UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

Filed by the Registrant

Filed by a Party other than the Registrant

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Petroleum Development Corporation

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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PETROLEUM DEVELOPMENT CORPORATION
1775 Sherman Street, Suite 3000
Denver, Colorado 80203

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
June 4, 2010

 

Denver Financial Center
Lobby Conference Room
1775 Sherman Street
Denver, Colorado 80203

 

To the Shareholders:

 

Notice is hereby given that the Annual Meeting of Shareholders of Petroleum Development Corporation (the “Company”) will be held at the Denver Financial Center, Lobby Conference Room, 1775 Sherman Street, Denver, Colorado 80203, on June 4, 2010, at 11:30 a.m., Mountain Time, for the following purposes, all as more fully described in the accompanying Proxy Statement:

 

 

The Board of Directors has fixed the close of business on April 7, 2010, as the record date for determining the shareholders having the right to vote at the annual meeting or any adjournment or postponement thereof. The presence in person or by proxy of the holders of a majority of the outstanding shares of the Company’s common stock entitled to vote is required to constitute a quorum.

 

Each shareholder is cordially invited to attend and to vote at this meeting in person. Shareholders who do not expect to attend are requested to sign and date the accompanying proxy card and return it promptly in the enclosed postpaid envelope.

 

By Order of the Board of Directors,

 

Daniel W. Amidon,
Corporate Secretary

 

Denver, Colorado

April 30, 2010

 

PETROLEUM DEVELOPMENT CORPORATION
1775 Sherman Street, Suite 3000
Denver, Colorado 80203

 

 

PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 4, 2010

 

 

Denver Financial Center
Lobby Conference Room
1775 Sherman Street
Denver, Colorado 80203

 

The accompanying proxy is solicited by the Board of Directors (“Board”) of Petroleum Development Corporation (“PDC” or the “Company”) for use at the Annual Meeting of Shareholders of the Company to be held on June 4, 2010, at 11:30 a.m. Mountain Time, and at any and all adjournments or postponements of the meeting, for the purposes set forth in this Proxy Statement and the attached Notice of Annual Meeting of Shareholders. This Proxy Statement and the enclosed form of proxy are first being mailed to the shareholders of the Company on or about April 30, 2010.

 

The Company will bear the cost related to the solicitation of proxies. The Company will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable and appropriate expenses incurred by them in sending proxy .materials to the beneficial owners of the Company’s common stock. In addition to solicitations by mail, Directors, officers and employees of the Company may solicit proxies by telephone and, to the extent necessary, other electronic communication, and personal interviews without additional compensation.

 

TABLE OF CONTENTS

 

 

Who May Vote

 

Shareholders of PDC, as recorded in the Company’s stock register on April 7, 2010, may vote at the meeting. The outstanding voting securities of the Company as of April 7, 2010, consisted of 19,253,526 shares of common stock. Each share is entitled to one vote on each matter considered at the meeting.

 

How Proxies Work

 

The Board is asking for your proxy. Giving the Board your proxy means that you authorize the Board to vote your shares at the meeting in the manner you direct. You may vote for any or all Director Nominees, or you may withhold your vote from any or all of the Director Nominees. You may also vote for or against the other proposals, or abstain from voting. Cumulative voting is not permitted by the Company’s By-Laws in the election of Directors.

 

If your shares are held in your name, you can vote by completing, signing and dating your proxy card and returning it in the enclosed envelope.

 

If you give the Board your signed proxy but do not specify how to vote, your shares will be voted in favor of the Director Nominees named on the proxy, in favor of approving the 2010 Long-Term Equity Compensation Plan, and in favor of the ratification of PricewaterhouseCoopers LLP as the Company’s independent registered accounting firm for the year ending December 31, 2010.

 

If you hold shares through someone else, such as a stockbroker, you will receive material from that firm asking how you want to vote. Check the voting form used by that firm to see what voting options you have available and to determine what procedures you must follow.

 

Revoking a Proxy

 

You may revoke your proxy before it is voted by:

 

 

If you hold your shares through someone else, such as a stockbroker, you will need to follow the directions they give you to revoke a proxy or otherwise vote at the meeting.

 

Quorum

 

In order to carry on the business of the meeting, there must be a quorum. This means that at least a majority of the outstanding shares eligible to vote must be represented at the meeting, either by proxy or in person. Treasury shares, which are shares owned by PDC itself, are not voted and do not count for this purpose.

 

Votes Needed

 

The Director Nominees who receive the most votes will be elected to fill the available seats on the Board. There is no provision in the Company’s By-Laws which requires Director Nominees to receive a majority of the votes cast to be elected. Approval of each of the other proposals requires the favorable vote of a majority of the votes cast. Only votes for or against a proposal count. Abstentions and broker non-votes will count for quorum purposes but not for voting purposes. Broker non-votes occur when a

broker returns a proxy but does not have authority from the owner of the stock to vote on a particular proposal.

 

Attending in Person

 

Only shareholders or their proxy holders and PDC’s guests may attend the annual meeting. For safety and security reasons, no cameras, audio or video recording equipment, large bags, briefcases or packages will be permitted in the meeting. In addition, each shareholder and guest may be asked to present valid, government-issued picture identification, such as a driver’s license, before being admitted to the meeting.

 

If your shares are held in the name of your broker, bank, or other nominee, you must bring to the meeting an account statement or letter from the nominee indicating that you beneficially owned the shares on April 7, 2010, the record date for voting. Shareholders who do not present such information at the meeting will be admitted upon verification of ownership at the admissions counter.

 

Conduct of the Meeting

 

The Chairman has broad authority to conduct the annual meeting in an orderly and timely manner. This authority includes establishing rules for shareholders who wish to address the meeting. The Chairman may also exercise broad discretion in recognizing shareholders who wish to speak and in determining the extent of discussion on each item of business. In light of the need to conclude the meeting within a reasonable period of time, there can be no assurance that every shareholder who wishes to speak on an item of business will be able to do so. The Chairman may also rely on applicable law regarding disruptions or disorderly conduct to ensure that the meeting is conducted in a manner that is fair to all shareholders.

 

Contact Information

 

If you have questions or need more information about the annual meeting, write to or call:

 

Corporate Secretary
Petroleum Development Corporation
1775 Sherman Street, Suite 3000
Denver, CO 80203

(303) 860-5800

 

For information about shares registered in your name, call PDC at 1-800-624-3821. You are also invited to visit PDC’s internet site at www.petd.com. Internet site materials are not part of this proxy solicitation.

 

As of the date of this proxy statement and as permitted by the Company’s By-Laws, the Company’s Board of Directors (“Board”) has nine members divided into three classes. Directors are usually elected for three-year terms. The terms for members of each class end in successive years.

 

The Board has nominated three continuing Directors, Larry F. Mazza, James M. Trimble and Richard W. McCullough, whose terms expire in 2010 at the annual meeting, to stand for election to the Board for a three-year term expiring in 2013. Vincent F. D’Annunzio has chosen not to stand for re-election. By resolution, the Board of Directors has decreased the size of the Board to eight members to be effective as of the date of the 2010 annual shareholder meeting. Mr. Mazza joined the Board in 2007 and currently serves on the Compensation Committee and the Nominating and Governance Committee. Mr. Trimble

joined the Board in September 2009 and currently serves on the Planning and Finance Committee as well as the Compensation Committee.

 

The appointed proxies will vote your proxy in accordance with your instructions, and for the election of the three nominees unless you withhold your authority to vote for any of them. The Board does not contemplate that any of the nominees will become unavailable for any reason; however, if any Director is unable to stand for election, the Board may reduce its size or choose a substitute. Proxies cannot be voted for a greater number of persons than the number of nominees named or for a person who is not named in this Proxy Statement as a candidate for Director.

 

NOMINEES FOR A THREE-YEAR TERM EXPIRING IN 2013

 

 

For the 2009-2010 Board term, each non-employee Director was paid an annual fee of $55,000 and received 4,000 shares of restricted stock of the Company. The Presiding Independent Director was paid an additional fee of $27,500. Each Non-Employee Director received the following fees for services on each committee on which he or she served:

 

2009-2010 Director Term Committee Fees

 

 

In addition, a Special Committee consisting of Messrs. Crisafio, Mazza, Parke and Swoveland was created to consider the potential repurchase of certain of the partnerships for which the Company is the managing general partner. Each Special Committee member was paid a fee of $3,500 for 2009.

 

As of the date of each annual shareholders’ meeting of the Company, each non-employee Director will be awarded a specified number of shares of restricted stock as determined by the Board. In 2009, Directors receiving restricted stock under the 2005 Non-Employee Director Restricted Stock Plan (“2005 Plan”) had all of the rights of a shareholder including the right to vote the shares and receive cash dividends and other cash distributions. Restricted stock will be subject to the restrictions for the restricted period commencing on the date the stock is awarded.

 

Each non-employee Director may also choose to defer a portion or all of his/her annual cash compensation by participating in the Non-Employee Director Deferred Compensation Plan. The plan’s trustee invests all cash deposits received exclusively in the common stock of the Company.

 

On April 19, 2010, the Board of Directors approved compensation for the 2010-2011 Board year. The annual compensation for the Chairs and members of the Planning and Finance Committee, Compensation Committee and Nominating and Governance Committee was raised to $12,000 and $6,000, respectively. The equity compensation was determined to be twice the retainer, or $110,000, for 2010-2011.

 

2009 Director Compensation

 

 

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES TO THE BOARD OF DIRECTORS SET FORTH IN THIS PROPOSAL #1. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY VOTE. THE PROXIES WILL BE VOTED IN ACCORDANCE WITH THE SHAREHOLDERS’ SPECIFICATIONS. DIRECTORS ARE ELECTED BY A PLURALITY OF THE VOTE.

 

(ITEM 2 ON THE PROXY)

 

Purpose of this Proposal

 

The purpose of this proposal is to seek shareholder approval of the Company’s 2010 Long-Term Equity Compensation Plan, effective April 1, 2010. We refer to this plan as the 2010 Plan. The 2010 Plan authorizes the issuance to employees and directors of up to 1,400,000 total shares of equity, in various forms, including but not limited to options, restricted stock and stock appreciation rights.

 

The Board of Directors proposes that you approve the 2010 Plan. The following is a substantive summary of the material provisions of the 2010 Plan. This summary is qualified in its entirety by reference to the full text of the 2010 Plan which appears as Exhibit A to this Proxy Statement.

 

In submitting the 2010 Plan to the shareholders for their consideration and approval, the Board is proposing to continue its program of equity incentives to key employees of the Company (currently through the Company’s 2004 Long-Term Equity Compensation Plan (the “2004 Plan”)) and its program of equity incentives to the Company’s non-employee Directors (currently through the 2005 Non-Employee Director Restricted Stock Plan (the “2005 Plan”)). The Company’s shareholders have previously considered and approved each of these earlier plans. As of April 20, 2010, the 2004 Plan currently has only 144 shares available for award and grant to key employees, while the 2005 Plan has only 27,144 shares available for award to non-employee Directors. In aggregate, there were 67,588 options and SARs outstanding as of April 20, 2010 with a weighted average exercise price of $27.10 and a weighted average term of 9.34 years. Also, as of April 20, 2010 there were 455,349 full value awards outstanding under all plans. The Board has determined that it is advisable for the Company to authorize, subject to shareholder approval, additional shares for issuance to the Company’s key employees and non-employee Directors in order to continue to further incentivize them in their management of the Company and to encourage them to own Company stock to further align their interests with those of the Company’s shareholders. For ease of administration, the Board has determined further that it is advisable to continue these programs in one new plan, the 2010 Plan, instead of two new freestanding plans. In this regard, the Board has determined to allocate and reserve a total of 1,400,000 shares of the Company’s common stock for future issuance, grant and award under the 2010 Plan. Awards may not be amended to reduce the exercise price of outstanding options or SARs or cancel outstanding options or SARs in exchange for cash, other awards or options or SARs with an exercise price that is less than the exercise price of the original options or SARs without shareholder approval.

