CONSOL Energy DEF 14A 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:
CONSOL Energy Inc.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
CONSOL Energy Inc.
1000 CONSOL Energy Drive
Canonsburg, Pennsylvania 15317
Telephone (724) 485-4000
Annual Meeting of Shareholders
to be held on April 28, 2009
You are cordially invited to attend CONSOL Energy Inc.s 2009 Annual Meeting of Shareholders on April 28, 2009, at 11:30 a.m., Eastern Time, at the Hyatt Regency Pittsburgh International Airport, Allegheny Room, 1111 Airport Boulevard, Pittsburgh, Pennsylvania 15231.
The enclosed Notice of Annual Meeting and the Proxy Statement describe the various matters to be acted upon during the meeting. In addition, there will be a report on the state of CONSOL Energy Inc.s business and an opportunity for you to ask questions on subjects related to CONSOL Energy Inc.s operations.
Whether or not you plan to attend the Annual Meeting, you can ensure that your shares are represented at the meeting by promptly voting and submitting your proxy by telephone or by internet (as described in the enclosed instructions, if applicable), or by completing and returning the enclosed proxy card or voting instruction card, which requires no additional postage if mailed in the United States.
If you need assistance, please contact CONSOL Energy Inc.s Investor Relations Office at 724-485-4000. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 accompanies these enclosures.
The Annual Meeting gives us an opportunity to review CONSOL Energy Inc.s results and discuss the steps CONSOL Energy Inc. has taken to assure a strong performance in the future. We appreciate your ownership of CONSOL Energy Inc., and I hope you will be able to join us at this years Annual Meeting.
March 23, 2009
CONSOL Energy Inc.
1000 CONSOL Energy Drive
Canonsburg, PA 15317
Telephone (724) 485-4000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 28, 2009
Notice is hereby given that the Annual Meeting of Shareholders of CONSOL Energy Inc. will be held on April 28, 2009, at 11:30 a.m., Eastern Time, at the Hyatt Regency Pittsburgh International Airport, Allegheny Room, 1111 Airport Boulevard, Pittsburgh, Pennsylvania for the following purposes:
By resolution of the Board of Directors, we have fixed the close of business on March 5, 2009, as the record date for determining the shareholders of CONSOL Energy Inc. entitled to notice of, and to vote at, the Annual Meeting and any adjournment thereof.
Whether or not you plan to attend the Annual Meeting, you can ensure that your shares are represented at the meeting by promptly voting and submitting your proxy by telephone or by internet (as described in the enclosed instructions, if applicable), or by completing and returning the enclosed proxy card or voting instruction card, which requires no additional postage if mailed in the United States. Your prompt response will be helpful and your cooperation is appreciated. If you attend the meeting, you may withdraw your proxy and vote in person, if you so choose.
IMPORTANT NOTICE: REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON APRIL 28, 2009:
The Proxy Statement, Annual Report on Form 10-K and related materials are available at http://materials.proxyvote.com/20854P.
March 23, 2009
TABLE OF CONTENTS
CONSOL Energy Inc.
1000 CONSOL Energy Drive
Canonsburg, PA 15317
INFORMATION ABOUT THE ANNUAL MEETING
March 23, 2009
The enclosed proxy is being solicited by the Board of Directors (the Board) of CONSOL Energy Inc. (CONSOL Energy or the Corporation) to be voted at the Annual Meeting of Shareholders to be held on April 28, 2009, at 11:30 a.m., Eastern Time, at the Hyatt Regency Pittsburgh International Airport, Allegheny Room, 1111 Airport Boulevard, Pittsburgh, Pennsylvania 15231 (the Annual Meeting).
The specific proposals to be considered, and voted upon, at the Annual Meeting are summarized in the Notice of Annual Meeting of Shareholders. Each proposal is described in more detail in this Proxy Statement.
The persons named as proxies on the accompanying proxy card have informed CONSOL Energy of their intention, if no contrary instructions are given, to vote the shares represented by such proxies:
The Board does not know of any business to be brought before the Annual Meeting other than as indicated in the Notice of Annual Meeting of Shareholders.
CONSOL Energys Annual Report to Shareholders and Annual Report on Form 10-K are being mailed to shareholders together with this Proxy Statement on or about March 23, 2009 to holders of record, as of March 5, 2009, of CONSOL Energy common stock.
Record Date and Vote Required for Approval
The record date with respect to this solicitation is March 5, 2009. All holders of record of CONSOL Energy common stock as of the close of business on March 5, 2009 are entitled to vote at the Annual Meeting and any
adjournment or postponement thereof. As of March 5, 2009, the Corporation had 180,637,172 shares of common stock outstanding. Each share of common stock is entitled to one vote. Shareholders do not have cumulative voting rights. The holders of a majority of the outstanding shares of common stock of the Corporation entitled to vote generally in the election of directors, represented in person or by proxy, will constitute a quorum at a meeting of shareholders, except in certain limited circumstances. Election of directors at all meetings of the shareholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of preferred stock to elect directors under specified circumstances, the affirmative votes of a plurality of the votes cast is required for the election of directors. The approval of the proposal to amend and restate the CONSOL Energy Inc. Equity Incentive Plan requires the affirmative vote of a majority of shares of common stock present in person or by proxy at the meeting and entitled to vote; provided that the total vote cast on this proposal represents over 50% in interest of all securities entitled to vote on the proposal. Except as otherwise provided by law, CONSOL Energys Certificate of Incorporation or Third Amended and Restated Bylaws, on all other matters, the affirmative vote of a majority of the shares of common stock present in person or represented by proxy at the meeting and entitled to vote on the matter is required for approval. If you hold shares beneficially in street name and do not provide your broker with voting instructions, your shares may constitute broker non-votes. Generally, broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. Brokers that have not received voting instructions from their clients cannot vote on their clients behalf on non-routine proposals, such as the CONSOL Energy Equity Incentive Plan and the shareholder proposals, although they may vote their clients shares on the election of directors and the ratification of the anticipated selection of Ernst & Young LLP, an independent registered public accounting firm, to serve as the independent auditor. In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are not considered entitled to vote on that proposal. Thus, broker non-votes will not affect the outcome of any matter being voted on at the meeting, assuming that a quorum is obtained. Abstentions have the same effect as votes against the matter. Proxies received but marked as abstentions and broker non-votes will be counted for quorum purposes.
The voting instruction form also serves as the voting instruction for the trustees who hold shares of record for participants in the CONSOL Energy Inc. Investment Plan for Salaried Employees. If voting instructions representing shares in this plan are not received, those shares will not be unvoted.
Revocation of Proxy
A proxy may be revoked by a shareholder at any time prior to the time that the proxy is exercised by delivery to the Corporate Secretary of a notice of revocation or a properly executed proxy bearing a later date or by voting in person at the meeting. If a proxy is properly executed and is not revoked by the shareholder, the shares it represents will be voted at the meeting in accordance with the instructions from the shareholder. If the proxy card is signed and returned without specifying choices, the shares will be voted in accordance with the recommendations of the Board and in accordance with their judgment, on any other matter that may properly come before the Annual Meeting. Attendance at the meeting without a request to revoke a proxy will not effectively revoke a previously executed and delivered proxy.
All costs relating to the solicitation of proxies will be borne by CONSOL Energy. Georgeson Inc. has been retained by CONSOL Energy to aid in the solicitation of proxies, at an estimated cost of $8,500 plus reimbursement of out-of-pocket expenses. Proxies may also be solicited by officers, directors and employees personally, by mail, or by telephone, facsimile transmission or other electronic means. On request, CONSOL Energy will pay brokers and other persons holding shares of common stock in their names or in those of their nominees for their reasonable expenses in sending soliciting material to, and seeking instructions from, their principals.
Secrecy in Voting
As a matter of policy, proxies, ballots and voting tabulations that identify individual shareholders are held confidential by CONSOL Energy. Such documents are available for examination only by the inspectors of election and certain employees who assist in the tabulation of the vote. The identity of the vote of any shareholder is not disclosed except as may be necessary to meet legal requirements.
Attendance at the Meeting
Subject to space availability, all shareholders as of the record date, or their duly appointed proxies, may attend the Annual Meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis. Registration will begin at 10 a.m. Those who attend may be asked to present valid picture identification, such as a drivers license or passport, and may be issued a ticket for admission to the meeting. Cameras, recording devices and other electronic devices will not be permitted at the meeting. Please also note that if shares are held in street name (that is, through a broker or other nominee), a copy of a brokerage statement reflecting stock ownership as of the record date must be provided during check-in at the registration desk at the Annual Meeting.
CONSOL Energy will provide to any shareholder, without charge and upon the written request of the shareholder, a copy (without exhibits, unless otherwise requested) of CONSOL Energys Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (the SEC) for CONSOL Energys fiscal year ended December 31, 2008. Any such request should be directed to CONSOL Energy Inc., Investor Relations Department, 1000 CONSOL Energy Drive, Canonsburg, PA 15317.
Board of Directors
The business and affairs of CONSOL Energy are under the direction of our Board. Our Board is currently comprised of eleven members. Those members are John Whitmire, James E. Altmeyer, Sr., Philip W. Baxter, William E. Davis, Raj K. Gupta, Patricia A. Hammick, David C. Hardesty, Jr., J. Brett Harvey, John T. Mills, William P. Powell, and Joseph T. Williams. We do not have a policy regarding directors attendance at the Annual Meeting of Shareholders; however, directors are encouraged to attend. All of the members of our Board attended the 2008 Annual Meeting of Shareholders, except for Mr. Baxter, who was not appointed to our Board until January 16, 2009.
Committees of the Board of Directors
Our Board has four standing committees: Audit, Compensation, Nominating and Corporate Governance, and Finance. Current charters for each committee are available on the Corporate Governance section of CONSOL Energys website at www.consolenergy.com. Actions taken by our committees are reported to the full Board. On February 17, 2009, the Board determined that all members of each of the Audit, Compensation and Nominating and Corporate Governance Committees are independent under the current listing standards of the New York Stock Exchange. See Determination of Director Independence on page 21 for additional information regarding the Boards independence determinations of its members.
Our Audit Committee, which currently consists of five directors, provides assistance to our Board in fulfilling its legal and fiduciary obligations with respect to matters involving the accounting, financial reporting, internal control and compliance functions of the Corporation and its subsidiaries. Our Audit Committee employs an independent registered public accounting firm to audit the financial statements of CONSOL Energy and its subsidiaries and perform other assigned duties. Further, our Audit Committee provides general oversight with respect to the accounting principles employed in financial reporting and the adequacy of CONSOL Energys internal controls. In discharging its responsibilities, our Audit Committee may rely on the reports, findings and representations of the Corporations auditors, legal counsel, and responsible officers. Our Board has determined that all members of the Audit Committee are financially literate within the meaning of SEC rules and under the current listing standards of the New York Stock Exchange. Our Board has also determined that Mr. Gupta qualifies as an audit committee financial expert. A copy of the audit committees report for the 2008 fiscal year is set forth in this Proxy Statement.
Our Compensation Committee, which currently consists of four directors, establishes executive compensation policies consistent with corporate objectives and shareholder interests. Our Compensation Committee also reviews
the performance of executive officers and establishes, adjusts and awards compensation, including incentive-based compensation, as more fully discussed below. In addition, our Compensation Committee generally is responsible for:
Our Compensation Committees charter generally permits it to delegate authority, duties and responsibilities or functions to one or more members of the Compensation Committee or to the Corporations officers other than for matters which laws or listing standards prohibit delegation. Under our Equity Incentive Plan (the Plan), our Compensation Committee is also permitted to delegate its power and authority to our officers. In February 2008, the Compensation Committee authorized our Chief Executive Officer to grant up to 380,000 shares (underlying stock option or restricted stock unit awards) to our non-executive employees in compliance with the terms and conditions of such delegation, the plan and applicable law and regulation.
Our Compensation Committee periodically reviews the compensation of non-employee directors, including the Chairman of the Board, and the principles upon which their compensation is determined, and periodically reports to our Board how the non-employee directors compensation practices compare with those of other similarly situated public corporations and, if the Compensation Committee deems it appropriate, recommends changes to our director compensation practices to our Board for approval.
Outside consulting firms retained by our Compensation Committee and management also provide assistance to the Compensation Committee in making its compensation-related decisions. In 2008, our Compensation Committee directly engaged Deloitte Consulting LLP (Deloitte) to assist with an evaluation of our compensation program for executive officers and directors. The scope of our consultants work for the Compensation Committee included, among other matters:
The compensation committee of the board of directors of CNX Gas Corporation, a publicly-traded subsidiary of CONSOL Energy (CNX Gas), separately retained in 2008 Deloitte to perform executive and director compensation services for that company. See the CNX Gas proxy statement filed on or about March 23, 2009, for a description of the scope of work performed by those firms for that company.
Our Compensation Committee has a charter, which is available on the Corporations website at www.consolenergy.com. For additional information regarding the Compensation Committees processes and procedures for the consideration and determination of executive officer compensation, see Compensation Discussion and Analysis on page 23.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee, which currently consists of four directors, is responsible for recommending to the Board nominees for election of directors at the Annual Meeting or appointment of directors in the event of any vacancy, generally monitoring CONSOL Energys corporate governance system and performing any other functions or duties deemed appropriate by the Board. In making director recommendations, the Nominating and Corporate Governance Committee will consider nominations submitted by shareholders. See Additional Matters on page 96 for more information on submitting director nominations.
The Nominating and Corporate Governance Committee reviews with our Board the size, function, and needs of the Board and, in doing so, takes into account that the Board as a whole should have competency in the following areas:
Our Board also seeks members from diverse backgrounds so that it consists of members with a broad spectrum of experience and expertise and with a reputation for integrity. Directors must have experience in positions with a high degree of responsibility and leadership experience in the companies or institutions with which they are or have been affiliated. Directors are selected based upon contributions that they can make to CONSOL Energy. The Nominating and Corporate Governance Committees process for identifying and evaluating director nominees is as follows:
Recommendations include a review by the Nominating and Corporate Governance Committee of the contribution of fellow directors, as well as the qualifications of new nominees.
On January 16, 2009, our Chairman and our CEO recommended to the Board that Philip W. Baxter rejoin the Board, and this recommendation was approved on such date.
The Finance Committee, which currently consists of five directors, monitors and provides advice and counsel to our Board and management regarding our asset mix, potential mergers and acquisitions, capital structure and policies, financial position and policies, financing activities, compliance with debt covenants, dividend policies and material investments and contracts. No member of the Finance Committee may be an officer or employee of CONSOL Energy or any of our subsidiaries.
Corporate Governance Web Page and Available Documents
We maintain a corporate governance page on our website at www.consolenergy.com that includes information about our corporate governance. The following documents are currently included on the website:
We will also provide a printed copy of these documents if you contact the Investor Relations department in writing at CONSOL Energy Inc., 1000 CONSOL Energy Drive, Canonsburg, Pennsylvania 15317.
Compensation Committee Interlocks and Insider Participation
During 2008, the members of the Compensation Committee were Messrs. Powell, Altmeyer, Mills and Ms. Hammick.
