UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to 240.14a-12

 

NATIONAL FUEL GAS COMPANY

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NATIONAL FUEL GAS COMPANY

 

Notice of Annual Meeting

 

and

 

Proxy Statement

 

Annual Meeting of Stockholders

 

to be held on

 

March 11, 2010

 

NATIONAL FUEL GAS COMPANY

6363 MAIN STREET

WILLIAMSVILLE, NEW YORK 14221

 

January 28, 2010

 

Dear Stockholders of National Fuel Gas Company:

 

We are pleased to invite you to join us at the Annual Meeting of Stockholders of National Fuel Gas Company. The meeting will be held at 10:00 a.m. local time on March 11, 2010, at The Grand America Hotel, Salt Lake City, Utah. The matters on the agenda for the meeting are outlined in the enclosed Notice of Annual Meeting and Proxy Statement.

 

So that you may elect Company directors and secure the representation of your interests at the Annual Meeting, we urge you to vote your shares. The preferred methods of voting are either by telephone or by Internet as described on the proxy card. These methods are both convenient for you and reduce the expense of soliciting proxies for the Company. If you prefer not to vote by telephone or the Internet, please complete, sign and date your proxy card and mail it in the envelope provided. The Proxies are committed by law to vote your proxy as you designate.

 

If you plan to be present at the Annual Meeting, you may so indicate when you vote by telephone or the Internet, or you can check the “WILL ATTEND MEETING” box on the proxy card. Even if you plan to be present, we encourage you to promptly vote your shares either by telephone or the Internet, or to complete, sign, date and return your proxy card in advance of the meeting. If you later wish to vote in person at the Annual Meeting, you can revoke your proxy by giving written notice to the Secretary of the Annual Meeting and/or the Trustee (as described on the first page of this proxy statement), and/or by casting your ballot at the Annual Meeting.

 

Coffee will be served at 9:30 a.m. and I look forward to meeting with you at that time.

 

Please review the proxy statement and take advantage of your right to vote.

 

Sincerely yours,

 

Philip C. Ackerman
Chairman of the Board of Directors

 

NATIONAL FUEL GAS COMPANY
6363 MAIN STREET
WILLIAMSVILLE, NEW YORK 14221

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

to be held on March 11, 2010

 

To the Stockholders of National Fuel Gas Company:

 

Notice is hereby given that the Annual Meeting of Stockholders of National Fuel Gas Company will be held at 10:00 a.m. local time on March 11, 2010 at The Grand America Hotel, Salt Lake City, Utah. The doors to the meeting will open at 9:30 a.m. local time. At the meeting, action will be taken with respect to:

 

(1) the election of four directors to hold office for three-year terms as provided in the attached proxy statement and until their respective successors have been elected and qualified;

 

(2) the appointment of an independent registered public accounting firm;

 

(3) the approval of the 2010 Equity Compensation Plan;

 

and such other business as may properly come before the meeting or any adjournment or postponement thereof.

 

Stockholders of record at the close of business on January 15, 2010, will be entitled to vote at the meeting.

 

By Order of the Board of Directors

 

Paula M. Ciprich

Secretary

 

January 28, 2010

 

Important Notice Regarding The Availability Of Proxy Materials For The Stockholder
Meeting To Be Held On March 11, 2010

The proxy statement and annual report to security holders are available at
proxy.nationalfuelgas.com.

 

 

 

 

NATIONAL FUEL GAS COMPANY
6363 MAIN STREET
WILLIAMSVILLE, NEW YORK 14221

 

PROXY STATEMENT

 

GENERAL INFORMATION

 

Introduction

 

This proxy statement is furnished to the holders of National Fuel Gas Company (the “Company”) common stock (the “Common Stock”), in connection with the solicitation of proxies on behalf of the Board of Directors of the Company (the “Board of Directors” or the “Board”) for use at the Annual Meeting of Stockholders (the “Annual Meeting”) to be held on March 11, 2010, or any adjournment or postponement thereof. This proxy statement and the accompanying proxy/voting instruction card are first being mailed to stockholders on or about January 28, 2010.

 

Solicitation of Proxies

 

All costs of soliciting proxies will be borne by the Company. MacKenzie Partners, Inc., 105 Madison Avenue, New York, NY 10016, has been retained to assist in the solicitation of proxies by mail, telephone, and electronic communication and will be compensated in the estimated amount of $12,500 plus reasonable out-of-pocket expenses. Approximately twenty-five (25) employees from MacKenzie Partners, Inc. will assist in the solicitation of proxies.

 

Record Date, Outstanding Voting Securities and Voting Rights

 

Only stockholders of record at the close of business on January 15, 2010, will be eligible to vote at the Annual Meeting or any adjournment or postponement thereof. As of that date, 81,040,399 shares of Common Stock were issued and outstanding. The holders of 40,520,200 shares will constitute a quorum at the meeting.

 

Each share of Common Stock entitles the holder thereof to one vote with respect to each matter that is subject to a vote at the Annual Meeting. All shares that are represented by effective proxies received by the Company in time to be voted shall be voted at the Annual Meeting or any adjournment or postponement thereof. Where stockholders direct how their votes shall be cast, shares will be voted in accordance with such directions. Proxies submitted with abstentions and broker non-votes will be included in determining whether or not a quorum is present. Abstentions and broker non-votes will not be counted in tabulating the number of votes cast on proposals submitted to stockholders and therefore will have no effect on the outcome of the votes. If you hold your shares in a broker or other street name account, your broker will not vote your shares for Proposals 1 and 3 without your instruction, which is called a broker non-vote. Please note in particular that this is the first year broker non-votes will not be counted with regard to the election of directors, so your vote is important.

 

The proxy also confers discretionary authority to vote on all matters that may properly come before the Annual Meeting, or any adjournment or postponement thereof, respecting (i) matters of which the Company did not have timely notice but that may be presented at the meeting; (ii) approval of the minutes of the prior meeting; (iii) the election of any person as a director if a nominee is unable to serve or for good cause will not serve; (iv) any stockholder proposal omitted from this proxy statement pursuant to Rule 14a-8 or 14a-9 of the Securities and Exchange Commission’s (the “SEC”) proxy rules; and (v) all matters incident to the conduct of the meeting.

 

Revoking a Proxy

 

Any stockholder giving a proxy may revoke it at any time prior to the voting thereof by mailing a revocation or a subsequent proxy to Paula M. Ciprich at the above address, by filing written revocation at the meeting with Ms. Ciprich, secretary of the meeting, or by casting a ballot at the meeting. If you are an employee stockholder or retired employee stockholder, you may revoke voting instructions given to the Trustee by following the instructions under “Employee and Retiree Stockholders” in this proxy statement.

