Note 7 – Compensation Plans

Equity Plan

There are several components to the Company’s Equity Plan that are described in this section. Various types of equity awards have been granted by the Company in different periods.

As of December 31, 2016, approximately 5.5 million shares of common stock remained available for grant under the Equity Plan. The issuance of a direct share benefit, such as a share of common stock, a stock option, a restricted share, an RSU, or a PSU, counts as one share against the number of shares available to be granted under the Equity Plan. Each PSU has the potential to count as two shares against the number of shares available to be granted under the Equity Plan based on the final performance multiplier. Stock options were issued out of the St. Mary Land & Exploration Company Stock Option Plan and the St. Mary Land & Exploration Company Incentive Stock Option Plan, both predecessors to the Equity Plan, although the last grant was in 2004, and all remaining stock options were exercised during the year ended December 31, 2014.

Performance Share Units

The Company grants PSUs to eligible employees as part of its long-term equity compensation program. The number of shares of the Company’s common stock issued to settle PSUs ranges from 0% to 200% of the number of PSUs awarded and is determined based on certain performance criteria over a three-year measurement period. The performance criteria for the PSUs are based on a combination of the Company’s annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared with the annualized TSR of certain peer companies for the performance period. Compensation expense for PSUs is recognized within general and administrative and exploration expense over the vesting periods of the respective awards.

The fair value of PSUs was measured at the grant date with a stochastic process method using the Geometric Brownian Motion Model (“GBM Model”). A stochastic process is a mathematically defined equation that can create a series of outcomes over time. These outcomes are not deterministic in nature, which means that by iterating the equations multiple times, different results will be obtained for those iterations. In the case of the Company’s PSUs, the Company cannot predict with certainty the path its stock price or the stock prices of its peers will take over the three-year performance period. By using a stochastic simulation, the Company can create multiple prospective stock pathways, statistically analyze these simulations, and ultimately make inferences regarding the path the stock price will take. As such, because future stock prices are stochastic, or probabilistic with some direction in nature, the stochastic method, specifically the GBM Model, is deemed an appropriate method by which to determine the fair value of the PSUs. Significant assumptions used in this simulation include the Company’s expected volatility, dividend yield, and risk-free interest rate based on U.S. Treasury yield curve rates with maturities consistent with a three-year vesting period, as well as the volatilities and dividend yields for each of the Company’s peers.

The Company records compensation expense associated with the issuance of PSUs based on the fair value of the awards as of the date of grant. Total compensation expense recorded for PSUs was $11.0 million, $10.6 million, and $16.0 million for the years ended December 31, 2016, 2015, and 2014, respectively. As of December 31, 2016, there was $15.9 million of total unrecognized expense related to PSUs, which is being amortized through 2019.

A summary of the status and activity of non-vested PSUs is presented in the following table:



	For the Years Ended December 31,
	2016				2015				2014
	PSUs		Weighted-Average Grant-Date Fair Value		PSUs		Weighted-Average Grant-Date Fair Value		PSUs		Weighted-Average Grant-Date Fair Value
Non-vested at beginning of year ⁽¹⁾	626,328		$	61.81	433,660		$	73.63	572,469		$	66.07
Granted ⁽¹⁾	447,971		$	26.56	320,753		$	45.34	202,404		$	94.66
Vested ⁽¹⁾	(130,353	)	$	64.17	(76,438	)	$	51.76	(206,830	)	$	64.79
Forfeited ⁽¹⁾	(115,023	)	$	55.59	(51,647	)	$	73.62	(134,383	)	$	86.72
Non-vested at end of year⁽¹⁾	828,923		$	43.25	626,328		$	61.81	433,660		$	73.63

____________________________________________


⁽¹⁾	The number of awards assumes a multiplier of one. The final number of shares of common stock issued may vary depending on the three-year performance multiplier, which ranges from zero to two.

The fair value of the PSUs granted in 2016, 2015, and 2014 was $11.9 million, $14.5 million, and $19.2 million, respectively. The PSUs granted in 2015 and 2014 will remain unvested until the third anniversary date of their issuance, at which time they will fully vest, unless the employee is retirement eligible in which case the PSUs vest immediately upon attainment of retirement age. PSUs granted in 2016 fully vest on the third anniversary of the date of the grant; however, employees who are retirement eligible at the time a PSU award was granted, vest in each portion of that award equally in six-month increments over a three-year period beginning at grant date. Retirement eligible employees must stay with the company through the entire six-month vesting period to receive that increment of vesting and any unvested portions of a PSU award will be forfeited when the employee leaves the company.

