PROXY STATEMENT

 

TABLE OF CONTENTS

 

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS
OF ENERGEN CORPORATION

April 28, 2010

 

 

We are providing this proxy statement in connection with the solicitation by the Board of Directors of Energen Corporation, an Alabama corporation (the “Company,” “we,” or “us”), of proxies for use at the 2010 Annual Meeting of Shareholders of the Company and at any adjournment thereof (the “Annual Meeting”).

 

You are invited to attend our Annual Meeting on April 28, 2010, beginning at 9:30 a.m., CDT. The Annual Meeting will be held at our principal office, 605 Richard Arrington Jr. Blvd. North, Birmingham, Alabama 35203-2707.

 

This proxy statement and form of proxy are being mailed on or about March 24, 2010.

Item 1: Election of Directors

 

Three Directors are to be elected. Our Board of Directors is divided into three classes serving staggered three-year terms. The terms of four of the present Directors expire at this Annual Meeting: Stephen D. Ban, Julian W. Banton, T. Michael Goodrich, and Wm. Michael Warren, Jr. Messrs. Ban, Banton and Goodrich have been nominated for re-election as Directors for terms expiring in 2013. Mr. Warren is retiring from our Board of Directors.

 

Your Board of Directors recommends that Stephen D. Ban, Julian W. Banton, and T. Michael Goodrich be elected to serve in the class with terms expiring in 2013 .  Each nominee has agreed to be named in this proxy statement and to serve if elected. We expect each nominee for election as a Director to be able to serve if elected. Biographical data on these nominees and the other members of the Board of Directors is presented beginning on page 4 of this proxy statement under the caption “Governance of the Company.”

 

Unless you otherwise direct on the proxy form, the proxy holders intend to vote your shares in favor of the above listed nominees. To be elected, a nominee must receive a majority of the votes cast at the Annual Meeting in person or by proxy. If one or more of the nominees becomes unavailable for election or service as a Director, the proxy holders may vote your shares for one or more substitutes designated by the Board of Directors; alternatively, we may reduce the size of the Board of Directors.

Item 2: Approval of Amendment and Restatement of Energen’s 1992 Directors Stock Plan

 

In January 2010, the Board of Directors adopted, subject to shareholder approval, amendments to the 1992 Directors Stock Plan (as amended through the date hereof, the “Directors Plan”) which define additional types of equity compensation that may be awarded under the Directors Plan, replace annual grants with compensatory grants to be awarded at the discretion of the Board, outline the authority of the Board to administer the Directors Plan and specify the method of determining the exercise price of stock option awards. The amendments do not increase the number of authorized shares under the Directors Plan. Your Board of Directors recommends the adoption of the Amended and Restated Directors Stock Plan.

 

The Board of Directors adopted, and the shareholders subsequently approved, the Company’s Annual Incentive Compensation Plan (as amended, the “AICP”) effective January 1, 2002. On December 9, 2009, the Board of Directors adopted, subject to shareholder approval, an amendment to the AICP which increases the maximum incentive for any individual for any one year from $1 million to $2.5 million.

 

The Company is required to resubmit the AICP for shareholder approval periodically so that the AICP may continue to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), which provides the Company with an exception from the $1 million limitation on its federal income tax deduction for certain compensation paid under the AICP (as described in more detail below) otherwise imposed by Section 162(m). Your Board of Directors recommends that the amendment to the AICP be approved. A vote to approve this amendment (as described in more detail below) also will constitute approval of the performance conditions and material terms of the AICP for purposes of Section 162(m) of the Code.

 

The Audit Committee has appointed PricewaterhouseCoopers LLP as the independent registered public accounting firm (the independent auditors) of the Company with respect to its operations for the year 2010. While ratification is not required, the Audit Committee determined to seek shareholder ratification of the appointment. Your Board of Directors recommends ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm.

 

We know of no other business that will be considered for action at the Annual Meeting. If any other business calling for a vote of shareholders is properly presented at the meeting, the proxy holders will vote your shares in accordance with their best judgment.

 

Holders of Company common stock of record at the close of business on February 26, 2010, are entitled to receive this notice of Annual Meeting and proxy statement and to vote their shares at the Annual Meeting. As of that date, a total of 71,854,814 shares of common stock were outstanding and entitled to vote. Each share of common stock is entitled to one vote on each matter properly brought before the Annual Meeting.

