Incentive Compensation / 401(k) Retirement Plan

Overview. Under our current stock-based compensation plans (the EP Energy Corporation 2014 Omnibus Incentive Plan and 2017 EP Energy Corporation Employment Inducement Plan), we may issue to our employees and non-employee directors various forms of long-term incentive (“LTI”) compensation including stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares/units, incentive awards, cash awards, and other stock-based awards. We are authorized to grant awards of up to 36,832,525 shares of our common stock for awards under these plans, with 10,579,000 shares remaining available for issuance as of December 31, 2019.

In addition, in conjunction with the acquisition of certain of our subsidiaries by Apollo and other private equity investors in 2012 (the Acquisition), we issued Class B shares (formerly management incentive units intended to constitute profits interests) which become payable only on the achievement of certain predetermined performance measures as further described below. No additional Class B shares are available for issuance.

We record stock-based compensation expense as general and administrative expense over the requisite service period. For the years ended December 31, 2019 and 2018, we recognized pre-tax compensation expense related to our LTI programs, net of the impact of forfeitures of approximately $9 million and $14 million, respectively, and recorded an associated income tax benefit of $2 million and $4 million for the years 2019 and 2018, respectively.

Restricted stock. We grant shares of restricted common stock which carry voting and dividend rights and may not be sold or transferred until they are vested. The fair value of our restricted stock is determined on the date of grant and these shares generally vest in equal amounts over three years from the date of the grant. A summary of the changes in our non-vested restricted shares for the year ended December 31, 2019 is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value per Share
Non-vested at December 31, 2018	7,060,334		$	2.69
Granted	103,000		$	0.70
Vested	(2,648,390	)	$	3.22
Forfeited	(1,000,409	)	$	2.45
Non-vested at December 31, 2019	3,514,535		$	2.30

The total unrecognized compensation cost related to these arrangements at December 31, 2019 was approximately $6 million, which is expected to be recognized over a weighted average period of approximately two years.

Performance Share Units. As of December 31, 2019, we had 1,478,100 of outstanding performance share units (PSUs). The PSUs represent a contractual right to receive one share of EP Energy’s common stock if certain conditions are met, and the number of PSUs actually earned, if any, will be based upon achievement of specified stock price goals over a four-year performance period (grant date thru October 2021). For accounting purposes, the PSUs are treated as an equity award and will vest over a weighted average period of three years with expense recognized on an accelerated basis over the life of the award. Of the 1,478,100 PSU’s outstanding at December 31, 2019, 1,224,000 shares will remain subject to certain settlement and transfer restrictions from November 2021 through October 2024 unless certain conditions are satisfied.

The grant date fair value of the 2018 and 2017 awards was approximately $5 million and $12 million, respectively, as determined by a Monte Carlo simulation, utilizing multiple input variables that determine the probability of satisfying the market condition stipulated in the award. Volatility was based on life-to-date volatility of EP Energy’s common stock, which has been publicly traded for an amount of time less than the contractual term of the award. We estimated the risk free rate based on zero coupon U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) that have a term equal to the length of the period from the valuation date to the final vest date. The following table summarizes the significant assumptions used to calculate the grant date fair value of the PSUs:



	2018 Awards		2017 Awards
Expected Term in Years	4		6
Expected Volatility	89.62	%	100.03	%
Risk-Free Interest Rate	2.75	%	1.89	%

Total compensation cost related to our non-vested performance share units not yet recognized at December 31, 2019 was $6 million, which is expected to be recognized over a weighted average period of two years.

Key Employee Retention Program. On May 29, 2019, the Compensation Committee of the Board of Directors of the Company approved the implementation of a Key Employee Retention Program (a “KERP”) for all employees of the Company. KERP payments totaling approximately $21 million were made in July 2019 and were comprised of approximately $10 million in lieu of target bonus amounts for 2019 performance, which were already being accrued during the year, plus an incremental amount of approximately $11 million in lieu of long-term incentive compensation for 2019. KERP payments are subject to certain termination provisions through June 30, 2020 which would result in the repayment of the award in full.

As of December 31, 2019, our consolidated balance sheet reflects a deferred charge in the amount of approximately$10 million related to the KERP. For accounting purposes, deferred expense is being amortized over the 13-month term of the KERP agreement. During the year ended December 31, 2019, we recorded $10 million in expense related to the KERP.

Other. We have issued and/or granted, in prior periods, (i) Class B shares (including those issued to EPE Employee Holdings, II, LLC, a subsidiary), which payout only occurs on the achievement of certain predetermined performance measures (e.g., certain liquidity events in which our private equity investors receive a return of at least one times their invested capital plus a stated return), (ii) stock options at a strike price of $19.82 per share and (iii) total shareholder return (TSR) based performance units treated as liability awards. Due to both reductions in force affecting the holders of these awards and/or declines in stock price performance in recent years, these awards will not materially impact the company and as of December 31, 2019, we had (i) unrecognized compensation expense of $1 million related to Class B shares, which will only be recognized should the liquidity events described above occur and the right to such amounts become nonforfeitable and (ii) less than $1 million in unrecognized compensation cost for non-vested performance units, which is expected to be recognized over a weighted average period of less than one year.

401(k) Retirement 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 2019 and 2018, we contributed $5 million and $6 million, respectively, of matching and non-elective employer contributions.