Statements are not necessarily representative of operations for an entire year. The Notes to Condensed Consolidated Financial Statements include disclosures for PNMR, PNM, and TNMP. This report uses the term Company when discussing matters of common applicability to PNMR, PNM, and TNMP. Discussions regarding only PNMR, PNM, or TNMP are so indicated. Certain amounts in the 2016 Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2017 financial statement presentation. These Condensed Consolidated Financial Statements are unaudited. Certain information and note disclosures normally included in the annual Consolidated Financial Statements have been condensed or omitted, as permitted under the applicable rules and regulations. Readers of these financial statements should refer to PNMR s, PNM s, and TNMP s audited Consolidated Financial Statements and Notes thereto that are included in their respective 2016 Annual Reports on Form 10-K. GAAP defines subsequent events as events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Based on their nature, magnitude, and timing, certain subsequent events may be required to be reflected at the balance sheet date and/or required to be disclosed in the financial statements. The Company has evaluated subsequent events as required by GAAP. Principles of Consolidation The Condensed Consolidated Financial Statements of each of PNMR, PNM, and TNMP include their accounts and those of subsidiaries in which that entity owns a majority voting interest. PNM also consolidates Valencia (Note 5) and, through January 15, 2016, the PVNGS Capital Trust. PNM owns undivided interests in several jointly-owned power plants and records its pro-rata share of the assets, liabilities, and expenses for those plants. The agreements for the jointly-owned plants provide that if an owner were to default on its payment obligations, the non-defaulting owners would be responsible for their proportionate share of the obligations of the defaulting owner. In exchange, the non-defaulting owners would be entitled to their proportionate share of the generating capacity of the defaulting owner. There have been no such payment defaults under any of the agreements for the jointly-owned plants. Certain PNMR shared services expenses, which represent costs that are primarily driven by corporate level activities, are charged to the business segments. These services are billed at cost and are reflected as general and administrative expenses in the business segments. Other significant intercompany transactions between PNMR, PNM, and TNMP include interest and income tax sharing payments, as well as equity transactions. All intercompany transactions and balances have been eliminated. See Note 14. Dividends on Common Stock 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 $ per share in July 2017 and $0.22 in July 27

28 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2016, which are reflected as being in the second quarter within Dividends Declared per Common Share on the PNMR Condensed Consolidated Statements of Earnings. TNMP declared and paid cash dividends on common stock to PNMR of $17.5 million in the six-months ended June 30, In the six-months ended June 30, 2016, PNMR made an equity contribution of $4.1 million to PNM. PNM and TNMP declared and paid cash dividends on common stock to PNMR of $4.1 million and $7.5 million in the six-months ended June 30, New Accounting Pronouncements Information concerning recently issued accounting pronouncements that have not been adopted by the Company is presented below. The Company does not expect difficulty in adopting these standards by their required effective dates. Accounting Standards Update Revenue from Contracts with Customers (Topic 606) In May 2014, the FASB issued ASU No The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also revises the disclosure requirements regarding revenue. When it becomes effective, the new standard will replace most existing revenue recognition guidance in GAAP. Since the issuance of ASU No , the FASB issued a one -year deferral in the effective date and has issued additional ASUs that clarify implementation guidance regarding principal versus agent considerations, licensing, and identifying performance obligations, as well as adding certain additional practical expedients. The new standard can be applied retrospectively to each prior period presented or on a modified retrospective basis with a cumulative effect adjustment to retained earnings on the date of adoption. The Company currently anticipates using the modified retrospective method. The Company has made significant progress in its assessment of the new standard, but along with others in the utility industry, is continuing to monitor the activities of the FASB and other non-authoritative groups regarding industry specific issues for further clarification. These industry specific issues include the impacts of the new guidance on its accounting for CIAC and the presentation of revenues associated with alternative revenue programs, which primarily result from the Company s approved rate rider programs. The Company is working towards completing its evaluation and drafting its revenue recognition disclosures under the new standard. The Company has not finalized conclusions and has not yet completely determined the effect of the standard on its financial reporting, but does not anticipate material changes in revenue recognition associated with retail electric service rates. Accounting Standards Update Financial Instruments (Subtopic ) Recognition and Measurement of Financial Assets and Financial Liabilities In January 2016, the FASB issued ASU No , which makes targeted improvements to GAAP regarding financial instruments. The new standard eliminates the requirement to classify investments in equity securities with readily determinable fair values into trading or available-for-sale categories and will require those equity securities to be measured at fair value with changes in fair value recognized in net income rather than in OCI. Also, the new standard will revise certain presentation and disclosure requirements. Under the new standard, accounting for investments in debt securities remains essentially unchanged. PNM currently classifies the investments held in the NDT and coal mine reclamation trusts as available-for-sale securities. Unrealized losses on these securities are recorded immediately through earnings and unrealized gains are recorded in AOCI until the securities are sold. The Company will adopt the new standard on January 1, 2018, its required effective date. At that time any unrealized gains, net of income taxes, recorded in AOCI related to equity securities will be reclassified to retained earnings as a cumulative effect adjustment and, thereafter, changes in the value of equity securities will be recorded in the Consolidated Statements of Earnings. The amount of the cumulative adjustment upon adoption will depend on the amounts recorded in AOCI at that time, but PNM had unrealized gains on equity securities, net of income taxes, recorded in AOCI of $7.8 million at June 30,

29 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accounting Standards Update Leases (Topic 842) In February 2016, the FASB issued ASU No This ASU provides guidance on the recognition, measurement, presentation, and disclosure of leases. The ASU will require that a liability be recorded on the balance sheet for all leases based on the present value of future lease obligations. A corresponding right-of-use asset will also be recorded. Amortization of the lease obligation and the right-of-use asset for certain leases, primarily those classified as operating leases, will be on a straight-line basis, which is not expected to have a significant impact on the statements of earnings or cash flows, whereas other leases will be required to be accounted for as financing arrangements similar to the accounting treatment for capital leases under current GAAP. Also, the new standard will revise certain disclosure requirements. Although early adoption of the standard is permitted, the Company does not currently plan to adopt this standard prior to January 1, 2019, its required effective date. At adoption of the ASU, leases will be recognized and measured as of the earliest period presented using a modified retrospective approach. As discussed in Note 7 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K, the Company has operating leases of office buildings, vehicles, equipment, and certain rights-of-way. PNM also has operating lease interests in PVNGS Units 1 and 2 that will expire in January 2023 and The Company, along with others in the utility industry, is continuing to monitor the activities of the FASB and other non-authoritative groups regarding industry specific issues for further clarification. The Company has formed a project team, conducted outreach activities across its lines of business, and made significant progress in identifying arrangements, in addition to its existing operating lease arrangements, that may be classified as leases under the ASU. It is likely the arrangements currently classified as leases will continue to be recognized as leases under the new ASU. It is possible that other contractual arrangements not previously meeting the lease definition may contain elements that qualify as leases under ASU and that previously identified operating leases may be classified as financing leases under the new standard. The Company is in the process of analyzing each of the identified contractual arrangement to determine if it contains lease elements under the new standard and to quantify the potential impacts of identified lease arrangements. The Company anticipates this process will continue into Accounting Standards Update Financial Instruments Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments In June 2016, the FASB issued ASU No This ASU changes the way entities recognize impairment of many financial assets, including accounts receivable and investments in debt securities, by requiring immediate recognition of estimated credit losses expected to occur over their remaining lives. The new standard is effective for the Company beginning on January 1, Early adoption is permitted beginning on January 1, The Company is in the process of analyzing the impacts of this new standard, but does not anticipate it will adopt the standard prior to its effective date. Accounting Standards Update Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued ASU No This ASU eliminates diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Although early adoption is permitted, the Company does not currently plan to adopt this standard prior to January 1, 2018, its required effective date. Based on its preliminary analysis, the Company believes its current presentation of the statement of cash flows is in accordance with the new standard. Therefore, the Company does not anticipate the new standard will have a significant impact on its financial statements. Accounting Standards Update Statement of Cash Flows (Topic 230): Restricted Cash In November 2016, the FASB issued ASU The ASU requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents during the period. Under the new standard, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The new standard does not provide a definition of what should be considered restricted cash. The Company is in the process of analyzing the impacts of this new standard, including identifying items considered to be restricted cash. The new standard requires the use of a retrospective transition method for each period presented after adoption. 29

30 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accounting Standards Update Intangibles Goodwill and Other (Topic 350) In January 2017, the FASB issued ASU to simplify the annual goodwill impairment assessment process. Currently, the first step of the quantitative impairment test requires an entity to compare the fair value of the reporting unit with its carrying value, including goodwill. If as a result of this analysis, the entity concludes there is an indication of impairment in a reporting unit having goodwill, the entity is required to perform the second step of the impairment analysis, determining the amount of goodwill impairment to be recorded. The amount is calculated by comparing the implied fair value of the goodwill to its carrying amount. This exercise requires the entity to allocate the fair value determined in step one to the individual assets and liabilities of the reporting unit. Any remaining fair value would be the implied fair value of goodwill on the testing date. To the extent the recorded amount of goodwill of a reporting unit exceeds the implied fair value determined in step two, an impairment loss would be reflected in results of operations. ASU eliminates the second step of the impairment analysis. Accordingly, if the first step of a quantitative goodwill impairment analysis performed after adoption of this ASU indicates that the fair value of a reporting unit is less than its carrying value, the goodwill of that reporting unit would be impaired to the extent of that difference. The Company must adopt this ASU in 2020, but early adoption is permitted. The Company currently anticipates adopting this ASU in However, if there is an indication of potential impairment of goodwill as a result of an annual impairment assessment prior to 2020, the Company will evaluate the impact of ASU and could elect to early adopt this ASU. Accounting Standards Update Compensation Retirement Benefits (Topic 715) In March 2017, the FASB issued ASU to improve the presentation of net periodic pension and other postretirement benefit costs. Currently, the Company presents all of its net periodic benefit costs as administrative and general expenses on its Condensed Consolidated Statements of Earnings, net of amounts capitalized to construction and other accounts. The amendments in this ASU require the service cost component of net benefit costs be presented in the same line item or items as compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of operating income with disclosures identifying where the other components of net benefit cost have been presented. The ASU also limits capitalization to only the service cost component of benefit costs. PNMR and its subsidiaries maintain qualified defined benefit pension and OPEB plans. Currently, net periodic benefit cost for the Company s defined benefit pension plans do not include a service cost component and there is only a minor amount of service cost for the OPEB plans. Additional information about the Company s plans is discussed in Note 12 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K and in Note 10. ASU requires retrospective presentation of the service cost component and the other components of net benefit cost in the income statement and prospective application regarding the capitalization of only the service cost component of net benefit cost. The Company is in the process of analyzing the impacts of this new standard, including the treatment of benefit costs by the NMPRC, PUCT, and FERC in the regulatory process. Accounting Standards Update Receivables Nonrefundable Fees and Other Costs (Topic ) Premium Amortization on Purchased Callable Debt Securities In March 2017, the FASB issued ASU No This ASU amends the amortization period for certain purchased callable debt securities held at a premium. Under current GAAP, some entities amortize the premium as an adjustment of yield over the contractual life of the security. The update requires premiums to be amortized over the period to the earliest call date. The new standard is effective for the Company beginning on January 1, Early adoption is permitted including adoption in an interim period. The Company is in the process of analyzing the impacts of this new standard. Accounting Standards Update Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting In May 2017, the FASB issued ASU No This ASU provides guidance about which changes to the terms or conditions of a share-based payment award are required to be accounted for as a modification of the award. The new standard is effective for the Company beginning on January 1, PNMR has not historically changed the terms or conditions of its share-based payment awards prior to their vesting. As a result, the Company does not anticipate this standard will have a significant impact on its financial statements. 30

31 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (2) Earnings Per Share In accordance with GAAP, dual presentation of basic and diluted earnings per share is presented in the Condensed Consolidated Statements of Earnings of PNMR. Information regarding the computation of earnings per share is as follows: (3) Segment Information Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share amounts) Net Earnings Attributable to PNMR $ 37,555 $ 27,076 $ 60,417 $ 37,622 Average Number of Common Shares: Outstanding during period 79,654 79,654 79,654 79,654 Vested awards of restricted stock Average Shares Basic 79,905 79,751 79,835 79,755 Dilutive Effect of Common Stock Equivalents: Stock options and restricted stock Average Shares Diluted 80,131 80,108 80,121 80,136 Net Earnings Per Share of Common Stock: Basic $ 0.47 $ 0.34 $ 0.76 $ 0.47 Diluted $ 0.47 $ 0.34 $ 0.75 $ 0.47 The following segment presentation is based on the methodology that management uses for making operating decisions and assessing performance of its various business activities. A reconciliation of the segment presentation to the GAAP financial statements is provided. PNM PNM includes the retail electric utility operations of PNM that are subject to traditional rate regulation by the NMPRC. PNM provides integrated electricity services that include the generation, transmission, and distribution of electricity for retail electric customers in New Mexico. PNM also includes the generation and sale of electricity into the wholesale market, as well as providing transmission services to third parties. The sale of electricity includes the asset optimization of PNM s jurisdictional capacity, as well as the capacity excluded from retail rates. FERC has jurisdiction over wholesale power and transmission rates. TNMP TNMP is an electric utility providing services in Texas under the TECA. TNMP s operations are subject to traditional rate regulation by the PUCT. TNMP provides transmission and distribution services at regulated rates to various REPs that, in turn, provide retail electric service to consumers within TNMP s service area. Corporate and Other The Corporate and Other segment includes PNMR holding company activities, primarily related to corporate level debt and PNMR Services Company. The activities of PNMR Development and NM Capital are also included in Corporate and Other. The following tables present summarized financial information for PNMR by segment. PNM and TNMP each operate in only one segment. Therefore, tabular segment information is not presented for PNM and TNMP. 31

32 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) PNMR SEGMENT INFORMATION Three Months Ended June 30, 2017 PNM TNMP (In thousands) Corporate and Other Consolidated Electric operating revenues $ 276,097 $ 86,223 $ $ 362,320 Cost of energy 82,952 21, ,267 Utility margin 193,145 64, ,053 Other operating expenses 97,533 23,025 (5,235) 115,323 Depreciation and amortization 36,448 15,597 5,580 57,625 Operating income (loss) 59,164 26,286 (345) 85,105 Interest income 1,858 2,027 3,885 Other income (deductions) 5, (123) 6,209 Interest charges (20,931) (7,510) (3,891) (32,332) Segment earnings (loss) before income taxes 45,991 19,208 (2,332) 62,867 Income taxes (benefit) 15,515 7,004 (883) 21,636 Segment earnings (loss) 30,476 12,204 (1,449) 41,231 Valencia non-controlling interest (3,544) (3,544) Subsidiary preferred stock dividends (132) (132) Segment earnings (loss) attributable to PNMR $ 26,800 $ 12,204 $ (1,449) $ 37,555 Six Months Ended June 30, 2017 Electric operating revenues $ 527,655 $ 164,843 $ $ 692,498 Cost of energy 164,268 42, ,070 Utility margin 363, , ,428 Other operating expenses 193,427 46,822 (9,894) 230,355 Depreciation and amortization 72,464 30,968 10, ,008 Operating income (loss) 97,496 44,251 (682) 141,065 Interest income 4,675 4,091 8,766 Other income (deductions) 13,582 1,165 (459) 14,288 Interest charges (41,943) (14,915) (7,173) (64,031) Segment earnings (loss) before income taxes 73,810 30,501 (4,223) 100,088 Income taxes (benefit) 23,223 10,693 (1,505) 32,411 Segment earnings (loss) 50,587 19,808 (2,718) 67,677 Valencia non-controlling interest (6,996) (6,996) Subsidiary preferred stock dividends (264) (264) Segment earnings (loss) attributable to PNMR $ 43,327 $ 19,808 $ (2,718) $ 60,417 At June 30, 2017: Total Assets $ 4,939,407 $ 1,437,547 $ 207,491 $ 6,584,445 Goodwill $ 51,632 $ 226,665 $ $ 278,297 32

33 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three Months Ended June 30, 2016 PNM TNMP (In thousands) Corporate and Other Consolidated Electric operating revenues $ 233,346 $ 82,045 $ $ 315,391 Cost of energy 61,367 19,996 81,363 Utility margin 171,979 62, ,028 Other operating expenses 97,617 23,777 (3,143) 118,251 Depreciation and amortization 32,602 14,897 3,456 50,955 Operating income (loss) 41,760 23,375 (313) 64,822 Interest income 5,518 4,676 10,194 Other income (deductions) 4, (268) 4,791 Interest charges (22,690) (7,473) (3,058) (33,221) Segment earnings before income taxes 28,970 16,579 1,037 46,586 Income taxes 9,177 6, ,634 Segment earnings 19,793 10, ,952 Valencia non-controlling interest (3,744) (3,744) Subsidiary preferred stock dividends (132) (132) Segment earnings attributable to PNMR $ 15,917 $ 10,508 $ 651 $ 27,076 Six Months Ended June 30, 2016 Electric operating revenues $ 468,952 $ 157,400 $ $ 626,352 Cost of energy 133,811 39, ,732 Utility margin 335, , ,620 Other operating expenses 205,619 46,144 (6,256) 245,507 Depreciation and amortization 64,466 29,406 6, ,784 Operating income (loss) 65,056 41,929 (656) 106,329 Interest income 7,040 6,775 13,815 Other income (deductions) 12,325 1,285 (1,335) 12,275 Interest charges (44,281) (14,841) (5,590) (64,712) Segment earnings (loss) before income taxes 40,140 28,373 (806) 67,707 Income taxes (benefit) 12,788 10,408 (406) 22,790 Segment earnings (loss) 27,352 17,965 (400) 44,917 Valencia non-controlling interest (7,031) (7,031) Subsidiary preferred stock dividends (264) (264) Segment earnings (loss) attributable to PNMR $ 20,057 $ 17,965 $ (400) $ 37,622 At June 30, 2016: Total Assets $ 4,775,481 $ 1,339,525 $ 245,450 $ 6,360,456 Goodwill $ 51,632 $ 226,665 $ $ 278,297 33

34 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (4) Accumulated Other Comprehensive Income (Loss) Information regarding accumulated other comprehensive income (loss) for the six months ended June 30, 2017 and 2016 is as follows: Accumulated Other Comprehensive Income (Loss) PNM PNMR Unrealized Fair Value Gains on Adjustment Available-for- Pension for Cash Sale Liability Flow Securities Adjustment Total Hedges Total (In thousands) Balance at December 31, 2016 $ 4,320 $ (96,748) $ (92,428) $ (23) $ (92,451) Amounts reclassified from AOCI (pre-tax) (6,961) 3,226 (3,735) 323 (3,412) Income tax impact of amounts reclassified 2,701 (1,252) 1,449 (125) 1,324 Other OCI changes (pre-tax) 14,903 14,903 (288) 14,615 Income tax impact of other OCI changes (5,783) (5,783) 112 (5,671) Net after-tax change 4,860 1,974 6, ,856 Balance at June 30, 2017 $ 9,180 $ (94,774) $ (85,594) $ (1) $ (85,595) Balance at December 31, 2015 $ 17,346 $ (88,822) $ (71,476) $ 44 $ (71,432) Amounts reclassified from AOCI (pre-tax) (5,049) 2,752 (2,297) 371 (1,926) Income tax impact of amounts reclassified 1,970 (1,074) 896 (145) 751 Other OCI changes (pre-tax) (1,695) (1,695) (1,746) (3,441) Income tax impact of other OCI changes ,342 Net after-tax change (4,113) 1,678 (2,435) (839) (3,274) Balance at June 30, 2016 $ 13,233 $ (87,144) $ (73,911) $ (795) $ (74,706) Pre-tax amounts reclassified from AOCI related to Unrealized Gains on Available-for-Sale Securities are included in Gains on available-for-sale securities in the Condensed Consolidated Statements of Earnings. Pre-tax amounts reclassified from AOCI related to Pension Liability Adjustment are reclassified to Operating Expenses Administrative and general in the Condensed Consolidated Statements of Earnings. Pre-tax amounts reclassified from AOCI related to Fair Value Adjustment for Cash Flow Hedges are reclassified to Interest Charges in the Condensed Consolidated Statements of Earnings. An insignificant amount was capitalized as AFUDC and capitalized interest. The income tax impacts of all amounts reclassified from AOCI are included in Income Taxes in the Condensed Consolidated Statements of Earnings. 34

35 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (5) Variable Interest Entities GAAP determines how an enterprise evaluates and accounts for its involvement with variable interest entities, focusing primarily on whether the enterprise has the power to direct the activities that most significantly impact the economic performance of a variable interest entity ( VIE ). GAAP also requires continual reassessment of the primary beneficiary of a VIE. Additional information concerning PNM s VIEs is contained in Note 9 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. Valencia PNM has a PPA to purchase all of the electric capacity and energy from Valencia, a 158 MW natural gas-fired power plant near Belen, New Mexico, through May A third-party built, owns, and operates the facility while PNM is the sole purchaser of the electricity generated. PNM is obligated to pay fixed operation and maintenance and capacity charges in addition to variable operation and maintenance charges under this PPA. For the three and six months ended June 30, 2017, PNM paid $4.9 million and $9.8 million for fixed charges and $0.2 million and $0.3 million for variable charges. For the three and six months ended June 30, 2016, PNM paid $4.8 million and $9.6 million for fixed charges and $0.4 million and $0.6 million for variable charges. PNM does not have any other financial obligations related to Valencia. The assets of Valencia can only be used to satisfy obligations of Valencia and creditors of Valencia do not have any recourse against PNM s assets. During the term of the PPA, PNM has the option, under certain conditions, to purchase and own up to 50% of the plant or the VIE. The PPA specifies that the purchase price would be the greater of 50% of book value reduced by related indebtedness or 50% of fair market value. PNM has concluded that the third party entity that owns Valencia is a VIE and that PNM is the primary beneficiary of the entity under GAAP since PNM has the power to direct the activities that most significantly impact the economic performance of Valencia and will absorb the majority of the variability in the cash flows of the plant. As the primary beneficiary, PNM consolidates Valencia in its financial statements. Accordingly, the assets, liabilities, operating expenses, and cash flows of Valencia are included in the Condensed Consolidated Financial Statements of PNM although PNM has no legal ownership interest or voting control of the VIE. The assets and liabilities of Valencia set forth below are immaterial to PNM and, therefore, not shown separately on the Condensed Consolidated Balance Sheets. The owner s equity and net income of Valencia are considered attributable to non-controlling interest. Summarized financial information for Valencia is as follows: Results of Operations Three Months Ended June 30, Six Months Ended June 30, (In thousands) Operating revenues $ 5,094 $ 5,248 $ 10,021 $ 10,185 Operating expenses (1,550) (1,504) (3,025) (3,154) Earnings attributable to noncontrolling interest $ 3,544 $ 3,744 $ 6,996 $ 7,031 35

36 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Westmoreland San Juan LLC ( WSJ ) and SJCC Financial Position June 30, December 31, (In thousands) Current assets $ 3,322 $ 2,551 Net property, plant, and equipment 65,528 66,947 Total assets 68,850 69,498 Current liabilities Owners equity non-controlling interest $ 68,185 $ 68,920 As discussed in the subheading Coal Supply in Note 11, PNM purchases coal for SJGS from SJCC under a coal supply agreement ( CSA ). That section includes information on the acquisition of SJCC by WSJ, a subsidiary of Westmoreland, on January 31, 2016, as well as a $125.0 million loan (the Westmoreland Loan ) from NM Capital, a subsidiary of PNMR, to WSJ which loan provided substantially all of the funds required for the SJCC purchase, and the issuance of $30.3 million in letters of credit to facilitate the issuance of reclamation bonds required in order for SJCC to mine coal to be supplied to SJGS. The Westmoreland Loan and the letters of credit support result in PNMR being considered to have a variable interest in WSJ, including its subsidiary, SJCC, since PNMR and NM Capital could be subject to possible loss in the event of a default by WSJ under the Westmoreland Loan and/or performance was required under the letter of credit support. Principal payments under the Westmoreland Loan began on August 1, 2016 and are required quarterly thereafter. Interest is also paid quarterly beginning on May 3, At June 30, 2017, the amount outstanding under the Westmoreland Loan was $75.8 million. In addition, interest receivable of $1.3 million is included in Other receivables. The Westmoreland Loan requires that all cash flows of WSJ, in excess of normal operating expenses, capital additions, and operating reserves, be utilized for principal and interest payments under the loan until it is fully repaid. A principal payment of $9.6 million plus interest of $2.0 million is due on August 1, As of July 25, 2017, $11.6 million was held in a SJCC bank account that is restricted solely to be used to service the Westmoreland Loan. The Westmoreland Loan is secured by the assets of and the equity interests in SJCC. In the event of a default by WSJ, NM Capital would have the ability to take over the mining operations. In such event, NM Capital would likely engage a third-party mining company to operate SJCC so that operations of the mine are not disrupted. The acquisition of SJCC for approximately $125.0 million on January 31, 2016 was an arms-length negotiated transaction between Westmoreland and BHP, which amount should approximate the fair value of SJCC at the date of acquisition. If WSJ were to default, NM Capital should be able to acquire assets of approximately the value of the Westmoreland Loan without a significant loss. Furthermore, PNMR considers the possibility of loss under the letters of credit support to be remote since the purpose of posting the bonds is to provide assurance that SJCC performs the required reclamation of the mine site in accordance with applicable regulations and all reclamation costs are reimbursable under the CSA. Also, much of the mine reclamation activities will not be performed until after the expiration of the CSA and the final maturity of the Westmoreland Loan. In addition, each of the SJGS participants has established and funds a trust to meet its future reclamation obligations. Both WSJ and SJCC are considered to be VIEs. PNMR s analysis of these arrangements concluded that Westmoreland, as the parent of WSJ, has the ability to direct the SJCC mining operations, which is the factor that most significantly impacts the economic performance of WSJ and SJCC. NM Capital s rights under the Westmoreland Loan are the typical protective rights of a lender, but do not give NM Capital any oversight over mining operations unless there is a default under the loan agreement. Other than PNM being able to ensure that coal is supplied in adequate quantities and of sufficient quality to provide the fuel necessary to operate SJGS in a normal manner, the mining operations are solely under the control of Westmoreland and its subsidiaries, including developing mining plans, hiring of personnel, and incurring operating and maintenance expenses. Neither PNMR nor PNM has any ability to direct or influence the mining operation. Therefore, PNM s involvement through the CSA is a protective right rather than a participating right and Westmoreland has the power to direct the activities that most significantly impact the economic performance of SJCC. The CSA requires SJCC to deliver coal required to fuel SJGS in exchange for payment of a set price per ton, which is escalated over time for inflation. If SJCC is able to mine more efficiently than anticipated, its 36

37 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) economic performance will be improved. Conversely, if SJCC cannot mine as efficiently as anticipated, its economic performance will be negatively impacted. Accordingly, PNMR believes Westmoreland is the primary beneficiary of WSJ and, therefore, WSJ and SJCC are not consolidated by either PNMR or PNM. The amounts outstanding under the Westmoreland Loan and the letter of credit support constitute PNMR s maximum exposure to loss from the VIEs. (6) Lease Commitments The Company leases office buildings, vehicles, and other equipment under operating leases. In addition, PNM leases interests in Units 1 and 2 of PVNGS. All of the Company s leases are currently accounted for as operating leases. See New Accounting Pronouncements in Note 1. Additional information concerning the Company s lease commitments is contained in Note 7 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K, including PNM s actions with regard to renewal and purchase options under the PVNGS leases. The PVNGS leases were scheduled to expire on January 15, 2015 for the four Unit 1 leases and January 15, 2016 for the four Unit 2 leases. The four Unit 1 leases have been extended to expire on January 15, 2023 and one of the Unit 2 leases has been extended to expire on January 15, For the other three PVNGS Unit 2 leases, PNM exercised its fair market value options to purchase the assets underlying those leases on the expiration date of the original leases. On January 15, 2016, PNM paid $78.1 million to the lessor under one lease for 31.3 MW of the entitlement from PVNGS Unit 2 and $85.2 million to the lessors under the other two leases for 32.8 MW of the entitlement from PVNGS Unit 2. See Note 12 for information concerning the NMPRC s treatment of the purchased assets and extended leases in PNM s NM 2015 Rate Case. PNM is exposed to losses under the PVNGS lease arrangements upon the occurrence of certain events that PNM does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to PVNGS or the occurrence of specified nuclear events), PNM would be required to make specified payments to the lessors, and take title to the leased interests. If such an event had occurred as of June 30, 2017, amounts due to the lessors under the circumstances described above would be up to $173.0 million, payable on July 15, 2017 in addition to the scheduled lease payments due on July 15, (7) Fair Value of Derivative and Other Financial Instruments Additional information concerning energy related derivative contracts and other financial instruments is contained in Note 8 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. Fair value is defined under GAAP as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is based on current market quotes as available and is supplemented by modeling techniques and assumptions made by the Company to the extent quoted market prices or volatilities are not available. External pricing input availability varies based on commodity location, market liquidity, and term of the agreement. Valuations of derivative assets and liabilities take into account nonperformance risk including the effect of counterparties and the Company s credit risk. The Company regularly assesses the validity and availability of pricing data for its derivative transactions. Although the Company uses its best judgment in estimating the fair value of these instruments, there are inherent limitations in any estimation technique. Overview Energy Related Derivative Contracts The primary objective for the use of commodity derivative instruments, including energy contracts, options, swaps, and futures, is to manage price risk associated with forecasted purchases of energy and fuel used to generate electricity, as well as managing anticipated generation capacity in excess of forecasted demand from existing customers. PNM s energy related derivative contracts manage commodity risk. PNM is required to meet the demand and energy needs of its retail and wholesale customers. PNM is exposed to market risk for its share of PVNGS Unit 3 and the needs of its wholesale customers not covered under a FPPAC. However, as discussed below, PNM has hedging arrangements for the output of PVNGS Unit 3 through December 31, 2017, at which time PVNGS Unit 3 will be included as a jurisdictional resource to serve New Mexico retail customers. Beginning January 37

38 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1, 2018, PNM expects to be exposed to market risk for the 65 MW of SJGS Unit 4 that is anticipated to be transferred to PNM from PNMR Development (Note 11). PNM s operations are managed primarily through a net asset-backed strategy, whereby PNM s aggregate net open forward contract position is covered by its forecasted excess generation capabilities or market purchases. PNM could be exposed to market risk if its generation capabilities were to be disrupted or if its load requirements were to be greater than anticipated. If all or a portion of load requirements were required to be covered as a result of such unexpected situations, commitments would have to be met through market purchases. TNMP does not enter into energy related derivative contracts. Commodity Risk Marketing and procurement of energy often involve market risks associated with managing energy commodities and establishing open positions in the energy markets, primarily on a short-term basis. PNM routinely enters into various derivative instruments such as forward contracts, option agreements, and price basis swap agreements to economically hedge price and volume risk on power commitments and fuel requirements and to minimize the effect of market fluctuations in wholesale portfolios. PNM monitors the market risk of its commodity contracts using VaR calculations to maintain total exposure within management-prescribed limits in accordance with approved risk and credit policies. Accounting for Derivatives Under derivative accounting and related rules for energy contracts, PNM accounts for its various derivative instruments for the purchase and sale of energy based on PNM s intent. During the six months ended June 30, 2017 and the year ended December 31, 2016, PNM was not hedging its exposure to the variability in future cash flows from commodity derivatives through designated cash flows hedges. The contracts recorded at fair value that do not qualify or are not designated for cash flow hedge accounting are classified as economic hedges. Economic hedges are defined as derivative instruments, including long-term power agreements, used to economically hedge generation assets, purchased power and fuel costs, and customer load requirements. Changes in the fair value of economic hedges are reflected in results of operations and are classified between operating revenues and cost of energy according to the intent of the hedge. PNM has no trading transactions. Commodity Derivatives PNM s commodity derivative instruments that are recorded at fair value, all of which are accounted for as economic hedges, are summarized as follows: June 30, 2017 Economic Hedges (In thousands) December 31, 2016 Current assets $ 3,847 $ 5,224 Deferred charges 4,106 7,953 5,224 Current liabilities (1,990) (2,339) Long-term liabilities (4,106) (6,096) (2,339) Net $ 1,857 $ 2,885 Included in the above table are $1.3 million and $2.7 million of current assets at June 30, 2017 and December 31, 2016 related to contracts for the sale of energy from PVNGS Unit 3 through 2017 at market price plus a premium. Certain of PNM s commodity derivative instruments in the above table are subject to master netting agreements whereby assets and liabilities could be offset in the settlement process. PNM does not offset fair value and cash collateral for derivative instruments under master netting arrangements and the above table reflects the gross amounts of fair value assets and liabilities for commodity derivatives. Included in the above table are equal amounts of assets and liabilities aggregating $5.2 million at June 30, 2017 and $0.5 million at December 31, 2016, which result from PNM s hazard sharing arrangements with Tri-State (Note 12). The hazard sharing arrangements are net-settled upon delivery. Other amounts that could be offset under master netting agreements were immaterial. 38

39 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) At June 30, 2017 and December 31, 2016, PNM had no amounts recognized for the legal right to reclaim cash collateral. However, at June 30, 2017 and December 31, 2016, amounts posted as cash collateral under margin arrangements were $1.3 million and $2.6 million. At June 30, 2017 and December 31, 2016, obligations to return cash collateral were $0.1 million and $0.1 million. Cash collateral amounts are included in other current assets and other current liabilities on the Condensed Consolidated Balance Sheets. PNM has a NMPRC approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. The table above includes $0.1 million of current assets and less than $0.1 million of current liabilities at June 30, 2017 and $0.2 million of current assets and $0.1 million of current liabilities at December 31, 2016 related to this plan. The offsets to these amounts are recorded as regulatory assets and liabilities on the Condensed Consolidated Balance Sheets. The following table presents the effect of mark-to-market commodity derivative instruments on PNM s earnings, excluding income tax effects. Commodity derivatives had no impact on OCI for the periods presented. Economic Hedges Three Months Ended Six Months Ended June 30, June 30, (In thousands) Electric operating revenues $ 4,592 $ (4,123) $ 7,933 $ (1,439) Cost of energy (5,286) (967) (5,276) (1,112) Total gain (loss) $ (694) $ (5,090) $ 2,657 $ (2,551) Commodity contract volume positions are presented in MMBTU for gas related contracts and in MWh for power related contracts. The table below presents PNM s net buy (sell) volume positions: Economic Hedges MMBTU MWh June 30, ,500 (1,383,295) December 31, ,100 (2,471,600) In connection with managing its commodity risks, PNM enters into master agreements with certain counterparties. If PNM is in a net liability position under an agreement, some agreements provide that the counterparties can request collateral if PNM s credit rating is downgraded; other agreements provide that the counterparty may request collateral to provide it with adequate assurance that PNM will perform; and others have no provision for collateral. PNM has contingent requirements to provide collateral under commodity contracts having an objectively determinable collateral provision that are in net liability positions and are not fully collateralized with cash. At June 30, 2017 and December 31, 2016, PNM had no such contracts in a net liability position. Sale of Power from PVNGS Unit 3 Because PNM s 134 MW share of Unit 3 at PVNGS is not currently included in retail rates, that unit s power is being sold in the wholesale market. PVNGS Unit 3 will be included as a jurisdictional resource to serve New Mexico retail customers beginning on January 1, As of June 30, 2017, PNM had contracted to sell substantially all of PVNGS Unit 3 output through 2017 at market price plus a premium. Through hedging arrangements that are accounted for as economic hedges, PNM has established fixed rates for substantially all of the sales through 2017, which average approximately $29 per MWh. 39

40 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Non-Derivative Financial Instruments The carrying amounts reflected on the Condensed Consolidated Balance Sheets approximate fair value for cash, receivables, and payables due to the short period of maturity. Available-for-sale securities are carried at fair value. Available-for-sale securities consist of PNM assets held in the NDT for its share of decommissioning costs of PVNGS and trusts for PNM s share of final reclamation costs related to the coal mines serving SJGS and Four Corners (Note 11). At June 30, 2017 and December 31, 2016, the fair value of available-for-sale securities included $274.4 million and $253.9 million for the NDT and $20.6 million and $19.1 million for the mine reclamation trusts. The fair value and gross unrealized gains of investments in available-for-sale securities are presented in the following table. June 30, 2017 December 31, 2016 Unrealized Gains Fair Value (In thousands) Unrealized Gains Fair Value Cash and cash equivalents $ $ 10,318 $ $ 23,683 Equity securities: Domestic value 4,640 69,106 1,135 34,796 Domestic growth 4,542 68,147 3,032 47,595 International and other 3,396 38,620 2,029 27,481 Fixed income securities: U.S. Government , ,962 Municipals , ,789 Corporate and other 1,423 42, ,671 $ 15,321 $ 295,026 $ 7,449 $ 272,977 The proceeds and gross realized gains and losses on the disposition of available-for-sale securities are shown in the following table. Realized gains and losses are determined by specific identification of costs of securities sold. Gross realized losses shown below exclude the (increase)/decrease in realized impairment losses of $(0.1) million and $1.0 million for the three and six months ended June 30, 2017 and $(0.7) million and $0.9 million for the three and six months ended June 30, Three Months Ended Six Months Ended June 30, June 30, (In thousands) Proceeds from sales $ 91,657 $ 69,115 $ 358,045 $ 194,014 Gross realized gains $ 7,971 $ 9,531 $ 16,617 $ 20,247 Gross realized (losses) $ (2,236) $ (4,233) $ (5,321) $ (10,349) Held-to-maturity securities are those investments in debt securities that the Company has the ability and intent to hold until maturity. At June 30, 2017 and December 31, 2016, PNMR s held-to-maturity securities consist of the Westmoreland Loan. The Company has no available-for-sale or held-to-maturity securities for which carrying value exceeds fair value. There are no impairments considered to be other than temporary that are included in AOCI and not recognized in earnings. 40

41 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) At June 30, 2017, the available-for-sale and held-to-maturity debt securities had the following final maturities: Fair Value Availablefor-Sale Held-to- Maturity PNMR and PNM PNMR (In thousands) Within 1 year $ 4,426 $ After 1 year through 5 years 22,201 86,070 After 5 years through 10 years 27,997 After 10 years through 15 years 4,324 After 15 years through 20 years 10,623 After 20 years 39,264 Fair Value Disclosures $ 108,835 $ 86,070 The Company determines the fair values of its derivative and other financial instruments based on the hierarchy established in GAAP, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Level 3 inputs used in determining fair values for the Company consist of internal valuation models. The Company records any transfers between fair value hierarchy levels as of the end of each calendar quarter. There were no transfers between levels during the six months ended June 30, 2017 or the year ended December 31, For available-for-sale securities, Level 2 fair values are provided by the trustee utilizing a pricing service. The pricing provider predominantly uses the market approach using bid side market value based upon a hierarchy of information for specific securities or securities with similar characteristics. For commodity derivatives, Level 2 fair values are determined based on market observable inputs, which are validated using multiple broker quotes, including forward price, volatility, and interest rate curves to establish expectations of future prices. Credit valuation adjustments are made for estimated credit losses based on the overall exposure to each counterparty. For the Company s long-term debt, Level 2 fair values are provided by an external pricing service. The pricing service primarily utilizes quoted prices for similar debt in active markets when determining fair value. For investments categorized as Level 3, including the Westmoreland Loan and certain items in other investments, fair values were determined by discounted cash flow models that take into consideration discount rates that are observable for similar types of assets and liabilities. Management of the Company independently verifies the information provided by pricing services. 41

42 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Items recorded at fair value by PNM on the Condensed Consolidated Balance Sheets are presented below by level of the fair value hierarchy. There were no Level 3 fair value measurements at June 30, 2017 and December 31, 2016 for items recorded at fair value. Available-for-sale securities June 30, 2017 Total GAAP Fair Value Hierarchy Quoted Prices in Active Markets for Identical Assets (Level 1) (In thousands) Significant Other Observable Inputs (Level 2) Cash and cash equivalents $ 10,318 $ 10,318 $ Equity securities: Domestic value 69,106 69,106 Domestic growth 68,147 68,147 International and other 38,620 35,366 3,254 Fixed income securities: U.S. Government 29,411 28,187 1,224 Municipals 37,137 37,137 Corporate and other 42,287 42,287 $ 295,026 $ 211,124 $ 83,902 Commodity derivative assets $ 7,953 $ $ 7,953 Commodity derivative liabilities (6,096) (6,096) Net $ 1,857 $ $ 1,857 Available-for-sale securities December 31, 2016 Cash and cash equivalents $ 23,683 $ 23,683 $ Equity securities: Domestic value 34,796 34,796 Domestic growth 47,595 47,595 International and other 27,481 27,481 Fixed income securities: U.S. Government 40,962 39,723 1,239 Municipals 43,789 43,789 Corporate and other 54,671 23,158 31,513 $ 272,977 $ 196,436 $ 76,541 Commodity derivative assets $ 5,224 $ $ 5,224 Commodity derivative liabilities (2,339) (2,339) Net $ 2,885 $ $ 2,885 42

43 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The carrying amounts and fair values of investments in the Westmoreland Loan, other investments, and long-term debt, which are not recorded at fair value on the Condensed Consolidated Balance Sheets are presented below: June 30, 2017 PNMR GAAP Fair Value Hierarchy Carrying Amount Fair Value Level 1 Level 2 Level 3 (In thousands) Long-term debt $ 2,373,362 $ 2,502,268 $ $ 2,502,268 $ Westmoreland Loan $ 75,820 $ 86,070 $ $ $ 86,070 Other investments $ 404 $ 1,051 $ 404 $ $ 647 PNM Long-term debt $ 1,631,912 $ 1,718,492 $ $ 1,718,492 $ Other investments $ 173 $ 173 $ 173 $ $ TNMP Long-term debt $ 421,024 $ 462,016 $ $ 462,016 $ Other investments $ 231 $ 231 $ 231 $ $ December 31, 2016 PNMR Long-term debt $ 2,392,712 $ 2,540,693 $ $ 2,540,693 $ Westmoreland Loan $ 95,000 $ 100,893 $ $ $ 100,893 Other investments $ 547 $ 1,164 $ 547 $ $ 617 PNM Long-term debt $ 1,631,369 $ 1,730,157 $ $ 1,730,157 $ Other investments $ 316 $ 316 $ 316 $ $ TNMP Long-term debt $ 420,875 $ 468,329 $ $ 468,329 $ Other investments $ 231 $ 231 $ 231 $ $ (8) Stock-Based Compensation PNMR has various stock-based compensation programs, including stock options, restricted stock, and performance shares granted under the Performance Equity Plan ( PEP ). Although certain PNM and TNMP employees participate in the PNMR plans, PNM and TNMP do not have separate employee stock-based compensation plans. In 2011, the Company changed its approach to awarding stock-based compensation. As a result, no stock options have been granted since 2010 and awards of restricted stock have increased. Certain restricted stock awards are subject to achieving performance or market targets. Other awards of restricted stock are only subject to time vesting requirements. Additional information concerning stock-based compensation under the PEP is contained in Note 13 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. Restricted stock under the PEP refers to awards of stock subject to vesting, performance, or market conditions rather than to shares with contractual post-vesting restrictions. Generally, the awards vest ratably over three years from the grant date of the award. However, awards with performance or market conditions vest upon satisfaction of those conditions. In addition, plan provisions provide that upon retirement, participants become 100% vested in certain stock awards. Beginning with 2017 awards, the vesting period for awards of restricted stock to nonemployee members of the Board is one year. The stock-based compensation expense related to restricted stock awards without performance or market conditions to participants that are retirement eligible on the grant date is recognized immediately at the grant date and is not amortized. Compensation expense for other such awards is amortized to compensation expense over the shorter of the requisite vesting period or the period until the participant becomes retirement eligible. Compensation expense for performance-based shares is recognized ratably over the performance period and is adjusted periodically to reflect the level of achievement expected to be attained. 43

44 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Compensation expense related to market-based shares is recognized ratably over the measurement period, regardless of the actual level of achievement, provided the employees meet their service requirements. At June 30, 2017 and December 31, 2016, PNMR had unrecognized expense related to stock awards of $5.8 million and $4.5 million, which are expected to be recognized over an average of 2.1 and 1.8 years. PNMR receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the price at which the options are sold over the exercise prices of the options, and a tax deduction for the value of restricted stock at the vesting date. The FASB issued Accounting Standards Update Compensation - Stock Compensation (Topic 718) to simplify several aspects of the accounting for share-based payment transactions and eliminate diversity in practice. PNMR s historical accounting for stock compensation complies with ASU , except for the treatment of the income tax consequences of awards and the presentation of reductions to taxes payable on the Consolidated Statements of Cash Flows. Prior to ASU , benefits resulting from income tax deductions in excess of compensation cost recognized under GAAP for vested restricted stock and on exercised stock options (collectively, excess tax benefits ) were recorded to equity provided the excess tax benefits reduced income taxes payable. Deficiencies resulting from tax deductions related to stock awards that were below recognized compensation cost upon vesting and on canceled stock options were recorded to equity. PNMR had not recorded excess tax benefits to equity since 2009 because it is in a net operating loss position for income tax purposes. ASU requires that all excess tax benefits and deficiencies be recorded to tax expense and classified as cash flows from operating activities. PNMR adopted ASU as of January 1, 2017 and recorded excess tax benefits of $0.3 million and $2.1 million in the three and six months ended June 30, 2017 of which $0.2 million and $1.6 million was allocated to PNM and $0.1 million and $0.5 million was allocated to TNMP. As required by ASU , PNMR recorded the excess tax benefits that were not recognized in prior years, due to its net operating loss position, as a cumulative effect adjustment of $10.4 million, increasing retained earnings and decreasing accumulated deferred income taxes on the Condensed Consolidated Balance Sheets. When excess tax benefits are used to reduce income taxes payable, the benefit will be reflected in cash flows from operating activities. The grant date fair value for restricted stock and stock awards with Company internal performance targets is determined based on the market price of PNMR common stock on the date of the agreements reduced by the present value of future dividends, which will not be received prior to vesting, applied to the total number of shares that are anticipated to vest, although the number of performance shares that ultimately vest cannot be determined until after the performance periods end. The grant date fair value of stock awards with market targets is determined using Monte Carlo simulation models, which provide grant date fair values that include an expectation of the number of shares to vest at the end of the measurement period. The following table summarizes the weighted-average assumptions used to determine the awards grant date fair value: Six Months Ended June 30, Restricted Shares and Performance Based Shares Expected quarterly dividends per share $ $ Risk-free interest rate 1.50% 0.94% Market-Based Shares Dividend yield 2.67% 2.74% Expected volatility 20.80% 20.44% Risk-free interest rate 1.54% 0.97% 44

45 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table summarizes activity in restricted stock awards, including performance-based and market-based shares, and stock options, for the six months ended June 30, 2017 : Restricted Stock Stock Options Shares Weighted- Average Grant Date Fair Value Shares Weighted- Average Exercise Price Outstanding at December 31, ,316 $ ,874 $ Granted 248,171 $ $ Exercised (264,367) $ (92,600) $ Forfeited (4,012) $ $ Expired $ (3,000) $ Outstanding at June 30, ,108 $ ,274 $ 9.96 PNMR s stock-based compensation program provides for performance and market targets through Included as granted and as exercised in the above table are 49,682 previously awarded shares that were earned for the 2014 through 2016 performance measurement period and ratified by the Board in February 2017 (based upon achieving market targets at target levels, weighted at 60%, and not meeting performance targets, weighted at 40% ). Excluded from the above table are maximums of 163,712, 137,036, and 133,632 shares for the three -year performance periods ending in 2017, 2018, and 2019 that would be awarded if all performance and market criteria are achieved at maximum levels and all executives remain eligible. In March 2012, the Company entered into a retention award agreement with its Chairman, President, and Chief Executive Officer under which she was to receive 135,000 shares of PNMR s common stock if PNMR met specific market targets at the end of 2016 and she remained an employee of the Company. Under the agreement, she received 35,000 of the total shares in 2015 since PNMR achieved specific market targets at the end of The specified market target was achieved at the end of 2016 and the Board ratified her receiving the remaining 100,000 shares, which are included in the above table, in February The retention award was made under the PEP and was approved by the Board on February 28, Effective as of January 1, 2015, the Company entered into a retention award agreement with its Executive Vice President and Chief Financial Officer under which he would receive awards of restricted stock if PNMR meets specific performance targets at the end of 2016 and 2017 and he remains an employee of the Company. If PNMR achieved the specific performance target for the period from January 1, 2015 through December 31, 2016, he was to receive $100,000 of PNMR common stock based on the market value per share on the grant date in early The specified market target was achieved at the end of 2016 and the Board ratified him receiving $100,000 of PNMR common stock in February 2017 based on a market per share value of $36.30 on the grant date of March 3, 2017, or 2,754 shares, which are included in the above table. Similarly, if PNMR achieves the specific performance target for the period from January 1, 2015 through December 31, 2017, he would receive $275,000 of PNMR common stock based on the market value per share on the grant date in early The retention award was made under the PEP and was approved by the Board on December 9, The above table does not include the restricted stock shares that remain unvested under this retention award agreement. In March 2015, the Company entered into an additional retention award agreement with its Chairman, President, and Chief Executive Officer under which she would receive 53,859 shares of PNMR s common stock if PNMR meets certain performance targets at the end of 2019 and she remains an employee of the Company. Under the agreement, she would receive 17,953 of the total shares if PNMR achieves specific performance targets at the end of The retention award was made under the PEP and was approved by the Board on February 26, The above table does not include any restricted stock shares under this retention award agreement. At June 30, 2017, the aggregate intrinsic value of stock options outstanding, all of which are exercisable, was $5.9 million with a weighted-average remaining contract life of 2.0 years. At June 30, 2017, no outstanding stock options had an exercise price greater than the closing price of PNMR common stock on that date. 45

46 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table provides additional information concerning restricted stock activity, including performance-based and market-based shares, and stock options: Six Months Ended June 30, Restricted Stock Weighted-average grant date fair value $ $ Total fair value of restricted shares that vested (in thousands) $ 5,489 $ 4,768 (9) Financing Stock Options Weighted-average grant date fair value of options granted $ $ Total fair value of options that vested (in thousands) $ $ Total intrinsic value of options exercised (in thousands) $ 1,699 $ 1,145 The Company s financing strategy includes both short-term and long-term borrowings. The Company utilizes short-term revolving credit facilities, as well as cash flows from operations, to provide funds for both construction and operating expenditures. Depending on market and other conditions, the Company will periodically sell long-term debt or enter into term loan arrangements and use the proceeds to reduce borrowings under the revolving credit facilities or refinance other debt. Each of the revolving credit facilities and the Company s term loans contains a single financial covenant, which requires the maintenance of a debt-to-capital ratio of less than or equal to 65%, and generally also include customary covenants, events of default, cross default provisions, and change of control provisions. PNM must obtain NMPRC approval for any financing transaction having a maturity of more than 18 months. In addition, PNM files its annual short-term financing plan with the NMPRC. Additional information concerning financing activities is contained in Note 6 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. Financing Activities On March 9, 2015, PNMR entered into a $150.0 million Term Loan Agreement ( PNMR 2015 Term Loan Agreement ) between PNMR, the lenders identified therein, and Wells Fargo Bank, National Association, as lender and administrative agent. The PNMR 2015 Term Loan Agreement bears interest at a variable rate and must be repaid on or before March 9, In September 2015, PNMR entered into a hedging agreement whereby it effectively established a fixed interest rate of 1.927%, subject to change if there is a change in PNMR s credit rating, for borrowings under the PNMR 2015 Term Loan Agreement for the period from January 11, 2016 through March 9, This hedge is accounted for as a cash flow hedge and had a fair value gain of $0.3 million at June 30, 2017, which is included in Other current assets on the Condensed Consolidated Balance Sheets, and a fair value loss of less than $0.1 million at December 31, The fair values were determined using Level 2 inputs under GAAP, including using forward LIBOR curves under the mid-market convention to discount cash flows over the remaining term of the agreement. At June 30, 2017, variable interest rates were 2.00% on the PNMR 2015 Term Loan Agreement, 2.17% on the $100.0 million PNMR 2016 Two -Year Term Loan, and 1.83% on the $175.0 million PNM 2016 Term Loan Agreement. As discussed in Note 11, NM Capital, a wholly owned subsidiary of PNMR, entered into a $125.0 million term loan agreement (the BTMU Term Loan Agreement ) with BTMU, as lender and administrative agent, as of February 1, The BTMU Term Loan Agreement has a maturity date of February 1, 2021 and bears interest at a rate based on LIBOR plus a customary spread, which aggregated 3.92% at June 30, PNMR, as parent company of NM Capital, has guaranteed NM Capital s obligations to BTMU. The BTMU Term Loan Agreement and the guaranty include customary covenants, including requirements for PNMR to not exceed a maximum debt-to-capital ratio of 65%, and customary events of default, a cross default provision, and a change of control provision consistent with PNMR s other term loan agreements. NM Capital utilized the proceeds of the BTMU Term Loan Agreement to provide funding of $125.0 million (the Westmoreland Loan ) to a ring-fenced, bankruptcy-remote, special-purpose entity that is a subsidiary of Westmoreland Coal Company to finance Westmoreland s purchase of SJCC. The BTMU Term Loan Agreement requires that NM Capital utilize all amounts, less taxes and fees, it receives under the Westmoreland 46

