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 9. 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.

In March 2017, the FASB issued Accounting Standards Update 2017-07 - Compensation - Retirement Benefits (Topic 715) to improve the presentation of net periodic pension and other postretirement benefit costs. Prior to ASU 2017-07, the Company presented all of its net periodic benefit costs, net of amounts capitalized to construction and other accounts, as administrative and general expenses on its statements of earnings. ASU 2017-07 requires the service cost component of net benefit costs be presented in the same line item or items as employees’ compensation. The other components of net periodic benefit cost (the “non-service cost components”) are required to be presented separately from the service cost component and outside of operating income. ASU 2017-07 also limits capitalization of net periodic benefit costs to only the service cost component. ASU 2017-07 requires retrospective presentation of the service and non-service cost components of net periodic benefit costs in the income statement and prospective application regarding the capitalization of only the service cost component of net periodic benefit costs. The Company adopted ASU 2017-07 as of January 1, 2018, its required effective date. In accordance with the standard, the PNM and PNMR Consolidated Statements of Earnings reflect a reclassification from administrative and general expenses to other (deductions) for the non-service cost components of net periodic benefit costs in the amount of $8.6 million and $6.7 million, net of amounts capitalized prior to the adoption of the standard, in the years ended December 31, 2017 and 2016. The non-service components of TNMP’s net periodic benefit costs in 2017 and 2016 were insignificant. The Company believes PNM and TNMP can continue to capitalize the non-service cost components of net periodic benefit costs as regulatory assets and liabilities to the extent attributable to regulated operations. During the year ended December 31, 2018, PNM recorded $4.3 million of non-service cost as other (deductions), which is net of $0.4 million recorded as regulatory assets, and TNMP recorded $0.3 million of non-service cost to other income, which is net of less than $0.1 million recorded as regulatory liabilities. See New Accounting Pronouncements in Note 1 regarding updates to disclosure requirements that will be effective in future periods.

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						TNMP
	Year Ended December 31,						Year Ended December 31,
	2018			2017			2018			2017
	(In thousands)
PBO at beginning of year	$	623,983		$	621,751		$	68,423		$	67,061
Service cost	—			—			—			—
Interest cost	24,270			26,908			2,625			2,887
Actuarial (gain) loss	(41,025		)	26,298			(5,216		)	3,050
Benefits paid	(42,970		)	(50,974		)	(5,245		)	(4,575		)
PBO at end of year	564,258			623,983			60,587			68,423
Fair value of plan assets at beginning of year	562,016			543,601			63,499			60,624
Actual return on plan assets	(29,068		)	69,389			(3,180		)	7,450
Employer contributions	—			—			—			—
Benefits paid	(42,970		)	(50,974		)	(5,245		)	(4,575		)
Fair value of plan assets at end of year	489,978			562,016			55,074			63,499
Funded status – asset (liability) for pension benefits	$	(74,280	)	$	(61,967	)	$	(5,513	)	$	(4,924	)

Actuarial (gain) loss results from changes in:



	PNM						TNMP
	Year Ended December 31,						Year Ended December 31,
	2018			2017			2018			2017
	(in thousands)
Discount rates	$	(34,769	)	$	27,547		$	(4,278	)	$	3,528
Demographic experience	431			(1,249		)	(301		)	(517		)
Mortality rate	(6,966		)	—			(705		)	—
Other assumptions and experience	279			—			68			39
	$	(41,025	)	$	26,298		$	(5,216	)	$	3,050

The following table presents pre-tax information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2018.



	PNM						TNMP
	December 31, 2018						December 31, 2018
	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	$	(1,045	)	$	148,526		$	—
Experience (gain) loss	—			22,728			1,926
Regulatory asset (liability) adjustment	1,045			(13,571		)	(1,926		)
Amortization recognized in net periodic benefit cost (income)	—			(7,409		)	—
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at end of year	$	—		$	150,274		$	—
Amortization expected to be recognized in 2019	$	—		$	7,270		$	—

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



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
PNM
Service cost	$	—		$	—		$	—
Interest cost	24,270			26,908			30,307
Expected return on plan assets	(34,686		)	(33,803		)	(35,416		)
Amortization of net (gain) loss	16,348			16,006			13,820
Amortization of prior service cost	(965		)	(965		)	(965		)
Net periodic benefit cost	$	4,967		$	8,146		$	7,746
TNMP
Service cost	$	—		$	—		$	—
Interest cost	2,625			2,887			3,304
Expected return on plan assets	(3,963		)	(3,779		)	(3,943		)
Amortization of net (gain) loss	1,088			923			700
Amortization of prior service cost	—			—			—
Net periodic benefit cost (income)	$	(250	)	$	31		$	61

