SHARE-BASED COMPENSATION

STOCK OPTIONS—AES grants options to purchase shares of common stock under stock option plans to employees and non-employee directors. Under the terms of the plans, the Company may issue options to purchase shares of the Company’s common stock at a price equal to 100% of the market price at the date the option is granted. Stock options are generally granted based upon a percentage of an employee’s base salary. Stock options issued under these plans in 2013, 2012 and 2011 have a three-year vesting schedule and vest in one-third increments over the three-year period. The stock options have a contractual term of ten years. At December 31, 2013, approximately 15 million shares were remaining for award under the plans. In all circumstances, stock options granted by AES do not entitle the holder the right, or obligate AES, to settle the stock option in cash or other assets of AES.

The following table presents the weighted average fair value of each option grant and the underlying weighted average assumptions, as of the grant date, using the Black-Scholes option-pricing model:



	December 31,
	2013			2012			2011
Expected volatility	23		%	26		%	31		%
Expected annual dividend yield	1		%	1		%	—		%
Expected option term (years)	6			6			6
Risk-free interest rate	1.13		%	1.08		%	2.65		%
Fair value at grant date	$	2.23		$	3.04		$	4.54

The Company exclusively relies on implied volatility as the expected volatility to determine the fair value using the Black-Scholes option-pricing model. The implied volatility may be exclusively relied upon due to the following factors:


•	The Company utilizes a valuation model that is based on a constant volatility assumption to value its employee share options;


•	The implied volatility is derived from options to purchase AES common stock that are actively traded;


•	The market prices of both the traded options and the underlying shares are measured at a similar point in time and on a date reasonably close to the grant date of the employee share options;


•	The traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and


•	The remaining maturities of the traded options on which the estimate is based are at least one year.

The Company uses a simplified method to determine the expected term based on the average of the original contractual term and the pro rata vesting period. This simplified method is used for stock options granted during 2013, 2012 and 2011. This simplified method may be used as the Company’s stock options have the following characteristics:


•	The stock options are granted at-the-money;


•	Exercisability is conditional only on performing service through the vesting date;


•	If an employee terminates service prior to vesting, the employee forfeits the stock options;


•	If an employee terminates service after vesting, the employee has a limited time to exercise the stock option; and


•	The stock option is nonhedgeable and not transferable.

The Company does not discount the grant date fair values to estimate post-vesting restrictions. Post-vesting restrictions include black-out periods when the employee is not able to exercise stock options based on their potential knowledge of information prior to the release of that information to the public.

The following table summarizes the components of stock-based compensation related to employee stock options recognized in the Company’s financial statements:



	December 31,
	2013			2012			2011
	(in millions)
Pre-tax compensation expense	$	2		$	2		$	7
Tax benefit	(1		)	(1		)	(2		)
Stock options expense, net of tax	$	1		$	1		$	5
Total intrinsic value of options exercised	$	5		$	10		$	8
Total fair value of options vested	2			5			7
Cash received from the exercise of stock options	13			9			4

No cash was used to settle stock options or compensation cost capitalized as part of the cost of an asset for the years ended December 31, 2013, 2012 and 2011. As of December 31, 2013, $3 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of 1.8 years.

A summary of the option activity for the year ended December 31, 2013 follows (number of options in thousands, dollars in millions except per option amounts):



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2012	7,883		$	14.91
Exercised	(1,349	)	9.56
Forfeited and expired	(1,097	)	16.70
Granted	1,428		11.25
Outstanding at December 31, 2013	6,865		$	14.91	5.1	$	12
Vested and expected to vest at December 31, 2013	6,618		$	15.04	5.0	$	11
Eligible for exercise at December 31, 2013	4,646		$	16.42	3.6	$	6

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2013. The amount of the aggregate intrinsic value will change based on the fair market value of the Company’s stock.

