STOCK-BASED COMPENSATION

In January 2007, the NJR 2007 Stock Award and Incentive Plan replaced the 2002 Employee and Outside Director Long-Term Incentive Plan. Shares have been issued in the form of options, performance shares, restricted stock and deferred retention stock. The Outside Director Stock Compensation Plan allows for the issuance of non-restricted shares to non-employee directors. As of September 30, 2016, 2.6 million and 4,223 shares remain available for future issuance to employees and directors, respectively.

The following table summarizes all stock-based compensation expense recognized during the following fiscal years:



(Thousands)	2016			2015			2014
Stock-based compensation expense:
Performance share awards	$	3,188		$	2,473		$	2,509
Restricted and non-restricted stock	2,161			1,899			1,664
Deferred retention stock	1,885			5,273			13,643
Compensation expense included in operation and maintenance expense	7,234			9,645			17,816
Income tax benefit	(2,955		)	(3,940		)	(7,278		)
Total, net of tax	$	4,279		$	5,705		$	10,538

Performance Shares

In fiscal 2016, the Company granted to various officers 46,175 performance shares, which are market condition awards that vest on September 30, 2018, subject to the Company meeting certain performance conditions. In fiscal 2016, the Company also granted to various officers 69,305 performance shares, of which 38,789 vest on September 30, 2018 and 30,516 vest annually over a three year period beginning on September 30, 2016, both of which are subject to the Company meeting certain performance conditions.

In fiscal 2015, the Company granted to various officers 41,214 performance shares, which are market condition awards that vest on September 30, 2017, subject to the Company meeting certain performance conditions. In fiscal 2015, the Company also granted to various officers 61,576 performance shares, of which 34,622 vest in September 30, 2017 and 26,954 vest annually over a three year period beginning in September 2015, both of which are subject to the Company meeting certain performance conditions.

In fiscal 2014, the Company granted to various officers 69,154 performance shares, which are market condition awards that vested on September 30, 2016, subject to the Company meeting certain performance conditions. In fiscal 2014, the Company also granted to various officers 78,574 performance shares, of which 50,480 vested in September 30, 2016 and 28,094 vest annually over a three year period beginning in September 30, 2014, both of which are subject to the Company meeting certain performance conditions.

There is $3 million of deferred compensation related to unvested performance shares that is expected to be recognized over the next two years.

The following table summarizes the performance share activity under the NJR 2007 Stock Award and Incentive Plan for the past three fiscal years:



	Shares ⁽¹⁾		Weighted Average Grant Date Fair Value		Total Fair Value of Vested Shares (in Thousands)
Non-vested and outstanding at September 30, 2013	156,644			$18.35		—
Granted	147,728			$20.28		—
Vested ⁽²⁾	(56,836	)		23.59		$	2,756
Non-vested and outstanding at September 30, 2014	247,536			$18.30		—
Granted	102,790			$28.25		—
Vested ⁽³⁾	(112,446	)		$17.10		$	4,318
Cancelled/forfeited ⁽⁴⁾	(23,416	)		17.98		—
Non-vested and outstanding at September 30, 2015	214,464			$23.40		—
Granted	115,480			$27.37		—
Vested ⁽⁵⁾	(137,053	)		$21.40		$	5,657
Cancelled/forfeited ⁽⁶⁾	(12,975	)		$23.40		—
Non-vested and outstanding at September 30, 2016	179,916			$27.47		—


(1)	The number of common shares issued related to certain performance shares may range from zero to 150 percent of the number of shares shown in the table above based on the Company’s achievement of performance goals.


(2)	As certified by the Company’s Leadership and Compensation Committee on November 11, 2014, the number of common shares related to performance shares earned was 150 percent, or 85,254 shares, excluding accumulated dividends. The number represented on this line is the target number of 100 percent. See footnote (1) above.

(3)

As certified by the Company’s Leadership and Compensation Committee on November 10, 2015, the number of common shares related to performance shares earned was 120 percent, or 112,918 shares, excluding accumulated dividends. The number represented on this line is the target number of 100 percent. See footnote (1) above. Also included in the vested number are 9,364 shares certified by the Leadership and Compensation Committee on November 11, 2014 and 8,984 shares certified by the Leadership and Compensation Committee on November 10, 2015.


(4)	As certified by the Company’s Leadership and Compensation Committee on November 10, 2015, 9,364 shares were canceled due to not achieving a certain performance target. The remainder were forfeitures due to individuals departing the company.

(5)

As certified by the Company’s Leadership and Compensation Committee on November 15, 2016, the number of common shares earned related to TSR performance was 85 percent or 55,702 shares, the number of common shares earned related to NFE performance was 150 percent or 71,808 shares, and the number of common shares earned related to Performance Based Restricted Stock was 100 percent or 23,649 shares. Each award earned excludes accumulated dividends. The number represented on this line is the target number of 100 percent.


