PUBLIC SERVICE CO OF NEW MEXICO

OPERATIONS AND REGULATION

Regulated Operations

Electric power demand is generally seasonal. Power consumption in both New Mexico and Texas peaks during the hot summer months with revenues traditionally peaking during that period. The seasonality of demand for electricity in turn impacts the timing of plant maintenance and operating expense throughout the year. As a result, the quarterly operating results of PNMR and its operating subsidiaries vary throughout the year. In addition, unusually mild or extreme weather patterns may cause the overall operating results of the Company to fluctuate.

PNM Operational Information

PNM is an electric utility that provides electric generation, transmission, and distribution service to its rate-regulated customers. PNM was incorporated in the State of New Mexico in 1917. PNM’s retail electric service territory covers a large area of north-central New Mexico, including the cities of Albuquerque, Rio Rancho, and Santa Fe, and certain areas of southern New Mexico. Service to retail electric customers is subject to the jurisdiction of the NMPRC. The largest retail electric customer served by PNM accounted for 3.6% of its retail electric revenues for the year ended December 31, 2023 and 2022. Other services provided by PNM include wholesale transmission services to third parties. Regulation encompasses the utility’s electric rates, service, accounting, issuances of securities, construction of major new generation, abandonment of existing generation, types of generation resources, transmission and distribution facilities, and other matters. See Notes 16 and 17 for additional information on rate cases and other regulatory matters.

Weather-normalized retail electric KWh sales decreased by 1.0% in 2023 and increased by 1.5% in 2022. The system peak demands for retail customers are as follows:

System Peak Demands

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PNM holds long-term, non-exclusive franchise agreements for its electric retail operations, with varying expiration dates. These franchise agreements allow the utility to access public rights-of-way for placement of its electric facilities. To the extent franchise agreements expire in some areas PNM serves, PNM remains obligated under New Mexico state law to provide service to customers in these areas, and therefore, the expirations should not have a material adverse impact. The Albuquerque, Rio Rancho, and Santa Fe metropolitan areas accounted for 41.6%, 7.4% and 5.9% of PNM’s 2023 revenues and no other franchise area represents more than 5%. PNM also earns revenues from its electric retail operations in its service areas that do not require franchise agreements.

PNM owns 3,428 miles of electric transmission lines that interconnect with other utilities in New Mexico, Arizona, Colorado, Texas, and Utah. New Mexico is frequently characterized by its high potential for solar and wind capacity. PNM owns transmission capacity in an area of eastern New Mexico with large wind generation potential and in recent years there has been substantial interest by developers of wind generation to interconnect to PNM’s transmission system in this area.

PNM began participating in the EIM in 2021 which has generated cost savings that are passed through to customers in PNM’s FPPAC. PNM also engages in activities to optimize its existing jurisdictional assets and long-term power agreements through spot market, hour-ahead, day-ahead, week-ahead, and other sales of excess generation not required to fulfill retail load and contractual commitments. These activities have significantly increased electric operating revenues and are passed on to customers under PNM’s FPPAC with no impact to net earnings. PNM continues to evaluate opportunities that benefit customers and is exploring opportunities with the expectation of reliably achieving incrementally greater cost savings and using the region’s increasing renewable resources more efficiently. PNM supports efforts in the Western United States to expand regional market opportunities by participating in day-ahead market design initiatives and discussions on Regional Transmission Organization formation.

Regulatory Activities

NMPRC Regulated Retail Rate Proceedings

The rates PNM charges retail customers are subject to traditional rate regulation by the NMPRC. In December 2022, PNM filed the 2024 Rate Change with the NMPRC. The application proposed an increase of $63.8 million in base non-fuel revenues. The requested change primarily reflected investments in transmission and distribution infrastructure, largely offset by cost reductions resulting from PNM’s transition to lower-cost, clean generation resources including the retirement of the SJGS and expiration of leased capacity from PVNGS. The request also included updated depreciation rates for natural gas plants to align with the Company’s 2040 carbon-free portfolio goal.

On December 8, 2023, the hearing examiners in the case issued a RD. The RD proposed an increase in non-fuel revenues of $6.1 million compared to the $63.8 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 9.26% compared to the 10.25% requested by PNM

•Finding of prudency regarding PNM’s decision to remain in Four Corners and a remedy for the prudency to be a disallowance to PNM’s total Four Corners net book value by $84.8 million

•Approval of $51.3 million of PNM’s requested $96.3 million regulatory asset for PVNGS undepreciated investments, but disallowance of a return on the remaining $45.0 million or any CWIP associated with it

•Recommended capital structure of 49.61% equity, 50.10% debt, and 0.29% preferred stock

On January 3, 2024, the NMPRC issued a final order largely adopting the RD. The most notable difference in the final order is with regards to PVNGS. The final order requires that the regulatory liability associated with leased capacity at PVNGS after the Unit 1 lease expired on January 15, 2023, be returned to ratepayers over two years through a separate rate rider. In addition, the NMPRC had modifications that included approval of accelerated depreciation for specific gas plants, approval of PNM’s TOD pilot program, and ordered PNM to update the remedy associated with Four Corners. See Note 17.

