SOUTHERN COSO
SOUTHERN CO Stock Compensation Disclosure
STOCK COMPENSATION
Successor
Stock-Based Compensation
Stock-based compensation primarily in the form of Southern Company performance share units and restricted stock units may be granted through the Omnibus Incentive Compensation Plan to certain levels of management within the Company. In 2017, stock-based compensation granted to employees includes performance share units and restricted stock units. In 2016, in conjunction with the Merger, stock-based compensation was granted to certain executives in the form of Southern Company restricted stock and performance share units. As of December 31, 2017, there were 327 current and former employees participating in the performance share unit and restricted stock unit programs.
Performance Share Units
Performance share units granted to employees vest at the end of a three-year performance period. All unvested performance share units vest immediately upon a change in control where Southern Company is not the surviving corporation. Shares of Southern Company common stock are delivered to employees at the end of the performance period with the number of shares issued ranging from 0% to 200% of the target number of performance share units granted, based on achievement of the performance goals established by the Compensation Committee of the Southern Company Board of Directors.
Southern Company issues performance share units with performance goals based on three performance goals to employees. These include performance share units with performance goals based on the total shareholder return (TSR) for Southern Company common stock during the three-year performance period as compared to a group of industry peers, performance share units with performance goals based on Southern Company's cumulative earnings per share (EPS) over the performance period, and performance share units with performance goals based on Southern Company's equity-weighted ROE over the performance period.
The total target grant date fair value of the stock compensation awards granted was comprised 20% each of EPS-based awards and ROE-based awards and 30% each of TSR-based awards and restricted stock units.
The fair value of TSR-based performance share unit awards is determined as of the grant date using a Monte Carlo simulation model to estimate the TSR of Southern Company's common stock among the industry peers over the performance period. Southern Company recognizes compensation expense on a straight-line basis over the three-year performance period without remeasurement.
The fair values of the EPS-based awards and the ROE-based awards are based on the closing stock price of Southern Company common stock on the date of the grant. Compensation expense for the EPS-based and ROE-based awards is generally recognized ratably over the three-year performance period initially assuming a 100% payout at the end of the performance period. Employees become immediately vested in the TSR-based performance share units, along with the EPS-based and ROE-based awards, upon retirement. As a result, compensation expense for employees that are retirement eligible at the grant date is recognized immediately while compensation expense for employees that become retirement eligible during the vesting period is recognized over the period from grant date to the date of retirement eligibility. The expected payout related to the EPS-based and ROE-based awards is reevaluated annually with expense recognized to date increased or decreased based on the number of shares currently expected to be issued. Unlike the TSR-based awards, the compensation expense ultimately recognized for the EPS-based awards and the ROE-based awards will be based on the actual number of shares issued at the end of the performance period.
For the year ended December 31, 2017, employees of the Company were granted 0.3 million performance share units. The weighted average grant-date fair value of TSR-based performance share units granted during 2017, determined using a Monte Carlo simulation model to estimate the TSR of Southern Company's stock among the industry peers over the performance period, was $49.27. The weighted average grant-date fair value of both EPS-based and ROE-based performance share units granted during 2017 was $49.22.
For the year ended December 31, 2017, total compensation cost for performance share units recognized in income was $8 million with the related tax benefit also recognized in income of $3 million. The compensation cost related to the grant of Southern Company performance share units to the Company's employees is recognized in the Company's financial statements with a corresponding credit to equity, representing a capital contribution from Southern Company. As of December 31, 2017, $6 million of total unrecognized compensation cost related to performance share award units will be recognized over a weighted-average period of approximately 21 months.
Restricted Stock Units
Stock-based compensation granted to employees included restricted stock units in addition to performance share units. One-third of the restricted stock units granted to employees vest each year throughout a three-year service period. All unvested restricted stock units vest immediately upon a change in control where Southern Company is not the surviving corporation. Shares of Southern Company common stock are delivered to employees at the end of the vesting period.
