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

 

 

NOTICE OF ANNUAL MEETING

 

April 2, 2007

 

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 Capitol View Business & Conference Center, 101 Constitution Avenue, Washington, DC 20001 on Tuesday, May 8, 2007, 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 13, 2007 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

Vice President, Administration & Corporate Secretary

 

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 and “FOR” the ratification of Deloitte & Touche LLP as the Company’s independent public accountants for 2007. 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 2, 2007. 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 and personal solicitation by officers and regular employees of the Company or its subsidiaries. To aid in the solicitation of proxies, the Company has retained Mellon Investor Services for a fee of $7,500 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 13, 2007 is the date for determining stockholders entitled to notice of and to vote at the Annual Meeting. As of March 13, 2007, 273,900,357 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 public accountants for 2007.

 

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 an identification picture 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 13, 2007, 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 Vice President, Administration and Corporate Secretary a letter indicating that you want to revoke your proxy or you can supersede your initial proxy by (i) delivering to the Vice President, Administration and 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. It is not anticipated there will be any broker non-votes, as brokers have discretion for both proposals.

 

In order for a director to be elected, he or she must receive more votes in favor of his or her election than against his or her election. Ratification of Deloitte & Touche LLP as the Company’s independent public accountants for 2007 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 public accountants for 2007. It is not anticipated there will be any broker non-votes, as brokers have discretion for both proposals.

 

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 is currently composed of eleven directors. On November 28, 2006, Mr. Gary L. Neale informed the board of directors of his decision not to stand for reelection to the board at the 2007 Annual Meeting and on January 24, 2007, Mr. Robert J. Welsh also informed the board of directors of his decision not to stand for reelection.

 

At the 2006 Annual Meeting the stockholders of the Company approved the amendment of the Company’s Certificate of Incorporation to eliminate the classified structure of the board and to provide instead for the annual election of all directors. Prior to the amendment, directors were elected to staggered three-year terms with approximately one-third of the directors standing for election each year. The amended Certificate of Incorporation now provides that beginning with the 2007 Annual Meeting, all directors will be elected to one-year terms of office. Accordingly, this year all eleven directors are up for election for a one-year term.

 

On November 28, 2006, the board of directors, at the recommendation of the Corporate Governance Committee, amended the By-Laws of the Company to require that in any election of directors in which only the holders of common stock are entitled to vote and in which the only nominees are those recommended by the board of directors, a nominee may only be elected if the votes cast in favor of the nominee exceed the votes cast against the nominee. On this same date, the board of directors also approved a recommendation from the Corporate Governance Committee to amend the Corporate Governance Guidelines to require that in any election in which the only nominees are those recommended by the board of directors, a director who is recommended for reelection will execute a conditional resignation, effective only if both (a) the votes against his or her election exceed the votes in favor of his or her election and (b) such resignation is subsequently accepted by the board. The board of directors will make the final determination on any resignation and publicly disclose its decision within 90 days after the election. All of the directors who are nominees for reelection have executed a conditional resignation.

 

At the recommendation of the Corporate Governance Committee, the board of directors has nominated the persons listed in the chart below to serve as directors for the term beginning at the annual meeting on May 8, 2007. All of the nominees other than Messrs. Kittrell and Nutter currently serve on the board of directors. Messrs. Kittrell and Nutter were initially identified by Russell Reynolds Associates, Inc. a third party search firm engaged by the board of directors for the specific purpose of identifying highly qualified candidates for potential nomination to the board. 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.

 

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

 

At the 2007 Annual Meeting, 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 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.

 

The board of directors has affirmatively determined that all of the members of the board (except Messrs. Neale and Skaggs) and all nominees (except for 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 separate from management three times in 2006. 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 (except for Mr. Neale) are “independent” directors. The independent directors met two times in 2006 in executive session.

 

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 Gary W. Pottorff, Vice President, Administration & Corporate
Secretary
801 East 86th Avenue
Merrillville, Indiana 46410

 

 

NiSource Inc.
Ethics Officer
801 East 86th Avenue
Merrillville, Indiana 46410

 

The board of directors 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 subsidiaries. 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 and will be provided by the Company to any stockholder who requests it in writing from the Company’s Vice President, Administration 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 board of directors adopted Corporate Governance Guidelines on March  23, 2004, which were amended and restated on November 28, 2006. The Corporate Governance Committee is responsible for reviewing and reassessing the Corporate Governance Guidelines periodically and will submit any recommended changes to the board of directors for its approval. A copy of the Corporate Governance Guidelines can be found on the Company’s website at http://ir.nisource.com and will be provided by the Company to any stockholder who requests it in writing from the Company’s Vice President, Administration and Corporate Secretary.

 

The board of directors of the Company met 10 times during 2006. The board has the following six standing committees:

 

 

During 2006, each director attended at least 80% 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. Pursuant to the Company’s Corporate Governance Guidelines, all directors are expected to attend the annual meeting of the Company’s stockholders. All incumbent directors (except Dr. Beering) who were on the board in May 2006 attended the 2006 Annual Meeting of Stockholders.

 

Executive Committee

 

The Executive Committee met one time in 2006. The Executive Committee has the authority to act on behalf of the board if reasonably necessary when the board is not in session. Mr. Neale was Chairman and Dr. Beering and Messrs. Rolland and Welsh were members of the Executive Committee throughout 2006. Messrs. Foster and Skaggs have served on the Committee since their election to the Committee on May 10, 2006.

