Duke Energy Corporation DEF 14A 2009
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Statement Pursuant to Section 14(a) of
I am pleased to invite you to our annual meeting to be held on May 7, 2009, in the O. J. Miller Auditorium located in our Charlotte headquarters building.
As explained in the enclosed proxy statement, at this year's meeting you will be asked to vote for the election of directors, to ratify the selection of the independent public accountant and to consider any other business that may properly come before the meeting.
It is important that all Duke Energy shareholders, regardless of the number of shares owned, participate in the affairs of the Company. At Duke Energy's last annual meeting, in May 2008, over 86 percent of Duke Energy's shares were represented in person or by proxy.
Even if you plan to attend this year's meeting, it is a good idea to vote your shares now before the meeting, in the event your plans change. You may mark, date and sign the proxy card and return it to us. Alternatively, you may also vote by telephone or the internet. Please follow the voting instructions that are included on your proxy card.
Whether you choose to vote by mail, telephone or internet, your response is greatly appreciated.
We hope you will find it possible to attend this year's meeting, and thank you for your continued interest in Duke Energy.
Duke Energy Corporation
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
March 20, 2009
We will convene the annual meeting of shareholders of Duke Energy Corporation on Thursday, May 7, 2009, at 10:00 a.m. in the O. J. Miller Auditorium in the Energy Center located at 526 South Church Street in Charlotte, North Carolina.
The purpose of the annual meeting is to consider and take action on the following:
Shareholders of record as of the close of business on March 12, 2009, are entitled to vote at the annual meeting. It is important that your shares be represented at this meeting.
Whether or not you expect to be present at the annual meeting, please vote by marking, dating and signing the proxy card and returning it to us. You may also vote by telephone or internet. Please follow the voting instructions that are included on your proxy card. Regardless of the manner in which you vote, we urge and greatly appreciate your prompt response.
TABLE OF CONTENTS
This proxy statement was first made available to shareholders on or about March 20, 2009.
The Board of Directors
The Board of Directors of Duke Energy currently consists of 10 members. Effective January 15, 2009, Ms. Mary L. Schapiro resigned from the Board of Directors, after being nominated, and subsequently confirmed, to serve as Chairman of the Securities and Exchange Commission. We have a declassified Board of Directors, which means all of the directors are voted on every year at the annual meeting.
If any director is unable to stand for election, the Board of Directors may reduce the number of directors or designate a substitute. In that case, shares represented by proxies may be voted for a substitute director. We do not expect that any nominee will be unavailable or unable to serve. The Corporate Governance Committee, comprised of only independent directors, has recommended the following candidates as nominees for directors and the Board of Directors has approved their nomination for election:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH NOMINEE.
Board of Directors' Meetings and Attendance
The Board of Directors of Duke Energy met 8 times during 2008. No director attended less than 75 percent of the total of the Board of Directors' meetings and the meetings of the committees upon which he or she served. Ms. Gray was appointed by the Board of Directors as lead director on April 4, 2006. The lead director is responsible for leading, in conjunction with the Corporate Governance Committee, the process for review of the Chief Executive Officer and Board, presiding at Board of Directors' meetings when the Chairman is not present, presiding at executive sessions of the non-management directors, assisting in the setting of the Board of Directors' meeting agendas with the Chairman and serving as a liaison between the independent directors and the Chairman and the Chief Executive Officer. Directors are encouraged to attend the annual meeting of shareholders. All members of the Board of Directors attended Duke Energy's last annual meeting of shareholders on May 8, 2008.
Independence of Directors
The Board of Directors may determine a director to be independent if the Board of Directors has affirmatively determined that the director has no material relationship with Duke Energy or its subsidiaries (references in this proxy statement to Duke Energy's subsidiaries shall mean its consolidated subsidiaries), either directly or as a shareholder, director, officer or employee of an organization that has a relationship with Duke Energy or its subsidiaries. Independence determinations will be made on an annual basis at the time the Board of Directors approves director nominees for inclusion in the annual proxy statement and, if a director joins the Board of Directors in the interim, at such time.
The Board of Directors has determined that none of the directors, other than Mr. Rogers, has a material relationship with Duke Energy or its subsidiaries, and all are, therefore, independent under the listing standards of the NYSE. In arriving at this determination, the Board of Directors considered all transactions and relationships between each director or any member of his or her immediate family and Duke Energy and its subsidiaries.
To assist in this determination, the Board of Directors uses the following categorical standards for relationships that are deemed not to impair a director's independence:
For purposes of these standards, immediate family members include a director's 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 shares the director's home. For purposes of the contribution relationship described under "Charitable Relationships" above, payments exclude amounts contributed or pledged to match employee contributions or pledges.
Board of Directors' Committees
The Board of Directors has the five standing committees described below:
The Audit Committee selects and retains a firm of independent public accountants to conduct audits of the accounts of Duke Energy and its subsidiaries.
It also reviews with the independent public accountants the scope and results of their audits, as well as the accounting procedures, internal controls, and accounting and financial reporting policies
and practices of Duke Energy and its subsidiaries, and makes reports and recommendations to the Board of Directors as it deems appropriate. The Audit Committee is responsible for approving all audit
and permissible non-audit services provided to Duke Energy by its independent public accountants. Pursuant to this responsibility, the Audit Committee adopted the policy on Engaging the
Independent Auditor for Services, which provides that the Audit Committee will establish detailed services and related fee levels that may be provided by the independent public accountants and review
such policy annually. See page 18 for additional information on the Audit Committee's pre-approval policy.
Ms. Schapiro (Chair) and Mr. Bernhardt, Dr. Rhodes and Dr. Sharp. Currently, the members are Mr. Browning (Chair), Mr. Bernhardt, Mr. DiMicco, Dr. Rhodes and Dr. Sharp. Each of these members has been determined to be "independent" within the meaning of the NYSE's listing standards, Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Company's categorical standards for independence. In addition, each of these members meets the financial literacy requirements for audit committee membership under the NYSE's rules and the rules and regulations of the Securities and Exchange Commission ("SEC").
Compensation Committee establishes and reviews the overall compensation philosophy, reviews and approves the salaries and other compensation of
certain employees, including all executive officers of Duke Energy, reviews and approves compensatory agreements with executive officers, approves equity grants and reviews the effectiveness of, and
approves changes to, the compensation program. This committee also makes recommendations to the Board of Directors on compensation for outside directors.
The Corporate Governance Committee considers matters related to corporate governance and formulates and periodically revises governance principles. It recommends the size and composition of the Board of Directors and its committees and recommends potential successors to the Chief Executive Officer. This committee also recommends to the Board of Directors the slate of nominees, including any nominees recommended by shareholders, for director for each year's annual meeting and, when vacancies occur, names of individuals who would make suitable directors of Duke Energy. This committee may engage an external search firm or a third party to identify or evaluate or to assist in identifying or evaluating a potential nominee. The committee also performs an annual
of the performance of the Chief Executive Officer with input from the full Board of Directors.
Finance and Risk Management Committee reviews Duke Energy's financial and fiscal affairs and makes recommendations to the Board of Directors
regarding dividends, financing and fiscal policies. It reviews the financial exposure of Duke Energy, as well as mitigating strategies, reviews Duke Energy's risk exposure as related to overall
company portfolio and impact on earnings, and reviews the financial impacts of major transactions as related to mergers, acquisitions, reorganizations and divestitures.
Nuclear Oversight Committee provides oversight of the nuclear safety, operational and financial performance, and long-term plans and
strategies of Duke Energy's nuclear power program. The oversight role is one of review, observation and comment and in no way alters management's authority, responsibility or accountability.
Each committee operates under a written charter adopted by the Board of Directors. The charters are posted on our website at www.duke-energy.com/corporate-governance/board-committee-charters.asp and are available in print to any shareholder upon request.
Board of Directors Committee Membership Roster (as of March 12, 2009)
Annual Retainer and Fees. Effective May 8, 2008, the retainer and meeting fees paid to our outside directors consisted of:
The director compensation program was changed on May 8, 2008, to increase the annual lead director fee from $20,000 to $35,000 and to increase the annual chair retainer from $8,500 to $10,000 for all committees other than the Audit Committee, which remained at $20,000.
Annual Stock Retainer for 2008. In 2008, each director, with the exception of Mr. Cox whose service on the Board of Directors ended at the May 2008 annual meeting of shareholders, received the portion of his or her annual retainer that was payable in stock in the form of 5,390 fully-vested shares that were granted under the Duke Energy Corporation 2006 Long-Term Incentive Plan.
Deferral Plans and Stock Purchases. Directors may elect to receive all or a portion of their annual compensation, consisting of retainers and attendance fees, on a current basis, or defer such compensation under the Duke Energy Corporation Directors' Savings Plan. Deferred amounts are credited to an unfunded account for the director's benefit, the balance of which is adjusted for the performance of phantom investment options, including the Duke Energy common stock fund, as elected by the director. Each outside director will receive deferred amounts credited to his or her account generally following termination of his or her service from the Board of Directors, in accordance with his or her distribution elections.
During 2008, the Duke Energy Corporation Directors' Savings Plan was amended to comply with Section 409A of the Code. The amendments impacted the timing and form of the payment of benefits under the Directors' Savings Plan. All members of the Board of Directors who participate in the Directors' Savings Plan were provided a one-time opportunity to elect to receive a lump sum payment of all or a portion of their benefits that are subject to Section 409A, payable in the form of a single lump sum in 2009. None of the current outside directors made such an election.
Charitable Giving Program. Duke Energy maintains a Directors' Charitable Giving Program. Eligibility for this program has been frozen and only Ms. Gray is eligible. Under this program, Duke Energy will make, upon the director's death, donations of up to $1,000,000 to charitable organizations selected by the director. A director may request that donations be made under this program during the director's lifetime, in which case the maximum donation will be reduced on an actuarially-determined net present value basis. In 2008, no donations were made on behalf of our current directors. Duke Energy maintains life insurance policies upon eligible directors to fund donations under the program. In addition, The Duke Energy Foundation, independent of Duke Energy, maintains The Duke Energy Foundation Matching Gifts Program under which directors (and current and retired employees) are eligible for matching contributions of up to $5,000 per director per calendar year to qualifying institutions.
Expense Reimbursement and Insurance. Duke Energy provides travel insurance to directors in the amount of $500,000, and reimburses directors for expenses reasonably incurred in connection with attendance and participation at Board of Directors and committee meetings and special functions.
