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Stock-Based Compensation
 12 Months Ended
Dec. 31, 2012
Stock-Based Compensation [Line Items]  
Stock-Based Compensation

12. Stock-Based Compensation

 

(PPL, PPL Energy Supply, PPL Electric and LKE)

 

In 2012, shareowners approved the PPL SIP. This new equity plan replaces the PPL ICP and incorporates the following changes:

 

       Eliminates the potential to pay dividend equivalents on stock options.

 

       Eliminates the automatic lapse of restrictions on all equity awards in the event of a "potential" change in control and requires that a termination of employment occur in the event of a change in control before restrictions lapse.

 

       Changes the treatment of outstanding stock options upon retirement to limit the exercise period to the earlier of the end of the term (ten years from grant) or five years after retirement.

 

To further align the executives' interests with those of PPL shareowners, this plan provides that each restricted stock unit entitles the executive to accrue additional restricted stock units equal to the amount of quarterly dividends paid on PPL stock. These additional restricted stock units would be deferred and payable in shares of PPL common stock at the end of the restriction period. Dividend equivalents on restricted stock unit awards prior to 2013 are currently paid in cash when dividends are declared by PPL.

 

Under the ICP, SIP and the ICPKE (together, the Plans), restricted shares of PPL common stock, restricted stock units, performance units and stock options may be granted to officers and other key employees of PPL, PPL Energy Supply, PPL Electric, LKE and other affiliated companies. Awards under the Plans are made by the Compensation, Governance and Nominating Committee (CGNC) of the PPL Board of Directors, in the case of the ICP and SIP, and by the PPL Corporate Leadership Council (CLC), in the case of the ICPKE.

 

The following table details the award limits under each of the plans.

    Annual Grant Limit   Annual Grant Limit
    Total As % of   For Individual Participants -
  Total Plan  Outstanding Annual Grant Performance Based Awards
  Award PPL Common Stock Limit For awards For awards
  Limit On First Day of Options denominated in denominated in
Plan (Shares) Each Calendar Year (Shares) shares (Shares) cash (in dollars)
            
ICP(a) 15,769,431 2% 3,000,000     
SIP 10,000,000   2,000,000 750,000 $15,000,000
ICPKE 14,199,796 2% 3,000,000     

(a)       Applicable to outstanding awards granted from January 27, 2006 to January 26, 2012. During 2012, the total plan award limit was reached and the ICP was replaced by the SIP.

 

Any portion of these awards that has not been granted may be carried over and used in any subsequent year. If any award lapses, is forfeited or the rights of the participant terminate, the shares of PPL common stock underlying such an award are again available for grant. Shares delivered under the Plans may be in the form of authorized and unissued PPL common stock, common stock held in treasury by PPL or PPL common stock purchased on the open market (including private purchases) in accordance with applicable securities laws.

 

Restricted Stock and Restricted Stock Units

 

Restricted shares of PPL common stock are outstanding shares with full voting and dividend rights. Restricted stock awards are granted as a retention award for select key executives and vest when the recipient reaches a certain age or meets service or other criteria set forth in the executive's restricted stock award agreement. The shares are subject to forfeiture or accelerated payout under plan provisions for termination, retirement, disability and death of employees. Restricted shares vest fully, in certain situations, as defined by each of the Plans.

 

The Plans allow for the grant of restricted stock units. Restricted stock units are awards based on the fair value of PPL common stock on the date of grant. Actual PPL common shares will be issued upon completion of a vesting period, generally three years.

 

The fair value of restricted stock and restricted stock units granted is recognized on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of restricted stock and restricted stock units granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant. Recipients of restricted stock and restricted stock units may also be granted the right to receive dividend equivalents through the end of the restriction period or until the award is forfeited. Restricted stock and restricted stock units are subject to forfeiture or accelerated payout under the plan provisions for termination, retirement, disability and death of employees. Restricted stock and restricted stock units vest fully, in certain situations, as defined by each of the Plans.

The weighted-average grant date fair value of restricted stock and restricted stock units granted was:

   2012 2011 2010
           
PPL $ 28.35 $ 25.25 $ 28.93
PPL Energy Supply   28.29   25.14   29.49
PPL Electric   28.51   25.09   29.40
LKE   28.34      26.31

Restricted stock and restricted stock unit activity for 2012 was:

      Weighted-
      Average
    Restricted Grant Date Fair
    Shares/Units Value Per Share
PPL      
Nonvested, beginning of period   2,040,035 $ 27.03
 Granted   1,487,556   28.35
 Vested   (1,002,229)   27.23
 Forfeited   (21,592)   27.69
Nonvested, end of period   2,503,770   27.73
        
PPL Energy Supply      
Nonvested, beginning of period   665,180 $ 27.30
 Transferred   62,320   28.66
 Granted   564,020   28.29
 Vested   (219,124)   27.04
 Forfeited   (11,710)   27.97
Nonvested, end of period   1,060,686   27.95
        
PPL Electric      
Nonvested, beginning of period   251,595 $ 27.10
 Transferred   (54,460)   28.93
 Granted   133,530   28.51
 Vested   (61,995)   27.63
 Forfeited   (7,442)   27.46
Nonvested, end of period   261,228   27.30
        
LKE      
Nonvested, beginning of period   145,210 $ 26.31
 Granted   144,340   28.34
 Vested   (149,910)   26.38
Nonvested, end of period   139,640   28.34

Substantially all restricted stock and restricted stock unit awards are expected to vest.

 

The total fair value of restricted stock and restricted stock units vesting for the years ended December 31 was:

   2012 2011 2010
           
PPL $ 27 $ 19 $ 15
PPL Energy Supply   6   6   7
PPL Electric   2   2   2
LKE   4   1   

Performance Units

 

Performance units are intended to encourage and award future performance. Performance units represent a target number of shares (Target Award) of PPL's common stock that the recipient would receive upon PPL's attainment of the applicable performance goal. Performance is determined based on total shareowner return during a 3-year performance period. At the end of the period, payout is determined by comparing PPL's performance to the total shareowner return of the companies included in an index group, in the case of the 2010 and 2011 awards, the S&P 500 Electric Utilities Index, and in the case of the 2012 awards, the Philadelphia Electric Utilities Index. Awards granted in 2010 are payable on a graduated basis within the following ranges: if PPL's performance is at or above the 85th percentile of the index group, the award is paid at 200% of the Target Award; at the 50th percentile of the index group, the award is paid at 100% of the Target Award; at the 40th percentile of the index group, the award is paid at 50% of the Target Award; and below the 40th percentile, no award is payable. Awards granted in 2011 and 2012 are payable on a graduated basis similar to 2010, except that the 2011 awards provide for a minimum payment at 25% of the Target Award if performance falls below the 40th percentile of the index group, and in 2012 the minimum payment was eliminated, with no award payable if performance falls below the 25th percentile. Dividends payable during the performance cycle accumulate and are converted into additional performance units and are payable in shares of PPL common stock upon completion of the performance period based on the determination of the CGNC of whether the performance goals have been achieved. Under the plan provisions, performance units are subject to forfeiture upon termination of employment except for retirement, disability or death of an employee, in which case the total performance units remain outstanding and are eligible for vesting through the conclusion of the performance period. The fair value of performance units granted is recognized as compensation expense on a straight-line basis over the 3-year performance period. Performance units vest on a pro rata basis, in certain situations, as defined by each of the Plans.