The Company initially recognizes compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. In 2013, AES has estimated a weighted average forfeiture rate of 25.50% for stock options granted in 2013. This estimate will be revised if subsequent information indicates that the actual number of instruments forfeited is likely to differ from previous estimates. Based on the estimated forfeiture rate, the Company expects to expense $2.4 million on a straight-line basis over a three year period (approximately $0.8 million per year) related to stock options granted during the year ended December 31, 2013.

RESTRICTED STOCK

Restricted Stock Units—The Company issues restricted stock units (“RSUs”) under its long-term compensation plan. The RSUs are generally granted based upon a percentage of the participant’s base salary. The units have a three-year vesting schedule and vest in one-third increments over the three-year period. Units granted prior to 2011 are required to be held for an additional two years before they can be converted into shares, and thus become transferable. There is no such requirement for units granted in 2011 and afterwards. In all circumstances, restricted stock units granted by AES do not entitle the holder the right, or obligate AES, to settle the restricted stock unit in cash or other assets of AES.

For the years ended December 31, 2013, 2012, and 2011, RSUs issued had a grant date fair value equal to the closing price of the Company’s stock on the grant date. The Company does not discount the grant date fair values to reflect any post-vesting restrictions. RSUs granted to employees during the years ended December 31, 2013, 2012, and 2011 had grant date fair values per RSU of $11.19, $13.54 and $12.65, respectively.

The following table summarizes the components of the Company’s stock-based compensation related to its employee RSUs recognized in the Company’s consolidated financial statements:



	December 31,
	2013			2012			2011
	(in millions)
RSU expense before income tax	$	12		$	11		$	11
Tax benefit	(3		)	(3		)	(3		)
RSU expense, net of tax	$	9		$	8		$	8
Total value of RSUs converted⁽¹⁾	$	10		$	9		$	5
Total fair value of RSUs vested	$	12		$	12		$	10


⁽¹⁾	Amount represents fair market value on the date of conversion.

There was no cash used to settle RSUs or compensation cost capitalized as part of the cost of an asset for the years ended December 31, 2013, 2012, and 2011. As of December 31, 2013, $13 million of total unrecognized compensation cost related to RSUs is expected to be recognized over a weighted average period of approximately 1.7 years. There were no modifications to RSU awards during the year ended December 31, 2013.

A summary of the activity of RSUs for the year ended December 31, 2013 follows (number of RSUs in thousands):



	RSUs		Weighted Average Grant Date Fair Values		Weighted Average Remaining Vesting Term
Nonvested at December 31, 2012	2,092		$	13.02
Vested	(942	)	12.82
Forfeited and expired	(337	)	12.55
Granted	1,444		11.19
Nonvested at December 31, 2013	2,257		$	12.01	1.8
Vested at December 31, 2013	2,315		$	8.68
Vested and expected to vest at December 31, 2013	4,353		$	10.26

The Company initially recognizes compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. In 2013, AES has estimated a weighted average forfeiture rate of 24.18% for RSUs granted in 2013. This estimate will be revised if subsequent information indicates that the actual number of instruments forfeited is likely to differ from previous estimates. Based on the estimated forfeiture rate, the Company expects to expense $12 million on a straight-line basis over a three year period related to RSUs granted during the year ended December 31, 2013.

The table below summarizes the RSUs that vested and were converted during the years ended December 31, 2013, 2012, and 2011 (number of RSUs in thousands):



	2013	2012	2011
RSUs vested during the year	942	1,138	982
RSUs converted during the year, net of shares withheld for taxes	905	761	442
Shares withheld for taxes	407	312	150