The fair value of restricted stock units is based on the closing stock price of Southern Company common stock on the date of the grant. Since one-third of the restricted stock units vest each year throughout a three-year service period, compensation expense for restricted stock unit awards is generally recognized over the corresponding one-, two-, or three-year period. Employees become immediately vested in the restricted stock units upon retirement. As a result, compensation expense for employees that are retirement eligible at the grant date is recognized immediately while compensation expense for employees that become retirement eligible during the vesting period is recognized over the period from grant date to the date of retirement eligibility.
For the year ended December 31, 2017, employees of the Company were granted 0.1 million restricted stock units. The weighted average grant-date fair value of restricted stock units granted during 2017 was $49.23.
For the year ended December 31, 2017, total compensation cost for restricted stock units recognized in income was $4 million with the related tax benefit also recognized in income of $2 million. The compensation cost related to the grant of Southern Company restricted stock units to the Company's employees is recognized in the Company's financial statements with a corresponding credit to equity, representing a capital contribution from Southern Company. As of December 31, 2017, $1 million of total unrecognized compensation cost related to restricted stock units will be recognized over a weighted-average period of approximately 13 months.
Merger Stock Compensation
At the effective time of the Merger, each share of Southern Company Gas common stock, other than certain excluded shares, was converted into the right to receive $66 in cash, without interest. Also at the effective time of the Merger:
• | Southern Company Gas' outstanding restricted stock units, restricted stock awards, and non-employee director stock awards were deemed fully vested and were canceled and converted into the right to receive an amount in cash equal to the product of (i) the total number of shares of Southern Company Gas' common stock subject to such award and (ii) the Merger consideration of $66 per share; |
• | Southern Company Gas' outstanding stock options, all of which were fully vested, were canceled and converted into the right to receive an amount in cash equal to the product of (i) the total number of shares of Southern Company Gas' common stock subject to such options and (ii) the excess of the Merger consideration of $66 per share over the applicable exercise price per share of such options; and |
• | each outstanding award of a performance share unit was converted into an award of Southern Company's restricted stock units (restricted stock awards). |
In conjunction with the Merger, stock-based compensation, in the form of Southern Company restricted stock and performance share units, was granted to certain executives of the Company through the Southern Company Omnibus Incentive Compensation Plan.
Southern Company Restricted Stock Awards
Under the terms of the restricted stock awards, the employees received a specified number of restricted stock units that vest when the employees have satisfied the requisite service period(s) at which time the employee receives Southern Company common stock. The terms of the award require the employee to be continuously employed through the original three-year vesting schedule of the award being replaced.
For the successor period ended December 31, 2016, employees of the Company were granted 0.7 million restricted stock units. The grant-date fair value of the restricted stock units granted was $53.83, based on the closing stock price of Southern Company common stock on the date of the grant. As a portion of the fair value of the award related to pre-combination service, the grant date fair value was allocated to pre- or post-combination service and accounted for as Merger consideration or compensation cost, respectively. Approximately $13 million of the grant date fair value was allocated to Merger consideration. The remaining fair value of $12 million is being recognized as compensation expense on a straight-line basis over the remaining vesting period.
The compensation cost related to the grant of restricted stock units to the Company's employees are recognized in the Company's financial statements with a corresponding credit to equity, representing a capital contribution from Southern Company. For the successor year ended December 31, 2017 and the successor period of July 1, 2016 through December 31, 2016, total compensation cost for restricted stock units recognized in income was $8 million and $13 million, respectively, with the related tax benefit also recognized in income of $4 million and $4 million, respectively. As of December 31, 2017, $3 million of total unrecognized compensation cost related to restricted stock units will be recognized over a weighted-average period of approximately 12 months. See "Performance Share Unit Awards" herein for additional information.
