Note 11 - Share-Based Compensation

Questar may issue stock options, restricted shares, restricted stock units and performance shares to certain officers, employees and non-employee directors under its LTSIP. To generally preserve the potential benefits under the LTSIP prior to the Spinoff, stock options and restricted share awards outstanding as of June 30, 2010, were adjusted and bifurcated into stock options and restricted share awards for both Questar and QEP, respectively. The exercise price of options and the grant-date prices of restricted shares were recast using the ratio of the June 30, 2010, closing prices of Questar, $14.66 or 32.23%, and QEP, $30.83 or 67.77%.

Questar recognizes expense over time as the stock options, restricted shares, restricted stock units and performance shares vest. Total share-based compensation expense amounted to $9.9 million in 2012 compared to $10.1 million in 2011 and $15.4 million in 2010. Deferred share-based compensation, representing the unvested value of restricted share awards and restricted stock unit awards, amounted to $5.1 million at December 31, 2012, and $5.6 million at December 31, 2011. Deferred share-based compensation is included in common stock on the Consolidated Balance Sheets. Cash flow from income tax benefits in excess of recognized compensation expense amounted to $9.2 million in 2011 and $8.4 million in 2010. There were no cash flows recognized in excess of compensation expense in 2012. At December 31, 2012, there were 6,720,979 shares available for future grant.

The Company uses the Black-Scholes-Merton mathematical model in estimating the fair value of stock options for accounting purposes. 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 was intended for measuring the value of options traded on an exchange. No stock options were granted in 2012 or 2011.

The calculated fair value of options granted and major assumptions used in the model at the date of the 2010 grant are listed below:



	2010
	Stock Option Input Variables
Fair value of options at grant date	$	13.10
Risk-free interest rate	2.30		%
Expected price volatility	30.3		%
Expected dividend yield	1.18		%
Expected life in years	5.2

Unvested stock options decreased by 88,396 shares to 29,398 shares in 2012. No stock options were granted or forfeited in 2012. Stock-option transactions under the terms of the LTSIP are summarized for the year ended December 31, 2012, below:



	Options Outstanding		Exercise Price Range					Weighted-Average Exercise Price
Balance at December 31, 2011	1,773,635		$	3.70	-	$	17.35	$	8.54
Exercised	(1,002,712	)	3.70		-	13.10		6.38
Balance at December 31, 2012	770,923		$	4.37	-	$	17.35	$	11.35



Options Outstanding									Options Exercisable			Unvested Options
Range of exercise prices					Number outstanding at Dec. 31, 2012	Weighted-average remaining term in years	Weighted-average exercise price		Number exercisable at Dec. 31, 2012	Weighted-average exercise price		Number unvested at Dec. 31, 2012	Weighted- average exercise price
$	4.37	-	$	7.84	150,750	1.4	$	6.67	150,750	$	6.67	—	$	—
			11.40		304,174	3.2	11.40		304,174	11.40		—	—
13.10		-	17.35		315,999	3.5	13.54		286,601	13.58		29,398	13.10
					770,923	3.0	$	11.35	741,525	$	11.28	29,398	$	13.10

As of December 31, 2012, the aggregate intrinsic value of outstanding and exercisable options was $6.5 million and $6.3 million, respectively.

Restricted shares are valued at the grant-date market price and amortized to expense over the vesting period. Most restricted share grants vest in equal installments over a three- or four-year period from the grant date. The weighted-average remaining vesting period of unvested restricted shares at December 31, 2012, was 12 months. Transactions involving restricted shares under the terms of the LTSIP for the year ended December 31, 2012, are summarized below:



	Restricted Shares Outstanding		Price Range					Weighted- Average Price
Balance at December 31, 2011	771,550		$	11.40	-	$	17.97	$	16.22
Granted	373,680		19.39		-	20.90		19.40
Distributed	(325,567	)	11.40		-	19.39		16.03
Forfeited	(9,321	)	13.10		-	19.39		17.76
Balance at December 31, 2012	810,342		$	13.10	-	$	20.90	$	17.74

Restricted stock units granted typically vest in equal installments over a three-year period from the grant date. At December 31, 2012, Questar's outstanding restricted stock units totaled 71,439 with a weighted-average price of $15.50 per share and a weighted-average remaining vesting period of 6 months.

As a result of the Spinoff and bifurcation of share-based awards, restricted QEP shares and QEP stock options were granted to certain officers, employees and non-employee directors of Questar. The awards included 47,545 unvested restricted shares with a weighted-average price of $29.61 per share and 29,398 unvested stock options with a weighted-average price of $27.55 per share at December 31, 2012. Questar will recognize expense in future periods for these unvested share-based awards. In addition, certain QEP officers, employees and non-employee directors held 482,418 Questar stock options with a weighted-average exercise price of $11.37 per share and a weighted-average remaining life of 3.4 years and 77,645 Questar unvested restricted shares with a weighted-average price of $12.95 at December 31, 2012.