The Board’s Reasons for the 2010 Plan

 

The success of the Company depends, in large measure, upon its ability to recruit and retain key employees with outstanding ability and experience. The Board also believes there is a need to align shareholder and employee interests by encouraging employee ownership of Company stock and to motivate employees with compensation conditioned upon achievement of the Company’s financial goals. Additionally, the Company’s Board plays a key role in setting the direction of the Company and representing the shareholders’ interests. Recent changes in rules and regulations governing public corporations and the general business environment have greatly increased the time and effort required of all directors of publicly traded companies, including the Company’s non-employee Directors. The Board believes that it is necessary to (1) compensate its non-employee Directors in a manner that will help attract qualified candidates to serve as non-employee Directors, and (2) induce incumbent non-employee Directors to continue to serve if the Board desires that they remain on the Board. At the same time, the Board desires to provide a vehicle by which non-employee Directors can increase their stock ownership and proprietary interest in the Company and enhance their identification with the interests of the Company’s shareholders through awards of shares of common stock.

 

In order to accomplish these objectives, the Board has adopted the 2010 Plan. The 2010 Plan is being presented to the shareholders for their approval as required by listing standards of the NASDAQ Stock Market. The affirmative vote of a majority of the shares of common stock cast at the annual meeting represented in person or by proxy and entitled to vote at the annual meeting is required for approval of the 2010 Plan.

 

Summary Description of the 2010 Plan

 

The following summary of the material terms of the 2010 Plan is qualified in its entirety by reference to the text of the 2010 Plan, which is attached as Exhibit A to this Proxy Statement. The 2010 Plan was adopted by the Board of Directors effective as of April 1, 2010, subject to your approval. The 2010 Plan requires the participant to enter into an award agreement at the time the Committee makes an award. The award agreement will describe the terms and conditions of the particular grant.

 

Administration

 

The 2010 Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”). As permitted by law, the Committee may delegate its authority.

 

Eligibility

 

Officers, key salaried employees and Directors who are employees of the Company and its subsidiaries are eligible to participate in all forms of awards in the 2010 Plan. Approximately 159 employees of the Company and its subsidiaries are presently eligible to participate. However, because the 2010 Plan provides for broad discretion by the Committee in selecting participants and in making awards, the total number of persons who will participate and the respective benefits to be accorded to them cannot be determined at this time.

 

Directors who are not employees of the Company or its subsidiaries are eligible to participate in all forms of award in the 2010 Plan, except for incentive stock options, performance shares and performance units. Currently, seven non-employee Directors of the Company are eligible to participate. However, because the size of the Board could change or other non-employee Directors could be elected, the total number of persons who will be eligible to participate in the future and the respective benefits to be accorded to them likewise cannot be determined at this time.

 

Stock Available for Issuance Through the 2010 Plan

 

The 2010 Plan provides for a number of forms of stock-based compensation, as further discussed below. Up to 1,400,000 shares of the Company’s common stock are authorized for issuance through the

2010 Plan. Shares issued under the 2010 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2010 Plan permit the reuse or reissuance by the 2010 Plan of shares of common stock for numerous reasons including shares of common stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights (“SARs”) paid out in the form of cash. On April 26, 2010, the closing price for a share of the Company’s common stock on the NASDAQ Stock Market was $26.21. Stock-based compensation will typically be awarded in consideration for the future performance of services to the Company.

 

Description of Awards Under the 2010 Plan

 

Awards to Company Employees.  The Committee may award to eligible employees incentive and nonqualified stock options, SARs, restricted stock, restricted stock units, performance units and performance shares.

 

Awards to Non-Employee Directors.  The Committee may award to non-employee Directors non-qualified stock options, SARs, restricted stock and restricted stock units.

 

Stock Options

 

The Committee has discretion to award incentive stock options (“ISOs”), which are intended to comply with Section 422 of the Internal Revenue Code (the “Code”), or nonqualified stock options (“NQSOs”), which are not intended to comply with Section 422 of the Code. The exercise price of an option may not be less than the fair market value of the underlying shares of common stock on the date of grant. If an award of stock options is intended to qualify as performance-based compensation under Section 162(m) of the Code, the maximum number of shares which may be subject to stock options granted in any calendar year to any one participant is 200,000. Options granted to employees under the 2010 Plan will expire at such times as the Committee determines at the time of the grant; provided, however, that no option will be exercisable later than ten years after the date of grant. Subject to the specific terms of the 2010 Plan, the Committee will have discretion to set such additional limitations on such grants as it deems appropriate; the award agreement will reflect these limitations.

 

Each option award agreement will set forth the extent to which the participant will have the right to exercise the option following termination of the participant’s employment with the Company. The termination provisions will be determined within the discretion of the Committee, might not be uniform among all participants and might reflect distinctions based on the reasons for termination of employment.

 

Upon the exercise of an option granted under the 2010 Plan, the option price is payable in full to the Company, either: (a) in cash or its equivalent, (b) if permitted in the award agreement, by tendering shares having a fair market value at the time of exercise equal to the total option price (provided that such shares have been held by the optionee for at least six months prior to their tender) or (c) by any combination of the foregoing methods of payment. The Committee may also allow options granted under the 2010 Plan to be exercised by a cashless exercise through a broker, as permitted under Federal Reserve Board Regulation T, or any other means the Committee determines to be consistent with the 2010 Plan’s purpose and applicable law, including by cashless exercise directly with the Company whereby the Company would withhold the proper number of shares which would have a fair market value on the date of exercise equal to the option exercise price.

 

SARs

 

The Committee may award SARs under the 2010 Plan upon such terms and conditions as it may establish. The Committee may award either freestanding SARs or SARs in tandem with stock options (a “tandem SAR”); a tandem SAR may not be granted to a non-employee Director unless the related option is a NQSO. The exercise price of a freestanding SAR will equal the fair market value of a share of common stock on the date of grant, whereas the exercise price of a tandem SAR issued in connection with a stock option will equal the option price of the related option. If an award of SARs is intended to

qualify as performance-based compensation under Section 162(m) of the Code, the maximum number of shares which may be subject to SARs awarded in any calendar year to any one participant is 200,000. At the discretion of the Committee, the payment upon SAR exercise may be in cash, in shares of Company common stock of equivalent value, or in some combination thereof.

 

If granted other than in tandem, the Committee will determine the number of shares of common stock covered by and the exercise period of the SAR. Upon exercise of a freestanding SAR, the participant will receive an amount equal to the excess of the fair market value of one share of common stock on the date of exercise over the grant price, multiplied by the number of shares of stock exercised under the SAR. In the case of a tandem SAR, the Committee may determine the exercise period of the SAR except that the exercise period may not exceed that of the related option. The participant may exercise the tandem SAR when the option is exercisable, surrender the option and receive on exercise an amount equal to the excess of the fair market value of one share of common stock on the date of exercise over the option purchase price, multiplied by the number of shares of stock covered by the surrendered option. Each award agreement will set forth the extent to which the participant will have the right to exercise the SAR following termination of the participant’s employment with the Company. The termination provisions will be determined by the Committee in its sole discretion, need not be uniform among all participants and may reflect distinctions based on the reasons for termination of employment.

 

Restricted Stock

 

The Committee may impose restrictions and conditions as to awards of shares of restricted stock as it deems advisable. With certain exceptions, all awards of restricted stock that are based on the passage of time may vest no more rapidly than over a three year period from the date of award; awards of restricted stock that are based on the achievement of specific measures may vest no more rapidly than one year from the date of award.

 

Awards to Key Employees.  The Committee may choose to award shares of restricted common stock under the 2010 Plan upon such terms and conditions as it may establish. If an award of restricted stock is intended to qualify as performance-based compensation under Section 162(m) of the Code, the maximum number of shares which may be granted in the form of restricted stock in any one calendar year to any one participant is 100,000. The award agreement will specify the period(s) of restriction, the number of shares of restricted stock granted, requirements that a participant pay a stipulated purchase price for each share, restrictions based upon the achievement of specific performance objectives and/or restrictions under applicable federal or state securities laws. Recipients may have the right to vote these shares from the date of grant, as determined by the Committee on the date of award. As determined by the Committee on the date of award, participants may receive dividends on their shares of restricted stock. Dividends accrued on restricted stock will be paid only if the restricted stock vests.

 

Each award agreement for restricted stock will set forth the extent to which the participant will have the right, if any, to retain unvested restricted stock following termination of the participant’s employment with the Company. The Committee will in its sole discretion make these determinations; these provisions need not be uniform among all shares of restricted stock issued under the 2010 Plan and may reflect distinctions based on reasons for termination of employment. Except in the case of terminations by reason of death or disability, the vesting of restricted stock, which qualifies for performance-based compensation under Section 162(m) and which are held by “covered employees” under Section 162(m), will occur at the time it otherwise would have vested, but for the employment termination.

 

Awards to Non-Employee Directors.  The Committee may award to non-employee Directors non-qualified stock options, SARs, restricted stock and restricted stock units. Restricted stock awards to non-employee Directors will be subject to the restrictions for a period (the “Restricted Period”) which will

commence upon the date when the restricted stock is awarded and will end on the earliest of the first to occur of the following:

 

 

As of the date specified by the Committee, each non-employee Director will be awarded that number of shares of restricted stock as determined by the Board, after consideration of the recommendations of the Committee. A non-employee Director who is first elected to the Board on a date subsequent to the date so specified will be awarded that number of shares of restricted stock as determined by the Board, after consideration of the recommendations of the Committee. The amount of the award for the upcoming plan year will be disclosed in the Company’s proxy statement for the Company’s annual meeting of shareholders. The 2010 Plan provides that non-employee Directors receiving restricted stock may have, subject to the provisions of the 2010 Plan, all of the rights of a shareholder with respect to the shares of restricted stock, including the right to vote the shares and receive cash dividends and other cash distributions thereon. Non-employee Directors receiving restricted stock units will have no voting rights during the restrictive period, but will be credited with an amount equal to the dividends paid on a share of common stock between the date of grant and the date the restricted stock unit is paid to the participant, if at all. If a non-employee Director ceases to be a member of the Board for any other reason, including removal or resignation for “Cause,” as defined in the 2010 Plan, the non-employee Director will forfeit to the Company all restricted stock awarded to him or her for which the Restricted Period has not ended.

 

Restricted Stock Units

 

The Committee may award restricted stock units (“RSUs”) to key employees and non-employee Directors upon such terms and conditions as the Committee determines. Each RSU will have a value equal to the fair market value of a share of the Company’s common stock on the date of grant. The maximum aggregate award of RSUs to any one participant during any one fiscal year will be equal to the fair market value of 100,000 shares; provided, further, that the maximum aggregate award of restricted stock and RSUs for any one fiscal year will be coordinated so that in no event will any one participant be awarded more than the fair market value of 100,000 shares taking into account all such awards. In its discretion, the Committee may impose conditions and restrictions on RSUs, as specified in the RSU award agreement, including restrictions based upon the achievement of specific performance goals and time-based restrictions on vesting following the attainment of the performance goals. As determined by the Committee at the time of the award, settlement of vested RSUs may be made in the form of cash,

shares of Company stock, or a combination of cash and Company stock. Settlement of vested RSUs will be solely in a lump sum as soon as practicable after the vesting date. The amount of the settlement will equal the fair market value of the RSUs on the vesting date. Each RSU will be credited with an amount equal to the dividends paid on a share of Company stock between the date of award and the date the RSU is paid to the participant, if at all. Dividends will vest, if at all, upon the same terms and conditions governing the vesting of the RSU under the 2010 Plan. Payment of the dividend equivalent will be paid at the same time as payment of the RSU. The holders of RSUs will have no voting rights.

 

Performance Units/Performance Shares

 

The Committee has the discretion to award performance units and performance shares under the 2010 Plan upon such terms and conditions as it may establish. If an award of performance units or performance shares is intended to qualify as performance-based compensation under Section 162(m) of the Code, the maximum aggregate payout for awards of performance shares which may be granted in any one calendar year to any one participant will be the fair market value of 100,000 shares, whereas the maximum aggregate payout for awards of performance units which may be granted in any one calendar year to any one participant will be $1,500,000. Performance units will have an initial value as determined by the Committee, whereas performance shares will have an initial value equal to one share of common stock on the date of award. The payout on the number and value of the performance units and performance shares will be a function of the extent to which corresponding performance goals are met. Payment of performance shares and performance units will be made in a single lump sum following the close of the applicable performance period. In its discretion, the Committee may pay earned performance shares or performance units in cash, in shares of Company stock or in a combination of cash and stock, which will have an aggregate fair market value equal to the value of the earned performance share or performance unit at the close of the applicable performance period. Participants will not be entitled to dividend or voting rights with respect to any performance shares or performance units earned but not yet distributed to a participant. Unless otherwise determined by the Committee, in the case of death or disability during the performance period, the participant, or his or her estate, will not be entitled to receive any payout of the performance shares or performance units. In the case of any other termination of the participant’s employment during the performance period, all performance shares and performance units intended to qualify as performance-based compensation will be forfeited by the participant.

