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.

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, 2016. 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, 2016, there were 173,279 shares available for issuance under any type of award and 250,000 shares available for option grants. This assumes 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, 2016 or 2015. 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. Forfeitures are recognized as they occur.

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 thousands	Shares⁽¹⁾	Expense During Award Year⁽²⁾		Total Expense for Award
Estimated award:
2014-2016 grant⁽³⁾	27,887	$	168	$	1,418
Actual award:
2013-2015 grant	8,914	312		1,240
2012-2014 grant	8,621	582		1,821


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


⁽³⁾	This represents the estimated number of shares to be awarded as of December 31, 2016 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 2017.

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		2016		Cumulative Expense
Performance Period	Target	Maximum	Expense		December 31, 2016
2014-16	39,725	79,450	$	168	$	1,418
2015-17	36,200	72,400	662		1,515
2016-18	27,950	55,900	478		478
Total	103,875	207,750	$	1,308

Performance share awards are based on EPS and Return on Invested Capital (ROIC) factors, a 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). Compensation expense is recognized in accordance with accounting standards 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, 2016 and 2015 was $50.83 and $49.09 per share, respectively. The weighted-average grant date fair value of shares vested during the year was $51.80 per share and for shares granted during the year was $50.15 per share. As of December 31, 2016, there was $2.2 million of unrecognized compensation expense related to the unvested portion of performance awards expected to be recognized through 2018.

Restricted Stock Units

In 2012, the Company began granting RSUs under the LTIP instead of stock options under the Restated SOP. Generally, the RSUs awarded are forfeitable and include a performance-based threshold as well as a vesting period of 4 years from the grant date. Upon vesting, the RSU holder is issued 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. The fair value of an RSU is equal to the closing market price of the Company's common stock on the grant date. During 2016, total RSU expense was $1.5 million compared to $1.3 million in 2015 and $0.9 million in 2014. As of December 31, 2016, there was $2.9 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized over a period extending through 2022.

Information regarding the RSU activity is summarized as follows:



	Number of RSUs		Weighted - Average Price Per RSU
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
Granted	37,264		46.29
Vested	(19,003	)	44.81
Forfeited	(468	)	44.99
Nonvested, December 31, 2015	88,587		44.78
Granted	40,271		54.36
Vested	(29,488	)	45.56
Forfeited	(9,397	)	44.59
Nonvested, December 31, 2016	89,973		48.85

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, however, no option grants have been awarded since 2012.

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 of 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, 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
Exercised	(62,900	)	39.96		0.5
Forfeited	(500	)	45.74		n/a
Balance outstanding, December 31, 2015	352,688		44.00		2.3
Exercised	(172,525	)	43.61		2.0
Forfeited	—		n/a		n/a
Balance outstanding and exercisable, December 31, 2016	180,163		44.38		2.8

During 2016, cash of $7.5 million was received for stock options exercised and $0.4 million related tax expense was recognized. All stock options were vested as of December 31, 2015. During 2015, the total fair value of options that vested was $0.2 million. The weighted average remaining life of options exercisable and outstanding at December 31, 2016 was 3.06 years.

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 $21,248 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	2016			2015			2014
Operations and maintenance expense, for stock-based compensation	$	2,370		$	2,673		$	2,309
Income tax benefit	(924		)	(1,012		)	(861		)
Net stock-based compensation effect on net income	$	1,446		$	1,661		$	1,448
Amounts capitalized for stock-based compensation	$	554		$	661		$	597