NiSource Inc.
801 E. 86th Avenue • Merrillville, IN 46410 • (877) 647-5990

 

 

NOTICE OF ANNUAL MEETING

 

April 3, 2009

 

To the Holders of Common Stock of NiSource Inc.:

 

The annual meeting (the “Annual Meeting”) of the stockholders of NiSource Inc. (the “Company”) will be held at The Westin, 310 South High Street, Columbus, Ohio 43215 on Tuesday, May 12, 2009, at 10:00 a.m., local time, for the following purposes:

 

 

All persons who are stockholders of record at the close of business on March 17, 2009 will be entitled to vote at the Annual Meeting.

 

Please act promptly to vote your shares with respect to the proposals described above. You may vote your shares by marking, signing, dating and mailing the enclosed proxy card. You may also vote by telephone or through the Internet by following the instructions set forth on the proxy card. If you attend the Annual Meeting, you may vote in person, even if you have previously submitted a proxy.

 

In order to help us arrange for the Annual Meeting, if you plan to attend the Annual Meeting, please so indicate in the space provided on the proxy card or respond when prompted on the telephone or through the Internet.

 

PLEASE VOTE YOUR SHARES BY TELEPHONE, THROUGH THE INTERNET OR BY PROMPTLY
MARKING, DATING, SIGNING AND RETURNING THE ENCLOSED PROXY CARD.

 

Gary W. Pottorff
Corporate Secretary

 

Important Notice Regarding the Availability of Proxy Materials
For the Annual Meeting of Stockholders to be Held on May 12, 2009

 

The Proxy Statement and 2008 Annual Report to Stockholders
are Available at http://ir.nisource.com/annuals.cfm

 

TABLE OF CONTENTS

 

 

The accompanying proxy is solicited on behalf of the Board of Directors of the Company. The common stock, $.01 par value per share, of the Company represented by the proxy will be voted as directed. If you return a signed proxy card without indicating how you want to vote your shares, the shares represented by the accompanying proxy will be voted as recommended by the Board of Directors “FOR” all of the nominees for director, “FOR” the ratification of Deloitte & Touche LLP as the Company’s independent registered public accountants for 2009 and “AGAINST” the Stockholder Proposal to give holders of 10% of our outstanding common stock (or the lowest percentage allowed by law above 10%) the power to call special stockholder meetings (the “Special Stockholder Meetings Proposal”). If any other matters properly come before the Annual Meeting, the persons named in the accompanying proxy will vote the shares represented by such proxy on such matters in accordance with their best judgment.

 

This proxy statement and form of proxy are first being sent to stockholders on April 3, 2009. The Company will bear the expense of this solicitation. The original solicitation of proxies by mail and a reminder letter may be supplemented by telephone, facsimile, e-mail and personal solicitation by officers, employees, and agents of the Company or its affiliates. To aid in the solicitation of proxies, the Company has retained Laurel Hill Advisory Group, LLC for a fee of $8,500 plus reimbursement of expenses. The Company also will request brokerage houses and other nominees and fiduciaries to forward proxy materials, at the Company’s expense, to the beneficial owners of stock held of record by such persons.

 

The close of business on March 17, 2009 is the date for determining stockholders entitled to notice of and to vote at the Annual Meeting. As of March 17, 2009, 274,305,532 shares of common stock were issued and outstanding. Each share of common stock outstanding on that date is entitled to one vote on each matter presented at the Annual Meeting.

 

If you are a stockholder of record (that is, if you hold shares of common stock of the Company in your own name), you may vote your shares by proxy using any of the following methods:

 

 

If your shares are held by a broker, bank or other nominee in “street name,” you will receive voting instructions from that entity, the “record holder,” that you must follow in order to have your shares of common stock voted at the Annual Meeting. If your shares are held by a broker or other nominee and you or any other person entitled to vote those shares does not provide the broker or other nominee with instructions as to how to vote such shares, that broker or nominee will only be able to vote your shares on the matters for which the broker or other nominee has discretionary authority. Brokers and most other nominees will have discretionary authority to vote your shares of common stock with regard to (i) the election of directors, and (ii) the ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accountants for 2009. We do not believe that brokers and most other nominees will have discretionary authority to vote your shares with respect to the Special Stockholder Meetings Proposal.

 

If you hold your shares in the Company’s 401(k) plan administered by Fidelity Investments, you will need to vote your shares by one of the methods discussed in this Proxy Statement in order to have your vote counted. Fidelity will not exercise any voting discretion over the shares held in its accounts. If you fail to vote by returning a completed proxy card, or by telephone or through the Internet, your shares held through Fidelity will not be voted.

 

If you plan to attend the Annual Meeting, please so indicate when you vote, so that the Company may send you an admission ticket and make the necessary arrangements. Stockholders who plan to attend the meeting must present picture identification along with an admission ticket or evidence of current beneficial ownership.

 

You also may come to the Annual Meeting and vote your shares in person by obtaining and submitting a ballot that will be provided at the meeting. However, if your shares are held by a broker, bank or other nominee in street name, including Fidelity Investments as administrator of the Company’s 401(k) plan, then in order to be able to vote at the meeting, you must obtain a proxy, executed in your favor, from the institution that is the holder of record for your shares, indicating that you were the beneficial owner of the shares on March 17, 2009, the record date for voting, and that the record holder is giving you the proxy to vote the shares.

 

A proxy may be revoked by the stockholder at any time before a vote is taken or the authority granted is otherwise exercised. To revoke a proxy, you may send to the Company’s Corporate Secretary a letter indicating that you want to revoke your proxy or you can supersede your initial proxy by (i) delivering to the Corporate Secretary a duly executed proxy bearing a later date, (ii) voting by telephone or through the Internet on a later date, or (iii) attending the meeting and voting in person. Attending the Annual Meeting will not in and of itself revoke a proxy.

 

A quorum of stockholders is necessary to take action at the Annual Meeting. A majority of the outstanding shares of common stock, present in person or represented by proxy, will constitute a quorum at the Annual Meeting. The inspectors of election appointed for the Annual Meeting will determine whether or not a quorum is present. The inspectors of election will treat abstentions and broker non-votes as present and entitled to vote for purposes of determining the presence of a quorum. A broker non-vote occurs when a broker holding shares for a beneficial owner does not have authority to vote the shares and has not received instructions from the beneficial owner as to how the beneficial owner would like the shares to be voted.

 

In order for a director to be elected, he or she must receive more votes in favor of their election than against their election. Ratification of Deloitte & Touche LLP as the Company’s independent registered public accountants for 2009 and the Special Stockholder Meetings Proposal requires the affirmative vote of the majority of the shares present in person or represented by proxy at the meeting and entitled to vote.

 

Votes cast in person or represented by proxy at the meeting will be tabulated by the inspectors of election. Abstentions will be counted as a vote against the ratification of Deloitte & Touche LLP as the Company’s independent registered public accountants for 2009, and against the Special Stockholder Meetings Proposal.

 

Stockholders holding shares of stock through the Company’s 401(k) Plan with Fidelity will need to vote their shares by one of the methods discussed in this proxy statement in order to have their votes counted.