A summary of the shares of common stock issued to settle PSUs is presented in the table below:



	For the Years Ended December 31,
	2016		2015		2014
Shares of common stock issued to settle PSUs ⁽¹⁾	44,870		288,962		130,163
Less: shares of common stock withheld for income and payroll taxes	(14,809	)	(100,683	)	(45,042	)
Net shares of common stock issued	30,061		188,279		85,121

Multiplier earned	0.2		1.0		0.55

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⁽¹⁾	During the years ended December 31, 2016, 2015, and 2014, the Company issued shares of common stock for PSUs granted in 2013, 2012, and 2011. The Company and the majority of grant recipients mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings in accordance with the Company’s Equity Plan and individual award agreements.

The total fair value of PSUs that vested during the years ended December 31, 2016, 2015, and 2014 was $8.4 million, $4.0 million, and $13.4 million, respectively.

Restricted Stock Units

The Company grants RSUs to eligible employees as part of its long-term equity incentive compensation program. Each RSU represents a right to receive one share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. Compensation expense for RSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the award.

Total compensation expense recorded for RSUs for the years ended December 31, 2016, 2015, and 2014, was $11.9 million, $13.4 million, and $13.9 million, respectively. As of December 31, 2016, there was $14.4 million of total unrecognized expense related to unvested RSU awards, which is being amortized through 2019. The Company records compensation expense associated with the issuance of RSUs based on the fair value of the awards as of the date of grant. The fair value of an RSU is equal to the closing price of the Company’s common stock on the day of the grant.

A summary of the status and activity of non-vested RSUs is presented below:



	For the Years Ended December 31,
	2016				2015				2014
	RSUs		Weighted- Average Grant-Date Fair Value		RSUs		Weighted- Average Grant-Date Fair Value		RSUs		Weighted- Average Grant-Date Fair Value
Non-vested at beginning of year	543,737		$	55.01	515,724		$	68.29	580,431		$	57.05
Granted	417,065		$	28.08	356,246		$	43.72	234,560		$	83.98
Vested	(241,363	)	$	58.06	(278,289	)	$	63.12	(253,031	)	$	58.19
Forfeited	(115,323	)	$	43.52	(49,944	)	$	66.53	(46,236	)	$	62.06
Non-vested at end of year	604,116		$	37.39	543,737		$	55.01	515,724		$	68.29

The fair value of RSUs granted in 2016, 2015, and 2014 was $11.7 million, $15.6 million, and $19.7 million, respectively. The RSUs granted in 2015 and 2014 vest one-third of the total grant on each anniversary of the grant dates, unless the employee is retirement eligible in which case the RSUs vest immediately upon attainment of retirement age. The RSUs granted in 2016 vest one-third of the total grant on each anniversary of the grant dates, unless the employee is retirement eligible in which case the RSUs vest in each portion of that award equally in six-month increments over a three-year period beginning at grant date. Retirement eligible employees must stay with the company through the entire six-month vesting period to receive that increment of vesting and any unvested portions of a RSU award will be forfeited when the employee leaves the company.

A summary of the shares of common stock issued to settle RSUs is presented in the table below:



	For the Years Ended December 31,
	2016		2015		2014
Shares of common stock issued to settle RSUs ⁽¹⁾	241,363		278,289		253,031
Less: shares of common stock withheld for income and payroll taxes	(72,181	)	(91,045	)	(81,434	)
Net shares of common stock issued	169,182		187,244		171,597

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⁽¹⁾	During the years ended December 31, 2016, 2015, and 2014, the Company issued shares of common stock for RSUs granted in previous years. The Company and the majority of grant recipients mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings in accordance with the Company’s Equity Plan and individual award agreements.

The total fair value of RSUs that vested during the years ended December 31, 2016, 2015, and 2014 was $14.0 million, $17.6 million, and $14.7 million, respectively.

Stock Option Grants

The Company previously granted stock options under the St. Mary Land & Exploration Company Stock Option Plan and the St. Mary Land & Exploration Company Incentive Stock Option Plan. The last issuance of stock options occurred on December 31, 2004. Stock options to purchase shares of the Company’s common stock were granted to eligible employees and members of the Board of Directors. All options granted under the option plans were granted at exercise prices equal to the respective closing market price of the Company’s underlying common stock on the grant dates. All stock options granted under the option plans were exercisable for a period of up to 10 years from the date of grant. The remaining options from the 2004 grant were exercised during the year ended December 31, 2014, and thus there is no unrecognized compensation expense related to stock option awards.

A summary of activity associated with the Company’s Stock Option Plans during the year ended December 31, 2014, is presented in the following table:



	Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value
For the year ended December 31, 2014
Outstanding, start of year	39,088		$	20.87	$	—
Exercised	(39,088	)	$	20.87	$	1,993,726
Forfeited	—		$	—	$	—
Outstanding, end of year	—		$	—	$	—
Vested and exercisable at end of year	—		$	—	$	—

The fair value of options was measured at the date of grant using the Black-Scholes-Merton option-pricing model. Cash received from stock options exercised for the year ended December 31, 2014, was $4.0 million.