In October 2022, PNM filed its Grid Modernization Application with the NMPRC. PNM’s proposal to modernize its electricity grid through infrastructure and technology improvements increases the efficiency, reliability, resilience, and security of PNM’s electric system. PNM’s application seeks approval of grid modernization investments of approximately $344 million for the first six years of a broader 11-year strategy. See Note 17.

PNM has a NMPRC-approved rate rider to collect costs for renewable energy procurements that are not otherwise being collected in rates. If PNM’s earned return on jurisdictional equity in a calendar year, adjusted for weather and other items not representative of normal operation, exceeds the NMPRC-approved rate by 0.5%, the rider provides that PNM would refund the excess to customers during the following year. PNM slightly exceeded the limitation in 2022 and does not expect to exceed the limitation in 2023. See Note 17. The NMPRC has also approved riders designed to allow PNM to bill and collect substantially all fuel and purchased power costs, costs of approved energy efficiency initiatives, and costs associated with enhancing transportation electrification in New Mexico.

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FERC Regulated Wholesale Transmission

Rates charged to wholesale electric transmission customers, other than customers on the Western Spirit Line described below, are based on a formula rate mechanism pursuant to which rates for wholesale transmission service are calculated annually in accordance with an approved formula. The formula includes updating cost of service components, including investment in plant and operating expenses, based on information contained in PNM’s annual financial report filed with FERC, as well as including projected transmission capital projects to be placed into service in the following year. The projections included are subject to true-up in the formula rate for the following year. Certain items, including changes to return on equity and depreciation rates, require a separate filing to be made with FERC before being included in the formula rate.

The Energy Transition Act (“ETA”)

The ETA became effective in 2019. As discussed below, the ETA amends the REA and requires utilities operating in New Mexico to provide 100% zero-carbon energy by 2045. The ETA also provides for a transition from fossil-fueled generating resources to renewable and other carbon-free resources by allowing utilities to issue to qualified investors securitized bonds, or “energy transition bonds,” related to the retirement of certain coal-fired generating facilities. Proceeds from the energy transition bonds must be used to provide utility service to customers and for other costs as defined by the ETA. In 2020, the NMPRC unanimously approved the hearing examiners’ recommended decisions regarding the abandonment of SJGS and the related securitized financing under the ETA. On August 25, 2023, PNM formed ETBC I for the limited purpose of purchasing, owning, and administering energy transition property, issuing Securitized Bonds, and performing related activities. On November 15, 2023, ETBC I issued $343.2 million of Securitized Bonds and purchased energy transition property from PNM.

In early 2021, PNM filed the Four Corners Abandonment Application, which sought NMPRC approval to exit PNM’s 13% share of Four Corners as of December 31, 2024, and to issue approximately $300 million of energy transition bonds as provided by the ETA. PNM’s request provided background on the prudence of PNM’s investment in Four Corners and explained how the proposed sale and abandonment provides a net public benefit. On December 15, 2021, the NMPRC issued a final order denying approval of the Four Corners Abandonment Application and the corresponding request for issuance of securitized financing. On December 22, 2021, PNM filed a Notice of Appeal with the NM Supreme Court of the NMPRC decision to deny the application. On July 6, 2023, the NM Supreme Court issued a decision concluding that the NMPRC reasonably and lawfully denied PNM’s application for abandonment, determining that PNM did not meet its burden in challenging the NMPRC’s final order. The Company is evaluating the facts and circumstances surrounding the exit of Four Corners and will determine next steps.

Renewable Energy

The REA was enacted to encourage the development of renewable energy in New Mexico. The ETA amended the REA and requires utilities operating in New Mexico to have renewable portfolios equal to 40% by 2025, 50% by 2030, 80% by 2040, and 100% zero-carbon energy by 2045. The REA provides for streamlined proceedings for approval of utilities’ renewable energy procurement plans, provides utilities recovery of costs incurred consistent with approved procurement plans, and sets a RCT for the procurement of renewable resources to prevent excessive costs being added to rates. PNM files required renewable energy plans with the NMPRC annually and makes procurements consistent with the plans approved by the NMPRC. See Note 17.