 

Audit Committee

 

The Audit Committee met eight times in 2006. The Audit Committee is responsible for monitoring:

 

 

The board of directors adopted a charter for the Audit Committee on January 23, 2004, a copy of which can be found on the Company’s website at http://ir.nisource.com and will be provided by the Company to any stockholder who requests it in writing from the Company’s Vice President, Administration and Corporate Secretary.

 

Mr. Rolland was Chairman of the Audit Committee through November 28, 2006, and Mr. Foster was Chairman thereafter. Dr. Woo and Messrs. Foster, Rolland, Thompson and Young were members of the Audit Committee in 2006. The board of directors 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 public accountants, both for 2006 and 2007, 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 six times in 2006. The Corporate Governance Committee took responsibility for the nomination and compensation of directors in 2004 and also is responsible for:

 

 

Pursuant to the Corporate Governance Guidelines, the Corporate Governance 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 of directors when it concludes changes are needed. The Corporate Governance Committee is also responsible for the evaluation of the CEO’s performance. The Corporate Governance Committee reviews and approves the Company’s goals and objectives relevant to CEO compensation and evaluates the CEO’s performance in light of those goals and objectives and after receiving input from the board of directors. The Chair of the Corporate Governance Committee reports the committee’s findings to the Officer Nomination and Compensation Committee, which uses these findings to set CEO compensation.

 

The Corporate Governance 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 Corporate Governance 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 Corporate Governance 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 Corporate Governance Committee will consider nominees for directors recommended by stockholders and will use the same criteria to evaluate candidates proposed by stockholders.

 

For information on how to nominate a person for election as a director at the 2008 annual meeting, please see the discussion under the heading “Stockholder Proposals and Nominations for 2008 Annual Meeting.”

 

The board of directors adopted the written charter for the Corporate Governance Committee on January 23, 2004, which was amended on February 17, 2006 and November 28, 2006, a copy of which can be found

on the Company’s website at http://ir.nisource.com and will be provided by the Company to any stockholder who requests it in writing from the Company’s Vice President, Administration and Corporate Secretary. Mr. Rolland was Chairman and Drs. Beering and Woo and Messrs. Foster, McCracken, Thompson, Young and Welsh were members of the Corporate Governance Committee throughout 2006. Mr. McCausland has served on the Committee since his election to the Committee on May 10, 2006. The board of directors 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.

 

Environmental, Health and Safety Committee

 

The Environmental, Health and Safety Committee met twice during 2006. 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 Company adopted a charter for this committee in 2001. Mr. Welsh was Chairman and Messrs. McCracken, Thompson and Young were members of the Environmental, Health and Safety Committee throughout 2006. Mr. McCausland has served on the Committee since his election to the Committee on March 28, 2006.

 

Public Affairs and Career Development Committee

 

The Public Affairs and Career Development Committee met twice in 2006. This committee reviews the activities of the Company with regard to charitable and other contributions, employment policies, and stockholder proposals concerning matters relating to the Company’s responsibilities as a corporate citizen. Dr. Woo was Chair of the Committee and Dr. Beering and Messrs. Foster and Rolland were members of the Public Affairs and Career Development Committee in 2006.

 

Officer Nomination and Compensation Committee

 

The Officer Nomination and Compensation Committee met four times in 2006. The board of directors adopted the current charter for the Officer Nomination and Compensation Committee on January 23, 2004, a copy of which can be found on the Company’s website at http://ir.nisource.com and will be provided by the Company to any stockholder who requests it in writing from the Company’s Vice President, Administration and Corporate Secretary. 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:

 

 

The Officer Nomination and Compensation Committee was increased from three directors to four in 2006. 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. Dr. Beering was Chairman and Messrs. McCracken and Welsh were members of the Officer Nomination and Compensation Committee throughout 2006. Mr. McCausland has served on the Committee since his election to the Committee on March 28, 2006.

 

Compensation Committee Interlocks and Insider Participation

 

There are no compensation committee interlocks. Mr. McCausland is the Chairman, Chief Executive Officer and a significant shareholder of Airgas, Inc., one of the Company’s vendors. See “Certain Relationships and Related Transactions.”

 

The table below sets forth all compensation earned by NiSource’s non-employee directors in 2006. Mr. Skaggs is the Company’s only employee director and does not receive any separate compensation for his service on the board.

 

 

 

 

 

Director Compensation.  The Company annually pays each director who is not receiving a salary from the Company (other than Mr. Neale and Mr. Rolland as they served as Chairman) the following fees:

 

 

On November 28, 2006, the board of directors appointed Mr. Rolland as Chairman of the Company. The board also determined that he would be compensated at the rate of $50,000 per calendar quarter, or part thereof, payable in arrears on the last day of each such quarter, in lieu of any other cash compensation to which he would be entitled as a

non-employee director, but in addition to any awards or grants to which he may be entitled under the Nonemployee Director Stock Incentive Plan or by virtue of his re-election to the Board.

 

The restricted shares of common stock or restricted stock units that are granted as part of a director’s annual retainer are granted in four equal installments on the last business day of each calendar quarter. The number of restricted shares of common stock or restricted stock units, as applicable, constituting such quarterly grant is determined by dividing $5,000 by the average of the high and low price of the Company’s common stock on the last business day of the relevant quarter.