Mr. Altmeyer, a member of the Board (and member of the CNX Gas board of directors (which we refer to as the CNX Gas Board)) has a brother who is a member of Phillips, Gardill, Kaiser & Altmeyer, PLLC, a twelve attorney law firm based in Wheeling, West Virginia. The Corporation and CNX Gas paid this law firm approximately $318,703 and $215,684, respectively, in 2008 for workmens compensation, litigation and land-related legal services, which amounts represented approximately less than 2.0% and 0.8% of total amounts paid by the Corporation and CNX Gas respectively to all law firms retained in 2008. CONSOL Energy engaged Phillips Gardill Kaiser & Altmeyer PLLC many years prior to Mr. Altmeyer becoming a member of the Board.
Membership and Meetings of the Board of Directors and its Committees
All of the incumbent directors attended no fewer than 88% of the sum of:
Current committee membership and the number of meetings of the full Board and its committees are shown in the following table:
During 2008, the non-management directors held 5 executive sessions of the Board. The presiding director for these sessions was the Chairman of the Board.
Communication with the Board of Directors
Shareholders and other interested persons who wish to communicate with the Board may do so by writing to it and should address their communications to the attention of the Corporate Secretary at CONSOL Energy Inc., 1000 CONSOL Energy Drive, Canonsburg, PA 15317 or by sending an e-mail to firstname.lastname@example.org. The Corporate Secretary will relay all such communication to the Board in its entirety or individual directors (as appropriate) at the next regularly scheduled Board meeting (or earlier as necessary). In accordance with instructions from the Board, the Corporate Secretary reviews all correspondence, organizes the communications for review by the Board and delivers communications to the full Board or individual directors, as appropriate. In the ordinary course, the Corporate Secretary does not deliver certain items that are unrelated to the Boards duties, such as spam, junk mail, mass mailings, solicitations, resumes and job inquiries. Communications that are intended specifically for the chairman, the independent directors or the non-management directors should be sent to the street address or e-mail address noted above, to the attention of the chairman. Information concerning communications with the Board also is contained on CONSOL Energys website at www.consolenergy.com.
DIRECTOR COMPENSATION TABLE - 2008
The following table sets forth the compensation of the Board for the 2008 fiscal year, and includes fees paid for service on the CONSOL and CNX Gas Boards, as applicable:
Executive Summary of Director Compensatory Arrangements
We use a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on our Board. Each of our non-employee directors is entitled to receive annual fees for their service, any portion of which may be deferred at such directors election. In lieu of all or any portion of the annual retainer otherwise payable to our non-employee directors, our Board may grant deferred stock units, which carry dividend equivalent rights. The nature of each of these fees and awards are described in greater detail below.
CONSOL Energy Non-Employee Director Annual Fees and Awards
Our non-employee director compensation program is set forth in the following table:
CONSOL Energy Non-Employee Director Stock Options
Prior to October 2006, our non-employee directors received nonqualified stock options to acquire shares of the Corporations common stock. The exercise price per share of each nonqualified stock option award granted to a director was the fair market value of the Corporations common stock on the grant date and, accordingly, was intended to be exempt from coverage under Section 409A of the Internal Revenue Code (the Code). The options vest ratably and become exercisable in one-third increments on each anniversary of the grant date. Subject to the provisions of the particular nonqualified stock option agreement and the Plan, the holder of the option may exercise all or any part of the vested portion of the option at any time prior to the tenth anniversary of the grant date, which is the expiration date.
Upon a change in control, the unvested portion of option awards vest, and, unless otherwise provided, remain exercisable for the lesser of a one-year period or until the expiration date of the option award.
If the director ceases to be a director of the Corporation on account of death, disability or retirement at normal retirement age for directors, all unvested option awards immediately vest and become exercisable and remain exercisable until the normal expiration of the option award. If the director is terminated for any other reason other than cause, unvested option awards are forfeited and vested option awards remain exercisable for three months following the termination date. If the director is terminated for cause, all options, whether vested or not, are forfeited as of the termination date. See CONSOL Energy Equity Incentive Plan Definitions on page 73 for definitions of change in control, cause and disability under the Plan.
CONSOL Energy Non-Employee Director Restricted Stock Units
Each restricted stock unit received as part of an award represents the right to receive one share of common stock following the vesting date of that unit. Upon a change in control, restricted stock unit awards accelerate and vest.
Prior to February 19, 2008, restricted stock units were paid in three successive equal annual installments upon each directors completion of continued service with us over the three-year period measured from the award date (subject
to any deferral election that may have been made with respect to the payment of such shares). On February 19, 2008, the Board approved changes to the vesting schedule of restricted stock units, such that an award will now vest one year from the grant date or the next shareholders meeting, whichever comes first. Directors may make an elective deferral under the terms of their restricted stock units agreements, to delay distribution of restricted stock units until their separation from service. Subject to any such deferral election, restricted stock units are structured to be paid concurrent with vesting and are intended to comply with the short-term deferral exception under Section 409A of the Code.
As with the deferred stock units, a director is not entitled to shareholder rights until the director becomes the record holder of the shares following their actual issuance. Should a regular cash dividend be declared on our common stock at a time when unissued shares of common stock are subject to an award, then the number of shares subject to the award will automatically be increased by an amount determined in accordance with a pre-established formula. The additional shares resulting from this calculation will be subject to the same terms and conditions as the unissued shares of common stock to which they relate under the award.
For awards granted prior to February 19, 2008, if a director ceases to be a director on account of death, disability or retirement at normal retirement age (as defined in our Plan) for directors, all shares subject to such award will vest automatically and be delivered to the director immediately, or as soon as administratively practical thereafter (but in no event later than the 15th day of the third month following that date). If the director is terminated for cause (as defined in our Plan) or ceases to provide services for any reason other than death, disability or retirement at a normal age, the directors award will be cancelled with respect to any unvested shares, and the number of restricted stock units will be reduced accordingly. The director will then cease to have any rights or entitlements to receive any shares of common stock under those cancelled units. In addition, in the event of a termination for cause or a breach of the proprietary information covenant, (i) the director will also forfeit all of his or her right, title and interest in and to any shares which have vested under the award and which are either held by him or her at that time or are otherwise subject to deferred issuance and (ii) to the extent the director sold any vested shares within the six (6) month period ending with the date of termination for cause or breach of the proprietary information covenant, the director will be required to repay to CONSOL Energy the cash proceeds received upon each such sale (which we refer to as the clawback provisions). In January 2008, the Board approved changes to the non-employee director restricted stock unit awards going forward, which include eliminating retirement as a trigger event for accelerated vesting and the clawback provisions. See CONSOL Energy Equity Incentive Plan Definitions on page 73 for definitions of cause and disability under our Plan.
As a condition to a directors right and entitlement to receive shares subject to an award, the director must agree to abide by the terms and conditions of the proprietary information covenant and must return Corporation materials also as described above.
CONSOL Energy Chairman Agreement with Mr. Whitmire
We entered into an agreement with Mr. Whitmire on February 22, 1999 pursuant to which he was engaged as the non-executive Chairman of our Board, subject to election by our shareholders. In order to more formally and completely document his duties and responsibilities as Chairman, as well as his compensation arrangements, a new agreement was entered into with him as of April 27, 2004. This agreement was amended and restated on April 29, 2008. Under the terms of this agreement, as amended and restated, Mr. Whitmire receives annual compensation as follows:
The above-described compensation will be in lieu of any and all cash, equity or other compensation to which other Board members are entitled to receive in connection with their service on our Board. In addition, Mr. Whitmire is provided clerical support by us at an annual cost not to exceed $30,000 and is reimbursed for business expenses for performing his duties for the Corporation.
Mr. Whitmires term of service as Chairman will continue until the earlier of the date on which he ceases to serve as a member of our Board for any reason, or the date on which he ceases to serve as Chairman, while remaining a member of our Board. Mr. Whitmires service as Chairman may be terminated by either Mr. Whitmire or us, with or without cause (as defined in this agreement), on at least 90 days prior written notice to the other party or at any time by mutual consent of the parties and provided, further, that the service period will terminate immediately and automatically upon Mr. Whitmires death or permanent disability or incapacity, as determined in the good faith judgment of our Board.
In the event that Mr. Whitmires service as Chairman terminates during a service year, then he will thereafter receive no additional cash compensation under the agreement but he will retain his entire grant of restricted stock units for the service year in which the termination occurs. If, following such termination, he remains on our Board, he will thereafter be entitled to compensation as is provided by us to our other non-employee directors; provided that for the remainder of that service year, he will not be entitled to any additional stock, option or restricted stock unit grants by virtue of non-Chairman Board service.
CONSOL Energy Non-Employee Directors Deferred Compensation Plan (adopted 1999)
The CONSOL Energy Directors Deferred Compensation Plan was adopted on October 25, 1999. The CONSOL Energy Directors Deferred Compensation Plan permits members of our Board to defer all or a portion of any Board fees, such as the annual retainer, meeting fees or other amounts earned for services performed as a member of our Board and allows each participants earnings under the plan to be based on the performance of specified authorized hypothetical investments that participants may periodically designate. These hypothetical investment options may include hypothetical investments in CONSOL Energys common stock. The CONSOL Energy Directors Deferred Compensation Plan is an unfunded and unsecured liability of CONSOL Energy, and benefits will be paid from our general assets. Accordingly, participants are general unsecured creditors of the Corporation with respect to the benefits. Currently, Mr. Whitmire is the only participant in the CONSOL Energy Directors Deferred Compensation Plan. The CONSOL Energy Directors Deferred Compensation Plan was amended in 2007 to ensure compliance with Section 409A of the Code. The changes include clarifying the timing of distribution events, including upon separation from service; clarifying the timing and implementation of deferral elections; and, to the extent applicable, providing that the payment benefits will be subject to a six-month delay in the event the participant is a specified employee (within the meaning of Section 409A) at the time of termination. The amendments were not intended to materially increase the benefits payable under the CONSOL Energy Directors Deferred Compensation Plan.
CONSOL Energy Non-Employee Directors Deferred Fee Plan (adopted 2004)
The CONSOL Energy Directors Deferred Fee Plan was adopted on July 20, 2004 to allow non-employee directors of the Corporation to defer payment of all or a portion of their annual cash Board retainer and director meeting fees. Participation is at the election of the particular director and, upon the Corporation receiving a deferral agreement from a director, we will establish an account on behalf of such person which will be credited with the deferred fees. Previously, the account of each participant was credited, on a quarterly basis, with interest based on the interest rate in effect on the last day of the applicable quarter. On February 21, 2006, our Board approved an amendment to the CONSOL Energy Directors Deferred Fee Plan which provides that a participants account will be adjusted by an amount equal to the amount that would have been earned (or lost) if amounts deferred under the plan had been invested in hypothetical investments designated by the participant based on a list of hypothetical investments provided by the plan administrator from time to time or, in the event that a participant fails to designate such hypothetical investments, the participants account shall earn interest as provided in the plan. Earnings will be credited to the participants account quarterly. The amount payable to a director participant will be paid in cash as soon as administratively practicable after the earlier of: the directors termination of service as a director or the date elected by such director which must be at least two years after the end of the plan year for which fees are deferred. The CONSOL Energy Directors Deferred Fee Plan is an unfunded and unsecured liability of the Corporation, and benefits will be paid from our general assets. Accordingly, participants are general unsecured creditors of the Corporation with respect to the benefits. Currently, Messrs. Gupta and Williams are the only participants in the Directors Deferred Fee Plan.
The CONSOL Energy Directors Deferred Fee Plan was recently amended to ensure compliance with Section 409A of the Code. The changes include clarifying the timing of distribution events, including upon separation from
service; clarifying the timing and implementation of deferral elections; and, to the extent applicable, providing that the payment benefits will be subject to a six-month delay in the event the participant is a specified employee (within the meaning of Section 409A) at the time of termination. The amendments were not intended to materially increase the benefits payable under the CONSOL Energy Directors Deferred Fee Plan.
CONSOL Energy Non-Employee Director Deferred Stock Units
Our Board may grant deferred stock units to directors who are not employees of CONSOL Energy or any of its affiliates, referred to as eligible directors, in lieu of all or any portion of the annual cash retainer otherwise payable to the eligible directors. Under the terms of our Plan, the Board may permit a director to elect to receive deferred stock units in lieu of all or any portion of the annual retainer or meeting fees otherwise payable to an eligible director in cash, or to defer receipt of shares or cash to be paid pursuant to deferred stock units. The deferred stock units have dividend equivalent rights. Deferred stock units that have vested are paid following the earlier of: the directors separation from service; or the date elected by the director on his or her payment date election form previously filed with the Corporation. Upon a change in control, unvested deferred stock units will accelerate and vest.
A director is not entitled to shareholder rights, including voting rights and actual dividend rights, with respect to the shares subject to an award until the director becomes the record holder of the shares following their actual issuance. Should a regular cash dividend be declared on the Corporations common stock at a time when the director holds deferred stock units, he or she will be entitled to dividend equivalent payments equal to the cash dividends declared on the shares. Dividend equivalents are converted into additional deferred stock units based on a pre-established formula. The additional deferred stock units resulting from this calculation will be subject to the same terms and conditions as the deferred stock units subject to the award.
If the director ceases to be a director on account of death, disability, or retirement at normal retirement age for directors, all unvested deferred stock units granted to a director will automatically vest and become non-forfeitable. If the director is terminated for cause or ceases to provide services for any reason other than death, disability or retirement at a normal age, all unvested deferred stock units and any rights to the underlying shares are immediately forfeited for no consideration. In addition, in the event of a termination for cause or a breach of the proprietary information covenant, the director will also forfeit all of his or her right, title and interest in and to any shares which have vested under their award. See CONSOL Energy Equity Incentive Plan Definitions on page 73 for definitions of cause and disability under our Plan. Deferred stock units are structured to comply with Section 409A of the Code. Accordingly, distributions shall be made only upon a permissible distribution event, including upon separation from service, and the timing and implementation of deferral elections must occur as prescribed by Section 409A of the Code.
CONSOL Energy Stock Ownership Guidelines for Directors
Our Board has adopted stock ownership guidelines for the directors to further align their interests with our shareholders and ensure that they maintain an appropriate financial stake in CONSOL Energy. The stock ownership guidelines provide, among other things, that directors hold CONSOL Energy common stock (not including shares issuable upon the exercise of options) equal to three times the annual Board cash retainer on or before the fifth anniversary of becoming a Board member.
CNX Gas Non-Employee Director Annual Fees and Awards
The CNX Gas Board amended the compensation program for non-employee directors. Changes were made in January 2009, including the elimination of the CNX Gas Boards Compensation, Finance and Nominating and Corporate Governance Committees.
In connection with the management reorganization, effective January 16, 2009, the Non-Executive Chairman of the CNX Gas Board position and all CNX Gas Board committees other than its Audit Committee have been eliminated, and as such, the fees and/or equity awards denoted by an asterisk above have also been eliminated. Additionally, the other equity awards described above are scheduled to be first made in 2009 after the CNX Gas Annual Meeting of Stockholders. However, the CNX Gas Board is expected to re-evaluate its Director compensation after the CNX Gas Annual Meeting of Shareholders, and accordingly, the fees and equity awards might change.
