Share-Based Compensation

Chesapeake’s share-based compensation program consists of restricted stock, stock options and performance share units (PSUs) granted to employees and restricted stock granted to non-employee directors under our long term incentive plans. The restricted stock and stock options are equity-classified awards and the PSUs are liability-classified awards.

Equity-Classified Awards

Restricted Stock. We grant restricted stock units to employees and non-employee directors. A summary of the changes in unvested restricted stock during the Current Period is presented below.



	Shares of Unvested Restricted Stock		Weighted Average Grant Date Fair Value
	(in thousands)
Unvested restricted stock as of January 1, 2017	9,092		$	11.39
Granted	9,872		$	5.40
Vested	(4,481	)	$	13.63
Forfeited	(942	)	$	8.85
Unvested restricted stock as of September 30, 2017	13,541		$	6.46

The aggregate intrinsic value of restricted stock that vested during the Current Period was approximately $25 million based on the stock price at the time of vesting.

As of September 30, 2017, there was approximately $59 million of total unrecognized compensation expense related to unvested restricted stock. The expense is expected to be recognized over a weighted average period of approximately 1.97 years.

Stock Options. In the Current Period and the Prior Period, we granted members of management stock options that vest ratably over a three-year period. Each stock option award has an exercise price equal to the closing price of the Company’s common stock on the grant date. Outstanding options expire seven years to ten years from the date of grant.

We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The expected life of an option is determined using the simplified method. Volatility assumptions are estimated based on an average of historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield is based on an annual dividend yield, taking into account the Company's dividend policy, over the expected life of the option. The Company used the following weighted average assumptions to estimate the grant date fair value of the stock options granted in the Current Period.



Expected option life – years	6.0
Volatility	62.42	%
Risk-free interest rate	2.17	%
Dividend yield	—	%

The following table provides information related to stock option activity in the Current Period.



	Number of Shares Underlying Options		Weighted Average Exercise Price Per Share		Weighted Average Contract Life in Years	Aggregate Intrinsic Value^(a)
	(in thousands)					($ in millions)
Outstanding as of January 1, 2017	8,593		$	11.88	7.22	$	14
Granted	9,226		$	5.45
Exercised	—		$	—		$	—
Expired	(524	)	$	18.45
Forfeited	(904	)	$	9.91
Outstanding as of September 30, 2017	16,391		$	8.16	8.04	$	2
Exercisable as of September 30, 2017	4,490		$	15.22	5.49	$	1

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(a)	The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.

As of September 30, 2017, there was $26 million of total unrecognized compensation expense related to stock options. The expense is expected to be recognized over a weighted average period of approximately 2.28 years.

Restricted Stock and Stock Option Compensation. We recognized the following compensation costs related to restricted stock and stock options for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	($ in millions)
General and administrative expenses	$	9	$	10	$	29	$	28
Oil and natural gas properties	3		4		10		13
Oil, natural gas and NGL production expenses	2		4		9		10
Marketing, gathering and compression expenses	—		—		—		1
Total restricted stock and stock option compensation	$	14	$	18	$	48	$	52

Liability-Classified Awards

Performance Share Units. We have granted PSUs to senior management that vest ratably over a three-year term and are settled in cash on the third anniversary of the awards. The ultimate amount earned is based on achievement of performance metrics established by the Compensation Committee of the Board of Directors, which include total shareholder return (TSR) and, for certain of the awards, operational performance goals, such as finding and development costs and production levels.

For PSUs granted, the TSR component can range from 0% to 100% and the operational component can range from 0% to 100%, resulting in a maximum payout of 200%. Compensation expense associated with PSU grants is recognized over the service period based on the graded-vesting method. The value of the PSU awards at the end of each reporting period is dependent upon the Company’s estimates of the underlying performance measures. The payout percentage for all PSU grants is capped at 100% if the Company’s absolute TSR is less than zero. The Company utilized a Monte Carlo simulation for the TSR performance measure and the following assumptions to determine the grant date fair value of the PSUs.



Volatility	87.16	%
Risk-free interest rate	1.51	%
Dividend yield for value of awards	—	%

The following table presents a summary of our 2017, 2016 and 2015 PSU awards.



		Grant Date Fair Value		September 30, 2017
	Units	Grant Date Fair Value		Fair Value		Vested Liability
		($ in millions)		($ in millions)
2017 Awards:
Payable 2020	1,217,774	$	8	$	6	$	2
2016 Awards:
Payable 2019	2,348,893	$	10	$	9	$	8
2015 Awards:
Payable 2018	629,694	$	13	$	1	$	1

PSU Compensation. We recognized the following compensation costs (credits) related to PSUs for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
	($ in millions)
General and administrative expenses	$	(2	)	$	7	$	(4	)	$	10
Restructuring and other termination costs	—			—		—			1
Total PSU compensation	$	(2	)	$	7	$	(4	)	$	11