 

Your vote is important. You can save us the expense of a second mailing by voting promptly. Because many shareholders cannot attend the Annual Meeting in person, it is necessary that a large number be represented by proxy. Please submit your instructions by telephone or by Internet, or by completing, signing, dating and returning your proxy in the postage-paid envelope provided. The proxy holders will vote shares represented by valid proxies received by telephone, by Internet or by mail in accordance with the instructions appearing on such proxies.

 

You can revoke your proxy at any time before it is exercised by:

 

 

Submitting your proxy by telephone, by Internet or by mail will in no way limit your right to vote at the Annual Meeting if you later decide to attend in person. If your shares are held in the name of a bank, broker or other holder of record, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote at the Annual Meeting.

 

All shares for which a proxy has been received and not revoked will be voted at the Annual Meeting. If you submit your proxy by telephone, by Internet or by mail but do not give voting instructions, the shares represented by that proxy will be voted as recommended by the Board of Directors.

 

The presence of the holders of a majority of the outstanding shares of common stock entitled to vote at the Annual Meeting, present in person or represented by proxy, is necessary to constitute a quorum. Abstentions are counted as present and entitled to vote for purposes of determining a quorum. Proxies relating to “street name” shares that are voted by brokers on some matters will be treated as shares present for determining the presence of a quorum, but will not be treated as shares entitled to vote at the Annual Meeting on those matters as to which authority to vote is withheld from the broker. A broker “non-vote” occurs when a broker holding shares for a beneficial owner does not vote on a particular proposal because the broker does not have discretionary voting power for that particular item and has not received voting instructions from the beneficial owner.

 

Under New York Stock Exchange Rules, if you are a beneficial owner and your broker holds your shares in its name, your broker is permitted to vote your shares on the ratification of independent accountants, even if the broker does not receive voting instructions from you if the broker has complied with rules concerning the delivery of proxy materials to beneficial owners.

 

Each of the nominees for Director must receive the affirmative vote of a majority of the votes cast by shareholders represented at the Annual Meeting as part of the quorum. Only votes “for” or “withhold authority” affect the outcome. Abstentions and broker “non-votes” are not counted for purposes of the election of Directors.

 

The affirmative vote of a majority of the votes cast at the Annual Meeting in person or by proxy by shareholders entitled to vote on the matter is required to (i) approve the adoption of the amended and restated Directors Plan, (ii) approve the amendment to the AICP (including approval of the AICP for purposes of Section 162(m) of the Code), and (iii) ratify the appointment of PricewaterhouseCoopers LLP as the independent public accounting firm. Abstentions and broker non-votes are not counted for purposes of the vote on these matters.

 

At the date this proxy statement went to press, we did not know of any other matters to be raised at the Annual Meeting.

 

This proxy statement, the form of proxy card and the 2009 Form 10-K are available on our website www.energen.com under the heading “Investor Relations” and subheading “SEC Filings”. Securities and Exchange Commission rules permit the Company to provide shareholders with proxy materials electronically instead of in paper form, even if they have not made an election to receive the material electronically. If we decide to take advantage of this electronic delivery alternative in the future, shareholders will receive a Notice of Internet Availability of Proxy Materials with instructions on how to access the material on the Internet.

 

The members of our Board of Directors, including the three nominees for election, are identified below.

NOMINEES FOR ELECTION AS DIRECTORS FOR THREE-YEAR TERMS EXPIRING IN 2013

 

DIRECTORS WHOSE TERMS EXPIRE IN 2010

 

DIRECTORS WHOSE TERMS EXPIRE IN 2011

 

DIRECTORS WHOSE TERMS EXPIRE IN 2012

 

 

Each of our Directors also serves as a Director of Alabama Gas Corporation and Energen Resources Corporation, our principal subsidiaries. Our Governance and Nominations Committee considers the qualifications and backgrounds of each of our Directors when nominated for service on our Board of Directors, and believes that each Director named above possesses skills and qualifications which enhance the quality of the Board as a whole. For further discussion of the nominee selection process, see “Selection of Board Nominees” below.

 

During 2009, the Board of Directors of the Company met seven times. All Directors of the Company attended at least 75% of the meetings of the Board of Directors and at least 75% of the meetings of committees of the Board during the time periods such Directors were serving as members of such committees. We encourage and expect our Board members to attend our Annual Meeting absent extenuating circumstances, but we do not have a formal policy requiring attendance. All of our Board members except for Dr. Ban and Dr. Merritt attended our Annual Meeting held in 2009.

