NOTE 10 - SHARE-BASED COMPENSATION

We have awarded share-based compensation to key employees and non-employee directors under several stock compensation plans. Awards under these plans have been comprised of stock options, common stock and performance shares. The last stock option awards were made in 2005 and we do not anticipate making additional awards. At December 31, 2011 these plans included:

			Stock		Shares
	Shares		Options		Available for
Plan	Authorized		Outstanding		Future Grant
1997 Stock Option Plan - Key Employees		350,000		33,948		0
2000 Stock Option Plan - Key Employees		350,000		96,880		0
Omnibus Stock Plan (a)		450,000		99,592		80,374
Total		1,150,000		230,420		80,374

(a)

The 2002 Long-Term Incentive Plan was amended in 2008. The amendments renamed the plan as the Omnibus Stock Plan, added 100,000 additional shares of our common stock to be issued under the plan and revised the plan to conform to certain other regulatory changes. The adoption of the amendments to the plan was authorized by the PSB on April 23, 2008 and by our shareholders on May 6, 2008.

The Omnibus Stock Plan authorizes the granting of stock options, stock appreciation rights, common shares and performance shares. The plan is intended to encourage stock ownership by recipients. Stock options have not been granted as a form of compensation since 2005 and stock appreciation rights have not been granted.

Total share-based compensation expense recognized in the Statement of Income was $0.9 million in 2011, 2010 and 2009. The total income tax benefit recognized in the Statement of Income for share-based compensation was $0.4 million in 2011, $0.3 million in 2010 and $0.4 million in 2009. No compensation costs were capitalized. Cash received from exercise of stock options was $0.9 million in 2011, $0.6 million in 2010 and $0.4 million in 2009. The tax benefit realized for the tax deductions from option exercises and performance shares issued was $0.4 million in 2011, $0.2 million in 2010 and $0.3 million in 2009. These amounts are included in other paid in capital on the balance sheet.

Currently, any outstanding stock options that are exercised and other stock awards are settled from original issue common shares. Under the existing plans, they may also be settled by the issuance of treasury shares or through open market purchases of common shares. Awards other than stock options can also be settled in cash at the discretion of the Compensation Committee of our Board of Directors. Historically, these awards have not been settled in cash.

Stock Options All outstanding stock options were granted at the fair market value of the common shares on the date of grant, and vested immediately. The maximum term of options is five years for non-employee directors and 10 years for key employees. Stock option activity during 2011 follows:

			Weighted Average
	Shares		Exercise Price
Options outstanding and exercisable at January 1		284,997	$	19.13
Exercised		50,677	$	17.75
Granted		0
Forfeited		0
Expired		3,900
Options outstanding and exercisable at December 31		230,420	$	19.49

The total intrinsic value of stock options exercised during the last three years was $0.6 million in 2011, $0.4 million in 2010 and $0.3 million in 2009. The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2011 was $3.6 million. The weighted-average remaining contractual life for options outstanding and exercisable as of December 31, 2011 was 2 years.

Common and Nonvested Shares The fair value of common stock granted to key employees and non-employee directors is equal to the market value of the underlying common stock on the date of grant. The shares vest immediately or cliff vest over predefined service periods. Although full ownership of the shares does not transfer to the recipients until vested, the recipients have the right to vote the shares and to receive dividends from the date of grant. A summary of common and nonvested share activity during 2011 follows:

				Weighted Average
	Shares			Grant-Date Fair Value
Nonvested at January 1		0
Granted		13,537		$	25.66
Vested		(3,928	)	$	27.98
Deferred		(4,910	)	$	27.98
Forfeited		0
Nonvested at December 31		4,699		$	21.28

Common stock is granted as part of the Board of Directors' annual retainer. These shares vest immediately, however, individual directors can elect to defer receipt of their retainer under the terms of the Deferred Compensation Plan for Directors and Officers. Compensation expense was $0.3 million in 2011 and $0.2 million in both 2010 and 2009. Unearned compensation expense at December 31, 2011 was $0.1 million.

The weighted-average grant-date fair value per share granted was $25.66 in 2011, $21.17 in 2010, $18.04 in 2009. The fair value of shares vested totaled approximately $0.1 million in 2011, 2010 and 2009.