47 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Loan to repay the BTMU Term Loan Agreement. The principal balance outstanding under the BTMU Term Loan Agreement was $71.8 million at June 30, Based on scheduled payments on the Westmoreland Loan, NM Capital estimates it will make principal payments of $24.8 million on the BTMU Term Loan Agreement in the twelve months ended June 30, On October 21, 2016, PNMR entered into letter of credit arrangements with JPMorgan Chase Bank, N.A. (the JPM LOC Facility ) under which letters of credit aggregating $30.3 million were issued to facilitate the posting of reclamation bonds, which SJCC is required to post in connection with permits relating to the operation of the San Juan mine (Note 11). In 2017, PNMR entered into three separate four -year hedging agreements whereby it effectively established fixed interest rates of 1.926%, 1.823%, and 1.629%, plus customary spreads over LIBOR, subject to change if there is a change in PNMR s credit rating, for three separate tranches, each of $50.0 million, of its variable rate short-term debt. These hedge agreements are accounted for as cash flow hedges. At June 30, 2017, one of the hedge agreements had a fair value gain of $0.2 million, which is included in Other current assets, and the other two had fair value losses aggregating $0.5 million, which are included in Other current liabilities, on the Condensed Consolidated Balance Sheets. The fair values were determined using Level 2 inputs under GAAP, including using forward LIBOR curves under the mid-market convention to discount cash flows over the remaining term of the agreement. On June 14, 2017, TNMP entered into an agreement, which provides that TNMP will issue $60.0 million aggregate principal amount of 3.22% first mortgage bonds, due 2027 on or about August 25, 2017, subject to satisfaction of certain conditions. TNMP anticipates using the proceeds from the bonds to reduce short-term debt. At December 31, 2016, PNM had $37.0 million of outstanding PCRBs, which have a final maturity of June 1, 2040, and $20.0 million of outstanding PCRBs which have a final maturity of June 1, These PCRBs were subject to mandatory tender for remarketing on June 1, 2017 and were successfully remarketed on that date. The $37.0 million of PCRBs now bear interest at 2.125% and the $20.0 million of PCRBs now bear interest at 2.45%. Both series are subject to mandatory tender for remarketing on June 1, On July 20, 2017, PNM entered into a $200.0 million term loan agreement (the PNM 2017 Term Loan Agreement ) between PNM and JPMorgan Chase Bank, N.A., as lender and administrative agent, and U.S. Bank National Association, as lender. The PNM 2017 Term Loan Agreement bears interest at a variable rate and must be repaid on or before January 18, PNM used the proceeds of the PNM 2017 Term Loan Agreement to prepay without penalty the $175.0 million PNM 2016 Term Loan Agreement, which was to mature on November 17, 2017, and short-term borrowings. The PNM 2017 Term Loan Agreement includes customary covenants, including requirements to not exceed a maximum debt-to-capital ratio of 65%, and customary events of default, a cross default provision, and a change of control provision consistent with PNM s other term loan agreements. In accordance with GAAP, borrowings under the PNM 2016 Term Loan Agreement are reflected as being long-term in the Condensed Consolidated Balance Sheet at June 30, 2017 since the PNM 2017 Term Loan Agreement demonstrates PNM s ability and intent to re-finance the PNM 2016 Term Loan Agreement on a long-term basis. On July 28, 2017, PNM entered into an agreement (the PNM 2017 Senior Unsecured Note Agreement ) with institutional investors for the sale of $450.0 million aggregate principal amount of Senior Unsecured Notes (the PNM 2018 SUNs ) offered in private placement transactions. Under the PNM 2017 Senior Unsecured Note Agreement, PNM has agreed to issue $350.0 million of the PNM 2018 SUNs on or about May 15, 2018 and $100.0 million of the PNM 2018 SUNs on or about August 1, The issuances of the PNM 2018 SUNs are subject to the satisfaction of certain conditions. PNM will use the gross proceeds from the PNM 2018 SUNs to repay $350.0 million of PNM s 7.95% Senior Unsecured Notes that mature on May 15, 2018 and $100.0 million of PNM s 7.50% Senior Unsecured Notes that mature on August 1, The terms of the PNM 2017 Senior Unsecured Note Agreement include customary covenants, including a covenant that requires the maintenance of a debt-to-capital ratio of less than or equal to 65%, customary events of default, including a cross default provision, and covenants regarding parity of financial covenants, liens and guarantees with respect to PNM s material credit facilities. In the event of a change of control, PNM will be required to offer to prepay the PNM 2018 SUNs at par. PNM will have the right to redeem any or all of the PNM 2018 SUNs prior to their respective maturities, subject to payment of a customary make-whole premium. In accordance with GAAP, borrowings under PNM s $350.0 million Senior Unsecured Notes due on May 15, 2018 are reflected as being long-term in the Condensed Consolidated Balance Sheet at June 30, 2017 since the PNM 2017 Senior Unsecured Note Agreement demonstrates PNM s ability an 47

48 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) d intent to re-finance the $350.0 million Senior Unsecured Notes on a long-term basis. Information concerning the maturities and interest rates on the PNM 2018 SUNs to be issued in May 2018 and August 2018 is as follows: Funding Maturity Principal Interest Date Date Amount Rate (In millions) Short-term Debt and Liquidity May 15, 2018 May 15, 2023 $ % May 15, 2018 May 15, % May 15, 2018 May 15, % May 15, 2018 May 15, % May 15, 2018 May 15, % May 15, 2018 May 15, % August 1, 2018 August 1, % August 1, 2018 August 1, % $ Currently, the PNMR Revolving Credit Facility has a financing capacity of $300.0 million and the PNM Revolving Credit Facility has a financing capacity of $400.0 million. In November 2016, PNMR and PNM entered into agreements to extend the maturity of both facilities from October 31, 2020 to October 31, However, one lender, whose current commitment is $10.0 million under the PNMR Revolving Credit Facility and $40.0 million under the PNM Revolving Credit Facility, did not agree to extend its commitments beyond October, 31, Unless one or more of the other current lenders or a new lender assumes the commitments of the non-extending lender, the financing capacities will be reduced to $290.0 million for the PNMR Revolving Credit Facility and $360.0 million for the PNM Revolving Credit Facility from November 1, 2020 through October 31, The TNMP Revolving Credit Facility is a $75.0 million revolving credit facility secured by $75.0 million aggregate principal amount of TNMP first mortgage bonds. The TNMP Revolving Credit Facility matures on September 18, PNM also has the $50.0 million PNM New Mexico Credit Facility that expires on January 8, At June 30, 2017, the weighted average interest rate was 2.43% for the PNMR Revolving Credit Facility, 2.33% for the PNM Revolving Credit Facility, 2.36% for the PNM New Mexico Credit Facility, 2.13% for the TNMP Revolving Credit Facility, and 2.07% for the PNMR 2016 One -Year Term Loan, which matures in December Short-term debt outstanding consisted of: PNM: June 30, December 31, Short-term Debt (In thousands) PNM Revolving Credit Facility $ 28,000 $ 35,000 PNM New Mexico Credit Facility 10,000 26,000 TNMP Revolving Credit Facility 47,000 PNMR: PNMR Revolving Credit Facility 188, ,100 PNMR 2016 One-Year Term Loan 100, ,000 $ 373,500 $ 287,100 In addition to the above borrowings, PNMR, PNM, and TNMP had letters of credit outstanding of $6.4 million, $2.5 million, and $0.1 million at June 30, 2017 that reduce the available capacity under their respective revolving credit facilities. The above table excludes intercompany debt. As of June 30, 2017, TNMP had intercompany borrowings from PNMR of $8.0 million. At July 25, 2017, PNMR, PNM, and TNMP had $119.9 million, $388.5 million, and $22.9 million of availability under their respective revolving credit facilities, including reductions of availability due to outstanding letters of credit, and PNM had 48

49 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) $50.0 million of availability under the PNM New Mexico Credit Facility. Total availability at July 25, 2017, on a consolidated basis, was $581.3 million for PNMR. As of July 25, 2017, TNMP had borrowings of $1.4 million from PNMR under its intercompany loan agreement. At July 25, 2017, PNMR, PNM, and TNMP had consolidated invested cash of $1.5 million, none, and none. As described above, the $175.0 million PNM 2016 Term Loan Agreement that was to mature on November 17, 2017 was repaid on July 20, 2017 from the proceeds of the PNM 2017 Term Loan Agreement. In addition, PNM entered into the PNM 2017 Senior Unsecured Note Agreement on July 28, 2017 to issue $450.0 million of the PNM 2018 SUNs on May 15, 2018 and August 1, 2018, proceeds from which will be used to repay like amounts of PNM Senior Unsecured Notes maturing on those dates. PNM has no other long-term debt due through December 31, The $50.0 million PNM New Mexico Credit Facility expires in January PNMR has maturities and other repayments of short-term and long-term debt aggregating $274.8 million in the period from July 1, 2017 through June 30, 2018 and $104.6 million in the remainder of 2018, including anticipated repayments on the BTMU Term Loan Agreement. TNMP has no required principal payments on its long-term debt through 2018, but the $75.0 million TNMP Revolving Credit Facility currently expires in September Additional information on debt maturities is contained in Note 6 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. (10) Pension and Other Postretirement Benefit Plans PNMR and its subsidiaries maintain qualified defined benefit pension plans, postretirement benefit plans providing medical and dental benefits, and executive retirement programs (collectively, the PNM Plans and TNMP Plans ). PNMR maintains the legal obligation for the benefits owed to participants under these plans. Additional information concerning pension and OPEB plans is contained in Note 12 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. Annual net periodic benefit cost for the plans is actuarially determined using the methods and assumptions set forth in that note and is recognized ratably throughout the year. See New Accounting Pronouncements in Note 1. PNM Plans The following tables present the components of the PNM Plans net periodic benefit cost: Components of Net Periodic Benefit Cost Three Months Ended June 30, Pension Plan OPEB Plan Executive Retirement Program (In thousands) Service cost $ $ $ 24 $ 35 $ $ Interest cost 6,727 7,577 1,006 1, Expected return on plan assets (8,451) (8,854) (1,308) (1,371) Amortization of net (gain) loss 4,001 3, Amortization of prior service cost (241) (241) (416) (7) Net periodic benefit cost $ 2,036 $ 1,937 $ 227 $ 30 $ 252 $

50 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Components of Net Periodic Benefit Cost Six Months Ended June 30, Pension Plan OPEB Plan Executive Retirement Program (In thousands) Service cost $ $ $ 48 $ 70 $ $ Interest cost 13,454 15,154 2,013 2, Expected return on plan assets (16,901) (17,708) (2,615) (2,742) Amortization of net (gain) loss 8,003 6,910 1, Amortization of prior service cost (483) (483) (832) (15) Net periodic benefit cost $ 4,073 $ 3,873 $ 455 $ 58 $ 506 $ 534 PNM did not make any contributions to its pension plan trust in the three and six months ended June 30, 2017 and 2016 and does not anticipate making any contributions to the pension plan in , based on current law, including recent amendments to funding requirements, and estimates of portfolio performance. The funding assumptions were developed using discount rates of 4.1% to 4.9%. Actual amounts to be funded in the future will be dependent on the actuarial assumptions at that time, including the appropriate discount rate. PNM may make additional contributions at its discretion. PNM made no contributions to the OPEB trust in the three and six months ended June 30, 2017 and $0.8 million and $1.6 million in the three and six months ended June 30, PNM does not expect to make any contributions to the OPEB trust in Disbursements under the executive retirement program, which are funded by PNM and considered to be contributions to the plan, were $0.4 million and $0.9 million in the three and six months ended June 30, 2017 and $0.4 million and $0.9 million in the three and six months ended June 30, 2016 and are expected to total $1.5 million during 2017 and $5.8 million for TNMP Plans The following tables present the components of the TNMP Plans net periodic benefit cost: Components of Net Periodic Benefit Cost Three Months Ended June 30, Pension Plan OPEB Plan Executive Retirement Program (In thousands) Service cost $ $ $ 36 $ 46 $ $ Interest cost Expected return on plan assets (945) (986) (114) (122) Amortization of net (gain) loss (20) (10) 2 1 Amortization of prior service cost Net Periodic Benefit Cost $ 8 $ 15 $ 41 $ 83 $ 10 $ 11 50

51 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Components of Net Periodic Benefit Cost Six Months Ended June 30, Pension Plan OPEB Plan Executive Retirement Program (In thousands) Service cost $ $ $ 72 $ 93 $ $ Interest cost 1,443 1, Expected return on plan assets (1,889) (1,971) (228) (245) Amortization of net (gain) loss (40) (20) 4 1 Amortization of prior service cost Net Periodic Benefit Cost $ 15 $ 31 $ 82 $ 167 $ 21 $ 21 TNMP did not make any contributions to its pension plan trust in the three and six months ended June 30, 2017 and 2016 and does not anticipate making any contributions in , based on current law, including recent amendments to funding requirements, and estimates of portfolio performance. The funding assumptions were developed using discount rates of 4.1% to 4.9%. Actual amounts to be funded in the future will depend on the actuarial assumptions at that time, including the appropriate discount rate. TNMP may make additional contributions at its discretion. TNMP made contributions of zero and $0.7 million to the OPEB trust in the three and six months ended June 30, 2017 and no contribution in the three and six months ended June 30, TNMP does not expect to make any additional contributions to the OPEB trust in 2017 and expects to make contributions totaling $1.4 million for Disbursements under the executive retirement program, which are funded by TNMP and considered to be contributions to the plan, were less than $0.1 million in the three and six months ended June 30, 2017 and 2016 and are expected to total $0.1 million during 2017 and $0.4 million in (11) Commitments and Contingencies Overview There are various claims and lawsuits pending against the Company. The Company also is subject to federal, state, and local environmental laws and regulations and periodically participates in the investigation and remediation of various sites. In addition, the Company periodically enters into financial commitments in connection with its business operations. Also, the Company is involved in various legal and regulatory (Note 12) proceedings in the normal course of its business. It is not possible at this time for the Company to determine fully the effect of all litigation and other legal and regulatory proceedings on its financial position, results of operations, or cash flows. With respect to some of the items listed below, the Company has determined that a loss is not probable or that, to the extent probable, cannot be reasonably estimated. In some cases, the Company is not able to predict with any degree of certainty the range of possible loss that could be incurred. Nevertheless, the Company assesses legal and regulatory matters based on current information and makes judgments concerning their potential outcome, giving due consideration to the nature of the claim, the amount and nature of any damages sought, and the probability of success. Such judgments are made with the understanding that the outcome of any litigation, investigation, or other legal proceeding is inherently uncertain. In accordance with GAAP, the Company records liabilities for matters where it is probable a loss has been incurred and the amount of loss is reasonably estimable. The actual outcomes of the items listed below could ultimately differ from the judgments made and the differences could be material. The Company cannot make any assurances that the amount of reserves or potential insurance coverage will be sufficient to cover the cash obligations that might be incurred as a result of litigation or regulatory proceedings. Except as otherwise disclosed, the Company does not expect that any known lawsuits, environmental costs, and commitments will have a material effect on its financial condition, results of operations, or cash flows. K. Additional information concerning commitments and contingencies is contained in Note 16 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-51

52 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Commitments and Contingencies Related to the Environment Nuclear Spent Fuel and Waste Disposal Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE that require the DOE to accept and dispose of all spent nuclear fuel and other highlevel radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Policy Act required the DOE to develop a permanent repository for the storage and disposal of spent nuclear fuel by 1998, the DOE announced that it would not be able to open the repository by 1998 and sought to excuse its performance of these requirements. In November 1997, the DC Circuit issued a decision preventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting spent nuclear fuel. Based on this decision and the DOE s delay, a number of utilities, including APS (on behalf of itself and the other PVNGS owners, including PNM), filed damages actions against the DOE in the Court of Federal Claims. The lawsuits filed by APS alleged that damages were incurred due to DOE s continuing failure to remove spent nuclear fuel and high level waste from PVNGS. In August 2014, APS and DOE entered into a settlement agreement, which establishes a process for the payment of claims for costs incurred through December 31, The settlement agreement has been extended to December 31, Under the settlement agreement, APS must submit claims annually for payment of allowable costs. PNM records estimated claims on a quarterly basis. The benefit from the claims is passed through to customers under the FPPAC to the extent applicable to NMPRC regulated operations. PNM estimates that it will incur approximately $57.7 million (in 2016 dollars) for its share of the costs related to the on-site interim storage of spent nuclear fuel at PVNGS during the term of the operating licenses. PNM accrues these costs as a component of fuel expense as the fuel is consumed. At June 30, 2017 and December 31, 2016, PNM had a liability for interim storage costs of $12.0 million and $12.1 million included in other deferred credits. PVNGS has sufficient capacity at its on-site ISFSI to store all of the nuclear fuel that will be irradiated during the initial operating license period, which ends in December Additionally, PVNGS has sufficient capacity at its on-site ISFSI to store a portion of the fuel that will be irradiated during the period of extended operation, which ends in November If uncertainties regarding the United States government s obligation to accept and store spent fuel are not favorably resolved, APS will evaluate alternative storage solutions that may obviate the need to expand the ISFSI to accommodate all of the fuel that will be irradiated during the period of extended operation. On June 8, 2012, the DC Circuit issued its decision on a challenge by several states and environmental groups of the NRC s rulemaking regarding temporary storage and permanent disposal of high level nuclear waste and spent nuclear fuel. The petitioners had challenged the NRC s 2010 update to the agency s Waste Confidence Decision and temporary storage rule (the Waste Confidence Decision ). The DC Circuit found that the Waste Confidence Decision update constituted a major federal action, which, consistent with NEPA, requires either an environmental impact statement or a finding of no significant impact from the NRC s actions. The DC Circuit found that the NRC s evaluation of the environmental risks from spent nuclear fuel was deficient and, therefore, remanded the Waste Confidence Decision update for further action consistent with NEPA. On September 6, 2012, the NRC commissioners issued a directive to the NRC staff to proceed with development of a generic EIS to support an updated Waste Confidence Decision, which was issued in September On August 26, 2014, the NRC approved a final rule on the environmental effects of continued storage of spent nuclear fuel. The continued storage rule adopted the findings of the generic EIS regarding the environmental impacts of storing spent fuel at any reactor site after the reactor s licensed period of operations. As a result, those generic impacts do not need to be reanalyzed in the environmental reviews for individual licenses. The NRC lifted its suspension on final licensing actions on all nuclear power plant licenses and renewals that went into effect when the DC Circuit issued its June 2012 decision although PVNGS had not been involved in any licensing actions affected by that decision. The August 2014 final rule has been subject to continuing legal challenges before the NRC and the United States Court of Appeals. On May 19, 2016, the NRC denied petitions filed by multiple petitioners to revise the August 2014 rule. The DC Circuit issued an order upholding the August 2014 rule on June 3, 2016 and denied a subsequent petition for rehearing on August 8, In 2011, the National Association of Regulatory Utility Commissioners and the Nuclear Energy Institute challenged, in the DC Circuit, DOE s 2010 determination of the adequacy of the one tenth of a cent per KWh fee (the one-mill fee ) paid by 52

53 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) the nation s commercial nuclear power plant owners pursuant to their individual contracts with the DOE. On January 3, 2014, the DOE notified Congress of its intention to suspend collection of the one-mill fee, subject to Congress disapproval, as ordered by the DC Circuit. On May 16, 2014, the DOE adjusted the fee to zero. PNM anticipates challenges to this action and is unable to predict its ultimate outcome. The Clean Air Act Regional Haze In 1999, EPA developed a regional haze program and regional haze rules under the CAA. The rule directs each of the 50 states to address regional haze. Pursuant to the CAA, states have the primary role to regulate visibility requirements by promulgating SIPs. States are required to establish goals for improving visibility in national parks and wilderness areas (also known as Class I areas) and to develop long-term strategies for reducing emissions of air pollutants that cause visibility impairment in their own states and for preventing degradation in other states. States must establish a series of interim goals to ensure continued progress. The first planning period specifies setting reasonable progress goals for improving visibility in Class I areas by the year In July 2005, EPA promulgated its final regional haze rule guidelines for states to conduct BART determinations for certain covered facilities, including utility boilers, built between 1962 and 1977 that have the potential to emit more than 250 tons per year of visibility impairing pollution. If it is demonstrated that the emissions from these sources cause or contribute to visibility impairment in any Class I area, then BART must be installed by On January 10, 2017, EPA published in the Federal Register revisions to the regional haze rule to provide certain clarifications to reflect interpretations of the 1999 rule. EPA also provided a companion draft guidance document for public comment. The new rule shifted the due date for the next cycle of SIPs that are designed to cover the second compliance period from 2019 to 2028, changed the schedule and process for states to file 5 -year progress reports, and revised certain aspects of the visibility impairment provisions. EPA s final rule was challenged by numerous parties. On May 19, 2017, the DC Circuit granted an unopposed motion from EPA extending the deadline for briefing proposals to July 24, PNM is currently evaluating the potential impacts of this rule on SJGS. SJGS BART Compliance SJGS is a source that is subject to the statutory obligations of the CAA to reduce visibility impacts. Note 16 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K contains detailed information concerning the BART compliance process, including interactions with governmental agencies responsible for environmental oversight and the NMPRC approval process. In December 2015, PNM received NMPRC approval for the plan to comply with the EPA regional haze rule at SJGS. Under the approved plan, the installation of selective non-catalytic reduction technology ( SNCR ) was required on SJGS Units 1 and 4, which was completed in early 2016, and Units 2 and 3 are to be retired by the end of In addition to the required SNCR equipment, the NSR permit, which was required to be obtained in order to install the SNCRs, specified that SJGS Units 1 and 4 be converted to balanced draft technology ( BDT ). PNM s share of the total costs for SNCRs and BDT equipment was $77.9 million. See Note 12 for information concerning the NMPRC s treatment of BDT in PNM s NM 2015 Rate Case. Although operating costs will be reduced due to the retirement of SJGS Units 2 and 3, the operating costs for SJGS Units 1 and 4 have increased with the installation of SNCR and BDT equipment. On December 16, 2015, the NMPRC issued an order regarding SJGS. As provided in that order: PNM will retire SJGS Units 2 and 3 (PNM s current ownership interest totals 418 MW) by December 31, 2017 and recover, over 20 years, 50% of their undepreciated net book value at that date and earn a regulated return on those costs PNM is granted a CCN to acquire an additional 132 MW in SJGS Unit 4, effective January 1, 2018, with an initial book value of zero, plus the costs of SNCR and other capital additions PNM is 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, including transmission assets associated with PVNGS Unit 3, (currently estimated to aggregate approximately $155 million ) No later than December 31, 2018, and before entering into a binding agreement for post-2022 coal supply for SJGS, PNM will file its position and supporting testimony in a NMPRC case to determine the extent to which SJGS should continue 53

54 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) serving PNM s retail customers needs after mid-2022; all parties to the stipulation agree to support this case being decided within six months (see Other SJGS Matters below and Note 12) PNM is authorized to acquire 65 MW of SJGS Unit 4 as excluded utility plant; PNM and PNMR commit that no further coal-fired merchant plant will be acquired at any time by PNM, PNMR, or any PNM affiliate; PNM is not precluded from seeking a CCN to include the 65 MW or other coal capacity in rate base Beginning January 1, 2020, for every MWh produced by 197 MW of coal-fired generation from PNM s ownership share of SJGS, PNM will acquire and retire one MWh of RECs or allowances that include a zero-co 2 emission attribute compliant with EPA s Clean Power Plan; this REC retirement is in addition to what is required to meet the RPS; the cost of these RECs are to be capped at $7.0 million per year and will be recovered in rates; PNM should purchase EPA-compliant RECs from New Mexico renewable generation unless those RECs are more costly PNM will accelerate recovery of SNCR costs on SJGS Units 1 and 4 so that the costs are fully recovered by July 1, 2022 (cost recovery for PNM s BDT project is discussed in Note 12) PNM will not recover approximately $20 million of other costs incurred in connection with CAA compliance The NMPRC will issue a Notice of Proposed Dismissal in PNM s 2014 IRP At December 31, 2015, PNM recorded losses for regulatory disallowances and restructuring costs, aggregating $165.7 million, reflecting a $127.6 million regulatory disallowance to reflect the write-off of the 50% of the estimated December 31, 2017 net book value that will not be recovered, the other unrecoverable costs, and the $16.5 million 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 ( CSA ). The ultimate amount of the regulatory disallowance will be dependent on the actual December 31, 2017 net undepreciated book values of SJGS Units 2 and 3. Accordingly, the amount initially recorded will be adjusted periodically to reflect changes in the projected December 31, 2017 net book values. Additional information about the CSA is discussed under Coal Supply below and in Note 16 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. During 2016, PNM revised its estimates of the December 31, 2017 projected book value of SJGS Units 2 and 3 and the other unrecoverable costs, which resulted in a net expense of $3.7 million, including a $4.5 million expense related to a refinement of the estimated liability for coal mine reclamation from the new coal mine reclamation arrangement. PNM recorded $0.8 million of such revision during the three months ended March 31, 2016, which is reflected in regulatory disallowances and restructuring costs on the Condensed Consolidated Statement of Earnings. In addition, PNMR Development recorded an expense of $0.6 million in the three months ended March 31, 2016 for costs it was obligated to reimburse the other SJGS participants under the restructuring arrangement, which is included in other deductions on the Condensed Consolidated Statement of Earnings. At June 30, 2017, the carrying value for PNM s current ownership share of SJGS Units 2 and 3 is comprised of plant in service of $471.8 million and accumulated depreciation and amortization (including cost of removal) of $209.0 million for a net undepreciated book value of $262.8 million, offset by 50% (which equals $128.6 million ) of the anticipated December 31, 2017 undepreciated net book value of SJGS Units 2 and 3 that will not be recovered, resulting in the net carrying value for SJGS Units 2 and 3 being $134.2 million at June 30, On January 14, 2016, NEE filed a Notice of Appeal with the NM Supreme Court of the NMPRC s December 16, 2015 order. On July 22, 2016, NEE filed a brief alleging that the NMPRC s decision violated New Mexico statutes and NMPRC regulations because PNM did not adequately consider replacement resources other than those proposed by PNM, the NMPRC did not require PNM to adequately address and mitigate ratepayer risk, the NMPRC unlawfully shifted the burden of proof, and the NMPRC s decision was arbitrary and capricious. Answer briefs refuting NEE s claims were filed on November 2, 2016 by PNM, the NMPRC, and certain intervenors. Reply briefs were filed by NEE on January 9, 2017 and the parties presented oral argument to the court on January 25, The court has not rendered a decision on the appeal and there is no required time frame for a decision. In addition, on March 31, 2016, NEE filed a complaint with the NMPRC against PNM regarding the financing provided by NM Capital to facilitate the sale of SJCC (see Coal Supply below). The complaint alleges that PNM failed to comply with its discovery obligation in the SJGS abandonment case and requests the NMPRC investigate whether the financing transactions could adversely affect PNM s ability to provide electric service to its retail customers. PNM responded to the complaint on May 4, The NMPRC has taken no action on this matter. PNM cannot currently predict the outcome of these matters. SJGS Ownership Restructuring Matters As discussed in Note 16 of the Notes to Consolidated Financial Statements in the 2016 Annual Report on Form 10-K, SJGS currently is jointly owned by PNM and eight other entities. In connection with the 54

55 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 costs, among other items. The exiting participants currently own 50.0% of SJGS Unit 3 and 38.8% of SJGS Unit 4, but none of SJGS Units 1 and 2. PNM currently owns 50.0% of SJGS Units 1, 2, and 3 and owns 38.5% of SJGS Unit 4. Following mediated negotiations, the SJGS participants executed the San Juan Project Restructuring Agreement ( RA ) on July 31, The RA provides the essential terms of restructured ownership and addresses other related matters, including that the exiting participants remain obligated for their proportionate shares of environmental, mine reclamation, and certain other legacy liabilities that are attributable to activities that occurred prior to their exit. PNMR Development became a party to the RA and agreed to acquire a 65 MW ownership interest in SJGS Unit 4 on the December 31, 2017 exit date, but has obligations related to Unit 4 before then. On the exit date, PNM would acquire 132 MW and PNMR Development would acquire 65 MW of the capacity in SJGS Unit 4 from the exiting owners for no initial cost other than funding capital improvements, including the costs of installing SNCR and BDT equipment. PNMR Development s share of the costs of installing SNCR and BDT equipment amounted to $7.6 million. PNMR currently anticipates that PNMR Development will transfer the rights and obligations related to the 65 MW to PNM prior to December 31, 2017 in order to facilitate dispatch of power from that capacity. As ordered by the NMPRC, PNM would treat the 65 MW as merchant utility plant that would be excluded from retail rates. Reflecting the additions of the 132 MW and 65 MW, PNM s ownership share would be 77.3% in SJGS Unit 4 and an aggregate of 66.3% in SJGS Units 1 and 4. The RA became effective contemporaneously with the effectiveness of the new CSA. The effectiveness of the new CSA was dependent on the closing of the purchase of the existing coal mine operation by a new mine operator, which as discussed in Coal Supply below, occurred at 11:59 PM on January 31, The RA sets forth the terms under which PNM acquired the coal inventory of the exiting SJGS participants as of January 1, 2016 and will supply coal to the exiting participants for the period from January 1, 2016 through December 31, 2017, which arrangement provides economic benefits that are being passed on to PNM s customers through the FPPAC. Other SJGS Matters Although the RA results in an agreement among the SJGS participants enabling compliance with current CAA requirements, it is possible that the financial impact of climate change regulation or legislation, other environmental regulations, the result of litigation, and other business considerations, could jeopardize the economic viability of SJGS or the ability or willingness of individual participants to continue participation in the plant. PNM s 2017 IRP (Note 12) filed with the NMPRC on July 3, 2017 presented resource portfolio plans for scenarios that assumed SJGS will operate beyond the end of the current coal supply agreement that runs through June 30, 2022 and for scenarios that assumed SJGS will cease operations after mid The 2017 IRP data shows that retiring SJGS in 2022 would provide long-term cost benefits to PNM s customers. Four Corners On August 6, 2012, EPA issued its Four Corners FIP with a final BART determination for Four Corners. The rule included two compliance alternatives. On December 30, 2013, APS notified EPA that the Four Corners participants selected the alternative that required APS to permanently close Units 1-3 by January 1, 2014 and install SCR post-combustion NOx controls on each of Units 4 and 5 by July 31, PNM owns a 13% interest in Units 4 and 5, but had no ownership interest in Units 1, 2, and 3, which were shut down by APS on December 30, For particulate matter emissions, EPA is requiring Units 4 and 5 to meet an emission limit of lbs/mmbtu and the plant to meet a 20% opacity limit, both of which are achievable through operation of the existing baghouses. Although unrelated to BART, the final BART rule also imposes a 20% opacity limitation on certain fugitive dust emissions from Four Corners coal and material handling operations. PNM estimates its share of costs for post-combustion controls at Four Corners Units 4 and 5 to be up to $90.3 million, including amounts incurred through June 30, 2017 and PNM s AFUDC. PNM is seeking recovery from its ratepayers of these costs in its NM 2016 Rate Case discussed in Note 17 of the Notes to Consolidated Financial Statements in the 2016 Annual Report on Form 10-K and Note 12. PNM is unable to predict the ultimate outcome of this matter. The Four Corners participants obligations to comply with EPA s final BART determinations, coupled with the financial impact of climate change regulation or legislation, other environmental regulations, and other business considerations, could 55

56 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) jeopardize the economic viability of Four Corners or the ability of individual participants to continue their participation in Four Corners. Four Corners Federal Agency Lawsuit On April 20, 2016, several environmental groups filed a lawsuit against OSM and other federal agencies in the United States District Court for the District of Arizona in connection with their issuance of the approvals that extended the life of Four Corners and the adjacent mine. The lawsuit alleges that these federal agencies violated both the ESA and NEPA in providing the federal approvals necessary to extend operations at Four Corners and the adjacent mine past July 6, The court granted an APS motion to intervene in the litigation on August 3, Briefing on the merits of this litigation was expected to extend through May On September 15, 2016, NTEC, the current owner of the mine providing coal to Four Corners, filed a motion to intervene for the purpose of dismissing the lawsuit based on NTEC s tribal sovereign immunity. Because the court has placed a stay on all litigation deadlines pending its decision regarding NTEC s motion to dismiss, the schedule for briefing and the anticipated time line for completion this litigation will likely be extended. PNM cannot predict the timing or outcome of this matter. Carbon Dioxide Emissions On August 3, 2015, EPA established final standards to limit CO 2 emissions from power plants. EPA took three separate but related actions in which it: (1) established the final carbon pollution standards for new, modified and reconstructed power plants; (2) established the final Clean Power Plan to set standards for carbon emission reductions from existing power plants; and (3) released a proposed federal plan associated with the final Clean Power Plan. The Clean Power Plan was published on October 23, Multiple states, utilities, and trade groups subsequently filed petitions for review and motions to stay in the DC Circuit. The Clean Power Plan establishes state-by-state targets for carbon emissions reduction and establishes deadlines for states to submit initial plans to EPA by September 6, 2016, with a potential two -year extension, and final plans by The September 2016 deadline passed with no action and the 2018 deadline could be adjusted due to the stay of the Clean Power Plan issued by the US Supreme Court and pending litigation described below. State plans can be based on either an emission standards (rate or mass) approach or a state measures approach. Under an emission standards approach, federally enforceable emission limits are placed directly on affected units in the state. A state measures approach must meet equivalent rates statewide, but may include some elements, such as renewable energy or energy efficiency requirements, that are not federally enforceable. State measures plans may only be used with mass-based goals and must include backstop federally enforceable standards that will become effective if the state measures fail to achieve the expected level of emission reductions. On January 21, 2016, the DC Circuit denied petitions to stay the Clean Power Plan. On January 26, 2016, 29 states and state agencies filed a petition to the US Supreme Court to reverse the DC Circuit s decision and stay the implementation of the Clean Power Plan. On February 9, 2016, the US Supreme Court issued a 5-4 decision granting the stay pending judicial review of the rule by the DC Circuit. The decision means the Clean Power Plan is not in effect and states are not obliged to comply with its requirements. The DC Circuit heard oral arguments on September 27, 2016 in the case challenging the Clean Power Plan, but has not rendered a decision. The proposed federal plan released concurrently with the Clean Power Plan is important to Four Corners and the Navajo Nation. Since the Navajo Nation does not have primacy over its air quality program, EPA would be the regulatory authority responsible for implementing the Clean Power Plan on the Navajo Nation if the Clean Power Plan is sustained under the current administration. In addition, the proposed rule recommends that EPA determine it is necessary or appropriate for EPA to regulate CO 2 emissions on the Navajo Nation. The comment period for the proposed rule closed on January 21, APS and PNM filed separate comments with EPA on EPA s draft plan and model trading rules, advocating that such a federal plan is neither necessary nor appropriate to protect air quality on the Navajo Nation. If EPA was to determine that it was not necessary or appropriate, the Clean Power Plan would not apply to the Navajo Nation, in which case, APS has indicated the Clean Power Plan would not have a material impact on Four Corners. PNM is unable to predict the financial or operational impacts on Four Corners operations if EPA determines that a federal plan is necessary or appropriate for the Navajo Nation. On June 30, 2016, EPA published in the Federal Register the design details of its voluntary Clean Energy Incentive Program under the Clean Power Plan. Comments were due to EPA on November 1,

57 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On March 28, 2017, President Trump issued an Executive Order on Energy Independence. The order puts forth two general policies: promote clean and safe development of energy resources, while avoiding regulatory burdens, and ensure electricity is affordable, reliable, safe, secure, and clean. The order directs the EPA Administrator to immediately review and, if appropriate and consistent with law, suspend, revise, or rescind (1) the Clean Power Plan, (2) the New Source Performance Standards for GHG from new, reconstructed, or modified electric generating units, (3) the Proposed Clean Power Plan Model Trading Rules, (4) the Legal Memorandum supporting the Clean Power Plan, and (5) the New Source Performance Standards for Oil & Natural Gas Sector. It also directs the EPA Administrator to notify the US Attorney General of his intent to review rules subject to pending litigation so that the US Attorney General may notify the court and, in his discretion, request that the court delay further litigation pending completion of the reviews. In connection with its review, EPA filed a petition with the DC Circuit requesting that the court hold the consolidated cases challenging the Clean Power Plan in abeyance until 30 days after the conclusion of EPA s review and any subsequent rulemaking. On April 28, 2017, the DC Circuit granted the motion to hold the consolidated cases in abeyance for 60 days, directed EPA to file status reports every 30 days, and ordered the parties to file supplemental briefs by May 15, 2017, addressing whether the cases should be remanded to EPA rather than held in abeyance. The DC Circuit issued a similar order on the same day in connection with a motion filed by EPA to hold consolidated cases challenging the NSPS in abeyance. EPA also signed a Federal Register notice announcing that EPA is initiating its review of the Clean Power Plan and providing advance notice of forthcoming rulemaking proceedings. The rulemaking process, if initiated, will require a period of public comment and will be subject to judicial review. EPA filed a supplemental status report on June 15, 2017, advising the DC Circuit that, as a result of EPA s review of the rule, EPA has begun the interagency review process of a proposed regulatory action. The 60 -day period of abeyance ended on June 27, PNM s review of the new CO 2 emission reductions standards is ongoing and the assessment of its impacts will depend on the litigation of the final rule and actions the Trump administration is taking through judicial and regulatory proceedings. Accordingly, PNM cannot predict the impact these standards may have on its operations or a range of the potential costs of compliance, if any. National Ambient Air Quality Standards ( NAAQS ) The CAA requires EPA to set NAAQS for pollutants considered harmful to public health and the environment. EPA has set NAAQS for certain pollutants, including NOx, SO 2, ozone, and particulate matter. In 2010, EPA updated the primary NOx and SO 2 NAAQS to include a 1-hour maximum standard while retaining the annual standards for NOx and SO 2 and the 24-hour SO 2 standard. New Mexico is in attainment for the 1-hour NOx NAAQS. On May 13, 2014, EPA released the draft data requirements rule for the 1-hour SO 2 NAAQS, which directs state and tribal air agencies to characterize current air quality in areas with large SO 2 sources to identify maximum 1-hour SO 2 concentrations. The proposed rule also describes the process and timetable by which air regulatory agencies would characterize air quality around large SO 2 sources through ambient monitoring or modeling. This characterization will result in these areas being designated as attainment, nonattainment, or unclassified for compliance with the 1-hour SO 2 NAAQS. On March 2, 2015, the United States District Court for the Northern District of California approved a settlement that imposes deadlines for EPA to identify areas that violate the NAAQS standards for 1-hour SO 2 emissions. The settlement results from a lawsuit brought by Earthjustice on behalf of the Sierra Club and the Natural Resources Defense Council under the CAA. The consent decree requires the following: (1) within 16 months of the consent decree entry, EPA must issue area designations for areas containing non-retiring facilities that either emitted more than 16,000 tons of SO 2 in 2012 or emitted more than 2,600 tons with an emission rate of 0.45 lbs/mmbtu or higher in 2012; (2) by December 2017, EPA must issue designations for areas for which states have not adopted a new monitoring network under the proposed data requirements rule; and (3) by December 2020, EPA must issue designations for areas for which states have adopted a new monitoring network under the proposed data requirements rule. SJGS and Four Corners SO 2 emissions are below the tonnages set forth in (1) above. EPA regions sent letters to state environmental agencies explaining how EPA plans to implement the consent decree. The letters outline the schedule that EPA expects states to follow in moving forward with new SO 2 non-attainment designations. NMED did not receive a letter. On August 11, 2015, EPA released the Data Requirements Rule for SO 2, telling states how to model or monitor to determine attainment or nonattainment with the new 1-hour SO 2 NAAQS. On June 3, 2016, NMED notified PNM that air quality modeling results indicated that SJGS was in compliance with the standard. In January 2017, NMED submitted their formal modeling report regarding attainment status to EPA. The modeling indicated that no area in New Mexico exceeds the 1-hour SO 2 standard. In July of each year, NMED will submit an annual report to EPA documenting annual SO 2 emissions from SJGS and the associated compliance status. 57

58 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On May 14, 2015, PNM received an amendment to its NSR air permit for SJGS, which reflects the revised state implementation plan for regional haze BART and requires the installation of SNCRs as described above. The revised permit also requires the reduction of SO 2 emissions to 0.10 pound per MMBTU on SJGS Units 1 and 4 and the installation of BDT equipment modifications for the purpose of reducing fugitive emissions, including NOx, SO 2, and particulate matter. These reductions will help SJGS meet the NAAQS for these constituents. The BDT equipment modifications were installed at the same time as the SNCRs, in order to most efficiently and cost effectively conduct construction activities at SJGS. See Regional Haze SJGS above. In January 2010, EPA announced it would strengthen the 8-hour ozone standard by setting a new standard in a range of parts per billion ( ppb ). On October 1, 2015, EPA finalized the new ozone NAAQS and lowered both the primary and secondary 8-hour standard from 75 ppb to 70 ppb. With ozone standards becoming more stringent, fossil-fueled generation units will come under increasing pressure to reduce emissions of NOx and volatile organic compounds, and to generate emission offsets for new projects or facility expansions located in nonattainment areas. On November 10, 2015, EPA proposed a rule revising its Exceptional Events Rule, which outlines the requirements for excluding air quality data (including ozone data) from regulatory decisions if the data are affected by events outside an area s control. The proposed rule is timely in light of the new more stringent ozone NAAQS final rule since western states like New Mexico and Arizona are particularly subject to elevated background ozone transport from natural local sources such as wildfires, and transported via winds from distant sources, such as the stratosphere or another region or country. On February 25, 2016, EPA released guidance on area designations, which states used to determine their initial designation recommendations by October 1, EPA recommended that states and tribes use the three most recent years of quality assured monitoring data available (e.g., 2013 to 2015) to recommend designations. In their submittals, states and tribes were also able to use preliminary 2016 data. EPA was expected to release final designations of attainment/nonattainment for areas by October 1, However, on June 6, 2017, the EPA administrator sent letters to state governors announcing that EPA is extending, by one year, the deadline for promulgating area designations. By October 2018, NMED is required to submit an infrastructure SIP that provides the basic air quality management program to implement the revised ozone standard. The extension of the deadline for designations would push out the due dates for attainment plans for those areas designated as non-attainment for ozone. These plans are generally due within 36 months from the date of designation and are expected to be submitted to EPA by October 1, NMED published its 2015 Ozone NAAQS Designation Recommendation Report on September 2, In New Mexico, NMED is designating only a small area in southern Dona Ana County as non-attainment for ozone. NMED will have responsibility for bringing this nonattainment area into compliance and will look at all sources of NOx and volatile organic compounds since these are the pollutants that form ground-level ozone. According to NMED s website, If emissions from Mexico keep New Mexico from meeting the standards, the New Mexico area could remain nonattainment but would not face more stringent requirements over time. PNM does not believe there will be material impacts to its facilities as a result of NMED s nonattainment designation of the small area within Dona Ana County, but must wait on EPA s ultimate approval, which should occur by October 1, Until EPA approves attainment designations for the Navajo Nation and releases a proposal to implement the revised ozone NAAQS, APS is unable to predict what impact the adoption of these standards may have on Four Corners. PNM cannot predict the outcome of this matter. WEG v. OSM NEPA Lawsuit In February 2013, WEG filed a Petition for Review in the United States District Court of Colorado against OSM challenging federal administrative decisions affecting seven different mines in four states issued at various times from 2007 through In its petition, WEG challenges several unrelated mining plan modification approvals, which were each separately approved by OSM. Of the fifteen claims for relief in the WEG Petition, two concern SJCC s San Juan mine. WEG s allegations concerning the San Juan mine arise from OSM administrative actions in WEG alleges various NEPA violations against OSM, including, but not limited to, OSM s alleged failure to provide requisite public notice and participation, alleged failure to analyze certain environmental impacts, and alleged reliance on outdated and insufficient documents. WEG s petition seeks various forms of relief, 58

59 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) including a finding that the federal defendants violated NEPA by approving the mine plans; voiding, reversing, and remanding the various mining modification approvals; enjoining the federal defendants from re-issuing the mining plan approvals for the mines until compliance with NEPA has been demonstrated; and enjoining operations at the seven mines. SJCC intervened in this matter. The court granted SJCC s motion to sever its claims from the lawsuit and transfer venue to the United States District Court for the District of New Mexico. In February 2016, venue for this matter was transferred to the United States District Court for the Western District of Texas. A stay in this matter expired on April 1, 2016 and was not renewed although the parties continued to engage in settlement negotiations. On August 31, 2016, the court entered an order remanding the matter to OSM for the completion of an EIS. The EIS is to be completed by August 31, The court ruled that mining operations may continue in the interim and the litigation will be administratively closed. If OSM does not complete the EIS within the time frame provided, the court will order immediate vacatur of the mining plan at issue. The scope of the EIS will be determined through a public process and is expected to include cumulative and indirect effects of surrounding sources. On March 22, 2017, OSM issued its Notice of Intent to initiate the public scoping process and prepare an EIS for the project. The Notice of Intent provided that the EIS will also analyze the effects of coal combustion at SJGS. PNM cannot currently predict the outcome of this matter. Navajo Nation Environmental Issues Four Corners is located on the Navajo Reservation and is held under an easement granted by the federal government, as well as a lease from the Navajo Nation. The Navajo Acts purport to give the Navajo Nation Environmental Protection Agency authority to promulgate regulations covering air quality, drinking water, and pesticide activities, including those activities that occur at Four Corners. In October 1995, the Four Corners participants filed a lawsuit in the District Court of the Navajo Nation challenging the applicability of the Navajo Acts to Four Corners. In May 2005, APS and the Navajo Nation signed an agreement resolving the dispute regarding the Navajo Nation s authority to adopt operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. As a result of this agreement, APS sought, and the court granted, dismissal of the pending litigation in the Navajo Nation Supreme Court and the Navajo Nation District Court, to the extent the claims relate to the CAA. The agreement does not address or resolve any dispute relating to other aspects of the Navajo Acts. PNM cannot currently predict the outcome of these matters or the range of their potential impacts. Cooling Water Intake Structures EPA signed its final cooling water intake structures rule on May 16, 2014, which establishes national standards for certain cooling water intake structures at existing power plants and other facilities under the Clean Water Act to protect fish and other aquatic organisms by minimizing impingement mortality (the capture of aquatic wildlife on intake structures or against screens) and entrainment mortality (the capture of fish or shellfish in water flow entering and passing through intake structures). The final rule was published on August 15, 2014 and became effective October 14, The final rule allows multiple compliance options and considerations for site specific conditions and the permit writer is granted a significant amount of discretion in determining permit requirements, schedules, and conditions. To minimize impingement mortality, the rule provides operators of facilities, such as SJGS and Four Corners, seven options for meeting Best Technology Available ( BTA ) standards for reducing impingement. SJGS has a closed-cycle recirculating cooling system, which is a listed BTA and may also qualify for the de minimis rate of impingement based on the design of the intake structure. To minimize entrainment mortality, the permitting authority must establish the BTA for entrainment on a site-specific basis, taking into consideration an array of factors, including endangered species and social costs and benefits. Affected sources must submit source water baseline characterization data to the permitting authority to assist in the determination. Compliance deadlines under the rule are tied to permit renewal and will be subject to a schedule of compliance established by the permitting authority. The rule is not clear as to how it applies and what the compliance timelines are for facilities like SJGS that have a cooling water intake structure and only a multi-sector general stormwater permit. PNM is in discussion with EPA regarding this issue. However, PNM does not expect material changes as a result of any requirements that may be imposed upon SJGS. APS is currently in discussions with EPA Region 9, the NPDES permit writer for Four Corners, to determine the scope of the impingement and entrainment requirements, which will, in turn, determine APS s costs to comply with the rule. PNM does not expect such costs to be material. 59

60 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Effluent Limitation Guidelines On June 7, 2013, EPA published proposed revised wastewater effluent limitation guidelines establishing technology-based wastewater discharge limitations for fossil fuel-fired electric power plants. EPA s proposal offered numerous options that target metals and other pollutants in wastewater streams originating from fly ash and bottom ash handling activities, scrubber activities, and non-chemical metal cleaning waste operations. All proposed alternatives establish a zero discharge effluent limit for all pollutants in fly ash transport water. Requirements governing bottom ash transport water differ depending on which alternative EPA ultimately chooses and could range from effluent limits based on Best Available Technology Economically Achievable to zero discharge effluent limits. EPA signed the final Steam Electric Effluent Guidelines rule on September 30, The final rule, which became effective on January 4, 2016, phases in the new, more stringent requirements in the form of effluent limits for arsenic, mercury, selenium, and nitrogen for wastewater discharged from wet scrubber systems and zero discharge of pollutants in ash transport water that must be incorporated into plants NPDES permits. Each plant must comply between 2018 and 2023 depending on when it needs a new/revised NPDES permit. Because SJGS is zero discharge for wastewater and is not required to hold a NPDES permit, it is expected that minimal to no requirements will be imposed. Reeves Station, a PNMowned gas-fired generating station, discharges cooling tower blowdown to a publicly owned treatment works and holds an NPDES permit. It is expected that minimal to no requirements will be imposed at Reeves. On April 14, 2017, EPA filed a motion with the United States Court of Appeals for the Fifth Circuit relating to ongoing litigation of the 2016 Steam Electric Effluent Guidelines rule. EPA asks the court to hold all proceedings in the case in abeyance until August 12, 2017 while EPA reconsiders the rule. EPA also asks to be allowed to file a motion on August 12, 2017 to inform the court if EPA wishes to seek a remand of any provisions of the rule so that EPA may conduct further rulemaking, if appropriate. The motion refers to the notice signed by EPA Administrator Scott Pruitt on April 12, 2017, which announced EPA s intent to reconsider this rule, as well as EPA s administrative stay of the compliance deadlines. On April 25, 2017, EPA published in the Federal Register a notice of postponement of certain compliance dates for the 2016 Steam Electric Effluent Guidelines rule, consistent with the EPA's decision to grant reconsideration of the rule. Specifically, the deadlines that will be postponed are the "best available technology" limitations and pretreatment standards for each of the following waste streams: fly ash transport water, bottom ash transport water, flue gas desulfurization wastewater, flue gas mercury control wastewater, and gasification wastewater. Four Corners may be required to change equipment and operating practices affecting boilers and ash handling systems, as well as change its waste disposal techniques. Until a draft NPDES permit is proposed for Four Corners, APS is uncertain what will be required to comply with the finalized effluent limitations. PNM is unable to predict the outcome of this matter or a range of the potential costs of compliance. Santa Fe Generating Station PNM and the NMED are parties to agreements under which PNM installed a remediation system to treat water from a City of Santa Fe municipal supply well, an extraction well, and monitoring wells to address gasoline contamination in the groundwater at the site of PNM s former Santa Fe Generating Station and service center. PNM believes the observed groundwater contamination originated from off-site sources, but agreed to operate the remediation facilities until the groundwater meets applicable federal and state standards or until the NMED determines that additional remediation is not required, whichever is earlier. The City of Santa Fe has indicated that since the City no longer needs the water from the well, the City would prefer to discontinue its operation and maintain it only as a backup water source. However, for PNM s groundwater remediation system to operate, the water well must be in service. Currently, PNM is not able to assess the duration of this project or estimate the impact on its obligations if the City of Santa Fe ceases to operate the water well. The Superfund Oversight Section of the NMED also has conducted multiple investigations into the chlorinated solvent plume in the vicinity of the site of the former Santa Fe Generating Station. In February 2008, a NMED site inspection report was 60

61 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) submitted to EPA, which states that neither the source nor extent of contamination has been determined and that the source may not be the former Santa Fe Generating Station. Results of tests conducted by NMED in April 2012 and April 2013 showed elevated concentrations of nitrate in three monitoring wells and an increase in free-phase hydrocarbons in another well. PNM conducted similar site-wide sampling activities in April 2014 and obtained results similar to the 2013 data. As part of this effort, PNM also collected a sample of hydrocarbon product for fingerprint analysis from a monitoring well located on the northeastern corner of the property. This analysis indicated that the hydrocarbon product was a mixture of newer and older fuels, and the location of the monitoring well suggests that the hydrocarbon product is likely from offsite sources. PNM does not believe the former generating station is the source of the increased levels of free-phase hydrocarbons, but no conclusive determinations have been made. However, it is possible that PNM s prior activities to remediate hydrocarbon contamination, as conducted under an NMED-approved plan, may have resulted in increased nitrate levels. Therefore, PNM has agreed to monitor nitrate levels in a limited number of wells under the terms of the renewed discharge permit for the former generating station. PNM is unable to predict the outcome of these matters. Effective December 22, 2015, PNM and NMED entered into a memorandum of understanding to address changing groundwater quality conditions at the site. Under the memorandum, PNM will continue hydrocarbon investigation of the site under the supervision of NMED and qualified costs of the work will be eligible for payment through the New Mexico Corrective Action Fund ( CAF ), which is administered by the NMED Petroleum Storage Tank Bureau. Among other things, money in the CAF is available to NMED to make payments to or on behalf of owners and operators for corrective action taken in accordance with statutory and regulatory requirements to investigate, minimize, eliminate, or clean up a release. PNM s work plan and cost estimates for specific groundwater investigation tasks were approved by the Petroleum Storage Tank Bureau. PNM submitted a monitoring plan consisting of a compilation of the data associated with the recent monitoring activities conducted under the CAF to NMED on October 3, Following NMED s review of the data, PNM and NMED will develop plans for the next phase of work under the CAF. Coal Combustion Byproducts Waste Disposal CCBs consisting of fly ash, bottom ash, and gypsum from SJGS are currently disposed of in the surface mine pits adjacent to the plant. SJGS does not operate any CCB impoundments or landfills. The NMMMD currently regulates placement of ash, which is generated from coal combustion at SJGS, in the San Juan mine with federal oversight by the OSM. APS disposes of CCBs in ash ponds and dry storage areas at Four Corners. Ash management at Four Corners is regulated by EPA and the New Mexico State Engineer s Office. In June 2010, EPA published a proposed rule that included two options for waste designation of coal ash. One option was to regulate CCBs as a hazardous waste, which would allow EPA to create a comprehensive federal program for waste management and disposal of CCBs. The other option was to regulate CCBs as a non-hazardous waste, which would provide EPA with the authority to develop performance standards for waste management facilities handling CCBs and would be enforced primarily by state authorities or through citizen suits. Both options allow for continued use of CCBs in beneficial applications. On December 19, 2014, EPA issued its coal ash rule, including a non-hazardous waste determination for coal ash. Coal ash will be regulated as a solid waste under Subtitle D of RCRA. The rule sets minimum criteria for existing and new CCB landfills and existing and new CCB surface impoundments and all lateral expansions consisting of location restrictions, design and operating criteria; groundwater monitoring and corrective action; closure requirements and post closure care; and recordkeeping, notification, and internet posting requirements. Because the rule is promulgated under Subtitle D, it does not require regulated facilities to obtain permits, does not require the states to adopt and implement the new rules, and is not within EPA s enforcement jurisdiction. Instead, the rule s compliance mechanism is for a state or citizen group to bring a RCRA citizen suit in federal district court against any facility that is alleged to be in non-compliance with the new requirements. EPA published the final CCB rule in the Federal Register on April 17, 2015, with an effective date of October 19, Based upon the requirements of the final rule, PNM conducted a CCB assessment at SJGS and made minor modifications at the plant to ensure that there are no facilities which would be considered impoundments or landfills under the rule. PNM does not expect it to have a material impact on operations, financial position, or cash flows. As indicated above, CCBs at Four Corners are currently disposed of in ash ponds and dry storage areas. Depending upon the results of groundwater monitoring required by the CCB rule, Four Corners may be required to take corrective action. Initial 61