Change in Control Awards
Southern Company awarded performance share units to certain employees remaining with the Company in lieu of certain change in control benefits the employee was entitled to receive following the Merger (change-in-control awards). Shares of Southern Company common stock and/or cash equal to the dollar value of the change-in-control benefit will vest and be issued one-third each year as long as the employee remains in service with the Company, or any of its affiliates, at each vest date. In addition to the change-in-control benefit, Southern Company common stock could be issued to the employees at the end of a performance period with the number of shares issued ranging from 0% to 100% of the target number of performance share units granted, based on achievement of certain Southern Company common stock price metrics, as well as performance goals established by the Compensation Committee of the Southern Company Board of Directors (achievement shares).
The change-in-control benefits are accounted for as a liability award with the fair value equal to the guaranteed dollar value of the change-in-control benefit. The grant-date fair value of the achievement portion of the award was determined using a Monte Carlo simulation model to estimate the number of achievement shares expected to vest based on the Southern Company common stock price. The expected payout is reevaluated annually with expense recognized to date increased or decreased proportionately based on the expected performance. The compensation expense ultimately recognized for the achievement shares will be based on the actual performance.
For the successor year ended December 31, 2017 and the successor period of July 1, 2016 through December 31, 2016, total compensation cost for the change-in-control awards recognized in income was $12 million and $4 million, respectively, with $6 million and less than $1 million, respectively, of related tax benefit recognized in income. The compensation cost related to the grant of Southern Company change-in-control benefit and achievement shares to the Company's employees are recognized in the Company's financial statements with a corresponding credit to a liability or equity, representing a capital contribution from Southern Company, respectively. As of December 31, 2017, $8 million of total unrecognized compensation cost related to change in control awards will be recognized over a weighted-average period of approximately 18 months.
Predecessor
For the predecessor periods of January 1, 2016 through June 30, 2016 and the year ended December 31, 2015, the employees of Southern Company Gas and subsidiaries participated in the AGL Resources Inc. Omnibus Performance Incentive Plan, as amended and restated.
The AGL Resources Inc. Omnibus Performance Incentive Plan, as amended and restated, and the Long-Term Incentive Plan (1999) provided for the grant of incentive and nonqualified stock options, stock appreciation rights, shares of restricted stock, restricted stock units, performance cash awards, and other stock-based awards to officers and key employees. Effective July 1, 2016, all Southern Company Gas shares of stock were canceled and/or converted as a result of the Merger. No further grants will be made from the Long-Term Incentive Plan (1999) or the AGL Resources Inc. Omnibus Performance Incentive Plan, as amended and restated.
For the predecessor periods, the Company recognized stock-based compensation expense for its stock-based awards over the requisite service period based on the estimated fair value at the date of grant for its stock-based awards using the modified prospective method. These stock awards included: stock options, stock and restricted stock awards, and performance units (restricted stock units, performance share units, and performance cash units).
Performance-based stock awards and performance units contained market and performance conditions. Stock options, restricted stock awards, and performance units also contained a service condition. The Company estimated forfeitures over the requisite service period when recognizing compensation expense. These estimates were adjusted to the extent that actual forfeitures differ, or were expected to materially differ, from such estimates. Excess tax benefits were reported as a financing cash inflow. The difference between the proceeds from the exercise of the Company's stock-based awards and the par value of the stock was recorded within additional paid-in capital.
Southern Company Gas granted stock awards with a grant price that was equal to the fair market value on the date of the grant. Fair market value was defined under the terms of the applicable plans as the closing price per share of Southern Company Gas' common stock on the grant date. For the predecessor periods of January 1, 2016 through June 30, 2016 and the year ended December 31, 2015, total compensation cost for cash and stock-based awards recognized in income was $24 million and $40 million, respectively, with related tax benefits also recognized in income, which were immaterial.
Incentive and Nonqualified Stock Options
The stock options that the Company granted prior to the Merger had a three-year vesting period and expired ten years after the date of grant. The exercise price for stock options granted equaled the stock price of Southern Company Gas common stock on the date of grant. Participants realized value from option grants only to the extent that the fair market value of the Company's common stock on the date of exercise of the option exceeded the fair market value of the common stock on the date of the grant. No stock options have been issued under the plan since 2009.