Gifts. Duke Energy presented a 2008 holiday gift to each person who was an outside director as of December 31, 2008. The aggregate cost of all the gifts was approximately $2,295.
Stock Ownership Guidelines. Outside directors are subject to stock ownership guidelines, which establish a target level of ownership of Duke Energy common stock (or common stock equivalents). During 2008, the required ownership level was 4,000 shares, and all directors whose stock ownership target date was on or before December 31, 2008, met the ownership target. Beginning January 1, 2009, our stock ownership policy changed and each outside director is now required to own shares with a value equal to at least five times the annual cash retainer (i.e., an ownership level of $250,000) or retain 50% of his or her vested annual equity retainer.
The following table describes the compensation earned during 2008 by each individual who served as an outside director during 2008.
the aggregate number of outstanding option and phantom share awards, covering Duke Energy and Spectra Energy shares, for each outside director was as follows:
Mr. Bernhardt, Dr. Rhodes and Ms. Gray received phantom shares on February 24, 2004; May 13, 2004; February 28, 2005; and May 12, 2005, all of which vest in equal annual installments on each of the first five anniversaries of the grant date. In addition, Mr. Bernhardt, Dr. Rhodes and Ms. Gray received stock option grants on February 25, 2003 that vested in equal annual installments on each of the first five anniversaries of the grant date, the last of which vested on February 25, 2008. Messrs. Bernhardt, Browning and DiMicco, Dr. Rhodes and Ms. Schapiro deferred their 2008 stock retainer of 5,390 Duke Energy shares.
2008 and a holiday gift (the amount of which varies for each director due to state sales taxes).
Representatives of Deloitte are expected to be present at the annual meeting. They will have an opportunity to make a statement and will be available to respond to appropriate questions. Information on Deloitte's fees for services rendered in 2008 and 2007 follows:
To safeguard the continued independence of the independent public accountant, the Audit Committee adopted a policy that provides that the independent public accountants are only permitted to provide services to Duke Energy and its subsidiaries that have been pre-approved by the Audit Committee. Pursuant to the policy, detailed audit services, audit-related services, tax services and certain other services have been specifically pre-approved up to certain categorical fee limits. In the event that the cost of any of these services may exceed the pre-approved limits, the Audit Committee must pre-approve the service. All other services that are not prohibited pursuant to the SEC's or other applicable regulatory bodies' rules or regulations must be specifically pre-approved by the Audit Committee. All services performed in 2008 and 2007 for Duke Energy by the independent public accountant were approved by the Audit Committee pursuant to its pre-approval policy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF DELOITTE & TOUCHE LLP AS DUKE ENERGY CORPORATION'S INDEPENDENT PUBLIC ACCOUNTANT FOR 2009.
The following table indicates the amount of Duke Energy common stock beneficially owned by the current directors, the executive officers listed in the Summary Compensation Table under Executive Compensation (referred to as the named executive officers), and all directors and executive officers as a group as of March 12, 2009.
We are not aware of any shareholder who was the beneficial owner of more than 5% of Duke Energy's outstanding shares of common stock as of December 31, 2008. This information is based on the most recently available reports filed with the SEC and provided to us by the companies listed.
The following is the report of the Audit Committee with respect to Duke Energy's audited financial statements for the fiscal year ended December 31, 2008.
The purpose of the Audit Committee is to assist the Board in its general oversight of Duke Energy's financial reporting, internal controls and audit functions. The Audit Committee Charter describes in greater detail the full responsibilities of the committee and is available on our website at www.duke-energy.com/corporate-governance/board-committee-charters/audit.asp.
The Audit Committee has reviewed and discussed the consolidated financial statements with management and Deloitte & Touche LLP ("Deloitte"), the Company's independent public accountants. Management is responsible for the preparation, presentation and integrity of Duke Energy's financial statements; accounting and financial reporting principles; establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)); establishing and maintaining internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)); evaluating the effectiveness of disclosure controls and procedures; evaluating the effectiveness of internal control over financial reporting; and, evaluating any change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. Deloitte is responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States ("GAAP"), as well as expressing an opinion on the effectiveness of internal control over financial reporting.
The Audit Committee reviewed the Company's audited financial statements with management and Deloitte, and met separately with both management and Deloitte to discuss and review those financial statements and reports prior to issuance. These discussions also addressed the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. Management has represented, and Deloitte has confirmed, that the financial statements were prepared in accordance with GAAP.
In addition, management completed the documentation, testing and evaluation of Duke Energy's system of internal control over financial reporting in response to the requirements set forth in Section 404 of the Sarbanes-Oxley Act of 2002, and related regulations. The Audit Committee was kept apprised of the progress of the evaluation and provided oversight and advice to management during the process. In connection with this oversight, the Audit Committee received periodic updates provided by management and Deloitte at each regularly scheduled Audit Committee meeting. At the conclusion of the process, management provided the Audit Committee with, and the Audit Committee reviewed, a report on the effectiveness of the Company's internal control over financial reporting. The Audit Committee also reviewed the report of management contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 ("Form 10-K") filed with the SEC, as well as Deloitte's Report of Independent Registered Public Accounting Firm included in the Company's Form 10-K related to its audit of (i) the consolidated financial statements and financial statement schedules and (ii) the effectiveness of internal control over financial reporting. The Audit Committee continues to oversee the Company's efforts related to its internal control over financial reporting and management's preparations for the evaluation in fiscal 2009.
The Audit Committee has discussed with Deloitte the matters required to be discussed by professional and regulatory requirements, including, but not limited to, the standards of the Public Company Accounting Oversight Board regarding The Auditors' Communications with Those Charged with Governance. In addition, Deloitte has provided the Audit Committee with the written disclosures and the letter required by "Public Company Accounting Oversight Board Ethics and Independence Rule 3526, Communications with Audit Committees Concerning Independence" that relates to Deloitte's independence from Duke Energy and its subsidiaries and the Audit Committee has discussed with Deloitte the firm's independence.
Based on its review of the consolidated financial statements and discussions with and representations from management and Deloitte referred to above, the Audit Committee recommended that the audited financial statements be included in Duke Energy's Form 10-K, for filing with the SEC.
The Compensation Committee of Duke Energy has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Duke Energy's Form 10-K and this proxy statement.
The purpose of this Compensation Discussion and Analysis is to provide information about Duke Energy's compensation objectives and policies for the named executive officers and give context for the numbers and narrative descriptions that follow. As the Compensation Committee of the Board of Directors of Duke Energy is responsible for making the compensation decisions for Duke Energy's executive officers, including the named executive officers, the discussion begins with a brief overview of the Compensation Committee and its processes, followed by an outline of the objectives and details of Duke Energy's compensation program.
Compensation Committee Overview
The responsibilities of the Compensation Committee are to: (1) establish and review the overall compensation philosophy of Duke Energy; (2) review and approve the annual salary, short-term incentive opportunities, long-term incentive opportunities, and other benefits of the Chief Executive Officer and other executive officers; (3) review and approve any employment or severance agreement entered into with an executive officer; (4) approve equity grants under Duke Energy's long-term incentive plan; (5) review the effectiveness of Duke Energy's compensation program in obtaining desired results and approve any changes thereto; and, (6) review and recommend to the full Board of Directors the compensation of outside directors.
Compensation Committee Meetings
The Compensation Committee's Chairman works with management to establish the meeting agendas. The Compensation Committee receives and reviews materials in advance of each meeting. These materials include information that management believes will be helpful to the Compensation Committee as well as materials the Compensation Committee has specifically requested. Depending on the agenda for a particular meeting, these materials may include such things as information relating to: (1) the competitiveness of executive and/or director compensation programs based on market data; (2) the total compensation provided to executives; (3) trends in compensation and/or benefits; (4) executive and director stock ownership levels; and, (5) corporate and individual performance compared to predetermined objectives.
Compensation Committee Advisors
The Compensation Committee has engaged Frederic W. Cook & Company, Inc. to report directly to the Compensation Committee as its independent compensation consultant. Frederic W. Cook & Company, Inc. performs such tasks as the Compensation Committee or its Chairman may request. The Compensation Committee's consultant provides advice to the Compensation Committee as follows:
Compensation Committee Effectiveness
As required in its charter, the Compensation Committee reviews its performance annually. Based on the results of this self-evaluation, the Compensation Committee may modify its procedures to improve its effectiveness.
Management's Role in the Compensation-Setting Process
The most significant aspects of management's role in the compensation-setting process are: (1) recommending compensation programs, compensation policies, compensation levels and incentive opportunities that support Duke Energy's business strategies; (2) compiling, preparing and distributing materials for Compensation Committee meetings, including market data; (3) recommending performance targets and objectives; and, (4) assisting in the evaluation of executive performance. Each year, management reviews the performance of each executive within the purview of the Compensation Committee (other than the Chief Executive Officer, whose performance is reviewed by the Corporate Governance Committee). The conclusions reached and
recommendations based on these reviews, including any salary adjustments and annual award amounts, are presented to the Compensation Committee. The Compensation Committee exercises its discretion in modifying recommended adjustments and awards for executives.
Objectives of the Compensation Program
The guiding principle of Duke Energy's compensation philosophy is that pay should be linked to performance and that the interests of executives and shareholders should be aligned, with significant upside and downside potential depending upon actual results as compared to predetermined measures of success. As discussed in more detail below, historically, more than half of the compensation opportunity of the executive officers has been provided in the form of short-term and long-term incentives. These incentives yield varying levels of compensation, including no compensation in the event of poor performance, depending upon the extent to which predetermined corporate, operational and individual goals are achieved. The Compensation Committee also believes that Duke Energy's overall compensation levels should be sufficiently competitive to attract and retain talented leaders and motivate those leaders to achieve superior results, and, at the same time, be set at responsible levels. Consistent with these principles, the Compensation Committee has approved compensation programs intended to:
Setting Executive Compensation Consistent with Duke Energy's Compensation Philosophy
In December of each year, the Compensation Committee generally reviews each component of the compensation, including base pay, short-term incentive opportunities and long-term incentive opportunities, of each executive officer, considering the appropriate external and internal data (as described below) with any resulting adjustments to be effective on the first day of the following year. As part of its decision-making process, the Compensation Committee:
Another important consideration in this process is the interaction between individual performance and compensation. In this regard, the Compensation Committee considers past performance when establishing the amount of each executive officer's base salary and short-term and long-term incentive opportunities. Duke Energy also provides a substantial percentage of the compensation opportunities of the executive officers in the form of variable, performance-based compensation, a portion of which (20% of the participating named executive officers' 2008 short-term incentive opportunities and 20% of Mr. Rogers' 2008 performance share opportunity) is based on the extent to which pre-established individual goals are achieved. The Compensation Committee takes individual performance into account by focusing on the individual goals that apply to each named executive officer under the short-term incentive plan, and, with respect to Mr. Rogers, the individual goals that apply to his performance shares, all as described in more detail below.