 

Performance Measures

 

The Committee may grant awards under the 2010 Plan to eligible employees and to non-employee Directors, subject to the attainment of certain specified performance measures. The number of performance-based awards granted to an officer, key employee or non-employee Director in any year is determined by the Committee in its sole discretion, subject to the maximum awards set forth in the 2010 Plan and as summarized above.

 

The value of each performance-based award will be determined solely upon the achievement of certain pre-established objective performance goals during each performance period. The duration of a performance period will be established by the Committee. The Committee will establish, in writing, the objective performance goals applicable to the valuation of performance-based awards granted in each performance period, the performance measures which will be used to determine the achievement of those performance goals, and any formulas or methods to be used to determine the value of the performance-based awards. Under the 2010 Plan, the Committee may utilize any of the following measures of performance: net income either before or after income taxes, including adjusted net income; share price; earnings per share (basic or diluted); total shareholder return; return on assets; return on equity; operating income; return on capital or investment; cash flow or adjusted cash flow from operations; economic value added or adjusted cash flow per share of Company stock (net income plus or minus change in operating assets and liabilities); debt level; cost reduction targets; equity ratios; capital efficiency (adjusted EBITDA divided by production and divided by average finding and development cost per unit); operating and general and administrative expense per Mcfe (the sum of total lease

operating expense, exploration general and administrative expense and corporate general and administrative expense divided by Mcfe (mcf equivalent for gas and oil)); average reserve replacement ratio (the sum of extensions and discoveries, revisions in previous estimates and purchase of reserves divided by the sum of the same); and production (actual production volume for a specified period of time); amount of the Company’s oil and natural gas reserves; oil and gas reserve additions; and costs of finding for oil and gas reserves. The value of performance-based awards may be based on absolute measures or on a comparison of the Company’s financial measures during a performance period to the financial measures of a group of competitors.

 

Following the end of a performance period, the Committee will determine the value of the performance-based awards granted for the period based on the attainment of the pre-established objective performance goals. The Committee will also have discretion to reduce (but not to increase) the value of a performance-based award. The Committee will certify, in writing, that the award is based on the degree of attainment of the pre-established objective performance goals. As soon as practicable thereafter, payment of the awards to participants will be made in the form of shares of Company common stock and/or cash, as applicable.

 

Conditions to Award Payments

 

With respect to participants who are employees, if such participant terminates employment with the Company for any reason other than death while any award under the 2010 Plan remains outstanding, that participant will receive such shares or benefit only if, during the entire period from his or her date of termination to the date of such receipt, the participant (i) consults and cooperates with the Company on matters under his or her supervision during the participant’s employment, and (ii) refrains from engaging in any activity that is directly or indirectly in competition with any activity of the Company for a one-year period. If a participant fails to comply with this requirement, the participant’s rights under any outstanding award will be forfeited unless otherwise waived by the Committee.

 

Adjustment and Amendments

 

The 2010 Plan provides for appropriate adjustments in the number of shares of Company stock subject to awards and available for future awards in the event of changes in outstanding common stock by reason of a merger, stock split, stock dividend, or certain other events.

 

The 2010 Plan may be modified or amended by the Board at any time and for any purpose which the Board deems appropriate. However, no such amendment may adversely affect any outstanding awards without the affected holder’s consent. NASDAQ listing standards require shareholder approval for all material amendments of the 2010 Plan.

 

Change in Control

 

In the event of a change in control, as defined in the 2010 Plan, generally all options and SARs granted under the 2010 Plan will become immediately exercisable; restriction periods and other restrictions imposed on restricted stock and RSUs which are not performance-based will lapse; and the target payout opportunities attainable under all outstanding awards of performance-based restricted stock, RSUs, performance shares and performance units will be deemed to have been fully earned for the entire performance period as of the effective date of the change in control. The vesting of such awards will be accelerated as of the effective date of the change in control.

 

Nontransferability

 

No award under the 2010 Plan may be sold, assigned or otherwise transferred in any manner by a participant except by will or by the laws of descent and distribution; and any award will be exercisable during a participant’s lifetime only by the participant or by the participant’s guardian or legal representative. These limitations may be waived by the Committee, subject to restrictions imposed under the SEC’s short-swing trading rules and federal tax requirements relating to incentive stock options.

Duration of the Plan

 

The 2010 Plan will remain in effect until all shares subject to the 2010 Plan have been purchased or acquired under the terms of the 2010 Plan, and all performance periods for performance-based awards granted under the 2010 Plan have been completed. However, in no event will an award be granted under the 2010 Plan on or after April 1, 2020.

 

Certain Federal Income Tax Consequences

 

The following description of the material federal income tax consequences of awards under the 2010 Plan is a general summary. State, local, and other taxes may also be imposed in connection with awards. This discussion is intended for the information of shareholders considering how to vote at the annual meeting and not as tax guidance to individuals who participate in the 2010 Plan.

 

Options

 

With respect to options which qualify as ISOs, a 2010 Plan participant will not recognize income for federal income tax purposes at the time options are granted or exercised, and the Company will not be entitled to a deduction with respect to the granting or exercise of such an option except in the limited circumstances discussed below. However, for purposes of the alternative minimum tax, in the year in which an ISO is exercised, the amount by which the fair market value of the shares acquired upon exercise exceeds the exercise price will be treated as an item of adjustment and included in the computation of the recipient’s alternative minimum tax. If the participant disposes of shares acquired by exercise of an ISO either before the expiration of two years from the date the options are granted or within one year after the issuance of shares upon exercise of the ISO (the “holding periods”), the participant will recognize in the year of disposition: (a) ordinary income, to the extent the lesser of either (1) the fair market value of the shares on the date of option exercise or (2) the amount realized on disposition, exceeds the option price; and (b) capital gain, to the extent the amount realized on disposition exceeds the fair market value of the shares on the date of option exercise. In addition, if the holding periods are not met, the Company will be entitled to a deduction corresponding to the ordinary income amount recognized by the participant. If the shares are sold after expiration of the holding periods, the participant generally will recognize long-term capital gain or loss equal to the difference between the amount realized on disposition and the option price.

 

With respect to NQSOs, the participant will not recognize any income and the Company will not be entitled to a deduction upon grant of the option. Upon exercise, the participant will recognize ordinary income, and the Company will be entitled to a corresponding deduction, in an amount equal to the excess of the fair market value of the shares on the date of option exercise over the amount paid by the participant for the shares. Upon a subsequent disposition of the shares received under the option, the participant generally will recognize capital gain or loss to the extent of the difference between the fair market value of the shares at the time of exercise and the amount realized on the disposition.

 

SARs

 

The recipient of a grant of SARs will not realize taxable income and the Company will not be entitled to a federal income tax deduction with respect to such grant on the date of such grant. Upon the exercise of an SAR, the recipient will realize ordinary income, and the Company will generally be entitled to a corresponding deduction, equal to the amount of cash received.

 

Restricted Stock

 

A participant holding restricted stock will realize, at the time the shares vest, ordinary income in an amount equal to the fair market value of the shares and any cash received attributable to credited dividends at the time of vesting, and the Company will generally be entitled to a corresponding deduction for federal income tax purposes.

RSUs

 

A participant holding RSUs will, at the time the participant receives a distribution, realize ordinary income in an amount equal to the distribution (which will be a single lump sum payment in cash or stock equal to the fair market value of the units held by the participant) and the Company will be entitled to a corresponding deduction for federal income tax purposes.

 

Performance Units and Performance Shares

 

The recipient of an award of performance units or performance shares will not realize taxable income and the Company will not be entitled to a deduction with respect to such grant on the date of such grant. Upon the payout of such award, the recipient will realize ordinary income and the Company will generally be entitled to a corresponding deduction, equal to the amount of cash or stock received.

 

Section 409A

 

Notwithstanding any contrary provision in the 2010 Plan, each provision in the 2010 Plan that otherwise relates to nonqualified deferred compensation benefits will be interpreted to permit the deferral of compensation and the payment of deferred amounts in accordance with Section 409A of the Code, to the extent applicable.

 

Section 162(m)

 

Under Section 162(m) of the Code, compensation paid by the Company in excess of $1 million for any taxable year to a “Covered Employee” generally is not deductible by the Company or its affiliates for federal income tax purposes unless an exemption from such limitation exists. One such exemption is if the subject compensation is based on the attainment of performance goals, is paid pursuant to a plan approved by shareholders of the Company, and meets certain other requirements. Generally, “Covered Employee” under Section 162(m) means the chief executive officer and the three other highest paid executive officers of the Company other than the Chief Executive Officer as of the last day of the taxable year. The Committee will at all times consist of “outside directors” as required for purposes of Section 162(m), and that the Committee will take the effect of Section 162(m) into consideration in structuring 2010 Plan awards.

 

Prospective awards of equity compensation under the 2010 Plan, if approved by the shareholders, are not currently determinable. As disclosed in the Company’s Current Report on Form 8-K, filed with the SEC on April 23, 2010, the Compensation Committee has made various awards of restricted shares and SARs to the Company’s CEO and each of the named executive officers with respect to 2010 compensation. The 2004 Plan had sufficient remaining shares of common stock to fulfill these equity awards. At the date of this Proxy Statement, there are no current plans for additional equity awards to the CEO and named executive officers during 2010.

 

Also disclosed in the Form 8-K referenced in the previous paragraph is the determination by the Committee to award to each of the Company’s continuing non-employee Directors shares of restricted stock with a value of $110,000. These shares will be awarded to these Directors as of July 1, 2010 and will be priced on the basis of the average closing price on the NASDAQ Stock Market for the fifteen business days beginning ten days prior to the date of the Annual Meeting on June 4, 2010. Consequently, as of the date of this Proxy Statement, the Company is unable to determine the total number of restricted shares that each non-employee Director will receive as a result of this award. As of the date of this Proxy Statement, the Company anticipates that the 27,144 shares remaining in the Company’s 2005 Non-Employee Director Restricted Stock Plan will be issued under this award to the subject Directors. The remaining indeterminable number of shares of restricted stock under the award will be issued to the subject Directors from the 2010 Plan, if approved by the shareholders at the annual meeting.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THIS PROPOSAL #2 TO APPROVE THE 2010 LONG-TERM EQUITY COMPENSATION PLAN. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY VOTE. THE PROXIES WILL BE VOTED IN ACCORDANCE WITH THE SHAREHOLDERS’ SPECIFICATIONS. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON STOCK CAST AT THE MEETING REPRESENTED IN PERSON OR BY PROXY AND ENTITLED TO VOTE AT THE MEETING IS REQUIRED FOR APPROVAL OF THIS PROPOSAL #2.

 

The Audit Committee and the Board have ratified the engagement of PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent registered public accounting firm with respect to its year ending December 31, 2010. The Board is submitting the appointment of PwC to the shareholders for ratification. If the appointment of PwC is not ratified, the Board will require the Audit Committee to reconsider its selection. A representative of PwC is expected to be present at the meeting, will have an opportunity to make a statement if he or she so desires, and will also be available to respond to appropriate questions.

 

Principal Accountant Fees and Services

 

 

 

 

Audit Committee Pre-Approval Policies and Procedures

 

The Sarbanes-Oxley Act of 2002 requires that all services provided to the Company by its independent registered public accounting firm be subject to pre-approval by the Audit Committee or authorized Audit Committee members. The Audit Committee has adopted policies and procedures for pre-approval of all audit services and non-audit services to be provided by the Company’s independent registered public accounting firm. Services necessary to conduct the annual audit must be pre-approved

by the Audit Committee annually. Permissible non-audit services to be performed by the independent accountant may also be approved on an annual basis by the Audit Committee if they are of a recurring nature. Permissible non-audit services, which are not eligible for annual pre-approval, to be conducted by the independent accountant must be pre-approved individually by the full Audit Committee or by an authorized Audit Committee member. Actual fees incurred for all services performed by the independent accountant will be reported to the Audit Committee after the services are fully performed. The duties of the Committee are described in the Audit Committee Charter, which is available at the Company’s website under “Corporate Governance.”