62 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) monitoring at Four Corners is not yet complete, so expenditures related to potential corrective actions, if any, cannot be reasonably estimated at this time. Pursuant to a June 24, 2016 order by the DC Circuit in litigation by industry and environmental groups challenging EPA s CCB regulations, EPA is required to complete a rulemaking proceeding within the next three years concerning whether or not boron must be included on the list of groundwater constituents that might trigger corrective action under EPA s CCB rules. EPA is not required to take final action approving the inclusion of boron, but EPA must propose and consider its inclusion. Should EPA take final action adding boron to the list of groundwater constituents, corrective action might be triggered. Any resulting corrective action measures may increase costs of compliance with the CCB rule at coal-fired generating facilities. At this time, PNM cannot predict when EPA will commence its rulemaking concerning boron or the eventual results of those proceedings. On December 16, 2016, the Water Infrastructure Improvements for the Nation Act (the WIIN Act ) was signed into law to address critical water infrastructure needs in the United States. The WIIN Act contains a number of provisions requiring EPA to modify the self-implementing provisions of the current CCB rules under Subtitle D. Among other things, the WIIN Act provides for the establishment of state and EPA permit programs for CCBs, provides flexibility for states to incorporate the EPA final rule for CCBs or develop other criteria that are at least as protective as the EPA s final rule, and requires EPA to approve state permit programs within 180 days of submission by the state for approval. As a result, the CCB rule is no longer selfimplementing and there will either be a state or federal permit program. Subject to Congressional appropriated funding, EPA will implement the permit program in states that choose not to implement a program. Until permit programs are in effect, EPA has authority to directly enforce the self-implementing CCB rule. For facilities located within the boundaries of Native American tribal reservations, such as the Navajo Nation where Four Corners is located, EPA is required to develop a federal permit program regardless of appropriated funds. EPA has yet to undertake rulemaking proceedings to implement the CCB provisions of the WIIN Act. There is no time line for establishing either state or federal permitting programs. The December 2014 CCB rule s preamble indicates EPA is still evaluating whether to reverse its original regulatory determination and regulate coal ash under RCRA Subtitle C, which means it is possible at some point in the future for EPA to review the new CCB rules. The CCB rule does not cover mine placement of coal ash. OSM is expected to publish a proposed rule covering mine placement in the future and will likely be influenced by EPA s rule. PNM cannot predict the outcome of OSM s proposed rulemaking regarding CCB regulation, including mine placement of CCBs, or whether OSM s actions will have a material impact on PNM s operations, financial position, or cash flows. PNM would seek recovery from its ratepayers of all CCB costs that are ultimately incurred. Coal Supply SJGS Other Commitments and Contingencies The coal requirements for SJGS are supplied by SJCC. SJCC holds certain federal, state, and private coal leases. Through January 31, 2016, SJCC was a wholly owned subsidiary of BHP and supplied processed coal for operation of SJGS under an underground coal sales agreement ( UG-CSA ) that was to expire on December 31, In addition to coal delivered to meet the current needs of SJGS, PNM prepaid SJCC for certain coal mined but not yet delivered to the plant site. At June 30, 2017 and December 31, 2016, prepayments for coal (including amounts purchased from the existing SJGS participants discussed below), which are included in other current assets, amounted to $37.4 million and $48.7 million. Additional information concerning the coal supply for SJGS is contained in Note 16 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. In conjunction with the activities undertaken to comply with the CAA for SJGS, as discussed above, PNM and the other owners of SJGS evaluated alternatives for the supply of coal to SJGS after the expiration of the UG-CSA. On July 1, 2015, PNM and Westmoreland Coal Company ( Westmoreland ) entered into a new coal supply agreement ( CSA ), pursuant to which Westmoreland would supply all of the coal requirements of SJGS through June 30, PNM and Westmoreland also entered into agreements under which Westmoreland would provide CCB disposal and mine reclamation services. Contemporaneous with the entry into the coal-related agreements, Westmoreland entered into a stock purchase agreement (the Stock Purchase Agreement ) 62

63 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) on July 1, 2015 to acquire all of the capital stock of SJCC. In addition, PNM, Tucson, SJCC, and SJCC s owner entered into an agreement to terminate the existing UG-CSA upon the effective date of the new CSA. The CSA became effective as of 11:59 PM on January 31, 2016, upon the closing under the Stock Purchase Agreement. Upon closing under the Stock Purchase Agreement, Westmoreland s rights and obligations under the CSA and the agreements for CCB disposal and mine reclamation services were assigned to SJCC. Westmoreland has guaranteed SJCC s performance under the CSA. Pricing under the CSA is primarily fixed, adjusted to reflect general inflation. The pricing structure takes into account that SJCC has been paid for coal mined but not delivered, as discussed above. PNM has the option to extend the 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 by July 1, 2018 and the parties must agree to the terms of the extension by January 1, However, as discussed in Note 12, PNM s 2017 IRP shows that retirement of PNM s SJGS capacity in 2022 would be cost-effective for customers. The RA sets forth terms under which PNM acquired the coal inventory, including coal mined but not delivered, of the exiting SJGS participants as of January 1, 2016 and will supply coal to the SJGS exiting participants for the period from January 1, 2016 through December 31, 2017 and to the SJGS remaining participants over the term of the CSA. Coal costs under the CSA are significantly less than under the previous arrangement with SJCC. Since substantially all of PNM s coal costs are passed through the FPPAC, the benefit of the reduced costs and the economic benefits of the coal inventory arrangement with the exiting owners are passed through to PNM s customers. In support of the closing under the Stock Purchase Agreement and to facilitate PNM customer savings, NM Capital, a wholly owned subsidiary of PNMR, provided funding of $125.0 million (the Westmoreland Loan ) to Westmoreland San Juan, LLC ( WSJ ), a ring-fenced, bankruptcy-remote, special-purpose entity that is a subsidiary of Westmoreland, to finance the purchase price of the stock of SJCC (including an insignificant affiliate) under the Stock Purchase Agreement. NM Capital was able to provide the $125.0 million financing to WSJ by first entering into a $125.0 million term loan agreement (the BTMU Term Loan Agreement ) with BTMU, as lender and administrative agent. The BTMU Term Loan Agreement became effective as of February 1, 2016, has a maturity date of February 1, 2021, and bears interest at a rate based on LIBOR plus a customary spread. In connection with the BTMU Term Loan Agreement, PNMR, as parent company of NM Capital, has guaranteed NM Capital s obligations to BTMU. The balance outstanding under the BTMU Term Loan Agreement was $71.8 million at June 30, The Westmoreland Loan is a $125.0 million loan agreement among NM Capital, as lender, WSJ, as borrower, SJCC and its affiliate, as guarantors, BTMU, as administrative agent, and MUFG Union Bank, N.A., as depository bank. The Westmoreland Loan became effective as of February 1, 2016, and has a maturity date of February 1, The interest rate on the Westmoreland Loan escalates over time and was initially a rate of 7.25% plus LIBOR. Such rate is 9.25% plus LIBOR for the period from February 1, 2017 through January 31, The Westmoreland Loan has been structured to encourage prepayments and early retirement of the debt. WSJ must pay principal and interest quarterly to NM Capital in accordance with an amortization schedule. In addition, the Westmoreland Loan requires that all cash flows of WSJ, in excess of normal operating expenses, capital additions, and operating reserves, be utilized for principal and interest payments under the loan until it is fully repaid. At June 30, 2017, the amount outstanding under the Westmoreland Loan was $75.8 million. The next principal payment of $9.6 million plus interest of $2.0 million is due on August 1, As of July 25, 2017, $11.6 million was held in a SJCC restricted bank account that is to be used solely to service the Westmoreland Loan. The Westmoreland Loan is secured by the assets of and the equity interests in SJCC and its affiliate. The Westmoreland Loan also includes customary representations and warranties, covenants, and events of default. There are no prepayment penalties. In connection with certain mining permits relating to the operation of the San Juan mine, SJCC is required to post reclamation bonds of $118.7 million with the NMMMD. In order to facilitate the posting of reclamation bonds by sureties on behalf of SJCC, PNMR entered into separate letter of credit arrangements with a bank under which letters of credit aggregating $30.3 million have been issued. Four Corners APS purchased all of Four Corners coal requirements from a supplier that was also a subsidiary of BHP and had a long-term lease of coal reserves with the Navajo Nation. That contract was to expire on July 6, 2016 with pricing determined using an 63

64 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) escalating base-price. On December 30, 2013, ownership of the mine was transferred to NTEC, an entity owned by the Navajo Nation, and a new coal supply contract for Four Corners, beginning in July 2016 and expiring in 2031, was entered into with NTEC (the Four Corners CSA ). The BHP subsidiary was retained as the mine manager and operator through December Bisti Fuels Company, LLC, a subsidiary of The North American Coal Corporation, took over management and operation of the mine effective January 1, The average coal price per MMBTU under the new contract was approximately 51% higher in the twelve months ended June 30, 2017 than in the twelve months ended June 30, 2016, excluding the disputed amounts discussed below. The contract provides for pricing adjustments over its term based on economic indices. PNM anticipates that its share of the increased costs will be recovered through its FPPAC. Four Corners Coal Supply Arbitration The owners of Four Corners are obligated to purchase a specified minimum amount of coal each contract year and to pay for any shortfall of coal that they fail to take delivery of below the minimum amount, except when caused by uncontrollable forces as defined in the Four Corners CSA. On June 13, 2017, APS received a demand for arbitration from NTEC in connection with the Four Corners CSA. NTEC is seeking a declaratory judgment to support its interpretation of a provision regarding uncontrollable forces in the agreement relating to the annual minimum quantities of coal to be purchased by the Four Corners owners. NTEC alleges a shortfall in those purchases for the initial contract year, which ended June 30, PNM s share of the shortfall is estimated to be approximately $6.5 million. PNM anticipates that substantially all of any amount it ultimately is required to pay would be passed through to customers under PNM s FPPAC. Although PNM cannot predict the timing or outcome of the arbitration, the outcome is not expected to have a material impact on its financial position, results of operations or cash flows. Coal Mine Reclamation In conjunction with the proposed shutdown of SJGS Units 2 and 3 to comply with the BART requirements of the CAA, an updated coal mine reclamation study was requested by the SJGS participants. In 2013, PNM updated its study of the final reclamation costs for both the surface mines that previously provided coal to SJGS and the current underground mine providing coal and revised its estimates of the final reclamation costs. This estimate reflected that, with the proposed shutdown of SJGS Units 2 and 3 described above, the mine providing coal to SJGS would continue to operate through 2053, the anticipated life of SJGS. The 2013 coal mine reclamation study indicated reclamation costs had increased, including significant increases due to the proposed shutdown of SJGS Units 2 and 3, which would reduce the amount of CCBs generated over the remaining life of SJGS and result in a significant increase in the amount of fill dirt required to remediate the underground mine area thereby increasing the overall reclamation costs. As discussed under Coal Combustion Byproducts Waste Disposal above, SJGS currently disposes of CCBs from the plant in the surface mine pits adjacent to the plant. In 2015, PNM updated its final reclamation costs estimates to reflect the terms of the new reclamation services agreement with Westmoreland, discussed above, and changes resulting from the approval of the 2015 SJCC Mine Permit Plan. The 2015 reclamation cost estimate reflected that the scope and pricing structure of the reclamation service agreement with Westmoreland would significantly increase reclamation costs. In addition, design plan changes, updated regulatory expectations, and common mine reclamation practices incorporated into the 2015 SJCC Mine Permit reflect an increase in the 2015 reclamation cost estimate. The impacts of these increases, amounting to $16.5 million, were recorded at December 31, Upon effectiveness of the CSA and the RA, PNM, on behalf of the SJGS owners, coordinated a more detailed coal mine reclamation cost study, which was completed in the third quarter of To complete the study, PNM was provided access to the mine site and obtained supporting data from Westmoreland, allowing for the 2015 study to be refined with a more extensive engineering analysis. This reclamation cost estimate reflected the terms of the new reclamation services agreement with Westmoreland and continuation of mining operations through The study indicated an increase in the reclamation cost estimate. PNM s share of the increase was $4.5 million, which was recorded in the last half of The current estimate for decommissioning the mine serving Four Corners reflects the operation of the mine through 2031, the term of the new agreement for coal supply. Based on the 2016 estimates and PNM s current ownership share of SJGS, PNM s remaining payments as of June 30, 2017 for mine reclamation, in future dollars, are estimated to be $101.4 million for the surface mines at both SJGS and Four Corners and $127.4 million for the underground mine at SJGS. At June 30, 2017 and December 31, 2016, liabilities, in current dollars, of $41.4 million and $41.0 million for surface mine reclamation and $14.3 million and $14.0 million for underground mine reclamation were recorded in other deferred credits. 64

65 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As discussed in Note 12, PNM filed its 2017 IRP on July 3, The conclusions contained in the 2017 IRP indicate that it would be cost beneficial to PNM s customers for PNM to retire its SJGS capacity in 2022 and for PNM to exit its ownership interest in Four Corners in If the NMPRC orders the abandonment of those facilities, PNM would be required to remeasure its liability for coal mine reclamation to reflect that reclamation activities would occur sooner than currently anticipated. The remeasurement would likely result in a significant increase in PNM s liability for SJGS mine reclamation due to a further increase in the amount of fill dirt required to remediate the mine areas thereby increasing the overall reclamation costs. PNM would record a regulatory asset for amounts recoverable from ratepayers under existing or future orders of the NMPRC and amounts not recoverable would be expensed. PNM cannot predict what actions the NMPRC might take. Under the terms of the CSA, PNM and the other SJGS owners are obligated to compensate SJCC for all reclamation costs associated with the supply of coal from the San Juan mine. The SJGS owners entered into a reclamation trust funds agreement to provide funding to compensate SJCC for post-term reclamation obligations under the UG-CSA. As part of the restructuring of SJGS ownership (see SJGS Ownership Restructuring Matters above), the SJGS owners and PNMR Development negotiated the terms of an amended agreement to fund postterm reclamation obligations under the CSA. The trust funds agreement requires each owner to enter into an individual trust agreement with a financial institution as trustee, create an irrevocable reclamation trust, and periodically deposit funds into the reclamation trust for the owner s share of the mine reclamation obligation. Deposits, which are based on funding curves, must be made on an annual basis. As part of the restructuring of SJGS ownership discussed above, the SJGS participants agreed to adjusted interim trust funding levels. Based on PNM s reclamation trust fund balance at June 30, 2017, the current funding curves indicate PNM s required contributions to its reclamation trust fund would be $6.3 million in 2017, $8.3 million in 2018, and $8.7 million in Under the Four Corners CSA, which became effective on July 7, 2016, PNM is required to fund its ownership share of estimated final reclamation costs in thirteen annual installments, beginning on August 1, 2016, into an irrevocable escrow account solely dedicated to the final reclamation cost of the surface mine at Four Corners. PNM s anticipated funding level is $2.0 million, $2.1 million, and $2.1 million in 2017, 2018, and PNM collects a provision for surface and underground mine reclamation costs in its rates. The NMPRC has capped the amount that can be collected from retail customers for final reclamation of the surface mines at $100.0 million. Previously, PNM recorded a regulatory asset for the $100.0 million and recovers the amortization of this regulatory asset in rates. If future estimates increase the liability for surface mine reclamation, the excess would be expensed at that time. The reclamation amounts discussed above reflect PNM s estimates of its share of the revised costs. Regulatory determinations made by the NMPRC may also affect the impact on PNM. PNM is currently unable to determine the outcome of these matters or the range of possible impacts. Continuous Highwall Mining Royalty Rate In August 2013, the DOI Bureau of Land Management ( BLM ) issued a proposed rulemaking that would retroactively apply the surface mining royalty rate of 12.5% to continuous highwall mining ( CHM ). Comments regarding the rulemaking were due on October 11, 2013 and PNM submitted comments in opposition to the proposed rule. There is no legal deadline for adoption of the final rule. SJCC utilized the CHM technique from 2000 to 2003 and, with the approval of the Farmington, New Mexico Field Office of BLM to reclassify the final highwall as underground reserves, applied the 8.0% underground mining royalty rate to coal mined using CHM and sold to SJGS. In March 2001, SJCC learned that the DOI Minerals Management Service ( MMS ) disagreed with the application of the underground royalty rate to CHM. In August 2006, SJCC and MMS entered into an agreement tolling the statute of limitations on any administrative action to recover unpaid royalties until BLM issued a final, non-appealable determination as to the proper rate for CHM-mined coal. The proposed BLM rulemaking has the potential to terminate the tolling provision of the settlement agreement, and underpaid royalties of approximately $5 million for SJGS would become due if the proposed BLM rule is adopted as proposed. PNM s share of any amount that is ultimately paid would be approximately 46.3%, none of which would be passed through PNM s FPPAC. PNM is unable to predict the outcome of this matter. 65

66 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) PVNGS Liability and Insurance Matters Public liability for incidents at nuclear power plants is governed by the Price-Anderson Nuclear Industries Indemnity Act, which limits the liability of nuclear reactor owners to the amount of insurance available from both commercial sources and an industry-wide retrospective payment plan. In accordance with this act, the PVNGS participants are insured against public liability exposure for a nuclear incident up to $13.4 billion per occurrence. PVNGS maintains the maximum available nuclear liability insurance in the amount of $450 million, which is provided by American Nuclear Insurers. The remaining $13.0 billion is provided through a mandatory industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, PNM could be assessed retrospective premium adjustments. Based on PNM s 10.2% interest in each of the three PVNGS units, PNM s maximum potential retrospective premium assessment per incident for all three units is $38.9 million, with a maximum annual payment limitation of $5.8 million, to be adjusted periodically for inflation. The PVNGS participants maintain insurance for damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. These coverages are provided by Nuclear Electric Insurance Limited ( NEIL ). A sublimit of $2.25 billion for non-nuclear property damage losses has been enacted to the primary policy offered by NEIL. If NEIL s losses in any policy year exceed accumulated funds, PNM is subject to retrospective premium adjustments of $5.4 million for each retrospective premium assessment declared by NEIL s Board of Directors due to losses. The insurance coverages discussed in this and the previous paragraph are subject to certain policy conditions, sublimits, and exclusions. Water Supply Because of New Mexico s arid climate and periodic drought conditions, there is concern in New Mexico about the use of water, including that used for power generation. Although PNM does not believe that its operations will be materially affected by drought conditions at this time, it cannot forecast long-term weather patterns. Public policy, local, state and federal regulations, and litigation regarding water could also impact PNM operations. To help mitigate these risks, PNM has secured permanent groundwater rights for the existing plants at Reeves Station, Rio Bravo, Afton, Luna, Lordsburg, and La Luz. Water availability is not an issue for these plants at this time. However, prolonged drought, ESA activities, and a federal lawsuit by the State of Texas (suing the State of New Mexico over water deliveries) could pose a threat of reduced water availability for these plants. For SJGS and Four Corners, PNM and APS have negotiated an agreement with the more senior water rights holders (tribes, municipalities, and agricultural interests) in the San Juan basin to mutually share the impacts of water shortages with tribes and other water users in the San Juan basin. The agreement to share shortages in 2017 through 2020 has been negotiated and awaits endorsement by the parties and the New Mexico State Engineer. In April 2010, APS signed an agreement on behalf of the PVNGS participants with five cities to provide cooling water essential to power production at PVNGS for 40 years. PVNGS Water Supply Litigation In 1986, an action commenced regarding the rights of APS and the other PVNGS participants to the use of groundwater and effluent at PVNGS. APS filed claims that dispute the court s jurisdiction over PVNGS groundwater rights and their contractual rights to effluent relating to PVNGS and, alternatively, seek confirmation of those rights. In 1999, the Arizona Supreme Court issued a decision finding that certain groundwater rights may be available to the federal government and Indian tribes. In addition, the Arizona Supreme Court issued a decision in 2000 affirming the lower court s criteria for resolving groundwater claims. Litigation on these issues has continued in the trial court. No trial dates have been set in these matters. PNM does not expect that this litigation will have a material impact on its results of operation, financial position, or cash flows. San Juan River Adjudication In 1975, the State of New Mexico filed an action in New Mexico District Court to adjudicate all water rights in the San Juan River Stream System, including water used at Four Corners and SJGS. PNM was made a defendant in the litigation in In March 2009, former President Obama signed legislation confirming a 2005 settlement with the Navajo Nation. Under the terms of the settlement agreement, the Navajo Nation s water rights would be settled and finally determined by entry by the court of two proposed adjudication decrees. The court issued an order in August 2013 finding that no evidentiary hearing was warranted in the 66

67 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Navajo Nation proceeding and, on November 1, 2013, issued a Partial Final Judgment and Decree of the Water Rights of the Navajo Nation approving the proposed settlement with the Navajo Nation. Several parties filed a joint motion for a new trial, which was denied by the court. A number of parties subsequently appealed to the New Mexico Court of Appeals. PNM has entered its appearance in the appellate case. The issues have been fully briefed and the matter is pending with the New Mexico Court of Appeals. PNM is participating in this proceeding since PNM s water rights in the San Juan Basin may be affected by the rights recognized in the settlement agreement as being owned by the Navajo Nation, which comprise a significant portion of water available from sources on the San Juan River and in the San Juan Basin. PNM is unable to predict the ultimate outcome of this matter or estimate the amount or range of potential loss and cannot determine the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners. Final resolution of the case cannot be expected for several years. An agreement reached with the Navajo Nation in 1985, however, provides that if Four Corners loses a portion of its rights in the adjudication, the Navajo Nation will provide, for an agreed upon cost, sufficient water from its allocation to offset the loss. Rights-of-Way Matter On January 28, 2014, the County Commission of Bernalillo County, New Mexico passed an ordinance requiring utilities to enter into a use agreement and pay a yet-to-be-determined fee as a condition to installing, maintaining, and operating facilities on county rights-of-way. The fee is purported to compensate the county for costs of administering and maintaining the rightsof-way, as well as for capital improvements. On February 27, 2014, PNM and other utilities filed a Complaint for Declaratory and Injunctive Relief in the United States District Court for the District of New Mexico challenging the validity of the ordinance. The court denied the utilities motion for judgment. The court further granted the County s motion to dismiss the state law claims. The utilities filed an amended complaint reflecting the two federal claims remaining before the federal court. The utilities also filed a complaint in Bernalillo County, New Mexico District Court reflecting the state law counts dismissed by the federal court. In subsequent briefing in federal court, the County filed a motion for judgment on one of the utilities claims, which was granted by the court, leaving a claim regarding telecommunications service as the remaining federal claim. On January 4, 2016, the utilities filed an Application for Interlocutory Appeal from the state court, which was denied. On March 28, 2017, the utilities filed a writ of certiorari with the NM Supreme Court, which was denied. The matter will proceed in New Mexico District Court. The utilities and Bernalillo County reached a standstill agreement whereby the County would not take any enforcement action against the utilities pursuant to the ordinance during the pendency of the litigation, but not including any period for appeal of a judgment, or upon 30 days written notice by either the County or the utilities of their intention to terminate the agreement. If the challenges to the ordinance are unsuccessful, PNM believes any fees paid pursuant to the ordinance would be considered franchise fees and would be recoverable from customers. PNM is unable to predict the outcome of this matter or its impact on PNM s operations. Navajo Nation Allottee Matters A putative class action was filed against PNM and other utilities in February 2009 in the United States District Court for the District of New Mexico. Plaintiffs claim to be allottees, members of the Navajo Nation, who pursuant to the Dawes Act of 1887, were allotted ownership in land carved out of the Navajo Nation and allege that defendants, including PNM, are rightsof-way grantees with rights-of-way across the allotted lands and are either in trespass or have paid insufficient fees for the grant of rights-of-way or both. In March 2010, the court ordered that the entirety of the plaintiffs case be dismissed. The court did not grant plaintiffs leave to amend their complaint, finding that they instead must pursue and exhaust their administrative remedies before seeking redress in federal court. In May 2010, plaintiffs filed a Notice of Appeal with the Bureau of Indian Affairs ( BIA ), which was denied by the BIA Regional Director. In May 2011, plaintiffs appealed the Regional Director s decision to the DOI, Office of Hearings and Appeals, Interior Board of Indian Appeals. Following briefing on the merits, on August 20, 2013, that board issued a decision upholding the Regional Director s decision that the allottees had failed to perfect their appeals, and dismissed the allottees appeals, without prejudice. The allottees have not refiled their appeals. Although this matter was dismissed without prejudice, PNM considers the matter concluded. However, PNM continues to monitor this matter in order to preserve its interests regarding any PNM-acquired rights-of-way. In a separate matter, in September 2012, 43 landowners claiming to be Navajo allottees filed a notice of appeal with the BIA appealing a March 2011 decision of the BIA Regional Director regarding renewal of a right-of-way for a PNM transmission line. The allottees, many of whom are also allottees in the above matter, generally allege that they were not paid fair market value for the right-of-way, that they were denied the opportunity to make a showing as to their view of fair market value, and thus denied 67

68 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) due process. On January 6, 2014, PNM received notice that the BIA, Navajo Region, requested a review of an appraisal report on 58 allotment parcels. After review, the BIA concluded it would continue to rely on the values of the original appraisal. On March 27, 2014, while this matter was stayed, the allottees filed a motion to dismiss their appeal with prejudice. On April 2, 2014, the allottees appeal was dismissed with prejudice. Subsequent to the dismissal, PNM received a letter from counsel on behalf of what appears to be a subset of the 43 landowner allottees involved in the appeal, notifying PNM that the specified allottees were revoking their consents for renewal of right of way on six specific allotments. On January 22, 2015, PNM received a letter from the BIA Regional Director identifying ten allotments with rights-of-way renewals that were previously contested. The letter indicated that the renewals were not approved by the BIA because the previous consent obtained by PNM was later revoked, prior to BIA approval, by the majority owners of the allotments. It is the BIA Regional Director s position that PNM must re-obtain consent from these landowners. On July 13, 2015, PNM filed a condemnation action in the United States District Court for the District of New Mexico regarding the approximately acres of land at issue. On December 1, 2015, the court ruled that PNM could not condemn two of the five allotments at issue based on the Navajo Nation s fractional interest in the land. PNM s motion for reconsideration of this ruling was denied. On March 31, 2016, the Tenth Circuit granted PNM s petition to appeal the December 1, 2015 ruling. On September 18, 2015, the allottees filed a separate complaint against PNM for federal trespass. Both matters have been consolidated and are stayed while PNM pursues its appeal before the Tenth Circuit. On June 27, 2016, PNM filed its opening brief in the Tenth Circuit. Amicus briefs were filed in support of PNM s position. On October 5, 2016, the United States, the Navajo Nation, and individual allottees filed their response briefs. After the response briefs were filed, other entities requested leave to file amicus briefs addressing arguments raised in the United States response brief. Oral argument before the Tenth Circuit was heard on January 17, On May 26, 2017, the Tenth Circuit affirmed the district court. On July 8, 2017, PNM filed a Motion for Reconsideration en banc with the Tenth Circuit. On July 21, 2017, the court denied PNM s Motion for Reconsideration. On July 26, 2017, PNM filed a motion to stay implementation of the court s decision. PNM is considering all of its procedural options going forward in the litigation. PNM cannot predict the outcome of these matters. (12) Regulatory and Rate Matters The Company is involved in various regulatory matters, some of which contain contingencies that are subject to the same uncertainties as those described in Note 11. Additional information concerning regulatory and rate matters is contained in Note 17 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. PNM New Mexico General Rate Cases New Mexico 2015 General Rate Case ( NM 2015 Rate Case ) On August 27, 2015, PNM filed an application with the NMPRC for a general increase in retail electric rates. The application proposed a revenue increase of $123.5 million, including base non-fuel revenues of $121.7 million. PNM s application was based on a future test year ( FTY ) period beginning October 1, 2015 and proposed a ROE of 10.5%. The primary drivers of PNM s identified revenue deficiency were the cost of infrastructure investments, including depreciation expense based on an updated depreciation study, and a decline in energy sales as a result of PNM s successful energy efficiency programs and economic factors. The application included several proposed changes in rate design to establish fair and equitable pricing across rate classes and to better align cost recovery with cost causation. Specific rate design proposals included higher customer and demand charges, a revenue decoupling pilot program applicable to residential and small commercial customers, a re-allocation of revenue among PNM s customer classes, a new economic development rate, and continuation of PNM s renewable energy rider. PNM requested that the proposed new rates become effective beginning in July On March 2, 2016, the NMPRC required PNM to file supplemental testimony regarding the treatment of renewable energy in PNM s FPPAC. See Renewable Portfolio Standard below. A public hearing on the proposed new rates was held in April Subsequent to this hearing, the NMPRC ordered PNM to file additional testimony regarding PNM s interests in PVNGS, including the 64.1 MW of PVNGS Unit 2 that PNM repurchased in January 2016, pursuant to the terms of the initial sales-leaseback transactions (Note 6). A subsequent public hearing was held in June After the June hearing, PNM and other parties were ordered to file supplemental briefs and to provide final recommended revenue requirements that incorporated fuel savings that PNM implemented effective January 1, 2016 from PNM s SJGS coal supply agreement ( CSA ). PNM s filing indicated that recovery for fuel related costs would be reduced by approximately $

69 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) million reflecting the current CSA (Note 11), which also reduced the request for base non-fuel related revenues by $0.2 million to $121.5 million. On August 4, 2016, the Hearing Examiner in the case issued a recommended decision ( RD ). The RD proposed an increase in non-fuel revenues of $41.3 million compared to the $121.5 million increase requested by PNM. Major components of the difference in the increase in non-fuel revenues proposed in the RD, included: A ROE of 9.575% compared to the 10.5% requested by PNM Disallowing recovery of the entire $163.3 million purchase price for the January 15, 2016 purchases of the assets underlying three leases of portions of PVNGS Unit 2 (Note 6); the RD proposed that power from the previously leased assets, aggregating 64.1 MW of capacity, be dedicated to serving New Mexico retail customers with those customers being charged for the costs of fuel and operating and maintenance expenses (other than property taxes, which were $0.8 million per year at that time), but the customers would not bear any capital or depreciation costs other than those related to improvements made after the date of the original leases Disallowing recovery from retail customers of the rent expense, which aggregates $18.1 million per year, under the four leases of capacity in PVNGS Unit 1 that were extended for eight years beginning January 15, 2015 and the one lease of capacity in PVNGS Unit 2 that was extended for eight years beginning January 15, 2016 (Note 6) and related property taxes, which were $1.5 million per year at that time; the RD proposed that power from the leased assets, aggregating MW of capacity, be dedicated to serving New Mexico retail customers with those customers being charged for the costs of fuel and operating and maintenance expense, except that customers would not bear rental costs or property taxes Disallowing recovery of the costs of converting SJGS Units 1 and 4 to BDT, which is required by the NSR permit for SJGS, (Note 11); PNM s share of the costs of installing the BDT equipment was $52.3 million of which $40.0 million was included in rate base in PNM s rate request Disallowing recovery of $4.5 million of amounts recorded as regulatory assets and deferred charges The RD recommended that the NMPRC find PNM was imprudent in the actions taken to purchase the previously leased 64.1 MW of capacity in PVNGS Unit 2, extending the leases for MW of capacity of PVNGS Units 1 and 2, and installing the BDT equipment on SJGS Units 1 and 4. The RD also proposed that all fuel costs be removed from base rates and be recovered through the FPPAC. The RD would credit retail customers with 100% of the New Mexico jurisdictional portion of revenues from refined coal (a third-party pre-treatment process) at SJGS. In addition, the RD would remove recovery of the costs of power obtained from New Mexico Wind from the FPPAC and include recovery of those costs through PNM s renewable energy rider discussed below. The RD recommended continuation of the renewable energy rider and certain aspects of PNM s proposals regarding rate design, but would not approve certain other rate design proposals or PNM s request for a revenue decoupling pilot program. The RD proposed approving PNM s proposals for revised depreciation rates (except for requiring depreciation on Four Corners be calculated based on a 2041 life rather than the 2031 life proposed by PNM), the inclusion of construction work in progress in rate base, and ratemaking treatment of the prepaid pension asset. The RD did not preclude PNM from supporting the prudence of the PVNGS purchases and lease renewals in its next general rate case and seeking recovery of those costs. PNM disagreed with many of the key conclusions reached by the Hearing Examiner in the RD and filed exceptions to defend its prudent utility investments. Other parties also filed exceptions to the RD. The NMPRC issued an order on September 28, 2016 that authorized PNM to implement an increase in non-fuel rates of $61.2 million, effective for bills sent to customers after September 30, The order generally approved the RD, but with certain significant modifications. The modifications to the RD included: Inclusion of the January 2016 purchase of the assets underlying three leases of capacity, aggregating 64.1 MW, of PVNGS Unit 2 at an initial rate base value of $83.7 million ; and disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW was being leased by PNM, which aggregated $43.8 million when the order was issued Full recovery of the rent expense and property taxes associated with the extended leases for capacity, aggregating MW, in Palo Verde Units 1 and 2 Disallowance of the recovery of any future contributions for PVNGS decommissioning costs related to the 64.1 MW of capacity purchased in January 2016 and the MW of capacity under the extended leases Recovery of assumed operating and maintenance expense savings of $0.3 million annually related to BDT 69

70 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On September 30, 2016, PNM filed a notice of appeal with the NM Supreme Court regarding the order in the NM 2015 Rate Case. Subsequently, NEE, NMIEC, and ABCWUA filed notices of cross-appeal. On October 26, 2016, PNM filed a statement of issues related to its appeal with the NM Supreme Court, which stated PNM is appealing the NMPRC s determination that PNM was imprudent in the actions taken to purchase the previously leased 64.1 MW of capacity in PVNGS Unit 2, extending the leases for MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. Specifically, PNM s statement indicated it is appealing the following elements of the NMPRC s order: Disallowance of recovery of the full purchase price, representing fair market value, of the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016 Disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity was leased by PNM Disallowance of recovery of future contributions for PVNGS decommissioning attributable to the 64.1 MW of purchased capacity and the MW of capacity under the extended leases Disallowance of recovery of the costs of converting SJGS Units 1 and 4 to BDT The issues that are being appealed by the various cross-appellants include: The NMPRC allowing PNM to recover the costs of the lease extensions for the MW of PVNGS Units 1 and 2 and any of the purchase price for the 64.1 MW in PVNGS Unit 2 The NMPRC allowing PNM to recover the costs incurred under the new coal supply contract for Four Corners The revised method to collect PNM s fuel and purchased power costs under the FPPAC The final rate design The NMPRC allowing PNM to include the prepaid pension asset in rate base NEE subsequently filed a motion for a partial stay of the order at the NM Supreme Court. This motion was denied. The NM Supreme Court stated that the court s intent was to request that PNM reimburse ratepayers for any amount overcharged should the cross-appellants prevail on the merits. Otherwise, the court has taken no action with respect to the appeals. On February 17, 2017, PNM filed its Brief in Chief, and pursuant to the court s rules, the briefing schedule was completed on July 21, PNM anticipates that the court will take oral argument. Although appeals of regulatory actions of the NMPRC have a priority at the NM Supreme Court under New Mexico law, there is no required time frame for the court to act on the appeals. GAAP requires that a loss is to be recognized when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. When there is a range of the amount of the probable loss, the minimum amount of the range is to be accrued unless an amount within the range is a better estimate than any other amount. PNM evaluated the accounting consequences of the order in the NM 2015 Rate Case and the likelihood of being successful on the issues it is appealing in the NM Supreme Court as required under GAAP. The evaluation indicates it is reasonably possible that PNM will be successful on the issues it is appealing. If the NM Supreme Court rules in PNM s favor on some or all of the issues, those issues would be remanded back to the NMPRC for further action. PNM estimates that it will take a minimum of 15 months, from the date PNM filed its appeal, for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues. During such time, the rates specified in the order will remain in effect. PNM has concluded that a range of probable loss resulted from the NMPRC order in the NM 2015 Rate Case; that the minimum amount of loss is 15 months of capital cost recovery that the order disallowed for its investments in the PVNGS Unit 2 purchases, PVNGS Unit 2 capitalized improvements, and BDT; and that no amount within the range of possible loss is a better estimate than any other amount. Accordingly, PNM recorded a pre-tax regulatory disallowance of $6.8 million in September 2016 for the capital costs that will not be covered during that 15 month appeal period. In addition, PNM recorded a pre-tax regulatory disallowance for $4.5 million of costs recorded as regulatory assets and deferred charges (which the order disallowed and which PNM did not challenge in its appeal) since PNM can no longer assert that those assets are probable of being recovered through the ratemaking process. Additional losses will be recorded if the currently estimated 15 month time frame for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues is extended. The NMPRC s order approved PNM s request to record a regulatory asset 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. 70

71 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The impact, net of federal income taxes, amounts to $2.1 million, which was reflected as a reduction of income tax expense in September PNM continues to believe that the disallowed investments, which are the subject of PNM s appeal, were prudently incurred and that PNM is entitled to full recovery of those investments through the ratemaking process. Although PNM believes it is reasonably possible that its appeals will be successful, it cannot predict what decision the NM Supreme Court will reach or what further actions the NMPRC will take on any issues remanded to it by the court. If PNM s appeal is unsuccessful, PNM would record further pre-tax losses related to the capitalized costs for any unsuccessful issues. The impacts of not recovering future contributions for decommissioning would be recorded in future periods. The amounts of any such losses to be recorded would depend on the ultimate outcome of the appeal and NMPRC process, as well as the actual amounts reflected on PNM books at the time of the resolution. However, based on the book values recorded by PNM as of June 30, 2017, such losses could include: The remaining costs to acquire the assets previously leased under three leases aggregating 64.1 MW of PVNGS Unit 2 capacity in excess of the recovery permitted under the NMPRC s order; the net book value of such excess amount was $76.9 million, after considering the loss recorded in 2016 The undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity in PVNGS Unit 2 purchased by PNM in January 2016 was being leased by PNM; the net book value of these improvements was $ 39.9 million, after considering the loss recorded in 2016 The remaining costs to convert SJGS Units 1 and 4 to BDT; the net book value of these assets was $50.0 million, after considering the loss recorded in 2016 Also, PNM has evaluated the accounting consequences of the issues that are being appealed by the cross-appellants. Although PNM does not believe the issues raised in the crossappeals have substantial merit, PNM is unable to predict what decision the NM Supreme Court will reach. PNM does not believe that the likelihood of the cross-appeals being successful is probable. However, if the NM Supreme Court were to overturn all of the issues subject to the cross-appeals and, upon remand, the NMPRC did not provide any recovery of those items, PNM would write-off all of the costs to acquire the assets previously leased under three leases aggregating 64.1 MW of PVNGS Unit 2 capacity, totaling $154.2 million (which amount includes $76.9 million that is the subject of PNM s appeal discussed above) at June 30, 2017, after considering the loss recorded in The impacts of not recovering costs for the lease extensions, new coal supply contract for Four Corners, and prepaid pension asset in rate base would be recognized in future periods reflecting that rates charged to customers would not recover those costs as they are incurred. The outcomes of the cross-appeals regarding the FPPAC and rate design should not have financial impact to PNM. PNM is unable to predict the outcome of this matter. New Mexico 2016 General Rate Case ( NM 2016 Rate Case ) On December 7, 2016, PNM filed an application with the NMPRC for a general increase in retail electric rates. PNM did not include any of the costs disallowed in the NM 2015 Rate Case that are at issue in its pending appeal to the NM Supreme Court. Key aspects of PNM s request are: An increase in base non-fuel revenues of $99.2 million Based on a FTY beginning January 1, 2018 (the NMPRC s rules specify that a FTY is a 12 month period beginning up to 13 months after the filing of a rate case application) ROE of % Drivers of revenue deficiency Implementation of the modifications in PNM s resource portfolio, which were previously approved by the NMPRC as part of the SJGS regional haze compliance plan (Note 11) Infrastructure investments, including environmental upgrades at Four Corners Declines in forecasted energy sales due to successful energy efficiency programs and other economic factors Updates in the FERC/retail jurisdictional allocations Proposed changes to rate design to establish fair and equitable pricing across rate classes and to better align cost recovery with cost causation Increased customer and demand charges 71

72 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A lost contribution to fixed cost mechanism applicable to residential and small commercial customers to address the regulatory disincentive associated with PNM s energy efficiency programs The NMPRC scheduled a public hearing to begin on June 5, 2017, ordered that a settlement conference should be held, and that any resulting stipulation should be filed by March 27, Settlement discussions were held, but no agreements were reached by March 27, PNM and several intervenors filed an unopposed motion with the NMPRC to extend by one month the procedural schedule, including the date for filing a stipulation. On April 12, 2017, the NMPRC issued an order modifying the procedural schedule to allow for additional settlement discussion. Under the revised schedule, any settlement stipulation was to be filed by April 27, On April 27, 2017, PNM and several intervenors filed a motion with the NMPRC to extend the deadline for filing a stipulation. The motion was granted by the Hearing Examiners and in May 2017, PNM and thirteen intervenors (the Signatories ) entered into a comprehensive stipulation. On May 12, 2017, the Hearing Examiners issued an order rejecting the stipulation in its then current form, but allowed the Signatories to revise the stipulation. On May 23, 2017, the Signatories filed a revised stipulation that addressed the issues raised by the Hearing Examiners in their order. The terms of the revised settlement include: A revenue increase totaling $62.3 million, with an initial increase of $32.3 million beginning January 1, 2018 and the remaining increase beginning January 1, 2019 A ROE of 9.575% Full recovery of the investment in SCRs at Four Corners with a debt-only return An agreement not to adjust non-fuel base rate changes to be effective prior to January 1, 2020 An agreement to adjust the January 2019 increase for certain changes in federal corporate tax laws enacted prior to November 1, 2018 and effective and applicable to PNM by January 1, 2019 Returning to customers over a three -year period the benefit of the reduction in the New Mexico corporate income tax rate (Note 13) to the extent attributable to PNM s retail operations PNM will withdraw its proposal for a lost contribution to fixed cost mechanism with the issue to be addressed in a future docket On May 24, 2017, the NMPRC issued an order, which resulted in the tolling of the statutory suspension period for two months and extending the suspension of the rate increase until January 6, The NMPRC can further extend the suspension period for an additional two months. The Hearing Examiners have issued a procedural order, that sets an evidentiary hearing on the merits of the revised stipulation commencing August 7, The revised settlement requires the approval of the NMPRC in order to take effect. If the NMPRC approves the revised settlement as filed, GAAP would require PNM to recognize a loss to reflect that PNM will not earn an equity return on its investments in SCRs at Four Corners. The loss would be recorded as a regulatory disallowance as of the date of NMPRC approval. The amount of the loss would be calculated by determining the present value of disallowed cash flows, which would equal the difference between the cash flows resulting from recovery of those investments with a debt only return and the cash flows with a full return on investment (including an equity component), and discounting the differences at PNM s WACC. Such amount would depend on the final costs of the SCRs and other factors and assumptions at the date of NMPRC approval. Based on the stipulation and PNM s current assumptions, PNM estimates the regulatory disallowance would be approximately $21 million. PNM cannot predict the outcome of this matter. Investigation/Rulemaking Concerning NMPRC Ratemaking Policies On March 22, 2017, the NMPRC issued an order opening an investigation and rulemaking to simplify and increase the transparency of NMPRC rate cases by reducing the number of issues litigated in rate cases, and provide a more level playing field among intervenors and NMPRC staff on the one hand, and the utilities on the other. The order posed the following questions: whether a standardized method should be established for determining ROE; should the ROE be subject to reward or penalty based on utilities meeting or failing to meet certain metrics, which could include customer complaints, outages, peak demand reductions, and RPS and energy efficiency compliance; whether recovery of utility rate case expenses should be limited to 50% unless the case is settled; whether intervenors should be allowed to recover their expenses if the NMPRC accepts their position; whether parties should have access to software used by utilities to support their positions; and how regulatory assets should be authorized and recovered. A procedural schedule was established that included initial comments on July 10, 2017 and a public workshop on September 14, PNM cannot predict the outcome of this proceeding. 72

73 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Renewable Portfolio Standard The REA establishes a mandatory RPS requiring a utility to acquire a renewable energy portfolio equal to 10% of retail electric sales by 2011, 15% by 2015, and 20% by PNM files annual renewable energy procurement plans for approval by the NMPRC. The NMPRC requires renewable energy portfolios to be fully diversified. The current diversity requirements, which are subject to the limitation of the RCT, are minimums of 30% wind, 20% solar, 3% distributed generation, and 5% other. The REA provides for streamlined proceedings for approval of utilities renewable energy procurement plans, assures that utilities recover costs incurred consistent with approved procurement plans, and requires the NMPRC to establish a RCT for the procurement of renewable resources to prevent excessive costs being added to rates. Currently, the RCT is set at 3% of customers annual electric charges. PNM makes renewable procurements consistent with the NMPRC approved plans. PNM recovers certain renewable procurement costs from customers through a rate rider. See Renewable Energy Rider below. Included in PNM s approved procurement plans are the following renewable energy resources: 107 MW of PNM-owned solar PV facilities, including 40 MW constructed in 2015 that were identified as a cost-effective resource in PNM s application to retire SJGS Units 2 and 3 (Note 11) and are being recovered in the base rates provided in the NM 2015 Rate Case discussed above rather than through PNM s renewable energy rider; and an additional procurement of 1.5 MW of PNM-owned solar PV facilities to supply the energy sold under PNM s voluntary renewable energy tariff A PPA through 2027 for the output of New Mexico Wind, having an aggregate capacity of 204 MW and a PPA through 2035 for the output of Red Mesa Wind, an existing wind generator having an aggregate capacity of 102 MW A PPA for the output of the Lightning Dock Geothermal facility; the geothermal facility began providing power to PNM in January 2014; the current capacity of the facility is 4 MW Solar distributed generation, aggregating 72.0 MW at June 30, 2017, owned by customers or third parties from whom PNM purchases any net excess output and RECs Solar and wind RECs as needed to meet the RPS requirements PNM filed its 2016 renewable energy procurement plan on June 1, The plan met RPS and diversity requirements within the RCT in 2016 and 2017 using existing resources and did not propose any significant new procurements. The NMPRC approved the plan in November 2015, and, after granting a rehearing motion to consider issues regarding the rate treatment of certain customers eligible for a cap on, or an exemption from, RPS procurement, the NMPRC again approved the plan in an order issued on February 3, The NMPRC deferred issues related to capped and exempt customers to PNM s NM 2015 Rate Case and to a new case, which the NMPRC subsequently initiated through issuance of an order to show cause. The NM 2015 Rate Case and show cause proceeding were to examine whether PNM miscalculated the FPPAC factor and base fuel costs in its treatment of renewable energy costs and application of the renewable procurement cost caps and exemptions. The show cause proceeding was stayed pending the outcome of the NM 2015 Rate Case. The September 28, 2016 order in the NM 2015 Rate Case directed that the cost of New Mexico Wind be recovered through PNM s renewable rider, rather than the FPPAC, and ordered certain other modifications regarding the accounting for renewable energy in PNM s FPPAC. These modifications do not affect the amount of fuel and purchased power or renewable costs that PNM will collect. No action has been taken in the show cause proceeding and PNM cannot predict its outcome. PNM filed its 2017 renewable energy procurement plan on June 1, The plan met RPS and diversity requirements for 2017 and 2018 using existing resources and PNM did not propose any significant new procurements. PNM projected that its plan would slightly exceed the RCT in 2017 and would be within the RCT in PNM requested a variance from the RCT in 2017 to the extent the NMPRC determined a variance was necessary. A public hearing was held on September 26, On October 21, 2016, the Hearing Examiner issued a Recommended Decision recommending that the plan be approved as filed and also found that a variance from the RCT was not required. The NMPRC approved the Recommended Decision on November 23, On June 1, 2017, PNM filed its 2018 renewable energy procurement plan. PNM is requesting approval to procure an additional 80 GWh in 2019 and 105 GWh in 2020 from a repowering 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 73

74 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) solar facilities to be constructed beginning in 2018; and various other requests, including the continuation of customer REC purchase programs and other purchases of RECs to ensure annual compliance with the RPS. PNM s proposed procurement cost for 2018 and 2019 will be within the RCT. The plan is also seeking a variance from the other diversity category in 2018 due to a revised production forecast of the Lightning Dock Geothermal facility in PNM also requested to adjust its annual renewable energy rate rider to collect the costs of renewable resources. On June 14, 2017, the NMPRC issued an initial order appointing a Hearing Examiner and suspending the proposed rate rider adjustment. On June 23, 2017, the Hearing Examiner issued a procedural order establishing a procedural schedule and setting an evidentiary hearing commencing September 18, PNM cannot predict the outcome of this matter. Renewable Energy Rider The NMPRC has authorized PNM to recover certain renewable procurement costs through a rate rider billed on a per KWh basis. In PNM s NM 2015 Rate Case, the NMPRC authorized continuation of the renewable rider. PNM recorded revenues from the rider of $9.6 million and $8.2 million in the three months ended June 30, 2017 and 2016 and $20.5 million and $16.6 million in the six months ended June 30, 2017 and In its 2016 renewable energy procurement plan case, PNM proposed to collect $42.4 million in The 2016 rider adjustment was approved as part of the order issued February 3, 2016 approving the 2016 renewable energy plan. In its 2017 renewable energy procurement plan, PNM proposed to collect $50.0 million through the rider in The increase, as compared with the amount the NMPRC approved for recovery through the rider in 2016, was due to recovering the costs of energy from New Mexico Wind through the rider, rather than through the FPPAC in compliance with the NMPRC s order in PNM s NM 2015 Rate Case. The 2017 rider adjustment was approved in the November 23, 2016 order that approved the 2017 renewable energy plan. On February 28, 2017, PNM filed a reconciliation of 2017 revenue requirement and proposed a revision to the rider that would recover $42.7 million during In its 2018 renewable energy procurement plan case, PNM proposes to collect $43.5 million. Under the renewable rider, if PNM s earned rate of return on jurisdictional equity in a calendar year, adjusted for weather and other items not representative of normal operations, exceeds the NMPRC-approved rate by 0.5%, PNM is required to refund the excess to customers during May through December of the following year. PNM s annual compliance filings with the NMPRC show that its rate of return on jurisdictional equity did not exceed the limitation through Energy Efficiency and Load Management Program Costs and Incentives Public utilities are required by the Efficient Use of Energy Act to achieve specified levels of energy savings and to obtain NMPRC approval to implement energy efficiency and load management programs. The act sets an annual program budget equal to 3% of an electric utility s annual revenue. PNM s costs to implement approved programs are recovered through a rate rider. On April 15, 2016, PNM filed an application for energy efficiency and load management programs to be offered in The proposed program portfolio consisted of ten programs with a total budget of $28.0 million. The application also sought approval of an incentive of $2.4 million based on targeted savings of 75 GWh. The actual incentive would be based on actual savings achieved. On January 11, 2017, the NMPRC approved an unopposed stipulation that established a method to ensure that funding of PNM s energy efficiency program is equal to 3% of retail revenues, with an estimated 2017 energy efficiency funding level of $26.0 million, and approved a sliding scale profit incentive with a base level of 7.1% of program costs, equal to $1.8 million, if PNM achieves a minimum proscribed level of energy savings, increasing to a maximum of 9.0% depending on actual energy savings achieved above the minimum. On April 14, 2017, PNM filed an application for energy efficiency and load management programs to be offered in The proposed program portfolio consists of a continuation of the ten programs approved in the 2016 application with a total budget of $25.1 million. The application also seeks approval of a sliding scale incentive with a base incentive of $1.9 million if PNM is able to achieve saving of 53 GWh in PNM projects it would earn an incentive of $2.1 million based on targeted savings of 70 GWh. The actual incentive would be based on actual savings achieved. The application also requests a variance if the NMPRC approves a pending rulemaking that would reduce the frequency of energy efficiency applications to every other year so that PNM 74

