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 (collectively, the “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. 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 is 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.

For the PNM Plans and TNMP Plans, the Company has in place a policy that defines the investment objectives, establishes performance goals of 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 OPEB 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,
	2014			2013			2014			2013
	(In thousands)
PBO at beginning of year	$	599,537		$	675,549		$	66,159		$	76,640
Service cost	—			—			—			—
Interest cost	30,163			28,142			3,193			3,087
Plan amendment	—			(6,346		)	—			—
Actuarial (gain) loss	72,524			(56,533		)	8,466			(7,820		)
Benefits paid	(44,667		)	(41,275		)	(5,513		)	(5,748		)
PBO at end of year	657,557			599,537			72,305			66,159
Fair value of plan assets at beginning of year	556,353			518,095			66,118			66,540
Actual return on plan assets	76,223			19,533			8,572			4,326
Employer contributions	—			60,000			—			1,000
Benefits paid	(44,667		)	(41,275		)	(5,513		)	(5,748		)
Fair value of plan assets at end of year	587,909			556,353			69,177			66,118
Funded status – asset (liability) for pension benefits	$	(69,648	)	$	(43,184	)	$	(3,128	)	$	(41	)

Effective January 1, 2014, the PNM Pension Plan was amended to allow for all participants, terminating after the effective date, to elect a lump sum payment of benefits. This change is reflected in the above table as of December 31, 2013.

The following table presents pre-tax information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2014.



	PNM Plan						TNMP Plan
	December 31, 2014						December 31, 2014
	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	$	(2,665	)	$	139,256		$	—
Experience loss (gain)	—			34,345			4,420
Regulatory asset (liability) adjustment	—			(19,920		)	(4,420		)
Amortization recognized in net periodic benefit cost (income)	405			(5,469		)	—
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at end of year	$	(2,260	)	$	148,212		$	—
Amortization expected to be recognized in 2015	$	(405	)	$	6,224		$	—

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



	Year Ended December 31,
	2014			2013			2012
	(In thousands)
PNM Plan
Service cost	$	—		$	—		$	—
Interest cost	30,163			28,142			32,232
Expected return on plan assets	(38,044		)	(41,930		)	(41,301		)
Amortization of net (gain) loss	13,020			14,840			10,516
Amortization of prior service cost	(965		)	76			317
Net periodic benefit cost	$	4,174		$	1,128		$	1,764
TNMP Plan
Service cost	$	—		$	—		$	—
Interest cost	3,193			3,087			3,635
Expected return on plan assets	(4,526		)	(4,849		)	(5,324		)
Amortization of net (gain) loss	665			1,049			462
Amortization of prior service cost	—			—			—
Net periodic benefit cost (income)	$	(668	)	$	(713	)	$	(1,227	)

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	2014		2013		2012
Discount rate for determining December 31 PBO	4.48	%	5.27	%	4.30	%
Discount rate for determining net periodic benefit cost (income)	5.27	%	4.30	%	5.67	%
Expected return on plan assets	7.20	%	7.65	%	8.25	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 PBO	4.39	%	5.06	%	4.19	%
Discount rate for determining net periodic benefit cost (income)	5.06	%	4.19	%	5.69	%
Expected return on plan assets	7.20	%	7.65	%	8.25	%
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 an increase in the PNM PBO of $50.6 million at December 31, 2014 and a decrease of $60.9 million at December 31, 2013. Changes in discount rates resulted in an increase in the TNMP PBO of $5.1 million at December 31, 2014 and a decrease of $6.4 million at December 31, 2013. Changes in demographic experience resulted in actuarial losses in the PNM PBO of $0.2 million and $4.4 million at December 31, 2014 and 2013. Changes in demographic experience resulted in actuarial gains in the TNMP PBO of $0.4 million at December 31, 2014 and $1.4 million at December 31, 2013. Changes in other assumptions and experience resulted in actuarial gains in the PNM PBO of $0.2 million at December 31, 2014 and less than $0.1 million at December 31, 2013. Changes in other assumptions and experience resulted in actuarial losses in the TNMP PBO of $1.3 million and less than $0.1 million at December 31, 2014 and 2013. These changes are reflected as actuarial (gain) loss above.