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THIS PROPOSAL #3. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY VOTE. THE PROXIES WILL BE VOTED IN ACCORDANCE WITH THE SHAREHOLDERS’ SPECIFICATIONS. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON STOCK CAST AT THE MEETING REPRESENTED IN PERSON OR BY PROXY AND ENTITLED TO VOTE AT THE MEETING IS REQUIRED FOR APPROVAL OF THIS PROPOSAL #3.

 

The Audit Committee of the Board is composed of four Directors (five prior to August 2009) and operates under a written charter adopted by the Board. Each member of the Audit Committee meets the independence requirements of Rule 5605(a)(2) of the NASDAQ listing standards. The duties of the Audit Committee are summarized in this Proxy Statement under “Committees of the Board of Directors” and are more fully described in the charter, which is available at the Company’s website under “Corporate Governance.”

 

Management is responsible for the Company’s internal controls and preparation of the consolidated financial statements in accordance with generally accepted accounting principles. The Company’s independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) and issuing a report thereon. The Committee’s responsibilities include monitoring and overseeing these processes.

 

The Committee met eight times during 2009 and the subcommittee related to the partnerships operated by the Company met an additional seven times. The Committee has continued to meet frequently during 2010.

 

The Committee reviewed and discussed the Company’s audited consolidated financial statements for the year ended December 31, 2009 (the “audited financial statements”) with management and the Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”). The Committee also discussed with PwC the matters required to be discussed by Statement of Auditing Standards No. 61, as amended, and PwC directly provided reports on significant matters to the Committee.

 

The Committee has received the written disclosures and the letter from PwC required by PCAOB Rule 3526 and has discussed with PwC its independence from the Company.

 

The Committee has discussed with management and PwC such other matters and received such assurances from them as the Committee deemed appropriate.

 

Based on the foregoing review and discussions and relying thereon, the Committee recommended that the Board include the audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The Board approved the Committee’s recommendation to appoint PwC to serve as the Company’s independent registered public accounting firm for 2010. In connection therewith, the Audit Committee considered whether the provision of non-audit services by PwC prior to their engagement was compatible with maintaining the independent registered public accounting firm’s independence. This appointment is subject to ratification by the Company’s shareholders.

 

Anthony J. Crisafio, Chair

Joseph E. Casabona

Jeffrey C. Swoveland

Kimberly Luff Wakim

 

AUDIT COMMITTEE

of the Board of Directors

 

As of the date of this Proxy Statement, the Board is not aware of any matters to be brought before the 2010 Annual Meeting other than the matters set forth in this Proxy Statement. However, if other matters properly come before the meeting, it is the intention of the proxy holders named in the enclosed form of proxy to vote in accordance with their discretion on such matters pursuant to such proxy.

 

The following table sets forth certain information regarding ownership of the Company’s common stock as of April 1, 2010, by (a) each person known by the Company to own beneficially more than 5% of the outstanding shares of common stock; (b) each Director of the Company; (c) each executive officer; and (d) all Directors and executive officers as a group. As of April 1, 2010, 19,253,526 common shares of the Company were issued and outstanding. Except as otherwise indicated, the address for each of the named security holders is 1775 Sherman Street, Suite 3000, Denver, Colorado 80203.

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) requires the Company’s officers and Directors, and persons who own more than 10% of the Company’s equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, Directors and holders of more than 10% of the common stock are required by regulations promulgated by the SEC pursuant to the Exchange Act to furnish the Company with copies of all Section 16(a) forms they file. The Company assists officers and Directors, and will assist beneficial owners, if any, of more than 10% of the common stock, in complying with the reporting requirements of Section 16(a) of the Exchange Act.

 

Based solely on its review of the copies of such forms received by it, the Company believes that for the year ended December 31, 2009, all Section 16(a) filing requirements applicable to its Directors, officers and greater than 10% beneficial owners were met, with the following exceptions: Form 4s were filed one day late for Messrs. Brookman, Mazza and Swoveland due to administrative delay.

 

Corporate Governance Guidelines

 

The Board has adopted Corporate Governance Guidelines that govern the structure and functioning of the Board and establish the Board’s policies on a number of corporate governance issues. The Guidelines are posted under “Governance Policies” in the Corporate Governance section of the Company’s internet site at www.petd.com. They are also available to any shareholder on request; see “Contact Information” above.

 

The Company’s By-Laws provide that the number of members of the Board shall be designated from time to time by a resolution of the Board. Currently, the designated number of Directors is nine, but with the decision by Vincent D’Annunzio not to stand for re-election, the Board has reduced the number of Directors to eight, effective on the date of the 2010 annual shareholders meeting. The By-Laws provide that the Board shall be divided into three separate classes of directors which are required to be as nearly equal in number as practicable. At each annual meeting of shareholders one class of Directors, whose term expires, will be elected to a term of three years. The classes are staggered so that the term of one class expires each year. There is no family relationship between any Director or executive officer and any other Director or executive officer of the Company. There are no arrangements or understandings between any Director or officer and any other person pursuant to which the person was selected as an officer.

 

Subject to some exceptions and transition provisions, the NASDAQ listing standards generally provide that a Director will not be independent if:

 

(A) the Director is, or at any time during the past three years was, employed by the Company;

 

(B) the Director or a member of the Director’s immediate family has received from the Company compensation of more than $120,000 during any period of 12 consecutive months within the three years preceding the determination of independence other than for service as a Director; compensation paid to a family member who is an employee of the Company (other than an executive officer); or benefits under a tax-qualified retirement plan;

 

(C) the Director is a family member of an individual who is, or at any time during the past three years was, an executive officer of the Company;

 

(D) the Director or a member of the Director’s immediate family is a partner in, or a controlling person of, or an executive officer of any organization to which PDC made, or from which PDC received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more;

 

(E) the Director or a member of the Director’s immediate family is employed as an executive officer of another entity where at any time during the past three years any of the Company’s executive officers serves on the compensation committee of the other entity; or

 

(F) the Director or a member of the Director’s immediate family is a current partner of PwC or during the past three years was a partner or employee of PwC.

 

Audit Committee members are subject to additional, more stringent NASDAQ and Exchange Act requirements.

 

The Board has reviewed business and charitable relationships between the Company and each non-employee Director to determine compliance with the NASDAQ listing standards described above and to evaluate whether there are any other facts or circumstances that might impair a Director’s independence. The Board has determined that all non-employee Directors are independent under NASDAQ Listing Rule 5605 and the Exchange Act.

 

The Board met ten times in 2009. Each of PDC’s Directors attended at least 75% of the aggregate Board and committee meetings (on which he or she served) during 2009.

 

As specified in the Company’s Corporate Governance Guidelines, Directors are strongly encouraged to attend the annual meeting of shareholders. All Directors attended last year’s meeting, except for Ms. Wakim, who was ill.

 

The following table identifies the current membership and chairs of the five standing committees of the Board.

 

 

 

 

The non-employee Directors generally meet in “executive session” without the presence of employee Directors at their discretion in connection with each regularly scheduled Board meeting. Mr. Swoveland serves as Presiding Independent Director at these sessions; however, the other non-employee Directors may, in the event of his absence, select another Director to preside over a particular session.

 

Audit Committee

 

The Audit Committee, which met 15 times in 2009, is composed entirely of persons whom the Board has determined to be independent under NASDAQ Listing Rule 5605(a)(2), Section 301 of the Sarbanes-Oxley Act of 2002 and Section 10A(m)(3) of the Exchange Act. Mr. Crisafio chairs the Audit Committee; other members are Ms. Wakim and Messrs. Casabona and Swoveland. The Board has determined that all four members of the Audit Committee qualify as financial experts as defined by SEC regulations and that all of the Audit Committee members are independent of management. The Audit Committee’s purpose is to assist the Board in monitoring the integrity of the financial reporting process, systems of internal controls and financial statements of the Company, and compliance by the Company with legal and regulatory requirements. Additionally, the Committee is directly responsible for the appointment, compensation and oversight of the independent auditors employed by the Company for the purpose of preparing or issuing an audit report or related work and to assess the need for an internal audit function and recommend its establishment when deemed appropriate.

 

In performing its responsibilities, the Audit Committee monitors the integrity of the Company’s financial reporting process and systems of internal controls regarding finance, accounting and legal compliance; monitors the independence of the independent registered public accounting firm; and provides an avenue of communications among the independent registered public accounting firm, management and the Board. The Board has adopted a Charter of the Audit Committee which is posted on the Company’s website. The Board continues to assess the adequacy of the Charter and will revise it as necessary.

 

Compensation Committee

 

The Board has determined that all members of the Compensation Committee are independent of the Company under Rule 5605(a)(2) of the NASDAQ listing standards. The Compensation Committee met eight times in 2009. The Board has adopted a Compensation Committee Charter which is posted on the Company’s website.

The purpose and functions of the Compensation Committee are to (1) oversee the development of a compensation strategy for the Company; (2) oversee the administration of the Company’s compensation programs; (3) evaluate the performance of and set compensation for the Chief Executive Officer; (4) review and approve the elements of compensation for other executive officers of the Company; (5) negotiate the terms of employment agreements with executive officers of the Company; (6) review and recommend to the full Board compensation of the Company’s Directors and changes in compensation levels to the Board; (7) approve equity grants and recommend equity-based incentive plans necessary to implement the Company’s compensation strategy; and (8) administer all equity-based incentive programs of the Company.

 

Compensation Committee Interlocks and Insider Participation.

 

There are no Compensation Committee interlocks.

 

Executive Committee

 

The purpose and functions of the Executive Committee are to exercise the powers and duties of the Board between Board meetings and, while the Board is not in session, implement the policy decisions of the Board. The Board has adopted an Executive Committee Charter which is posted on the Company’s website.

 

Nominating and Governance Committee

 

The Board has determined that all members of the Nominating and Governance Committee are independent of the Company under Rule 5605(a)(2) of the NASDAQ listing standards. The Nominating and Governance Committee met six times in 2009. The purpose of and functions performed by the Committee are to (1) assist the Board by identifying individuals qualified to become Board members and to recommend to the Board nominees for the next annual meeting of shareholders or fill any vacancies; (2) recommend to the Board corporate governance guidelines applicable to the Company; (3) lead the Board in its annual review of the Board’s performance; and (4) recommend to the Board Director nominees for each committee. The Board has adopted a Charter for the Nominating and Governance Committee. The Charter has been posted on the Company’s website.

 

As noted in the Corporate Governance Guidelines, the Board believes it is appropriate and efficient to combine the offices of Chairman and Chief Executive Officer, provided that a Lead Director is in place to preside at executive sessions of the independent Directors and otherwise provide leadership for the independent Directors. Particularly at a small business, such as the Company, the Board believes that separation of these roles is not necessary. In addition, the Board currently consists of eight independent Directors and only one management Director, further mitigating any risks associated with combining the offices of Chairman and Chief Executive Officer. The Committee reviews this position of combined offices , as well as the other Governance Guidelines, on an annual basis.

 

Director Qualifications and Selection

 

The Board has adopted Director Nomination Procedures that prescribe the process the Nominating and Governance Committee will use to select the Company’s nominees for election to the Board. The Nominating and Governance Committee evaluates each candidate based on the candidate’s level and diversity of experience and knowledge (specifically within the industry and relevant industries in which the Company operates, as well as his or her general overall experience and knowledge), skills, education, reputation and integrity, professional stature and other factors that may be relevant depending on the particular candidate.

 

Additional factors considered by the Committee include the size and composition of the Board at a particular time, and allowing the Company to benefit from having a broad mixture of skills, experience and perspectives on the Board. Accordingly, one or more of these factors may be given more weight in a particular case at a particular time, no single factor would be viewed as determinative, and the

Committee has not specified any minimum qualifications that it believes must be met by any particular nominee. The Company’s Director Nomination Procedures are posted on the Company’s website.

