ITEM 7A.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 Risk Management Committee (“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 tolerance levels and activities in each of the business segments
• Approving new types of derivatives entered into for marketing and hedging
• Reviewing and approving hedging risk activities
• Establishing policies regarding counterparty credit 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 9, including a summary of the fair values of mark-to-market energy related derivative contracts included in the Consolidated Balance Sheets. During the years ended December 31, 2024 and 2023, the Company had no commodity derivative instruments designated as cash flow hedging instruments.
Commodity contracts that meet the definition of a derivative, are recorded at fair value on the Consolidated Balance Sheets. During the years ended December 31, 2024 and 2023, the effects of mark-to-market commodity derivative instruments had no impact to PNM’s net earnings and $6.6 million of fair value losses and $10.2 million of fair value gains have been recorded as a regulatory asset and a regulatory liability. All of the fair values as of December 31, 2024 were determined based on prices provided by external sources other than actively quoted market prices. The net mark-to-market amounts will settle by the end of 2025.
PNM may be 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.
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
December 31, 2024
| | | | | | | | | | | | | | | | | | | | |
Rating (1) | | Credit Risk Exposure (2) | | Number of
Counter-parties >10% | | Net Exposure of
Counter-parties >10% |
| | | (Dollars in thousands) |
| External ratings: | | | | | | |
| Investment grade | | $ | 3,993 | | | 1 | | | $ | 3,641 | |
| Non-investment grade | | — | | | — | | | — | |
| Split ratings | | — | | | — | | | — | |
| Internal ratings: | | | | | | |
| Investment grade | | 359 | | | — | | | — | |
| Non-investment grade | | — | | | — | | | — | |
| Total | | $ | 4,352 | | | | | $ | 3,641 | |
(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, forward sales, and short-term sales. The gross 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 December 31, 2024, TXNM held zero of cash collateral to offset its credit exposure.
Net credit risk for the Company’s largest counterparty as of December 31, 2024 was $3.6 million.
Other investments have no significant counterparty credit risk.
Interest Rate Risk
The majority of PNM’s and TNMP’s long-term debt is fixed-rate debt, which does not expose earnings to adverse changes in market interest rates. PNM and TNMP earnings are exposed to adverse changes in market interest rates when long-term debt must be refinanced, repriced or redeemed. TXNM’s debt and the revolving credit facilities of PNM and TNMP are exposed to interest rate risk to the extent variable interest rates continue to rise. The Company periodically makes plans to reduce its variable interest rate exposures through various instruments including fixed rate debt and equity and hedging arrangements like those executed by TXNM in 2022 and 2023, and otherwise expects that it will be able to extend or replace variable rate debt under similar terms and conditions prior to their expirations. Variable interest rates under the TXNM, PNM, and TNMP revolving credit facilities and term loans are based on SOFR.
At February 14, 2025, variable rate debt balances and weighted average interest rates were as follows:
| | | | | | | | | | | | | | | | | | | | |
Variable Rate Debt | | Weighted Average Interest Rate | | Balance Outstanding | | Capacity |
| | | | (In thousands) |
| Short-term Debt: | | | |
TXNM Revolving Credit Facility | | 5.91 | % | | $ | 144,700 | | | $ | 300,000 | |
| PNM Revolving Credit Facility | | 5.67 | | | 184,300 | | | 400,000 | |
| PNM New Mexico Credit Facility | | 5.66 | | | 35,000 | | | 40,000 | |
| TNMP Revolving Credit Facility | | 5.29 | | | 112,200 | | | 200,000 | |
| | | | | | |
| | | | $ | 476,200 | | | $ | 940,000 | |
| Long-term Debt: | | | | | | |
TXNM 2021 Delayed-Draw Term Loan | | 5.36 | % | | $ | 51,000 | | | |
TXNM 2023 Term Loan | | 5.76 | | | 410,000 | | | |
PNM 2024 Term Loan | | 5.31 | | | 200,000 | | | |
PNM 2025 Term Loan | | 5.30 | | | 195,000 | | | |
| | | | $ | 856,000 | | | |
The investments held by PNM in trusts for decommissioning, reclamation, pension benefits, and other post-employment benefits had an estimated fair value of $925.3 million at December 31, 2024, of which 18.5% were fixed-rate debt securities that subject PNM to risk of loss of fair value with increases in market interest rates. If interest rates were to increase by 50 basis points from their levels at December 31, 2024, the decrease in the fair value of the fixed-rate securities would be 5.5%, or $9.4 million. The securities held by TNMP in trusts for pension and other post-employment benefits had an estimated fair value of $45.7 million at December 31, 2024, of which 47.5% were fixed-rate debt securities that subject TNMP 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 December 31, 2024, the decrease in the fair value of the fixed-rate securities would be 5.1%, or $1.1 million.
PNM and TNMP do not directly recover or return through rates any losses or gains on the securities, including equity and alternative investments discussed below, in the trusts for decommissioning, reclamation, pension benefits, and other post-employment benefits. 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. PNM and TNMP are at risk for shortfalls in funding of obligations due to investment losses, including those from the equity market and alternatives investment 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 and trusts established for PNM’s and TNMP’s pension and post-employment benefits plans include certain equity securities at December 31, 2024. These equity securities expose PNM and TNMP to losses in fair value should the market values of the underlying securities decline. Equity securities comprised 55.4% and 35.7% of the securities held by the various PNM and TNMP trusts as of December 31, 2024. A hypothetical 10% decrease in equity prices would reduce the fair values of these funds by $51.2 million for PNM and $1.6 million for TNMP.
Alternatives Investment Risk
As of December 31, 2024, PNM and TNMP had 8.9% and 10.6% of its pension assets invested in the alternative asset class. Alternative investments include investments in hedge funds, real estate funds, and private equity funds. The hedge funds and private equity funds are limited partner structures that are structured as multi-manager multi-strategy fund of funds to achieve a diversified position in these asset classes. The general partner oversees the selection and monitoring of the underlying managers. The hedge funds pursue various absolute return strategies such as relative value, long-short equity, and event driven. Private equity fund strategies include mezzanine financing, buy-outs, and venture capital. The real estate investments are commingled real estate portfolios that invest in a diversified portfolio of assets including commercial property and multi-family housing. The Company’s Corporate Investment Committee, assisted by its investment consultants, monitors the performance of the funds and general partner’s investments process. There is risk associated with these funds due to the nature of the strategies and techniques and the use of investments that do not have readily determinable fair values. A hypothetical 10% decrease in equity prices would reduce the fair values of these funds by $8.2 million for PNM and $0.5 million for TNMP.