The principal reasons for the difference in the amount of compensation provided to each executive officer are competitive market forces and the individual performance of each executive officer. Other factors, however, are also relevant. For example, Mr. Rogers' compensation is higher than the compensation of the other executive officers for several reasons. First, market forces dictate that a chief executive officer with Mr. Rogers' unique skills and significant experience in the utility industry receive higher compensation than Duke Energy's other executive officers. Second, the compensation package provided to Mr. Rogers in 2008 was negotiated in connection with the execution of the merger agreement between Duke Energy and Cinergy, resulting in an agreement that his compensation at Duke Energy would be no less favorable than his then-existing compensation arrangement with Cinergy. Finally, it is important to note that the equity awards that were granted to Mr. Rogers in 2006 were intended to compensate him for a three-year period, whereas Duke Energy generally grants new equity awards to the other executive officers on an annual basis.
In order to encourage more discussion about individual performance and roles and to facilitate rotational assignments, in December 2007, the Compensation Committee implemented a new approach for establishing the compensation of Group Executives who report directly to the Chief Executive Officer, including Messrs. Hauser, Turner and Manly and Ms. Good. In particular, the Compensation Committee will continue to review each component of the executives' total direct compensation (i.e., base salary, short-term incentive opportunity and long-term incentive opportunity) annually. However, the base salary amounts established by the Compensation Committee are intended to be effective for three years, unless an earlier adjustment is appropriate. These base salary amounts are set at an amount that is intended to target the expected market median of salaries for individuals in comparable positions and markets during the three-year cycle,
based on the actual market median at the beginning of the three-year cycle, except that the base salaries of certain executives whose roles with Duke Energy have recently changed may be below or above the market median for a temporary period.
During the three-year cycle, the Compensation Committee will exercise discretion when establishing each named executive officer's short-term and long-term incentive opportunity, which amounts will be determined based on each executive's current role and applicable performance. The 2008 short-term incentive opportunities were established at a level intended to provide total cash compensation (i.e., base salary and short-term incentive opportunity) at the market median for individuals in comparable positions and markets in the event of the achievement of target performance and above-market median in the event of outstanding financial, operational and individual results. The Compensation Committee designed the Duke Energy 2008 long-term incentive program to provide long-term incentive opportunities above the market median for individuals in comparable positions and markets if target performance is achieved and significant upside opportunity if outstanding results are achieved.
As discussed above, the Committee reviewed market surveys comparing each element of total compensation against comparable positions at comparable companies when establishing the 2008 compensation level of the executive officers. For utility-specific positions, the market data source was the Towers Perrin CDB Energy Services Executive Compensation Database, which consists of the 90 companies listed on Appendix A, as well as the members of the Philadelphia Utility Index. For general corporate positions, the market data source was the Towers Perrin CDB General Industry Executive Compensation Database, which consists of the 92 companies listed on Appendix B. The market information from the survey used for these positions was regressed based on revenues of $13.1 billion.
The executive compensation philosophy and program are generally the same in 2009 as they were in 2008. As a result, in addition to having the same salaries in 2009 as 2008, the 2009 short-term and long-term incentive opportunities of Duke Energy's executive officers, including of Messrs. Hauser, Turner and Manly and Ms. Good, also will continue at 2008 levels.
Elements of Duke Energy's Compensation Program and Why Each Element Was Chosen (How It Relates to Objectives)
As discussed in more detail below, during 2008, the principal components of compensation for the named executive officers were:
Base Salary. Base salaries for executives are determined based upon job responsibilities, level of experience, individual performance, comparisons to the salaries of executives in similar positions obtained from market surveys and internal comparisons. The Compensation Committee approves all salary adjustments for executive officers. As described below, Mr. Rogers is paid substantially in the form of equity-based compensation and does not receive a base salary.
Short-Term Incentives. Short-term incentive opportunities are provided to the executive officers (other than Mr. Rogers) under the Duke Energy Corporation Executive Short-Term Incentive Plan ("STI Plan") to promote the achievement of annual performance objectives. Each year the Compensation Committee establishes the incentive opportunity for each participating executive officer, which is based on a percentage of his or her base salary, along with the individual and corporate goals that must be achieved to earn that incentive opportunity. The earned short-term incentive opportunity is paid in cash. Although Mr. Rogers does not participate in the STI Plan, as described below, his 2008 annual performance shares contained the same corporate financial goal that applies to the other executive officers under the STI Plan.
2008 Short-Term Incentives. During 2008, depending on actual performance, participants were eligible to receive up to 190% of the amount of their short-term incentive target opportunity. The named executive officers were provided with the following target incentive opportunities for 2008:
This opportunity was based on the achievement of a corporate financial goal, which had an 80% weighting, and the remaining 20% was based on achievement of individual goals. The individual goals, in the aggregate, could result in a payout with respect to the target opportunity equal to 50% in the event of threshold performance, 100% in the event of target performance and 150% in the event of maximum performance. The 2008 corporate financial goal consisted of a pre-established adjusted diluted earnings per share ("EPS") goal. The Compensation Committee established the threshold, target and maximum performance levels for the 2008 adjusted diluted EPS goal as follows:
Payouts are interpolated for performance between these levels.
In order to encourage a continued focus on safety, the Compensation Committee included the following safety measures as part of the 2008 short-term incentives provided under the STI Plan:
Duke Energy's 2008 adjusted diluted EPS of $1.22 (as computed for purposes of determining incentive awards) exceeded threshold performance and corresponds to a payout of 64.29% of target with respect to the corporate financial goal. Duke Energy's TICR result of 1.15 was better than target such that the safety penalty was not triggered and did not decrease the 2008 STI Plan awards. Unfortunately, an individual who was employed by one of Duke Energy's contractors died at a Duke Energy site during 2008. The Compensation Committee, however, determined that because the fatality occurred while the contractor was acting outside the scope of his assigned duties, the 5% safety adder should apply to increase the STI Plan payments of all eligible employees, including the named executive officers.
The individual goals of the named executive officers for 2008 consisted of a combination of strategic and operational objectives. Those goals listed below that do not contain objective metrics generally are measured based on a subjective determination.
Mr. Hauser's 2008 individual goals were as follows:
Complete Midwest Financial Migration. Threshold achievement required the deployment of new financial systems in the Midwest by the end of 2008. Target achievement required the deployment of the new financial system in the Midwest by the close of August 2008. Maximum achievement required the deployment of the new financial system in the Midwest by the close of July 2008.
Build the Retail Investor Base. Threshold achievement required completion of: (i) management presentations to 5 retail houses; and (ii) 10 investor road shows. Target achievement required: (i) management presentations to 5 retail houses; (ii) 15 investor road shows;
(iii) an increase in the retail investor base of 2%; and (iv) the addition of new institutional shareholders. Maximum achievement required: (i) management presentations to 5 retail houses; (ii) 20 investor road shows; (iii) an increase in the retail investor base of 4%; and (iv) the addition of new institutional shareholders.
Support the Growth, Acquisition, Merger and Earnings Objectives of Duke Energy. Objectives with respect to the financial condition of Duke Energy, delivery of quality and timely financial statements as well as participation in strategy planning and execution.
Mr. Turner's 2008 individual goals were as follows:
Customer Service. Threshold, target and maximum achievement determined based on the average achievement level for certain key operational metrics, as set forth below.
Capital Stewardship. Threshold achievement required the attainment of key milestones with respect to environmental and other transmission and distribution projects at no more than 5% over-budget and behind schedule. Target achievement required attainment of key milestones on-time and on-budget. Maximum achievement required attainment of key milestones at 5% or more under-budget and ahead of schedule.
Safety and Culture. Threshold achievement required: (i) obtaining a U.S. Franchised Electric and Gas TICR of 2.31 or better; (ii) meeting with at least 3,000 employees; (iii) establishing an internal blog with regular updates; and (iv) achieving the minimum performance level with respect to the continuous improvement initiative. Target achievement required: (i) obtaining a U.S. Franchised Electric and Gas TICR of 1.99 or better; (ii) meeting with at least 4,000 employees; (iii) establishing an internal blog with high traffic and significant employee comment; and (iv) achieving the target performance level with respect to the continuous improvement initiative. Maximum achievement required: (i) obtaining a U.S. Franchised Electric and Gas TICR of 1.92 or better; (ii) meeting with at least 5,000 employees; (iii) establishing an internal blog with favorable comments in the employee opinion survey; and (iv) achieving the maximum performance level with respect to the continuous improvement initiative.
Mr. Manly's 2008 individual goals were as follows:
Legal Client Support. Increasing efficiencies in the legal support functions and developing related performance metrics.
Corporate Secretary and Audit. Organizing and conducting successful meetings of the Board of Directors, developing and executing the 2008 Internal Audit Plan and promoting an organizational culture that encourages ethical conduct and legal compliance.
Human Resources Review. Developing and implementing a Human Resources infrastructure that will support a sustainable organization, with a focus on workforce planning, succession planning, employee engagement, safety, diversity, employee development and management development.
Ms. Good's 2008 individual goals were as follows:
Execute Approved Growth Capital Projects. Threshold achievement required the successful execution of approved growth capital projects and Duke Energy International development projects, including hitting key milestones. Target achievement required delivering threshold achievement on-time with delivery of projected economic value. Maximum achievement required delivering threshold achievement ahead of schedule with delivery of enhanced economic value.
Identify Additional Development Opportunities. Identifying additional 2009-2010 development opportunities for Duke Energy's North American commercial businesses, including consideration of expanding renewable investment, asset acquisitions, expanding the non-regulated generation platform and other growth platforms.
Support Earnings Growth. Threshold achievement required development of a comprehensive plan outlining a pipeline of new asset development and acquisition opportunities. Target achievement required actions that would deliver Latin American earnings before interest and taxes growth of 10% per year over the period 2008-2012. Maximum achievement required actions that would deliver Latin American earnings before interest and taxes growth of more than 10% per year over the period 2008-2012.