The fair value of each performance unit granted was estimated using a Monte Carlo pricing model that considers stock beta, a risk-free interest rate, expected stock volatility and expected life. The stock beta was calculated comparing the risk of the individual securities to the average risk of the companies in the index group. The risk-free interest rate reflects the yield on a U.S. Treasury bond commensurate with the expected life of the performance unit. Volatility over the expected term of the performance unit is calculated using daily stock price observations for PPL and all companies in the index group and is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL and the companies in the index group. PPL had used historical volatility to value its performance units in 2010. Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands.

 

The weighted-average assumptions used in the model were:

    2012  2011  2010
           
Risk-free interest rate  0.30%  1.00%  1.41%
Expected stock volatility  19.30%  23.40%  34.70%
Expected life  3 years  3 years  3 years

The weighted-average grant date fair value of performance units granted was:

   2012 2011 2010
           
PPL $ 31.41 $ 29.67 $ 34.06
PPL Energy Supply   31.40   29.68   34.16
PPL Electric   31.37   29.57   33.54
LKE   31.30   29.20   

Performance unit activity for 2012 was:

      Weighted-
      Average Grant
   Performance Date Fair Value
   Units Per Share
PPL      
Nonvested, beginning of period   398,609 $ 33.31
 Granted   322,771   31.41
 Forfeited   (127,177)   38.61
Nonvested, end of period   594,203   31.14
        
PPL Energy Supply      
Nonvested, beginning of period   75,067 $ 33.00
 Transferred   12,719   34.15
 Granted   71,572   31.40
 Forfeited   (35,169)   38.90
Nonvested, end of period   124,189   31.26
        
PPL Electric      
Nonvested, beginning of period   32,808 $ 33.11
 Transferred   (12,719)   34.15
 Granted   16,234   31.37
 Forfeited   (10,240)   34.17
Nonvested, end of period   26,083   31.10
        
LKE      
Nonvested, beginning of period   26,893 $ 29.20
 Granted   55,857   31.30
Nonvested, end of period   82,750   30.62

Stock Options

 

Under the Plans, stock options may be granted with an option exercise price per share not less than the fair value of PPL's common stock on the date of grant. Options outstanding at December 31, 2012, become exercisable in equal installments over a three-year service period beginning one year after the date of grant, assuming the individual is still employed by PPL or a subsidiary. The CGNC and CLC have discretion to accelerate the exercisability of the options, except that the exercisability of an option issued under the ICP may not be accelerated unless the individual remains employed by PPL or a subsidiary for one year from the date of grant. All options expire no later than ten years from the grant date. The options become exercisable immediately in certain situations, as defined by each of the Plans. The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of options granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant.

The fair value of each option granted is estimated using a Black-Scholes option-pricing model. PPL uses a risk-free interest rate, expected option life, expected volatility and dividend yield to value its stock options. The risk-free interest rate reflects the yield for a U.S. Treasury Strip available on the date of grant with constant rate maturity approximating the option's expected life. Expected life is calculated based on historical exercise behavior. Volatility over the expected term of the options is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL's volatility in those prior periods. Management's expectations for future volatility, considering potential changes to PPL's business model and other economic conditions, are also reviewed in addition to the historical data to determine the final volatility assumption. PPL had used historical volatility to value its stock options granted in 2010. Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands. The dividend yield is based on several factors, including PPL's most recent dividend payment, as of the grant date and the forecasted stock price through 2013. The assumptions used in the model were:

   2012 2011 2010
           
Risk-free interest rate  1.13%  2.34%  2.52%
Expected option life  6.17 years  5.71 years  5.43 years
Expected stock volatility  20.60%  21.60%  28.57%
Dividend yield  5.00%  5.93%  5.61%

The weighted-average grant date fair value of options granted was:

   2012 2011 2010
           
PPL $ 2.48 $ 2.47 $ 4.70
PPL Energy Supply   2.51   2.47   4.73
PPL Electric   2.50   2.47   4.62
LKE   2.51   2.47   

Stock option activity for 2012 was:

       Weighted-  
      Weighted Average   
     Average Remaining Aggregate
   Number Exercise Contractual Total Intrinsic
   of Options Price Per Share Term Value
PPL            
Outstanding at beginning of period   7,530,198 $ 30.65      
 Granted   1,948,550   28.19      
 Exercised   (263,094)   23.22      
 Forfeited   (81,109)   28.43      
Outstanding at end of period   9,134,545   30.36   6.3 $ 9
Options exercisable at end of period   6,134,265   31.70   5.7   6
              
PPL Energy Supply            
Outstanding at beginning of period   1,690,153 $ 30.79      
 Transferred   176,070   31.90      
 Granted   483,740   28.19      
 Exercised   (36,358)   24.35      
 Forfeited   (48,482)   29.34      
Outstanding at end of period   2,265,123   30.45   6.1 $ 2
Options exercisable at end of period   1,529,711   31.80   4.9   1
              
PPL Electric            
Outstanding at beginning of period   460,510 $ 31.05      
 Transferred   (176,070)   31.90      
 Granted   100,590   28.22      
 Exercised   (11,873)   25.67      
 Forfeited   (32,627)   27.07      
Outstanding at end of period   340,530   30.35   7.0   
Options exercisable at end of period   193,355   32.43   5.8   
              
LKE            
Outstanding at beginning of period   329,600 $ 25.77      
 Granted   354,490   28.17      
 Exercised   (49,243)   25.74      
Outstanding at end of period   634,847   27.11   8.6 $ 1
Options exercisable at end of period   144,260   26.62   8.4   

PPL received $6 million in cash from stock options exercised in 2012. The related tax savings were not significant for 2012. Substantially all stock option awards are expected to vest.

 

The total intrinsic value of stock options exercised for the years ended December 31, 2012, 2011 and 2010 was not significant.

Compensation Expense

 

Compensation expense for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards was as follows:

   2012 2011 2010
           
PPL $ 49 $ 36 $ 26
PPL Energy Supply   23   16   20
PPL Electric   11   8   6
LKE   8   5   

The income tax benefit related to above compensation expense was as follows:

   2012 2011 2010
           
PPL  $ 20 $ 15 $ 11
PPL Energy Supply   10   6   8
PPL Electric    4   3   3
LKE    4   2   

The income tax benefit PPL realized from stock-based awards vested or exercised for 2012 was not significant.

