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 have been granted since 2010 and awards of restricted stock have increased. Certain restricted stock awards are subject to achieving performance or market targets and some of these awards 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 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 certain stock awards. 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 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 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 meet their service requirements.

In June 2014, the FASB issued Accounting Standards Update 2014-12 – Compensation – Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in estimating the grant date fair value of the award. The FASB issued ASU 2012-12 to eliminate diversity in practice. The Company currently treats the performance targets covered by the standard as performance conditions, so this ASU has no impact on the Company.

Total compensation expense for stock-based payment arrangements recognized by PNMR for the years ended December 31, 2014, 2013, and 2012 was $5.9 million, $5.3 million, and $3.6 million. Stock compensation expense of $4.2 million, $3.8 million, and $2.7 million was charged to PNM and $1.7 million, $1.5 million, and $1.0 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, 2014, PNMR had unrecognized compensation expense of $4.7 million related to restricted stock and performance-based shares and $1.8 million related to market-based shares, which are expected to be recognized over an average of 1.8 years.

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	2014			2013			2012
Expected quarterly dividends per share	$	0.185		$	0.165		$	0.145
Risk-free interest rate	0.62		%	0.34		%	1.22		%

Market-Based Shares
Dividend yield	2.82		%	2.86		%	3.45		%
Expected volatility	25.11		%	25.11		%	43.98		%
Risk-free interest rate	0.64		%	0.36		%	1.04		%

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, 2013	315,305		$	17.87	1,343,666		$	20.63
Granted	242,164		$	21.27	—		$	—
Exercised	(295,423	)	$	16.70	(345,426	)	$	20.04
Forfeited	(3,276	)	$	22.46	(17,151	)	$	26.43
Expired	—		—		(60,584	)	$	27.98
Outstanding at December 31, 2014	258,770		$	22.31	920,505		$	20.39

Included as restricted stock granted and exercised above are 112,864 shares that were based upon achieving performance or market targets for 2013. The Board approved these shares 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 2011 through 2013 performance period.

As of December 31, 2014, PNMR’s stock-based compensation program provides for performance and market targets through 2016. Excluded from the above table are 179,845 shares approved by the Board in February 2015 (based upon achieving market targets, weighted at 60%, at target levels and performance targets, weighted at 40%, at maximum levels for the 2012 through 2014 performance period), as well as maximums of 179,811 and 163,152 shares for the three-year performance periods ending in 2015 and 2016 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 approved her receiving the 35,000 shares in February 2015. 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 this retention award agreement.

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. 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. If the target for the first performance period is not met, but the target for the second performance period is met, he would receive both awards, less any amount received previously under the agreement. The retention award was made under the PEP and was approved by the Board on December 9, 2014. The above table does not include any restricted stock shares under this retention award agreement.

At December 31, 2014, the aggregate intrinsic value of stock options outstanding, all of which are exercisable, was $8.9 million with a weighted-average remaining contract life of 2.83 years. At December 31, 2014, the exercise price of 254,050 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:



	Year Ended December 31,
Restricted Stock	2014		2013		2012
Weighted-average grant date fair value	$	21.27	$	20.03	$	16.75
Total fair value of restricted shares that vested (in thousands)	$	4,933	$	4,395	$	5,099

Stock Options
Weighted-average grant date fair value of options granted	$	—	$	—	$	—
Total fair value of options that vested (in thousands)	$	—	$	625	$	1,054
Total intrinsic value of options exercised (in thousands)	$	2,473	$	2,721	$	6,356