Chevron 2006 Annual Report Download - page 80

78 CHEVRON CORPORATION 2006 ANNUAL REPORT78 CHEVRON CORPORATION 2006 ANNUAL REPORT
64 million of those shares may be in a form other than a stock
option, stock appreciation right or award requiring full payment
for shares by the award recipient.
Stock options and stock appreciation rights granted
under the LTIP extend for 10 years from grant date. Effec-
tive with options granted in June 2002, one-third of each
award vests on the fi rst, second and third anniversaries of
the date of grant. Prior to this change, options granted by
Chevron vested one year after the date of grant. Perfor-
mance units granted under the LTIP settle in cash at the end
of a three-year performance period. Settlement amounts are
based on achievement of performance targets relative to major
competitors over the period, and payments are indexed to the
company’s stock price.
Texaco Stock Incentive Plan (Texaco SIP) On the closing
of the acquisition of Texaco in October 2001, outstand-
ing options granted under the Texaco SIP were converted
to Chevron options. These options retained a provision for
being restored, which enables a participant who exercises
a stock option to receive new options equal to the number
of shares exchanged or who has shares withheld to satisfy
tax withholding obligations to receive new options equal to
the number of shares exchanged or withheld. The restored
options are fully exercisable six months after the date of
grant, and the exercise price is the market value of the com-
mon stock on the day the restored option is granted. Apart
from the restored options, no further awards may be granted
under the former Texaco plans.
Unocal Share-Based Plans (Unocal Plans) On the closing of
the acquisition of Unocal in August 2005, outstanding stock
options and stock appreciation rights granted under various
Unocal Plans were exchanged for fully vested Chevron options
and appreciation rights at a conversion ratio of 1.07 Chevron
shares for each Unocal share. These awards retained the same
provisions as the original Unocal Plans. Awards issued prior to
2004 generally may be exercised for up to three years after ter-
mination of employment (depending upon the terms of the
individual award agreements) or the original expiration date,
whichever is earlier. Awards issued since 2004 generally remain
exercisable until the end of the normal option term if termina-
tion of employment occurs prior to August 10, 2007. Other
awards issued under the Unocal Plans, including restricted
stock, stock units, restricted stock units and performance
shares, became vested at the acquisition date, and shares or
cash were issued to recipients in accordance with change-in-
control provisions of the plans.
The fair market values of stock options and stock apprecia-
tion rights granted in 2006, 2005 and 2004 were measured on
the date of grant using the Black-Scholes option-pricing model,
with the following weighted-average assumptions:
Year ended December 31
2006 2005 2004
Chevron LTIP
Expected term in years1 6.4 6.4 7.0
Volatility2 23.7% 24.5% 16.5%
Risk-free interest rate based on
zero coupon U.S. treasury note 4.7% 3.8% 4.4%
Dividend yield 3.1% 3.4% 3.7%
Weighted-average fair value per
option granted $ 12.74 $ 11.66 $ 7.14
Texaco SIP
Expected term in years1 2.2 2.1 2.0
Volatility2 19.6% 18.6% 17.8%
Risk-free interest rate based on
zero coupon U.S. treasury note 4.8% 3.8% 2.5%
Dividend yield 3.3% 3.4% 3.8%
Weighted-average fair value per
option granted $ 7.72 $ 6.09 $ 4.00
Unocal Plans3
Expected term in years1 – 4.2 –
Volatility2 – 21.6% –
Risk-free interest rate based on
zero coupon U.S. treasury note – 3.9% –
Dividend yield – 3.4% –
Weighted-average fair value per
option granted – $ 21.48 –
1 Expected term is based on historical exercise and post-vesting cancellation data.
2 Volatility rate is based on historical stock prices over an appropriate period, generally
equal to the expected term.
3 Represents options converted at the acquisition date.
A summary of option activity during 2006 is presented
below:
Weighted-
Weighted- Average
Average Remaining Aggregate
Shares Exercise Contractual Intrinsic
(Thousands) Price Term Value
Outstanding at
January 1, 2006 59,524 $ 45.32
Granted 9,248 $ 56.64
Exercised (14,921) $ 46.11
Restored 4,002 $ 64.13
Forfeited (1,908) $ 57.09
Outstanding at
December 31, 2006 55,945 $ 47.91 6.0 yrs. $ 1,433
Exercisable at
December 31, 2006 37,063 $ 43.56 5.1 yrs. $ 1,111
The total intrinsic value (i.e., the difference between
the exercise price and the market price) of options exercised
during 2006, 2005 and 2004 was $281, $258 and $129,
respectively.
At adoption of FAS 123R, the company elected to amor-
tize newly issued graded awards on a straight-line basis over
the requisite service period. In accordance with FAS 123R
implementation guidance issued by the staff of the Securities
and Exchange Commission, the company accelerates the vest-
Notes to the Consolidated Financial Statements
Millions of dollars, except per-share amounts
NOTE 22. STOCK OPTIONS AND OTHER SHARE-BASED
COMPENSATION – Continued