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. As discussed in Note 2, PNM completed the sale of its gas operations to NMGC on January 30, 2009. PNM retained the obligations under the defined benefit pension plans and executive retirement plans relating to employees that transferred to NMGC upon the sale. NMGC assumed the postretirement medical and dental obligations for the transferred employees. The periodic costs or income of the PNM Plans and TNMP Plans are included in regulated rates to the extent attributable to regulated operations. In addition, PNM receives a regulated return on the amount it has funded for its pension plan in excess of the periodic cost or income.

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. Such changes are reported in other comprehensive income.

GAAP also 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 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


•	Generate a rate of return for the total portfolio that equals or exceeds the actuarial investment rate assumption


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

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 lie within a corridor of plus or minus 4.0% around the expected return on market value. Gains and losses that lie outside the corridor are amortized over five years. This market-related valuation recognizes the portion of return that is outside the range over a five-year period from the year in which the return occurs. As such, the future value of assets will be impacted as previously deferred returns are recorded.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law. This legislation expands health care coverage to individuals and will largely be funded through tax increases. One provision that will impact certain companies significantly is the elimination of the tax deductibility of the Medicare Part D subsidy. The Company does not expect any significant impact on its financial statements as a result of the legislation.

In June 2010, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act was enacted. The act contains a provision designed to lower required contributions to pension plans by offering extended amortization methods for shortfalls resulting from recent losses in asset market value. The Company’s pension plans were allowed relief for losses occurring in any two years within the 2009-2011 periods. The Company elected this relief for year 2009 and 2010 for the PNM Plan and 2010 and 2011 for the TNMP Plan. The impacts of this legislation have been reflected in estimated future contributions to the pension plans.

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 APBO represents the PBO without considering future compensation levels. Since the plans are frozen, the PBO and APBO 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,
	2011			2010			2011			2010
	(In thousands)
PBO at beginning of year	$	593,457		$	545,747		$	72,260		$	68,636
Service cost	—			—			—			—
Interest cost	32,804			34,073			3,800			4,126
Actuarial (gain) loss	1,197			51,379			(2,793		)	5,113
Benefits paid	(38,584		)	(37,742		)	(6,033		)	(5,615		)
PBO at end of year	588,874			593,457			67,234			72,260
Fair value of plan assets at beginning of year	392,788			360,854			60,387			57,744
Actual return on plan assets	31,671			51,725			4,447			8,013
Employer contributions	41,511			17,951			1,151			245
Benefits paid	(38,584		)	(37,742		)	(6,033		)	(5,615		)
Fair value of plan assets at end of year	427,386			392,788			59,952			60,387
Funded status-asset (liability) for pension benefits	$	(161,488	)	$	(200,669	)	$	(7,282	)	$	(11,873	)

The following table presents pre-tax information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2011.



	PNM Plan						TNMP Plan
	December 31, 2011						December 31, 2011
	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	$	314		$	133,153		$	521
Experience loss (gain)	—			6,601			(1,863		)
Regulatory asset (liability) adjustment	(3		)	(1,592		)	1,358
Amortization recognized in net periodic benefit cost (income)	(140		)	(4,074		)	(16		)
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at end of year	$	171		$	134,088		$	—
Amortization expected to be recognized in 2012	$	(138	)	$	(4,573	)	$	—

The following table presents the components of net periodic benefit cost (income) recognized in the Consolidated Statements of Earnings (Loss):



	Year Ended December 31,
	2011			2010			2009
	(In thousands)
PNM Plan
Service cost	$	—		$	—		$	—
Interest cost	32,804			34,073			34,439
Expected return on plan assets	(37,075		)	(37,354		)	(38,763		)
Amortization of net (gain) loss	9,209			6,450			3,818
Amortization of prior service cost	317			317			317
Net periodic benefit cost (income)	$	5,255		$	3,486		$	(189	)
TNMP Plan
Service cost	$	—		$	—		$	—
Interest cost	3,800			4,126			4,396
Expected return on plan assets	(5,470		)	(5,794		)	(6,093		)
Amortization of net (gain) loss	346			—			—
Amortization of prior service cost	—			—			—
Net periodic benefit cost (income)	$	(1,324	)	$	(1,668	)	$	(1,697	)