All cash payments are to be made quarterly in arrears.
In addition, the Non-Executive Chairman in 2008 was provided clerical support by CNX Gas at an annual cost not to exceed $24,000.
CNX Gas Non-Employee Director Stock Options
The exercise price per share of each nonqualified stock option award granted to a CNX Gas director is the fair market value of CNX Gas common stock on the grant date. Options vest and become exercisable in one-third increments on each of the first three anniversaries of the grant date. Subject to the provisions of the particular nonqualified stock option agreement and CNX Gas Equity Incentive Plan, the holder of the option may exercise all or any part of the vested portion of the option at any time prior to the tenth anniversary of the grant date. See CNX Gas Stock Options on page 78 for a discussion of the effects of termination and change in control on the CNX Gas nonqualified stock options. CNX Gas directors no longer receive CNX Gas stock options.
CNX Gas Non-Employee Director Restricted Stock Units
CNX Gas restricted stock unit awards entitle a CNX Gas director to receive shares of CNX Gas common stock in a series of installments over their period of continued service with CNX Gas. The restricted stock unit awards (including associated dividend equivalent rights) are made annually. Beginning with the grants made in 2008, those annual grants vest in their entirety on the one-year anniversary of the grant date. For grants made prior to 2008, the restricted stock units vest in 3 equal annual amounts over the 3-year period measured from the grant date. With respect to all grants, each unit represents the right to receive one share of CNX Gas common stock following the vesting date of that unit. A CNX Gas director is not entitled to shareholder rights until the CNX Gas director becomes the record holder of the shares following their actual issuance. Should a regular cash dividend be declared on CNX Gas common stock at a time when unissued shares of common stock are subject to an award, then the number of shares subject to the award will automatically be increased by an amount determined in accordance with
a pre-established formula. The additional shares resulting from this calculation will be subject to the same terms and conditions as the unissued shares of common stock to which they relate under the award. Upon a change in control, the award accelerates and vests.
CNX Gas Non-Employee Directors Deferred Fee Plan
The CNX Gas Corporation Directors Deferred Fee Plan was adopted on December 10, 2007 to allow non-employee directors of CNX Gas to defer payment of all or a portion of their annual cash fees paid in 2008 or thereafter with respect to service in 2008 or thereafter. Participation is at the election of the particular director and, upon CNX Gas receiving a deferral agreement from a director, CNX Gas establishes an account on behalf of such person which is credited with the deferred fees. A participants account will be adjusted by an amount equal to the amount that would have been earned (or lost) if amounts deferred under the plan had been invested in hypothetical investments designated by the participant based on a list of hypothetical investments provided by the plan administrator from time to time or, in the event that a participant fails to designate such hypothetical investments, the participants account shall earn interest as provided in the plan. These hypothetical investment options may include hypothetical investments in CNX Gas common stock. The amount payable to a director participant will be paid in cash as soon as administratively practicable after the earlier of: the directors termination of service as a director or the date elected by such director, which must be at least two years after the end of the plan year for which fees are deferred. The CNX Gas Corporation Directors Deferred Fee Plan is an unfunded and unsecured liability of CNX Gas, and benefits will be paid from its general assets. Accordingly, participants are general unsecured creditors of CNX Gas with respect to the benefits. Currently, Messrs. Gupta and Williams are the only participants in the CNX Gas Directors Deferred Fee Plan.
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth information with respect to beneficial ownership of the Corporations common stock by:
Amounts shown include options that are currently exercisable or that may become exercisable within 60 days and the shares underlying deferred stock units and restricted stock units which a person listed below may acquire within 60 days. Unless otherwise indicated, the named person has the sole voting and dispositive powers with respect to shares of CONSOL Energy common stock set forth opposite such persons name.
Brokerage account agreements may grant security interests in securities held at the broker to secure payment and performance obligations of the brokerage account holder in the ordinary course. Shares shown in the table for the directors and executive officers may be subject to this type of security interest.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
CONSOL Energys directors and its executive officers are required under Section 16(a) of the Securities Exchange Act of 1934 to file reports of ownership and changes in ownership of CONSOL Energy common stock with the SEC and the New York Stock Exchange. Based upon a review of filings with the SEC, written representations that no other reports were required, and on CONSOL Energys records, CONSOL Energy believes that during 2008, all Section 16(a) filing requirements applicable to its executive officers and directors were complied with, except that J. Brett Harvey filed an amended Form 4 on March 31, 2008, to correct the total number of restricted stock units and shares subject to an option granted to Mr. Harvey on February 19, 2008, which were, due to an administrative error, incorrectly reported on a Form 4 filed on February 21, 2008.
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
The nominees for election as directors are identified as follows. Each director holds office until the next annual election of directors at the Annual Meeting and until the directors successor is elected and qualified. All nominees are current members of the Board. If any nominee should for any reason become unable to serve, the shares represented by all valid proxies will be voted for the election of such other person as the Board may designate following recommendation by the Nominating and Corporate Governance Committee, or the Board may reduce the number of directors to eliminate the vacancy. The following contains information concerning the nominees, including their recent employment, positions with CONSOL Energy, other directorships, and age as of March 20, 2009.
Chairman of the Board, age 68
John Whitmire has served as Chairman of the Board of CONSOL Energy since March 3, 1999. Mr. Whitmire currently serves ex officio on the Audit, Compensation, Finance and Nominating and Corporate Governance Committees. Mr. Whitmire is also a director of Transocean Inc. (formerly Global Santa Fe Corporation before it was merged into Transocean Inc.), which is engaged in the business of offshore drilling for oil and natural gas reserves and El Paso Corporation, which provides natural gas and related energy products. Mr. Whitmire currently serves as Chair of the executive compensation committee of Transocean Inc., Chair of the health, safety and environmental committee of El Paso Corporation, and is a member of the audit committee of El Paso Corporation as well.
J. Brett Harvey
President, Chief Executive Officer and Director, age 58
J. Brett Harvey has been President and Chief Executive Officer and a director of CONSOL Energy since January 1998. He has been a director of CNX Gas since June 30, 2005, the date of its formation, and was appointed as chairman of the CNX Gas Board in January 2009. Mr. Harvey was also elected to the position of chairman and chief executive officer of CNX Gas in January 2009. Mr. Harvey is a member of the board of directors of the Bituminous Coal Operators Association and a member of the executive committee and the board of the American Coalition for Clean Coal Energy. In December 2005, Mr. Harvey was elected to the board of directors of Barrick Gold Corporation, the worlds largest gold producer (Barrick). He serves on the Barrick compensation and environmental, health and safety committees. In December of 2007, Mr. Harvey was also elected to the board of directors of Allegheny Technologies Incorporated, a specialty metals producer, and serves on its nominating and corporate governance and compensation committees.
James E. Altmeyer, Sr.
Director, age 70
James E. Altmeyer, Sr. has been a director of CONSOL Energy since November 2003 and a director of CNX Gas since June 30, 2005, the date of its formation. He currently serves as a member of the Audit and Compensation Committees of CONSOL Energy. He also serves as a member of the audit committee of CNX Gas. Mr. Altmeyer served as President and Chief Executive Officer of Altmeyer Funeral Homes, Inc. of West Virginia, Ohio, and Virginia from 1972 until 2007, at which time he became Chairman of Altmeyer Funeral Homes, Inc. He has also been President of Altmeyer Realty, a real estate holding company, and of Martin-Steadfast Insurance Company since 1972. Since 1987, Mr. Altmeyer has served on the board of directors of WesBanco, Inc., a multi-state bank holding company, and currently serves on its audit committee. Mr. Altmeyer also serves as a member of the executive committee of the board of directors of Wheeling Hospital; President of the American Legion Home Corporation; Vice Chairman of the Chambers Foundation and as a member of the board of directors of the General Douglas MacArthur Foundation.
Philip W. Baxter
Director, age 60
Philip W. Baxter rejoined the Board in January 2009. He currently serves as a member of the Audit and Finance Committees of the Board. Mr. Baxter served as the Chairman of the board of directors of CNX Gas from June 30, 2005, the date of its formation, until January 2009, and continues to serve as a director of CNX Gas. Mr. Baxter served as Chairman of the Audit Committee and as a member of the Finance Committee of CONSOL Energy and served as a Director of CONSOL Energy from August 1999 until August 2, 2005. Mr. Baxter has been the President of Stan Johnson Company, a nationally recognized leader in commercial real estate brokerage specializing in single-tenant properties, since September 2002. Mr. Baxter was Chief Financial Officer and Executive Vice President of the Tulsa-based energy conglomerate, Mapco Inc., until March 1998 when it merged with The Williams Company. During his 18-year career at Mapco, Mr. Baxter held a number of officer level positions including Chief Information Officer and Senior Vice President of Strategic Planning. Prior to his career at Mapco, he held a number of financial positions with Williams Energy Company, a subsidiary of The Williams Company.
William E. Davis
Director, age 66
William E. Davis joined the Board in January 2004. He currently serves as Chairman of the Nominating and Corporate Governance Committee and as a member of the Audit Committee. Since November 2007, Mr. Davis has been a director of AbitibiBowater Inc., which produces a broad range of paper and forest products marketed around the world, and serves on its nominating and governance and compensation committees. Mr. Davis was a director of Abitibi Consolidated Inc, which produced newsprint, commercial printing paper and other wood products, from April 2003 to November 2007, and served on its audit and nominating and governance committees. Mr. Davis was also the chairman of the board of directors and Chief Executive Officer of Niagara Mohawk Power Corporation, an electricity and natural gas utility located in upstate New York from May 1993 to February 2002. Following the sale
of Niagara Mohawk in February 2002 and until his retirement in April 2003, Mr. Davis served as chairman of National Grid USA and as an executive director of National Grid (UK), owner and operator of the electricity transmission network in England and Wales. He served as Chairman and Chief Executive Officer of the Metropolitan Development Foundation of Central New York until December 4, 2008.
Raj K. Gupta
Director, age 66
Raj K. Gupta has been a director of CONSOL Energy since February 2004 and a director of CNX Gas since June 30, 2005, the date of its formation. He currently serves as Chairman of the Audit Committee and as a member of the Finance Committee. He also serves as a member of the audit committee of CNX Gas. Since July 2007, Mr. Gupta has also served as chairman of the board of directors of Quetzal Energy, Inc., a Canadian-based international oil and gas company operating in Guatemala, Central America. Mr. Gupta currently works as an independent management consultant. From 2000 to December 2004, Mr. Gupta served on the board of directors of Yukos Oil Company, Moscow, Russia, chaired its compensation committee and was a member of its audit and finance committees. Since 2000, Mr. Gupta has been a member of the Advisory Council of the Industrial, Manufacturing and Systems Engineering at Kansas State University. He also serves on the advisory board of Preng & Associates in Houston.
Patricia A. Hammick
Director, age 62
Patricia A. Hammick has served on the Board since June 2001. She currently serves on the Nominating and Corporate Governance and Compensation Committees. Mrs. Hammick also currently serves as lead independent director for the board of directors of Dynegy Inc., an independent power producer to which she was elected in April of 2003. Since January 2007, she has also been a director of SNC Lavalin Group, Inc. (SNC), a company engaged in engineering and construction, infrastructure ownership and management, and facilities and operations management. She serves as a member of SNCs audit and health, safety & environment committees. She is a member of the National Association of Corporate Directors and was an adjunct professor in graduate studies at The George Washington University from 2001 to 2003.
David C. Hardesty, Jr.
Director, age 63
David C. Hardesty, Jr. joined the Board in October 2005. He currently serves as a member of the Nominating and Corporate Governance and Finance Committees. Mr. Hardesty is President Emeritus and Professor of Law at West Virginia University (WVU). He was President of WVU from 1995 to 2007. While serving as President, he was also a member of the National Security Higher Education Advisory Board. In addition, Mr. Hardesty served as the permanent chair of WVUs affiliated research corporation, teaching hospital and the hospitals parent health care system of hospitals. He also serves on the board of numerous professional and civic organizations. Prior to his career in academia, Mr. Hardesty was a partner in the law firm of Bowles Rice McDavid Graff & Love in Charleston, West Virginia, where he practiced in the areas of state and local taxation, corporate and banking and administrative law, and is currently Of Counsel at this law firm. Mr. Hardesty was also State Tax Commissioner during Senator John D. Rockefeller IVs first term as governor of West Virginia (1977-1980). He also served as chairman of the National 4-H Council, a director and officer in the Big East Conference, and a member of the Bowl Championship Series Presidential Oversight Committee, as well as a founding directors of the Blanchettee Rockefeller Neurosciences Institute.
John T. Mills
Director, age 61
John T. Mills joined the Board in March 2006. Mr. Mills currently serves as a member of the Audit and the Compensation Committees. In January 2008, Mr. Mills became a member of the board of directors and audit, conflicts and risk management committees of Regency GP, LLC, the general partner of Regency GP, LP, the general partner of Regency Energy Partners LP, a natural gas gathering, processing and transportation master limited partnership. Mr. Mills served as the chairman of the board of directors of Horizon Offshore, Inc., a marine
construction company, from September 2004 until December 11, 2007, when it was acquired by Cal Dive International Inc. He currently serves on the board of directors of Cal Dive International Inc., a marine contractor providing manned diving, derrick, pipelay and pipe burial services to the offshore oil and natural gas industry, and serves on the audit, compensation and corporate governance and nominating committees. Mr. Mills was the Chief Financial Officer of Marathon Oil Corporation, an integrated energy company, from January 2002 until his retirement in December 2003.
William P. Powell
Director, age 53
William P. Powell has served on the Board since January 2004. He currently serves as Chairman of the Compensation Committee and as a member of the Finance Committee. Since 1993, Mr. Powell has also been a director of Cytec Industries, a global specialty chemicals and materials company, where he chairs the governance committee and has served on the audit committee. Until May 2007, Mr. Powell was a managing director of Williams Street Advisors, a New York City-based merchant banking boutique. Mr. Powell resigned from William Street Advisors to establish a family office, 535 Partners LLC. Mr. Powell serves as managing partner of 535 Partners LLC.
Joseph T. Williams
Director, age 71
Joseph T. Williams has been a director of CONSOL Energy since January 2004. He currently serves as Chairman of the Finance Committee and a member of the Nominating and Corporate Governance Committee. Mr. Williams also served as a director of CNX Gas from July 10, 2006 until January 2009. Mr. Williams is a retired oil and natural gas industry executive who has held positions as chairman or Chief Executive Officer or both for NASDAQ, American, and New York Stock Exchange listed companies. He is currently a member of a number of industry organizations, including the Society of Petroleum Engineers and the 25 Year Club of the Petroleum Industry.
Related Party Policy and Procedures
Our Audit Committee adopted a written Related Party Policy and Procedures for the review and approval or ratification of related party transactions with directors, nominees for director and executive officers. A copy of the policy is available on our website at www.consolenergy.com.