 

The Company’s Board of Directors consists of eleven directors who will be elected at this year’s Annual Meeting and each will serve until the 2010 Annual Meeting.

 

At the recommendation of the Corporate Governance Committee, the Board of Directors has nominated the persons listed below to serve as directors for the term beginning at the annual meeting on May 12, 2009 and each will serve until the 2010 Annual Meeting. The nominees for election of directors at the annual meeting include ten independent directors, as defined in the applicable rules for companies that trade on the New York Stock Exchange (“NYSE”), and the President and Chief Executive Officer of the Company. The Board of Directors does not anticipate that any of the nominees will be unable to serve, but if any nominee is unable to serve, the proxies will be voted in accordance with the judgment of the person or persons acting thereunder.

 

All of the nominees currently serve on the Board of Directors.

 

The following chart gives information about all nominees (each of whom has consented to being named in the proxy statement and to serving if elected). The dates shown for service as a director include service as a director of our corporate predecessors NiSource Inc. (incorporated in Indiana) and Northern Indiana Public Service Company.

 

Votes Required

 

In order to be elected, all nominees must receive more votes cast in favor of such nominee than votes cast against such nominee.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES LISTED BELOW.

 

 

For many years, a substantial majority of the Company’s Board of Directors (the “Board”) has been comprised of “independent” directors. In order to assist the board in making its determination of director independence, the board has adopted categorical standards of independence consistent with the standards contained in Section 303A.02(b) of the NYSE Corporate Governance Listing Standards. The Company’s categorical standards of independence are set forth on Exhibit A to this proxy statement and are listed in the Company’s Corporate Governance Guidelines, a copy of which can be found on the Company’s website at http://ir.nisource.com/governance.cfm.

 

The Board has affirmatively determined that all of the members of the board (except Mr. Skaggs) and all nominees (except Mr. Skaggs) are “independent directors” as defined in Section 303A.02(b) of the NYSE Listing Standards and meet the standards for independence set by the board.

 

The non-management members of the board met separately from management two times in 2008. Mr. Ian M. Rolland serves as lead, or presiding director at the executive sessions of the non-management directors. All of the non-management members are “independent” directors.

 

Stockholders and other interested persons may communicate any concerns they may have regarding the Company as follows:

 

 

NiSource Inc.
Attention: [Board of Directors]/[Board
Member]/[Non-management Directors]/[Lead Director]
c/o Corporate Secretary
801 East 86th Avenue
Merrillville, Indiana 46410

 

 

NiSource Inc.
Vice President, Ethics and Compliance
801 East 86th Avenue
Merrillville, Indiana 46410

 

The Board of the Company has adopted a Code of Ethics (the “Code”) to promote (i) ethical behavior including the ethical handling of conflicts of interest, (ii) full, fair, accurate, timely and understandable disclosure, (iii) compliance with applicable laws, rules and regulations, (iv) accountability for adherence to the Code and (v) prompt internal reporting of violations of the Code. The Code satisfies applicable Securities and Exchange Commission and NYSE requirements and applies to all directors, officers (including the Company’s principal executive officer, principal financial officer, and principal accounting officer and controller) and employees of the Company and its affiliates. Employees who are not executive officers satisfy their compliance obligations under the

Code by complying with the Company’s Business Ethics Program, including its Code of Integrity and accompanying booklet. The Business Ethics Program is not considered a part of the Code for any other purpose. A copy of the Code and the Company’s Business Ethics Program is available on the Company’s website at http://ir.nisource.com/governance.cfm and will be provided by the Company to any stockholder who requests it in writing from the Company’s Vice President, Ethics and Compliance, and Corporate Secretary. The Company intends to disclose any amendments to the Code, and all waivers from the Code for directors and executive officers, by posting such information on its website.

 

The Corporate Governance Committee is responsible for reviewing and reassessing the Corporate Governance Guidelines periodically and will submit any recommended changes to the Board for its approval. A copy of the Corporate Governance Guidelines can be found on the Company’s website at http://ir.nisource.com/governance.cfm and will be provided by the Company to any stockholder who requests it in writing from the Company’s Corporate Secretary.

 

The Board met ten times during 2008. Each director attended at least 91% of the combined total number of the Company’s board meetings and the meetings of the committees on which he or she was a member except for Mr. McCracken (1). The Board has established five standing committees to assist the Board in carrying out its duties: the Audit Committee; the Corporate Governance Committee; the Environmental, Health and Safety Committee (“EH&S”); the Finance Committee; and the Officer Nomination and Compensation Committee (“ON&C”). Pursuant to the Company’s Corporate Governance Guidelines, all directors are expected to attend the Annual Meeting. All incumbent directors who were on the board in May 2008, attended the 2008 Annual Meeting of Stockholders with the exception of Mr. Young who retired from the Board on May 13, 2008. The table below shows the composition of each board committee during 2008.

 

 

 

 

Audit Committee

 

The Audit Committee met nine times in 2008. The Audit Committee is responsible for monitoring:

 

 

The charter for the Audit Committee can be found on the Company’s website at http://ir.nisource.com/governance.cfm and will be provided by the Company to any stockholder who requests it in writing from the Company’s Corporate Secretary.

 

The Board has determined that all of the members of the Audit Committee are independent as defined under the applicable NYSE rules and meet the additional independence standard set forth in the Corporate Governance Guidelines. The Audit Committee has reviewed and approved the independent registered public accountants, both for 2008 and 2009, and the fees relating to audit services and other services performed by them.

 

For more information regarding the Audit Committee please see the Audit Committee Report.

 

Corporate Governance Committee

 

The Corporate Governance Committee met seven times in 2008. The Corporate Governance Committee is responsible for:

 

 

Pursuant to the Corporate Governance Guidelines, the Committee, with the assistance of the Company’s staff, reviews the amount and composition of director compensation from time to time and makes recommendations to the Board when it concludes changes are needed. The Committee is also responsible for the evaluation of the CEO’s performance and the direct reports of the CEO. The Committee reviews and approves the Company’s goals and objectives relevant to CEO and his direct report’s compensation and evaluates their performance in light of those goals and objectives and after receiving input from the Board of Directors. The Chair of the Committee reports the Committee’s findings to the Officer Nomination and Compensation Committee, which uses these findings to set the compensation of the CEO and his direct reports.

 

The Committee screens candidates for director and makes its recommendations for director to the board as a whole. Based on the Committee’s recommendations, the board as a whole selects the candidates for director. In considering candidates for director, the Committee considers the nature of the expertise and experience required for the performance of the duties of a director of a company engaged in the company’s business, as well as each candidate’s relevant business, academic and industry experience, professional background, age, current employment, community service and other board service. The Committee also considers the racial, ethnic and gender diversity of the board. The Committee seeks to identify and recommend candidates with a reputation for and record of integrity and good business judgment who (1) have experience in positions with a high degree of responsibility and are leaders in the organizations with which they are affiliated, (2) are effective in working in complex collegial settings, (3) are free from conflicts of interest that could interfere with a director’s duties to the Company and its stockholders and (4) are willing and able to make the necessary commitment of time and attention required for effective board service. The Committee also takes into account the candidate’s level of financial literacy. The Corporate Governance Committee monitors the mix of skills and experience of the directors in order to assess

whether the board has the necessary tools to perform its oversight function effectively. The Committee will consider nominees for directors recommended by stockholders and will use the same criteria to evaluate candidates proposed by stockholders.

