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

 

 

NOTICE OF ANNUAL MEETING

 

April 3, 2008

 

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 Grand Wayne Convention Center, 120 West Jefferson Boulevard, Fort Wayne, Indiana 46802 on Tuesday, May 13, 2008, 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, 2008 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

 

Important Notice Regarding the Availability of Proxy Materials
For the Annual Meeting of Stockholders to be Held on May 13, 2008

 

The Proxy Statement and 2007 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 2008 and “FOR” management’s proposal to amend the Company’s Certificate of Incorporation to eliminate all supermajority vote requirements (the “Charter Amendment 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, 2008. 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 subsidiaries. To aid in the solicitation of proxies, the Company has retained BNY Mellon Shareowner Services 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, 2008 is the date for determining stockholders entitled to notice of and to vote at the Annual Meeting. As of March 17, 2008, 274,177,301 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 2008. We do not believe that brokers and most other nominees will have discretionary authority to vote your shares with respect to the Charter Amendment 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-id 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, 2008, 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.

 

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 registered public accountants for 2008 requires the affirmative vote of the majority of the shares present in person or represented by proxy at the meeting and entitled to vote. Approval of the Charter Amendment Proposal requires the affirmative vote of eighty percent (80%) of the outstanding shares of common stock of the Company.

 

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 2008, and against the Charter Amendment 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. However, on February 7, 2008, Steven McCracken passed away creating a vacancy on the board. Eleven directors will be elected at this year’s Annual Stockholder’s meeting and each will serve until the 2009 Annual Meeting.

 

On July 23, 2007, Peter McCausland resigned from the board of directors. At the recommendation of the Corporate Governance Committee, the board of directors elected Deborah S. Coleman to fill the vacancy of Mr. McCausland on August 28, 2007. Ms. Coleman was identified by Russell Reynolds Associates, Inc., a third-party search firm engaged by the board for the specific purpose of identifying highly qualified candidates for potential nomination to the board.

 

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 13, 2008 and each will serve until the 2009 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 other than Messrs. Abdoo and Jesanis currently serve on the board of directors. Messrs Abdoo and Jesanis were also initially identified by Russell Reynolds Associates, Inc.

 

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 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 Mr. 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 separately from management two times in 2007. 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 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 seven times during 2007. In May 2007, the Corporate Governance Committee recommended to the board the restructuring of its standing committees. The board approved the creation of the Finance Committee to assist the board in the review of the Company’s financial plans and recommended the elimination of the Executive Committee and the Public Affairs and Career Development and Executive Committee. The responsibilities of the Public Affairs and Career Development Committee were divided between the Corporate Governance Committee and the Officer Nomination and Compensation Committee. The board now has the following five standing committees:

 

 

During 2007, each director attended at least 77% 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 who passed away on February 7, 2008. 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 Messrs. McCausland and McCracken) who were on the board in May 2007, attended the 2007 Annual Meeting of Stockholders.

 

Audit Committee

 

The Audit Committee met eight times in 2007.  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. Foster was Chair of the Audit Committee throughout 2007. Dr. Woo and Messrs. Rolland, Thompson and Young were members of the Audit Committee throughout 2007. Mr. Kittrell was elected to the committee upon his election to the board on May 8, 2007. Mr. McCausland served on the Audit Committee until his resignation on July 23, 2007. 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 registered public accountants, both for 2007 and 2008, 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 2007. 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 of directors when it concludes changes are needed. The Committee is also responsible for the evaluation of the CEO’s performance. The 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 Committee reports the committee’s findings to the Officer Nomination and Compensation Committee, which uses these findings to set CEO compensation.

 

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.

 

For information on how to nominate a person for election as a director at the 2009 Annual Meeting, please see the discussion under the heading “Stockholder Proposals and Nominations for 2009 Annual Meeting.”

