Unit-Based Compensation

Long-Term Incentive Plan

On March 15, 2006, the LTIP for Legacy was implemented for its employees, consultants and directors, its affiliates and its general partner. On June 12, 2015, the unitholders of Legacy approved an amendment to the LTIP to provide for an increase in the number of units available for issuance from 2,000,000 to 5,000,000. The awards under the LTIP may include unit grants, restricted units, phantom units, unit options and unit appreciation rights ("UARs"). As of June 30, 2015, grants of awards net of forfeitures and, in the case of phantom units, historical exercises covering 2,180,140 units had been made, comprised of 266,014 unit option awards, 855,534 restricted unit awards, 862,064 phantom unit awards and 196,528 unit awards. The UAR awards granted under the LTIP may only be settled in cash, and therefore are not included in the aggregate number of units granted under the LTIP. The LTIP is administered by the compensation committee (the “Compensation Committee”) of the board of directors of LRGPLLC.

The cost of employee services in exchange for an award of equity instruments is measured based on a grant-date fair value of the award (with limited exceptions), and that cost must generally be recognized over the vesting period of the award. However, if an entity that nominally has the choice of settling awards by issuing stock predominately settles in cash, or if an entity usually settles in cash whenever an employee asks for cash settlement, the entity is settling a substantive liability rather than repurchasing an equity instrument. Due to Legacy’s historical practice of settling options and UARs in cash, Legacy accounts for unit options and UARs by utilizing the liability method. The liability method requires companies to measure the cost of the employee services in exchange for a cash award based on the fair value of the underlying security at the end of each reporting period. Compensation cost is recognized based on the change in the liability between periods.

Unit Appreciation Rights and Unit Options

A UAR is a notional unit that entitles the holder, upon vesting, to receive cash valued at the difference between the closing price of units on the exercise date and the exercise price, as determined on the date of grant. Because these awards are settled in cash, Legacy is accounting for the UARs by utilizing the liability method.

During the year ended December 31, 2014, Legacy issued 136,100 UARs to employees which vest ratably over a three-year period and 105,174 UARs to employees which vest at the end of a three-year period. During the six-month period ended June 30, 2015, Legacy issued 21,500 UARs to employees which vest ratably over a three-year period. All UARs granted in 2014 and 2015 expire seven years from the grant date and are exercisable when they vest.

For the six-month periods ended June 30, 2015 and 2014, Legacy recorded $16,359 and $256,674, respectively, of compensation expense due to the change in liability from December 31, 2014 and 2013, respectively, based on its use of the Black-Scholes model to estimate the June 30, 2015 and 2014 fair value of these UARs (see Note 6). As of June 30, 2015, there was a total of approximately $16,867 of unrecognized compensation costs related to the unexercised and non-vested portion of these UARs. At June 30, 2015, this cost was expected to be recognized over a weighted-average period of approximately 2.24 years. Compensation expense is based upon the fair value as of June 30, 2015 and is recognized as a percentage of the service period satisfied. Based on historical data, Legacy has assumed a volatility factor of approximately 41% and employed the Black-Scholes model to estimate the June 30, 2015 fair value to be realized as compensation cost based on the percentage of service period satisfied. Based on historical data, Legacy has assumed an estimated forfeiture rate of 4.7%. Legacy will adjust the estimated forfeiture rate based upon actual experience. Legacy has assumed an annual distribution rate of $1.40 per unit.

A summary of UAR and unit option activity for the six months ended June 30, 2015 is as follows:



	Units		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2015	671,229		$	26.97
Granted	21,500		11.12
Forfeited	(9,300	)	24.42
Outstanding at June 30, 2015	683,429		$	26.51	4.7	$	—

Options and UARs exercisable at June 30, 2015	272,719		$	25.80	3.4	$	—

The following table summarizes the status of Legacy’s non-vested UARs since January 1, 2015:



	Non-Vested UARs
	Number of Units		Weighted-Average Exercise Price
Non-vested at January 1, 2015	451,173		$	27.69
Granted	21,500		11.12
Vested	(52,663	)	27.04
Forfeited	(9,300	)	24.42
Non-vested at June 30, 2015	410,710		$	26.98

Legacy has used a weighted-average risk-free interest rate of 1.5% in its Black-Scholes calculation of fair value, which approximates the U.S. Treasury interest rates at June 30, 2015 whose terms are consistent with the expected life of the UARs and unit options. Expected life represents the period of time that UARs and unit options are expected to be outstanding and is based on Legacy’s best estimate. The following table represents the weighted-average assumptions used for the Black-Scholes option-pricing model.