 

The Board has determined that all of the members of the Corporate Governance Committee are independent as defined under the applicable NYSE rules and meet the additional independence standard set forth in the Corporate Governance Guidelines by the board.

 

The charter for the Corporate Governance Committee can be found on the Company’s website at http://ir.nisource.com/governance.cfm and will be provided by the Company to any stockholder who requests it in writing from the Company’s Corporate Secretary.

 

For information on how to nominate a person for election as a director at the 2010 Annual Meeting, please see the discussion under the heading “Stockholder Proposals and Nominations for 2010 Annual Meeting.”

 

Environmental, Health and Safety Committee

 

The Environmental, Health and Safety Committee met twice during 2008. This Committee reviews the status of environmental compliance of the Company and considers environmental public policy issues as well as health and safety issues affecting the Company. The charter for this Committee can be found on the Company’s website at http://ir.nisource.com/governance.cfm and will be provided by the Company to any stockholder who requests it in writing from the Company’s Corporate Secretary.

 

Finance Committee

 

The Finance Committee met eleven times during 2008. This Committee is responsible for monitoring the financial plans of the Company, capital structure and financial risk. The charter for the Finance Committee can be found on the Company’s website at http://ir.nisource.com/governance.cfm and will be provided by the Company to any stockholder who requests it in writing from the Company’s Corporate Secretary.

 

Officer Nomination and Compensation Committee

 

The Officer Nomination and Compensation Committee met five times in 2008. The charter for the Officer Nomination and Compensation Committee can be found on the Company’s website at http://ir.nisource.com./governance.cfm Pursuant to the charter, this Committee advises the board with respect to nomination, evaluation, compensation and benefits of the Company’s executives. In that regard, the Committee:

 

 

All of the directors serving on the Committee are (i) independent as defined under the applicable NYSE rules and meet the additional independence standard set forth in the Corporate Governance Guidelines, (ii) “non-employee directors” as defined under the Rule 16b-3 of the Securities Exchange Act of 1934, and (iii) “outside directors” as defined by Section 162(m) of the Internal Revenue Code.

Compensation Committee Interlocks and Insider Participation

 

There are no compensation committee interlocks.

 

Director Compensation.  The Company uses a combination of cash and stock-based awards to attract and retain highly qualified candidates to serve on the board. Only non-employee directors receive director compensation, therefore, since Mr. Skaggs is an employee of the Company, he does not receive compensation for his service as a board member.

 

In early 2008, the Corporate Governance Committee asked Hewitt Associates (“Hewitt”), an executive compensation consulting firm, to prepare an analysis of the non-employee director compensation using a peer group of 27 energy companies, including gas, electric, combination utility, and natural gas transmission companies. This is the same peer group of energy companies used by the Company in conjunction with the Company’s executive compensation analysis. As a result of this analysis the Corporate Governance Committee recommended to the board that the compensation for the directors be simplified. The Committee recommended that we eliminate the separate fees paid to directors based on committee membership, attendance, and election to the board and that we eliminate the Non-employee Director Retirement Plan and pension replacement grants.

 

On March 25, 2008 the Board approved a new director compensation structure effective on May 13, 2008. The Company began to pay each director an annual retainer of $165,000, consisting of $82,500 in cash and an award of restricted stock units valued at $82,500, under the Company’s Non-employee Director Stock Incentive Plan. The cash retainer and the restricted stock units that are granted are made in arrears in four equal installments on the last business day of each calendar quarter. The number of restricted units issued each quarter is determined by dividing the value of the grant by the closing price of the Company’s common stock on the last business day of the relevant quarter.

 

In keeping with industry trends, the board continues to provide additional compensation to those directors who take on additional responsibilities and serve as the chair of a board committee. The board approved the following annual committee chair fees to be effective May 13, 2008; Audit Committee $20,000; Officer Nomination & Compensation Committee $18,000, and the Finance Committee and Environmental Health &Safety Committee $15,000. The non-executive independent chairman of the Board also serves as the chair of the Corporate Governance Committee and receives additional annual compensation of $135,000 per year. Fees paid to the chairman of the board and the committee chairs are paid in four equal installments and in arrears. Fees are also prorated based on when Board and committee service begins or ends.

 

Prior to the board implementing the new compensation structure on May 13, 2008, the board paid the following fees:

 

 

Effective as of May 13, 2008, the board eliminated meeting fees, standing committee fees, election grants, Director Retirement Plan and the Charitable Gift Program discussed below.

Election Grants — (Discontinued).  Upon election, re-election or appointment to the board, each non-employee director received an annual award of restricted shares of common stock or restricted stock units equal to $30,000 per year of the director’s term. The number of restricted shares of common stock or restricted stock units, or a combination thereof, as applicable, was determined by dividing the amount of the grant by the closing price of the Company’s common stock on the date of such election, re-election or appointment. On March 25, 2008, the board eliminated the election grants in lieu of the new director compensation structure.

 

Director Retirement Plan — (Discontinued).  On March 25, 2008, the board elected to terminate any future accrual of benefits under the Retirement Plan beyond May 13, 2008. The Company’s Non-employee Director Retirement Plan provided a retirement benefit for each non-employee director serving on the board who was originally elected or appointed to the board on or before December 31, 2001, who had completed at least five years of service on the board and who did not elect to opt out of the plan during 2002. The benefit under the Retirement Plan was a monthly amount equal to one-twelfth of the annual retainer for board service in effect at the time of the director’s retirement from the board and would be paid for 120 months, or the number of full months of service the individual served as a non-employee director of the Company, whichever was less. Directors first elected prior to 2001 who elected to opt out of the Retirement Plan in 2002 received, under the Company’s Non-employee Director Stock Incentive Plan, restricted stock units comparable to the value of the retirement benefit such director had earned under the Retirement Plan through June 30, 2002.

 

Directors who elected to opt out of the Retirement Plan in 2002 and directors first elected after 2001 did not receive a retirement benefit under the Retirement Plan. Instead, such directors received restricted stock unit grants under the Company’s Non-employee Director Stock Incentive Plan to ensure that the non-employee director received a competitive compensation package. These additional amounts were paid upon a director being elected or appointed to the board.

 

As a result of the board electing to terminate any future accrual of the benefits under the Retirement Plan, Drs. Beering and Woo made an election to receive the value of their accrued benefit in cash or restricted stock units under the Non-employee Director Stock Incentive Plan, or a combination thereof. Dr. Beering elected to receive 50% in cash and 50% in restricted stock units. Dr. Woo elected to receive 60% in cash and 40% in restricted stock units. The restricted stock units were issued on May 13, 2008 and will be distributed after the director leaves the board in accordance with the provisions of the Non-employee Director Stock Incentive Plan. The portion elected to be received in cash was paid to each of the directors in 2009. Mr. Young did not opt out of the retirement Plan and retired from the board on May 13, 2008. He has begun to receive the retirement benefit provided under the Retirement Plan.