 

The board of directors adopted the written charter for the Committee on January 23, 2004, which was amended on February 17, 2006, November 28, 2006, and May 8, 2007. A copy of the Charter 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 Chair and Drs. Beering and Woo and Messrs. Foster, McCracken, Thompson and Young were members of the Corporate Governance Committee throughout 2007. Ms. Coleman has served on the committee since her appointment to the Board on August 28, 2007 and Messrs. Kittrell and Nutter have served on the committee since being elected to the board on May 8, 2007. 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 2007. 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, 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. Dr. Woo was elected as Chair of the Committee on May 8, 2007 replacing Mr. Welsh who retired from the board on May 8, 2007. Messrs. McCracken and Young were members of the Environmental, Health and Safety Committee throughout 2007. Ms. Coleman has served on the Committee since her appointment to the board on August 28, 2007, and Dr. Beering and Mr. Nutter have served on the Committee since being elected to the Committee on May 8, 2007.

 

Finance Committee

 

The board of directors created the Finance Committee on May 8, 2007. The Committee met three times during 2007. This committee is responsible for monitoring the financial plans of the company, capital structure and financial risk. The board of directors adopted a written charter for the Committee on May 8, 2007, 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. Thompson was elected as Chair of the committee on May 8, 2007 and Messrs. Foster, Kittrell, McCracken, and Nutter have served on the committee since it was created.

 

Officer Nomination and Compensation Committee

 

The Officer Nomination and Compensation Committee met four times in 2007. The board of directors adopted the current charter for the Officer Nomination and Compensation Committee on January 23, 2004, which was amended on May 8, 2007, 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 four directors to five in 2007. 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 Chair and Mr. McCracken was a member of the Committee throughout 2007. Dr. Woo and Mr. Nutter were elected to the Committee on May 8, 2007 and Ms. Coleman has served on the Committee since her appointment to the board of directors on August 28, 2007.

 

Compensation Committee Interlocks and Insider Participation

 

There are no compensation committee interlocks.

 

Director Compensation.  The Company currently 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 March 25, 2008, the board approved a recommendation by the Corporate Governance Committee to change the fees paid to directors. Beginning in May, 2008 non-management directors will receive an annual $165,000 retainer, consisting of $82,500 in cash and $82,500 annual award of restricted stock units or restricted shares or a combination thereof, under the Company’s Nonemployee Director Stock Incentive Plan. The chair of the following committees will also receive annual cash compensation, paid quarterly and in arrears as follows: Audit, $20,000; Officer Nomination and Compensation, $18,000; and Finance and Environmental, $15,000.

 

Mr. Rolland served as Chairman of the Board and Chairman of the Corporate Governance Committee of the Company for all of 2007. The board 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. As part of the Company’s new director compensation program, beginning in May, 2008 the independent Chairman will receive the same fees paid to non-management directors, except that he or she will also receive additional cash compensation of$33,720 per calendar quarter, paid in arrears.

 

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 the value of the grant by the closing 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 has received 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, 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. Each member of the board of directors elected on May 8, 2007 received an election grant with a value of $30,000, except for Mr. McCausland. In February 2006, at which time the board of 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 did not receive an additional election grant in 2007 on his election to the board. Ms. Coleman was appointed to the board of directors to fill the vacancy of Peter McCausland on August 28, 2007. As a result of this appointment, Ms. Coleman received a grant of restricted stock units with a value of $20,000 representing eight months of the annual election grant. On March 25, 2008 the board eliminated the election grants discussed herein.

 

The grants of both the restricted shares of common stock and the restricted stock units under the Company’s Nonemployee Director Stock Incentive Plan historically have vested in 20% annual increments, with all of a director’s stock and units vesting five years after the date of award. In addition, those grants would have vested 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. Effective March 25, 2008 all outstanding grants and future grants of restricted stock units will vest immediately. 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 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 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 Plan.  The Company’s Nonemployee Director Retirement Plan provided a retirement benefit for each nonemployee director 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. On March 25, 2008, the board elected to terminate any future accrual of benefits under the Retirement Plan beyond May 13, 2008. Directors who did not previously opt out of the Retirement Plan will receive the value of their accrued benefit in cash or restricted stock units under the Nonemployee Director Stock Incentive Plan, or a combination thereof.