Performance Shares Awards under the executive officer long-term incentive program are delivered in the form of contingently granted performance shares of common stock. At the start of each year a fixed number of performance shares are contingently granted for three-year service periods (referred to as performance cycles). The number of shares awarded at the end of each performance cycle is dependent on our performance compared to pre-established performance targets for relative TSR compared to all publicly traded electric and combined utilities, and on operational measures. The number of shares awarded at the end of the performance cycles ranges from zero to 1.5 times the number of shares targeted, based on actual performance versus targets. Dividends payable on performance shares during the performance cycle are reinvested into additional performance shares. Once the award is earned, shares become fully vested. If the participant's employment is terminated mid-cycle due to retirement, death, disability or a change-in-control, that employee or their estate is entitled to receive a pro rata portion of shares at target performance.

The fair value of performance shares for operational measures was estimated based on the market value of the shares on the grant date and the expected outcome of each measure. The grant-date fair value of performance shares with operational measures granted in 2011 was $22.01 per share. Compensation cost is recognized over the three-year performance cycle and is adjusted for the actual percentage of target achieved.

The fair value of performance shares for TSR measures was estimated on the grant date using a Monte Carlo simulation model. The grant-date fair value of performance shares with TSR measures granted in 2011 was $22.21 per share. Compensation cost is recognized on a straight-line basis over the three-year performance cycle and is not adjusted for the actual percentage of target achieved. The weighted-average assumptions used in the Monte Carlo valuation for TSR performance shares granted during the past three years are shown in the table below.

	2011			2010			2009
Volatility		39.00	%		42.00	%		42.30	%
Risk-free rate of return		0.98	%		1.53	%		1.09	%
Dividend yield		4.50	%		4.75	%		4.07	%
Term (years)		3			3			3

The volatility assumption was based on the historical volatility of our common stock over the three-year period ending on the grant date. The risk-free rate of return was based on the yield, at the grant date, of a U.S. Treasury security with a maturity period of three years. The dividend yield assumption was based on historical dividend payouts. The expected term of performance shares is based on a three-year cycle.

A summary of performance share activity, excluding estimated dividend equivalents, during 2011 follows:

				Weighted Average
	Shares			Grant-Date Fair Value
Outstanding at January 1		63,400		$	19.87
Contingently granted for the 2011 - 2013 performance cycle		31,700		$	22.11
Vested for the 2009 - 2011 performance cycle		(35,044	)	$	19.41
Forfeited		(18,056	)	$	21.10
Outstanding at December 31		42,000		$	21.13

Compensation expense for performance share plans amounted to $0.6 million in both 2011 and 2010 and $0.7 million in 2009. Unrecognized compensation expense for outstanding performance shares based on anticipated performance levels as of December 31, 2011 is approximately $0.3 million and is expected to be recognized over 1.5 years.

In the first quarter of 2011, a total of 12,138 common shares were issued for the 2008-2010 performance cycle, of which the participants withheld receipt of 3,438 shares to satisfy withholding tax obligations. Executive officers can elect to defer the receipt of performance shares. In the first quarter of 2011 a total of 2,713 common shares were deferred. The fair value of shares vested at December 31, 2010 was $0.3 million based on the goals that were achieved for the 2008 - 2010 performance cycle.

In the second quarter of 2011, the Board of Directors approved the issuance of 17,083 shares to an officer who retired effective May 31, 2011. There were 9,477 shares issued for the 2009-2011 performance cycle, 6,004 shares issued for the 2010-2012 performance cycle and 1,602 shares issued for the 2011-2013 performance cycle. The retiring officer elected to withhold receipt of 5,670 shares to satisfy withholding tax obligations. The fair value of shares vested at May 31, 2011 was $0.6 million based on a pro-rata number of shares at target performance for all three open performance cycles.

In December 2011, the fair value of performance shares that were earned or vested, including dividend equivalents, based on goals that were achieved for the 2009 - 2011 performance cycle was $0.9 million. The Board of Directors approved the early issuance of the 2009-2011 performance shares on December 16, 2011. In the fourth quarter of 2011, a total of 26,353 common shares were issued for the 2009 - 2011 performance cycle, of which the participants withheld receipt of 5,153 shares to satisfy withholding tax obligations. Executive officers can elect to defer the receipt of performance shares. In the fourth quarter of 2011 a total of 10,831 common shares were deferred.

In the first quarter of 2010, a total of 35,155 common shares were issued for the 2007 - 2009 performance cycle, of which the participants withheld receipt of 8,971 shares to satisfy withholding tax obligations. Executive officers can elect to defer the receipt of performance shares. In the first quarter of 2010 a total of 11,063 common shares were deferred. The fair value of shares vested at December 31, 2009 was $0.7 million based on the goals that were achieved for the 2007 - 2009 performance cycle.