Pension and Other Postretirement Benefits

PNMR and its subsidiaries maintain qualified defined benefit pension plans, postretirement benefit plans providing medical and dental benefits, and executive retirement programs (“PNM Plans” and “TNMP Plans”). PNMR maintains the legal obligation for the benefits owed to participants under these plans. The periodic costs or income of the PNM Plans and TNMP Plans are included in regulated rates to the extent attributable to regulated operations. PNM receives a regulated return on the amount it has funded for its pension plan in excess of the periodic cost or income to the extent included in retail rates.

Participants in the PNM Plans include eligible employees and retirees of PNMR and other subsidiaries of PNMR. Participants in the TNMP Plans include eligible employees and retirees of TNMP and other subsidiaries of TNP. The PNM pension plan was frozen at the end of 1997 with regard to new participants, salary levels, and benefits. Through December 31, 2007, additional credited service could be accrued under the PNM pension plan up to a limit determined by age and service. The TNMP pension plan was frozen at December 31, 2005 with regard to new participants, salary levels, and benefits.

GAAP requires a plan sponsor to (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur.

GAAP requires unrecognized prior service costs and unrecognized gains or losses to be recorded in AOCI and subsequently amortized. The amortization of these incurred costs will ultimately be included as pension and postretirement benefit periodic cost or income in subsequent years. To the extent the amortization of these items will ultimately be recovered in future rates, PNM and TNMP record the costs as a regulatory asset or regulatory liability.

The Company has in place, for the PNM Plans and TNMP Plans, a policy that defines the investment objectives, establishes performance goals of the asset managers and provides procedures for the manner in which investments are to be reviewed. The plans implement investment strategies to achieve the following objectives:


•	Maximize the return on assets, commensurate with the risk that the Corporate Investment Committee deems appropriate to meet the obligations of the pension plans and other postretirement benefits plans, minimize the volatility of expense, and account for contingencies


•	Transition asset mix over time to a higher proportion of high quality fixed income investments as the plans' funded statuses improve

Management is responsible for the determination of the asset target mix and the expected rate of return. The target asset allocations are determined based on consultations with external investment advisors. The expected long-term rate of return on pension and postretirement plan assets is calculated on the market-related value of assets. GAAP requires that actual gains and losses on pension and postretirement plan assets be recognized in the market-related value of assets equally over a period of not more than five years, which reduces year-to-year volatility. For the PNM Plans and TNMP Plans, the market-related value of assets is equal to the prior year’s market related value of assets adjusted for contributions, benefit payments and investment gains and losses that are within a corridor of plus or minus 4.0% around the expected return on market value. Gains and losses that are outside the corridor are amortized over five years.

Pension Plans

For defined benefit pension plans, including the executive retirement plans, the PBO represents the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to that date using assumptions regarding future compensation levels. The ABO represents the PBO without considering future compensation levels. Since the plans are frozen, the PBO and ABO are equal. The following table presents information about the PBO, fair value of plan assets, and funded status of the plans:



	PNM Plan						TNMP Plan
	Year Ended December 31,						Year Ended December 31,
	2012			2011			2012			2011
	(In thousands)
PBO at beginning of year	$	588,874		$	593,457		$	67,234		$	72,260
Service cost	—			—			—			—
Interest cost	32,232			32,804			3,635			3,800
Actuarial (gain) loss	94,361			1,197			11,434			(2,793		)
Benefits paid	(39,918		)	(38,584		)	(5,663		)	(6,033		)
PBO at end of year	675,549			588,874			76,640			67,234
Fair value of plan assets at beginning of year	427,386			392,788			59,952			60,387
Actual return on plan assets	52,927			31,671			6,951			4,447
Employer contributions	77,700			41,511			5,300			1,151
Benefits paid	(39,918		)	(38,584		)	(5,663		)	(6,033		)
Fair value of plan assets at end of year	518,095			427,386			66,540			59,952
Funded status-asset (liability) for pension benefits	$	(157,454	)	$	(161,488	)	$	(10,100	)	$	(7,282	)

The following table presents pre-tax information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2012.



