Progress Energy 2007 Annual Report Download - page 98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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defined in the plan. Such compensation cost is allocated
to participants’ accounts in the form of Progress Energy
common stock, with the number of shares determined by
dividing compensation cost by the common stock market
value at the time of allocation. We currently meet common
stock share needs with open market purchases, with
shares released from the ESOP suspense account and
with newly issued shares. Costs for incentive goal
compensation are accrued during the fiscal year and
typically paid in shares in the following year, while
costs for the matching component are typically met
with shares in the same year incurred. Matching
and incentive costs, which were met and will be met
with shares released from the suspense account,
totaled approximately $23 million, $14 million and
$18 million for the years ended December 31, 2007, 2006
and 2005, respectively. Total matching and incentive
costs were approximately $30 million, $23 million and
$30 million for the years ended December 31, 2007, 2006 and
2005, respectively. We have a long-term note receivable
from the 401(k) Trustee related to the purchase of common
stock from us in 1989. The balance of the note receivable
from the 401(k) Trustee is included in the determination
of unearned ESOP common stock, which reduces
common stock equity. ESOP shares that have not been
committed to be released to participants’ accounts are
not considered outstanding for the determination of
earnings per common share. Interest income on the note
receivable and dividends on unallocated ESOP shares are
not recognized for financial statement purposes.
Effective January 1, 2008, the 401(k) was revised. As
revised, the employer match percentage was increased
and the employee stock incentive plan based on goal
attainment was discontinued.
STOCK OPTIONS
Pursuant to our 1997 Equity Incentive Plan (EIP) and 2002
EIP, amended and restated as of July 10, 2002, we may
grant options to purchase shares of Progress Energy
common stock to directors, officers and eligible employees
for up to 5 million and 15 million shares, respectively.
Generally, options granted to employees vest one-third
per year with 100 percent vesting at the end of year three,
while options granted to directors vest 100 percent at the
end of one year. The options expire 10 years from the date
of grant. All option grants have an exercise price equal to
the fair market value of our common stock on the grant
date. We curtailed our stock option program in 2004 and
replaced that compensation program with other programs.
No stock options have been granted since 2004. We issue
new shares of common stock to satisfy the exercise of
previously issued stock options.
A summary of the status of our stock options at December 31,
2007, and changes during the year then ended, is presented
below:
The options outstanding and exercisable at December 31,
2007, had a weighted-average remaining contractual life
of 5.0 years and an aggregate intrinsic value of $8 million.
Total intrinsic value of options exercised during the years
ended December 31, 2007, 2006 and 2005, respectively,
was $17 million, $10 million and less than $1 million.
Compensation cost, for pro forma purposes prior to the
adoption of SFAS No. 123R and for expense purposes
subsequent to the adoption, is measured at the grant date
based on the fair value of the award and is recognized
over the vesting period. The fair value for these options
was estimated at the grant date using a Black-Scholes
option pricing model. Dividend yield and the volatility
factor were calculated using three years of historical
trend information. The expected term was based on the
contractual life of the options.
As of December 31, 2006, all options were fully vested;
therefore, no compensation expense was recognized
in 2007. Stock option expense totaling $2 million
was recognized in income during the year ended
December 31, 2006, with a recognized tax benefit of
$1 million. No compensation cost related to stock options
was capitalized during the year. Stock option expense
totaling $3 million was recognized in income during the
year ended December 31, 2005, with a recognized tax
benefit of $1 million. No compensation cost related to
stock options was capitalized during the year.
As previously indicated, we did not record stock option
expense prior to the adoption of SFAS No. 123R as of
July 1, 2005. The following table illustrates the effect on
our net income and earnings per share if the fair value
method had been applied to all outstanding and nonvested
awards in each period:
(option quantities in millions)
Number of
Options
Weighted-Average
Exercise Price
Options outstanding, January 1 4.0 $43.70
Canceled –45.55
Exercised (2.3) 43.47
Options outstanding, December 31 1.7 43.99
Options exercisable, December 31 1.7 43.99