 

Non-employee Director Stock Incentive Plan.  The provisions of the Plan permit the board to approve awards of restricted stock or restricted stock units. All grants of restricted stock units vest immediately but are not distributed until the director terminates or retires from the board. With respect to restricted stock, dividends are paid to holders in cash on the date dividends are actually paid to stockholders of the Company. With respect to restricted stock units, additional restricted stock units are credited to each non-employee director to reflect dividends paid to stockholders of the Company with respect to common stock. The restricted stock units have no voting or other stock ownership rights and are payable in shares of the Company’s common stock upon the directors termination of service from the board.

 

The board may designate that a scheduled award will consist of nonqualified stock options to purchase shares of the Company’s common stock rather than shares of restricted stock or restricted stock units. In such event, in lieu of such shares of restricted stock or restricted stock units, each non-employee director would be granted a nonqualified stock option with a market value on the date of any such grant equal to the dollar value of the grant otherwise scheduled to be made to such non-employee director on such date. Grants of nonqualified stock options vest in 20% annual increments and become fully vested on the fifth anniversary of the date of the grant. The grants will vest immediately upon the director’s death, disability or retirement after attaining age 70, or the effective date of a change in control of the Company. No awards of nonqualified stock options have been made under the Plan.

 

Directors’ Charitable Gift Program — (Discontinued).  On March 25, 2008, the board approved amendments to the Directors’ Charitable Gift program that terminated the Program on December 31, 2008. Under the Program the Company made donations on behalf of non-employee directors who were serving on the board on or

before February 16, 2006, and who were not previously employees of the Company, to one or more eligible tax-exempt organizations as designated by each eligible director. The Company contributed up to an aggregate of $125,000 for each non-employee director who has served as a director of the Company for at least five years and up to an additional $125,000 (for an overall $250,000) for each non-employee director who has served ten years or more. Organizations eligible to receive a gift under the program include charitable organizations and accredited United States institutions of higher learning. Individual directors derive no financial benefit from the program, as all deductions relating to the charitable donations accrue solely to the Company. A director’s private foundation was not eligible to receive donations under the program. As a result of the amendments to the Program, Dr. Woo and Messrs. Foster and Thompson were each eligible to recommend contributions of $125,000 by the Company to eligible organizations prior to the termination date.

 

Director’s Stock Ownership.  In 2008, the board updated its Corporate Governance Guidelines to include stock ownership requirements for its directors. Within five years of adopting these ownership requirements, each non-employee director is required to hold an amount equal to or greater than four times the annual cash retainer paid to directors by the Company. Company stock that counts towards satisfaction of this requirement includes shares purchased on the open market, awards of restricted stock or restricted stock units through the director Plan, and shares beneficially owned in a trust, by a spouse or other immediate family member residing in the same household.

 

Each director has a significant portion of their compensation directly aligned with long term stockholder value. As of May 13, 2008, fifty (50%) of the board’s annual retainer is awarded in restricted stock units. Each unit is equal to one share of common stock and is not distributed to the director until the director leaves the board.

 

The table below shows the number of shares of common stock beneficially owned by each director, the number of non-voting restricted stock units that have been awarded, and the total as of March 20, 2009.

 

 

 

 

Director Compensation

 

The table below sets forth all compensation earned by NiSource’s non-employee directors in 2008. Mr. Skaggs is the Company’s only employee director and does not receive any separate compensation for his service on the board. Mr. McCracken passed away on February 7, 2008; and Mr. Young retired from the board on May 13, 2008. Messrs. Abdoo and Jesanis were elected to the board on May 13, 2008.

 

 

 

 

 

The following table contains information about those persons or groups that are known to the Company to be the beneficial owners of more than five percent of the outstanding common stock.

 

 

 

 

The following table contains information about the beneficial ownership of the Company’s common stock as of March 20, 2009 for each of the directors, nominees and Named Officers, and for all directors and executive officers as a group.

 

 

 

Overview of Executive Compensation Philosophy and Decisions

 

The Officer Nomination and Compensation Committee referred to as the “Committee” throughout the Compensation Discussion and Analysis is composed entirely of independent directors. The Committee administers the executive compensation programs. It approves the compensation of the Chief Executive Officer (“CEO”), based on the Corporate Governance Committee’s report on its evaluation of CEO performance. The Committee also makes recommendations to the Board with respect to incentive-compensation plans and equity-based plans and reviews and approves the general compensation policy for other officers of the Company and officers of its principal affiliates. Further, the Committee makes recommendations to the Board with respect to the specific compensation of the CEO’s direct executive reports, which we refer to as the Company’s senior executives.

 

The Company’s executive compensation program is designed to attract and retain highly qualified executives and provide compensation in a manner that is aligned with the Company’s strategic plan to create additional stockholder value. Our compensation policy is designed to relate total compensation to corporate performance, while remaining competitive with the compensation practices of competitors in the energy industry and, to a lesser extent, general industry. Accordingly, the Committee’s philosophy is to provide a competitive total compensation opportunity which approximates the 50th percentile of the compensation opportunities of similar energy companies, (see peer group below) taking into account the Company’s performance and individual performance. Total compensation opportunities are defined as the sum of base salary, target annual incentives, and the grant date value of long-term incentives (LTI). Target annual incentives and the grant date value of LTI are used in particular as the market reference point because they focus on opportunities rather than outcomes, i.e., earned or realized pay. Earned or realized incentive compensation is largely a function of performance, not the market benchmarking process. The objective of the executive compensation structure, generally, is not to ensure outcomes, but to target a competitive opportunity. If earned/realized incentive awards are greater or lesser than these target/grant date opportunities, it will be as a result of individual and/or Company performance and not because of the market benchmarking process.

 

The Committee generally determines all elements of compensation on an annual basis, during the first quarter of the year. The Committee typically determines at this time the executives’ incentive payout for the year just ended as well as any adjustment in other elements of the total compensation opportunity for the year that has just begun. Accordingly, the discussion that follows concerns the Committee’s decisions in the first quarter of 2008 with respect to 2008 base salary and the 2008 long-term incentive grant, and the Committee’s decisions in January 2009 with respect to incentive payouts for 2008 performance. On occasion, the Committee will consider compensation at other times of the year — for example, when new executives are being considered for employment by the Company or when the Committee deems it appropriate to consider an adjustment to a particular executive’s compensation.

For 2008, the Committee engaged the services of Hewitt, an executive compensation consulting firm, to advise it with respect to compensation design, comparative compensation practices, and other compensation matters. Under separate agreements, Hewitt also provides other services to the Company, including benefits administration, actuarial services, and health and welfare consulting. The Committee’s decision to engage Hewitt to provide consulting services to the Committee was independent of the Company’s engagement of Hewitt for these other services. The Committee has instructed Hewitt that its executive compensation consultant is to act independently of management with respect to the executive compensation services Hewitt provides to the Committee. The same executive compensation consultant has worked with the Committee for several years. He does not receive any incremental compensation from Hewitt for Hewitt’s provision of any other services to the Company and he does not receive any individual incentives for cross-selling other Hewitt services. He does not manage the overall relationship with the Company, and the Committee reasonably believes that his judgments are not in any way influenced by the other work Hewitt performs. The Committee meets with the executive compensation consultant in executive session without management present.