	PNM Plan						TNMP Plan
	December 31, 2012						December 31, 2012
	Prior service cost			Net actuarial (gain) loss			Net actuarial (gain) loss
	(In thousands)
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at beginning of year	$	171		$	134,088		$	—
Experience loss (gain)	—			82,734			9,807
Regulatory asset (liability) adjustment	(1		)	(52,423		)	(9,807		)
Amortization recognized in net periodic benefit cost (income)	(138		)	(4,573		)	—
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at end of year	$	32		$	159,826		$	—
Amortization expected to be recognized in 2013	$	(32	)	$	(6,233	)	$	—

The following table presents the components of net periodic benefit cost (income):



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
PNM Plan
Service cost	$	—		$	—		$	—
Interest cost	32,232			32,804			34,073
Expected return on plan assets	(41,301		)	(37,075		)	(37,354		)
Amortization of net (gain) loss	10,516			9,209			6,450
Amortization of prior service cost	317			317			317
Net periodic benefit cost	$	1,764		$	5,255		$	3,486
TNMP Plan
Service cost	$	—		$	—		$	—
Interest cost	3,635			3,800			4,126
Expected return on plan assets	(5,324		)	(5,470		)	(5,794		)
Amortization of net (gain) loss	462			346			—
Amortization of prior service cost	—			—			—
Net periodic benefit cost (income)	$	(1,227	)	$	(1,324	)	$	(1,668	)

The following significant weighted-average assumptions were used to determine the PBO and net periodic benefit cost (income). Should actual experience differ from actuarial assumptions, the PBO and net periodic benefit cost (income) would be affected.



	Year Ended December 31,
PNM Plan	2012		2011		2010
Discount rate for determining December 31 PBO	4.30	%	5.67	%	5.72	%
Discount rate for determining net periodic benefit cost (income)	5.67	%	5.72	%	6.47	%
Expected return on plan assets	8.25	%	8.50	%	8.75	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 PBO	4.19	%	5.69	%	5.50	%
Discount rate for determining net periodic benefit cost (income)	5.69	%	5.50	%	6.31	%
Expected return on plan assets	8.25	%	8.50	%	8.75	%
Rate of compensation increase	N/A		N/A		N/A

The assumed discount rate for determining the PBO was determined based on a review of long-term high-grade bonds and management’s expectations. Changes in discount rates resulted in increases in the PNM PBO of $86.4 million and $2.8 million at December 31, 2012 and 2011. Changes in discount rates resulted in an increase in the TNMP PBO of $10.7 million at December 31, 2012 and a decrease of $1.2 million at December 31, 2011. Changes in demographic experiences also resulted in an actuarial loss in the PNM PBO of $8.0 million and an actuarial gain of $1.6 million at December 31, 2012 and 2011. Changes in demographic experiences resulted in an actuarial loss in the TNMP PBO of $0.8 million and an actuarial gain of $1.7 million at December 31, 2012 and 2011. The impacts of other changes in assumptions and experience were not significant. These changes are reflected as actuarial (gain) loss above. In 2011, TNMP had an actuarial loss due to changes in demographics associated with the early retirement of FCP employees. The loss was not significant and is not included in the net periodic benefit (income) cost above.

The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the PBO. Factors that are considered include, but are not limited to, historic returns on plan assets, current market information on long-term returns (e.g., long-term bond rates) and current and target asset allocations between asset categories. The expected long-term rate of return assumption for the PNM and TNMP pension plans compares to the actual return of 11.0% and 11.2% for the year ended December 31, 2012. If all other factors were to remain unchanged, a 1% decrease in the expected long-term rate of return would cause PNM’s and TNMP’s 2013 net periodic cost to increase $5.5 million and $0.6 million (analogous changes would result from a 1% increase).

The Company's long-term pension investment strategy is to invest in assets whose interest rate sensitivity is correlated with the pension liability. The Company has chosen to implement this strategy known as Liability Driven Investing ("LDI") by increasing the liability matching investments as the funded status of the pension plans improves. These liability matching investments are currently fixed income securities. The pension plans current targeted asset allocation is 31% equities, 53% fixed income, and 16% alternative investments. Equity investments are primarily in domestic securities that include large, mid, and small capitalization companies. The pension plans have an 8% targeted allocation to equities of companies domiciled primarily in developed countries outside of the United States. This category includes actively managed international and domestic equity securities that are benchmarked against a variety of style indices. Fixed income investments are primarily corporate bonds of companies from diversified industries, and government securities. Alternative investments include investments in hedge funds, real estate funds, and private equity funds. The hedge funds and private equity funds are structured as multi-manager multi-strategy fund of funds to achieve a diversified position in these asset classes. 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 investment is structured as an open-ended, commingled private real estate portfolio that invests in a diversified portfolio of assets including commercial property and multi-family housing. See Note 8 for fair value information concerning assets held by the pension plans.