Under the policy, prior to entering into a related person transaction, a director, nominee or executive officer is to notify our chief financial officer and general counsel of the material facts regarding it. If our chief financial officer and general counsel determine that the proposed transaction is a related person transaction, it is presented to our Audit Committee (or if it is not practicable or desirable to wait until the next Audit Committee meeting, to the chairman of the Audit Committee) for approval. The Audit Committee will consider all relevant facts and circumstances including the terms of the transaction and terms that would be available to unrelated parties, the benefits to us, and, if it involves an independent director, any impact on independence. The Audit Committee will also inform our Nominating and Corporate Governance Committee of any related party transactions involving directors or nominees. Since the SECs related party regulation also applies to directors and executive officers family members as well as entities in which they may be deemed to have an indirect material interest, it is possible that related person transactions could occur without a director or executive officer being aware of them and bringing them to us for approval. When we become aware of a related person transaction that has not been previously approved, the policy provides that it will be presented to our Audit Committee for ratification or other action. The policy also provides that our Audit Committee will review on an annual basis ongoing related person transactions having a remaining term of more than six months or a remaining amount in excess of $120,000. The transactions described above in Related Party Transactions and the transactions that were described in Compensation Committee Interlocks and Insider Participation on page 6 were ratified under this policy. We also require that officers and directors complete director and officer questionnaires annually and that they adhere to written codes of business conduct and ethics regarding various topics including conflicts of interest, loans from the Corporation, the receipt of gifts, service in outside organizations, political activity and corporate opportunities; officers and directors certify compliance with these codes in writing each year. With respect to CNX Gas, its audit committees charter
addresses its review, and, if appropriate, approval or ratification of transactions between it (including its subsidiaries) and related persons that are required to be reported by it under the SECs related party regulation.
For a description of certain relationships and related transactions, see Compensation Committee Interlocks and Insider Participation on page 6.
Determination of Director Independence
Our Board is required under the New York Stock Exchange rules to affirmatively determine the independence of each director and to disclose this determination in the Proxy Statement for each annual meeting of shareholders of CONSOL Energy. Based on the independence standards set forth in our Corporate Governance Guidelines which are described below, our Board at its meeting held on February 17, 2009, determined that all non-employee directors (i.e., all directors except J. Brett Harvey) had no material relationship with CONSOL Energy (either directly or indirectly, including as a partner, shareholder, or officer of an organization that has a relationship with CONSOL Energy) and are independent under our Corporate Governance Guidelines and the corporate governance rules of the New York Stock Exchange codified in Section 303A of the NYSE Listed Company Manual. The Board considered the transactions described in Compensation Committee Interlocks and Insider Participation on page 6 with respect to Mr. Altmeyer. Each member of the Audit Committee meets the heightened independence standards required for audit committee members under the NYSE listing standards and the SEC rules.
The Board established the following standards for determining director independence in our Corporate Governance Guidelines, which are available on the Corporate Governance section of the Corporations website at www.consolenergy.com.
A director will not be deemed independent if:
Immediate family members of a director are the directors spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who share such persons home. When applying the look-back period referenced in clauses (i) (v) above, directors need not consider individuals who are no longer immediate family members as a result of legal separation or divorce, or those who have died or become incapacitated.
Executive officer has the meaning specified for the term officer in Rule 16a-1(f) under the Securities Exchange Act of 1934.
Any related person transaction required to be disclosed under SEC Regulation S-K, Item 404, shall be considered in determining the independence of a director or nominee.
As more fully set forth in Section 2.9 of CONSOL Energys Third Amended and Restated Bylaws, the affirmative vote of a plurality of the votes cast at the Annual Meeting shall elect directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE ABOVE-NAMED NOMINEES FOR THE BOARD OF DIRECTORS.
This Compensation Discussion and Analysis section is designed to explain the material elements of compensation paid to our executive officers and to describe the manner and context in which compensation is awarded to and earned by these individuals.
Our executive compensation program consists of base salary, time-based restricted stock units and at-risk compensation, both short and long-term. The elements of our executive compensation program include base salary, annual cash incentive awards, long-term incentive awards, retirement and other post-employment programs and perquisites.
The Compensation Committee uses a variety of resources, including tally sheets, competitive market analysis, and input from independent consultants to make decisions regarding our executives compensation which are consistent with our executive compensation philosophy and objectives. The Compensation Committee considers the Corporations business performance, financial goals, the current industry environment and various tax considerations in determining how to apply the Corporations executive compensation philosophy to decisions regarding executive compensation.
The five individuals identified in the Summary Compensation Table of this Proxy Statement comprise our named executives. In 2008, four of our named executives were employees of CONSOL Energy, and one was an employee of CONSOL Energys publicly-traded subsidiary CNX Gas. The four employees of CONSOL Energy included our Chief Executive Officer (Mr. Harvey), our Chief Financial Officer (Mr. Lyons), our former President Coal Group (Mr. Lilly, who has since retired) and our Chief Legal Officer (Mr. Richey), and their compensation in 2008 was determined by our Compensation Committee (and the independent members of our Board in the case of our Chief Executive Officer). The CNX Gas employee was its Chief Executive Officer (Mr. DeIuliis) and his compensation for 2008 was determined in December 2008 by the CNX Gas Board and its former compensation committee.
As a result of a management reorganization of CONSOL Energy and CNX Gas in January 2009 (as described immediately below), Mr. DeIuliis, now President and Chief Operating Officer of CNX Gas, became an employee of CONSOL Energy and assumed the title of Executive Vice President and Chief Operating Officer of CONSOL Energy. Although the CNX Gas Board and its compensation committee approved his 2009 compensation package in December 2008, the Compensation Committee for CONSOL Energy also reviewed and approved his 2009 compensation package in February 2009 since he is now the Chief Operating Officer of CONSOL Energy.
The analysis that follows describes the material elements of CONSOL Energys compensation programs for the four named executives who were CONSOL Energy employees during 2008 (except with respect to an equity award granted to Mr. DeIuliis, who was an employee of CNX Gas in 2008). For information regarding the executive compensation arrangements for our Chief Operating Officer for 2008, please refer to the CNX Gas proxy statement filed in March 2009.
On January 16, 2009, our Board and the CNX Gas Board implemented a reorganization of the management structure of the two companies. In this proxy statement, we will refer to this reorganization as the management reorganization. The changes effected by this management reorganization are as follows:
Effective January 16, 2009, these persons became the executive officers of CONSOL Energy and CNX Gas.
The goal of the management reorganization is to improve performance and profitability of both CONSOL Energy and CNX Gas, as well as to increase efficiency and reduce costs across all business areas by creating a more unified organizational structure that will have functional, operational, and financial responsibility for all coal, gas and related assets, while still recognizing the status of CNX Gas as a separate public company.
Elements of Our Executive Compensation Program
The Compensation Committee seeks to achieve its objectives through the following elements of our executive compensation program:
- Restricted Stock Units
- Performance Share Units
- Retirement Benefits
- Employment and Letter Agreements
- Change in Control Agreements
Objectives of Our Executive Compensation Program
One of the primary objectives of our executive compensation program is to attract and retain talented individuals to manage and lead CONSOL Energy. Accordingly, our Compensation Committee is responsible for approving the compensation of our executive officers and, in the case of our Chief Executive Officer, recommending his compensation to the independent members of the Board for final approval.
We believe that the quality, skills and dedication of our named executives are critical factors affecting the short and long-term value of CONSOL Energy. As a result, the objectives of our compensation program are as follows:
Through the use of our long-term compensation program, executive officers have the opportunity to receive total compensation at the top quartile among our peer group of companies, only if absolute and relative performance warrant such a payout.
Role of Outside Compensation Consultants
The Compensation Committee has engaged outside compensation consulting firms to assist it with the development of our compensation program, and these consultants, engaged by the Compensation Committee, work for the Compensation Committee in coordination with management.
The Compensation Committee looks to the outside compensation consultants to review the elements of our compensation program and recommend any modifications thereto, including the appropriate mix of short and long-term incentives, based on the consultants review of the market practices of a peer group of companies (which are recommended by the consultant after discussions with the Compensation Committee and management, and approved by the Compensation Committee). The consultants also provide ongoing input on the design of our incentive programs and the underlying performance metrics.
The Compensation Committee also uses the compensation consultants benchmarking studies to determine the market pay practices of similarly situated executives to our named executives. The Compensation Committees policy is to use the data prepared and presented by the outside compensation consultants as a reference point or guideline. Actual compensation may be higher or lower than the compensation for executives in similar positions at comparable companies.
The rationale for having higher or lower compensation than other executives at comparable companies is a function of that persons performance, skills, experience and specific role in the organization, as well as CONSOL Energys overall performance. For example, with respect to each of our named executives, the compensation consultant found in February 2008, the 2008 compensation packages recommended by the Compensation Committee were between the median and 86th percentile of proxy data. It was determined that for each of these individuals, their history with the Corporation, the depth and breadth of their experiences, their job responsibilities and CONSOL Energys performance in 2007 warranted the recommended level of compensation. Additionally, when reviewing the ranking of CONSOL Energys compensation packages to its peers, the Compensation Committee analyzes the size of CONSOL Energy relative to the Peer Group. For example, at the end of 2007, CONSOL Energys revenues of $3.7 billion positioned itself at the 74th percentile of the Peer Group and CONSOL Energys market capitalization of $10.5 billion was positioned at the 63rd percentile of the Peer Group.
2008 Peer Group
For purposes of establishing 2008 compensation, the Compensation Committee approved a Peer Group that consisted of the following 14 companies (the Peer Group):
The Peer Group was modified in 2008 to better reflect CONSOL Energys size and business operations. The compensation consultant explained that the Peer Group should be increased in size to ensure there are sufficient
matches for each position and to minimize the potential impact of one or two outliers which could bias the data. Additionally, the consultants standard methodology is to recommend that peer companies are in the same sub-industry (coal) and/or industry (energy) as CONSOL Energy and then to examine the size of companies based on revenues and market capitalization to identify the most comparable companies. Applying this methodology, the consultant suggested adding five companies to the Peer Group (Chesapeake Energy Corporation, EOG Resources, Inc., Noble Energy, Inc., PPL Corporation and Questar Corporation). The consultant continued to include Foundation Coal and Alpha Natural Resources in the proposed peer group due to their focus on coal (even though they did not meet the revenue and market capitalization parameters). Finally, Barrick Gold Corporation (for industry reasons) and Apache Corp. (for size considerations) were eliminated from the Peer Group for 2008.
In connection with the 2008 compensation program, the compensation consultant also used data of S&P 500 companies (excluding financial services companies) and proxy data from fifteen similarly-sized general industry companies to supplement its findings and provide the Compensation Committee with a general industry perspective on competitive pay levels. This data was used as a reference point only and was not directly used for benchmarking purposes.
2009 Peer Group
In December 2008, our outside compensation consultants reviewed additional companies in the coal and energy industries. Based on that review, the consultants recommended, and our Compensation Committee approved, adding Patriot Coal Corporation to the Peer Group for purposes of establishing 2009 compensation levels. Patriot Coal Corporation is a coal company that was spun off from Peabody Energy Corporation in November 2007. While it is one of the smaller companies in the Peer Group based on revenue and market capitalization, it is an appropriate comparator company based on business focus and the geographic location of its operations.
Considerations of the Compensation Committee
The Compensation Committee relies on its own judgment in setting each executive officers compensation and not on any rigid guidelines or strict formulas. To establish compensation for a particular executive officer, the Corporations human resources personnel make an initial assessment and submit it to our Chief Executive Officer for review (except in the case of the Chief Executive Officers compensation). This assessment considers relevant industry salary practices, the positions complexity and level of responsibility, its importance to us in relation to other executive positions, and the competitiveness of an executive officers total compensation. Our Chief Executive Officer may make appropriate changes to this assessment based on his determination of such named executives past performance. The Compensation Committee then reviews:
From this information, the Compensation Committee approves, in consultation with the Chief Executive Officer and the outside compensation consultant, the amount of each executive officers annual base salary, bonus and long-term incentive compensation.
To establish compensation for our Chief Executive Officer, the Compensation Committee reviews:
The Compensation Committees current intent is to perform at least annually a strategic review of our named executives overall compensation packages to determine whether they provide adequate incentives and whether they
properly compensate our executive officers relative to comparable officers in other companies with which we compete for executives. Our Compensation Committees most recent overall compensation review occurred in early 2009. Our Chief Executive Officer, Chief Financial Officer and Chief Legal Officer typically attend all or a portion of the Compensation Committee meetings. However, the named executives are not present during that portion of the meeting in which their compensation is considered and approved.
Performance of CONSOL Energy in 2008
In 2008, CONSOL Energy achieved certain milestones in a number of critical areas in which we judge our performance:
Objectives and Performance of Named Executives
2008 Performance Goals and Objectives
As mentioned above, the performance of our named executives is considered when establishing individual compensation. This means that the individuals performance is taken into account when compensating a named executive for prior performance and/or approving a compensation package for the following year. This section is intended to explain the considerations used with respect to our named executives performance.
Our Corporation takes a team approach to achieving our strategic vision for CONSOL Energy. For 2008, our named executives had the following as their combined primary performance goals and objectives:
The Compensation Committee, in conjunction with our Chief Executive Officer, determined that our named executives exceeded their 2008 goals and objectives.
2009 Performance Goals and Objectives
Our named executives collective goals and objectives for 2009 are substantially similar to their goals and objectives for 2008. The goals and objectives largely remained the same because these goals are long-term objectives which will be realized over time and which will drive CONSOL Energys strategic success. The Compensation Committee will review in 2010, as it did in 2009 prior to approving 2008 award pay-outs, whether our named executives made measurable strides toward the achievement of these goals in the one-year period.
Mix of Total Compensation
The Compensation Committee analyzed the mix of salary, short-term incentive compensation and long-term compensation for purposes of setting 2008 compensation.
2008 Base Salary
The objectives of base salary are to provide fixed compensation necessary to attract and retain key executives and to offset the cyclicality in our business that may impact variable pay year-to-year. Factors considered in establishing base salaries include competitiveness with external market data, internal worth and value assigned to the named executives role and responsibilities at CONSOL Energy, and the named executives skill and performance.
The Compensation Committee (and in the case of the Chief Executive Officer, the independent members of the Board) approved the base salaries of our named executives in February 2008 after the 2007 proxy data (containing 2006 compensation information) and survey data became available.
In January 2008, the Compensation Committee approved annual base salary increases for each of our named executives, except the Chief Executive Officer (whose base salary was not increased for the reasons described below). For those named executives receiving an annual base salary increase, the increases ranged from 2% to 9% from 2007.
The annual base salaries were approved as follows:
Based in part on each persons 2007 performance, it was deemed reasonable to have salaries for each of the executive officers that are aligned at or above the 75th percentile of the Peer Group. This is consistent with our revenue and market capitalization position relative to our Peer Group at the end of 2007.
