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 and TNMP receive a regulated return on the amounts funded for pension and OPEB plans in excess of the periodic cost or income to the extent included in retail rates (a “prepaid pension asset”).

Participants in the PNM Plans include eligible employees and retirees of PNMR and PNM. 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 or returned through future rates, PNM and TNMP record the costs as a regulatory asset or regulatory liability.

The Company maintains trust funds for the pension and OPEB plans from which benefits are paid to eligible employees and retirees. The Company’s funding policy is to make contributions to the trusts, as determined by an independent actuary, that comply with minimum guidelines of the Employee Retirement Income Security Act and the Internal Revenue Code. Information concerning the investments is contained in Note 8. 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:


•	Implement investment strategies 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 the long-term 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 OPEB 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 pension 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,
	2017			2016			2017			2016
	(In thousands)
PBO at beginning of year	$	621,751		$	597,900		$	67,061		$	64,198
Service cost	—			—			—			—
Interest cost	26,908			30,307			2,887			3,304
Actuarial (gain) loss	26,298			39,463			3,050			4,318
Benefits paid	(50,974		)	(45,919		)	(4,575		)	(4,759		)
PBO at end of year	623,983			621,751			68,423			67,061
Fair value of plan assets at beginning of year	543,601			557,923			60,624			62,082
Actual return on plan assets	69,389			31,597			7,450			3,301
Employer contributions	—			—			—			—
Benefits paid	(50,974		)	(45,919		)	(4,575		)	(4,759		)
Fair value of plan assets at end of year	562,016			543,601			63,499			60,624
Funded status – asset (liability) for pension benefits	$	(61,967	)	$	(78,150	)	$	(4,924	)	$	(6,437	)

Actuarial (gain) loss results from changes in:



	PNM Plan						TNMP Plan
	Year Ended December 31,						Year Ended December 31,
	2017			2016			2017			2016
	(in thousands)
Discount rates	$	27,547		$	41,849		$	3,528		$	5,055
Demographic experience	(1,249		)	(334		)	(517		)	(556		)
Other assumption and experience	—			(2,052		)	39			(181		)
	$	26,298		$	39,463		$	3,050		$	4,318

The following table presents pre-tax information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2017.



	PNM Plan						TNMP Plan
	December 31, 2017						December 31, 2017
	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	$	(1,450	)	$	159,149		$	—
Experience (gain) loss	—			(9,288		)	(621		)
Regulatory asset (liability) adjustment	—			5,387			621
Amortization recognized in net periodic benefit cost (income)	405			(6,722		)	—
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at end of year	$	(1,045	)	$	148,526		$	—
Amortization expected to be recognized in 2018	$	(405	)	$	6,653		$	—

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



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
PNM Plan
Service cost	$	—		$	—		$	—
Interest cost	26,908			30,307			28,255
Expected return on plan assets	(33,803		)	(35,416		)	(39,323		)
Amortization of net (gain) loss	16,006			13,820			14,820
Amortization of prior service cost	(965		)	(965		)	(965		)
Net periodic benefit cost	$	8,146		$	7,746		$	2,787
TNMP Plan
Service cost	$	—		$	—		$	—
Interest cost	2,887			3,304			3,043
Expected return on plan assets	(3,779		)	(3,943		)	(4,420		)
Amortization of net (gain) loss	923			700			782
Amortization of prior service cost	—			—			—
Net periodic benefit cost (income)	$	31		$	61		$	(595	)

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	2017		2016		2015
Discount rate for determining December 31 PBO	4.05	%	4.51	%	5.29	%
Discount rate for determining net periodic benefit cost (income)	4.51	%	5.29	%	4.48	%
Expected return on plan assets	6.40	%	6.50	%	6.80	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 PBO	4.01	%	4.49	%	5.39	%
Discount rate for determining net periodic benefit cost (income)	4.49	%	5.39	%	4.39	%
Expected return on plan assets	6.40	%	6.50	%	6.80	%
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 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 2018 net periodic cost to increase $5.3 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 13.4% and 12.8% for the year ended December 31, 2017.