M&A Objective. Recommend a strategic transaction that would significantly advance Duke Energy's strategies relating to industry consolidation and/or its non-regulated businesses.
With respect to the individual goals, Messrs. Hauser, Turner and Manly and Ms. Good achieved performance that corresponded to a payout equal to 142%, 137.5%, 145% and 131.25% of target, respectively. As a result of the aggregate corporate and individual performance and after the application of the 5% safety adder, Messrs. Hauser, Turner and Manly and Ms. Good earned bonuses under the 2008 STI Plan equal to $402,318; $430,933; $405,342 and $326,238, respectively.
2009 Short-Term Incentives. During 2009, each executive officer, except Mr. Rogers, participates in the STI Plan. Each leadership employee's, including each named executive officer's, incentive is based on several corporate objectives, including Duke Energy's achievement of an adjusted diluted EPS goal, an operations and maintenance expense control goal and a reliability goal, which are weighted 50%, 20% and 10%, respectively, with the remaining 20% of each executive officer's 2009 opportunity under the STI Plan being based on operational or individual objectives. In order to provide the Compensation Committee with additional flexibility, if the threshold EPS performance level is not achieved, the Compensation Committee has reserved discretion to reduce payouts attributable to the operations and maintenance expense control goal and the reliability goal. Similar to 2008, each executive officer will be subject to up to a 5% reduction in his or her STI Plan payout in the event a predetermined safety goal is not achieved, and the 2009 STI awards of all eligible employees will be increased by 5% if there are no work-related employee, contractor or subcontractor fatalities in 2009.
Long-Term Incentives. Opportunities under the long-term incentive program are provided to the executive officers (other than Mr. Rogers, who receives separate long-term incentive awards, which are based in part on the same performance measures that apply to the other named executive officers under the STI Plan) to align executive and shareholder interests in an effort to maximize shareholder value. In this regard, each year the Compensation Committee reconsiders the design and amount of the long-term incentives and generally grants equity awards at the Compensation Committee's first regularly-scheduled meeting each year. Duke Energy's executive officers do not have a role in selecting the date on which long-term incentives are granted, and because the closing price of Duke Energy's common stock is a key factor in determining the number of shares in each employee's long-term incentive award, the Compensation Committee considers price trends and volatility when determining the size of long-term incentive plan awards.
2006-2008 Performance Shares Under the 2006 Long-Term Incentive Program. The 2006 performance share cycle commenced on January 1, 2006, and ended on December 31, 2008. The performance shares generally vest only to the extent that Duke Energy's total shareholder return ("TSR") targets for the 2006-2008 period were met, as compared with the TSR of the companies in the S&P 500. The performance shares granted under the 2006 cycle also provided that if Duke Energy's relative TSR percentile ranking among the companies in the S&P 500 Utilities Index over the 2006-2008 period was lower than the 60th percentile, the Compensation Committee had discretion to reduce or eliminate any vesting of the performance shares. The following table illustrates how the performance share payouts directly align participants' pay for performance:
Performance shares earned are interpolated for TSR performance between these percentiles. For this purpose, (1) TSR refers to the change in fair market value over a specified period of time, expressed as a percentage of an initial investment in common stock, with dividends reinvested, (2) during the portion of the performance period that occurred prior to Duke Energy's spin-off of Spectra Energy in January 2007, the TSR calculation was based only on Duke Energy's performance, and (3) during the portion of the performance period that occurred after Duke Energy's spin-off of Spectra Energy, the TSR calculation was based on both the performance of Duke Energy and Spectra Energy.
With respect to the S&P 500 peer group, Duke Energy's relative TSR ranking for the 2006-2008 period was at the 67.3 percentile, taking into account the TSR of Spectra Energy during the portion of the performance period that occurred after the spin-off of Spectra Energy, which corresponded to a payout of 126.9% of the target number of performance shares (plus dividend equivalents). With respect to the S&P 500 Utilities peer group, Duke Energy achieved a relative TSR ranking at the 33.3 percentile, taking into account the TSR of Spectra Energy during the portion of the performance period that occurred after the spin-off of Spectra Energy. Although this performance was below the 60th percentile, the Compensation Committee did not exercise discretion to reduce the payout of the performance shares because, if the performance of Spectra Energy is not taken into account, Duke Energy's relative TSR performance was at the 66.7 percentile of the S&P 500 Utilities Index.
The following table lists the number of 2006-2008 performance shares to which Messrs. Hauser, Turner and Manly and Ms. Good became vested at the end of the performance cycle:
2008 Long-Term Incentive Program. The target long-term incentive opportunities for 2008, expressed as a percentage of base salary, for Messrs. Hauser, Turner and Manly and Ms. Good were 250%, 200%, 200% and 200%, respectively. Under the 2008 long-term incentive program, 30% of each named executive officer's long-term incentive opportunity was provided in the form of phantom shares and the remaining 70% was provided in the form of performance shares, as follows:
The 2008 phantom shares generally vest in equal portions on each of the first three anniversaries of the grant date, provided the recipient continues to be employed by Duke Energy on each vesting date or his or her employment terminates by reason of retirement. The 2008 performance shares generally vest only to the extent two equally weighted performance measures are satisfied. The first measure is based on Duke Energy's relative TSR for the three-year period from January 1, 2008, to December 31, 2010, as compared to the companies in the Philadelphia Utility Index, as follows:
The second measure is based on Duke Energy's compounded annual growth rate ("CAGR") with respect to adjusted diluted EPS over the three-year performance period from January 1, 2008, to December 31, 2010, as follows:
Earned performance shares will be paid following the determination in early 2011 of the extent to which the performance goals have been achieved (or, if elected, deferred). Any shares not earned are forfeited. In addition, following a determination that the performance goals have been achieved, participants will receive a cash payment (which will be deferred if so elected by the participant) equal to the amount of cash dividends paid on one share of Duke Energy common stock during the performance period multiplied by the number of performance shares earned. If the recipient's employment terminates during the performance period as a result of retirement, death, disability, or by Duke Energy without cause or as a result of a divestiture, following determination that the TSR and CAGR measures have been achieved, the number of shares earned will be adjusted to reflect actual service during the performance period. If the recipient's employment terminates during the performance period for any other reason, all shares covered by the award are forfeited. In the event of a "change in control" prior to December 31, 2010, achievement of target TSR and CAGR performance is assumed and the number of shares earned is adjusted to reflect actual service during the performance period prior to the change in control. Vesting ceases if, at the time the participant terminates employment, he or she is retirement eligible and subsequent to such termination of employment becomes employed by, or otherwise provides service to, a Duke Energy competitor to the detriment of Duke Energy.
2009 Long-Term Incentive Program. With respect to the 2009 long-term incentive program, the Compensation Committee continued the 2008 weighting of 30% phantom shares and 70% performance shares, in order to further emphasize pay for performance. The phantom share awards again will be subject to a three-year vesting schedule. As was the case with respect to the 2008 long-term incentive plan, the 2009 performance share grants generally will vest only to the extent predetermined measures based on TSR and CAGR are achieved. The vesting of 50% of the performance shares will be based on Duke Energy's relative TSR performance as compared to the companies in the Philadelphia Utility Index for the three-year period commencing on January 1, 2009, and ending on December 31, 2011, as follows:
The vesting of the remaining performance shares will be based on Duke Energy's CAGR with respect to adjusted diluted EPS over the three-year performance period from January 1, 2009, to December 31, 2011, as follows:
Special Awards. The Compensation Committee may grant special awards from time to time to recognize increased responsibilities or special contributions, to attract new hires, to retain executives, or to recognize other special circumstances. No such awards were granted to any of the named executive officers during 2008. In this regard, however, at the time of the consummation of the merger with Cinergy, Messrs. Hauser, Turner and Manly and Ms. Good received retention awards payable if the respective executive officer remained employed at the Company two years after the merger. Because each remained employed until the second anniversary of the merger, those retention grants were earned and paid on April 4, 2008, in the amounts of $1,000,000; $900,000; $860,000 and $1,124,000, respectively.
Retirement and Other Benefits. These benefits are comparable to the benefits provided by peers of Duke Energy, as determined based on market surveys, and provide an important tool for the attraction and retention of employees. Duke Energy provides employee benefits to the named executive officers under several different plans. Mr. Rogers does not participate in any of these employee benefit plans on a going-forward basis except with respect to the receipt of health and welfare benefits, and he is permitted to elect to defer his stock awards. Mr. Rogers, however, maintains balances under certain of these plans reflecting previously accrued benefits.
The Duke Energy Retirement Savings Plan, a "401(k) plan," is generally available to all Duke Energy employees in the United States, including each named executive officer. The plan is a tax-qualified retirement plan that provides a means for employees to save for retirement on a tax-favored basis and to receive an employer matching contribution. Earnings on amounts credited to the Duke Energy Retirement Savings Plan are determined by reference to investment funds (including a Duke Energy Common Stock Fund) selected by each participant.
The Duke Energy Corporation Executive Savings Plan is offered to a select group of management, including each named executive officer. The plan enables these employees to defer compensation, and receive employer matching contributions, in excess of the limits of the Code that apply to qualified retirement plans such as the Duke Energy Retirement Savings Plan. Earnings on amounts credited to the Duke Energy Corporation Executive Savings Plan are determined by reference to investment options that are generally similar to those offered under the Duke Energy Retirement Savings Plan.
During 2008, the Duke Energy Corporation Executive Savings Plan was amended to comply with Section 409A of the Code. These amendments impacted the timing and form of the payment of benefits under the Duke Energy Corporation Executive Savings Plan. All actively employed participants in the plan were provided a one-time opportunity to elect to receive a lump sum payment of all or a portion of their benefits that are subject to Section 409A of the Code. All of the
named executive officers, including Mr. Rogers, elected to have a portion of their benefit that was subject to Section 409A of the Code paid to them. These amounts were paid to the named executive officers in the form of a single lump sum in 2009.
The Duke Energy Retirement Cash Balance Plan is generally available to all legacy Duke Energy employees (generally, employees of Duke Energy prior to its merger with Cinergy and certain new hires) in the United States, including Mr. Hauser. This plan provides a defined benefit for retirement, the amount of which is based on a participant's cash balance account balance, which increases with monthly pay and interest credits.
