16. Stock-Based Compensation and Awards

During the years ended December 31, 2015, 2014 and 2013 we recognized stock based compensation expense in our results of operations of $10.0 million, $12.8 million and $9.0 million, respectively, related to stock options, restricted stock units, performance units, phantom units and the employee stock purchase plan.

Stock Incentive Plan

In April 2013, we adopted the 2013 Plan to provide for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, other stock-based awards and dividend equivalent rights to directors of Archrock and employees and consultants of Archrock and its affiliates. Under the 2013 Plan, the maximum number of shares of common stock available for issuance pursuant to awards is 6,500,000. Each option and stock appreciation right granted counts as one share against the aggregate share limit, and any share subject to a stock settled award other than a stock option, stock appreciation right or other award for which the recipient pays intrinsic value counts as 1.75 shares against the aggregate share limit. Shares subject to awards granted under the 2013 Plan that are subsequently canceled, terminated, settled in cash or forfeited (excluding shares withheld to satisfy tax withholding obligations to or pay the exercise price of an option) are, to the extent of such cancelation, termination, settlement or forfeiture, available for future grant under the 2013 Plan. Cash settled awards are not counted against the aggregate share limit. No additional grants may be made under the Archrock, Inc. 2007 Amended and Restated Stock Incentive Plan (the “2007 Plan”). Previous grants made under the 2007 Plan will continue to be governed by their respective plans.

Exterran Corporation Spin-off Adjustments

In connection with the Spin-off of Exterran Corporation, stock options, restricted stock, restricted stock units and performance unit awards were adjusted in accordance with anti-dilution provisions under the existing plans. As such, we did not record any additional compensation expense related to the adjustment of the awards. The awards were generally adjusted as follows:

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Pre-2015 Awards. Immediately prior to the Spin-off, each outstanding Exterran Holdings stock option, restricted stock, restricted stock unit and performance unit granted prior to January 1, 2015, whether vested or unvested, was split into two awards, consisting of an Archrock award and an Exterran Corporation award. However, Exterran Holdings “incentive stock options” (within the meaning of Section 422 of the Code) were converted solely, into options denominated in shares of common stock of the applicable holder’s post-spin employer if the holder of the award elected, prior to the Spin-off, to preserve the tax treatment of such option.

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2015 Awards. Each Exterran Holdings stock option, restricted stock award, restricted stock unit award and performance unit award that was (i) granted in calendar year 2015 and (ii) held by an individual who became our employee or is engaged to provide service to us following the Spin-off was converted solely into an Archrock award. We did not grant any stock options in the calendar year 2015 prior to the Spin-off.

Equity awards that were adjusted as described above generally remain subject to the same vesting, expiration, performance conditions and other terms and conditions as applied to the awards immediately prior to the Spin-off.

Stock Options

Stock options are granted at fair market value at the grant date, are exercisable according to the vesting schedule established by the compensation committee of our board of directors in its sole discretion and expire no later than 7 years after the grant date. Stock options generally vest one-third per year on each of the first three anniversaries of the grant date, subject to continued services through the applicable vesting date.

During the year ended December 31, 2015 we did not grant any stock options. The weighted average grant date fair value for stock options granted during the years ended December 31, 2014 and 2013 was $14.47 and $10.19, respectively, and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:



	Years Ended December 31,
	2014		2013
Expected life in years	4.5		4.5
Risk-free interest rate	1.33	%	0.66	%
Volatility	46.51	%	49.19	%
Dividend yield	1.5	%	0.0	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for a period commensurate with the estimated expected life of the stock options. Expected volatility is based on the historical volatility of our stock over the period commensurate with the expected life of the stock options and other factors. The dividend yield is based on the current annualized dividend rate in effect during the quarter in which the grant was made. At the time of the stock option grants during the year ended December 31, 2013, we had not historically paid any dividends and did not expect to pay any dividends during the expected life of the stock options.

The following table presents stock option activity during the year ended December 31, 2015:



	Stock Options (in thousands)		Weighted Average Exercise Price Per Share ⁽²⁾			Weighted Average Remaining Life (in years)	Aggregate Intrinsic Value (in thousands)
Options outstanding, January 1, 2015	1,495		$	33.39
Granted	—		—
Exercised	(90	)	12.29
Canceled	(300	)	59.91
Spin-off of Exterran Corporation ⁽¹⁾	142		(56.65		)
Options outstanding, December 31, 2015	1,247		18.28			2.2	$	278
Options exercisable, December 31, 2015	1,118		17.97			1.9	278


⁽¹⁾	Reflects adjustment of awards outstanding and the exercise price as a result of the Spin-off.


⁽²⁾	Activity prior to the Spin-off reflects historical exercise price.

Intrinsic value is the difference between the market value of our stock and the exercise price of each stock option multiplied by the number of stock options outstanding for those stock options where the market value exceeds their exercise price. The total intrinsic value of stock options exercised during 2015, 2014 and 2013 was $1.5 million, $16.6 million and $4.4 million, respectively. As of December 31, 2015, we expect $0.5 million of unrecognized compensation cost related to unvested stock options to be recognized over the weighted-average period of 1.0 years.

