PG&E 2008 Annual Report Download - page 135

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133
The fair value of each stock option on the date of
grant is estimated using the Black-Scholes valuation method.
The weighted average grant-date fair value of options granted
using the Black-Scholes valuation method was $4.46, $7.81,
and $6.98 per share in 2008, 2007, and 2006, respectively.
The signifi cant assumptions used for shares granted in 2008,
2007, and 2006 were:
2008 2007 2006
Expected stock price
volatility 18.9% 16.5% 22.1%
Expected annual dividend
payment $1.56 $1.44 $1.32
Risk-free interest rate 2.77% 4.73% 4.46%
Expected life 5.4 years 5.4 years 5.6 years
Expected volatilities are based on historical volatility of
PG&E Corporation’s common stock. The expected dividend
payment is the dividend yield at the date of grant. The risk-
free interest rate for periods within the contractual term
of the stock option is based on the U.S. Treasury rates in
effect at the date of grant. The expected life of stock options
is derived from historical data that estimates stock option
exercises and employee departure behavior.
The following table summarizes total intrinsic value (fair
market value of PG&E Corporation’s stock less stock option
strike price) of options exercised for PG&E Corporation
and the Utility in 2008, 2007, and 2006:
PG&E
(in millions) Corporation Utility
2008:
Intrinsic value of options exercised $13 $9
2007:
Intrinsic value of options exercised $59 $34
2006:
Intrinsic value of options exercised $97 $51
The tax benefi t from stock options exercised totaled $4 mil-
lion and $20 million for the year ended December 31, 2008
and December 31, 2007, respectively, of which approximately
$3 million and $10 million was recorded by the Utility.
Awards made under the PG&E Corporation Long-Term
Incentive Program before December 31, 2005 and still out-
standing continue to be governed by the terms and conditions
of the PG&E Corporation Long-Term Incentive Program.
PG&E Corporation and the Utility use an estimated
annual forfeiture rate of 2.5% for stock options and restricted
stock and 3% for performance shares, based on historic
forfeiture rates, for purposes of determining compensation
expense for share-based incentive awards. The following
table provides a summary of total compensation expense for
PG&E Corporation and the Utility for share-based incentive
awards for the years ended December 31, 2007 and 2008:
Year ended December 31, 2008
PG&E
(in millions) Corporation Utility
Stock Options $ 2 $ 2
Restricted Stock 22 15
Performance Shares 33 20
Total Compensation Expense (pre-tax) $57 $37
Total Compensation Expense (after-tax) $34 $22
Year ended December 31, 2007
PG&E
(in millions) Corporation Utility
Stock Options $ 7 $ 4
Restricted Stock 24 15
Performance Shares (8) (7)
Total Compensation Expense (pre-tax) $23 $12
Total Compensation Expense (after-tax) $14 $7
Stock Options
Other than the grant of options to purchase 4,032 shares
of PG&E Corporation common stock to non-employee
directors of PG&E Corporation in accordance with the
formula and nondiscretionary provisions of the 2006 LTIP,
no other stock options were granted during 2008. The exer-
cise price of stock options granted under the 2006 LTIP and
all other outstanding stock options is equal to the market
price of PG&E Corporation’s common stock on the date of
grant. Stock options generally have a ten-year term and vest
over four years of continuous service, subject to accelerated
vesting in certain circumstances.