The Cinergy Corp. Non-Union Employees' Pension Plan is generally available to all legacy Cinergy employees (generally, employees of Cinergy prior to its merger with Duke Energy and certain new hires) in the United States, including Messrs. Turner and Manly and Ms. Good. This plan provides a defined benefit for retirement, the amount of which is based either on the participant's cash balance account balance, which increases with monthly pay and interest credits, or on a traditional final average pay formula. Mr. Turner and Ms. Good participate in the plan's cash balance feature, which mirrors the benefit provided under the Duke Energy Retirement Cash Balance Plan, and Mr. Manly earns benefits under the plan's traditional final average pay formula.
The Duke Energy Corporation Executive Cash Balance Plan is offered to a select group of management. The plan provides participants with the retirement benefits to which they would be entitled under the Duke Energy Retirement Cash Balance Plan but for certain limits contained in the Code. Mr. Hauser is the only named executive officer who is currently earning additional benefits (other than interest) under this plan. Additionally, supplemental credits have been made to this plan on behalf of certain executives when determined to be reasonable and appropriate. For example, supplemental credits were made to this plan on behalf of Messrs. Turner and Manly and Ms. Good to reflect the conversion of amounts they previously accrued under the legacy Cinergy nonqualified cash balance and final average pay retirement plans. If Messrs. Turner or Manly or Ms. Good continues in employment with Duke Energy past age 62, he or she would be eligible to commence earning additional benefits, in excess of those permitted under the limits of the Code, with respect to employment and compensation that occurs after age 62.
With the exception of certain grandfathered life insurance benefits provided to Mr. Hauser, Duke Energy provides the named executive officers with the same health and welfare benefits as it provides to all other similarly-situated employees, and at the same cost charged to all other eligible employees. The named executive officers are also entitled to the same post-retirement health and welfare benefits as those provided to similarly-situated retirees.
Additionally, in 2008, Duke Energy provided the named executive officers with certain other perquisites, which are disclosed in footnote 6 to the Summary Compensation Table. Duke Energy provides these perquisites, as well as other benefits to certain executives, in order to provide competitive compensation packages. The costs of perquisites and other personal benefits are not considered part of base salary and, therefore, do not affect the calculation of awards and benefits under Duke Energy's other compensation arrangements (e.g., retirement and incentive
compensation plans). Unless otherwise noted, each named executive officer receives the perquisites and other benefits described in the following table.
Severance. Duke Energy provides limited severance protection to the named executive officers. Duke Energy also provides severance protection to other members of the senior leadership team, which for this purpose is generally limited to the executive officers. Except in the case of Mr. Rogers and certain other legacy Cinergy executives for whom the severance protection previously provided by Cinergy ended on April 3, 2008, the severance protection provided by Duke Energy is generally 200% of the executive's annual compensation and becomes payable only if there is both a change in control and a qualifying termination of employment. The Compensation Committee approved the 200% severance multiplier after consulting with its advisors and reviewing the severance protection provided by peer companies. The severance protection provided to Mr. Rogers by Cinergy, generally 300% of his annual compensation, was carried forward for a limited transition period that ended on February 19, 2009. The Compensation Committee believes that the protection provided through these severance arrangements is appropriate in order to diminish the uncertainty and risk to their roles in the context of a potential change in control.
In order to ensure that Duke Energy provides only reasonable severance benefits, the Compensation Committee has established a policy pursuant to which it generally will seek shareholder approval for any future agreement with certain individuals (e.g., a named executive officer) that provides severance benefits in excess of 2.99 times the sum of the executive's base salary and annual bonus, plus the value of continued participation in welfare, retirement and equity compensation plans determined as if the executive remained employed for 2.99 additional years. Under the policy, Duke Energy also will seek shareholder approval of any such agreement that provides for the payment of any tax gross-ups by reason of the executive's termination of employment, including reimbursement of golden parachute excise taxes.
As stated above, the Compensation Committee is responsible for establishing the compensation of the Chief Executive Officer. The Compensation Committee's objective in this regard is to motivate and retain a Chief Executive Officer who is committed to delivering sustained superior performance for all of Duke Energy's stakeholders. In order to ensure a thorough consideration of prior year results, the Compensation Committee reviews and approves the compensation of the Chief Executive Officer based upon input from all of the members of the Board of Directors, and in particular the Corporate Governance Committee (which establishes the Chief Executive Officer's individual goals), regarding the Chief Executive Officer's performance and informs the Board of Directors of any adjustments or actions.
Effective upon Duke Energy's merger with Cinergy, Duke Energy entered into a three-year employment agreement (the "April 2006 Agreement") with Mr. Rogers to provide for his employment as President and Chief Executive Officer. In connection with the spin-off of Spectra Energy, Mr. Rogers additionally became the Chairman of the Board of Directors of Duke Energy.
The April 2006 Agreement, which was scheduled to expire by its terms effective April 3, 2009, was replaced by a new agreement (the "February 2009 Agreement"), effective February 19, 2009, which continues through the period ending December 31, 2013. The February 2009 Agreement generally establishes Mr. Rogers' compensation and other terms and conditions of employment for 2009 and future years. Because this Compensation Discussion and Analysis is designed primarily to provide information about Duke Energy's compensation objectives and policies for 2008, the following discussion relates primarily to the April 2006 Agreement, which governed Mr. Rogers' compensation for 2008.
The April 2006 Agreement compensated Mr. Rogers substantially in the form of equity-based compensation. Under the April 2006 Agreement, Mr. Rogers did not receive a base salary and was not eligible to participate in cash bonus programs. Instead, he was compensated substantially through the following equity awards, which remain payable in accordance with their terms notwithstanding the adoption of the February 2009 Agreement.
As was the case with all of Duke Energy's outstanding equity grants, these awards were split into awards covering both Duke Energy and Spectra Energy common stock upon the spin-off of Spectra Energy.
Mr. Rogers generally is prohibited from selling stock acquired pursuant to the option described above until April 3, 2009 (or, if earlier, upon termination of employment). The vested phantom shares and performance shares will not be paid until April 3, 2009 (or, if earlier, upon the termination of employment), and will earn fully vested and currently payable cash dividend equivalents while they remain outstanding. For 2008, the performance criteria for the vesting of Mr. Rogers' performance shares were weighted 80% on Duke Energy's adjusted diluted EPS and 20% on individual strategic and operational goals. Mr. Rogers' 2008 individual goals were as follows:
Execute Succession Planning Strategies. Threshold achievement required completion of: (i) succession plans for Executive Leadership Team ("ELT") positions; (ii) succession plans for other key positions; (iii) quarterly talent planning sessions; (iv) comprehensive assessments for direct reports; (v) succession planning sessions with the Board of Directors; and (vi) the Human Resources talent management study. Target achievement required threshold achievement and: (i) identification of 3 rotational, development opportunities for individuals on high potential list; (ii) completion of development plans for direct reports as a result of comprehensive assessments; and (iii) execution of recommendations arising out of the Human Resources talent management study. Maximum achievement required target performance and: (i) identification of 5 (rather than 3) rotational, development opportunities for individuals on high potential list; (ii) completion of inaugural session of the Strategic Leadership Program; (iii) completion of 2, one-on-one talent review sessions with each direct report; and (iv) complete comprehensive assessments and development plans for ELT.
Achieve Public Policy, Regulatory and Legislative Outcomes That Balance Customers' Needs for Reliable Energy at Competitive Prices with Shareholders' Expectations of Superior Returns. Threshold achievement required: (i) successful deployment of Team 25, an initiative designed to increase stakeholder engagement in order to obtain support for climate change policies; (ii) development of strategy for full deployment of Utility of the Future, an initiative related to the implementation of smart-grid technology, with successful implementation of 5,000 point deployment in Charlotte, 2,500 point deployment in South Carolina and deployment in Ohio consistent with regulatory strategy and filings; and (iii) development of integrated advocacy and communications plans for each regulatory and legislative issue. Target achievement required: (i) successful deployment of Team 25, including obtaining public recognition/support from third parties such as media, academia and other constituents; (ii) successful implementation of Utility of the Future, including making presentations to all 5 state commissions and key stakeholders, resulting in supportive regulatory treatment; (iii) obtaining endorsement of Duke Energy's policies as evidenced by media coverage, honors, awards, etc.; and (iv) successful advancement of key state and federal regulatory and legislative initiatives. Maximum achievement required target achievement and: (i) successful development of Team 25, including obtaining significant support among policy makers resulting in alternative climate change proposals; and (ii) obtaining approval, in at least one state, of tracker for Utility of the Future costs.
Optimize Operations by Focusing on Key Operational Metrics and Capital Projects; Develop and Execute Infrastructure to Support a Sustainable Organization. Threshold achievement required: (i) average performance at threshold with respect to key operational metrics, as set forth below; (ii) attainment of key milestones with respect to the Cliffside and Edwardsport projects on-time and
on budget; (iii) completion of supply chain study; (iv) achievement of enterprise-wide TICR of 1.38 or better; and (v) completion of financial migration, HR operations study as well as advancement of major technology projects. Target achievement required: (i) average performance at target with respect to key operational metrics, as set forth below; (ii) execution of supply chain study; (iii) achievement of enterprise-wide TICR of 1.19 or better; and (iv) execution of recommendations arising out of the Human Resources operations study. Maximum achievement required: (i) average performance at maximum with respect to key operational metrics, as set forth below; and (ii) achievement of enterprise-wide TICR of 1.13 or better.
Mr. Rogers' 2008 performance share opportunity was subject to the same 5% TICR-based safety penalty that applied to the other executive officers under the 2008 STI Plan. The penalty was not triggered due to the fact that Duke Energy's actual TICR was better than the pre-established target TICR level. In addition, the Compensation Committee determined that the same 5% safety adder (in the event of no work-related employee or contractor fatality) that applied to other executive officers in the 2008 STI Plan should apply to Mr. Rogers' 2008 performance shares because he had been subject to the TICR-based safety penalty. This resulted in a 5% increase in his 2008 performance share payout because there were no work-related employee or contractor fatalities in 2008. With respect to his individual goals, Mr. Rogers achieved performance that corresponded to a payout equal to 130%, 124% and 122% of target performance for the succession planning, public policy and operation optimization goals, respectively. Based on the actual level of achievement of the objectives related to Mr. Rogers' performance shares for 2008, and taking into account the 5% safety adder, Mr. Rogers earned approximately 80.5% of his 2008 target performance share opportunity, which covered 107,600 shares of Duke Energy and 53,800 shares of Spectra Energy, resulting in a payout of 86,667 shares of Duke Energy and 43,333 shares of Spectra Energy.