 

Employee and Retiree Stockholders

 

If you are a participant in at least one of the Company’s Employee Stock Ownership Plans or Tax-Deferred Savings Plans, the proxy card will also serve as a voting instruction form to instruct the Trustee as to how to vote your shares. All shares of Common Stock for which the Trustee has not received timely directions shall be voted by the Trustee in the same proportion as the shares of Common Stock for

which the Trustee received timely directions, except in the case where to do so would be inconsistent with the provisions of Title I of ERISA. If the voting instruction form is returned signed but without directions marked for one or more items, regarding the unmarked items you are instructing the Trustee and the Proxies to vote FOR Proposals 1, 2 and 3. Participants in the Plan(s) may also provide those voting instructions by telephone or the Internet. Those instructions may be revoked by written notice to Vanguard Fiduciary Trust Company, Trustee for the Company’s Tax-Deferred Savings Plans and the Employee Stock Ownership Plan, on or before March 11, 2010 at the following address:

 

National Fuel Gas Company
c/o BNY Mellon Shareowner Services
Proxy Tabulation
480 Washington Blvd.
Jersey City, NJ 07310

 

Multiple Copies of Proxy Statement

 

The Company has adopted a procedure approved by the Securities and Exchange Commission (“SEC”) called “householding.” Under this procedure, stockholders of record who have the same address and last name can choose to receive only one copy of the proxy statement and the Company’s annual report. If you would like to receive just one set of these materials, call 1-800-648-8166 and listen for the “household” option. You will need your 12-digit Investor ID #. Simply follow the prompts. You may also log on to www.bnymellon.com/shareowner/isd to access your account. Once you’ve accessed your account see Account Preferences. This procedure will reduce our printing costs and postage fees.

 

Stockholders who participate in householding will continue to receive separate proxy cards. Householding will not affect your dividend check mailings.

 

For additional information on householding, please see “IMPORTANT NOTICE REGARDING DELIVERY OF STOCKHOLDER DOCUMENTS” in this proxy statement.

 

Other Matters

 

The Board of Directors does not know of any other matter that will be presented for consideration at the Annual Meeting. If any other matter does properly come before the Annual Meeting, the Proxies will vote in their discretion on such matter.

 

Annual Report

 

Mailed herewith is a copy of the Company’s Annual Report for the fiscal year ended September 30, 2009, which includes financial statements. The Company will furnish any exhibit to the Form 10-K upon request to the Secretary at the Company’s principal office, and upon payment of $5 per exhibit.

 

PROPOSAL 1. ELECTION OF DIRECTORS

 

Four directors are to be elected at this Annual Meeting. The nominees for the four directorships are: Philip C. Ackerman, Craig G. Matthews, Richard G. Reiten and David F. Smith. Messrs. Ackerman, Matthews, Reiten and Smith are currently directors of the Company.

 

The Company’s Certificate of Incorporation provides that the Board of Directors shall be divided into three classes, and that these three classes shall be as nearly equal in number as possible. (A class of directors is the group of directors whose terms expire at the same annual meeting of stockholders.) As well, the Company’s Certificate of Incorporation provides any elected director shall hold office until their successors are elected and qualify, subject to prior death, resignation, retirement, disqualification or removal from office. Accordingly, Messrs. Ackerman, Matthews, Reiten and Smith have been nominated for terms of three years and until their respective successors shall be elected and shall qualify.

 

It is intended that the Proxies will vote for the election of Messrs. Ackerman, Matthews, Reiten and Smith as directors, unless they are otherwise directed by the stockholders. Although the Board of Directors has no reason to believe that any of the nominees will be unavailable for election or service, stockholders’ proxies confer discretionary authority upon the Proxies to vote for the election of another nominee for director in the event any nominee is unable to serve or for good cause will not serve. Messrs. Ackerman, Matthews, Reiten and Smith have consented to being named in this proxy statement and to serve if elected.

 

The affirmative vote of a plurality of the votes cast by the holders of shares of Common Stock entitled to vote is required to elect each of the nominees for director.

 

Refer to the following pages for information concerning the four nominees for director, as well as concerning the six incumbent directors of the Company whose current terms will continue after the 2010 Annual Meeting, including information with respect to their principal occupations and certain other positions held by them.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR
THE ELECTION OF EACH OF THE NOMINEES NAMED BELOW.

 

Last year all directors attended the Annual Meeting of Stockholders, and they are expected to do so this year. A meeting of the Board of Directors will take place on the same day and at the same place as the Annual Meeting of Stockholders this year (and probably future years), and directors are expected to attend all meetings. If a director is unable to attend a Board meeting in person, participation by telephone is permitted and in that event the director may not be physically present at the Annual Meeting of Stockholders.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF
MESSRS. ACKERMAN, MATTHEWS, REITEN AND SMITH

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF
MESSRS. ACKERMAN, MATTHEWS, REITEN AND SMITH

 

 

 

 

 

 

 

 

Director Independence

 

The Board of Directors has determined that directors Brady, Cash, Ewing, Kidder, Matthews, Mazanec, Reiten and Salerno are independent, and that Mr. Ackerman, Chairman of the Board of the Company, and Mr. Smith, Chief Executive Officer and President of the Company, are not due to their employment relationship with the Company, which for Mr. Ackerman ceased June 1, 2008. The Board’s determinations of director independence were made in accordance with the listing standards of the New York Stock Exchange (NYSE), SEC regulations, and the Director Independence Guidelines adopted by the Board. The Director Independence Guidelines (“Independence Guidelines”) are available on the Company’s website at www.nationalfuelgas.com, and included in this proxy statement as Appendix A. Generally, the Independence Guidelines provide that, in order for a director to be considered independent, the Board must affirmatively determine that the director has no direct or indirect material relationship with the Company or any subsidiary, after consideration of all relevant facts and circumstances not merely

from the standpoint of the director, but also from that of persons or entities with which the director has an affiliation. The Independence Guidelines set out seven specific circumstances in which a director will not be considered independent, and three categorical types of commercial or charitable relationships that will not be considered material relationships for purposes of determining whether a director is independent. The Independence Guidelines also set out four types of independence-related disclosures that the Company will continue to make.

 

Non-management directors meet at regularly scheduled executive sessions without management. The sessions are chaired by Robert T. Brady. The Board of Directors provides a process for stockholders and other interested parties to send communications to the Board or to certain directors. Communications to Mr. Brady, to the non-management directors as a group, or to the entire Board should be addressed as follows: Robert T. Brady, Moog, Inc., P.O. Box 18, East Aurora, New York 14052. For the present, all stockholder and interested parties’ communications addressed in such manner will go directly to the indicated directors. If the volume of communication becomes such that the Board adopts a process for determining which communications will be relayed to Board members, that process will appear on the Company’s website at www.nationalfuelgas.com.

 

Meetings of the Board of Directors and Standing Committees

 

During the Company’s fiscal year ended September 30, 2009 (“fiscal 2009”), there were four meetings of the Board of Directors. In addition, certain directors attended meetings of standing or pro tempore committees. The Audit Committee held nine meetings, the Compensation Committee held five meetings, the Executive Committee held two meetings, and the Nominating/Corporate Governance Committee held three meetings. During fiscal 2009, all incumbent directors attended at least 75% of the aggregate of meetings of the Board and of the committees of the Board on which they served.