2009 Base Salary
In February 2009, the Compensation Committee approved annual base salary increases for each of our named executive officers, except the Chief Executive Officer (whose base salary was not increased for the reasons described below). For our new Chief Operating Officer, the Chief Financial Officer and the Chief Legal Officer, the increases ranged from 6.0 to 7.1% from 2008. These increases were attributable, in part, to the additional responsibilities assumed by the named executives as a result of the management reorganization.
Short-Term Incentive Compensation
2008 Short-Term Incentive Compensation
We implemented the Short-Term Incentive Compensation Plan (which we call the Short-Term Plan) to provide incentives to our employees to achieve performance goals and to reward our employees for the achievement of those goals. The Short-Term Plan is designed to deliver greater cash awards when CONSOL Energy and the employees are successful in achieving established targets and to pay less when CONSOL Energy and/or the employee fall short of these targets. The Short-Term Plan is also designed to provide incentive compensation (measured at target) that is comparable to compensation provided by companies with which CONSOL Energy competes for executive talent.
In February 2008, the Compensation Committee approved design changes to the short-term incentive compensation awards in order to qualify the 2008 awards thereunder as performance-based compensation under Section 162(m) of the Code (as described below). With respect to the 2008 cash incentive awards, the Compensation Committee granted such awards as performance-based compensation under the Equity Incentive Plan (subject to a maximum annual award for each executive of $2,000,000). Each of the named executives had an opportunity to earn a 2008
bonus if CONSOL Energy achieved threshold level goals for any of the following reasons: (i) total shareholder return relative to the Shareholder Return Peer Group (50th percentile), (ii) EBITDA, or (iii) annual net income. If any of the thresholds were achieved, each named executive had the opportunity to earn his maximum bonus which the Compensation Committee may, in its discretion, reduce through the exercise of negative discretion.
In exercising its negative discretion, the Compensation Committee may rely on a number of factors, including the following formula, to determine the amount actually paid:
The Opportunity Percentage referenced in the above formula is expressed as a percentage of base salary. In early 2008, the Compensation Committee determined the Opportunity Percentages for our named executives after the 2007 proxy data (containing 2006 compensation information) and survey data became available. The Compensation Committee (and in the case of the Chief Executive Officer, the independent members of the Board) approved the Opportunity Percentages as follows:
The Opportunity Percentages and target payouts are benchmarked against the Peer Group and survey data (as available). This data was utilized to ensure that recommendations were within market. As a result of this study, the Compensation Committee approved the named executives (other than himself) Opportunity Percentages and target payouts as proposed by the Chief Executive Officer and noted that the target payouts were generally competitive between median and 75th percentile levels of the Peer Group.
The Annual Incentive Compensation Award Factor, as referred to in the above formula, consists of two targets (each weighted equally). One target consists of individual performance (which includes those objectives set forth in the section above), and the other target consists of CONSOL Energy performance (which is a function of whether CONSOL Energy achieved its profit objective). Each of these targets is measured independently such that if one target is not achieved, an opportunity exists for the other target to be achieved, resulting in an annual award payment. The scores may range from 70-200% for each target, with a 100% score indicating achievement of a target and a higher score (up to 200%) indicating that the target was exceeded. If the minimum score of 70% is not reached for a target, a score of zero will be recorded for that target.
The CONSOL Energy performance target for 2008 was CONSOL Energys profit objective net income, while the minimum threshold score was equal to 80% of the financial target and the maximum score was equal to 120% of the financial target. The profit objective net income number is derived directly from the Board-approved plan for the year and is deemed confidential information. When this net income target was established, the Compensation Committee believed that it was a challenging, but achievable net income target based upon CONSOL Energys prior performance and its business plan and objectives.
In early 2009, the Compensation Committee and the independent members of the Board reviewed and evaluated the Chief Executive Officers self-assessment in light of his stated goals and objectives and agreed to an individual
performance score of 185. In the case of our Chief Financial Officer and Chief Legal Officer, their individual performance targets were based on the target goals referenced above. In January 2009, our Chief Executive Officer reviewed and discussed with the Compensation Committee his assessment of their performances in 2008 relative to the goals. Our Compensation Committee concurred with our Chief Executive Officers assessment of executive performance and approved performance scores for our Chief Financial Officer and Chief Legal Officer that were at or within the following range: 160 to 180.
Consequently, the ultimate payouts under the 2008 short-term incentive awards were as follows:
With some exceptions, Section 162(m) of the federal income tax laws limits CONSOL Energys deduction for compensation in excess of $1 million paid to certain covered employees (generally our Chief Executive Officer and the four next highest-paid executive officers). Compensation paid to covered employees is not subject to the deduction limitation if it is considered qualified performance-based compensation within the meaning of Section 162(m) of the Code.
For 2008, the Compensation Committee decided to administer the short-term incentive compensation awards under the Equity Incentive Plan in order to comply with Section 162(m) and obtained shareholder approval for a new Executive Annual Incentive Plan at the 2008 annual meeting of shareholders for annual grants of cash bonus awards thereafter. As part of the Corporations long-term incentive compensation program, the Corporation maintains the performance share unit and option programs which are also intended to be in compliance with Section 162(m).
2009 Short-Term Incentive Compensation
In February 2009, the Compensation Committee approved the 2009 Short-Term Plan target payouts which, if earned, would be paid to the Companys officers and other employees in the first quarter of 2010. The target payouts were approved under the new shareholder-approved CONSOL Energy Inc. Executive Annual Incentive Plan so that awards to be granted thereunder to covered employees would comply with Section 162(m) of the Code. In consultation with the outside compensation consultant and management, the Compensation Committee determined to retain the design of the Short-Term Plan and approved target payouts with substantially similar terms and conditions to the 2008 Short-Term Plan target payouts.
The Compensation Committee maintained Opportunity Percentages for the Chief Financial Officer and the Chief Legal Officer, but increased our Chief Executive Officers Opportunity Percentage from 120% to 130%. This increase was determined simultaneously with the decision to maintain the base salary for our Chief Executive Officer in 2009 at $1,000,000.
Long-Term Incentive Compensation
Mix of Long-Term Incentive Compensation
The Compensation Committee believes that combined grants of stock options, restricted stock units and performance share units provide a balance for our named executives between risk and potential reward consistent
with the market trends of our peers. In February 2008, the Compensation Committee determined that target long-term incentive expected value would be derived 1/3 from stock options, 1/3 from restricted stock units and 1/3 from performance share units (assuming target performance is achieved). This allocation was based primarily on a desire to balance risk and retention. It was further determined by the Compensation Committee that this general mix, for officer awards, provided rewards for stock price appreciation and financial performance over the short and long-term.
For the Chief Executive Officer, the Compensation Committee recommended, and the independent members of the Board approved, altering the long-term incentive mix for him in order to provide compensation that is more performance oriented, and the Compensation Committee decreased the emphasis on time-based restricted stock units. Accordingly, his target long-term incentive expected value in 2008 was derived 42% from stock options, 42% from performance share units and 16% from restricted stock units. The rationale for this mix was to link our Chief Executive Officers compensation more to performance-related equity (as opposed to time-based restricted stock units). The number of units and options to be received is based on the closing market price of CONSOL Energys common stock on the grant date and the Black-Scholes value, respectively.
2008 Long-Term Incentive Compensation
In February 2008, the Compensation Committee reviewed the matters described above for purposes of establishing each executives target long-term incentive value. The Compensation Committee, in coordination with our Chief Executive Officer, approved maintaining the same mix of restricted stock units, options and performance share units to be granted to our named executives, other than the Chief Executive Officer. As discussed above, the Compensation Committee decided in 2008 to place more emphasis on the long-term performance component of our named executives 2008 total direct compensation to incentivize our key management members to achieve our longer-term performance objectives and strategic plan.
In light of these objectives, the Compensation Committee approved an increase from 2007 in the long-term incentive opportunity for each of our Chief Executive Officer, our Chief Financial Officer, our former President Coal Group, and our Chief Legal Officer of 29.98%, 22.20%, 18.21% and 20.12%, respectively. As a result, the Compensation Committee approved the following equity awards (in the dollar amounts shown below):
These increased long-term incentive opportunities are positioned between the median and 75th percentile of the peer group.
Additional information regarding each of the equity grants and their terms and conditions is more fully described in Understanding Our Summary Compensation and Grants of Plan-Based Awards Tables on page 44.
2009 Long-Term Incentive Compensation
In February 2009, the Compensation Committee, in coordination with our Chief Executive Officer, approved maintaining the same mix of restricted stock units, options and performance share units to be granted to our named executives, other than the Chief Executive Officer. Consistent with its decisions in 2008, the Compensation Committee decided to place more emphasis on the long-term performance component of our named executives 2009 total direct compensation to incentivize our key management members to achieve our longer-term performance objectives consistent with our strategic plan. Accordingly, the Compensation Committee approved an increase from 2008 in the long-term incentive opportunity of each of our Chief Executive Officer, Chief Financial Officer and Chief Legal Officer of approximately 6.5%, 6.3% and 7.9%, respectively.
The Compensation Committee maintained the same equally weighted mix of long-term equity awards for the named executives. The independent members of the Board approved stock options, restricted stock units and performance share units comprising approximately 45%, 15% and 40% for the Chief Executive Officers long-term incentive compensation.
As a result of the management reorganization, our new Chief Operating Officer will participate in the CONSOL Energy long-term incentive compensation program. In February 2009, the Compensation Committee approved equity awards for Mr. DeIuliis. As with the other CONSOL Energy named executives, the award has three components restricted stock units, stock options and performance share units. The mix is evenly weighted among the three components, and the award replaces the long-term award made by the CNX Gas Compensation Committee in December 2008.
Options and Restricted Stock Units
The Compensation Committee has the authority to administer the Equity Incentive Plan and make annual awards of non-qualified options to purchase our common stock and restricted stock units (along with associated dividend equivalent rights, which accrue and are ultimately paid in stock only if the underlying units vest) to our named executives. The Compensation Committee believes that our stock option and restricted stock unit awards promote the achievement by CONSOL Energy of short and long-term performance objectives, while aligning our named executives interests with CONSOL Energys shareholders.
The stock option and restricted stock unit awards vest ratably over a three-year period to enhance our retention objectives. The stock option and restricted stock unit awards also provide that, upon a change in control, the unvested portion of the awards will vest. In the event of a potential change in control transaction, this provision will motivate executives to take actions that are in the best interests of CONSOL Energy and its shareholders and reduce the distraction regarding the impact of such a transaction on the personal situation of the executives.
Additionally, our award agreements contain confidentiality provisions, two-year non-competition and two-year non-solicitation provisions, which protect our business by, for example, causing a forfeiture of awards if a named executive violates these covenants. See CONSOL Energy Stock Options on page 71 and CONSOL Energy Restricted Stock Units on page 72 for a more detailed description of the restrictive covenants in option and restricted stock unit awards and the effects of employment termination.
The Compensation Committee has determined that it should grant equity awards at the beginning of the year that follows the year in which performance occurred, and therefore, such awards will be granted (when and as appropriate) at the first regularly scheduled Compensation Committee and Board meetings in which comprehensive compensation packages are approved. By doing so, equity awards will be granted closer in time to a review of each named executives year-end performance.
2008 Long-Term Incentive Program (LTIP)
In 2008, the Compensation Committee retained outside compensation consultants to assist it in designing an LTIP that would address the Compensation Committees objectives. In connection with developing the LTIP, the outside compensation consultants provided the Compensation Committee with general energy sector compensation data from published compensation surveys and proxy data of the Peer Group. The data reflected the use of different long-term incentive programs and the pay magnitude in terms of both target opportunity and actual payouts.
In February 2008, the Compensation Committee (and the independent members of the Board with respect to the Chief Executive Officer) approved performance unit awards for each of our named executive officers. For the performance period of January 1, 2008 through December 31, 2010, the program provides that each named executives maximum award will be eligible for potential vesting if a threshold level of performance is achieved for any one of three performance goals: (i) total shareholder return relative to CONSOL Energys peers (50th percentile), (ii) cumulative EBITDA for the period, or (iii) cumulative net income for the period. If any of these goals is achieved, the maximum awards will be subject to Compensation Committee discretion to reduce the awards by exercising negative discretion, which negative discretion may include considerations of CONSOL Energys
performance relative to total shareholder return to its peers during the period and EBITDA performance. The incorporation of negative discretion will provide flexibility to reduce an award, after taking into account each executives performance and the performance of CONSOL Energy.
The target information for our total shareholder return performance metric is as follows:
The target information for our EBITDA performance metric is as follows:
The performance share unit award agreements include a change in control provision, which provides that in the event of a change in control of CONSOL Energy, the units will accelerate and vest at target. In the event of a potential change in control transaction, this provision will motivate executives to take actions that are in the best interests of CONSOL Energy and its shareholders and reduce the distraction regarding the impact of such a transaction on the personal situation of the executives.
The Shareholder Return Peer Group (as referenced above) is comprised of the following 29 companies:
For purposes of measuring total shareholder return, the Compensation Committee selected the above group of 29 energy companies in which we compete for capital in the market. How well CONSOL Energy performs in that competition is measured by our respective total shareholder return. The Compensation Committee further believes that these companies are similar to CONSOL Energy from an investors perspective. Unlike the 14-company Peer Group used to benchmark pay levels, this peer group was not adjusted based on company size, and represents a broader mix of energy companies.
2009 Long-Term Incentive Program
In February 2009, the Compensation Committee (and the independent members of the Board with respect to the Chief Executive Officer) approved new performance unit awards for each of our named executives. The program is structured substantially similar to the 2008 Long-Term Incentive Program and covers the performance period of January 1, 2009 through December 31, 2011.
On January 16, 2009 the boards of CONSOL Energy and CNX Gas decided to consolidate the management teams of the companies, as discussed above under Management Reorganization. Among other matters, our Chief Executive Officer became the Chief Executive Officer of CNX Gas, while the former Chief Executive Officer of CNX Gas became our and CNX Gas Chief Operating Officer, and our other executive officers became the executive officers of CNX Gas. Prior to this management reorganization, CNX Gas had adopted three long-term performance share award programs for its executives and management, or as we call them, PSUs: the 2007 PSUs, the 2008 PSUs and the 2009 PSUs. None of our executive officers have any PSUs other than our Chief Operating Officer who received them prior to the management reorganization in his capacity as the then Chief Executive Officer of CNX Gas.
Due to the management reorganization, no awards were made nor will be made relative to the CNX Gas 2009 PSUs, as these were cancelled by the CNX Gas board. With respect to the outstanding 2007 PSUs and 2008 PSUs, due to our executives becoming the executive officers of CNX Gas and the CNX Gas Chief Executive Officer becoming our Chief Operating Officer and former CNX Gas employees assuming responsibilities at CONSOL Energy, we decided that we should treat those awards as though they had ended effective on the date of the management reorganization. Thus, we computed the value of those awards assuming that the end date for measurement purposes was January 16, 2009 (the date of the management reorganization). Although earned 2007 PSUs and 2008 PSUs were to be settled in cash following the end date, we desired not to pay them out in cash, but rather to use CONSOL Energy restricted stock units (CONSOL RSUs) to incentivize (i) performance for both companies, (ii) former CNX Gas employees who assumed responsibilities with CONSOL Energy to stay with CONSOL Energy, and (iii) other employees who remained at CNX Gas to continue employment, all through the original measurement date.
