Long-Term Incentive Compensation / Retirement 401(k) Plan	12 Months Ended
Dec. 31, 2013
Long-Term Incentive Compensation / Retirement 401(k) Plan
Long-Term Incentive Compensation / Retirement 401(k) Plan	9. Long-Term Incentive Compensation / Retirement 401(k) Plan Long Term Incentive Compensation Programs. Upon the closing of the Acquisition, we adopted new long term incentive (LTI) programs, including an annual performance-based cash incentive payment program and certain long-term equity based programs. For accounting and financial reporting purposes, we record the compensation expense related to these awards issued to our employees. Each of these awards is further discussed below: · Cash-Based Long Term Incentive. In 2012 and 2013, we provided long term cash-based incentives to certain of our employees linking annual performance-based cash incentive payments to the financial performance of the company as approved by the Compensation Committee of the board of directors of our parent, EPE Acquisition, LLC, and the employee’s individual performance for the year. These cash-based LTI awards have a three-year vesting schedule (50% vesting at the end of the first year, and 25% vesting at the end of each of the succeeding two years). These performance based cash incentive awards were treated as liability awards. Cash-based LTI awards granted during 2013 and 2012 had a fair value of $22 million and $24 million on each respective grant date that will be amortized primarily on an accelerated basis over a three-year vesting period. For the year ended December 31, 2013 and for the period from March 23 (inception) to December 31, 2012, we recorded approximately $16 million and $8 million, respectively, in expense related to these awards. As of December 31, 2013, we had unrecognized compensation expense of $12 million related to these awards of which approximately $9 million will be recognized in 2014 and the remainder on an accelerated basis over the remaining requisite service period. · Long Term Equity Incentive Awards. We have provided certain individuals with long term equity incentive awards as follows: · Class A “Matching” Grants. In conjunction with the Acquisition, certain of our employees purchased Class A units. In connection with their purchase of these units, these employees were awarded (i) “matching” Class A unit grants in an amount equal to 50% of the Class A units purchased subject to repurchase by the company in the event of certain termination scenarios and (ii) a “guaranteed cash bonus” which was treated as a liability award and was paid in March 2013 equivalent to the amount of the “matching” Class A unit grant. For accounting purposes, we treated the “matching” Class A unit grants as compensatory equity awards. These awards had a combined fair value of approximately $24 million on the grant date. For the “guaranteed cash bonus”, we recognized the fair value as compensation cost over the period from the date of grant (May 24, 2012) through the cash payout date in March 2013. For the “matching” Class A unit grant, we recognize the fair value as compensation cost ratably over the four year period from the date of grant through the period over which the requisite service is provided and the time period at which certain transferability restrictions are removed. For the year ended December 31, 2013 and the period from March 23 (inception) to December 31, 2012, we recognized approximately $6 million and $11 million, respectively, as compensation expense related to both of these awards. As of December 31, 2013, we had unrecognized compensation expense of $7 million related to the “matching” Class A unit grants, of which we will recognize $3 million in 2014 and the remainder ratably thereafter as noted above. · Management Incentive Units. In addition to the Class A “matching” awards described above, certain employees were awarded Management Incentive Units (MIPs). These MIPs are intended to constitute profits interests. Each award of MIPs represents a share in any future appreciation of the company after the date of grant, subject to certain limitations, and once certain shareholder returns have been achieved. The MIPs vest ratably over 5 years subject to certain forfeiture provisions based on continued employment with the company, although 25% of any vested awards are forfeitable in the event of certain termination events. The MIPs become payable based on the achievement of certain predetermined performance measures, including, without limitation, the occurrence of certain specified capital transactions. The MIPs were issued at no cost to the employees and have value only to the extent the value of the company increases. For accounting purposes, these profits interests were treated as compensatory equity awards. On May 24, 2012, the grant date fair value of this award was determined using a non-controlling, non-marketable option pricing model which valued these management incentive units assuming a 0.77 % risk free rate, a 5 year time to expiration, and a 73 percent volatility rate. Based on these factors, we determined a grant date fair value of $74 million. For the year ended December 31, 2013 and the period from March 23 (inception) to December 31, 2012, we recognized approximately $19 million and $15 million, respectively, of compensation expense related to these awards. As of December 31, 2013, we had unrecognized compensation expense of $40 million. Of this amount, $21 million of the unrecognized compensation expense, net of forfeitures, will continue to be recognized on an accelerated basis for each tranche of the award, over the remainder of the five year requisite service period. The remaining $19 million will be recognized upon a specified capital transaction when the right to such amounts become nonforfeitable. · Other. On September 18, 2013, EP Energy Corporation, our ultimate parent, issued additional shares of Class B common stock to EPE Employee Holdings II, LLC (EPE Holdings II). EPE Holdings II was formed to hold such shares and serve as an entity through which current and future employee incentive awards will be granted. Holders of the awards will not hold actual Class B common stock or equity in EPE Holdings II, but rather will have a right to receive proceeds paid to EPE Holdings II in respect of such shares which is conditional upon certain events (e.g. certain liquidity events in which our Sponsors receive a return of at least one times their invested capital plus a stated return) that are not yet probable of occurring. As a result, no compensation expense was recognized upon the issuance of the Class B shares to EPE Holdings II, and none will occur until those events that give rise to a payout on such shares becomes probable of occurring. At that time, the full value of the awards issued to EPE Holdings II will be recognized based on actual amounts paid on the Class B common stock. Retirement 401(k) Plan. We sponsor a tax-qualified defined contribution retirement plan for a broad-based group of employees. We make matching contributions (dollar for dollar up to 6% of eligible compensation) and non-elective employer contributions (5% of eligible compensation) to the plan, and individual employees are also eligible to contribute to the defined contribution plan. During 2013 and after the Acquisition in 2012, we had contributed $12 million and $7 million, respectively, of matching and non-elective employer contributions.