 

The table below shows the number of meetings conducted in fiscal 2009 and the directors who currently serve (or did serve) on these committees.

 

 

Audit

 

The Audit Committee is a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”). The Audit Committee held nine meetings during fiscal 2009 in order to review the scope and results of the annual audit, to receive reports of the Company’s independent registered public accounting firm and chief internal auditor, to monitor compliance with the Company’s Reporting Procedures for Accounting and Auditing Matters (included in this proxy statement as Appendix C) and to prepare a report of the committee’s findings and recommendations to the Board of Directors. The members of the committee are independent as independence for audit committee members is defined in the NYSE’s listing standards applicable to the Company, in SEC regulations, and in the Independence Guidelines. No Audit Committee member simultaneously serves on the audit committees of more than three public companies. The Board limits the audit committees on which an Audit Committee member can serve to three, unless the Board has determined that such simultaneous service would not impair the ability of such members to serve effectively. The Company’s Board of Directors has determined that the Company has at least two audit committee financial experts (as defined by SEC regulations) serving on its Audit Committee, namely Messrs. Matthews and Mazanec, both of whom are independent directors.

 

In connection with its review of the Company’s internal audit function, the Audit Committee in 2006 had a Quality Assessment performed by a consulting firm that concluded that the Company’s Audit

Services Department conducts its audits in accordance with the Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing (the “Standards”). Under the Standards, external Quality Assessments should be conducted at least once every five years.

 

Further information relating to the Audit Committee appears in this proxy statement under the headings “Audit Fees” and “Audit Committee Report.” A current copy of the charter is available to security holders on the Company’s website at www.nationalfuelgas.com, and in print to stockholders who request a copy from the Company’s Secretary at its principal office.

 

Compensation

 

As described in the Compensation Discussion and Analysis in this proxy statement, the Compensation Committee held five meetings during fiscal 2009, in order to review and determine the compensation of Company executive officers, to review reports and to grant awards under the 1997 Award and Option Plan, the Performance Incentive Program, the Annual At Risk Compensation Incentive Program (“AARCIP” or the “At Risk Plan”) and, effective for fiscal 2009, the Executive Annual Cash Incentive Program (“EACIP”). The members of the committee are independent as independence is defined in the NYSE listing standards applicable to the Company, in SEC regulations, and in the Company’s Director Independence Guidelines. A current copy of the charter of the committee is available to security holders on the Company’s website at www.nationalfuelgas.com and is available in print to stockholders who request a copy from the Company’s Secretary at its principal office.

 

The Compensation Committee is responsible for various aspects of executive compensation, including approval of the base salaries and bonuses of the Company’s executive officers. The committee is authorized to evaluate director compensation and make recommendations to the full Board regarding director compensation. The committee may form subcommittees and delegate to those subcommittees such authority as the committee deems appropriate, other than authority required to be exercised by the committee as a whole. The committee also administers the Company’s 1997 Award and Option Plan, the At Risk Plan, and the National Fuel Gas Company Performance Incentive Program and approves performance conditions and target incentives of executive officers under the EACIP. As described more fully in the Compensation Discussion and Analysis, the Company retains The Hay Group, and Hewitt Consulting, both independent compensation consulting firms, to assist in approving executive compensation. In addition, as set forth in the Compensation Committee’s charter, the Chief Executive Officer may and does make, and the committee may and does consider, recommendations regarding the Company’s compensation and employee benefit plans and practices. The committee then approves executive compensation as it deems appropriate.

 

Executive

 

There were two meeting(s) of the Executive Committee during fiscal 2009. The committee has and may exercise the authority of the full Board, except as may be prohibited by New Jersey corporate law (N.J.S.A.§ 14A:6-9).

 

Nominating/Corporate Governance

 

All the members of the Nominating/Corporate Governance Committee are independent, as independence for nominating committee members is defined in the NYSE listing standards applicable to the Company, in SEC regulations, and in the Company’s Independence Guidelines. The committee makes recommendations to the full Board on nominees for the position of director. The committee also has duties regarding corporate governance matters as required by law, regulation or NYSE rules. The committee held three meetings during fiscal 2009. Stockholders may recommend individuals to the committee to consider as potential nominees. Procedures by which stockholders may make such recommendations are set forth in Exhibit B to the Company’s Corporate Governance Guidelines, described in the following paragraph.

 

The committee’s charter provides for the committee to develop and recommend to the Board criteria for selecting new director nominees and evaluating unsolicited nominations, which criteria are included in this proxy statement as part of the Company’s Corporate Governance Guidelines. A current copy of the charter of the committee is available to security holders on the Company’s website at www.nationalfuelgas.com and in print to stockholders who request a copy from the Company’s Secretary at its principal office. A current copy of the Corporate Governance Guidelines is included in this proxy statement as Appendix B, available to security holders on the Company’s website at www.nationalfuelgas.com, and available in print to stockholders who request a copy from the Company’s Secretary at its principal office. Appendix B also addresses the qualifications and skills the committee believes are necessary in a director, and the committee’s consideration of stockholder recommendations for director. Stockholder recommendations identifying a proposed nominee and setting out his or her qualifications should be delivered to the Company’s Secretary at its principal office no later than September 30, 2010 in order to be eligible for consideration at the 2011 Annual Meeting of Stockholders.

Charitable Contributions by Company

 

Within the preceding three years, the Company did not make any charitable contributions to any charitable organization in which a director served as executive officer which exceeded the greater of $1 million or 2% of the charitable organization’s consolidated gross revenues.

 

Compensation Committee Interlocks and Insider Participation

 

There are no “Compensation Committee interlocks” or “insider participation” which SEC regulations or NYSE listing standards require to be disclosed in this proxy statement.

 

Code of Business Conduct and Ethics

 

The Company’s Code of Business Conduct and Ethics is available on the Company’s website at www.nationalfuelgas.com and in print to stockholders who request it from the Company’s Secretary at its principal office.

 

Related Person Transactions

 

The Company had no related person transactions in fiscal 2009. The Company’s Code of Business Conduct and Ethics (which is in writing and available to stockholders as described above) identifies the avoidance of any actual or perceived conflicts between personal interests and Company interests as an essential part of the responsibility of the Company’s directors, officers and employees. The Code provides that a conflict of interest may arise when a director, officer or employee receives improper personal benefits as a result of his or her position in the Company, or when personal situations tend to influence or compromise a director’s, officer’s or employee’s ability to render impartial business decisions in the best interest of the Company. Potential conflicts of interest under the Code would include but not be limited to related person transactions. The Audit Committee administers the Code as it relates to the Company’s directors and executive officers.

