Common Stock and Stock Compensation

12 Months Ended

Dec. 31, 2016

COMMON STOCK

Stock Issued

In May and August 2016, Southern Company issued an aggregate of 50.8 million shares of common stock in underwritten offerings for an aggregate purchase price of approximately $2.5 billion. Of the 50.8 million shares, approximately 2.6 million were issued from treasury and the remainder were newly issued shares. The proceeds were used to fund a portion of the consideration for the Merger and related transaction costs, to fund a portion of the purchase price for the SNG investment and related transaction costs, and for other general corporate purposes.

During the fourth quarter 2016, Southern Company issued approximately 8.0 million shares of common stock through at-the-market issuances pursuant to sales agency agreements related to Southern Company's continuous equity offering program and received cash proceeds of approximately $381 million, net of $3 million in fees and commissions.

In addition, during 2016, Southern Company issued approximately 20 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $874 million.

Shares Reserved

At December 31, 2016, a total of 94 million shares were reserved for issuance pursuant to the Southern Investment Plan, the Employee Savings Plan, the Outside Directors Stock Plan, and the Omnibus Incentive Compensation Plan (which includes stock options and performance share units as discussed below). Of the total 94 million shares reserved, there were 14 million shares of common stock remaining available for awards under the Omnibus Incentive Compensation Plan as of December 31, 2016.

Stock-Based Compensation

Stock-based compensation primarily in the form of performance share units may be granted through the Omnibus Incentive Compensation Plan to a large segment of Southern Company system employees ranging from line management to executives. As of December 31, 2016, there were 5,229 current and former employees participating in the stock option and performance share unit programs.

In conjunction with the Merger, stock-based compensation in the form of Southern Company restricted stock and performance share units was also granted to certain executives of Southern Company Gas through the Southern Company Omnibus Incentive Compensation Plan.

Stock Options

Through 2009, stock-based compensation granted to employees consisted exclusively of non-qualified stock options. The exercise price for stock options granted equaled the stock price of Southern Company common stock on the date of grant. Stock options vest on a pro rata basis over a maximum period of three years from the date of grant or immediately upon the retirement or death of the employee. Options expire no later than 10 years after the grant date. All unvested stock options vest immediately upon a change in control where Southern Company is not the surviving corporation. Compensation expense is generally recognized on a straight-line basis over the three-year vesting period with the exception of employees that are retirement eligible at the grant date and employees that will become retirement eligible during the vesting period. Compensation expense in those instances is recognized at the grant date for employees that are retirement eligible and through the date of retirement eligibility for those employees that become retirement eligible during the vesting period. In 2015, Southern Company discontinued the granting of stock options.

The estimated fair values of stock options granted were derived using the Black-Scholes stock option pricing model. Expected volatility was based on historical volatility of Southern Company's stock over a period equal to the expected term. Southern Company used historical exercise data to estimate the expected term that represents the period of time that options granted to employees are expected to be outstanding. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant that covers the expected term of the stock options.

The following table shows the assumptions used in the pricing model and the weighted average grant-date fair value of stock options granted:



Year Ended December 31	2014
Expected volatility	14.6%
Expected term (in years)	5
Interest rate	1.5%
Dividend yield	4.9%
Weighted average grant-date fair value	$2.20

Southern Company's activity in the stock option program for 2016 is summarized below:



	Shares Subject to Option	Weighted Average Exercise Price
Outstanding at December 31, 2015	35,749,906	$	40.96
Exercised	11,120,613	40.26
Cancelled	43,429	41.38
Outstanding at December 31, 2016	24,585,864	$	41.28
Exercisable at December 31, 2016	21,133,320	$	41.26

The number of stock options vested, and expected to vest in the future, as of December 31, 2016 was not significantly different from the number of stock options outstanding at December 31, 2016 as stated above. As of December 31, 2016, the weighted average remaining contractual term for the options outstanding and options exercisable was approximately six years and five years, respectively, and the aggregate intrinsic value for the options outstanding and options exercisable was $195 million and $168 million, respectively.

For the years ended December 31, 2016, 2015, and 2014, total compensation cost for stock option awards recognized in income was $3 million, $6 million, and $27 million, respectively, with the related tax benefit also recognized in income of $1 million, $2 million, and $10 million, respectively. As of December 31, 2016, the total unrecognized compensation cost related to stock option awards not yet vested was immaterial.

