9. STOCK-BASED COMPENSATION

Effective January 25, 2017, the shareholders of the Company approved the NJR 2017 Stock Award and Incentive Plan, which replaced the NJR 2007 Stock Award and Incentive Plan. The 2007 plan had 914,169 shares granted but not issued as of September 30, 2017, which were transferred into the 2017 plan. The 2017 plan added an additional 3,135,000 shares available for issuance. Shares have been issued in the form of performance shares, restricted stock, deferred retention stock and unrestricted common stock to non-employee directors. As of September 30, 2018, 3,473,062 shares remain available for future issuance.

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



(Thousands)	2018			2017			2016
Stock-based compensation expense:
Performance share awards	$	3,526		$	2,614		$	3,188
Restricted and non-restricted stock	2,191			1,732			2,161
Deferred retention stock	7,128			1,461			1,885
Compensation expense included in operation and maintenance expense	12,845			5,807			7,234
Income tax benefit ⁽¹⁾	(3,734		)	(2,372		)	(2,955		)
Total, net of tax	$	9,111		$	3,435		$	4,279


(1)	Excludes additional tax benefit related to delivered shares of $3 million, $1.3 million and $1.8 million as of September 30, 2018, 2017 and 2016, respectively.

Performance Shares

In fiscal 2018, the Company granted to various officers 31,836 performance shares, which are market condition awards that vest on September 30, 2020, subject to the Company meeting certain performance conditions. In fiscal 2018, the Company also granted to various officers 59,341 performance shares, of which 29,608 vest on September 30, 2020 and 29,733 vest annually over a three-year period beginning on September 30, 2018, both of which are subject to the Company meeting certain performance conditions.

In fiscal 2017, the Company granted to various officers 44,576 performance shares, which are market condition awards that vest on September 30, 2019, subject to the Company meeting certain performance conditions. In fiscal 2017, the Company also granted to various officers 51,931 performance shares, of which 25,806 vest on September 30, 2019 and 26,125 vest annually over a three-year period beginning in September 30, 2017, both of which are subject to the Company meeting certain performance conditions.

In fiscal 2016, the Company granted to various officers 46,175 performance shares, which are market condition awards that vested 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 vested in September 30, 2018 and 30,516 vest annually over a three-year period beginning in September 2016, both of which were subject to the Company meeting certain performance conditions. The vesting of these awards are shown in the table below.

There is approximately $3.8 million of deferred compensation related to unvested performance shares that is expected to be recognized over the weighted average period of 1.7 years.

The following table summarizes the performance share activity under the stock award and incentive plans 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, 2015	214,464			$23.40		—
Granted	115,480			$27.37		—
Vested ⁽²⁾	(137,053	)		$21.40		$	5,657
Cancelled/forfeited ⁽³⁾	(12,975	)		$23.40		—
Non-vested and outstanding at September 30, 2016	179,916			$27.47		—
Granted	96,507			$33.57		—
Vested ⁽⁴⁾	(95,407	)		$28.88		$	4,179
Cancelled/forfeited	(24,429	)		$29.14		—
Non-vested and outstanding at September 30, 2017	156,587			$30.12		—
Granted	91,177			$44.67		—
Vested ⁽⁵⁾	(100,146	)		$29.49		$	4,714
Cancelled/forfeited	(2,442	)		$31.45		—
Non-vested and outstanding at September 30, 2018	145,176			$39.67		—


(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 15, 2016, the number of common shares related to performance shares earned 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.


(3)	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.

(4)

As certified by the Company’s Leadership and Compensation Committee on November 14, 2017, the number of common shares earned related to TSR performance was 108.44 percent or 39,595 shares, the number of common shares earned related to NFE performance was 119 percent or 36,498 shares, and the number of common shares earned related to Performance Based Restricted Stock was 100 percent or 28,223 shares. Each award earned excludes accumulated dividends. The number represented on this line is the target number of 100 percent.

(5)

As certified by the Company’s Leadership and Compensation Committee on November 13, 2018, the number of common shares earned related to TSR performance was 99 percent or 38,660 shares, the number of common shares earned related to NFE performance was 121 percent or 39,694 shares and the number of common shares earned related to Performance Based Restricted Stock was 100 percent or 36,998 shares. Each award earned excludes accumulated dividends. The number represented on this line is the target number of 100 percent.

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 2018, the Company granted 27,949 shares of restricted stock that vest annually over a three-year period beginning October 15, 2018. In fiscal 2017, the Company granted 22,591 shares of restricted stock that vest annually over a three-year period beginning in October 2017. In fiscal 2017, the Company also granted 6,143 shares of restricted stock that vest annually over a three-year period beginning May 8, 2018. In fiscal 2016, the Company granted 41,909 shares of restricted stock that vest annually over a three-year period beginning in October 2016. There is approximately $612,964 of deferred compensation related to unvested restricted stock shares that is expected to be recognized over the weighted average period of two years.

The following table summarizes the restricted stock activity under the stock award and incentive plans 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, 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		—
Granted	28,734			$35.79		—
Vested	(38,752	)		$28.92		$	1,344
Cancelled/forfeited	(11,899	)		$31.56		—
Non-vested and outstanding at September 30, 2017	51,154			$32.40		—
Granted	27,949			$45.00
Vested	(33,815	)		$31.23		$	1,438
Cancelled/forfeited	(1,120	)		$33.54
Non-vested and outstanding at September 30, 2018	44,168			$41.24		—

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 stock award and incentive plans 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, 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		—
Granted/Vested	63,977			$35.64		—
Delivered	(53,878	)		$23.11		$	1,774
Outstanding at September 30, 2017	672,578			$29.54		—
Granted/Vested	24,167			$45.00
Delivered	(452,694	)		$29.42		$	19,581
Forfeited	(1,969	)		$35.56
Outstanding at September 30, 2018	242,082			$32.99		—

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:



	2018		2017	2016
Shares granted	26,524	⁽¹⁾	27,972	27,481
Weighted average grant date fair value	$39.85		$35.59	$32.75


(1)	$264,000 of expense remains as of September 30, 2018, to be recognized through December 31, 2018.