In late 2014, the Society of Actuaries issued revised mortality tables that include changes in assumptions to reflect increased life expectancy and the corresponding decrease in mortality rates. This change impacts the Company’s pension plans, as the mortality assumptions are used as the basis for stating the pension obligation in financial statements, determining funding requirements, and making minimum lump-sum calculations. The actuarial valuation performed as of December 31, 2014 incorporated the impacts of the revised mortality tables. Utilizing the revised mortality tables increased the PNM PBO by $21.9 million and the TNMP PBO by $2.5 million, which are reflected as the actuarial losses 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. 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 2015 net periodic cost to increase $5.8 million and $0.6 million (analogous changes would result from a 1% increase). The actual rate of return for the PNM and TNMP pension plans was 14.3% and 13.5% for the year ended December 31, 2014.

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 21% equities, 65% fixed income, and 14% alternative investments. Equity investments are primarily in domestic securities that include large, mid, and small capitalization companies. The pension plans have a 6% 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)
2015	$	53,472	$	5,997
2016	53,468		5,667
2017	51,241		5,351
2018	49,640		5,585
2019	48,560		5,188
2020 – 2024	213,759		23,600

Due to declines during the recent recession 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 2015, the Company made a contribution of to the PNM pension plan of $30.0 million. The Company does not anticipate making any additional contributions to the pension plans in 2015. Based on current law, including recent amendments to funding requirements, and estimates of portfolio performance, contributions to the pension plan trust for 2016-2019 are estimated to total $22.0 million for PNM and none for TNMP. These anticipated contributions were developed using current funding assumptions with discount rates of 4.8% to 5.5%. 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 of all future benefits attributed under the terms of the postretirement benefit plan to employee service rendered to 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,
	2014			2013			2014			2013
	(In thousands)
APBO at beginning of year	$	92,165		$	99,613		$	12,266		$	13,678
Service cost	181			260			237			299
Interest cost	4,630			4,113			619			566
Participant contributions	2,582			2,537			366			373
Actuarial (gain) loss	4,455			(4,566		)	1,639			(1,080		)
Benefits paid	(8,838		)	(9,792		)	(1,057		)	(1,570		)
APBO at end of year	95,175			92,165			14,070			12,266
Fair value of plan assets at beginning of year	73,565			64,464			9,601			8,643
Actual return on plan assets	7,334			12,780			841			1,813
Employer contributions	3,532			3,576			343			342
Participant contributions	2,582			2,537			366			373
Benefits paid	(8,838		)	(9,792		)	(1,057		)	(1,570		)
Fair value of plan assets at end of year	78,175			73,565			10,094			9,601
Funded status – asset (liability)	$	(17,000	)	$	(18,600	)	$	(3,976	)	$	(2,665	)

In the year ended December 31, 2014, actuarial losses of $2.8 million and $1.3 million were recorded in regulatory assets for the PNM Plan and TNMP Plan. There were no prior service costs recorded for the year ended December 31, 2014.

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



	Year Ended December 31,
	2014			2013			2012
	(In thousands)
PNM Plan
Service cost	$	181		$	260		$	217
Interest cost	4,630			4,113			5,293
Expected return on plan assets	(5,638		)	(5,043		)	(4,901		)
Amortization of net (gain) loss	2,225			4,242			3,888
Amortization of prior service credit	(1,343		)	(1,343		)	(1,343		)
Net periodic benefit cost	$	55		$	2,229		$	3,154
TNMP Plan
Service cost	$	237		$	299		$	244
Interest cost	619			566			624
Expected return on plan assets	(534		)	(503		)	(516		)
Amortization of net (gain) loss	(122		)	—			(209		)
Amortization of prior service cost	32			57			57
Net periodic benefit cost	$	232		$	419		$	200

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	2014		2013		2012
Discount rate for determining December 31 APBO	4.45	%	5.21	%	4.26	%
Discount rate for determining net periodic benefit cost	5.21	%	4.26	%	5.70	%
Expected return on plan assets	8.50	%	8.50	%	8.50	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 APBO	4.45	%	5.21	%	4.26	%
Discount rate for determining net periodic benefit cost	5.21	%	4.26	%	5.70	%
Expected return on plan assets	6.50	%	6.50	%	6.50	%
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 $6.7 million at December 31, 2014 and a decrease of $8.8 million at December 31, 2013. Changes in discount rates resulted in an increase in the TNMP APBO of $1.1 million at December 31, 2014 and a decrease of $1.3 million at December 31, 2013. Changes in claims, contributions, medical trends, and demographic experience resulted in an actuarial gain in the PNM plan of $5.4 million at December 31, 2014 and an actuarial loss of $4.2 million at December 31, 2013. Changes in claims, contributions, and demographic experience resulted in actuarial losses in the TNMP plan of less than $0.1 million at December 31, 2014 and $0.2 million at December 31, 2013. These changes are reflected as actuarial (gain) loss above.

