Note 8. Stock Compensation Plans

Stock Incentive Plans

We have two stock compensation plans. The first plan (providing only for the issuance of stock options) has been in existence since 1995 (the “1995 Plan”) and expired in August 2005 (although options granted under the 1995 Plan prior to that time can remain outstanding for up to 10 years). The second plan, the 2004 Omnibus Stock and Incentive Plan (the “2004 Plan”), has a 10-year term and was approved by the stockholders in May 2004. The 2004 Plan provides for the issuance of incentive and non-qualified stock options, restricted stock awards, restricted stock units, SARs settled in stock, and performance awards that may be issued to officers, employees, directors and consultants. Awards covering a total of 29.5 million shares of common stock have been authorized for issuance pursuant to the 2004 Plan. At December 31, 2012, 11.3 million shares were available under the 2004 Plan for future issuance of awards, all of which could be issued in the form of restricted stock or performance vesting awards. Our incentive compensation program is administered by the Compensation Committee of our Board of Directors.

Prior to January 1, 2006, we granted incentive and non-qualified stock options to our employees. Effective January 1, 2006, we completely replaced the use of stock options for employees with SARs settled in stock, as SARs are less dilutive to our stockholders while providing an employee with essentially the same economic benefits as stock options. The stock options and SARs generally become exercisable over a three- or four-year vesting period, with the specific terms of vesting determined at the time of grant based on guidelines established by the Compensation Committee of the Board of Directors. The stock options and SARs expire over terms not to exceed 10 years from the date of grant, 90 days after termination of employment, 90 days or one year after permanent disability, depending on the plan, or one year after the death of the optionee. The stock options and SARs are granted at the fair market value at the time of grant, which is defined in the 2004 Plan as the closing price on the NYSE on the date of grant.

Holders of restricted stock awards have the rights and privileges of owning the shares (including voting rights) except that the holders are not entitled to delivery of a portion thereof until certain requirements are met. Restricted stock awards vest over three-to-four-year vesting periods, with the specific terms of vesting determined at the time of grant.

Annually, the Board of Directors grants performance-based equity awards to officers of Denbury. These performance-based awards vest over 1.25 to 3.25 years and the number of performance-based shares earned (and eligible to vest) during the performance period will depend upon two sets of factors: (1) our level of success in achieving four specifically identified performance targets ("Performance-based Operational Awards") and (2) relative performance of our stock to that of a designated peer group ("Performance-based TSR Awards"). Generally, one-half of the maximum number of shares that could be earned under the performance-based awards will be earned for performance at the designated target levels (100% target vesting levels) or upon any earlier change of control, and twice the number of shares will be earned if the higher maximum target levels are met. If performance is below the designated minimum levels for all performance targets, no performance-based shares will be earned. Performance-based Operational Awards are valued using the fair market value of Denbury stock on the grant date and Performance-based TSR Awards are valued using a Monte Carlo simulation.

Stock-based compensation expense associated with our field employees is included in “Lease operating expense,” while such expense associated with non-field employees is included in “General and administrative expenses” in the Consolidated Statements of Operations. Stock-based compensation associated with Encore Merger transition employees is included in “Transaction and other costs related to the Encore Merger” in the Consolidated Statements of Operations. Stock-based compensation associated with our employees involved in exploration and drilling activities is capitalized as part of “Oil and natural gas properties” in the Consolidated Balance Sheets.

Stock-based compensation costs for the years ended December 31, 2012, 2011 and 2010, are as follows:



	Year Ended December 31,
In thousands	2012		2011		2010
Stock-based compensation expensed:
General and administrative expenses	$	26,463	$	30,256	$	28,169
Lease operating expenses	2,847		2,621		2,056
Transaction and other costs related to the Encore Merger	—		313		5,866
Total stock-based compensation expensed	29,310		33,190		36,091
Stock-based compensation capitalized	8,587		6,998		3,702
Total cost of stock-based compensation arrangements	$	37,897	$	40,188	$	39,793

Income tax benefit realized for stock-based compensation arrangements	$	15,131	$	18,383	$	8,462

Stock Options and SARs

The fair value of each SARs award is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions noted in the following table. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of stock options and SARs granted was derived from examination of our historical option grants and subsequent exercises. The contractual terms (cliff vesting and graded vesting) are evaluated separately for the expected life, as the exercise behavior for each is different. Expected volatilities are based on the historical volatility of our common stock. Implied volatility was not used in this analysis, as our tradable call option terms are short and the trading volume is low. Our dividend yield is zero, as we have historically not paid dividends.