75 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) would not have to file its next energy efficiency application until PNM proposes to continue the same ten programs and a similar incentive mechanism in 2019, with a proposed budget of $28.2 million and a base level incentive of $2.1 million. On July 26, 2017, PNM, NMPRC staff, and other parties filed a stipulation that would resolve all issues in the case if approved by the NMPRC. Under the settlement terms, all of PNM s proposed programs would be approved with limited modifications and PNM s base level incentive would be $1.7 million in PNM would earn an incentive of $1.9 million based on targeted savings of 69 GWh. An evidentiary hearing date is scheduled for September 11-12, PNM is unable to predict the outcome of this proceeding. Energy Efficiency Rulemaking In July 2012, the NMPRC opened an energy efficiency rulemaking docket to potentially address decoupling and incentives. Workshops to develop a proposed rule have been held, but no order proposing a rule has been issued. PNM is unable to predict the outcome of this matter. On January 25, 2017, the NMPRC opened another energy efficiency rulemaking docket to consider whether applications for approval of energy efficiency and load management programs should be filed every two years rather than annually. Written comments were filed in the rulemaking docket, and a public comment hearing was held on March 31, On June 21, 2017, the NMPRC issued an order that modifies the filing frequency for utility energy efficiency plans to every three years. Also on June 21, 2017, the NMPRC issued a new notice of proposed rulemaking to consider possible changes affecting a utility s ability to modify NMPRC approved funding levels by up to 10% between energy efficiency program applications. This rulemaking is in response to consensus changes proposed by parties in the January 25, 2017 rulemaking. PNM is unable to predict the outcome of this matter. Integrated Resource Plans NMPRC rules require that investor owned utilities file an IRP every three years. The IRP is required to cover a 20 -year planning period and contain an action plan covering the first four years of that period IRP PNM filed its 2014 IRP on July 1, The four -year action plan was consistent with the replacement resources identified in PNM s application to retire SJGS Units 2 and 3. PNM indicated that it planned to meet its anticipated long-term resource needs with a combination of additional renewable energy resources, energy efficiency, and natural gas-fired facilities. Consistent with statute and NMPRC rule, PNM incorporated a public advisory process into the development of its 2014 IRP. On July 31, 2014, several parties requested the NMPRC not to accept the 2014 IRP as compliant with NMPRC rule because to do so could affect the then pending proceeding on PNM s application to abandon SJGS Units 2 and 3 and for CCNs for certain replacement resources (Note 11) and because they asserted that the 2014 IRP did not conform to the NMPRC s IRP rule. Certain parties also asked that further proceedings on the 2014 IRP be held in abeyance until the conclusion of the SJGS abandonment/ccn proceeding. The NMPRC issued an order in August 2014 that docketed a case to determine whether the 2014 IRP complied with applicable NMPRC rules. The order also held the case in abeyance pending the issuance of final, non-appealable orders in PNM s 2015 renewable energy procurement plan case and its application to retire SJGS Units 2 and 3. The order regarding PNM s application to abandon SJGS Units 2 and 3 described in Note 11 states that the NMPRC will issue a Notice of Proposed Dismissal in the 2014 IRP docket. On May 4, 2016, the NMPRC issued the Notice of Proposed Dismissal, stating that the docket would be closed with prejudice within thirty days unless good cause was shown why the docket should remain open. On May 31, 2016, NEE filed a request to hold the protests filed against PNM s 2014 IRP in abeyance or to dismiss those protests without prejudice. PNM responded on June 13, 2016 and requested that the NMPRC dismiss the case with prejudice. The NMPRC has not yet acted on its Notice of Proposed Dismissal or the request filed on May 31, PNM cannot predict the outcome of this matter IRP PNM filed its 2017 IRP on July 3, 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 its filing. PNM held its initial public advisory meeting on the 2017 IRP on June 30, 2016 and has hosted 17 meetings statewide to present details of the process and receive public comment. The NMPRC s order concerning SJGS compliance with the BART requirements of 75

76 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) the CAA discussed in Note 11 requires PNM to make a filing in 2018 to determine the extent to which SJGS Units 1 and 4 should continue serving PNM s retail customers needs after June 30, The 2017 IRP analyzed several scenarios utilizing assumptions that PNM continues service from its SJGS capacity beyond mid-2022 and that PNM retires its capacity after mid Key findings of the 2017 IRP include: Retiring PNM s share of SJGS in 2022 after the expiration of the current operating and coal supply agreements would provide long-term cost savings for PNM s customers PNM exiting its ownership interest in Four Corners after its current coal supply agreement expires in 2031 would also save customers money The best mix of new resources to replace the retired coal generation would include solar energy and flexible natural gas-fired peaking capacity; the mix could include energy storage if the economics support it and wind energy provided additional transmission capacity becomes available Significant increases in future wind energy supplies will likely require new transmission capacity built from eastern New Mexico to PNM s service territory PNM should retain the currently leased capacity in PVNGS, which would avoid replacement with carbon-emitting generation PNM should continue to develop and implement energy efficiency and demand management programs PNM should assess the costs and benefits of participating in the California Energy Imbalance Market PNM should analyze its current Reeves Generating Station to consider possible technology improvements to phase out the older generators and replace them with new, more flexible supplies or energy storage The 2017 IRP is not a final determination of PNM s future generation portfolio. Retiring PNM s share of SJGS capacity and exiting Four Corners would require NMPRC approval of abandonment filings, which PNM would make at appropriate times in the future. Likewise, NMPRC approval of new generation resources through CCN filings would be required. PNM cannot predict the ultimate outcome of the 2017 IRP process or whether the NMPRC will approve subsequent filings that would encompass actions to implement the conclusions of the 2017 IRP. San Juan Generating Station Units 2 and 3 Retirement On December 16, 2015, the NMPRC issued an order approving PNM s retirement of SJGS Units 2 and 3 on December 31, On January 14, 2016, NEE filed an appeal of the order with the NM Supreme Court. Additional information concerning the NMPRC filing and related proceedings is set forth in Note 11. Application for Certificate of Convenience and Necessity On April 26, 2016, PNM filed an application for an 80 MW gas plant to be located at SJGS, with an anticipated June 2018 in-service date. On October 13, 2016, PNM filed a motion to vacate the procedural schedule to allow PNM to assess the continued need for the plant in light of possible changed circumstances affecting loads and resources. On October 28, 2016, PNM filed a motion to withdraw its application and close the docket. As grounds for the motion, PNM stated that, based on its updated peak demand forecast, the 80 MW plant would not be needed in On December 1, 2016, the Hearing Examiner issued a recommended decision that would grant PNM s motion to withdraw its application. On May 24, 2017, the NMPRC issued its order approving the recommended decision and granting the motion to withdraw the application. PNM will continue to evaluate its resource needs as part of its ongoing resource planning activities. PNM s current capital forecast includes an additional 40 MW of peaking capacity that would be operational in 2020 to meet requirements for operating reserves. Advanced Metering Infrastructure Application On February 26, 2016, PNM filed an application with the NMPRC requesting approval of a project to replace its existing customer metering equipment with Advanced Metering Infrastructure ( AMI ). The application also asks the NMPRC to authorize the recovery of the cost of the project, up to $87.2 million, in future ratemaking proceedings, as well as to approve the recovery of the remaining undepreciated investment in existing metering equipment estimated to be approximately $33 million at the date of implementation and the costs of customer education and severances for affected employees. PNM does not intend to proceed with the AMI project unless the NMPRC approves the entire application. On August 5, 2016, PNM filed a motion to suspend its AMI application so that it could evaluate the effect of the order in the NM 2015 Rate Case. The NMPRC approved this motion. 76

77 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On November 22, 2016, PNM filed a motion to lift the suspension and establish a new procedural schedule. In December 2016, the Hearing Examiner issued an order lifting the suspension and issued a new procedural schedule. Hearings in this matter were held in February and March During the March 2017 hearing, it was disclosed that the proposed meter contractor may not have complied with certain New Mexico contractor licensing requirements. PNM subsequently filed testimony regarding that matter as ordered by the Hearing Examiner. On May 12, 2017, PNM requested a new procedural schedule to allow it to issue a new RFP for contracting work related to the meter installation and to update its cost-benefit analysis. On June 13, 2017, the Hearing Examiner issued a new procedural schedule requiring PNM to file additional testimony on September 1, 2017, and setting an additional hearing for October 25-26, PNM cannot predict the outcome of this matter. Facebook, Inc. Data Center Project On July 8, 2016, PNM filed an application with the NMPRC for approval of: Two new electric service rates A PPA under which PNM would purchase renewable energy from PNMR Development A special service contract to provide electric service to a prospective new customer, a large Internet company, that was considering locating a data center in PNM s service area The NMPRC approved PNM s application on August 17, At that time, the new customer was also considering the state of Utah for the location of the data center. On September 15, 2016, PNM filed a notice informing the NMPRC that the customer, Facebook, Inc., had announced that it was selecting a site in New Mexico for its new data center. Facebook s service requirements include the acquisition by PNM of a sufficient amount of new renewable energy resources and RECs to match the energy and capacity requirements of the data center. PNM s initial procurement will be through a PPA with PNMR Development for the energy production from 30 MW of new solar capacity that PNMR Development will construct and own. The cost of the PPA will be passed through to Facebook under a new rate rider. A new special service rate will be applied to Facebook s energy consumption in those hours of the month when their consumption exceeds the energy production from the new renewable resources. Construction of the first 10 MW of solar capacity is expected to be completed in early 2018, which will coincide with initial operations of the data center, with the remainder of the capacity completed by mid The approval order included a provision requiring that in any future rate case filed by PNM requesting an increase in rates of any other customer class, the NMPRC shall determine whether or not any customer class will be subject to increased rates due to Facebook s fixed Contribution to Production Charge for System Supplied Energy and, if so, the NMPRC shall determine whether or not PNM will be allowed to recover such increased costs in the form of increased rates to other customers. In the NM 2016 Rate Case filing discussed above, PNM indicated the Facebook arrangement did not result in increased rates to any other customer class. Hazard Sharing Agreements On June 1, 2016, PNM and Tri-State entered into a one -year hazard sharing agreement, which expired on May 31, Under the agreement, each party will sell the other party 100 MW of capacity and energy on a unit contingent basis, from each party s designated primary resources, which is SJGS Unit 4 for PNM and Springerville Generating Station Unit 3 for Tri- State. The 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. Both purchases and sales are made at the same market index price. In 2016, PNM sold GWh for $12.8 million and purchased GWh for $12.9 million under the agreement. PNM and Tri-State entered into an additional agreement, under substantially identical terms, for a term of five years beginning June 1, 2017, subject to NMPRC approval. NMPRC approval was not required for the one -year agreement, but was required for the five -year agreement. On May 10, 2017, the NMPRC issued a final order approving the five -year agreement. In the three months ended June 30, 2017, PNM sold GWh for $5.7 million and purchased GWh for $6.1 million under the agreements. In the six months ended June 30, 2017, PNM sold GWh for $10.5 million and purchased GWh for $10.6 million under the agreements. Both the purchases and the sales under the agreements are passed through to customers under PNM s FPPAC. 77

78 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Firm-Requirements Wholesale Customers Navopache Electric Cooperative, Inc. As discussed in Note 17 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K, NEC filed a petition on April 8, 2015 for a declaratory order requesting that FERC find that NEC could purchase an unlimited amount of power and energy from third party supplier(s) under its PSA with PNM. Following proceedings before a settlement judge, PNM and NEC entered into, and filed with FERC, a settlement agreement on October 29, 2015 that includes certain amendments to the PSA and related contracts on file with FERC. FERC approved the settlement on January 21, Under the settlement agreement, PNM served all of NEC s load in 2016 at reduced demand and energy rates from those under the PSA. Beginning January 1, 2016, NEC also paid certain third-party transmission costs that it only partially paid previously. The PSA and related transmission agreements terminated on December 31, In 2017, PNM is serving 10 MW of NEC s load under a short term coordination tariff at a rate lower than provided under the PSA. Amounts billed to NEC were $1.1 million and $4.7 million in the three months ended June 30, 2017 and 2016 and $2.2 million and $10.0 million in the six months ended June 30, 2017 and PNM s NM 2016 Rate Case discussed above reflects a reallocation of costs among regulatory jurisdictions reflecting the termination of the contract to serve NEC. TNMP Advanced Meter System Deployment In July 2011, the PUCT approved a settlement and authorized an AMS deployment plan that permits TNMP to collect $113.4 million in deployment costs through a surcharge over a 12 -year period. TNMP began collecting the surcharge on August 11, Deployment of advanced meters began in September TNMP completed its mass deployment in 2016 and has installed more than 242,000 advanced meters. The PUCT adopted a rule creating a non-standard metering service for retail customers choosing to decline standard metering service via an advanced meter. The cost of providing nonstandard metering service is to be borne by opt-out customers through an initial fee and ongoing monthly charge. As approved by the PUCT, TNMP is recovering $0.2 million in costs through initial fees ranging from $63.97 to $ and ongoing annual expenses of $0.5 million through a $36.78 monthly fee. These amounts presume up to 1,081 consumers will elect the nonstandard meter service, but TNMP has the right to adjust the fees if the number of anticipated consumers differs from that estimate. As of July 25, 2017, 102 consumers have made the election. TNMP does not expect the implementation of non-standard metering service to have a material impact on its financial position, results of operations, or cash flows. Transmission Cost of Service Rates TNMP can update its transmission rates twice per year to reflect changes in its invested capital. Updated rates reflect the addition and retirement of transmission facilities, including appropriate depreciation, federal income tax and other associated taxes, and the approved rate of return on such facilities. The following sets forth TNMP s recent interim transmission cost rate increases: Effective Date Approved Increase in Rate Base (In millions) Annual Increase in Revenue September 10, 2015 $ 7.0 $ 1.4 March 23, September 8, March 14, On July 19, 2017, TNMP filed an application to further update its transmission rates to reflect an increase in total rate base of $27.5 million, which would increase revenues by $4.7 million annually. The application is pending before the PUCT. On March 23, 2017, the PUCT staff filed proposed amendments to the interim transmission cost of service filing rule. If approved, the amendments could reduce the frequency of such filings to once per year. The amendments could also reduce the amount recovered by requiring that changes in accumulated deferred income taxes be considered and would preclude filings by 78

79 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) utilities earning more than their authorized rate of return using weather-normalized data. The PUCT has not yet approved the amendments for publication. Initial comments on the proposed rule will be due 30 days after publication. TNMP cannot predict the outcome of this matter. Periodic Distribution Rate Adjustment PUCT rules permit interim rate adjustments to reflect changes in investments in distribution assets. Distribution utilities may file for a periodic rate adjustment between April 1 and April 8 of each year as long as the electric utility is not earning more than its authorized rate of return using weather-normalized data. However, TNMP has not made a filing to adjust rates for additional investments in distribution assets. In connection with TNMP s deployment of its advance meter system discussed above, TNMP committed to file a general rate case no later than September 1, TNMP has also committed that it would not file a request for an increase in rates to reflect changes in investments in distribution assets until after the 2018 general rate case. Competition Transition Charge Compliance Filing In connection with the adoption of legislation that deregulated electric utilities operating within ERCOT, TNMP was allowed to recover its stranded costs through the CTC and to also recover a carrying charge on the CTC. Further, the order authorizing TNMP's CTC included a true-up provision requiring an adjustment to the CTC due to a cumulative over- or undercollection of revenues, including interest, greater-than or equal to 15% of the most recent annual CTC funding amount. On March 13, 2017, TNMP made a filing to true-up the CTC. The requested adjustment reduces the collection of the amortization by $1.1 million annually. On April 3, 2017, the PUCT staff filed its recommendation to approve the requested adjustment. The change was approved on April 5, 2017 and went into effect on June 1, Energy Efficiency TNMP recovers the costs of its energy efficiency programs through an energy efficiency cost recovery factor ( EECRF ), which includes projected program costs, under or over collected costs from prior years, rate case expenses, and performance bonuses (if the programs exceed mandated savings goals). On May 25, 2017, TNMP filed its request to adjust the EECRF to reflect changes in costs for The total amount requested is $6.0 million, which includes a performance bonus of $1.1 million based on TNMP s energy efficiency achievements in the 2016 plan year. A procedural schedule has been set with a hearing on the merits set for August 21, (13) Income Taxes 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 In accordance with GAAP, PNMR and PNM adjusted accumulated deferred income taxes during the period that includes the date of enactment, which was in the year ended December 31, 2013, to reflect the tax rate at which the balances are expected to reverse. At that time, the portion of the adjustment related to PNM s regulated activities was recorded as a reduction in deferred tax liabilities, which was offset by an increase in a regulatory liability, on the assumption that PNM will be required to return the benefit to customers over time. In addition, the portion of the adjustment that is not related to PNM s regulated activities was recorded in PNMR s Corporate and Other segment 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 will result in refinements of the impacts of this change in tax rates being recorded periodically until 2018, when the rate reduction is fully phased in. In the three months ended March 31, 2017 and 2016, PNM s regulatory liability was reduced by $4.8 million and $7.1 million, which increased deferred tax liabilities. Deferred tax assets not related to PNM s regulatory activities were: reduced by $0.1 million in the three months ended March 31, 2017, increasing income tax expense by less than $0.1 million for PNM and $0.1 million for the Corporate and Other segment; and decreased by $0.7 million in the three months ended March 31, 2016, increasing income tax expense by $0.8 million for PNM and reducing income tax expense by $0.1 million for the Corporate and Other segment. In the stipulation filed in PNM s NM 2016 Rate Case (Note 12), it is proposed that the benefit of the lower New Mexico corporate income tax rate be returned to customers over a three -year period beginning January 1, 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 79

80 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 in the three months ended June 30, Of the refunds, $2.1 million was recorded as a reduction of 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. 718). See Note 8 for a discussion of the impacts on income tax expense resulting from the adoption of Accounting Standards Update Compensation - Stock Compensation (Topic (14) Related Party Transactions PNMR, PNM, and TNMP are considered related parties as defined under GAAP, as is PNMR Services Company, a wholly-owned subsidiary of PNMR that provides corporate services to PNMR and its subsidiaries in accordance with shared services agreements. These services are billed at cost on a monthly basis to the business units. The table below summarizes the nature and amount of related party transactions of PNMR, PNM, and TNMP: (15) Goodwill Services billings: Three Months Ended Six Months Ended June 30, June 30, (In thousands) PNMR to PNM $ 23,190 $ 22,269 $ 47,593 $ 45,003 PNMR to TNMP 7,806 7,240 15,943 14,288 PNM to TNMP TNMP to PNMR TNMP to PNM Interest billings: PNMR to TNMP PNMR to PNM PNM to PNMR Income tax sharing payments: PNMR to PNM PNMR to TNMP The excess purchase price over the fair value of the assets acquired and the liabilities assumed by PNMR for its 2005 acquisition of TNP was recorded as goodwill and was pushed down to the businesses acquired. In 2007, the TNMP assets that were included in its New Mexico operations, including goodwill, were transferred to PNM. PNMR s reporting units that currently have goodwill are PNM and TNMP. Additional information concerning the Company s goodwill is contained in Note 18 of Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K. GAAP requires the Company to evaluate its goodwill for impairment annually at the reporting unit level or more frequently if circumstances indicate that the goodwill may be impaired. Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, and determination of the fair value of each reporting unit. GAAP provides that in certain circumstances an entity may perform a qualitative analysis to conclude that the goodwill of a reporting unit is not impaired. Under a qualitative assessment an entity considers macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events affecting a reporting unit, as well as whether a sustained decrease (both absolute and relative to its peers) in share price had occurred. An entity considers 80

81 Table of Contents PNM RESOURCES, INC. AND SUBSIDIARIES PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) the extent to which each of the adverse events and circumstances identified could affect the comparison of a reporting unit s fair value with its carrying amount. An entity places more weight on the events and circumstances that most affect a reporting unit s fair value or the carrying amount of its net assets. An entity also should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity evaluates, on the basis of the weight of evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative analysis is not required. In other circumstances, an entity may perform a quantitative analysis to reach the conclusion regarding impairment with respect to a reporting unit. The first step of the quantitative impairment test requires an entity to compare the fair value of the reporting unit with its carrying value, including goodwill. If as a result of this analysis, the entity concludes there is an indication of impairment in a reporting unit having goodwill, GAAP currently requires the entity to perform the second step of the impairment analysis, determining the amount of goodwill impairment to be recorded. The amount is calculated by comparing the implied fair value of the goodwill to its carrying amount. This exercise would require the entity to allocate the fair value determined in step one to the individual assets and liabilities of the reporting unit. Any remaining fair value would be the implied fair value of goodwill on the testing date. To the extent the recorded amount of goodwill of a reporting unit exceeds the implied fair value determined in step two, an impairment loss would be reflected in results of operations. As further discussed under New Accounting Pronouncements in Note 1, a new accounting pronouncement will eliminate the second step of the quantitative impairment analysis. An entity may choose to perform a quantitative analysis without performing a qualitative analysis and may perform a qualitative analysis for certain reporting units but a quantitative analysis for others. For its annual evaluations performed as of April 1, 2016, PNMR performed quantitative analyses for both the PNM and TNMP reporting units. For the quantitative analyses, a discounted cash flow methodology was primarily used to estimate the fair value of the reporting unit. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of long-term growth rates for the business, and determination of appropriate weighted average cost of capital for each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value and the conclusion of impairment. The April 1, 2016 quantitative evaluations indicated the fair value of the PNM reporting unit, which has goodwill of $51.6 million, exceeded its carrying value by approximately 25%. The April 1, 2016 quantitative evaluation indicated the fair value of the TNMP reporting unit, which has goodwill of $226.7 million, exceeded its carrying value by approximately 32%. For its annual evaluations performed as of April 1, 2017, PNMR performed qualitative analyses for both the PNM and TNMP reporting units. The qualitative analysis was performed by considering changes in the Company s expectations of future financial performance since the April 1, 2016 quantitative analysis. This analysis included consideration of Company specific events including the potential impacts of legal and regulatory matters discussed in Note 11 and Note 12 including the estimated impacts of the proposed revised stipulation in PNM s NM 2016 Rate Case, the impacts of potential outcomes of the matters appealed to the NM Supreme Court under the NM 2015 Rate Case, and the impacts of changes in PNM s resource needs based on PNM s 2017 IRP. This evaluation also considered changes in TNMP s regulatory environment such as the PUCT s proposed amendments to the interim transmission cost of service filing rule, as well as potential outcomes associated with TNMP s general rate case filing which the Company anticipates filing in The qualitative analysis also considered market and macroeconomic factors including changes in anticipated growth rates, anticipated changes in the WACC, and changes in discount rates. The Company also evaluated its stock price relative to historical performance, industry peers, and to major market indices, including an evaluation of the Company s market capitalization relative to the carrying value of its reporting units. Based on an evaluation of these and other factors, the Company determined it is not more likely than not that the April 1, 2017 carrying values of PNM or TNMP exceed their fair values. As indicated above, the annual evaluations performed as of April 1, 2017 and 2016 did not indicate impairments of the goodwill of any of PNMR s reporting units. Since the April 1, 2017 annual evaluation, there have been no indications that the fair values of the reporting units with recorded goodwill have decreased below their carrying values. ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management s Discussion and Analysis of Financial Condition and Results of Operations for PNMR is presented on a combined basis, including certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is presented as permitted by Form 10-Q General Instruction H(2). This report uses the term Company when discussing matters of common applicability to PNMR, PNM, and TNMP. A reference to a Note in this Item 2 refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1, unless otherwise specified. Certain of the tables below may not appear visually accurate due to rounding. Overview and Strategy MD&A FOR PNMR EXECUTIVE SUMMARY PNMR is a holding company with two regulated utilities serving approximately 770,000 residential, commercial, and industrial customers and end-users of electricity in New Mexico and Texas. PNMR s electric utilities are PNM and TNMP. Strategic Goals PNMR is focused on achieving three key strategic goals: Earning authorized returns on regulated businesses Delivering above industry-average earnings and dividend growth Maintaining solid investment grade credit ratings In conjunction with these goals, PNM and TNMP are dedicated to: Maintaining strong employee safety, plant performance, and system reliability Delivering a superior customer experience Demonstrating environmental stewardship in their business operations Supporting the communities in their service territories Earning Authorized Returns on Regulated Businesses PNMR s success in accomplishing its strategic goals is highly dependent on two key factors: fair and timely regulatory treatment for its utilities and the utilities strong operating performance. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: safety, operational excellence, and customer satisfaction, while engaging stakeholders to build productive relationships. Both PNM and TNMP seek cost recovery for their investments through general rate cases and various rate riders. Fair and timely rate treatment from regulators is crucial to PNM and TNMP in earning their allowed returns and critical for PNMR to achieve its strategic goals. PNMR believes that earning allowed returns would be viewed positively by credit rating agencies and would further improve the Company s ratings, which could lower costs to utility customers. Also, earning allowed returns should result in increased earnings for PNMR, which would lead to increased growth in EPS.

82 Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K and in Note 12. State Regulation New Mexico Rate Cases On September 28, 2016, the NMPRC issued an order that authorized PNM to implement an increase in base non-fuel rates of $61.2 million for New Mexico retail customers, effective for bills sent after September 30, This order was on PNM s application for a general increase in retail electric rates (the NM 2015 Rate Case ) filed in August PNM s application requested an increase in base non-fuel revenues of $121.5 million based on a future test year ( FTY ) beginning October 1, The primary drivers of the revenue deficiency were infrastructure investments and declines in forecasted 81

83 Table of Contents energy sales due to successful energy efficiency programs and other economic factors. PNM also proposed changes to rate design to provide fairer pricing across rate classes and better align cost recovery with cost causation. Following public hearings, the Hearing Examiner in the case issued a recommended decision ( RD ) in August 2016 proposing an increase in non-fuel revenues of $41.3 million. The NMPRC s September 26, 2016 order approved many aspects of the RD, including the determination that PNM was imprudent in purchasing the 64.1 MW of previously leased capacity in PVNGS Unit 2, extending the leases for MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. However, the order also made certain significant modifications to the RD. Major components of the difference between the increase in non-fuel revenues approved in the order and PNM s request, include: A ROE of 9.575%, compared to the 10.5% requested by PNM Inclusion of the January 2016 purchase of the assets underlying three leases of capacity, totaling 64.1 MW, of PVNGS Unit 2 (Note 6) at an initial rate base value of $83.7 million, compared to PNM s request for recovery of the fair market value purchase price of $163.3 million; and disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW was being leased by PNM, which costs totaled $43.8 million when the order was issued Disallowance of the recovery of any future contributions for PVNGS decommissioning costs related to the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016 and the MW of the leased capacity in PVNGS Units 1 and 2 that were extended for eight years beginning January 15, 2015 and 2016 (Note 6) Disallowance of recovery of the costs associated with converting SJGS Units 1 and 4 to BDT, which is required by the NSR permit for SJGS (Note 12), but allows recovery of avoided operating and maintenance expenses of $0.3 million annually related to BDT; PNM s share of the costs of installing the BDT equipment was $52.3 million, $40.0 million of which PNM requested be included in rate base in the NM 2015 Rate Case Disallowance of recovery of $4.5 million of amounts recorded as regulatory assets and deferred charges The order continues the renewable energy rider and approved certain aspects of PNM s proposals regarding rate design, but did not approve certain other rate design proposals or PNM s request for a revenue decoupling pilot program. The order also proposed changes in the methods of recovering certain costs through PNM s FPPAC and renewable energy rider. The order credits retail customers with 100% of the New Mexico jurisdictional portion of revenues from refined coal (a third-party pre-treatment process) at SJGS. The order approved PNM s proposals for revised depreciation rates (with certain exceptions), the inclusion of construction work in progress in rate base, and the ratemaking treatment of the prepaid pension asset. On September 30, 2016, PNM filed a notice of appeal with the NM Supreme Court regarding the order in the NM 2015 Rate Case. Subsequently, NEE, NMIEC, and ABCWUA filed notices of cross appeal. On October 26, 2016, PNM filed a statement of issues related to its appeal with the NM Supreme Court, which stated PNM is appealing the NMPRC s determination that PNM was imprudent in the actions taken to purchase the previously leased 64.1 MW of capacity in PVNGS Unit 2, extending the leases for MW of capacity of PVNGS Units 1 and 2, and installing BDT equipment on SJGS Units 1 and 4. Specifically, PNM s statement indicated it is appealing the following elements of the NMPRC s order: Disallowance of recovery of the full fair market value purchase price of the 64.1 MW of capacity in PVNGS Unit 2 purchased in January 2016 Disallowance of the recovery of the undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity was leased by PNM Disallowance of recovery of future contributions for PVNGS decommissioning attributable to 64.1 MW of purchased capacity and the MW of capacity under the extended leases Disallowance of recovery of the costs of converting SJGS Units 1 and 4 to BDT The issues that are being appealed by the various cross-appellants are: The NMPRC allowing PNM to recover the costs of the lease extensions for the MW of PVNGS Units 1 and 2 and any of the purchase price for the 64.1 MW in PVNGS Unit 2 The NMPRC allowing PNM to recover the costs incurred under the new coal supply contract for Four Corners The revised method to collect PNM s fuel and purchased power costs under the FPPAC The final rate design The NMPRC allowing PNM to include the pre-paid pension asset in rate base 82

84 Table of Contents NEE subsequently filed a motion for a partial stay of the order at the NM Supreme Court. This motion was denied. The NM Supreme Court stated that the court s intent was to request that PNM reimburse ratepayers for any amount overcharged should the cross-appellants prevail on the merits. Otherwise, the court has taken no action with respect to the appeals. On February 17, 2017, PNM filed its Brief in Chief, and pursuant to the court s rules, the briefing schedule was completed on July 21, PNM anticipates that the court will take oral argument. Although appeals of regulatory actions of the NMPRC have a priority at the NM Supreme Court under New Mexico law, there is no required time frame for the court to act on the appeals. PNM evaluated the accounting consequences of the order in the NM 2015 Rate Case and the likelihood of being successful on the issues it is appealing in the NM Supreme Court as required under GAAP. The evaluation indicates it is reasonably possible that PNM will be successful on the issues it is appealing. If the NM Supreme Court rules in PNM s favor on some or all of the issues, those issues would be remanded back to the NMPRC for further action. PNM estimates that it will take a minimum of 15 months, from the date PNM filed its appeal, for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues. During such time, the rates specified in the order will remain in effect. Accordingly, at September 30, 2016, PNM recorded a pre-tax regulatory disallowance of $11.3 million, representing 15 months of capital cost recovery on its investments that the order disallowed, as well as amounts recorded as regulatory assets and deferred charges that the order disallowed and which PNM did not challenge in its appeal. Additional losses will be recorded if the currently estimated 15 month time frame for the NM Supreme Court to render a decision and for the NMPRC to take action on any remanded issues is extended. PNM continues to believe that the disallowed investments, which are the subject of PNM s appeal, were prudently incurred and that PNM is entitled to full recovery of those investments through the ratemaking process. PNM believes it is reasonably possible that its appeals will be successful, but cannot predict what decision the NM Supreme Court will reach or what further actions the NMPRC will take on any issues remanded to it by the court. If PNM s appeal is unsuccessful, PNM would record additional pre-tax losses related to any unsuccessful issues. The June 30, 2017 book values of PNM s investments that the order disallowed, after considering the loss recorded in 2016, were $76.9 million for the 64.1 MW of purchased capacity in PVNGS Unit 2, $39.9 million for the PVNGS Unit 2 disallowed capital improvements, and $50.0 million for the BDT equipment. PNM does not believe that the likelihood of the cross-appeals being successful is probable. However, if the NM Supreme Court were to overturn all of the issues subject to the crossappeals and, upon remand, the NMPRC did not provide any recovery of those items, PNM would write-off all of the costs to acquire the assets previously leased under three leases aggregating 64.1 MW of PVNGS Unit 2 capacity, totaling $154.2 million at June 30, 2017 (which amount includes $76.9 million that is the subject of PNM s appeal discussed above) after considering the loss recorded in The impacts of not recovering costs for the lease extensions, new coal supply contract for Four Corners, and prepaid pension asset in rate base would be recognized in future periods reflecting that rates charged to customers would not recover those costs as they are incurred. The outcomes of the cross-appeals regarding the FPPAC and rate design should not have financial impact to PNM. On December 7, 2016, PNM filed an application with the NMPRC for a general increase in retail electric rates (the NM 2016 Rate Case ). PNM did not include any of the costs disallowed in the NM 2015 Rate Case that are at issue in its pending appeal to the NM Supreme Court. Key aspects of PNM s request in the NM 2016 Rate Case are: An increase in base non-fuel revenues of $99.2 million Based on a FTY beginning January 1, 2018 (the NMPRC s rules specify that a FTY is a 12 month period beginning up to 13 months after the filing of a rate case application) ROE of % Drivers of revenue deficiency Implementation of the modifications in PNM s resource portfolio, which were previously approved by the NMPRC as part of the SJGS regional haze compliance plan (see below and Note 12) Infrastructure investments, including environmental upgrades at Four Corners Declines in forecasted energy sales due to successful energy efficiency programs and other economic factors Updates in the FERC/retail jurisdictional allocations Proposed changes to rate design to establish fair and equitable pricing across rate classes and to better align cost recovery with cost causation Increased customer and demand charges A lost contribution to fixed cost mechanism applicable to residential and small commercial customers to address the regulatory disincentive associated with PNM s energy efficiency programs 83

85 Table of Contents The NMPRC scheduled a public hearing to begin on June 5, 2017 and ordered that a settlement conference should be held. After settlement discussions were held, PNM and representatives of several intervenors reached an agreement on the parameters for a settlement in this proceeding. In May 2017, PNM and thirteen intervenors (the Signatories ) entered into a comprehensive stipulation. On May 12, 2017, the Hearing Examiners issued an order rejecting the stipulation in its current form and allowing the Signatories to revise the stipulation. On May 23, 2017, the Signatories filed a revised stipulation that addressed the issues raised by the Hearing Examiners in their order. The terms of the revised settlement include: A revenue increase totaling $62.3 million, with an initial increase of $32.3 million beginning January 1, 2018 and the remaining increase beginning January 1, 2019 A ROE of 9.575% Full recovery of the investment in SCRs at Four Corners with a debt-only return An agreement not to seek to adjust non-fuel base rate changes to be effective prior to January 1, 2020 An agreement to adjust the January 2019 increase for certain changes in federal corporate tax laws Returning to customers over a three-year period the benefit of the reduction in the New Mexico corporate income tax rate to the extent attributable to PNM s retail operations PNM will withdraw its proposal for a lost contribution to fixed cost mechanism with the issue to be addressed in a future docket On May 24, 2017, the NMPRC issued an order, which resulted in the tolling of the statutory suspension period for two months and extending the suspension of the rate increase until January 6, The NMPRC can further extend the suspension period for an additional two months. The Hearing Examiners have issued a procedural order that sets an evidentiary hearing on the merits of the revised stipulation commencing August 7, The revised settlement requires the approval of the NMPRC in order to take effect. If the NMPRC approves the revised settlement as filed, GAAP would require PNM to recognize a loss to reflect that PNM would not earn an equity return on its investments in SCRs at Four Corners. The loss would be recorded as a regulatory disallowance as of the date of NMPRC approval. Such amount would depend on the final costs of the SCRs and other factors and assumptions at the date of NMPRC approval. Based on the stipulation and PNM s current assumptions, PNM estimates the regulatory disallowance would be approximately $21 million. PNM cannot predict the outcome of this matter. Advanced Metering In September 2011, TNMP began its deployment of advanced meters for homes and businesses across its service area. TNMP completed its mass deployment in 2016 and has installed more than 242,000 advanced meters. As part of the State of Texas long-term initiative to create an advanced electric grid, installation of advanced meters will ultimately give consumers more data about their energy consumption and help them make more informed decisions. In addition, TNMP recently completed installation of a new outage management system that will leverage capabilities of the advanced metering infrastructure to enhance TNMP s responsiveness to outages. On February 26, 2016, PNM filed an application with the NMPRC requesting approval of a project to replace its existing customer metering equipment with Advanced Metering Infrastructure ( AMI ). The application also asks the NMPRC to authorize the recovery, in future ratemaking proceedings, of the cost of the project, up to $87.2 million, as well as to approve the recovery of the remaining undepreciated investment in existing metering equipment estimated to be approximately $33 million and the costs of customer education and severance for any affected employees. PNM does not intend to proceed with the AMI project unless the NMPRC approves the entire application. Hearings on the AMI application concluded in March During the March 2017 hearing, it was disclosed that the proposed meter contractor may not have complied with certain New Mexico contractor licensing requirements. PNM subsequently filed testimony regarding that matter as ordered by the Hearing Examiner and requested a new procedural schedule to allow it to issue a new RFP for contracting work related to the meter installation and to update its cost-benefit analysis. On June 13, 2017, the Hearing Examiner issued a new procedural schedule requiring PNM to file additional testimony on September 1, 2017, and setting an additional hearing for October 25-26, PNM cannot predict the outcome of this matter. PVNGS Unit 3 Currently, PNM s 134 MW interest in PVNGS Unit 3 is excluded from NMPRC jurisdictional rates. The power generated from that interest is sold into the wholesale market and any earnings or losses are realized by shareholders. As part of compliance with the requirements for BART at SJGS discussed below, the NMPRC approved including PVNGS Unit 3 as a jurisdictional resource in the determination of rates charged to customers in New Mexico beginning in PVNGS Unit 3 is included as a jurisdictional resource in PNM s NM 2016 Rate Case. Rate Riders and Interim Rate Relief The PUCT has approved mechanisms that allow TNMP to recover capital invested in transmission and distribution projects without having to file a general rate case. This permits more timely recovery of investments. 84

86 Table of Contents The PUCT has also approved riders that allow TNMP to recover amounts related to AMS, energy efficiency, third-party transmission costs, and the CTC. The NMPRC has approved rate riders for renewable energy and energy efficiency that allow for more timely recovery of investments and improve PNM s ability to earn its authorized return. TNMP General Rate Case TNMP s last general rate case was filed in 2010 with new rates becoming effective on February 1, In connection with TNMP s deployment of its AMS, TNMP has committed to file a general rate case no later than September 1, TNMP currently anticipates filing its general rate case in May 2018 using a 2017 calendar year test period. New rates are expected to be effective during January FERC Regulation Rates PNM charges for transmission customers and wholesale generation services customers are subject to traditional rate regulation by FERC. For a number of years, PNM allocated a portion of its generation assets to serve FERC wholesale generation services customers. Recently, the low natural gas price environment has resulted in market prices for power to be substantially lower than what PNM is able to offer wholesale generation customers under the cost of service model that FERC requires PNM to use. As a result of this change in market conditions, PNM has not been earning an adequate return on the assets required to serve wholesale generation contracts. Consequently, PNM has decided to stop pursuing wholesale generation contracts. Currently, PNM has no full-requirements wholesale generation customers. Navopache Electric Cooperative, Inc. PNM had a PSA, which contained an expiration date in 2035, to supply power to NEC that was approved by FERC in April On April 8, 2015, NEC filed a petition for a declaratory order requesting that FERC find that NEC could purchase an unlimited amount of power and energy from third party supplier(s) under the PSA. PNM intervened, requesting that FERC deny NEC s petition. On July 16, 2015, FERC set the matter for a public hearing concerning the parties intent with regard to certain provisions of the PSA and held the hearing in abeyance to provide time for settlement judge procedures. On October 29, 2015, PNM and NEC entered into, and filed with FERC, a settlement agreement, which FERC approved in January Under the agreement, PNM served all of NEC s load through December 31, 2015 at rates that were substantially consistent with those provided under the PSA. In 2016, PNM served all of NEC s load at reduced demand and energy rates from those under the PSA. The PSA terminated on December 31, In 2017, PNM is serving 10 MW of NEC s load under a short-term coordination tariff at a rate lower than provided under the PSA, but higher than prices available under short-term market rates at the time of the settlement. For the six months ended June 30, 2017 and 2016, amounts billed to NEC were $2.2 million and $10.0 million. Although the settlement agreement will negatively impact results of operations in 2017, PNM expects to be able to mitigate these impacts through market sales of power that would have been sold to NEC, reductions in fuel and transmission expenses, and other measures. PNM s NM 2016 Rate Case discussed above proposes a reallocation of costs among regulatory jurisdictions reflecting the termination of the contract to serve NEC. Delivering Above Industry-Average Earnings and Dividend Growth PNMR s strategic goal to deliver above industry-average earnings and dividend growth enables investors to realize the value of their investment in the Company s business. PNMR s current target is 7% to 8% earnings growth through Earnings growth is based on 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. PNMR targets a dividend payout ratio of 50% to 60% of its ongoing earnings. PNMR expects to provide above industry-average dividend growth in the near-term and to manage the payout ratio to meet its long-term target. The Board will continue to evaluate the dividend on an annual basis, considering sustainability and growth, capital planning, and industry standards. The Board approved the following increases in the indicated annual common stock dividend: 85

87 Table of Contents Approval Date Percent Increase February % February % December % December % December % December % Maintaining Solid Investment Grade Credit Ratings The Company is committed to maintaining solid investment grade credit ratings in order to reduce the cost of debt financing and to help ensure access to credit markets, when required. See the subheading Liquidity included in the full discussion of Liquidity and Capital Resources below for the specific credit ratings for PNMR, PNM, and TNMP. Currently, all of the credit ratings issued by both Moody s and S&P on the Company s debt are investment grade. S&P has PNMR, PNM, and TNMP on a stable outlook. In June 2017, Moody s changed the outlook for PNMR and PNM from stable to positive while maintaining a stable outlook for TNMP. Business Focus PNMR strives to create enduring value for customers, communities, and shareholders. PNMR s strategy and decision-making are focused on safely providing reliable, affordable, and environmentally responsible power. PNMR works closely with customers, stakeholders, legislators, and regulators to ensure that resource plans and infrastructure investments benefit from robust public dialogue and balance the diverse needs of our communities. Equally important is the focus of PNMR s utilities on customer satisfaction and community engagement. Reliable and Affordable Power PNMR and its utilities are aware of the important roles they play in enhancing economic vitality in their service territories. Management believes that maintaining strong and modern electric infrastructure is critical to ensuring reliability and supporting economic growth. When contemplating expanding or relocating their operations, businesses consider energy affordability and reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability and to deliver a superior customer experience. Investing in PNM s and TNMP s infrastructure is critical to ensuring reliability and meeting future energy needs. Both utilities have long-established records of providing customers with reliable electric service. Utility Plant Investments During the 2014 to 2016 period, PNM and TNMP together invested $1,541.4 million in utility plant, including substations, power plants, nuclear fuel, and transmission and distribution systems. PNM completed the 40 MW natural gas-fired La Luz peaking generating station located near Belen, New Mexico in December PNM also completed installation of SNCR and BDT equipment on SJGS Units 1 and 4 in early 2016 and the addition of 40 MW of PNM-owned solar PV facilities in In addition, on January 15, 2016, PNM completed the $163.3 million acquisition of 64.1 MW of capacity in PVNGS Unit 2 that had previously been leased to PNM. Integrated Resource Plan NMPRC rules require that investor-owned utilities file an IRP every three years. The IRP is required to cover a 20 -year planning period and contain an action plan covering the first four years of that period. PNM filed its 2014 IRP on July 1, The four-year action plan was consistent with the replacement resources identified in PNM s application to retire SJGS Units 2 and 3. PNM indicated that it planned to meet its anticipated energy demand with a combination of additional renewable energy resources, energy efficiency, and natural gas-fired facilities. PNM filed its 2017 IRP on July 3, In the NMPRC s order concerning SJGS compliance with the BART requirements of the CAA discussed in Note 11, PNM is required to make a filing in 2018 to determine the extent to which SJGS should continue serving PNM s retail customers needs after June 30, The 2017 IRP analyzed several scenarios utilizing assumptions that PN 86

88 Table of Contents M continues service from its SJGS capacity beyond mid-2022 and that PNM retires its capacity after mid Key findings of the 2017 IRP include: Retiring PNM s share of SJGS in 2022 after the expiration of the current operating and coal supply agreements would provide long-term cost savings for PNM s customers PNM exiting its ownership interest in Four Corners after its current coal supply agreement expires in 2031 would also provide long-term cost savings for customers The best mix of new resources to replace the retired coal generation would include solar energy and flexible natural gas-fired peaking capacity; the mix could include energy storage if the economics support it and wind energy provided additional transmission capacity becomes available Significant increases in future wind energy supplies will likely require new transmission capacity built from Eastern New Mexico to PNM s service territory PNM should retain the currently leased capacity in PVNGS, which would avoid replacement with carbon-emitting generation PNM should continue to develop and implement energy efficiency and demand management programs PNM should assess the costs and benefits of participating in the California Energy Imbalance Market PNM should analyze its current Reeves Generating Station to consider possible technology improvements to phase out the older generators and replace them with new, more flexible supplies or energy storage The 2017 IRP is not a final determination of PNM s future generation portfolio. Retiring PNM s share of SJGS capacity and exiting Four Corners would require NMPRC approval of abandonment filings, which PNM would make at appropriate times in the future. Likewise, NMPRC approval of new generation resources through CCN filings would be required. PNM cannot predict the ultimate outcome of the 2017 IRP process or whether the NMPRC will approve subsequent filings that would encompass actions to implement the conclusions of the 2017 IRP. Environmentally Responsible Power PNMR has a long-standing record of environmental stewardship. PNM s environmental focus has been in three key areas: 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 new federal regulations for CO 2 emissions from existing power plants Preparing to meet New Mexico s increasing renewable energy requirements as cost-effectively as possible Increasing energy efficiency participation 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 will be retired by the end of 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 SO 2, particulate matter, CO 2, and mercury, as well as reducing water usage. Additional information is contained in Note 16 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K and in Note 11. Under the key provisions of the order approving the compliance plan, PNM: Will retire SJGS Units 2 and 3 (PNM s current ownership interest totals 418 MW) by December 31, 2017 and recover, over 20 years, 50% (currently estimated to be approximately $128.6 million) of their undepreciated net book value at that date and earn a regulated return on those costs Is granted a CCN to acquire an additional 132 MW in SJGS Unit 4, 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 (see New Mexico Rate Cases above and Note 12) Is 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 (currently estimated to be approximately $155 million) 87

89 Table of Contents Is authorized to acquire 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-co 2 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) Will 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 ( CSA ). In 2016, PNM recorded additional pre-tax losses of $3.7 million resulting from revised estimates of these items. Additional information about the CSA is discussed below and in Note 16 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K and in Note 11. On January 14, 2016, NEE filed a Notice of Appeal with the NM Supreme Court of the NMPRC s December 16, 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 appeals. 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, The NMPRC has taken no action on this matter. 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 costs, among other items. The San Juan Project Restructuring Agreement ( RA ) sets forth the agreement among the SJGS owners regarding ownership restructuring. Key provisions of the RA include: Capacity acquisition On December 31, 2017, PNM will acquire 132 MW of the exiting owners capacity in SJGS Unit 4 and PNMR Development agreed to acquire 65 MW of such capacity. It is currently anticipated that PNMR Development will transfer the rights and obligations related to the 65 MW to PNM prior to December 31, 2017 in order to facilitate dispatch of power from that capacity. As ordered by the NMPRC, PNM would treat the 65 MW as merchant utility plant that would be excluded from retail rates. Coal inventory The RA also sets forth the terms under which PNM acquired the coal inventory of the exiting SJGS participants as of January 1, 2016 and will provide coal supply to the exiting participants during the period from January 1, 2016 through December 31, 2017, which arrangement provides economic benefits that are being passed on to PNM s customers through the FPPAC. Coal supply The RA became effective contemporaneously with the effectiveness of the new CSA for SJGS. The effectiveness of the new 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, 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 has a maturity date of February 1, 2021 and initially bears interest at a rate of 7.25% plus LIBOR and escalates over time. Such rate is 9.25% plus LIBOR for the period from February 1, 2017 through January 31, WSJ must pay principal and interest quarterly to NM Capital in accordance with an amortization schedule. The Westmoreland Loan has been structured to encourage prepayments and early retirement of the debt. As of July 25, 2017, the balance of the Westmoreland Loan was $75.8 million. The next principal payment of 88

90 Table of Contents $9.6 million plus interest of $2.0 million is due on August 1, As of July 25, 2017, $11.6 million was held in a SJCC restricted bank account that is to be used solely to service the Westmoreland Loan. Coal mine reclamation Under the terms of the CSA, PNM and the other SJGS owners are obligated to compensate SJCC for all reclamation costs associated with the supply of coal from the San Juan mine. 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 11. 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 EPA in October 2015, is currently stayed by order of the US Supreme Court pending further proceedings before the DC Circuit. Oral argument was heard by the DC Circuit in September 2016, but the court has taken no action. On March 28, 2017, President Trump issued an Executive Order on Energy Independence. The order sets out two general policies: promote clean and safe development of energy resources, while avoiding regulatory burdens, and ensure electricity is affordable, reliable, safe, secure, and clean. The order rescinds various actions undertaken by the previous administration and directs the EPA Administrator to review and if appropriate suspend, revise, or rescind the Clean Power Plan, as well as other environmental regulations. PNM estimates that implementation of the BART plan at SJGS, as well as potentially exiting ownership in the remaining units at SJGS and Four Corners, which are discussed above, should provide significant steps for New Mexico to meet its ultimate compliance with Section 111(d). PNM is unable to predict the impact of this rule on its fossil-fueled generation. Because of environmental upgrades completed in 2009, SJGS is well positioned to outperform the mercury limit imposed by EPA in the 2011 Mercury and Air Toxics Standards. The major environmental upgrades on each of the four units at SJGS have significantly reduced emissions of NOx, SO 2, particulate matter, and mercury. Since 2006, SJGS has reduced NOx emissions by 46%, SO 2 by 78%, particulate matter by 75%, and mercury by 98%. 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, wind, and geothermal 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 2016, 19 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 The Company expects to continue to do well in this area in the future. 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, 2016, PNM had 107 MW of utility-owned solar capacity, including 40 MW completed in The NM 2015 Rate Case discussed above includes recovery in base rates of the costs associated with the 40 MW solar facilities. As discussed in Note 12, PNMR Development will construct and own 30 MW of new solar capacity that PNM will use to supply power to a new data center being constructed in PNM s service territory by Facebook Inc. In addition, PNM purchases power from a customer-owned distributed solar generation program that had an installed capacity of 72.0 MW at June 30, 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, 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 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 89

91 Table of Contents 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, On June 1, 2017, PNM filed its 2018 renewable energy procurement plan. PNM is requesting 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 hearing on the plan will be held in September PNM cannot predict the outcome of this matter. PNM will continue to procure renewable resources while balancing the impact to customers bills 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 2016, annual energy saved as a result of PNM s portfolio of energy efficiency programs was approximately 82 GWh. This is equivalent to the annual consumption of approximately 11,000 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 2016 resulted in energy savings totaling an estimated 22 GWh. This is equivalent to the annual consumption of approximately 2,250 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. 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, regulators, intervenors, legislators, and shareholders. Beginning in 2013, PNM refocused its efforts to improve 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. PNM s focus on the customer experience has resulted in increasing scores in the JD Power Electric Utility Residential Customer Satisfaction Study. The Company has leveraged a number of communications channels and strategic content to better serve and engage its many stakeholders. PNM s website, provides the details of major regulatory filings, including general rate requests, as well as the background on PNM s efforts to maintain reliability, keep prices affordable, and protect the environment. The website is designed 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 to provide additional information regarding the Company s environmental and other sustainability efforts. The site provides the key sustainability information related to the operations of PNM and TNMP. 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. 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 longstanding 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. Through the PNM Resources Foundation and widespread employee volunteerism, as well as PNM s low income program, the Company demonstrates its core value of caring. In addition to the extensive engagement both PNM and TNMP have with nonprofits organizations in their communities, the PNM Resources Foundation provides more than $1 million each year across New Mexico and Texas. These grants help nonprofits become more energy efficient and support community projects ranging from creating public gathering 90

92 Table of Contents spaces to revitalizing neighborhood parks to building a youth sports field, as well as providing employee matching and volunteer grants. In 2017, A New Century of Service grants, which celebrate PNM s 100th anniversary, will fund community projects to build a better future for local communities. PNM provides support for nonprofits in New Mexico focused in the areas of economic development, education, and environmental giving. During 2016, PNM provided $1.0 million to support these areas in communities within New Mexico. One of PNM s most important outreach programs is tailored for low income customers. In 2016, PNM hosted 41 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, services for seniors, and weatherization. PNM has hosted 25 similar events in the first six months of Additionally, through its Good Neighbor Fund, PNM provided $0.5 million of assistance with electric bills to 3,770 families in 2016 and offered financial literacy training to further support customers. Volunteerism is an important facet of the PNMR culture. In 2016, more than 750 PNM and TNMP employees and retirees contributed approximately 9,000 volunteer hours serving their local communities. Company volunteers also actively participate on nonprofit boards, in educational, economic, and environmental forums, as well as safety seminars. PNMR employees are, in large part, responsible for the success of the Company s customer, stakeholder, and community outreach. Economic Factors PNM In the three and six months ended June 30, 2017, PNM experienced a decrease in weather normalized retail load of 0.2% and 0.5% compared to 2016, primarily due to decreased commercial and industrial sales consistent with recent flattening in Albuquerque s employment growth. The sales decreases reflect a continued sluggish economy in New Mexico although economic conditions in Albuquerque appear to be stabilizing and even improving in certain areas, as evidenced by continuing upticks in the number of residential housing sales and prices. In addition, some of the previously announced successful economic development efforts, such as the selection of a site in New Mexico for a data center by Facebook Inc. within PNM s service territory, 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 that is driven primarily by low oil and natural gas prices. Although PNM does not serve the regions of the state that produce oil and gas, it is anticipated that the impacts of layoffs and the decrease in state royalty revenues will further soften the economies in PNM s service territory, particularly in the Albuquerque metropolitan area and Santa Fe, as the state deals with budget shortfalls. A large industrial customer of PNM previously announced a restructuring initiative, but has not formally announced what impacts, if any, the restructuring would have on its operations in PNM s service territory. Accordingly, PNM is unable to predict if there will be any impact to its operations. TNMP In the three and six months ended June 30, 2017, TNMP experienced an increase in volumetric weather normalized retail load of 1.1% and 3.0% compared to Most of TNMP s industrial and larger commercial customers are billed based on their peak demand. The Texas economy continues to grow, primarily due to its diverse base, which helps compensate for the weakness in the energy sector. 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 $60.4 million, or $0.75 per diluted share in the six months ended June 30, 2017 compared to $37.6 million, or $0.47 per diluted share, in Among other things, earnings in the six months ended June 30, 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 at PNM, rate increases and increased load at TNMP, lower plant maintenance costs at PNM, and excess tax benefits related to stock compensation recognized under a new accounting standard (Note 8). These increases were offset by milder weather at PNM and TNMP, lower revenue from NEC, increased depreciation and property taxes due to increased plant in service, and lower interest income on the Westmoreland Loan. Additional information on factors impacting results of operation for each segment is discussed under Results of Operations below. Liquidity and Capital Resources PNMR and PNM have revolving credit facilities that expire in October The PNMR and PNM facilities have capacities of $300.0 million and $400.0 million through October 2020 and $290.0 million and $360.0 million from November 2020 through 91