To achieve these goals, we took the value of the CNX Gas PSUs and determined what an equivalent value at January 16, 2009 would be for CONSOL RSUs. In order to effectuate this, on March 13, 2009, CONSOL Energy filed a registration statement on Form S-4 relating to the registration of CONSOL Energy RSUs and the common stock underlying those RSUs, to be issued to the holders of the 2007 PSUs and 2008 PSUs. Since the PSUs are governed by existing award agreements, we intend to accomplish this by requesting the holders of the PSUs to surrender them to CNX Gas in exchange for CONSOL Energy issuing CONSOL RSUs on substantially similar terms (including but not limited to vesting periods and forfeiture terms). This proxy statement does not constitute an offer of CONSOL RSUs or the underlying CONSOL Energy common stock to the holders of the 2007 PSUs or the 2008 PSUs; any such offer will only be made pursuant to a prospectus.
Stock Ownership Guidelines for Executives
The stock ownership guidelines provide that all employees designated as officers for purposes of the policy should own shares of the Corporations stock, the value of which is a multiple of that persons base salary. Shares issuable upon the exercise of options or settlement of performance share units held by an individual are not counted for purposes of determining whether an individual has satisfied the ownership guideline requirement. For the named executives, the stock ownership guidelines are as follows:
Our stock ownership guidelines were implemented by the Compensation Committee in order to further align our named executives interest with shareholders and to comply with best practices. The Compensation Committee believes that long-term stock ownership by our named executives further ensures that their interests are aligned with those of other shareholders. CONSOL Energy reviews compliance with the stock ownership guidelines annually. As of early 2009, Messrs. Harvey, Lyons, Lilly and Richey had satisfied their stock ownership guidelines. Mr. DeIuliis, our newest employee to CONSOL Energy, has approximately five years to comply with the stock ownership guidelines.
Post Employment Benefits
In 2005 and 2006, the Compensation Committee studied CONSOL Energys retirement plans with the assistance of the outside compensation consultants. These plans included the Employee Retirement Plan (which we call the Pension Plan) and the Retirement Restoration Plan (which we call the Restoration Plan). The Compensation Committee reviewed a market study prepared by an outside compensation consultant which surveyed 86 pension plans of energy and mining industry companies to determine market practices with retirement benefit plans and to develop an overall retirement benefit program which was consistent with such market practices. The Compensation Committee determined, after that review, that CONSOL Energys cumulative retirement benefits for the named executives were below the median of the peer group.
In April 2005, the Board, after discussions with, and upon the recommendation of, the Compensation Committee, amended the Pension Plan to, among other matters, modify the benefit formulas applicable to participants future accrual of benefits under the plan. The modification to the benefit formula reduced the benefits offered to all employees and also eliminated the lump sum feature of the Pension Plan for benefits accruing after December 31, 2005. The Compensation Committee retained outside compensation consultants to review the impact of this modification to the Pension Plan on the Restoration Plan, which provides some employees (including our named executives) with supplemental retirement benefits that are otherwise linked to and limited by the Pension Plan due to statutory limitations applicable to the Pension Plan. In October 2006, the consultants advised the Compensation Committee that, without amending the Restoration Plan or adopting a supplemental retirement plan, the amendment to the Pension Plan (effective January 1, 2006) would result (over time) in an inadequate retirement benefit being provided to the named executives and other executives eligible to receive a supplemental retirement benefit for the following reasons:
After a review of the Restoration Plan and based on an outside compensation consultants analysis and recommendations, our Compensation Committee determined in December 2006 that it was advisable to restore
benefits offered to certain levels of employees through the adoption of the Supplemental Retirement Plan. The CONSOL Energy Supplemental Retirement Plan, unlike the Restoration Plan, is independent of the Pension Plan formula. Benefits under the CONSOL Energy Supplemental Retirement Plan are calculated by taking 50% of the average of the highest five consecutive annual compensation amounts (including short-term incentive compensation payments), and multiplying by a service fraction.
In light of the foregoing, the Compensation Committee recommended to our Board, and our Board authorized, that the Restoration Plan be frozen effective December 31, 2006, for CONSOL Energy employees and that the Restoration Plan be replaced prospectively with the CONSOL Energy Supplemental Retirement Plan effective January 1, 2007. The objective of the CONSOL Energy Supplemental Retirement Plan is to promote the interests of CONSOL Energy and our shareholders by facilitating the attraction and retention of key employees vital to our success.
Because CNX Gas employees do not participate in the CONSOL Energy Supplemental Retirement Plan, they were offered a one-time distribution election of benefits accrued through December 31, 2005 under the Restoration Plan calculated as of January 1, 2006. Accordingly, Mr. DeIuliis made this election and received a lump sum payment from the Restoration Plan on January 30, 2007 of $199,353. In addition, in August 2007, Mr. DeIuliis executed a letter agreement with CONSOL Energy in which CONSOL Energy agreed to pay him approximately $407,000 for various matters, including benefits that would have otherwise accrued in 2006 under CONSOL Energys Retirement Restoration Plan, but for certain plan amendments that were approved by the Board in December 2006. Pursuant to this agreement, Mr. DeIuliis agreed, among other matters, that he would not assert any claims regarding any retirement benefits or other deferred compensation benefits provided by CONSOL Energy. However, as a result of the management reorganization and the fact that Mr. DeIuliis is now an employee of CONSOL Energy, he will participate in the CONSOL Energy Supplemental Retirement Plan effective January 16, 2009 (the date of the management reorganization).
Additional details regarding the Pension Plan, the Restoration Plan, the CONSOL Energy Supplemental Retirement Plan and the agreements are more fully described in Understanding Our Pension Benefits Table on page 54.
Employment and Letter Agreements
We have entered into an employment agreement with our Chief Executive Officer and into letter agreements with our Chief Legal Officer and our former President Coal Group, who retired effective January 31, 2009. CONSOL Energy entered into each of these agreements for purposes of attracting the named executive to CONSOL Energy. In the case of our Chief Executive Officers most recent employment agreement, the Compensation Committee believed that such an agreement was necessary for purposes of maintaining consistency with market and past practice and retaining our Chief Executive Officer. For a description of the additional terms of each of these agreements, see Understanding our Summary Compensation and Grants of Plan-Based Awards Tables on page 44 and Understanding Our Change in Control and Employment Termination Tables on page 66.
Change in Control Agreements
We have entered into Change in Control Agreements with each of our named executives (which we refer to as CIC Agreements). The Compensation Committee believes that the CIC Agreements will motivate executives to take actions that are in the best interests of CONSOL Energy and its shareholders and reduce the distraction regarding the impact of such a transaction on the personal situation of the executives. Under the CIC Agreements, each named executive will receive severance benefits if such named executives employment is terminated or constructively terminated after, or in connection with, a change in control (as defined in the respective CIC Agreements) if such named executive enters into a general release of claims reasonably satisfactory to us. Under these circumstances, these named executives would be entitled to, among other severance payments and benefits, a lump sum cash payment equal to a multiple of base pay plus a multiple of incentive pay as follows:
In connection with a review of all of CONSOL Energys CIC Agreements, management noted that the multiplier for Mr. Lyons CIC Agreement (as well as the agreements for other employees) needed to be modified for internal pay equity purposes. Accordingly, in September 2008, management proposed, and the Compensation Committee approved, changing Mr. Lyons from 2.0 to 2.5 such that it was consistent with Mr. Lillys.
Additionally, equity grants would accelerate and vest. To protect our business interests, the CIC Agreements also contain confidentiality obligations, a one-year non-competition covenant and a two-year non-solicitation covenant. Additional terms of these agreements are more fully described in Understanding Our Change in Control and Employment Termination Tables on page 66.
In connection with the sale of approximately 18.5% of CNX Gas to investors in 2005, CONSOL Energy and CNX Gas wanted to ensure the retention and smooth transition of executive officers of CONSOL Energy to CNX Gas by providing them with agreements substantially similar to the CONSOL Energy CIC Agreements. The Compensation Committee reviewed with CONSOL Energys executive officers information regarding the potential cost of entering into change in control agreements with key employees of CNX Gas if a change in control triggering event occurred (including cost by individual agreement, total cost with respect to all agreements and market analysis of such costs). After consideration of this information, our Compensation Committee determined that the potential costs were consistent with market practice and such agreements were approved and authorized by the Compensation Committee.
Pete Lillys Letter Agreement (for Retirement)
Mr. Lilly retired from his position as President Coal Group of CONSOL Energy effective January 31, 2009. In connection with Mr. Lillys retirement, CONSOL Energy and Mr. Lilly entered into a letter agreement effective March 10, 2009, pursuant to which the Corporation will provide Mr. Lilly certain separation benefits, subject to his release of claims against the Corporation and his continued compliance with restrictive covenants in his equity award agreements under the Corporations Equity Incentive Plan, including two-year non-competition and two-year non-solicitation covenants, and confidentiality provisions. Pursuant to this letter agreement, Mr. Lilly will be entitled to the following cash payments, in addition to certain accrued benefits: a one-time severance payment of $635,000, minus required deductions, and a one-time bonus payment of $450,000, minus required deductions.
Additionally, the provisions applicable to a reduction in force will be applied to his equity awards. These provisions generally (subject to the other terms and conditions of the equity award agreements) have the following effect: (i) with respect to performance share unit awards, such awards are retained and scheduled to be paid, to the extent earned as determined at the end of the applicable performance period and the terms of the program documents; (ii) with respect to option awards, the unvested portion of such awards will continue to vest in accordance with the applicable awards vesting schedule and, once vested, remain exercisable until the expiration of such options term; and (iii) with respect to restricted stock unit awards, the unvested portion of such awards accelerates and vests. As of January 31, 2009, Mr. Lilly held options to purchase 187,488 shares of the Companys common stock, 26,874 restricted stock units and 19,727 performance share units.
Change in Control Tax Gross-Up
In connection with the Compensation Committees objective to provide compensation opportunities that will attract and retain superior executive personnel who will make significant contributions to CONSOL Energy, our CIC agreements provide for tax gross-ups in the event of a change in control. If a change in control of CONSOL Energy causes compensation, including performance-based compensation, or awards, including but not limited to equity awards, to be paid or result in accelerating the vesting, a disqualified individual could, in some cases, be considered to have received parachute payments within the meaning of Section 4999 and Section 280G of the federal income tax laws. Pursuant to Section 4999, a disqualified individual can be subject to a 20% excise tax on excess parachute payments. Similarly, under Section 280G, CONSOL Energy is denied a deduction for excess parachute payments. As indicated above, CONSOL Energy and CNX Gas have entered into change in control agreements whereby, if it is determined that any payment or distribution by CONSOL Energy or CNX Gas (in the case of its Chief Executive Officer) to or for the disqualified persons benefit would constitute an excess parachute payment, CONSOL Energy or CNX Gas (in the case of its Chief Executive Officer) will pay to the disqualified person a gross-up
payment, subject to certain limitations, such that the net amount retained by the disqualified person after deduction of any excise tax imposed under Section 4999, and any tax imposed upon the gross-up payment, will be equal to the excise tax on such payments or distributions. Gross-up payments will not be deductible by CONSOL Energy or CNX Gas (in the case of its Chief Executive Officer). In connection with incorporating gross-up provisions in the CIC agreements, the Compensation Committee determined that such gross-up payments were consistent with general market practice and ensured that each executive received the intended level of severance benefits, unencumbered by the 20% excise tax.
We provide our named executives and other senior officers with perquisites that we believe are reasonable, competitive and consistent with CONSOL Energys compensation program. We believe that our perquisites help maximize an executives time, and assist us in recruiting and retaining our named executives and senior officers. Our principal perquisite programs primarily include the personal use of the corporate aircraft in accordance with the terms and conditions of the Aircraft Policy, country club memberships, financial planning assistance, a vehicle allowance and certain associated tax gross-ups. These programs are more fully described in the footnotes to the Summary Compensation Table and Understanding Our Summary Compensation and Grants of Plan-Based Awards Tables on page 44.
Section 409A of the Code generally provides that amounts deferred under nonqualified deferred compensation arrangements will be subject to accelerated income recognition, interest and substantial penalties unless the arrangement satisfies certain design and operational requirements. Final regulations for Section 409A were issued in April 2007, and the transition period for amending plans to comply with Section 409A ended on December 31, 2008. CONSOL Energy has amended our compensatory arrangements affected by Section 409A, including the employment agreement with our Chief Executive Officer and the CIC Agreements. These changes are intended to ensure that compensation payable under the arrangements is not subject to taxation under Section 409A, and principally include clarifying the timing of compensatory payments and incorporating definitional modifications in order to comply with Section 409A (or certain exceptions thereto). Any such amendments are not intended to materially increase the benefits payable under our plans and arrangements.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with CONSOL Energys management and, based upon such review and discussion, the Compensation Committee recommended to our Board that the Compensation Discussion and Analysis be included in this Proxy Statement. The Compensation Committees charter is available on our website at www.consolenergy.com.
Members of the Compensation Committee:
William P. Powell, Chairman
Patricia A. Hammick
James E. Altmeyer, Sr.
John T. Mills
March 23, 2009
The foregoing Compensation Committee Report does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing of CONSOL Energy under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Corporation specifically incorporates the Report by reference therein.
SUMMARY COMPENSATION TABLE - 2008, 2007 AND 2006
The following table discloses the compensation for Mr. Harvey, the principal executive officer of CONSOL Energy, William J. Lyons, the principal financial officer of CONSOL Energy, and the other three most highly compensated executive officers of CONSOL Energy or its subsidiaries who were serving as executive officers at the fiscal year ended December 31, 2008, whose total annual compensation (excluding items described in the column entitled Change in Pension Value and Nonqualified Deferred Compensation Earnings) exceeded $100,000.
GRANTS OF PLAN-BASED AWARDS - 2008
The following table sets forth each grant of awards made to a named executive in the 2008 fiscal year under plans established by CONSOL Energy or CNX Gas.
GRANTS OF PLAN-BASED AWARDS TABLES
Executive Summary of CONSOL Energy Plans and Agreements with Named Executive Officers
In addition to their base salary, our executive officers receive a mix of at-risk compensation, both short and long-term, for their services. Pursuant to various plans which have been adopted by the Corporation, our executive officers are eligible to receive annual cash incentive awards based on the achievement of certain performance targets, stock options, restricted stock units and performance share units. Executive officers are also entitled to use of the Corporations owned and chartered aircraft, pursuant to certain terms and conditions set forth below. The executive officers of CNX Gas are entitled to similar awards. Each of these elements of compensation and the plans under which they are awarded are discussed below in greater detail.
Certain of our executive officers have executed agreements with the Corporation or its subsidiary, CNX Gas, entitling them to additional benefits aside from those available under our various plans. The following is a list of agreements relating to the compensation arrangements between the Corporation or CNX Gas and those individuals (each of which are discussed below in greater detail):
Employment Agreement with our Chief Executive Officer
Mr. Harvey entered into an employment agreement with CONSOL Energy on June 3, 2005. The Employment Agreement was amended and restated on December 2, 2008. The following is a description of the Employment Agreement, as amended and restated (the Employment Agreement).