 

Our Board of Directors has standing Governance and Nominations, Audit, Officers Review, and Finance Committees. The current members of these Committees are as follows:

 

 

Mr. Warren will cease his service on the Finance Committee upon his retirement from the Board of Directors at the 2010 Annual Meeting.

 

Governance and Nominations Committee.   The duties of the Governance and Nominations Committee are to review and advise the Board of Directors on general governance and structure issues, to review and recommend to the Board the term and tenure of Directors, to consider future Board members and recommend nominations to the Board, and to review and make recommendations to the Board regarding non-employee Director compensation. The charter of the Governance and Nominations Committee describes the duties of the Governance and Nominations Committee in detail. The charter and the Company’s Corporate Governance Guidelines are available on our website under the heading “Governance” ( www.energen.com ). During 2009, the Governance and Nominations Committee held two meetings. The Board of Directors has determined that

each member of the Governance and Nominations Committee is “independent” as defined by the listing standards of the New York Stock Exchange.

 

Audit Committee.   The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities with respect to the integrity of our financial statements, our legal and regulatory compliance and the performance of our internal and independent auditors. As part of its responsibilities, the Audit Committee is solely responsible for the appointment, compensation, retention, discharge or replacement of our independent auditors. Our Audit Committee charter describes the functions of our Audit Committee in detail, and is available on our website under the heading “Governance” ( www.energen.com ). During 2009, the Audit Committee held five meetings. The Audit Committee Report is presented at page 22 of this proxy statement under the caption “2009 Audit Committee Report.”

 

The Board of Directors has determined that each member of the Audit Committee is “independent” within the meaning of applicable SEC regulations and the listing standards of the New York Stock Exchange and each member meets the financial literacy and accounting or financial management requirements of the New York Stock Exchange listing standards. The Board has also determined that Mr. Wilson is an audit committee financial expert under the rules and regulations of the Securities and Exchange Commission.

 

Officers Review Committee.   Our Officers Review Committee (“ORC”) considers and makes recommendations to the Board of Directors with respect to executive succession and compensation paid to officers of the Company and its subsidiaries. The ORC also administers the Company’s executive compensation plans. The charter of the ORC describes the duties and functions of the ORC in detail, and is available on our website under the heading “Governance” ( www.energen.com ). During 2009, the ORC held five meetings. The Report of the ORC is presented on page 30 of the proxy statement under the caption “Compensation Committee Report.” The Board of Directors has determined that each member of the ORC is “independent” as defined by the listing standards of the New York Stock Exchange.

 

The ORC is responsible for overseeing and administering the Company’s executive compensation program. The ORC establishes the salaries and other compensation of the executive officers of the Company, including the Chairman and CEO, the CFO, and other executive officers named in the Summary Compensation Table. In setting salaries and granting other forms of compensation, the ORC receives and considers information and recommendations from the CEO and the Vice President of Human Resources. The ORC also reviews and considers reports and analysis provided by its executive compensation consultant, Towers Perrin. Towers Perrin is engaged by the Company at the direction of the ORC. Management meets with Towers Perrin representatives and participates in most meetings between Towers Perrin and the ORC. Towers Perrin provides a range of services to the ORC, including competitive assessments of the Company’s executive compensation levels and practices relative to relevant executive labor markets and other assignments as requested by the ORC. During 2009, Towers Perrin also provided to the Governance and Nominations Committee an assessment of outside director competitive compensation. For a more detailed description of the ORC’s authority and interaction with management and Towers Perrin, see “Compensation Discussion & Analysis” beginning on page 24.

 

Finance Committee.   Our Finance Committee reviews and makes recommendations to the Board with respect to significant financing and acquisition activities. The Finance Committee charter describes the duties of the Finance Committee in detail, and is available on our website under the heading “Governance” ( www.energen.com ). The Finance Committee held two meetings during 2009.

 

Availability of Corporate Governance Documents.   Shareholders may obtain copies of our Committee charters, Code of Ethics and Corporate Governance Guidelines from us without charge by requesting such documents in writing or by telephone at the following address or telephone number:

 

J. David Woodruff

Energen Corporation

605 Richard Arrington Jr. Blvd. North

Birmingham, Alabama 35203-2707

Phone: (205) 326-2700

 

Each of these documents is also available on our website under the heading “Governance” ( www.energen.com ).