Performance Stock Units—The Company issues performance stock units (“PSUs”) to officers under its long-term compensation plan. PSUs are restricted stock units of which 50% of the units awarded include a market condition and the remaining 50% include a performance condition. Vesting will occur if the applicable continued employment conditions are satisfied and (a) for the units subject to the market condition the Total Stockholder Return (“TSR”) on AES common stock exceeds the TSR of the Standard and Poor’s 500 Utilities Sector Index over the three-year measurement period beginning on January 1^st of the grant year and ending on December 31^st of the third year and (b) for the units subject to the performance condition if the Company’s actual Adjusted EBITDA meets the performance target over the three-year measurement period beginning on January 1^st of the grant year and ending on December 31^st of the third year. The market and performance conditions determine the vesting and final share equivalent per PSU and can result in earning an award payout range of 0% to 200%, depending on the achievement. In all circumstances, PSUs granted by AES do not entitle the holder the right, or obligate AES, to settle the restricted stock unit in cash or other assets of AES.

The effect of the market condition on PSUs issued to officers of the Company during 2013 is reflected in the award’s fair value on the grant date. The results of the valuation estimated the fair value at $13.28 per share, equating to 119% of the Company’s closing stock price on the date of grant. PSUs that included a market condition granted during the year ended December 31, 2013, 2012, and 2011 had a grant date fair value per RSU of $13.28, $19.75 and $17.68, respectively. The fair value of the PSUs with a performance condition had a grant date fair value of $11.17 equal to the closing price of the Company’s stock on the grant date. The Company believes that it is probable that the performance condition will be met; this will continue to be evaluated throughout the performance period. If the fair value of the market condition was not applied to PSUs issued to officers, the total grant date fair value of PSUs granted during the year ended December 31, 2013 would have decreased by $1 million.

Restricted stock units with a market condition awarded to officers of the Company prior to 2011 contained only the market condition measuring the TSR on AES common stock. These units were required to be held for an additional two years subsequent to vesting before they could be converted into shares and become transferable. There is no such requirement for the shares granted during 2011 and afterwards.

The following table summarizes the components of the Company’s stock-based compensation related to its PSUs recognized in the Company’s consolidated financial statements:



	December 31,
	2013			2012			2011
	(in millions)
PSU expense before income tax	$	4		$	5		$	5
Tax benefit	(1		)	(1		)	(1		)
PSU expense, net of tax	$	3		$	4		$	4
Total value of PSUs converted⁽¹⁾	$	—		$	—		$	—
Total fair value of PSUs vested	—			2			—


⁽¹⁾	Amount represents fair market value on the date of conversion.

There was no cash used to settle PSUs or compensation cost capitalized as part of the cost of an asset for the years ended December 31, 2013, 2012, and 2011. As of December 31, 2013, $7 million of total unrecognized compensation cost related to PSUs is expected to be recognized over a weighted average period of approximately 1.8 years. There were no modifications to PSU awards during the year ended December 31, 2013.

A summary of the activity of PSUs for the year ended December 31, 2013 follows (number of PSUs in thousands):



	PSUs		Weighted Average Grant Date Fair Values		Weighted Average Remaining Vesting Term
Nonvested at December 31, 2012	1,082		$	14.96
Vested	—		—
Forfeited and expired	(367	)	12.94
Granted	624		12.23
Nonvested at December 31, 2013	1,339		$	14.24	1.4
Vested at December 31, 2013	343		$	6.68
Vested and expected to vest at December 31, 2013	1,486		12.68

The Company initially recognizes compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. In 2013, AES has estimated a forfeiture rate of 25.50% for PSUs granted in 2013. This estimate will be revised if subsequent information indicates that the actual number of instruments forfeited is likely to differ from previous estimates. Based on the estimated forfeiture rate, the Company expects to expense $6 million on a straight-line basis over a three year period (approximately $2 million per year) related to PSUs granted during the year ended December 31, 2013.

The table below summarizes the PSUs that vested and were converted during the years ended December 31, 2013, 2012, and 2011 (number of PSUs in thousands):



	2013	2012	2011
PSUs vested during the year	—	343	—
PSUs converted during the year, net of shares withheld for taxes	—	—	—
Shares withheld for taxes	—	—	—