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