Sunoco 2006 Annual Report Download - page 69

which is similar to the method followed by the Company
under the provisions of SFAS No. 123. SFAS No. 123R
also requires the use of a non-substantive vesting period
approach for new share-based payment awards that vest
when an employee becomes retirement eligible as is the
case under Sunoco’s share-based awards (i.e., the vesting
period cannot exceed the date an employee becomes re-
tirement eligible). The effect is to accelerate expense
recognition compared to the vesting period approach that
Sunoco previously followed under SFAS No. 123. Adop-
tion of SFAS No. 123R resulted in $7 million higher
after-tax compensation expense in 2006 compared to
what it otherwise would have been under SFAS No. 123,
primarily due to the accelerated expense recognition. The
future impact of the non-substantive vesting period will
be dependent upon the value of future stock-based awards
granted to employees who are eligible to retire prior to
the normal vesting periods of the awards.
The stock options granted under LTPEP II have a 10-year
term, are not exercisable until two years after the date of
grant and permit optionees to purchase Company com-
mon stock at its fair market value on the date of grant.
Under SFAS No. 123, the fair value of the stock options
was estimated using the Black-Scholes option pricing
model. Use of this model requires the Company to make
certain assumptions regarding the term that the options
are expected to be outstanding (“expected life”), as well
as regarding the risk-free interest rate, the Company’s
expected dividend yield and the expected volatility of the
Company’s stock price during the period the options are
expected to be outstanding. The expected life and divi-
dend yield are estimated based on historical experience.
The risk-free interest rate is based on the U.S. Treasury
yield curve at the date of grant for periods that are
approximately equal to the expected life. The Company
uses historical share prices, for a period equivalent to the
options’ expected life, to estimate the expected volatility
of the Company’s share price. Under SFAS No. 123R, the
Company continues to use the Black-Scholes option pric-
ing model to estimate the fair value of stock options.
Such fair value has been based on the following
weighted-average assumptions:
2006 2005 2004
Expected life (years) 555
Risk-free interest rate 4.4% 4.5% 3.8%
Dividend yield 1.5% 1.0% 1.5%
Expected volatility 28.8% 27.7% 27.4%
The following table summarizes information with respect to common stock option awards under Sunoco’s manage-
ment incentive plans:
Management Incentive Plans
(Dollars in Millions, Except Per-Share
and Per-Option Amounts)
Shares
Under
Option
Weighted-
Average
Option Price
Per Share
Weighted-
Average
Fair Value
Per Option*
Intrinsic
Value
Outstanding, December 31, 2003 6,400,080 $ 17.27
Granted 821,200 $ 41.28 $ 10.96
Exercised (4,454,192) $ 16.01 $77
Canceled —
Outstanding, December 31, 2004 2,767,088 $ 26.42
Granted 373,700 $ 77.54 $ 22.76
Exercised (1,612,482) $ 20.39 $77
Canceled —
Outstanding, December 31, 2005 1,528,306 $ 45.27
Granted 456,325 $68.72 $19.68
Exercised** (658,190) $38.05 $20
Canceled (6,400) $52.61
Outstanding, December 31, 2006 1,320,041*** $56.95 $16
Exercisable, December 31
2004 936,288 $ 15.56
2005 333,406 $ 18.94
2006 492,016*** $30.47 $16
* Represents the weighted-average fair value per option granted as of the date of grant.
** Cash received by the Company upon exercise totaled $7 million and the related tax benefit realized amounted to $8 million.
*** The weighted-average remaining contractual term of outstanding options and exercisable options was 8.4 and 6.5 years, respectively.
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