 

In order to further strengthen the Company’s governance practices, the Corporate Governance Committee, at its January 2009 meeting, unanimously approved a change in board policy such that, following a transition period of no more than six months, future executive compensation consultants advising the Committee should not be retained to provide any other services to the Company, its affiliates or its senior executive officers.

 

For its 2008 compensation considerations, the Committee engaged Hewitt to provide the Committee survey information for a group of energy companies, including gas, electric, combination utility, and natural gas transmission companies. For its 2008 considerations, the Committee approved the following energy company comparative group:

 

Energy Company Comparative Group

 

AGL Resources Inc		Nicor Inc.
Allegheny Energy, Inc.		Pepco Holdings, Inc.
Ameren Corporation		PG&E Corporation
American Electric Power Company, Inc.		PNM Resources, Inc.
Aquila, Inc.		PPL Corporation
CenterPoint Energy, Inc.		Public Service Enterprise Group
CMS Energy Corporation		Questar Corp
Dominion Resources, Inc.		SCANA Corporation
DTE Energy Company		Sempra Energy
Duke Energy Corporation		Southern Company
El Paso Corp		TXU Corp.
Equitable Resources Inc.		WGL Holdings, Inc.
FirstEnergy Corp		Williams Cos Inc.
Kinder Morgan Energy — LP

 

In making its recommendations concerning the various components of executive compensation, the Committee takes into account various factors, including:

 

 

In making its compensation decisions for the CEO, the Committee considers the Corporate Governance Committee’s evaluation of the CEO’s performance. Under our governance structure, the Corporate Governance

Committee has the responsibility to evaluate the CEO’s performance. The Corporate Governance Committee also meets with the CEO and the Senior Vice President, Human Resources to review the performance of the other senior executives. In this meeting, the Corporate Governance Committee also reviews the Company’s succession plans for senior executives. Because all of the members of the Committee are also members of the Corporate Governance Committee, each member of the Committee participates in this performance review discussion.

 

For 2008, the Committee considered the performance reviews of senior executives in making its compensation recommendations to the board. The Committee recommends adjustments to compensation based upon the individual’s contributions to the Company, the achievement of predetermined goals and the performance of the business. The Committee discusses and considers these factors, and then makes compensation recommendations to the full Board, which takes the final action on these matters. The board accepted all of the Committee’s recommendations in 2008.

 

Elements of Compensation

 

Our executive compensation program consists of: base salary; an annual incentive plan; long-term incentive opportunities; benefit programs (including pension, retirement savings, deferred compensation and health and welfare); a limited amount of perquisites; and post-termination benefits. With respect to balancing these elements, the Committee considers competitive conditions, internal comparisons, Company and individual performance and evolving governance practices.

 

The Committee approves compensation for Robert C. Skaggs, Jr., President and CEO. The Committee makes recommendations to the board with respect to the compensation of our other senior executive officers, which includes all of our other Named Officers (the Named Officers, in addition to the CEO, are the Chief Financial Officer, and the three other most highly compensated executive officers as of December 31, 2008).

 

Beginning in 2006, the Committee modified its overall compensation philosophy to provide a competitive total compensation program based on the approximate 50th percentile of the range of compensation paid by similar energy companies, taking into account the Company’s performance. The Committee seeks to align executive compensation with Company performance.

 

2008 Base Salary.  The Company targets base salary at the 50th percentile of the range of compensation paid by the companies in the Energy Company Comparative Group in order to be competitive for these executive positions. The Committee reviews the base salary of the Company’s senior executives annually. The Committee determines base salary based upon the consideration of such factors as level of responsibility, experience, historical compensation, and individual performance and contribution to the business objectives. In making its decisions regarding 2008 base salary, the Committee considered the respective executive’s performance and contribution in 2007.

 

For 2008, the Committee increased the annual base salary of Mr. Skaggs from $750,000 to $800,000 effective March 1, 2008 (the Company made base salary adjustments for exempt employees effective March 1, 2008). In making this decision, the Committee considered that the Company continued to make significant progress on its four-part business plan, centering on: (1) expansion and commercial growth of the gas transmission and storage business; (2) regulatory and commercial initiatives at our utilities; (3) financial management; and (4) process and expense management. For each aspect of the plan, the Committee concluded that the Company achieved significant progress in 2007. Among its achievements were the following:

 

 

 

In addition to these achievements, the Committee also considered the fact that the Company had exceeded its earnings trigger goal for 2007, that Mr. Skaggs’ base salary was below the 50th percentile of salaries for CEO’s in the comparative groups, and that Mr. Skaggs had not received an increase to his base salary since July 2005.

 

With respect to the other Named Officers, the Committee made the following recommendations.

 

 

The Board accepted the Committee’s recommendations.

 

2009 Base Salary Freeze for Named Officers.  For 2009, Mr. Skaggs recommended, and the Committee approved, that the Company should freeze the base salaries of its senior executives, including all of the Named Officers. The Committee determined that, despite the strong performance of Mr. Skaggs and his senior executive team in meeting the Company’s operational and financial objectives during 2008, this action was appropriate given the current economic climate and the Company-wide cost-savings initiatives being implemented in 2009.

 

2008 Annual Incentive Plan.  The Committee determines annual incentive ranges for all senior executives under the NiSource Corporate Incentive Plan, which is a broad-based plan that extends to most employees within the organization. The purpose of this component is to provide an incentive opportunity for employees based upon the annual performance of the Company. As in past years, every eligible employee has an incentive level that identifies their incentive opportunity at trigger, target and stretch.

 

In determining incentive compensation ranges, the Committee considered benchmark information, advice from the compensation consultant, historical payouts and individual executive performance. The Committee did not change the incentive compensation ranges for incumbent Named Officers.

 

The incentive ranges for the Named Officers, stated as a percentage of base salary, under the Corporate Incentive Plan in 2008 were:

 

Robert C. Skaggs, President and Chief Executive Officer		35% to 105% with a target of 70%
For the other Named Officers		32.5% to 97.5% with a target of 65%

Under the 2008 NiSource Corporate Incentive Plan (“Incentive Plan”), the Board established a corporate trigger financial goal of $1.25 of net operating earnings per share (after accounting for the cost of any incentive payout). If the Company did not achieve that level of operating earnings in 2008, no annual incentive under the Incentive Plan would be paid.

 

The Company uses net operating earnings for determining financial performance for its incentive compensation plans because the Board and management believes this measure better represents the fundamental earnings strength and performance of the Company. NiSource uses this measure internally for budgeting and for reporting to the Board. Net operating earnings is defined as income from continuing operations determined in accordance with Generally Accepted Accounting Principles (GAAP) adjusted for certain items, such as weather, gains and losses on the sale of assets, and certain out-of-period items and reserve adjustments.