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	2018		2017		2016
Discount rate for determining December 31 PBO	4.65	%	4.05	%	4.51	%
Discount rate for determining net periodic benefit cost (income)	4.05	%	4.51	%	5.29	%
Expected return on plan assets	6.54	%	6.40	%	6.50	%
Rate of compensation increase	N/A		N/A		N/A
TNMP
Discount rate for determining December 31 PBO	4.63	%	4.01	%	4.49	%
Discount rate for determining net periodic benefit cost (income)	4.01	%	4.49	%	5.39	%
Expected return on plan assets	6.57	%	6.40	%	6.50	%
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 2019 net periodic benefit cost to increase $5.0 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 (5.4)% and (5.2)% for the year ended December 31, 2018.

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 improve. These liability matching investments are currently fixed income securities. Beginning in 2018, the pension plans targeted asset allocation was 26% equities, 54% fixed income, and 20% alternative investments. The Company modified the LDI strategy by decreasing the liability matching fixed income investments portfolio from 65% to 54% in 2018. Equity investments are primarily in domestic securities that include large, mid, and small capitalization companies. The pension plans have a 7% targeted allocation to equities of companies domiciled primarily in developed countries outside of the United States. The equity investments 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 investments are commingled real estate portfolios that invest in a diversified portfolio of assets including commercial property and multi-family housing. See Note 9 for fair value information concerning assets held by the pension plans.

The following pension benefit payments are expected to be paid:



	PNM		TNMP
	(In thousands)
2019	$	46,125	$	5,137
2020	45,595		5,065
2021	44,804		5,005
2022	44,000		4,886
2023	43,066		4,667
2024 - 2028	199,157		21,075

Based on current law, the Company does not expect to make any cash contributions to the pension plans in 2019-2021 but expects to contribute $1.3 million and zero to the PNM and TNMP pension plans in 2022. These expectations were developed using current funding assumptions with discount rates of 4.2% to 4.6%. Actual amounts to be funded in the future will be dependent on the actuarial assumptions at that time, including the appropriate discount rates. 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						TNMP
	Year Ended December 31,						Year Ended December 31,
	2018			2017			2018			2017
	(In thousands)
APBO at beginning of year	$	89,897		$	94,269		$	12,279		$	12,830
Service cost	83			96			134			143
Interest cost	3,439			4,025			477			556
Participant contributions	2,390			3,069			174			379
Actuarial (gain) loss	(12,206		)	(1,601		)	(2,213		)	(381		)
Benefits paid	(8,298		)	(9,961		)	(787		)	(1,248		)
APBO at end of year	75,305			89,897			10,064			12,279
Fair value of plan assets at beginning of year	80,356			72,694			10,002			8,544
Actual return on plan assets	(7,669		)	14,222			(988		)	1,642
Employer contributions	2,924			332			343			685
Participant contributions	2,390			3,069			174			379
Benefits paid	(8,298		)	(9,961		)	(787		)	(1,248		)
Fair value of plan assets at end of year	69,703			80,356			8,744			10,002
Funded status – asset (liability)	$	(5,602	)	$	(9,541	)	$	(1,320	)	$	(2,277	)

Actuarial (gain) loss results from changes in:



	PNM						TNMP
	Year Ended December 31,						Year Ended December 31,
	2018			2017			2018			2017
	(in thousands)
Discount rates	$	(4,076	)	$	3,536		$	(710	)	$	613
Claims, contributions, and demographic experience	(3,174		)	(5,845		)	72			(994		)
Assumed participation rate	(4,040		)	—			(1,461		)	—
Mortality rate	(916		)	—			(114		)	—
Medical benefits	—			1,425			—			—
Dental trend assumption	—			(717		)	—			—
	$	(12,206	)	$	(1,601	)	$	(2,213	)	$	(381	)

In the year ended December 31, 2018, actuarial losses of $0.9 million were recorded as adjustments to regulatory assets for the PNM OPEB plan. For the TNMP OPEB 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 (income):



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
PNM
Service cost	$	83		$	96		$	140
Interest cost	3,439			4,025			4,346
Expected return on plan assets	(5,414		)	(5,230		)	(5,483		)
Amortization of net (gain) loss	2,354			3,682			1,145
Amortization of prior service credit	(1,664		)	(1,663		)	(30		)
Net periodic benefit cost (income)	$	(1,202	)	$	910		$	118
TNMP
Service cost	$	134		$	143		$	186
Interest cost	477			556			677
Expected return on plan assets	(542		)	(456		)	(490		)
Amortization of net (gain) loss	(227		)	(79		)	(40		)
Amortization of prior service cost	—			—			—
Net periodic benefit cost (income)	$	(158	)	$	164		$	333