 

The Company’s policies and procedures for the review, approval or ratification of related person transactions are set forth in writing in the charter of the Audit Committee. The charter provides that the Audit Committee will review and, if appropriate, approve or ratify any transaction between the Company and a related person which is required to be disclosed under SEC rules. In the course of its review of a transaction, the Audit Committee will consider the nature of the related person’s interest in the transaction, the material terms of the transaction, the significance of the transaction to the related person and to the Company, whether the transaction would affect the independence of a director, and any other matters the Audit Committee deems appropriate. The Audit Committee will approve or ratify only those transactions that are in, or are not inconsistent with, the best interests of the Company and its stockholders, as the Audit Committee determines in good faith. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction.

 

Directors’ Compensation

 

The 2009 Non-Employee Director Equity Compensation Plan (“Director Compensation Plan”) was approved at the 2009 Annual Meeting. The Retainer Policy for Non-Employee Directors (the “Retainer Policy”), which was approved at the 1997 Annual Meeting of Stockholders and amended at the 2009 Annual Meeting, currently remains in place as well. Directors who are not Company employees or retired employees do not participate in any of the Company’s employee benefit or compensation plans. Directors who are current employees receive no compensation for serving as directors. Only non-employee directors may participate in the Director Compensation Plan and Retainer Policy, under which directors are paid in cash plus an amount of common stock adjusted from time to time. Effective April 11, 2009, the annual retainer is $36,000 plus 1,600 shares of Common Stock.

 

In fiscal 2009, the Directors were paid pursuant to the Retainer Policy and Director Compensation Plan, with the exception of Mr. Salerno and Mr. Ackerman, whose payments are further described below. The non-employee directors received two quarterly payments of $8,000 and 300 shares of stock and received two quarterly payments of $9,000 and 400 shares of stock. Common Stock issued to non-employee directors under director compensation plans is nontransferable until the later of two years from issuance or six months after the recipient’s cessation of service as a director of the Company except that transferability restrictions lapse upon the death of the recipient.

 

Non-employee directors were each paid a fee of $2,000 for each Board meeting and $2,000 for each Committee meeting attended in person or by telephone. Non-employee directors were each paid an additional annual retainer fee of $10,000 if appointed as Chairman of any committee; accordingly,

Messrs. Brady, Matthews and Mazanec each received an additional annual retainer fee of $10,000 during fiscal 2009.

 

Benefit accruals under the Directors’ Retirement Plan ceased for each current non-employee director on December 31, 1996. Mr. Brady is the only current director eligible for benefits under the Directors’ Retirement Plan benefits, and he will receive his accrued Directors’ Retirement Plan benefits of $1,800 per year for up to ten years. People who first become directors after February 1997 are not eligible to receive benefits under the Directors’ Retirement Plan. The Directors’ Retirement Plan pays an annual retirement benefit equal to 10% of the annual retainer in effect on December 31, 1996 ($18,000 per year), multiplied by the number of full years of service prior to January 1, 1997, but not to exceed 100% of that annual retainer. The retirement benefit would begin upon the later of the date of the director’s retirement from the board or the date the director turns age 70, and would continue until the earlier of the expiration of ten years or the death of the director.

 

Mr. Salerno received no payment through the end of the settlement agreement with the New Mountain Group, (as defined at Note (5) at page 12). Mr. Salerno received payment for his service after September 15, 2009.

 

In place of the above-described director compensation, Philip C. Ackerman, the Chairman of the Board of Directors, received director compensation under a Director Services Agreement (“Agreement”). Generally, the Agreement provides that, effective as of June 1, 2008, after Mr. Ackerman’s retirement from the Company, he will perform the duties and responsibilities of Chairman of the Board of Directors as established under the Company’s By-Laws and Corporate Governance Guidelines, and consult with the Chief Executive Officer on matters pertaining to the administration and operation of the Company that Mr. Ackerman or the Chief Executive Officer deems appropriate. In no event will Mr. Ackerman provide, or be required to provide, services during the term of the Agreement for more than the equivalent of fifty full time days in any calendar year (pro-rated for the partial calendar years during such period at the beginning and the end of the Chairman Services Period). Under the Agreement, Mr. Ackerman receives an annual fee equal to $400,000. The Agreement was initially for a term of one year and, by approval of the Board in June of 2009, was extended through the conclusion of the 2010 Annual Meeting or if such 2010 Annual Meeting is not held by May 31, 2010 the Agreement will expire unless otherwise agreed by the Board, the Chief Executive Officer and by Mr. Ackerman. Under the Agreement, Mr. Ackerman is not eligible for any other compensation for his services, except for the insurance provided by the Company for all directors or to accrue any additional benefits under any employee benefit plans of the Company. Also under the Agreement, the Company reimburses Mr. Ackerman for reasonable travel, lodging, meals and other appropriate expenses incurred by him in performance of the Agreement and provides him with suitable office space on its premises and appropriate secretarial services on an as needed basis.

 

The Company requires that each director, in order to receive compensation for service as a director, must beneficially own at least 500 shares of Common Stock during the first year of service as a director, at least 1,000 shares during the second year of service and at least 2,500 shares thereafter. The transfer of shares issued by the Company to a director as compensation for service as a director is prohibited until the later of (i) two years after the date those shares were issued to the director, or (ii) six months after the director ceases to be as a director of the Company; however, upon death those transferability restrictions disappear.

The following table sets forth the compensation paid to each non-employee director for service during fiscal 2009:

 

DIRECTOR COMPENSATION TABLE — FISCAL 2009

 

 

 

 

AUDIT FEES

 

In addition to retaining PricewaterhouseCoopers LLP to report on the annual consolidated financial statements of the Company for fiscal 2009, the Company retained PricewaterhouseCoopers LLP to provide various non-audit services in fiscal 2009. The aggregate fees billed for professional services by PricewaterhouseCoopers LLP for each of the last two fiscal years were as follows:

 

 

 

 

The Audit Committee’s charter (available on the Company’s website at www.nationalfuelgas.com and in print to stockholders who request a copy from the Company’s Secretary at its principal office) references its pre-approval policies and procedures. The committee has pre-approved the use of PricewaterhouseCoopers LLP for specific types of services, including various audit and audit-related services and certain tax services, among others. The chair of the committee and, in his absence, another specified member of the committee are authorized to pre-approve any audit or non-audit service on behalf of the committee. Each pre-approval is to be reported to the full committee at the first regularly scheduled committee meeting following such pre-approval.

 

For fiscal 2009, none of the services provided by PricewaterhouseCoopers LLP were approved by the Audit Committee in reliance upon the “de minimus exception” contained in Section 202 of Sarbanes-Oxley and codified in Section 10A(i)(1)(B) of the Securities Exchange Act and in 17 CFR 210.2-01(c)(7)(i)(C).

 

AUDIT COMMITTEE REPORT

 

The Company’s Board of Directors has adopted a written charter for the Audit Committee of the Board of Directors, a copy of which is available on the Company’s website at www.nationalfuelgas.com and in print to stockholders who request a copy from the Company’s Secretary at its principal office.

