Stock-Based Compensation

In May 2014, our shareholders approved the 2014 Omnibus Incentive Compensation Plan (2014 Omnibus Plan). Under the provisions of the 2014 Omnibus Plan, the number of shares of stock that may be issued in satisfaction of plan awards may not exceed 3,000,000 shares, plus any shares forfeited under prior plans. No single employee who is our chief executive officer, chief financial officer, or any one of our other three highest compensated officers (including officers of our subsidiaries) can be granted stock options for more than 1,000,000 shares or receive a payout in excess of 250,000 shares for performance stock rights during any calendar year. Additional awards will not be issued under prior plans, although the plans continue to exist for purposes of the existing outstanding stock-based compensation awards. At September 30, 2014, stock options, performance stock rights, and restricted share units were outstanding under prior plans.

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



	Three Months Ended September				Nine Months Ended September 30
(Millions)	2014		2013		2014		2013
Stock options	$	0.4	$	0.5	$	1.2	$	1.4
Performance stock rights	1.1		1.2		10.8		4.4
Restricted share units *	1.5		2.5		7.6		7.8
Nonemployee director deferred stock units	0.2		0.2		0.6		0.7
Total stock-based compensation expense	$	3.2	$	4.4	$	20.2	$	14.3
Deferred income tax benefit	$	1.3	$	1.8	$	8.1	$	5.7


*	The three and nine months ended September 30, 2013, include an insignificant amount related to IES's retail energy business. The three and nine months ended September 30, 2014, do not include any amounts related to IES's retail energy business as the estimated forfeiture rate was adjusted in the third quarter of 2014 to reflect the sale.

No stock-based compensation cost was capitalized during the three and nine months ended September 30, 2014, and 2013.

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. The expected stock price volatility is estimated using the 10-year historical volatility of our stock price. The following table shows the assumptions incorporated into the valuation model:



		February 2014 Grant
Expected term		8 years
Risk-free interest rate		0.12% – 2.88%
Expected dividend yield		5.28%
Expected volatility		18%

The weighted-average fair value per stock option granted during the nine months ended September 30, 2014, and 2013, was $6.70 and $6.03, respectively.

A summary of stock option activity for the nine months ended September 30, 2014, and information related to outstanding and exercisable stock options at September 30, 2014, 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, 2013	1,550,374		$	50.93
Granted	264,332		55.23
Exercised	(411,214	)	48.63
Forfeited	(2,542	)	55.23
Outstanding at September 30, 2014	1,400,950		$	52.41	6.6	$	17.4
Exercisable at September 30, 2014	714,317		$	50.33	4.9	$	10.3

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, 2014. This is calculated as the difference between our closing stock price on September 30, 2014, 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, 2014, and 2013, was $7.5 million and $9.0 million, respectively. The actual tax benefit realized for the tax deductions from these option exercises was $3.0 million and $3.6 million for the nine months ended September 30, 2014, and 2013, respectively.

Effective October 24, 2014, our Board of Directors accelerated the vesting of all unvested stock options held by active employees in order to help mitigate the tax impacts of Section 280G of the Internal Revenue Code on us and certain of our employees. All stock options awarded to active employees also became exercisable as of this date. As a result of this modification, the remaining $1.5 million of unrecognized compensation expense related to unvested and outstanding stock options at September 30, 2014, will be recognized in the fourth quarter of 2014.

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 stock price volatility is estimated using one to three years of historical data. The table below reflects the assumptions used in the valuation of the outstanding grants at September 30:



		2014
Risk-free interest rate		0.06% – 0.60%
Expected dividend yield		5.28% – 5.33%
Expected volatility		17% – 23%

A summary of the activity for the nine months ended September 30, 2014, 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, 2013	85,749		$	46.62
Granted	21,146		44.28
Award modifications ⁽¹⁾	64,612		85.09
Adjustment for shares not distributed	(45,748	)	43.29
Forfeited	(203	)	44.28
Outstanding at September 30, 2014	125,556		$	67.24

⁽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, 2014, and 2013, was $44.28 and $48.50, per performance stock right, respectively.

A summary of the activity for the nine months ended September 30, 2014, related to performance stock rights accounted for as liability awards is presented below:



	Performance Stock Rights
Outstanding at December 31, 2013	198,904
Granted	84,529
Award modifications *	(64,612	)
Adjustment for shares not distributed	(39,001	)
Forfeited	(813	)
Outstanding at September 30, 2014	179,007

The weighted-average fair value of all outstanding performance stock rights accounted for as liability awards as of September 30, 2014, was $78.61 per performance stock right.

No shares of common stock were distributed for performance stock rights during the nine months ended September 30, 2014, because the performance percentage was below the threshold payout level for those rights that were eligible for distribution. The total intrinsic value of shares distributed during the nine months ended September 30, 2013, was $8.8 million. The actual tax benefit realized for the tax deductions from the distribution of shares during the nine months ended September 30, 2013, was $3.6 million.

Effective October 24, 2014, our Board of Directors approved the acceleration of the distribution of certain performance stock rights held by active employees. For those performance stock rights with a performance period ending December 31, 2014, a portion of the estimated distribution will be made in December 2014. This change was made to help mitigate the tax impacts of Section 280G of the Internal Revenue Code on us and certain of our employees.

As of September 30, 2014, $5.0 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 1.4 years.

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, 2014, is presented below:



	Restricted Share Unit Awards		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2013	511,301		$	52.24
Granted	214,953		55.23
Dividend equivalents	17,317		54.45
Vested and released	(208,873	)	49.76
Forfeited	(16,730	)	54.66
Outstanding at September 30, 2014 *	517,968		$	54.48

* Includes 94,267 restricted share units that were forfeited on November 1, 2014 related to the sale of IES's retail energy business. See Note 4, Dispositions, for more information on the sale.

The weighted-average grant date fair value of restricted share units awarded during the nine months ended September 30, 2014, and 2013, was $55.23 and $55.93 per unit, respectively.

The total intrinsic value of restricted share unit awards vested and released during the nine months ended September 30, 2014, and 2013, was $11.4 million and $11.6 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, 2014, and 2013, was $4.6 million and $4.7 million, respectively.

As of September 30, 2014, $9.5 million of compensation cost related to unvested and outstanding restricted share units was expected to be recognized over a weighted-average period of 2.2 years.

Nonemployee Directors Deferred Stock Units

Each nonemployee director is granted deferred stock units (DSUs), typically in January of each year. These awards generally vest over one year; therefore, the expense is recognized pro-rata over the year in which the grant occurs. 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. Nonemployee directors also receive forfeitable dividend equivalents in the form of additional DSUs.