(12) STOCK-BASED COMPENSATION

The Southwestern Energy Company 2013 Incentive Plan was adopted in February 2013, approved by stockholders in May 2013 and amended and restated per stockholders’ approval in May 2016 and further amended in May 2017 (the “2013 Plan”). 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 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 52,700,000 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.

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. 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 under the 2013 Plan immediately vest upon death, disability or retirement (subject to a minimum of three years of service).

In January 2016, the Company announced a 40% workforce reduction that was substantially concluded by the end of March 2016. In April 2016, the Company also partially restructured executive management, which was substantially completed in the second quarter of 2016. Affected employees were offered a severance package that included, if applicable, amendments to certain outstanding equity awards that modified forfeiture provisions upon separation from the Company. As a result, certain unvested stock-based equity awards became fully vested at the time of separation. These shares were revalued and recognized immediately as a component of restructuring charges on the Company’s consolidated statement of operations. The unvested portion of equity-based performance units was forfeited upon separation from the Company.

Stock Options

The Company recorded the following compensation costs related to stock options for the years ended December 31, 2017, 2016 and 2015:


(in millions)	2017		2016		2015
Stock options – general and administrative expense (1)	$	3	$	6	$	5
Stock options – general and administrative expense capitalized	$	1	$	1	$	3

(1)

Includes less than $1 million related to the reduction in workforce and $1 million related to executive management restructuring for the year ended December 31, 2016.

The Company also recorded a deferred tax asset of $1 million, $2 million and $2 million related to stock options in 2017, 2016 and 2015, respectively. Unrecognized compensation cost related to the Company’s unvested stock options totaled $4 million at December 31, 2017. 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 the 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	2017	2016	2015
Risk-free interest rate	1.9%	1.4%	1.7%
Expected dividend yield	–	–	–
Expected volatility	50.5%	41.0%	36.0%
Expected term	5 years	5 years	5 years

The following tables summarize stock option activity for the years 2017, 2016 and 2015, and provide information for options outstanding at December 31 of each year:


	2017			2016			2015
		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	5,416	$	23.46	5,623	$	24.57	3,622	$	35.41
Granted (1)	1,604		8.00	155		8.60	2,401		9.47
Exercised	−		−	(45)		7.74	–		–
Forfeited or expired	(1,000)		22.93	(317)		38.01	(400)		32.20
Options outstanding at December 31	6,020	$	19.43	5,416	$	23.46	5,623	$	24.57

(1)

Shares granted in 2016 are considerably lower than historical norms. In 2016, the Company changed the grant date of its annual stock option awards from December to the following February.


	Options Outstanding				Options Exercisable
				Weighted				Weighted
	Options	Weighted		Average	Options	Weighted		Average
	Outstanding at	Average		Remaining	Exercisable at	Average		Remaining
Range of	December 31,	Exercise		Contractual	December 31,	Exercise		Contractual
Exercise Prices	2017	Price		Life	2017	Price		Life
	(in thousands)			(years)	(in thousands)			(years)
$5.22-$29.42	3,614		8.85	5.4	1,487		9.52	4.8
$30.59-$35.91	1,252		32.35	2.9	1,252		32.35	2.9
$36.22-$39.68	1,046		37.77	1.8	1,046		37.77	1.8
$40.15-$51.47	108		45.92	2.9	108		45.92	2.9
	6,020	$	19.43	4.2	3,893	$	25.46	3.3

The weighted-average grant date fair value of options granted during the years 2017, 2016 and 2015 was $3.47, $3.22 and $3.16, respectively. There were no options exercised in 2017. The total intrinsic value of options exercised during 2016 was less than $1 million. There were no options exercised in 2015.

Restricted Stock

The Company recorded the following compensation costs related to restricted stock grants for the years ended December 31, 2017, 2016 and 2015:


(in millions)	2017		2016		2015
Restricted stock grants – general and administrative expense (1)	$	16	$	33	$	14
Restricted stock grants – general and administrative expense capitalized	$	11	$	8	$	16

(1)

Includes $16 million related to the reduction in workforce and $1 million related to executive management restructuring for the year ended December 31, 2016.

The Company also recorded a deferred tax asset of $9 million related to restricted stock for the year ended December 31, 2017, compared to a deferred tax assets of $12 million and $11 million for 2016 and 2015, respectively. As of December 31, 2017, there was $45 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 years.