93 Table of Contents October Both facilities provide for short-term borrowings and letters of credit. In addition, PNM has a $50.0 million revolving credit facility, which expires in January 2018, with banks having a significant presence in New Mexico and TNMP has a $75.0 million revolving credit facility, which expires in September Total availability for PNMR on a consolidated basis was $581.3 million at July 25, The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational expenditures. PNMR also has intercompany loan agreements with each of its subsidiaries. PNMR projects that its consolidated capital requirements, consisting of construction expenditures and dividends, will total $2,481.2 million for , including amounts expended through June 30, The construction expenditures include estimated amounts for environmental upgrades at Four Corners, the 30 MW of new solar capacity to supply power to a new data center being constructed by Facebook Inc. (Note 12), and a 40 MW gas-fired peaking generating facility to be completed in In July 2017, PNM entered into the $200.0 million PNM 2017 Term Loan Agreement and repaid a $175.0 million term loan with part of the proceeds. Also in July 2017, PNM entered into the PNM 2017 Senior Unsecured Note Agreement, under which $450.0 million of the PNM 2018 SUNs are to be issued in 2018 and the proceeds will be used to repay $450.0 million of currently outstanding Senior Unsecured Notes on their maturity dates in After considering the effects of those financings, PNMR has consolidated maturities, mandatory remarketings, and other repayments of short-term and long-term debt aggregating $274.8 million in the period from July 1, 2017 through June 30, 2018 and $104.6 million in the remainder of Furthermore the $50.0 million PNM New Mexico Credit Facility expires in January 2018 and the $75.0 million TNMP Revolving Credit Facility expires in September In addition to internal cash generation, the Company anticipates that it will be necessary to obtain additional long-term financing in the form of debt refinancing, new debt issuances, and/or new equity in order to fund its capital requirements during the period. The Company currently believes that its internal cash generation, existing credit arrangements, and access to public and private capital markets will provide sufficient resources to meet the Company s capital requirements. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Trends and contingencies of a material nature are discussed to the extent known. Refer also to Disclosure Regarding Forward Looking Statements and to Part II, Item 1A. Risk Factors. A summary of net earnings attributable to PNMR is as follows: Three Months Ended June 30, Six Months Ended June 30, Change Change (In millions, except per share amounts) Net earnings attributable to PNMR $ 37.6 $ 27.1 $ 10.5 $ 60.4 $ 37.6 $ 22.8 Average diluted common and common equivalent shares Net earnings attributable to PNMR per diluted share $ 0.47 $ 0.34 $ 0.13 $ 0.75 $ 0.47 $ 0.28 The components of the change in net earnings attributable to PNMR are: Three Months Ended Six Months Ended June 30, 2017 June 30, 2017 (In millions) PNM $ 10.9 $ 23.2 TNMP Corporate and Other (2.1) (2.3) Net change $ 10.5 $ 22.8 Information regarding the factors impacting PNMR s operating results by segment are set forth below. Segment Information The following discussion is based on the segment methodology that PNMR s management uses for making operating decisions and assessing performance of its various business activities. See Note 3 for more information on PNMR s operating segments. 92

94 Table of Contents PNM PNM s utility margin is defined as electric operating revenues less cost of energy, which consists primarily of fuel and purchase power costs. PNM believes that utility margin provides a more meaningful basis for evaluating operations than electric operating revenues since substantially all fuel and purchase power costs are offset in revenues, as those costs are passed through to customers under PNM s FPPAC. The following table summarizes the operating results for PNM: Three Months Ended June 30, Six Months Ended June 30, Change Change (In millions) Electric operating revenues $ $ $ 42.8 $ $ $ 58.7 Cost of energy Utility margin Operating expenses (0.1) (12.2) Depreciation and amortization Operating income Other income (deductions) (2.1) (1.1) Interest charges (20.9) (22.7) 1.8 (41.9) (44.3) 2.4 Segment earnings before income taxes Income (taxes) (15.5) (9.2) (6.3) (23.2) (12.8) (10.4) Valencia non-controlling interest (3.5) (3.7) 0.2 (7.0) (7.0) Preferred stock dividend requirements (0.1) (0.1) (0.3) (0.3) Segment earnings $ 26.8 $ 15.9 $ 10.9 $ 43.3 $ 20.1 $ 23.2 The following table shows total GWh sales, including the impacts of weather, by customer class and average number of customers: Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage Change Change (Gigawatt hours, except customers) Residential (2.3)% 1, ,500.7 (2.7)% Commercial , ,858.2 (1.8) Industrial (1.1) (3.0) Public authority Economy energy service (1) (11.0) (10.8) Firm-requirements wholesale (2) (79.3) (80.7) Other sales for resale (3) , , , , % 6, , % Average retail customers (thousands) % % (1) PNM purchases energy for a major customer on the customer s behalf and delivers the energy to the customer s location through PNM s transmission system. PNM charges the customer for the cost of the energy as a direct pass through to the customer with only a minor impact in utility margin resulting from providing ancillary services. (2) Decrease in 2017 reflects reduced sales to NEC (Note 12) and loss of other firm-requirements wholesale customers. (3) Increase in 2017 includes the hazard sharing agreement with Tri-State (Note 12). Increase is also due to more power available for off-system sales, primarily related to SJGS and Four Corners, as well as power that was previously sold to NEC and other firm-requirements wholesale customers. Substantially all of the margin from off-system sales is returned to customers through the FPPAC. 93

95 Table of Contents Operating Results Three months ended June 30, 2017 compared to 2016 The following table summarizes the significant changes to utility margin: Three Months Ended June 30, 2017 Change Utility margin: (In millions) Rate relief Additional revenue due to rate increase approved by the NMPRC on September 28, 2016 and certain fuel costs being passed through the FPPAC $ 18.3 Customer usage/load PNM s weather normalized retail KWh sales decreased 0.2%; decreases in residential and industrial sales were partially offset by increases in commercial sales (0.4) Weather Milder weather; heating degree days were 14.4% lower and cooling degree days were 3.4% lower in 2017 (1.1) Transmission Higher revenues under formula transmission rates and addition of a new customer 2.0 Wholesale contracts Primarily due to NEC (Note 12) (2.3) Unregulated margin Higher hedged prices for PVNGS Unit 3 power sales 0.8 Rate riders Includes renewable energy and energy efficiency riders (0.5) Net unrealized economic hedges Primarily related to hedges of PVNGS Unit 3 power sales 4.3 Net Change $ 21.1 The following tables summarize the primary drivers for operating expenses, depreciation and amortization, other income (deductions), interest charges, and income taxes: Three Months Ended June 30, 2017 Change Operating expenses: (In millions) Lower plant maintenance costs, primarily due to timing of maintenance outages $ (2.4) Lower employee related expenses and outside consulting costs (0.9) Lower bad debt expense, primarily related to the bankruptcy of an industrial customer in 2016 (0.7) Higher capitalized administrative and general expenses due to higher construction spending in 2017 (0.3) Higher costs associated with rate riders 1.1 Higher allocated corporate costs, including increased depreciation of computer software 1.1 Higher property taxes due to increased utility plant in service 0.5 Training costs associated with new software implementation 0.3 Lower environmental expenses in Other 0.8 Net Change $ (0.1) 94

96 Table of Contents Three Months Ended June 30, 2017 Change Depreciation and amortization: (In millions) Higher depreciation rates approved by the NMPRC in PNM s 2015 NM Rate Case $ 2.1 Increased utility plant in service and other 1.7 Net Change $ 3.8 Other income (deductions): Interest charges: Income taxes: 2016 interest income from IRS, net of related expenses (Note 13) $ (2.9) Lower income from refined coal (a third-party pre-treatment process); income is now passed through to customers as ordered in PNM s NM 2015 Rate Case (1.3) Higher trust expenses related to available-for-sale securities in the NDT and coal mine reclamation trusts, partially offset by higher interest income (0.1) Higher equity AFUDC, primarily due to increased levels of construction expenditures 1.2 Higher gains on available-for-sale securities in the NDT and coal mine reclamation trusts 1.0 Net Change $ (2.1) Lower interest on $146.0 million of PCRBs refinanced in September 2016 $ 0.9 Lower short term debt borrowings 0.4 Other 0.5 Net Change $ 1.8 Increase due to higher segment earnings before income taxes $ (6.7) Decrease due to excess tax benefits related to stock compensation awards (Note 8) 0.2 Other 0.2 Net Change $ (6.3) 95

97 Table of Contents Operating Results Six months ended June 30, 2017 compared to 2016 The following table summarizes the significant changes to utility margin: Six Months Ended June 30, 2017 Change Utility margin: (In millions) Rate relief Additional revenue due to rate increase approved by the NMPRC on September 28, 2016 and certain fuel costs being passed through the FPPAC $ 31.8 Customer usage/load PNM s weather normalized retail KWh sales decreased 0.5%, primarily in commercial and industrial sales (1.0) Weather Milder weather; heating degree days were 12.7% lower and cooling degree days were 3.0% lower in 2017 (4.0) Leap Year Decrease in revenue due to additional day in 2016 (1.6) Transmission Higher revenues under formula transmission rates and addition of a new customer 3.9 Wholesale contracts Primarily due to NEC (Note 12) (5.1) Unregulated margin Higher hedged prices for PVNGS Unit 3 power sales 1.8 Rate riders Includes renewable energy and energy efficiency riders (1.5) Net unrealized economic hedges Primarily related to hedges of PVNGS Unit 3 power sales 4.2 Other (0.2) Net Change $

98 Table of Contents The following tables summarize the primary drivers for operating expenses, depreciation and amortization, other income (deductions), interest charges, and income taxes: Six Months Ended June 30, 2017 Change Operating expenses: (In millions) Lower plant maintenance costs, primarily due to timing of maintenance outages $ (10.3) Lower employee related expenses and outside consulting costs (2.9) Lower rent expense associated with PVNGS leases (Note 6) (0.9) 2016 regulatory disallowance due to change in estimated write-offs associated with the SJGS BART determination and ownership restructuring (Note 11) (0.8) Higher capitalized administrative and general expenses due to higher construction spending in 2017 (0.7) Lower bad debt expense, primarily related to the bankruptcy of an industrial customer in 2016 (0.5) Lower property and casualty expense due to favorable claims experience (0.5) Higher allocated corporate costs, including increased depreciation of computer software 2.7 Training costs associated with new software implementation 1.1 Higher costs associated with rate riders 1.2 Higher property taxes due to increases in utility plant in service 0.4 Lower environmental expenses in Other (1.5) Net Change $ (12.2) Depreciation and amortization: Higher depreciation rates approved by the NMPRC in PNM s 2015 NM Rate Case $ 3.6 Increased utility plant in service and other 4.4 Net Change $

99 Table of Contents Other income (deductions): 2016 interest income from IRS, net of related expenses (Note 13) $ (2.9) Lower income from refined coal (a third-party pre-treatment process); income is now passed through to customers as ordered in PNM s NM 2015 Rate Case (2.5) Higher interest income related to available-for-sale securities in the NDT and coal mine reclamation trusts, partially offset by lower trust expenses Higher equity AFUDC, primarily due to increased levels of construction expenditures 1.6 Higher gains on available-for-sale securities in the NDT and coal mine reclamation trusts 1.5 Interest income from third party transmission service provider due to FERC ruling 1.0 Net Change $ (1.1) 0.2 Six Months Ended June 30, 2017 Change Interest charges: (In millions) Income taxes: Lower interest on $146.0 million of PCRBs refinanced in September 2016 $ 1.8 Lower short term debt borrowings 0.5 Other 0.1 Net Change $ 2.4 Increase due to higher segment earnings before income taxes $ (13.1) Impacts of phased-in reduction in New Mexico corporate income tax rates 0.8 Decrease due to excess tax benefits related to stock compensation awards (Note 8) 1.5 Other 0.4 Net Change $ (10.4) TNMP TNMP s utility margin is defined as electric operating revenues less cost of energy, which consists of costs charged by third-party transmission providers. TNMP believes that utility margin provides a more meaningful basis for evaluating operations than electric operating revenues since all third-party transmission costs are passed on to customers through a transmission cost recovery factor. The following table summarizes the operating results for TNMP: 98

100 Table of Contents Three Months Ended June 30, Six Months Ended June 30, Change Change (In millions) Electric operating revenues $ 86.2 $ 82.0 $ 4.2 $ $ $ 7.4 Cost of energy Utility margin Operating expenses (0.8) Depreciation and amortization Operating income Other income (deductions) (0.3) (0.1) Interest charges (7.5) (7.5) (14.9) (14.8) (0.1) Segment earnings before income taxes Income (taxes) (7.0) (6.1) (0.9) (10.7) (10.4) (0.3) Segment earnings $ 12.2 $ 10.5 $ 1.7 $ 19.8 $ 18.0 $

101 Table of Contents The following table shows total sales, including the impacts of weather, by retail tariff consumer class and average number of consumers: Volumetric load (1) (GWh) Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage Change Change Residential % 1, , % Commercial and other (21.3) (19.2) Total volumetric load % 1, , % Demand-based load (2) (MW) 4, , % 7, , % Average retail consumers (thousands) (3) % % (1) Volumetric load consumers are billed on KWh usage. (2) Demand-based load includes consumers billed on monthly KW peak and also includes retail transmission customers that are primarily billed under TNMP s rate riders. (3) TNMP provides transmission and distribution services to REPs that provide electric service to their customers in TNMP s service territories. The number of consumers above represents the customers of these REPs. Under TECA, consumers in Texas have the ability to choose any REP to provide energy. Operating Results Three months ended June 30, 2017 compared to 2016 The following table summarizes the significant changes to utility margin: Three Months Ended June 30, 2017 Change Utility margin: (In millions) Rate relief Transmission cost of service rate increases in September 2016 and March 2017 $ 1.7 Customer usage/load 1.1% increase in weather normalized retail KWh sales, primarily related to the residential class; higher demand-based revenues for large commercial and industrial retail consumers; and increased wholesale transmission load in 2017; the average number of retail consumers increased 1.2% 1.1 Weather Warmer weather in 2017; cooling degree days were 11.4% higher in Rate riders Impacts of rate riders, including the AMS surcharge, CTC surcharge, energy efficiency rider, and transmission cost recovery factor (0.5) Net Change $

102 Table of Contents The following tables summarize the primary drivers for operating expenses, depreciation and amortization, other income (deductions), interest charges, and income taxes: Three Months Ended June 30, 2017 Change Operating expenses: (In millions) Lower property and casualty expense due to favorable claims experience $ (0.4) Lower employee related expenses (0.3) Higher capitalized administrative and general expenses due to higher construction spending in 2017 (0.5) Higher property taxes due to increased utility plant in service 0.2 Training costs associated with new software implementation 0.1 Other 0.1 Net Change $ (0.8) Depreciation and amortization: Increase primarily due to increased utility plant in service $ 0.7 Other income (deductions): Interest charges: Income taxes: 2016 interest income from IRS, net of related expenses (Note 13) $ (0.3) Increase due to higher short-term borrowings $ (0.1) Higher debt AFUDC 0.1 Net Change $ Increase due to higher segment earnings before income taxes $ (0.9) Decrease due to excess tax benefits related to stock compensation awards (Note 8) 0.1 Other (0.1) Net Change $ (0.9) 101

103 Table of Contents Operating Results Six months ended June 30, 2017 compared to 2016 The following table summarizes the significant changes to utility margin: Six Months Ended June 30, 2017 Change Utility margin: (In millions) Rate relief Transmission cost of service rate increases in March 2016, September 2016, and March 2017 $ 2.9 Customer usage/load 3.0% increase in weather normalized retail KWh sales, primarily related to the residential class; higher demand-based revenues for large commercial and industrial retail consumers; and increased wholesale transmission load; the average number of retail consumers increased 1.2% 3.1 Rate riders Impacts of rate riders, including the AMS surcharge, CTC surcharge, energy efficiency rider, and transmission cost recovery factor (1.4) Weather Milder weather in 2017; heating degree days were 36.1% lower, partially offset by a 26.0% increase in cooling degree days (0.3) Other 0.2 Net Change $ 4.5 The following tables summarize the primary drivers for operating expenses, depreciation and amortization, other income (deductions), interest charges, and income taxes: Six Months Ended June 30, 2017 Change Operating expenses: (In millions) Higher property taxes due to increased utility plant in service $ 0.5 Training costs associated with new software implementation 0.4 Higher employee related expenses 0.3 Higher capitalized administrative and general expenses due to higher construction spending in 2017 (0.6) Other 0.1 Net Change $ 0.7 Depreciation and amortization: Increase primarily due to increased utility plant in service $ 1.6 Other income (deductions): 2016 interest income from IRS, net of related expenses (Note 13) $ (0.3) Higher equity AFUDC 0.2 Net Change $ (0.1) 102

104 Table of Contents Six Months Ended June 30, 2017 Change Interest charges: (In millions) Income taxes: Increase due to the issuance of $60.0 million of long-term debt in February 2016 $ (0.2) Higher debt AFUDC 0.1 Net Change $ (0.1) Increase due to higher segment earnings before income taxes $ (0.7) Decrease due to excess tax benefits related to stock compensation awards (Note 8) 0.5 Other (0.1) Corporate and Other Net Change $ (0.3) The table below summarizes the operating results for Corporate and Other: Three Months Ended June 30, Six Months Ended June 30, Change Change (In millions) Total revenues $ $ $ $ $ $ Cost of energy Utility margin Operating expenses (5.2) (3.1) (2.1) (9.9) (6.3) (3.6) Depreciation and amortization Operating income (loss) (0.3) (0.3) (0.7) (0.7) Other income (deductions) (2.5) (1.8) Interest charges (3.9) (3.1) (0.8) (7.2) (5.6) (1.6) Segment earnings (loss) before income taxes (2.3) 1.0 (3.3) (4.2) (0.8) (3.4) Income (taxes) benefit 0.9 (0.4) Segment earnings (loss) $ (1.4) $ 0.7 $ (2.1) $ (2.7) $ (0.4) $ (2.3) Corporate and Other operating expenses shown above are net of amounts allocated to PNM and TNMP under shared services agreements. The amounts allocated include certain expenses shown as depreciation and amortization and other income (deductions) in the table above. The change in depreciation expense primarily relates to increased depreciation rates and additions to computer software. Substantially all depreciation and amortization expense is offset in operating expenses as a result of allocation of these costs to other business segments. 103

105 Table of Contents Operating Results Three months ended June 30, 2017 compared to 2016 The following tables summarize the primary drivers for other income (deductions), interest charges, and income taxes: Three Months Ended June 30, 2017 Change Other income (deductions): (In millions) Interest charges: Income taxes: Decrease in interest income on the Westmoreland Loan (Note 11) $ (1.7) 2016 interest income from the IRS, net of related expenses (Note 13) (0.8) Net Change $ (2.5) Issuance of the $100.0 million 2016 Two-Year Term Loan in December 2016 $ (0.5) Issuance of the $100.0 million 2016 One-Year Term Loan in December 2016 (0.5) Higher short term borrowings and interest rates (0.9) Repayment of a $150.0 million PNMR term loan in December Other 0.6 Net Change $ (0.8) Increase in benefit due to change in segment earnings (loss) before income taxes $ 1.3 Operating Results Six months ended June 30, 2017 compared to 2016 The following tables summarize the primary drivers for other income (deductions), interest charges, and income taxes: Six Months Ended June 30, 2017 Change Other income (deductions): (In millions) Interest charges: Decrease in interest income on the Westmoreland Loan (Note 11) $ (1.7) 2016 interest income from IRS, net of related expenses (Note 13) (0.8) 2016 costs paid by PNMR Development related to obligations under the SJGS restructuring agreement 0.6 Other 0.1 Net Change $ (1.8) Issuance of the $100.0 million 2016 Two-Year Term Loan in December 2016 $ (0.9) Issuance of the $100.0 million 2016 One-Year Term Loan in December 2016 (0.9) Higher short term borrowings and interest rates (1.1) Repayment of a $150.0 million PNMR term loan in December Other 0.3 Net Change $ (1.6) 104

106 Table of Contents Income taxes: Increase in benefit due to change in segment (earnings) loss before income taxes $ 1.3 Impacts of phased-in reduction in New Mexico corporate income tax rates (0.2) Net Change $ 1.1 LIQUIDITY AND CAPITAL RESOURCES Statements of Cash Flows The changes in PNMR s cash flows for the six months ended June 30, 2017 compared to June 30, 2016 are summarized as follows: Six Months Ended June 30, Change (In millions) Net cash flows from: Operating activities $ $ $ 79.6 Investing activities (213.4) (493.7) Financing activities (321.2) Net change in cash and cash equivalents $ (2.3) $ (41.1) $ 38.8 Cash Flows from Operating Activities Changes in PNMR s cash flow from operating activities result from net earnings, adjusted for items impacting earnings that do not provide or use cash. See Results of Operations above. Certain changes in assets and liabilities resulting from normal operations, including the effects of the seasonal nature of the Company s operations, also impact operating cash flows. Cash Flows from Investing Activities The changes in PNMR s cash flows from investing activities relate primarily to changes in utility plant additions. Cash flows from investing activities also include activity related to the Westmoreland Loan. Major components of PNMR s cash inflows and (outflows) from investing activities are shown below: 105

107 Table of Contents PNM: Cash (Outflows) for Utility Plant Additions Six Months Ended June 30, Change (In millions) Generation $ (19.8) $ (48.7) $ 28.9 Transmission and distribution (75.1) (53.0) (22.1) Purchase of previously leased capacity in PVNGS Unit 2 (163.3) Four Corners SCRs (17.1) (23.8) 6.7 Nuclear fuel (13.7) (13.9) 0.2 TNMP: (125.7) (302.7) Transmission (44.5) (27.3) (17.2) Distribution (33.3) (28.4) (4.9) AMS (1.1) (4.1) 3.0 Corporate and Other: Cash Flow from Financing Activities (78.9) (59.8) (19.1) Computer hardware and software (20.9) (15.7) (5.2) PNMR Development utility plant additions (5.4) (0.4) (5.0) Cash Inflows (Outflows) on the Westmoreland Loan (26.3) (16.1) (10.2) $ (230.9) $ (378.6) $ Loan origination $ $ (122.3) $ Principal payments The changes in PNMR s cash flows from financing activities include: Financing Activities $ 19.2 $ (122.3) $ Short-term borrowings increased $86.4 million in 2017 compared to an increase of $150.8 million in 2016, resulting in a net decrease in cash flows from financing activities of $64.4 million In 2017, PNM successfully remarketed $57.0 million of outstanding PCRBs NM Capital borrowed $122.5 million under the BTMU Term Loan Agreement in 2016 and used the proceeds to provide funds for the Westmoreland Loan; in accordance with the BTMU Term Loan Agreement, NM Capital made principal payments of $20.4 million in 2017 compared to $1.2 million in 2016 In 2016, PNM borrowed $175.0 million under the PNM 2016 Term Loan Agreement and used the proceeds to prepay a $125.0 million term loan TNMP issued $60.0 million of 3.53% first mortgage bonds in 2016 and used the funds to reduce short-term debt and intercompany debt See Note 6 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K and Note 9 for additional information concerning the Company s financing activities. PNM must obtain NMPRC approval for any financing transaction having a maturity of more than 18 months. In addition, PNM files its annual short-term financing plan with the NMPRC. The Company s ability to access the credit and capital markets at a reasonable cost is largely dependent upon its: Ability to earn a fair return on equity Results of operations Ability to obtain required regulatory approvals Conditions in the financial markets Credit ratings 106

108 Table of Contents Each of the Company s revolving credit facilities and term loans contains one financial covenant, which requires the maintenance of debt-to-capital ratios of less than or equal to 65%, and generally includes customary covenants, events of default, cross default provisions, and change of control provisions. As discussed in Note 11, NM Capital, a wholly owned subsidiary of PNMR, entered into the $125.0 million BTMU Term Loan Agreement, among NM Capital, The Bank of Tokyo- Mitsubishi UFJ, Ltd. ( BTMU ), as lender, and BTMU, as Administrative Agent. The BTMU Term Loan Agreement has a maturity date of February 1, 2021 and bears interest at a rate based on LIBOR plus a customary spread, which aggregated 3.92% at June 30, The principal balance outstanding under the BTMU Term Loan Agreement was $71.8 million at June 30, PNMR, as parent company of NM Capital, has guaranteed NM Capital s obligations to BTMU. NM Capital utilized the proceeds of the BTMU Term Loan Agreement to provide funding for the $125.0 million Westmoreland Loan to a ring-fenced, bankruptcy-remote, special-purpose entity, which is a subsidiary of Westmoreland, to finance Westmoreland s purchase of SJCC. On October 21, 2016, PNMR entered into letter of credit arrangements with JPMorgan Chase Bank, N.A. (the JPM LOC Facility ) under which letters of credit aggregating $30.3 million were issued to facilitate the posting of reclamation bonds, which SJCC is required to post in connection with permits relating to the operation of the San Juan mine (Note 11). On June 14, 2017, TNMP entered into an agreement which provides that TNMP will issue $60.0 million aggregate principal amount of 3.22% first mortgage bonds on or about August 25, 2017, subject to the satisfaction of certain conditions. TNMP anticipates using the proceeds to reduce short-term debt. At December 31, 2016, PNM had $37.0 million of outstanding PCRBs, which have a final maturity of June 1, 2040, and $20.0 million of outstanding PCRBs which have a final maturity of June 1, These PCRBs were subject to mandatory tender for remarketing on June 1, 2017 and were successfully remarketed on that date. Both series are subject to mandatory tender for remarketing on June 1, On July 20, 2017, PNM entered into a $200.0 million term loan agreement (the PNM 2017 Term Loan Agreement ), which bears interest at a variable rate and must be repaid on or before January 18, PNM used the proceeds of the PNM 2017 Term Loan Agreement to prepay the $175.0 million PNM 2016 Term Loan Agreement, which was to mature on November 17, 2017, and short-term borrowings. The PNM 2017 Term Loan Agreement includes customary covenants and conditions, including a covenant that requires the maintenance of a debt-tocapital ratio of less than or equal to 65%. On July 28, 2017, PNM entered into the PNM 2017 Senior Unsecured Note Agreement with institutional investors for the sale of $450.0 million aggregate principal amount of eight series of Senior Unsecured Notes (the PNM 2018 SUNs ) offered in private placement transactions. PNM has agreed to issue $350.0 million of the PNM 2018 SUNs (at fixed annual interest rates ranging from 3.15% to 4.50% for terms between 5 and 30 years) on or about May 15, 2018 and $100.0 million of the PNM 2018 SUNs (at fixed annual interest rates of 3.78% and 4.60% for terms of 10 and 30 years) on or about August 1, The issuances of the PNM 2018 SUNs are subject to the satisfaction of certain conditions. PNM will use the gross proceeds from the PNM 2018 SUNs to pay $350.0 million of PNM s 7.95% Senior Unsecured Notes that mature on May 15, 2018 and $100.0 million of PNM s 7.50% Senior Unsecured Notes that mature on August 1, The PNM 2017 Senior Unsecured Note Agreement includes customary covenants and conditions, including a covenant that requires the maintenance of a debt-to-capital ratio of less than or equal to 65%. At June 30, 2017, interest rates on outstanding borrowings were 2.00% for the $150.0 million PNMR 2015 Term Loan Agreement, 2.07% for the $100.0 million PNMR 2016 One-Year Term Loan, 2.17% for the $100.0 million PNMR 2016 Two-Year Term Loan, and 1.83% for the $175.0 million PNM 2016 Term Loan Agreement. PNMR has a hedging agreement whereby it effectively established a fixed interest rate of 1.927%, subject to change if there is a change in PNMR s credit rating, for borrowings under the PNMR 2015 Term Loan Agreement for the period from January 11, 2016 through March 9, In 2017, PNMR entered into three separate four-year hedging agreements whereby it effectively established fixed interest rates on three separate tranches, each of $50.0 million, of its short-term debt. The hedging agreements effectively fix interest rates on the aggregate $150.0 million of short-term debt at rates of 1.926%, 1.823%, and 1.629%, plus customary spreads over LIBOR, and are subject to changes if there is a change in PNMR s credit rating. The Finance Committee of the Board has authorized management to enter into additional transactions to hedge against exposure to changes in interest rates on its variable rate debt of up to an additional notional amount of $150.0 million. 107

109 Table of Contents Capital Requirements PNMR s total capital requirements consist of construction expenditures and cash dividend requirements for PNMR common stock and PNM preferred stock. Key activities in PNMR s current construction program include: Upgrading generation resources, including expenditures for compliance with environmental requirements and for renewable energy resources Expanding the electric transmission and distribution systems Purchasing nuclear fuel Projected capital requirements, including amounts expended through June 30, 2017, are: Total (In millions) Construction expenditures $ $ 1,562.4 $ 2,092.3 Dividends on PNMR common stock Dividends on PNM preferred stock Total capital requirements $ $ 1,873.5 $ 2,481.2 The construction expenditure estimates are under continuing review and subject to ongoing adjustment, as well as to Board review and approval. The construction expenditures above include environmental upgrades of $44.1 million at Four Corners, $47.2 million for 30 MW of new solar capacity to supply power to a new data center being constructed by Facebook Inc. (Note 12), and $43.7 million for a 40 MW gas-fired peaking generating facility to be completed in The construction amounts do not include expenditures related to PNM s request for NMPRC approval to procure 50 MW of new solar facilities, as set forth in PNM s 2018 renewable energy procurement plan (Note 12). Expenditures for environmental upgrades are estimated to be $35.2 million in 2017, including amounts expended through June 30, See Note 11 and Commitments and Contractual Obligations below. The ability of PNMR to pay dividends on its common stock is dependent upon the ability of PNM and TNMP to be able to pay dividends to PNMR. Note 5 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K describes regulatory and contractual restrictions on the payment of dividends by PNM and TNMP. During the six months ended June 30, 2017, PNMR met its capital requirements and construction expenditures through cash generated from operations, as well as its liquidity arrangements. In addition to the capital requirements for construction expenditures and dividends, the Company has long-term debt and term loans that must be paid or refinanced at maturity. The $175.0 million PNM 2016 Term Loan Agreement that was to mature on November 17, 2017 was repaid on July 20, 2017 from the proceeds of the PNM 2017 Term Loan Agreement. The $100.0 million PNMR 2016 One-Year Term Loan matures on December 21, 2017, the $150.0 million PNMR 2015 Term Loan Agreement matures on March 9, 2018, $350.0 million of PNM Senior Unsecured Notes mature on May 15, 2018, and $100.0 million of PNM Senior Unsecured Notes mature on August 1, As described above, PNM entered into the PNM 2017 Senior Unsecured Note Agreement on July 28, Proceeds from the $450.0 million of the PNM 2018 SUNs to be issued under that agreement will be used to repay the Senior Unsecured Notes that mature on May 15, 2018 and August 1, The BTMU Term Loan Agreement requires that NM Capital utilize all amounts, less taxes and fees, it receives under the Westmoreland Loan to repay the BTMU Term Loan Agreement. Based on scheduled payments on the Westmoreland Loan, NM Capital estimates it will make principal payments of $24.8 million on the BTMU Term Loan Agreement in the twelve months ended June 30, The Company has additional long-term debt of $104.6 million that matures from July 2018 through December Note 6 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K contains additional information about the maturities of long-term debt. PNMR and PNM anticipate that funds to repay these long-term debt maturities and term loans will come from entering into new arrangements similar to the existing agreements, borrowing under their revolving credit facilities, issuance of new long-term debt, or a combination of these sources. The Company has from time to time refinanced or repurchased portions of its outstanding debt before scheduled maturity. Depending on market conditions, the Company may refinance other debt issuances or make additional debt repurchases in the future. Liquidity PNMR s liquidity arrangements include the PNMR Revolving Credit Facility, the PNM Revolving Credit Facility, and the TNMP Revolving Credit Facility. The PNMR and PNM facilities have capacities of $300.0 million and $400.0 million through October 2020 and $290.0 million and $360.0 million from November 2020 through October The TNMP Revolving Credit 108

110 Table of Contents Facility, which expires in September 2018, has a financing capacity of $75.0 million. PNM also has the $50.0 million PNM New Mexico Credit Facility, which expires in January The Company believes the terms and conditions of these facilities are consistent with those of other investment grade revolving credit facilities in the utility industry. The Company expects that it will be able to extend or replace these credit facilities under similar terms and conditions prior to their expirations. The revolving credit facilities and the PNM New Mexico Credit Facility provide short-term borrowing capacity. The revolving credit facilities also allow letters of credit to be issued. Letters of credit reduce the available capacity under the facilities. The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational expenditures. The Company s business is seasonal with more revenues and cash flows from operations being generated in the summer months. In general, the Company relies on the credit facilities to be the initial funding source for construction expenditures. Accordingly, borrowings under the facilities may increase over time. Depending on market and other conditions, the Company will periodically sell long-term debt and use the proceeds to reduce the borrowings under the credit facilities. Borrowings under the PNMR Revolving Credit Facility ranged from $153.1 million to $196.5 million during the three months ended June 30, 2017 and $111.8 million to $196.5 million during the six months ended June 30, Borrowings under the PNM Revolving Credit Facility ranged from $6.8 million to $51.0 million during the three months ended June 30, 2017 and $6.8 million to $65.0 million during the six months ended June 30, Borrowings under the PNM New Mexico Credit Facility ranged from zero to $10.0 million during the three months ended June 30, 2017 and zero to $26.0 million during the six months ended June 30, Borrowings under the TNMP Revolving Credit Facility ranged from $22.0 million to $53.0 million during the three months ended June 30, 2017 and zero to $53.0 million during the six months ended June 30, At June 30, 2017, the average interest rate was 2.43% for the PNMR Revolving Credit Facility, 2.33% for the PNM Revolving Credit Facility, 2.36% for the PNM New Mexico Credit Facility, and 2.13% for the TNMP Revolving Credit Facility. At June 30, 2017, TNMP had $8.0 million in borrowings from PNMR under its intercompany loan agreement. The Company currently believes that its capital requirements can be met through internal cash generation, existing or new credit arrangements, and access to public and private capital markets. However, the Company anticipates that it will be necessary to obtain additional long-term financing to fund its capital requirements during the period. This could include new debt issuances and/or new equity. To cover the difference in the amounts and timing of internal cash generation and cash requirements, the Company intends to use short-term borrowings under its current and future liquidity arrangements. However, if difficult market conditions experienced during the 2008 recession return, the Company may not be able to access the capital markets or renew credit facilities when they expire. Should that occur, the Company would seek to improve cash flows by reducing capital expenditures and exploring other available alternatives. Also, PNM could consider seeking authorization for the issuance of first mortgage bonds to improve access to the capital markets. Information concerning the credit ratings for PNMR, PNM, and TNMP was set forth under the heading Liquidity in the MD&A contained in the 2016 Annual Reports on Form 10-K. As of July 25, 2017, ratings on the Company s securities were as follows: S&P PNMR PNM TNMP Corporate rating BBB+ BBB+ BBB+ Senior secured debt * * A Senior unsecured debt * BBB+ * Preferred stock * BBB- * Moody s Issuer rating Baa3 Baa2 A3 Senior secured debt * * A1 Senior unsecured debt * Baa2 * * Not applicable Currently, all of the credit ratings issued by both Moody s and S&P on the Company s debt are investment grade. S&P has PNMR, PNM, and TNMP on a stable outlook. In June 2017, Moody s changed the outlook for PNMR and PNM from stable to positive while maintaining a stable outlook for TNMP. However, the ultimate outcome from PNM s NM 2015 Rate Case, including the pending appeal before the NM Supreme Court, and the outcome of PNM s NM 2016 Rate Case, as discussed in Note 12, could affect both the outlook and credit ratings. Investors are cautioned that a security rating is not a recommendation to buy, sell, or hold securities, that each rating is subject to revision or withdrawal at any time by the assigning rating organization, and that each rating should be evaluated independently of any other rating. 109

111 Table of Contents A summary of liquidity arrangements as of July 25, 2017 is as follows: Financing capacity: PNMR Separate PNM Separate TNMP Separate (In millions) PNMR Consolidated Revolving credit facility $ $ $ 75.0 $ PNM New Mexico Credit Facility Total financing capacity $ $ $ 75.0 $ Amounts outstanding as of July 25, 2017: Revolving credit facility $ $ 9.0 $ 52.0 $ PNM New Mexico Credit Facility Letters of credit Total short-term debt and letters of credit Remaining availability as of July 25, 2017 $ $ $ 22.9 $ Invested cash as of July 25, 2017 $ 1.5 $ $ $ 1.5 In addition to the above, PNMR had $30.3 million of letters of credit outstanding under the JPM LOC Facility. The above table excludes intercompany debt. As of July 25, 2017, TNMP had intercompany borrowings from PNMR of $1.4 million. The remaining availability under the revolving credit facilities at any point in time varies based on a number of factors, including the timing of collections of accounts receivables and payments for construction and operating expenditures. PNMR can offer new shares of common stock through the PNM Resources Direct Plan under a SEC shelf registration statement that expires in August PNM has a shelf registration statement for up to $475.0 million of Senior Unsecured Notes that expires in May

112 Table of Contents Off-Balance Sheet Arrangements PNMR s off-balance sheet arrangements include PNM s operating leases for portions of PVNGS Units 1 and 2. These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers. See MD&A Off-Balance Sheet Arrangements and Notes 7 and 9 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K, as well as Note 6. Commitments and Contractual Obligations PNMR, PNM, and TNMP have contractual obligations for long-term debt, operating leases, construction expenditures, purchase obligations, and certain other long-term obligations. See MD&A Commitments and Contractual Obligations in the 2016 Annual Reports on Form 10-K. Contingent Provisions of Certain Obligations As discussed in the 2016 Annual Reports on Form 10-K, PNMR, PNM, and TNMP have a number of debt obligations and other contractual commitments that contain contingent provisions. Some of these, if triggered, could affect the liquidity of the Company. In the unlikely event that the contingent requirements were to be triggered, PNMR, PNM, or TNMP could be required to provide security, immediately pay outstanding obligations, or be prevented from drawing on unused capacity under certain credit agreements. The contingent provisions also include contractual increases in the interest rate charged on certain of the Company s short-term debt obligations in the event of a downgrade in credit ratings. The Company believes its financing arrangements are sufficient to meet the requirements of the contingent provisions. No conditions have occurred that would result in any of the above contingent provisions being implemented. Capital Structure The capitalization tables below include the current maturities of long-term debt, but do not include short-term debt and do not include operating lease obligations as debt. PNMR June 30, 2017 December 31, 2016 PNMR common equity 42.0% 41.1% Preferred stock of subsidiary 0.3% 0.3% Long-term debt 57.7% 58.6% Total capitalization 100.0% 100.0% PNM PNM common equity 46.8% 46.0% Preferred stock 0.4% 0.4% Long-term debt 52.8% 53.6% Total capitalization 100.0% 100.0% TNMP Common equity 58.6% 58.5% Long-term debt 41.4% 41.5% Total capitalization 100.0% 100.0% 111

113 Table of Contents OTHER ISSUES FACING THE COMPANY Climate Change Issues Background In 2016, GHG associated with PNM s interests in its generating plants included approximately 6.6 million metric tons of CO 2, which comprises the vast majority of PNM s GHG. By comparison, the total GHG in the United States in 2015, the latest year for which EPA has published this data, were approximately 6.6 billion metric tons, of which approximately 5.4 billion metric tons were CO 2. PNM has several programs underway to reduce or offset GHG from its resource portfolio, thereby reducing its exposure to climate change regulation. See Note 12. PNM owns utilityscale solar generation with a total generation capacity of 107 MW. Since 2003, PNM has purchased the entire output of New Mexico Wind, which has an aggregate capacity of 204 MW, and, since January 2015, has purchased the full output of Red Mesa Wind, which has an aggregate capacity of 102 MW. PNM has a 20-year PPA for the output of Lightning Dock Geothermal, which began providing power to PNM in January The current capacity of the geothermal facility is 4 MW. On June 1, 2017, PNM filed its 2018 renewable energy procurement plan. PNM is requesting 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 Additionally, PNM has a customer distributed solar generation program that represented 72.0 MW at June 30, PNM s distributed solar programs will reduce PNM s annual production from fossil-fueled electricity generation by about 147 GWh. PNM offers its customers a comprehensive portfolio of energy efficiency and load management programs, with a budget of $26.0 million for the 2017 program year. These programs saved approximately 82 GWh of electricity in Over the next 20 years, PNM projects energy efficiency and load management programs will provide the equivalent of approximately 9,600 GWh of electricity, which will avoid at least 5.2 million metric tons of CO 2 based upon projected emissions from PNM s system-wide resources. These estimates are subject to change because of the uncertainty of many of the underlying variables, including changes in demand for electricity, and complex relationships between those variables. For the past several years, management has identified multiple risks and opportunities related to climate change, including potential environmental regulation, technological innovation, and availability of fuel and water for operations, as among the most significant risks facing the Company. Accordingly, these risks are overseen by the full Board in order to facilitate more integrated risk and strategy oversight and planning. Board oversight includes understanding of the various challenges and opportunities presented by these risks, including the financial consequences that might result from potential federal and/or state regulation of GHG; plans to mitigate the risks; and the impacts these risks may have on the Company s strategy. In addition, the Board approves certain PNM investments in environmental equipment and grid modernization technologies. Management periodically updates the Board on implementation of the corporate environmental policy and the Company s environmental management systems, promotion of energy efficiency, and use of renewable resources. The Board is also advised of the Company s practices and procedures to assess the sustainability impacts of operations on the environment. The Board considers associated issues around climate change, the Company s GHG exposures, and the financial consequences that might result from potential federal and/or state regulation of GHG. As of December 31, 2016, approximately 70.7% of PNM s generating capacity, including resources owned, leased, and under PPAs, all of which is located within the United States, consisted of coal or gas-fired generation that produces GHG. Based on current forecasts, the Company does not expect its output of GHG from existing sources to increase significantly in the near-term. Many factors affect the amount of GHG emitted. Plant performance and renewable resource availability impact the annual amount of GHG emitted. For example, between 2007 and 2016, production from New Mexico Wind has varied from a high of 580 GWh in 2011 to a low of 405 GWh in Variations are primarily due to how much and how often the wind blows. In addition, if PVNGS experienced prolonged outages or if PNM s entitlement from PVNGS were reduced, PNM might be required to utilize other power supply resources such as gas-fired generation, which could increase GHG. As described in Note 11, PNM received approval for the December 31, 2017 shutdown of SJGS Units 2 and 3 as part of its strategy to address the regional haze requirements of the CAA. Based on 2016 data, the shutdown of Units 2 and 3 would result in a reduction of GHG for the entire station of approximately 50%, including an overall reduction of approximately 40% of GHG from the Company s owned interests. In addition, as discussed in Note 12, PNM s 2017 IRP indicates exiting ownership in the remaining SJGS units in 2022 and Four Corners in 2031 would provide long-term cost savings to its customers and could further reduce PNM s GHG. 112

114 Table of Contents Because of PNM s dependence on fossil-fueled generation, legislation or regulation that imposes a limit or cost on GHG could impact the cost at which electricity is produced. While PNM expects to recover any such costs through rates, the timing and outcome of proceedings for cost recovery are uncertain. In addition, to the extent that any additional costs are recovered through rates, customers may reduce their usage, relocate facilities to other areas with lower energy costs, or take other actions that ultimately will adversely impact PNM. PNM s generating stations are located in the arid southwest. Access to water for cooling for some of these facilities is critical to continued operations. Forecasts for the impacts of climate change on water supply in the southwest range from reduced precipitation to changes in the timing of precipitation. In either case, PNM s facilities requiring water for cooling will need to mitigate the impacts of climate change through adaptive measures. Current measures employed by PNM generating stations such as air cooling, use of grey water, improved reservoir operations, and shortage sharing arrangements with other water users will continue to be important to sustain operations. PNM s service areas occasionally experience periodic high winds, forest fires, and severe thunderstorms. TNMP has operations in the Gulf Coast area of Texas, which experiences periodic hurricanes and drought conditions. In addition to potentially causing physical damage to Company-owned facilities, which disrupts the ability to transmit and/or distribute energy, weather and other events of nature can temporarily reduce customers usage and demand for energy. Changes in the climate are generally not expected to have material consequences to the Company in the near-term. The Company cannot anticipate or predict the potential long-term effects of climate change on its assets and operations. EPA Regulation In April 2007, the US Supreme Court held that EPA has the authority to regulate GHG under the CAA. This decision heightened the importance of this issue for the energy industry. In December 2009, EPA released its endangerment finding stating that the atmospheric concentrations of six key greenhouse gases (CO 2, methane, nitrous oxides, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) endanger the public health and welfare of current and future generations. In May 2010, EPA released the final PSD and Title V Greenhouse Gas Tailoring Rule (the Tailoring Rule ) to address GHG from stationary sources under the CAA permitting programs. The purpose of the rule was to tailor the applicability of two programs, PSD and Title V operating permit programs, to avoid impacting millions of small GHG emitters. The rule focused on the largest sources of GHG, including fossil-fueled electric generating units. This program covered the construction of new emission units that emit GHG of at least 100,000 tons per year in CO 2 equivalents (even if PSD is not triggered for other pollutants). In addition, modifications at existing major-emitting facilities that increase GHG by at least 75,000 tons per year in CO 2 equivalents would be subject to PSD permitting requirements, even if they did not significantly increase emissions of any other pollutant. As a result, PNM s fossil-fueled generating plants were more likely to trigger PSD permitting requirements because of the magnitude of GHG. However, as discussed below, a court case in 2014 now limits the extent of the Tailoring Rule. On June 26, 2012, the DC Circuit rejected challenges to EPA s 2009 GHG endangerment finding, GHG standards for light-duty vehicles, PSD Interpretive Memorandum (EPA s socalled GHG Timing Rule ), and the Tailoring Rule. The court found that EPA s endangerment finding and its light-duty vehicle rule are neither arbitrary nor capricious, that EPA s interpretation of the governing CAA provisions is unambiguously correct, and that no petitioner has standing to challenge the Timing and Tailoring Rules. On October 15, 2013, the US Supreme Court granted a petition for a Writ of Certiorari regarding the permitting of stationary sources that emit GHG. The US Supreme Court limited its review to the question of whether EPA s determination that regulation of GHG from motor vehicles required EPA to regulate stationary sources under the PSD and Title V permitting programs. The petitioners argued that EPA s determination was unlawful as it violates Congressional intent. On June 23, 2014, the US Supreme Court issued its opinion in the above case and reversed the DC Circuit. First, the US Supreme Court found the CAA does not compel or permit EPA to adopt an interpretation of the act that requires a source to obtain a PSD or Title V permit on the sole basis of its potential GHG. Second, the US Supreme Court rejected EPA s position that, even if it was not required to regulate GHGs under the PSD and Title V programs, the Tailoring Rule was nonetheless justified on the grounds that it was a reasonable interpretation of the CAA. Third, the US Supreme Court found EPA lacked authority to tailor the CAA s unambiguous numerical thresholds of 100 or 250 tons per year. Fourth, the US Supreme Court found that it would be reasonable for EPA to interpret the CAA to limit the PSD program for GHGs to anyway sources those sources that have to comply with the PSD program for other non-ghg pollutants. The US Supreme Court said that EPA needed to establish a de minimis level below which BACT would not be required for anyway sources. In response to the US Supreme Court decision, EPA released a proposed rule on October 3, 2016, to revise the permitting rules for GHG under the CAA. Among other things, the proposed rule would set the Significant Emissions Rate ( SER ) for GHGs under the major source permitting program at 113

115 Table of Contents 75,000 tons of CO 2 equivalent per year for new and modified sources that are already subject to NSR based on emission of other pollutants. If finalized as proposed, the rule would require a new major source or major modification that triggers PSD permitting for other criteria pollutants like NOx to undergo a BACT review for GHG if the potential to emit GHG exceeds the 75,000 tons per year. Comments on the proposed rule were due on December 16, On June 25, 2013, former President Obama announced his Climate Action Plan which outlined how his administration planned to cut GHG in the United States, prepare the country for the impacts of climate change, and lead international efforts to combat and prepare for global warming. The plan proposed actions that would lead to the reduction of GHG by 17% below 2005 levels by The former President also issued a Presidential Memorandum to EPA to continue development of the GHG NSPS regulations for electric generators. The Presidential Memorandum established a timeline for the proposal and issuance of a GHG NSPS for new sources under section 111(b) of the CAA and a timeline for the proposal and final rule for developing carbon pollution standards, regulations, or guidelines for GHG reductions from existing sources under Section 111(d) of the CAA. The Presidential Memorandum further directed EPA to allow the use of market-based instruments and other regulatory flexibilities to ensure standards will allow for continued reliance on a range of energy sources and technologies, and that the standards are developed and implemented in a manner that provides for reliable and affordable energy. The Presidential Memorandum required EPA to undertake the rulemaking through direct engagement with states, as they will play a central role in establishing and implementing standards for existing power plants, and with utility leaders, labor leaders, nongovernmental organizations, tribal officials, and other stakeholders. EPA met the former President s timeline for issuance of carbon pollution standards for new sources under Section 111(b) and for existing sources under Section 111(d) of the CAA. On August 3, 2015, EPA issued its final standards to limit CO 2 emissions from power plants. The final rule was published on October 23, Three separate but related actions took place: (1) the final Carbon Pollution Standards for new, modified, and reconstructed power plants were established (under Section 111(b)); (2) the final Clean Power Plan was issued to set standards for carbon emission reductions from existing power plants (under Section 111(d)); and (3) a proposed federal plan associated with the final Clean Power Plan was released. EPA s final rule to limit GHG from new, modified, and reconstructed power plants establishes standards based upon certain, specific conditions. For newly constructed and reconstructed base load natural gas-fired stationary combustion turbines, the EPA finalized a standard of 1,000 lbs CO 2 /MWh-gross based on efficient natural gas combined cycled technology as the best system of emissions reductions ( BSER ). Alternatively, owners and operators of base load natural gas-fired combustion turbines may elect to comply with a standard based on an output of 1,030 lbs CO 2 /MWh-net. A new source is any newly constructed fossil fuel-fired power plant that commenced construction after January 8, The final standards for coal-fired power plants vary depending on whether the unit is new, modified, or reconstructed. The BSER for new steam units is a supercritical pulverized coal unit with partial carbon capture and storage. Based on that technology, new coal-fired units are required to meet an emissions standard equal to 1,400 lbs CO 2 /MWh from the beginning of the power plant s life. The BSER for modified units is based on each affected unit s own best potential performance. Standards will be in the form of an emission limit in pounds of CO 2 per MWh, which will apply to units with modifications resulting in an increase of hourly CO 2 emissions of more than 10% relative to the emissions of the most recent five years from that unit. The BSER for reconstructed coal-fired power units is the performance of the most efficient generating technology for these types of units. Final emissions standards depend on heat input. Sources with heat input greater than 2,000 MMBTU/hour would be required to meet an emission limit of 1,800 lbs CO 2 /MWh-gross, and sources with a heat input of less than or equal to 2,000 MMBTU/hour would be required to meet an emission limit of 2,000 lbs CO 2 /MWh-gross. The final Clean Power Plan rule changed significantly in structure from the proposed rule that was released in June Changes include delaying the first compliance date by two years from 2020 to 2022; adopting a new approach to calculating the emission targets which resulted in different state goals than those originally proposed; adding a reliability safety valve; and proposing rewards for early reductions. The rule establishes two numeric emission standards one for fossil-steam units (coal- and oil-fired units) and one for natural gas-fired units (combined cycle only). The emission standards are based on emission reduction opportunities that EPA deemed achievable using technical assumptions for three building blocks : efficiency improvements at coal-fired EGUs, displacement of affected EGUs with renewable energy, and displacement of coal-fired generation with natural gas-fired generation. The final standards are 1,305 lbs/mwh for fossil-steam units and 771 lbs/mwh for gas units, both of which phase in over the period To facilitate implementation, EPA converted the emission standards into state goals. Each state s goal reflects the average state-wide emission rate that all of the state s affected EGUs would meet in the aggregate if each one achieved the emission standards alone based upon a weighted average of each state s unique mix of affected units. 114