 

Election Grants.  Upon election, re-election or appointment to the board, each nonemployee director receives an 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, is determined by dividing the amount of the grant by the average of the high and low price of the Company’s common stock on the date of such election, re-election or appointment. In 2006, the stockholders approved an amendment to the Certificate of Incorporation that declassified the board of directors. As a result, Messrs. Welsh and Young were each elected to a one-year term and each received a grant of restricted stock units with a value of $30,000. In February 2006, at which time the board or directors was still a classified board, Mr. McCausland was appointed to the board of directors to fill the vacancy of a director whose term would expire at the annual meeting of stockholders in 2008. As a result of this appointment, Mr. McCausland received a grant of restricted stock units with a value of $62,500, representing $30,000 per year for two-years and one full month of pro rata service. Because of the two year and one-month grant made to Mr. McCausland in 2006, Mr. McCausland will not receive an additional election grant in 2007 should he be re-elected to the board.

 

The grants of both the restricted shares of common stock and the restricted stock units under the Company’s Nonemployee Director Stock Incentive Plan vest in 20% annual increments, with all of a director’s stock and units vesting five years after the date of award. However, the grants 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. 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 nonemployee 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.

 

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 nonemployee 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 nonemployee 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. The Nonemployee Director Stock Incentive Plan was amended and restated effective January 1, 2005 in order to comply with Section 409A of the Internal Revenue Code.

 

Director Retirement Plans.  The Company’s Nonemployee Director Retirement Plan provides a retirement benefit for each nonemployee director currently serving on the board who was originally elected or appointed to the board on or before December 31, 2001, who has 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 is 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 is paid for 120 months, or the number of full months of service the individual served as a nonemployee director of the Company, whichever is less. Directors first elected prior to 2001 who elected to opt out of the Retirement Plan in 2002 received, under the Company’s Nonemployee 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. The Nonemployee Director Retirement Plan was amended and restated effective January 1, 2005 in order to comply with Section 409A of the Internal Revenue Code.

 

Directors who elected to opt out of the Retirement Plan in 2002 and directors first elected after 2001 do not receive a retirement benefit under the Retirement Plan. Instead, such directors may receive, at the discretion of the Corporate Governance Committee, restricted shares of common stock and/or restricted stock unit grants under the Company’s Nonemployee Director Stock Incentive Plan to ensure that the nonemployee director receives a competitive compensation package. In February 2006, Mr. McCausland was appointed to the board of directors to fill the vacancy of a director whose term would expire at the annual meeting of stockholders in 2008. As a result of this appointment, Mr. McCausland received, as an alternative retirement benefit, a grant of restricted stock units with a value of $26,214, representing $12,583 per year for two-years and one full month of a month of service. Because of the grants made to Mr. McCausland in 2006, Mr. McCausland will not receive an alternative retirement benefit in 2007 should he be re-elected to the board. Mr. Welsh did not receive an alternative retirement benefit because he has chosen to continue to participate in the Nonemployee Director Retirement Plan.

 

Directors’ Charitable Gift Program.  The Company has a Directors’ Charitable Gift Program for nonemployee directors who were serving on the board on or before February 16, 2006, and who were not previously employees of the Company. Under the program, the Company makes a donation to one or more eligible tax-exempt organizations as designated by each eligible director. The Company contributes up to an aggregate of $125,000 for each nonemployee 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 nonemployee 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 is not eligible to receive donations under the program. All current directors (other than Mr. McCausland) who were not previously employees of the Company are eligible to participate in the program. No donations or promises of donations were made in 2006.

 

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 1, 2007, for each of the directors, nominees and named executive officers, and for all directors and executive officers as a group.

 

 

 

 

Overview of Executive Compensation Philosophy and Decisions

 

The Officer Nomination and Compensation Committee (“Committee”) is composed entirely of independent directors. The Committee administers our 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 subsidiaries. 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 program based on the approximate 50th percentile of the range of compensation paid by similar energy companies, taking into account the Company’s performance and individual performance.

 

The Committee generally determines all elements of compensation on an annual basis, currently in January. 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.

 

The Committee engaged Hewitt Associates (“Hewitt”), an independent compensation consulting firm, to advise it with respect to compensation design, comparative compensation practices, and other compensation matters. 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 is independent of the Company’s engagement of Hewitt for these other services. The Committee has instructed Hewitt that it is to act independently of management with respect to the services Hewitt provides to the Committee. The Committee meets with Hewitt without management present at various times throughout the year.

 

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, including all of the named executive officers (other than Mr. Grossman). This meeting also includes a review of succession plans. 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.

 

The Committee considers the performance reviews of senior executives, including all of the named executive officers (other than Mr. Grossman), in making their compensation recommendations. 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 of directors, which takes the final action on these matters. The board accepted all of the Committee’s recommendations in 2006.

 

Elements of Compensation

 

Our executive compensation program consists of: base salary; an annual incentive plan; long-term incentive compensation; 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 historical Company practices.

 

The Committee approves compensation for Robert C. Skaggs, Jr., President and CEO. The Committee makes recommendations to the board with respect to all aspects of compensation for three of our named executive officers: Michael W. O’Donnell, Executive Vice President, and Chief Financial Officer; Christopher A. Helms, Pipeline Group President; and Robert D. Campbell, Senior Vice President, Human Resources. The Committee does not make recommendations to the Board with respect to the base salary or incentive payouts for Mr. Grossman because he is not a direct report of Mr. Skaggs. However, the Committee discusses with the CEO and Senior Vice President, Human Resources the performance and compensation elements of Mr. Grossman’s compensation.

