Notes to Consolidated Financial Statements
Note 4 Stock-based and Other Incentive Compensation Plans and Agreements
General
We currently sponsor the following stock-based and other incentive compensation plans and agreements:
Shares issuable upon exercise of outstanding stock options and/or SARs(1) |
Shares issuable and/or SARs available for issuance(1) |
Details |
|
| 2007 Omnibus Performance Incentive Plan | 514,987 | 4,147,782 | Grants of incentive and nonqualified stock options, stock appreciation rights (SARs), shares of restricted stock, restricted stock units and performance cash awards to key employees. |
| Long-Term Incentive Plan (1999) (2) | 2,039,248 | — | Grants of incentive and nonqualified stock options, shares of restricted stock and performance units to key employees. |
| Officer Incentive Plan | 60,731 | 211,409 | Grants of nonqualified stock options and shares of restricted stock to new-hire officers. |
| 2006 Non-Employee Directors Equity Compensation Plan |
not applicable | 152,740 | Grants of stock to non-employee directors in connection with non employee director compensation (for annual retainer, chair retainer and for initial election or appointment). |
| 1996 Non-Employee Directors Equity Compensation Plan |
40,213 | 14,304 | Grants of nonqualified stock options and stock to non-employee directors in connection with nonemployee director compensation (for annual retainer and for initial election or appointment). The plan was amended in 2002 to eliminate the granting of stock options. |
| Employee Stock Purchase Plan | not applicable | 258,065 | Nonqualified, broad-based employee stock purchase plan for eligible employees |
(1) As of December 31, 2009
(2) Following shareholder approval of the Omnibus Performance Incentive Plan in 2008, no further grants will be made except for reload options that may be granted under the plan’s outstanding options.
Accounting Treatment and Compensation Expense
Effective January 1, 2006, we adopted authoritative guidance related
to stock compensation, using the modified prospective application
transition method. Prior to January 1, 2006, we accounted for our
share-based payment transactions in accordance with guidance
previously amended. This allowed us to account for our stock-based
compensation plans under the intrinsic value method.
The authoritative guidance related to stock compensation
requires us to measure and recognize stock-based compensation
expense in our financial statements based on the estimated fair
value at the date of grant for our stock-based awards, which include:
- stock options
- stock awards, and
- performance units (restricted stock units and performance cash
units)
Performance-based stock awards and performance units contain market conditions. Stock options, restricted stock awards and performance units also contain a service condition. In accordance with this guidance, we recognize compensation expense over the requisite service period for:
- awards granted on or after January 1, 2006 and
- unvested awards previously granted and outstanding as of
January 1, 2006
In addition, we estimate forfeitures over the requisite service
period when recognizing compensation expense. These estimates
are adjusted to the extent that actual forfeitures differ, or are expected
to materially differ, from such estimates.
The following table provides additional information on
compensation costs and income tax benefits related to our stockbased
compensation awards. We recorded these amounts in our
consolidated statements of income for the years ended
December 31, 2009, 2008 and 2007.
| In millions | 2009 | 2008 | 2007 |
| Compensation costs | $11 | $10 | $9 |
| Income tax benefits | 2 | 1 | 3 |
The authoritative guidance requires excess tax benefits to be
reported as a financing cash inflow. In 2007, our cash flows from
financing activities included an immaterial amount for recognized
compensation costs in excess of the benefits of tax deductions. In
2009 and 2008, we included $2 million of such benefits in cash
flow provided by operating activities.
Incentive and Nonqualified Stock Options
We grant incentive and nonqualified stock options with a strike price
equal to the fair market value on the date of the grant. “Fair market
value” is defined under the terms of the applicable plans as the most
recent closing price per share of AGL Resources common stock as
reported in The Wall Street Journal. Stock options generally have a
three-year vesting period. Nonqualified options generally expire
10 years after the date of grant. Participants realize value from option
grants only to the extent that the fair market value of our common
stock on the date of exercise of the option exceeds the fair market
value of the common stock on the date of the grant. Compensation
expense associated with stock options is generally recorded over
the option vesting period; however, for unvested options that are
granted to employees who are retirement-eligible, the remaining
compensation expense is recorded in the current period rather than
over the remaining vesting period.