(6)	As certified by the Company’s Leadership and Compensation Committee on November 15, 2016, 9,366 shares were canceled due to not achieving a certain performance target. The remainder were forfeitures due to individuals departing the company.

The Company measures compensation expense related to performance shares based on the fair value of these awards at their date of grant. In accordance with ASC 718, Compensation - Stock Compensation, compensation expense for market condition grants are recognized for awards granted, and are not adjusted based on actual achievement of the performance goals. The Company estimated the fair value of these grants on the date of grant using a lattice model. Performance condition grants are initially fair valued at the company’s stock price on grant date, and are subsequently adjusted for actual achievement of the performance goals.

Restricted Stock

In fiscal 2016, the Company granted 41,909 shares of restricted stock that vest annually over a three year period beginning October 2016. In fiscal 2015, the Company granted 48,542 shares of restricted stock that vest annually over a three year period beginning in October 2015. In fiscal 2015, the Company also granted 10,236 shares of restricted stock that will vest October 15, 2017 and 3,194 that vested September 30, 2015. In fiscal 2014, the Company granted 33,356 shares of restricted stock that vest annually over a three year period beginning in October 2014. There is $714,000 of deferred compensation related to unvested restricted stock shares that is expected to be recognized over the next two years.

The following table summarizes the restricted stock activity under the NJR 2007 Stock Award and Incentive Plan for the past three fiscal years:



	Shares		Weighted Average Grant Date Fair Value		Total Fair Value of Vested Shares (in Thousands)
Non-vested and outstanding at September 30, 2013	78,511			$20.53		—
Granted	33,356			$22.78		—
Vested	(68,460	)		$20.37		$	1,534
Cancelled/forfeited	(1,916	)		$20.37		—
Non-vested and outstanding at September 30, 2014	41,491			$22.60		—
Granted	61,972			$29.41		—
Vested	(18,170	)		$24.45		$	510
Cancelled/forfeited	(3,801	)		$26.79		—
Non-vested and outstanding at September 30, 2015	81,492			$27.17		—
Granted	41,909			$30.03		—
Vested	(48,089	)		$26.66		$	1,469
Cancelled/forfeited	(2,241	)		$29.21		—
Non-vested and outstanding at September 30, 2016	73,071			$29.09		—

Deferred Retention Stock

Deferred retention stock awards vest immediately when granted, with shares delivered at a future date in accordance with the terms of the underlying agreements. The expense for these awards is recognized in the fiscal year in which services are rendered. The related shares are granted upon approval by the Board of Directors, which generally occurs subsequent to the fiscal year end.

The following table summarizes the deferred retention stock award under the NJR 2007 Stock Award and Incentive Plan for the past three fiscal years:



	Shares		Weighted Average Grant Date Fair Value		Total Fair Value of Vested Shares (in Thousands)
Outstanding at September 30, 2013	223,586			$21.69		—
Granted/Vested	57,970			$22.88		—
Forfeited	(4,774	)		$21.47		—
Outstanding at September 30, 2014	276,782			$21.95		—
Granted/Vested	462,790			$29.32		—
Delivered	(95,098	)		$23.62		$	2,519
Forfeited	(11,744	)		$24.69		—
Outstanding at September 30, 2015	632,730			$27.03		—
Granted/Vested	159,831			$30.37		—
Delivered	(121,764	)		$20.31		$	3,751
Forfeited	(8,318	)		$28.14		—
Outstanding at September 30, 2016	662,479			$29.06		—

Stock Options

The following table summarizes the stock option activity:



	Shares		Weighted Average Exercise Price
Outstanding at September 30, 2013	133,250			$14.77
Exercised	(85,000	)		$13.13
Outstanding at September 30, 2014	48,250			$15.00
Exercised	(48,250	)		$15.00
Outstanding at September 30, 2015	—			—
Exercisable at September 30, 2015	—			—
Exercisable at September 30, 2014	48,250			$15.00

NJR received proceeds of $724,000 and $1.2 million from the stock options exercised during fiscal 2015 and 2014, respectively. There were no remaining stock options outstanding as of September 30, 2015 and therefore NJR received no proceeds from stock options exercised during fiscal 2016. There were no stock options granted during fiscal 2016, 2015 and 2014.

Non-Employee Director Stock

Non-employee director compensation includes an annual January retainer that is awarded in stock. The shares vest immediately and are subsequently amortized to expense over a 12-month period. The following summarizes non-employee director share awards for the past three fiscal years:



	2016		2015	2014
Shares granted	27,481	⁽¹⁾	26,122	31,696
Weighted average grant date fair value	$32.75		$30.63	$22.40


(1)	$225,000 of expense remaining as of September 30, 2016, to be recognized through December 31, 2016.