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $120 million, $48 million, and $125 million, respectively. The actual tax benefit for the tax deductions from stock option exercises totaled $46 million, $19 million, and $48 million for the years ended December 31, 2016, 2015, and 2014, respectively. Prior to the adoption of ASU 2016-09, the excess tax benefits related to the exercise of stock options were recognized in Southern Company's financial statements with a credit to equity. Upon the adoption of ASU 2016-09, beginning in 2016, all tax benefits related to the exercise of stock options are recognized in income.

Southern Company has a policy of issuing shares to satisfy share option exercises. Cash received from issuances related to option exercises under the share-based payment arrangements for the years ended December 31, 2016, 2015, and 2014 was $448 million, $154 million, and $400 million, respectively.

Performance Share Units

From 2010 through 2014, stock-based compensation granted to employees included performance share units in addition to stock options. Beginning in 2015, stock-based compensation consisted exclusively of 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.

The performance goal for all performance share units issued from 2010 through 2014 was 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. For these performance share units, at the end of three years, active employees receive shares based on Southern Company's performance while retired employees receive a pro rata number of shares based on the actual months of service during the performance period prior to retirement. 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.

Beginning in 2015, Southern Company issued two additional types of performance share units to employees in addition to the TSR-based awards. These included performance share units with performance goals based on 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 EPS-based and ROE-based awards each represent 25% of total target grant date fair value of the performance share unit awards granted. The remaining 50% of the target grant date fair value consists of TSR-based awards. In contrast to the Monte Carlo simulation model used to determine the fair value of the TSR-based awards, 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. The TSR-based performance share units, along with the EPS-based and ROE-based awards, vest immediately upon the retirement of the employee. 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.

In determining the fair value of the TSR-based awards issued to employees, the expected volatility was based on the historical volatility of Southern Company's stock over a period equal to the performance period. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant that covers the performance period of the awards. The following table shows the assumptions used in the pricing model and the weighted average grant-date fair value of performance share award units granted:



Year Ended December 31	2016	2015	2014
Expected volatility	15.0%	12.9%	12.6%
Expected term (in years)	3	3	3
Interest rate	0.8%	1.0%	0.6%
Annualized dividend rate^(*)	N/A	N/A	$2.03
Weighted average grant-date fair value	$45.06	$46.38	$37.54

N/A - Not applicable


(*)	Beginning in 2015, cash dividends paid on Southern Company's common stock are accumulated and payable in additional shares of Southern Company's common stock at the end of the three-year performance period and are embedded in the grant date fair value which equates to the grant date stock price.

The weighted average grant-date fair value of both EPS-based and ROE-based performance share units granted during 2016 and 2015 was $48.87 and $47.75, respectively.

Total unvested performance share units outstanding as of December 31, 2015 were 2,480,392. During 2016, 1,717,167 performance share units were granted, 937,121 performance share units were vested, and 35,899 performance share units were forfeited, resulting in 3,224,539 unvested performance share units outstanding at December 31, 2016. No shares were issued in January 2017 for the three-year performance and vesting period ended December 31, 2016.

For the years ended December 31, 2016, 2015, and 2014, total compensation cost for performance share units recognized in income was $96 million, $88 million, and $33 million, respectively, with the related tax benefit also recognized in income of $37 million, $34 million, and $13 million, respectively. As of December 31, 2016, $32 million of total unrecognized compensation cost related to performance share award units will be recognized over a weighted-average period of approximately 22 months.

Southern Company Gas Restricted Stock Awards

At the effective time of the Merger, each outstanding award of existing Southern Company Gas performance share units was converted into an award of Southern Company's restricted stock units (RSU). Under the terms of the RSU awards, the employees received Southern Company stock when they satisfy the requisite service period by being continuously employed through the original three-year vesting schedule of the award being replaced. Southern Company issued 742,461 RSUs with a grant-date fair value of $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.

As of December 31, 2016, total compensation cost and related tax benefit for RSUs recognized in income was $13 million and $4 million, respectively. As of December 31, 2016, $12 million of total unrecognized compensation cost related to RSUs is expected to be recognized over a weighted-average period of approximately 20 months.

Southern Company Gas Change in Control Awards

Southern Company awarded performance share units to certain Southern Company Gas employees who continued their employment with the Southern 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 Southern Company or its subsidiaries 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 based on achievement of certain Southern Company common stock price metrics, as well 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.

As of December 31, 2016, total compensation cost and related tax benefit for the change in control awards recognized in income was immaterial. As of December 31, 2016, approximately $20 million of total unrecognized compensation cost related to change in control awards is expected to be recognized over a weighted-average period of approximately 23 months.