 

The Audit Committee has reviewed and discussed the Company’s audited financial statements for fiscal 2009 with management. The Audit Committee has also reviewed with management its evaluation of the Company’s internal control over financial reporting and reviewed management’s assessment about the effectiveness of the Company’s internal control over financial reporting, including any significant deficiencies in such internal control over financial reporting. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, Communication With Audit Committees, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T. The Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by Rule 3526, Communication with Audit Committees Concerning Independence, of the PCAOB and has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence. The Audit Committee also has considered whether the independent registered public accounting firm’s provision of non-audit services to the Company and its affiliates is compatible with the independent registered public accounting firm’s independence.

 

Based on the review, discussions and considerations referred to in the preceding paragraph, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K (17 CFR 249.310) for the last fiscal year for filing with the SEC.

 

AUDIT COMMITTEE

 

Craig G. Matthews, Chairman
R. Don Cash

Stephen E. Ewing

Rolland E. Kidder

George L. Mazanec

 

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth for each current director, each nominee for director, each of the executive officers named in the Summary Compensation Table, and for all directors and officers as a group, information concerning beneficial ownership of Common Stock. The Common Stock is the only class of Company equity securities outstanding. Unless otherwise stated, to the best of the Company’s knowledge, each person has sole voting and investment power with respect to the shares listed, including shares which the individual has the right to acquire through exercise of stock options but has not done so. All information is as of November 30, 2009.

 

 

 

 

As of January 15, 2010, the Company knows of no one who beneficially owns in excess of 5% of the Company’s Common Stock, which is the only class of Company stock outstanding, except as set forth in the table below.

 

 

 

 

EQUITY COMPENSATION PLAN INFORMATION
As of September 30, 2009

 

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Committee Report

 

The Compensation Committee of the Board of Directors (the “Committee”) has reviewed and discussed with management the Compensation Discussion and Analysis contained in this proxy statement. Based upon this review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

COMPENSATION COMMITTEE

 

G. L. Mazanec, Chairman

R. T. Brady
R. D. Cash
S. E. Ewing
R. G. Reiten
F. V. Salerno

 

Compensation Discussion and Analysis

 

OBJECTIVES

 

The Company’s executive compensation program is designed to:

 

 

Role of the Compensation Committee

 

The Compensation Committee sets the base salaries and available bonus ranges of the Company’s executive officers. It also exercises authority delegated to it by the stockholders or the Board with respect to compensation plans. Plans under which stockholders have delegated authority to the Committee include the National Fuel Gas Company 1997 Award and Option Plan, as amended (the “1997 Award and Option Plan”), and the 2007 Annual At Risk Compensation Incentive Plan (the “AARCIP” or “At Risk Plan”). In addition, the Committee makes recommendations to the Board with respect to the development of incentive compensation plans and equity-based plans and administers the National Fuel Gas Company Performance Incentive Program (the “Performance Incentive Program”) and the Executive Annual Cash Incentive Program (the “EACIP”) which became effective in fiscal 2009. The Committee is also responsible for recommending to the Board changes in compensation for non-employee directors. The Committee is comprised of the six directors named above, all of whom have been determined by the Board to be independent. No member of the Committee is permitted to receive any award under any plan administered by the Committee.

 

Compensation Consultant

 

The Committee retains The Hay Group (“Hay”), an independent compensation consulting firm, to assist it in evaluating and setting officer compensation in the regulated subsidiaries. The Company has utilized Hay and the Hay system, since the early 1980s, with respect to the overall compensation structure in its regulated companies. The Committee believes that Hay’s base of proprietary information from multiple parent organizations and business units provides a useful source of compensation information.

 

Each year, Hay compares Company compensation practices to energy industry and general industry market practices based on Hay’s proprietary databases. In addition, Hay makes an annual recommendation on incentive compensation target amounts for both a short-term incentive (cash bonuses as discussed below) and long-term incentive (stock appreciation rights, restricted stock and the Performance Incentive Program target awards also discussed below). The Committee utilizes these recommendations in exercising its business judgment as to compensation matters.

In 2008, the Committee also retained Hewitt Consulting (“Hewitt”) to assist in evaluating and setting compensation for employees, including that of Mr. Cabell, at Seneca Resources Corporation, the Company’s exploration and production subsidiary. The Committee selected Hewitt for this purpose due to that entity’s expertise in the exploration and production industry.

 

In 2008, Hay provided a proxy analysis for three of the top four officers (Messrs. Smith, and Tanski, and Mrs. Cellino) based on 2008 proxy data for the Company and energy companies in a comparable group. Based on that proxy data, the companies in the thirteen-member peer group range in size from $5.9 billion in revenues to $135 million in revenues. The median size of the peer group is $2.6 billion in revenues. The peer group is:

 

AGL Resources Inc.
Atmos Energy Corporation
Energen Corporation
Energy East Corporation
EnergySouth Inc.
Equitable Resources Inc.
MDU Resources Group Inc.
New Jersey Resources Corporation
Northwest Natural Gas Company
Questar Corporation
Southern Union Company
Southwest Gas Corporation
UGI Corporation

 

These companies were selected as members of the peer group because each participates in one or more of the business segments in which the Company participates. The Committee reviews the members of the peer group from time to time, and makes adjustments, as it believes warranted. In 2008, two companies, Peoples Energy Corporation and Keyspan Corporation, were eliminated from the peer group due to acquisitions.

 

In 2008, Hewitt provided a proxy analysis for Mr. Cabell. The Hewitt proxy analysis was based on proxy data from twenty-one (21) exploration and production companies chosen based on certain measures, such as revenues, assets and standardized measure. The companies range in size from $2.2 billion to $157 million in E&P revenues, (with a median of $798 million), from $8.7 billion to $660 million in E&P asset size (with a median of $2.4 billion) and from $6.8 billion to $447 million in standardized measure (with a median of $2.6 billion). The peer group is:

 

Berry Petroleum

Cabot Oil & Gas Corporation

Carrizo Oil & Gas, Inc.

Continental Resources Inc.

El Paso Corporation

Energen Corporation

Equitable Resources, Inc.

Kinder Morgan Oil & Gas

Mariner Energy, Inc.

Penn Virginia Corporation

Petroleum Development Corporation

Petroquest Energy, Inc.

Questar Corporation

Quicksilver Resources, Inc.

Range Resources Corporation

Southwestern Energy Company

St. Mary Land & Exploration Company

Swift Energy

Ultra Petroleum Corporation

Whiting Petroleum Corporation

Williams Companies, Inc.

 

TOTAL COMPENSATION

 

Total compensation for executive officers is comprised of the following components:

 

 

 

The cash and equity components of total compensation are determined by the Committee, based on its business judgment, utilizing the Hay and Hewitt information and recommendations, as the Committee deems appropriate. The employee benefits for executive officers employed prior to 2004 are a reflection of the Company’s historic practice of providing benefits that are commensurate with those in the regulated energy industry. Mr. Cabell was hired in December 2006, and the Committee reviews his compensation and benefits based on the advice of Hewitt and practices of other non-regulated exploration and production companies.

