(12) 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 (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 replaced the Southwestern Energy Company 2004 Stock Incentive Plan, the Southwestern Energy Company 2000 Stock Incentive Plan (“2000 Plan”) and the Southwestern Energy Company 2002 Employee Stock Incentive Plan (“2002 Plan”) but did not affect prior awards under those plans which remained valid and some of which are still outstanding. The awards under the prior plans have been adjusted for stock splits as permitted under such plans.

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 33,850,000 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.

As initially adopted, the 2004 Plan, the 2000 Plan and the 2002 Plan provided for grants of options, stock appreciation rights, shares of phantom stock and shares of restricted stock that, in the aggregate, did not exceed 16,800,000, 1,250,000 and 300,000 shares, respectively, to employees who are not officers or directors of the Company under provisions of Section 16 of the Securities Exchange Act of 1934, as amended. The Company may utilize treasury shares, if available, or authorized but unissued shares when a stock option is exercised or when restricted stock is granted.

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. All options are issued at fair market value at the date of grant and expire seven years from the date of grant for awards under both the 2013 Plan and the 2004 Plan and ten years from the date of grant for awards under all other plans. Generally, stock options granted to employees and directors vest ratably over three years from the grant date. The Company issues shares of restricted stock to employees and directors which generally vest over four years. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the individual grants with the exception of awards granted to participants who have reached retirement age or will reach retirement age during the vesting period. Restricted stock and stock options granted to participants on or after December 6, 2013 immediately vest upon death, disability or retirement (subject to a minimum of three years of service).

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 unaudited consolidated statement of operations. The unvested portion of equity-based performance units was forfeited upon separation from the Company.

Stock Options

The Company recorded the following compensation costs related to stock options for the years ended December 31, 2016, 2015 and 2014:


	2016		2015		2014
		(in millions)
Stock-based compensation cost related to stock options – general and administrative expense (1)	$	6	$	5	$	5
Stock-based compensation cost related to stock options – capitalized	$	1	$	3	$	4

(1)

Includes less than $1 million and $1 million related to the reduction in workforce and executive management restructuring, respectively, for the year ended December 31, 2016.

The Company also recorded a deferred tax asset of $2 million, $2 million and $3 million related to stock options in 2016, 2015 and 2014, respectively. Unrecognized compensation cost related to the Company’s unvested stock options totaled $4 million at December 31, 2016. This cost is expected to be recognized over a weighted-average period of 2 years.

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.


Assumptions	2016	2015	2014
Risk-free interest rate	1.4%	1.7%	1.6%
Expected dividend yield	–	–	–
Expected volatility	41.0%	36.0%	32.5%
Expected term	5 years	5 years	5 years

The following tables summarize stock option activity for the years 2016, 2015 and 2014, and provide information for options outstanding at December 31 of each year:


	2016			2015			2014
		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	5,623	$	24.57	3,622	$	35.41	3,313	$	35.70
Granted (1)	155		8.60	2,401		9.47	835		32.31
Exercised	(45)		7.74	–		–	(402)		30.60
Forfeited or expired	(317)		38.01	(400)		32.20	(124)		37.80
Options outstanding at December 31	5,416	$	23.46	5,623	$	24.57	3,622	$	35.41

(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.


	Options Outstanding						Options Exercisable
				Weighted						Weighted
	Options	Weighted		Average			Options	Weighted		Average
	Outstanding at	Average		Remaining		Aggregate	Exercisable at	Average		Remaining		Aggregate
Range of	December 31,	Exercise		Contractual		Intrinsic	December 31,	Exercise		Contractual		Intrinsic
Exercise Prices	2016	Price		Life		Value	2016	Price		Life		Value
	(in thousands)			(years)		( in millions)	(in thousands)			(years)		(in millions)
$7.74-$29.69	2,501		9.54	5.9			781		9.77	5.8
$30.59-$35.91	1,384		32.32	3.9			1,146		32.68	3.7
$36.22-$39.68	1,402		37.49	2.4			1,402		37.49	2.4
$40.15-$51.47	129		45.79	3.3			99		45.57	3.0
	5,416	$	23.46	4.4	$	7	3,428	$	29.80	3.6	$	2

The weighted-average grant date fair value of options granted during the years 2016, 2015 and 2014 was $3.22, $3.16 and $10.16, respectively. The total intrinsic value of options exercised during 2016 and 2014 was less than $1 million and $4 million, respectively. There were no options exercised in 2015.