 

The Committee identifies Director candidates primarily through recommendations made by the non-employee Directors. These recommendations are developed based on the Directors’ own knowledge and experience in a variety of fields, and research conducted by PDC staff at the Committee’s direction. The Committee also considers recommendations made by the employee Directors, employees, shareholders, and others, including search firms. All recommendations, regardless of the source, are evaluated on the same basis against the criteria contained in the guidelines. The Committee has the authority to engage consultants to help identify or evaluate potential Director nominees but has not done so recently. Mr. Trimble, appointed in 2009, was recommended by several non-employee Directors.

 

Diversity Consideration

 

In addition to qualities of intellect, integrity and judgment, the Nominating and Governance Committee takes into consideration diversity of background, senior management experience, education, and an understanding of some combination of oil and gas marketing, finance, technology, government regulation, and public policy. The Committee makes its determination in the context of an assessment of the perceived needs of the Board at that point in time. The Committee evaluates all nominees for Director considering these criteria, including nominees recommended by shareholders. The new director nomination process specifically includes disclosure of the diversity provided by each candidate, but the Nominating and Governance Committee does not make the recommendations of nominees based solely on any such criteria, nor does it have any official or unofficial goals for any specific group.

 

Shareholder Recommendations

 

The Company’s Nominating and Governance Committee will consider Director candidates recommended by shareholders of the Company. Any shareholder who wishes to recommend a prospective Board nominee to the Committee should notify the Nominating and Governance Committee of the recommendation by writing to the Committee at the Company’s headquarters, or by sending the information via email to board@petd.com. All recommendations will be received by the Nominating and Governance Committee.

 

A submission recommending a candidate should include:

 

 

Shareholder Nominations

 

Shareholders who wish to may nominate candidates for election to the Board. The Company’s By-Laws require shareholders who wish to submit nominations of persons for election to the Board of Directors at the annual meeting of shareholders to follow certain procedures. The shareholder must give written notice to the Corporate Secretary at Petroleum Development Corporation, 1775 Sherman Street, Suite 3000, Denver, Colorado 80203 or may email notice to board@petd.com not later than 80 days nor more than 90 days prior to the first anniversary of the preceding year’s annual meeting or, if the date of the annual meeting is more than 30 days before or more than 60 days after that anniversary date, notice by such shareholder to be timely, not later than 80 days before such annual meeting, or within 10 days following the Company’s public announcement of the date of its annual shareholder meeting. The

shareholder notice also must be received by the Company no earlier than 90 days prior to the annual meeting. The shareholder must be a shareholder of record at the time the notice is given. The written notice must set forth (a) as to each nominee all information relating to that person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (b) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made (1) the name and address of the shareholder, as they appear on the Company’s books, and of such beneficial owner and (2) the class and number of shares of the Company’s securities that are beneficially owned by such shareholder and the beneficial owner; and (c) any material interest of such shareholder and such beneficial owner in such nomination.

 

Planning and Finance Committee

 

The purpose of the Planning and Finance Committee is to oversee the responsibilities of the Board relating to planning and finance, including: (1) to organize and oversee the Board’s participation in the development of the Company’s Strategic Plan and the risk assessment and management process; (2) to follow the progress in the implementation of the Strategic Plan and to advise the Board if additional Board action appears to be needed to assure successful implementation of the plan or if a need exists to revise the plan in the face of changing conditions or other factors; (3) to assure that management is addressing the personnel requirements for the successful implementation of the Strategic Plan; (4) to assure that a talent-rich organization is being developed to address both current and future leadership needs; (5) to assure that robust management development and succession planning processes are developed and implemented for management at all levels in the Company; and (6) to work with the CFO and other executive management regarding corporate financial matters including operating and capital budgets, capital structure, dividends, and other significant financial and capital issues. The Board has adopted a charter for the Planning and Finance Committee which is posted on the Company’s website.

 

The Board seeks to understand and oversee critical business risks. Risks are considered in every business decision, not just through Board oversight of the Company’s Risk Management system. For instance, a special assessment of risks (financial and otherwise) is included in every acquisition proposal presented to the Planning and Finance Committee. The Board realizes, however, that it is not possible to eliminate all risk, nor is it desirable, and that appropriate risk-taking is essential to achieve the Company’s objectives.

 

The Board risk oversight structure provides that management report on risk to the Planning and Finance Committee. Other committees, however, are active in managing the risks related to such committees’ oversight areas. For example, the Audit Committee reviews many risks and related controls in areas that it considers fundamental to the integrity and reliability of the financial statements, such as counterparty risks and derivative program risks. Similarly, the Compensation Committee considers risks related to the structure and size of the Company’s compensation plans as noted in the following section.

 

Compensation Risk Assessment

 

We do not believe the Company’s executive and non-executive compensation structure is reasonably likely to have a materially adverse effect on the Company. With respect to specific elements of compensation and risk analysis:

 

 

 

One element of compensation for Mr. Lauck is a bonus related to successful results from future acquisitions over several years. The Company has considered this risk and does not consider it to be inappropriate. Other units of the Company receive incentive compensation primarily related to Company performance as a whole. For example, the individuals responsible for oil and gas price hedging transactions are not compensated on the basis of the success or timing of those trades. Furthermore, they can only initiate trades approved by the Company’s Derivative Committee, which includes a broad cross-section of management, and whose committee charter prohibits speculative trading.

 

Shareholders wishing to communicate with the Board or a committee may do so by writing to the attention of the Board or committee at the Company’s corporate headquarters or by emailing the Board at board@petd.com, with “Board” or the appropriate committee in the subject line.

 

In January 2003, the Company adopted its Code of Business Conduct and Ethics, as amended (the “Code of Conduct”) applicable to all Directors, officers, employees, agents and representatives of the Company and consultants. The Company’s principal executive officer, principal financial officer and principal accounting officer are subject to additional specific provisions under the Code of Conduct. The Company’s Code of Conduct is posted on its website at www.petd.com.  In the event of an amendment to, or a waiver of, including an implicit waiver, the Code of Conduct, the Company will disclose the information on its internet website. The Board approved a waiver regarding any potential conflict related to the service of Mr. Swoveland on the Board of Directors of Linn Energy LLC. If the Board becomes aware of a potential conflict in the future, it will consider at that time whether or not to continue this waiver.

 

The Board has adopted a written policy for the review, approval and ratification of transactions that involve related parties and potential conflicts of interest.

 

The related party transaction policy applies to each Director and executive officer of the Company, any nominee for election as a Director, any security holder who is known to own more than five percent of the Company’s voting securities, any immediate family member of any of the foregoing persons and any corporation, firm or association in which one or more of the Company’s Directors are directors or officers, or have a substantial financial interest.

 

Under the related party transaction policy, a related person transaction is a transaction or arrangement involving a related person in which the Company is a participant or that would require disclosure in the Company’s filings with the SEC as a transaction with a related person.

 

The related persons must disclose to the Audit Committee any potential related person transactions and must disclose all material facts with respect to such interest. All related person transactions will be reviewed by the Audit Committee. In determining whether to approve or ratify a transaction, the Audit Committee will consider the relevant facts and circumstances of the transaction which may include factors such as the relationship of the related person with the Company, the materiality or significance of

the transaction to the Company and the business purpose and reasonableness of the transaction, whether the transaction is comparable to a transaction that could be available to the Company on an arms-length basis, and the impact of the transaction on the Company’s business and operations.

 

From January 1, 2009 to the present, there was no transaction or series of transactions, or any currently proposed transaction, in which the amount involved exceeds $120,000 and in which any director, executive officer, holder of more than five percent of the Company’s common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.

 

The Company’s By-Laws provide that the Company shall indemnify any Director, officer, employee, or other agent of the Company who is or was a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of the Company to procure a judgment in its favor) by reason of the fact that such person is or was an agent of the Company, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with such proceeding, if that person acted in good faith and in a manner that person reasonably believed to be in the best interest of the Company, and in the case of a criminal proceeding, had no reasonable cause to believe the conduct of that person was unlawful.

 

The Company has entered into separate indemnification agreements with each of its Directors whereby the Company has agreed to indemnify the Director against all expenses, including attorneys’ fees, and other amounts reasonably incurred by the director in connection with any threatened, pending or completed civil, criminal, administrative or investigative action or proceeding to which such person is party by reason of the fact that he is or was a Director, as the case may be, of the Company, if the person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, the person had no reasonable cause to believe such conduct to be unlawful. The agreements provide for the advancement of expenses and that the Company has the right to purchase and maintain insurance on behalf of the director against any liability or liabilities asserted against such person, whether or not the Company would have the power to indemnify the person against such liability under any provision of the agreement. The Company has agreed to indemnify such person against expenses actually and reasonably incurred in connection with any action in which the person has been successful on the merits or otherwise. Indemnification must also be provided by the Company (unless ordered otherwise by a court) only as authorized in the specific case upon a determination that the indemnification of the person is appropriate because he or she has met the applicable standard of conduct described in the agreement made by (1) the Board of Directors, by a majority vote of a quorum consisting of Directors who are not parties to such action or proceeding, (2) independent legal counsel in a written opinion or (3) the shareholders of the Company.

 

The “Corporate Governance” section of the Company’s internet site contains additional information, including PDC’s Certificate of Incorporation and By-Laws, written charters for each Board committee, and Board policy statements.

 

The Company files annual, quarterly and current reports, proxy statements and other information with the SEC. Copies of the Company’s filings with the SEC are available to the public at the SEC’s website at http://www.sec.gov. These documents may also be viewed at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

 

The current executive officers of the Company, their principal occupations for the past five years and additional information is set forth below.

 

 

 

 

RICHARD W. MCCULLOUGH was appointed Chief Executive Officer of the Company in June 2008 and Chairman of PDC’s Board of Directors in November 2008. From November 2006 until November 2008, he served as the Chief Financial Officer of the Company. Prior to joining PDC, Mr. McCullough served from July 2005 to November 2006 as an energy consultant. From January 2004 to July 2005, he was President and Chief Executive Officer of Gasource, LLC, a marketer of long-term, natural gas supplies in Dallas, Texas. From 2001 to 2003, Mr. McCullough served as an investment banker with J.P. Morgan Securities, Atlanta, Georgia, in the public finance utility group supporting bankers nationally in all natural gas matters. Additionally, Mr. McCullough has held senior positions with Progress Energy, Deloitte and Touche, and the Municipal Gas Authority of Georgia. He holds BS and MS degrees from the University of Southern Mississippi and was a practicing Certified Public Accountant for eight years.

 

Gysle R. Shellum was appointed Chief Financial Officer in 2008. Prior to joining the Company, Mr. Shellum served as Vice President, Finance and Special Projects of Crosstex Energy, L.P., Dallas, Texas. Mr. Shellum served in this capacity from September 2004 through September 2008. From March 2001 until September 2004, Mr. Shellum served as a consultant to Value Capital, a private consulting firm in Dallas, Texas, where he worked on various projects, including corporate finance and Sarbanes-Oxley Act compliance. Crosstex Energy, L.P. is a publicly traded Delaware limited partnership whose securities are listed on the NASDAQ Global Select Market and is an independent midstream energy company engaged in the gathering, transmission, treating, processing and marketing of natural gas and natural gas liquids.

 

Barton R. Brookman, Jr. was appointed Senior Vice President Exploration and Production in March 2008. Previously, Mr. Brookman served as Vice President Exploration and Production since joining PDC in July 2005. Prior to joining PDC, Mr. Brookman worked for Patina Oil and Gas and its predecessor Snyder Oil for 17 years in a series of positions of increasing responsibility, ending his service as Vice President of Operations of Patina.

 

Daniel W. Amidon was appointed General Counsel and Secretary in July 2007. Prior to his current position, Mr. Amidon was employed by Wheeling-Pittsburgh Steel Corporation beginning in July 2004; he served in several positions including General Counsel and Secretary. Prior to his employment with Wheeling-Pittsburgh Steel, Mr. Amidon worked for J&L Specialty Steel Inc. from 1992 through July 2004 in positions of increasing responsibility, including General Counsel and Secretary. Mr. Amidon practiced with the Pittsburgh law firm of Buchanan Ingersoll PC from 1986 through 1992.