February 2009 Agreement
As with the April 2006 Agreement, under his February 2009 Agreement Mr. Rogers does not receive a base salary and he is not eligible to participate in Duke Energy's cash bonus programs. Instead, he will be compensated, for 2009 and future years through 2013 as long as he remains the Chief Executive Officer, primarily through annual grants (as opposed to one initial grant, as under the April 2006 Agreement) of stock options, phantom shares and performance shares, as follows:
The equity awards for 2009 have a value of 75% of those for 2010-2013 in recognition of the fact that the equity awards made under the April 2006 Agreement were intended to compensate Mr. Rogers through April 3, 2009 (i.e., essentially through the first quarter of 2009). The Committee believes that the equity awards called for under the February 2009 Agreement strike a balance between awards designed principally to reward continued employment (the phantom stock awards) and awards designed principally to reward both continued employment and stock price and operational performance (the stock options and performance share awards). Moreover, by linking the performance metrics under the performance shares to those applicable to Duke Energy's other executive officers, the Compensation Committee is ensuring that all of the executive officers are focused on achieving the same goals, all of which are designed to increase shareholder value.
Mr. Rogers generally is not eligible to participate in Duke Energy's benefit plans, but he will be permitted to participate in Duke Energy's medical and dental plans if he pays the required premiums. Mr. Rogers also is entitled to certain fringe benefits, and he remains entitled to benefits under legacy plans and agreements of Cinergy.
For security reasons, Mr. Rogers is required by Duke Energy to use Duke Energy aircraft, whenever feasible, for his business travel. Mr. Rogers also is permitted to use Duke Energy aircraft for his personal travel within North America; however, Mr. Rogers will be required to pay for the cost of personal travel on Duke Energy aircraft in accordance with Duke Energy's policies, except that he is not required to pay for the cost of travel to his annual physical examination or to meetings of the board of directors of other companies on whose board Mr. Rogers serves. Mr. Rogers is responsible for any income taxes resulting from such aircraft usage. However, to the extent Mr. Rogers incurs expenses associated with his spouse accompanying him on business travel, Mr. Rogers is entitled to reimbursement for those expenses, including payment of a tax gross-up.
The February 2009 Agreement contains noncompetition and nonsolicitation obligations on Mr. Rogers. The noncompetition obligations survive for one year following his termination of employment for any reason, and the nonsolicitation obligations survive for two years following his termination of employment for any reason.
Finally, the February 2009 Agreement establishes the treatment of the equity awards in the circumstances of Mr. Rogers' termination of employment or a change in control of Duke Energy. These provisions of the February 2009 Agreement are described more fully below (see "Potential Payments Upon Termination or Change in Control").
Other Compensation Policies
Stock Ownership Policy. Duke Energy has adopted a stock ownership policy to reinforce the importance of stock ownership. This is intended to align the interests of the executive officers and shareholders, and to focus the executive officers on the long-term success of Duke Energy. During 2008, the stock ownership policy applied to Duke Energy's directors as well as its executive officers and other key employees who participate in Duke Energy's long-term incentive program as follows:
In order to ensure that Duke Energy's stock ownership guidelines continue to be consistent with our peer group, general industry practices and governance best practices, the stock ownership guidelines were modified effective January 1, 2009, to apply to only the directors and the ELT, as follows:
Each employee covered by the amended stock ownership guidelines is required to hold 50% of all shares of Duke Energy common stock in which they become vested under the long-term incentive program (after the payment of any applicable taxes) until the applicable ownership requirement is satisfied.
Option Holding Policy. Duke Energy has adopted a policy that prohibits each executive officer, including each named executive officer, from selling shares of Duke Energy common stock acquired through the exercise of stock options until such executive officer is in compliance with Duke Energy's stock ownership requirements. An executive officer may, however, sell common stock acquired through an option exercise for the limited purpose of paying the exercise price of the stock option and any applicable tax liability.
Clawback policy. Duke Energy has memorialized its intent to recover any inappropriate payments by formally adopting a clawback policy. Under this policy, to the extent permitted by law and if the Board of Directors determines it to be reasonable and appropriate under the circumstances, Duke Energy will require the reimbursement of the portion of any performance-based bonus or incentive compensation payment paid to any executive officer, where such portion
of the payment was predicated upon the achievement of financial results that were subsequently the subject of a restatement caused or partially caused by such executive officer's fraud or misconduct.
Equity Award Granting Policy. As Duke Energy recognizes the importance of adhering to specific practices and procedures in the granting of equity awards, the Compensation Committee has adopted a formal policy that applies to the granting of all equity awards for employees and directors. Under this policy, the Compensation Committee or Board of Directors may grant equity awards only as follows:
The Compensation Committee has delegated authority to each of the Chairman of the Board of Directors and the Chairman of the Compensation Committee to grant equity awards, subject to certain limitations, to employees who are not executive officers. Equity awards made by delegated authority must be made on the first or second business day of an "open window period," as defined in Duke Energy's insider trading policy.
Tax and Accounting Implications
Deductibility of Executive Compensation. The Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Code, which provides that Duke Energy generally may not deduct, for federal income tax purposes, annual compensation in excess of $1 million paid to certain employees. Performance-based compensation paid pursuant to shareholder-approved plans is not subject to the deduction limit as long as such compensation is approved by "outside directors" within the meaning of Section 162(m) of the Code.
Although the Compensation Committee generally intends to structure and administer executive compensation plans and arrangements so that they will not be subject to the deduction limit of Section 162(m) of the Code, the Compensation Committee may from time to time approve payments that cannot be deducted in order to maintain flexibility in structuring appropriate compensation programs in the interests of shareholders. For example, phantom share awards received by certain employees, and amounts paid to certain employees under the STI Plan with respect to individual objectives, may not be deductible for federal income tax purposes, depending on the amount and other types of compensation received by such employees.
Accounting for Stock-Based Compensation. Duke Energy accounts for stock-based payments in accordance with the requirements of FAS 123R. Equity classified stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period, which generally begins on the date the award is granted and extends through the earlier of the date the award vests or the date the employee otherwise becomes entitled to the award (e.g., upon becoming retirement eligible).
Non-GAAP Financial Measures. As described previously in this Compensation Discussion and Analysis, Duke Energy uses various financial measures, including adjusted diluted EPS, in connection with short-term and long-term incentives. Adjusted diluted EPS is a non-GAAP financial measure as it represents diluted EPS from continuing operations, adjusted for the per share impact of special items and the mark-to-market impacts of economic hedges related to certain generation assets in the Commercial Power segment. Special items represent certain charges and credits which management believes will not be recurring on a regular basis. Because the operations of the generation assets are accounted for under the accrual method, management believes that excluding the impact of mark-to-market changes of the economic hedge contracts from adjusted earnings until settlement better matches the financial impacts of the hedge contract with the portion of the economic value of the underlying hedged asset. The most directly comparable GAAP measure for adjusted diluted EPS is reported diluted EPS from continuing operations, which includes the impact of special items and the mark-to-market impacts of economic hedges in the Commercial Power segment.
SUMMARY COMPENSATION TABLE
GRANTS OF PLAN-BASED AWARDS
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Effective on January 2, 2007, Duke Energy spun off its gas businesses to form Spectra Energy. Effective with the spin-off, equitable adjustments were made with respect to stock options and outstanding equity awards relating to Duke Energy common stock. All such awards were adjusted into two separate awards, one relating to Duke Energy common stock and one relating to Spectra Energy common stock. This adjustment was made such that the number of shares relating to the award covering Spectra Energy common stock was equal to the number of shares of Spectra Energy common stock that the award holder would have received in the distribution had the Duke Energy award represented outstanding shares of Duke Energy common stock (i.e., a ratio of 0.5 shares of Spectra Energy common stock for every one share of Duke Energy common stock). With respect to stock options, the per share option exercise price of the original Duke Energy stock option was proportionally allocated between the two types of stock options taking into account the spin-off distribution ratio and the relative per share trading prices immediately following the spin-off. The resulting Duke Energy and Spectra Energy awards continue to be subject to the vesting schedule under the original Duke Energy award agreement. For purposes of vesting and the post-termination exercise periods applicable to the options, continued employment with Duke Energy or Spectra Energy is considered to be continued employment with the other. The adjustments preserved, but did not increase, the value of the equity awards. The following two tables show each named executive officer's Duke Energy and Spectra Energy equity awards.
SPECTRA ENERGY CORP
OPTION EXERCISES AND STOCK VESTED
Duke Energy provides pension benefits that are intended to assist its retirees with their retirement income needs. A more detailed description of the plans that comprise Duke Energy's pension program follows.
Duke Energy Retirement Cash Balance Plan and Executive Cash Balance Plan
Mr. Hauser actively participates in the Duke Energy Retirement Cash Balance Plan ("RCBP"), which is a noncontributory, defined benefit retirement plan that is intended to satisfy the requirements for qualification under Section 401(a) of the Code. The RCBP generally covers employees of Duke Energy and affiliates, with certain exceptions for legacy Cinergy employees who
are covered under the Cinergy Plan (described below). The RCBP provides benefits under a "cash balance account" formula. Mr. Hauser has satisfied the eligibility requirements to receive his account benefit upon termination of employment. The RCBP benefit is payable in the form of a lump sum in the amount credited to a hypothetical account at the time of benefit commencement. Payment is also available in annuity forms based on the actuarial equivalent of the account balance.
The amount credited to the hypothetical account is increased with monthly pay credits equal to: (i) for participants with combined age and service of less than 35 points, 4% of eligible monthly compensation, (ii) for participants with combined age and service of 35 to 49 points, 5% of eligible monthly compensation, (iii) for participants with combined age and service of 50 to 64 points, 6% of eligible monthly compensation, and (iv) for participants with combined age and service of 65 or more points, 7% of eligible monthly compensation. If the participant earns more than the Social Security wage base, the account is credited with additional pay credits equal to 4% of eligible compensation above the Social Security wage base. Interest credits are credited monthly, with the interest rate determined quarterly based on the 30-year Treasury rate.