9. Long-Term Incentive Compensation / Retirement 401(k) Plan

Long Term Incentive Compensation Programs. Upon the closing of the Acquisition, we adopted new long term incentive (LTI) programs, including an annual performance-based cash incentive payment program and certain long-term equity based programs. For accounting and financial reporting purposes, we record the compensation expense related to these awards issued to our employees. Each of these awards is further discussed below:

· Cash-Based Long Term Incentive. In 2012 and 2013, we provided long term cash-based incentives to certain of our employees linking annual performance-based cash incentive payments to the financial performance of the company as approved by the Compensation Committee of the board of directors of our parent, EPE Acquisition, LLC, and the employee’s individual performance for the year. These cash-based LTI awards have a three-year vesting schedule (50% vesting at the end of the first year, and 25% vesting at the end of each of the succeeding two years). These performance based cash incentive awards were treated as liability awards. Cash-based LTI awards granted during 2013 and 2012 had a fair value of $22 million and $24 million on each respective grant date that will be amortized primarily on an accelerated basis over a three-year vesting period. For the year ended December 31, 2013 and for the period from March 23 (inception) to December 31, 2012, we recorded approximately $16 million and $8 million, respectively, in expense related to these awards. As of December 31, 2013, we had unrecognized compensation expense of $12 million related to these awards of which approximately $9 million will be recognized in 2014 and the remainder on an accelerated basis over the remaining requisite service period.

· Long Term Equity Incentive Awards. We have provided certain individuals with long term equity incentive awards as follows:

· Class A “Matching” Grants. In conjunction with the Acquisition, certain of our employees purchased Class A units. In connection with their purchase of these units, these employees were awarded (i) “matching” Class A unit grants in an amount equal to 50% of the Class A units purchased subject to repurchase by the company in the event of certain termination scenarios and (ii) a “guaranteed cash bonus” which was treated as a liability award and was paid in March 2013 equivalent to the amount of the “matching” Class A unit grant. For accounting purposes, we treated the “matching” Class A unit grants as compensatory equity awards. These awards had a combined fair value of approximately $24 million on the grant date. For the “guaranteed cash bonus”, we recognized the fair value as compensation cost over the period from the date of grant (May 24, 2012) through the cash payout date in March 2013. For the “matching” Class A unit grant, we recognize the fair value as compensation cost ratably over the four year period from the date of grant through the period over which the requisite service is provided and the time period at which certain transferability restrictions are removed. For the year ended December 31, 2013 and the period from March 23 (inception) to December 31, 2012, we recognized approximately $6 million and $11 million, respectively, as compensation expense related to both of these awards. As of December 31, 2013, we had unrecognized compensation expense of $7 million related to the “matching” Class A unit grants, of which we will recognize $3 million in 2014 and the remainder ratably thereafter as noted above.

· Management Incentive Units. In addition to the Class A “matching” awards described above, certain employees were awarded Management Incentive Units (MIPs). These MIPs are intended to constitute profits interests. Each award of MIPs represents a share in any future appreciation of the company after the date of grant, subject to certain limitations, and once certain shareholder returns have been achieved. The MIPs vest ratably over 5 years subject to certain forfeiture provisions based on continued employment with the company, although 25% of any vested awards are forfeitable in the event of certain termination events. The MIPs become payable based on the achievement of certain predetermined performance measures, including, without limitation, the occurrence of certain specified capital transactions. The MIPs were issued at no cost to the employees and have value only to the extent the value of the company increases. For accounting purposes, these profits interests were treated as compensatory equity awards. On May 24, 2012, the grant date fair value of this award was determined using a non-controlling, non-marketable option pricing model which valued these management incentive units assuming a 0.77 % risk free rate, a 5 year time to expiration, and a 73 percent volatility rate. Based on these factors, we determined a grant date fair value of $74 million. For the year ended December 31, 2013 and the period from March 23 (inception) to December 31, 2012, we recognized approximately $19 million and $15 million, respectively, of compensation expense related to these awards. As of December 31, 2013, we had unrecognized compensation expense of $40 million. Of this amount, $21 million of the unrecognized compensation expense, net of forfeitures, will continue to be recognized on an accelerated basis for each tranche of the award, over the remainder of the five year requisite service period. The remaining $19 million will be recognized upon a specified capital transaction when the right to such amounts become nonforfeitable.

· Other. On September 18, 2013, EP Energy Corporation, our ultimate parent, issued additional shares of Class B common stock to EPE Employee Holdings II, LLC (EPE Holdings II). EPE Holdings II was formed to hold such shares and serve as an entity through which current and future employee incentive awards will be granted. Holders of the awards will not hold actual Class B common stock or equity in EPE Holdings II, but rather will have a right to receive proceeds paid to EPE Holdings II in respect of such shares which is conditional upon certain events (e.g. certain liquidity events in which our Sponsors receive a return of at least one times their invested capital plus a stated return) that are not yet probable of occurring. As a result, no compensation expense was recognized upon the issuance of the Class B shares to EPE Holdings II, and none will occur until those events that give rise to a payout on such shares becomes probable of occurring. At that time, the full value of the awards issued to EPE Holdings II will be recognized based on actual amounts paid on the Class B common stock.

Retirement 401(k) Plan. We sponsor a tax-qualified defined contribution retirement plan for a broad-based group of employees. We make matching contributions (dollar for dollar up to 6% of eligible compensation) and non-elective employer contributions (5% of eligible compensation) to the plan, and individual employees are also eligible to contribute to the defined contribution plan. During 2013 and after the Acquisition in 2012, we had contributed $12 million and $7 million, respectively, of matching and non-elective employer contributions.