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 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 OBEB 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 independent actuary and 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:


•	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 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,
	2016			2015			2016			2015
	(In thousands)
PBO at beginning of year	$	597,900		$	657,557		$	64,198		$	72,305
Service cost	—			—			—			—
Interest cost	30,307			28,255			3,304			3,043
Actuarial (gain) loss	39,463			(38,151		)	4,318			(5,157		)
Benefits paid	(45,919		)	(49,761		)	(4,759		)	(5,993		)
PBO at end of year	621,751			597,900			67,061			64,198
Fair value of plan assets at beginning of year	557,923			587,909			62,082			69,177
Actual return on plan assets	31,597			(10,225		)	3,301			(1,102		)
Employer contributions	—			30,000			—			—
Benefits paid	(45,919		)	(49,761		)	(4,759		)	(5,993		)
Fair value of plan assets at end of year	543,601			557,923			60,624			62,082
Funded status – asset (liability) for pension benefits	$	(78,150	)	$	(39,977	)	$	(6,437	)	$	(2,116	)

Actuarial (gain) loss results from changes in:



	PNM Plan						TNMP Plan
	Year Ended December 31,						Year Ended December 31,
	2016			2015			2016			2015
	(in thousands)
Discount rates	$	41,849		$	(45,918	)	$	5,055		$	(6,090	)
Demographic experience	(334		)	2,778			(556		)	877
Other assumption and experience	(2,052		)	4,989			(181		)	56
	$	39,463		$	(38,151	)	$	4,318		$	(5,157	)

The following table presents pre-tax information about prior service cost and net actuarial (gain) loss in AOCI as of December 31, 2016.



	PNM Plan						TNMP Plan
	December 31, 2016						December 31, 2016
	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	$	(1,855	)	$	146,775		$	—
Experience (gain) loss	—			43,283			4,960
Regulatory asset (liability) adjustment	—			(25,104		)	(4,960		)
Amortization recognized in net periodic benefit cost (income)	405			(5,805		)	—
Amounts in AOCI not yet recognized in net periodic benefit cost (income) at end of year	$	(1,450	)	$	159,149		$	—
Amortization expected to be recognized in 2017	$	(405	)	$	6,320		$	—

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



	Year Ended December 31,
	2016			2015			2014
	(In thousands)
PNM Plan
Service cost	$	—		$	—		$	—
Interest cost	30,307			28,255			30,163
Expected return on plan assets	(35,416		)	(39,323		)	(38,044		)
Amortization of net (gain) loss	13,820			14,820			13,020
Amortization of prior service cost	(965		)	(965		)	(965		)
Net periodic benefit cost	$	7,746		$	2,787		$	4,174
TNMP Plan
Service cost	$	—		$	—		$	—
Interest cost	3,304			3,043			3,193
Expected return on plan assets	(3,943		)	(4,420		)	(4,526		)
Amortization of net (gain) loss	700			782			665
Amortization of prior service cost	—			—			—
Net periodic benefit cost (income)	$	61		$	(595	)	$	(668	)

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



	Year Ended December 31,
PNM Plan	2016		2015		2014
Discount rate for determining December 31 PBO	4.51	%	5.29	%	4.48	%
Discount rate for determining net periodic benefit cost (income)	5.29	%	4.48	%	5.27	%
Expected return on plan assets	6.50	%	6.80	%	7.20	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 PBO	4.49	%	5.39	%	4.39	%
Discount rate for determining net periodic benefit cost (income)	5.39	%	4.39	%	5.06	%
Expected return on plan assets	6.50	%	6.80	%	7.20	%
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 2017 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 5.9% and 5.5% for the year ended December 31, 2016.

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)
2017	$	50,244	$	5,526
2018	48,398		5,728
2019	47,696		5,086
2020	46,879		5,042
2021	45,348		5,294
2022 – 2026	209,331		22,509

The Company does not expect to make any cash contributions to the pension plans in 2017-2021, 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 4.1% to 4.9%. 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,
	2016			2015			2016			2015
	(In thousands)
APBO at beginning of year	$	84,674		$	95,175		$	13,106		$	14,070
Service cost	140			204			186			247
Interest cost	4,346			4,089			677			608
Participant contributions	2,690			2,439			520			320
Actuarial (gain) loss	17,877			(6,565		)	(96		)	(575		)
Benefits paid	(11,734		)	(10,668		)	(1,563		)	(1,564		)
Plan design changes	(3,724		)	—			—			—
APBO at end of year	94,269			84,674			12,830			13,106
Fair value of plan assets at beginning of year	72,952			78,175			9,111			10,094
Actual return on plan assets	5,923			(617		)	476			(82		)
Employer contributions	2,863			3,623			—			343
Participant contributions	2,690			2,439			520			320
Benefits paid	(11,734		)	(10,668		)	(1,563		)	(1,564		)
Fair value of plan assets at end of year	72,694			72,952			8,544			9,111
Funded status – asset (liability)	$	(21,575	)	$	(11,722	)	$	(4,286	)	$	(3,995	)

Actuarial (gain) loss results from changes in:



	PNM Plan						TNMP Plan
	Year Ended December 31,						Year Ended December 31,
	2016			2015			2016			2015
	(in thousands)
Discount rates	$	6,569		$	(7,345	)	$	1,112		$	(1,322	)
Claims, contributions, and demographic experience	19,562			780			(102		)	747
Assumed participation rate	(6,335		)	—			(1,013		)	—
Mortality rate	(691		)	—			(93		)	—
Medical benefits	(1,228		)	—			—			—
	$	17,877		$	(6,565	)	$	(96	)	$	(575	)

In the year ended December 31, 2016, actuarial losses of $17.4 million were recorded as adjustments to regulatory assets for the PNM Plan. For the TNMP Plan, actuarial gains of less than $0.1 million were recorded as adjustments to regulatory liabilities.

