STOCK-BASED COMPENSATION

The following table reflects the stock-based compensation expense and the related deferred tax benefit recognized in income for the three and nine months ended September 30:



	Three Months Ended September 30				Nine Months Ended September 30
(Millions)	2013		2012		2013		2012
Stock options	$	0.5	$	0.5	$	1.4	$	1.5
Performance stock rights	1.2		0.5		4.4		4.8
Restricted share units	2.5		2.1		7.8		7.5
Nonemployee director deferred stock units	0.2		—		0.7		1.0
Total stock-based compensation expense	$	4.4	$	3.1	$	14.3	$	14.8
Deferred income tax benefit	$	1.8	$	1.2	$	5.7	$	5.9

No stock-based compensation cost was capitalized during the three and nine months ended September 30, 2013 and 2012.

Stock Options

The fair value of stock option awards granted is estimated using a binomial lattice model. The expected term of option awards is derived from the output of the binomial lattice model and represents the period of time that options are expected to be outstanding. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current and historical dividend rate. Our expected stock price volatility is estimated using the 10-year historical volatility of our stock price. The following table shows the weighted-average fair value per stock option granted during the nine months ended September 30, 2013, along with the assumptions incorporated into the valuation model:



		February 2013 Grant
Weighted-average fair value per option		$6.03
Expected term		5 years
Risk-free interest rate		0.18% – 2.11%
Expected dividend yield		5.33%
Expected volatility		24%

A summary of stock option activity for the nine months ended September 30, 2013, and information related to outstanding and exercisable stock options at September 30, 2013, is presented below:



	Stock Options		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value (Millions)
Outstanding at December 31, 2012	2,046,355		$	49.25
Granted	319,234		56.00
Exercised	(793,455	)	48.58
Forfeited	(15,510	)	56.00
Outstanding at September 30, 2013	1,556,624		$	50.91	6.5	$	8.2
Exercisable at September 30, 2013	816,336		$	49.92	4.8	$	5.3

The aggregate intrinsic value for outstanding and exercisable options in the above table represents the total pre-tax intrinsic value that would have been received by the option holders had they all exercised their options on September 30, 2013. This is calculated as the difference between our closing stock price on September 30, 2013, and the option exercise price, multiplied by the number of in-the-money stock options. The intrinsic value of options exercised during the nine months ended September 30, 2013, and 2012, was $9.0 million and $10.8 million, respectively. The actual tax benefit realized for the tax deductions from these option exercises for the nine months ended September 30, 2013, and 2012, was $3.6 million and $4.4 million, respectively.

As of September 30, 2013, $1.5 million of compensation cost related to unvested and outstanding stock options was expected to be recognized over a weighted-average period of 2.0 years.

Performance Stock Rights

The fair values of performance stock rights are estimated using a Monte Carlo valuation model. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current and historical dividend rate. The expected volatility is estimated using two to three years of historical data. The table below reflects the assumptions used in the valuation of the outstanding grants at September 30:



		2013
Risk-free interest rate		0.26% – 1.27%
Expected dividend yield		5.18% – 5.34%
Expected volatility		19% – 36%

A summary of the activity for the nine months ended September 30, 2013, related to performance stock rights accounted for as equity awards is presented below:



	Performance Stock Rights		Weighted-Average Fair Value ⁽²⁾
Outstanding at December 31, 2012	108,314		$	65.38
Granted	22,636		48.50
Award modifications ⁽¹⁾	28,789		39.80
Distributed	(94,758	)	72.36
Adjustment for final payout	21,867		72.36
Forfeited	(1,099	)	48.50
Outstanding at September 30, 2013	85,749		$	46.62

⁽¹⁾ Six months prior to the end of the performance period, employees can no longer change their election to defer the value of their performance stock rights into the deferred compensation plan. As a result, any awards not elected for deferral at this point in the performance period will be settled in our common stock. This changes the classification of these awards from a liability award to an equity award. The change in classification is accounted for as an award modification.


⁽²⁾	Reflects the weighted-average fair value used to measure equity awards. Equity awards are measured using the grant date fair value or the fair value on the modification date.

The weighted-average grant date fair value of performance stock rights awarded during the nine months ended September 30, 2013, and 2012, was $48.50 and $52.70, per performance stock right, respectively.

A summary of the activity for the nine months ended September 30, 2013, related to performance stock rights accounted for as liability awards is presented below:



	Performance Stock Rights
Outstanding at December 31, 2012	189,093
Granted	90,496
Award modifications *	(28,789	)
Distributed	(61,753	)
Adjustment for final payout	14,255
Forfeited	(4,398	)
Outstanding at September 30, 2013	198,904

Six months prior to the end of the performance period, employees can no longer change their election to defer the value of their performance stock rights into the deferred compensation plan. As a result, any awards not elected for deferral at this point in the performance period will be settled in our common stock. This changes the classification of these awards from a liability award to an equity award. The change in classification is accounted for as an award modification.

The weighted-average fair value of all outstanding performance stock rights accounted for as liability awards as of September 30, 2013, was $47.32 per performance stock right.

As of September 30, 2013, $3.0 million of compensation cost related to unvested and outstanding performance stock rights (equity and liability awards) was expected to be recognized over a weighted-average period of 1.5 years.

The total intrinsic value of performance stock rights distributed during the nine months ended September 30, 2013, and 2012, was $8.8 million and $4.7 million, respectively. The actual tax benefit realized for the tax deductions from the distribution of performance stock rights during the nine months ended September 30, 2013, and 2012, was $3.6 million and $1.9 million, respectively.

Restricted Share Units

A summary of the activity related to all restricted share unit awards (equity and liability awards) for the nine months ended September 30, 2013, is presented below:



	Restricted Share Unit Awards		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2012	505,690		$	48.38
Granted	196,894		55.93
Dividend equivalents	17,830		52.19
Vested and released	(207,411	)	46.32
Forfeited	(5,997	)	53.16
Outstanding at September 30, 2013	507,006		$	52.24

As of September 30, 2013, $12.6 million of compensation cost related to these awards was expected to be recognized over a weighted-average period of 2.3 years.

The total intrinsic value of restricted share unit awards vested and released during the nine months ended September 30, 2013, and 2012, was $11.6 million and $10.5 million, respectively. The actual tax benefit realized for the tax deductions from the vesting and release of restricted share units during the nine months ended September 30, 2013, and 2012, was $4.7 million and $4.2 million respectively.

The weighted-average grant date fair value of restricted share units awarded during the nine months ended September 30, 2013, and 2012, was $55.93 and $53.24 per unit, respectively.

Nonemployee Directors Deferred Stock Units

Each nonemployee director is granted deferred stock units (DSUs), typically in January of each year. The number of DSUs granted is calculated by dividing a set dollar amount by our closing common stock price on December 31 of the prior year. Prior to January 1, 2013, under the terms of the agreement, these awards vested immediately, and therefore were expensed on the grant date. Beginning in 2013, these awards generally vest over one year. Therefore, the expense for these awards is recognized pro-rata over the year in which the grant occurs.