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. Prior to 2018, the pension plans targeted asset allocation was 21% equities, 65% fixed income, and 14% alternative investments. The Company is contemplating modifying the LDI strategy by decreasing the liability matching fixed income investments portfolio from 65% to 50% beginning in 2018. The new asset allocation will be implemented in 2018. 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)
2018	$	49,221	$	5,929
2019	48,639		5,215
2020	47,069		5,108
2021	45,246		5,373
2022	44,232		4,856
2023 - 2027	201,389		22,085

The Company does not expect to make any cash contributions to the pension plans in 2018-2021, but expects to contribute $5.1 million and zero to the PNM and TNMP pension plans in 2022, based on current law, including recent amendments to funding requirements, and estimates of portfolio performance. These anticipations were developed using current funding assumptions with discount rates of 4.0% to 5.1%. Actual amounts to be funded in the future will be dependent on the actuarial assumptions at that time, including the appropriate discount rate. PNM and TNMP may make additional contributions at their discretion.

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,
	2017			2016			2017			2016
	(In thousands)
APBO at beginning of year	$	94,269		$	84,674		$	12,830		$	13,106
Service cost	96			140			143			186
Interest cost	4,025			4,346			556			677
Participant contributions	3,069			2,690			379			520
Actuarial (gain) loss	(1,601		)	17,877			(381		)	(96		)
Benefits paid	(9,961		)	(11,734		)	(1,248		)	(1,563		)
Plan design changes	—			(3,724		)	—			—
APBO at end of year	89,897			94,269			12,279			12,830
Fair value of plan assets at beginning of year	72,694			72,952			8,544			9,111
Actual return on plan assets	14,222			5,923			1,642			476
Employer contributions	332			2,863			685			—
Participant contributions	3,069			2,690			379			520
Benefits paid	(9,961		)	(11,734		)	(1,248		)	(1,563		)
Fair value of plan assets at end of year	80,356			72,694			10,002			8,544
Funded status – asset (liability)	$	(9,541	)	$	(21,575	)	$	(2,277	)	$	(4,286	)

Actuarial (gain) loss results from changes in:



	PNM Plan						TNMP Plan
	Year Ended December 31,						Year Ended December 31,
	2017			2016			2017			2016
	(in thousands)
Discount rates	$	3,536		$	6,569		$	613		$	1,112
Claims, contributions, and demographic experience	(5,845		)	19,562			(994		)	(102		)
Assumed participation rate	—			(6,335		)	—			(1,013		)
Mortality rate	—			(691		)	—			(93		)
Medical benefits	1,425			(1,228		)	—			—
Dental trend assumption	(717		)	—			—			—
	$	(1,601	)	$	17,877		$	(381	)	$	(96	)

In the year ended December 31, 2017, actuarial gains of $10.6 million were recorded as adjustments to regulatory assets for the PNM Plan. For the TNMP Plan, actuarial gains of $1.6 million were recorded as adjustments to regulatory liabilities.

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



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
PNM Plan
Service cost	$	96		$	140		$	204
Interest cost	4,025			4,346			4,089
Expected return on plan assets	(5,230		)	(5,483		)	(5,610		)
Amortization of net (gain) loss	3,682			1,145			1,966
Amortization of prior service credit	(1,663		)	(30		)	(642		)
Net periodic benefit cost	$	910		$	118		$	7
TNMP Plan
Service cost	$	143		$	186		$	247
Interest cost	556			677			608
Expected return on plan assets	(456		)	(490		)	(520		)
Amortization of net (gain) loss	(79		)	(40		)	—
Amortization of prior service cost	—			—			—
Net periodic benefit cost	$	164		$	333		$	335

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	2017		2016		2015
Discount rate for determining December 31 APBO	4.00	%	4.47	%	5.34	%
Discount rate for determining net periodic benefit cost	4.47	%	5.34	%	4.45	%
Expected return on plan assets	7.50	%	7.70	%	7.70	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 APBO	4.00	%	4.47	%	5.34	%
Discount rate for determining net periodic benefit cost	4.47	%	5.34	%	4.45	%
Expected return on plan assets	5.40	%	5.70	%	5.70	%
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. 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 2018 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 20.5% and 19.4% for the year ended December 31, 2017.