The following pension benefit payments are expected to be paid:



	PNM Plan		TNMP Plan
	(In thousands)
2013	$	42,186	$	5,922
2014	42,979		6,189
2015	43,573		6,385
2016	44,092		5,982
2017	44,608		5,893
2018 – 2022	223,777		26,193

Due to declines in the general price levels of marketable equity securities held by the pension plans, PNM and TNMP have been making contributions to the pension plans since 2010. In January 2013, the Company made contributions to the PNM and TNMP pension plans of $60.0 million and $1.0 million. No additional contributions are required to be made in 2013. Based on current law, including recent amendments to funding requirements, and estimates of portfolio performance, contributions to the pension plan trust for 2014-2017 are estimated to total $49.1 million for PNM and none for TNMP. These anticipated contributions were developed using current funding assumptions with a discount rates of 4.8% to 5.2%. Actual amounts to be funded in the future will be dependent on the actuarial assumptions at that time, including the appropriate discount rate.

Other Postretirement Benefit Plans

For postretirement benefit plans, the APBO is the actuarial present value as of a date of all future benefits attributed under the terms of the postretirement benefit plan to employee service rendered to that date.

The following table presents information about the APBO, the fair value of plan assets, and the funded status of the plans:



	PNM Plan						TNMP Plan
	Year Ended December 31,						Year Ended December 31,
	2012			2011			2012			2011
	(In thousands)
APBO at beginning of year	$	96,221		$	99,486		$	11,344		$	12,152
Service cost	217			259			244			306
Interest cost	5,293			5,378			624			654
Participant contributions	2,266			2,206			404			281
Actuarial (gain) loss	5,008			712			2,727			(862		)
Benefits paid	(9,392		)	(10,315		)	(1,665		)	(1,187		)
Plan amendments	—			(1,505		)	—			—
APBO at end of year	99,613			96,221			13,678			11,344
Fair value of plan assets at beginning of year	58,776			61,749			8,303			8,596
Actual return on plan assets	9,285			2,263			1,259			262
Employer contributions	3,529			2,873			342			351
Participant contributions	2,266			2,206			404			281
Benefits paid	(9,392		)	(10,315		)	(1,665		)	(1,187		)
Fair value of plan assets at end of year	64,464			58,776			8,643			8,303
Funded status-asset (liability)	$	(35,149	)	$	(37,445	)	$	(5,035	)	$	(3,041	)

In 2011, TNMP had an actuarial gain due to changes in demographics associated with the early retirement of FCP employees. The gain was not significant and is not included in the net periodic benefit (income) cost below. The early retirement of FCP employees in 2011 resulted in 100% of the TNMP plan being related to regulated operations. The following table presents pre-tax information about the PNM Plan prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2012.



	PNM Plan						TNMP Plan
	December 31, 2012						December 31, 2012
	Prior service cost (credit)			Net actuarial (gain) loss			Prior service cost		Net actuarial (gain) loss
	(In thousands)
Amount in AOCI not yet recognized in net periodic benefit cost (income) at beginning of year	$	(121	)	$	960		$	—	$	—
Experience loss (gain)	—			623			—		1,985
Regulatory asset (liability) adjustment	156			(1,683		)	—		(1,985		)
Amortization recognized in net periodic benefit cost (income)	(35		)	100			—
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at end of year	$	—		$	—		$	—	$	—
Amortization expected to be recognized in 2013	$	—		$	—		$	—	$	—

The following table presents the components of net periodic benefit cost:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
PNM Plan
Service cost	$	217		$	259		$	419
Interest cost	5,293			5,378			7,650
Expected return on plan assets	(4,901		)	(5,388		)	(5,572		)
Amortization of net (gain) loss	3,888			3,205			5,489
Amortization of prior service credit	(1,343		)	(2,648		)	(4,143		)
Net periodic benefit cost	$	3,154		$	806		$	3,843
TNMP Plan
Service cost	$	244		$	306		$	289
Interest cost	624			654			711
Expected return on plan assets	(516		)	(533		)	(514		)
Amortization of net (gain) loss	(209		)	(193		)	(195		)
Amortization of prior service cost	57			60			60
Net periodic benefit cost	$	200		$	294		$	351

The following significant weighted-average assumptions were used to determine the APBO and net periodic benefit cost. Should actual experience differ from actuarial assumptions, the APBO and net periodic benefit cost would be affected.



