Sunoco 2004 Annual Report Download - page 72

The following table provides additional information concerning all options outstanding at December 31, 2004:
Options Outstanding Options Exercisable
Range of Exercise Prices
Shares Under
Option
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
Shares
Under
Option
Weighted-
Average
Exercise
Price
$25.25—$30.15 346,100 7 $29.22 346,100 $29.22
$32.88—$39.88 132,044 6 $36.61 122,044 $36.50
$49.02 494,800 9 $49.02 —
$82.56 410,600 10 $82.56 —
$25.25—$82.56 1,383,544 9 $52.84 468,144 $31.11
Common stock unit awards mature upon completion of a
restriction period or upon attainment of predetermined
performance targets. At December 31, 2002, all out-
standing common stock units were payable in Company
common stock. In December 2003, the Company
changed the method of payment for certain outstanding
common stock unit awards to cash. As a result, the Com-
pany recorded a $12 million charge to the capital in ex-
cess of par value component of shareholders’ equity at
December 31, 2003. At December 31, 2004, 416,735 of
the outstanding common stock unit awards were payable
in cash and 83,640 were payable in Company common
stock. The following table summarizes information with
respect to all common stock unit awards under Sunoco’s
management incentive plans:
2004 2003 2002
Outstanding at beginning of year 495,434 462,212 519,290
Granted* 122,460 144,565 151,650
Performance factor adjustment** 52,593 33,931 (53,372)
Matured*** (170,112) (143,674) (147,061)
Canceled —(1,600) (8,295)
Outstanding at end of year 500,375 495,434 462,212
* The weighted-average price for common stock unit awards on the date of grant was
$82.18, $48.40 and $30.14 for awards granted in 2004, 2003 and 2002,
respectively.
** Consists of adjustments to performance-based awards to reflect actual performance.
The adjustments are required since the original grants of these awards were at 100
percent of the targeted amounts.
*** Includes 127,628 common stock unit awards in 2004 that were paid in cash.
Sunoco follows the fair value method of accounting for
employee stock compensation plans. Stock-based
compensation expense for 2004, 2003 and 2002 de-
termined utilizing this method amounted to $31, $13 and
$11 million, respectively, which consisted of $6, $6 and
$6 million, respectively, related to stock option awards
and $25, $7 and $5 million, respectively, related to com-
mon stock unit awards. In addition, equity-based
compensation expense attributable to Sunoco Logistics
Partners L.P. for 2004, 2003 and 2002 amounted to $4,
$3 and $1 million, respectively.
The stock-based compensation expense for stock options
reflects the estimated fair values of $21.91, $13.07 and
$7.08 per option granted during 2004, 2003 and 2002,
respectively. These values are calculated using the Black-
Scholes option pricing model based on the following
weighted-average assumptions:
2004 2003 2002
Expected life (years) 566
Risk-free interest rate 3.8% 3.7% 3.7%
Dividend yield 1.5% 2.2% 3.3%
Expected volatility 27.4% 28.8% 29.3%
16. Financial Instruments
The estimated fair value of financial instruments has been
determined based on the Company’s assessment of avail-
able market information and appropriate valuation
methodologies. However, these estimates may not
necessarily be indicative of the amounts that the Com-
pany could realize in a current market exchange.
Sunoco’s current assets (other than inventories and de-
ferred income taxes) and current liabilities are financial
instruments. The estimated fair value of these financial
instruments approximates their carrying amounts. At
December 31, 2004 and 2003, the estimated fair value of
Sunoco’s long-term debt was $1,495 and $1,684 million,
respectively, compared to carrying amounts of $1,379 and
$1,498 million, respectively. Long-term debt that is pub-
licly traded was valued based on quoted market prices
while the fair value of other debt issues was estimated by
management based upon current interest rates available
to Sunoco at the respective balance sheet dates for similar
issues.
The Company guarantees the debt of affiliated companies
and others. Due to the complexity of these guarantees
and the absence of any market for these financial instru-
ments, the Company does not believe it is practicable to
estimate their fair value. The accounting recognition
provisions of FASB Interpretation No. 45 do not apply to
these guarantees as they were entered into prior to Jan-
uary 1, 2003, the date prospective application of the
provisions is required (Note 1).
Sunoco uses swaps, options, futures, forwards and other
derivative instruments for hedging purposes. Sunoco is at
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