 

Our Board of Directors has adopted independence standards consistent with the listing standards adopted by the New York Stock Exchange. A Director will be considered “independent” and found to have no material relationship with the Company if:

 

(1)  During the prior three years:

 

• The Director has not been an employee of the Company or any of its subsidiaries;

 

 

 

 

In January 2010, the Board reviewed the independence of its members. Based on this review and the independence standards set forth above, the Board of Directors determined that none of the Director nominees and none of the current Directors, with the exception of Mr. McManus and Mr. Warren, have a material relationship with the Company other than in their capacities as members of the Board of Directors. Mr. McManus is considered an inside Director due to his current employment as Chief Executive Officer of the Company. Mr. Warren is retiring from service on the Board at the 2010 Annual Meeting.

 

In evaluating the independence of the Directors, the Board considered the following relationships and found them to not be material to an assessment of Director independence.

 

(1) Alabama Gas Corporation provides natural gas utility and related services to several Directors, including businesses for which Company Directors, or the spouses of Company Directors, serve as executive officers. These customers participate in the various gas service, transportation and marketing incentive programs available to their respective customer classes.

 

(2) During 2009, the Company contributed $1,000 and requested a $2,500 donor advised fund grant to Jefferson State Community College of which Dr. Merritt is President.

 

(3) Mr. Snider served as CEO of Exterran Holdings, Inc. until June 2009. Exterran provides services to the Company’s subsidiary, Energen Resources Corporation and, during 2009, received payments for such services approximating 0.74% of the Company’s revenues and 0.38% of Exterran’s revenues.

 

(4) During 2009 Energen contributed $25,300 to Children’s Health System of which Mr. Warren is Chief Executive Officer.

Although the Company does not have specific policies and procedures for the review, approval or ratification of Company transactions in which any director, executive officer or other related person will have a direct or indirect material interest, the Company does have the following provisions in its Code of Ethics and Corporate Governance Guidelines:

 

Members of the board of directors, officers, and employees should not have any position with or a substantial interest in any business that might affect their independent judgment on behalf of Energen, unless the interest is fully disclosed to and approved by Energen. (Code of Ethics)

 

Directors are expected to disclose to other Directors any potential conflicts of interest they may have with respect to any matters under discussion, and, if appropriate, refrain from voting on a matter in which they may have a conflict. (Corporate Governance Guidelines)

 

We rely on our directors and executive officers to make advance disclosure to the Board of Directors of transactions with the Company in which a director or an executive officer will have a direct or indirect interest. Our Board of Directors would then evaluate and determine whether to approve any such proposed transaction. Failure to disclose such a transaction to our Board of Directors in advance and to seek approval from our Board prior to engaging in such a transaction would constitute a violation of our Company’s Code of Ethics. Our directors and executive officers also complete an annual questionnaire which identifies or confirms the absence of any direct or indirect participation in any transaction with the Company.

 

The Chairman of the Company’s Board of Directors is Mr. McManus, who also serves as the Company’s Chief Executive Officer. This combined Chairman-CEO leadership role has been used by the Company for many years except during brief succession transition periods. The Company has also always had a majority independent Board membership. Mr. McManus and Mr. Warren, who is retiring from the Board at the upcoming Annual Meeting, are the only non-independent members of the Board. Under our Corporate Governance Guidelines, our Board designates a presiding director for purposes of convening and chairing meetings of our non-management Directors. The role of presiding director is currently filled by Mr. French. Based on many years of experience, the Board believes that this structure serves the Company well in providing effective and efficient leadership with active independent oversight.

 

The Board exercises its risk oversight role through Board and Committee meetings. As noted above, a majority of the Board members are independent. All Committee Chairs are independent and, except in the case of the Finance Committee on which Mr. Warren serves, all Committee members are independent. Risk oversight matters are raised in various ways: normal agenda items, presentations in response to Director request, presentations initiated by management, and issues raised and discussed during the course of a meeting.

Compensation Committee Interlocks and Insider Participation

 

None of the Directors serving on the ORC has served as an officer or employee of the Company. Of our Directors serving on the ORC, only Mr. Snider had a relationship (other than a utility customer relationship) with the Company which required consideration by our Board of Directors in connection with their review of independence. Mr. Snider’s prior position as CEO of Exterran Holdings, Inc. is discussed above under “Corporate Governance — Independence Determinations.”