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



	Year Ended December 31,
	2016			2015			2014
	(In thousands)
PNM Plan
Service cost	$	140		$	204		$	181
Interest cost	4,346			4,089			4,630
Expected return on plan assets	(5,483		)	(5,610		)	(5,638		)
Amortization of net (gain) loss	1,145			1,966			2,225
Amortization of prior service credit	(30		)	(642		)	(1,343		)
Net periodic benefit cost	$	118		$	7		$	55
TNMP Plan
Service cost	$	186		$	247		$	237
Interest cost	677			608			619
Expected return on plan assets	(490		)	(520		)	(534		)
Amortization of net (gain) loss	(40		)	—			(122		)
Amortization of prior service cost	—			—			32
Net periodic benefit cost	$	333		$	335		$	232

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	2016		2015		2014
Discount rate for determining December 31 APBO	4.47	%	5.34	%	4.45	%
Discount rate for determining net periodic benefit cost	5.34	%	4.45	%	5.21	%
Expected return on plan assets	7.70	%	7.70	%	8.50	%
Rate of compensation increase	N/A		N/A		N/A
TNMP Plan
Discount rate for determining December 31 APBO	4.47	%	5.34	%	4.45	%
Discount rate for determining net periodic benefit cost	5.34	%	4.45	%	5.21	%
Expected return on plan assets	5.70	%	5.70	%	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. 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 2017 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 8.5% and 5.5% for the year ended December 31, 2016.

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



	PNM Plan
	December 31,
	2016		2015
Health care cost trend rate assumed for next year	6.8	%	7.0	%
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	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	$	259	$	(226	)
Effect on APBO	$	1,575	$	(2,193	)

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 and are net of participant contributions, are expected to be paid:



	PNM Plan		TNMP Plan
	(In thousands)
2017	$	8,425	$	803
2018	8,327		818
2019	8,092		827
2020	7,965		839
2021	7,792		859
2022 - 2026	33,891		4,466

PNM expects to make no cash contributions to the PNM postretirement benefit plan totaling for 2017-2021. TNMP expects to make contributions to the TNMP postretirement benefit plan totaling $0.4 million in 2017 and $1.4 million for 2018-2021.

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,
	2016			2015			2016			2015
	(In thousands)
PBO at beginning of year	$	16,105		$	17,730		$	794		$	878
Service cost	—			—			—			—
Interest cost	812			760			40			36
Actuarial (gain) loss	768			(908		)	47			(26		)
Benefits paid	(1,473		)	(1,477		)	(94		)	(94		)
PBO at end of year – funded status	16,212			16,105			787			794
Less current liability	1,510			1,519			93			93
Non-current liability	$	14,702		$	14,586		$	694		$	701

The following table presents pre-tax information about net actuarial loss in AOCI as of December 31, 2016.



	December 31, 2016
	PNM Plan			TNMP Plan
	(In thousands)
Amount in AOCI not yet recognized in net periodic benefit cost at beginning of year	$	2,084		$	—
Experience (gain) loss	768			47
Regulatory asset (liability) adjustment	(445		)	(47		)
Amortization recognized in net periodic benefit cost (income)	(108		)	—
Amount in AOCI not yet recognized in net periodic benefit cost at end of year	$	2,299		$	—
Amortization expected to be recognized in 2017	$	132		$	—

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



	Year Ended December 31,
	2016		2015		2014
	(In thousands)
PNM Plan
Service cost	$	—	$	—	$	—
Interest cost	812		760		822
Amortization of net (gain) loss	256		325		210
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	1,068	$	1,085	$	1,032
TNMP Plan
Service cost	$	—	$	—	$	—
Interest cost	40		36		39
Amortization of net (gain) loss	2		5		—
Amortization of prior service cost	—		—		—
Net periodic benefit cost	$	42	$	41	$	39

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	2016		2015		2014
Discount rate for determining December 31 PBO	4.51	%	5.29	%	4.48	%
Discount rate for determining net periodic benefit cost	5.29	%	4.48	%	5.27	%
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	4.49	%	5.39	%	4.39	%
Discount rate for determining net periodic benefit cost	5.39	%	4.39	%	5.06	%
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)
2017	$	1,510	$	93
2018	1,487		92
2019	1,459		89
2020	1,427		86
2021	1,391		83
2022 – 2026	6,228		341

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 had been allowed to save on an after-tax basis. This plan has been amended and the after-tax provision was eliminated as of June 30, 2015.

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



	Year Ended December 31,
	2016		2015		2014
	(In thousands)
PNMR
401(k) plan	$	17,762	$	16,725	$	16,703
Non-qualified plan	$	2,017	$	1,436	$	2,257
PNM
401(k) plan	$	13,397	$	12,679	$	12,745
Non-qualified plan	$	1,535	$	1,090	$	1,722
TNMP
401(k) plan	$	4,365	$	4,046	$	3,958
Non-qualified plan	$	482	$	346	$	535