SHARE-BASED COMPENSATION

The share and per share data below reflects the three-for-one stock split effective February 28, 2014. See Note 13 for discussion on the stock split. Our 2015 LTIP, which was adopted by our board and approved by shareholders in 2015, permits the compensation committee to make grants of a variety of share-based awards (such as options, restricted stock, restricted stock units and performance shares) for a cumulative amount of up to 6,500,000 shares to employees, directors and consultants. The 2015 LTIP provides that no more than 4,600,000 of the shares may be granted as awards to be settled in shares of common stock other than options or stock appreciation rights. Under the 2015 LTIP agreement, no awards would be permitted after March 26, 2025. Prior to the adoption of the 2015 LTIP, we made various share-based awards under the 2006 LTIP, including options, restricted stock, deferred stock units and performance shares. In addition, our board of directors and shareholders approved a new ESPP in 2015, which replaced the previous ESPP, and allows for the issuance of an aggregate of 1,000,000 shares of our common stock. Participation in this plan is available to substantially all employees. ITC Holdings issues new shares to satisfy option exercises, restricted stock and performance share grants, employee ESPP purchases and settlement of deferred stock units. As of December 31, 2015, 11,276,238 shares were available for future issuance under our 2006 LTIP, 2015 LTIP and ESPP, including 3,817,200 shares issuable upon the exercise of outstanding stock options, of which 2,718,865 were vested.

We recorded share-based compensation in 2015, 2014 and 2013 as follows:



(In thousands)	2015		2014		2013
Operation and maintenance expenses	$	1,672	$	1,444	$	1,617
General and administrative expenses	10,546		8,549		9,318
Amounts capitalized to property, plant and equipment	5,391		4,659		4,731
Total share-based compensation	$	17,609	$	14,652	$	15,666
Total tax benefit recognized in the consolidated statement of operations	$	5,087	$	4,182	$	4,557

Tax deductions that exceed the cumulative compensation cost recognized for options exercised, restricted shares that vested or deferred stock units that are settled are recognized as common stock only if the tax deductions reduce taxes payable as a result of a realized cash benefit from the deduction. For the years ended December 31, 2015, 2014 and 2013, we recognized the tax effects of the excess tax deductions as an increase in common stock of $11.7 million, $7.8 million and $4.3 million, respectively, as the deductions have resulted in a reduction of taxes payable.

Options

Our option grants vest in equal annual installments over a 3 year period from the date of grant, or as a result of other events such as death or disability of the option holder. The options have a term of 10 years from the grant date.

Stock option activity for 2015 was as follows:



			Weighted
	Number of		Average
	Options		Exercise Price
Outstanding at January 1, 2015 (3,198,528 exercisable with a weighted average exercise price of $15.98)	4,603,292		$	20.71
Granted	473,200		35.91
Exercised	(1,203,376	)	9.44
Forfeited	(55,916	)	34.65
Outstanding at December 31, 2015 (2,718,865 exercisable with a weighted average exercise price of $22.38)	3,817,200		$	25.94

Grant date fair value of the stock options awards granted during 2015, 2014 and 2013 was determined using a Black-Scholes option pricing model. The following assumptions were used in determining the weighted average fair value per option:



	2015			2014			2013
	Option Grants			Option Grants			Option Grants
Weighted average grant date fair value per option	$	6.05		$	8.92		$	7.06
Weighted average expected volatility (a)	18.6		%	27.2		%	29.3		%
Weighted average risk-free interest rate	1.8		%	1.8		%	1.1		%
Weighted average expected term (b)	6 years			6 years			6 years
Weighted average expected dividend yield	1.59		%	1.55		%	1.72		%
Estimated fair value of underlying shares	$	35.91		$	36.73		$	29.31

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(a)	We estimated volatility using the historical volatility of our stock.

(b)

The expected term represents the period of time that options granted are expected to be outstanding. We have utilized the simplified method permitted under share-based award accounting standards in determining the expected term for all option grants as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited number of awards of equity shares that have reached expiration.

At December 31, 2015, the aggregate intrinsic value and the weighted average remaining contractual term for all outstanding options were approximately $50.8 million and 6.2 years, respectively. At December 31, 2015, the aggregate intrinsic value and the weighted average remaining contractual term for exercisable options were $45.9 million and 5.2 years, respectively. The aggregate intrinsic value of options exercised during 2015, 2014 and 2013 was $28.1 million, $18.5 million and $53.2 million, respectively. At December 31, 2015, the total unrecognized compensation cost related to the unvested options awards was $4.2 million and the weighted average period over which it is expected to be recognized was 1.6 years.

We estimate that 3,741,114 of the options outstanding at December 31, 2015 will vest, including those already vested. The weighted average exercise price, aggregate intrinsic value and the weighted average remaining contractual term for options shares that are vested and expected to vest as of December 31, 2015 was $25.76 per share, $50.5 million and 6.2 years, respectively.