The following table summarizes the restricted stock activity for the years 2017, 2016 and 2015, and provides information for restricted stock outstanding at December 31 of each year:


	2017			2016			2015
	Number of Shares		Weighted Average Fair Value	Number of Shares		Weighted Average Fair Value	Number of Shares		Weighted Average Fair Value
	(in thousands)			(in thousands)			(in thousands)
Unvested shares at January 1	3,321	$	11.85	7,222	$	13.24	2,376	$	34.00
Granted (1)	5,055		8.38	81		8.56	5,822		8.07
Vested (2)	(1,380)		13.28	(3,817)		11.34	(873)		33.33
Forfeited	(742)		10.04	(165)		12.05	(103)		29.14
Unvested shares at December 31	6,254	$	8.85	3,321	$	11.85	7,222	$	13.24

(1)

Shares granted in 2016 were considerably lower than historical norms. In 2016, the Company changed the grant date of its annual restricted stock awards from December to the following February.

(2)

Includes 2,059,626 shares and 151,575 shares related to reduction in workforce and executive management restructuring, respectively, for the year ended December 31, 2016.

The fair values of the grants were $42 million for 2017, $1 million for 2016 and $47 million for 2015. The total fair value of shares vested were $18 million for 2017, $43 million for 2016 and $29 million for 2015.

Equity-Classified Performance Units

The Company recorded compensation costs related to equity-classified performance units for the years ended December 31, 2017, 2016 and 2015. The performance units awarded in 2017, 2016 and 2015 included a market condition based on relative Total Shareholder Return (“TSR”). The grant date fair value is calculated using the closing price of the Company’s common stock at the grant date and a Monte Carlo model to estimate the TSR market condition. The estimated fair value is amortized to compensation expense on a straight-line basis over the vesting period of the award.


(in millions)	2017		2016		2015
Performance units – general and administrative expense (1)	$	5	$	9	$	6
Performance units – general and administrative expense capitalized	$	2	$	1	$	4

(1)

Includes less than $1 million related to reduction in workforce and $1 million related to executive management restructuring for the year ended December 31, 2016.

The Company also recorded a deferred tax asset of $3 million related to equity-based performance units for the year ended December 31, 2017, compared to deferred tax assets of $4 million and $4 million in 2016 and 2015, respectively. As of December 31, 2017, there was $8 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 2 years.

The following table summarizes performance unit activity to be paid out in Company stock for the years ended December 31, 2017, 2016 and 2015, and provides information for unvested units as of December 31, 2017, 2016 and 2015:


	2017			2016			2015
	Number of Units (1)	Weighted Average Fair Value		Number of Units (1)	Weighted Average Fair Value		Number of Units (1)	Weighted Average Fair Value
	(in thousands)			(in thousands)			(in thousands)
Unvested shares at January 1	719	$	11.46	407	$	36.65	223	$	40.44
Granted	1,197		10.47	1,503		8.60	443		35.22
Vested (2)	(325)		12.21	(889)		12.78	(259)		37.46
Forfeited (3)	(507)		9.53	(302)		11.26	–		–
Unvested shares at December 31	1,084	$	10.12	719	$	11.46	407	$	36.65

(1) These amounts reflect the number of performance units granted in thousands. The actual payout in shares may range from a minimum of zero shares to a maximum of two shares contingent upon the actual performance against the Performance Measures. The performance units have a three-year vesting term and the actual disbursement of shares, if any, is not determined until March following the end of the three-year vesting period.

(2) Includes 22,918 units and 37,590 units related to the reduction in workforce and executive management restructuring, respectively, for the year ended December 31, 2016.

(3) Includes 87,595 units and 195,834 units related to the reduction in workforce and executive management restructuring, respectively, for the year ended December 31, 2016.

Liability-Classified Performance Units

Prior to 2013, certain employees were provided performance units vesting equally over three years that were settled in cash. The payout of these units was based on certain metrics, such as total shareholder return and reserve replacement efficiency, compared to a predetermined group of peer companies and Company goals. At the end of each performance period, the value of the vested performance units, if any, would be paid in cash. In the first quarter of 2016, the Company completed the final payout under these performance unit agreements.