Cash flows resulting from excess tax benefits are classified as part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for vested RSUs, settled PSUs, and exercised options in excess of the deferred tax asset attributable to stock compensation costs for such equity awards. The Company recorded no excess tax benefits for the years ended December 31, 2016, 2015, and 2014.

Director Shares

In 2016, 2015, and 2014, the Company issued 53,473, 39,903, and 27,677 shares, respectively, of its common stock to its non-employee directors under the Company’s Equity Plan. The Company recorded $2.0 million of compensation expense for the year ended December 31, 2016, related to director shares issued, and $1.6 million for each of the years ended December 31, 2015, and 2014.

Beginning with the awards granted in 2016, all shares issued to non-employee directors fully vest on December 31^st of the year granted. Prior to 2016, all shares of common stock issued to the Company’s non-employee directors were earned over the one-year service period following the date of grant, unless five years of service had been provided to the Company by the director, in which case that director’s shares vested upon the earlier of the completion of the one year service period or the director retiring from the Board of Directors.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, without accruing in excess of $25,000 in value from purchases for each calendar year. The purchase price of the stock is the lower of 85% of the closing price of the stock on the first day of the offering period or 85% of the closing price of the stock on the purchase date, and shares issued under the ESPP have no restriction period. The ESPP is intended to qualify under Section 423 of the IRC. The Company had approximately 0.7 million shares available for issuance under the ESPP as of December 31, 2016. There were 218,135, 197,214, and 83,136 shares issued under the ESPP in 2016, 2015, and 2014, respectively. Total proceeds to the Company for the issuance of these shares were $4.2 million, $4.8 million, and $4.1 million for the years ended December 31, 2016, 2015, and 2014, respectively.

The fair value of ESPP grants is measured at the date of grant using the Black-Scholes-Merton option-pricing model. Expected volatility was calculated based on the Company’s historical daily common stock price, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with a six-month vesting period.

The fair value of ESPP shares issued during the periods reported were estimated using the following weighted-average assumptions:



	For the Years Ended December 31,
	2016		2015		2014
Risk free interest rate	0.4	%	0.1	%	0.1	%
Dividend yield	0.4	%	0.2	%	0.1	%
Volatility factor of the expected market price of the Company’s common stock	95.0	%	61.2	%	33.0	%
Expected life (in years)	0.5		0.5		0.5

The Company expensed $2.0 million, $1.8 million, and $1.1 million for the years ended December 31, 2016, 2015, and 2014, respectively, based on the estimated fair value of the ESPP grants.

401(k) Plan

The Company has a defined contribution plan (the “401(k) Plan”) that is subject to the Employee Retirement Income Security Act of 1974. The 401(k) Plan allows eligible employees to contribute a maximum of 60 percent of their base salaries up to the contribution limits established under the IRC. For employees hired before December 31, 2014, the Company matches each employee’s contribution up to six percent of the employee’s base salary and performance bonus, and may make additional contributions at its discretion. The Company matches contributions made by employees hired after December 31, 2014, up to nine percent of the employee’s base salary and performance bonus in lieu of pension plan benefits, and may make additional contributions at its discretion. Please refer to Note 8 - Pension Benefits for additional discussion of pension benefits. The Company’s matching contributions to the 401(k) Plan were $5.4 million, $5.6 million, and $6.4 million for the years ended December 31, 2016, 2015, and 2014, respectively.

Net Profits Plan

Under the Company’s Net Profits Plan, all oil and gas wells that were completed or acquired during each year were designated within a specific pool with key employees designated as participants that became entitled to payments under the Net Profits Plan after the Company has received net cash flows returning 100 percent of all costs associated with that pool. Thereafter, 10 percent of future net cash flows generated by the pool are allocated among the participants and distributed at least annually. The portion of net cash flows from the pool to be allocated among the participants increases to 20 percent after the Company has recovered 200 percent of the total costs for the pool, including payments made under the Net Profits Plan at the 10 percent level. In December 2007, the Board of Directors discontinued the creation of new pools under the Net Profits Plan. As a result, the 2007 pool was the last Net Profits Plan pool established by the Company.

The following table presents cash payments made or accrued under the Net Profits Plan related to periodic operations, of which the majority is recorded as general and administrative expense, and cash payments made or accrued as a result of divestitures of properties subject to the Net Profits Plan, which are recorded as a reduction to the net gain on divestiture activity line item in the accompanying statements of operations.



	For the Years Ended December 31,
	2016		2015		2014
	(in thousands)
Cash payments made or accrued related to operations	$	6,608	$	3,498	$	9,016
Cash payments made or accrued related to divestitures	24,349		3,789		8,341
Total net settlements	$	30,957	$	7,287	$	17,357