At December 31, 2012, unrecognized compensation expense related to nonvested restricted stock, restricted stock units, performance units and stock option awards was:

       
     Weighted-
   Unrecognized Average
   Compensation Period for
   Expense Recognition
        
PPL $ 27  2.1 years
PPL Energy Supply   11  2.4 years
PPL Electric   2  2.2 years
LKE   2  1.8 years
PPL Energy Supply LLC [Member]
  
Stock-Based Compensation [Line Items]  
Stock-Based Compensation

12. Stock-Based Compensation

 

(PPL, PPL Energy Supply, PPL Electric and LKE)

 

In 2012, shareowners approved the PPL SIP. This new equity plan replaces the PPL ICP and incorporates the following changes:

 

       Eliminates the potential to pay dividend equivalents on stock options.

 

       Eliminates the automatic lapse of restrictions on all equity awards in the event of a "potential" change in control and requires that a termination of employment occur in the event of a change in control before restrictions lapse.

 

       Changes the treatment of outstanding stock options upon retirement to limit the exercise period to the earlier of the end of the term (ten years from grant) or five years after retirement.

 

To further align the executives' interests with those of PPL shareowners, this plan provides that each restricted stock unit entitles the executive to accrue additional restricted stock units equal to the amount of quarterly dividends paid on PPL stock. These additional restricted stock units would be deferred and payable in shares of PPL common stock at the end of the restriction period. Dividend equivalents on restricted stock unit awards prior to 2013 are currently paid in cash when dividends are declared by PPL.

 

Under the ICP, SIP and the ICPKE (together, the Plans), restricted shares of PPL common stock, restricted stock units, performance units and stock options may be granted to officers and other key employees of PPL, PPL Energy Supply, PPL Electric, LKE and other affiliated companies. Awards under the Plans are made by the Compensation, Governance and Nominating Committee (CGNC) of the PPL Board of Directors, in the case of the ICP and SIP, and by the PPL Corporate Leadership Council (CLC), in the case of the ICPKE.

 

The following table details the award limits under each of the plans.

    Annual Grant Limit   Annual Grant Limit
    Total As % of   For Individual Participants -
  Total Plan  Outstanding Annual Grant Performance Based Awards
  Award PPL Common Stock Limit For awards For awards
  Limit On First Day of Options denominated in denominated in
Plan (Shares) Each Calendar Year (Shares) shares (Shares) cash (in dollars)
            
ICP(a) 15,769,431 2% 3,000,000     
SIP 10,000,000   2,000,000 750,000 $15,000,000
ICPKE 14,199,796 2% 3,000,000     

(a)       Applicable to outstanding awards granted from January 27, 2006 to January 26, 2012. During 2012, the total plan award limit was reached and the ICP was replaced by the SIP.

 

Any portion of these awards that has not been granted may be carried over and used in any subsequent year. If any award lapses, is forfeited or the rights of the participant terminate, the shares of PPL common stock underlying such an award are again available for grant. Shares delivered under the Plans may be in the form of authorized and unissued PPL common stock, common stock held in treasury by PPL or PPL common stock purchased on the open market (including private purchases) in accordance with applicable securities laws.

 

Restricted Stock and Restricted Stock Units

 

Restricted shares of PPL common stock are outstanding shares with full voting and dividend rights. Restricted stock awards are granted as a retention award for select key executives and vest when the recipient reaches a certain age or meets service or other criteria set forth in the executive's restricted stock award agreement. The shares are subject to forfeiture or accelerated payout under plan provisions for termination, retirement, disability and death of employees. Restricted shares vest fully, in certain situations, as defined by each of the Plans.

 

The Plans allow for the grant of restricted stock units. Restricted stock units are awards based on the fair value of PPL common stock on the date of grant. Actual PPL common shares will be issued upon completion of a vesting period, generally three years.

 

The fair value of restricted stock and restricted stock units granted is recognized on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of restricted stock and restricted stock units granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant. Recipients of restricted stock and restricted stock units may also be granted the right to receive dividend equivalents through the end of the restriction period or until the award is forfeited. Restricted stock and restricted stock units are subject to forfeiture or accelerated payout under the plan provisions for termination, retirement, disability and death of employees. Restricted stock and restricted stock units vest fully, in certain situations, as defined by each of the Plans.

The weighted-average grant date fair value of restricted stock and restricted stock units granted was:

   2012 2011 2010
           
PPL $ 28.35 $ 25.25 $ 28.93
PPL Energy Supply   28.29   25.14   29.49
PPL Electric   28.51   25.09   29.40
LKE   28.34      26.31

Restricted stock and restricted stock unit activity for 2012 was:

      Weighted-
      Average
    Restricted Grant Date Fair
    Shares/Units Value Per Share
PPL      
Nonvested, beginning of period   2,040,035 $ 27.03
 Granted   1,487,556   28.35
 Vested   (1,002,229)   27.23
 Forfeited   (21,592)   27.69
Nonvested, end of period   2,503,770   27.73
        
PPL Energy Supply      
Nonvested, beginning of period   665,180 $ 27.30
 Transferred   62,320   28.66
 Granted   564,020   28.29
 Vested   (219,124)   27.04
 Forfeited   (11,710)   27.97
Nonvested, end of period   1,060,686   27.95
        
PPL Electric      
Nonvested, beginning of period   251,595 $ 27.10
 Transferred   (54,460)   28.93
 Granted   133,530   28.51
 Vested   (61,995)   27.63
 Forfeited   (7,442)   27.46
Nonvested, end of period   261,228   27.30
        
LKE      
Nonvested, beginning of period   145,210 $ 26.31
 Granted   144,340   28.34
 Vested   (149,910)   26.38
Nonvested, end of period   139,640   28.34

Substantially all restricted stock and restricted stock unit awards are expected to vest.

 

The total fair value of restricted stock and restricted stock units vesting for the years ended December 31 was:

   2012 2011 2010
           
PPL $ 27 $ 19 $ 15
PPL Energy Supply   6   6   7
PPL Electric   2   2   2
LKE   4   1   

Performance Units

 

Performance units are intended to encourage and award future performance. Performance units represent a target number of shares (Target Award) of PPL's common stock that the recipient would receive upon PPL's attainment of the applicable performance goal. Performance is determined based on total shareowner return during a 3-year performance period. At the end of the period, payout is determined by comparing PPL's performance to the total shareowner return of the companies included in an index group, in the case of the 2010 and 2011 awards, the S&P 500 Electric Utilities Index, and in the case of the 2012 awards, the Philadelphia Electric Utilities Index. Awards granted in 2010 are payable on a graduated basis within the following ranges: if PPL's performance is at or above the 85th percentile of the index group, the award is paid at 200% of the Target Award; at the 50th percentile of the index group, the award is paid at 100% of the Target Award; at the 40th percentile of the index group, the award is paid at 50% of the Target Award; and below the 40th percentile, no award is payable. Awards granted in 2011 and 2012 are payable on a graduated basis similar to 2010, except that the 2011 awards provide for a minimum payment at 25% of the Target Award if performance falls below the 40th percentile of the index group, and in 2012 the minimum payment was eliminated, with no award payable if performance falls below the 25th percentile. Dividends payable during the performance cycle accumulate and are converted into additional performance units and are payable in shares of PPL common stock upon completion of the performance period based on the determination of the CGNC of whether the performance goals have been achieved. Under the plan provisions, performance units are subject to forfeiture upon termination of employment except for retirement, disability or death of an employee, in which case the total performance units remain outstanding and are eligible for vesting through the conclusion of the performance period. The fair value of performance units granted is recognized as compensation expense on a straight-line basis over the 3-year performance period. Performance units vest on a pro rata basis, in certain situations, as defined by each of the Plans.

