(13) 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’s stock-based compensation is classified as either equity or liability awards in accordance with generally accepted accounting principles. The fair value of an equity-classified award is determined at the grant date and is amortized to general and administrative expense on a straight-line basis over the vesting period of the award. The fair value of a liability-classified award is determined on a quarterly basis beginning at the grant date until final vesting. Changes in the fair value of liability-classified awards are recorded to general and administrative expense over the vesting period of the award. A portion of this general and administrative expense is capitalized into natural gas and oil properties, included in property and equipment. Generally, stock options granted to employees and directors vest ratably over three years from the grant date and expire seven years from the date of grant. The Company issues shares of restricted stock or restricted stock units to employees and directors which generally vest over four years. Restricted stock, restricted stock units 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 June 2018, the Company announced a workforce reduction. Unvested stock-based awards of the affected employees were subsequently cancelled and the approximate fair value of a portion of those cancelled awards was included in a cash severance payment that was paid in the third quarter of 2018. Stock-based compensation costs recognized prior to the cancellation as either general and administrative expense or capitalized expense were reversed and the severance payments were subsequently recognized as restructuring charges for the year ended December 31, 2018 on the consolidated statements of operations.

In December 2018, the Company closed on the sale of the equity in certain of its subsidiaries that owned and operated its Fayetteville Shale E&P and related midstream gathering assets in Arkansas. As part of this transaction, most employees associated with those assets became employees of the buyer although the employment of some was or will be terminated. All affected employees were offered a severance package, which included a one-time cash payment depending on length of service and, if applicable, the current value of a portion of equity awards that were forfeited. Stock-based compensation costs recognized prior to the cancellation as either general and administrative expense or capitalized expense were reversed and the severance payments were subsequently recognized as restructuring charges for the year ended December 31, 2018 on the consolidated statements of operations.

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 cancelled upon separation from the Company.

Equity-Classified Awards

Equity-Classified Stock Options

The Company recorded the following compensation costs related to stock options for the years ended December 31, 2018, 2017 and 2016:


(in millions)	2018		2017		2016
Stock options – general and administrative expense (1)	$	2	$	3	$	6
Stock options – general and administrative expense capitalized	$	–	$	1	$	1

(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 less than $1 million, $1 million and $2 million related to stock options in 2018, 2017 and 2016, respectively. Unrecognized compensation cost related to the Company’s unvested stock options totaled $1 million at December 31, 2018. This cost is expected to be recognized over a weighted-average period of one year.

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. The Company did not issue equity-classified stock options in 2018.


Assumptions	2018	2017	2016
Risk-free interest rate	–	1.9%	1.4%
Expected dividend yield	–	–	–
Expected volatility	–	50.5%	41.0%
Expected term	–	5 years	5 years

The following tables summarize stock option activity for the years 2018, 2017 and 2016, and provide information for options outstanding at December 31 of each year:


	2018			2017			2016
		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	6,020	$	19.43	5,416	$	23.46	5,623	$	24.57
Granted (1)	–	$	–	1,604	$	8.00	155	$	8.60
Exercised	–	$	–	–	$	–	(45)	$	7.74
Forfeited or expired	(842)	$	33.99	(1,000)	$	22.93	(317)	$	38.01
Options outstanding at December 31	5,178	$	17.06	6,020	$	19.43	5,416	$	23.46

(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. The Company did not issue equity-classified stock options in 2018.


	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	2018	Price		Life	2018	Price		Life
	(in thousands)			(years)	(in thousands)			(years)
$5.22-$29.42	3,517	$	8.68	4.4	2,605	$	8.96	4.1
$30.59-$35.64	1,135	$	32.26	2.1	1,135	$	32.26	2.1
$36.69-$39.48	436	$	38.97	1.9	436	$	38.97	1.9
$40.15-$49.00	90	$	46.55	2.4	90	$	46.55	2.4
	5,178	$	17.06	3.6	4,266	$	19.02	3.3

There were no options granted in 2018. The weighted-average grant date fair value of options granted during the years 2017 and 2016 were $3.47 and $3.22, respectively. There were no options exercised in 2018 or 2017. The total intrinsic value of options exercised during 2016 was less than $1 million.

Equity-Classified Restricted Stock

The Company recorded the following compensation costs related to restricted stock grants for the years ended December 31, 2018, 2017 and 2016:


(in millions)	2018		2017		2016
Restricted stock grants – general and administrative expense (1)	$	9	$	16	$	33
Restricted stock grants – general and administrative expense capitalized	$	5	$	11	$	8

(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 $2 million related to restricted stock for the year ended December 31, 2018, compared to a deferred tax assets of $9 million and $12 million for 2017 and 2016, respectively. As of December 31, 2018, there was $15 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 two years.

The following table summarizes the restricted stock activity for the years 2018, 2017 and 2016, and provides information for restricted stock outstanding at December 31 of each year:


	2018				2017			2016
			Weighted			Weighted				Weighted
	Number of		Average Fair		Number of	Average Fair		Number of		Average Fair
	Shares		Value		Shares	Value		Shares		Value
	(in thousands)				(in thousands)			(in thousands)
Unvested shares at January 1	6,254		$	8.85	3,321	$	11.85	7,222		$	13.24
Granted	350		$	4.72	5,055	$	8.38	81	(2)	$	8.56
Vested	(2,058)	(1)	$	9.24	(1,380)	$	13.28	(3,817)	(3)	$	11.34
Forfeited	(1,829)		$	9.01	(742)	$	10.04	(165)		$	12.05
Unvested shares at December 31	2,717		$	7.91	6,254	$	8.85	3,321		$	11.85

(1)

Includes 1,287,636 shares forfeited as a result of the reduction in workforce for the year ended December 31, 2018.