As of December 31, 2009, we had an immaterial amount of
unrecognized compensation costs related to stock options. Cash
received from stock option exercises for 2009 was $2 million, and
the income tax benefit from stock option exercises was less than
$1 million. The following tables summarize activity related to stock
options for key employees and non-employee directors.
| Stock Options | Number of options |
Weighted average exercise price |
Weighted average remaining life (in years) |
Aggregate intrinsic value (in millions) |
| Outstanding – December 31, 2006 | 2,325,486 |
$30.85 |
||
| Granted | 735,196 |
39.11 |
||
| Exercised | (361,385) |
27.78 |
||
| Forfeited(1) | (181,799) |
36.75 |
||
| Outstanding – December 31, 2007 | 2,517,498 |
$33.28 |
||
| Granted | 258,017 |
38.70 |
||
| Exercised | (212,600) |
23.53 |
||
| Forfeited(1) | (86,926) |
38.01 |
||
| Outstanding – December 31, 2008 | 2,475,989 |
$34.52 |
6.7 |
|
| Granted | 250,440 |
31.09 |
9.1 |
|
| Exercised | (119,126) |
27.20 |
3.5 |
|
| Forfeited(1) | (55,735) |
36.50 |
6.9 |
|
| Outstanding – December 31, 2009 | 2,551,568 |
$34.48 |
6.0 |
$7 |
| Exercisable – December 31, 2009 | 1,767,248 |
$33.94 |
5.3 |
$6 |
(1) Includes 13,716 shares which expired in 2009, 4,226 in 2008 and none in 2007.
| Unvested Stock Options | Number of unvested options |
Weighted average exercise price |
Weighted average remaining vesting period (in years) |
Weighted average fair value |
| Outstanding – December 31, 2008 | 1,028,481 |
$37.80 |
1.1 |
$4.33 |
| Granted | 250,440 |
31.09 |
2.1 |
1.24 |
| Forfeited | (20,286) |
36.97 |
1.7 |
2.95 |
| Vested | (474,315) |
37.80 |
— |
4.48 |
| Outstanding – December 31, 2009 | 784,320 |
$35.68 |
1.2 |
$3.29 |
Information about outstanding and exercisable options as of December 31, 2009, is as follows.
Options outstanding |
Options Exercisable |
||||
| Range of Exercise Prices | Number of options |
Weighted average remaining contractual life (in years) |
Weighted average exercise price |
Number of options |
Weighted average exercise price |
| $20.69 to $24.49 | 164,576 |
2.0 |
$21.79 |
164,576 |
$21.79 |
| $24.50 to $28.30 | 162,375 |
3.6 |
26.80 |
162,375 |
26.80 |
| $28.31 to $32.11 | 269,519 |
8.6 |
30.89 |
24,299 |
28.83 |
| $32.12 to $35.92 | 1,074,035 |
5.5 |
34.87 |
874,035 |
34.65 |
| $35.93 to $39.73 | 842,067 |
7.0 |
38.76 |
513,234 |
38.71 |
| $39.74 to $43.54 | 38,996 |
6.6 |
41.45 |
28,729 |
41.44 |
| Outstanding - Dec. 31, 2009 | 2,551,568 |
6.0 |
$34.48 |
1,767,248 |
$33.94 |
Summarized below are outstanding options that are fully
exercisable.
| Exercisable at: | Number of options |
Weighted average exercise price |
| December 31, 2007 | 1,102,536 |
$28.48 |
| December 31, 2008 | 1,447,508 |
$32.18 |
| December 31, 2009 | 1,767,248 |
$33.94 |
In accordance with the fair value method of determining
compensation expense, we use the Black-Scholes pricing model.
Below are the ranges for per share value and information about the
underlying assumptions used in developing the grant date value for
each of the grants made during 2009, 2008 and 2007.
2009 |
2008 |
2007 |
|
| Expected life (years) | 7 |
7 |
7 |
| Risk-free interest rate %(1) | 2.30 |
2.93–3.31 |
3.87–5.05 |
| Expected volatility %(2) | 12.9 |
12.8–13.0 |
13.2–14.3 |
| Dividend yield %(3) | 5.5 |
4.3–4.84 |
3.8–4.2 |
| Fair value of options granted(4) | $1.24 |
$0.19–$2.69 |
$3.55–$5.98 |
(1) US Treasury constant maturity – 7 years.
(2) Volatility is measured over 7 years, the expected life of the options; weighted average volatility for
2009 was 12.9%, 2008 was 13.0% and 2007 was 14.2%.
(3) Weighted average dividend yield for 2009 was 5.5%, 2008 was 4.3% and 2007 was 4.2%.
(4) Represents per share value.
Intrinsic value for options is defined as the difference between
the current market value and the grant price. Total intrinsic value of
options exercised during 2009 was $1 million. With the
implementation of our share repurchase program in 2006, we use
shares purchased under this program to satisfy share-based
exercises to the extent that repurchased shares are available.
Otherwise, we issue new shares fromour authorized common stock.
