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, 2015, 2.8 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 Under the Equity Plan

The Company grants PSUs to eligible employees as a 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 most likely 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 $10.6 million, $16.0 million, and $16.8 million for the years ended December 31, 2015, 2014, and 2013, respectively. As of December 31, 2015, there was $18.4 million of total unrecognized expense related to PSUs, which is being amortized through 2018.

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



	For the Years Ended December 31,
	2015				2014				2013
	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⁾	433,660		$	73.63	572,469		$	66.07	669,308		$	63.91
Granted ⁽¹⁾	320,753		$	45.34	202,404		$	94.66	274,831		$	64.13
Vested ⁽¹⁾	(76,438	)	$	51.76	(206,830	)	$	64.79	(345,005	)	$	60.06
Forfeited ⁽¹⁾	(51,647	)	$	73.62	(134,383	)	$	86.72	(26,665	)	$	69.74
Non-vested at end of year⁽¹⁾	626,328		$	61.81	433,660		$	73.63	572,469		$	66.07

____________________________________________


(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 2015, 2014, and 2013 was $14.5 million, $19.2 million, and $17.6 million, respectively. The PSUs granted in 2015, 2014, and 2013 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.

The total fair value of PSUs that vested during the years ended December 31, 2015, 2014, and 2013 was $4.0 million, $13.4 million, and $20.7 million, respectively.

During the years ended December 31, 2015, 2014, and 2013, the Company issued 188,279, 85,121, and 387,461 net shares, respectively, of common stock for PSUs granted in 2012, 2011, and 2010 that earned a 1.0, 0.55, and 1.725 multiplier, respectively. 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. As a result, the Company withheld 100,683, 45,042, and 200,050 shares, respectively, to satisfy income and payroll tax withholding obligations that arose upon the delivery of the shares underlying the PSUs in 2015, 2014, and 2013, respectively.

Restricted Stock Units Under the Equity Plan

The Company grants RSUs to eligible employees as part of its long-term equity incentive compensation program. Restrictions and vesting periods for the awards are determined by the Compensation Committee of the Board of Directors and are set forth in the award agreements. 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, 2015, 2014, and 2013, was $13.4 million, $13.9 million, and $13.1 million, respectively. As of December 31, 2015, there was $19.3 million of total unrecognized expense related to unvested RSU awards, which is being amortized through 2018. 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,
	2015				2014				2013
	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	515,724		$	68.29	580,431		$	57.05	496,244		$	51.81
Granted	356,246		$	43.72	234,560		$	83.98	329,939		$	60.01
Vested	(278,289	)	$	63.12	(253,031	)	$	58.19	(207,376	)	$	49.73
Forfeited	(49,944	)	$	66.53	(46,236	)	$	62.06	(38,376	)	$	54.37
Non-vested at end of year	543,737		$	55.01	515,724		$	68.29	580,431		$	57.05

The fair value of RSUs granted in 2015, 2014, and 2013 was $15.6 million, $19.7 million, and $19.8 million, respectively. The RSUs granted in 2015, 2014, and 2013 vest one-third of the total grant on each of the next three anniversaries of the date of the grant.

The total fair value of RSUs that vested during the years ended December 31, 2015, 2014, and 2013, was $17.6 million, $14.7 million, and $10.3 million, respectively.

During the years ended December 31, 2015, 2014, and 2013, the Company settled 278,289, 253,031, and 207,378 RSUs, respectively. 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. As a result, the Company issued net shares of common stock of 187,244, 171,597, and 139,391 for 2015, 2014, and 2013, respectively. The remaining 91,045, 81,434, and 67,987 shares were withheld to satisfy income and payroll tax withholding obligations that arose upon delivery of the shares underlying the RSUs for 2015, 2014, and 2013, respectively.

Stock Option Grants Under the Equity Plan

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 had been 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. As of December 31, 2015, and 2014, there was no unrecognized compensation expense related to stock option awards.

