Stock-Based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]



(15) Stock-Based Compensation

We grant stock-based awards through our Amended and Restated Equity Compensation Plan (ECP), which includes restricted stock awards and performance share awards. As of December 31, 2019, there were 750,205 shares of common stock remaining available for grants. The remaining vesting period for awards previously granted ranges from one to five years if the service and/or performance requirements are met. Nonvested shares do not receive dividend distributions. The long-term incentive plan provides for accelerated vesting in the event of a change in control.

We account for our share-based compensation arrangements by recognizing compensation costs for all share-based awards over the respective service period for employee services received in exchange for an award of equity or equity-based compensation. The compensation cost is based on the fair value of the grant on the date it was awarded.

Performance Unit Awards

Performance unit awards are granted annually under the ECP. These awards vest at the end of the three-year performance period if we have achieved certain performance goals and the individual remains employed by us. The exact number of shares issued will vary from 0% to 200% of the target award, depending on actual company performance relative to the performance goals. These awards contain both market- and performance-based components. The performance goals are independent of each other and equally weighted, and are based on two metrics: (i) EPS growth level and average return on equity; and (ii) total shareholder return (TSR) relative to a peer group.

Fair value is determined for each component of the performance unit awards. The fair value of the earnings per share component is estimated based upon the closing market price of our common stock as of the date of grant less the present value of expected dividends, multiplied by an estimated performance multiple determined on the basis of historical experience, which is subsequently trued up at vesting based on actual performance. The fair value of the TSR portion is estimated using a statistical model that incorporates the probability of meeting performance targets based on historical returns relative to the peer group. The following summarizes the significant assumptions used to determine the fair value of performance shares and related compensation expense as well as the resulting estimated fair value of performance shares granted:



	2019		2018
Risk-free interest rate	2.47	%	2.30	%
Expected life, in years	3		3
Expected volatility	16.4% to 20.9%		16.5% to 21.9%
Dividend yield	3.5	%	4.2	%

The risk-free interest rate was based on the U.S. Treasury yield of a three-year bond at the time of grant. The expected term of the performance shares is three years based on the performance cycle. Expected volatility was based on the historical volatility for the peer group. Both performance goals are measured over the three-year vesting period and are charged to compensation expense over the vesting period based on the number of shares expected to vest.

A summary of nonvested shares as of and changes during the year ended December 31, 2019, are as follows:



	Performance Unit Awards
	Shares		Weighted-Average Grant-Date Fair Value
Beginning nonvested grants	197,703		$	47.99
Granted	73,366		60.41
Vested	(86,712	)	47.99
Forfeited	(6,112	)	51.12
Remaining nonvested grants	178,245		$	53.00

We recognized compensation expense of $6.5 million, $6.3 million, and $3.9 million for the years ended December 31, 2019, 2018, and 2017, respectively, and related income tax expense of $0.2 million, $0.3 million, and $0.4 million for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, we had $4.9 million of unrecognized compensation cost related to the nonvested portion of outstanding awards, which is reflected as nonvested stock as a portion of additional paid in capital in our Statements of Common Shareholders' Equity. The cost is expected to be recognized over a weighted-average period of 2 years. The total fair value of shares vested was $4.2 million, $4.2 million, and $3.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Retirement/Retention Restricted Share Awards

In December 2011, an executive retirement / retention program was established that provides for the annual grant of restricted share units. These awards are subject to a five-year performance and vesting period. The performance measure for these awards requires net income for the calendar year of at least three of the five full calendar years during the performance period to exceed net income for the calendar year the awards are granted. Once vested, the awards will be paid out in shares of common stock in five equal annual installments after a recipient has separated from service. The fair value of these awards is measured based upon the closing market price of our common stock as of the date of grant less the present value of expected dividends.

A summary of nonvested shares as of and changes during the year ended December 31, 2019, are as follows:



	Shares		Weighted-Average Grant-Date Fair Value
Beginning nonvested grants	73,391		$	48.19
Granted	13,425		60.73
Vested	(13,958	)	43.79
Forfeited	—		—
Remaining nonvested grants	72,858		$	51.35

Director's Deferred Compensation

Nonemployee directors may elect to defer up to 100% of any qualified compensation that would be otherwise payable to him or her, subject to compliance with our 2005 Deferred Compensation Plan for Nonemployee Directors and Section 409A of the Internal Revenue Code. The deferred compensation may be invested in NorthWestern stock or in designated investment funds. Compensation deferred in a particular month is recorded as a deferred stock unit (DSU) on the first of the following month based on the closing price of NorthWestern stock or the designated investment fund. The DSUs are marked-to-market on a quarterly basis with an adjustment to director’s compensation expense. Based on the election of the nonemployee director, following separation from service on the Board, other than on account of death, he or she shall be paid a distribution either in a lump sum or in approximately equal installments over a designated number of years (not to exceed 10 years). During the years ended December 31, 2019, 2018 and 2017, DSUs issued to members of our Board totaled 19,027, 29,870 and 54,920, respectively. During 2019, DSUs withdrawn by our Board totaled 3,708. Total compensation expense attributable to the DSUs during the years ended December 31, 2019, 2018 and 2017 was approximately $3.7 million, $1.9 million and $2.9 million, respectively. During 2019, DSUs of $0.3 million were withdrawn.