Chesapeake Energy 2013 Annual Report Download - page 119

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
111
Stock Options. In 2013, we granted members of our senior management team stock options that will vest ratably
over a three-year period. We also granted retention awards to certain officers of stock options that will vest one-third
on each of the third, fourth and fifth anniversaries of the grant date. Each stock option award has an exercise price
equal to the closing price of the Company’s common stock on the grant date. Prior to 2006, we had granted stock
options under several stock compensation plans which vested over a four-year period. Outstanding options expire ten
years from the date of grant.
We utilized the Black-Scholes option pricing model to measure the fair value of the stock options that were granted
in 2013. The expected life of an option is determined using the "simplified method", as there is not adequate historical
exercise behavior available. Volatility assumptions are estimated based on an average of historical volatility over the
expected life of an option. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant
over the expected life of the option. The dividend yield is based on an annual dividend yield, taking into account the
Company's current dividend policy over the expected life of the option. The Company used the following weighted-
average assumptions to estimate the fair value of the stock options granted in 2013:
Expected option life - years ........................................................................................................................ 6.49
Volatility ...................................................................................................................................................... 48.47%
Risk-free interest rate ................................................................................................................................. 1.30%
Dividend yield ............................................................................................................................................. 1.82%
The following table provides information related to stock option activity for 2013, 2012 and 2011:
Number of
Shares
Underlying
Options
Weighted
Average
Exercise
Price
Per Share
Weighted
Average
Contract
Life in
Years
Aggregate
Intrinsic
Value(a)
(in thousands) ($ in millions)
Outstanding at January 1, 2013 ............................... 481 $ 12.69 0.96 $ 2
Granted .............................................................. 5,264 $ 19.32
Exercised ........................................................... (346) $ 10.82 $ 11
Expired ............................................................... (131) $ 19.31
Outstanding at December 31, 2013.......................... 5,268 $ 19.28 6.66 $ 41
Exercisable at December 31, 2013 .......................... 1,552 $ 18.82 1.97 $ 13
Outstanding at January 1, 2012 ............................... 1,051 $ 9.84 1.41 $ 13
Exercised ........................................................... (570) $ 7.45 $ 7
Outstanding and exercisable at December 31, 2012 481 $ 12.69 0.96 $ 2
Outstanding at January 1, 2011................................ 1,808 $ 8.90 2.03 $ 31
Exercised ........................................................... (757) $ 7.59 $ 15
Outstanding and exercisable at December 31, 2011 1,051 $ 9.84 1.41 $ 13
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(a) The intrinsic value of a stock option is the amount by which the current market value or the market value upon
exercise of the underlying stock exceeds the exercise price of the option.
As of December 31, 2013, there was $16 million of total unrecognized compensation cost related to stock options.
The cost is expected to be recognized over a weighted average period of approximately 2.5 years.