	Six Months Ended
	June 30, 2015
Expected life (years)	4.71
Risk free interest rate	1.5	%
Annual distribution rate per unit	$1.40
Volatility	41	%

Phantom Units

Legacy has also issued phantom units under the LTIP to both executive officers, as described below, and certain other employees. A phantom unit is a notional unit that entitles the holder, upon vesting, to receive one Partnership unit for each phantom unit. Legacy is accounting for these phantom units by utilizing the equity method.

On September 21, 2009, the board of directors of LRGPLLC, upon the recommendation of the Compensation Committee, implemented an equity-based incentive compensation policy applicable to the executive officers of Legacy. In addition to cash bonus awards, under the compensation plan, the executives are eligible for both subjective and objective grants of phantom units. The subjective, or service-based, grants may be awarded up to a maximum percentage of annual salary as determined by the Compensation Committee. Once granted, these phantom units vest ratably over a three-year period. The objective, or performance-based, grants may be awarded up to a maximum percentage of annual salary as determined by the Compensation Committee. However, the amount to vest each year for the three-year vesting period will be determined on each vesting date based on a three-step process, with the first two steps each comprising 50% of the total vesting amount while the third step is the sum of the first two steps. The first step in the process will be a function of Total Unitholder Return (“TUR”) for the Partnership and the percentage rank of the Legacy TUR among a peer group of upstream master limited partnerships, as determined by the Compensation Committee at the beginning of each year. In the second step, the Legacy TUR will be compared to the TUR of a group of master limited partnerships included in the Alerian MLP Index. The third step is the addition of the above two steps to determine the total performance-based awards to vest. On March 7, 2013, the board of directors of LRGPLLC, upon the recommendation of the Compensation Committee, approved a revised compensation policy (the “Revised Policy”). This Revised Policy applies to incentive awards granted after the fiscal year ended 2013. While the Revised Policy measures TUR against both the peer group and Alerian MLP Index, the measurement periods were increased to a three-year cumulative measurement period with a corresponding increase in vesting from a ratable three-year vesting to three-year cliff vesting. Performance based phantom units subject to vesting which do not vest in a given year will be forfeited. With respect to both the subjective and objective units awarded under both compensation policies, distribution equivalent rights ("DERs") will accumulate and accrue based on the total number of actual amounts vested and will be payable at the date of vesting. However, due to the aforementioned revision for executive employees, accrued DERs paid at the date of vesting will be treated as distributions in the period paid rather than being recognized as compensation expense over the life of the award.

On March 4, 2014, the Compensation Committee approved the award of 117,197 subjective, or service-based, phantom units and 102,572 objective, or performance based, phantom units to Legacy’s executive officers. On February 24, 2015, the Compensation Committee approved the award of 341,251 subjective, or service-based, phantom units and 259,998 objective, or performance based, phantom units to Legacy’s executive officers.

Compensation expense related to the phantom units and associated DERs was $1.4 million and $1.0 million for the six months ended June 30, 2015 and 2014, respectively.

Restricted Units

During the year ended December 31, 2014, Legacy issued an aggregate of 127,845 restricted units to non-executive employees. These restricted units awarded typically vest ratably over a three-year period all beginning on or around the date of grant. During the six-month period ended June 30, 2015, Legacy issued an aggregate of 326,160 restricted units to both non-executive employees and an executive employee. The restricted units awarded to non-executive employees vest ratably over a three-year period. The restricted units granted to the executive employee vest ratably over a three-year period for a portion of the restricted units, with the remainder vesting in full at the end of a five-year period. Compensation expense related to restricted units was $1.2 million and $1.1 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was a total of $6.1 million of unrecognized compensation expense related to the unvested portion of these restricted units. At June 30, 2015, this cost was expected to be recognized over a weighted-average period of 2.6 years. Pursuant to the provisions of ASC 718, Legacy’s issued units, as reflected in the accompanying consolidated balance sheet at June 30, 2015, do not include 508,830 units related to unvested restricted unit awards.

Board Units

On May 15, 2014, Legacy granted and issued 3,628 units to each of its five non-employee directors. The value of each unit was $27.50 at the time of issuance. On June 15, 2015, Legacy granted and issued 11,025 units to each of its six non-employee directors. The value of each unit was $9.13 at the time of issuance.