OG&E 2014 Annual Report Download - page 26

48 OGE Energy Corp. OGE Energy Corp. 49
As a result of the formation of Enable on May 1, 2013, performance
unit grants to OGE Holdings’ employees that were previously based on
earnings before interest, taxes, depreciation and amortization were
converted to performance units based on total shareholder return or
earnings per share. Total 2013 performance unit grants converted were
91,390, comprised of 45,596 total shareholder return performance
units with a $25.89 grant date fair value and 45,794 earnings per share
performance units with a $26.73 grant date fair value. Total 2012
performance unit grants converted were 82,930, comprised of
41,554 total shareholder return performance units with a $47.71 grant
date fair value and 41,376 earnings per share performance units with a
$34.94 grant date fair value. The amount of these performance units
were adjusted for the effects of the stock split. The impact of the
modification of the performance unit grants on stock-based
compensation expense for 2013 was not material.
Performance Units – Total Shareholder Return
The fair value of the performance units based on total shareholder
return was estimated on the grant date using a lattice-based valuation
model that factors in information, including the expected dividend yield,
expected price volatility, risk-free interest rate and the probable
outcome of the market condition, over the expected life of the
performance units. Compensation expense for the performance units
is a fixed amount determined at the grant date fair value and is
recognized over the three-year award cycle regardless of whether
performance units are awarded at the end of the award cycle.
Dividends were not accrued or paid for awards prior to February 2014,
and were therefore not included in the fair value calculation. Beginning
with the February 2014 performance unit awards, dividends are
accrued on a quarterly basis pending achievement of payout criteria,
and were therefore included in the fair value calculations. Expected
price volatility is based on the historical volatility of the Company’s
common stock for the past three years and was simulated using the
Geometric Brownian Motion process. The risk-free interest rate for the
performance unit grants is based on the three-year U.S. Treasury yield
curve in effect at the time of the grant. The expected life of the units
is based on the non-vested period since inception of the award cycle.
There are no post-vesting restrictions related to the Company’s
performance units based on total shareholder return. The number
of performance units granted based on total shareholder return and
the assumptions used to calculate the grant date fair value of the
performance units based on total shareholder return are shown
in the following table.
2014 2013 2012
Number of units granted 219,106 316,162 338,678
Fair value of units granted $34.80 $25.89 $25.91
Expected dividend yield 2.5% 2.8% 3.0%
Expected price volatility 20.0% 20.0% 22.0%
Risk-free interest rate 0.67% 0.37% 0.38%
Expected life of units (in years) 2.86 2.84 2.87
Performance Units – Earnings Per Share
The fair value of the performance units based on earnings per share is
based on grant date fair value which is equivalent to the price of one
share of the Company’s common stock on the date of grant. The fair
value of performance units based on earnings per share varies as the
number of performance units that will vest is based on the grant date
fair value of the units and the probable outcome of the performance
condition. The Company reassesses at each reporting date whether
achievement of the performance condition is probable and accrues
compensation expense if and when achievement of the performance
condition is probable. As a result, the compensation expense
recognized for these performance units can vary from period to period.
There are no post-vesting restrictions related to the Company’s
performance units based on earnings per share. The number of
performance units granted based on earnings per share and the grant
date fair value are shown in the following table.
2014 2013 2012
Number of units granted 73,037 74,570 81,594
Fair value of units granted $34.81 $26.73 $23.82
Restricted Stock
Under the Stock Incentive Plan and beginning in 2008, the Company
issued restricted stock to certain existing non-officer employees as well
as other executives upon hire to attract and retain individuals to be
competitive in the marketplace. The restricted stock vests in one-third
annual increments. Prior to vesting, each share of restricted stock is
subject to forfeiture if the recipient ceases to render substantial
services to the Company or a subsidiary for any reason other than
death, disability or retirement. These shares may not be sold,
assigned, transferred or pledged and are subject to a risk of forfeiture.
The fair value of the restricted stock was based on the closing
market price of the Company’s common stock on the grant date.