For the RCBP, eligible monthly compensation is equal to Form W-2 wages, plus elective deferrals under a 401(k), cafeteria, or 132(f) transportation plan, and deferrals under the Duke Energy Corporation Executive Savings Plan. Compensation does not include severance pay (including bank time and payment for unused vacation), expense reimbursements, allowances, cash or noncash fringe benefits, moving expenses, bonuses for performance periods in excess of one year, transition pay, long-term incentive compensation (including income resulting from any stock-based awards such as stock options, stock appreciation rights, phantom stock or restricted stock) and other compensation items to the extent described as not included for purposes of benefit plans or the RCBP. The benefit of participants in the RCBP may not be less than determined under certain prior benefit formulas (including optional forms). In addition, the benefit under the RCBP is limited by maximum benefits and compensation limits under the Code.
Mr. Hauser is eligible to participate in the Duke Energy Corporation Executive Cash Balance Plan ("ECBP"), which is a noncontributory, defined benefit retirement plan that is not intended to satisfy the requirements for qualification under Section 401(a) of the Code. Benefits earned under the ECBP are attributable to: (i) compensation in excess of the annual compensation limit ($245,000 for 2009) under the Code that applies to the determination of pay credits under the RCBP, (ii) certain deferred compensation that was not recognized by the RCBP prior to 2008, (iii) restoration of benefits in excess of a defined benefit plan maximum annual benefit limit ($195,000 for 2009) under the Code that applies to the RCBP, and (iv) supplemental benefits granted to a particular participant. Generally, benefits earned under the RCBP and the ECBP vest upon completion of three years of service, and, with certain exceptions, vested benefits generally become payable upon termination of employment with Duke Energy.
As described in footnote 8 to the Summary Compensation Table on page 48, amounts were credited to an account established for each of Messrs. Turner and Manly and Ms. Good under the Duke Energy Corporation Executive Cash Balance Plan pursuant to an amendment to each of their employment agreements that was negotiated in connection with the merger of Cinergy and Duke Energy. Messrs. Turner and Manly and Ms. Good will not earn any additional benefits under any nonqualified defined benefit plan (other than future interest credits under the Duke Energy Corporation Executive Cash Balance Plan) unless and until they continue employment with Duke Energy past age 62.
Cinergy Corp. Non-Union Employees' Pension Plan
Mr. Rogers has an accrued benefit under the Cinergy Corp. Non-Union Employees' Pension Plan ("Cinergy Plan"), but his benefit was "frozen" on April 3, 2006 (i.e., it is not increased by Mr. Rogers' service and pay after April 3, 2006). Messrs. Turner and Manly and Ms. Good participate in the Cinergy Plan. The Cinergy Plan is a tax-qualified defined benefit plan that generally covers legacy Cinergy non-bargaining employees. The Cinergy Plan includes the following two program formulas: (i) a Traditional Program and (ii) the Duke Account Formula (which, in 2007, replaced the Balanced and Investor Programs). The Traditional Program formula is based on service and final average monthly pay. The Duke Account Formula (and the prior Balanced and Investor Programs) are "cash balance account" formulas. In 2007, Traditional Program participants were given the choice of continuing to accrue benefits under the Traditional Program or to retain their accrued benefit under the Traditional Program and participate in the Duke Account Formula. Mr. Turner chose to retain his accrued benefits under the Traditional Program and in the future participate in the Duke Account Formula; Mr. Manly chose to remain in the Traditional Program. In 2007, Ms. Good automatically ceased participating in the Investor Program and began to participate in the Duke Account Formula.
Under the Cinergy Plan's Traditional Program, in which Mr. Rogers participated prior to April 3, 2006, and in which Mr. Turner participated prior to April 1, 2007, and in which Mr. Manly continues to participate, each participant earns a benefit under a final average pay formula, which calculates pension benefits based on a participant's "highest average earnings" and years of plan participation. The Traditional Program benefit is payable following normal retirement at age 65, following early retirement at or after age 50 with five or more years of service (with reduction in the life annuity for commencement before age 62 in accordance with prescribed factors) and at or after age 55 with combined age and service of 85 points (with no reduction in the life annuity for commencement before normal retirement age). Messrs. Rogers, Turner and Manly and Ms. Good are eligible for an early retirement benefit, the amount of which would be reduced for early commencement. Payment is available in a variety of annuity forms, and for Mr. Turner is also available in a lump sum.
The Traditional Program benefit formula is the sum of (a), (b), and (c), where (a) is 1.1% of final average monthly pay ("FAP") times years of participation (up to a maximum of 35 years), where (b) is 0.5% times FAP in excess of monthly Social Security covered compensation times years of participation (up to a maximum of 35 years), and where (c) is 1.55% of FAP times years of participation in excess of 35. The benefit under the Traditional Program will not be less than the minimum formula, which is the sum of (x) and (y), where (x) is the lesser of (i) 1.12% of FAP times years of participation (up to a maximum of 35 years) plus 0.5% times FAP in excess of monthly Social Security covered compensation times years of participation (up to a maximum of 35 years) or (ii) 1.163% of FAP pay times years of participation (up to a maximum of 35 years), and where (y) is 1.492% of FAP times years of participation over 35 years. Social Security covered compensation is the average of the Social Security wage bases during the 35 calendar years ending in the year the participant reaches Social Security retirement age.
FAP is the average of the participant's total pay during the three consecutive years of highest pay from the last 10 years of participation. This is determined using the three consecutive calendar years that will result in the highest FAP or by using the last 36 months of participation. If the participant's highest FAP occurs other than using the last 36 months, FAP will be calculated as if accrued vacation pay, if any, was received by the participant during the last month during the period that is used to determine the highest FAP. Mr. Turner's FAP continues to be adjusted for
future compensation, but his service after April 1, 2007, does not increase his accrued benefits under the Traditional Program.
Total pay includes base salary or wages, overtime pay, shift premiums, work schedule recognition pay, holiday premiums, unused accrued vacation pay, service watch payments, performance lump sum pay, annual incentive plan awards and annual performance cash awards. Total pay does not include reimbursements or other expense allowances, imputed income, fringe benefits, moving and relocation expenses, deferred compensation, welfare benefits, long-term performance awards and executive individual incentive awards. The benefit under the Cinergy Plan is limited by maximum benefit and compensation limits under the Code.
The Duke Account Formula feature of the Cinergy Plan provides a benefit substantially similar to that provided under the RCBP.
Present Value Assumptions
The valuation method and assumptions used in determining the present value of the current accrued benefit for the Pension Benefits table is as follows: (i) for the RCBP and ECBP, and for the cash balance account benefits under the Cinergy Plan, the value of the cash balance account as of December 31, 2008, is projected to age 65 for Mr. Hauser and age 62 for Messrs. Turner and Manly and Ms. Good at the assumed interest crediting rate of 4% and is then discounted back to December 31, 2008 using the assumed discount rate of 6.5%, and (ii) for the Cinergy Plan, the assumptions used by Duke Energy in its Form 10-K for the year ended December 31, 2008, are used, along with the assumption that Messrs. Rogers, Turner and Manly and Ms. Good will remain employed until age 62 (i.e., the earliest retirement date on which unreduced benefits can be paid).
NONQUALIFIED DEFERRED COMPENSATION
Chief Executive Officer of Cinergy and its predecessor companies. The amount in Mr. Rogers' Account includes the following:
Under the Duke Energy Corporation Executive Savings Plan, participants can elect to defer a portion of their base salary, short-term incentive compensation and long-term incentive compensation (other than stock options). Participants also receive a company matching contribution in excess of the contribution limits prescribed by the Code under the Duke Energy Retirement Savings Plan. In general, payments are made following termination of employment or death in the form of a lump sum or installments, as selected by the participant. In general, participants may direct the deemed investment of base salary deferrals, short-term incentive deferrals and matching contributions among investments options available under the Duke Energy Retirement Savings Plan, including in the Duke Energy Common Stock Fund. However, as described above, earnings on Mr. Rogers' account under the Cinergy Corp. 401(k) Excess Plan are calculated in part based on the actual investment returns of the phantom investment options previously offered under the Cinergy Corp. 401(k) Excess Plan. Participants may change their investment elections on a daily basis. Deferrals of equity awards are credited with earnings and losses based on the performance of the Duke Energy Common Stock Fund. The benefits payable under the plan are unfunded and subject to the claims of Duke Energy's creditors. As described in the Compensation Discussion and Analysis, the Duke Energy Corporation Executive Savings Plan was amended in 2008 to comply with Section 409A of the Code and to permit actively-employed participants to elect to receive a lump sum payment of all or a portion of their benefits that are subject to Section 409A in 2009.
Deferred Compensation Agreement for Mr. Rogers
In 1992, PSI Energy, Inc. (a predecessor to Cinergy) entered into a deferred compensation agreement with Mr. Rogers. Except for earnings on amounts previously deferred, Mr. Rogers is not accruing any additional benefits under this agreement. The agreement provides Mr. Rogers with the right to receive two 15-year annual cash benefits beginning the first January following his termination of employment for any reason other than death; provided, however, that cash benefits will commence no later than January 2010. The first annual payment ranges from $471,000 if payment commenced in January 2009 to $554,000 if payment begins in January 2010. Payment of the second annual cash benefit will commence no earlier than January 2009 and no later than January 2010 and ranges from $210,000 if payment commenced in January 2009 to $247,000 if payment begins in January 2010. Comparable amounts are payable if Mr. Rogers dies before these payments begin. The deferred payments accrue interest at an annual rate of 17.5%. The benefits payable under the agreement are unfunded and subject to the claims of Duke Energy's creditors.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Under certain circumstances, each named executive officer would be entitled to compensation in the event his or her employment terminates or upon a change in control. The amount of the compensation is contingent upon a variety of factors, including the circumstances under which he or she terminates employment. The relevant agreements that each named executive officer has entered into with Duke Energy are described below, followed by a table that quantifies the amount that would become payable to each named executive officer as a result of his or her termination of employment.
The amounts shown assume that such termination was effective as of December 31, 2008 and are merely estimates of the amounts that would be paid out to the named executive officers upon their termination. The actual amounts to be paid out can only be determined at the time of such named executive officer's termination of employment.
The table shown below does not include amounts that have been earned and which are payable without regard to the named executive officer's termination of employment. Such earned amounts, however, are described immediately following the table.
Mr. James E. Rogers
On April 4, 2006, Duke Energy entered into a three-year employment agreement with Mr. Rogers (the "April 2006 Agreement") to provide for his employment as Chief Executive Officer and President, effective as of the closing of the merger with Cinergy on April 3, 2006. The employment agreement superseded his employment agreement with Cinergy, except as described below.