 

For its 2006 compensation considerations, the Committee engaged Hewitt to provide the Committee survey information for (1) a group of energy companies, including gas, electric or combination utility companies and (2) a diversified group of companies representing general industry. The Committee primarily considers the survey information for the energy companies. The Committee considers, to a lesser extent, general industry information for those executive positions where the Company would compete among general industry firms for executive talent. For its 2006 considerations, the Committee approved the following executive compensation comparative groups:

 

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
Cinergy Corp.		SCANA Corporation
CMS Energy Corporation		Sempra Energy
Dominion Resources, Inc.		Southern Company
DTE Energy Company		TXU Corp.
Duke Energy Corporation		WGL Holdings, Inc.
FirstEnergy Corp

General Industry Comparative Group

 

3M Company		Illinois Tool Works Inc.
ALLTEL Company		ITT Industries, Inc.
American Standard Companies Inc.		Kellogg Company
Automatic Data Processing, Inc.		Kennemetal Inc.
Avon Products, Inc.		Kimberly-Clark Corporation
Baxter International Inc.		Masco Corporation
The Black & Decker Corporation		Newell Rubbermaid Inc.
Boise Cascade Corporation		Rockwell Automation, Inc.
Briggs & Stratton Corporation		The Scotts Company
Campbell Soup Company		The Sherwin-Williams Company
The Clorox Company		Tribune Company
FMC Corporation		W.W. Grainger, Inc.
General Mills, Inc.		Whirlpool Corporation
The Goodyear Tire & Rubber Company

 

The Committee considers the surveys and advice provided by Hewitt in determining each executive officer’s base salary, annual incentives and long-term stock-based compensation.

 

Prior to 2006, the Committee set base salaries and performance-based annual cash incentives between the 50th and 75th percentile of the energy and general industry comparative groups. The annual cash-based compensation was then supplemented with restricted or contingent stock awards and option grants under the Long-Term Incentive Plan, again between the 50th and 75th percentile of the comparative groups. 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 made this change to be clear that it intended to align executive compensation with Company performance.

 

Base Salary:  We target 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 Messrs. Skaggs, O’Donnell, Helms, and Campbell annually. The Committee determines base salary based upon the consideration of such factors as level of responsibility, experience, internal equity considerations, historical compensation, and individual performance and contribution to the business objectives. Messrs. Skaggs, O’Donnell and Campbell determine the base salary of Mr. Grossman annually by considering these same factors.

 

For 2006, the Committee recommended to the board that the base salaries of Messrs. Skaggs, Helms and Campbell should remain the same as they were in 2005. With respect to Mr. Skaggs’ base salary for 2006, Mr. Skaggs requested that his base compensation not be increased in light of the Company’s failure to meet its financial performance goals in 2005. The Committee and the Board agreed to keep Mr. Skaggs’ base salary the same for 2006 even though it recognized that the Company had made progress on its four-part business plan and that Mr. Skaggs’ base salary would be below the 50th percentile of salaries in the comparative groups. Both Messrs. Helms and Campbell joined NiSource in 2005. Because they were new to their positions, the Committee determined that an increase in base compensation in 2006 was not warranted.

 

During 2006, the Committee recommended to the Board that Mr. O’Donnell’s base salary be increased to $440,000. The reasons for this recommendation were: Mr. O’Donnell’s base salary had been the same since 2001; his individual performance and contribution to the Company warranted an increase; and the new base salary was near the 50th percentile for similar positions within the Energy Company Comparative Group.

 

For 2006, Messrs. Skaggs, O’Donnell, and Campbell determined that Mr. Grossman’s base salary should be increased from $235,000 to $245,000 because Mr. Grossman had made significant contributions to the Company in

2005, he played a key role in overseeing the financial reporting systems and a base salary of $245,000 was near the 50th percentile for similar positions within the Energy Company Comparative Group.

 

Annual Incentive Plan:   The Committee determines annual incentive ranges for all senior executives in accordance with 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 that is based upon the annual performance of the Company.

 

The incentive ranges for the named executive officers, stated as a percentage of base salary, under the Corporate Incentive Plan in 2006 were:

 

Robert C. Skaggs		35% to 105%
Michael W. O’Donnell		32.5% to 97.5%
Christopher A. Helms		32.5% to 97.5%
Robert D. Campbell		25% to 75%
Jeffrey W. Grossman		25% to 75%

 

The NiSource Corporate Incentive Plan establishes a trigger amount of financial performance below which no annual incentive is paid. At that trigger level, employees in good standing are eligible to receive an incentive in accordance with the plan and their individual incentive opportunity. 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 executive officers, based on the identical overall corporate financial performance measure.

 

In 2006, the trigger amount of financial performance was $1.50 of basic earnings per share from net operating earnings (after accounting for the cost of the incentive plan). In November 2006, the board determined that in the event the Company achieved a level of financial performance of $1.40 basic earnings per share from net operating earnings (after accounting for the cost of the incentive plan), the Company could fund an incentive pool sufficient to pay half of the amount that would have been available at the “trigger” level of financial performance to recognize the contribution of employees for 2006. In making this determination, the board considered: that a primary reason for the Company not meeting the trigger amount of financial performance was the unprecedented level of natural gas usage erosion that the Company experienced in its local distribution companies; the Company’s significant progress on its four-part plan for creating a platform for long-term sustainable growth; and that the Company had not made an incentive payout in 2005. For 2006, the Company achieved $1.43 of basic earnings per share from net operating earnings (after accounting for the cost of the incentive plan). Accordingly, the Company provided an incentive payout for its employees at the reduced level approved by the board in November 2006. However, because the Company did not achieve $1.50 of basic earnings per share from net operating earnings (after accounting for the cost of the incentive plan), it did not make profit sharing contributions to the Company’s Retirement Savings Plan accounts with respect to 2006.