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	2011		2010		2009
Discount rate for determining December 31 PBO	5.67	%	5.72	%	6.47	%
Discount rate for determining net periodic benefit cost (income)	5.72	%	6.47	%	7.25	%
Expected return on plan assets	8.50	%	8.75	%	8.75	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 PBO	5.69	%	5.50	%	6.31	%
Discount rate for determining net periodic benefit cost (income)	5.50	%	6.31	%	7.25	%
Expected return on plan assets	8.50	%	8.75	%	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 $2.8 million and $41.5 million at December 31, 2011 and 2010. Changes in discount rates resulted in a decrease in the TNMP PBO of $1.2 million at December 31, 2011 and an increase of $5.1 million at December 31, 2010. In addition, the PNM PBO increased by $9.0 million at December 31, 2010 due to changes in demographics. The impacts of other changes in assumptions and experience were not significant. These changes are reflected as actuarial (gain) loss above. In 2009, an actuarial loss of $9.6 million resulted from changes in demographics associated with early retirement of PNM Gas employees transferred to NMGC. Although under GAAP a curtailment did not occur, GAAP required measuring the effects of the reduction in the work force in the same manner as a curtailment for purposes of determining the gain or loss on the sale of gas operations. This $9.6 million, which is not included in net periodic benefit (income) cost above, was recognized as a loss reducing the gain on the sale of PNM Gas. 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 8.0% and 7.7% for the year ended December 31, 2011. 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 2012 net periodic cost to increase $5.0 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 values are 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 42% equities, 41% fixed income, and 17% alternative investments. Equity investments are primarily in domestic securities that include large, mid, and small capitalization companies. The pension plans have a 10% 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)
2012	$	40,809	$	6,690
2013	41,759		5,806
2014	42,536		6,236
2015	43,183		6,046
2016	43,715		5,690
Years 2017 – 2021	222,072		25,715

There was a significant decline in the general price levels of marketable equity securities held by the pension plans in late 2008 and in early 2009. Such declines have been partially offset by price increases through 2010. PNM and TNMP began making contributions to the pension plans in 2010. Based on current law and estimates of portfolio performance, contributions to the pension plan trust are estimated to be $77.7 million in 2012 and a total of $85.3 million for 2013-2016 for PNM and $5.3 million in 2012 and a total of $1.8 million for 2013-2016 for TNMP. These anticipated contributions were developed using current funding assumptions with a discount rate of 5.3%. 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,
	2011			2010			2011			2010
	(In thousands)
APBO at beginning of year	$	99,486		$	122,417		$	12,152		$	11,554
Service cost	259			419			306			289
Interest cost	5,378			7,650			654			711
Participant contributions	2,206			1,732			281			257
Actuarial (gain) loss	712			(17,952		)	(862		)	(116		)
Benefits paid	(10,315		)	(9,331		)	(1,187		)	(543		)
Plan amendments	(1,505		)	(5,449		)	—			—
APBO at end of year	96,221			99,486			11,344			12,152
Fair value of plan assets at beginning of year	61,749			57,126			8,596			7,093
Actual return on plan assets	2,263			9,771			262			1,214
Employer contributions	2,873			2,451			351			575
Participant contributions	2,206			1,732			281			257
Benefits paid	(10,315		)	(9,331		)	(1,187		)	(543		)
Fair value of plan assets at end of year	58,776			61,749			8,303			8,596
Funded status-asset (liability)	$	(37,445	)	$	(37,737	)	$	(3,041	)	$	(3,556	)

As a result of the sale of gas operations on January 30, 2009, $15.7 million of the APBO liability was transferred to the purchaser and PNM recognized unamortized prior service costs resulting in a $2.9 million gain, which is not included in net periodic benefit cost below. 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 following table presents pre-tax information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2011.



	PNM Plan						TNMP Plan
	December 31, 2011						December 31, 2011
	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	$	(882	)	$	3,187		$	12		$	(110	)
Experience loss (gain)	(1,505		)	3,837			—			(431		)
Regulatory asset (liability) adjustment	2,164			(5,940		)	(11		)	537
Amortization recognized in net periodic benefit cost (income)	102			(124		)	(1		)	4
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at end of year	$	(121	)	$	960		$	—		$	—
Amortization expected to be recognized in 2012	$	35		$	(100	)	$	—		$	—

The following table presents the components of net periodic benefit cost recognized in the Consolidated Statements of Earnings (Loss):



	Year Ended December 31,
	2011			2010			2009
	(In thousands)
PNM Plan
Service cost	$	259		$	419		$	417
Interest cost	5,378			7,650			7,388
Expected return on plan assets	(5,388		)	(5,572		)	(5,832		)
Amortization of net (gain) loss	3,205			5,489			3,290
Amortization of prior service credit	(2,648		)	(4,143		)	(4,262		)
Net periodic benefit cost	$	806		$	3,843		$	1,001
TNMP Plan
Service cost	$	306		$	289		$	260
Interest cost	654			711			733
Expected return on plan assets	(533		)	(514		)	(495		)
Amortization of net (gain) loss	(193		)	(195		)	(265		)
Amortization of prior service cost	60			60			60
Net periodic benefit cost	$	294		$	351		$	293

