Sunoco 2003 Annual Report Download - page 65

Common stock unit awards mature upon completion of a
restriction period or upon attainment of predetermined
performance targets. At December 31, 2002, all out-
standing common stock units were payable in Company
common stock. In December 2003, the Company
changed the method of payment for certain outstanding
common stock unit awards to cash. As a result, the Com-
pany recorded a $12 million charge to the capital in ex-
cess of par value component of shareholders’ equity at
December 31, 2003. At December 31, 2003, 402,600 of
the outstanding common stock unit awards were payable
in cash and 92,834 were payable in Company common
stock. The following table summarizes information with
respect to all common stock unit awards under Sunoco’s
management incentive plans:
2003 2002 2001
Outstanding at beginning of year 462,212 519,290 436,292
Granted* 144,565 151,650 114,500
Performance factor adjustment** 33,931 (53,372) —
Matured (143,674) (147,061) (22,902)
Canceled (1,600) (8,295) (8,600)
Outstanding at end of year 495,434 462,212 519,290
* The weighted average price for common stock awards on the date of grant was
$48.40, $30.14 and $37.07 for awards granted in 2003, 2002 and 2001,
respectively.
** Consists of adjustments to performance-based awards to reflect actual performance.
The adjustments are required since the original grants of these awards were at 100
percent of the targeted amounts.
During the fourth quarter of 2002, Sunoco adopted the
fair value method of accounting for employee stock com-
pensation plans, retroactive to January 1, 2002 (Note 1).
Stock-based compensation expense for 2003 and 2002
determined utilizing this method amounted to $13 and
$11 million, respectively ($8 and $7 million after tax,
respectively), which consisted of $6 and $6 million, re-
spectively, related to stock option awards and $7 and $5
million, respectively, related to common stock unit
awards. Had the fair value method been followed during
2001, the pro forma impact on Sunoco’s net income and
net income per share of common stock on a diluted basis
would have been as follows:
(Millions of Dollars, Except Per Share Amounts)
Net income, as reported: $398
Add back after-tax stock-based compensation
expense included in reported net income 4
Less after-tax stock-based compensation
expense determined under SFAS No. 123 (7)
Net income, pro forma $395
Net income per share:
As reported $4.85
Pro forma $4.82
The 2003 and 2002 historical amounts and the 2001 pro
forma amounts above have been computed in accordance
with the fair value method and reflect the estimated fair
values of $13.07, $7.08 and $10.38 per option granted
during 2003, 2002 and 2001, respectively. These values
are calculated using the Black-Scholes option pricing
model based on the following weighted-average
assumptions:
2003 2002 2001
Expected life (years) 666
Risk-free interest rate 3.7% 3.7% 4.8%
Dividend yield 2.2% 3.3% 2.7%
Expected volatility 28.8% 29.3% 29.3%
16. Financial Instruments
The estimated fair value of financial instruments has been
determined based on the Company’s assessment of avail-
able market information and appropriate valuation
methodologies. However, these estimates may not
necessarily be indicative of the amounts that the Com-
pany could realize in a current market exchange.
Sunoco’s current assets (other than inventories and de-
ferred income taxes) and current liabilities are financial
instruments. The estimated fair value of these financial
instruments approximates their carrying amounts. At
December 31, 2003 and 2002, the estimated fair value of
Sunoco’s long-term debt was $1,536 and $1,593 million,
respectively, compared to carrying amounts of $1,350 and
$1,453 million, respectively. Long-term debt that is pub-
licly traded was valued based on quoted market prices
while the fair value of other debt issues was estimated by
management based upon current interest rates available
to Sunoco at the respective balance sheet dates for similar
issues.
The Company guarantees the debt of affiliated companies
and others. Due to the complexity of these guarantees
and the absence of any market for these financial instru-
ments, the Company does not believe it is practicable to
estimate their fair value. The accounting recognition
provisions of FASB Interpretation No. 45 do not apply to
these guarantees as they were entered into prior to Jan-
uary 1, 2003, the date prospective application of the
provisions is required (Note 1).
Sunoco uses swaps, options, futures, forwards and other
derivative instruments for hedging purposes. Sunoco is at
risk for possible changes in the market value for these de-
rivative instruments. However, it is anticipated that such
risk would be mitigated by price changes in the under-
lying hedged items. In addition, Sunoco is exposed to
credit risk in the event of nonperformance by counter-
parties. Management believes this risk is negligible as its
counterparties are either regulated by exchanges or are
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