Diluted Earnings Per Share

For Southern Company, the only difference in computing basic and diluted EPS is attributable to awards outstanding under the stock option and performance share plans. The effect of both stock options and performance share award units was determined using the treasury stock method. Shares used to compute diluted EPS were as follows:



	Average Common Stock Shares
	2016	2015	2014
	(in millions)
As reported shares	951	910	897
Effect of options and performance share award units	7	4	4
Diluted shares	958	914	901

Prior to the adoption of ASU 2016-09, the effect of options and performance share award units included the assumed impacts of any excess tax benefits from the exercise of all "in the money" outstanding share based awards. In accordance with the new guidance, no prior year information was adjusted. Stock options and performance share award units that were not included in the diluted EPS calculation because they were anti-dilutive were immaterial as of December 31, 2016 and 2015.

Common Stock Dividend Restrictions

The income of Southern Company is derived primarily from equity in earnings of its subsidiaries. At December 31, 2016, consolidated retained earnings included $7.0 billion of undistributed retained earnings of the subsidiaries.

Alabama Power [Member]

Class of Stock [Line Items]

STOCK COMPENSATION

Stock-Based Compensation

Stock-based compensation primarily in the form of Southern Company performance share units may be granted through the Omnibus Incentive Compensation Plan to a large segment of the Company's employees ranging from line management to executives. As of December 31, 2016, there were 865 current and former employees participating in the stock option and performance share unit programs.

Stock Options

The weighted average grant-date fair value of stock options granted during 2014 derived using the Black-Scholes stock option pricing model was $2.20.

The compensation cost related to the grant of Southern Company stock options 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. Compensation cost and related tax benefits recognized in the Company's financial statements were not material for any year presented. As of December 31, 2016, the amount of unrecognized compensation cost related to stock option awards not yet vested was immaterial.

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $21 million, $8 million, and $21 million, respectively. No cash proceeds are received by the Company upon the exercise of stock options. The actual tax benefit realized by the Company for the tax deductions from stock option exercises totaled $8 million, $3 million, and $8 million for the years ended December 31, 2016, 2015, and 2014, respectively. Prior to the adoption of ASU 2016-09, the excess tax benefits related to the exercise of stock options were recognized in the Company's financial statements with a credit to equity. Upon the adoption of ASU 2016-09, beginning in 2016, all tax benefits related to the exercise of stock options are recognized in income. As of December 31, 2016, the aggregate intrinsic value for the options outstanding and options exercisable was $30 million and $26 million, respectively.

Performance Share Units

The performance goal for all performance share units issued from 2010 through 2014 was 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. For these performance share units, at the end of three years, active employees receive shares based on Southern Company's performance while retired employees receive a pro rata number of shares based on the actual months of service during the performance period prior to retirement. 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. The Company recognizes compensation expense on a straight-line basis over the three-year performance period without remeasurement.

For the years ended December 31, 2016, 2015, and 2014, employees of the Company were granted performance share units of 249,065, 214,709, and 176,070, respectively. The weighted average grant-date fair value of TSR-based performance share units granted during 2016, 2015, and 2014, 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 $45.15, $46.42, and $37.54, respectively. The weighted average grant-date fair value of both EPS-based and ROE-based performance share units granted during 2016 and 2015 was $48.86 and $47.78, respectively.

For the years ended December 31, 2016, 2015, and 2014, total compensation cost for performance share units recognized in income was $15 million, $13 million, and $5 million, respectively, with the related tax benefit also recognized in income of $6 million, $5 million, and $2 million, respectively. 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, 2016, $3 million of total unrecognized compensation cost related to performance share award units will be recognized over a weighted-average period of approximately 22 months.

Georgia Power [Member]

Class of Stock [Line Items]

STOCK COMPENSATION

Stock-Based Compensation

Stock-based compensation primarily in the form of Southern Company performance share units may be granted through the Omnibus Incentive Compensation Plan to a large segment of the Company's employees ranging from line management to executives. As of December 31, 2016, there were 990 current and former employees participating in the stock option and performance share unit programs.

Stock Options

The weighted average grant-date fair value of stock options granted during 2014 derived using the Black-Scholes stock option pricing model was $2.20.

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $18 million, $9 million, and $19 million, respectively. No cash proceeds are received by the Company upon the exercise of stock options. The actual tax benefit realized by the Company for the tax deductions from stock option exercises totaled $7 million, $4 million, and $7 million for the years ended December 31, 2016, 2015, and 2014, respectively. Prior to the adoption of ASU 2016-09, the excess tax benefits related to the exercise of stock options were recognized in the Company's financial statements with a credit to equity. Upon the adoption of ASU 2016-09, beginning in 2016, all tax benefits related to the exercise of stock options are recognized in income. As of December 31, 2016, the aggregate intrinsic value for the options outstanding and options exercisable was $46 million and $41 million, respectively.