The fair value of each performance unit granted was estimated using a Monte Carlo pricing model that considers stock beta, a risk-free interest rate, expected stock volatility and expected life. The stock beta was calculated comparing the risk of the individual securities to the average risk of the companies in the index group. The risk-free interest rate reflects the yield on a U.S. Treasury bond commensurate with the expected life of the performance unit. Volatility over the expected term of the performance unit is calculated using daily stock price observations for PPL and all companies in the index group and is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL and the companies in the index group. PPL had used historical volatility to value its performance units in 2010. Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands.

 

The weighted-average assumptions used in the model were:

    2012  2011  2010
           
Risk-free interest rate  0.30%  1.00%  1.41%
Expected stock volatility  19.30%  23.40%  34.70%
Expected life  3 years  3 years  3 years

The weighted-average grant date fair value of performance units granted was:

   2012 2011 2010
           
PPL $ 31.41 $ 29.67 $ 34.06
PPL Energy Supply   31.40   29.68   34.16
PPL Electric   31.37   29.57   33.54
LKE   31.30   29.20   

Performance unit activity for 2012 was:

      Weighted-
      Average Grant
   Performance Date Fair Value
   Units Per Share
PPL      
Nonvested, beginning of period   398,609 $ 33.31
 Granted   322,771   31.41
 Forfeited   (127,177)   38.61
Nonvested, end of period   594,203   31.14
        
PPL Energy Supply      
Nonvested, beginning of period   75,067 $ 33.00
 Transferred   12,719   34.15
 Granted   71,572   31.40
 Forfeited   (35,169)   38.90
Nonvested, end of period   124,189   31.26
        
PPL Electric      
Nonvested, beginning of period   32,808 $ 33.11
 Transferred   (12,719)   34.15
 Granted   16,234   31.37
 Forfeited   (10,240)   34.17
Nonvested, end of period   26,083   31.10
        
LKE      
Nonvested, beginning of period   26,893 $ 29.20
 Granted   55,857   31.30
Nonvested, end of period   82,750   30.62

Stock Options

 

Under the Plans, stock options may be granted with an option exercise price per share not less than the fair value of PPL's common stock on the date of grant. Options outstanding at December 31, 2012, become exercisable in equal installments over a three-year service period beginning one year after the date of grant, assuming the individual is still employed by PPL or a subsidiary. The CGNC and CLC have discretion to accelerate the exercisability of the options, except that the exercisability of an option issued under the ICP may not be accelerated unless the individual remains employed by PPL or a subsidiary for one year from the date of grant. All options expire no later than ten years from the grant date. The options become exercisable immediately in certain situations, as defined by each of the Plans. The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of options granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant.

The fair value of each option granted is estimated using a Black-Scholes option-pricing model. PPL uses a risk-free interest rate, expected option life, expected volatility and dividend yield to value its stock options. The risk-free interest rate reflects the yield for a U.S. Treasury Strip available on the date of grant with constant rate maturity approximating the option's expected life. Expected life is calculated based on historical exercise behavior. Volatility over the expected term of the options is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL's volatility in those prior periods. Management's expectations for future volatility, considering potential changes to PPL's business model and other economic conditions, are also reviewed in addition to the historical data to determine the final volatility assumption. PPL had used historical volatility to value its stock options granted in 2010. Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands. The dividend yield is based on several factors, including PPL's most recent dividend payment, as of the grant date and the forecasted stock price through 2013. The assumptions used in the model were:

   2012 2011 2010
           
Risk-free interest rate  1.13%  2.34%  2.52%
Expected option life  6.17 years  5.71 years  5.43 years
Expected stock volatility  20.60%  21.60%  28.57%
Dividend yield  5.00%  5.93%  5.61%

The weighted-average grant date fair value of options granted was:

   2012 2011 2010
           
PPL $ 2.48 $ 2.47 $ 4.70
PPL Energy Supply   2.51   2.47   4.73
PPL Electric   2.50   2.47   4.62
LKE   2.51   2.47   

Stock option activity for 2012 was:

       Weighted-  
      Weighted Average   
     Average Remaining Aggregate
   Number Exercise Contractual Total Intrinsic
   of Options Price Per Share Term Value
PPL            
Outstanding at beginning of period   7,530,198 $ 30.65      
 Granted   1,948,550   28.19      
 Exercised   (263,094)   23.22      
 Forfeited   (81,109)   28.43      
Outstanding at end of period   9,134,545   30.36   6.3 $ 9
Options exercisable at end of period   6,134,265   31.70   5.7   6
              
PPL Energy Supply            
Outstanding at beginning of period   1,690,153 $ 30.79      
 Transferred   176,070   31.90      
 Granted   483,740   28.19      
 Exercised   (36,358)   24.35      
 Forfeited   (48,482)   29.34      
Outstanding at end of period   2,265,123   30.45   6.1 $ 2
Options exercisable at end of period   1,529,711   31.80   4.9   1
              
PPL Electric            
Outstanding at beginning of period   460,510 $ 31.05      
 Transferred   (176,070)   31.90      
 Granted   100,590   28.22      
 Exercised   (11,873)   25.67      
 Forfeited   (32,627)   27.07      
Outstanding at end of period   340,530   30.35   7.0   
Options exercisable at end of period   193,355   32.43   5.8   
              
LKE            
Outstanding at beginning of period   329,600 $ 25.77      
 Granted   354,490   28.17      
 Exercised   (49,243)   25.74      
Outstanding at end of period   634,847   27.11   8.6 $ 1
Options exercisable at end of period   144,260   26.62   8.4   

PPL received $6 million in cash from stock options exercised in 2012. The related tax savings were not significant for 2012. Substantially all stock option awards are expected to vest.

 

The total intrinsic value of stock options exercised for the years ended December 31, 2012, 2011 and 2010 was not significant.

Compensation Expense

 

Compensation expense for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards was as follows:

   2012 2011 2010
           
PPL $ 49 $ 36 $ 26
PPL Energy Supply   23   16   20
PPL Electric   11   8   6
LKE   8   5   

The income tax benefit related to above compensation expense was as follows:

   2012 2011 2010
           
PPL  $ 20 $ 15 $ 11
PPL Energy Supply   10   6   8
PPL Electric    4   3   3
LKE    4   2   

The income tax benefit PPL realized from stock-based awards vested or exercised for 2012 was not significant.