 

In addition to the corporate operating earnings measure, the Incentive Plan also established earnings goals for the Company’s three business units. The respective units had goals at trigger, target and stretch levels. For employees in the Company’s respective business units, 50% of their incentive opportunity was based upon overall corporate performance and 50% was based upon business unit performance. For employees in the corporate services functions, 100% of their incentive opportunity was based upon overall corporate performance.

 

Under the plan, if the Company meets its corporate trigger financial goal, employees in good standing are eligible to receive an incentive in accordance with the plan. The Committee retained the discretion once the trigger is met to pay incentives under the Incentive Plan within the incentive opportunity range for each Named Officer. Additionally, a profit sharing contribution of between 0.5% and 1.5% of an employee’s eligible earnings may be made to an employee’s account in the Company’s Retirement Savings Plan on behalf of all eligible employees, including the Named Officers, based on the overall corporate financial performance measure.

 

In 2008, the Company achieved $1.27 of net operating earnings per share (after accounting for the cost of any incentive payout). Because the Company exceeded the trigger level of financial performance, the Committee deemed it appropriate to fund the portion of the incentive pool based upon corporate performance at a level of 80% of target. The funding of the portions of the incentive pool based upon business unit performance varied. Because the NGD business unit exceeded its stretch goal, the Committee recommended that the portion of the incentive pool based upon the NGD business unit be funded at a stretch level (stretch is 150% of target). The NGT&S business unit met its target goal. Accordingly, the Committee recommended that the portion of the incentive pool based upon NGT&S business unit performance be funded at a target level. Although the NIE business unit did not meet its trigger earnings goal, Mr. Skaggs requested that the Committee and the Board consider funding the portion of the incentive pool based upon NIE business unit performance at the trigger level (trigger is 50% of target) because of the substantial gains that had been made during 2008 in addressing legacy issues and building more effective relationships with external stakeholders. The Committee agreed to Mr. Skaggs’ request. The Committee recommended to the Board, based upon the corporate performance and the respective business units’ performance, that overall payouts to the respective business units be funded as follows:

 

 

The Board accepted the Committee’s recommendations regarding the Incentive Plan.

 

Further, the Company made a profit sharing contribution of 0.5% of an employee’s eligible earnings, including those of the Named Officers, to the respective employees’ accounts in the Company’s Retirement Savings Plan.

 

2008 Incentive Plan Payouts to the Named Officers.  Mr. Skaggs, as he had in prior years, requested that he not receive an incentive payout for 2008. Although the Company accomplished the financial performance for a payout under the 2008 incentive plan, the market price of the Company stock declined during 2008. In light of the

Company’s stock price, Mr. Skaggs did not believe that an incentive payout was warranted. The Committee agreed to this request.

 

Mr. Skaggs made recommendations to the Committee with respect to the award of incentive payouts to senior executives, including all of the Named Officers, for 2008. The Committee considered Mr. Skaggs’ recommendations, as well as overall corporate performance, the contributions of the individual executives, the individual executive’s incentive range and the funding level of the incentive pool approved by the board. The Committee, in turn, made its recommendation to the board. The board accepted all of the Committee’s recommendations for incentive payouts. The incentive payouts for 2008 to the Named Officers were as follows.

 

 

Long-Term Incentive Plan (LTIP).  The Company’s compensation program includes a long-term incentive component of equity-based compensation. The purpose of this component includes:

 

 

Under the LTIP, the Committee may award stock options, stock appreciation rights, performance units, restricted stock awards, and contingent stock awards. The Committee considers base salaries of the executive officers, prior awards under the LTIP, and the Company’s total compensation philosophy in establishing long-term incentive awards. The actual compensation value of awards under the LTIP depends on actual stock price appreciation and total stockholder return.

 

The Company’s philosophy is that the preponderance of its long-term incentive award opportunities be performance based. Accordingly, 67% of the total long-term incentive opportunity during 2008 for each of the Named Officers was in the form of contingent shares, while 33% were in the form of restricted shares. The contingent shares are contingent upon the Company meeting certain performance goals over the three-year period from 2008 through 2010. The contingent shares have two measures, each with a 50% weighting. The measures are cumulative net operating earnings over the three-year period and cumulative funds from operations over the three-year period. The Committee selected these measures because it was their view that they were key drivers to the enhancement of long-term stockholder value. If the threshold level of performance was exceeded, the executive could receive up to a maximum of 150% of the grant designated by the Board. The measures and goals are:

 

50% weighting — cumulative net operating earnings per share for 2008-2010

 

 

50% weighting — funds from operations for 2008-2010 (millions)

 

 

If prior to the lapse of the performance conditions, the employee terminates employment (1) due to retirement, having attained age 55 and completed ten years of service, (2) due to disability, or (3) due to death with less than or equal to 12 months remaining in the performance period, the employee will receive a pro rata portion of the contingent shares upon the performance conditions being met. If prior to the lapse of the performance conditions, the employee terminates employment due to death with more than 12 months remaining in the performance period, the employee will receive a pro rata portion of the contingent shares as if the performance conditions had been met. Termination due to any other reason will result in all contingent shares awarded being forfeited effective the employee’s date of termination.

 

The restricted stock was granted to facilitate retention, particularly during the strategic transition that the Company is undertaking, while at the same time strengthening the linkage to changes in stockholder value.

 

The 2008 restricted shares vest over approximately three years. The service conditions lapse on January 31, 2011. If before January 31, 2011, the employee terminates employment (1) due to retirement, having attained age 55 and completed ten years of service, or (2) due to death or disability, the employment conditions will lapse with respect to a pro rata portion of the restricted units on the date of termination. Termination due to any other reason will result in all restricted shares awarded being forfeited effective the employee’s date of termination.

In March 2008, the Committee recommended, and the Board approved, grants of 244,907 restricted shares and 417,196 shares of contingent stock to executives of the Company. The Committee determined that it was appropriate to include an equity-based component in the executive compensation program since it was aligned with stockholder interest, was tied to performance, and had a long-term vesting schedule in order to provide an incentive for retention of executives.

 

In determining the 2008 long-term incentive grants to be awarded to the Named Officers, the Committee considered the market information provided by Hewitt, as well as the performance of the individuals and the desire to further align the interests of management with those of the Company’s stockholders. With respect to Mr. Skaggs, the Committee also considered that Mr. Skaggs, pursuant to his requests, did not receive an incentive payout for 2006 or 2007. The Committee recommended, and the Board authorized, restricted and contingent stock awards to the Named Officers in the following amounts:

 

 

Consistent with the philosophy and principles articulated above, the Committee believes that the 2008 stock awards:

 

 

Pursuant to his employment agreement with the Company, and to compensate him for the loss of a portion of the long-term incentive award from his prior employer, the Committee recommended, and the Board approved, a grant to Mr. Smith of a contingent stock award of 36,298 contingent shares which will vest, solely on the passage of time, in one-third increments on December 31, 2008, 2009 and 2010.