Performance Units
In general, a performance unit is an award of the right to receive
(i) an equal number of shares of our common stock, which we refer
to as a restricted stock unit or (ii) cash, subject to the achievement
of certain pre-established performance criteria, which we refer to as
a performance cash unit. Performance units are subject to certain
transfer restrictions and forfeiture upon termination of employment.
The dollar value of restricted stock unit awards is equal to the grant
date fair value of the awards, over the requisite service period,
determined pursuant to the authoritative guidance related to stock
compensation. The dollar value of performance cash unit awards is
equal to the grant date fair value of the awards measured against
progress towards the performance measure, over the requisite
service period, determined pursuant to the authoritative guidance
related to stock compensation. No other assumptions are used to
value these awards.
Restricted Stock Units In general, a restricted stock unit is an
award that represents the opportunity to receive a specified number
of shares of our common stock, subject to the achievement of
certain pre-established performance criteria. In 2009, we granted
to a select group a total of 211,230 restricted stock units (the 2009
restricted stock units), of which 204,590 of these units were
outstanding as of December 31, 2009. These restricted stock units
had a performance measurement period that ended December 31,
2009, which were achieved, and a performance measure related to
a basic earnings per common share attributable to AGL Resources
Inc. common shareholders goal that was met.
Performance Cash Awards In general, a performance cash award
represents the opportunity to receive cash, subject to the achievement
of certain pre-established performance criteria. In 2009, we
granted performance cash awards to a select group of officers. These
awards have a performance measure that is related to annual
growth in basic earnings per common share attributable to
AGL Resources Inc. common shareholders and the average dividend
yield. Accruals in connection with these grants are as follows:
| In millions | Measurement period end date |
Accrued at Dec. 31, 2009 |
Maximum aggregate payout |
| Year of grant | |||
| 2007 | Dec. 31, 2009 |
$1 |
$2 |
| 2008(1) | Dec. 31, 2010 |
1 |
3 |
| 2009(1) | Dec. 31, 2011 |
1 |
4 |
(1)Adjusted to reflect the effect of economic value created during the performance measurement
period by our wholesale services segment.
Stock and Restricted Stock Awards
We refer to restricted stock as an award of our common stock that
is subject to time-based vesting or achievement of performance
measures. Restricted stock awards are subject to certain transfer
restrictions and forfeiture upon termination of employment. The
dollar value of both stock awards and restricted stock awards are
equal to the grant date fair value of the awards, over the requisite
service period, determined pursuant to the authoritative guidance
related to stock compensation. No other assumptions are used to
value the awards.
Stock Awards — Non-Employee Directors Non-employee
director compensation may be paid in shares of our common stock
in connection with initial election, the annual retainer, and chair
retainers, as applicable. Stock awards for non-employee directors
are 100% vested and nonforfeitable as of the date of grant. The
following table summarizes activity during 2009, related to stock
awards for our non-employee directors.
Shares of restricted stock |
Weighted average fair value |
|
| Issued | 19,693 |
$29.43 |
| Forfeited | — |
— |
| Vested | 19,693 |
$29.43 |
| Outstanding | — |
— |
Restricted Stock Awards — Employees The following table
summarizes the restricted stock awards activity for our employees
during the last three years.
Shares of restricted stock |
Weighted average remaining vesting period (in years) |
Weighted average fair value |
|
| Outstanding – December 31, 2007(1) | 349,036 |
$38.15 |
|
| Issued | 28,024 |
35.63 |
|
| Forfeited | (6,483) |
38.43 |
|
| Vested | (70,199) |
36.75 |
|
| Outstanding – December 31, 2008(1) | 300,378 |
1.3 |
$38.20 |
| Issued | 191,300 |
2.0 |
31.09 |
| Forfeited | (15,616) |
1.4 |
36.03 |
| Vested | (134,817) |
— |
39.17 |
| Outstanding – December 31, 2009(1)(2) | 341,245 |
1.0 |
$33.93 |
(1) Subject to restriction.
(2) Includes 103,611 restricted shares with nonforfeitable dividend rights."
Employee Stock Purchase Plan (ESPP)
Under the ESPP, employees may purchase shares of our common
stock in quarterly intervals at 85% of fair market value. Employee
contributions under the ESPP may not exceed $25,000 per
employee during any calendar year.
2009 |
2008 |
2007 |
|
| Shares purchased on the open market | 63,847 |
66,247 |
52,299 |
| Average per-share purchase price | $ 31.45 |
$ 33.22 |
$ 34.69 |
| Purchase price discount | $298,968 |
$326,615 |
$313,584 |