A summary of activity associated with the Company’s Stock Option Plans during the years ended December 31, 2014, and 2013, is presented in the following table:



			Weighted -
			Average		Aggregate
			Exercise		Intrinsic
	Shares		Price		Value
For the year ended December 31, 2013
Outstanding, start of year	267,846		$	14.95
Exercised	(228,758	)	$	13.92	$	12,326,994
Forfeited	—		$	—
Outstanding, end of year	39,088		$	20.87	$	2,432,837
Vested and exercisable at end of year	39,088		$	20.87	$	2,432,837
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 years ended December 31, 2014, and 2013, was $4.0 million and $3.2 million, respectively.

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, 2015, 2014, and 2013.

Director Shares

In 2015, 2014, and 2013, the Company issued 37,950, 27,677, and 28,169 shares, respectively, of its common stock to its non-employee directors under the Company’s Equity Plan. Additionally, the Company issued 1,953 shares to the Company’s former Chief Executive Officer in 2015 for his service as a director through May 2015, following his retirement as an officer of the Company. The Company recorded compensation expense related to these issuances of $1.6 million, $1.6 million, and $1.4 million for the years ended December 31, 2015, 2014, and 2013, respectively.

All shares of common stock issued to the Company’s non-employee directors are earned over the one-year service period following the date of grant, unless five years of service has been provided to the Company by the director, in which case that director’s shares vest 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 85% of the lower of the fair market value of the stock on the first or last day of the purchase period, 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 0.9 million shares available for issuance under the ESPP as of December 31, 2015. There were 197,214, 83,136, and 77,427 shares issued under the ESPP in 2015, 2014, and 2013, respectively. Total proceeds to the Company for the issuance of these shares were $4.8 million, $4.1 million, and $3.7 million for the years ended December 31, 2015, 2014, and 2013, 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,
	2015		2014		2013
Risk free interest rate	0.1	%	0.1	%	0.1	%
Dividend yield	0.2	%	0.1	%	0.2	%
Volatility factor of the expected market price of the Company’s common stock	61.2	%	33.0	%	41.1	%
Expected life (in years)	0.5		0.5		0.5

The Company expensed $1.8 million, $1.1 million, and $1.1 million for the years ended December 31, 2015, 2014, and 2013, 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. 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. Please refer to Note 8 - Pension Benefits for additional discussion of change to pension benefits. The Company’s matching contributions to the 401(k) Plan were $5.6 million, $6.4 million, and $4.2 million for the years ended December 31, 2015, 2014, and 2013, respectively. No discretionary contributions were made by the Company to the 401(k) Plan for any of these years.

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. Key employees recommended by senior management and designated as participants by the Compensation Committee of the Company’s Board of Directors and employed by the Company on the last day of that year 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.

Cash payments made or accrued under the Net Profits Plan that have been recorded as either general and administrative expense or exploration expense are detailed in the table below:



	For the Years Ended December 31,
	2015		2014		2013
	(in thousands)
General and administrative expense	$	3,239	$	8,326	$	13,734
Exploration expense	259		690		1,310
Total	$	3,498	$	9,016	$	15,044

Additionally, the Company made or accrued cash payments under the Net Profits Plan of $3.8 million, $8.3 million, and $10.3 million for the years ended December 31, 2015, 2014, and 2013, respectively, as a result of divestitures of properties subject to the Net Profits Plan. These cash payments are accounted for as a reduction in the net gain on divestiture activity line item in the accompanying statements of operations.

The Company records changes in the present value of estimated future payments under the Net Profits Plan as a separate line item in the accompanying statements of operations. The change in the estimated liability is recorded as a non-cash expense or benefit in the current period. The amount recorded as an expense or benefit associated with the change in the estimated liability is not allocated to general and administrative expense or exploration expense because it is associated with the future net cash flows from oil and gas properties in the respective pools rather than results being realized through current period production. If the Company allocated the change in liability to these specific functional line items, based on the current allocation of actual distributions made by the Company, such expenses or benefits would predominately be allocated to general and administrative expense. As time has passed, the amount distributed relating to prospective exploration efforts has become insignificant as more is paid to employees that have terminated employment and do not provide ongoing exploration support to the Company.