 

Lance Lauck was appointed Senior Vice President Business Development in August 2009. Previously Mr. Lauck served as Vice President - Acquisitions and Business Development for Quantum Resources Management LLC from 2006 - 2009. From 1988 until 2006, he held various management positions at Anadarko Petroleum Corporation in the areas of acquisitions and divestitures, corporate mergers and business development.

 

The Compensation Committee of the Board of Directors of the Company has reviewed and discussed the following Compensation Discussion and Analysis with management and, based on its review and discussions, recommends its inclusion in the Proxy Statement.

 

Kimberly Luff Wakim, Chair

Vincent F. D’Annunzio

Anthony J. Crisafio

Larry F. Mazza

David C. Parke

James M. Trimble

 

COMPENSATION COMMITTEE

of the Board of Directors

 

This Compensation Discussion and Analysis focuses on the following:

 

 

The Compensation Committee

 

The Board has assigned to the Compensation Committee the responsibility for developing and overseeing the Company’s compensation programs and executive compensation. The Committee consists entirely of independent Board members. The Committee has been authorized by the Board to make final determinations for all elements of compensation for the executive officers. Independent Board members who are not part of the Committee are often consulted as part of the Committee’s decision making process. The Committee also negotiates terms and approves all executive employment agreements and administers the Company’s long-term incentive plans.

 

In early 2009, the oil and gas industry faced very low gas prices, tight credit markets and depressed stock prices. The Company found itself in a challenging position and as a result, chose to focus on ways to improve the Company’s liquidity and maintain cash flow to fund ongoing operations. The Company delivered strong financial performance for 2009 by exceeding its cash flow and liquidity goals and making some key strategic moves such as aggressive and timely hedging late in the year which sustained the Company’s bank line of credit amount and the formation of the Marcellus joint venture. During 2009, the Company’s executive leadership team conducted a full strategic assessment and determined to increase the Company’s focus on ways of reducing the Company’s cost structure through cost management and leveraging economies of scale in existing basins and to look at some significant asset reconfiguration efforts. These measures are tied to the short-term incentive goals for 2010. By focusing on strengthening the Company’s financial position in 2009, PDC is financially poised for strategic growth in the future.

During this period, the Compensation Committee reviewed its executive compensation programs to ensure that they provide appropriate incentive and reward in this environment based upon the Company’s pay-for-performance objectives. As described below, no significant changes were made in the compensation programs for 2009, although the short-term incentive goals were shifted from the traditional focus on earnings and production to a focus on liquidity and cash flow, as the ultimate depth of the recession was still uncertain. Even though the Company’s stock price was depressed, no repricing or accommodation was made for past restricted stock or performance share awards, which are now worth a fraction of their value upon issuance, or for options that now have no intrinsic value.

 

The Committee believes that the competition remains tight for effective oil and gas executives. The Compensation Committee targets total direct compensation (combination base salary, short-term incentives and long-term incentives) for the executive group at the median of the market measured against a group of peer companies and industry survey data (as defined below). Although the Committee believes Company performance has been excellent in recent years, target total direct compensation for the entire officer group was found to be below the market median when the Committee evaluated compensation in hindsight after 2009 peer data became available. As the market has improved, the Committee has made adjustments in pay for 2010 as described below.

 

The Compensation Committee will continue to monitor trends and developments to ensure that the Company provides the appropriate executive compensation incentives and remains competitively positioned to attract and retain executive talent. The Committee believes that the total executive compensation program provides significant incentive, but does not encourage management to take excessive risks, and serves the shareholders’ best interests: it features short- and long-term performance measures, an appropriate balance of operating and financial performance goals, and promotes long-term retention and significant stock ownership. We believe that these elements, in combination, tie our executives’ compensation to the Company’s sustained long-term performance.

 

The following characteristics of the compensation program constitute the Committee’s general philosophy:

 

 

The Compensation Committee utilizes several different tools and resources in reviewing elements of executive compensation and making compensation decisions. These decisions, however, are not formulaic and the Compensation Committee exercises judgment and discretion in making them.

 

Compensation Consultant.  The Committee uses a nationally recognized independent executive compensation consultant, Towers Watson (formerly known as Towers Perrin), to review the Company compensation programs. The Compensation Committee directly retained Towers Watson (sometimes referred to herein as the “Consultant”). In this engagement, the Consultant reported directly and exclusively to the Compensation Committee. At the Committee’s direction, the Consultant works directly with management to review or prepare materials for the Committee. The Consultant assists the Committee with the annual review and revision of the peer group, conducts a competitive benchmarking of the Company’s executive and Non-Employee Director compensation programs, provides relevant market data as a background against which the Compensation Committee considers total compensation elements and awards, and attends and participates in Compensation Committee meetings throughout the year as the Committee deems appropriate. With the assistance of Towers Watson, the Committee periodically assesses (1) the effectiveness and competitiveness of the Company’s executive compensation and compensation design, ensuring that the Company’s programs are effectively aligned with the interests of our shareholders, and (2) the value and cost of various potential compensation arrangements. The Compensation Committee reviews the engagement of its independent compensation consultant on an annual basis and as a part of that process reviews a summary of all services provided by the Consultant and related costs. In 2009, the Consultant did not perform any other material services for the Company.

 

Benchmarking.  The Compensation Committee targets compensation around the median of the market through a mix of cash and long-term incentives with a heavier emphasis on long-term incentives. The Committee believes that the executives should receive pay above the median when Company performance and individual performance so warrant and below the median when performance is not achieved. To determine the competitive market, the Committee conducts an annual benchmarking review of an industry peer group to use as a reference point for assessing competitive compensation data. This industry peer group consists of select oil and gas industry peer companies that are similar in size, scope and nature of business operations. The initial step in the annual benchmarking process is to evaluate the composition of the peer group and determine whether any changes are warranted due to changes among the peers that render them too large, too small, or otherwise less useful, e.g., due to merger/acquisition activity. The composition of the peer group over the past three years is summarized below.

These companies, collectively, are referred to as the “Peer Group.”

 

 

Benchmarking is conducted annually with respect to each of the key annual elements of the Company’s executive compensation programs discussed above (salary, short-term incentive (this annual cash bonus is referred to as “STI”) and long-term incentive (this stock/equity is referred to as “LTI”) compensation). Historically, the primary source of the benchmarking analysis was the peer group described above. Beginning in 2009, in connection with 2010 compensation planning, the Consultant also benchmarked our executive positions using proprietary survey data from a broader sample of comparably-sized oil and gas companies in order to provide an additional market perspective. The Committee uses benchmarking data to establish a dollar target level for each key element to deliver a target total direct compensation to each executive at approximately the market median, with consideration of the executive’s individual performance. Targeting the median with the ability to receive compensation above the median if Company and individual performance so warrants helps ensure that the Company’s compensation practices will be competitive in terms of attracting and retaining executive talent, while performance based compensation provides for variations due to superior or sub-par performance.

 

Role of Chief Executive Officer and/or Other Executive Officers in Determining Executive Compensation.  The Committee consults with the CEO regarding: proposed peer group changes; his evaluation of the Company’s performance for the year; his assessment of his own performance and his evaluation of performance of the other executive officers; short-term and long-term incentive plans; individual executive achievement of key operating targets; the Company’s strategic plan; and management development and succession planning. At the Compensation Committee’s request, our executive officers assess the design of, and make observations or recommendations related to, our compensation and benefit programs, including recommendations related to the appropriate financial and operational performance measures used in our incentive programs.

The Compensation Committee, with input from the Consultant, determines each element of compensation for the CEO and, with input from the Consultant and the CEO, determines each element of compensation for the other executive officers. The CEO is not present during voting or deliberations with regard to his own compensation.

 

Review of Total Compensation.  The Committee reviews for each of the executive officers the total dollar value of each officer’s annual compensation, including salary, STI and LTI compensation, perquisites, retirement benefits, deferred compensation accruals and other compensation. The Committee also reviews shareholdings and accumulated unrealized gains under prior equity-based compensation awards, and amounts payable to the executive officer upon termination of the executive’s employment under various different circumstances, including retirement and termination in connection with a change in control. See the 2009 Summary Compensation Table and the Termination Benefits Table below. As none of the current executive officers have served in their current positions long enough to have accumulated significant wealth from the Company, wealth accumulation is not a current consideration in Committee deliberations.

 

Other Considerations.  In addition to the above resources, the Compensation Committee considers other factors when making compensation decisions, such as individual experience, individual performance, internal equity, development and/or succession status, and other individual or organizational circumstances. With respect to equity-based awards, the Compensation Committee also considers the cost of such awards, the impact on dilution, and the relative value of each element comprising total target executive compensation.

 

Regulatory Requirements.  Together with the Consultant, the Compensation Committee carefully reviews and considers current tax, accounting and securities regulations as they relate to the design of the Company’s compensation programs and related decisions.

 

Section 162(m) of the Internal Revenue Code of 1986, as amended (“IRC”), limits a company’s ability to deduct compensation paid in excess of $1 million during any fiscal year to the CEO and the next three highest executive officers, other than the CFO, unless the compensation is “performance-based” as defined under the IRC. Elements of the executive compensation program are indeed performance-based, such as stock options, SARs and performance-based equity awards issued under the Company’s 2004 Long-Term Equity Compensation Plan. Other aspects of the executive compensation program do not qualify as performance-based, such as time-based restricted stock and the Company’s STI annual incentive bonus program, because the Committee prefers to maintain the ability to exercise discretion in evaluating a portion of participants’ performance. It is our intent to maximize our income tax deductions by qualifying compensation paid to our top executives, where practicable under our compensation policies. The Compensation Committee nonetheless may approve compensation that may not qualify for the compensation deduction if, in light of all applicable circumstances, the Committee believes that it would be in our best interest for such compensation to be paid. The financial implications of a potential lost deduction were not material in prior years; the Committee will continue to monitor its position on the impact of Section 162(m) for the Company’s executive compensation programs.

 

Section 409A of the IRC provides that all amounts deferred under a non-qualified deferred compensation plan are currently included in gross income, to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are met. We have designed or amended our plans and programs to either be exempt from Section 409A or, if subject to Section 409A, in compliance with applicable regulations to properly allow deferral.

 

To achieve the objectives of the executive compensation program, the Committee uses four elements of compensation in varying proportions for the different executive officers. These elements, described below, are cash compensation (comprised of base salary and STI), awards tied to the Company’s stock (LTI, which we also refer to as “equity-based compensation”) and other perquisites and benefits. The Committee balances salary and performance-based compensation, and cash and non-cash compensation, in a manner it believes best meets the overall compensation philosophy in its judgment as a Committee. The Committee allocates among the different elements of compensation in a manner similar to the median allocation of the Peer Group, based on the level of the executive’s position, but generally targets the median in base salary and median in total direct compensation (base, target STI and LTI value). If Company and individual performance so warrants, the Committee may award above or below the market median. Generally, it is the policy of the Committee that, as position/responsibility levels increase, a greater proportion of the executive’s income should be in the form of STI and LTI compensation. For example, the CEO of the Company receives a higher percentage of his compensation in the form of short- and long-term incentives compared to other Company executives and, correspondingly, a smaller percentage of his compensation in the form of salary, consistent with CEOs in the Peer Group. The following table shows the breakdown of target compensation among the three elements (other than perquisites and benefits) for 2008 and 2009 for each executive officer.

 

Target Compensation for Elements as a Percentage of Total Target Compensation

 

 

 

 

The chart above indicates that, for the executive officers below the CEO, on average, 62% of target total direct compensation is variable and 42% is in the form of equity-based compensation, and for the CEO, 73% of his compensation is variable, with 46% in the form of equity-based compensation.

 

Base salary is intended to provide a fixed level of income to compensate executives for their level of responsibility, relative expertise and experience, individual performance and in some cases their potential for advancement. The Committee annually reviews the base salaries of the CEO and other executive officers relative to the Peer Group. Salaries are also reviewed in the case of promotions or other significant changes in responsibilities. Base salary is intended to provide a baseline of compensation that is not contingent upon the Company’s performance.

