Annual report pursuant to Section 13 and 15(d)

Share-Based Compensation

v2.4.0.6
Share-Based Compensation
 12 Months Ended
Dec. 31, 2012
Share-based Compensation [Abstract]  
Share-based Compensation
SHARE-BASED COMPENSATION
 
We have granted options to purchase common stock to employees, consultants and outside directors under the Cheniere Energy, Inc. Amended and Restated 1997 Stock Option Plan ("1997 Plan"), Amended and Restated 2003 Stock Incentive Plan, as amended ("2003 Plan"), and 2011 Incentive Plan, as amended (the"2011 Plan"). We recognize our share-based payments to employees in the consolidated financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line or accelerated recognition methods.
 
For the years ended December 31, 2012, 2011 and 2010, the total share-based compensation expense recognized in our net loss (net of capitalization) was $58.7 million, $26.4 million and $17.9 million, respectively.  The effect of a change in estimated forfeitures is recognized through a cumulative adjustment included in share-based compensation cost in the period of change in estimate. We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. For the years ended December 31, 2012, 2011 and 2010, the cumulative adjustment recognized in our compensation expense was zero, $0.6 million and $1.1 million, respectively. For the years ended December 31, 2012, 2011 and 2010, the total share-based compensation cost capitalized as part of the cost of capital assets was $2.4 million, zero and zero respectively.
 
The total unrecognized compensation cost at December 31, 2012 relating to non-vested share-based compensation arrangements granted under the 1997 Plan, 2003 Plan and 2011 Plan was $90.9 million. That cost is expected to be recognized over 4.0 years, with a weighted average period of 3.5 years.
 
We have disclosed the deferred tax benefit realized from share-based compensation exercised during the annual period in Note 13—"Income Taxes". A valuation allowance equal to the deferred tax asset has been established due to the uncertainty of realizing the tax benefits related to this deferred tax asset.
 
Phantom Stock
 
On February 25, 2009, the Compensation Committee of our Board of Directors (the "Compensation Committee") made phantom stock grants of 5,545,000 shares pursuant to our 2003 Plan to all Cheniere executives, designated employees and one consultant. On June 12, 2009, the Compensation Committee made additional phantom stock grants of 800,000 shares to our Chief Executive Officer pursuant to the approval from our stockholders to increase the maximum number of shares granted to any one individual under our 2003 Plan during a calendar year from 1.0 million shares to 3.0 million shares. The shares were awarded under a time based plan and a performance based plan. The time based plan included an aggregate of 1,565,000 shares of phantom stock and provided for a three-year graded vesting schedule. The shares awarded under the time based plan vested equally on each of December 15, 2009, 2010 and 2011. The performance based plan included an aggregate of 4,780,000 shares of phantom stock with each grant divided into three equal parts providing incentive compensation based on separate vesting terms. Vested shares of phantom stock were settled in cash or in shares of common stock, as determined by the Compensation Committee. In June 2009, we obtained approval from our stockholders to increase the number of shares of common stock available for issuance under our 2003 Plan from 11.0 million common shares to 21.0 million shares of common stock, which provided the requisite shares of common stock needed to satisfy vested phantom stock.  We transferred the fair valued compensation liability associated with these phantom stock grants into additional paid-in capital.  Using a Monte Carlo simulation, fair values were calculated as of June 12, 2009 for the time and performance based plans.  For the years ended December 31, 2012, 2011 and 2010, a total of zero, $12.2 million and $7.0 million was recognized as compensation expense relating to the vesting of time and performance based phantom stock grants. There was no unrecognized compensation cost at December 31, 2012 relating to non-vested phantom stock. 
Stock Options 
We estimate the fair value of stock options at the date of grant using a Black-Scholes valuation model. The risk-free rate is based on the U.S. Treasury securities yield curve in effect at the time of grant. The expected term (estimated period of time outstanding) of stock options granted is based on the "simplified" method of estimating the expected term for "plain vanilla" stock options, and varies based on the vesting period and contractual term of the stock option. Expected volatility for stock options granted is based on an equally weighted average of the implied volatility of exchange traded stock options on our common stock expiring more than one year from the measurement date, and historical volatility of our common stock for a period equal to the stock option’s expected life. We have not declared dividends on our common stock. We did not issue any options to purchase shares of our common stock during the year ended December 31, 2012. 
The table below provides a summary of option activity under the 1997 Plan, 2003 Plan and 2011 Plan as of December 31, 2012:
 
 
Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
(in thousands)
 
 
 
 
 
(in thousands)
Outstanding at January 1, 2012
 
771

 
$
26.45

 
 
 
 
Granted
 
—

 
—

 
 
 
 
Exercised
 
(106
)
 
7.86

 
 
 
 
Forfeited or Expired
 
(27
)
 
38.22

 
 
 
 
Outstanding at December 31, 2012
 
638

 
$
29.08

—

2.27
 
$
1,552

Exercisable at December 31, 2012
 
638

 
$
29.08

 
2.27
 
$
—

 
The weighted average grant-date fair value of options granted during the years ended December 31, 2012, 2011 and 2010 was zero. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $0.7 million, zero and zero, respectively.

We received $0.8 million, zero and zero proceeds from the exercise of stock options in the years ended December 31, 2012, 2011 and 2010, respectively.
 