Compensation expense for the restricted stock is a fixed amount
determined at the grant date fair value and is recognized as services
are rendered by employees over a three-year vesting period. Also, the
Company treats its restricted stock as multiple separate awards by
recording compensation expense separately for each tranche whereby
a substantial portion of the expense is recognized in the earlier years
in the requisite service period. Dividends are accrued and paid during
the vesting period on all restricted stock awards prior to July 2014, and
therefore included in the fair value calculation. For all awards after
July 2014, dividends will only be paid on any restricted stock awards
that vest, accordingly dividends are no longer included in the fair value
calculations. The expected life of the restricted stock is based on the
non-vested period since inception of the three-year award cycle. There
are no post-vesting restrictions related to the Company’s restricted
stock. The number of shares of restricted stock granted and the grant
date fair value are shown in the following table.
2014 2013 2012
Shares of restricted stock granted 7,037 5,940 10,824
Fair value of restricted stock granted $35.71 $29.71 $26.72
A summary of the activity for the Company’s performance units and
restricted stock at December 31, 2014 and changes in 2014 are shown
in the following table.
Stock Options
The Company last issued stock options in 2004 and as of
December 31, 2006, all stock options were fully vested and expensed.
All stock options had a contractual life of 10 years.
A summary of the activity for the Company’s exercised stock options
in 2013 and 2012 are shown in the following table.
Year ended December 31 (In millions) 2013 2012
Intrinsic value (A) $1.4 $2.0
Cash received from stock options exercised 0.4 0.8
(A)
The difference between the market value on the date of exercise and the option
exercise price.
Performance Units
Total Shareholder Retrun Earnings Per Share Restricted Stock
Aggregate Aggregate Aggregate
Number Intrinsic Number Intrinsic Number Intrinsic
(Dollars in millions) of Units Value of Units Value of Shares Value
Units/Shares Outstanding at 12/31/13 1,062,060 354,026 23,628
Granted 219,106(A) 73,037(A) 7,037
Converted (355,078)(B) $19.3 (118,350)(B) $8.0 N/A
Vested N/A N/A (7,876) $0.3
Forfeited (33,097) (11,026) (10,288)
Units/Shares Outstanding at 12/31/14 892,991 $ — 297,687 $8.0 12,501 $0.4
Units/Shares Fully Vested at 12/31/14 336,147 $ — 111,950 $4.8
(A)
For performance units, this represents the target number of performance units granted. Actual number of performance units earned, if any, is dependent upon performance and may
range from 0 percent to 200 percent of the target.
(B) These amounts represent performance units that vested at December 31, 2013 which were settled in February 2014.
A summary of the activity for the Company’s non-vested performance
units and restricted stock at December 31, 2014 and changes in 2014
are shown in the following table.
Performance Units
Total Shareholder Retrun Earnings Per Share Restricted Stock
Weighted- Weighted- Weighted-
Average Average Average
Number Grant Date Number Grant Date Number Grant Date
of Units Fair Value of Units Fair Value of Shares Fair Value
Units/Shares Non-Vested at 12/31/13 706,982 $25.90 235,676 $25.28 23,628 $26.30
Granted 219,106(A) $34.80 73,037(A) $34.81 7,037 $35.71
Vested (336,147) $28.61 (111,950) $27.93 (7,876) $26.82
Forfeited (33,097) $27.02 (11,026) $26.85 (10,288) $24.65
Units/Shares Non-Vested at 12/31/14 556,844 $29.38 185,737 $29.90 12,501 $32.65
Units/Shares Expected to Vest 503,991(B) 167,807(B) 12,501
(A)
For performance units, this represents the target number of performance units granted. Actual number of performance units earned, if any, is dependent upon performance and may
range from 0 percent to 200 percent of the target.
(B) The intrinsic value of the performance units based on total shareholder return and earnings per share is $0.0 million and $6.2 million, respectively.
Fair Value of Vested Performance Units and Restricted Stock
A summary of the Company’s fair value for its vested performance
units and restricted stock is shown in the following table.
Year ended December 31 (In millions) 2014 2013 2012
Performance units
Total shareholder return $9.5 $8.2 $7.4
Earnings per share 3.8 4.9 4.1
Restricted stock 0.2 0.7 0.7
Unrecognized Compensation Cost
A summary of the Company’s unrecognized compensation cost for its
non-vested performance units and restricted stock and the weighted-
average periods over which the compensation cost is expected to be
recognized are shown in the following table.
Unrecognized Weighted Average
Compensation Cost to be Recognized
December 31, 2014 (in millions) (in years)
Performance units
Total shareholder return $7.2 1.63
Earnings per share 2.0 1.76
Total performance units 9.2
Restricted stock 0.2 2.47
Total $9.4