116 Table of Contents Under the final rule, the Clean Power Plan compliance schedule required states to make initial plan submissions to EPA by September 6, EPA could then choose to grant up to a two-year extension provided that the initial plan meets certain specified criteria for progress and consultation. States receiving an extension were to submit an update to EPA in 2017 and final plans by September States not requesting an extension were to submit their final plans by September State plans can be based on either an emission standards (rate or mass) approach or a state measures approach. Under an emission standards approach, federally enforceable emission limits are placed directly on affected units in the state. A state measures approach must meet equivalent rates statewide, but may include some elements, such as renewable energy or energy efficiency requirements, that are not federally enforceable. Plans using state measures may only be used with mass-based goals and must include backstop federally enforceable standards for EGUs that will become effective if the state measures fail to achieve the expected level of emission reductions. The Clean Power Plan also proposes a Clean Energy Incentive Program ( CEIP ) designed to award credits for early development of certain renewable energy and energy efficiency programs that displace fossil generation in 2020 and 2021 prior to the compliance obligation taking effect in On June 30, 2016, EPA published proposed design details of the CEIP. Comments were due to EPA on November 1, In addition, the Clean Power Plan contains a reliability safety valve for individual power plants. The reliability safety valve allows for a 90- day relief from CO 2 emissions limits if generating units need to continue to operate and release excess emissions during emergencies that could compromise electric system reliability. As discussed above, EPA issued a proposed Federal Plan in association with the Clean Power Plan. Under Section 111(d), EPA is authorized to issue a federal plan for states that do not submit an approvable state plan. EPA indicated that states may voluntarily adopt the Federal Plan in whole or in part as its state plan. EPA explained in its communications that the proposed Federal Plan will be released in advance of the deadline for submission of state plans to provide regulatory certainty to states that fail to submit an approvable plan. The proposed Federal Plan will apply emission reduction obligations directly on affected EGUs. The plan presents two approaches: a rate-based emissions trading program and a mass-based emissions trading program. EPA indicated that it will choose only one of these approaches in the final Federal Plan. However, the proposed rule offered both approaches for states to use as models in their own plans. EPA asked for comments on the proposed Federal Plan by January 21, PNM submitted comments in response. Multiple states, utilities, and trade groups filed petitions for review and motions to stay in the DC Circuit. On January 21, 2016, the DC Circuit denied the motions to stay the EPA s section 111(d) rule (the Clean Power Plan). It did, however, expedite briefing in the case and set it for oral argument on June 2, Under the court s order, briefing on all issues was to be completed by April 22, Petitioners had asked for bifurcated briefing that would allow the core legal issues to be litigated first and the programmatic issues related to the rule to be litigated later depending on the outcome of the litigation. The court denied that request. On January 26, 2016, 29 states and state agencies filed a petition to the US Supreme Court asking the court to reverse the DC Circuit s decision and stay the implementation of the Clean Power Plan. On February 9, 2016, the US Supreme Court granted the applications to stay the Clean Power Plan pending judicial review of the rule. The US Supreme Court issued a onepage order that stated, The EPA rule to have states cut power sector carbon dioxide (CO 2 ) emissions 32% by 2030 is stayed pending disposition of the applicants petitions for review in the United States Court of Appeals for the District of Columbia Circuit. The vote was 5-4 among the US Supreme Court Justices. The decision means the Clean Power Plan is not in effect and states are not obliged to comply with its requirements. The DC Circuit heard oral arguments on the merits of the states case on September 27, The arguments were made in front of a 10- judge panel. There is no mandatory deadline for the DC Circuit to make a decision on the case. The stay will remain in effect pending US Supreme Court review if such review is sought. On March 28, 2017, President Trump issued an Executive Order titled Promoting Energy Independence and Economic Growth. Among its goals are to promote clean and safe development of our Nation s vast energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production, constrain economic growth, and prevent job creation. The order rescinds several key pieces of the Obama Administration s climate agenda, including the Climate Action Plan and the Final Guidance on Consideration of Climate Change in NEPA Reviews. It directs agencies to review and suspend, revise or rescind any regulations or agency actions that potentially burden the development or use of domestically produced energy resources. Most notably, the order directs the EPA to immediately review and, if appropriate and consistent with law, suspend, revise, or rescind (1) the Clean Power Plan, (2) the New Source Performance Standards for GHG emissions from new, reconstructed or modified electric utilities, (3) the Proposed Clean Power Plan Model Trading Rules, (4) the Legal Memorandum supporting the 115

117 Table of Contents Clean Power Plan, and (5) the New Source Performance Standards for Oil & Natural Gas Sector. The Order disbands the Interagency Working Group on the Social Cost of Greenhouse Gases, rescinds all documents developed by that group as no longer representative of government policy, and directs agencies to evaluate costs consistent with a 2003 memorandum from the Office of Management and Budget. In addition, the order repeals the moratorium on new leases for coal mined from federal lands. Finally, it requires EPA and the Department of Justice to work with the US Attorney General to put on hold any litigation regarding any of the regulations the order addresses. Subsequently, on March 28, 2017, EPA and the Department of Justice filed a motion in the DC Circuit seeking to hold the Clean Power Plan case in abeyance. On April 28, 2017, the DC Circuit granted EPA s request to suspend litigation for 60 days. The court ordered a 60-day abeyance and directed EPA to file status reports at 30-day intervals. The court further directed the parties for file supplemental briefs addressing whether the case should be remanded to EPA rather than held in abeyance. Although the 60-day abeyance has passed, the court has not yet ruled on the case. PNM is unable to predict the impact to the Company of this Executive Order. It is uncertain the direction EPA will undertake with respect to suspending, revising or rescinding these rules. If the Clean Power Plan prevails in some form after a formal notice and comment rulemaking, or a future regulation limiting GHG from fossil electric generating units is adopted, such regulations would impact PNM s existing and future fossil-fueled EGUs. The existing Carbon Pollution Standards covering new sources will also impact PNM s generation fleet although that rule is also under review by EPA. Impacts could result in requirements for investments in additional renewables and energy efficiency programs, efficiency improvements, and/or control technologies at PNM s fossil-fueled EGUs. There are limited efficiency enhancement measures that may be available to a subset of the existing EGUs; however, such measures would provide only marginal GHG improvements. The only emission control technology for GHG reduction from coal and gas-fired power plants is carbon capture and sequestration, which is not yet a commercially demonstrated technology. Additional GHG control technologies for existing EGUs may become viable in the future. The costs of purchasing carbon credits or allowances, making improvements, or installing new technology could impact the economic viability of some plants. PNM estimates that implementation of the BART plan at SJGS that required the installation of SNCRs on Units 1 and 4 by early 2016, which has been completed, and the retirement of SJGS Units 2 and 3 by the end of 2017 as described in Note 11, as well as the exiting ownership in the remaining SJGS units in 2022 as discussed in Note 12 should provide a significant step for New Mexico to meet its ultimate compliance with future regulations limiting GHG. PNM is unable to predict the impact on its fossil-fueled generation. Federal Legislation Prospects for enactment in Congress of legislation imposing a new or enhanced regulatory program to address climate change are unlikely in EPA continues to be the primary vehicle for GHG regulation in the near future, especially for coal-fired EGUs. State and Regional Activity Pursuant to New Mexico law, each utility must submit an IRP to the NMPRC every three years to evaluate renewable energy, energy efficiency, load management, distributed generation, and conventional supply-side resources on a consistent and comparable basis. The IRP is required to take into consideration risk and uncertainty of fuel supply, price volatility, and costs of anticipated environmental regulations when evaluating resource options to meet supply needs of the utility s customers. The NMPRC requires that New Mexico utilities factor a standardized cost of carbon emissions into their IRPs using prices ranging between $8 and $40 per metric ton of CO 2 emitted and escalating these costs by 2.5% per year. Under the NMPRC order, each utility must analyze these standardized prices as projected operating costs. Reflecting the developing nature of this issue, the NMPRC order states that these prices may be changed in the future to account for additional information or changed circumstances. Although these prices may not reflect the costs that ultimately will be incurred, PNM is required to use these prices for purposes of its IRP. As discussed in Note 12, in the 2017 IRP, PNM analyzed resource portfolio plans for scenarios that assumed SJGS will operate beyond the end of the current coal supply agreement that runs through June 30, 2022 and for scenarios that assumed SJGS will cease operations by the end of The key findings of the 2017 IRP include that exiting SJGS in 2022 would provide long-term cost benefits to PNM s customers and that PNM exiting its ownership interest in Four Corners in 2031 would also save customers money. The materials presented in the process are available at In the past, New Mexico adopted regulations that would directly limit GHG from larger sources, including EGUs, through a regional GHG cap and trade program. Although these rules have been repealed, PNM cannot rule out future state legislative or regulatory initiatives to regulate GHG. 116

118 Table of Contents International Accords The United Nations Framework Convention on Climate Change ( UNFCCC ) is an international environmental treaty that was negotiated at the 1992 United Nations Conference on Environment and Development (informally known as the Earth Summit) and entered into force in March The objective of the treaty is to stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Parties to the UNFCCC, including the United States, have been meeting annually in Conferences of the Parties ( COP ) to assess progress in meeting the objectives of the UNFCCC. This assessment process led to the negotiation of the Kyoto Protocol in the mid-1990s. The Kyoto Protocol, which was agreed to in 1997 and established legally binding obligations for developed countries to reduce their GHG, was never ratified by the United States. PNM monitors the proceedings of the UNFCCC, including the annual COP meetings, to determine potential impacts to its business activities. At the COP meeting in 2011, participating nations, including the United States, agreed to negotiate by 2015 an international agreement involving commitments by all nations to begin reducing carbon emissions by On December 12, 2015, the Paris Agreement was finalized during the 2015 COP. The agreement, which was agreed to by more than 190 nations, requires that countries submit Nationally Determined Contributions ( NDCs ). NDCs reflect national targets and actions that arise out of national policies, and elements relating to oversight, guidance and coordination of actions to reduce emissions by all countries. In November 2014, former President Obama announced the United States commitment to reduce GHG, on an economy-wide basis, by 26%-28% from 2005 levels by the year The United States NDC is part of an overall effort by the Obama administration to have the United States achieve economy-wide reductions of around 80% by The former administration s GHG reduction target for the electric utility industry is a key element of its NDC and is based on EPA s final GHG regulations for new, existing, and modified and reconstructed sources. The United States was one of 189 nations that offered intended NDCs. Thresholds for the number of countries necessary to ratify or accede to the Paris Agreement and total global GHG percentage were achieved on October 5, 2016, and the Paris Agreement entered into force on November 4, To date, 153 countries have ratified the Paris Agreement. On June 1, 2017, President Trump announced that the United States would withdraw from the Paris Agreement. In his public statement, he indicated that the United States would "begin negotiations to reenter either the Paris Accord or a...new transaction on terms that are fair to the United States, its businesses, its workers, its people, its taxpayers." To date there have been no specific details as to how this will be accomplished. PNM will continue to monitor the United States involvement in international accords and believes that implementation of the BART plan for SJGS (Note 11), as well as the potential exit from the remaining SJGS units and Four Corners as discussed in Note 12 should provide a significant step for New Mexico to comply with the Clean Power Plan, or other GHG reduction requirements, should they prevail. Assessment of Legislative/Regulatory Impacts The Company has assessed, and continues to assess, the impacts of climate change legislation or regulation on its business. This assessment is ongoing and future changes arising out of the legislative or regulatory process could impact the assessment significantly. PNM s assessment includes assumptions regarding specific GHG limits; the timing of implementation of these limits; the possibility of a market-based trading program, including the associated costs and the availability of emission credits or allowances; the development of emission reduction and/or renewable energy technologies; and provisions for cost containment. Moreover, the assessment assumes various market reactions such as the price of coal and gas and regional plant economics. These assumptions are, at best, preliminary and speculative. However, based upon these assumptions, the enactment of climate change legislation or regulation could, among other things, result in significant compliance costs, including large capital expenditures by PNM, and could jeopardize the economic viability of certain generating facilities. See Notes 11 and 12. In turn, these consequences could lead to increased costs to customers and affect results of operations, cash flows, and financial condition if the incurred costs are not fully recovered through regulated rates. Higher rates could also contribute to reduced usage of electricity. PNM s assessment process is too preliminary and speculative at this time for a meaningful prediction of financial impact. Transmission Issues At any given time, FERC has various notices of inquiry and rulemaking dockets related to transmission issues pending. Such actions may lead to changes in FERC administrative rules or ratemaking policy, but have no time frame in which action must be taken or a docket closed with no further action. Further, such notices and rulemaking dockets do not apply strictly to PNM, but will have industry-wide effects in that they will apply to all FERC-regulated entities. PNM monitors and often submits comments taking a position in such notices and rulemaking dockets or may join in larger group responses. PNM often cannot 117

119 Table of Contents determine the full impact of a proposed rule and policy change until the final determination is made by FERC and PNM is unable to predict the outcome of these matters. On November 24, 2009, FERC issued Order 729 approving two Modeling, Data, and Analysis Reliability Standards ( Reliability Standards ) submitted by NERC MOD (Available Transmission System Capability) and MOD (Rated System Path Methodology). Both MOD and MOD require a consistent approach, provided for in the Reliability Standards, to measuring the total transmission capability ( TTC ) of a transmission path. The TTC level established using the two Reliability Standards could result in a reduction in the available transmission capacity currently used by PNM to deliver generation resources necessary for its jurisdictional load and for fulfilling its obligations to third-party users of the PNM transmission system. During the first quarter of 2011, at the request of PNM and other southwestern utilities, NERC advised all transmission owners and transmission service providers that the implementation of portions of the MOD-029 methodology for Flow Limited paths has been delayed until such time as a modification to the standard can be developed that will mitigate the technical concerns identified by the transmission owners and transmission service providers. PNM and other western utilities filed a Standards Action Request with NERC in the second quarter of NERC initiated an informal development process to address directives in Order 729 to modify certain aspects of the MOD standards, including MOD-001 and MOD-029. The modifications to this standard would retire MOD-029 and require each transmission operator to determine and develop methodology for TTC values for MOD-001. A final ballot for MOD concluded on December 20, 2013 and received sufficient affirmative votes for approval. On February 10, 2014, NERC filed with FERC a petition for approval of MOD and retirement of reliability standards MOD-001-1a, MOD-004-1, MOD-008-1, MOD-028-2, MOD-029-1a, and MOD On June 19, 2014, FERC issued a NOPR to approve a new reliability standard. The MOD standard will become effective on the first day of the calendar quarter that is 18 months after the date the standard is approved by FERC. MOD will replace multiple existing reliability standards and will remove the risk of reduced TTC for PNM and other western utilities. Financial Reform Legislation The Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Reform Act ), enacted in July 2010, includes provisions that will require certain over-the-counter derivatives, or swaps, to be centrally cleared and executed through an exchange or other approved trading facility. It also includes provisions related to swap transaction reporting and record keeping and may impose margin requirements on swaps that are not centrally cleared. The United States Commodity Futures Trading Commission ( CFTC ) has published final rules defining several key terms related to the act and has set compliance dates for various types of market participants. The Dodd-Frank Reform Act provides exemptions from certain requirements, including an exception to the mandatory clearing and swap facility execution requirements for commercial end-users that use swaps to hedge or mitigate commercial risk. PNM has elected the end-user exception to the mandatory clearing requirement. PNM expects to be in compliance with the Dodd-Frank Reform Act and related rules within the time frames required by the CFTC. However, as a result of implementing and complying with the Dodd-Frank Reform Act and related rules, PNM s swap activities could be subject to increased costs, including from higher margin requirements. The Trump administration has indicated that the provisions of the Dodd-Frank Reform Act will be reviewed and certain regulations may be rolled back, but no formal action has been taken. At this time, PNM cannot predict the ultimate impact the Dodd-Frank Reform Act may have on PNM s financial condition, results of operations, cash flows, or liquidity. Other Matters See Notes 11 and 12 herein and Notes 16 and 17 of the Notes to Consolidated Financial Statements in the 2016 Annual Reports on Form 10-K for a discussion of commitments and contingencies and rate and regulatory matters. See Note 1 for a discussion of accounting pronouncements that have been issued, but are not yet effective and have not been adopted by the Company. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with GAAP requires Company management to select and apply accounting policies that best provide the framework to report the results of operations and financial position for PNMR, PNM, and TNMP. The selection and application of those policies requires management to make difficult, subjective, and/or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets 118

120 and liabilities at the date of the financial statements. As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions. As of June 30, 2017, there have been no significant changes with regard to the critical accounting policies disclosed in PNMR s, PNM s, and TNMP s 2016 Annual Reports on Forms 10-K. The policies disclosed included unbilled revenues, regulatory accounting, impairments, decommissioning and reclamation costs, pension and other postretirement benefits, accounting for contingencies, income taxes, and market risk. MD&A FOR PNM RESULTS OF OPERATIONS PNM operates in only one reportable segment, as presented above in Results of Operations for PNMR. MD&A FOR TNMP RESULTS OF OPERATIONS TNMP operates in only one reportable segment, as presented above in Results of Operations for PNMR. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Statements made in this filing that relate to future events or PNMR s, PNM s, or TNMP s expectations, projections, estimates, intentions, goals, targets, and strategies are made pursuant to the Private Securities Litigation Reform Act of 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 order in PNM s NM 2015 Rate Case, appeals of that order, PNM s NM 2016 Rate Case, 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, including appeals, and NM 2016 Rate Case 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, including the failure to maintain or replace customer contracts on favorable terms Uncertainty surrounding the status of PNM s participation in jointly-owned generation projects, including the 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 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, appeals of that order, the ultimate outcome of PNM s NM 2016 Rate Case, and PNM s 2017 IRP 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, including appeals, and PNM s NM 2016 Rate Case 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 119

121 Table of Contents Risks related to climate change, including potential financial risks resulting from climate change litigation and legislative and regulatory efforts to limit GHG, including the Clean Power Plan 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 State and federal regulatory, legislative, executive, and judicial decisions and actions on ratemaking, tax, including the potential for tax reform, and other matters 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 Any material changes to risk factors occurring after the filing of PNMR s, PNM s, and TNMP s 2016 Annual Reports on Form 10-K are disclosed in Item 1A, Risk Factors, in Part II of this Form 10-Q. For information about the risks associated with the use of derivative financial instruments, see Item 3. Quantitative and Qualitative Disclosures About Market Risk. SECURITIES ACT DISCLAIMER Certain securities described or cross-referenced in this report have not been registered under the Securities Act of 1933, as amended, or any state securities laws and may not be reoffered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. This Form 10-Q does not constitute an offer to sell or the solicitation of an offer to buy any securities. WEBSITES The PNMR website, is an important source of Company information. New or updated information for public access is routinely posted. PNMR encourages analysts, investors, and other interested parties to register on the website to automatically receive Company information by . This information includes news releases, notices of webcasts, and filings with the SEC. Participants will not receive information that was not requested and can unsubscribe at any time. Our corporate Internet addresses are: PNMR: PNM: TNMP: The PNMR website includes a link to PNMR s Sustainability Portal, This portal provides access to key sustainability information related to the operations of PNM and TNMP and reflects PNMR s commitment to do business in an ethical, open, and transparent manner. 120

122 The contents of these websites are not a part of this Form 10-Q. The SEC filings of PNMR, PNM, and TNMP, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are accessible free of charge on the PNMR website as soon as reasonably practicable after they are filed with, or furnished to, the SEC. These reports are also available in print upon request from PNMR free of charge. Also available on the Company s website at and in print upon request from any shareholder are our: Corporate Governance Principles Code of Ethics ( Do the Right Thing Principles of Business Conduct ) Charters of the Audit and Ethics Committee, Nominating and Governance Committee, Compensation and Human Resources Committee, and Finance Committee The Company will post amendments to or waivers from its code of ethics (to the extent applicable to the Company s executive officers and directors) on its website. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company manages the scope of its various forms of market risk through a comprehensive set of policies and procedures with oversight by senior level management through the RMC. The Board s Finance Committee sets the risk limit parameters. The RMC has oversight over the risk control organization. The RMC is assigned responsibility for establishing and enforcing the policies, procedures, and limits and evaluating the risks inherent in proposed transactions on an enterprise-wide basis. The RMC s responsibilities include: Establishing policies regarding risk exposure levels and activities in each of the business segments Approving the types of derivatives entered into for hedging Reviewing and approving hedging risk activities Establishing policies regarding counterparty exposure and limits Authorizing and delegating transaction limits Reviewing and approving controls and procedures for derivative activities Reviewing and approving models and assumptions used to calculate mark-to-market and market risk exposure Proposing risk limits to the Board s Finance Committee for its approval Reporting to the Board s Audit and Finance Committees on these activities To the extent an open position exists, fluctuating commodity prices, interest rates, equity prices, and economic conditions can impact financial results and financial position, either favorably or unfavorably. As a result, the Company cannot predict with certainty the impact that its risk management decisions may have on its businesses, operating results, or financial position. Commodity Risk Information concerning accounting for derivatives and the risks associated with commodity contracts is set forth in Note 7, including a summary of the fair values of mark-to-market energy related derivative contracts included in the Condensed Consolidated Balance Sheets. During the six months ended June 30, 2017 and the year ended December 31, 2016, the Company had no commodity derivative instruments designated as cash flow hedging instruments. Commodity contracts, other than those that do not meet the definition of a derivative under GAAP and those derivatives designated as normal purchases and normal sales, are recorded at fair value on the Condensed Consolidated Balance Sheets. The following table details the changes in the net asset or liability balance sheet position for mark-to-market energy transactions. 121

123 Table of Contents Economic Hedges Sources of fair value gain (loss): Six Months Ended June 30, (In thousands) Net fair value at beginning of period $ 2,885 $ 4,576 Amount realized on contracts delivered during period (3,597) (2,612) Changes in fair value 2,657 (2,551) Net mark-to-market change recorded in earnings (940) (5,163) Net change recorded as regulatory assets and liabilities (88) (362) Net fair value at end of period $ 1,857 $ (949) The following table provides the maturity of the net assets (liabilities), giving an indication of when these mark-to-market amounts will settle and generate (use) cash. Fair Value of Mark-to-Market Instruments at June 30, 2017 Economic hedges Settlement Dates (In thousands) Prices actively quoted $ $ Prices provided by other external sources 1,857 Prices based on models and other valuations Total $ 1,857 $ PNM is exposed to changes in the market prices of electricity and natural gas for the positions in its wholesale portfolio (not covered by the FPPAC). The Company manages risks associated with these market fluctuations by utilizing various commodity instruments that may qualify as derivatives, including futures, forwards, options, and swaps. PNM uses such instruments to hedge its exposure to changes in the market prices of electricity and natural gas. PNM also uses such instruments under an NMPRC approved hedging plan to manage fuel and purchased power costs related to customers covered by its FPPAC. PNM measures the market risk of its wholesale activities not covered by the FPPAC using a Monte Carlo VaR simulation model to report the possible loss in value from price movements. VaR is not a measure of the potential accounting mark-to-market loss. The quantitative risk information is limited by the parameters established in creating the model. The Monte Carlo VaR methodology employs the following critical parameters: historical volatility estimates, market values of all contractual commitments, a three-day holding period, seasonally adjusted and cross-commodity correlation estimates, and a 95% confidence level. The instruments being evaluated may trigger a potential loss in excess of calculated amounts if changes in commodity prices exceed the confidence level of the model used. PNM measures VaR for the positions in its wholesale portfolio (not covered by the FPPAC). For the six months ended June 30, 2017, the high, low, and average VaR amounts were $0.7 million, $0.2 million, and $0.5 million. For the year ended December 31, 2016, the high, low, and average VaR amounts were $1.3 million, $0.3 million, and $0.6 million. At June 30, 2017 and December 31, 2016, the VaR amounts for the PNM wholesale portfolio were $0.3 million and $0.6 million. The VaR represents an estimate of the potential gains or losses that could be recognized on the Company s portfolios, subject to market risk, given current volatility in the market, and is not necessarily indicative of actual results that may occur, since actual future gains and losses will differ from those estimated. Actual gains and losses may differ due to actual fluctuations in market prices, operating exposures, and the timing thereof, as well as changes to the underlying portfolios during the year. VaR limits were not exceeded during the six months ended June 30, 2017 or the year ended December 31,

124 Table of Contents Credit Risk The Company is exposed to credit risk from its retail and wholesale customers, as well as the counterparties to derivative instruments. The Company conducts counterparty risk analysis across business segments and uses a credit management process to assess the financial conditions of counterparties. The following table provides information related to credit exposure by the credit worthiness (credit rating) and concentration of credit risk for wholesale counterparties, all of which will mature in less than two years. Schedule of Credit Risk Exposure June 30, 2017 Rating (1) External ratings: Credit Risk Exposure (2) Number of Counterparties >10% (Dollars in thousands) Net Exposure of Counterparties >10% Investment grade $ 2,290 1 $ 896 Non-investment grade 10 Split ratings 8 Internal ratings: Investment grade 1, ,761 Non-investment grade 4, ,755 Total $ 8,907 $ 7,412 (1) The rating Investment Grade is for counterparties, or a guarantor, with a minimum S&P rating of BBB- or Moody s rating of Baa3. The category Internal Ratings Investment Grade includes those counterparties that are internally rated as investment grade in accordance with the guidelines established in the Company s credit policy. (2) The Credit Risk Exposure is the gross credit exposure, including long-term contracts (other than firm-requirements wholesale customers), forward sales, and short-term sales. The exposure captures the amounts from receivables/payables for realized transactions, delivered and unbilled revenues, and mark-to-market gains/losses. Gross exposures can be offset according to legally enforceable netting arrangements, but are not reduced by posted credit collateral. At June 30, 2017, PNMR held $0.1 million of cash collateral to offset its credit exposure. Net credit risk for the Company s largest counterparty as of June 30, 2017 was $4.8 million. As discussed in Note 11, PNMR s subsidiary, NM Capital, entered into the Westmoreland Loan to facilitate the acquisition of SJCC by WSJ, a subsidiary of Westmoreland, and PNMR has arranged for letters of credit to be issued to support the coal mining operations of SJCC. PNMR is exposed to credit risk under these arrangements in the event of default by WSJ. As of July 25, 2017, remaining required principal payments under the Westmoreland Loan are $19.2 million in 2017, $3.6 million in 2018, $8.6 million in 2019, $23.3 million in 2020, and $21.1 million in As of July 25, 2017, $11.6 million was held in a SJCC restricted bank account that will be used solely to make the August 1, 2017 scheduled principal payment of $9.6 million and interest on the Westmoreland Loan. In addition, the Westmoreland Loan requires that all cash flows of WSJ, in excess of normal operating expenses, capital additions, and operating reserves, be utilized for principal and interest payments under the loan until it is fully repaid. The Westmoreland Loan is secured by the assets of and the equity interests in SJCC. In the event of a default by WSJ, NM Capital would have the ability to take over the mining operations, the value of which PNMR believes approximates the amount outstanding under the Westmoreland Loan. Furthermore, PNMR considers the possibility of loss under the letters of credit to be remote as discussed in Note 5. Accordingly, PNMR does not consider its credit risk under these arrangements to be material. Other investments have no significant counterparty credit risk. Interest Rate Risk The majority of the Company s long-term debt is fixed-rate debt and does not expose earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of PNMR s consolidated long-term debt instruments would increase by 1.6%, or $40.0 million, if interest rates were to decline by 50 basis points from their levels at June 30, In general, 123

125 Table of Contents an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if all or a portion of debt instruments were acquired in the open market prior to their maturity. At July 25, 2017, PNMR, PNM, and TNMP had short-term debt outstanding of $173.7 million, $9.0 million, and $52.0 million under their revolving credit facilities, which allow for a maximum aggregate borrowing capacity of $300.0 million for PNMR, $400.0 million for PNM, and $75.0 million for TNMP. PNM had no borrowings under the $50.0 million PNM New Mexico Credit Facility at July 25, The revolving credit facilities, the PNM New Mexico Credit Facility, the $150.0 million PNMR 2015 Term Loan Agreement, the $100.0 million PNMR 2016 One-Year Term Loan Agreement, the $100.0 million PNMR 2016 Two-Year Term Loan Agreement, the $200.0 million PNM 2017 Term Loan Agreement, and the $125.0 million BTMU Term Loan Agreement bear interest at variable rates. On July 25, 2017, interest rates on borrowings averaged 2.48% for the PNMR Revolving Credit Facility, 2.13% for the PNMR 2015 Term Loan Agreement, 3.92% for the BTMU Term Loan Agreement, 2.08% for the PNMR 2016 One-Year Term Loan Agreement, 2.18% for the PNMR 2016 Two-Year Term Loan Agreement, 2.36% for the PNM Revolving Credit Facility, 1.96% for the PNM 2017 Term Loan Agreement, and 2.22% for the TNMP Revolving Credit Facility. The Company is exposed to interest rate risk to the extent of future increases in variable interest rates. However, as discussed in Note 9, PNMR has entered into hedging arrangements to effectively establish fixed interest rates on the PNMR 2015 Term Loan Agreement and $150.0 million of short-term variable rate debt. The investments held by PNM in trusts for decommissioning and reclamation had an estimated fair value of $295.0 million at June 30, 2017, of which 36.9% were fixed-rate debt securities that subject PNM to risk of loss of fair value with movements in market interest rates. If interest rates were to increase by 50 basis points from their levels at June 30, 2017, the decrease in the fair value of the fixed-rate securities would be 3.7%, or $4.0 million. PNM does not directly recover or return through rates any losses or gains on the securities, including equity investments discussed below, in the trusts for decommissioning and reclamation. However, the overall performance of these trusts does enter into the periodic determinations of expense and funding levels, which are factored into the rate making process to the extent applicable to regulated operations. However, as described in Note 12, the NMPRC has ruled that PNM would not be able to include future contributions made by PNM for decommissioning of PVNGS, to the extent applicable to certain capacity previously leased by PNM, in rates charged to retail customers. PNM has appealed the NMPRC s ruling to the NM Supreme Court. PNM is at risk for shortfalls in funding of obligations due to investment losses, including those from the equity market risks discussed below to the extent not ultimately recovered through rates charged to customers. Equity Market Risk The investments held by PNM in trusts for decommissioning and reclamation include certain equity securities at June 30, These equity securities expose PNM to losses in fair value should the market values of the underlying securities decline. Equity securities comprised 59.6% of the securities held by the trusts as of June 30, A hypothetical 10% decrease in equity prices would reduce the fair values of these funds by $17.6 million. ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures As of the end of the period covered by this quarterly report, each of PNMR, PNM, and TNMP conducted an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer of each of PNMR, PNM, and TNMP concluded that the disclosure controls and procedures are effective. Changes in internal controls over financial reporting Each of PNMR, PNM, and TNMP implemented a new enterprise asset management ( EAM ) system to replace its legacy system during the quarter ended June 30, The new EAM system was a process improvement initiative and not in response to any identified deficiency in internal controls over financial reporting. In connection with the new EAM system, each of PNMR, PNM, and TNMP made appropriate changes to internal controls and procedures, as is expected with a major system implementation. There have been no other changes in each of PNMR s, PNM s, and TNMP s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, each of PNMR s, PNM s, and TNMP s internal control over financial reporting. 124

126 Table of Contents PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Notes 11 and 12 for information related to the following matters, for PNMR, PNM, and TNMP, incorporated in this item by reference. Note 11 The 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 Nations Allottee Matters Note 12 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 Application for Certificate of Convenience and Necessity PNM Advanced Metering Infrastructure Application PNM Hazard Sharing Agreement TNMP Transmission Cost of Service Rates TNMP Competition Transition Charge Compliance Filing TNMP Energy Efficiency ITEM 1A. RISK FACTORS As of the date of this report, there have been no material changes with regard to the Risk Factors disclosed in PNMR s, PNM s, and TNMP s Annual Reports on Form 10-K for the year ended December 31, ITEM 5. OTHER INFORMATION Information regarding PNM s entry into an Agreement to sell Senior Unsecured Notes provided in Form 10-Q in lieu of filing Form 8-K (Item Entry into a Material Definitive Agreement) On July 28, 2017, PNM entered into the PNM 2017 Senior Unsecured Note Agreement with institutional investors for the sale of $450.0 million aggregate principal amount of eight series of PNM Senior Unsecured Notes (the PNM 2018 SUNs ) offered in private placement transactions. Under the PNM 2017 Senior Unsecured Note Agreement, PNM has agreed to issue $350.0 million of the PNM 2018 SUNs (at fixed annual interest rates ranging from 3.15% to 4.50% for terms between 5 and 30 years) on or about May 15, 2018 and $100.0 million of the PNM 2018 SUNs (at fixed annual interest rates of 3.78% and 4.60% for terms of 10 and 30 years) on or about August 1, The issuances of the PNM 2018 SUNs are subject to the satisfaction of customary conditions, including continuing compliance with the representations, warranties and covenants of the PNM 2017 Senior Unsecured Note Agreement. PNM will use the gross proceeds from the PNM 2018 SUNs to be issued under that agreement to repay $350.0 million of PNM s 7.95% Senior Unsecured Notes at their maturity on May 15, 2018 and $100.0 million of PNM s 7.50% Senior Unsecured Notes at their maturity on August 1, The terms of the PNM 2017 Senior Unsecured Note Agreement include customary covenants, including a covenant that requires the maintenance of a debt-to-capital ratio of less than or equal to 65%, customary events of default, including a cross default provision, and covenants regarding parity of financial covenants, liens and guarantees with respect to PNM s material credit facilities. In the event of a change of control, PNM will be required to offer to prepay the PNM 2018 SUNs at par. PNM will have the right to redeem any or all of the PNM 2018 SUNs prior to their respective maturities, subject to payment of a customary make-whole premium. The foregoing description is qualified in its entirety by the PNM 2017 Senior Unsecured Note Agreement, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. 125

127 Table of Contents ITEM 6. EXHIBITS 3.1 PNMR Articles of Incorporation of PNMR, as amended to date (incorporated by reference to Exhibit 3.1 to PNMR s Current Report on Form 8-K filed November 21, 2008) 3.2 PNM Restated Articles of Incorporation of PNM, as amended through May 31, 2002 (incorporated by reference to Exhibit to PNM s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002) 3.3 TNMP Articles of Incorporation of TNMP, as amended through July 7, 2005 (incorporated by reference to Exhibit to TNMP s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005) 3.4 PNMR Bylaws of PNMR, with all amendments to and including February 26, 2015 (incorporated by reference to Exhibit 3.4 to PNMR s Annual Report on Form 10-K for the year ended December 31, 2014) 3.5 PNM Bylaws of PNM, with all amendments to and including May 31, 2002 (incorporated by reference to Exhibit to PNM s Report on Form 10-Q for the fiscal quarter ended June 30, 2002) 3.6 TNMP Bylaws of TNMP, with all amendments to and including June 18, 2013 (incorporated by reference to Exhibit 3.6 to TNMP s Current Report on Form 8-K filed June 20, 2013) 10.1 PNM Note Purchase Agreement dated July 28, 2017 between PNM and the purchasers named therein PNMR Ratio of Earnings to Fixed Charges 12.2 PNM Ratio of Earnings to Fixed Charges 12.3 TNMP Ratio of Earnings to Fixed Charges 31.1 PNMR Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of PNMR Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of PNM Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of PNM Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of TNMP Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of TNMP Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of PNMR Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of PNM Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of TNMP Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE PNMR, PNM, and TNMP PNMR, PNM, and TNMP PNMR, PNM, and TNMP PNMR, PNM, and TNMP PNMR, PNM, and TNMP PNMR, PNM, and TNMP XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document 126

128 Table of Contents SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. PNM RESOURCES, INC. PUBLIC SERVICE COMPANY OF NEW MEXICO TEXAS-NEW MEXICO POWER COMPANY (Registrants) Date: July 28, 2017 /s/ Joseph D. Tarry Joseph D. Tarry Vice President, Finance and Controller (Officer duly authorized to sign this report) 127

129 Exhibit 10.1 EXECUTION VERSION PUBLIC SERVICE COMPANY OF NEW MEXICO $450,000,000 $55,000, % Senior Unsecured Notes, Series A, due May 15, 2023 $104,000, % Senior Unsecured Notes, Series B, due May 15, 2025 $88,000, % Senior Unsecured Notes, Series C, due May 15, 2028 $15,000, % Senior Unsecured Notes, Series D, due August 1, 2028 $38,000, % Senior Unsecured Notes, Series E, due May 15, 2033 $45,000, % Senior Unsecured Notes, Series F, due May 15, 2038 $20,000, % Senior Unsecured Notes, Series G, due May 15, 2048 $85,000, % Senior Unsecured Notes, Series H, due August 1, 2048 NOTE PURCHASE AGREEMENT Dated July 28, docx

130 TABLE OF CONTENTS SECTION HEADING PAGE SECTION 1. AUTHORIZATION OF NOTES 1 SECTION 2. SALE AND PURCHASE OF NOTES 2 SECTION 3. CLOSING 2 SECTION 4. CONDITIONS TO CLOSING 2 Section 4.1. Representations and Warranties 3 Section 4.2. Performance; No Default 3 Section 4.3. Compliance Certificates 3 Section 4.4. Opinions of Counsel 3 Section 4.5. Purchase Permitted By Applicable Law, Etc 3 Section 4.6. Sale of Other Notes 3 Section 4.7. Payment of Special Counsel Fees 4 Section 4.8. Private Placement Number 4 Section 4.9. Changes in Corporate Structure 4 Section Funding Instructions 4 Section Regulatory Approvals 4 Section Delayed Funding Closing Condition 4 Section Proceedings and Documents 4 SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 5 Section 5.1. Organization; Power and Authority 5 Section 5.2. Authorization, Etc 5 Section 5.3. Disclosure 5 Section 5.4. Organization; Affiliates 5 Section 5.5. Financial Statements; Material Liabilities 5 Section 5.6. Compliance with Laws, Other Instruments, Etc 6 Section 5.7. Governmental Authorizations, Etc 6 Section 5.8. Litigation; Observance of Agreements, Statutes and Orders 6 Section 5.9. Taxes 7 Section Title to Property; Leases 7 Section Licenses, Permits, Etc 7 Section Compliance with Employee Benefit Plans 7 Section Private Offering by the Company 8 Section Use of Proceeds; Margin Regulations 8 Section Existing Indebtedness; Future Liens 9 Section Foreign Assets Control Regulations, Etc 9 Section Status under Certain Statutes 10 Section Environmental Matters 10 Section Solvency 10 -i-

131 SECTION 6. REPRESENTATIONS OF THE PURCHASERS 10 Section 6.1. Purchase for Investment 10 Section 6.2. Source of Funds 11 SECTION 7. INFORMATION AS TO COMPANY 12 Section 7.1. Financial and Business Information 12 Section 7.2. Officer s Certificate 15 Section 7.3. Visitation 16 Section 7.4. Electronic Delivery 16 SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES 17 Section 8.1. Maturity 17 Section 8.2. Optional Prepayments with Make Whole Amount 17 Section 8.3. Allocation of Partial Prepayments 17 Section 8.4. Maturity; Surrender, Etc. 18 Section 8.5. Purchase of Notes 18 Section 8.6. Make Whole Amount 18 Section 8.7. Change of Control 20 Section 8.8. Payments Due on Non Business Days 21 SECTION 9. AFFIRMATIVE COVENANTS. 21 Section 9.1. Compliance with Laws 21 Section 9.2. Insurance 21 Section 9.3. Maintenance of Properties 21 Section 9.4. Payment of Taxes and Claims 22 Section 9.5. Corporate Existence, Etc 22 Section 9.6. Books and Records 22 Section 9.7. Guarantors 22 Section 9.8. Most Favored Lender. 24 SECTION 10. NEGATIVE COVENANTS. 24 Section Transactions with Affiliates 25 Section Consolidation and Merger 25 Section Sale or Lease of Assets 25 Section Line of Business 25 Section Economic Sanctions, Etc 25 Section Liens 25 Section Financial Covenant 28 SECTION 11. EVENTS OF DEFAULT 28 SECTION 12. REMEDIES ON DEFAULT, ETC 30 Section Acceleration 30 -ii-

132 Section Other Remedies 31 Section Rescission 31 Section No Waivers or Election of Remedies, Expenses, Etc 31 SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES 32 Section Registration of Notes 32 Section Transfer and Exchange of Notes 32 Section Replacement of Notes 32 SECTION 14. PAYMENTS ON NOTES 33 Section Place of Payment 33 Section Payment by Wire Transfer 33 Section FATCA Information 33 SECTION 15. EXPENSES, ETC 34 Section Transaction Expenses 34 Section Certain Taxes 34 Section Survival 35 SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT 35 SECTION 17. AMENDMENT AND WAIVER 35 Section Requirements 35 Section Solicitation of Holders of Notes 36 Section Binding Effect, Etc 36 Section Notes Held by Company, Etc 36 SECTION 18. NOTICES 37 SECTION 19. REPRODUCTION OF DOCUMENTS 37 SECTION 20. CONFIDENTIAL INFORMATION 38 SECTION 21. SUBSTITUTION OF PURCHASER 39 SECTION 22. MISCELLANEOUS 39 Section Successors and Assigns 39 Section Accounting Terms 39 Section Severability 40 Section Construction, Etc 40 Section Counterparts 41 Section Regulatory Statement 41 Section Governing Law 41 -iii-

133 Section Jurisdiction and Process; Waiver of Jury Trial 41 Signature 43 -iv-

134 SCHEDULE A Defined Terms SCHEDULE 1-A Form of 3.15% Senior Unsecured Note, Series A, due May 15, 2023 SCHEDULE 1-B Form of 3.45% Senior Unsecured Note, Series B, due May 15, 2025 SCHEDULE 1-C Form of 3.68% Senior Unsecured Note, Series C, due May 15, 2028 SCHEDULE 1-D Form of 3.78% Senior Unsecured Note, Series D, due August 1, 2028 SCHEDULE 1-E Form of 3.93% Senior Unsecured Note, Series E, due May 15, 2033 SCHEDULE 1-F Form of 4.22% Senior Unsecured Note, Series F, due May 15, 2038 SCHEDULE 1-G Form of 4.50% Senior Unsecured Note, Series G, due May 15, 2048 SCHEDULE 1-H Form of 4.60% Senior Unsecured Note, Series H, due August 1, 2048 SCHEDULE 4.4(a) Form of Opinions of Various Counsel for the Company SCHEDULE 5.3 SCHEDULE 5.4 SCHEDULE 5.5 SCHEDULE 5.15 Disclosure Materials Subsidiaries of the Company and Ownership of Subsidiary Stock Financial Statements Existing Indebtedness PURCHASER SCHEDULE Information Relating to Purchasers -v-

135 PUBLIC SERVICE COMPANY OF NEW MEXICO 414 SILVER AVE. SW ALBUQUERQUE, NEW MEXICO $55,000, % Senior Unsecured Notes, Series A, due May 15, 2023 $104,000, % Senior Unsecured Notes, Series B, due May 15, 2025 $88,000, % Senior Unsecured Notes, Series C, due May 15, 2028 $15,000, % Senior Unsecured Notes, Series D, due August 1, 2028 $38,000, % Senior Unsecured Notes, Series E, due May 15, 2033 $45,000, % Senior Unsecured Notes, Series F, due May 15, 2038 $20,000, % Senior Unsecured Notes, Series G, due May 15, 2048 $85,000, % Senior Unsecured Notes, Series H, due August 1, 2048 July 28, 2017 TO EACH OF THE PURCHASERS LISTED IN THE PURCHASER SCHEDULE HERETO: Ladies and Gentlemen: Public Service Company of New Mexico, a New Mexico corporation (the Company ), agrees with each of the Purchasers as follows: SECTION 1. AUTHORIZATION OF NOTES. The Company will authorize the issue and sale of (i) $55,000,000 aggregate principal amount of its 3.15% Senior Unsecured Notes, Series A, due May 15, 2023 (the Series A Notes ); (ii) $104,000,000 aggregate principal amount of its 3.45% Senior Unsecured Notes, Series B, due May 15, 2025 (the Series B Notes ); (iii) $88,000,000 aggregate principal amount of its 3.68% Senior Unsecured Notes, Series C, due May 15, 2028 (the Series C Notes ); (iv) $15,000,000 aggregate principal amount of its 3.78% Senior Unsecured Notes, Series D, due August 1, 2028 (the Series D Notes ); (v) $38,000,000 aggregate principal amount of its 3.93% Senior Unsecured Notes, Series E, due May 15, 2033 (the Series E Notes ), (vi) $45,000,000 aggregate principal amount of its 4.22% Senior Unsecured Notes, Series F, due May 15, 2038 (the Series F Notes ); (vii) $20,000,000 aggregate principal amount of its 4.50% Senior Unsecured Notes, Series G, due May 15, 2048 (the Series G Notes ); and (vii) $85,000,000 aggregate principal amount of its 4.60% Senior Unsecured Notes, Series H, due August 1, 2048 (the Series H Notes ; collectively with the Series A Notes, the Series B Notes, the Series C Notes, the Series D Notes, the Series E Notes, the Series F Notes and the Series G Notes, the Notes ). The Notes shall be substantially in the form set out in Schedule 1 A through Schedule 1-H, as applicable. Certain capitalized and other terms used in this Agreement are defined in Schedule A and, for purposes of this Agreement, the rules of construction set forth in Section 22.4 shall govern. References to Series of Notes shall refer to the Series A Notes, the Series B Notes, Series C Notes, the Series

136 D Notes, the Series E Notes, the Series F Notes, the Series G Notes or the Series H Notes or all, as the context may require. SECTION 2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount specified opposite such Purchaser s name in the Purchaser Schedule at the purchase price of 100% of the principal amount thereof. The Purchasers obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non performance of any obligation by any other Purchaser hereunder. SECTION 3. CLOSING. The execution and delivery of this Agreement shall occur on July 28, The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, at 7:00 a.m. Chicago time, at two closings (each a Closing ). The Closing in relation to the Series A Notes, the Series B Notes, the Series C Notes, the Series E Notes, the Series F Notes and the Series G Notes (the First Closing ) shall occur on May 15, 2018 and the Closing in relation to the Series D Notes and the Series H Notes (the Second Closing ) shall occur on August 1, 2018; provided that the Company shall have the option to select an earlier date for either Closing, provided that (i) such earlier date must be a Business Day, (ii) such earlier date must be no more than two (2) Business Days before the date specified for the First Closing or Second Closing, as applicable, and (iii) the Company shall provide the applicable Purchasers at least five (5) Business Days written notice of the earlier date for such Closing. At each Closing the Company will deliver to each Purchaser the Notes of such Series to be purchased by such Purchaser in the form of a single Note of such Series (or such greater number of Notes in denominations of at least $100,000 as such Purchaser may request) dated the date of such Closing and registered in such Purchaser s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company in accordance with the instructions delivered by the Company pursuant to Section If at such Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser s satisfaction, such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure by the Company to tender such Notes or any of the conditions specified in Section 4 not having been fulfilled to such Purchaser s satisfaction. SECTION 4. CONDITIONS TO CLOSING. Each Purchaser s obligation to purchase and pay for the Notes to be sold to such Purchaser at the applicable Closing is subject to the fulfillment to such Purchaser s satisfaction, prior to or at such Closing, of the following conditions: -2-

137 Section 4.1. Representations and Warranties. The representations and warranties of the Company in this Agreement shall be correct when made and at such Closing. Section 4.2. Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at such Closing. From the date of this Agreement until such Closing, before and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14), no Change of Control, Default or Event of Default shall have occurred and be continuing. Section 4.3. Compliance Certificates. (a) Officer s Certificate. The Company shall have delivered to such Purchaser an Officer s Certificate, dated the date of such Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled. (b) Secretary s Certificate. The Company shall have delivered to such Purchaser a certificate of its Secretary or Assistant Secretary, dated the date of such Closing, certifying as to (i) the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes and this Agreement and (ii) the Company s organizational documents as then in effect. Section 4.4. Opinions of Counsel. Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of such Closing (a) from McGuireWoods LLP, counsel for the Company, and in-house legal counsel to the Company, covering the matters set forth in Schedule 4.4(a) and covering such other matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to the Purchasers) and (b) from Chapman and Cutler LLP, the Purchasers special counsel in connection with such transactions, covering such matters incident to such transactions as such Purchaser may reasonably request. Section 4.5. Purchase Permitted By Applicable Law, Etc. On the date of such Closing such Purchaser s purchase of Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a) (8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted. Section 4.6. Sale of Other Notes. Contemporaneously with such Closing the Company shall sell to each other Purchaser and each other Purchaser shall purchase the Notes to be purchased by it at such Closing as specified in the Purchaser Schedule. -3-

138 Section 4.7. Payment of Special Counsel Fees. Without limiting Section 15.1, the Company shall have paid on or before the date of this Agreement and the date of such Closing the fees, charges and disbursements of the Purchasers special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the date of this Agreement or the date of such Closing, as applicable. Section 4.8. Private Placement Number. A Private Placement Number issued by Standard & Poor s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for each Series of Notes. Section 4.9. Changes in Corporate Structure. Other than transactions permitted by Section 10, the Company shall not have changed its jurisdiction of incorporation or organization, as applicable, or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. Section Funding Instructions. At least three (3) Business Days prior to the date of such Closing, each Purchaser shall have received written wire transfer instructions signed by a Responsible Officer on letterhead of the Company including (i) the name and address of the transferee bank, (ii) such transferee bank s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited. Section Regulatory Approvals. The issue and sale of the Notes hereunder shall have been duly authorized by each regulatory authority whose consent or approval shall be required for the issue and sale of the Notes to such Purchaser and any orders issued pursuant thereto shall be in full force and effect as of such Closing and all appeal periods, if any, shall have expired; provided, however, that with respect to the registration requirements of section 5 of the Securities Act or to the registration requirements of any Securities or blue sky laws of any applicable jurisdiction, satisfaction of the foregoing condition assumes the accuracy of the representations and warranties of the Purchasers contained in Section 6.1 of this Agreement. Such Purchaser shall have received copies of such consents, approvals or orders including a copy of the approval of the NMPRC authorizing this transaction. Section Delayed Funding Closing Condition. If the Company fails to comply with any provisions of this Agreement on or after the date of this Agreement but prior to such Closing (before and after giving effect to the issuance of the Notes on a pro forma basis), then any of the Purchasers may elect not to purchase the Notes on the date of such Closing specified in Section 3. Furthermore, it shall be a condition to the Second Closing that the First Closing shall have occurred. Section Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to such Purchaser and its special counsel, and such Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as such Purchaser or such special counsel may reasonably request. -4-

139 SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Purchaser that: Section 5.1. Organization; Power and Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof. Section 5.2. Authorization, Etc. This Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Section 5.3. Disclosure. The Company, through its agents, J.P. Morgan Securities LLC and MUFG Securities Americas Inc., has delivered to each Purchaser a copy of a Private Placement Memorandum, dated July 2017 (the Memorandum ), relating to the transactions contemplated hereby. This Agreement, the Memorandum, the financial statements listed in Schedule 5.5 and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company prior to July 21, 2017 in connection with the transactions contemplated hereby and identified in Schedule 5.3 (this Agreement, the Memorandum and such documents, certificates or other writings and such financial statements delivered to each Purchaser being referred to, collectively, as the Disclosure Documents ), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Disclosure Documents, since March 31, 2017, there has been no change in the financial condition, operations, business, or properties of the Company or any Subsidiary except changes that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates. Schedule 5.4 contains (except as noted therein) complete and correct lists of (i) the Company s Affiliates and (ii) the Company s directors and senior officers. The Company has no active Subsidiaries as of the date of this Agreement. Section 5.5. Financial Statements; Material Liabilities. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on -5-

140 Schedule 5.5. All of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year end adjustments). Section 5.6. Compliance with Laws, Other Instruments, Etc. The execution, delivery and performance by the Company of this Agreement and the Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter, regulations or by laws, shareholders agreement or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, the violation of which would have or would be reasonably be expected to have a Material Adverse Effect, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. Section 5.7. Governmental Authorizations, Etc. No consent, approval, authorization or order of, or registration, filing or declaration with, any Governmental Authority or body having jurisdiction over the Company is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes, except for (i) such approval by the NMPRC as has been obtained and (ii) required notice filings related to this Agreement with the SEC or the NMPRC; provided that with respect to the registration requirements of section 5 of the Securities Act or to the registration requirements of any Securities or blue sky laws of any applicable jurisdiction, the foregoing representation and warranty assumes the accuracy of the representations and warranties of the Purchasers contained in Section 6.1 of this Agreement. Section 5.8. Litigation; Observance of Agreements, Statutes and Orders. (a) Except as disclosed in the Disclosure Documents, there are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is (i) in violation of any order, judgment, decree or ruling of any court, any arbitrator of any kind or any Governmental Authority or (ii) in violation of any applicable law, ordinance, rule or regulation of any Governmental Authority (including Environmental Laws, the USA PATRIOT Act or any of the other laws and regulations that are referred to in Section 5.16), which default or violation would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. -6-

141 Section 5.9. Taxes. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which, individually or in the aggregate, is not Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of U.S. federal, state or other taxes for all fiscal periods are adequate. The U.S. federal income tax liabilities of the Company and its Subsidiaries have been finally determined (whether by reason of completed audits or the statute of limitations having run) for all fiscal years up to and including the fiscal year ended December 31, Section Title to Property; Leases. The Company and its Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after such date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement except for those defects in title and Liens that, individually or in the aggregate, would not have a Material Adverse Effect. All Material leases are valid and subsisting and are in full force and effect in all material respects. Section Licenses, Permits, Etc. Except as disclosed in the Disclosure Documents, the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others, except for those conflicts that, individually or in the aggregate, would not have a Material Adverse Effect. Section Compliance with Employee Benefit Plans. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Titles I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition relating to such employee benefit plans has occurred or exists that would, individually or in the aggregate, reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Titles I or IV of ERISA or to section 430(k) of the Code or to any such penalty or excise tax provisions under the Code or federal law or section 4068 of ERISA or by the granting of a security interest in connection with the amendment of a Plan, other than such liabilities or Liens as would not be individually or in the aggregate Material. -7-

142 (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan s most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by more than $70,000,000 in the case of any single Plan and by more than $70,000,000 in the aggregate for all Plans. The term benefit liabilities has the meaning specified in section 4001 of ERISA and the terms current value and present value have the meaning specified in section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected postretirement benefit obligation (determined as of the last day of the Company s most recently ended fiscal year in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic , without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of such Purchaser s representation in Section 6.2 as to the sources of the funds to be used to pay the purchase price of the Notes to be purchased by such Purchaser. (f) The Company and its Subsidiaries do not have any Non-U.S. Plans. Section Private Offering by the Company. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar Securities for sale to, or solicited any offer to buy the Notes or any similar Securities from, or otherwise approached or negotiated in respect thereof with, any Person other than seventy-five (75) Institutional Investors (including the Purchasers), each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of section 5 of the Securities Act or to the registration requirements of any Securities or blue sky laws of any applicable jurisdiction. Section Use of Proceeds; Margin Regulations. The Company will apply the proceeds of the sale of the Notes hereunder as set forth in The Offering and Use of Proceeds section of the Memorandum. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any Securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock -8-

