
11.	SHARE-BASED PAYMENTS

The ONE Gas Equity Compensation Plan (ECP or ONE Gas Plan) provides for the granting of stock-based compensation, including incentive stock options, nonstatutory stock options, stock bonus awards, restricted stock awards, restricted stock unit awards, performance stock awards and performance unit awards to eligible employees and the granting of stock awards to nonemployee directors. We have reserved 2.8 million shares of common stock for issuance under the ECP. At December 31, 2014, we had approximately 1.3 million shares available for issuance under the ECP, which reflect shares issued and estimated shares expected to be issued upon vesting of outstanding awards granted under the plan, less forfeitures. The plan allows for the deferral of awards granted in stock or cash, in accordance with Internal Revenue Code section 409A requirements.

Prior to our separation, certain employees assigned to us in the separation participated in ONEOK’s share-based awards plans (ONEOK Plans). The ONEOK Plans provided for ONEOK common stock based awards to both employees and ONEOK’s nonmanagement directors. The plans permitted the granting of various types of awards including, but not limited to, performance stock units and restricted stock units. Awards could be granted for no consideration other than prior and future services or based on certain financial performance targets. In connection with the separation, awards granted by ONEOK in 2012 and 2013 were cancelled and replaced with awards of ONE Gas shares. The number of restricted stock units held by a ONE Gas participant was multiplied by a ratio of 2.04 which was determined by the ONEOK volume-weighted average share price of $68.22 on January 31, 2014, and the ONE Gas volume-weighted average share price of $33.50 on February 3, 2014, rounded to the nearest whole share.

The same ratio of 2.04 was used to convert the outstanding performance stock units awarded by ONEOK prior to the separation into awards for ONE Gas shares. A pre-distribution payout factor was applied to each grant based on ONEOK’s total shareholder return performance compared with its peer group for the number of days lapsed from the date of the grant to January 31, 2014, and these awards were frozen or “banked” and are not subject to an additional payout factor. The remaining units from each grant will continue to be at-risk based on our performance and the relative total shareholder return of our peer group.

No incremental cost was recorded in our financial statements upon cancellation and replacement of the 2012 and 2013 restricted stock units and performance stock units because the previous awards were cancelled and replaced pursuant to anti-dilution provisions of the ONEOK Plans and the fair value of the awards immediately following the cancellation and replacement was not higher than the fair value of the awards immediately before the cancellation and replacement.

We were charged by ONEOK for share-based compensation expense related to employees that directly supported our operations. ONEOK also charged us for the allocated costs of certain employees of ONEOK (including stock-based compensation) who provided general and administrative services on our behalf. Information included in this note is limited to share-based compensation associated with employees in 2014, and employees that directly supported our operations as part of ONEOK prior to our separation. See Note 2 for total costs charged to us by ONEOK.

Compensation cost expensed for our share-based payment plans was $7.0 million, net of tax benefits of $4.4 million, for 2014. Compensation cost charged to us for employees directly supporting our operations by ONEOK for 2013 and 2012 totaled $9.7 million and $4.8 million, respectively, which is net of $6.1 million and $3.0 million of tax benefits, respectively. Compensation costs capitalized for employees were not material for 2014, 2013 and 2012.

Restricted Stock Unit Awards - We have granted restricted stock unit awards to key employees that vest over a service period of generally three years and entitle the grantee to receive shares of our common stock. The awards granted that replaced awards granted by ONEOK in 2012 vested, and 2013 will vest, consistent with their original vesting dates in 2015 and 2016, respectively. No dividends accrue prior to vesting on the restricted stock units granted that replaced the awards granted by ONEOK in 2012. Restricted stock unit awards granted in 2014 and that replaced awards granted by ONEOK in 2013 accrue dividend equivalents in the form of additional restricted stock units prior to vesting. Restricted stock unit awards are measured at fair value as if they were vested and issued on the grant date, reduced by expected dividend payments for awards that do not accrue dividends and adjusted for estimated forfeitures. Compensation expense is recognized on a straight-line basis over the vesting period of the award. A forfeiture rate of 3 percent per year based on historical forfeitures under our share-based payment plans is used.

Performance Stock Unit Awards - We have granted performance stock unit awards to key employees. The shares of common stock underlying the performance stock units vest at the expiration of a service period of generally three years if certain performance criteria are met by us as determined by the Executive Compensation Committee of the Board of Directors. The awards granted that replaced awards granted by ONEOK in 2012 vested, and 2013 will vest, consistent with their original vesting dates in 2015 and 2016, respectively, if certain performance criteria are met by us for the at-risk portion of the awards as described above. Upon vesting, a holder of performance stock units is entitled to receive a number of shares of common stock equal to a percentage (0 percent to 200 percent) of the performance stock units granted, based on our total shareholder return over the vesting period, compared with the total shareholder return of a peer group of other utilities over the same period.