The actuarial valuation performed as of December 31, 2014 incorporated the impacts of the revised mortality tables discussed above. Utilizing the revised mortality tables increased the PNM APBO by $3.2 million and the TNMP APBO by $0.5 million, which are reflected as actuarial losses 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. 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 2015 postretirement benefit cost to increase $0.7 million and $0.1 million (analogous changes would result from a 1% increase). The actual rate of return for the PNM and TNMP postretirement benefit plans was 10.2% and 8.9% for the year ended December 31, 2014.

The following table shows the assumed health care cost trend rates for the PNM postretirement benefit plan:



	PNM Plan
	December 31,
	2014		2013
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	2023		2019

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	$	350	$	(281	)
Effect on APBO	$	5,305	$	(4,622	)

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 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)
2015	$	6,560	$	801
2016	6,635		822
2017	6,718		838
2018	6,875		860
2019	6,950		882
2020 - 2024	34,585		4,717

PNM expects to make contributions to the PNM postretirement benefit plan totaling $3.5 million in 2015 and $14.0 million for 2016-2019. TNMP expects to make contributions to the TNMP postretirement benefit plan totaling $0.3 million in 2015 and $1.4 million for 2016-2019 .

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,
	2014			2013			2014			2013
	(In thousands)
PBO at beginning of year	$	16,363		$	17,467		$	823		$	902
Service cost	—			—			—			—
Interest cost	822			720			39			36
Actuarial (gain) loss	2,040			(330		)	110			(21		)
Benefits paid	(1,495		)	(1,494		)	(94		)	(94		)
PBO at end of year – funded status	17,730			16,363			878			823
Less current liability	1,528			1,536			94			94
Non-current liability	$	16,202		$	14,827		$	784		$	729

The following table presents pre-tax information about net actuarial loss in AOCI as of December 31, 2014.



	December 31, 2014
	PNM Plan			TNMP Plan
	(In thousands)
Amount in AOCI not yet recognized in net periodic benefit cost at beginning of year	$	1,833		$	—
Experience loss (gain)	2,040			(110		)
Regulatory asset (liability) adjustment	(1,183		)	110
Amortization recognized in net periodic benefit cost (income)	(88		)	—
Amount in AOCI not yet recognized in net periodic benefit cost at end of year	$	2,602		$	—
Amortization expected to be recognized in 2015	$	136		$	—

The following table presents the components of net periodic benefit:



	Year Ended December 31,
	2014		2013		2012
	(In thousands)
PNM Plan
Service cost	$	—	$	—	$	—
Interest cost	822		720		876
Amortization of net (gain) loss	210		232		83
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	1,032	$	952	$	959
TNMP Plan
Service cost	$	—	$	—	$	—
Interest cost	39		36		45
Amortization of net (gain) loss	—		—		—
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	39	$	36	$	45

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	2014		2013		2012
Discount rate for determining December 31 PBO	4.48	%	5.27	%	4.30	%
Discount rate for determining net periodic benefit cost	5.27	%	4.30	%	5.67	%
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	4.39	%	5.06	%	4.19	%
Discount rate for determining net periodic benefit cost	5.06	%	4.19	%	5.69	%
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)
2015	$	1,528	$	93
2016	1,510		92
2017	1,490		91
2018	1,468		89
2019	1,445		86
2020 – 2024	6,722		384

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. This plan has been amended and the after-tax provision will be eliminated on June 30, 2015.

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



	Year Ended December 31,
	2014		2013		2012
	(In thousands)
PNMR
401(k) plan	$	16,703	$	16,785	$	16,185
Non-qualified plan	$	2,257	$	2,204	$	1,491
PNM
401(k) plan	$	12,745	$	12,952	$	12,427
Non-qualified plan	$	1,722	$	1,691	$	1,143
TNMP
401(k) plan	$	3,958	$	3,953	$	3,739
Non-qualified plan	$	535	$	513	$	327