Performance Share Units

The performance goal for all performance share units issued from 2010 through 2014 was 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. For these performance share units, at the end of three years, active employees receive shares based on Southern Company's performance while retired employees receive a pro rata number of shares based on the actual months of service during the performance period prior to retirement. 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. The Company recognizes compensation expense on a straight-line basis over the three-year performance period without remeasurement.

For the years ended December 31, 2016, 2015, and 2014, employees of the Company were granted performance share units of 261,434, 236,804, and 176,224, respectively. The weighted average grant-date fair value of TSR-based performance share units granted during 2016, 2015, and 2014, 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 $45.17, $46.41, and $37.54, respectively. The weighted average grant-date fair value of both EPS-based and ROE-based performance share units granted during 2016 and 2015 was $48.84 and $47.78, respectively.

For the years ended December 31, 2016, 2015, and 2014, total compensation cost for performance share units recognized in income was $15 million, $15 million, and $6 million, respectively, with the related tax benefit also recognized in income of $6 million, $6 million, and $2 million, respectively. 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, 2016, $4 million of total unrecognized compensation cost related to performance share award units will be recognized over a weighted-average period of approximately 22 months.

Gulf Power [Member]

Class of Stock [Line Items]

STOCK COMPENSATION

Stock-Based Compensation

Stock-based compensation primarily in the form of Southern Company performance share units may be granted through the Omnibus Incentive Compensation Plan to a large segment of the Company's employees ranging from line management to executives. As of December 31, 2016, there were 184 current and former employees participating in the stock option and performance share unit programs.

Stock Options

The weighted average grant-date fair value of stock options granted during 2014 derived using the Black-Scholes stock option pricing model was $2.20.

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $3 million, $2 million, and $5 million, respectively. No cash proceeds are received by the Company upon the exercise of stock options. The actual tax benefit realized by the Company for the tax deductions from stock option exercises totaled $1 million for the years ended December 31, 2016 and 2015 and $2 million for 2014. Prior to the adoption of ASU 2016-09, the excess tax benefits related to the exercise of stock options were recognized in the Company's financial statements with a credit to equity. Upon the adoption of ASU 2016-09, beginning in 2016, all tax benefits related to the exercise of stock options are recognized in income. As of December 31, 2016, the aggregate intrinsic value for the options outstanding and options exercisable was $6 million and $5 million, respectively.

Performance Share Units

The performance goal for all performance share units issued from 2010 through 2014 was 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. For these performance share units, at the end of three years, active employees receive shares based on Southern Company's performance while retired employees receive a pro rata number of shares based on the actual months of service during the performance period prior to retirement. 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. The Company recognizes compensation expense on a straight-line basis over the three-year performance period without remeasurement.

For the years ended December 31, 2016, 2015, and 2014, employees of the Company were granted performance share units of 57,333, 48,962, and 37,829, respectively. The weighted average grant-date fair value of TSR-based performance share units granted during 2016, 2015, and 2014, 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 $45.18, $46.38, and $37.54, respectively. The weighted average grant-date fair value of both EPS-based and ROE-based performance share units granted during 2016 and 2015 was $48.83 and $47.75, respectively.

For the years ended December 31, 2016, 2015, and 2014, total compensation cost for performance share units recognized in income was $3 million, $2 million, and $1 million, respectively. The related tax benefit also recognized in income was $1 million in 2016 and 2015 and immaterial in 2014. 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, 2016, $2 million of total unrecognized compensation cost related to performance share award units will be recognized over a weighted-average period of approximately 22 months.

Mississippi Power [Member]

Class of Stock [Line Items]

STOCK COMPENSATION

Stock-Based Compensation

Stock-based compensation primarily in the form of Southern Company performance share units may be granted through the Omnibus Incentive Compensation Plan to a large segment of the Company's employees ranging from line management to executives. As of December 31, 2016, there were 220 current and former employees participating in the stock option and performance share unit programs.

Stock Options

The weighted average grant-date fair value of stock options granted during 2014 derived using the Black-Scholes stock option pricing model was $2.20.