At December 31, 2012, unrecognized compensation expense related to nonvested restricted stock, restricted stock units, performance units and stock option awards was:

       
     Weighted-
   Unrecognized Average
   Compensation Period for
   Expense Recognition
        
PPL $ 27  2.1 years
PPL Energy Supply   11  2.4 years
PPL Electric   2  2.2 years
LKE   2  1.8 years
PPL Electric Utilities Corp [Member]
  
Stock-Based Compensation [Line Items]  
Stock-Based Compensation

12. Stock-Based Compensation

 

(PPL, PPL Energy Supply, PPL Electric and LKE)

 

In 2012, shareowners approved the PPL SIP. This new equity plan replaces the PPL ICP and incorporates the following changes:

 

       Eliminates the potential to pay dividend equivalents on stock options.

 

       Eliminates the automatic lapse of restrictions on all equity awards in the event of a "potential" change in control and requires that a termination of employment occur in the event of a change in control before restrictions lapse.

 

       Changes the treatment of outstanding stock options upon retirement to limit the exercise period to the earlier of the end of the term (ten years from grant) or five years after retirement.

 

To further align the executives' interests with those of PPL shareowners, this plan provides that each restricted stock unit entitles the executive to accrue additional restricted stock units equal to the amount of quarterly dividends paid on PPL stock. These additional restricted stock units would be deferred and payable in shares of PPL common stock at the end of the restriction period. Dividend equivalents on restricted stock unit awards prior to 2013 are currently paid in cash when dividends are declared by PPL.

 

Under the ICP, SIP and the ICPKE (together, the Plans), restricted shares of PPL common stock, restricted stock units, performance units and stock options may be granted to officers and other key employees of PPL, PPL Energy Supply, PPL Electric, LKE and other affiliated companies. Awards under the Plans are made by the Compensation, Governance and Nominating Committee (CGNC) of the PPL Board of Directors, in the case of the ICP and SIP, and by the PPL Corporate Leadership Council (CLC), in the case of the ICPKE.

 

The following table details the award limits under each of the plans.

    Annual Grant Limit   Annual Grant Limit
    Total As % of   For Individual Participants -
  Total Plan  Outstanding Annual Grant Performance Based Awards
  Award PPL Common Stock Limit For awards For awards
  Limit On First Day of Options denominated in denominated in
Plan (Shares) Each Calendar Year (Shares) shares (Shares) cash (in dollars)
            
ICP(a) 15,769,431 2% 3,000,000     
SIP 10,000,000   2,000,000 750,000 $15,000,000
ICPKE 14,199,796 2% 3,000,000     

(a)       Applicable to outstanding awards granted from January 27, 2006 to January 26, 2012. During 2012, the total plan award limit was reached and the ICP was replaced by the SIP.

 

Any portion of these awards that has not been granted may be carried over and used in any subsequent year. If any award lapses, is forfeited or the rights of the participant terminate, the shares of PPL common stock underlying such an award are again available for grant. Shares delivered under the Plans may be in the form of authorized and unissued PPL common stock, common stock held in treasury by PPL or PPL common stock purchased on the open market (including private purchases) in accordance with applicable securities laws.

 

Restricted Stock and Restricted Stock Units

 

Restricted shares of PPL common stock are outstanding shares with full voting and dividend rights. Restricted stock awards are granted as a retention award for select key executives and vest when the recipient reaches a certain age or meets service or other criteria set forth in the executive's restricted stock award agreement. The shares are subject to forfeiture or accelerated payout under plan provisions for termination, retirement, disability and death of employees. Restricted shares vest fully, in certain situations, as defined by each of the Plans.

 

The Plans allow for the grant of restricted stock units. Restricted stock units are awards based on the fair value of PPL common stock on the date of grant. Actual PPL common shares will be issued upon completion of a vesting period, generally three years.

 

The fair value of restricted stock and restricted stock units granted is recognized on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of restricted stock and restricted stock units granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant. Recipients of restricted stock and restricted stock units may also be granted the right to receive dividend equivalents through the end of the restriction period or until the award is forfeited. Restricted stock and restricted stock units are subject to forfeiture or accelerated payout under the plan provisions for termination, retirement, disability and death of employees. Restricted stock and restricted stock units vest fully, in certain situations, as defined by each of the Plans.

The weighted-average grant date fair value of restricted stock and restricted stock units granted was:

   2012 2011 2010
           
PPL $ 28.35 $ 25.25 $ 28.93
PPL Energy Supply   28.29   25.14   29.49
PPL Electric   28.51   25.09   29.40
LKE   28.34      26.31

Restricted stock and restricted stock unit activity for 2012 was:

      Weighted-
      Average
    Restricted Grant Date Fair
    Shares/Units Value Per Share
PPL      
Nonvested, beginning of period   2,040,035 $ 27.03
 Granted   1,487,556   28.35
 Vested   (1,002,229)   27.23
 Forfeited   (21,592)   27.69
Nonvested, end of period   2,503,770   27.73
        
PPL Energy Supply      
Nonvested, beginning of period   665,180 $ 27.30
 Transferred   62,320   28.66
 Granted   564,020   28.29
 Vested   (219,124)   27.04
 Forfeited   (11,710)   27.97
Nonvested, end of period   1,060,686   27.95
        
PPL Electric      
Nonvested, beginning of period   251,595 $ 27.10
 Transferred   (54,460)   28.93
 Granted   133,530   28.51
 Vested   (61,995)   27.63
 Forfeited   (7,442)   27.46
Nonvested, end of period   261,228   27.30
        
LKE      
Nonvested, beginning of period   145,210 $ 26.31
 Granted   144,340   28.34
 Vested   (149,910)   26.38
Nonvested, end of period   139,640   28.34

Substantially all restricted stock and restricted stock unit awards are expected to vest.

 

The total fair value of restricted stock and restricted stock units vesting for the years ended December 31 was:

   2012 2011 2010
           
PPL $ 27 $ 19 $ 15
PPL Energy Supply   6   6   7
PPL Electric   2   2   2
LKE   4   1   

Performance Units

 

Performance units are intended to encourage and award future performance. Performance units represent a target number of shares (Target Award) of PPL's common stock that the recipient would receive upon PPL's attainment of the applicable performance goal. Performance is determined based on total shareowner return during a 3-year performance period. At the end of the period, payout is determined by comparing PPL's performance to the total shareowner return of the companies included in an index group, in the case of the 2010 and 2011 awards, the S&P 500 Electric Utilities Index, and in the case of the 2012 awards, the Philadelphia Electric Utilities Index. Awards granted in 2010 are payable on a graduated basis within the following ranges: if PPL's performance is at or above the 85th percentile of the index group, the award is paid at 200% of the Target Award; at the 50th percentile of the index group, the award is paid at 100% of the Target Award; at the 40th percentile of the index group, the award is paid at 50% of the Target Award; and below the 40th percentile, no award is payable. Awards granted in 2011 and 2012 are payable on a graduated basis similar to 2010, except that the 2011 awards provide for a minimum payment at 25% of the Target Award if performance falls below the 40th percentile of the index group, and in 2012 the minimum payment was eliminated, with no award payable if performance falls below the 25th percentile. Dividends payable during the performance cycle accumulate and are converted into additional performance units and are payable in shares of PPL common stock upon completion of the performance period based on the determination of the CGNC of whether the performance goals have been achieved. Under the plan provisions, performance units are subject to forfeiture upon termination of employment except for retirement, disability or death of an employee, in which case the total performance units remain outstanding and are eligible for vesting through the conclusion of the performance period. The fair value of performance units granted is recognized as compensation expense on a straight-line basis over the 3-year performance period. Performance units vest on a pro rata basis, in certain situations, as defined by each of the Plans.