Restricted Stock, Stock-Settled Restricted Stock Units, Performance Units, Cash Settled Restricted Stock Units and Performance Units

For grants of restricted stock, restricted stock units and performance units, we recognize compensation expense over the vesting period equal to the fair value of our common stock at the grant date. Our restricted stock and certain of our restricted stock units and performance units include rights to receive dividends or dividend equivalents. We remeasure the fair value of cash settled restricted stock units and cash-settled performance units and record a cumulative adjustment of the expense previously recognized. Our obligation related to the cash-settled restricted stock units and cash-settled performance units is reflected as a liability in our consolidated balance sheets. Restricted stock, stock-settled restricted stock units, performance units, cash-settled restricted stock units and performance units generally vest one-third per year on each of the first three anniversaries of the grant date, subject to continued services through the applicable vesting date.

The following table presents restricted stock, stock-settled restricted stock unit, performance unit, cash-settled restricted stock unit and cash-settled performance unit activity during the year ended December 31, 2015:



	Shares (in thousands)		Weighted Average Grant-Date Fair Value Per Share ⁽³⁾
Non-vested awards, January 1, 2015	1,170		$	27.37
Granted	1,008		25.49
Vested	(809	)	23.05
Canceled	(53	)	30.25
Spin-off of Exterran Corporation ⁽¹⁾	(161	)	(99.93		)
Non-vested awards, December 31, 2015 ⁽²⁾	1,155		18.50


⁽¹⁾	Reflects adjustment of outstanding awards in connection with and the grant date fair value adjusted as a result of, the Spin-off.


⁽²⁾	Non-vested awards as of December 31, 2015 are comprised of 55,000 cash settled restricted stock units and cash settled performance units and 1,100,000 restricted shares, stock-settled restricted stock units and performance units.


⁽³⁾	Excluding the Spin-off of Exterran Corporation adjustment, reflects historical grant date fair value.

As of December 31, 2015, we expect $11.7 million of unrecognized compensation cost related to unvested restricted stock, restricted stock units, performance units, cash settled restricted stock units and cash settled performance units to be recognized over the weighted-average period of 1.8 years.

Employee Stock Purchase Plan

In August 2007, we adopted the Archrock, Inc. Employee Stock Purchase Plan (as amended, the “ESPP”), which is intended to provide employees with an opportunity to participate in our long-term performance and success through the purchase of shares of common stock at a price that may be less than fair market value. The ESPP is designed to comply with Section 423 of the Internal Revenue Code of 1986, as amended. Each quarter, an eligible employee may elect to withhold a portion of his or her salary up to the lesser of $25,000 per year or 10% of his or her eligible pay to purchase shares of our common stock at a price equal to 85% to 100% of the fair market value of the stock as of the first trading day of the quarter, the last trading day of the quarter or the lower of the first trading day of the quarter and the last trading day of the quarter, as the compensation committee of our board of directors may determine. The ESPP will terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, unless it is extended. In May 2011, we amended the ESPP to increase the maximum number of shares of common stock available for purchase under the ESPP to 1,000,000. As a result of the Spin-off, the ESPP was suspended after the second quarter 2015 purchase period.

Directors’ Stock and Deferral Plan

On August 20, 2007, we adopted the Archrock, Inc. Directors’ Stock and Deferral Plan to provide non-employee members of the board of directors with an opportunity to elect to receive our common stock as payment for a portion or all of their retainer and meeting fees. The number of shares paid each quarter is determined by dividing the dollar amount of fees elected to be paid in common stock by the closing sales price per share of the common stock on the last day of the quarter. In addition, directors who elect to receive a portion or all of their fees in the form of common stock may also elect to defer, until a later date, the receipt of a portion or all of their fees to be received in common stock. We have reserved 100,000 shares under the Directors’ Stock and Deferral Plan, and as of December 31, 2015, 48,022 shares remained available to be issued under the plan.

Partnership Long-Term Incentive Plan

The Partnership’s Long-Term Incentive Plan (the “Partnership Plan”) was adopted, in October 2006 for the benefit of the employees, directors and consultants of the Partnership, us and our respective affiliates. A maximum of 1,035,378 common units are available for the issuance of common unit options, restricted units, unit awards and phantom units under the Partnership Plan. The Partnership Plan is administered by the compensation committee of the board of directors of Archrock GP LLC, the general partner of the Partnership’s general partner (the “Partnership Plan Administrator”).

Phantom units are notional units that entitle the grantee to receive common units upon the vesting of such phantom units or, at the discretion of the Partnership Plan Administrator, cash equal to the fair market value of such common units. Phantom units granted under the Partnership Plan may include nonforfeitable tandem distribution equivalent rights to receive cash distributions on unvested phantom units in the quarter in which distributions are paid on common units. Phantom units generally vest one-third per year on each of the first three anniversaries of the grant date, subject to continued service through the applicable vesting date.

Partnership Phantom Units

The following table presents phantom unit activity during the year ended December 31, 2015:



	Phantom Units (in thousands)		Weighted Average Grant-Date Fair Value per Unit
Phantom units outstanding, January 1, 2015	92		$	27.38
Granted	45		24.87
Vested	(60	)	25.94
Phantom units outstanding, December 31, 2015	77		27.01

As of December 31, 2015, we expect $1.2 million of unrecognized compensation cost related to unvested phantom units to be recognized over the weighted-average period of 1.7 years.