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	2018		2017		2016
Discount rate for determining December 31 APBO	4.63	%	4.00	%	4.47	%
Discount rate for determining net periodic benefit cost	4.00	%	4.47	%	5.34	%
Expected return on plan assets	7.42	%	7.50	%	7.70	%
Rate of compensation increase	N/A		N/A		N/A
TNMP
Discount rate for determining December 31 APBO	4.63	%	4.00	%	4.47	%
Discount rate for determining net periodic benefit cost	4.00	%	4.47	%	5.34	%
Expected return on plan assets	5.86	%	5.40	%	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 2019 net periodic 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 OPEB plans was (9.7)% and (10.0)% for the year ended December 31, 2018.

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



	PNM
	December 31,
	2018		2017
Health care cost trend rate assumed for next year	6.5	%	6.5	%
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	2026		2024

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



	PNM
	1-Percentage- Point Increase		1-Percentage- Point Decrease
	(In thousands)
Effect on total of service and interest cost	$	60	$	100
Effect on APBO	$	1,158	$	(1,529	)

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, which was reached at the end of 2001, are wholly borne by the participants. 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. Effective January 1, 2018, the PNM OPEB plan was amended to limit the annual increase in the Company’s costs to 5% thereby reducing the impact of an increase in the assumed rates. Increases in excess of the limit are born by the PNM OPEB plan participants.

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 OPEB plans have a target asset allocation of 70% equities and 30% fixed income. See Note 9 for fair value information concerning assets held by the other postretirement benefit plans.

The following OPEB payments, which reflect expected future service and are net of participant contributions, are expected to be paid:



	PNM		TNMP
	(In thousands)
2019	$	7,365	$	629
2020	7,309		653
2021	7,029		674
2022	6,653		699
2023	6,351		714
2024 - 2028	26,678		3,558

PNM and TNMP do not expect to make contributions to the OPEB plans for 2019-2023.

Executive Retirement Programs

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



	PNM						TNMP
	Year Ended December 31,						Year Ended December 31,
	2018			2017			2018			2017
	(In thousands)
PBO at beginning of year	$	16,117		$	16,212		$	771		$	787
Service cost	—			—			—			—
Interest cost	622			697			29			33
Actuarial (gain) loss	(508		)	674			(4		)	44
Benefits paid	(1,505		)	(1,466		)	(94		)	(93		)
PBO at end of year – funded status	14,726			16,117			702			771
Less current liability	1,627			1,501			141			93
Non-current liability	$	13,099		$	14,616		$	561		$	678

The following table presents pre-tax information about net actuarial loss in AOCI as of December 31, 2018.



	December 31, 2018
	PNM			TNMP
	(In thousands)
Amount in AOCI not yet recognized in net periodic benefit cost at beginning of year	$	2,450		$	—
Experience (gain) loss	(508		)	4
Regulatory asset (liability) adjustment	295			(4		)
Amortization recognized in net periodic benefit cost (income)	(151		)	—
Amount in AOCI not yet recognized in net periodic benefit cost at end of year	$	2,086		$	—
Amortization expected to be recognized in 2019	$	133		$	—

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



	Year Ended December 31,
	2018		2017		2016
	(In thousands)
PNM
Service cost	$	—	$	—	$	—
Interest cost	622		697		812
Amortization of net (gain) loss	359		313		256
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	981	$	1,010	$	1,068
TNMP
Service cost	$	—	$	—	$	—
Interest cost	29		33		40
Amortization of net (gain) loss	15		9		2
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	44	$	42	$	42

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	2018		2017		2016
Discount rate for determining December 31 PBO	4.66	%	4.05	%	4.51	%
Discount rate for determining net periodic benefit cost	4.05	%	4.51	%	5.29	%
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
Discount rate for determining December 31 PBO	4.63	%	4.01	%	4.49	%
Discount rate for determining net periodic benefit cost	4.01	%	4.49	%	5.39	%
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		TNMP
	(In thousands)
2019	$	1,627	$	141
2020	1,463		91
2021	1,427		88
2022	1,385		84
2023	1,337		79
2024 - 2028	5,792		301

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,
	2018		2017		2016
	(In thousands)
PNMR
401(k) plan	$	16,677	$	16,452	$	17,762
Non-qualified plan	$	865	$	3,702	$	2,017
PNM
401(k) plan	$	12,052	$	12,120	$	13,397
Non-qualified plan	$	621	$	2,834	$	1,535
TNMP
401(k) plan	$	4,625	$	4,332	$	4,365
Non-qualified plan	$	244	$	868	$	482