	Year Ended December 31,
PNM Plan	2012		2011		2010
Discount rate for determining December 31 APBO	4.26	%	5.70	%	5.59	%
Discount rate for determining net periodic benefit cost	5.70	%	5.59	%	6.42	%
Expected return on plan assets	8.50	%	8.50	%	8.75	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 APBO	4.26	%	5.70	%	5.59	%
Discount rate for determining net periodic benefit cost	5.70	%	5.59	%	6.42	%
Expected return on plan assets	6.50	%	6.30	%	6.70	%
Rate of compensation increase	N/A		N/A		N/A

The assumed discount rate for determining the APBO was determined based on a review of long-term high-grade bonds and management’s expectations. Changes in the discount rates resulted in an increase in the PNM APBO of $13.1 million at December 31, 2012 and a decrease of $1.0 million at December 31, 2011. Changes in discount rates resulted in an increase in the TNMP APBO of $2.0 million at December 31, 2012 and a decrease of $0.1 million at December 31, 2011. Changes in claims, contributions, and demographic experience also resulted in actuarial gains in the PNM plan of $8.1 million at December 31, 2012 and actuarial losses of $1.7 million at December 31, 2011. Additionally, changes in claims, contributions, and demographic experience resulted in an actuarial loss in the TNMP plan of $0.8 million at December 31, 2012 and an actuarial gain of $0.6 million at December 31, 2011. The impacts of other changes in assumptions and experience were not significant. These changes are reflected as actuarial (gain) loss above.

The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the APBO. Factors that are considered include, but are not limited to, historic returns on plan assets, current market information on long-term returns (e.g., long-term bond rates), and current and target asset allocations between asset categories. The expected long-term rate of return assumption for the PNM and TNMP postretirement benefit plans compares to the actual return of 16.3% and 16.1% for the year ended December 31, 2012. If all other factors were to remain unchanged, a 1% decrease in the expected long-term rate of return would cause PNM’s and TNMP’s 2013 postretirement benefit cost to increase $0.6 million and $0.1 million (analogous changes would result from a 1% increase).

TNMP’s exposure to cost increases in the postretirement benefit plan is minimized by a provision that limits TNMP’s share of costs under the plan. Costs of the plan in excess of the limit are wholly borne by the participants. TNMP reached the cost limit at the end of 2001. As a result, a one-percentage-point change in assumed health care cost trend rates would have no effect on either the net periodic expense or the year-end APBO.

The following table shows the assumed health care cost trend rates:



	PNM Plan
	December 31,
	2012		2011
Health care cost trend rate assumed for next year	7.0	%	7.5	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	5.0	%	5.0	%
Year that the rate reaches the ultimate trend rate	2017		2017

The following table shows the impact of a one-percentage-point change in assumed health care cost trend rates:



	PNM Plan
	1-Percentage- Point Increase		1-Percentage- Point Decrease
	(In thousands)
Effect on total of service and interest cost	$	395	$	(342	)
Effect on APBO	$	6,454	$	(5,550	)

The Company’s other postretirement benefit plans invest in a portfolio that is diversified by asset class and style strategies. The other postretirement benefit plans generally use the same pension fixed income and equity investment managers and utilize the same overall investment strategy as described above for the pension plans, except there is no allocation to alternative investments. The other postretirement benefit plans have a target asset allocation of 70% equities and 30% fixed income. See Note 8 for fair value information concerning assets held by the other postretirement benefit plans.

The following other postretirement benefit payments, which reflect expected future service, are expected to be paid:



	PNM Plan		TNMP Plan
	(In thousands)
2013	$	6,123	$	786
2014	6,327		796
2015	6,450		803
2016	6,668		823
2017	6,780		838
2018 – 2022	34,983		4,322

PNM expects to make contributions totaling $3.5 million to the PNM postretirement benefit plan in 2013. TNMP expects to make contributions totaling $0.3 million to the TNMP postretirement benefit plan in 2013.