 

Base Salary

 

Base salaries provide a predictable base compensation for day-to-day job performance. The Committee reviews base salaries at calendar year-end for the Company’s executive officers and adjusts them, if it deems appropriate, upon consideration of the recommendations of its outside compensation consultants and the Chief Executive Officer. In addition, base salary may be adjusted during the calendar year when changes in responsibility occur.

 

In establishing the base salary amount, the Committee generally targets a range of the 50th percentile to the 75th percentile of the survey data provided by Hay and Hewitt. The Committee believes this percentile range sets an appropriate market-competitiveness standard. The Hewitt data is based on then-current fiscal year information from participant data submissions (with some supplementation from publicly-filed information reflecting prior year compensation). The Hay proxy group survey data reflects prior fiscal year information. The general market information provided by Hay is projected to the then-current fiscal year. The Hay energy sector information used for Mr. Ramsdell is also projected to the then-current fiscal year. The Committee also considers overall corporate performance and an individual’s specific responsibilities, experience (including time in position), and effectiveness and makes adjustments based on the Committee members’ business judgment and the CEO’s recommendations.

 

For calendar year 2009, for the reasons stated above, the Committee increased Mr. Smith’s base salary to an amount that is within the target range of the 2008 proxy group survey data (which reports on fiscal 2007 compensation) and below the market median for general industry. The Committee also increased Mr. Tanski’s base salary for calendar year 2009 (to an amount that is above the target range of the 2008 proxy group survey data and was slightly below the market median for general industry) to reflect his dual role of chief financial officer and president of a major subsidiary. The Committee discussed with Mr. Smith Mr. Cabell’s responsibilities, experience and effectiveness in the past year managing the Company’s exploration and production segment with particular consideration of development of the Company’s Marcellus Shale assets. It then increased Mr. Cabell’s base salary for calendar 2009 to an amount that was slightly higher than the 75th percentile of the Hewitt data. The Committee asked Mr. Smith for a recommendation on Mrs. Cellino’s base salary for calendar 2009. The Committee accepted Mr. Smith’s recommendation of an amount that approximates the 75th percentile of the 2008 proxy group survey data and that is well below the market median for the general industry. Mr. Smith’s recommendation was based on Mrs. Cellino’s attention to customer service and oversight of budget and cost control at the utility.

 

For executive officers below the level of these four individuals, including Mr. Ramsdell, Mr. Smith made recommendations for annual base salary increases, which were accepted by the Committee. In making such recommendations, Mr. Smith referenced Hay’s compensation report and made recommendations based on his opinion, and the advice of Mr. Tanski, of an individual’s specific responsibilities, experience and effectiveness. Mr. Ramsdell received a base salary increase for calendar 2009 based on his performance managing field operations in the regulated companies, including his oversight of the field operation’s capital and operating budgets. The merit increase to base salary placed him within the recommended salary range for the energy sector based on the Hay system.

 

The fiscal 2009 base salaries of the named executive officers are shown on the Summary Compensation Table under “Salary” column within this proxy statement.

 

Annual Cash Incentive

 

We pay an annual cash incentive to our executives to motivate their performance over a short-term (which we generally consider to be no longer than two years). For fiscal 2009, for Messrs. Smith, Tanski and Cabell, and Mrs. Cellino, this incentive was paid under the At Risk Plan. Effective for fiscal 2009, the Board of Directors adopted a new program, EACIP, that sets forth the parameters for awarding an annual cash incentive to those executives who do not receive an award under the At Risk Plan. This program is

administered by the CEO. Target incentive opportunities, which are a percentage of base salary, are proposed by the CEO and approved by the Committee for executive officers. Payouts are in cash. The CEO establishes performance conditions for each participant, subject to the Committee’s approval for executive officers. At least 75% of the target incentive is dependent on objective performance criteria, and no more than 25% may be discretionary, with any discretionary amount for executive officers subject to Committee approval.

 

Target Award Levels

 

In setting target award levels for the annual cash incentive for 2009, the Committee exercised its business judgment and, upon consideration of the recommendations of Hay and Hewitt, set target awards as follows:

 

 

In each case, the maximum possible award was two times the target amount. Hay’s recommendations were based on current and emerging trends in both energy and general industries. Hewitt’s recommendations were based on competitive market trends in the exploration and production industry.

 

Performance Goals

 

The following are the general categories of performance goals and the purpose of such goals. The precise performance goals differ for each executive.

 

For fiscal 2009, At Risk Plan goals for Mr. Smith were based on the following:

 

 

In fiscal 2009, Mr. Smith was awarded a bonus of 177.35% of his target amount for his performance on the goals set under the At Risk Plan.

 

For fiscal 2009, At Risk Plan goals for Mr. Tanski were based on the following:

 

 

In fiscal 2009, Mr. Tanski was awarded a bonus of 163.05% of his target amount for his performance on the goals set under the At Risk Plan.

For fiscal 2009, At Risk Plan goals for Mr. Cabell were based on the following:

 

 

In fiscal 2009, Mr. Cabell was awarded a bonus of 190.10% of his target amount for his performance on the goals set under the At Risk Plan.

 

For fiscal 2009, At Risk Plan goals for Mrs. Cellino were based on the following:

 

 

In fiscal 2009, Mrs. Cellino was awarded a bonus of 172.00% of her target amount for her performance on the goals set under the At Risk Plan.

For fiscal 2009, EACIP goals for Mr. Ramsdell were based on the following:

 

 

The remaining 25% was awarded, if at all, based solely on the CEO’s discretion.

 

In fiscal 2009, Mr. Ramsdell was awarded a bonus of 126.45% of his target amount for his performance on the goals set under the EACIP.

 

The fiscal 2009 annual cash incentives of the named executive officers are shown on the Summary Compensation Table in the “Non-Equity Incentive Plan Compensation” column.

 

Equity Compensation and Long Term Incentive Compensation

 

Stock options, restricted stock, stock-settled stock appreciation rights (“SARs”) and the Performance Incentive Program represent the long-term incentive and retention component of the executive compensation package. Such awards are intended to focus attention on managing the Company from a long-term investor’s perspective. In addition, we wish to encourage officers and other managers to have a significant, personal investment in the Company through stock ownership. Awards of stock options, SARs and/or restricted stock are used to attract and retain key management employees. The Company typically makes equity awards on an annual basis. The Committee has not recently granted equity awards at a specific quarterly meeting because of its ongoing consideration of the appropriate option practice, including setting of performance criteria.

 

In exercising its business judgment regarding long-term incentive compensation, the Committee generally refers to its compensation consultants’ guidelines on the level of such compensation, but makes adjustments based on its discussion with the Chief Executive Officer as to what is appropriate on an individual basis given the Company’s future plans and needs.

 

Stock Appreciation Rights, Stock Options and Restricted Stock

 

Awards of stock-settled SARs, stock options and restricted stock are made by the Committee under the 1997 Award and Option Plan (“Option Plan”). The exercise price for all options and SARs is the average of the high and low market price (FMV) of the Company’s Common Stock on the date of the grant. This method of determining the FMV appears in all of the Company’s stock option plans since 1983 and has been approved by the stockholders.

