Sunoco 2005 Annual Report Download - page 69

Common stock unit awards mature upon completion of a
restriction period or upon attainment of predetermined
performance targets. At January 1, 2003, all outstanding
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 Company re-
corded a $12 million charge to the capital in excess of par
value component of shareholders’ equity at December 31,
2003. At December 31, 2005, 787,990 of the outstanding
common stock unit awards were payable in cash and
146,830 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:
2005 2004 2003
Outstanding at beginning of year 1,000,750 990,868 924,424
Granted* 102,670 244,920 289,130
Performance factor adjustment** 164,600 105,185 67,863
Matured*** (333,200) (340,223) (287,349)
Canceled —— (3,200)
Outstanding at end of year 934,820 1,000,750 990,868
* The weighted-average price for common stock unit awards on the date of grant was
$77.54, $41.09 and $24.20 for awards granted in 2005, 2004 and 2003,
respectively.
** Consists of adjustments to matured 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 276,000 and 255,255 common stock unit awards in 2005 and 2004,
respectively, that were paid in cash.
Sunoco follows the fair value method of accounting for
employee stock compensation plans prescribed by SFAS
No. 123. Stock-based compensation expense for 2005,
2004 and 2003 determined utilizing this method
amounted to $65, $31 and $13 million, respectively,
which consisted of $8, $6 and $6 million, respectively,
related to stock option awards and $57, $25 and $7 mil-
lion, respectively, related to common stock unit awards.
In addition, equity-based compensation expense attribut-
able to Sunoco Logistics Partners L.P. for 2005, 2004 and
2003 amounted to $3, $4 and $3 million, respectively.
Under SFAS No. 123R, which Sunoco intends to adopt ef-
fective January 1, 2006 (Note 1), a non-substantive vest-
ing period approach will be required for new share-based
payment transactions that vest when an employee be-
comes retirement eligible as is the case under Sunoco’s
share-based awards (i.e., the vesting period cannot exceed
the date an employee becomes retirement eligible). The
effect will be to accelerate expense recognition compared
to the vesting period approach that Sunoco currently uses
that reflects the stated vesting period. For the year ending
December 31, 2006, the Company currently estimates
that its after-tax compensation expense under this provi-
sion of SFAS No. 123R will be approximately $5-$10 mil-
lion higher than it would have been under SFAS No. 123.
The stock-based compensation expense for stock options
reflects the estimated fair values of $22.76, $10.96 and
$6.54 per option granted during 2005, 2004 and 2003,
respectively. These values are calculated using the Black-
Scholes option pricing model based on the following
weighted-average assumptions:
2005 2004 2003
Expected life (years) 556
Risk-free interest rate 4.5% 3.8% 3.7%
Dividend yield 1.0% 1.5% 2.2%
Expected volatility 27.7% 27.4% 28.8%
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 values of these financial
instruments approximate their carrying amounts. At De-
cember 31, 2005 and 2004, the estimated fair value of
Sunoco’s long-term debt was $1,317 and $1,495 million,
respectively, compared to carrying amounts of $1,234 and
$1,379 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.
Sunoco uses swaps, options, futures, forwards and other
derivative instruments for hedging purposes. Sunoco is at
risk for possible changes in the market value for these de-
rivative instruments. However, it is anticipated that such
risk would be mitigated by price changes in the under-
lying hedged items. In addition, Sunoco is exposed to
credit risk in the event of nonperformance by counter-
parties. Management believes this risk is negligible as its
counterparties are either regulated by exchanges or are
major international financial institutions or corporations
with investment-grade credit ratings. Market and credit
risks associated with all of Sunoco’s derivative contracts
are reviewed regularly by management.
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