STOCK COMPENSATION

Stock-Based Compensation

Stock-based compensation primarily in the form of Southern Company performance share units (PSU) and restricted stock units (RSU) may be granted through the Omnibus Incentive Compensation Plan to a large segment of Southern Company system employees ranging from line management to executives. Southern Company Gas and Southern Power had no employee participants in the stock-based compensation plans until 2017 and 2018, respectively. In conjunction with the Merger, stock-based compensation in the form of Southern Company RSUs and PSUs was granted to certain executives of Southern Company Gas through the Southern Company Omnibus Incentive Compensation Plan.

At December 31, 2018, the number of current and former employees participating in stock-based compensation programs for the registrants was as follows:



	Southern Company	Alabama Power	Georgia Power	Mississippi Power	Southern Power	Southern Company Gas
Number of employees	4,716	745	822	164	95	285

Employees become immediately vested in PSUs and RSUs 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. In addition, the registrants recognize forfeitures as they occur.

All unvested PSUs and RSUs vest immediately upon a change in control where Southern Company is not the surviving corporation.

Performance Share Units

PSUs granted to employees vest at the end of a three-year performance period. 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 PSUs granted, based on achievement of the performance goals established by the Compensation Committee of the Southern Company Board of Directors.

Southern Company has issued three types of PSUs, each with a unique performance goal. These types of PSUs include total shareholder return (TSR) awards based on the TSR for Southern Company common stock during the three-year performance period as compared to a group of industry peers; ROE awards based on Southern Company's equity-weighted return over the performance period; and EPS awards based on Southern Company's cumulative EPS over the performance period. EPS awards were not granted in 2018.

The fair value of TSR 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 industry peers over the performance period. In determining the fair value of the TSR awards issued to employees, the expected volatility is based on the historical volatility of Southern Company's stock over a period equal to the performance period. The risk-free rate is 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 TSR awards granted:



Year Ended December 31	2018	2017	2016
Expected volatility	14.9%	15.6%	15.0%
Expected term (in years)	3	3	3
Interest rate	2.4%	1.4%	0.8%
Weighted average grant-date fair value	$43.75	$49.08	$45.06

The registrants recognize TSR award compensation expense on a straight-line basis over the three-year performance period without remeasurement.

The fair values of EPS awards and ROE awards are based on the closing stock price of Southern Company common stock on the date of the grant. The weighted average grant-date fair value of the awards granted during 2018, 2017, and 2016 was $43.49, $49.21, and $48.87, respectively. Compensation expense for EPS and ROE awards is generally recognized ratably over the three-year performance period adjusted for expected changes in EPS and ROE performance. Total compensation cost recognized for vested EPS awards and ROE awards reflects final performance metrics.

Southern Company's total unvested PSUs outstanding at December 31, 2017 was 2.9 million. In February 2018, 1.5 million PSUs vested for the three-year performance period ended December 31, 2017 were converted into 1.9 million shares outstanding at a share price of $44.68.

During 2018, Southern Company granted 1.3 million PSUs and 1.9 million PSUs were vested or forfeited, resulting in 2.5 million unvested PSUs outstanding at December 31, 2018. In February 2019, the PSUs that vested for the three-year performance period ended December 31, 2018 were converted into 1.7 million shares outstanding at a share price of $49.24.

Total PSU compensation cost, and the related tax benefit recognized in income, for the years ended December 31, 2018, 2017, and 2016 are as follows:



	2018		2017		2016
	(in millions)
Southern Company
Compensation cost recognized in income	$	91	$	74	$	96
Tax benefit of compensation cost recognized in income	24		29		37
Alabama Power
Compensation cost recognized in income	$	11	$	9	$	15
Tax benefit of compensation cost recognized in income	3		4		6
Georgia Power
Compensation cost recognized in income	$	11	$	10	$	15
Tax benefit of compensation cost recognized in income	3		4		6
Mississippi Power
Compensation cost recognized in income	$	3	$	2	$	4
Tax benefit of compensation cost recognized in income	1		1		1
Southern Power
Compensation cost recognized in income	$	4	N/A		N/A
Tax benefit of compensation cost recognized in income	1		N/A		N/A
Southern Company Gas
Compensation cost recognized in income	$	11	$	8	N/A
Tax benefit of compensation cost recognized in income	3		3		N/A

The compensation cost related to the grant of Southern Company PSUs to the employees of the traditional electric operating companies, Southern Power, and Southern Company Gas is recognized in each respective registrant's financial statements with a corresponding credit to equity representing a capital contribution from Southern Company.

At December 31, 2018, Southern Company's total unrecognized compensation cost related to PSUs was $30 million and is expected to be recognized over a weighted-average period of approximately 16 months. The total unrecognized compensation cost related to PSUs as of December 31, 2018 was immaterial for all other registrants.

Restricted Stock Units

Beginning in 2017, employees are granted RSUs in addition to PSUs. One-third of the RSUs granted to employees vest each year throughout a three-year service period. Shares of Southern Company common stock are delivered to employees at the end of each vesting period.

The fair value of RSUs is based on the closing stock price of Southern Company common stock on the date of the grant. The weighted average grant-date fair values of RSUs granted during 2018 and 2017 were $43.81 and $49.25, respectively. Since one-third of the RSUs vest each year throughout a three-year service period, compensation cost for RSUs is generally recognized over the corresponding one-, two-, or three-year vesting period.