 

In 2009, the Committee awarded performance-based SARs rather than options, as they are less dilutive to stockholder equity. The Committee anticipates that it will continue this practice in the future. The fiscal 2009 SARs granted to the named executive officers are set out in the Grants of Plan-Based Awards in Fiscal 2009 Table within this proxy statement. These SARs were granted subject to performance conditions. Vesting is conditioned on achieving a five percent increase in aggregate production over the prior fiscal year levels in certain of the Company’s production areas.

 

On September 17, 2009, the Committee also awarded Mr. Cabell 35,000 shares of restricted stock in recognition of his excellent performance managing the Company’s exploration and production segment, with particular consideration of his efforts with respect to the Company’s Marcellus Shale assets, and to act as a retention tool and a retirement benefit. This award vests in full if Mr. Cabell remains employed until March 20, 2018. Mr. Cabell forfeits this award if his employment terminates prior to March 20, 2018 due to any reason other than death or disability.

Performance Incentive Program

 

The Performance Incentive Program is the Company’s cash-based, long-term incentive program. This program was adopted to complement the equity-based programs, under which future awards have been limited due to their dilutive nature.

 

Under the Performance Incentive Program, the Compensation Committee may establish a performance condition for a performance period of at least one year. The default performance condition is the Company’s total return on capital as compared to the same metric for peer companies in the Natural Gas Distribution and Integrated Natural Gas Companies group as calculated and reported in the Monthly Utility Reports (each, a “Monthly Utility Report”) of AUS, Inc., a leading industry consultant (“AUS”). A cash bonus may be paid following the end of the performance period based on the level of performance. The natural gas distribution and integrated natural gas companies reported in the December 2009 Monthly Utility Report are:

 

AGL Resources Inc.

Atmos Energy Corporation

Chesapeake Utilities Corporation

Delta Natural Gas Company

El Paso Corporation

Energen Corporation

Energy, Incorporated

EQT Corporation

Laclede Group, Inc.

National Fuel Gas Company

New Jersey Resources Corp.

NICOR Inc.

Northwest Natural Gas Co.

ONEOK, Inc.

Piedmont Natural Gas Co., Inc.

Questar Corporation

RGC Resources, Inc.

South Jersey Industries, Inc.

Southern Union Company

Southwest Gas Corporation

Southwestern Energy Company

UGI Corporation

WGL Holdings, Inc.

Williams Companies, Inc.

 

In fiscal 2007, the Compensation Committee chose the Company’s total return on capital as the performance metric for the three-year performance period of October 1, 2006 to September 30, 2009. The Committee selected this financial metric because it reflects how profitably management is able to allocate capital to its operations and also because it provides a performance metric of relevance to all participants, regardless of the business segment(s) for which they provide services. Based on the level of performance at the end of each of the three-year performance periods, payment can range from 0% to 200% of the target incentives. To achieve 100% of the target incentive, the Company must rank in the 60th percentile of the peer group. Ranking is determined by calculating the average return on capital for the three-year period for each company and sorting the companies from highest to lowest. For this performance period, the Committee approved the following target incentives as discussed under “Compensation Consultant” on p. 18 for the current named executive officers:

 

 

Because the Monthly Utility Report with the necessary data for fiscal 2009 will not be available until February of 2010, the actual award amounts earned for the performance period of October 1, 2006 through September 30, 2009 are unknown. The amounts shown in the Summary Compensation Table, under column (g), footnote (5) within this proxy statement were accrued by the Company in fiscal 2009 as estimates of the amount which will be calculated and paid, in the second quarter of fiscal 2010.

 

In fiscal 2008 and fiscal 2009 the Committee also chose the Company’s total return on capital as the performance metric. The performance period selected in fiscal 2008 was the three-year period of

October 1, 2007 through September 30, 2010, and the target incentive as discussed under “Compensation Consultant” on p. 18 for the current named executive officers was selected as follows:

 

 

The performance period selected in fiscal 2009 was the three-year period of October 1, 2008 through September 30, 2011, and the target incentive as discussed under “Compensation Consultant” on p. 18 for the current named executive officers was selected as follows:

 

 

The target thresholds for these two performance periods are the same as noted above.

 

EMPLOYEE BENEFITS

 

Retirement Benefits

 

The Company maintains a qualified defined contribution retirement plan which includes a traditional 401(k) benefit as well as a Retirement Savings Account (“RSA”) benefit for eligible employees, a qualified defined benefit retirement plan, a non-qualified executive retirement plan and a non-qualified tophat plan. These plans help the Company attract and retain high caliber employees in high-level management positions, and, in the case of the non-qualified plans, restore retirement benefits lost to employees under the qualified retirement plans as a result of the effect of the Internal Revenue Code limits and the qualified plans’ limits on compensation considered and benefits provided under such qualified plans.

 

Messrs. Smith, Tanski and Ramsdell and Mrs. Cellino are eligible to participate in the qualified defined contribution retirement plan (traditional 401(k)), the qualified defined benefit retirement plan and both of the non-qualified plans. Mr. Cabell is eligible to participate in the qualified defined benefit contribution plan (including the RSA benefit) and the non-qualified tophat plan. These benefits are described in more detail in the section entitled “Pension Benefits” within this proxy statement.

 

Mr. Smith has a Retirement Benefit Agreement, approved by the Board and entered into in September of 2003, that provides additional retirement benefits if Mr. Smith’s employment is terminated by the Company without cause or by Mr. Smith with good reason, prior to March 1, 2011. If eligible for the enhanced benefit, Mr. Smith’s retirement benefit would be calculated as though he were 571/2 years old for purposes of determining the applicable early retirement penalty, but without giving Mr. Smith credit for additional years of service. The Committee recommended this agreement as a reflection of Mr. Smith’s achieving a high level position at a relatively early age, such that his retirement benefits could be severely reduced in the event of termination without cause. The Committee also viewed this agreement as a retention tool and a means to direct Mr. Smith’s attention to his duties of acting in the best interests of the stockholders. This benefit is described in more detail in the section entitled “Retirement Benefit Assessment for David F. Smith” within this proxy statement.

 

Mr. Cabell is eligible for post-employment health benefits if he is employed at least through March 20, 2018 and if such benefits are provided to officers of the Company’s utility subsidiary. These benefits would be provided, if at all, subject to the same terms and condition as applicable to then-retiring officers of the Company’s state-regulated utility subsidiary. The Committee recommended this benefit as a retention tool and retirement benefit. The other named executives officers are eligible for post-employment health benefits.

