11. Stock-Based Compensation

The Calpine Equity Incentive Plans provide for the issuance of equity awards to all employees as well as the non-employee members of our Board of Directors. The equity awards may include incentive or non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance compensation awards and other share-based awards. The equity awards granted under the Calpine Equity Incentive Plans include both graded and cliff vesting options which vest over periods between one and five years, contain contractual terms of approximately five and ten years and are subject to forfeiture provisions under certain circumstances, including termination of employment prior to vesting. At June 30, 2011, there are 567,000 and 27,533,000 shares of our common stock authorized for issuance to participants under the Director Plan and the Equity Plan, respectively.

We use the Black-Scholes option-pricing model or the Monte Carlo simulation model to estimate the fair value of our employee stock options on the grant date, which takes into account the exercise price and expected life of the stock option, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the stock option as of the grant date. For our restricted stock and restricted stock units, we use our closing stock price on the date of grant, or the last trading day preceding the grant date for restricted stock granted on non-trading days, as the fair value for measuring compensation expense. Stock-based compensation expense is recognized over the period in which the related employee services are rendered. The service period is generally presumed to begin on the grant date and end when the equity award is fully vested. We use the graded vesting attribution method to recognize fair value of the equity award over the service period. For example, the graded vesting attribution method views one three-year option grant with annual graded vesting as three separate sub-grants, each representing 33 1/3% of the total number of stock options granted. The first sub-grant vests over one year, the second sub-grant vests over two years and the third sub-grant vests over three years. A three-year option grant with cliff vesting is viewed as one grant vesting over three years.

Stock-based compensation expense recognized was $7 million and $6 million for the three months ended June 30, 2011 and 2010, respectively, and $12 million for both the six months ended June 30, 2011 and 2010. We did not record any significant tax benefits related to stock-based compensation expense in any period as we are not benefiting from a significant portion of our deferred tax assets, including deductions related to stock-based compensation expense. In addition, we did not capitalize any stock-based compensation expense as part of the cost of an asset for the three and six months ended June 30, 2011 and 2010. At June 30, 2011, there was unrecognized compensation cost of $17 million related to options, $22 million related to restricted stock and $1 million related to restricted stock units, which is expected to be recognized over a weighted average period of 1.6 years for options, 1.8 years for restricted stock and 0.9 years for restricted stock units. We issue new shares from our reserves set aside for the Calpine Equity Incentive Plans and employment inducement options when stock options are exercised and for other share-based awards.

A summary of all of our non-qualified stock option activity for the Calpine Equity Incentive Plans for the six months ended June 30, 2011, is as follows:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Term (in years)		Aggregate Intrinsic Value (in millions)
Outstanding - December 31, 2010		17,164,890	$	17.44		5.6	$	8
Granted		909,306	$	14.32
Exercised		6,654	$	10.95
Forfeited		51,050	$	11.23
Expired		156,885	$	17.55
Outstanding - June 30, 2011		17,859,607	$	17.30		5.3	$	25
Exercisable - June 30, 2011		6,665,499	$	19.15		5.3	$	1
Vested and expected to vest - June 30, 2011		17,443,021	$	17.41		5.2	$	24

The total intrinsic value and the cash proceeds received from our employee stock options exercised were not significant for the six months ended June 30, 2011 and 2010.

The fair value of options granted during the six months ended June 30, 2011 and 2010, was determined on the grant date using the Black-Scholes pricing model. Certain assumptions were used in order to estimate fair value for options as noted in the following table.


	2011			2010
Expected term (in years)(1)		6.5			6.5
Risk-free interest rate(2)		2.7 — 3.2	%		2.9 — 3.3	%
Expected volatility(3)		31.2 — 31.7	%		35.0 — 37.6	%
Dividend yield(4)		—			—
Weighted average grant-date fair value (per option)	$	5.48		$	4.66

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(1)	Expected term calculated using the simplified method prescribed by the SEC due to the lack of sufficient historical exercise data to provide a reasonable basis to estimate the expected term.

(2)	Zero Coupon U.S. Treasury rate or equivalent based on expected term.

(3)	Volatility calculated using the implied volatility of our exchange traded stock options.

(4)	We have never paid cash dividends on our common stock, and it is not anticipated that any cash dividends will be paid on our common stock in the near future.

No restricted stock or restricted stock units have been granted other than under the Calpine Equity Incentive Plans. A summary of our restricted stock and restricted stock unit activity for the Calpine Equity Incentive Plans for the six months ended June 30, 2011, is as follows:


	Number of Restricted Stock Awards		Weighted Average Grant-Date Fair Value
Nonvested - December 31, 2010		2,683,117	$	11.16
Granted		1,630,465	$	14.38
Forfeited		145,923	$	11.88
Vested		460,232	$	14.62
Nonvested - June 30, 2011		3,707,427	$	12.10

The total fair value of our restricted stock and restricted stock units that vested during the six months ended June 30, 2011 and 2010, was $7 million and $4 million, respectively.