The fair value of each performance unit granted was estimated using a Monte Carlo pricing model that considers stock beta, a risk-free interest rate, expected stock volatility and expected life. The stock beta was calculated comparing the risk of the individual securities to the average risk of the companies in the index group. The risk-free interest rate reflects the yield on a U.S. Treasury bond commensurate with the expected life of the performance unit. Volatility over the expected term of the performance unit is calculated using daily stock price observations for PPL and all companies in the index group and is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL and the companies in the index group. PPL had used historical volatility to value its performance units in 2010. Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands.

 

The weighted-average assumptions used in the model were:

    2012  2011  2010
           
Risk-free interest rate  0.30%  1.00%  1.41%
Expected stock volatility  19.30%  23.40%  34.70%
Expected life  3 years  3 years  3 years

The weighted-average grant date fair value of performance units granted was:

   2012 2011 2010
           
PPL $ 31.41 $ 29.67 $ 34.06
PPL Energy Supply   31.40   29.68   34.16
PPL Electric   31.37   29.57   33.54
LKE   31.30   29.20   

Performance unit activity for 2012 was:

      Weighted-
      Average Grant
   Performance Date Fair Value
   Units Per Share
PPL      
Nonvested, beginning of period   398,609 $ 33.31
 Granted   322,771   31.41
 Forfeited   (127,177)   38.61
Nonvested, end of period   594,203   31.14
        
PPL Energy Supply      
Nonvested, beginning of period   75,067 $ 33.00
 Transferred   12,719   34.15
 Granted   71,572   31.40
 Forfeited   (35,169)   38.90
Nonvested, end of period   124,189   31.26
        
PPL Electric      
Nonvested, beginning of period   32,808 $ 33.11
 Transferred   (12,719)   34.15
 Granted   16,234   31.37
 Forfeited   (10,240)   34.17
Nonvested, end of period   26,083   31.10
        
LKE      
Nonvested, beginning of period   26,893 $ 29.20
 Granted   55,857   31.30
Nonvested, end of period   82,750   30.62

Stock Options

 

Under the Plans, stock options may be granted with an option exercise price per share not less than the fair value of PPL's common stock on the date of grant. Options outstanding at December 31, 2012, become exercisable in equal installments over a three-year service period beginning one year after the date of grant, assuming the individual is still employed by PPL or a subsidiary. The CGNC and CLC have discretion to accelerate the exercisability of the options, except that the exercisability of an option issued under the ICP may not be accelerated unless the individual remains employed by PPL or a subsidiary for one year from the date of grant. All options expire no later than ten years from the grant date. The options become exercisable immediately in certain situations, as defined by each of the Plans. The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of options granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant.

The fair value of each option granted is estimated using a Black-Scholes option-pricing model. PPL uses a risk-free interest rate, expected option life, expected volatility and dividend yield to value its stock options. The risk-free interest rate reflects the yield for a U.S. Treasury Strip available on the date of grant with constant rate maturity approximating the option's expected life. Expected life is calculated based on historical exercise behavior. Volatility over the expected term of the options is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL's volatility in those prior periods. Management's expectations for future volatility, considering potential changes to PPL's business model and other economic conditions, are also reviewed in addition to the historical data to determine the final volatility assumption. PPL had used historical volatility to value its stock options granted in 2010. Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands. The dividend yield is based on several factors, including PPL's most recent dividend payment, as of the grant date and the forecasted stock price through 2013. The assumptions used in the model were:

   2012 2011 2010
           
Risk-free interest rate  1.13%  2.34%  2.52%
Expected option life  6.17 years  5.71 years  5.43 years
Expected stock volatility  20.60%  21.60%  28.57%
Dividend yield  5.00%  5.93%  5.61%

The weighted-average grant date fair value of options granted was:

   2012 2011 2010
           
PPL $ 2.48 $ 2.47 $ 4.70
PPL Energy Supply   2.51   2.47   4.73
PPL Electric   2.50   2.47   4.62
LKE   2.51   2.47   

Stock option activity for 2012 was:

       Weighted-  
      Weighted Average   
     Average Remaining Aggregate
   Number Exercise Contractual Total Intrinsic
   of Options Price Per Share Term Value
PPL            
Outstanding at beginning of period   7,530,198 $ 30.65      
 Granted   1,948,550   28.19      
 Exercised   (263,094)   23.22      
 Forfeited   (81,109)   28.43      
Outstanding at end of period   9,134,545   30.36   6.3 $ 9
Options exercisable at end of period   6,134,265   31.70   5.7   6
              
PPL Energy Supply            
Outstanding at beginning of period   1,690,153 $ 30.79      
 Transferred   176,070   31.90      
 Granted   483,740   28.19      
 Exercised   (36,358)   24.35      
 Forfeited   (48,482)   29.34      
Outstanding at end of period   2,265,123   30.45   6.1 $ 2
Options exercisable at end of period   1,529,711   31.80   4.9   1
              
PPL Electric            
Outstanding at beginning of period   460,510 $ 31.05      
 Transferred   (176,070)   31.90      
 Granted   100,590   28.22      
 Exercised   (11,873)   25.67      
 Forfeited   (32,627)   27.07      
Outstanding at end of period   340,530   30.35   7.0   
Options exercisable at end of period   193,355   32.43   5.8   
              
LKE            
Outstanding at beginning of period   329,600 $ 25.77      
 Granted   354,490   28.17      
 Exercised   (49,243)   25.74      
Outstanding at end of period   634,847   27.11   8.6 $ 1
Options exercisable at end of period   144,260   26.62   8.4   

PPL received $6 million in cash from stock options exercised in 2012. The related tax savings were not significant for 2012. Substantially all stock option awards are expected to vest.

 

The total intrinsic value of stock options exercised for the years ended December 31, 2012, 2011 and 2010 was not significant.

Compensation Expense

 

Compensation expense for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards was as follows:

   2012 2011 2010
           
PPL $ 49 $ 36 $ 26
PPL Energy Supply   23   16   20
PPL Electric   11   8   6
LKE   8   5   

The income tax benefit related to above compensation expense was as follows:

   2012 2011 2010
           
PPL  $ 20 $ 15 $ 11
PPL Energy Supply   10   6   8
PPL Electric    4   3   3
LKE    4   2   

The income tax benefit PPL realized from stock-based awards vested or exercised for 2012 was not significant.