 

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 received 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 May 2007, Messrs. Foster, Kittrell, McCracken, Nutter, Rolland, and Thompson were elected to the board of directors at the annual meeting of stockholders. As a result of their election, each received, as an alternate retirement benefit, a grant of restricted stock units with a value of $18,825. In February 2006, at which time the board of 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 as an alternative retirement benefit with a value of $26,214, representing $12,583 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 did not receive an alternative retirement grant in 2007 on his election to the board, except that he received additional restricted stock units with a value of $6,242 representing the increased value of the alternate benefit when the value was changed by the board in April 2007. In August 2007, Ms. Coleman was appointed to the board of directors to fill the vacancy of a director who resigned. As a result of this appointment, Ms. Coleman received, as an alternative retirement benefit, a grant of restricted stock units with a value of $12,550. Drs. Beering and Woo and Mr. Young did not receive an alternative retirement benefit because they have chosen to continue to participate in the Nonemployee Director Retirement Plan. As part of the Company’s new director compensation program, the board has elected to terminate any future grants of restricted stock units to directors who opted out of the Retirement Plan on 2002 or to those directors elected or appointed after 2001.

 

Directors’ Charitable Gift Program.  On March 25, 2008, the board approved amendments to the Directors’ Charitable Gift program such that it will terminate on December 31, 2008. Historically under the Program the Company would make a donation 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 would contribute 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. As a result of the amendments to the Program, Dr. Woo and Messrs. Foster and Thompson are each eligible to recommend contributions of $125,000 by the Company to eligible organizations prior to the termination date. No donations or promises of donations were made in 2007.

 

The table below sets forth all compensation earned by NiSource’s non-employee directors in 2007. Mr. Skaggs is the Company’s only employee director and does not receive any separate compensation for his service on the board. Messrs. Neale and Welsh did not stand for election to the board in May 2007, Mr. McCausland resigned from the board on July 23, 2007, and Ms. Coleman was appointed to the board on August 28, 2007.

 

 

 

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 3, 2008 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 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 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 the services of Hewitt Associates (“Hewitt”), an independent 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 is 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 NiSource, 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.

For its 2007 compensation considerations, the Committee engaged Hewitt to provide the Committee survey information for (1) a group of energy companies, including gas, electric, combination utility, and natural gas transmission 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 2007 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
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*

 

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		Officemax Inc.*
Briggs & Stratton Corporation		Rockwell Automation, Inc.
Campbell Soup Company		The Scotts Company
The Clorox Company		The Sherwin-Williams Company
FMC Corporation		Tribune Company
General Mills, Inc.		W.W. Grainger, Inc.
The Goodyear Tire & Rubber Company		Whirlpool Corporation

 

The companies with an asterisk were added by the Committee for consideration in its compensation determinations in January 2008. The Committee considers the surveys and advice provided by Hewitt in determining each executive officer’s base salary, annual incentives and long-term equity-based compensation.

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 2007, the Committee considered the performance reviews of senior executives in making their 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 of directors, which takes the final action on these matters. The board accepted all of the Committee’s recommendations in 2007.

 

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 the compensation of our senior executive officers, which includes all of our named executive officers other than Mr. Grossman.

 

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.

 

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 the Company’s senior executives 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. For 2007, Messrs. Skaggs, O’Donnell and Campbell determined the base salary of Mr. Grossman by considering these same factors.

 

For 2007, the Committee recommended to the board that the base salaries of Messrs. Skaggs and Campbell should remain the same as they were in 2006. Mr. Skaggs requested that his base salary not be increased for 2007. The Committee and the board agreed to honor Mr. Skaggs’ request for 2007 even though they recognized that the Company had made significant progress on its four-part business plan, the Company had met the goals of its 2007 financial plan, and that Mr. Skaggs’ base salary would remain below the 50th percentile of salaries in the comparative groups.

With respect to Mr. Campbell, the Committee determined that an increase in base compensation in 2007 was not warranted because Mr. Campbell’s base compensation was near the 50th percentile for similar positions within the Energy Company Comparative Groups and because Mr. Campbell would receive a guaranteed bonus payment for 2007 pursuant to his employment agreement with the Company.

 

The Committee recommended to the Board that Mr. O’Donnell’s base salary be increased to $450,000 effective March 1, 2007 (the Company generally makes base salary adjustments for exempt employees effective March 1 of each calendar year). The Committee’s reasons for this recommendation were that Mr. O’Donnell had performed effectively as Chief Financial Officer and that the proposed base salary was near the 50th percentile for similar positions within the Energy Company Comparative Group.

