Stock-Based Compensation Plans

PNMR has various types of stock-based compensation programs, including stock options, restricted stock and performance shares granted under the Performance Equity Plan (“PEP”). All stock-based compensation is granted through stock-based employee compensation plans maintained by PNMR. Although certain PNM and TNMP employees participate in the PNMR plans, PNM and TNMP do not have separate employee stock-based compensation plans. In 2011, the Company changed its approach to awarding stock-based compensation. As a result, no stock options were granted in 2011 and awards of restricted stock increased.

Performance Equity Plan

The PEP provides for the granting of non-qualified stock options, restricted stock rights, performance shares, performance units, and stock appreciation rights to officers, key employees, and non-employee board members. Generally, the awards vest ratably over three years from the grant date of the award. However, plan provisions provide that upon retirement, participants become 100% vested in stock awards. The total number of shares of PNMR common stock subject to all awards under the PEP may not exceed 12.34 million shares, subject to adjustment under certain circumstances defined in the PEP. The number of shares of PNMR common stock subject to the grant of restricted stock rights, performance shares and units and stock appreciation rights is limited to 3.24 million shares. Re-pricing of stock options is prohibited unless specific shareholder approval is obtained.

Source of Shares

The source of shares for exercised stock options, delivery of vested restricted stock, and performance shares is shares acquired on the open market by an independent agent, rather than newly issued shares.

Accounting for Stock Awards

The unearned stock-based compensation related to stock options and restricted stock awards is being amortized to compensation expense over the requisite vesting period, which is generally equally over three years. However, compensation expense for stock options and restricted stock awards to participants that are retirement eligible on the grant date is recognized immediately at the grant date and is not amortized over the vesting period. The Company records compensation cost for performance stock awards based upon periodic estimates of the levels that the performance targets will be achieved.

Total compensation expense for stock-based payment arrangements recognized by PNMR for the years ended December 31, 2011, 2010, and 2009 was $6.2 million, $2.2 million, and $2.2 million. Of the total expense, $4.3 million, $1.5 million, and $1.4 million was charged to PNM and $1.4 million, $0.4 million, and $0.5 million was charged to TNMP.

PNMR receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the price at which the options are sold over the exercise prices of the options and a tax deduction for increases in the value of equity instruments issued under stock-based payment arrangements.

At December 31, 2011, PNMR had $2.3 million of unrecognized compensation expense related to stock-based payments that is expected to be recognized over a weighted-average period of 1.9 years.

Stock Options

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards with the following weighted-average assumptions (no options were granted in 2011):



	Year Ended December 31,
	2010		2009
Dividend yield	4.09	%	6.27	%
Expected volatility	41.55	%	42.03	%
Risk-free interest rates	2.13	%	1.56	%
Expected life (years)	4.6		4.5

The assumptions above are based on multiple factors, including historical exercise patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and both the implied and historical volatility of PNMR’s stock price.

The following table summarizes activity in stock option plans:



	Stock Option Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value			Weighted Average Remaining Contract Life
Outstanding at December 31, 2008	3,725,907		$	21.54
Granted	790,064		$	8.23
Exercised	(6,236	)	$	10.22
Forfeited	(69,200	)	$	16.40
Expired	(166,516	)	$	21.32
Outstanding at December 31, 2009	4,274,019		$	19.19
Granted	618,708		$	12.23
Exercised	(140,986	)	$	8.69
Forfeited	(106,966	)	$	11.02
Expired	(696,513	)	$	21.26
Outstanding at December 31, 2010	3,948,262		$	18.33
Granted	—		$	—
Exercised	(493,590	)	$	11.39
Forfeited	(12,999	)	$	11.46
Expired	(239,444	)	$	24.71
Outstanding at December 31, 2011	3,202,229		$	18.95	$	1,610,851	⁽¹⁾	4.80 years
Exercisable at December 31, 2011	2,738,362		$	22.16	$	1,146,714		4.29 years


⁽¹⁾	At December 31, 2011, the exercise price of 1,591,648 outstanding stock options is greater than the closing price of PNMR common stock on that date so those options have no intrinsic value.

The following table provides additional information concerning stock option activity:



	Year Ended December 31,
Options for PNMR Common Stock	2011		2010		2009
Weighted-average grant date fair value of options granted	$	—	$	3.05	$	1.63
Total fair value of options that vested (in thousands)	$	1,189	$	1,393	$	1,179
Total intrinsic value of options exercised (in thousands)	$	2,616	$	525	$	15

Restricted Stock and Performance Shares

The PEP allows for the issuance of restricted stock awards. The term “restricted stock” is the name of these awards provided for in the PEP and refers to awards of stock subject to vesting. It does not refer to restricted shares with contractual post-vesting restrictions as defined in GAAP. Compensation expense for restricted stock and performance stock awards was determined based on the market price of PNMR stock on the date of grant reduced by the present value of future dividends, which will not be received during the vesting period, applied to the total number of shares that were anticipated to fully vest with the following weighted-average assumptions:



	Year Ended December 31,
	2011			2010			2009
Expected quarterly dividends per share	$	0.125		$	0.125		$	0.125
Risk-free interest rate	1.35		%	1.49		%	3.11		%

The following table summarizes nonvested restricted stock activity for the year ended December 31, 2011:



Nonvested Restricted Stock	Shares		Weighted- Average Grant-Date Fair Value
Nonvested at beginning of period	237,021		$	9.24
Granted	308,985		$	13.79
Vested	(125,076	)	$	9.92
Forfeited	(2,200	)	$	13.67
Nonvested at end of period	418,730		$	12.36

The following table provides additional information concerning restricted stock activity:



	Year Ended December 31,
Nonvested Restricted Stock	2011		2010		2009
Weighted-average grant date fair value of shares granted	$	13.79	$	9.26	$	7.81
Total fair value of shares that vested (in thousands)	$	1,240	$	1,365	$	1,900

During 2009 and 2010, the Company issued performance share agreements to certain executives that are based upon the Company achieving specified performance targets for those respective years. During 2009, the Company also issued performance share agreements that are based upon achieving specific performance targets for the period 2009 through 2011. The determination of the number of shares ultimately issued depends on the levels at which the performance criteria are achieved and cannot be determined until after the performance periods end. For the targets based only on 2009 performance, optimal levels were attained resulting in 102,375 shares being awarded in 2010, which vest over three years. For the targets based only on 2010 performance, optimal levels were attained resulting in 88,913 shares being awarded in 2011, which vest over three years. The 2010 and 2011 awards are included in the number of shares granted in the above table. Excluded from the above table are 42,768 shares for the targets based on the period 2009 through 2011 performance that will be issued and fully vested in 2012 since all performance criteria were achieved at the optimal level.

Performance share agreements issued in 2011 provide for performance periods through 2014. The determination of the number of shares ultimately issued depends on the levels at which the performance criteria are achieved and cannot be determined until after the performance periods end. Excluded from the above table are 117,174 shares for the targets based only on 2011 performance, as well as maximums of 167,382 and 188,401 shares in 2013 and 2014 that could be issued if all performance criteria are achieved and all executives remain eligible. These awards would be fully vested upon issue.

ESPP

PNMR terminated the ESPP effective June 30, 2009. Under the ESPP, employees were allowed to purchase shares of PNMR’s common stock at a 5% discount from the market price. The ESPP was not considered to be a compensatory plan. See Note 6.