At December 31, 2012, unrecognized compensation expense related to nonvested restricted stock, restricted stock units, performance units and stock option awards was:

       
     Weighted-
   Unrecognized Average
   Compensation Period for
   Expense Recognition
        
PPL $ 27  2.1 years
PPL Energy Supply   11  2.4 years
PPL Electric   2  2.2 years
LKE   2  1.8 years
LG And E And KU Energy LLC [Member]
  
Stock-Based Compensation [Line Items]  
Stock-Based Compensation

12. Stock-Based Compensation

 

(PPL, PPL Energy Supply, PPL Electric and LKE)

 

In 2012, shareowners approved the PPL SIP. This new equity plan replaces the PPL ICP and incorporates the following changes:

 

       Eliminates the potential to pay dividend equivalents on stock options.

 

       Eliminates the automatic lapse of restrictions on all equity awards in the event of a "potential" change in control and requires that a termination of employment occur in the event of a change in control before restrictions lapse.

 

       Changes the treatment of outstanding stock options upon retirement to limit the exercise period to the earlier of the end of the term (ten years from grant) or five years after retirement.

 

To further align the executives' interests with those of PPL shareowners, this plan provides that each restricted stock unit entitles the executive to accrue additional restricted stock units equal to the amount of quarterly dividends paid on PPL stock. These additional restricted stock units would be deferred and payable in shares of PPL common stock at the end of the restriction period. Dividend equivalents on restricted stock unit awards prior to 2013 are currently paid in cash when dividends are declared by PPL.

 

Under the ICP, SIP and the ICPKE (together, the Plans), restricted shares of PPL common stock, restricted stock units, performance units and stock options may be granted to officers and other key employees of PPL, PPL Energy Supply, PPL Electric, LKE and other affiliated companies. Awards under the Plans are made by the Compensation, Governance and Nominating Committee (CGNC) of the PPL Board of Directors, in the case of the ICP and SIP, and by the PPL Corporate Leadership Council (CLC), in the case of the ICPKE.

 

The following table details the award limits under each of the plans.

    Annual Grant Limit   Annual Grant Limit
    Total As % of   For Individual Participants -
  Total Plan  Outstanding Annual Grant Performance Based Awards
  Award PPL Common Stock Limit For awards For awards
  Limit On First Day of Options denominated in denominated in
Plan (Shares) Each Calendar Year (Shares) shares (Shares) cash (in dollars)
            
ICP(a) 15,769,431 2% 3,000,000     
SIP 10,000,000   2,000,000 750,000 $15,000,000
ICPKE 14,199,796 2% 3,000,000     

(a)       Applicable to outstanding awards granted from January 27, 2006 to January 26, 2012. During 2012, the total plan award limit was reached and the ICP was replaced by the SIP.

 

Any portion of these awards that has not been granted may be carried over and used in any subsequent year. If any award lapses, is forfeited or the rights of the participant terminate, the shares of PPL common stock underlying such an award are again available for grant. Shares delivered under the Plans may be in the form of authorized and unissued PPL common stock, common stock held in treasury by PPL or PPL common stock purchased on the open market (including private purchases) in accordance with applicable securities laws.

 

Restricted Stock and Restricted Stock Units

 

Restricted shares of PPL common stock are outstanding shares with full voting and dividend rights. Restricted stock awards are granted as a retention award for select key executives and vest when the recipient reaches a certain age or meets service or other criteria set forth in the executive's restricted stock award agreement. The shares are subject to forfeiture or accelerated payout under plan provisions for termination, retirement, disability and death of employees. Restricted shares vest fully, in certain situations, as defined by each of the Plans.

 

The Plans allow for the grant of restricted stock units. Restricted stock units are awards based on the fair value of PPL common stock on the date of grant. Actual PPL common shares will be issued upon completion of a vesting period, generally three years.

 

The fair value of restricted stock and restricted stock units granted is recognized on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of restricted stock and restricted stock units granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant. Recipients of restricted stock and restricted stock units may also be granted the right to receive dividend equivalents through the end of the restriction period or until the award is forfeited. Restricted stock and restricted stock units are subject to forfeiture or accelerated payout under the plan provisions for termination, retirement, disability and death of employees. Restricted stock and restricted stock units vest fully, in certain situations, as defined by each of the Plans.

The weighted-average grant date fair value of restricted stock and restricted stock units granted was:

   2012 2011 2010
           
PPL $ 28.35 $ 25.25 $ 28.93
PPL Energy Supply   28.29   25.14   29.49
PPL Electric   28.51   25.09   29.40
LKE   28.34      26.31

Restricted stock and restricted stock unit activity for 2012 was:

      Weighted-
      Average
    Restricted Grant Date Fair
    Shares/Units Value Per Share
PPL      
Nonvested, beginning of period   2,040,035 $ 27.03
 Granted   1,487,556   28.35
 Vested   (1,002,229)   27.23
 Forfeited   (21,592)   27.69
Nonvested, end of period   2,503,770   27.73
        
PPL Energy Supply      
Nonvested, beginning of period   665,180 $ 27.30
 Transferred   62,320   28.66
 Granted   564,020   28.29
 Vested   (219,124)   27.04
 Forfeited   (11,710)   27.97
Nonvested, end of period   1,060,686   27.95
        
PPL Electric      
Nonvested, beginning of period   251,595 $ 27.10
 Transferred   (54,460)   28.93
 Granted   133,530   28.51
 Vested   (61,995)   27.63
 Forfeited   (7,442)   27.46
Nonvested, end of period   261,228   27.30
        
LKE      
Nonvested, beginning of period   145,210 $ 26.31
 Granted   144,340   28.34
 Vested   (149,910)   26.38
Nonvested, end of period   139,640   28.34

Substantially all restricted stock and restricted stock unit awards are expected to vest.

 

The total fair value of restricted stock and restricted stock units vesting for the years ended December 31 was:

   2012 2011 2010
           
PPL $ 27 $ 19 $ 15
PPL Energy Supply   6   6   7
PPL Electric   2   2   2
LKE   4   1   

Performance Units

 

Performance units are intended to encourage and award future performance. Performance units represent a target number of shares (Target Award) of PPL's common stock that the recipient would receive upon PPL's attainment of the applicable performance goal. Performance is determined based on total shareowner return during a 3-year performance period. At the end of the period, payout is determined by comparing PPL's performance to the total shareowner return of the companies included in an index group, in the case of the 2010 and 2011 awards, the S&P 500 Electric Utilities Index, and in the case of the 2012 awards, the Philadelphia Electric Utilities Index. Awards granted in 2010 are payable on a graduated basis within the following ranges: if PPL's performance is at or above the 85th percentile of the index group, the award is paid at 200% of the Target Award; at the 50th percentile of the index group, the award is paid at 100% of the Target Award; at the 40th percentile of the index group, the award is paid at 50% of the Target Award; and below the 40th percentile, no award is payable. Awards granted in 2011 and 2012 are payable on a graduated basis similar to 2010, except that the 2011 awards provide for a minimum payment at 25% of the Target Award if performance falls below the 40th percentile of the index group, and in 2012 the minimum payment was eliminated, with no award payable if performance falls below the 25th percentile. Dividends payable during the performance cycle accumulate and are converted into additional performance units and are payable in shares of PPL common stock upon completion of the performance period based on the determination of the CGNC of whether the performance goals have been achieved. Under the plan provisions, performance units are subject to forfeiture upon termination of employment except for retirement, disability or death of an employee, in which case the total performance units remain outstanding and are eligible for vesting through the conclusion of the performance period. The fair value of performance units granted is recognized as compensation expense on a straight-line basis over the 3-year performance period. Performance units vest on a pro rata basis, in certain situations, as defined by each of the Plans.

