Chevron 2006 Annual Report Download - page 81

CHEVRON CORPORATION 2006 ANNUAL REPORT 79CHEVRON CORPORATION 2006 ANNUAL REPORT 79
ing period for retirement-eligible employees in accordance with
vesting provisions of the company’s share-based compensation
programs for awards issued after adoption of FAS 123R. As
of December 31, 2006, there was $99 of total unrecognized
before-tax compensation cost related to nonvested share-based
compensation arrangements granted or restored under the
plans. That cost is expected to be recognized over a weighted-
average period of 2.0 years.
At January 1, 2006, the number of LTIP performance
units outstanding was equivalent to 2,346,016 shares. Dur-
ing 2006, 709,200 units were granted, 827,450 units vested
with cash proceeds distributed to recipients, and 117,570 units
were forfeited. At December 31, 2006, units outstanding were
2,110,196, and the fair value of the liability recorded for these
instruments was $113. In addition, outstanding stock apprecia-
tion rights that were awarded under various LTIP and former
Texaco and Unocal programs totaled approximately 700,000
equivalent shares as of December 31, 2006. A liability of $16
was recorded for these awards.
Broad-Based Employee Stock Options In addition to the plans
described above, Chevron granted all eligible employees stock
options or equivalents in 1998. The options vested after two
years, in February 2000, and expire after 10 years, in Febru-
ary 2008. A total of 9,641,600 options were awarded with an
exercise price of $38.16 per share.
The fair value of each option on the date of grant was
estimated at $9.54 using the Black-Scholes model for the
preceding 10 years. The assumptions used in the model,
based on a 10-year average, were: a risk-free interest rate of
7 percent, a dividend yield of 4.2 percent, an expected life
of seven years and a volatility of 24.7 percent.
At January 1, 2006, the number of broad-based
employee stock options outstanding was 1,682,904. Dur-
ing 2006, exercises of 354,845 shares and forfeitures of
22,000 shares reduced outstanding options to 1,306,059. As
of December 31, 2006, these instruments had an aggregate
intrinsic value of $46 and the remaining contractual term of
these options was 1.1 years. The total intrinsic value of these
options exercised during 2006, 2005 and 2004 was $10, $9
and $16, respectively.
NOTE 23.
OTHER CONTINGENCIES AND COMMITMENTS
Income Taxes The company calculates its income tax expense
and liabilities quarterly. These liabilities generally are not fi nal-
ized with the individual taxing authorities until several years
after the end of the annual period for which income taxes have
been calculated. The U.S. federal income tax liabilities have
been settled through 1996 for Chevron Corporation, 1997 for
Unocal Corporation (Unocal) and 2001 for Texaco Corpora-
tion (Texaco). California franchise tax liabilities have been
settled through 1991 for Chevron, 1998 for Unocal and 1987
for Texaco. Settlement of open tax years, as well as tax issues
in other countries where the company conducts its busi-
nesses, is not expected to have a material effect on the
consolidated fi nancial position or liquidity of the company
and, in the opinion of management, adequate provision has
been made for income and franchise taxes for all years under
examination or subject to future examination.
Guarantees At December 31, 2006, the company and its sub-
sidiaries provided guarantees, either directly or indirectly, of
$296 for notes and other contractual obligations of affi liated
companies and $131 for third parties, as described by major
category below. There are no amounts being carried as liabili-
ties for the company’s obligations under these guarantees.
The $296 in guarantees provided to affi liates related
to borrowings for capital projects. These guarantees were
undertaken to achieve lower interest rates and generally cover
the construction periods of the capital projects. Included in
these amounts are the company’s guarantees of $214 associ-
ated with a construction completion guarantee for the debt
fi nancing of the company’s equity interest in the Baku-Tbilisi-
Ceyhan (BTC) crude oil pipeline project. Substantially all
of the $296 guaranteed will expire between 2007 and 2011,
with the remaining expiring by the end of 2015. Under the
terms of the guarantees, the company would be required to
fulfi ll the guarantee should an affi liate be in default of its
loan terms, generally for the full amounts disclosed.
The $131 in guarantees provided on behalf of third
parties related to construction loans to governments of cer-
tain of the company’s international upstream operations.
Substantially all of the $131 in guarantees expire by 2011,
with the remainder expiring by 2015. The company would be
required to perform under the terms of the guarantees should
an entity be in default of its loan or contract terms, generally
for the full amounts disclosed.
At December 31, 2006, Chevron also had outstanding
guarantees for about $120 of Equilon debt and leases. Follow-
ing the February 2002 disposition of its interest in Equilon,
the company received an indemnifi cation from Shell for any
claims arising from the guarantees. The company has not
recorded a liability for these guarantees. Approximately 50
percent of the amounts guaranteed will expire within the 2007
through 2011 period, with the guarantees of the remaining
amounts expiring by 2019.
Indemnifi cations The company provided certain indemnities
of contingent liabilities of Equilon and Motiva to Shell and
Saudi Refi ning, Inc., in connection with the February 2002
sale of the company’s interests in those investments. The
company would be required to perform if the indemnifi ed
liabilities become actual losses. Were that to occur, the com-
pany could be required to make future payments up to $300.
NOTE 22. STOCK OPTIONS AND OTHER SHARE-BASED
COMPENSATION – Continued