Questar grants performance shares to certain Company executive officers under the terms of the LTSIP. The awards are designed to motivate and reward these executives for long-term Company performance and provide an incentive for them to remain with the Company. The target number of performance shares for each executive officer is subject to adjustment upward or downward based on the Company's performance relative to a specified peer group of companies over a three-year performance period with respect to defined performance criteria. Each three-year performance period commences at the beginning of the year of grant. The actual performance shares awarded, if any, are distributed in the quarter following the conclusion of the performance period so long as such executive officer was employed by the Company or its affiliates as of the last day of the performance period.

The Company uses the Monte Carlo simulation method in estimating the fair value of performance shares. Fair value calculations rely upon subjective assumptions used in the mathematical model and may not be representative of future results. The calculated fair value of performance shares granted and major assumptions used in the simulation at the date of grant are listed below. There were no performance shares granted prior to 2011.



	2012			2011
	Performance Share Input Variables
Fair value of performance shares at grant date	$	25.42		$	18.23
Risk-free interest rate	0.35		%	1.32		%
Expected price volatility	22.0		%	31.3		%
Expected dividend yield	3.35		%	3.39		%
Expected life in years	2.9			2.9

The grant-date fair value of performance shares is amortized to expense over the vesting period. Half of any award will be distributed in shares of Questar common stock and half in cash. Equity- and liability-based performance share compensation expense amounted to $1.8 million in 2012 and $0.6 million in 2011. The weighted-average remaining vesting period of unvested performance shares at December 31, 2012, was 18 months. Transactions involving performance shares under the terms of the LTSIP for the year ended December 31, 2012, are summarized below:



	Target Number of Performance Shares Outstanding	Grant-Date Fair Value Range					Weighted- Average Grant-Date Fair Value
Balance at December 31, 2011	128,021				$	18.23	$	18.23
Granted	136,846				25.42		25.42
Balance at December 31, 2012	264,867	$	18.23	-	$	25.42	$	21.94

As of December 31, 2012, the total unrecognized compensation cost related to outstanding stock options, restricted shares, restricted stock units and performance shares was $8.3 million, which the Company expects to recognize over a weighted-average period of 12 months.

Questar issues stock options, restricted shares and performance shares to certain officers and employees of Questar Gas and Questar Pipeline under its LTSIP and recognizes expense over time as the stock options, restricted shares and performance shares vest. Questar Gas share-based compensation expense amounted to $1.2 million in 2012 compared with $1.1 million in 2011 and $1.4 million in 2010. Questar Pipeline share-based compensation expense amounted to $2.0 million in 2012 compared with $1.8 million in 2011 and $1.3 million in 2010.

The following table summarizes the stock options held under the LTSIP by Questar Gas and Questar Pipeline officers and employees at December 31, 2012:



Options Outstanding									Options Exercisable			Unvested Options
Range of exercise prices					Number outstanding at Dec. 31, 2012	Weighted-average remaining term in years	Weighted-average exercise price		Number exercisable at Dec. 31, 2012	Weighted-average exercise price		Number unvested at Dec. 31, 2012	Weighted- average exercise price
Questar Gas
$	4.37	-	$	13.10	28,750	2.2	$	8.94	26,417	$	8.57	2,333	$	13.10
Questar Pipeline
$	7.84	-	$	13.10	161,266	2.6	$	9.42	152,000	$	9.19	9,266	$	13.10

The following table summarizes the restricted shares held under the LTSIP by Questar Gas and Questar Pipeline officers and employees at December 31, 2012. The weighted-average remaining vesting period of unvested restricted shares at December 31, 2012, for Questar Gas and Questar Pipeline was 12 months.



	Restricted Shares Outstanding	Price Range					Weighted- Average Price
Questar Gas	105,303	$	13.10	-	$	19.39	$	18.15
Questar Pipeline	174,362	$	13.10	-	$	19.56	$	17.92

The following table summarizes the target number of performance shares held under the LTSIP by Questar Gas and Questar Pipeline executive officers at December 31, 2012. The weighted-average remaining vesting period of unvested performance shares at December 31, 2012, for Questar Gas and Questar Pipeline was 18 months.



	Target Number of Performance Shares Outstanding	Grant-Date Fair Value Range					Weighted- Average Grant-Date Fair Value
Questar Gas	22,838	$	18.23	-	$	25.42	$	22.03
Questar Pipeline	48,119	$	18.23	-	$	25.42	$	21.81