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $4 million, $3 million, and $5 million, respectively. No cash proceeds are received by the Company upon the exercise of stock options. The actual tax benefit realized by the Company for the tax deductions from stock option exercises totaled $2 million, $1 million, and $2 million for the years ended December 31, 2016, 2015, and 2014, respectively. Prior to the adoption of ASU 2016-09, the excess tax benefits related to the exercise of stock options were recognized in the Company's financial statements with a credit to equity. Upon the adoption of ASU 2016-09, beginning in 2016, all tax benefits related to the exercise of stock options are recognized in income. As of December 31, 2016, the aggregate intrinsic value for the options outstanding and options exercisable was $6 million and $5 million, respectively.

Performance Share Units

The performance goal for all performance share units issued from 2010 through 2014 was 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. For these performance share units, at the end of three years, active employees receive shares based on Southern Company's performance while retired employees receive a pro rata number of shares based on the actual months of service during the performance period prior to retirement. 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. The Company recognizes compensation expense on a straight-line basis over the three-year performance period without remeasurement.

For the years ended December 31, 2016, 2015, and 2014, employees of the Company were granted performance share units of 62,435, 53,909, and 49,579, respectively. The weighted average grant-date fair value of TSR-based performance share units granted during 2016, 2015, and 2014, 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 $45.17, $46.41, and $37.54, respectively. The weighted average grant-date fair value of both EPS-based and ROE-based performance share units granted during 2016 and 2015 was $48.84 and $47.77, respectively.

For the years ended December 31, 2016, 2015, and 2014, total compensation cost for performance share units recognized in income was $4 million, $4 million, and $2 million, respectively, with the related tax benefit also recognized in income of $1 million, $2 million, and $1 million, respectively. 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, 2016, $1 million of total unrecognized compensation cost related to performance share award units will be recognized over a weighted-average period of approximately 22 months.

Southern Company Gas [Member]

Class of Stock [Line Items]

STOCK COMPENSATION

Stock-Based Compensation

Successor

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 (RSUs).

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 RSU awards, the employees received a specified number of RSUs 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 742,461 RSUs. The grant-date fair value of the RSUs 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 will be recognized as compensation expense on a straight-line basis over the remaining vesting period.

The compensation cost related to the grant of RSUs 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 period of July 1, 2016 through December 31, 2016, total compensation cost for RSUs recognized in income was $13 million, with the related tax benefit also recognized in income of $4 million. As of December 31, 2016, $12 million of total unrecognized compensation cost related to RSUs will be recognized over a weighted-average period of approximately 20 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 period July 1, 2016 through December 31, 2016, total compensation cost for the change-in-control awards recognized in income was $4 million, with less than $1 million 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, 2016, $20 million of total unrecognized compensation cost related to change in control awards will be recognized over a weighted-average period of approximately 23 months.

Predecessor

For the predecessor periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014, 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. Under the AGL Resources Inc. Omnibus Performance Incentive Plan, as of December 31, 2015, the number of shares that were issuable upon exercise of outstanding stock options, warrants, and rights was 359,586 shares. Under the Long-Term Incentive Plan (1999), as of December 31, 2015, the number of shares that were issuable upon exercise of outstanding stock options, warrants, and rights was 80,600 shares. The maximum number of shares that were available for future issuance under the AGL Resources Inc. Omnibus Performance Incentive Plan was 3,513,992 shares, which included 1,514,116 shares previously available under the Nicor Inc. 2006 Long-Term Incentive Plan, as amended, pursuant to New York Stock Exchange rules. 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 years ended December 31, 2015 and 2014, total compensation cost for cash and stock-based awards recognized in income was $24 million, $40 million, and $24 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 used shares purchased under its 2006 share repurchase program to satisfy exercises to the extent that repurchased shares were available. Otherwise, the Company issued new shares from its authorized common stock.

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 period ended December 31, 2015, the Company had no unrecognized compensation costs related to stock options. Cash received from stock option exercises for the predecessor periods ended June 30, 2016 and December 31, 2015 were less than $1 million and $5 million, respectively, and the income tax benefit from stock option exercises was immaterial for both periods.

For the predecessor periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014, the total intrinsic value of options exercised was $3 million, $13 million, and $4 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 was an award that represented 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 periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014, the Company granted 25,166, 47,546, and 44,272, respectively, of restricted stock units (including dividends) to certain employees. At the effective time of the Merger, all 65,042 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 years ended December 31, 2015 and 2014, 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. The 2014 performance share units were measured entirely based on the Company's total shareholder return relative to a group of peer companies.

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 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 were 398,832. During 2016, 303,618 restricted stock awards were granted, 699,960 restricted stock awards were vested, and 2,466 restricted stock awards were 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.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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