The fair value of each performance unit granted was estimated using a Monte Carlo pricing model that considers stock beta, a risk-free interest rate, expected stock volatility and expected life. The stock beta was calculated comparing the risk of the individual securities to the average risk of the companies in the index group. The risk-free interest rate reflects the yield on a U.S. Treasury bond commensurate with the expected life of the performance unit. Volatility over the expected term of the performance unit is calculated using daily stock price observations for PPL and all companies in the index group and is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL and the companies in the index group. PPL had used historical volatility to value its performance units in 2010. Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands.

 

The weighted-average assumptions used in the model were:

    2012  2011  2010
           
Risk-free interest rate  0.30%  1.00%  1.41%
Expected stock volatility  19.30%  23.40%  34.70%
Expected life  3 years  3 years  3 years

The weighted-average grant date fair value of performance units granted was:

   2012 2011 2010
           
PPL $ 31.41 $ 29.67 $ 34.06
PPL Energy Supply   31.40   29.68   34.16
PPL Electric   31.37   29.57   33.54
LKE   31.30   29.20   

Performance unit activity for 2012 was:

      Weighted-
      Average Grant
   Performance Date Fair Value
   Units Per Share
PPL      
Nonvested, beginning of period   398,609 $ 33.31
 Granted   322,771   31.41
 Forfeited   (127,177)   38.61
Nonvested, end of period   594,203   31.14
        
PPL Energy Supply      
Nonvested, beginning of period   75,067 $ 33.00
 Transferred   12,719   34.15
 Granted   71,572   31.40
 Forfeited   (35,169)   38.90
Nonvested, end of period   124,189   31.26
        
PPL Electric      
Nonvested, beginning of period   32,808 $ 33.11
 Transferred   (12,719)   34.15
 Granted   16,234   31.37
 Forfeited   (10,240)   34.17
Nonvested, end of period   26,083   31.10
        
LKE      
Nonvested, beginning of period   26,893 $ 29.20
 Granted   55,857   31.30
Nonvested, end of period   82,750   30.62

Stock Options

 

Under the Plans, stock options may be granted with an option exercise price per share not less than the fair value of PPL's common stock on the date of grant. Options outstanding at December 31, 2012, become exercisable in equal installments over a three-year service period beginning one year after the date of grant, assuming the individual is still employed by PPL or a subsidiary. The CGNC and CLC have discretion to accelerate the exercisability of the options, except that the exercisability of an option issued under the ICP may not be accelerated unless the individual remains employed by PPL or a subsidiary for one year from the date of grant. All options expire no later than ten years from the grant date. The options become exercisable immediately in certain situations, as defined by each of the Plans. The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of options granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant.

The fair value of each option granted is estimated using a Black-Scholes option-pricing model. PPL uses a risk-free interest rate, expected option life, expected volatility and dividend yield to value its stock options. The risk-free interest rate reflects the yield for a U.S. Treasury Strip available on the date of grant with constant rate maturity approximating the option's expected life. Expected life is calculated based on historical exercise behavior. Volatility over the expected term of the options is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL's volatility in those prior periods. Management's expectations for future volatility, considering potential changes to PPL's business model and other economic conditions, are also reviewed in addition to the historical data to determine the final volatility assumption. PPL had used historical volatility to value its stock options granted in 2010. Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands. The dividend yield is based on several factors, including PPL's most recent dividend payment, as of the grant date and the forecasted stock price through 2013. The assumptions used in the model were:

   2012 2011 2010
           
Risk-free interest rate  1.13%  2.34%  2.52%
Expected option life  6.17 years  5.71 years  5.43 years
Expected stock volatility  20.60%  21.60%  28.57%
Dividend yield  5.00%  5.93%  5.61%

The weighted-average grant date fair value of options granted was:

   2012 2011 2010
           
PPL $ 2.48 $ 2.47 $ 4.70
PPL Energy Supply   2.51   2.47   4.73
PPL Electric   2.50   2.47   4.62
LKE   2.51   2.47   

Stock option activity for 2012 was:

       Weighted-  
      Weighted Average   
     Average Remaining Aggregate
   Number Exercise Contractual Total Intrinsic
   of Options Price Per Share Term Value
PPL            
Outstanding at beginning of period   7,530,198 $ 30.65      
 Granted   1,948,550   28.19      
 Exercised   (263,094)   23.22      
 Forfeited   (81,109)   28.43      
Outstanding at end of period   9,134,545   30.36   6.3 $ 9
Options exercisable at end of period   6,134,265   31.70   5.7   6
              
PPL Energy Supply            
Outstanding at beginning of period   1,690,153 $ 30.79      
 Transferred   176,070   31.90      
 Granted   483,740   28.19      
 Exercised   (36,358)   24.35      
 Forfeited   (48,482)   29.34      
Outstanding at end of period   2,265,123   30.45   6.1 $ 2
Options exercisable at end of period   1,529,711   31.80   4.9   1
              
PPL Electric            
Outstanding at beginning of period   460,510 $ 31.05      
 Transferred   (176,070)   31.90      
 Granted   100,590   28.22      
 Exercised   (11,873)   25.67      
 Forfeited   (32,627)   27.07      
Outstanding at end of period   340,530   30.35   7.0   
Options exercisable at end of period   193,355   32.43   5.8   
              
LKE            
Outstanding at beginning of period   329,600 $ 25.77      
 Granted   354,490   28.17      
 Exercised   (49,243)   25.74      
Outstanding at end of period   634,847   27.11   8.6 $ 1
Options exercisable at end of period   144,260   26.62   8.4   

PPL received $6 million in cash from stock options exercised in 2012. The related tax savings were not significant for 2012. Substantially all stock option awards are expected to vest.

 

The total intrinsic value of stock options exercised for the years ended December 31, 2012, 2011 and 2010 was not significant.

Compensation Expense

 

Compensation expense for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards was as follows:

   2012 2011 2010
           
PPL $ 49 $ 36 $ 26
PPL Energy Supply   23   16   20
PPL Electric   11   8   6
LKE   8   5   

The income tax benefit related to above compensation expense was as follows:

   2012 2011 2010
           
PPL  $ 20 $ 15 $ 11
PPL Energy Supply   10   6   8
PPL Electric    4   3   3
LKE    4   2   

The income tax benefit PPL realized from stock-based awards vested or exercised for 2012 was not significant.

At December 31, 2012, unrecognized compensation expense related to nonvested restricted stock, restricted stock units, performance units and stock option awards was:

       
     Weighted-
   Unrecognized Average
   Compensation Period for
   Expense Recognition
        
PPL $ 27  2.1 years
PPL Energy Supply   11  2.4 years
PPL Electric   2  2.2 years
LKE   2  1.8 years