Effective February 19, 2009, Duke Energy entered into a new employment agreement with Mr. Rogers (the "February 2009 Areement") for the period ending December 31, 2013. The severance and change in control provisions under the February 2009 Agreement supersede those under the April 2006 Agreement, effective February 19, 2009, except that the equity awards made before adoption of the February 2009 Agreement continue in accordance with their terms. Because the tabular disclosure below quantifies the amounts that would have been payable assuming the respective triggering events had occurred as of December 31, 2008 (as required pursuant to the applicable SEC rules), those amounts have been determined in accordance with the terms of the April 2006 Agreement (which was then still in effect).
The April 2006 Agreement, but not the February 2009 Agreement, made provision for cash severance under certain circumstances. If, on or after April 3, 2008, but during the term of the April 2006 Agreement, Mr. Rogers' employment had been terminated by Duke Energy without "cause" or by Mr. Rogers for "good reason" (each as defined in the April 2006 Agreement), Mr. Rogers would have been entitled to the severance benefits to which he would have received under his prior employment agreement with Cinergy had his employment terminated outside of the "change in control" context. Generally, this would have entitled Mr. Rogers to (a) cash severance equal to three times the sum of his salary and maximum bonus, determined by reference to his employment at Cinergy, (b) welfare benefits for the remainder of the stated term of the employment agreement or a cash equivalent (reduced by coverage obtained from subsequent employers); (c) a payment of $60,000 in connection with the legacy Cinergy automobile benefit; and (d) miscellaneous benefits, including tax counseling services.
Moreover, if any payment made to Mr. Rogers while the April 2006 Agreement remained in force had been subject to the "golden parachute" excise tax imposed under the Code, Duke Energy would have made a tax gross-up payment to Mr. Rogers to hold him harmless from the effect of such excise tax. The February 2009 Agreement eliminates this gross-up provision.
The February 2009 Agreement makes no provision for cash payments upon a termination of employment, whether before or after a change in control of Duke Energy. The February 2009 Agreement does provide for the treatment of Mr. Rogers' outstanding equity awards upon termination of employment or upon a change in control.
As noted above, however, the equity awards made before adoption of the February 2009 Agreement continue in accordance with their existing terms. Under the April 2006 Agreement, in the event of Mr. Rogers' termination of employment for any reason other than death or disability, a prorated portion of his phantom shares, performance shares (assuming target performance) and stock options attributable to the pending quarterly or annual service or performance period (as the case may be), to the extent not already vested, would vest based on the amount of time during the vesting period that elapsed prior to his termination of employment. If Mr. Rogers' employment were terminated as a result of his death or disability, all of his phantom shares, performance shares (assuming target performance) and stock options would immediately vest, regardless of the service or performance period to which they are attributable. In addition, upon his termination of employment, his stock options, to the extent vested, would remain exercisable during the remainder of their ten-year term, except such options shall remain exercisable for no more than 90 days in the event that Mr. Rogers' employment is terminated for cause (as defined in the April 2006 Agreement).
Under the February 2009 Agreement, if Mr. Rogers' employment terminates without cause or for good reason (each as defined in the February 2009 Agreement) or by reason of his retirement with the approval of the Duke Energy Board of Directors, then (i) the stock options and phantom stock granted to him pursuant to the February 2009 Agreement will continue to vest in accordance with their otherwise applicable schedule as if his employment had not terminated, (ii) the stock options will remain exercisable for their full ten-year term, and (iii) the performance shares will be payable (if at all) at the end of the cycle based on actual performance, again determined as if his employment had not terminated. If Mr. Rogers' employment terminates as a result of his death or disability, then the stock options and phantom stock granted to him pursuant to the February 2009 Agreement will vest in full, the stock options (whether or not previously vested) will remain exercisable for their full ten-year term, and the performance shares will be pro-rated for actual service and will be payable (if at all) at the end of the cycle based on actual performance. If Mr. Rogers terminates his employment without good reason (as defined in the February 2009 Agreement) or retires without the approval of the Duke Energy Board of Directors, the unvested stock options, phantom stock and performance shares granted to him pursuant to the February 2009 Agreement will expire immediately, and any previously vested options will expire 90 days after the termination of employment. If Mr. Rogers' employment is terminated for cause (as defined in the February 2009 Agreement), all stock options, phantom stock and performance shares (whether or not vested) granted to him pursuant to the February 2009 Agreement will expire immediately.
If a change in control of Duke Energy occurs and Mr. Rogers' employment is terminated within two years of the change in control, by Duke Energy without cause or by Mr. Rogers for good reason or by reason of his retirement with the approval of the Board of Directors, then notwithstanding the preceding paragraph, the stock options will vest immediately and the phantom stock and performance shares will immediately vest and be paid (in the case of performance
shares, based on the target level of performance). If Mr. Rogers' employment terminates after the expiration of the term of the February 2009 Agreement but before vesting of all options and performance shares, each such award will be subject to the treatment described above, but determined as if termination had occurred during the term of the February 2009 Agreement, and any termination by Mr. Rogers, other than in anticipation of a termination for cause, will be deemed a termination for good reason.
Under both the April 2006 Agreement and February 2009 Agreement, "cause" generally means (i) if not cured, the willful and continued failure by the Mr. Rogers to substantially perform his duties or to comply with Duke Energy's rules or procedures, (ii) the breach of confidentiality obligations by Mr. Rogers (and, in the case of the February 2009 Agreement, breach of the new noncompetition and nonsolicitation obligations), or (iii) Mr. Rogers' conviction of a felony, including the entry of a guilty or nolo contendere plea, or any willful or grossly negligent action or inaction by Mr. Rogers that has a materially adverse effect on Duke Energy, and "good reason" generally means (a) the material reduction without Mr. Rogers' consent of his title, authority, duties, or responsibilities from those in effect immediately prior to the reduction (except, under the February 2009 Agreement, his ceasing to serve as President of Duke Energy or, if Duke Energy adopts a policy that its Chief Executive Officer shall no longer serve as Chairman of its Board of Directors, his ceasing to serve as Chairman), (b) the failure by Duke Energy without Mr. Rogers' consent to nominate him for re-election to the Board of Directors, (c) a material adverse change in Mr. Rogers' reporting responsibilities, (d) any breach by Duke Energy of any other material provision of Mr. Rogers' agreement or (e) a failure by Duke Energy to require any successor entity to Duke Energy specifically to assume in writing all of Duke Energy's obligations under Mr. Rogers' agreement.
Other Named Executive Officers
Duke Energy entered into change in control agreements with Messrs. Hauser, Turner and Manly and Ms. Good, effective as of July 1, 2005; April 4, 2006; April 4, 2006; and April 4, 2006, respectively. The agreements have an initial term of two years, after which the agreements automatically extend, unless six months prior written notice is provided, from the first date of each month for one additional month.
The change in control agreements provide for payments and benefits to the executive in the event of termination of employment within two years after a "change in control" by Duke Energy without "cause" or by the executive for "good reason" (each as defined below) as follows: (1) a lump-sum cash payment equal to a pro-rata amount of the executive's target bonus for the year in which the termination occurs; (2) a lump-sum cash payment equal to two times the sum of the executive's annual base salary and target annual bonus opportunity in effect immediately prior to termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting "good reason"; (3) continued medical, dental and basic life insurance coverage for a two-year period or a lump sum cash payment of equivalent value (reduced by coverage obtained by subsequent employers); and (4) a lump-sum cash payment of the amount Duke Energy would have allocated or contributed to the executive's qualified and nonqualified defined benefit pension plan and defined contribution savings plan accounts during the two years following the termination date, plus the unvested portion, if any, of the executive's accounts as of the date of termination that would have vested during the remaining term of the agreement. If the executive would have become eligible for normal retirement at age sixty-five within the two-year period following termination, the two times multiple or two year period mentioned above will be reduced to the period from the termination date to the executive's normal retirement date. As
described in more detail below, the agreements also provide for enhanced benefits with respect to equity awards.
Under the change in control agreements, each named executive officer also is entitled to reimbursement of up to $50,000 for the cost of certain legal fees incurred in connection with claims under the agreements. In the event that any of the payments or benefits provided for in the change in control agreement otherwise would constitute an "excess parachute payment" (as defined in Section 280G of the Code), the amount of payments or benefits would be reduced to the maximum level that would not result in excise tax under Section 4999 of the Code if such reduction would cause the executive to retain an after-tax amount in excess of what would be retained if no reduction were made. In the event a named executive officer becomes entitled to payments and benefits under a change in control agreement, he or she would be subject to a one-year noncompetition and nonsolicitation provision from the date of termination, in addition to certain confidentiality and cooperation provisions.
For purposes of the change in control agreements, "cause" generally means, unless cured within 30 days, (i) a material failure by the executive to carry out, or malfeasance or gross insubordination in carrying out, reasonably assigned duties or instructions consistent with the executive's position, (ii) the final conviction of the executive of a felony or crime involving moral turpitude, (iii) an egregious act of dishonesty by the executive in connection with employment, or a malicious action by the executive toward the customers or employees of the Duke Energy, (iv) a material breach by the executive of Duke Energy's Code of Business Ethics, or (v) the failure of the executive to cooperate fully with governmental investigations involving Duke Energy. "Good reason," for this purpose, generally means: (a) a reduction in the executive's annual base salary or target annual bonus as in effect immediately prior to the change in control (exclusive of any across the board reduction similarly affecting substantially all similarly situated employees) or (b) the assignment to the executive of a job position with a total point value under the Hay Point Factor Job Evaluation System that is less than 70% of the total point value of the job position held by the executive immediately before the change in control.
The change in control agreements for Messrs. Turner and Manly and Ms. Good contained enhanced severance protection in the event of a qualifying termination of employment prior to the second anniversary of the merger of Duke Energy and Cinergy (i.e., April 3, 2008). This enhanced protection expired without being triggered.
Equity Awards Consequence of Termination of Employment
As described above, each year Duke Energy grants long-term incentives to its executive officers, and the terms of these awards vary somewhat from year to year. The following table summarizes the consequences under Duke Energy's long-term incentive award agreements, without giving effect to the change in control and severance agreements described above, that would
generally occur in the event of the termination of employment of a named executive officer (other than Mr. Rogers, whose treatment is described above).