Chesapeake Energy 2015 Annual Report Download - page 118

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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As of December 31, 2015, there was approximately $109 million of total unrecognized compensation expense
related to unvested restricted stock. The expense is expected to be recognized over a weighted average period of
approximately 1.85 years.
The vesting of certain restricted stock grants may result in state and federal income tax benefits, or reductions
in these benefits, related to the difference between the market price of the Company’s common stock at the date of
vesting and the date of grant. During 2015 and 2013, we recognized reductions in tax benefits related to restricted
stock of $12 million and $14 million, respectively. During 2014, we recognized an excess tax benefit related to restricted
stock of $12 million. Each adjustment was recorded to additional paid-in capital and deferred income taxes.
Stock Options. In 2015, 2014 and 2013, we granted members of senior management stock options that vest
ratably over a three-year period. In January 2013, we also granted retention awards of stock options to certain officers
that 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. Outstanding options
expire seven to ten years from the date of grant.
We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The expected life
of an option is determined using the simplified method, as there is no adequate historical exercise behavior available.
Volatility assumptions are estimated based on an average of historical volatility of Chesapeake stock 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
dividend policy, over the expected life of the option. The Company used the following weighted average assumptions
to estimate the grant date fair value of the stock options granted in 2015:
Expected option life – years ........................................................................................................................ 4.5
Volatility ...................................................................................................................................................... 39.91%
Risk-free interest rate ................................................................................................................................. 1.33%
Dividend yield ............................................................................................................................................. 1.91%