143 does not constitute more than 5% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 5% of the value of such assets. As used in this Section, the terms margin stock and purpose of buying or carrying shall have the meanings assigned to them in said Regulation U. Section Existing Indebtedness; Future Liens. (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all individual items of outstanding Indebtedness of the Company and its Subsidiaries that exceeds $20,000,000 (or in the case of Contingent Obligations, such Contingent Obligations guaranteeing or otherwise in respect of obligations that exceed $20,000,000 described in the definition of Indebtedness ) as of June 30, 2017 (including descriptions of the obligors and obligees, principal amounts outstanding, any collateral therefor and any Guaranty thereof), since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary the outstanding principal amount of which exceeds $20,000,000 that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) Except as disclosed in Schedule 5.15 or as permitted in Section 10.6, neither the Company nor any Subsidiary has agreed or consented to cause or permit any of its property, whether now owned or hereafter acquired, to be subject to a Lien that secures Indebtedness or to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien that secures Indebtedness. (c) Neither the Company nor any Subsidiary is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other agreement (including its charter or any other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company, except as disclosed in Schedule Section Foreign Assets Control Regulations, Etc. (a) Neither the Company nor any Controlled Entity (i) is a Blocked Person, (ii) has been notified that its name appears or may in the future appear on a State Sanctions List or (iii) is a target of sanctions that have been imposed by the United Nations or the European Union. (b) Neither the Company nor any Controlled Entity (i) has violated, been found in violation of, or been charged or convicted under, any applicable U.S. Economic Sanctions Laws, Anti Money Laundering Laws or Anti Corruption Laws or (ii) to the Company s knowledge, is under investigation by any Governmental Authority for possible violation of any U.S. Economic Sanctions Laws, Anti Money Laundering Laws or Anti Corruption Laws. (c) No part of the proceeds from the sale of the Notes hereunder: -9-

144 (i) constitutes or will constitute funds obtained on behalf of any Blocked Person in violation of applicable law or will otherwise be used by the Company or any Controlled Entity, directly or indirectly, (A) in connection with any investment in, or any transactions or dealings with, any Blocked Person or any Sanctioned Jurisdiction in violation of applicable law, (B) for any purpose that would cause any Purchaser to be in violation of any U.S. Economic Sanctions Laws or (C) otherwise in violation of any U.S. Economic Sanctions Laws; (ii) Laws; or will be used, directly or indirectly, in violation of, or cause any Purchaser to be in violation of, any applicable Anti Money Laundering (iii) will be used, directly or indirectly, for the purpose of making any improper payments, including bribes, to any Governmental Official or commercial counterparty in order to obtain, retain or direct business or obtain any improper advantage, in each case which would be in violation of, or cause any Purchaser to be in violation of, any applicable Anti Corruption Laws. (d) The Company has established procedures and controls which it reasonably believes are adequate (and otherwise in compliance with applicable law) to ensure that the Company and each Controlled Entity is and will continue to be in compliance with all applicable U.S. Economic Sanctions Laws, Anti Money Laundering Laws and Anti Corruption Laws. Section Status under Certain Statutes. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, the ICC Termination Act of 1995, or Section 204 of the Federal Power Act, nor is the Company or any Subsidiary a holding company for the purposes of the Public Utility Holding Company Act of Section Environmental Matters. Except as would not result or reasonably be expected to result in a Material Adverse Effect: (a) each of the real properties of the Company and its Subsidiaries and all operations at such real properties are in substantial compliance with all applicable Environmental Laws, (b) there is no undocumented or unreported violation of any Environmental Laws with respect to such real properties or the businesses operated by the Company and its Subsidiaries that the Company is aware of, and (c) to the Company s knowledge, there are no conditions relating to such businesses or real properties that have given rise to or would reasonably be expected to give rise to a liability under any applicable Environmental Laws or to any Environmental Claim. Section this Agreement, will be, Solvent. Solvency. The Company is and, after the issuance of Notes and the consummation of the transactions contemplated by SECTION 6. REPRESENTATIONS OF THE PURCHASERS. Section 6.1. Purchase for Investment. Each Purchaser severally represents that it is (a) purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser s or their property shall at all -10-

145 times be within such Purchaser s or their control and (b) it is an accredited investor (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act). Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. Section 6.2. Source of Funds. Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a Source ) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder: (a) the Source is an insurance company general account (as the term is defined in the United States Department of Labor s Prohibited Transaction Exemption ( PTE ) 95 60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the NAIC (the NAIC Annual Statement )) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95 60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser s state of domicile; or (b) the Source is a separate account that is maintained solely in connection with such Purchaser s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or (c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90 1 or (ii) a bank collective investment fund, within the meaning of the PTE and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (d) the Source constitutes assets of an investment fund (within the meaning of Part VI of PTE (the QPAM Exemption )) managed by a qualified professional asset manager or QPAM (within the meaning of Part VI of the QPAM Exemption), no employee benefit plan s assets that are managed by the QPAM in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Part VI(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, represent more than 20% of the total client assets managed by -11-

146 such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM maintains an ownership interest in the Company that would cause the QPAM and the Company to be related within the meaning of Part VI(h) of the QPAM Exemption and (i) the identity of such QPAM and (ii) the names of any employee benefit plans whose assets in the investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Part VI(c)(1) of the QPAM Exemption) of such employer or by the same employee organization, represent 10% or more of the assets of such investment fund, have been disclosed to the Company in writing pursuant to this clause (d); or (e) the Source constitutes assets of a plan(s) (within the meaning of Part IV(h) of PTE (the INHAM Exemption )) managed by an in house asset manager or INHAM (within the meaning of Part IV(a) of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of control in Part IV(d)(3) of the INHAM Exemption) owns a 10% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or (f) the Source is a governmental plan; or (g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or (h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 6.2, the terms employee benefit plan, governmental plan, and separate account shall have the respective meanings assigned to such terms in section 3 of ERISA. SECTION 7. INFORMATION AS TO COMPANY Section 7.1. Institutional Investor: Financial and Business Information. The Company shall deliver to each Purchaser and each holder of a Note that is an (a) Quarterly Statements within sixty (60) days (or such shorter period as is the earlier of (x) fifteen (15) days greater than the period applicable to the filing of the Company s Quarterly Report on Form 10 Q (the Form 10 Q ) with the SEC regardless of whether the Company is subject to the filing requirements thereof and (y) the date by which such financial statements are required to be delivered under any Material Credit Facility or the date on which such corresponding financial statements are delivered under any Material Credit Facility if such delivery occurs earlier than such required delivery date) -12-

147 after the end of each Fiscal Quarter in each Fiscal Year of the Company (other than the last quarterly fiscal period of each such Fiscal Year), duplicate copies of (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such Fiscal Quarter, (ii) consolidated statements of income of the Company and its Subsidiaries, for such Fiscal Quarter and (in the case of the second and third quarters) for the portion of the Fiscal Year ending with such Fiscal Quarter, and (iii) consolidated statements of changes in shareholders equity and cash flows of the Company and its Subsidiaries for the portion of the Fiscal Year ending with such Fiscal Quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year end adjustments; (b) Annual Statements within one hundred twenty (120) days (or such shorter period as is the earlier of (x) fifteen (15) days greater than the period applicable to the filing of the Company s Annual Report on Form 10 K (the Form 10 K ) with the SEC regardless of whether the Company is subject to the filing requirements thereof and (y) the date by which such financial statements are required to be delivered under any Material Credit Facility or the date on which such corresponding financial statements are delivered under any Material Credit Facility if such delivery occurs earlier than such required delivery date) after the end of each Fiscal Year of the Company, duplicate copies of (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such Fiscal Year, and (ii) consolidated statements of income, changes in shareholders equity and cash flows of the Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon (without a going concern or similar qualification or exception and without any qualification or exception as to the scope of the audit on which such opinion is based) of independent public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with -13-

148 generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances; (c) SEC and Other Reports promptly upon their becoming available, one copy of (i) each financial statement, report, notice, proxy statement or similar document sent by the Company or any Subsidiary (x) to its creditors under any Material Credit Facility (excluding information sent to such creditors in the ordinary course of administration of a credit facility, such as information relating to pricing and borrowing availability) or (y) to its public Securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the SEC; (d) Notice of Default or Event of Default promptly, and in any event within ten (10) days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) Employee Benefits Matters promptly, and in any event within ten (10) days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, would reasonably be expected to have a Material Adverse Effect; -14-

149 (f) Debt Ratings prompt notice of any change in its Debt Ratings; and (g) Requested Information with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries (including actual copies of the Company s Form 10 Q and Form 10 K) or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Purchaser or holder of a Note; provided that any such requested information is subject to the confidentiality provisions set forth in Section 20. Section 7.2. Officer s Certificate. In connection with each set of financial statements delivered to a Purchaser or holder of a Note pursuant to Section 7.1(a) or Section 7.1(b), the Company shall deliver on or before the deadline set forth in Section 7.1(a) or Section 7.1(b), as applicable, a certificate of a Senior Financial Officer: (a) Covenant Compliance setting forth the information from such financial statements that is required in order to establish whether the Company was in compliance with the requirements of Section 10 during the quarterly or annual period covered by the financial statements then being furnished (including with respect to each such provision that involves mathematical calculations, the information from such financial statements that is required to perform such calculations) and detailed calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Section, and the calculation of the amount, ratio or percentage then in existence. In the event that the Company or any Subsidiary has made an election to measure any financial liability using fair value (which election is being disregarded for purposes of determining compliance with this Agreement pursuant to Section 22.2) as to the period covered by any such financial statement, such Senior Financial Officer s certificate as to such period shall include a reconciliation from GAAP with respect to such election; (b) Event of Default certifying that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto; and (c) Guarantors setting forth a list of all Subsidiaries and other entities that are Guarantors and certifying that each Subsidiary or other entity that is required to be a Guarantor pursuant to Section 9.7 is a Guarantor, in each case, as of the date of such certificate of Senior Financial Officer. -15-

150 Investor: Section 7.3. Visitation. The Company shall permit the representatives of each Purchaser and holder of a Note that is an Institutional (a) No Default if no Default or Event of Default then exists, at the expense of such Purchaser or holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company s officers, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) Default if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. Section 7.4. Electronic Delivery. Financial statements, opinions of independent certified public accountants, other information and Officer s Certificates that are required to be delivered by the Company pursuant to Sections 7.1(a), (b) or (c) and Section 7.2 shall be deemed to have been delivered if the Company satisfies any of the following requirements with respect thereto: (a) such financial statements satisfying the requirements of Section 7.1(a) or (b) and related Officer s Certificate satisfying the requirements of Section 7.2 and any other information required under Section 7.1(c) are delivered to each Purchaser or holder of a Note by e mail at the e mail address set forth in such Purchaser s or holder s Purchaser Schedule or as communicated from time to time in a separate writing delivered to the Company; (b) the Company shall have timely filed such Form 10 Q or Form 10 K, satisfying the requirements of Section 7.1(a) or Section 7.1(b), as the case may be, with the SEC on EDGAR and shall have made such form and the related Officer s Certificate satisfying the requirements of Section 7.2 available on its home page on the internet, which is located at as of the date of this Agreement; (c) such financial statements satisfying the requirements of Section 7.1(a) or Section 7.1(b) and related Officer s Certificate(s) satisfying the requirements of Section 7.2 and any other information required under Section 7.1(c) are timely posted by or on behalf of the Company on IntraLinks or on any other similar website to which each Purchaser and holder of Notes has free access; or (d) the Company shall have timely filed any of the items referred to in Section 7.1(c) with the SEC on EDGAR and shall have made such items available on its -16-

151 home page on the internet or on IntraLinks or on any other similar website to which each Purchaser and each holder of Notes has free access; provided, however, that in no case shall access to such financial statements, other information and Officer s Certificates be conditioned upon any waiver or other agreement or consent (other than confidentiality provisions consistent with Section 20 of this Agreement); provided, further, that in the case of any of clauses (b), (c) or (d), the Company shall have given each Purchaser and each holder of a Note prior written notice, which may be by e mail or in accordance with Section 18, of such posting or filing in connection with each delivery, provided, further, that upon request of any Purchaser or any holder to receive paper copies of such forms, financial statements, other information and Officer s Certificates or to receive them by e mail, the Company will promptly e mail them or deliver such paper copies, as the case may be, to such Purchaser or such holder. SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES. Date thereof. Section 8.1. Maturity. As provided therein, the entire unpaid principal balance of each Note shall be due and payable on the Maturity Section 8.2. Optional Prepayments with Make Whole Amount. (a) The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes of any Series, in an amount not less than 20% of the aggregate principal amount of the Notes of any Series to be prepaid then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Make Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than ten (10) days and not more than sixty (60) days prior to the date fixed for such prepayment unless the Company and the Required Holders agree to another time period pursuant to Section 17. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes of each Series to be prepaid on such date, the principal amount of each Note of each Series held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make Whole Amount due with respect to each Series of Notes to be prepaid in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two (2) Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make Whole Amount as of the specified prepayment date. (b) Notwithstanding anything contained in this Section 8.2 to the contrary, if and so long as any Default or Event of Default shall have occurred and be continuing, any prepayment of the Notes pursuant to the provisions of Section 8.2(a) shall be allocated among all of the Notes of all Series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof. Section 8.3. Allocation of Partial Prepayments. In the case of each partial prepayment of the Notes pursuant to Section 8.2, the principal amount of the Notes of the Series to be prepaid -17-

152 shall be allocated among all of the Notes of such Series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. Section 8.4. Maturity; Surrender, Etc. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. Section 8.5. Purchase of Notes. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes of any Series except (a) upon the payment or prepayment of the Notes of any Series in accordance with this Agreement and the Notes or (b) pursuant to an offer to purchase made by the Company or an Affiliate pro rata to the holders of all Notes of any Series at the time outstanding upon the same terms and conditions, provided that if and so long as any Default or Event of Default exists, such written offer shall be made pro rata to the holders of all Notes of all Series outstanding upon the same terms and conditions. Any such offer shall provide each holder with sufficient information to enable it to make an informed decision with respect to such offer, and shall remain open for at least five (5) Business Days. If the holders of more than 20% of the principal amount of the Notes of the applicable Series then outstanding accept such offer, the Company shall promptly notify the remaining holders of such Series of Notes of such fact and the expiration date for the acceptance by holders of such Series of Notes of such offer shall be extended by the number of days necessary to give each such remaining holder at least ten (10) Business Days from its receipt of such notice to accept such offer. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to this Agreement and no Notes may be issued in substitution or exchange for any such Notes. Section 8.6. Make Whole Amount. The term Make Whole Amount means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make Whole Amount may in no event be less than zero; provided further that the Make-Whole Amount shall equal zero with respect to the relevant Series of Notes if such prepayment occurs (i) on or after the date which is thirty (30) days prior to their respective Maturity Dates in the case of the Series A Notes, the Series B Notes, the Series C Notes and the Series D Notes, (ii) on or after the date which is sixty (60) days prior to the Maturity Date in the case of the Series E Notes or (iii) on or after the date which is ninety (90) days prior to their respective Maturity Dates in the case of the Series F Notes, the Series G Notes and the Series H Notes. For the purposes of determining the Make Whole Amount, the following terms have the following meanings: Called Principal means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to -18-

153 Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. Discounted Value means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. Reinvestment Yield means, with respect to the Called Principal of any Note, the sum of (a) 0.50% plus (b) the yield to maturity implied by the Ask Yield(s) reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as Page PX1 (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities ( Reported ) having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. If there are no such U.S. Treasury securities Reported having a maturity equal to such Remaining Average Life, then such implied yield to maturity will be determined by (i) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (ii) interpolating linearly between the Ask Yields Reported for the applicable most recently issued actively traded on the run U.S. Treasury securities with the maturities (1) closest to and greater than such Remaining Average Life and (2) closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note. If such yields are not Reported or the yields Reported as of such time are not ascertainable (including by way of interpolation), then Reinvestment Yield means, with respect to the Called Principal of any Note, the sum of (x) 0.50% plus (y) the yield to maturity implied by the U.S. Treasury constant maturity yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for the U.S. Treasury constant maturity having a term equal to the Remaining Average Life of such Called Principal as of such Settlement Date. If there is no such U.S. Treasury constant maturity having a term equal to such Remaining Average Life, such implied yield to maturity will be determined by interpolating linearly between (1) the U.S. Treasury constant maturity so reported with the term closest to and greater than such Remaining Average Life and (2) the U.S. Treasury constant maturity so reported with the term closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note. Remaining Average Life means, with respect to any Called Principal, the number of years obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years, computed on the basis of a 360 day year comprised of twelve 30 day months and calculated to two decimal places, that will elapse between -19-

154 the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. Remaining Scheduled Payments means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or Section Settlement Date means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. Section 8.7. Change of Control. (a) Notice of Change of Control. The Company will, within fifteen (15) Business Days after the occurrence of any Change of Control, give written notice (the Change of Control Notice ) of such Change of Control to each holder of Notes. Such Change of Control Notice shall contain and constitute an offer to prepay the Notes as described in Section 8.7(b) hereof and shall be accompanied by the certificate described in Section 8.7(e). (b) Offer to Prepay Notes. The offer to prepay Notes contemplated by Section 8.7(a) shall be an offer to prepay, in accordance with and subject to this Section 8.7, all, but not less than all, of the Notes held by each holder (in this case only, holder in respect of any Note registered in the name of a nominee for a disclosed beneficial owner shall mean such beneficial owner) on a date specified in such Change of Control Notice (the Proposed Prepayment Date ). Such date shall be not fewer than thirty (30) days and not more than sixty (60) days after the date of delivery of the Change of Control Notice. (c) Acceptance. Any holder of Notes may accept the offer to prepay made pursuant to this Section 8.7 by causing a notice of such acceptance to be delivered to the Company not fewer than ten (10) days prior to the Proposed Prepayment Date. A failure by a holder of Notes to respond to an offer to prepay made pursuant to this Section 8.7 shall be deemed to constitute a rejection of such offer by such holder. (d) Prepayment. Prepayment of the Notes to be prepaid pursuant to this Section 8.7 shall be at 100% of the principal amount of such Notes together with accrued and unpaid interest thereon but without any Make Whole Amount or other premium. The prepayment shall be made on the Proposed Prepayment Date. (e) Officer s Certificate. Each offer to prepay the Notes pursuant to this Section 8.7 shall be accompanied by a certificate, executed by a Senior Financial Officer and dated the date of delivery of the Change of Control Notice, specifying: (i) the Proposed Prepayment Date; (ii) that such offer is made pursuant to this Section 8.7; (iii) the principal amount of each Note offered to -20-

155 be prepaid (which shall be 100% of the outstanding principal balance of each such Note); (iv) the interest that would be due on each Note offered to be prepaid, accrued to the Proposed Prepayment Date; (v) that the conditions of this Section 8.7 required to be fulfilled prior to the giving of notice have been fulfilled; and (vi) in reasonable detail, the general nature and date of the Change of Control. Section 8.8. Payments Due on Non Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, (x) except as set forth in clause (y), any payment of interest on any Note that is due on a date that is not a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; and (y) any payment of principal of or Make Whole Amount on any Note (including principal due on the Maturity Date of such Note) that is due on a date that is not a Business Day shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day. SECTION 9. AFFIRMATIVE COVENANTS. From the date of this Agreement until the Second Closing and thereafter, so long as any of the Notes are outstanding, the Company covenants that: Section 9.1. Compliance with Laws. Without limiting Section 10.4, the Company will, and will cause each of its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which each of them is subject (including ERISA, Environmental Laws, the USA PATRIOT Act and the other laws and regulations that are referred to in Section 5.16) and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 9.2. Insurance. The Company will, and will cause each of its Subsidiaries to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co insurance and self insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. Section 9.3. Maintenance of Properties. The Company will, and will cause each of its Subsidiaries to, maintain and keep, or cause to be maintained and kept, their respective properties in good working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section 9.3 shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance would not, individually or in -21-

156 the aggregate, reasonably be expected to have a Material Adverse Effect; and provided, further, that this provision shall not apply to properties required to be closed, discontinued or abandoned pursuant to a law, legal order, mandate or requirement from the NMPRC or any other federal or state governmental authority or regulatory authority with the authority to regulate or oversee any aspect of the business of the Company or its Affiliates. Section 9.4. Payment of Taxes and Claims. The Company will, and will cause each of its Subsidiaries to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, levies or claims payable by any of them, to the extent the same have become due and payable and before they have become delinquent, provided that neither the Company nor any Subsidiary need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 9.5. Corporate Existence, Etc. Subject to Section 10.2, the Company will at all times preserve and keep its existence in full force and effect. Subject to Sections 10.2 and 10.3, the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless dissolved or merged into the Company or a Wholly Owned Subsidiary) and all Material rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise would not, individually or in the aggregate, have a Material Adverse Effect. Section 9.6. Books and Records. The Company will, and will cause each of its Subsidiaries to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over the Company or such Subsidiary, as the case may be. The Company will, and will cause each of its Subsidiaries to, keep books, records and accounts which, in reasonable detail, accurately reflect all transactions and dispositions of assets. The Company and its Subsidiaries have devised a system of internal accounting controls sufficient to provide reasonable assurances that their respective books, records, and accounts accurately reflect all transactions and dispositions of assets and the Company will, and will cause each of its Subsidiaries to, continue to maintain such system. Section 9.7. Guarantors. (a) The Company will (x) cause each of its Subsidiaries that guarantees or otherwise becomes liable at any time, whether as a borrower or an additional or co borrower or otherwise, for or in respect of any Indebtedness under any Material Credit Facility (a Subsidiary Guarantor ) and (y) use commercially reasonable efforts to cause any other entity that is not a Subsidiary that guarantees or otherwise becomes liable at any time, whether as a borrower or an additional or co borrower or otherwise, for or in respect of any Indebtedness under a Material Credit Facility (a Non-Subsidiary Guarantor ; together with any other Non-Subsidiary Guarantors and any Subsidiary Guarantors, each a Guarantor ) to concurrently therewith: -22-

157 (i) enter into an agreement in form and substance satisfactory to the Required Holders providing for the guaranty by such Guarantor, on a joint and several basis with all other such Guarantors, of (x) the prompt payment in full when due of all amounts payable by the Company pursuant to the Notes (whether for principal, interest, Make Whole Amount or otherwise) and this Agreement, including all indemnities, fees and expenses payable by the Company thereunder and (y) the prompt, full and faithful performance, observance and discharge by the Company of each and every covenant, agreement, undertaking and provision required pursuant to the Notes or this Agreement to be performed, observed or discharged by it (a NPA Guaranty ); and (ii) deliver the following to each Purchaser and holder of a Note: (A) an executed counterpart of such NPA Guaranty; (B) a certificate signed by an authorized responsible officer of such Guarantor containing representations and warranties on behalf of such Guarantor to the same effect, mutatis mutandis, as those contained in Sections 5.1, 5.2, 5.6, 5.7 and 5.16 of this Agreement (but with respect to such Guarantor and such NPA Guaranty rather than the Company); (C) all documents as may be reasonably requested by the Required Holders to evidence the due organization, continuing existence and, where applicable, good standing of such Guarantor and the due authorization by all requisite action on the part of such Guarantor of the execution and delivery of such NPA Guaranty and the performance by such Guarantor of its obligations thereunder; and (D) an opinion of counsel reasonably satisfactory to the Required Holders covering such matters relating to such Guarantor and such NPA Guaranty as the Required Holders may reasonably request. (b) At the election of the Company and by written notice to each holder of Notes, any Guarantor may be discharged from all of its obligations and liabilities under its NPA Guaranty and shall be automatically released from its obligations thereunder without the need for the execution or delivery of any other document by the holders, provided that (i) if such Guarantor is a guarantor or is otherwise liable for or in respect of any Material Credit Facility, then such Guarantor has been released and discharged (or will be released and discharged concurrently with the release of such Guarantor under its NPA Guaranty) under such Material Credit Facility, (ii) at the time of, and after giving effect to, such release and discharge, no Default or Event of Default shall be existing, (iii) no amount is then due and payable under such NPA Guaranty, (iv) if in connection with such Guarantor being released and discharged under any Material Credit Facility, any fee or other form of consideration is given to any holder of Indebtedness under such Material Credit Facility for such release, the holders of the Notes shall receive equivalent consideration substantially concurrently therewith and (v) each holder shall have received a certificate of a Responsible Officer certifying as to the matters set forth in clauses (i) through (iv). -23-

158 (c) Section 9.7. The failure of a Non-Subsidiary Guarantor to comply with Section 9.7(a)(i) or (ii) will constitute non-compliance by a Guarantor with this Section 9.8. Most Favored Lender. (a) If at any time after the date of this Agreement the Company amends or modifies any financial covenant or any event of default in the nature of a financial covenant (or the related definitions or provisions governing accounting terms) (each, a Financial Covenant ) in any Material Credit Facility that is similar to any Financial Covenant now or hereafter included herein, or if a Financial Covenant is added to such Material Credit Facility (any such amended, modified or added Financial Covenant, a Modified Covenant ), then the Company shall provide a Most Favored Lender Notice to each holder of the Notes, and such Financial Covenant herein shall be deemed to be amended, modified or added automatically without any further action on the part of the Company or any holder; provided that if such Modified Covenant is less restrictive on the Company, then the amendment, modification or addition to this Agreement shall take effect fifteen (15) days after all holders receipt of such Most Favored Lender Notice, unless the Required Holders notify the Company of their objection to such amendment, modification or addition within such fifteen (15) day period, in which case such amendment, modification or addition to this Agreement will not take effect; provided further that, notwithstanding the foregoing, no such amendment, modification or addition shall increase the ratio contained in this Section 10.7 in excess of 0.65 to 1.00 (whether by amending the ratio, the related definitions or provisions governing accounting terms) without the consent of the Required Holders. (b) Notwithstanding the foregoing, if a Default or an Event of Default then exists and the amendment, modification or addition of any Financial Covenant herein would make such provision less restrictive on the Company, then such Financial Covenant shall only be deemed automatically amended, modified or added at such time when such Default or Event of Default no longer exists, if such time should occur. Furthermore, if any fee or other consideration shall be given to the lenders under such Material Credit Facility in connection with a Modified Covenant, the equivalent of such fee or other consideration shall be given, pro rata, to the holders of the Notes; provided that no fee or other consideration shall be due if the Modified Covenant is made in connection with a renewal, restatement or extension of or entry into such Material Credit Facility. (c) Most Favored Lender Notice means, in respect of any Modified Covenant, a written notice to each of the holders of the Notes delivered promptly, and in any event within twenty (20) Business Days after the inclusion of such Modified Covenant in any Material Credit Facility (including by way of amendment or other modification of any existing provision thereof) from a Responsible Officer referring to the provisions of this Section 9.8 and setting forth a reasonably detailed description of such Modified Covenant (including any defined terms used therein) and related explanatory calculations, as applicable. SECTION 10. NEGATIVE COVENANTS. From the date of this Agreement until the Second Closing and thereafter, so long as any of the Notes are outstanding, the Company covenants that: -24-

159 Section Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, enter into directly or indirectly any Material transaction or Material group of related transactions (including the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except pursuant to the reasonable requirements of the Company s or such Subsidiary s business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm s length transaction with a Person not an Affiliate. Section Consolidation and Merger. The Company will not (a) enter into any transaction of merger or (b) consolidate, liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); provided that, so long as no Default or Event of Default shall exist or be caused thereby, a Person may be merged or consolidated with or into the Company so long as the Company shall be the continuing or surviving Person. Section Sale or Lease of Assets. The Company will not (nor will it permit its Subsidiaries to) sell, lease, transfer or otherwise dispose of, any of its assets (including all or substantially all of its assets, whether in one transaction or a series of related transactions) except (a) sales or transfers of accounts receivable and related rights to payment in connection with a State Approved Securitization and other sales and transfers of accounts receivable and related rights to payment so long as such other sales and transfers are non recourse to the Company (other than with respect to Standard Securitization Undertakings) and are otherwise on commercially reasonable terms, (b) sales of assets (excluding those permitted in clause (a) hereof) for fair value, if the aggregate value of all such transactions in any calendar year, does not exceed 25% of the book value of Total Assets, as calculated as of the end of the most recent Fiscal Quarter and (c) the sale, lease, transfer or other disposition, at less than fair value, of any other assets, provided that the aggregate book value of such assets shall not exceed $20,000,000 in any calendar year. Section Line of Business. The Company will not and will not permit any Subsidiary to engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the general nature of the business in which the Company and its Subsidiaries, taken as a whole, are engaged on the date of this Agreement as described in the Memorandum. Section Economic Sanctions, Etc. The Company will not, and will not permit any Controlled Entity to (a) become (including by virtue of being owned or controlled by a Blocked Person), own or control a Blocked Person or (b) directly or knowingly indirectly have any investment in or engage in any dealing or transaction (including any investment, dealing or transaction involving the proceeds of the Notes) with any Person if such investment, dealing or transaction (i) would cause any holder or any affiliate of such holder to be in violation of any law or regulation applicable to such holder or (ii) is prohibited by any U.S. Economic Sanctions Laws. Section Liens. The Company will not (nor will it permit its Subsidiaries to) contract, create, incur, assume or permit to exist any Lien with respect to any of its property or assets of any kind (whether real or personal, tangible or intangible), whether now owned or hereafter acquired, securing any Indebtedness other than the following: -25-

160 (a) Liens securing the Notes; (b) Liens for taxes not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof); (c) Liens in respect of property imposed by law arising in the ordinary course of business such as materialmen s, mechanics, warehousemen s, carrier s, landlords and other nonconsensual statutory Liens which are not yet due and payable, which have been in existence less than ninety (90) days or which are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof); (d) pledges or deposits made in the ordinary course of business to secure payment of worker s compensation insurance, unemployment insurance, pensions or social security programs; (e) Liens arising from good faith deposits in connection with or to secure performance of tenders, bids, leases, government contracts, performance and return of money bonds and other similar obligations incurred in the ordinary course of business (other than obligations in respect of the payment of borrowed money); appeal bonds; (f) Liens arising from good faith deposits in connection with or to secure performance of statutory obligations and surety and (g) easements, rights of way, restrictions (including zoning restrictions), minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered property for its intended purposes; (h) judgment Liens that would not constitute an Event of Default; (i) Liens arising by virtue of any statutory or common law provision relating to banker s liens, rights of setoff or similar rights as to deposit accounts or other funds maintained with a creditor depository institution; (j) any Lien created or arising over any property which is acquired, constructed or created by the Company or its Subsidiaries, but only if (i) such Lien secures only principal amounts (not exceeding the cost of such acquisition, construction or creation) raised for the purposes of such acquisition, construction or creation, together with any costs, expenses, interest and fees incurred in relation thereto or a guarantee given in respect thereof, (ii) such Lien is created or arises on or before one hundred eighty (180) days after the completion of such acquisition, construction or creation, (iii) such Lien is confined solely to the property so acquired, constructed or created and any improvements thereto -26-

161 and (iv) the aggregate principal amount of all Indebtedness secured by such Liens shall not exceed $50,000,000 at any one time outstanding; (k) any Lien on Margin Stock; (l) the assignment of, or Liens on, accounts receivable and related rights to payment in connection with (i) a State Approved Securitization or (ii) any other accounts receivable securitization so long as such other securitization is non recourse to the Company (other than with respect to Standard Securitization Undertakings) and is otherwise on commercially reasonable terms, and the filing of related financing statements under the Uniform Commercial Code of the applicable jurisdictions; (m) the assignment of, or Liens on, demand, energy or wheeling revenues, or on capacity reservation or option fees, payable to the Company with respect to any wholesale electric service or transmission agreements, the assignment of, or Liens on, revenues from energy services contracts, and the assignment of, or Liens on, capacity reservation or option fees payable to the Company with respect to asset sales permitted herein; (n) any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Liens referred to in the foregoing clauses (a) through (m), for amounts not exceeding the principal amount of the Indebtedness secured by the Lien so extended, renewed or replaced, provided that such extension, renewal or replacement Lien is limited to all or a part of the same property or assets that were covered by the Lien extended, renewed or replaced (plus improvements on such property or assets); (o) Liens on Property that is subject to a lease that is classified as an operating lease as of the date of the Second Closing but which is subsequently converted into a capital lease; purposes; (p) Liens securing obligations under Hedging Agreements entered into in the ordinary course of business and not for speculative (q) Liens granted by bankruptcy remote special purpose Subsidiaries to secure stranded cost securitization bonds in connection with the San Juan Generating Station or any other energy-generating facility or property of the Company; and (r) Liens on Property, in addition to those otherwise permitted by clauses (a) through (q) above, securing, directly or indirectly, Indebtedness or obligations arising pursuant to other agreements entered into in the ordinary course of business which do not exceed, in the aggregate at any one time outstanding, $50,000,000; provided that the Company and its Subsidiaries shall not secure pursuant to this Section 10.6(r) any Indebtedness outstanding under any Material Credit Facility unless and until the Notes (and any guaranty delivered in connection therewith) shall concurrently be secured equally and ratably with such Indebtedness pursuant to documentation reasonably acceptable to the Required Holders in substance and in form. -27-

162 Section Financial Covenant. The Company shall not permit the ratio of (a) Consolidated Indebtedness to (b) Consolidated Capitalization to be greater than 0.65 to 1.0 as of the last day of any Fiscal Quarter. SECTION 11. EVENTS OF DEFAULT. An Event of Default shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal or Make Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note for more than five (5) Business Days after the same becomes due and payable; or 10; or (c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d), Section 9.5 or Section (d) the Company or any Guarantor defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a), (b) and (c)) or in any NPA Guaranty and such default is not remedied within thirty (30) days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a notice of default and to refer specifically to this Section 11(d)); or (e) (i) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made, or (ii) any representation or warranty made in writing by or on behalf of any Guarantor or by any officer of such Guarantor in any NPA Guaranty or any writing furnished in connection with such NPA Guaranty proves to have been false or incorrect in any material respect on the date as of which made; or (f) (i) the Company or any Significant Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $20,000,000 (or its equivalent in the relevant currency of payment) beyond any period of grace provided with respect thereto, or (ii) the Company or any Significant Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $20,000,000 (or its equivalent in the relevant currency of payment) or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more -28-

163 Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company or any Significant Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $20,000,000 (or its equivalent in the relevant currency of payment), or (y) one or more Persons have the right to require the Company or any Significant Subsidiary so to purchase or repay such Indebtedness in an amount of at least $20,000,000; or (g) the Company or any Significant Subsidiary (i) admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or (h) a court or other Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Significant Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding up or liquidation of the Company or any of its Significant Subsidiaries, or any such petition shall be filed against the Company or any of its Significant Subsidiaries and such petition shall not be dismissed within sixty (60) days; or (i) any event occurs with respect to the Company or any Significant Subsidiary which under the laws of any jurisdiction is analogous to any of the events described in Section 11(g) or Section 11(h), provided that the applicable grace period, if any, which shall apply shall be the one applicable to the relevant proceeding which most closely corresponds to the proceeding described in Section 11(g) or Section 11(h); or (j) any final judgment or order for the payment of money aggregating in excess of $20,000,000 or one or more such judgments or orders in excess of $40,000,000 in the aggregate (or its equivalent in the relevant currency of payment), including any such final order enforcing a binding arbitration decision, are rendered against one or more of the Company and its Significant Subsidiaries and which judgments are not, within sixty (60) days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such stay; or -29-

164 (k) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) there is any amount of unfunded benefit liabilities (within the meaning of section 4001(a)(18) of ERISA) under one or more Plans, determined in accordance with Title IV of ERISA, (iv) the aggregate present value of accrued benefit liabilities under all funded Non U.S. Plans exceeds the aggregate current value of the assets of such Non U.S. Plans allocable to such liabilities, (v) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (vi) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, (vii) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder, (viii) the Company or any Subsidiary fails to administer or maintain a Non U.S. Plan in compliance with the requirements of any and all applicable laws, statutes, rules, regulations or court orders or any Non U.S. Plan is involuntarily terminated or wound up, or (ix) the Company or any Subsidiary becomes subject to the imposition of a financial penalty (which for this purpose shall mean any tax, penalty or other liability, whether by way of indemnity or otherwise) with respect to one or more Non U.S. Plans; and any such event or events described in clauses (i) through (ix) above, either individually or together with any other such event or events, would reasonably be expected to have a Material Adverse Effect. As used in this Section 11(k), the terms employee benefit plan and employee welfare benefit plan shall have the respective meanings assigned to such terms in section 3 of ERISA; or (l) any NPA Guaranty shall cease to be in full force and effect, any Guarantor or any Person acting on behalf of any Guarantor shall contest in any manner the validity, binding nature or enforceability of any NPA Guaranty, or the obligations of any Guarantor under any NPA Guaranty are not or cease to be legal, valid, binding and enforceable in accordance with the terms of such NPA Guaranty. SECTION 12. REMEDIES ON DEFAULT, ETC. Section Acceleration. (a) If an Event of Default with respect to the Company described in Section 11(g), (h) or (i) (other than an Event of Default described in clause (i) of Section 11(g) or described in clause (vi) of Section 11(g) by virtue of the fact that such clause encompasses clause (i) of Section 11(g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing, the Required Holders may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. -30-

165 (c) If any Event of Default described in Section 11(a) or (b) has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including interest accrued thereon at the Default Rate) and (y) the Make Whole Amount determined in respect of such principal amount, shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. Section Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note or NPA Guaranty, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. Section Rescission. At any time after any Notes have been declared due and payable pursuant to Section 12.1(b) or (c), the Required Holders, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. Section No Waivers or Election of Remedies, Expenses, Etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder s rights, powers or remedies. No right, power or remedy conferred by this Agreement, any NPA Guaranty or any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note -31-

166 on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including reasonable attorneys fees, expenses and disbursements. SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. Section Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. If any holder of one or more Notes is a nominee, then (a) the name and address of the beneficial owner of such Note or Notes shall also be registered in such register as an owner and holder thereof and (b) at any such beneficial owner s option, either such beneficial owner or its nominee may execute any amendment, waiver or consent pursuant to this Agreement. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. Section Transfer and Exchange of Notes. Upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii)), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered holder of such Note or such holder s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten (10) Business Days thereafter, the Company shall execute and deliver, at the Company s expense (except as provided below), one or more new Notes of the same series (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Schedule 1 A through Schedule 1- H, as applicable. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes of a Series, one Note of such Series may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2. Section Replacement of Notes. Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii)) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and -32-

167 (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it ( provided that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum net worth of at least $50,000,000 or a Qualified Institutional Buyer, such Person s own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, within ten (10) Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. SECTION 14. PAYMENTS ON NOTES. Section Place of Payment. Subject to Section 14.2, payments of principal, Make Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in New York, New York at the principal office of Wells Fargo Bank, National Association in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. Section Payment by Wire Transfer. So long as any Purchaser or its nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make Whole Amount, if any, interest and all other amounts becoming due hereunder by the method and at the address specified for such purpose below such Purchaser s name in the Purchaser Schedule, or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section Section FATCA Information. By acceptance of any Note, the holder of such Note agrees that such holder will with reasonable promptness duly complete and deliver to the Company, or to such other Person as may be reasonably requested by the Company, from time to time (a) in the case of any such holder that is a United States Person, such holder s United States -33-

168 tax identification number or other Forms reasonably requested by the Company necessary to establish such holder s status as a United States Person under FATCA and as may otherwise be necessary for the Company to comply with its obligations under FATCA and (b) in the case of any such holder that is not a United States Person, such documentation prescribed by applicable law (including as prescribed by section 1471(b)(3)(C)(i) of the Code) and such additional documentation as may be necessary for the Company to comply with its obligations under FATCA and to determine that such holder has complied with such holder s obligations under FATCA or to determine the amount (if any) to deduct and withhold from any such payment made to such holder. Nothing in this Section 14.3 shall require any holder to provide information that is confidential or proprietary to such holder unless the Company is required to obtain such information under FATCA and, in such event, the Company shall treat any such information it receives as confidential. SECTION 15. EXPENSES, ETC. Section Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys fees of a special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement, any NPA Guaranty or the Notes (whether or not such amendment, waiver or consent becomes effective), including: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement, any NPA Guaranty or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement, any NPA Guaranty or the Notes, or by reason of being a holder of any Note, (b) the costs and expenses, including financial advisors fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work out or restructuring of the transactions contemplated hereby and by the Notes and any NPA Guaranty and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO, provided that such costs and expenses under this clause (c) shall not exceed $5,000 per Series of Note. If required by the NAIC, the Company shall obtain and maintain at its own cost and expense a Legal Entity Identifier (LEI). The Company will pay, and will save each Purchaser and each other holder of a Note harmless from, (i) all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other holder in connection with its purchase of the Notes), (ii) any and all wire transfer fees that any bank or other financial institution deducts from any payment under such Note to such holder or otherwise charges to a holder of a Note with respect to a payment under such Note and (iii) any judgment, liability, claim, order, decree, fine, penalty, cost, fee, expense (including reasonable attorneys fees and expenses) or obligation resulting from the consummation of the transactions contemplated hereby, including the use of the proceeds of the Notes by the Company. Section Certain Taxes. The Company agrees to pay all stamp, documentary or similar taxes or fees which may be payable in respect of the execution and delivery or the -34-

169 enforcement of this Agreement or any NPA Guaranty or the execution and delivery (but not the transfer) or the enforcement of any of the Notes in the United States or any other jurisdiction where the Company or any Guarantor has assets or of any amendment of, or waiver or consent under or with respect to, this Agreement or any NPA Guaranty or of any of the Notes, and to pay any value added tax due and payable in respect of reimbursement of costs and expenses by the Company pursuant to this Section 15, and will save each holder of a Note to the extent permitted by applicable law harmless against any loss or liability resulting from nonpayment or delay in payment of any such tax or fee required to be paid by the Company hereunder. Section Survival. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement, any NPA Guaranty or the Notes, and the termination of this Agreement. SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a validly transferred Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement, the Notes and any NPA Guaranty embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. SECTION 17. AMENDMENT AND WAIVER. Section Requirements. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), only with the written consent of the Company and the Required Holders, except that: (a) no amendment or waiver of any of Sections 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing; and (b) no amendment or waiver may, without the written consent of each Purchaser and the holder of each Note at the time outstanding, (i) subject to Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of (x) interest on the Notes or (y) the Make Whole Amount, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any amendment or waiver or the principal amount of the Notes that the Purchasers are to purchase pursuant to Section 2 upon the satisfaction of the conditions to Closing that -35-

170 appear in Section 4, or (iii) amend any of Sections 8 ( except as set forth in the second sentence of Section 8.2 ), 11(a), 11(b), 12, 17 or 20. Section Solicitation of Holders of Notes. (a) Solicitation. The Company will provide each Purchaser and each holder of a Note with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Purchaser or such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes or any NPA Guaranty. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to this Section 17 or any NPA Guaranty to each Purchaser and each holder of a Note promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Purchasers or holders of Notes. (b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Purchaser or holder of a Note as consideration for or as an inducement to the entering into by such Purchaser or holder of any waiver or amendment of any of the terms and provisions hereof or of any NPA Guaranty or any Note unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Purchaser and each holder of a Note even if such Purchaser or holder did not consent to such waiver or amendment. (c) Consent in Contemplation of Transfer. Any consent given pursuant to this Section 17 by a holder of a Note that has transferred or has agreed to transfer its Note to (i) the Company, (ii) any Subsidiary or any other Affiliate or (iii) any other Person in connection with, or in anticipation of, such other Person acquiring, making a tender offer for or merging with the Company and/or any of its Affiliates, in each case in connection with such consent, shall be void and of no force or effect except solely as to such holder, and any amendments effected or waivers granted or to be effected or granted that would not have been or would not be so effected or granted but for such consent (and the consents of all other holders of Notes that were acquired under the same or similar conditions) shall be void and of no force or effect except solely as to such holder. Section Binding Effect, Etc. Any amendment or waiver consented to as provided in this Section 17 or any NPA Guaranty applies equally to all Purchasers and holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and any Purchaser or holder of a Note and no delay in exercising any rights hereunder or under any Note or NPA Guaranty shall operate as a waiver of any rights of any holder of such Note. Section Notes Held by Company, Etc. Solely for the purpose of determining whether the Purchasers or holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given -36-

171 under this Agreement, any NPA Guaranty or the Notes, or have directed the taking of any action provided herein or in any NPA Guaranty or the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. SECTION 18. NOTICES. Except to the extent otherwise provided in Section 7.4, all notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by an internationally recognized overnight delivery service (charges prepaid), (b) by registered or certified mail with return receipt requested (postage prepaid) or (c) by an internationally recognized overnight delivery service (charges prepaid). Any such notice must be sent: (i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in the Purchaser Schedule, or at such other address as such Purchaser or nominee shall have specified to the Company in writing, writing, or (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of the Treasurer of the Company, or at such other address as the Company shall have specified to the holder of each Note in writing. Notwithstanding the foregoing, any notices or communications to be provided by the Company hereunder may be delivered to each Purchaser or its nominee by electronic delivery at the address set forth for such Purchaser or nominee in the Purchaser Schedule, or, for each Purchaser or its nominee or any holder of a Note, to the address as communicated from time to time in a separate writing delivered to the Company. Notices under this Section 18 will be deemed given only when actually received. SECTION 19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at any Closing (except the Notes themselves) and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such -37-

172 reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. SECTION 20. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, Confidential Information means information delivered to any Purchaser by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by such Purchaser as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser s behalf or any Person from whom such disclosure would, to the knowledge of such Purchaser, violate a duty of confidentiality to the Company or any Subsidiary, (c) otherwise becomes known to such Purchaser other than through disclosure by the Company or any Subsidiary or any Person from whom such disclosure would, to the knowledge of such Purchaser, violate a duty of confidentiality to the Company or any Subsidiary or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its auditors, financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by this Section 20), (v) any Person from which it offers to purchase any Security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by this Section 20), (vi) any federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser s investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser s Notes, this Agreement or any NPA Guaranty. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such -38-

173 holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying this Section 20. In the event that as a condition to receiving access to information relating to the Company or its Subsidiaries in connection with the transactions contemplated by or otherwise pursuant to this Agreement, any Purchaser or holder of a Note is required to agree to a confidentiality undertaking (whether through IntraLinks, another secure website, a secure virtual workspace or otherwise) which is different from this Section 20, this Section 20 shall not be amended thereby and, as between such Purchaser or such holder and the Company, this Section 20 shall supersede any such other confidentiality undertaking. SECTION 21. SUBSTITUTION OF PURCHASER. Each Purchaser shall have the right to substitute any one of its Affiliates or another Purchaser or any one of such other Purchaser s Affiliates (a Substitute Purchaser ) as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Substitute Purchaser, shall contain such Substitute Purchaser s agreement to be bound by this Agreement and shall contain a confirmation by such Substitute Purchaser of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21), shall be deemed to refer to such Substitute Purchaser in lieu of such original Purchaser. In the event that such Substitute Purchaser is so substituted as a Purchaser hereunder and such Substitute Purchaser thereafter transfers to such original Purchaser all of the Notes then held by such Substitute Purchaser, upon receipt by the Company of notice of such transfer, any reference to such Substitute Purchaser as a Purchaser in this Agreement (other than in this Section 21), shall no longer be deemed to refer to such Substitute Purchaser, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original holder of the Notes under this Agreement. SECTION 22. MISCELLANEOUS. Section Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including any subsequent holder of a Note) whether so expressed or not, except that, subject to Section 10.2, the Company may not assign or otherwise transfer any of its rights or obligations hereunder or under the Notes without the prior written consent of each holder. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto and their respective successors and assigns permitted hereby) any legal or equitable right, remedy or claim under or by reason of this Agreement. Section Accounting Terms. (a) All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with this -39-

174 Agreement (including Section 9, Section 10 and the definition of Indebtedness ), any election by the Company to measure any financial liability using fair value (as permitted by Financial Accounting Standards Board Accounting Standards Codification Topic No Fair Value Option, International Accounting Standard 39 Financial Instruments: Recognition and Measurement or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made. (b) If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in this Agreement (including the financial covenant contained in Section 10.7), and either the Company or the Required Holders shall so request, the holders of Notes and the Company shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required Holders); provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (ii) the Company shall provide to the holders of Notes financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. Section Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. Section Construction, Etc. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. Defined terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words include, includes and including shall be deemed to be followed by the phrase without limitation. The word will shall be construed to have the same meaning and effect as the word shall. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein) and, for purposes of the Notes, shall also include any such notes issued in substitution therefor pursuant to Section 13, (b) subject to Section 22.1, any reference herein to any Person shall be construed to include such Person s successors and assigns, (c) the words herein, hereof and hereunder, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Sections and Schedules shall be construed to refer to Sections of, and Schedules to, this Agreement, and (e) any reference to any law or regulation herein shall, unless -40-

175 otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time. Section Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. Section Regulatory Statement. Pursuant to the terms of an order issued by the NMPRC and a stipulation that has been approved by the NMPRC, the Company is required to include the following separateness covenants in any debt instrument: (a) The Company and its corporate parent, the Parent, are being operated as separate corporate and legal entities. In agreeing to make loans to Parent, Parent s lenders are relying solely on the creditworthiness of Parent based on the assets owned by Parent, and the repayment of any loan to Parent will be made solely from the assets of Parent and not from any assets of the Company; and the Parent s lenders will not take any steps for the purpose of procuring the appointment of an administrative receiver or the making of an administrative order for instituting any bankruptcy, reorganization, insolvency, wind up or liquidation or any like proceeding under applicable law in respect of the Company. (b) Notwithstanding any of the foregoing set forth in this Section 22.6, the Company and the holders hereby acknowledge and agree that (i) this Agreement and the Notes evidence Indebtedness of the Company and not of the Parent, (ii) the holders are not, and shall not at any time be deemed to be, Parent s lenders under this Agreement and the Notes, (iii) as set forth in this Agreement and the Notes, the Company is responsible for the repayment of all amounts outstanding hereunder, and (iv) the holders of Notes reserve all rights to pursue any and all remedies available at law and otherwise (including in bankruptcy) should the Company breach any of its obligations under this Agreement and/or the Notes. Section Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. Section Jurisdiction and Process; Waiver of Jury Trial. (a) The Company irrevocably submits to the non exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. -41-

176 (b) The Company agrees, to the fullest extent permitted by applicable law, that a final judgment in any suit, action or proceeding of the nature referred to in Section 22.8(a) brought in any such court shall be conclusive and binding upon it subject to rights of appeal, as the case may be, and may be enforced in the courts of the United States of America or the State of New York (or any other courts to the jurisdiction of which it or any of its assets is or may be subject) by a suit upon such judgment. (c) The Company consents to process being served by or on behalf of any holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by mailing a copy thereof by registered, certified, priority or express mail (or any substantially similar form of mail), postage prepaid, return receipt or delivery confirmation requested, to it at its address specified in Section 18 or at such other address of which such holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service. (d) Nothing in this Section 22.8 shall affect the right of any holder of a Note to serve process in any manner permitted by law, or limit any right that the holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction. (e) THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH OR THEREWITH. * * * * * -42-

177 If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company. Very truly yours, PUBLIC SERVICE COMPANY OF NEW MEXICO By /s/ Elisabeth Eden Name: Elisabeth Eden Title: Vice President and Treasurer -43-

178 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ Ty Bowman Vice President THE PRUDENTIAL LIFE INSURANCE COMPANY, LTD. By: Prudential Investment Management Japan Co., Ltd., as Investment Manager By: PGIM, Inc., as Sub-Adviser By: /s/ Ty Bowman Vice President PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY By: PGIM, Inc., as investment manager By: /s/ Ty Bowman Vice President FARMERS INSURANCE EXCHANGE By: Prudential Private Placement Investors, L.P. (as Investment Advisor) By: Prudential Private Placement Investors, Inc. (as its General Partner) By: /s/ Ty Bowman Vice President

179 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. MID CENTURY INSURANCE COMPANY By: Prudential Private Placement Investors, L.P. (as Investment Advisor) By: Prudential Private Placement Investors, Inc. (as its General Partner) By: /s/ Ty Bowman Vice President THE GIBRALTAR LIFE INSURANCE CO., LTD. By: Prudential Investment Management Japan Co., Ltd., as Investment Manager By: PGIM, Inc., as Sub-Adviser By: /s/ Ty Bowman Vice President

180 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. JOHN HANCOCK LIFE INSURANCE COMPANY (U.S.A.) By /s/ Matthew Fedors Name: Matthew Fedors Title: Director

181 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: Northwestern Mutual Investment Management Company, LLC, its investment adviser By /s/ David A. Barras Name: David A. Barras Title: Managing Director THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY for its Group Annuity Separate Account By /s/ David A. Barras Name: David A. Barras Title: Authorized Representative

182 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. COBANK, ACB By /s/ C. Brock Taylor Name: C. Brock Taylor Title: Regional Vice President

183 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA By: /s/ John Kunkle Name: John Kunkle Title: Senior Director

184 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. FIRST UNUM LIFE INSURANCE COMPANY By: Provident Investment Management, LLC Its: Agent By: /s/ Ben Vance Name: Title: Ben Vance Vice President, Senior Managing Director

185 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. PROTECTIVE LIFE INSURANCE COMPANY By /s/ Philip E. Passafiume Name: Philip E. Passafiume Title: Director, Fixed Income MONY LIFE INSURANCE COMPANY By /s/ Philip E. Passafiume Name: Philip E. Passafiume Title: Director, Fixed Income

186 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. AMERICAN UNITED LIFE INSURANCE COMPANY By /s/ David M. Weisenburger Name: David M. Weisenburger Title: VP, Fixed Income Securities THE STATE LIFE INSURANCE COMPANY By:American United Life Insurance Company Its: Agent By /s/ David M. Weisenburger Name: David M. Weisenburger Title: VP, Fixed Income Securities

187 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY By: /s/ David Divine Name: David Divine Title: Senior Portfolio Manager

188 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. COUNTRY LIFE INSURANCE COMPANY COUNTRY MUTUAL INSURANCE COMPANY By: /s/ John A. Jacobs Name: John A. Jacobs Title: Director Fixed Income

189 Public Service Company of New Mexico Note Purchase Agreement This Agreement is hereby accepted and agreed to as of the date hereof. ASSURITY LIFE INSURANCE COMPANY By: /s/ Victor Weber Victor Weber Title: Senior Director - Investments Name:

