Chevron 2007 Annual Report Download - page 83

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the date of grant. Performance 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 pay-
ments 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, which have 10-year
contractual lives extending into 2011, retained a provision
for being restored. This provision 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 common stock on the day the restored option is granted.
Beginning in 2007, restored options were granted under the
LTIP. No further awards may be granted under the former
Texaco plans.
Unocal Share-Based Plans (Unocal Plans) When Chevron
acquired 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. These awards retained the same provi-
sions as the original Unocal Plans. Awards issued prior to
2004 generally may be exercised for up to three years after
termination of employment (depending upon the terms of
the individual award agreements) or the original expiration
date, whichever is earlier. Awards issued since 2004 generally
remained exercisable until the end of the normal option term
if termination of employment occurred prior to August 10,
2007. Other awards issued under the Unocal Plans, including
restricted stock, stock units, restricted stock units and per-
formance 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 appre-
ciation rights granted in 2007, 2006 and 2005 were measured
on the date of grant using the Black-Scholes option-pricing
model, with the following weighted-average assumptions:
Year ended December 31
2007 2006 2005
Stock Options
Expected term in years1 6.3 6.4 6.4
Volatility2 22.0% 23.7% 24.5%
Risk-free interest rate based on
zero coupon U.S. treasury note 4.5% 4.7% 3.8%
Dividend yield 3.2% 3.1% 3.4%
Weighted-average fair value per
option granted $ 15.27 $ 12.74 $ 11.66
Restored Options
Expected term in years1 1.6 2.2 2.1
Volatility2 21.2% 19.6% 18.6%
Risk-free interest rate based on
zero coupon U.S. treasury note 4.5% 4.8% 3.8%
Dividend yield 3.2% 3.3% 3.4%
Weighted-average fair value per
option granted $ 8.61 $ 7.72 $ 6.09
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 Represent options converted at the acquisition date.
A summary of option activity during 2007 is presented
below:
Weighted-
Weighted- Average
Average Remaining Aggregate
Shares Exercise Contractual Intrinsic
(Thousands) Price Term Value
Outstanding at
January 1, 2007 55,945 $ 47.91
Granted 12,848 $ 74.08
Exercised (14,340) $ 51.92
Restored 3,458 $ 80.45
Forfeited (554) $ 72.36
Outstanding at
December 31, 2007 57,357 $ 54.50 6.3 yrs. $ 2,227
Exercisable at
December 31, 2007 35,540 $ 45.93 5.1 yrs. $ 1,685
The total intrinsic value (i.e., the difference between the
exercise price and the market price) of options exercised during
2007, 2006 and 2005 was $423, $281 and $258, respectively.
Upon adoption of FAS 123R, the company elected to
amortize 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-
ing period for retirement-eligible employees in accordance with
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