Southern Company had 0.7 million RSUs outstanding at December 31, 2017. During 2018, Southern Company granted 0.7 million RSUs and 0.3 million RSUs were vested or forfeited, resulting in 1.1 million unvested RSUs outstanding at December 31, 2018, including RSUs related to employee retention agreements.

For the years ended December 31, 2018 and 2017, Southern Company's total compensation cost for RSUs recognized in income was $27 million and $25 million, respectively. The related tax benefit also recognized in income was $7 million and $10 million for the years ended December 31, 2018 and 2017, respectively. Total unrecognized compensation cost related to RSUs as of December 31, 2018 for Southern Company of $13 million will be recognized over a weighted-average period of approximately 16 months.

Total RSUs outstanding and total compensation cost and related tax benefit for the RSUs recognized in income for the years ended December 31, 2018 and 2017, as well as the total unrecognized compensation cost as of December 31, 2018, were immaterial for all other registrants.

Stock Options

In 2015, Southern Company discontinued granting stock options. Stock options expire no later than 10 years after the grant date and the latest possible exercise will occur no later than November 2024. As of December 31, 2018, the weighted average remaining contractual term for the options outstanding and exercisable was approximately 4 years.

As of December 31, 2017, all stock option awards are vested and compensation cost fully recognized. Total compensation cost for stock option awards and the related tax benefits recognized in income for the years ended December 31, 2017 and 2016 were immaterial for Southern Company, Alabama Power, Georgia Power, and Mississippi Power.

Southern Company's activity in the stock option program for 2018 is summarized below:



	Shares Subject to Option	Weighted Average Exercise Price
	(in millions)
Outstanding at December 31, 2017	18.6	$	41.68
Exercised	1.1	37.82
Outstanding and Exercisable at December 31, 2018	17.5	$	41.92

Southern Company's cash receipts from issuances related to stock options exercised under the share-based payment arrangements for the years ended December 31, 2018, 2017, and 2016 were $41 million, $239 million, and $448 million, respectively.

At December 31, 2018, the aggregate intrinsic value for the options outstanding and exercisable was as follows:



	Southern Company		Alabama Power		Georgia Power		Mississippi Power
	(in millions)
Total intrinsic value for outstanding and exercisable options	$	39	$	5	$	13	$	1

Total intrinsic value of options exercised, and the related tax benefit, for the years ended December 31, 2018, 2017, and 2016 are presented below:



Year Ended December 31	2018		2017		2016
	(in millions)
Southern Company
Intrinsic value of options exercised	$	9	$	64	$	120
Tax benefit of options exercised	2		25		46
Alabama Power
Intrinsic value of options exercised	$	2	$	12	$	21
Tax benefit of options exercised	—		5		8
Georgia Power
Intrinsic value of options exercised	$	2	$	13	$	18
Tax benefit of options exercised	—		5		7
Mississippi Power
Intrinsic value of options exercised	$	1	$	2	$	4
Tax benefit of options exercised	—		1		2

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 RSUs, 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 Southern Company Gas PSU was converted into an award of Southern Company RSUs. 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.

Southern Company Restricted Stock Awards

At the effective time of the Merger, each outstanding award of existing Southern Company Gas PSUs was converted into an award of Southern Company RSUs. Under the terms of the restricted stock 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 0.7 million 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. Southern Company Gas recognized the remaining fair value as compensation expense on a straight-line basis over the remaining vesting period. As of December 31, 2018, all RSUs are vested and compensation cost is fully recognized.

For the years ended December 31, 2018, 2017, and 2016, total compensation cost for RSUs recognized in income was $2 million, $8 million, and $13 million, respectively, with the related tax benefit of $1 million, $4 million, and $4 million, respectively, also recognized in income. The compensation cost related to the grant of RSUs to Southern Company Gas employees is recognized in Southern Company Gas' financial statements with a corresponding credit to equity, representing a capital contribution from Southern Company.

Southern Company Gas Change in Control Awards

Southern Company awarded PSUs 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 compensation cost of the change in control benefit is recognized in Southern Company Gas' financial statements with a corresponding credit to a liability. 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 compensation cost of the achievement shares is recognized in Southern Company Gas' financial statements with a corresponding credit to equity, representing a capital contribution from Southern Company. The expected payout is reevaluated annually with expense recognized to date increased or decreased proportionately based on the expected performance. The compensation cost ultimately recognized for the achievement shares will be based on the actual performance.

For the years ended December 31, 2018, 2017, and 2016, total compensation cost for the change in control awards recognized in income was $5 million, $12 million, and $4 million, respectively, with the related tax benefit of $2 million, $6 million, and less than $1 million, respectively, also recognized in income. As of December 31, 2018, $2 million of total unrecognized compensation cost related to change in control awards will be recognized over a weighted-average period of approximately six months.

Predecessor

For the predecessor period of January 1, 2016 through June 30, 2016, 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, RSUs, 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 period, Southern Company Gas recognized stock-based compensation cost 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.

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. Southern Company Gas estimated forfeitures over the requisite service period when recognizing compensation cost. These estimates were adjusted to the extent that actual forfeitures differ, or were expected to materially differ, from such estimates. The difference between the proceeds from the exercise of Southern Company Gas' 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 period of January 1, 2016 through June 30, 2016, total compensation cost for cash and stock-based awards recognized in income was $24 million with related tax benefits of an immaterial amount also recognized in income.