The Company measured compensation cost related to stock options based on the fair value of these awards at their date of grant using the Black-Scholes option-pricing model. For the predecessor year ended December 31, 2015, the Company had no unrecognized compensation costs related to stock options. For the predecessor period ended June 30, 2016 and the year ended December 31, 2015, cash received from stock option exercises and the related income tax benefits were immaterial.
For the predecessor periods of January 1, 2016 through June 30, 2016 and the year ended December 31, 2015, the total intrinsic value of options exercised was $3 million, and $13 million, respectively.
Effective July 1, 2016, all of the Company's outstanding stock options, all of which were fully vested, were canceled and converted into the right to receive an amount in cash equal to the product of (i) the total number of shares of Southern Company Gas' common stock subject to such options and (ii) the excess of the Merger consideration of $66 per share over the applicable exercise price per share of such options.
Restricted Stock Units
A restricted stock unit is an award that represents the opportunity to receive a specified number of shares of the Company's common stock, subject to the achievement of certain pre-established performance criteria. For the predecessor period of January 1, 2016 through June 30, 2016 and the year ended December 31, 2015, the Company granted 25,166 and 47,546, respectively, of restricted stock units (including dividends) to certain employees. At the effective time of the Merger, all restricted stock units outstanding were deemed fully vested and were canceled and converted into the right to receive an amount in cash equal to the product of (i) the total number of shares of Southern Company Gas' common stock subject to such award and (ii) the Merger consideration of $66 per share.
Performance Share Unit Awards
A performance share unit award represented the opportunity to receive cash and shares subject to the achievement of certain pre-established performance criteria. For the predecessor periods of January 1, 2016 through June 30, 2016 and the year ended December 31, 2015, the Company granted performance share unit awards to certain officers. The Company's 2016 and 2015 performance share units had two performance measures. One measure, which accounted for 75%, related to the Company's total shareholder return relative to a group of peer companies. The second measure, which accounted for 25%, related to the Company's earnings per share, excluding wholesale gas services, over the three-year performance period.
At the effective time of the Merger, each outstanding performance share unit was converted into an award of Southern Company's restricted stock units. The conversion ratio was the product of (i) the greater of (a) 125% of the number of units underlying such award based on target level achievement of all relevant performance goals and (b) the number of units underlying such award based on the actual level of achievement of all relevant performance goals against target and (ii) an exchange ratio based on the Merger consideration of $66 per share as compared to the volume-weighted average price per share of Southern Company common stock. The resulting Southern Company restricted stock units will follow the vesting schedule and payment terms, and otherwise be issued on similar terms and conditions, as were applicable to such pre-Merger performance share unit awards, subject to certain exceptions. See "Southern Company Restricted Stock Awards" for additional information.
Stock and Restricted Stock Awards
The compensation cost of both stock awards and restricted stock awards was equal to the grant date fair value of the awards, recognized over the requisite service period. No other assumptions were used to value the awards. The Company referred to restricted stock as an award of Company common stock subject to time-based vesting or achievement of performance measures. Prior to vesting, restricted stock awards were subject to certain transfer restrictions and forfeiture upon termination of employment.
Restricted Stock Awards — Employees
Total unvested restricted stock awards outstanding as of December 31, 2015 totaled 0.4 million. During 2016, 0.3 million restricted stock awards were granted, 0.7 million restricted stock awards were vested or forfeited. At the effective time of the Merger, Southern Company Gas' outstanding restricted stock awards were deemed fully vested and were canceled and converted into the right to receive an amount in cash equal to the product of (i) the total number of shares of Southern Company Gas' common stock subject to such award and (ii) the Merger consideration of $66 per share.
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2017 | Feb 21, 2018 | Showing above |
| 2016 | Feb 22, 2017 | |
| 2015 | Feb 26, 2016 | |
About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.