	2012			2011			2010
Weighted average fair value of SARs granted	$	8.90		$	9.68		$	8.45
Risk-free interest rate	0.79		%	1.74		%	2.19		%
Expected life	4.0 to 5.0 years			4.0 to 5.0 years			4.0 to 4.3 years
Expected volatility	64.9		%	63.3		%	65.0		%
Dividend yield	—		%	—		%	—		%

The following is a summary of our stock option and SARs activity:



	Number of Awards		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2011	11,949,610		$	13.56
Granted	1,066,294		17.14
Exercised	(2,029,570	)	8.03
Forfeited or expired	(541,199	)	18.34
Outstanding at December 31, 2012	10,445,135		14.75		3.7	$	31,861

Exercisable at end of period	7,115,744		$	13.81	3.2	$	30,031

The following is a summary of the total intrinsic value of stock options and SARs exercised and grant-date fair value of stock options and SARs vested:



	Year Ended December 31,
In thousands	2012		2011		2010
Intrinsic value of stock options exercised	$	17,315	$	20,463	$	12,670
Grant-date fair value of stock options and SARs vested	26,391		11,416		8,689

As of December 31, 2012, there was $13.8 million of total compensation cost to be recognized in future periods related to nonvested stock option and SARs share-based compensation arrangements. The cost is expected to be recognized over a weighted-average period of 2.0 years. The following is a summary of cash received from stock option exercises under share-based payment arrangements and tax benefits realized from the exercises of stock options and SARs:



	Year Ended December 31,
In thousands	2012		2011		2010
Cash received from stock option exercises	$	6,022	$	4,685	$	4,867
Tax benefit realized for the exercises of stock options and SARs	241		879		4,603

Restricted Stock – 2004 Plan

As of December 31, 2012, there was $29.0 million of unrecognized compensation expense related to nonvested restricted stock grants. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.61 years. The following is a summary of the total vesting date fair value of restricted stock under the 2004 Plan:



	Year Ended December 31,
In thousands	2012		2011		2010
Fair value of restricted stock vested	$	22,332	$	12,355	$	12,731

A summary of the status of our nonvested restricted stock grants issued under our 2004 Plan and the changes during the year ended December 31, 2012 is presented below:



	Number of Shares		Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2011	3,131,435		$	14.82
Granted	1,909,739		16.94
Vested	(1,378,496	)	15.38
Forfeited	(256,471	)	17.08
Nonvested at December 31, 2012	3,406,207		15.60

Restricted Stock – Legacy Encore Plan

In February 2010, prior to the consummation of the Encore Merger, Encore issued a restricted stock grant to its employees under the Encore Acquisition Company 2008 Incentive Stock Plan (“Encore Plan”). At the time of the Encore Merger, the shares were converted to shares of Denbury restricted stock. The shares vest ratably over a four-year graded vesting period; however, legacy Encore employees who terminate their employment for Good Reason, as defined by Encore’s legacy Employee Severance Protection Plan, will automatically vest in their awards upon termination. Encore employees who did not accept permanent positions with Denbury but who continued their employment through a predefined transition period were considered to have terminated for Good Reason and, accordingly, vested in their awards upon termination. As of December 31, 2012, there was $0.5 million of unrecognized compensation expense related to non-vested restricted stock issued under the Encore Plan, which is expected to be recognized over a weighted-average period of 1.1 years. The following is a summary of the total vesting date fair value of restricted stock under the Encore Plan:



	Year Ended December 31,
In thousands	2012		2011		2010
Fair value of restricted stock vested	$	584	$	2,259	$	6,571

A summary of the status of the non-vested restricted stock grants under the Encore Plan and the changes during the year ended December 31, 2012 is presented below:



	Number of Shares		Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2011	103,043		$	15.43
Vested	(36,049	)	15.43
Forfeited	(10,736	)	15.43
Nonvested at December 31, 2012	56,258		15.43

Performance-Based Equity Awards

During 2012, we granted Performance-based Operational Awards and Performance-based TSR Awards to our officers. The range of assumptions used in the Monte Carlo simulation valuation approach for Performance-based TSR Awards, which were granted for the first time during 2012, are as follows:



	2012
Weighted average fair value of Performance-based TSR Award granted	$	24.68
Risk-free interest rate	0.42		%
Expected life	2.81 years
Expected volatility	45.2		%
Dividend yield	—		%

A summary of the status of the nonvested performance-based equity awards (presented at the target level) during the year ended December 31, 2012 is as follows:



	Performance-based Operational Awards				Performance-based TSR Awards
	Number of Awards		Weighted Average Grant-Date Fair Value		Number of Awards		Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2011	214,627		$	18.71	—		$	—
Granted	110,615		17.27		96,325		24.68
Vested⁽¹⁾	(214,627	)	18.71		—		—
Forfeited	(10,422	)	17.27		(9,408	)	24.68
Nonvested at December 31, 2012	100,193		17.27		86,917		$	24.68


(1)	During 2012, the 2011 annual Performance-based Operational Awards vested, and award holders received shares equivalent to 56% of the number of target-level shares.

The following is a summary of the total vesting date fair value of performance-based equity awards:



	Year Ended December 31,
In thousands	2012		2011		2010
Vesting date fair value of Performance-based Operational Awards	$	2,191	$	10,892	$	7,532