The current term of the Employment Agreement ends on June 3, 2009, unless sooner terminated, and is automatically extended for additional one year terms thereafter, unless not later than ninety (90) days immediately preceding such anniversary, the Corporation or Mr. Harvey shall have given written notice to the other that it does not wish to extend the Employment Agreement. Under the Original Employment Agreement, Mr. Harvey received an annual base salary of $850,000. Under the Employment Agreement, Mr. Harvey will receive an annual base salary of $1,000,000. The Employment Agreement further provides that Mr. Harvey is eligible to participate in an annual bonus plan on terms established from time to time by the Board. His annual target bonus under that plan will not be less than 100% of his then current base salary. During the term of the Employment agreement, he is also eligible to participate in any Corporation long-term incentive plan, and in all employee benefit and fringe benefit plans and arrangements made available by the Corporation to its executives and key management employees upon the terms and subject to the conditions set forth in the applicable plan or arrangement.
The Employment Agreement provides, among other matters, that if our Chief Executive Officer resigns for good reason (as defined in the Employment Agreement) or is terminated without cause (as defined in the Employment Agreement) and in each such case has delivered a signed release of claims reasonably satisfactory to the Corporation to the Corporations General Counsel within thirty (30) days of the date of his termination and not revoked such release within the seven-day revocation period provided for in such release, he is entitled to receive, among other severance payments and benefits, an amount equal to two times his then current base salary and two times the target annual bonus amount (subject to his compliance with the confidentiality, non-competition and non-solicitation restrictions set forth in the employment agreement). The confidentiality provisions survive the termination of his employment with us and the non-competition and non-solicitation provisions survive for a period of two years following the termination of his employment.
Additionally, the employment agreement provides our Chief Executive Officer with service credit for eleven additional years of service under the CONSOL Energy Employee Retirement Plan and our retiree medical plan, which benefits represent his years of service at PacifiCorp Energy Inc. and its affiliates; and provided further that if this credit cannot be provided under the CONSOL Energy Employee Retirement Plan, CONSOL Energy will provide these benefits under a supplemental retirement plan. The amount of unreduced retirement benefits payable to Mr. Harvey (i.e., amount owed to him at normal retirement age) from PacifiCorp Energy Inc. will be deducted from benefits paid by the Corporation to Mr. Harvey under the CONSOL Energy Retirement Restoration Plan or the CONSOL Energy Supplemental Retirement Plan, as applicable. Credited service was negotiated and agreed to with our Chief Executive Officer in 1997, as an inducement for him to leave PacifiCorp Energy Inc. and join our Corporation as its Chief Executive Officer, and was re-affirmed in the 2005 employment agreement.
For more information regarding Mr. Harveys employment agreement, see Understanding our Change in Control and Employment Termination Tables on page 66.
Letter Agreement with our Former President-Coal Group
In October 2002, the Corporation entered into an agreement with Mr. Lilly to induce him to join the Corporation. However, this letter agreement is no longer effective since he retired on January 31, 2009.
The agreement provided for:
In addition, the Corporation agreed, as consideration for Mr. Lillys lost compensation resulting from his resignation from the board of directors of Penn Virginia Resources, LLC and of Penn Virginia Corporation (as a condition to his employment with the Corporation), to pay him $400,000 in four equal installments, with each installment to be made annually on the anniversary date of his employment with the Corporation commencing on October 28, 2003 and ending on October 28, 2006. Mr. Lilly is also entitled to credited service from August 1, 1977 with respect to retiree medical benefits under The CONSOL Energy Inc. Comprehensive Medical Expense Benefits Plan For Salaried Employees.
Letter Agreement with our Chief Legal Officer
Mr. Richeys agreement provides for the following:
CONSOL Energy Short-Term Incentive Compensation Plan
To be eligible for an annual award under the Short-Term Plan, a named executive must be an active, full-time, employee on December 31, have worked for at least three months of that same year and be an active employee on the date the annual award is distributed unless the named executive is an early, normal, or incapacity retiree then the named executive must only be an active, full-time employee on December 31. For more information on the Short-Term Plan, see Compensation Discussion and Analysis on page 23.
Stock Options Awarded under the CONSOL Energy Equity Incentive Plan
Our Plan permits the granting of options, both incentive stock options and non-qualified stock options, to purchase shares of CONSOL Energy common stock. Our Compensation Committee establishes the exercise price at the time each option is granted. The Plan provides that the option exercise price for each share covered by an option, including incentive and non-qualified options, must equal or exceed the fair market value of a share of CONSOL Energy common stock on the date the option is granted, and that the term of the option may not exceed ten years from the grant date. Accordingly, options are intended to be excepted from coverage under Section 409A of the Code.
The exercise price of options granted under the Plan may be paid for by (i) cash, or its equivalent, (ii) by exchanging shares of CONSOL Energy common stock (which are not the subject of any pledge or other security interest) with a fair market value on the exercise date equal to the aggregate exercise price of the options, or (iii) a participant electing to pay all or any portion of the aggregate exercise price by having shares with a fair market value on the exercise date equal to the aggregate exercise price withheld by CONSOL Energy or sold by a broker-dealer.
Our Plan also provides that the Compensation Committee may provide in an award agreement for the automatic grant of a restoration option to a participant who delivers shares in payment of the exercise price of any option granted under our Plan, or in the event that the withholding tax liability arising upon exercise of any such option by a participant is satisfied through the withholding by CONSOL Energy of shares otherwise deliverable upon exercise of the option. A restoration option entitles the holder to purchase a number of shares equal to the number of such shares delivered or withheld upon exercise of the original option. A restoration option must have an exercise price of not less than 100% of the fair market value on the grant date. To date, the Compensation Committee has not granted any options with a restoration provision.
The Plan was recently amended to ensure compliance with Section 409A of the Code. The changes include clarifying eligible service recipients; the timing of distribution events, including upon separation from service; clarifying the timing and implementation of deferral elections; and, to the extent applicable, providing that the payment benefits will be subject to a six-month delay in the event a participant is a specified employee (within the meaning of Section 409A) at the time of termination. The amendments were not intended to materially increase the benefits payable under the Plan.
Restricted Stock Units Awarded under the CONSOL Energy Equity Incentive Plan
Restricted stock units are also be granted under our Plan. Our Compensation Committee determines the number of restricted stock units to be granted to each participant, the duration of such awards, the conditions under which the restricted stock units may be forfeited to CONSOL Energy, and the other terms and conditions of such awards. Restricted stock units are structured to comply with Section 409A of the Code. Accordingly, distributions shall be made only upon a permissible distribution event, including upon separation from service, and the timing and implementation of deferral elections must occur with rules prescribed by Section 409A of the Code.
Variable Long-Term Incentive Compensation Award under the CONSOL Energy Equity Incentive Plan
In 2005, the Compensation Committee developed a variable long-term incentive compensation award (which we call the LTIC), which was payable in stock options and restricted stock units in 2007 to our Chief Executive
Officer, if he attained certain pre-determined performance goals in 2006. The payout of this award, made in February 2007 is included in the Summary Compensation Table 2008, 2007 and 2006 on page 40.
The terms of this award provided that if at the time of the performance review of the Chief Executive Officer, the independent members of the Board determined that our Chief Executive Officer had achieved any of the pre-established performance goals during the performance period, the Chief Executive Officer would be entitled to a pro rata portion of the award. Additionally, our Board reserved the discretion to grant all or any portion of the award if any or none of the performance goals was achieved during the performance period. In February 2007, our Board determined that our Chief Executive Officer had met certain performance goals for 2006, and options and restricted stock units were granted to him under our Plan, and which grants are subject to the terms and conditions, including vesting restrictions, contained in the Corporations standard nonqualified stock option and restricted stock unit award agreements. The Boards assessment of our Chief Executive Officers 2006 performance in connection with determining the LTIC award amounts is described in the Compensation Discussion and Analysis section in CONSOL Energys proxy statement filed on March 30, 2007. Options are valued using the Black-Scholes option valuation methodology. The exercise price of any options and the value of any shares underlying restricted stock units issued in satisfaction of an equity award are based on the fair market value of our common stock on the grant date as provided under the terms of our Plan.
Long-Term Incentive Performance Program
The 2008 LTIP, as approved by the Board upon recommendation of the Compensation Committee, provides each named executive and the other executives with a number of performance share units, including dividend rights. The number of performance share units is equal to the target cash value of the award as so determined for an executive, divided by the average closing price of a share of CONSOL Energys common stock on the grant date. The performance share units represent a contingent right to receive one share of CONSOL Energy common stock to the extent such unit is earned and becomes payable pursuant to the terms of the LTIP. Compensatory payments under the 2007 LTIP are structured to comply with the short-term deferral exception under Section 409A of the Code. For more information on the 2008 LTIP, see Compensation Discussion and Analysis on page 23.
CNX Gas Short-Term Incentive Compensation Plan
CNX Gas Short-Term Incentive Compensation Plan has a threshold level of net income which must be achieved for incentive payments to be made pursuant to the program. In 2008, CNX Gas compensation committee approved short-term incentive compensation awards for several individuals, including Mr. DeIuliis. CNX Gas compensation committee authorized the payment of an annual incentive (i.e., bonus) award to Mr. DeIuliis, which is set forth in the Summary Compensation Table 2008, 2007 and 2006 on page 40. For 2008, the threshold net income threshold was $90 million, which was achieved. If the threshold level of net income is achieved, incentive payments are paid with respect to the program based on:
The actual bonuses earned are then determined by comparing CNX Gas actual performance during fiscal year 2008 against the target performance goals for each of the above mentioned criteria and the employees actual performance against his or her individual performance goals.
Stock Options Awarded under the CNX Gas Equity Incentive Plan
Stock options were granted to Mr. DeIuliis under CNX Gas equity incentive plan. The exercise price per share of each stock option award granted is the fair market value of CNX Gas common stock on the grant date. The options granted to the Mr. DeIuliis during 2005 vest in four equal installments on the first four anniversaries of the grant date while the options granted during 2006 vest in their entirety on the third anniversary of the grant date. Subject to the provisions of the particular option agreement and CNX Gas equity incentive plan, the holder of the option may exercise all or any part of the vested portion of the option at any time prior to the tenth anniversary of the grant date, which is the expiration date. See CNX Gas Stock Options on page 78 for a description of the employment termination, change in control and restrictive covenant provisions of the CNX Gas option agreements.
CNX Gas Long-Term Incentive Programs under the CNX Gas Equity Incentive Plan
On October 11, 2006 and December 10, 2007, CNX Gas approved and adopted programs under CNX Gas equity incentive plan, each called the CNX Gas Long-Term Incentive Program. The performance share units represent a contingent right to receive a cash payment, determined by reference to the value of one share of CNX Gas common stock, if such performance share unit is earned and becomes payable pursuant to the terms of the program. The total number of performance share units earned, if any, by a participant is based on CNX Gas total shareholder return relative to the total shareholder return of each company in a peer group of companies for the period of October 11, 2006 to December 31, 2009, in the case of the 2006 awards, and January 1, 2008 to December 31, 2010, in the case of the December 2007 awards.
A determination of total stockholder return for each performance period will be calculated based on the same methodology as used by CONSOL Energy for its Long-Term Incentive Performance Program (as described in Long-Term Incentive Performance Program on page 47), except that the analysis will use the stock prices of CNX Gas and its peers, and the payout schedule will be as follows:
OUTCOME RELATIVE TO PEER GROUP
Note: Interpolation between points will be made on a straight line basis. Below the 25th percentile and above the 90th percentile, there will be no interpolation.
Any performance share units earned by a participant will be settled and paid in cash by CNX Gas or its affiliates, as applicable, with the amount calculated to be based on how well the CNX Gas stock price performs relative to its peers over the performance period.
See Exchange Offer in Compensation and Discussion Analysis on page 23.
We have a policy titled the Use of Corporate-Owned or Leased or Chartered Aircraft (which we refer to as the Aircraft Policy). To best utilize the time of directors, executive officers, and members of management as well as due to potential security concerns, we own, lease and charter aircraft for use by our directors, executives, members of management and their spouses in connection with business travel. To comply with applicable laws and prevent any abuse of this aircraft by having it used for personal reasons, we have instituted the Aircraft Policy. The policy sets forth the detailed procedures by which a person may use CONSOL Energy-owned or leased aircraft and chartered aircraft including, without limitation, completing a request form which details the trip and a description of the business activities and accompanying persons and, in the case of CONSOL Energy-owned or leased aircraft, the prior approval of our Chief Executive Officer for trips for which he is not present. In the case of flights on which our Chief Executive Officer is present, the flight manifest is approved by our Chief Financial Officer and Chief Legal Officer. The Aircraft Policy also informs any user of CONSOL Energy-owned or leased or chartered aircraft that such use could result in imputed income, as a taxable employee benefit, to the director(s), executive(s) or member(s) of management under federal tax regulations relating to the non-business use of aircraft.
Time Sharing Agreement
On May 1, 2007, the Corporation entered into a Time Sharing Agreement (which we refer to as the Time Sharing Agreement) with Mr. Harvey. The Time Sharing Agreement provides that CONSOL Energy will, from time to time, lease its Gulfstream Aerospace G-II59 aircraft (the Aircraft) to Mr. Harvey with a flight crew for the operation thereof, as and when required by Mr. Harvey, so long as the Aircraft is not otherwise employed on behalf of the Corporation . Mr. Harveys use of the Aircraft will constitute a non-exclusive lease and the Time Sharing Agreement will only be applicable in instances in which the Corporation seeks partial reimbursement of Aircraft-related costs. Pursuant to the Time Sharing Agreement, Mr. Harvey has agreed that the rates to be charged for any particular flight (round-trip between Pittsburgh, Pennsylvania and Toronto, Canada) will be $1,500 unless otherwise modified by the Chairman of the Compensation Committee in compliance with the Time Sharing Agreement and applicable law. The Corporation has the right to charge Mr. Harvey on a flight-by-flight basis up to an amount which equals: (i) fuel, oil, lubricants, and other additives; (ii) travel expenses of the crew; (iii) hangar and tie-down costs away from the Aircrafts base of operation; (iv) insurance obtained for the specific flight; (v) landing fees, airport taxes, and similar assessments; (vi) customs, foreign permit, and similar fees directly related to the flight, if applicable; (vii) in-flight food and beverages; (viii) passenger ground transportation; (ix) flight planning and weather contract services; and (x) an additional charge equal to 100% of the expenses listed in (i) above.
CONSOL Energy is also obligated to provide and maintain Aircraft third party aviation legal liability insurance under the Time Sharing Agreement, naming Mr. Harvey as an additional insured and to indemnify and agree to hold Mr. Harvey harmless from and against any and all liabilities, claims, demands, suits, judgments, damages, losses, costs and expenses (including reasonable legal expenses and attorneys fees) arising in connection with the Aircraft. The Corporation and Mr. Harvey will both have the right to terminate the Time Sharing Agreement with immediate effect upon written notice to the other party and the Time Sharing Agreement will automatically terminate upon the cessation of Mr. Harveys employment with us.
