Freeport-McMoRan 2008 Annual Report Download - page 92

Notes to Consolidated Financial Statements
90 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
Summaries of options outstanding, including SARs, and changes
during the years ended December 31, 2007 and 2006, follow:
2007 2006
Weighted- Weighted-
Number of Average Number of Average
Options Option Price Options Option Price
Balance at January 1 5,801,716 $ 39.70 7,355,612 $ 31.43
Granted 6,641,500 69.89 1,126,250 62.88
Conversion of
Phelps Dodge options 806,595 28.38 – –
Exercised (2,276,391) 34.45 (2,614,273) 26.51
Expired/Forfeited (213,622) 59.29 (65,873) 39.12
Balance at December 31 10,759,798 58.17 5,801,716 39.70
The fair value of each option award is estimated on the date of
grant using the Black-Scholes-Merton option valuation model.
Expected volatility is based on implied volatilities from traded
options on FCX’s stock and historical volatility of FCX’s stock.
FCX uses historical data to estimate future option exercises,
forfeitures and expected life of the options. When appropriate,
separate groups of employees that have similar historical exercise
behavior are considered separately for valuation purposes. The
expected dividend rate is calculated as the annual dividend
(excludes supplemental dividends) at the date of grant divided by
the average stock price for the one-year period preceding the
grant date. The risk-free interest rate is based on Federal Reserve
rates in effect for bonds with maturity dates equal to the
expected term of the option at the grant date. The weighted-
average assumptions used to value stock option awards during
the years ended December 31, 2008, 2007 and 2006, are noted in
the following table.
2008 2007 2006
Expected volatility 49.3% 37.3% 37.7%
Expected life of options (in years) 4.6 4.25 4.0
Expected dividend rate 2.0% 2.2% 2.9%
Risk-free interest rate 3.3% 4.6% 4.4%
The weighted-average grant-date fair value of options granted
was $34.91 per option during 2008, $21.33 per option during 2007
and $17.67 per option during 2006. The total intrinsic value of
options exercised was $128 million during 2008 and $96 million
during each of 2007 and 2006. The total fair value of options
vested was $61 million during 2008, $29 million during 2007 and
$30 million during 2006. As of December 31, 2008, FCX had
$86 million of total unrecognized compensation cost related to
unvested stock options expected to be recognized over a
weighted-average period of one year.
The following table includes amounts related to exercises of
stock options and SARs and vesting of restricted stock units and
restricted stock awards during the years ended December 31,
2008, 2007 and 2006:
2008 2007 2006
FCX shares tendered to pay the
exercise price and/or the
minimum required taxes
a
823,915 1,389,845 809,926
Cash received from stock option
exercises $ 56 $ 54 $ 37
Actual tax benefit realized for tax
deductions 180 138 31
Amounts FCX paid for employee taxes 34 68 22
Amounts FCX paid for exercised SARs 1 5 2
a. Under terms of the related plans, upon exercise of stock options and vesting of
restricted stock units and restricted stock awards, employees may tender FCX
shares to FCX to pay the exercise price and/or the minimum required taxes.
Restricted Stock Units. Prior to December 2008, FCX had a
restricted stock program that allowed FCX senior executives to
elect to receive restricted stock units in lieu of all or part of their
annual cash incentive compensation. The annual cash incentive
was a function of FCX’s consolidated operating cash flows for the
preceding year. Awards of these restricted stock units to the FCX
executive officers were considered performance-based awards.
To compensate for certain restrictions and the risk of forfeiture,
the restricted stock units were awarded at a 50 percent premium
to the market value on the date of grant. The awards vest ratably
over three years or upon retirement and were subject to
achievement of certain performance measures. For retirement-
eligible executives, the fair value of the restricted stock units was
estimated based on projected operating cash flows for the year
and was charged to expense ratably over the year the cash flows
were generated. Effective December 2, 2008, the board of
directors discontinued this program.
FCX also granted other restricted stock units that vest over a
period of up to five years. The plans and award agreements
provide for accelerated vesting of all restricted stock units if there
is a change of control (as defined in the plans) and provide that
participants will receive the following year’s vesting after
retirement (except for the restricted stock units with five year
vesting that do not allow acceleration because of retirement).
Dividends and interest on restricted stock units accrue and are
paid upon the award’s vesting.
FCX grants restricted stock units to its directors under the
2004 Plan. The restricted stock units vest over four years.
The fair value of the restricted stock units is amortized over the
four-year vesting period or the period until the director
becomes retirement-eligible, whichever is shorter. Upon a
director’s retirement, all of their unvested restricted stock
units immediately vest. For retirement-eligible directors, the fair
value of restricted stock units is recognized on the date of grant.