 

For 2006, Mr. Skaggs requested that he not receive an incentive payout due to the Company’s failure to achieve the initial $1.50 trigger. The Committee and the Board agreed to this request.

 

With respect to the award of incentive payouts to senior executives for 2006, the Committee considered overall corporate performance, the contributions of the individual executives, the individual executive’s incentive range and the incentive pool at the reduced “trigger” level approved by the board in November.

 

The Committee recommended that Mr. O’Donnell receive an incentive payout of $154,000 based upon his performance and his individual contributions to the Company’s performance. These contributions included accomplishing a decrease in interest expense in 2006, maintaining investment grade credit ratings, enhancing the Company’s risk management and capital expense programs, and overseeing the amendment of the agreement between the Company’s Whiting Clean Energy unit and BP.

 

The Committee recommended that Mr. Helms receive an incentive payout of $160,000 based upon his performance and his individual contributions to the Company’s performance. These contributions included the development and implementation of a growth strategy in our Gas Transmission and Storage segment. In 2006, that

segment achieved nearly $50 million in optimization revenues and developed a number of projects to expand our transmission and storage assets.

 

The Committee recommended that Mr. Campbell receive an incentive payout of $135,000 for 2006 in accordance with the letter agreement dated August 10, 2005 between the Company and Mr. Campbell.

 

As with base salary, the incentive payouts to Mr. Grossman are determined by Messrs. Skaggs, O’Donnell, and Campbell. They determined that Mr. Grossman should receive an incentive payout of $30,625 and an additional key performer award of $17,500. Messrs. Skaggs, O’Donnell, and Campbell believed these payouts to Mr. Grossman were appropriate due to his contributions in overseeing the Company’s financial reporting systems.

 

For 2007, the Board set the trigger amount of financial performance at $1.35 of basic earnings per share from net operating earnings (after accounting for the cost of the incentive plan).

 

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

 

 

Under the Long-Term Incentive Plan, 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 Long-Term Incentive Plan, and the Company’s total compensation target in establishing long-term incentive awards. The actual compensation value of awards under the Long-Term incentive plan depends on actual stock price appreciation and total stockholder return.

 

In 2003 and 2004 (and with respect to certain employees new to the Company in 2005), the Company made grants of restricted and contingent stock under the Long Term Incentive Plan pursuant to a Time Accelerated Restricted Stock Award Program (“TARSAP”). Generally under the plan, restrictions with respect to the TARSAP awards lapse six years from the date of the grant; however, if at the end of a three year performance cycle the Company meets both a peer group target (a 60% percentile for relative total stockholder return ranking) and an absolute target (a 12% annualized compound total stockholder return), the restrictions with respect to the awards would lapse on the third anniversary of the grants. The three-year TARSAP performance targets were not met on either grant so the vesting will not be accelerated on either grant. The six-year lapse on awards of restricted stock is reduced on a pro rata basis for an executive if he or she terminates employment due to disability or death. The six-year lapse period on awards of contingent stock is reduced on a pro rata basis for an executive if he or she terminates employment, without cause, on or after attaining age 55 with ten years of service, or if he or she dies or becomes disabled, to a minimum of three years to the extent that the end of the six-year period would extend beyond age 62. In the event of a change in control, all restrictions on the TARSAP awards immediately lapse five business days prior to the date such change in control occurs.

 

In 2005, the Company provided awards to incumbent executives under the Long-Term Incentive Plan only in the form of stock options that vested immediately and required a minimum one-year holding period prior to exercise. The Company also made grants of restricted stock to Messrs. Helms and Campbell upon their respective employment by the Company. These grants are subject to the restrictions under the TARSAP described above, as if the grants were made in 2003 and 2004.

 

In addition, the Company granted Mr. Helms a restricted stock award of 10,000 shares. The restrictions on these shares lapse on March 31, 2008; the actual number of shares which vest will be a percentage (not to exceed 100%) determined by the achievement of specified performance goals. These goals are: (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. Further, in the event of retirement, disability, or death, the restrictions would lapse on the first day of the calendar year following any such event.

 

For 2006, the Company did not grant its incumbent executive officers additional options or restricted or contingent shares. This decision was made as part of a number of cost-containment measures for 2006. In making this determination, the Committee considered whether the failure to make additional grants in 2006 would weaken the Company’s ability to retain highly qualified executives. The Committee also considered whether the failure to make additional grants in 2006 would lessen the Company’s commitment to long-term stock price appreciation. The Committee determined that the options and restricted and contingent shares already awarded to incumbent executives provided sufficient value to retain highly qualified executives and provided continued focus on long-term stock price appreciation.

 

In March 2007, the Committee made grants of 320,330 shares of contingent stock to the executives of the Company. The Committee determined that it was appropriate to reintroduce an equity-based component to the executive compensation program, provided that it was aligned with shareholder interest, was tied to performance, and had a long-term vesting schedule in order to provide an incentive for retention of executives.

