Stock-Based Compensation

2014 Equity and Incentive Plan

On May 14, 2014, our shareholders approved the CF Industries Holdings, Inc. 2014 Equity and Incentive Plan (the 2014 Equity and Incentive Plan) which replaced the CF Industries Holdings, Inc. 2009 Equity and Incentive Plan. Under the 2014 Equity and Incentive Plan, we may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards (payable in cash or stock) and other stock-based awards to our officers, employees, consultants and independent contractors (including non-employee directors). The purpose of the 2014 Equity and Incentive Plan is to provide an incentive for our employees, officers, consultants and non-employee directors that is aligned with the interests of our stockholders.

Share Reserve and Individual Award Limits

The maximum number of shares reserved for the grant of awards under the 2014 Equity and Incentive Plan is the sum of (i) 13.9 million and (ii) the number of shares subject to outstanding awards under our predecessor plans to the extent such awards terminate or expire without delivery of shares. For purposes of determining the number of shares of stock available for grant under the 2014 Equity and Incentive Plan, each option or stock appreciation right is counted against the reserve as one share. Each share of stock granted, other than an option or a stock appreciation right, is counted against the reserve as 1.61 shares. If any outstanding award expires or is settled in cash, any unissued shares subject to the award are again available for grant under the 2014 Equity and Incentive Plan. Shares tendered in payment of the exercise price of an option and shares withheld by the Company or otherwise received by the Company to satisfy tax withholding obligations are not available for future grant under the 2014 Equity and Incentive Plan. As of December 31, 2016, we had 11.7 million shares available for future awards under the 2014 Equity and Incentive Plan. The 2014 Equity and Incentive Plan provides that no more than 5.0 million underlying shares may be granted to a participant in any one calendar year.

Stock Options

Under the 2014 Equity and Incentive Plan and our predecessor plans, we granted to plan participants nonqualified stock options to purchase shares of our common stock. The exercise price of these options is equal to the market price of our common stock on the date of grant. The contractual life of each option is ten years and generally one-third of the options vest on each of the first three anniversaries of the date of grant.

The fair value of each stock option award is estimated using the Black-Scholes option valuation model. Key assumptions used and resulting grant date fair values are shown in the following table.



	2016	2015	2014
Weighted-average assumptions:
Expected volatility	39%	31%	33%
Expected term of stock options	4.3 Years	4.3 Years	4.3 Years
Risk-free interest rate	1.2%	1.5%	1.3%
Expected dividend yield	3.3%	1.9%	1.6%
Weighted-average grant date fair value	$8.97	$13.99	$12.77

The expected volatility of our stock options is based on the combination of the historical volatility of our common stock and implied volatilities of exchange traded options on our common stock. The expected term of options is estimated based on our historical exercise experience, post-vesting employment termination behavior and the contractual term. The risk-free interest rate is based on the U.S. Treasury Strip yield curve in effect at the time of grant for the expected term of the options.

A summary of stock option activity during the year ended December 31, 2016 is presented below:



	Shares		Weighted- Average Exercise Price
Outstanding as of December 31, 2015	3,654,318		$	41.79
Granted	1,415,920		36.14
Exercised	(17,600	)	9.09
Forfeited	(93,446	)	44.22
Expired	(53,920	)	45.78
Outstanding as of December 31, 2016	4,905,272		40.18
Exercisable as of December 31, 2016	2,765,940		37.25

Selected amounts pertaining to stock option exercises are as follows:



	2016		2015		2014
	(in millions)
Cash received from stock option exercises	$	—	$	8	$	18
Actual tax benefit realized from stock option exercises	$	—	$	2	$	10
Pre-tax intrinsic value of stock options exercised	$	—	$	8	$	31

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2016:



	Options Outstanding						Options Exercisable
Range of Exercise Prices	Shares	Weighted- Average Remaining Contractual Term (years)	Weighted- Average Exercise Price		Aggregate Intrinsic Value⁽¹⁾ (in millions)		Shares	Weighted- Average Remaining Contractual Term (years)	Weighted- Average Exercise Price		Aggregate Intrinsic Value⁽¹⁾ (in millions)
$ 8.83 - $20.00	570,080	2.9	$	14.75	$	9	570,080	2.9	$	14.75	$	9
$20.01 - $62.25	4,335,192	7.5	43.53		1		2,195,860	6.2	43.09		1
	4,905,272	6.9	40.18		$	10	2,765,940	5.6	37.25		$	10

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⁽¹⁾	The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $31.48 as of December 31, 2016, which would have been received by the option holders had all option holders exercised their options as of that date.