 

After reviewing the Peer Group salary levels and considering individual performance, the Committee increased base salaries in 2009 by 32% for the CEO and between 0% and 8% for the other named executive officers. Mr. McCullough’s increase is related to 2009 being his first full year as CEO and to his

assumption of the role of Chairman in 2009. In 2009, the base salary compensation of the executive officers approximated the median of the Peer Group, with the exception of a few of the officers, including the CEO, that were below the median. Annual base salaries for the executive officers for 2008 and 2009 are shown in the following table:

 

 

The Company increased base salaries in 2010. See “2010 Compensation” below for a discussion of the changes.

 

The Company’s STI program is intended to motivate and reward executives for achieving short-term Company goals and objectives aligned with value creation. This program also recognizes team and individual contributions to Company performance. The annual STI payment is tied to the Company’s overall performance for the fiscal year, as measured against the objective criteria set each year by the Committee, as well as the Committee’s subjective assessment of Company performance and individual performance of each executive.

 

Individual Target Bonus Opportunities.  Individual STI target bonus opportunities, expressed as a percentage of base salary, are set for each named executive officer during the first 90 days of the fiscal year based on job level and responsibilities. In 2009, potential payouts ranged from zero to as much as 200% of the target for the year. The following table sets forth the STI threshold, target and maximum or “stretch” levels for 2008 and 2009 of the performance bonus portion of the STI for the executives, expressed as a percentage of base salary.

 

 

 

 

STI Performance Metrics for 2009.  Annually, the Compensation Committee establishes goals for determining the STI awards for the executive officers. In determining the award for 2009, 60% of the award potential was based on objective criteria and 40% was based on individual performance and other factors at the discretion of the Committee. Historically, the Company has focused on production and earnings per share goals in determining the objective criteria for the STI. Because of the financial markets and depressed gas prices at the end of 2008 and early 2009, the Committee wanted management in 2009 to focus on two measures, adjusted cash flow and liquidity. In both approving goals and measuring the

Company’s performance against those goals, the Committee may use its discretion in determining the extent to which goals are met and whether the results properly reflect the Company’s achievement of its overall business objectives, including any material changes in the Company’s operations or business objectives during the course of the year. With respect to the 2009 objective criteria, the Committee did not adjust the criteria once the goals were established. The table below reflects the threshold, target, and maximum goals for the year, the actual performance and the weighting assigned each of the objective goal as approved by the Committee.

 

Pay-for-Performance Table for 2009

 

 

In determining the results for the objective criteria that make up 60% of the award, based on the actual results for 2009, the Company met 179% of its target for adjusted cash flow per share and exceeded the maximum target for liquidity. These results produced a total performance for the objective criteria of 193% of target. When the Compensation Committee considered the results after backing out the effect of the stock offering, the Company exceeded the maximum performance for both adjusted cash flow per share and liquidity which would have produced a total result of 200% of target. Although performance goals were met, stock performance remained flat. In determining the final award, the Compensation Committee concluded that although the stock price performance had yet to reflect the financial position of the Company, the actions taken by the management team to position the Company financially for growth by raising capital and securing liquidity in a time when markets were difficult was critical to the future success of the Company. Examples include the hedging steps that were taken again in late 2009 to help sustain the bank line levels and formation of the Marcellus joint venture to reduce risk and finance the development of that field and creating the ability for the Company to issue equity. Based on the assessment of all the considerations for 2009, the Committee adjusted the rating downward slightly and awarded an overall rating of 175% for the 60% objective portion of the bonus.

 

The discretionary portion of the STI program permits the Committee to account for individual performance and differentiate among executives. In determining what portion of the discretionary income to award, the Committee looks at the overall Company performance for the objective measures, multiplies the overall rating for the achievement of the Company objectives (175% for 2009) times the 40% discretionary portion and adjusts for individual performance. The Committee assesses individual executive performance with input from the CEO as well as other Board members and Committees. The CEO also provides input to the Committee as to how he and the Company have performed. In determining final awards, the Compensation Committee considered the executive team’s performance in achieving the Company’s results, the work performed and results undertaken on the Company’s updated strategy and individual performance against each executive’s specific goals. STI bonus awards are pro-rated for partial years. The 40% discretionary individual performance variations were fairly small, as the Committee believes that the senior management team must generally operate and be judged as a team, absent individual exceptional performance or markedly sub-standard performance.

 

The actual STI awards earned and paid for 2009 performance to each executive officer were as follows: Mr. McCullough $788,000; Mr. Shellum $210,000; Mr. Brookman $235,000; Mr. Amidon $215,000; and Mr. Lauck $65,000. Mr. Lauck’s award was pro-rated to adjust for partial-year employment in 2009. The Committee believes these awards are justified based on the discussion above.

 

In addition to his STI bonus described above, Mr. Lauck is eligible to receive a special bonus in the event of the completion of successful acquisitions in a given year, as determined by the Committee. The details of this program have not been finalized by the Committee, but the maximum Mr. Lauck could

receive is an amount equal to 100% of his base salary (i.e., 200% maximum when combined with normal STI) in effect as of the date of the acquisition, payable over 2 years. No payouts have been made under this program.

 

The STI plan for the named executives was modified for 2010 based on the Company’s review of its long term strategic plan. The five metrics used in the new plan and the 2010 bonus targets are outlined below in “2010 Compensation” below.

 

The Company’s LTI program is an integral part of the Company’s overall executive compensation program and serves to align the interests of executives with those of our shareholders. The program establishes a direct relationship between compensation and shareholder value by (1) emphasizing long-term share ownership through the Company’s Stock Ownership Guidelines, (2) rewarding long-term growth in the Company’s stock value, and (3) focusing senior executives on the achievement of long-term performance objectives that are aligned with the Company’s corporate strategy. The program also furthers the goal of executive retention, since the executive officer will forfeit any unvested awards in the event the officer voluntarily terminates employment with the Company without “good reason.”

 

In the last three years, we have implemented our LTI program using two vehicles:

 

 

In making long-term incentive awards, the Committee uses a market-based value approach, in which the Committee determines competitive LTI values through the annual benchmarking work conducted by the Consultant. The value is then allocated to each of the LTI vehicles. In 2008, the LTI values were generally allocated half to time-vested restricted stock (vesting pro rata over four years) and half to performance-based LTIP stock. In response to the economic upheaval described earlier, and to promote stock ownership for our new management team, the 2009 LTI values were allocated 75% to time-vested restricted stock and 25% to performance-based LTIP stock.

 

Half of the 2009 performance-based LTIP stock awards will vest and be issued based upon an annual stock price increase of approximately 12%, with the starting price based on the average price of the stock in December preceding the award year. An additional 25% of the awarded LTIP shares will vest and be issued at an annualized hurdle rate of 16% and an additional 25% at 20%. For the 2009 performance-based LTIP awards, the stock price used to determine if the LTIP shares will vest will be the average daily closing price for each of the three monthly periods: December 2011, 2012, and 2013. Any shares not vested in 2011 and 2012 will remain eligible to be vested in future years; however, any unvested shares at December 31, 2013 will lapse. The Committee decided to use three measurement dates to take into account the volatility of energy prices and their impact on the stock price of the Company.

 

The Committee has used a consistent methodology to translate target LTI values into share awards, namely, award values have been converted to shares based on the average stock price in the December preceding the award. Further, with respect to the performance-based LTIP stock, at the Committee’s direction, the Consultant calculated the fair value utilizing methods it has developed for use with these types of equity valuations, including taking into account the probability and/or timing of vesting under the performance criteria for the LTIP shares and the other restricted stock. The actual values of the 2009 grants were significantly below the intended values because the shares were granted in March when stock prices in general were near their low, however, the valuation was based on the prior December stock price. To address this problem for the future, in 2010, the Committee agreed that for all types of equity grants, it would use prices based on an average 20-day trading price ending ten days prior to grant. This should make future actual grant values more consistent with the intended grant values and assist when comparing the Company with its peers.

The following table summarizes recurring LTI awards for 2008 and 2009, and the second table summarizes the target prices for the performance vesting of the LTIP awards, all of which vested pro rata over four years from the date of issuance.

 

Long-Term Incentive Awards

 

 

 

 

 

 

 

The Compensation Committee made LTI grants under the 2004 Plan on April 19, 2010. For a description of the 2010 equity awards, see “2010 Compensation” below. To enable the Committee to continue to use LTI grants as an integral part of the compensation package for executives and other employees of the Company, the Committee is requesting shareholders to approve the 2010 Long-Term Equity Compensation Plan.

 

The Company has a combined qualified 401(k) and profit sharing plan for all of the Company’s employees, including the executive officers. The purpose of the retirement plan is to provide a competitive means for employees to build financial security, and offers a tax-advantaged vehicle for employees to save effectively for retirement. The plan provides for discretionary matching contributions. Generally, the Company matches 401(k) contributions dollar for dollar up to 10% of the employee’s compensation and then matches 20% of employee contributions above 10% of the employee’s compensation up to the

maximum allowable limits under the Internal Revenue Code (“IRC”). The Company’s profit sharing contribution is discretionary and for 2009 was equal to approximately $500,000 for all employees.

 

Mr. McCullough, under the terms of his Employment Agreement, also earns the right to a future non-qualified deferred compensation benefit following his retirement or other termination from the Company. Under the terms of his Agreement, Mr. McCullough earns an annual payment for the 10 years following his termination equal to $7,500 times the number of completed years of service with the Company (maximum 10 years). The maximum amount he could receive from the Company is $750,000 ($75,000 for 10 years). As of December 31, 2009, Mr. McCullough’s total cumulative benefit, including the 2009 increment, was $225,000 ($22,500 per year for 10 years), as the benefit began in 2006, prior to his appointment as CEO, when Mr. McCullough was first hired as Chief Financial Officer.

 

In addition to the normal benefits provided to all employees, the Company provides certain other perquisites and benefits to its executive officers that are not tied to any formal individual or Company performance criteria and are intended to be part of a competitive overall compensation program. The purpose of these plans is to enhance employee welfare and financial security and to provide a competitive package to attract and retain employees and executive officers.

 

Perquisites and executive benefits do not constitute a significant part of executive compensation; however, each of the executive officers, except as noted below, has (1) a Company vehicle (or vehicle allowance) that he uses for Company business and is allowed personal usage as well, and (2) 13 weeks of short-term disability benefits under his employment agreement (described below). In addition, Messrs. McCullough and Amidon are entitled to (1) reimbursement of medical expenses not covered by the Company medical plan (eliminated effective April 19, 2010) and (2) the Company will provide them with or reimburse them for the cost of a $1 million life insurance policy and disability insurance.

 

Based on the Committee’s benchmarking review, the total direct compensation (base salary, STI and LTI) of the Company’s executives have consistently been significantly below the median of the peer companies. Due to the economic climate at the end of 2008/early 2009, the Committee felt it was inappropriate to make adjustments in such compensation to the market, even though it felt the Company and individual performance had been excellent. Since then, market conditions have improved. The Committee believes that the Company has assembled an excellent management team and wants to ensure that the team is retained and focused on the long term growth of the Company.

 

As a result, in 2010, the Compensation Committee adjusted compensation to move executives closer to the median of the market and also recognized differences in specific roles within the Company with variations in STI and LTI target awards levels. This adjustment recognizes executives for actions taken in 2008/2009 to position the Company financially for growth by raising capital and securing liquidity in a time when markets were difficult. Examples include:

 

 

The Committee also wished to compensate the executives for renegotiating their employment agreements to replace the “single trigger” with a “double trigger” when determining separation benefits following a change of control of the Company. The compensation adjustments were conditional upon

the executive signing the new employment agreement. In making its 2010 LTI equity grants, the Committee considered the level of equity grants in recent years, including the special retention grant of restricted stock in 2008. Prior to the 2010 equity grants, however, the management team had relatively little equity, which the Committee and investors believe is critical to success.