Restricted Stock Awards

Holders of restricted stock awards have all the rights of a holder of common stock of ITC Holdings, including dividend and voting rights. The holder becomes vested as a result of certain events such as death or disability of the holder, but not later than the vesting date of the awards. Holders of restricted shares may not sell, transfer or pledge their restricted shares until the shares vest and the restrictions lapse. Restricted stock awards are recorded at fair value at the date of grant, which is based on the closing share price on the grant date. Awards that were granted for future services are treated as unearned compensation, with amounts amortized over the vesting period.

Restricted stock award activity for 2015 was as follows:



	Number of		Weighted
	Restricted		Average
	Stock		Grant Date
	Awards		Fair Value
Unvested restricted stock awards at January 1, 2015	1,223,819		$	28.37
Granted	259,039		36.30
Vested	(400,239	)	23.63
Forfeited	(58,209	)	26.65
Unvested restricted stock awards at December 31, 2015	1,024,410		$	32.10

The weighted average grant date fair value of restricted stock awarded during 2014 and 2013 was $36.75 and $29.42 per share, respectively. The aggregate fair value of restricted stock awards as of December 31, 2015 was $40.2 million. The aggregate fair value of restricted stock awards that vested during 2015, 2014 and 2013 was $14.5 million, $14.4 million and $15.8 million, respectively. At December 31, 2015, the total unrecognized compensation cost related to the restricted stock awards was $16.3 million and the weighted average period over which that cost is expected to be recognized was 2.2 years.

As of December 31, 2015, we estimate that 907,864 shares of the restricted shares outstanding at December 31, 2015 will vest. The weighted average fair value, aggregate intrinsic value and the weighted average remaining contractual term for restricted shares that are expected to vest is $31.83 per share, $35.6 million and 1.4 years, respectively.

Performance Share Awards

Holders of performance share awards have all the rights of a holder of common stock of ITC Holdings, including dividend and voting rights. However, performance shares earn and accumulate dividend equivalents, which are settled in the form of additional shares upon vesting of the related award. Dividend equivalents paid on performance shares that do not vest will be forfeited. The performance share awards generally vest three years after the grant date, or as a result of certain events such as death or disability of the performance share award holder. Holders of performance shares may not sell, transfer or pledge their shares until the shares vest.

Approximately one-half of the performance share awards will be earned based on an external measure for total shareholder return (“TSR”) relative to a predetermined peer group (“TSR condition”) and the remainder will be earned based on adjusted diluted EPS growth (“EPS condition”). Payout of the performance share awards will range from 0% to 200% of the target number of shares granted, plus additional dividend equivalent shares on the earned portion of the performance share awards. The performance share awards with the EPS condition are recorded at fair value based on the closing price of ITC Holdings’ common stock on the grant date.

We recognize the fair value of the performance share awards on a straight-line basis (net of any estimated forfeitures) over the requisite service period of the awards. However, the compensation cost for the portion of the performance share awards subject to the EPS condition is recognized based on the probable payout (net of any estimated forfeitures), which is reassessed each reporting period and subject to change.



	Number of		Weighted
	Performance		Average
	Share		Grant Date
	Awards		Fair Value
Unvested performance share awards at January 1, 2015	—		$	—
Granted	287,464		32.55
Vested	—		—
Forfeited	(7,754	)	32.55
Unvested performance share awards at December 31, 2015	279,710		$	32.55

Grant date fair value of the portion of the performance share awards subject to the TSR condition granted during 2015 was determined using a Monte Carlo simulation valuation model. The following assumptions were used in determining the weighted average fair value per performance share with the TSR condition:



	2015
	Performance
	Share Grants
Weighted average grant date fair value per performance share	$	29.19
Weighted average expected volatility (a)	17.7		%
Weighted average risk-free interest rate	0.87		%
Estimated fair value of underlying shares	$	35.91

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(a)	We estimated volatility using the historical volatility of our stock.

The aggregate fair value of performance share awards as of December 31, 2015 was $11.0 million. At December 31, 2015, the total unrecognized compensation cost related to the performance share awards was $9.2 million and the weighted average period over which that cost is expected to be recognized was 2.4 years.

As of December 31, 2015, we estimate that 229,994 shares of the performance shares outstanding at December 31, 2015 will vest. The weighted average fair value, aggregate intrinsic value and the weighted average remaining contractual term for performance shares that are expected to vest is $32.55 per share, $9.0 million and 2.4 years, respectively.

Employee Stock Purchase Plan

The ESPP is a compensatory plan accounted for under the expense recognition provisions of the share-based payment accounting standards. Compensation cost is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. During 2015, 2014 and 2013, employees purchased 76,041, 69,230 and 77,097 shares, respectively, resulting in proceeds from the sale of our common stock of $2.3 million, $2.1 million and $1.9 million, respectively, under the ESPP. The total share-based compensation amortization for the ESPP was $0.5 million, $0.5 million and $0.4 million for the years ended December 31, 2015, 2014 and 2013, respectively.