Restricted Stock

The Company recorded the following compensation costs related to restricted stock grants for the years ended December 31, 2016, 2015 and 2014:


	2016		2015		2014
		(in millions)
Stock-based compensation cost related to restricted stock grants – general and administrative expense (1)	$	33	$	14	$	10
Stock-based compensation cost related to restricted stock grants – capitalized	$	8	$	16	$	12

(1)

Includes $16 million and $1 million related to the reduction in workforce and executive management restructuring, respectively, for the year ended December 31, 2016.

The Company also recorded a deferred tax asset of $12 million related to restricted stock for the year ended December 31, 2016, compared to a deferred tax asset of $11 million for 2015 and a deferred tax liability of $10 million for 2014. As of December 31, 2016, there was $37 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 2 years.

The following table summarizes the restricted stock activity for the years 2016, 2015 and 2014, and provides information for restricted stock outstanding at December 31 of each year:


	2016			2015			2014
	Number of Shares		Weighted Average Fair Value	Number of Shares		Weighted Average Fair Value	Number of Shares		Weighted Average Fair Value
	(in thousands)			(in thousands)			(in thousands)
Unvested shares at January 1	7,222	$	13.24	2,376	$	34.00	1,771	$	37.55
Granted (1)	81		8.56	5,822		8.07	1,295		30.89
Vested (2)	(3,817)		11.34	(873)		33.33	(548)		37.12
Forfeited	(165)		12.05	(103)		29.14	(142)		37.91
Unvested shares at December 31	3,321	$	11.85	7,222	$	13.24	2,376	$	34.00

(1)

Shares granted in 2016 are 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.

(2)

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 $1 million for 2016, $47 million for 2015 and $40 million for 2014. The total fair value of shares vested were $43 million for 2016, $29 million for 2015 and $20 million for 2014.

Equity-Classified Performance Units

The Company recorded compensation costs related to equity-classified performance units for the years ended December 31, 2016, 2015 and 2014. The performance units awarded in 2013 and 2014 included a market condition based on relative Total Shareholder Return (“TSR”) and a performance condition based on the Company’s Present Value Index (“PVI”), collectively the “Performance Measures.” The fair value of the TSR market condition is based on a Monte Carlo model and is amortized to compensation expense on a straight-line basis over the vesting period of the award. The fair value of the PVI performance condition is based on economic analysis for each investment opportunity based upon the expected present value added for each dollar to be invested and amortized to compensation expense on a straight line basis over the vesting period of the award. The performance units awarded in 2016 and 2015 are based exclusively on TSR. The grant date fair value is calculated using the applicable Performance Measures and the closing price of the Company’s common stock at the grant date.


	2016		2015		2014
	(in millions)
Stock-based compensation cost related to performance units – general and administrative expense (1)	$	9	$	6	$	3
Stock-based compensation cost related to performance units – capitalized	$	1	$	4	$	2

(1)

Includes less than $1 million and $1 million related to reduction in workforce and executive management restructuring, respectively, for the year ended December 31, 2016.

The Company also recorded a deferred tax asset of $4 million related to equity-based performance units for the year ended December 31, 2016, compared to deferred tax assets of $4 million and $2 million in 2015 and 2014, respectively. As of December 31, 2016, there was $9 million of total unrecognized compensation cost related to unvested equity-based performance units that is expected to be recognized over a weighted-average period of 2 years.

The following table summarizes performance unit activity to be paid out in Company stock for the years ended December 31, 2016, 2015 and 2014, and provides information for unvested units as of December 31, 2016, 2015 and 2014:


	2016			2015			2014
	Number of Units (1)	Weighted Average Fair Value		Number of Units (1)	Weighted Average Fair Value		Number of Units (1)	Weighted Average Fair Value
	(in thousands)			(in thousands)			(in thousands)
Unvested shares at January 1	407	$	36.65	223	$	40.44	–	$	–
Granted	1,503		8.60	443		35.22	359		40.44
Vested(2)	(889)		12.78	(259)		37.46	(111)		40.44
Forfeited(3)	(302)		11.26	–		–	(25)		40.44
Unvested shares at December 31	719	$	11.46	407	$	36.65	223	$	40.44

(1)

These amounts reflect the number of performance units granted in thousands. The actual payout in shares may range from a minimum of zero shares to a maximum of two shares contingent upon the actual performance against the Performance Measures. The performance units have a three-year vesting term and the actual disbursement of shares, if any, is not determined until March following the end of the three-year vesting period.

(2)

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.

(3)

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 Performance Units

Prior to 2013, certain employees were provided performance units vesting equally over three years that were settled in cash. The payout of these units was based on certain metrics, such as total shareholder return and reserve replacement efficiency, compared to a predetermined group of peer companies and Company goals. At the end of each performance period, the value of the vested performance units, if any, would be paid in cash. In the first quarter of 2016, the Company completed the final payout under these performance unit agreements.