 

The Committee also recommended to the Board that Mr. Helms’ base salary be increased to $500,000 effective March 1, 2007. The Committee’s bases for this recommendation were to recognize Mr. Helms’ leadership of NiSource’s Gas Transmission and Storage Operations, including the development and implementation of a growth strategy, and to remain competitive within the natural gas transmission industry for senior executives.

 

Messrs. Skaggs, O’Donnell, and Campbell determined that Mr. Grossman’s base salary should be increased from $245,000 to $252,500 effective March 1, 2007 because Mr. Grossman continued to effectively oversee the Company’s financial reporting systems and a base salary of $252,500 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 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.

 

The incentive ranges for the named executive officers, stated as a percentage of base salary, under the Corporate Incentive Plan in 2007 were:

 

Robert C. Skaggs, President and Chief Executive Officer		35% to 105%
Michael W. O’Donnell, Executive Vice President and Chief Financial Officer		32.5% to 97.5%
Christopher A. Helms, Executive Vice President and Group Chief Executive Officer		32.5% to 97.5%
Robert D. Campbell, Senior Vice President, Human Resources		25% to 75%
Jeffrey W. Grossman, Vice President and Controller		25% to 75%

 

Under the NiSource Corporate Incentive Plan, the Board annually 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 at the bottom of the individual’s incentive opportunity range. The Committee retains the discretion once the trigger is met to pay incentives under the NiSource Corporate Incentive Plan within the incentive opportunity range for each executive shown above. 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 2007, the trigger amount of financial performance was $1.35 of net operating earnings per share (after accounting for the cost of any incentive payout). For 2007, the Company achieved $1.37 of net operating earnings per share from net operating earnings (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 incentive pool for 2007 at a level of 125% of trigger in light of the Corporation’s performance and to recognize the employees of the Corporation for their contributions. The Board accepted the Committee’s recommendation. Further, the

Company made a profit sharing contribution of 0.5% of an employee’s eligible earnings, including the named executive officers, to the respective employees’ accounts in the Company’s Retirement Savings Plan.

 

The Company focuses on net operating earnings for determining financial performance for its incentive compensation plans, which is a non-GAAP measure, because management believes this measure better represents the fundamental earnings strength and performance of the company. NiSource uses this measure internally for budgeting, for reporting to the board of directors. Net operating earnings is defined as income from continuing operations determined in accordance with Generally Accepted Accounting Principles (GAAP) adjusted for certain items. Adjustments reflected in this measure are primarily weather, restructuring and transition costs related to the outsourcing contract with IBM, gains and losses on the sale of assets, certain reserve adjustments and other items.

 

Mr. Skaggs requested that he not receive an incentive payout for 2007. Although the Company accomplished the financial performance for a payout under the 2007 incentive plan, the market price of the Company stock declined during 2007. Further, as described below, Mr. Skaggs, like other recipients of the 2007 LTIP grant, received an increase in the number of shares awarded to him as a result of the Company’s 2007 financial performance. Mr. Skaggs explained to the Committee that in light of the Company’s stock price and his receipt of additional shares under the 2007 LTIP grant he did not believe that an incentive payout was warranted. The Committee and the board 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 executive officers, for 2007. 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 recommendation for incentive payouts.

 

The Committee accepted Mr. Skaggs’ recommendation that Mr. O’Donnell receive an incentive payout of $185,000 based upon his performance and his individual contributions to the Company’s performance. His contributions included the refinancing of $800 million in Company debt on favorable terms, maintaining investment grade credit ratings, and the ongoing enhancement of the Company’s capital expense program.

 

The Committee accepted Mr. Skaggs’ recommendation that Mr. Helms receive an incentive payout of $225,000 based upon his performance and his individual contributions to the Company’s performance. His contributions included the delivery of key growth projects, the attainment of key revenue metrics, the divestiture of certain non-core assets, and the reorganization of the natural gas transmission and storage business unit.

