Note 12 – Equity-Based Compensation

QEP issues stock options and restricted shares under its Long-Term Stock Incentive Plan (LTSIP) and awards performance-based share units under its Cash Incentive Plan (CIP) to certain officers, employees, and non-employee directors. QEP recognizes expense over time as the stock options, restricted shares, and performance-based share units vest. Deferred equity-based compensation is included in additional paid-in capital in the Condensed Consolidated Balance Sheets. There were 10.9 million shares available for future grants under the LTSIP at March 31, 2014. Equity-based compensation expense is recognized in “General and administrative” on the Condensed Consolidated Statements of Operations. During the three months ended March 31, 2014, QEP recognized $6.8 million in total compensation expense related to equity-based compensation compared to $6.1 million during the three months ended March 31, 2013.

QEP Midstream maintains a unit-based compensation plan for officers, directors and employees of the general partner of QEP Midstream and its affiliates and any consultants, affiliates of the general partner, or other individuals who perform services for QEP Midstream. The QEP Midstream 2013 Long-Term Incentive Plan (the QEP Midstream LTIP) permits various types of awards, including awards of restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, profits interest units and other unit-based awards. Awards granted during 2013 under the QEP Midstream LTIP will be settled with QEP Midstream units. During the three months ended March 31, 2014, QEP recognized $0.4 million in compensation expense related to QEP Midstream LTIP.

Stock Options

QEP uses the Black-Scholes-Merton mathematical model to estimate the fair value of stock option awards at the date of the grant. Fair-value calculations rely upon subjective assumptions used in the mathematical model and may not be representative of future results. The Black-Scholes-Merton model is intended for measuring the value of options traded on an exchange. The Company utilizes the "simplified" method to estimate the expected term of the stock options granted as there is limited historical exercise data available in estimating the expected term of the stock options. QEP uses a historical volatility method to estimate the fair value of stock options awards and the risk-free interest rate is based on the yield on U.S. Treasury strips with maturities similar to those of the expected term of the stock options. The stock options typically vest in equal installments over a three-year period from the grant date and are exercisable immediately upon vesting through the seventh anniversary of the grant date. To fulfill options exercised, QEP either reissues treasury stock or issues new shares.

The calculated fair value of options granted and major assumptions used in the model at the date of grant are listed below:



	Stock Option Assumptions
	Three Months Ended
	March 31, 2014
Weighted-average grant-date fair value of awards granted during the period	$	10.12
Weighted-average risk-free interest rate	1.31		%
Weighted-average expected price volatility	37.2		%
Expected dividend yield	0.25		%
Expected term in years at the date of grant	4.5

Stock option transactions under the terms of the LTSIP are summarized below:



	Options Outstanding		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
			(per share)		(in years)	(in millions)
Outstanding at December 31, 2013	1,794,187		$	27.90
Granted	279,458		31.67
Exercised	(29,479	)	23.01
Outstanding at March 31, 2014	2,044,166		$	28.49	3.91	$	5.2
Options Exercisable at March 31, 2014	1,480,337		$	27.56	3.02	$	5.1
Unvested Options at March 31, 2014	563,829		$	30.93	6.24	$	0.1

The total intrinsic value (the difference between the market price at the exercise date and the exercise price) of options exercised was $0.2 million and $4.2 million during the three months ended March 31, 2014 and 2013, respectively. The Company realized $0.1 million and $1.4 million of income tax benefit for the three months ended March 31, 2014 and 2013, respectively, which had no significant impact on Additional Paid-in-Capital (APIC) pool as of March 31, 2014. As of March 31, 2014, $4.7 million of unrecognized compensation cost related to stock options granted under the LTSIP is expected to be recognized over a weighted-average period of 2.43 years. During the three months ended March 31, 2014, QEP received $0.7 million in cash in relation to the exercise of stock options during 2014.

Restricted Shares

Restricted share grants typically vest in equal installments over a three-year period from the grant date. The grant date fair value is determined based on the closing bid price of the Company's common stock on the grant date. The total fair value of restricted stock that vested during the three months ended March 31, 2014 and 2013, was $15.1 million and $14.8 million, respectively. The Company realized $1.5 million and $0.3 million of income tax expense for the three months ended March 31, 2014 and 2013, respectively, with a $0.6 million impact to the Company's APIC pool as of March 31, 2014. The weighted average grant-date fair value of restricted stock was $31.69 per share and $30.12 per share for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, $35.5 million of unrecognized compensation cost related to restricted shares granted under the LTSIP is expected to be recognized over a weighted-average vesting period of 2.53 years.

Transactions involving restricted shares under the terms of the LTSIP are summarized below:



	Restricted Shares Outstanding		Weighted- Average Grant-Date Fair Value
			(per share)
Unvested balance at December 31, 2013	1,388,953		$	30.96
Granted	844,552		31.69
Vested	(524,672	)	31.89
Forfeited	(18,170	)	31.28
Unvested balance at March 31, 2014	1,690,663		$	31.03

Performance Share Units

The performance share units' cash payouts are dependent upon the Company’s total shareholder return compared to a group of its peers over a three-year period. The awards are denominated in share units but delivered in cash at the end of the performance period. The weighted average grant-date fair value of the performance share units was $31.69 per share and $30.12 per share for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, $12.8 million of unrecognized compensation cost, representing the fair market value of performance shares granted, is expected to be recognized over a weighted-average vesting period of 2.40 years.

Transactions involving performance share units under the terms of the CIP are summarized below:



	Performance Share Units Outstanding		Weighted- Average Grant-Date Fair Value
Unvested balance at December 31, 2013	480,660		$	32.33
Granted	241,321		31.69
Vested and paid out	(55,659	)	39.07
Vested and canceled ⁽¹⁾	(51,361	)	39.07
Unvested balance at March 31, 2014	614,961		$	30.90

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⁽¹⁾	Represents units that vested but were not paid out. Payout of the performance share units are dependent upon the Company’s total shareholder return compared to a group of its peers over a three-year period.