CAPITAL POWER CORPORATION (Tabular amounts in millions of Canadian dollars, except share and per share amounts) 28. Share-based payments: Share purchase options Under the Company’s long-term incentive plan, the Company provides share purchase options to certain employees to purchase common shares, provided that the number of shares reserved for issuance will not exceed 10% of the common shares to be outstanding at closing and that the aggregate number of shares issued by the Company under this plan will not exceed 7,094,506 common shares. In March 2012, the Company granted 1,449,568 share purchase options with one third vesting on March 26 of each of 2013, 2014 and 2015. The fair values of these options at grant date were $1.47, $1.52 and $1.56 per option for the 2013, 2014 and 2015 tranches respectively. Granted options may be exercised within 7 years of the grant date at a price of $24.27 per share. In March 2011, the Company granted 1,445,457 share purchase options with one third vesting on March 21 of each of 2012, 2013 and 2014. The fair values of these options at grant date were $2.05, $2.14 and $2.23 per option for the 2012, 2013 and 2014 tranches respectively. Granted options may be exercised within 7 years of the grant date at a price of $24.90 per share. The following assumptions were used in estimating the fair value of the granted share purchase options: 3 Based on the Government of Canada zero-coupon yield curve. Represents the weighted average risk-free rate of the three tranches for each grant date. 2 Represents the weighted average expected life of the three tranches for each grant date. 1 Volatility has been estimated based on the historical volatility in the share prices of the Company’s peer group. Share purchase options issued in: 2012 2011 Share price at grant date $ 24.27 $ 24.90 Expected volatility 1 14% 16% Expected option life 2 4.5 years 4.5 years Expected dividend yield 5.19% 5.06% Risk-free interest rate 3 1.26% 2.33% Exercise price $ 24.27 $ 24.90 Expiry date March 26, 2019 March 21, 2018 2012 2011 Number of options Weighted average exercise price Number of options Weighted average exercise price Options outstanding, as at January 1 3,930,334 $ 23.50 3,093,893 $ 22.81 Granted 1,449,568 24.27 1,445,457 24.90 Exercised 4 (348,349) 23.04 (273,507) 22.90 Forfeited (645,841) 23.80 (335,509) 23.61 Options outstanding, as at December 31 4,385,712 $ 23.75 3,930,334 $ 23.50 Vested options outstanding, as at December 31 2,118,107 $ 23.20 1,515,331 $ 22.91 The following illustrates the movements on share purchase options during the years ended December 31 2012 and 2011: 4 The weighted average share price at the date of exercise was $24.88 (2011 - $25.15). 116 Notes to the Consolidated Financial Statements