 

Additional reasons for adjustment in compensation of the CEO include: (1) The fact that the CEO has been instrumental over the last several years in addressing some significant accounting and reporting deficiencies of the Company that could have had detrimental effects if not corrected; (the NASDAQ hearing board, convened in 2007 to consider delisting of the Company, stated that it specifically considered the confidence it had in Mr. McCullough as a principal reason for giving the Company an additional chance to correct its accounting issues); (2) the CEO led an assessment of the Company’s strategy resulting in a new vision and strategic direction focused on growing the Company intrinsically; (3) the CEO has brought together a strong leadership team, both at the executive and middle management levels and united that team to implement the strategy; (4) the CEO has implemented a number of progressive management systems and practices to prepare the Company for future growth; and (5) the CEO agreed to eliminate the reimbursement of medical expenses over and beyond those covered under the Company’s medical plan as part of his new employment agreement.

 

As part of the changes in 2010, the Committee also adjusted the mix of compensation with more emphasis on short-term incentive bonus and long-term incentives to align executive compensation with the execution of the corporate strategy. For the named executive officers excluding the CEO, variable compensation on average now comprises 68% of total direct compensation with 50% in the form of equity-based grant values. The CEO now receives 77% of his compensation in the form of variable pay with 54% as equity-based compensation. Below is a table showing the new base salaries and STI targets expressed as a percentage of base salary, effective as of January 1, 2010. Actual award payouts under the STI plan can range from 0% to 200% of target.

 

2010 SHORT-TERM INCENTIVE COMPENSATION

 

 

The Committee also changed LTI vehicles for 2010, allocating 75% of the grant value to restricted stock (same percentage as in 2009) which vests over three years and granting the remaining 25% in the form of SARs instead of LTIP shares (the SARs vest over three years and have a term of ten years). The Committee did not believe the LTIP shares were performing as designed because of the volatility of oil and gas prices, and made the change to ensure continued focus by the executives on increasing stock value, thereby directly linking compensation to the stock price. On April 19, 2010, the following values were awarded as LTI grants for 2010; Mr. McCullough $1,300,000; Mr. Shellum $435,000; Mr. Brookman $425,000; Mr. Amidon $400,000; and Mr. Lauck $375,000.

 

The Committee also substantially reevaluated the corporate performance metrics to be used for 2010 STI, increasing the number of metrics as well as changing the type of metrics to tie to the Company’s updated corporate strategy. The Committee felt the following five metrics would provide better balance and a broader picture of corporate performance:

 

 

 

In calculating the bonus, 50% will be based on a combination of (1) and (2) above and 50% will be based on a combination of (3), (4) and (5) above. Such rating can also be adjusted upward or downward at the Committee’s discretion based on successful completion of annual projects/goals by the executive team.

 

In order to promote equity ownership and further align the interests of management with the Company’s shareholders, the Committee has adopted share retention and ownership guidelines for senior management and non-employee Directors. Under these guidelines in effect during 2009, executive officers and non-employee Directors were required to achieve and continue to maintain a significant ownership position, as follows:

 

 

Compliance is measured once a year, on July 2. Shares held by the executive officers and shares held indirectly through the Company 401(k) plan are included in determining an executive officer’s share ownership.

 

On April 19, 2010, the Board amended such guidelines effective July 1, 2010, to increase the non-employee Director ownership from one times the annual retainer to three times the annual retainer. Non-employee Directors are also now required to comply with the ownership guidelines within three years of their election to the Board instead of five years, as previously provided. Lastly, the Board clarified that unvested restricted stock would be included in the calculation for officers and Directors.

 

Mr. Lauck has occupied his position for less than one year, and therefore is exempt from the guidelines. Similarly, Mr. Trimble has been a member of the Board for less than three years, and therefore is exempt from guidelines.

 

Based on this annual compliance measurement and the three-year initial grace period, no Director or officer is anticipated to be out of compliance with the ownership guidelines on July 2, 2010.

 

The Company’s Insider Trading Policy expressly prohibits Company officers, Directors, employees and associates from engaging in options, puts, calls or other transactions that are intended to hedge against the economic risk of owning the Company shares.

 

The Compensation Committee has entered into employment agreements with each of the named executive officers. The Committee believes employment agreements are necessary to attract and help retain executive officers in a volatile and consolidating industry and to provide transitional income following an executive officer’s involuntary termination of employment. The severance benefits in the event of an involuntary termination or a termination of employment by the employee for Good Reason following a change in control (“double trigger”) also serve to lessen the potential negative impact of a change in control on the executive officers and to lessen the potential conflict between the best interests of the shareholders and that of the executives. The Committee believes this provision is desirable, in combination with significant stock ownership, to encourage the executives to consider in an unbiased manner possible change in control situations that might benefit the Company’s shareholders. The

employment agreements provide for the continued employment for a period of two years following a “change in control” of the Company. For this purpose, the definition of “change of control” corresponds to the definition under IRC Section 409A and the supporting treasury regulations, with certain changes. These agreements are intended to retain the executives and provide continuity of management in the event of an actual or threatened change in the control of the Company and ensure that the executive’s compensation and benefits expectations would be maintained in such event.

 

On April 19, 2010, as a condition of the compensation adjustments in 2010, the executive officers each entered into amended and restated employment agreements providing for a double trigger in place of the single trigger as well as related changes. A “single trigger” provision permits the executive to terminate his employment for any reason after a change of control and receive severance. A double trigger requires involuntary termination (or constructive termination for Good Reason) in addition to a change of control in order to trigger severance. In addition, in the April 2010 amendment, Messrs. McCullough and Amidon agreed to eliminate the contractual provision providing for reimbursement of medical expenses over and beyond those covered under the Company’s medical plan.

 

The initial term of the new employment agreements is 21 months, until December 31, 2011. The agreements are automatically extended for an additional twelve months on December 31, 2010 and on each successive December 31 unless either party cancels the agreements.

 

The employment agreements continue to provide for (1) base annual salary to be reviewed annually (see “Base Salary” above); (2) an annual performance bonus as determined by the Committee based in part upon written objective criteria and in part upon the discretion of the Committee (see “Short-Term Incentives” above); (3) participation in the Company’s long term equity program (see “Long Term Incentives” above); (4) participation in the Company’s other cash, stock and benefit plans; (5) a Company-owned vehicle or vehicle allowance; (6) four weeks of vacation annually; (7) in the case of Messrs. McCullough and Amidon, $1 million in life insurance benefits and company-paid disability benefits; and (8) in the case of Mr. McCullough, supplemental retirement benefits providing that, for each complete year worked, beginning with his employment date with the Company (November 13, 2006) and each anniversary thereof, he will earn and be entitled to receive an annual retirement payment for ten years following his termination of employment (see “Retirement Plans” above for a description of the program).

 

Each employment agreement contains a non-disclosure covenant and also provides that the executive officer is prohibited during the term of his employment and for a period of one year following his termination from engaging in any competing business within any county, or adjacent county, in which the Company is doing business.

 

Clawback Provisions.  The employment agreements also contain a “claw back” provision requiring the executive to reimburse the Company for annual bonus payments received for each affected year if the Company must restate all or a portion of its financial statements due to material noncompliance by the Company with any financial reporting requirement under the securities laws. The reimbursements will be equal to the difference between the bonus paid to the employee for the affected years and the bonus that would have been paid to the employee had the financial results been properly reported.

 

Termination Benefits (other than for Change of Control).  The executive is entitled to severance benefits upon certain termination events as outlined below:

 

When the Company terminates the executive officer without “Just Cause” or when the executive officer terminates employment for “Good Reason,” the severance benefits, to be paid in a lump sum within 40 days following the termination, are equal to two times (three times in the case of Messrs. McCullough and Amidon) the sum of: (a) the executive officer’s highest annual base salary during the previous two years of employment immediately preceding the termination date plus (b) the highest annual bonus paid to the executive officer during the same two year period. The executive officer is also entitled to (1) vesting of any unvested equity compensation (excluding all performance-based LTIP shares), (2) reimbursement for any unpaid expenses, (3) continued coverage under the Company’s medical plan at the Company’s cost for up to 18 months, (4) payment of any earned, unpaid bonus amounts, and (5) in the case of Mr. McCullough, the supplemental retirement benefits earned under the current employment agreement, although these benefits are

not increased or accelerated. In addition, a terminated executive officer is entitled to receive any benefits that he otherwise would have been entitled to receive under our 401(k) and profit sharing plan, although those benefits are not increased or accelerated.

 

If an executive officer voluntarily terminates his employment with the Company for other than Good Reason, he is entitled to receive (1) the base salary and bonus, provided, however, that with respect to Messrs. McCullough and Amidon, there shall be no proration of the bonus in the event such executive officer leaves prior to March 31 in the year of his termination and, with respect to Messrs. Brookman, Shellum and Lauck, there shall be no bonus if such executive leaves prior to the last day of the year (2) any incentive, deferred or other compensation which has been earned or has become payable, but which has not yet been paid under the schedule originally contemplated in the agreement under which they were granted, (3) any unpaid expense reimbursement upon presentation by the executive officer of an accounting of such expenses in accordance with normal Company practices, and (4) any other payments for benefits earned under the employment agreement or Company plans.

 

If the executive officer’s termination is due to his death or by the company due to his “disability,” certain benefits are provided to him. For this purpose, the definition of “disability” corresponds to the definition under IRC Section 409A and the supporting treasury regulations. The benefit payable shall be payable in a lump sum and shall be equal to base salary (plus bonus in the case of Messrs. McCullough and Amidon) that would otherwise have been paid for a six month period following the termination date plus , in the case of disability, ongoing base salary for up to 13 weeks following the disability.

 

Termination Benefits Following a Change of Control.  If within two years following a change of control of the Company, either the executive is terminated by the Company without “Just Cause” or the executive terminates his employment for “Good Reason,” the executive is entitled to receive severance benefits equal to three times the sum of: (a) the executive officer’s highest annual base salary during the previous two years of employment immediately preceding the termination date, plus (b) the highest annual bonus paid to the executive officer during the same two year period. If this occurs in the first two years of employment, Mr. Lauck’s agreement provides that such bonus used for such calculation shall not be less than his target bonus percentage. The executive officer is also entitled to (1) vesting of any unvested equity compensation (excluding all performance-based LTIP shares), (2) reimbursement for any unpaid expenses, (3) continued coverage under the Company’s medical plan at the Company’s expense for up to 18 months, and (4) payment of any earned, unpaid bonus amounts. In addition, a terminated executive officer is entitled to receive any benefits that he otherwise would have been entitled to receive under our 401(k) and profit sharing plan, although those benefits are not increased or accelerated. The Company does not gross up any executive in the event a “parachute tax” is owed pursuant to Section 280G. In such circumstance, the severance payment will be reduced if it would result in a higher payment to the executive than paying such 280G tax.

 

The table below provides information regarding the amounts each of the executive officers would have been eligible to receive if a termination event had occurred as of December 31, 2009. For the purpose of valuing equity compensation, the presentation below assumes the closing price per share of the Company’s stock on December 31, 2009 was $18.21.

 

 

 

Effect of Change of Control on Equity Award.  In addition to the change of control benefits discussed above, our equity plans and corresponding agreements provide that upon a change of control of the Company:

 

 

We believe this “single-trigger” treatment in our stock plans is appropriate because it ensures that continuing employees are treated the same as terminated employees, and is particularly appropriate for performance — based equity given the potential difficulty of replicating or achieving the performance goals after the change of control.

 

Eric Stearns Separation Agreement.  On May 19, 2009, the Company entered into a Separation Agreement with Eric Stearns, its prior Executive Vice President (the “Stearns Separation Agreement”). The Stearns Separation Agreement notes that Mr. Stearns resigned with Good Reason, as provided in his Employment Agreement. Mr. Stearns’ compensation included a payment of $2,001,000 and acceleration of his restricted stock. Mr. Stearns was not compensated in excess of his rights under the Employment Agreement dated December 31, 2008, between the Company and Mr. Stearns.

 

Other Agreements.  No current executive officers are investors in the Company’s partnerships for which the Company is the general partner. Prior to 2007, however, prior executive officers could invest in a Board-approved executive drilling program at the Company’s cost. Effective with the 2007 partnership, the Board eliminated this executive officer investment program.

 

The following table provides summary compensation information for the Company’s Chief Executive Officer, the Chief Financial Officer, and the three most highly compensated executive officers, other than the Chief Executive Officer and Chief Financial Officer and a former Executive Officer, whose total compensation exceeded $100,000 in 2009 (the “named executive officers”).