Executive Retirement Programs

For the executive retirement programs, the following table presents information about the PBO and funded status of the plans:



	PNM Plan						TNMP Plan
	Year Ended December 31,						Year Ended December 31,
	2012			2011			2012			2011
	(In thousands)
PBO at beginning of year	$	16,191		$	17,020		$	844		$	884
Service cost	—			—			—			—
Interest cost	876			930			45			46
Actuarial (gain) loss	1,895			(252		)	107			8
Benefits paid	(1,495		)	(1,507		)	(94		)	(94		)
PBO at end of year-funded status	17,467			16,191			902			844
Less current liability	1,452			1,436			90			89
Non-current liability	$	16,015		$	14,755		$	812		$	755

The following table presents pre-tax information about net actuarial loss in AOCI as of December 31, 2012.



	December 31, 2012
	PNM Plan			TNMP Plan
	(In thousands)
Amount in AOCI not yet recognized in net periodic benefit cost at beginning of year	$	1,354		$	—
Experience loss (gain)	1,895			107
Regulatory asset (liability) adjustment	(1,216		)	(107		)
Amortization recognized in net periodic benefit cost (income)	36			—
Amount in AOCI not yet recognized in net periodic benefit cost at end of year	$	2,069		$	—
Amortization expected to be recognized in 2013	$	(98	)	$	—

The following table presents the components of net periodic benefit:



	Year Ended December 31,
	2012		2011		2010
	(In thousands)
PNM Plan
Service cost	$	—	$	—	$	—
Interest cost	876		930		1,053
Amortization of net loss	83		93		71
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	959	$	1,023	$	1,124
TNMP Plan
Service cost	$	—	$	—	$	—
Interest cost	45		46		52
Amortization of net (gain) loss	—		—		(4		)
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	45	$	46	$	48

The following significant weighted-average assumptions were used to determine the PBO and net periodic benefit cost. Should actual experience differ from actuarial assumptions, the PBO and net periodic benefit cost would be affected.



	Year Ended December 31,
PNM Plan	2012		2011		2010
Discount rate for determining December 31 PBO	4.30	%	5.67	%	5.72	%
Discount rate for determining net periodic benefit cost	5.67	%	5.72	%	6.47	%
Long-term rate of return on plan assets	N/A		N/A		N/A
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 PBO	4.19	%	5.69	%	5.50	%
Discount rate for determining net periodic benefit cost	5.69	%	5.50	%	6.31	%
Long-term rate of return on plan assets	N/A		N/A		N/A
Rate of compensation increase	N/A		N/A		N/A

The assumed discount rate for determining the PBO was determined based on a review of long-term high-grade bonds and management’s expectations. The impacts of changes in assumptions or experience were not significant.

The following executive retirement plan payments, which reflect expected future service, are expected:



	PNM Plan		TNMP Plan
	(In thousands)
2013	$	1,452	$	92
2014	1,436		91
2015	1,418		89
2016	1,396		87
2017	1,371		85
2018 – 2022	6,340		371

Other Retirement Plans

PNMR sponsors a 401(k) defined contribution plan for eligible employees, including those of its subsidiaries. PNMR’s contributions to the 401(k) plan consist of a discretionary matching contribution equal to 75% of the first 6% of eligible compensation contributed by the employee on a before-tax basis. PNMR also makes a non-matching contribution ranging from 3% to 10% of eligible compensation based on the eligible employee’s age.

PNMR also provides executive deferred compensation benefits through an unfunded, non-qualified plan. The purpose of this plan is to permit certain key employees of PNMR who participate in the 401(k) defined contribution plan to defer compensation and receive credits without reference to the certain limitations on contributions. Eligible employees are allowed to save on an after-tax basis.

A summary of expenses for these other retirement plans is as follows:



	Year Ended December 31,
	2012		2011		2010
	(In thousands)
PNMR
401(k) plan	$	16,185	$	17,000	$	17,199
Non-qualified plan	$	1,491	$	1,931	$	2,500
PNM
401(k) plan	$	12,427	$	12,541	$	12,788
Non-qualified plan	$	1,143	$	1,407	$	1,871
TNMP
401(k) plan	$	3,739	$	3,723	$	3,496
Non-qualified plan	$	327	$	431	$	478