(2)

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.

(3)

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 $2 million for 2018, $42 million for 2017 and $1 million for 2016. The total fair value of shares vested were $19 million for 2018, $18 million for 2017 and $43 million for 2016.

Equity-Classified Performance Units

The Company recorded compensation costs related to equity-classified performance units for the years ended December 31, 2018, 2017 and 2016. The performance units awarded in 2018, 2017 and 2016 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)	2018		2017		2016
Performance units – general and administrative expense (1)	$	3	$	5	$	9
Performance units – general and administrative expense capitalized	$	1	$	2	$	1

(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 $1 million related to equity-classified performance units for the year ended December 31, 2018, compared to deferred tax assets of $3 million and $4 million in 2017 and 2016, respectively. As of December 31, 2018, there was $3 million of total unrecognized compensation cost related to unvested equity-classified performance units that is expected to be recognized over a weighted-average period of one year.

The following table summarizes equity-classified performance unit activity to be paid out in Company stock for the years ended December 31, 2018, 2017 and 2016, and provides information for unvested units as of December 31, 2018, 2017 and 2016:


	2018				2017			2016
			Weighted			Weighted				Weighted
	Number of		Average Fair		Number of	Average Fair		Number of		Average Fair
	Units (1)		Value		Units (1)	Value		Units (1)		Value
	(in thousands)				(in thousands)			(in thousands)
Unvested shares at January 1	1,084		$	10.12	719	$	11.46	407		$	36.65
Granted	–		$	–	1,197	$	10.47	1,503		$	8.60
Vested	(290)		$	10.47	(325)	$	12.21	(889)	(3)	$	12.78
Forfeited	(196)	(2)	$	9.94	(507)	$	9.53	(302)	(4)	$	11.26
Unvested shares at December 31	598		$	10.01	1,084	$	10.12	719		$	11.46

(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 per unit contingent upon TSR. The performance units have a three-year vesting term and the actual disbursement of shares, if any, is determined during the first quarter following the end of the three-year vesting period.

(2)

Includes 144,927 units related to the reduction in workforce for the year ended December 31, 2018.

(3)

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.

(4)

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 Awards

Liability-Classified Restricted Stock Units

In the first quarter of 2018, the Company granted restricted stock units that vest over a period of four years and are payable in either cash or shares at the option of the Compensation Committee of the Company’s Board of Directors. The Company has accounted for these as liability-classified awards, and accordingly changes in the market value of the instruments will be recorded to general and administrative expense and capitalized expense over the vesting period of the award.


(in millions)	2018
Restricted stock units – general and administrative expense	$	4
Restricted stock units – general and administrative expense capitalized	$	3

The Company also recorded a deferred tax asset of $2 million related to liability-classified restricted stock units for the year ended December 31, 2018. As of December 31, 2018, there was $22 million of total unrecognized compensation cost related to liability-classified restricted stock units that is expected to be recognized over a weighted-average period of three years.

The following table summarizes restricted stock unit activity to be paid out in cash for the year ended December 31, 2018 and provides information for unvested units as of December 31, 2018:


	Number	Weighted Average
	of Units	Fair Value
	(in thousands)
Unvested shares at January 1, 2018	–	$	–
Granted	12,216	$	3.69
Vested	(232)	$	5.14
Forfeited (1)	(3,782)	$	4.86
Unvested units at December 31, 2018	8,202	$	3.41

(1)

Includes 2,766,610 units related to the reduction in workforce for the year ended December 31, 2018.

Liability-Classified Performance Units

In the first quarter of 2018, the Company granted performance units that vest over a three-year period and are payable in either cash or shares at the option of the Compensation Committee of the Company’s Board of Directors. The Company has accounted for these as liability-classified awards, and accordingly changes in the fair market value of the instruments will be recorded to general and administrative expense and capitalized expense over the vesting period of the awards. The liability-classified performance unit awards include a performance condition based on cash flow per debt-adjusted share and two market conditions, one based on absolute TSR and the other on relative TSR as compared to a group of the Company’s peers, collectively the “Performance Measures.” The fair values of the two market conditions are calculated by Monte Carlo models on a quarterly basis.


(in millions)	2018
Liability-classified performance units – general and administrative expense	$	2
Liability-classified performance units – general and administrative expense capitalized	$	–

The Company also recorded a deferred tax asset of $1 million related to liability-classified performance units for the year ended December 31, 2018. As of December 31, 2018, there was $9 million of total unrecognized compensation cost related to liability-classified performance units. This cost is expected to be recognized over a weighted-average period of two years. The final value of the performance unit awards is contingent upon the Company’s actual performance against the Performance Measures.

The following table summarizes liability-classified performance unit activity to be paid out in cash for the year ended December 31, 2018 and provides information for unvested units as of December 31, 2018:


	Number	Weighted Average
	of Shares	Fair Value
	(in thousands)
Unvested shares at January 1, 2018	–	$	–
Granted	3,200	$	3.70
Vested	–	$	–
Forfeited (1)	(397)	$	4.55
Unvested units at December 31, 2018	2,803	$	3.41

(1)

Includes 295,160 units related to the reduction in workforce for the year ended December 31, 2018.