Progress Energy 2004 Annual Report Download - page 82

released from the ESOP suspense account and with
newly issued shares. Costs for incentive goal
compensation are accrued during the fiscal year and
typically paid in shares in the following year, while costs
for the matching component are typically met with
shares in the same year incurred. Matching and
incentive costs, which were met and will be met with
shares released from the suspense account, totaled
approximately $21 million, $20 million and $20 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. Total matching and incentive cost totaled
approximately $32 million, $35 million and $30 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. The Company has a long-term note
receivable from the 401(k) Trustee related to the
purchase of common stock from the Company in 1989.
The balance of the note receivable from the 401(k)
Trustee is included in the determination of unearned
ESOP common stock, which reduces common stock
equity. ESOP shares that have not been committed to be
released to participants’ accounts are not considered
outstanding for the determination of earnings per
common share. Interest income on the note receivable
and dividends on unallocated ESOP shares are not
recognized for financial statement purposes.
STOCK OPTION AGREEMENTS
Pursuant to the Company’s 1997 Equity Incentive Plan
and 2002 Equity Incentive Plan, amended and restated as
of July 10, 2002, the Company may grant options to
purchase shares of common stock to directors, officers
and eligible employees for up to 5 million and 15 million
shares, respectively. Generally, options granted to
employees vest one-third per year with 100% vesting at
the end of year three, while options granted to directors
vest 100% at the end of one year. The options expire
10 years from the date of grant. All option grants have an
exercise price equal to the fair market value of the
Company’s common stock on the grant date. The
Company measures compensation expense for stock
options as the difference between the market price of its
common stock and the exercise price of the option at the
grant date. The exercise price at which options are
granted by the Company equals the market price at grant
date and, accordingly, no compensation expense has
been recognized for any options granted during 2004,
2003 and 2002. The Company will begin expensing stock
options on July 1, 2005, based on SFAS No. 123R (See
Note 2). In 2004, however, the Company made the
decision to cease granting stock options and intends to
replace that compensation program with other
programs. Therefore, the amount of stock option
expense expected to be recorded in 2005 is below the
amount that would have been recorded if the stock
option program had continued.
The pro forma information presented in Note 1 regarding
net income and earnings per share is required by SFAS
No. 148. Under this statement, compensation cost is
measured at the grant date based on the fair value of the
award and is recognized over the vesting period. The pro
forma amounts presented in Note 1 have been
determined as if the Company had accounted for its
employee stock options under SFAS No. 123. The fair
value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
The option valuation model requires the input of
highly subjective assumptions, primarily stock price
volatility, changes in which can materially affect the fair
value estimate.
The options outstanding at December 31, 2004, 2003 and
2002 had a weighted-average remaining contractual life
of 7.6, 8.7 and 9.3 years, respectively, and had exercise
prices that ranged from $40.41 to $51.85. The tabular
information for the option activity is as follows:
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Notes to Consolidated Financial Statements
2004 2003 2002
Risk-free interest rate 4.22% 4.25% 4.14%
Dividend yield 5.19% 4.75% 5.20%
Volatility factor 20.30% 22.28% 24.98%
Weighted-average expected life
of the options (in years) 10 10 10