 

Executive Life Insurance

 

In 2004, the Committee authorized an insurance program known as the “ExecutiveLife Insurance Plan.” Under this plan, upon specific direction of the Company’s Chief Executive Officer, when an executive officer reaches age 50, the Company would pay the cost of a life insurance policy or policies, to be owned by the executive officer, in an amount up to $15,000 per year. The payment is taxable income to the executive officer and ceases when the executive officer’s employment ceases. The Committee authorized this plan as a replacement for its prior practice of providing split dollar life insurance agreements to designated executive officers. The Committee replaced the split dollar arrangement with the current plan because it was prohibited by the Sarbanes Oxley Act from making premium payments on

certain split dollar policies due to their nature as loans. Mr. Tanski, Mr. Cabell, Mrs. Cellino, and Mr. Ramsdell are covered by the ExecutiveLife Insurance Plan.

 

Life insurance for Mr. Smith is currently maintained under a split dollar arrangement, into which the Company makes no premium payments. Mr. Smith is not a participant in the ExecutiveLife Insurance Plan referenced above. In September 2009, the Company entered into an agreement with Mr. Smith (the Life Insurance Premium Agreement) whereby the Company pays to Mr. Smith up to $33,000 per year to be used for life insurance. The Committee recommended the agreement because the Company has been prohibited by the Sarbanes-Oxley Act from making premium payments on split dollar arrangements, as noted above. The payment is taxable income to Mr. Smith. Pursuant to the agreement, this agreement terminates on the earliest of: (1) Mr. Smith’s death, (2) October 31, 2017, or (3) the date Mr. Smith’s employment is terminated if for cause.

 

CHANGE IN CONTROL ARRANGEMENTS

 

If an executive officer’s employment is terminated without cause within a specific time following a Change in Control of the Company, many of the components of total compensation described above become immediately vested or paid out in a lump sum. More detail about these items and calculations as of September 30, 2009, are set forth in the section entitled “Potential Payments Upon Termination or Change in Control” within this proxy statement.

 

In December of 1998, upon recommendation by the Committee, the Company adopted an amended and restated Change in Control agreement, known as the “Employment Continuation and Noncompetition Agreement” (“ECNA”). In September of 2007, and again in September of 2008, the ECNA was amended and restated in order to be in compliance with Internal Revenue Code Section 409A and the final regulations promulgated thereunder. No enhancement to the benefit provided under the original agreement was added either time. Each of the named executive officers is a party to an ECNA.

 

The Company and the Committee believe that these agreements are required for the attraction and retention of the executive talent needed to achieve corporate objectives and to assure that executive officers direct their attention to their duties, acting in the best interests of the stockholders, notwithstanding the potential for loss of employment in connection with a Change in Control.

 

The agreement contains a “double-trigger” provision that provides payment only if employment terminates within three years following a Change in Control, as defined in the agreement, either by the Company other than for cause or by the executive officer for good reason. The Committee believes this structure strikes a balance between the incentive and the executive attraction and retention efforts described above, without providing Change in Control benefits to executive officers who continue to enjoy employment with the Company in the event of a Change in Control transaction.

 

The payment is generally calculated by multiplying 1.99 by the sum of the executive officer’s current base salary plus the average of the annual cash bonus for the previous two fiscal years. The 1.99 multiplier is reduced on a pro-rata basis if termination occurs between age 62 and 65. There is no gross-up for taxes. If payment is triggered, certain health benefits are continued for the earlier of 18 months following termination or the date other similar coverage becomes available.

 

The ECNA contains a restrictive covenant whereby the executive officer may, upon termination following a Change in Control, choose to refrain from being employed by or otherwise serving as an agent, consultant, partner or major stockholder of a business engaged in activity that is competitive with that of the Company or its subsidiaries. If the executive officer so chooses to be bound by this restrictive covenant, an additional payment is made in the amount of one times the sum of current base salary plus the average of the annual cash bonus for the previous two fiscal years. The Committee and the Company believe this is an appropriate payment in exchange for the non-compete covenant agreed to by the executive officer.

 

OWNERSHIP GUIDELINES

 

In fiscal 2002, in an effort to emphasize the importance of stock ownership and after consultation with the Compensation Committee, Company Common Stock ownership guidelines were established for officers. These guidelines range from one times base salary for junior officers to four times base salary at the Chief Executive Officer level. Other employees receiving options and SARs are encouraged to retain their Common Stock for long-term investment. We believe that employees who are stockholders perform their jobs in a manner that considers the long-term interests of the stockholders.

TAX CONSIDERATIONS

 

Section 162(m) of the Internal Revenue Code prohibits the Company from deducting compensation paid in excess of $1 million per year to any executive officer listed in the Compensation Summary Table unless such compensation qualifies as “performance-based compensation” within the meaning of Section 162(m). The Committee generally intends that compensation paid to its managers, including its executive officers, should not fail to be deductible for federal income tax purposes by reason of Section 162(m). For this reason, compensation paid under the At Risk Plan is designed to qualify as performance-based compensation under Section 162(m). The Committee may elect to award compensation, especially to a Chief Executive Officer, that is not fully deductible, if the Committee determines that such award is consistent with its philosophy and is in the best interests of the Company and its stockholders.

 

Summary Compensation Table

 

The following table sets forth a summary of the compensation paid to or earned by each person who served as the Chief Executive Officer, the Principal Financial Officer and each of the three other most highly compensated executive officers (the “named executive officers”) of the Company in fiscal 2009. The compensation reflected for each officer was for the officer’s services provided in all capacities to the Company and its subsidiaries.

 

 

 

 

The following table describes each component of the All Other Compensation column in the Summary Compensation Table for fiscal 2009.

 

 

 

 

Grants of Plan-Based Awards in Fiscal 2009

 

The following table sets forth information with respect to awards granted to the named executive officers during fiscal 2009 under the Performance Incentive Program, the At Risk Plan, and the 1997 Award and Option Plan. There are no future payouts under Equity Incentive Plan Awards; therefore we have removed those columns from the table. Please refer to the Compensation Discussion and Analysis (CD&A) within this proxy statement for additional information regarding these plans.

 

 

 

The Company’s named executive officers serve at the pleasure of the Board of Directors and are not employed pursuant to employment agreements. Each of the named executive officers is a party to an Employment Continuation and Noncompetition Agreement with the Company, which would become effective upon a Change in Control of the Company. In addition, David F. Smith and the Company are parties to a Retirement Benefit Agreement that provides Mr. Smith with certain retirement benefits in the event the Company terminates him without cause, or Mr. Smith terminates employment with good reason, prior to the first day of the month after which Mr. Smith reaches 571/2 years of age or March 1, 2011. The Employment Continuation and Noncompetition Agreements and the Retirement Benefit Agreement for David F. Smith are described in this proxy statement under “Potential Payments Upon Termination or Change-in-Control.”

Outstanding Equity Awards at Fiscal Year-End 2009

 

The following table sets forth, on an award-by-award basis, the number of securities underlying unexercised stock options or SARs and the total number and aggregate market value of shares of unvested restricted stock held by the named executives as of September 30, 2009. The table also provides the exercise price (average of the high and low on grant date) and date of expiration of each unexercised stock option or SAR.