 

The 2007 contingent stock award is contingent both upon the Company’s performance in 2007 and a service requirement of two years thereafter. In order for participants to receive an award of shares, the Company must achieve performance in 2007 of at least $1.35 of basic earnings per share from net operating earnings (after accounting for the cost of the incentive plan). If that threshold level of performance is reached, the individual executive will earn 100% of the grant designated by the board. If that threshold level of performance is exceeded, the executive can earn up to a maximum of 150% of the grant designated by the Committee. In order for an executive to receive 150% of the grant, the Company must achieve performance in 2007 of at least $1.40 of basic earnings per share from net operating earnings (after accounting for the cost of the incentive plan). In addition to the performance restriction, the shares are also subject to a service restriction of two years. Generally, the earned shares would vest on December 31, 2009, provided the executive remains employed by the Company through December 31, 2009.

 

The Committee believes that the 2007 contingent stock award grants:

 

 

Benefits:  The Company provides a variety of health and welfare benefits to its employees, including a number of health care plans, vision, dental, and life insurance. The named executive 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 executive officers), named executive 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 $44,000) and 401(a)(17) (a limitation on annual compensation of $220,000) of the Internal Revenue Code, reduced by his or her 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 executive 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 executive 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 executive 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. The pension plans of the Company have been determined by the Internal Revenue Service to be qualified under Section 401 of the Internal Revenue Code.

 

Messrs Skaggs, O’Donnell and Grossman participate in the Retirement Plan of Columbia Energy Group Companies, because they were participants in this plan at the time of the acquisition of Columbia Energy Group by NiSource. Messrs. Campbell and Helms 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 his or her opening account balance plus annual pay and interest credits to his or her cash balance account. Pay credits equal a percentage of compensation based on the participant’s combined age and service. Interest is credited to his or her 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, then current 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.

 

Messrs. Skaggs and Grossman 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, Helms, and Campbell 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 all employees of the Company and its affiliates (including all of the named executive 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. All of the named executive officers are participants in the Pension Restoration 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 of directors 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 executive officers to be sure that the perquisites are in line with the Company’s compensation philosophy. The Company provided the following perquisites to certain of its executive officers in 2006:

 

 

The Company reimburses the named executive officers for the payment of personal income taxes in connection with the relocation services and related expenses and travel expenses. Although the Company has determined to discontinue providing annual physical examinations and the leasing of automobiles for its named executive officers, the Company has decided not to discontinue these perquisites for those executives who currently receive them under prior practice.

 

Disclosure of the dollar value of each perquisite provided to the named executive officers in 2006 is set forth in the table in footnote 7 to the Summary Compensation Table presented elsewhere in this proxy statement.

 

Post-Termination Benefits:  The Company maintains an executive severance policy, Change in Control and Termination Agreements with Messrs. Skaggs, O’Donnell, and Grossman, and letter agreements with Messrs. Campbell and Helms regarding payments to be made in connection with the termination of employment of the executive or in the event of a change in control. The Company entered into those 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, totally independent judgment is enhanced to maximize stockholder value. 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

 

Effective March 1, 2007, the Company established stock ownership guidelines for its senior executives. The ownership requirement for our CEO is five times his annual base salary. At the end of 2006, Mr. Skaggs held stock and stock equivalent units with a value of $4,703,353, thereby exceeding his ownership guideline. The other senior executives have a stock ownership guideline of three times their respective annual base salary. At the end of 2006, Mr. O’Donnell held stock and stock equivalent units that exceeded this guideline. The Committee expects senior executives to attain their ownership guideline within five years of becoming subject to the stock ownership guidelines policy.

 

Deductibility 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 other named executive officers, 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 2006. However, the Committee will continue to review the deductibility of compensation under Section 162(m) and related regulations.

 

Total Executive Compensation

 

The Company intends to continue to compensate our executives in accordance with performance. As noted above, both the annual incentive opportunity and the 2007 long-term incentive opportunity for senior executives is 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 executive officers 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

Steven R. McCracken

Peter McCausland

Robert J. Welsh

 

March 6, 2007

 

Summary.  The following table summarizes compensation for services to NiSource and its subsidiaries for 2006 awarded to, earned by or paid to the CEO, Chief Financial Officer and three other most highly compensated executive officers as of December 31, 2006 (collectively these individuals constitute the “Named Officers”).

 

Summary Compensation Table

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

 

No stock or stock options were granted to the Named Officers in 2006.

 

The following table sets forth information concerning plan-based awards under the NiSource Corporate Incentive Plan to the Named Officers in 2006.

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information at fiscal year end concerning outstanding grants of equity awards to the Named Officers, including awards of options to purchase common stock and restricted and contingent stock, including grants made pursuant to a Time Accelerated Restricted Stock Award Program (“TARSAP”) to the Named Officers. No unearned equity incentive plan awards existed at fiscal year-end. No options were exercised and no restricted or contingent stock vested in 2006.

 

 

 

 

 

Pension Benefits

 

 

 

 

Pension Benefit.  Messrs. Skaggs and Grossman currently would receive the final average pay benefit under the Retirement Plan of Columbia Energy Group Companies. The formula for the normal 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.

 

Compensation means base pay and “banked” vacation, including any salary reduction contributions made for the employee pursuant to a plan maintained by the Company or an affiliate under Code Section 125 or 401(k), but

excluding any amounts deferred to a nonqualified plan maintained by the Company. In accordance with Internal Revenue Code limits, the maximum compensation taken into account in determining benefits was limited to $220,000 in 2006.