If paid, the outstanding performance stock unit awards entitle the grantee to receive shares of our common stock. The outstanding performance stock unit awards are equity awards with a market-based condition, which results in the compensation cost for these awards being recognized over the requisite service period, provided that the requisite service period is fulfilled, regardless of when, if ever, the market condition is satisfied. No dividends accrue prior to vesting on performance stock units granted to replace awards granted by ONEOK in 2012. The new performance stock unit awards granted in 2014 and the grants that replaced awards granted by ONEOK in 2013 accrue dividend equivalents in the form of additional performance stock units prior to vesting. The fair value of these performance stock units was estimated on the grant date based on a Monte Carlo model. A forfeiture rate of 3 percent per year based on historical forfeitures under our and, prior to the separation, ONEOK’s share-based payment plans was used. Compensation expense is recognized on a straight-line basis over the period of the award. The compensation expense on these awards will only be adjusted for changes in forfeitures.

Restricted Stock Unit Award Activity

As of December 31, 2014, there was $2.8 million of total unrecognized compensation costs related to the nonvested restricted stock unit awards, which is expected to be recognized over a weighted-average period of 1.8 years. The following tables set forth activity and various statistics for restricted stock unit awards outstanding under the respective plans for the period indicated:



	ONE Gas Plan				ONEOK Plans
	Number of Shares		Weighted- Average Price		Number of Shares		Weighted- Average Price
Nonvested December 31, 2013	—		$	—	137,670		$	34.57
Released to participants prior to separation	—		$	—	(66,960	)	$	28.50
Cancelled and replaced upon separation	246,683		$	19.71	(70,710	)	$	40.31
Granted	94,865		$	33.19	—		$	—
Released to participants	(7,217	)	$	19.85	—		$	—
Forfeited	(8,601	)	$	25.76	—		$	—
Nonvested December 31, 2014	325,730		$	23.47	—		$	—



	2014		2013		2012
Weighted-average grant date fair value (per share)	$	33.19	$	47.36	$	36.60
Fair value of shares granted (thousands of dollars)	$	3,149	$	1,323	$	2,046

Performance Stock Unit Award Activity

As of December 31, 2014, there was $4.9 million of total unrecognized compensation cost related to the nonvested performance stock unit awards, which is expected to be recognized over a weighted-average period of 1.7 years. The following tables set forth activity and various statistics related to our performance stock unit awards and the assumptions used by us, and ONEOK prior to 2014, in the valuations of the 2014, 2013 and 2012 grants at the grant date:



	ONE Gas Plan				ONEOK Plans
	Number of Units		Weighted- Average Price		Number of Units		Weighted- Average Price
Nonvested December 31, 2013	—		$	—	264,537		$	40.45
Released to participants prior to separation	—		$	—	(128,458	)	$	34.68
Cancelled and replaced upon separation	739,521		$	14.57	(136,079	)	$	45.90
Granted	124,015		$	35.98	—		$	—
Forfeited	(15,585	)	$	19.15	—		$	—
Nonvested December 31, 2014	847,951		$	17.62	—		$	—



	2014		2013		2012
Volatility	18.40%	(a)	22.27%	(b)	27.00%	(b)
Dividend yield	3.37%		3.04%		2.86%
Risk-free interest rate	0.67%		0.42%		0.38%
(a) - Volatility based on historical volatility over three years using daily stock price observations of our peer utilities.
(b) - Volatility based on historical volatility over three years using daily ONEOK stock price observations.



	2014		2013		2012
Weighted-average grant date fair value (per share)	$	35.98	$	52.30	$	42.39
Fair value of shares granted (thousands of dollars)	$	4,462	$	2,926	$	4,286

Employee Stock Purchase Plan

We have reserved a total of 0.7 million shares of common stock for issuance under our Employee Stock Purchase Plan (the ESPP). Subject to certain exclusions, all employees who work at least 20 hours per week are eligible to participate in the ESPP. Employees can choose to have up to 10 percent of their annual base pay withheld to purchase our common stock, subject to terms and limitations of the plan. The purchase price of the stock is 85 percent of the lower of the average market price of our common stock on the grant date or exercise date. Approximately 36 percent of employees participated in the plan in 2014 and purchased 51,418 shares at $32.29. Compensation expense, before taxes, was $0.4 million in 2014. All eligible employees of ONEOK were eligible to participate in a similar ESPP plan, but enrollment of our employees in that plan was terminated upon the separation. Compensation expense, before tax, charged to us by ONEOK for employees who directly supported our operations was $2.7 million and $0.8 million for 2013 and 2012, respectively.

Employee Stock Award Program

Under the program, each time the per-share closing price of our common stock on the NYSE closed for the first time at or above each $1.00 increment above its previous historical high closing price, we issued, for no monetary consideration, one share of our common stock to all eligible employees. Shares issued to employees under this program during 2014 totaled 35,324, and compensation expense, before taxes, related to the Employee Stock Award Program was $2.5 million. Compensation expense, before taxes, charged to us by ONEOK related to a similar program to ours that was administered by ONEOK for employees who directly supported our operations was $4.2 million and $1.2 million for 2013 and 2012, respectively.