Restricted Stock Awards, Restricted Stock Units and Performance Share Units

The fair value of a restricted stock award (RSA) or an award of restricted stock units (RSU) is equal to the number of shares subject to the award multiplied by the closing market price of our common stock on the date of grant. We estimated the fair value of each performance share unit (PSU) on the date of grant using a Monte Carlo simulation. Awards granted to key employees generally vest three years from the date of grant. The vesting of PSUs is also subject to the attainment of applicable performance goals during the performance period. The RSAs awarded to non-management members of the Board vest the earlier of one year from the date of the grant or the date of the next annual stockholder meeting. During the vesting period, the holders of the RSAs are entitled to dividends and voting rights. During the vesting period, the holders of the RSUs are paid dividend equivalents in cash to the extent we pay cash dividends. PSUs accrue dividend equivalents to the extent we pay cash dividends on our common stock during the performance and vesting period. Upon vesting of the PSUs, holders are paid the accrued dividend equivalents based on the shares of common stock, if any, delivered in settlement of PSUs. Holders of RSUs and PSUs are not entitled to voting rights unless and until the awards have vested.

A summary of restricted stock activity during the year ended December 31, 2016 is presented below:



	Restricted Stock Awards				Restricted Stock Units				Performance Share Units
	Shares		Weighted- Average Grant-Date Fair Value		Shares		Weighted- Average Grant-Date Fair Value		Shares		Weighted-Average Grant-Date Fair Value
Outstanding as of December 31, 2015	84,918		$	51.34	74,523		$	55.87	47,940		$	83.74
Granted	41,645		27.85		92,050		36.00		60,030		40.62
Restrictions lapsed (vested)	(74,918	)	43.79		(3,296	)	53.51		—		—
Forfeited	(10,000	)	38.02		(4,554	)	56.71		(1,255	)	84.15
Outstanding as of December 31, 2016	41,645		27.85		158,723		44.38		106,715		59.48

The 2016, 2015 and 2014 weighted-average grant date fair value for RSAs was $27.85, $61.54, and $49.76, for RSUs was $36.00, $61.60, and $51.16, and for PSUs was $40.62, $91.13, and $77.65, respectively.

Selected amounts pertaining to restricted stock awards that vested are as follows:



	Year ended December 31,
	2016		2015		2014
	(in millions)
Actual tax benefit realized from restricted stock vested	$	1	$	1	$	3
Fair value of restricted stock vested	$	2	$	5	$	9

Compensation Cost

Compensation cost is recorded primarily in selling, general and administrative expenses. The following table summarizes stock-based compensation costs and related income tax benefits.



	Year ended December 31,
	2016			2015			2014⁽¹⁾
	(in millions)
Stock-based compensation expense	$	19		$	17		$	17
Income tax benefit	(7		)	(6		)	(6		)
Stock-based compensation expense, net of income taxes	$	12		$	11		$	11

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⁽¹⁾	Includes incremental compensation expense of $2 million related to the modification of 299,950 stock options and 80,495 RSAs.

As of December 31, 2016, pre-tax unrecognized compensation cost was $12 million for stock options, which will be recognized over a weighted-average period of 1.8 years, $4 million for RSAs and RSUs, which will be recognized over a weighted-average period of 1.7 years, and $3 million for PSUs, which will be recognized over a weighted-average period of 1.8 years.

Excess tax benefits realized from the vesting of restricted stock or stock option exercises are recognized as an income tax benefit in our consolidated statements of operations and are required to be reported as an operating cash inflow rather than a reduction of taxes paid. The excess tax benefits in 2016, 2015 and 2014 were zero, $2 million, and $9 million, respectively.