 

With respect to the Retirement Plan of Columbia Energy Group Companies in the case of Mr. O’Donnell and the NiSource Pension Plan in the case of Messrs. Helms and Campbell, Messrs. O’Donnell, Helms, and Campbell elected to receive the new cash balance benefit. Under the new cash balance benefit, an account is maintained for each participant, which consists of (i) an opening account balance equal to the lump sum actuarial equivalent of his accrued benefit under the plan as of December 31, 2005, (ii) compensation credits made by the Company as of the end of each calendar year that range from 4%-6% of compensation, plus 1% of compensation above 1/2 of the taxable Social Security wage base, and (iii) interest credits made by the Company as of the end of each calendar year, based on the 30-year Treasury securities rate for the September preceding each such year (subject to a minimum interest date of 4%). Compensation means base pay, bonuses and “banked” vacation, including any salary reduction contributions made pursuant to a plan maintained by the Company under Section 125 or 401(k) of the Code, but excluding any amounts deferred to a nonqualified plan maintained by the Company. In accordance with Internal Revenue Code limits, the maximum compensation taken into account in determining benefits was limited to $220,000 in 2006.

 

The normal form of benefit under the Retirement Plan of Columbia Energy Group Companies is a single life annuity in the case of an unmarried participant and a 50% joint and survivor annuity in the case of a married participant. The normal form of benefit under the NiSource Pension Plan is a single life annuity in the case of an unmarried participant, a 50% joint and survivor annuity in the case of a married participant in the final average pay option or the original cash balance feature, and a 50% joint and survivor pop-up annuity in the case of a participant in the new cash balance feature. Optional forms of payment are available under the pension plans, depending on the participant’s marital status and chosen benefit feature. All optional forms are the actuarial equivalent of the applicable normal form of payment except that the benefit payable to a participant in the new cash balance feature under the 50% joint and survivor pop-up annuity will be reduced to reflect the value of the pop-up feature.

 

Eligibility.  A participant is eligible to receive a benefit under the Retirement Plan of Columbia Energy Group Companies after completing five years of vesting service. Under the plan, a participant is eligible to receive (i) a normal retirement benefit if his employment terminates on or after the later of his or her attaining the full social security retirement age or the fifth anniversary of the date he or she became a participant (“normal retirement date”), (ii) an early retirement benefit if his or her employment terminates on or after attaining age 60 with five years of credited service or age 55 with ten years of credited service (reduced in either case to reflect commencement prior to age 65), (iii) a delayed retirement benefit if he or she remains an employee after his or her normal retirement date or (iv) a vested retirement benefit upon attaining his or her vested retirement age (age prior to early retirement age after completing at least five years of vesting service).

 

A participant is eligible to receive a benefit under the NiSource Pension Plan after completing five years of vesting service. Under the plan, a participant is eligible to receive (i) a normal retirement benefit if his or her employment terminates on or after the later of his or her attaining age 65 or the fifth anniversary of the date he or she became a participant, (ii) an early retirement benefit if he or she terminates employment after age 55 with ten years of credited service (reduced to reflect commencement prior to age 65, except for a participant who terminates employment on or after age 60 with 25 years of credited service), (iii) a disability benefit if he or she terminates employment after he or she has completed three years of credited service and is disabled due to an injury on the job other than an intentionally self-inflicted injury or (iv) a deferred vested benefit if he or she terminates employment after completing five years of service.

 

Assumptions.  The assumptions used in calculating the present value of the accumulated benefit are set forth in Note 11 — Pension and Other Postretirement Benefits in the footnotes to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company has not granted any extra years of credited service under the plans identified above, other than as noted below under “Potential Payments upon Termination of Employment or a Change In Control of the Company.”

 

Pension Restoration and Supplemental Executive Retirement Plan.  For discussion of the Pension Restoration and Supplemental Executive Retirement Plan, please see the Compensation Discussion and Analysis.

 

Messrs. O’Donnell and Grossman are the only Named Officers who are currently eligible for early retirement under the plans in which they participate. No plan benefits were paid to any Named Officer in 2006.

 

Nonqualified Deferred Compensation

 

 

 

 

Potential Payments upon Termination of Employment or a Change in Control
of the Company

 

The Company provides certain benefits to eligible employees upon certain types of termination of employment, including a termination of employment involving a change in control of the Company. These benefits are in addition to the benefits to which the employees would be entitled upon a termination of employment generally (i.e., (i) vested retirement benefits accrued as of the date of termination, (ii) stock-based awards that are vested as of the date of termination, (iii) the right to continue medical coverage pursuant to COBRA, and (iv) severance payments to salaried employees upon an involuntary termination of employment in accordance with the Company’s severance policies). The incremental benefits that pertain to the Named Officers are described below.

 

NiSource Executive Severance Policy.  The NiSource Executive Severance Policy was established to provide severance pay and other benefits to terminated executive-level employees who satisfy the terms of the policy. An employee is not eligible to receive benefits under the policy if his or her termination of employment results in the employee being eligible for a payment under a Change in Control and Termination Agreement.

 

A participant becomes entitled to receive benefits under the policy only if he or she is terminated for any of the following reasons: (a) the employee’s position is eliminated due to a reduction in force or other restructuring; (b) the employee’s position is required by the Company to relocate more than 50 miles from its current location and the employee chooses not to relocate; or (c) the employee is constructively terminated. Constructive termination means (1) the scope of the participant’s position is changed materially or (2) the participant’s base pay is reduced by a material amount or (3) the participant’s opportunity to earn a bonus under a Corporate Incentive Plan of the Company is materially reduced or is eliminated, and, in any such event, the participant chooses not to remain employed in such position.

