Stock-Based Compensation

PNMR has various stock-based compensation programs, including stock options, restricted stock, and performance shares granted under the Performance Equity Plan (“PEP”). In 2011, the Company changed its approach to awarding stock-based compensation. As a result, no stock options have been granted in 2013 or 2012 and awards of restricted stock have increased. Certain restricted stock awards are subject to achieving performance or market targets and have service requirements. Other awards of restricted stock are only subject to time vesting requirements. Additional information concerning stock-based compensation under the PEP is contained in Note 13 of the Notes to Consolidated Financial Statements in the 2012 Annual Reports on Form 10-K.

Restricted stock under the PEP refers to awards of stock subject to vesting, performance, or market conditions rather than to shares with contractual post-vesting restrictions. Generally, the awards vest ratably over three years from the grant date of the award. However, certain awards with performance or market conditions vest upon satisfaction of those conditions. In addition, plan provisions provide that upon retirement, participants become 100% vested in stock awards.

The stock-based compensation expense related to stock options and restricted stock awards without performance or market conditions is amortized to compensation expense over the requisite vesting period, which is generally three years. However, compensation expense for awards to participants that are retirement eligible on the award date is recognized immediately at the award date and is not amortized. Compensation expense for performance-based shares is recognized ratably over the performance period and is adjusted periodically to reflect the level of achievement expected to be attained. Compensation expense related to market-based shares is recognized ratably over the measurement period, regardless of the actual level of achievement, provided the employees meet their service requirements. At June 30, 2013 and December 31, 2012, PNMR had unrecognized expense related to stock awards of $6.3 million and $3.8 million.

The Company uses the Black Scholes option pricing model to estimate the fair value of stock option awards 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 exercising patterns for these same homogeneous groups, and both the implied and historical volatility of PNMR's stock price. The grant date fair value for restricted stock and stock awards with Company internal performance targets is determined based on the market price of PNMR common stock on the date of the agreements reduced by the present value of future dividends, which will not be received prior to vesting, applied to the total number of shares that are anticipated to vest, although the number of shares that ultimately vest cannot be determined until after the performance periods end. The grant date fair value of stock awards with market targets is determined using Monte Carlo simulation models, which provide grant date fair values that include an expectation of the number of shares to vest.

The following table summarizes the weighted-average assumptions used to determine the awards grant date fair value:



	Six Months Ended June 30,
Restricted Shares and Performance Based Shares	2013			2012
Expected quarterly dividends per share	$	0.165		$	0.145
Risk-free interest rate	0.34		%	0.65		%

Market-Based Shares
Dividend yield	2.86		%	3.45		%
Expected volatility	25.11		%	43.98		%
Risk-free interest rate	0.36		%	1.04		%

The following table summarizes activity in stock options and restricted stock awards, including performance-based and market-based shares, for the six months ended June 30, 2013:



	Stock Option Shares		Weighted- Average Exercise Price		Restricted Stock		Weighted- Average Grant Date Fair Value
Outstanding at beginning of period	1,992,700		$	20.72	353,722		$	14.03
Granted	—		$	—	249,113		$	20.03
Exercised	(225,328	)	$	13.09	(275,122	)	$	15.93
Forfeited	—		$	—	(8,982	)	$	18.05
Expired	(258,526	)	$	27.24	—		$	—
Outstanding at end of period	1,508,846		$	20.75	318,731		$	17.87

Included as restricted stock granted and exercised in the table above are 100,953 shares that were based upon achieving performance or market targets for 2012. The Board approved these shares in February 2013, including shares with market targets at near maximum levels.

PNMR also has share agreements that provide for performance or market targets through 2015. Excluded from the above table are maximums of 188,129, 198,369, and 179,811 restricted stock shares for periods ending in 2013, 2014, and 2015 that would be awarded if all performance or market criteria are achieved and all executives remain eligible.

In March 2012, the Company entered into a retention award agreement with its Chairman, President, and Chief Executive Officer under which she would receive 135,000 shares of PNMR's common stock if the Company meets specific market targets at the end of 2016 and she remains an employee of the Company. If the Company achieves specific market targets at the end of 2014 and she remains an employee of the Company, she would receive 35,000 of the total shares at that time. The retention award was made under the PEP and was approved by the Board on February 28, 2012. The above table does not include any shares under the retention award agreement.

At June 30, 2013, the aggregate intrinsic value of stock options outstanding, all of which are exercisable, was $6.6 million with a weighted-average remaining contract life of 3.79 years. At June 30, 2013, the exercise price of 825,877 outstanding stock options is greater than the closing price of PNMR common stock on that date; therefore, those options have no intrinsic value.

The following table provides additional information concerning stock options and restricted stock activity, including performance-based and market-based shares:



	Six Months Ended June 30,
Stock Options	2013		2012
Weighted-average grant date fair value of options granted	$	—	$	—
Total fair value of options that vested (in thousands)	$	625	$	1,058
Total intrinsic value of options exercised (in thousands)	$	2,189	$	1,917

Restricted Stock
Weighted-average grant date fair value	$	20.03	$	15.63
Total fair value of restricted shares that vested (in thousands)	$	4,383	$	3,828