6. STOCK-BASED COMPENSATION

Our stock-based compensation plans are designed to promote stock ownership in NW Natural by employees and officers. These compensation plans include a Long-Term Incentive Plan (LTIP), an ESPP, and a Restated SOP. A variety of equity programs may be granted under the LTIP. The Restated SOP was terminated in 2012 with respect to new grants; however, options granted before the Restated SOP was terminated will remain outstanding until the earlier of their expiration, forfeiture, or exercise. Any new grants of stock options would be made under the LTIP. No stock options were granted under the LTIP during the year ended December 31, 2014.

Long-Term Incentive Plan

The LTIP is intended to provide a flexible, competitive compensation program for eligible officers and key employees. Under the LTIP, shares of common stock are authorized for equity incentive grants in the form of stock, restricted stock, restricted stock units, stock options, or performance shares. An aggregate of 850,000 shares were authorized for issuance as of December 31, 2014. Shares awarded under the LTIP may be purchased on the open market or issued as original shares.

Of the 850,000 shares of common stock authorized for LTIP awards at December 31, 2014, there were 225,669 shares available for issuance under any type of award and 250,000 shares available for option grants. This assumes that market, performance, and service based grants currently outstanding are awarded at the target level. There were no outstanding grants of restricted stock or stock options under the LTIP at December 31, 2014 or 2013. The LTIP stock awards are compensatory awards for which compensation expense is based on the fair value of stock awards, with expense being recognized over the performance and vesting period of the outstanding awards.

Performance Shares

Since the LTIP’s inception in 2001, performance shares, which incorporate market, performance, and service-based factors, have been granted annually with three-year performance periods. The following table summarizes performance share expense information:



Dollars in millions	Shares⁽¹⁾	Expense During Award Year⁽³⁾		Total Expense for Award
Estimated award:
2012-2014 grant⁽²⁾	8,408	$	0.6	$	1.8
Actual award:
2011-2013 grant	9,819	0.4		1.0
2010-2012 grant	9,924	0.5		1.2


⁽¹⁾	In addition to common stock shares, a participant also receives a dividend equivalent cash payment equal to the number of shares of common stock received on the award payout multiplied by the aggregate cash dividends paid per share during the performance period.


⁽²⁾	This represents the estimated number of shares to be awarded as of December 31, 2014 as certain performance share measures had been achieved. Amounts are subject to change with final payout amounts authorized by the Board of Directors in February 2015.


⁽³⁾	Amount represents the expense recognized in the third year of the vesting period noted above.

The aggregate number of performance shares granted and outstanding at the target and maximum levels were as follows:



Dollars in thousands	Performance Share Awards Outstanding		2014		Cumulative Expense
Performance Period	Target	Maximum	Expense		December 31, 2014
2012-14	35,340	70,680	$	583	$	1,821
2013-15	37,300	74,600	442		928
2014-16	43,625	87,250	618		618
Total	116,265	232,530	$	1,643

For the 2012-2014 and 2013-2015 performance periods, awards will be based on total shareholder return (TSR factor) relative to a peer group of gas distribution companies over the three-year performance period and on performance results achieved relative to specific core and non-core strategies (strategic factor). In addition to the TSR and strategic factors, the 2014-2016 award also included weighting for EPS and Return on Invested Capital (ROIC) factors. Compensation expense is recognized in accordance with the accounting standard for stock-based compensation and calculated based on performance levels achieved and an estimated fair value using the Monte-Carlo method. The weighted-average grant date fair value of unvested shares at December 31, 2014 and 2013 was $42.06 and $43.39 per share, respectively. The weighted-average grant date fair value of shares vested during the year was $43.67 per share and for shares granted during the year was $42.43 per share. As of December 31, 2014, there was $1.7 million of unrecognized compensation expense related to the unvested portion of performance awards expected to be recognized through 2016.