 

Under the severance policy, an eligible employee receives severance pay in the amount of 52 weeks of base salary at the rate in effect on the date of termination. The employee also receives: a lump sum payment equivalent to 130% of 52-weeks of COBRA (as defined in the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974) continuation coverage premiums; and outplacement services.

 

All of the Named Officers are eligible to receive benefits under the severance policy.

 

Change in Control and Termination Agreements and Employment Agreements.  The Company has Change in Control and Termination Agreements with Messrs. Skaggs, O’Donnell, and Grossman. These agreements have been in place since February 1, 2001. The Company entered into those 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, totally independent judgment is enhanced to maximize stockholder value. The agreements can be terminated on three years’ notice and provide for the payment of specified benefits if the executive terminates employment for good reason or is terminated by the Company for any reason other than good cause within 24 months following certain changes in control. Each of these agreements also provides for payment of these benefits if the executive voluntarily terminates employment for any reason during a specified one-month period (for Messrs. Skaggs and Grossman, the 13th month and for Mr. O’Donnell, the 7th month) within 24 months following a change in control. No amounts will

be payable under the agreements if the executive’s employment is terminated by the Company for good cause. For purposes of the Change in Control and Termination Agreements:

 

“change in control” shall be deemed to take place on the occurrence of any of the following events: (i) the acquisition by an entity, person or group of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of capital stock of the Company entitled to exercise more than 30% of the outstanding voting power of all capital stock of NiSource Inc. entitled to vote in elections of directors (“Voting Power”); (ii) the effective time of (1) a merger or consolidation of the Company with one or more other corporations as a result of which the holders of the outstanding Voting Power of the Company immediately prior to such merger or consolidation (other than the surviving or resulting corporation or any affiliate or associate thereof) hold less than 50% of the Voting Power of the surviving or resulting corporation, or (2) a transfer of 30% of the Voting Power, or a “substantial portion of the property,” of the Company other than to an entity of which the Company owns at least 50% of the Voting Power; or (iii) the election to the board of directors of the Company of candidates who were not recommended for election by the board of directors of the Company in office immediately prior to the election, if such candidates constitute a majority of those elected in that particular election. Notwithstanding the foregoing, a Change in Control shall not be deemed to take place by virtue of any transaction in which the executive is a participant in a group effecting an acquisition of the Company and, after such acquisition, the executive holds an equity interest in the entity that has acquired the Company.

 

“good cause” shall be deemed to exist if, and only if: (i) the executive engages in acts or omissions constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing or malfeasance, in each case that results in substantial harm to the Company; or (ii) the executive is convicted of a criminal violation involving fraud or dishonesty.

 

“good reason” shall be deemed to exist if, and only if: (i) there is a significant change in the nature or the scope of executive’s authorities or duties; (ii) there is a significant reduction in the executive’s monthly rate of base salary, his opportunity to earn a bonus under an incentive bonus compensation plan maintained by the Company or his benefits; or (iii) the Company changes by 100 miles or more the principal location in which executive is required to perform services.

 

The agreements provide for a payment of two (in the case of Mr. Grossman) or three (in the case of Messrs. Skaggs and O’Donnell) times the executive’s current annual base salary and target incentive bonus compensation. The executive will also receive a pro rata portion of the executive’s targeted incentive bonus for the year of termination. The executive would also receive benefits from the Company that would otherwise be earned during the applicable two or three-year period following the executive’s termination under the Company’s Supplemental Executive Retirement Plan, Pension Restoration Plan and the relevant qualified pension plan. With respect to Messrs. Skaggs and O’Donnell, the Company will increase the payment made to the executive as necessary to compensate the executive on an after-tax basis for any parachute excise tax imposed on the payment of amounts under the contracts. Any payment to Mr. Grossman under his change in control agreement will be capped at the maximum amount allowed that avoids any excess parachute payment and related excise tax.

 

During the applicable two or three-year period following the executive’s termination, the executive and his or her spouse or other dependents will continue to be covered by applicable health or welfare plans of the Company. If the executive dies during such two or three-year period following the executive’s termination, all amounts payable to the executive will be paid to a named beneficiary. In the event of a change in control, all stock options, restricted stock awards and contingent stock awards which have been granted to each of the Named Officers (including the CEO) under the Company’s Long-Term Incentive Plan will immediately vest.

Pursuant to a letter agreement, dated March 15, 2005 between the Company and Mr. Helms, in the event of a change in control of the Company prior to April 1, 2006, Mr. Helms would receive a payment of one year of base pay and targeted bonus and all of his long-term incentive plan grants would vest. Each month from April 1, 2006 until April 1, 2007, if a change of control occurs during that period, the amount payable to Mr. Helms under this change in control would increase by one month, capped at a total possible payment of two years of base pay and targeted bonus. Any payment under this change in control would be in lieu of any benefit under the NiSource Executive Severance Policy.

 

Pursuant to a letter agreement dated August 10, 2005 between the Company and Mr. Campbell, in the event Mr. Campbell’s employment is involuntarily terminated without cause prior to September 1, 2007, Mr. Campbell would receive a severance payment equal to his salary for the balance of months remaining in his initial term of employment (three years) and a lump sum payment equivalent to 130% of the COBRA continuation premiums due for the severance period in lieu of any continued medical, dental, vision and other welfare benefits offered by the Company.

Potential Payments Upon Termination of Employment.  The table below represents amounts payable for the events described, assuming that such events occurred on December 29, 2006.