(13) STOCK-BASED COMPENSATION

The Southwestern Energy Company 2013 Incentive Plan (2013 Plan) was adopted in February 2013 and approved by stockholders in May 2013. The 2013 Plan provides for the compensation of officers, key employees and eligible non-employee directors of the Company and its subsidiaries. The 2013 Plan replaced the Southwestern Energy Company 2004 Stock Incentive Plan, 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 2013 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 20,500,000 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 2013 Plan.

As initially adopted, the 2004 Plan, the 2000 Plan, and 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 16,800,000, 1,250,000, and 300,000 shares, respectively, 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 both the 2013 Plan and 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 6, 2013 immediately vest upon death, disability, or retirement (subject to a minimum of three years of service).

Stock Options

The Company recorded the following compensation costs related to stock options for the years ended December 31, 2014, 2013 and 2012:


	2014		2013		2012
		(in millions)
Stock-based compensation cost related to stock options – general and administrative expense	$	5	$	5	$	5
Stock-based compensation cost related to stock options – capitalized	$	4	$	5	$	4

The Company also recorded a deferred tax asset of $3 million related to stock options in 2014, compared to deferred tax benefits of $4 million in 2013 and $2 million in 2012. A total of $13 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 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	2014	2013	2012
Risk-free interest rate	1.6%	1.5%	0.6%
Expected dividend yield	–	–	–
Expected volatility	32.5%	38.6%	58.2%
Expected term	5 years	5 years	5 years

The following tables summarize stock option activity for the years 2014, 2013 and 2012 and provide information for options outstanding at December 31 of each year:


	2014			2013			2012
			Weighted			Weighted			Weighted
			Average			Average			Average
	Number		Exercise	Number		Exercise	Number		Exercise
	of Shares		Price	of Shares		Price	of Shares		Price
	(in thousands)			(in thousands)			(in thousands)
Options outstanding at January 1	3,313	$	35.70	3,650	$	29.84	4,743	$	21.24
Granted	835		32.31	571		38.95	613		34.34
Exercised	(402)		30.60	(833)		12.12	(1,608)		5.71
Forfeited or expired	(124)		37.80	(75)		37.31	(98)		37.76
Options outstanding at December 31	3,622	$	35.41	3,313	$	35.70	3,650	$	29.84


	Options Outstanding					Options Exercisable
				Weighted					Weighted
				Average					Average
	Options		Weighted	Remaining		Options		Weighted	Remaining
	Outstanding at		Average	Contractual		Exercisable at		Average	Contractual
Range of	December 31,		Exercise	Life		December 31,		Exercise	Life
Exercise Prices	2014		Price	(Years)		2014		Price	(Years)
	(in thousands)					(in thousands)
$27.09-$29.69	21		28.42	2.9		17		28.53	2.5
$30.23-$35.91	1,744		32.04	4.9		819		32.83	3.1
$36.22-$39.91	1,443		37.52	4.3		1,117		37.10	3.9
$40.15-$51.47	414		42.64	2.9		324		41.56	1.9
	3,622	$	35.41	4.4	$	2,277	$	36.13	3.3

The weighted-average grant-date fair value of options granted during the years 2014, 2013 and 2012 was $10.16, $13.39, and $16.91, respectively. The total intrinsic value of options exercised during 2014, 2013 and 2012 was $4 million, $22 million and $44 million, respectively.

Restricted Stock

The Company recorded the following compensation costs related to restricted stock grants for the years ended December 31, 2014, 2013 and 2012:


		2014		2013		2012
		(in millions)
Stock-based compensation cost related to restricted stock grants – general and administrative expense	$	10	$	7	$	6
Stock-based compensation cost related to restricted stock grants – capitalized	$	12	$	7	$	6

The Company also recorded a deferred tax liability of $10 million related to restricted stock for the year ended December 31, 2014, compared to deferred tax liabilities of $15 million for 2013 and $1 million for 2012. As of December 31, 2014, there was $75 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 3.1 years.

The following table summarizes the restricted stock activity for the years 2014, 2013 and 2012 and provides information for restricted stock outstanding at December 31 of each year:


	2014			2013			2012
			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
	(in thousands)			(in thousands)				(in thousands)
Unvested shares at January 1	1,771	$	37.55	1,118	$	35.64		1,020	$	36.71
Granted	1,295		30.89	1,109		38.92		537		34.39
Vested	(548)		37.12	(382)		36.29		(344)		36.50
Forfeited	(142)		37.91	(74)		35.81		(95)		36.97
Unvested shares at December 31	2,376	$	34.00	1,771	$	37.55		1,118	$	35.64

The fair values of the grants were $40 million for 2014, $43 million for 2013 and $19 million for 2012. The total fair value of shares vested were $20 million for 2014, $14 million for 2013 and $13 million for 2012.

Equity-Classified Performance Units

The Company recorded the following compensation costs related to equity-classified performance units for the years ended December 31, 2014. The performance units include a market condition based on Relative Total Shareholder Return (“TSR”) and a performance condition based on the Company’s Present Value Index (“PVI”). The fair value of the TSR market condition of the performance units is based on a Monte Carlo model and is amortized to compensation expense on a straight-line basis over the vesting period of the award. The fair value of the PVI performance condition of the performance units is based on the closing price of the Company’s common stock at the grant date and amortized to compensation expense on a straight line basis over the vesting period of the award.


		2014
		(millions)
Stock-based compensation cost related to performance units - general and administrative expense	$	3
Stock-based compensation cost related to performance units - capitalized	$	2

The Company also recorded a deferred tax asset of $2 million related to equity-based performance units for the year ended December 31, 2014, compared to no deferred tax recorded in 2013 and 2012. As of December 31, 2014, there was $24 million of total unrecognized compensation cost related to unvested equity-based performance units that is expected to be recognized over a weighted-average period of 3 years.

The following table summarizes performance unit activity to be paid out in Company stock for the twelve months ended December 31, 2014 and provides information for unvested units as of December 31, 2014:


	2014
			Weighted
			Average
	Number		Grant Date
	of Units (1)		Fair Value
Unvested shares at January 1	-	$	-
Granted	359		40.44
Vested	(111)		40.44
Forfeited	(25)		40.44
Unvested shares at December 31	223	$	40.44

(1) These amounts reflect the number of performance units granted in thousands. The actual payout of shares may range from a minimum of zero shares to a maximum of two shares contingent upon the actual performance against the Performance Measures.

Liability-Classified Performance Units

Certain employees were provided performance units vesting equally over three years. The payout of these units is based on certain metrics, such as total shareholder return and reserve replacement efficiency, compared to a predetermined group of peer companies and Company goal. At the end of each performance period, the value of the vested performance units, if any, is paid in cash. The Company paid $25 million related to the vested performance units in 2014, $3 million in 2013, and $19 million in 2012. As of December 31, 2014 and 2013, the Company’s liability under the performance unit agreements was $51 million and $45 million, respectively.