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	2011		2010		2009
Discount rate for determining December 31 APBO	5.70	%	5.59	%	6.42	%
Discount rate for determining net periodic benefit cost	5.59	%	6.42	%	7.25	%
Expected return on plan assets	8.50	%	8.75	%	8.75	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 APBO	5.70	%	5.59	%	6.42	%
Discount rate for determining net periodic benefit cost	5.59	%	6.42	%	7.25	%
Expected return on plan assets	6.30	%	6.70	%	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. The change in discount rate resulted in an increase in the PNM APBO of $7.4 million at December 31, 2010. In addition, the December 31, 2010 PNM APBO decreased $20.1 million as a result of updated claims assumptions and recent retiree experience. The impacts of other changes in assumptions or experience were not significant.

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 3.8% and 3.2% for the year ended December 31, 2011. 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 2012 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,
	2011		2010
Health care cost trend rate assumed for next year	7.5	%	8.0	%
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	$	424	$	(365	)
Effect on APBO	$	6,215	$	(5,417	)

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 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 an 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)
2012	$	6,708	$	777
2013	6,874		780
2014	7,138		797
2015	7,270		799
2016	7,520		816
Years 2017 – 2021	38,933		4,157

PNM expects to make contributions totaling $2.5 million to the PNM postretirement benefit plan in 2012. TNMP expects to make contributions totaling $0.2 million to the TNMP postretirement benefit plan in 2012.

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,
	2011			2010			2011			2010
	(In thousands)
PBO at beginning of year	$	17,020		$	17,004		$	884		$	867
Service cost	—			—			—			—
Interest cost	930			1,054			46			52
Actuarial (gain) loss	(252		)	473			8			59
Benefits paid	(1,507		)	(1,511		)	(94		)	(94		)
PBO at end of year-funded status	16,191			17,020			844			884
Less current liability	1,436			1,478			89			89
Non-current liability	$	14,755		$	15,542		$	755		$	795

The following table presents pre-tax information about net actuarial loss in AOCI as of December 31, 2011.



	December 31, 2011
	PNM Plan			TNMP Plan
	(In thousands)
Amount in AOCI not yet recognized in net periodic benefit cost at beginning of year	$	1,588		$	—
Experience loss (gain)	(252		)	8
Regulatory asset (liability) adjustment	59			(8		)
Amortization recognized in net periodic benefit cost (income)	(41		)	—
Amount in AOCI not yet recognized in net periodic benefit cost at end of year	$	1,354		$	—
Amortization expected to be recognized in 2012	$	(36	)	$	—

The following table presents the components of net periodic benefit cost recognized in the Consolidated Statements of Earnings (Loss):



	Year Ended December 31,
	2011		2010			2009
	(In thousands)
PNM Plan
Service cost	$	—	$	—		$	59
Interest cost	930		1,053			1,135
Amortization of net loss	93		71			27
Amortization of prior service cost	—		—			10
Net periodic benefit cost	$	1,023	$	1,124		$	1,231
TNMP Plan
Service cost	$	—	$	—		$	—
Interest cost	46		52			76
Amortization of net (gain) loss	—		(4		)	—
Amortization of prior service cost	—		—			—
Net periodic benefit cost	$	46	$	48		$	76

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	2011		2010		2009
Discount rate for determining December 31 PBO	5.67	%	5.72	%	6.47	%
Discount rate for determining net periodic benefit cost	5.72	%	6.47	%	7.25	%
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	5.69	%	5.50	%	6.31	%
Discount rate for determining net periodic benefit cost	5.50	%	6.31	%	7.25	%
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)
2012	$	1,477	$	91
2013	1,460		90
2014	1,441		89
2015	1,418		87
2016	1,393		85
Years 2017 – 2021	6,462		375

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,
	2011		2010		2009
	(In thousands)
PNMR
401(k) plan	$	17,000	$	17,199	$	16,743
Non-qualified plan	$	1,931	$	2,500	$	2,073
PNM
401(k) plan	$	12,541	$	12,788	$	11,698
Non-qualified plan	$	1,407	$	1,871	$	1,299
TNMP
401(k) plan	$	3,723	$	3,496	$	3,323
Non-qualified plan	$	431	$	478	$	405