Stock-Based Compensation

Calpine Equity Incentive Plans

The Calpine Equity Incentive Plans provide for the issuance of equity awards to all non-union 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 awards which vest over periods between one and five years, contain contractual terms between approximately five and ten years and are subject to forfeiture provisions under certain circumstances, including termination of employment prior to vesting. At March 31, 2014, there were 567,000 and 40,533,000 shares of our common stock authorized for issuance to participants under the Director Plan and the Equity Plan, respectively.

Equity Classified Share-Based Awards

We use the Black-Scholes option-pricing model or the Monte Carlo simulation model, as appropriate, to estimate the fair value of our employee stock options on the grant date, which takes into account the exercise price and expected term 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 restricted stock grant with annual graded vesting as three separate sub-grants, each representing 33 1/3% of the total number of shares of restricted stock 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 restricted stock grant with cliff vesting is viewed as one grant vesting over three years.

Stock-based compensation expense recognized for our equity classified share-based awards was $9 million and $8 million for the three months ended March 31, 2014 and 2013, respectively. 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 months ended March 31, 2014 and 2013. At March 31, 2014, there was unrecognized compensation cost of $1 million related to options, $47 million related to restricted stock and nil related to restricted stock units, which is expected to be recognized over a weighted average period of 0.9 years for options, 1.7 years for restricted stock and 0.1 years for restricted stock units. We issue new shares from our share 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 three months ended March 31, 2014, is as follows:



	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding — December 31, 2013	14,114,289	$	18.25	3.1	$	36
Granted	—	$	—
Exercised	184,931	$	15.56
Forfeited	—	$	—
Expired	1,500	$	17.39
Outstanding — March 31, 2014	13,927,858	$	18.29	2.8	$	48
Exercisable — March 31, 2014	13,012,308	$	18.50	2.5	$	43
Vested and expected to vest – March 31, 2014	13,871,693	$	18.30	2.8	$	48

The total intrinsic value of our employee stock options exercised was $1 million and $2 million for the three months ended March 31, 2014 and 2013, respectively. The total cash proceeds received from our employee stock options exercised was $3 million and $9 million for the three months ended March 31, 2014 and 2013, respectively.

There were no stock options granted during the three months ended March 31, 2014. The fair value of options granted during the three months ended March 31, 2013 was determined on the grant date using the Black-Scholes option-pricing model. Certain assumptions were used in order to estimate fair value for options as noted in the following table:



	2013
Expected term (in years)⁽¹⁾	6.5
Risk-free interest rate⁽²⁾	1.4		%
Expected volatility⁽³⁾	25.6		%
Dividend yield⁽⁴⁾	—
Weighted average grant-date fair value (per option)	$	5.31

___________


(1)	Expected term calculated using the simplified method prescribed by the SEC due to the lack of sufficient historical exercise data on the grant date 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 we do not anticipate any cash dividend payments on our common stock in the near future.

A summary of our restricted stock and restricted stock unit activity for the three months ended March 31, 2014, is as follows:



	Number of Restricted Stock Awards	Weighted Average Grant-Date Fair Value
Nonvested — December 31, 2013	4,431,841	$	16.45
Granted	1,764,446	$	19.11
Forfeited	25,977	$	17.03
Vested	1,434,614	$	15.07
Nonvested — March 31, 2014	4,735,696	$	17.86

The total fair value of our restricted stock and restricted stock units that vested during the three months ended March 31, 2014 and 2013, was approximately $29 million and $20 million, respectively.

Liability Classified Share-Based Awards

During the first quarter of 2014 our Board of Directors approved the award of performance share units to certain senior management employees. These performance share units will be settled in cash with payouts based on the relative performance of Calpine’s TSR over the three-year performance period of January 1, 2014 through December 31, 2016 compared with the TSR performance of the S&P 500 companies over the same period. The performance share units vest on the last day of the performance period and will be settled in cash; thus, these awards are liability classified and are measured at fair value using a Monte Carlo simulation model at each reporting date until settlement. Stock-based compensation expense recognized related to our liability classified share-based awards was $1 million and nil for the three months ended March 31, 2014 and 2013, respectively.

A summary of our performance share unit activity for the three months ended March 31, 2014, is as follows:



	Number of Performance Share Units		Weighted Average Grant-Date Fair Value
Nonvested — December 31, 2013	449,798		$	21.25
Granted	461,393		$	22.56
Forfeited	—		$	—
Vested	15,312	⁽¹⁾	$	21.25
Nonvested — March 31, 2014	895,879		$	21.92

___________


(1)	In accordance with the applicable performance share unit agreements, performance share units granted to employees who meet the retirement eligibility requirements stipulated in the Equity Plan are fully vested upon the later of the date on which the employee becomes eligible to retire or one-year anniversary of the grant date.