 

Under the terms of the letter agreement dated August 10, 2005 between the Company and Mr. Campbell, the Company agreed that Mr. Campbell would receive a minimum bonus in 2007 of at least $135,000. The Committee accepted Mr. Skaggs’ recommendation that Mr. Campbell receive an incentive payout of $140,000 for 2007 based upon his performance and his individual contributions to the Company’s performance. His contributions included redefining the Company’s employee proposition in the areas of employee engagement, compensation and benefits, performance management, and leadership development.

 

The Committee accepted Mr. Skaggs’ recommendation that Mr. Grossman receive an incentive payout of $80,000 based upon his performance and his individual contributions in overseeing the Company’s financial reporting systems. Further, Messrs. Skaggs, O’Donnell, and Campbell determined that Mr. Grossman should receive an additional key performer award of $20,000 to recognize his contributions.

 

For 2008, the board set the trigger amount of financial performance at $1.25 of net operating earnings per share, the target amount of financial performance at $1.30 of net operating earnings per share, and the stretch amount of financial performance at $1.35 of net operating earnings per share. All of these financial measures are after accounting for the cost of any incentive payout.

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 target 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.

 

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 LTIP 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 met specified performance targets, 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 so the vesting was not accelerated on either grant. The six-year lapse period 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 LTIP 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 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 was 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 have achieved 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 was reached, the individual executive would earn 100% of the grant designated by the Committee. If that threshold level of performance was exceeded, the executive could earn up to a maximum of 150% of the grant designated by the Committee. The Company’s performance in 2007 of $1.37 net operating earnings per share resulted in the participants receiving 120% of the number of shares awarded. In addition to the performance restriction, the shares are also subject to a service restriction of two years. Generally, the earned shares will vest on December 31, 2009, provided the executive remains employed by the Company through December 31, 2009.

 

In determining the grants to be awarded, the Committee considered the survey information provided by Hewitt, as well as the performance of the individuals and the desire to create a long-term incentive for the individuals to remain with the organization. With respect to Mr. Skaggs, the Committee also considered that Mr. Skaggs did not receive an increase in his base salary for 2007 and did not receive an incentive payout for 2006. The Committee recommended and the Board authorized 2007 contingent stock awards to the named executive officers in the following amounts:

 

 

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, long-term disability 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 $45,000) and 401(a)(17) (a limitation on annual compensation of $225,000) 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.

 

Messrs. Skaggs, O’Donnell and Grossman 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. 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 2007:

 

 

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 receive them under prior practice.

 

Disclosure of the dollar value of each perquisite provided to the named executive officers in 2007 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 a letter agreement with Mr. 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. For Messrs. Skaggs, O’Donnell and Grossman, their payments include vested phantom stock

units that were given as an inducement for the executives to remain employed with the Company. 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 2007, Mr. Skaggs held stock and stock equivalent units with a value that exceeds his ownership guideline. The other senior executives have a stock ownership guideline of three times their respective annual base salary. At the end of 2007, 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.

 

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 executive 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 2007. 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 executive 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 Mr. Skaggs and Mr. O’Donnell could be subject to these taxes. The Company is reviewing these agreements in connection with its Section 409A compliance review discussed in the paragraph below.

 

Finally, Section 409A of the Internal Revenue Code imposes additional taxes on service providers, including directors and named executive officers, who deferred compensation in a manner that does not comply with Section 409A. To assist in preventing the imposition of additional tax under Section 409A, the Company is reviewing 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 2007 annual incentive opportunity and the 2007 long-term incentive opportunity for senior executives 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 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 the Company’s Annual Report on Form 10-K for the year ending December 31, 2007, and 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
Deborah S. Coleman
W. Lee Nutter
Carolyn Y. Woo

 

March 3, 2008

 

Summary.  The following table summarizes compensation for services to NiSource and its subsidiaries for 2007 awarded to, earned by or paid to the CEO, Chief Financial Officer and three other most highly compensated executive officers as of December 31, 2007 (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 2007.

 

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 2007.

 

 

 

 

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, and grants made pursuant to a Time Accelerated Restricted Stock Award Program (“TARSAP”) to the Named Officers. No options were exercised and no restricted or contingent stock vested in 2007.