Exelon 2014 Annual Report Download - page 255

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
Exelon receives a tax deduction based on the intrinsic value of the award on the exercise date for stock options and the distribution
date for performance share awards and restricted stock units. For each award, throughout the requisite service period, Exelon
recognizes the tax benefit related to compensation costs. The tax deductions in excess of the benefits recorded throughout the
requisite service period are recorded to common stock and are included in other financing activities within Exelon’s Consolidated
Statements of Cash Flows. The following table presents information regarding Exelon’s tax benefits for the years ended
December 31, 2014, 2013 and 2012:
Year Ended
December 31,
2014 2013 2012
Realized tax benefit when exercised/distributed:
Stock options .......................................................................... $— $— $ 3
Restricted stock units ................................................................... 17 11 11
Performance share awards .............................................................. 11 11 7
Stock deferral plan ..................................................................... — 1 —
Excess tax benefits included in other financing activities of Exelon’s
Consolidated Statements of Cash Flows:
Stock options .......................................................................... $— $— $ 2
Stock Options
Non-qualified stock options to purchase shares of Exelon’s common stock were granted under the LTIP through 2012. Due to
changes in the LTIP, there were no stock options granted in 2013 or 2014. For all stock options granted through 2012, the exercise
price of the stock options is equal to the fair market value of the underlying stock on the date of option grant. The vesting period of
stock options is generally four years. All stock options expire ten years from the date of grant.
The value of stock options at the date of grant is expensed over the requisite service period using the straight-line method. The
requisite service period for stock options is generally four years. However, certain stock options become fully vested upon the
employee reaching retirement-eligibility. The value of the stock options granted to retirement-eligible employees is either recognized
immediately upon the date of grant or through the date at which the employee reaches retirement eligibility.
The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The following
table presents the weighted average assumptions used in the pricing model for grants and the resulting weighted average grant date
fair value of stock options granted for the year ended 2012:
Year ended
December 31, 2012
Dividend yield .................................................................................. 5.28%
Expected volatility .............................................................................. 23.20%
Risk-free interest rate ........................................................................... 1.30%
Expected life (years) ............................................................................ 6.25
Weighted average grant date fair value (per share) ................................................... 4.18
The assumptions above relate to Exelon stock options granted in 2012 and therefore do not include stock options that were
converted in connection with the merger with Constellation during the year ended 2012.
The dividend yield is based on several factors, including Exelon’s most recent dividend payment at the grant date and the average
stock price over the previous year. Expected volatility is based on implied volatilities of traded stock options in Exelon’s common
stock and historical volatility over the estimated expected life of the stock options. The risk-free interest rate for a security with a term
equal to the expected life is based on a yield curve constructed from U.S. Treasury strips at the time of grant. For each year
presented, the expected life represents the period of time the stock options are expected to be outstanding and is based on the
simplified method. Exelon believes that the simplified method is appropriate due to several factors that result in historical exercise
data not being sufficient to determine a reasonable estimate of expected term. Exelon uses historical data to estimate employee
forfeitures, which are compared to actual forfeitures on a quarterly basis and adjusted as necessary.
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