 

In addition, in 2008, the Committee certified the performance goals related to a previous grant of 10,000 shares of restricted stock to Mr. Helms. The restrictions on 100% of those shares lapsed on March 31, 2008, based upon the Committee’s assessment that Mr. Helms had achieved the specified performance goals. The goals were: (1) develop and execute an aggressive pipeline unit growth strategy that results in the development and approval of material regulated pipeline and storage asset capital projects that meet or exceed corporate economic requirements; (2) lead the pipeline business unit in the execution of its transformation plan by meeting or exceeding agreed milestones and performance metrics including the realization of expected operational and financial benefits; and (3) develop and execute a plan to insure the safe, efficient and profitable operation of the pipeline business unit that meets or exceeds agreed financial, safety, and operational goals.

 

Benefits.  The Company provides a variety of health and welfare benefits to its employees, including a number of health care plans, vision, dental, long-term disability and life insurance. The Named Officers are eligible to participate in these plans as employees of the Company. The Company also has the following plans.

 

Defined Contribution Plans.  Under the NiSource Inc. Retirement Savings Plan, the Company’s 401(k) plan that covers most of the Company’s non-union employees (including the Named Officers), Named Officers can defer a portion of their base salary and receive employer matching contributions that vary according to the terms of the respective pension plans in which they participate. In addition, the Company sponsors the Savings Restoration Plan for NiSource Inc. and Affiliates. The Savings Restoration Plan provides for a supplemental benefit equal to the difference between (i) the benefit an employee would have received under the NiSource Inc. Retirement Savings

Plan had such benefit not been limited by sections 415 (a limitation on annual contributions under a defined contribution plan of $46,000 for 2008) and 401(a)(17) (a limitation on annual compensation of $230,000 for 2008) of the Internal Revenue Code, reduced by their deferrals into the Company’s Executive Deferred Compensation Plan, minus (ii) the actual benefit he received under the Retirement Savings Plan. All of the Named Officers are eligible to participate in the Savings Restoration Plan.

 

Executive Deferred Compensation Plan.  The Company sponsors the Executive Deferred Compensation Plan whereby employees at certain job levels and other key employees designated by the Committee, including the Named Officers, are eligible to participate. Participants who elect to participate may elect to defer and invest between 5% and 80% of their compensation and between 5% and 100% of their incentive payment on a pre-tax basis. Employees designate how their contributions will be invested; the investment options generally are the same as those available under the Company’s 401(k) plan except that there are additional investment options for former Bay State Gas Company Plan participants and transferred Columbia Energy Group Plan accounts. Employee contributions and any earnings thereon are 100% vested.

 

Pension Plans.  The Company and its affiliates sponsor several qualified pension plans for their respective employees. The plan in which an employee participates, including each of the Named Officers, differs depending upon the affiliate into which the employee was hired. The pensions are payable out of a trust fund, which consists of contributions made by the Company and the earnings of the fund. Over a period of years, the contributions are intended to result in overall actuarial solvency of the trust fund.

 

Messrs. Skaggs and O’Donnell participate in the Retirement Plan of Columbia Energy Group Companies, as they were participants in this plan at the time of the acquisition of Columbia Energy Group by NiSource. Ms. Odum and Messrs. Helms, Smith and Staton participate in the NiSource Pension Plan because they were hired into NiSource Corporate Services Company.

 

Both the Retirement Plan of Columbia Energy Group Companies and the NiSource Pension Plan provide for a “final average pay” benefit. Both plans also adopted a cash balance feature, whereby an executive will have a benefit consisting of their opening account balance plus annual pay and interest credits to their cash balance account. Pay credits equal a percentage of compensation based on the participant’s combined age and service. Interest is credited to their account based on the interest rate on 30-year Treasury securities, as determined by the Internal Revenue Service, for the September immediately proceeding the first day of each year, but not less than 4%. At the time the plans added this cash balance benefit, eligible employees were provided a choice between receiving the final average pay benefit or receiving the cash balance benefit.

 

Both Pension Plans were amended and restated effective January 1, 2006 to add a new cash balance feature, for exempt employees only. Participants in the plans prior to October 1, 2005 were entitled to elect to remain in the “final average pay feature” or the original cash balance feature, or to begin participating in the new cash balance feature. Participants hired into exempt employee positions on or after October 1, 2005 and prior to January 1, 2006 automatically participated in the original cash balance feature until January 1, 2006, when they automatically began participating in the new cash balance feature. Participants hired into exempt employee positions on or after January 1, 2006 automatically participate in the new cash balance feature. The difference between the original cash balance feature and the new cash balance feature is that the pay credits provided under the new cash balance feature are a lower percentage of compensation based upon a participant’s combined age and service. Participants in the new cash balance feature receive an enhanced matching contribution under the Retirement Savings Plan. As of January 1, 2011, all participants who are exempt employees will participate in the new cash balance feature and will receive the enhanced matching contribution under the Retirement Savings Plan.

 

Mr. Skaggs elected to continue to receive the final average pay benefit under the Retirement Plan of Columbia Energy Group Companies. The formula for a retiree’s monthly retirement benefit at age 65 under the Retirement Plan of Columbia Energy Group is (i) 1.15% of the retiree’s final average compensation that does not exceed 1/2 of the taxable Social Security wage base times years of service up to 30, plus (ii) 1.5% of the retiree’s final average compensation in excess of 1/2 of the taxable Social Security wage base times years of service up to 30, plus (iii) 0.5% of the retiree’s final average compensation times years of service between 30 and 40.

 

Messrs. O’Donnell and Helms elected to receive the new cash balance benefit.

The Company also sponsors the Pension Restoration Plan for NiSource Inc. and Affiliates. The Pension Restoration Plan is a nonqualified defined benefit plan. The plan includes employees of the Company and its affiliates (including all of the Named Officers) whose benefits under the applicable tax-qualified pension plan are limited by sections 415 and 401(a)(17) of the Internal Revenue Code. The Pension Restoration Plan provides for a supplemental retirement benefit equal to the difference between (i) the benefit a participant would have received under the qualified pension plan had such benefit not been limited by section 401(a)(17) of the Internal Revenue Code and reduced by deferrals into the Company’s Executive Deferred Compensation Plan, minus (ii) the actual benefit received under the qualified pension plan. Benefits earned under the Pension Restoration Plan are used to offset amounts earned under the Supplemental Executive Retirement Plan.

 

Supplemental Executive Retirement Plan.  The Company also has a Supplemental Executive Retirement Plan which applies to those officers and other employees selected by the Board to participate in the plan. Benefits from this plan are to be paid from the general assets of the Company. For each officer and employee who first participated in the Supplemental Executive Retirement Plan prior to January 23, 2004, the Supplemental Executive Retirement Plan provides a retirement benefit at age 62, or age 60 and the completion of at least 25 years of service of the greater of (i) 60% of final average pay (prorated for less than 20 years of service) and an additional 0.5% of final average pay per year between 20 and 30 years of service, less 5% of Primary Social Security Benefits (prorated for less than 20 years of service) or (ii) the benefit formula under the NiSource qualified pension plan. Final average pay is determined by dividing the participant’s total compensation during the 60 consecutive months within the last 120 months of service that produce the highest result, by the number of months for which such compensation was received. For purposes of the Plan, total compensation is compensation as defined in the NiSource Pension Plan (but disregarding the limitations required by Code Section 401(a)(17) and the 50% limitation applicable to bonuses). In either case, the benefit is reduced by the actual pension payable from the qualified pension plan covering the officer or employee and benefits earned under the Pension Restoration Plan for NiSource Inc. and Affiliates. In addition, the Supplemental Executive Retirement Plan provides certain early retirement and disability benefits and pre-retirement death benefits for the spouse of a participant. Mr. O’Donnell is the only named executive officer who participates in the Supplemental Executive Retirement Plan and his participation is based on his service and compensation with the Company and its affiliates from and after November 1, 2000.