Stock and Non-Vested Stock
 
We have granted stock, phantom stock and restricted stock and non-vested restricted stock to employees, executive officers, outside directors and consultants under the 2003 Plan and 2011 Plan. Grants of non-vested stock are accounted for on an intrinsic value basis. The amortization of the calculated value of non-vested stock grants is accounted for as a charge to compensation expense or capitalized with a corresponding increase to additional paid-in-capital over the requisite service period.
 
For the years ended December 31, 2012, 2011 and 2010, we issued zero shares, 5,262,000 shares and 502,000 shares, respectively, of phantom stock awards to our executives and certain officers.

For the years ended December 31, 2012, 2011 and 2010, we issued 10,293,000 shares, 2,565,000 shares and 1,234,000 shares, respectively, of restricted stock awards to our employees, executives, directors and a consultant as performance, retention, service and new hire awards.  A majority of the awards were issued with a one, three or four-year graded vesting period.  A certain group of 2007 retention grants received a vesting schedule of 50% on December 1, 2008, 30% on December 1, 2009 and 20% on June 1, 2010. A certain group of 2011 restricted stock awards received a vesting schedule of 33% on June 30, 2011, 33% on June 30, 2012, and 33% on June 30, 2013.
 
On May 25, 2007, the Compensation Committee approved a bonus plan covering substantially all employees not otherwise included in the 2007 Plan. This plan provided covered employees the ability to earn bonuses based on the achievement of established annual performance goals as well as a stock price appreciation goal. The fair value of the grants was recalculated at each balance sheet date until the total number of restricted shares was granted in January 2008. Because of the existence of the stock price appreciation goal, which was a market condition, the restricted stock was not eligible for amortization under the straight-line method, and each vesting tranche is being amortized separately.

In July 2012, we met the criteria to determine the Long-Term Commercial Bonus Pool that was established by the Compensation Committee of the Board of Directors in the 2011-2013 Bonus Plan in relation to LNG trains 1 and 2 of the Liquefaction Project. In August 2012, the Compensation Committee approved a Long-Term Commercial Bonus Pool, which consisted of approximately $60 million in cash awards and 10 million restricted shares of common stock to be issued under the 2011 Plan. The restricted stock awards vest in five installments. The first restricted stock award installment vested in August 2012 when Sabine Pass Liquefaction issued its full notice to proceed ("NTP") to Bechtel under the lump sum turnkey agreement with respect to LNG Train 1 and Train 2 of the Liquefaction Project. The restricted stock awards vest in five installments as follows:
•
35% when NTP is issued;
•
10% on the first anniversary of the issuance of NTP;
•
15% on the second anniversary of the issuance of NTP;
•
15% on the third anniversary of the issuance of NTP; and
•
25% on the fourth anniversary of the issuance of NTP.

In general, employees must be employed at the time of each vesting to receive the awards or will otherwise forfeit such awards. Vesting and payment of the awards would accelerate in full upon (i) termination of employment by the Company without "Cause" or, solely in the case of executive officers, termination of employment by the employee for "Good Reason" (each as defined in the 2003 Plan), (ii) the employee's death or disability, or (iii) the occurrence of a change of control.
 
The table below provides a summary of the status of our non-vested shares under the 2003 Plan and 2011 Plan as of December 31, 2012 (in thousands except for per share information):
 
 
Non-Vested
Shares
 
Weighted
Average Grant
Date Fair Value
Per Share
Non-vested at January 1, 2012
 
1,879

 
$
7.75

Granted
 
10,293

 
14.06

Vested
 
(4,361
)
 
12.76

Forfeited
 
(14
)
 
12.78

Non-vested at December 31, 2012
 
7,797

 
$
13.27



The weighted average grant date fair values per share of restricted stock granted during the years ended December 31, 2012, 2011 and 2010 were $14.06, $7.72, and $3.31, respectively. The total grant date fair value per share of shares vested during the years ended December 31, 2012, 2011 and 2010 were $12.76, $7.26 and $5.54, respectively.

Share-based Plan Descriptions and Information
 
Our 1997 Plan provides for the issuance of stock options to purchase up to 5.0 million shares of our common stock, all of which have been granted. Non-qualified stock options were granted to employees, contract service providers and outside directors.
 
In June 2009, we obtained approval from our stockholders to increase the number of shares of common stock available for issuance under our 2003 Plan from 11.0 million shares to 21.0 million shares. These awards may be in the form of non-qualified stock options, incentive stock options, purchased stock, restricted (non-vested) stock, bonus (unrestricted) stock, stock appreciation rights, phantom stock and other share-based performance awards deemed by the Compensation Committee to be consistent with the purposes of the 2003 Plan. To date, the only awards made by the Compensation Committee have been in the form of non-qualified stock options, restricted stock, restricted stock units and phantom shares.
 
401(k) Plan
 
In 2005, we established a defined contribution pension plan ("401(k) Plan"). The 401(k) Plan allows eligible employees to contribute up to 100% of their compensation up to the IRS maximum. We match each employee’s salary deferrals (contributions) up to five percent of compensation and may make additional contributions at our discretion. Effective January 1, 2007, employees are immediately vested in the contributions made by us. Our contributions to the 401(k) Plan were $1.4 million, $1.1 million and $1.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. We have made no discretionary contributions to the 401(k) Plan to date.