Stock-Based Compensation Plans

PNMR has various stock-based compensation programs, including stock options, restricted stock, and performance shares granted under the Performance Equity Plan (“PEP”). 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, 2012, or 2013 and awards of restricted stock increased. Certain restricted stock awards are subject to achieving performance or market targets and some also have time vesting requirements. Other awards of restricted stock are only subject to time vesting requirements.

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. Restricted stock under the PEP refers to awards of stock subject to vesting, performance, or market conditions not 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 and 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 and vested restricted stock is shares acquired on the open market by an independent agent, rather than newly issued shares.

Accounting for 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 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. 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 remain with the Company during the period.

Total compensation expense for stock-based payment arrangements recognized by PNMR for the years ended December 31, 2013, 2012, and 2011 was $5.3 million, $3.6 million, and $6.2 million. Stock compensation expense of $3.8 million, $2.7 million, and $4.3 million was charged to PNM and $1.5 million, $1.0 million, and $1.4 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 the value of restricted stock at the vesting date.

At December 31, 2013, PNMR had no unrecognized compensation expense related to stock options. Unrecognized compensation expense of $3.4 million related to restricted stock and performance-based shares and $1.2 million related to market-based shares is expected to be recognized over an average of 1.7 years.

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 homogenous groups with respect to exercise and post-vesting employment termination behaviors, expected exercising patterns for these same homogenous 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 performance 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 at the end of the measurement period.

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



	Year Ended December 31,
Restricted Shares and Performance-Based Shares	2013			2012			2011
Expected quarterly dividends per share	$	0.165		$	0.145		$	0.125
Risk-free interest rate	0.34		%	1.22		%	1.35		%

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

The following table summarizes activity in stock options and restricted stock awards, including performance-based and market-based shares:



	Stock Options				Restricted Stock
	Shares		Weighted Average Exercise Price		Shares		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2012	1,992,700		$	20.72	353,722		$	14.03
Granted	—		$	—	249,113		$	20.03
Exercised	(319,239	)	$	14.47	(275,988	)	$	15.92
Forfeited	—		$	—	(11,542	)	$	18.39
Expired	(329,795	)	$	27.17	—		—
Outstanding at December 31, 2013	1,343,666		$	20.63	315,305		17.87

Included as restricted stock granted and exercised above are 100,593 shares that were based upon achieving performance or market targets for the 2011 through 2012 performance period. The Board approved these shares in February 2013, including shares with market targets at near maximum levels.

As of December 31, 2013, PNMR’s stock-based compensation program provides for performance and market targets through 2015. Excluded from the above table are 112,864 shares approved by the Board in February 2014 (based upon achieving market targets, weighted at 60%, at maximum levels and performance targets, weighted at 40%, at below threshold levels for the 2011 through 2013 performance period), as well as maximums of 198,369 and 179,811 shares for the three-year performance periods ending in 2014 and 2015 that would be awarded if all performance and market criteria are achieved at maximum levels 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 restricted stock shares under the retention award agreement.

At December 31, 2013, the aggregate intrinsic value of stock options outstanding, all of which are exercisable, was $7.3 million with a weighted-average remaining contract life of 3.43 years. At December 31, 2013, the exercise price of 509,916 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 options, and restricted stock activity including performance-based and market-based shares:



	Year Ended December 31,
Stock Options	2013		2012		2011
Weighted-average grant date fair value of options granted	$	—	$	—	$	—
Total fair value of options that vested (in thousands)	$	625	$	1,054	$	1,189
Total intrinsic value of options exercised (in thousands)	$	2,721	$	6,356	$	2,616

Restricted Stock
Weighted-average grant date fair value	$	20.03	$	16.75	$	13.79
Total fair value of restricted shares that vested (in thousands)	$	4,395	$	5,099	$	1,240