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



	PNM Plan
	December 31,
	2017		2016
Health care cost trend rate assumed for next year	6.5	%	6.8	%
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	2024		2024

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	$	72	$	(111	)
Effect on APBO	$	1,452	$	(2,235	)

TNMP’s exposure to cost increases in the OPEB 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 OPEB plans invest in a portfolio that is diversified by asset class and style strategies. The OPEB 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 and are net of participant contributions, are expected to be paid:



	PNM Plan		TNMP Plan
	(In thousands)
2018	$	7,829	$	708
2019	7,730		725
2020	7,605		748
2021	7,442		774
2022	7,132		795
2023 - 2027	31,250		4,126

PNM expects to make no contributions to the PNM OPEB plan for 2018-2022. TNMP expects to make contributions to the TNMP OPEB totaling $0.3 million in 2018 and $1.4 million for 2019-2022.

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,
	2017			2016			2017			2016
	(In thousands)
PBO at beginning of year	$	16,212		$	16,105		$	787		$	794
Service cost	—			—			—			—
Interest cost	697			812			33			40
Actuarial (gain) loss	674			768			44			47
Benefits paid	(1,466		)	(1,473		)	(93		)	(94		)
PBO at end of year – funded status	16,117			16,212			771			787
Less current liability	1,501			1,510			93			93
Non-current liability	$	14,616		$	14,702		$	678		$	694

The following table presents pre-tax information about net actuarial loss in AOCI as of December 31, 2017.



	December 31, 2017
	PNM Plan			TNMP Plan
	(In thousands)
Amount in AOCI not yet recognized in net periodic benefit cost at beginning of year	$	2,299		$	—
Experience (gain) loss	674			44
Regulatory asset (liability) adjustment	(391		)	(44		)
Amortization recognized in net periodic benefit cost (income)	(132		)	—
Amount in AOCI not yet recognized in net periodic benefit cost at end of year	$	2,450		$	—
Amortization expected to be recognized in 2018	$	151		$	—

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



	Year Ended December 31,
	2017		2016		2015
	(In thousands)
PNM Plan
Service cost	$	—	$	—	$	—
Interest cost	697		812		760
Amortization of net (gain) loss	313		256		325
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	1,010	$	1,068	$	1,085
TNMP Plan
Service cost	$	—	$	—	$	—
Interest cost	33		40		36
Amortization of net (gain) loss	9		2		5
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	42	$	42	$	41

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	2017		2016		2015
Discount rate for determining December 31 PBO	4.05	%	4.51	%	5.29	%
Discount rate for determining net periodic benefit cost	4.51	%	5.29	%	4.48	%
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	4.01	%	4.49	%	5.39	%
Discount rate for determining net periodic benefit cost	4.49	%	5.39	%	4.39	%
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)
2018	$	1,501	$	93
2019	1,473		91
2020	1,441		89
2021	1,405		85
2022	1,363		81
2023 - 2027	6,014		324

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.

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



	Year Ended December 31,
	2017		2016		2015
	(In thousands)
PNMR
401(k) plan	$	16,452	$	17,762	$	16,725
Non-qualified plan	$	3,702	$	2,017	$	1,436
PNM
401(k) plan	$	12,120	$	13,397	$	12,679
Non-qualified plan	$	2,834	$	1,535	$	1,090
TNMP
401(k) plan	$	4,332	$	4,365	$	4,046
Non-qualified plan	$	868	$	482	$	346