190 DEFINED TERMS As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: Acceptable Rating Agency means S&P, Moody s or other nationally recognized statistical ratings organization so designated by the SEC, in each case, whose status has been confirmed by the SVO. Affiliate means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person. Unless the context otherwise clearly requires, any reference to an Affiliate is a reference to an Affiliate of the Company. Agreement means this Note Purchase Agreement, including all Schedules attached to this Agreement, as it may be amended, restated, supplemented or otherwise modified from time to time. Anti Corruption Laws means any law or regulation in a U.S. or any non U.S. jurisdiction regarding bribery or any other corrupt activity, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act Anti Money Laundering Laws means any law or regulation in a U.S. or any non U.S. jurisdiction regarding money laundering, drug trafficking, terrorist related activities or other money laundering predicate crimes, including the Currency and Foreign Transactions Reporting Act of 1970 (otherwise known as the Bank Secrecy Act) and the USA PATRIOT Act. Authorized Officer means any of the president, chief executive officer, chief financial officer or treasurer of the Company. time. Bankruptcy Code means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to Blocked Person means (a) a Person whose name appears on the list of Specially Designated Nationals and Blocked Persons published by OFAC, (b) a Person, entity or organization that is blocked or a target of sanctions that have been imposed under U.S. Economic Sanctions Laws or (c) a Person that is an agent, department or instrumentality of, or otherwise beneficially owned fifty percent (50%) or more by, controlled by or acting on behalf of, directly or indirectly, any one or more Person(s), entity or organization described in clause (a) or (b) or a Sanctioned Jurisdiction. Business Day means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed. SCHEDULE A (to Note Purchase Agreement)

191 Capital Lease means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. Capital Stock means (a) in the case of a corporation, all classes of capital stock of such corporation, (b) in the case of a partnership, partnership interests (whether general or limited), (c) in the case of a limited liability company, membership interests and (d) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person; including, in each case, all warrants, rights or options to purchase any of the foregoing. Change in Law means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, promulgation, implementation or application thereof by any Governmental Authority, (c) the adoption or taking effect of any request, rule, guideline, policy or directive (whether or not having the force of law) by any Governmental Authority or (d) any change in any request, rule, guideline, policy or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (i) the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 and all requests, rules, guidelines or directives thereunder or issued in connection therewith shall be deemed to be a Change in Law, regardless of the date enacted, adopted or issued and (ii) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a Change in Law, regardless of the date enacted, adopted or issued. Change of Control means the failure of the Parent to own and control more than 50% of the Voting Stock of the Company. Closing is defined in Section 3. Code means the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder from time to time. Company is defined in the first paragraph of this Agreement. Confidential Information is defined in Section 20. Consolidated Capitalization means the sum of (a) all of the shareholders equity or net worth of the Company and its Subsidiaries, as determined in accordance with GAAP plus (b) Consolidated Indebtedness minus (c) Securitization Equity. Consolidated Indebtedness means, as of any date of determination, with respect to the Company and its Subsidiaries on a consolidated basis, the difference of (a) an amount equal to all A-2

192 Indebtedness of the Company and its Subsidiaries as of such date minus (b) Non Recourse Securitization Indebtedness. Contingent Obligation means, with respect to any Person, any direct or indirect liability of such Person with respect to any Indebtedness, liability or other obligations (the primary obligation ) of another Person (the primary obligor ), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor in respect thereof to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof; provided, however, that, with respect to the Company and its Subsidiaries, the term Contingent Obligation shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation of any Person shall be deemed to be an amount equal to the maximum amount of such Person s liability with respect to the stated or determinable amount of the primary obligation for which such Contingent Obligation is incurred or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder. Control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms Controlled and Controlling shall have meanings correlative to the foregoing. Controlled Entity means (a) any of the Subsidiaries of the Company and any of their or the Company s respective Controlled Affiliates and (b) if the Company has a parent company, such parent company and its Controlled Affiliates. Debt Rating means the long term unsecured senior non credit enhanced debt rating of the Company by an Acceptable Rating Agency. Default means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. Default Rate means that rate of interest as defined in the first paragraph of the Notes of such Series. Disclosure Documents is defined in Section 5.3. EDGAR means the SEC s Electronic Data Gathering, Analysis and Retrieval System or any successor SEC electronic filing system for such purposes. A-3

193 Environmental Claim means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, accusations, allegations, notices of noncompliance or violation, investigations (other than internal reports prepared by any Person in the ordinary course of its business and not in response to any third party action or request of any kind) or proceedings relating in any way to any actual or alleged violation of or liability under any Environmental Laws or relating to any permit issued, or any approval given, under any such Environmental Laws (collectively, Claims ), including (a) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Laws and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to human health or the environment. Environmental Laws means any and all federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to Hazardous Materials. ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. ERISA Affiliate means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. Event of Default is defined in Section 11. FATCA means (a) sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version), together with any current or future regulations or official interpretations thereof, (b) any treaty, law or regulation of any other jurisdiction, or relating to an intergovernmental agreement between the United States of America and any other jurisdiction, which (in either case) facilitates the implementation of the foregoing clause (a), and (c) any agreements entered into pursuant to section 1471(b)(1) of the Code. Financial Covenant is defined in Section 9.8(a). First Closing is defined in Section 3. Fiscal Quarter means each of the calendar quarters ending as of the last day of each March, June, September and December. Fiscal Year means the calendar year ending December 31. Form 10 K is defined in Section 7.1(b). Form 10 Q is defined in Section 7.1(a). A-4

194 GAAP means (a) generally accepted accounting principles as in effect from time to time in the United States of America and (b) for purposes of Section 9.6, with respect to any Subsidiary, generally accepted accounting principles (including International Financial Reporting Standards, as applicable) as in effect from time to time in the jurisdiction of organization of such Subsidiary. Guarantor is defined in Section 9.7. Governmental Authority means (a) the government of (i) the United States of America or any state or other political subdivision thereof, or (ii) any other jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or government. (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such Governmental Official means any governmental official or employee, employee of any government owned or government controlled entity, political party, any official of a political party, candidate for political office, official of any public international organization or anyone else acting in an official capacity. Guaranty means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. A-5

195 In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. Hazardous Materials means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law, including asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances. Hedging Agreements means, collectively, interest rate protection agreements, equity index agreements, foreign currency exchange agreements, option agreements or other interest or exchange rate or commodity price hedging agreements (other than forward contracts for the delivery of power or gas written by the Company to its jurisdictional and wholesale customers in the ordinary course of business). holder means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1, provided, however, that if such Person is a nominee, then for the purposes of Sections 7, 12, 17.2 and 18 and any related definitions in this Schedule A, holder shall mean the beneficial owner of such Note whose name and address appears in such register. INHAM Exemption is defined in Section 6.2(e). Indebtedness means, with respect to any Person (without duplication), (a) all indebtedness and obligations of such Person for borrowed money or in respect of loans or advances of any kind, (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (c) all reimbursement obligations of such Person with respect to surety bonds, letters of credit and bankers acceptances (in each case, whether or not drawn or matured and in the stated amount thereof), (d) all obligations of such Person to pay the deferred purchase price of property or services, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (f) all obligations of such Person as lessee under leases that are or are required to be, in accordance with GAAP, recorded as capital leases, to the extent such obligations are required to be so recorded, (g) the net termination obligations of such Person under any Hedging Agreements, calculated as of any date as if such agreement or arrangement were terminated as of such date in accordance with the applicable rules under GAAP, (h) all Contingent Obligations of such Person, (i) all obligations and liabilities of such Person incurred in connection with any transaction or series of transactions providing for the financing of assets through one or more securitizations or in connection with, or pursuant to, any synthetic lease or similar off-balance sheet financing, (j) the aggregate amount of uncollected accounts receivable of such Person subject at the time of determination to a sale of receivables (or similar transaction) to the extent such transaction is effected with recourse to such Person (whether or not such transaction would be reflected on the balance sheet of such Person in accordance with GAAP) and (k) all indebtedness referred to in clauses (a) through (j) above secured by any Lien A-6

196 on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by such Person or is nonrecourse to the credit of such Person. Institutional Investor means (a) any Purchaser of a Note, (b) any holder of a Note holding (together with one or more of its affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any holder of any Note. Lien means any mortgage, pledge, hypothecation, assignment, security interest, lien (statutory or otherwise), preference, priority, charge or other encumbrance of any nature, whether voluntary or involuntary, including the interest of any vendor or lessor under any conditional sale agreement, title retention agreement, capital lease or any other lease or arrangement having substantially the same effect as any of the foregoing. Make Whole Amount is defined in Section 8.6. Margin Stock has the meaning ascribed to such term in Regulation U. Material means material in relation to the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole. Material Adverse Effect means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, (b) the ability of the Company to perform its obligations under this Agreement and the Notes or (c) the validity or enforceability of this Agreement or the Notes, provided, however, that a Material Adverse Effect shall not include the effect of the shutdown or closure of the San Juan Generating Station or the Four Corners Power Plant, provided that the Company remains in compliance with Section 10.7 of this Agreement. Material Credit Facility means, as to the Company and its Subsidiaries, (a) the Credit Agreement dated as of October 31, 2011 among the Company, the lenders identified therein and Wells Fargo Bank, National Association as administrative agent, including any renewals, extensions, amendments, supplements, restatements, replacements or refinancing thereof; (b) the Term Loan Agreement dated as of July 20, 2017 among the Company, the lenders identified therein and JPMorgan Chase Bank, N.A., as administrative agent, including any renewals, extensions, amendments, supplements, restatements, replacements or refinancing thereof; (c) any other agreement(s) creating or evidencing indebtedness for borrowed money entered into on or after the date of this Agreement by the Company or any A-7

197 Subsidiary, or in respect of which the Company or any Subsidiary is an obligor or otherwise provides a guarantee or other credit support ( Credit Facility ), in a principal amount outstanding or available for borrowing equal to or greater than (i) $75,000,000 for the purposes of Section 9.8 (or the equivalent of such amount in the relevant currency of payment, determined as of the date of the closing of such facility based on the exchange rate of such other currency) or (ii) $20,000,000 for all other provisions under this Agreement (or the equivalent of such amount in the relevant currency of payment, determined as of the date of the closing of such facility based on the exchange rate of such other currency); and if no Credit Facility or Credit Facilities equal or exceed such amounts, then the largest Credit Facility shall be deemed to be a Material Credit Facility. Maturity Date is defined in the first paragraph of each Note. Memorandum is defined in Section 5.3. Modified Covenant is defined in Section 9.8(a). Moody s means Moody s Investors Service, Inc. and its successors. Most Favored Lender Notice is defined in Section 9.8(c). Multiemployer Plan means any Plan that is a multiemployer plan (as such term is defined in section 4001(a)(3) of ERISA). NAIC means the National Association of Insurance Commissioners. NMPRC means the New Mexico Public Regulation Commission or any successor commission. Non U.S. Plan means any plan, fund or other similar program that (a) is established or maintained outside the United States of America by the Company or any Subsidiary primarily for the benefit of employees of the Company or one or more Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment and (b) is not subject to ERISA or the Code. Non Recourse Securitization Indebtedness means, as of any date of determination, all Indebtedness related to State Approved Securitizations up to a maximum amount of $500,000,000 at any one time; provided that such Indebtedness is non recourse to the Company, other than with respect to Standard Securitization Undertakings. Non-Subsidiary Guarantor is defined in Section 9.7(a). Notes is defined in Section 1. NPA Guaranty is defined in Section 9.7(a). A-8

198 OFAC means the Office of Foreign Assets Control of the United States Department of the Treasury. OFAC Sanctions Program means any economic or trade sanction that OFAC is responsible for administering and enforcing. A list of OFAC Sanctions Programs may be found at Officer s Certificate means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. Parent means PNM Resources, Inc., a New Mexico corporation. PBGC means the Pension Benefit Guaranty Corporation referred to and defined in ERISA. Person means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority. Plan means an employee benefit plan (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five (5) years, has been established or maintained, or to which contributions are or, within the preceding five (5) years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. Property means any right, title or interest in or to any property or asset of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. property or properties means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. PTE is defined in Section 6.2(a). Purchaser or Purchasers means each of the purchasers that has executed and delivered this Agreement to the Company and such Purchaser s successors and assigns (so long as any such assignment complies with Section 13.2), provided, however, that any Purchaser of a Note that ceases to be the registered holder or a beneficial owner (through a nominee) of such Note as the result of a transfer thereof pursuant to Section 13.2 shall cease to be included within the meaning of Purchaser of such Note for the purposes of this Agreement upon such transfer. Purchaser Schedule means the Purchaser Schedule to this Agreement listing the Purchasers of the Notes and including their notice and payment information. Qualified Institutional Buyer means any Person who is a qualified institutional buyer within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act. QPAM Exemption is defined in Section 6.2(d). A-9

199 Related Fund means, with respect to any holder of any Note, any fund or entity that (a) invests in Securities or bank loans, and (b) is advised or managed by such holder, the same investment advisor as such holder or by an affiliate of such holder or such investment advisor. Required Holders means (i) prior to the Second Closing, the Purchasers and (ii) at any time on or after the Second Closing, or if no Second Closing occurs but the Notes issued at the First Closing remain outstanding, the holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates). Responsible Officer means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement. Sanctioned Jurisdiction means, at any time, a country or territory which is itself subject to or the target of any comprehensive country-wide sanctions under U.S. Economic Sanctions (as opposed to individual, entity or other list-based Sanctions) (at the time of this Agreement, the Crimea Region of Ukraine, Cuba, Iran, North Korea, Sudan and Syria). S&P means Standard & Poor s Financial Services LLC, a subsidiary of The McGraw Hill Companies, Inc. and its successors. SEC means the Securities and Exchange Commission of the United States of America. Second Closing is defined in Section 3. Securities or Security shall have the meaning specified in section 2(1) of the Securities Act. Securities Act means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. Securitization Equity means, as of any date of determination, with respect to a Subsidiary of the Company formed for the purpose of entering into a State Approved Securitization, all of the equity of such Subsidiary, as determined in accordance with GAAP. Senior Financial Officer means the chief financial officer, principal accounting officer, treasurer or controller of the Company. Series is defined in Section 1. Series A Notes is defined in Section 1. Series B Notes is defined in Section 1. Series C Notes is defined in Section 1. Series D Notes is defined in Section 1. A-10

200 Series E Notes is defined in Section 1. Series F Notes is defined in Section 1. Series G Notes is defined in Section 1. Series H Notes is defined in Section 1. Significant Subsidiary means at any time any Subsidiary that would at such time constitute a significant subsidiary (as such term is defined in Regulation S-X of the SEC as in effect on the date of this Agreement) of the Company. Solvent means, with respect to any Person as of a particular date, that on such date (a) such Person is able to pay its debts and other liabilities, Contingent Obligations and other commitments as they mature in the normal course of business, (b) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person s ability to pay as such debts and liabilities mature in their ordinary course, (c) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person s assets would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged or is to engage, (d) the fair value of the assets of such Person is greater than the total amount of liabilities of such Person and (e) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured. Source is defined in Section 6.2. Standard Securitization Undertakings means representations, warranties, covenants and indemnities entered into by the Company or a Subsidiary thereof that are reasonably customary in non recourse securitization transactions. State Approved Securitization means a securitization financing entered into by the Company pursuant to existing or future New Mexico statutory authority and regulatory approval by the NMPRC authorizing the imposition on electric customers of a charge to permit the recovery over time of costs identified by a financing order issued by the NMPRC pursuant to statutory authority, so long as such securitization financing is non-recourse to the Company (other than with respect to Standard Securitization Undertakings). State Sanctions List means a list that is adopted by any state Governmental Authority within the United States of America pertaining to Persons that engage in investment or other commercial activities in Iran or any other country that is a target of economic sanctions imposed under U.S. Economic Sanctions Laws. Subsidiary means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of A-11

201 contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Any reference to a Subsidiary of the Company herein shall not include a Subsidiary that is inactive, has minimal or no assets and does not generate revenues. Unless the context otherwise clearly requires, any reference to a Subsidiary is a reference to a Subsidiary of the Company. Substitute Purchaser is defined in Section 21. SVO means the Securities Valuation Office of the NAIC. United States Person has the meaning set forth in Section 7701(a)(30) of the Code. USA PATRIOT Act means United States Public Law , Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001 and the rules and regulations promulgated thereunder from time to time in effect. U.S. Economic Sanctions Laws means those laws, executive orders, enabling legislation or regulations administered and enforced by the United States pursuant to which economic sanctions have been imposed on any Person, entity, organization, country or regime, including the Trading with the Enemy Act, the International Emergency Economic Powers Act, the Iran Sanctions Act, the Sudan Accountability and Divestment Act and any other OFAC Sanctions Program. Voting Stock means the Capital Stock of a Person that is then outstanding and normally entitled to vote in the election of directors and other securities of such Person convertible into or exercisable for such Capital Stock (whether or not such securities are then currently convertible or exercisable). Wholly Owned Subsidiary means, at any time, any Subsidiary all of the equity interests (except directors qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company s other Wholly Owned Subsidiaries at such time. A-12

202 [FORM OF SERIES A NOTE] PUBLIC SERVICE COMPANY OF NEW MEXICO 3.15% SENIOR UNSECURED NOTE, SERIES A, DUE MAY 15, 2023 No. [ ] [Date] $[ ] PPN A*2 FOR VALUE RECEIVED, the undersigned, PUBLIC SERVICE COMPANY OF NEW MEXICO (herein called the Company ), a corporation organized and existing under the laws of the State of New Mexico, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid) on May 15, 2023 (the Maturity Date ), with interest (computed on the basis of a 360 day year of twelve 30 day months) (a) on the unpaid balance hereof at the rate of 3.15% per annum from the date hereof, payable semiannually, on the 15th day of May and November in each year, commencing with the May or November next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (x) on any overdue payment of interest and (y) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make Whole Amount, at a rate per annum from time to time equal to the greater of (i) 5.15% or (ii) 2.00% over the rate of interest publicly announced by Wells Fargo Bank, National Association from time to time in New York, New York as its base or prime rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand) (the Default Rate ). Payments of principal of, interest on and any Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Wells Fargo Bank, National Association or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Unsecured Notes (herein called the Notes ) issued pursuant to the Note Purchase Agreement, dated July 28, 2017 (as from time to time amended, the Note Purchase Agreement ), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) made the representation set forth in Section 6.2 of the Note Purchase Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the SCHEDULE 1-A (to Note Purchase Agreement)

203 transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. PUBLIC SERVICE COMPANY OF NEW MEXICO By [Title] 1-A-1

204 [FORM OF SERIES B NOTE] PUBLIC SERVICE COMPANY OF NEW MEXICO 3.45% SENIOR UNSECURED NOTE, SERIES B, DUE MAY 15, 2025 No. [ ] $[ ] [Date] PPN A@0 FOR VALUE RECEIVED, the undersigned, PUBLIC SERVICE COMPANY OF NEW MEXICO (herein called the Company ), a corporation organized and existing under the laws of the State of New Mexico, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid) on May 15, 2025 (the Maturity Date ), with interest (computed on the basis of a 360 day year of twelve 30 day months) (a) on the unpaid balance hereof at the rate of 3.45% per annum from the date hereof, payable semiannually, on the 15th day of May and November in each year, commencing with the May or November next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (x) on any overdue payment of interest and (y) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make Whole Amount, at a rate per annum from time to time equal to the greater of (i) 5.45% or (ii) 2.00% over the rate of interest publicly announced by Wells Fargo Bank, National Association from time to time in New York, New York as its base or prime rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand). Payments of principal of, interest on and any Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Wells Fargo Bank, National Association or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Unsecured Notes (herein called the Notes ) issued pursuant to the Note Purchase Agreement, dated July 28, 2017 (as from time to time amended, the Note Purchase Agreement ), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) made the representation set forth in Section 6.2 of the Note Purchase Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the SCHEDULE 1-B (to Note Purchase Agreement)

205 transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. PUBLIC SERVICE COMPANY OF NEW MEXICO By [Title] 1-B-1

206 [FORM OF SERIES C NOTE] PUBLIC SERVICE COMPANY OF NEW MEXICO 3.68% SENIOR UNSECURED NOTE, SERIES C, DUE MAY 15, 2028 No. [ ] [Date] $[ ] PPN A#8 FOR VALUE RECEIVED, the undersigned, PUBLIC SERVICE COMPANY OF NEW MEXICO (herein called the Company ), a corporation organized and existing under the laws of the State of New Mexico, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid) on May 15, 2028 (the Maturity Date ), with interest (computed on the basis of a 360 day year of twelve 30 day months) (a) on the unpaid balance hereof at the rate of 3.68% per annum from the date hereof, payable semiannually, on the 15th day of May and November in each year, commencing with the May or November next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (x) on any overdue payment of interest and (y) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make Whole Amount, at a rate per annum from time to time equal to the greater of (i) 5.68% or (ii) 2.00% over the rate of interest publicly announced by Wells Fargo Bank, National Association from time to time in New York, New York as its base or prime rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand). Payments of principal of, interest on and any Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Wells Fargo Bank, National Association or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Unsecured Notes (herein called the Notes ) issued pursuant to the Note Purchase Agreement, dated July 28, 2017 (as from time to time amended, the Note Purchase Agreement ), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) made the representation set forth in Section 6.2 of the Note Purchase Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the SCHEDULE 1-C (to Note Purchase Agreement)

207 transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. PUBLIC SERVICE COMPANY OF NEW MEXICO By [Title] 1-C-1

208 [FORM OF SERIES D NOTE] PUBLIC SERVICE COMPANY OF NEW MEXICO 3.78% SENIOR UNSECURED NOTE, SERIES D, DUE AUGUST 1, 2028 No. [ ] [Date] $[ ] PPN B*1 FOR VALUE RECEIVED, the undersigned, PUBLIC SERVICE COMPANY OF NEW MEXICO (herein called the Company ), a corporation organized and existing under the laws of the State of New Mexico, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid) on August 1, 2028 (the Maturity Date ), with interest (computed on the basis of a 360 day year of twelve 30 day months) (a) on the unpaid balance hereof at the rate of 3.78% per annum from the date hereof, payable semiannually, on the 1st day of February and August in each year, commencing with the February or August next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (x) on any overdue payment of interest and (y) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make Whole Amount, at a rate per annum from time to time equal to the greater of (i) 5.78% or (ii) 2.00% over the rate of interest publicly announced by Wells Fargo Bank, National Association from time to time in New York, New York as its base or prime rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand) (the Default Rate ). Payments of principal of, interest on and any Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Wells Fargo Bank, National Association or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Unsecured Notes (herein called the Notes ) issued pursuant to the Note Purchase Agreement, dated July 28, 2017 (as from time to time amended, the Note Purchase Agreement ), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) made the representation set forth in Section 6.2 of the Note Purchase Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the SCHEDULE 1-D (to Note Purchase Agreement)

209 transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. PUBLIC SERVICE COMPANY OF NEW MEXICO By [Title] 1-D-1

210 [FORM OF SERIES E NOTE] PUBLIC SERVICE COMPANY OF NEW MEXICO 3.93% SENIOR UNSECURED NOTE, SERIES E, DUE MAY 15, 2033 No. [ ] $[ ] [Date] PPN B@9 FOR VALUE RECEIVED, the undersigned, PUBLIC SERVICE COMPANY OF NEW MEXICO (herein called the Company ), a corporation organized and existing under the laws of the State of New Mexico, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid) on May 15, 2033 (the Maturity Date ), with interest (computed on the basis of a 360 day year of twelve 30 day months) (a) on the unpaid balance hereof at the rate of 3.93% per annum from the date hereof, payable semiannually, on the 15th day of May and November in each year, commencing with the May or November next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (x) on any overdue payment of interest and (y) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make Whole Amount, at a rate per annum from time to time equal to the greater of (i) 5.93% or (ii) 2.00% over the rate of interest publicly announced by Wells Fargo Bank, National Association from time to time in New York, New York as its base or prime rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand). Payments of principal of, interest on and any Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Wells Fargo Bank, National Association or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Unsecured Notes (herein called the Notes ) issued pursuant to the Note Purchase Agreement, dated July 28, 2017 (as from time to time amended, the Note Purchase Agreement ), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) made the representation set forth in Section 6.2 of the Note Purchase Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the SCHEDULE 1-E (to Note Purchase Agreement)

211 transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. PUBLIC SERVICE COMPANY OF NEW MEXICO By [Title] 1-E-1

212 [FORM OF SERIES F NOTE] PUBLIC SERVICE COMPANY OF NEW MEXICO 4.22% SENIOR UNSECURED NOTE, SERIES F, DUE MAY 15, 2038 No. [ ] [Date] $[ ] PPN B#7 FOR VALUE RECEIVED, the undersigned, PUBLIC SERVICE COMPANY OF NEW MEXICO (herein called the Company ), a corporation organized and existing under the laws of the State of New Mexico, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid) on May 15, 2038 (the Maturity Date ), with interest (computed on the basis of a 360 day year of twelve 30 day months) (a) on the unpaid balance hereof at the rate of 4.22% per annum from the date hereof, payable semiannually, on the 15th day of May and November in each year, commencing with the May or November next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (x) on any overdue payment of interest and (y) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make Whole Amount, at a rate per annum from time to time equal to the greater of (i) 6.22% or (ii) 2.00% over the rate of interest publicly announced by Wells Fargo Bank, National Association from time to time in New York, New York as its base or prime rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand). Payments of principal of, interest on and any Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Wells Fargo Bank, National Association or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Unsecured Notes (herein called the Notes ) issued pursuant to the Note Purchase Agreement, dated July 28, 2017 (as from time to time amended, the Note Purchase Agreement ), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) made the representation set forth in Section 6.2 of the Note Purchase Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the SCHEDULE 1-F (to Note Purchase Agreement)

213 transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. PUBLIC SERVICE COMPANY OF NEW MEXICO By [Title] 1-F-1

214 [FORM OF SERIES G NOTE] PUBLIC SERVICE COMPANY OF NEW MEXICO 4.50% SENIOR UNSECURED NOTE, SERIES G, DUE MAY 15, 2048 No. [ ] [Date] $[ ] PPN C*0 FOR VALUE RECEIVED, the undersigned, PUBLIC SERVICE COMPANY OF NEW MEXICO (herein called the Company ), a corporation organized and existing under the laws of the State of New Mexico, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid) on May 15, 2048 (the Maturity Date ), with interest (computed on the basis of a 360 day year of twelve 30 day months) (a) on the unpaid balance hereof at the rate of 4.50% per annum from the date hereof, payable semiannually, on the 15th day of May and November in each year, commencing with the May or November next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (x) on any overdue payment of interest and (y) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make Whole Amount, at a rate per annum from time to time equal to the greater of (i) 6.50% or (ii) 2.00% over the rate of interest publicly announced by Wells Fargo Bank, National Association from time to time in New York, New York as its base or prime rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand) (the Default Rate ). Payments of principal of, interest on and any Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Wells Fargo Bank, National Association or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Unsecured Notes (herein called the Notes ) issued pursuant to the Note Purchase Agreement, dated July 28, 2017 (as from time to time amended, the Note Purchase Agreement ), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) made the representation set forth in Section 6.2 of the Note Purchase Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the SCHEDULE 1-G (to Note Purchase Agreement)

215 transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. PUBLIC SERVICE COMPANY OF NEW MEXICO By [Title] 1-G-1

216 [FORM OF SERIES H NOTE] PUBLIC SERVICE COMPANY OF NEW MEXICO 4.60% SENIOR UNSECURED NOTE, SERIES H, DUE AUGUST 1, 2048 No. [ ] $[ ] [Date] PPN C@8 FOR VALUE RECEIVED, the undersigned, PUBLIC SERVICE COMPANY OF NEW MEXICO (herein called the Company ), a corporation organized and existing under the laws of the State of New Mexico, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid) on August 1, 2048 (the Maturity Date ), with interest (computed on the basis of a 360 day year of twelve 30 day months) (a) on the unpaid balance hereof at the rate of 4.60% per annum from the date hereof, payable semiannually, on the 1st day of February and August in each year, commencing with the February or August next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (x) on any overdue payment of interest and (y) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make Whole Amount, at a rate per annum from time to time equal to the greater of (i) 6.60% or (ii) 2.00% over the rate of interest publicly announced by Wells Fargo Bank, National Association from time to time in New York, New York as its base or prime rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand). Payments of principal of, interest on and any Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Wells Fargo Bank, National Association or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Unsecured Notes (herein called the Notes ) issued pursuant to the Note Purchase Agreement, dated July 28, 2017 (as from time to time amended, the Note Purchase Agreement ), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) made the representation set forth in Section 6.2 of the Note Purchase Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the SCHEDULE 1-H (to Note Purchase Agreement)

217 transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State. PUBLIC SERVICE COMPANY OF NEW MEXICO By [Title] 1-H-1

218 SCHEDULE 4.4(A) FORM OF OPINION OF IN-HOUSE COUNSEL TO THE COMPANY The following opinions are to be provided by in-house counsel to the Company, pursuant to New Mexico law, subject to customary assumptions, limitations and qualifications. All capitalized terms used herein without definition shall have the meanings ascribed thereto in the Note Purchase Agreement. 1. The Company is a corporation validly existing and in good standing under the laws the State of New Mexico. 2. The Company has the corporate power and execute, deliver and perform its obligations under the Note Purchase Agreement and the Notes, and the Company has taken all necessary corporate action to authorize the execution, delivery and performance by it of the Note Purchase Agreement and the Notes. 3. The Company has duly executed and delivered the Note Purchase Agreement and the Notes. 4. Other than the Company s filing with the NMPRC, and the NMPRC s approval, of the transactions contemplated by the Note Purchase Agreement, which have previously been made and obtained, no consent, approval or authorization of, or filing with, any governmental authority of the State of New Mexico applicable to the Company is required in connection with the execution, delivery or performance of the Note Purchase Agreement and the Notes by the Company, except (i) as have been previously made or obtained and (ii) filings which are necessary in order to release liens not permitted by the Note Purchase Agreement. 5. The execution, delivery and performance by the Company of the Note Purchase Agreement and the Notes do not (i) violate the articles of incorporation or bylaws of the Company, (ii) violate any applicable law or regulation of the State of New Mexico, (iii) violate or constitute a default under any order, decree, injunction or judgment (each an Order ) or under any material indenture, credit agreement, mortgage, deed of trust, contract or other agreement or instrument (each an Agreement ), in each case known to me and to which the Company is a party or by which the Company or its properties may be bound or (iv) to my knowledge, result in the creation or imposition of any Lien on any asset of the Company pursuant to the terms of any Order or Agreement. 6. To my knowledge, after making reasonable inquiry of other members of the law department of the Company, and except as disclosed in the Company s Annual Report on Form 10-K for the Fiscal Year ended December 31, 2017, and in the Borrower s Quarterly Report on Form 10-Q for the Fiscal Quarter[s] ended March 31, 2018 [and June 30, 2018], there are no actions, suits or legal, equitable, arbitration or administrative proceedings pending or threatened SCHEDULE 4.4(a) (to Note Purchase Agreement)

219 against the Borrower that (a) draw into question the validity of the Note Purchase Agreement or the Notes or (b) would have or would be reasonably expected to have a Material Adverse Effect. S-4.4(a)-2

220 FORM OF OPINION OF SPECIAL COUNSEL FOR THE COMPANY The following opinions are to be provided by the special counsel of the Company, pursuant to New York and federal law, subject to customary assumptions (including assumptions regarding matters covered by the opinion of Company counsel), limitations and qualifications. All capitalized terms used herein without definition shall have the meanings ascribed thereto in the Note Purchase Agreement. 1. Each of the Note Purchase Agreement and the Notes constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance its terms under the laws of the State of New York. 2. No consent, approval or authorization of or filing with, any Governmental Authority of the State of New York or the United States that, in each case, is applicable to the Company is required for the execution, delivery or performance by the Company of the Note Purchase Agreement or the Notes, except (i) as have been previously made or obtained and (ii) filings which are necessary in order to release liens not permitted by the Note Purchase Agreement, if any. 3. The Company is not required to be registered under the Investment Company Act of 1940, as amended. 4. No registration under the Securities Act of 1933, as amended, of the Notes, and no qualification of an Indenture under the Trust Indenture Act of 1939, as amended, in respect of the Notes, is required for the offer and sale of the Notes in the manner contemplated by the Note Purchase Agreement, it being understood that no opinion is expressed as to any subsequent resale of any Notes. 5. Neither the execution and delivery by the Company of the Note Purchase Agreement or the Notes, nor the performance by the Company of its obligations thereunder violates any statute or regulation of New York or United States federal law (including Regulation T, U or X of the Board of Governors of the United States Federal Reserve System) that is applicable to the Company. S-4.4(a)-2

221 SCHEDULE 5.3 DISCLOSURE MATERIALS PUBLIC SERVICE COMPANY OF NEW MEXICO IntraLinks Items : Document Title PNM Cover Letter PNM Cover Letter pdf PNM Note Purchase Agreement PNM Note Purchase Agreement.pdf (Draft of ) PNM Note Purchase Agreement Redline PNM Note Purchase Agreement_Redline.pdf (redlined to Model Form 1) Private Placement Memorandum PNM Private Placement Memorandum dated July 2017 PNM Investor Call Presentation PNM Investor Presentation July 2017 PNM FINAL.pdf Financial Statements Listed in Schedule 5.5 SEC Filings : PNM s Annual Reports on Form 10-K for the years ended December 31, , Quarterly Report on Form 10 Q for March 31, 2017, and Current Reports on Form 8-K filed May 5, 2017, May 15, 2017, May 23, 2017 and July 20, 2017 are all available on the following link: SCHEDULE 5.3 (to Note Purchase Agreement)

222 SCHEDULE 5.4 i) The Company s Subsidiaries (as defined): None i) The Company s Affiliates 1, other than Subsidiaries (as defined): SUBSIDIARIES AND AFFILIATES OF THE COMPANY AS OF JULY 28, 2017 a) PNM Resources, Inc. b) TNP Enterprises, Inc. c) Texas-New Mexico Power Company d) PNMR Services Company e) PNMR Development and Management Corporation f) NM Capital Utility Corporation ii) The Company s Directors and Officers: a) Directors: Patricia K. Collawn, Chairman Ronald N. Darnell, Director Charles N. Eldred, Director Chris M. Olson, Director b) Officers: Patrick V. Apodaca, Senior Vice President, General Counsel and Secretary Patricia K. Collawn, Chief Executive Officer and President Ronald N. Darnell, Senior Vice President, Public Policy Elisabeth A. Eden, Vice President and Treasurer Charles N. Eldred, Executive Vice President and Chief Financial Officer Thomas G. Fallgren, Interim Vice President, NM Operations Michael Mertz, Vice President and Chief Information Officer Laurie S. Monfiletto, Vice President, Human Resources Chris M. Olson, Vice President, Utility Operations Gerard T. Ortiz, Vice President, Regulatory and Economic Development Joseph D. Tarry, Vice President, Finance and Controller Becky R. Teague, Vice President, External Affairs 1 List does not include inactive Affiliates. SCHEDULE 5.4 (to Note Purchase Agreement)

223 SCHEDULE 5.5 Financial Statements of Public Service Company of New Mexico contained in the following SEC Filings: Date Filed SEC Filings Description 4/28/ Q Quarterly Report for quarter ended 3/31/17 2/28/ K Annual Report for year ended 12/31/16 2/29/ K Annual Report for year ended 12/31/15 2/27/ K Annual Report for year ended 12/31/14 Available on the following link: SCHEDULE 5.5 (to Note Purchase Agreement)

224 SCHEDULE 5.15 [see attached] SCHEDULE 5.15 (to Note Purchase Agreement)

225 EXISTING INDEBTEDNESS OF THE COMPANY 2 AT 6/30/2017 * The $175M PNM Term Loan was prepaid on July 20, 2017 with proceeds from a new unsecured $200M PNM Term Loan, which matures on January 18, 2019 and has an interest rate of LIBOR % 2 As set forth in Section 5.4, PNM has no Subsidiaries (as defined)

226 PUBLIC SERVICE COMPANY OF NEW MEXICO 414 SILVER AVENUE SW ALBUQUERQUE, NM INFORMATION RELATING TO PURCHASERS NAME AND ADDRESS OF PURCHASER THE PRUDENTIAL INSURANCE COMPANY OF AMERICA c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series C $6,400,000 Series E $13,000,000 (1) All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Account Name: Prudential GM Buyout Private Custody Account No.: P30819 (please do not include spaces) Each such wire transfer shall set forth the name of the Company, a reference to "3.68% Senior Unsecured Notes due May 15, 2028, Security No. INV12133, PPN A#8 (Series C)" and/or "3.93% Senior Unsecured Notes due May 15, 2033, Security No. INV12133, PPN B@9 (Series E)" and the due date and application (as among principal, interest and Make-Whole Amount) of the payment being made. (2) Address for all communications and notices: The Prudential Insurance Company of America c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power s for delivery: Wendy.carlson@prudential.com Ty.bowman@prudential.com efg.dallas@prudential.com PURCHASER SCHEDULE (to Note Purchase Agreement)

227 and for all notices relating solely to scheduled principal and interest payments to : The Prudential Insurance Company of America c/o PGIM, Inc. Prudential Tower 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: PIM Private Accounting Processing Team Pim.Private.Accounting.Processing.Team@prudential.com (3) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: PGIM, Inc. 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: Michael Iacono - Trade Management Manager (b) Send copy by to: Jaya McClure Jaya.Mcclure@prudential.com (214) (4) Tax Identification No.: Purchaser Schedule

228 NAME AND ADDRESS OF PURCHASER THE PRUDENTIAL INSURANCE COMPANY OF AMERICA c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series D $15,000,000 Series F $1,000,000 (1) All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Account Name: Prudential Managed Portfolio Account No.: P86188 (please do not include spaces) Each such wire transfer shall set forth the name of the Company, a reference to "3.78% Senior Unsecured Notes due August 1, 2028, Security No. INV12133, PPN B*1 (Series D)" and/or "4.22% Senior Unsecured Notes due May 15, 2038, Security No. INV12133, PPN B#7 (Series F)" and the due date and application (as among principal, interest and Make-Whole Amount) of the payment being made. (2) Address for all communications and notices: The Prudential Insurance Company of America c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power s for delivery: Wendy.carlson@prudential.com Ty.bowman@prudential.com efg.dallas@prudential.com and for all notices relating solely to scheduled principal and interest payments to : -3- Purchaser Schedule

229 The Prudential Insurance Company of America c/o PGIM, Inc. Prudential Tower 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: PIM Private Accounting Processing Team Pim.Private.Accounting.Processing.Team@prudential.com (3) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: PGIM, Inc. 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: Michael Iacono - Trade Management Manager (b) Send copy by to: Jaya McClure Jaya.Mcclure@prudential.com (214) (4) Tax Identification No.: Purchaser Schedule

230 NAME AND ADDRESS OF PURCHASER THE PRUDENTIAL INSURANCE COMPANY OF AMERICA c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series F $15,000,000 (1) All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Account Name: Hartford Financial Single Client SA Account No.: P99726 (please do not include spaces) Each such wire transfer shall set forth the name of the Company, a reference to "4.22% Senior Unsecured Notes due May 15, 2038, Security No. INV12133, PPN B#7" and the due date and application (as among principal, interest and Make-Whole Amount) of the payment being made. (2) Address for all communications and notices: The Prudential Insurance Company of America c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power s for delivery: Wendy.carlson@prudential.com Ty.bowman@prudential.com efg.dallas@prudential.com and for all notices relating solely to scheduled principal and interest payments to : -5- Purchaser Schedule

231 The Prudential Insurance Company of America c/o PGIM, Inc. Prudential Tower 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: PIM Private Accounting Processing Team Pim.Private.Accounting.Processing.Team@prudential.com (3) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: PGIM, Inc. 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: Michael Iacono - Trade Management Manager (b) Send copy by to: Jaya McClure Jaya.Mcclure@prudential.com (214) (4) Tax Identification No.: Purchaser Schedule

232 NAME AND ADDRESS OF PURCHASER THE PRUDENTIAL LIFE INSURANCE COMPANY, LTD. c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series C $28,000,000 (1) All principal, interest and Make-Whole Amount payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Account Name: POJ U.S. Privates Account No.: P86291 (please do not include spaces) Each such wire transfer shall set forth the name of the Company, a reference to "3.68% Senior Unsecured Notes due May 15, 2028, Security No. INV12133, PPN A#8" and the due date and application (as among principal, interest and Make-Whole Amount) of the payment being made. (2) All payments, other than principal, interest or Make-Whole Amount, on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank New York, NY ABA No Account No Account Name: Prudential International Insurance Service Co. Each such wire transfer shall set forth the name of the Company, a reference to "3.68% Senior Unsecured Notes due May 15, 2028, Security No. INV12133, PPN A#8" and the due date and application (e.g., type of fee) of the payment being made. (3) Address for all communications and notices: -7- Purchaser Schedule

233 The Prudential Life Insurance Company, Ltd. c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power and Attention: Kohei Imamura, Manager of Investment Administration Team and: and for all notices relating solely to scheduled principal and interest payments to : The Prudential Life Insurance Company, Ltd , Nagatacho Chiyoda-ku, Tokyo , Japan Attention: Kazuhito Ashizawa, Team Leader of Investment Administration Team kazuhito.ashizawa@prudential.co.jp and copy to: Attention: Kohei Imamura, Manager of Investment Administration Team kohei.imamura@prudential.co.jp (4) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: PGIM, Inc. 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: Michael Iacono - Trade Management Manager -8- Purchaser Schedule

234 (b) Send copy by to: Jaya McClure (214) (5) Tax Identification No.: Purchaser Schedule

235 NAME AND ADDRESS OF PURCHASER PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series B $20,000,000 Series C $5,800,000 (1) All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Account Name: PRIAC - DC (Non-Trust) - Privates Account No.: P86329 (please do not include spaces) Each such wire transfer shall set forth the name of the Company, a reference to "3.45% Senior Unsecured Notes due May 15, 2025, Security No. INV12133, PPN A@0 (Series B)" and/or 3.68% Senior Unsecured Notes due May 15, 2028, Security No. INV12133, PPN A#8 (Series C)" and the due date and application (as among principal, interest and Make-Whole Amount) of the payment being made. (2) Address for all communications and notices: Prudential Retirement Insurance and Annuity Company c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power s for delivery: Wendy.carlson@prudential.com Ty.bowman@prudential.com efg.dallas@prudential.com and for all notices relating solely to scheduled principal and interest payments to : -10- Purchaser Schedule

236 Prudential Retirement Insurance and Annuity Company c/o PGIM, Inc. Prudential Tower 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: PIM Private Accounting Processing Team Pim.Private.Accounting.Processing.Team@prudential.com (3) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: PGIM, Inc. 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: Michael Iacono - Trade Management Manager (b) Send copy by to: Jaya McClure Jaya.Mcclure@prudential.com (214) (4) Tax Identification No.: Purchaser Schedule

237 NAME AND ADDRESS OF PURCHASER PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series C $4,800,000 (1) All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Account Name: PRIAC - SA - Principal Preservation - Privates Account No.: P86345 (please do not include spaces) Each such wire transfer shall set forth the name of the Company, a reference to "3.68% Senior Unsecured Notes due May 15, 2028, Security No. INV12133, PPN A#8" and the due date and application (as among principal, interest and Make-Whole Amount) of the payment being made. (2) Address for all communications and notices: Prudential Retirement Insurance and Annuity Company c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power s for delivery: Wendy.carlson@prudential.com Ty.bowman@prudential.com efg.dallas@prudential.com -12- Purchaser Schedule

238 and for all notices relating solely to scheduled principal and interest payments to : Prudential Retirement Insurance and Annuity Company c/o PGIM, Inc. Prudential Tower 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: PIM Private Accounting Processing Team Pim.Private.Accounting.Processing.Team@prudential.com (3) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: PGIM, Inc. 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: Michael Iacono - Trade Management Manager (b) Send copy by to: Jaya McClure Jaya.Mcclure@prudential.com (214) (4) Tax Identification No.: Purchaser Schedule

239 NAME AND ADDRESS OF PURCHASER FARMERS INSURANCE EXCHANGE c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series C $10,500,000 (1) All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Beneficiary Account No: Beneficiary Account Name: JPMorgan Income Ultimate Beneficiary: P13939 Farmers Insurance Exchange Each such wire transfer shall set forth the name of the Company, a reference to "3.68% Senior Unsecured Notes due May 15, 2028, PPN A#8" and the due date and application (as among principal, interest and Make-Whole Amount) of the payment being made. (2) Address for all communications and notices: Prudential Private Placement Investors, L.P. c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power s: usw.treasury.farmers@farmersinsurance.com Wendy.carlson@prudential.com Ty.bowman@prudential.com efg.dallas@prudential.com and for all notices relating solely to scheduled principal and interest payments and written confirmations of wire transfers to: -14- Purchaser Schedule

240 Farmers 4680 Wilshire Blvd. Los Angeles, CA Attention: Treasury Treasury Treasury Manager (3) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: If sending by overnight mail: JPMorgan Chase Bank, N.A. Physical Receive Department 4 Chase Metrotech Center, 3rd Floor Brooklyn, NY Attention: Brian Cavanaugh Telephone: (718) If sending by messenger: JPMorgan Chase Bank, N.A. 4 Chase Metrotech Center 1st Floor, Window 5 Brooklyn, NY Attention: Physical Receive Department (Use Willoughby Street Entrance) Please include in the cover letter accompanying the Notes a reference to the Purchaser's account number ("P Farmers Insurance Exchange") and CUSIP information. (b) Send copy by to: -15- Purchaser Schedule

241 Jaya McClure (214) and (4) Tax Identification No.: Purchaser Schedule

242 NAME AND ADDRESS OF PURCHASER MID CENTURY INSURANCE COMPANY c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series C $4,500,000 (1) All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Beneficiary Account No: Beneficiary Account Name: JPMorgan Income Ultimate Beneficiary: G23628 Mid Century Insurance Company Each such wire transfer shall set forth the name of the Company, a reference to "3.68% Senior Unsecured Notes due May 15, 2028, PPN A#8" and the due date and application (as among principal, interest and Make-Whole Amount) of the payment being made. (2) Address for all communications and notices: Prudential Private Placement Investors, L.P. c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power s to: usw.treasury.farmers@farmersinsurance.com Wendy.carlson@prudential.com Ty.bowman@prudential.com efg.dallas@prudential.com and for all notices relating solely to scheduled principal and interest payments and written confirmations of wire transfers to: -17- Purchaser Schedule

243 Farmers 4680 Wilshire Blvd. Los Angeles, CA Attention: Treasury Treasury Treasury Manager (3) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: If sending by overnight mail: JPMorgan Chase Bank, N.A. Physical Receive Department 4 Chase Metrotech Center, 3rd Floor Brooklyn, NY Attention: Brian Cavanaugh Telephone: (718) If sending by messenger: JPMorgan Chase Bank, N.A. 4 Chase Metrotech Center 1st Floor, Window 5 Brooklyn, NY Attention: Physical Receive Department (Use Willoughby Street Entrance) Please include in the cover letter accompanying the Notes a reference to the Purchaser's account number ("G Mid Century Insurance Company ") and CUSIP information. (b) Send copy by to: -18- Purchaser Schedule

244 Jaya McClure (214) and (4) Tax Identification No.: Purchaser Schedule

245 NAME AND ADDRESS OF PURCHASER THE GIBRALTAR LIFE INSURANCE CO., LTD. c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series E $12,000,000 Series F $14,000,000 (1) All principal, interest and Make-Whole Amount payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Account Name: Gibraltar Private Placements USD Account No.: P86406 (please do not include spaces) Each such wire transfer shall set forth the name of the Company, a reference to "3.93% Senior Unsecured Notes due May 15, 2033, Security No. INV12133, PPN B@9 (Series E)" and/or "4.22% Senior Unsecured Notes due May 15, 2038, Security No. INV12133, PPN B#7 (Series F)" and the due date and application (as among principal, interest Make-Whole Amount) of the payment being made. (2) All payments, other than principal, interest or Make-Whole Amount, on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: JPMorgan Chase Bank, NA New York, NY ABA No.: Account No.: Account Name: Prudential International Insurance Service Co. Each such wire transfer shall set forth the name of the Company, a reference to "3.93% Senior Unsecured Notes due May 15, 2033, Security No. INV12133, PPN B@9 (Series E)" and/or "4.22% Senior Unsecured Notes due May 15, 2038, Security No. INV12133, PPN B#7 (Series F)" and the due date and application (e.g., type of fee) of the payment being made. (3) Address for all communications and notices: -20- Purchaser Schedule

246 Prudential Private Placement Investors, L.P. c/o Prudential Capital Group 2200 Ross Ave. Suite 4300W Dallas, TX Attention: Managing Director, Energy Finance Group Power and for all notices relating solely to scheduled principal and interest payments to : The Gibraltar Life Insurance Co., Ltd , Nagata-cho Chiyoda-ku, Tokyo , Japan Attention: Osamu Egi, Team Leader of Investment Administration Team osamu.egi@gib-life.co.jp and copy to: Attention: Tetsuya Sawazaki, Manager of Investment Administration Team tetsuya.sawazaki@gib-life.co.jp (4) Address for Delivery of Notes: (a) Send physical security by nationwide overnight delivery service to: PGIM, Inc. 655 Broad Street 14th Floor - South Tower Newark, NJ Attention: Michael Iacono - Trade Management Manager (b) Send copy by to: Jaya McClure Jaya.Mcclure@prudential.com (214) (5) Tax Identification No.: Purchaser Schedule

247 NAME AND ADDRESS OF PURCHASER JOHN HANCOCK LIFE INSURANCE COMPANY (U.S.A.) 197 Clarendon Street Boston, MA PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series F $15,000,000 Series G $10,000,000 Series H $40,000,000 PAYMENTS: All payments to be by bank wire transfer of immediately available funds to: Bank Name: The Bank of New York Mellon ABA Number: DDA Number: Account Name: F008 US PP Collector JHUSA Account Number: On Order of: Public Service Company of New Mexico, CUSIP/PPN and P&I Breakdown Full name, interest rate and maturity date of Notes or other obligations NOTICES AND AUDIT REQUESTS: All notices with respect to payments, prepayments (scheduled and unscheduled, whether partial or in full) and audit requests shall be sent to: John Hancock Financial Services 197 Clarendon Street Boston, MA Attention: Investment Administration InvestmentAdministration@jhancock.com All notices and communication with respect to compliance reporting, financial statements and related certifications shall be sent to: John Hancock Financial Services 197 Clarendon Street Boston, MA Attention: Bond and Corporate Finance, C-2 Address: PowerTeam@jhancock.com -22- Purchaser Schedule

248 All other notices shall be sent to: John Hancock Financial Services and John Hancock Financial Services 197 Clarendon Street 197 Clarendon Street Boston, MA Boston, MA Attention: Investment Law, C-3 Attention: Bond and Corporate Finance, C-2 Address: (available from credit contact) TAX IDENTIFICATION NUMBER: REGISTERED NAME OF SECURITIES: John Hancock Life Insurance Company (U.S.A.) -23- Purchaser Schedule

249 NAME AND ADDRESS OF PURCHASER THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY 720 East Wisconsin Avenue Milwaukee, WI Attention: Securities Department PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series B $61,300,000 I. All payments on account of Notes held by such Purchaser shall be made by wire transfer of immediately available funds, providing sufficient information to identify the source of the transfer, the amount of the dividend and/or redemption (as applicable) and the identity of the security as to which payment is being made. Please contact our Treasury & Investment Operations Department to securely obtain wire transfer instructions for The Northwestern Mutual Life Insurance Company. payments@northwesternmutual.com Phone: (414) II. All notices with respect to confirmation of payments on account of the Notes shall be delivered or mailed to: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI Attention: Investment Operations payments@northwesternmutual.com Phone: (414) III. All other communications shall be delivered or mailed to: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI Attention: Securities Department privateinvest@northwesternmutual.com IV. Address for delivery of Notes: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI Attention: Myja Raghuvanshi V. Tax Identification No.: Purchaser Schedule

250 -25- Purchaser Schedule

251 NAME AND ADDRESS OF PURCHASER THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY FOR ITS GROUP ANNUITY SEPARATE ACCOUNT 720 East Wisconsin Avenue Milwaukee, WI Attention: Securities Department PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series B $700,000 I. All payments on account of Notes held by such Purchaser shall be made by wire transfer of immediately available funds, providing sufficient information to identify the source of the transfer, the amount of the dividend and/or redemption (as applicable) and the identity of the security as to which payment is being made. Please contact our Treasury & Investment Operations Department to securely obtain wire transfer instructions for The Northwestern Mutual Life Insurance Company for its Group Annuity Separate Account. payments@northwesternmutual.com Phone: (414) II. All notices with respect to confirmation of payments on account of the Notes shall be delivered or mailed to: The Northwestern Mutual Life Insurance Company for its Group Annuity Separate Account 720 East Wisconsin Avenue Milwaukee, WI Attention: Investment Operations payments@northwesternmutual.com Phone: (414) III. All other communications shall be delivered or mailed to: The Northwestern Mutual Life Insurance Company for its Group Annuity Separate Account 720 East Wisconsin Avenue Milwaukee, WI Attention: Securities Department privateinvest@northwesternmutual.com -26- Purchaser Schedule

252 IV. Address for delivery of Notes: The Northwestern Mutual Life Insurance Company for its Group Annuity Separate Account 720 East Wisconsin Avenue Milwaukee, WI Attention: Myja Raghuvanshi V. Tax Identification No.: Purchaser Schedule

253 NAME AND ADDRESS OF PURCHASER COBANK, ACB 6340 S. Fiddlers Green Circle Greenwood Village, CO PRINCIPAL AMOUNT AND SERIES OF NOTES TO BE PURCHASED Series A $50,000,000 [See Attached] -28- Purchaser Schedule

254 -29- Purchaser Schedule [CoBANK]