OUTSTANDING EQUITY AWARDS TABLES AT FISCAL YEAR-END - 2008
The following tables set forth all unexercised options, restricted stock units and performance share unit awards that have been awarded to our named executives by each of CONSOL Energy and CNX Gas (as applicable) and were outstanding as of December 31, 2008.
Outstanding Equity Awards at Fiscal Year End for CONSOL Energy - 2008
Outstanding Equity Awards At Fiscal Year End For CNX Gas - 2008
OPTION EXERCISES AND STOCK VESTED TABLE - 2008
The following table set forth information concerning each exercise of CONSOL Energy stock options and the vesting of restricted stock units of CONSOL Energy during the 2008 fiscal year.
PENSION BENEFITS TABLE
The following table provides information with respect to each plan that provides for specified retirement payments or benefits, or payments or benefits that will be provided primarily following retirement, including tax-qualified defined benefit plans and supplemental employee retirement plans (which we refer to as the CONSOL Energy Supplemental Retirement Plan), but excluding defined contribution plans.
Executive Summary of CONSOL Energy Pension Plans
This section provides information regarding the Corporations retirement programs, which include the following:
CONSOL Energy Employee Retirement Plan (the Pension Plan)
The Pension Plan is a defined benefit plan that pays retirement benefits based on years of service and compensation. It is a qualified plan, meaning that it is subject to a variety of IRS rules. These rules contain various requirements on coverage, funding, vesting, and the amount of compensation that can be taken into account in calculating benefits. The Pension Plan has a fairly broad application across the employee population, and forms a part of the general retirement benefit program available to employees.
Full-time (or those who have completed 1,000 or more hours of service during a twelve-month consecutive period beginning on the employment date), salaried, production and maintenance and operations and maintenance employees who have completed five years of employment with the Corporation, earn the right to receive benefits upon retirement at the normal retirement age of 65. Payments commencing prior to age 65 are reduced based on various early reduction schedules depending upon age at the payment commencement date and years of service at the time of termination. Payment under the Pension Plan may not commence prior to age 50 except in the event of an incapacity retirement as described below.
Employees who have attained age 40 with at least ten years of service who are deemed disabled and consequently receive a Social Security disability award (proving the disability occurred while engaged in employment with CONSOL Energy or CNX Gas) are eligible for an incapacity retirement resulting in an unreduced benefit, payable in the form of an annuity, commencing the month following termination. Messrs. Harvey, Lyons and DeIuliis would have been eligible for incapacity retirement under the Pension Plan as of December 31, 2008 if they had incurred a qualifying disability on that date.
Employees who terminate employment with five years or more of service prior to attaining age 50 or have attained age 50 but have fewer than ten years of service upon termination qualify for a separation retirement. Payment of the accrued vested benefit is payable at an amount reduced for age beginning at age 50, or the full benefit may be paid at age 65. Messrs. DeIuliis and Lilly are currently eligible for separation retirement under the Pension Plan, however, Mr. DeIuliis would not be entitled to payment until he attained age 50. Mr. Richey will be eligible for Separation Retirement once he attains five years of service.
Employees who have completed ten or more years of service with the Corporation and are age 50 or older upon termination are eligible for early retirement. Under early retirement, an employee may elect to defer payment to age 65 or elect to begin payment the first of any month up to age 65, subject to a reduction for age as mentioned above. Messrs. Harvey and Lyons are eligible for early retirement under the Pension Plan.
Employees who terminate employment with five or more years of service and have attained age 65 qualify for normal retirement. Payment of the full benefit commences the month following termination. None of the named executives qualify for normal retirement under the Pension Plan as of December 31, 2008.
Form of Payment
The portion of accrued pension benefit earned under the Pension Plan as of December 31, 2005 may be elected to be paid in the form of a lump-sum payment except in the case of an incapacity retirement as discussed above. Pension benefits earned after January 1, 2006 are payable in the form of a single life annuity, 50% joint and survivor annuity, 75% joint and survivor annuity or 100% joint and survivor annuity.
Calculation of Benefits
Pension benefits for salaried employees under the Pension Plan, as amended, are based on an employees years of service and average monthly pay during the employees five highest-paid years, which is referred to as the covered compensation. Average monthly pay for this purpose includes regular compensation but excludes compensation in excess of limits imposed by the federal income tax laws. Such covered compensation is reflected in the Salary column of the Summary Compensation Table (up to $230,000). Prior to January 1, 2006, pension benefits under the Pension Plan were based on the average monthly pay during the employees three highest-paid years and included annual amounts payable under the Corporations Short-Term Plan not in excess of limits imposed by the federal income tax laws, which limits the amount of annual benefits which may be payable from the qualified pension trust. Retirement benefits provided under the Pension Plan in excess of these limitations are paid from the Corporations general revenues under the separate, non-funded, non-qualified Pension Plans, which are described below.
CNX Gas Employees
Compensation earned by employees of CNX Gas on and after January 1, 2006 is included in determining the employees final average compensation for purposes of calculating retirement benefits attributable to service earned prior to January 1, 2006 under the Pension Plan, to the extent that the final average compensation does not increase by more than 4.25% per year from January 1, 2006 onward. Any benefits that are attributable to this prior service due to increases in the final average compensation earned on and after January 1, 2006 in excess of the 4.25% per year threshold, not in excess of limits imposed by federal income tax laws, are paid under the CNX Gas Employee Retirement Plan. This applies only to those CNX Gas employees who were previously employed by CONSOL Energy prior to August 1, 2004 and who are otherwise eligible to participate in the Pension Plan. Mr. DeIuliis is eligible for this additional compensation growth under the Pension Plan. Years of service earned on or after January 1, 2006 by employees of CNX Gas who are members of the Pension Plan are used in determining eligibility for early, incapacity and separation retirement and when calculating early reduction factors for payments commencing prior to age 65. For additional information on the CNX Gas retirement plan, please see CNX Gas Employee Retirement Plan on page 57.
CONSOL Energy Retirement Restoration Plan (the Restoration Plan)
The Restoration Plan is an unfunded deferred compensation plan maintained by the Corporation for the benefit of employees whose eligible compensation under the Pension Plan exceeded limits imposed by the federal income tax laws. The Corporation established this plan in order to attract and maintain persons that the Corporation considered to be important to its success by providing retirement benefits that are not restricted by the artificial limits imposed by the Code. The reasons for the existence of this plan, and the reasons that changes were made to this plan, are also discussed above in the Compensation Discussion and Analysis on page 23.
In December 2006, the Board authorized amendments which froze the Restoration Plan effective December 31, 2006 for CONSOL Energy employees and December 31, 2005 for CNX Gas employees. After that date, no existing participant accrues benefits and no compensation or service is counted for purposes of the Restoration Plan. A participants benefit is calculated as of that date with reference to the participants benefits under the Pension Plan as of that date.
To comply with Section 409A of the federal income tax laws, the Restoration Plan was further amended to provide that all distributions of benefits accrued and vested under the plan as of December 31, 2006, and through December 31, 2005 for CNX Gas employees, will be paid in a lump sum, which will be paid no later than 30 days following the later to occur of the end of the month following the month in which the participant turns age 50 or the end of the month following the month in which the participant incurs a separation of service. The benefit will be calculated and actuarially reduced, as necessary (using assumptions specified in the Pension Plan), based on a participants benefit being initially expressed as a single life annuity payable commencing on such participants normal retirement date.
Payment under the plan may not commence prior to age 50 except in the event of an incapacity retirement or under a termination due to a change in control. Payments commencing prior to age 65 are reduced based on various early reduction schedules depending upon age at the payment commencement date and years of service at the time of termination. The Restoration Plan provides the same types of retirement options as described above for the Pension Plan. Messrs. Harvey and Lyons are eligible for early retirement under the Restoration Plan. Mr. Lilly is eligible for separation retirement under the Restoration Plan. Mr. Richey will be eligible for separation retirement under the Restoration Plan once he attains five years of service. In addition, CNX Gas employee participants were also eligible to elect to receive in 2007 lump sum payments of accrued benefits. Mr. DeIuliis made this election and is no longer entitled to any other benefits under the Restoration Plan.
CONSOL Energy Supplemental Retirement Plan
On December 5, 2006, the Corporations Board approved and adopted the CONSOL Energy Supplemental Retirement Plan, effective January 1, 2007. Certain modifications were made to the CONSOL Energy Supplemental Retirement Plan which became effective December 4, 2007. The CONSOL Energy Supplemental Retirement Plan is designed primarily for the purpose of providing benefits for a select group of management and highly compensated employees of the Corporation and its subsidiaries and is intended to qualify as a top hat plan under the Employee Retirement Income Security Act of 1974, as amended. The CONSOL Energy Supplemental Retirement Plan is an unsecured obligation of the Corporation, the benefits of which will be paid from its general assets. CNX Gas employees do not participate in the CONSOL Energy Supplemental Retirement Plan.
Thus, the currently-employed named executives, and Mr. DeIuliis (as of January 16, 2009), and other eligible individuals are participants in the CONSOL Energy Supplemental Retirement Plan.
We established this Plan in order to attract and maintain persons that we considered to be important to our success by providing benefits that are not restricted by the artificial limits imposed by the federal income tax laws. The reasons for this Plan and the general change in the manner in which supplemental retirement compensation is described in the Compensation Discussion and Analysis on page 23.
The Compensation Committee has reserved the right to terminate a participants participation in the CONSOL Energy Supplemental Retirement Plan at any time. Additionally, if a participants employment is terminated or if a participant no longer meets the CONSOL Energy Supplemental Retirement Plans basic eligibility standards, the participants participation in the CONSOL Energy Supplemental Retirement Plan (and right to accrue any benefits under it) will terminate automatically, with no further action required. Final average compensation and years of service will be determined at this time.
The amount of each participants benefit as of age 65 (expressed as an annual amount) will be equal to 50% of final average compensation multiplied by the service fraction as calculated on the participants date of employment termination with the Corporation. Final average compensation means the average of a participants five highest consecutive annual compensation amounts (annual base salary plus amounts received under the Corporations Short-Term Plan) while employed by the Corporation or its subsidiaries. The service fraction means a fraction with a numerator equal to a participants number of years of service and with a denominator of 20. The service fraction can never exceed one.
The benefit described above will be reduced by a participants age 65 vested benefits (including benefits which have been paid or are payable in the future (converted to an annual amount)) under: (a) the Pension Plan; (b) the
Restoration Plan; and (c) any other plan or arrangement providing retirement type benefits, including arrangements with prior employers, to the extent service with such other employer or under such arrangement is credited under the CONSOL Energy Supplemental Retirement Plan.
No benefit will be vested under the CONSOL Energy Supplemental Retirement Plan until a participant has five years of service with the Corporation or its participating subsidiaries while the participant meets the eligibility standards in the plan. For a description of the effect of employment termination or change in control upon a participants right to benefits under the CONSOL Energy Supplemental Retirement Plan, see Understanding Our Change in Control and Employment Termination Tables on page 66.
Benefits under the CONSOL Energy Supplemental Retirement Plan will be paid in the form of a life annuity with a guaranteed term of 20 years (which will be the actuarial equivalent of a single life annuity) commencing in the month following the later to occur of: (a) the end of the month following the month in which the participant turns age 50; or (b) the end of the month following the month in which the employment termination of a participant occurs. In the event the benefits commence prior to the participants normal retirement age, the benefit will be actuarially reduced, as necessary (using assumptions specified in the Pension Plan).
CNX Gas Employee Retirement Plan
CNX Gas established pension benefits for salaried employees under the CNX Gas Employee Retirement Plan which are very similar to the benefits these employees had under the Pension Plan. The benefits are calculated based on an employees years of service and average monthly pay during the employees five highest-paid years, which is referred to as the covered compensation. Average monthly pay for this purpose includes regular compensation but excludes compensation in excess of limits imposed by the Code. Such covered compensation is reflected in the Salary column of the Summary Compensation Table (up to $230,000).
The portion of accrued pension benefit earned under the CNX Gas Retirement Plan is payable in the form of a single life annuity, 50% joint and survivor annuity, 75% joint and survivor annuity or 100% joint and survivor annuity. Payment under the CNX Gas Employee Retirement Plan may not commence prior to age 50 except in the event of an incapacity retirement. Payments commencing prior to age 65 are reduced based on various early reduction schedules depending upon age at the payment commencement date and years of service at the time of termination. The CNX Gas Employee Retirement Plan provides the same type of retirement options as described above for the Pension Plan. Mr. DeIuliis is eligible for separation retirement under the CNX Gas Employee Retirement Plan. Compensation earned by employees of CNX Gas on and after January 1, 2006 is included in determining the employees final average compensation for purposes of calculating retirement benefits attributable to service earned prior to January 1, 2006 under the Pension Plan, to the extent that the final average compensation does not increase by more than 4.25% per year from January 1, 2006 onward. Any benefits that are attributable to this prior service due to increases, not in excess of limits imposed by federal income tax laws, in the final average compensation earned on and after January 1, 2006 in excess of the 4.25% per year threshold are paid under the CNX Gas Employee Retirement Plan. This applies only to those CNX Gas employees who were previously employed by CONSOL Energy prior to August 1, 2004 and eligible to participate in the Pension Plan. Mr. DeIuliis is eligible for this additional compensation growth under the Pension Plan.
NONQUALIFIED DEFERRED COMPENSATION TABLE - 2008
UNDERSTANDING OUR DEFERRED COMPENSATION TABLE
Our Plan permits the granting of restricted stock units (with associated dividend equivalent rights). A person may, prior to December 31 of the calendar year that precedes the beginning of the service period, file a deferral election with us pursuant to which the recipient may elect to defer the issuance of each annual share installment which vests under his or her award. The deferral may be 100% or 50% of each installment (i) until 5 years from the grant date, (ii) termination of employment or (iii) upon a change in control. The dividend equivalent rights associated with our restricted stock unit awards automatically increase the number of shares underlying a restricted stock unit award when we declare and pay a regular cash dividend on our common stock.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL TABLES
Except as otherwise provided, the following narrative and tables set forth the potential payments and the value of other benefits that would vest or otherwise accelerate vesting at, following, or in connection with any termination, including without limitation resignation, severance, retirement or a constructive termination of a named executive, or a change in control of CONSOL Energy or CNX Gas, in the case of Mr. DeIuliis, or a change in the named executives responsibilities, as such scenarios are contemplated in the contracts, agreements, plans or arrangements described below. For the currently employed named executives, the amounts in each table represent the total amount of benefits payable to an individual assuming an employment termination and/or change in control occurred on December 31, 2008. A description of some elements of the plans, arrangements and agreements covered by the following tables and which provide for payments or benefits in connection with a termination of employment or change in control are also described under Compensation Discussion and Analysis on page 23 and Understanding Our Summary Compensation and Grants of Plan-Based Awards Tables on page 44. The footnotes to the tables describe the assumptions that were used.
J. Brett Harvey*