(12) STOCK-BASED COMPENSATION

The Southwestern Energy Company 2004 Stock Incentive Plan (2004 Plan) was adopted in February 2004 and approved by stockholders in May 2004. The 2004 Plan provides for the compensation of officers, key employees and eligible non-employee directors of the Company and its subsidiaries. The 2004 Plan replaced the Southwestern Energy Company 2000 Stock Incentive Plan (2000 Plan) and the Southwestern Energy Company 2002 Employee Stock Incentive Plan (2002 Plan) but did not affect prior awards under those plans which remained valid and some of which are still outstanding. The awards under the prior plans have been adjusted for stock splits as permitted under such plans.

The 2004 Plan provides for grants of options, stock appreciation rights, and shares of restricted stock and restricted stock units to employees, officers and directors that in the aggregate do not exceed 16,800,000 shares. The types of incentives that may be awarded are comprehensive and are intended to enable the Company’s board of directors to structure the most appropriate incentives and to address changes in income tax laws which may be enacted over the term of the 2004 Plan.

As initially adopted, the 2000 Plan provided for the grant of options, stock appreciation rights, shares of phantom stock, and shares of restricted stock to employees, officers and directors that in the aggregate did not exceed 1,250,000 shares of common stock. As initially adopted, the 2002 Plan provided for grants of options, stock appreciation rights, shares of phantom stock and shares of restricted stock that in the aggregate did not exceed 300,000 shares to employees who are not officers or directors of the Company under provisions of Section 16 of the Securities Exchange Act of 1934, as amended.

The Company may utilize treasury shares, if available, or authorized but unissued shares when a stock option is exercised or when restricted stock is granted.

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. All options are issued at fair market value at the date of grant and expire seven years from the date of grant for awards under the 2004 Plan and ten years from the date of grant for awards under all other plans. Generally, stock options granted to employees and directors vest ratably over three years from the grant date. The Company issues shares of restricted stock to employees and directors which generally vest over four years. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the individual grants with the exception of awards granted to participants who have reached retirement age or will reach retirement age during the vesting period. Restricted stock and stock options granted to participants on or after December 8, 2005 immediately vest upon death, disability or retirement (subject to a minimum of five years of service).

Stock Options

The Company recorded the following compensation costs related to stock options for the years ended December 31, 2012, 2011 and 2010:


	2012		2011		2010
		(in thousands)

Stock-based compensation cost related to stock options – general and administrative expense	$	5,427	$	4,959	$	4,706
Stock-based compensation cost related to stock options – capitalized	$	4,468	$	3,365	$	2,679

The Company also recorded a deferred tax benefit of $2.2 million related to stock options in 2012, compared to deferred tax benefits of $1.7 million in 2011 and $1.7 million in 2010. A total of $20.4 million of unrecognized compensation cost related to the Company’s unvested stock option and restricted stock grants. This cost is expected to be recognized over a weighted-average period of 2.9 years.

The fair value of stock options is estimated on the date of the grant using a Black-Scholes valuation model that uses the weighted average assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s common stock and other factors. The Company uses historical data on exercise of stock options, post vesting forfeitures and other factors to estimate the expected term of the stock-based payments granted. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.


Assumptions	2012	2011	2010
Risk-free interest rate	0.6%	0.9%	2.0%
Expected dividend yield	–	–	–
Expected volatility	58.2%	58.1%	60.1%
Expected term	5 years	5 years	5 years

The following tables summarize stock option activity for the years 2012, 2011 and 2010 and provide information for options outstanding at December 31 of such years:


	2012			2011			2010
			Weighted			Weighted			Weighted
			Average			Average			Average
	Number		Exercise	Number		Exercise	Number		Exercise
	of Shares		Price	of Shares		Price	of Shares		Price

Options outstanding at January 1	4,741,732	$	21.24	4,769,122	$	16.13	5,649,233	$	11.59
Granted	613,120		34.34	853,478		36.64	446,895		37.05
Exercised	(1,607,784)		5.71	(850,659)		7.54	(1,293,046)		3.01
Forfeited or expired	(97,548)		37.76	(30,209)		35.46	(33,960)		35.26
Options outstanding at December 31	3,649,520	$	29.84	4,741,732	$	21.24	4,769,122	$	16.13


	Options Outstanding						Options Exercisable
				Weighted							Weighted
				Average							Average
	Options		Weighted	Remaining		Aggregate		Options		Weighted	Remaining		Aggregate
	Outstanding at		Average	Contractual		Intrinsic		Exercisable at		Average	Contractual		Intrinsic
Range of	December 31,		Exercise	Life		Value		December 31,		Exercise	Life		Value
Exercise Prices	2012		Price	(Years)		(thousands)		2012		Price	(Years)		(thousands)

$1.43 - $3.10	465,772	$	2.64	0.9				465,772	$	2.64	0.9
$16.75 - $29.69	553,756		24.32	1.7				541,606		24.24	1.6
$30.23 - $35.91	1,175,749		33.04	5.2				505,485		31.30	3.1
$36.22 - $39.68	1,062,788		36.77	5.5				493,943		36.75	5.3
$40.15 - $51.47	391,455		41.60	4.0				365,732		41.49	3.9
	3,649,520	$	29.84	4.1	$	20,521		2,372,538	$	26.77	2.9	$	20,437

The weighted-average grant-date fair value of options granted during the years 2012, 2011 and 2010 was $16.91, $18.17 and $19.40, respectively. The total intrinsic value of options exercised during 2012, 2011 and 2010 was $44.1 million, $27.0 million and $41.4 million, respectively.

Restricted Stock

The Company recorded the following compensation costs related to restricted stock grants for the years ended December 31, 2012, 2011 and 2010:


		2012		2011		2010
		(in thousands)

Stock-based compensation cost related to restricted stock grants – general and administrative expense	$	6,368	$	5,591	$	5,114
Stock-based compensation cost related to restricted stock grants – capitalized	$	5,994	$	5,162	$	4,107

The Company also recorded a deferred tax liability of $1.4 million related to restricted stock for the year ended December 31, 2012, compared to deferred tax liabilities of $2.1 million for 2011 and $1.4 million for 2010. As of December 31, 2012, there was $32.0 million of total unrecognized compensation cost related to unvested shares of restricted stock that is expected to be recognized over a weighted-average period of 3.2 years.

The following table summarizes the restricted stock activity for the years 2012, 2011 and 2010 and provides information for restricted stock outstanding at December 31 of such years:


	2012			2011			2010
			Weighted			Weighted			Weighted
			Average			Average			Average
	Number		Grant Date	Number		Grant Date	Number		Grant Date
	of Shares		Fair Value	of Shares		Fair Value	of Shares		Fair Value

Unvested shares at January 1	1,019,737	$	36.71	834,058	$	36.24	794,529	$	33.70
Granted	537,244		34.39	532,754		36.41	390,415		36.46
Vested	(344,164)		36.50	(294,358)		34.90	(319,894)		30.45
Forfeited	(95,302)		36.97	(52,717)		36.45	(30,992)		33.54
Unvested shares at December 31	1,117,515	$	35.64	1,019,737	$	36.71	834,058	$	36.24

The fair values of the grants were $18.5 million for 2012, $19.4 million for 2011 and $14.2 million for 2010. The total fair value of shares vested were $12.6 million for 2012, $10.9 million for 2011 and $9.7 million for 2010.