Restricted Stock Units

In 2012, the Company began granting RSUs under the LTIP instead of stock options under the Restated SOP. The fair value of an RSU is equal to the closing market price of the Company's common stock on the grant date. During 2014, total RSU expense was $0.9 million compared to $0.6 million in 2013. As of December 31, 2014, there was $2.2 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized over a period extending through 2019. Generally, RSUs awarded include a performance-based threshold and a vesting period of four years from the grant date. An RSU obligates the Company upon vesting to issue the RSU holder one share of common stock plus a cash payment equal to the total amount of dividends paid per share between the grant date and vesting date of that portion of the RSU.

Information regarding the RSU activity is summarized as follows:



	Number of RSUs		Weighted - Average Price Per RSU
Nonvested, December 31, 2011	—		$	—
Granted	25,224		47.58
Vested	—		—
Forfeited	(360	)	48.00
Nonvested, December 31, 2012	24,864		$	47.57
Granted	25,748		45.38
Vested	(5,455	)	48.01
Forfeited	(590	)	46.58
Nonvested, December 31, 2013	44,567		46.27
Granted	38,765		42.19
Vested	(12,060	)	46.52
Forfeited	(478	)	45.47
Nonvested, December 31, 2014	70,794		44.00

Restated Stock Option Plan

The Restated SOP was terminated for new option grants in 2012; however, options granted before the plan terminated will remain outstanding until the earlier of their expiration, forfeiture, or exercise. Any new grants of stock options would be made under the LTIP.

At December 31, 2014, a total of 416,088 shares of common stock remained reserved for issuance under the Restated SOP. As the plan is closed, there are no additional shares available for grant. Options under the Restated SOP were granted to officers and key employees designated by a committee of our Board of Directors. All options were granted at an option price equal to the closing market price on the date of grant and may be exercised for a period up to 10 years and seven days from the date of grant. Option holders may exchange shares they have owned for at least six months, valued at the current market price, to purchase shares at the option price.

Information regarding the Restated SOP activity is summarized as follows:



	Option Shares		Weighted - Average Price Per Share		Intrinsic Value (In millions)
Balance outstanding, December 31, 2011	579,225		$	42.09	$	3.4
Exercised	(46,825	)	40.62		0.4
Forfeited	(2,475	)	43.78		n/a
Balance outstanding, December 31, 2012	529,925		42.22		1.3
Exercised	(33,800	)	32.16		0.3
Forfeited	(3,975	)	43.72		n/a
Balance outstanding, December 31, 2013	492,150		42.89		0.6
Exercised	(69,662	)	39.82		0.5
Forfeited	(6,400	)	43.59		n/a
Balance outstanding, December 31, 2014	416,088		43.40		2.7
Exercisable, December 31, 2014	388,965		43.23		2.6

During 2014, cash of $2.8 million was received for option shares exercised and $0.1 million related tax benefit was realized. During 2014, 2013, and 2012, the total fair value of options that vested was $0.4 million, $0.5 million and $0.6 million, respectively. The weighted average remaining life of options exercisable and outstanding at December 31, 2014 was 4.2 years and 4.3 years, respectively.

Employee Stock Purchase Plan

The ESPP allows employees to purchase common stock at 85% of the closing price on the trading day immediately preceding the initial offering date, which is set annually. Each eligible employee may purchase up to $21,239 worth of stock through payroll deductions over a 12-month period, with shares issued at the end of the 12-month subscription period.

Stock-Based Compensation Expense

Stock-based compensation expense is recognized as operations and maintenance expense or is capitalized as part of construction overhead. The following table summarizes the financial statement impact of stock-based compensation under our LTIP, Restated SOP and ESPP:



In thousands	2014			2013			2012
Operations and maintenance expense, for stock-based compensation	$	2,309		$	1,876		$	1,668
Income tax benefit	(861		)	(765		)	(707		)
Net stock-based compensation effect on net income	$	1,448		$	1,111		$	961
Amounts capitalized for stock-based compensation	$	597		$	331		$	294