 

Perquisites.  Perquisites are not a principal element of the Company’s executive compensation program. The Company’s perquisites are limited in number and modest in dollar value in comparison to its principal elements of compensation. They are intended to assist executive officers in the performance of their duties on behalf of the Company or otherwise to provide benefits that have a combined personal and business purpose.

 

The Committee annually reviews the types and costs of perquisites provided by the Company to its Named Officers to be sure that the perquisites are in line with the Company’s compensation philosophy. During 2008, the only perquisite offered by the Company to all of its Named Officers in 2008 was financial planning and tax advisory services. The Company did not reimburse the Named Officers for the payment of personal income taxes in connection with this benefit.

 

In addition to the perquisite discussed above, certain individual Named Officers also received an automobile leasing and annual physical perquisite. Both of these perquisites have been discontinued but not with respect to Named Officers who received them under prior practice. Certain Named Officers also received benefits in the form of relocation services and the payment of relocation expenses where such Named Officer relocated at the Company’s request or as the result of a job transfer. The Company reimburses the Named Officers for the payment of personal income taxes in connection with the relocation services and related expenses and travel expenses.

 

From time to time, the Company may also allow limited personal use of Company aircraft or limited spousal travel in conjunction with attending Company events; however, no such activity occurred during 2008.

 

Post-Termination Benefits.  The Company maintains an executive severance policy, Change in Control Agreements with the Named Officers and letter agreements with Messrs. Helms, Smith, and Staton and Ms. Odum regarding payments to be made in connection with the termination of employment of the executive. Messrs. Skaggs and O’Donnell are also entitled to receive payments for vested phantom stock units that were given to them in February 2001 as an inducement to remain employed with the Company following the Company’s acquisition of Columbia Energy Group. The Company entered into the Change in Control Agreements based upon its belief that

these agreements are in the best interests of the stockholders, to insure that in the event of extraordinary events, a thoroughly objective judgment be made on any potential corporate transaction, so that stockholder value is appropriately safeguarded and maximized by having these agreements. For further discussion of these arrangements see “Compensation of Executive Officers — Potential Payments upon Termination of Employment or a Change in Control of the Company” below.

 

Executive Stock Ownership Guidelines

 

The Company established stock ownership guidelines for its senior executives in 2007, and revised the guidelines in January 2009. Officers are generally expected to satisfy their applicable ownership guidelines within five (5) years of becoming subject to the guidelines. The ownership requirement for the CEO is five times his annual base salary. The other senior executives have a stock ownership guideline of three times their respective annual base salary. At the end of 2008, the Named Officers (other than Mr. O’Donnell, who met his guideline on December 31, 2008) are progressing toward their ownership guidelines but have been subject to them for less than five years, the time generally estimated to reach the guidelines. Once an officer satisfies the guidelines, the officer must continuously own a sufficient number of shares to remain in compliance with the guidelines. Until such time as the officer satisfies their share ownership guidelines, the officer is required to hold 50% of the shares of common stock received upon the lapse of the restrictions on restricted stock, and the vesting of performance units.

 

Tax Treatment of Executive Compensation

 

Section 162(m) of the Internal Revenue Code provides that annual compensation in excess of $1,000,000 paid to the chief executive officer or any of the three other most highly compensated Named Officers (excluding the chief financial officer), other than compensation meeting the definition of “performance based compensation,” will not be deductible by a corporation for federal income tax purposes. The Committee does not anticipate that the limits of Section 162(m) will materially affect the deductibility of compensation paid by the Company in 2008. However, the Committee will continue to review the deductibility of compensation under Section 162(m) and related regulations published by the IRS. The Committee retains the discretion to amend or not amend any compensation arrangement to comply with Section 162(m)’s requirements for deductibility in accordance with the terms of such arrangements and what it believes is the best interest of the Company.

 

In addition, Section 280G and 4999 of the Internal Revenue Code impose excise taxes on Named Officers, directors who own significant stockholder interests in the Company, and other service providers who receive payments in excess of a threshold level upon a change in control. Additionally, the Company or its successor could lose a deduction for amounts subject to the additional tax. As discussed in the “Potential Payments upon Termination of Employment or a Change in Control of the Company” section, it is possible that payments to the Named Officers could be subject to these taxes.

 

Finally, Section 409A of the Internal Revenue Code imposes additional taxes on service providers, including directors and Named Officers, who deferred compensation in a manner that does not comply with Section 409A. The Company has reviewed its compensation arrangements to help ensure they comply with applicable Section 409A requirements.

 

Total Executive Compensation

 

The Company intends to continue to compensate our executives in accordance with performance. As noted above, both the 2008 annual incentive opportunity and two-thirds of the value of the 2008 long-term incentive opportunity for senior executives, including all of the Named Officers, was based upon the Company attaining pre-established goals. The Committee believes that its overall executive compensation program has been, and will continue to be, successful in providing competitive compensation sufficient to attract and retain highly qualified executives, while at the same time encouraging the senior executives to strive toward the creation of additional stockholder value.

 

The Officer Nomination and Compensation Committee of the Board of Directors has furnished the following report to the stockholders of the Company in accordance with rules adopted by the Securities and Exchange Commission.

 

The Officer Nomination and Compensation Committee of the Company states that the Committee reviewed and discussed with management the Company’s Compensation Discussion and Analysis contained in this Proxy Statement.

 

Based upon the review and discussions referred to above, the Officer Nomination and Compensation Committee recommended to the Board of Directors that the Company’s Compensation Discussion and Analysis be included in this Proxy Statement.

 

This report is submitted on behalf of the members of the Officer Nomination and Compensation Committee:

 

Officer Nomination and Compensation Committee
Steven C. Beering, Chairman
Richard A. Abdoo
W. Lee Nutter
Deborah S. Parker
Carolyn Y. Woo

 

March 11, 2009

 

Summary.  The following table summarizes compensation for services to NiSource and its affiliates for 2008 awarded to, earned by or paid to the CEO, Chief Financial Officer and three other most highly compensated executive officers as of December 31, 2008 (collectively these individuals constitute the “Named Officers”).

 

Summary Compensation Table

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

No stock options were granted to the Named Officers in 2008.

 

The following table sets forth information concerning plan-based awards under the NiSource Corporate Incentive Plan, and the NiSource Long-Term Incentive Plan to the Named Officers in 2008.