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”). 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 have been granted since 2010 and awards of restricted stock have increased. Certain restricted stock awards are subject to achieving performance or market targets. 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 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, 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 certain stock awards. The vesting period for awards of restricted stock to non-employee members of the Board in 2017 and thereafter will be one year. The total number of shares of PNMR common stock subject to all awards under the PEP, as approved by PNMR’s shareholders in May 2014, may not exceed 13.5 million shares, subject to adjustment and certain share counting rules set forth in the PEP. This current share pool is charged five shares for each share subject to restricted stock or other full value award. 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 restricted stock awards without performance or market conditions to participants that are retirement eligible on the grant date is recognized immediately at the grant date and is not amortized. Compensation expense for other such awards is amortized to compensation expense over the shorter of the requisite vesting period or the period until the participant becomes retirement eligible. 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.

Total compensation expense for stock-based payment arrangements recognized by PNMR for the years ended December 31, 2016, 2015, and 2014 was $5.6 million, $4.9 million, and $5.9 million. Stock compensation expense of $4.2 million, $3.6 million, and $4.2 million was charged to PNM and $1.5 million, $1.3 million, and $1.7 million was charged to TNMP. At December 31, 2016, PNMR had unrecognized compensation expense related to stock awards of $4.5 million, which are expected to be recognized over an average of 1.82 years.

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. See New Accounting Pronouncements in Note 1.

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	2016			2015			2014
Expected quarterly dividends per share	$	0.2200		$	0.2000		$	0.1850
Risk-free interest rate	0.94		%	0.92		%	0.62		%

Market-Based Shares
Dividend yield	2.74		%	2.87		%	2.82		%
Expected volatility	20.44		%	18.73		%	25.11		%
Risk-free interest rate	0.97		%	1.00		%	0.64		%

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



	Restricted Stock				Stock Options
	Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted Average Exercise Price
Outstanding at December 31, 2015	245,094		$	24.81	569,342		$	19.35
Granted	190,276		$	26.49	—		$	—
Exercised	(216,340	)	$	23.47	(253,268	)	$	27.75
Forfeited	(714	)	$	29.54	(2,000	)	$	12.22
Expired	—		—		(8,200	)	$	24.85
Outstanding at December 31, 2016	218,316		$	27.59	305,874		$	12.29

PNMR’s stock-based compensation program provides for performance and market targets through 2018. Included as restricted stock granted and exercised in the above table are 79,619 previously awarded shares that were earned for the 2013 through 2015 performance measurement period and ratified by the Board in February 2016 (based upon achieving market targets at “target” levels, weighted at 60%, and performance targets at “threshold” levels, weighted at 40%). Excluded from the above table are 49,682 previously awarded shares that were earned for the 2014 through 2016 performance measurement period and ratified by the Board in February 2017 (based upon achieving market targets at “target” levels, weighted at 60%, and not meeting performance targets, weighted at 40%), as well as maximums of 163,712 and 137,036 shares for the three-year performance periods ending in 2017 and 2018 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 PNMR meets specific market targets at the end of 2016 and she remains an employee of the Company. Under the agreement, she would receive 35,000 of the total shares if PNMR achieved specific market targets at the end of 2014. The specified market target was achieved at the end of 2014 and the Board ratified her receiving the 35,000 shares in February 2015. The specified market target was achieved at the end of 2016 and the Board ratified her receiving the 100,000 shares in February 2017. The above table does not include the restricted stock shares issued in February 2017. The retention award was made under the PEP and was approved by the Board on February 28, 2012.

Effective as of January 1, 2015, the Company entered into a retention award agreement with its Executive Vice President and Chief Financial Officer under which he would receive awards of restricted stock if PNMR meets specific performance targets at the end of 2016 and 2017 and he remains an employee of the Company. If PNMR achieves the specific performance target for the period from January 1, 2015 through December 31, 2016, he would receive $100,000 of PNMR common stock based on the market value per share on the grant date in early 2017. The specified market target was achieved at the end of 2016 and the Board ratified him receiving $100,000 of PNMR common stock in February 2017 based on the market value per share on the grant date in early 2017. Similarly, if PNMR achieves the specific performance target for the period from January 1, 2015 through December 31, 2017, he would receive $275,000 of PNMR common stock based on the market value per share on the grant date in early 2018. The above table does not include any restricted stock shares under this retention award agreement. The retention award was made under the PEP and was approved by the Board on December 9, 2014.

In March 2015, the Company entered into an additional retention award agreement with its Chairman, President, and Chief Executive Officer under which she would receive 53,859 shares of PNMR’s common stock if PNMR meets certain performance targets at the end of 2019 and she remains an employee of the Company. Under the agreement, she would receive 17,953 of the total shares if PNMR achieves specific performance targets at the end of 2017. The above table does not include any restricted stock shares under this retention award agreement. The retention award was made under the PEP and was approved by the Board on February 26, 2015.

At December 31, 2016, the aggregate intrinsic value of stock options outstanding, all of which are exercisable, was $6.7 million with a weighted-average remaining contract life of 2.04 years. At December 31, 2016, no outstanding stock options had an exercise price greater than the closing price of PNMR common stock on that date.

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



	Year Ended December 31,
Restricted Stock	2016		2015		2014
Weighted-average grant date fair value	$	26.49	$	20.34	$	21.27
Total fair value of restricted shares that vested (in thousands)	$	5,079	$	6,507	$	4,933

Stock Options
Weighted-average grant date fair value of options granted	$	—	$	—	$	—
Total fair value of options that vested (in thousands)	$	—	$	—	$	—
Total intrinsic value of options exercised (in thousands)	$	1,242	$	2,350	$	2,473