 

Our Governance and Nominations Committee identifies and evaluates Board candidates using one or more informal processes deemed appropriate for the circumstances. A determination of whether to pursue discussions with a particular individual is made after discussion by the Committee and may be preceded by formal or informal discussions involving one or all of the other Board members. Information considered by the Committee may include information provided by the candidate and one or more Committee or Board members. The Committee will also consider potential committee service by Board candidates at the time such candidates are evaluated for service on the Board and, if the Board has vacancies on a particular committee, or

foresees such a vacancy, the Committee may be more likely to consider Board candidates with credentials and experience suitable for service on such committee. Board candidates are expected to possess high personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the shareholders. They are also expected to have an inquisitive and objective perspective, practical wisdom and good judgment. In addition to these fundamental characteristics, the Committee seeks to assemble and maintain a Board membership with a diverse portfolio of expertise, education, and experience conducive to generating multiple perspectives on the business, community, and strategic issues and opportunities encountered or anticipated by the Company and its operating subsidiaries.

 

Once appropriate candidates have been identified, the Committee recommends nominations to our Board and to the boards of our subsidiaries. Our Governance and Nominations Committee has not adopted a policy or procedure for the consideration of director candidates recommended by shareholders. Our Board does not recall an instance in which a shareholder (other than a shareholder serving as an officer or director) has recommended a director candidate; however, as stated in prior years, the Governance and Nominations Committee will consider timely shareholder recommendations. The Governance and Nominations Committee did not receive any director candidate recommendations from shareholders holding at least 5% of our common stock for our 2010 Annual Meeting.

 

Based on past experience, we expect to receive and respond to shareholder communications in a variety of ways. Our Board does not want to limit this flexibility and has not implemented a defined process for shareholders to send communications to the Board. Any shareholder or other interested person wishing to communicate with a member of the Board may send correspondence to his or her attention at Energen Corporation, 605 Richard Arrington Jr. Blvd. North, Birmingham, Alabama 35203-2707. The names, titles and committee assignments of our officers and Directors, together with our mailing address and telephone number, can be found on our website under the heading “Governance” (www.energen.com). Also under that heading is a copy of the procedure adopted by our Audit Committee for the handling of inquiries and correspondence relating to errors, deficiencies and misrepresentations in accounting, internal control and audit related matters. Such inquiries and correspondence are forwarded by our General Counsel to the Chairman of our Audit Committee.

Directors’ Compensation

 

 

 

The Governance and Nominations Committee charter provides that:

 

At such times as it determines appropriate or as requested by the Board, the Committee will review and make recommendations with respect to Director compensation. Such compensation is intended to be sufficient to attract and retain qualified candidates and may include a combination of cash and stock based compensation.

 

Management discusses Director compensation with the Governance and Nominations Committee, and makes recommendations on Director compensation which the Governance and Nominations Committee considers as part of its process in reviewing Director compensation. During 2009, at the request of the Governance and Nominations Committee, the Company engaged Towers Perrin to provide an assessment of outside director competitive compensation for use by the Committee in its review of director compensation. Towers Perrin also serves as an executive compensation consultant to the Officers Review Committee. The 2009 Director monthly cash retainer fees and meeting fees were approved by the Board in December 2007 and have not increased since that time. The 2009 share awards were issued pursuant to the Directors Plan which currently provides for annual grants of 1,200 shares. Assuming approval of the Amendment and Restatement of the Directors Plan by the shareholders, our Governance and Nominations Committee intends to continue making annual grants of shares to each non-employee Director. If approved, the Governance and Nominations Committee plans to recommend an additional 2010 grant of 340 shares to the non-employee Directors which, when added to the 1,200 shares granted in January 2010, would result in a grant of approximately $72,000 in value to each non-employee Director based on the January 2010 share price.

 

Monthly Cash Retainer Fees and Meeting Fees.   During 2009, non-employee Directors were paid a retainer of $51,000 per year. Non-employee Directors also received a fee of $1,500 for each Board meeting attended, and $1,500 for each committee meeting attended. The Governance and Nominations and Finance Committee Chairs received a retainer supplement of $3,000 per year, while the Chair of the Audit Committee received a supplement of $15,000 per year and the Chair of the Officers Review Committee received a supplement of $10,000 per year. Members of the Audit Committee other than the Chair received a retainer supplement of $3,000 per year. Our Presiding Director received a retainer supplement of $3,000 per year. No Director who is an employee of the Company is compensated for service as a member of the Board of Directors or any committee of the Board of Directors.

 

Share Awards and Deferred Compensation.   Prior to the amendments discussed below, the Directors Plan provided each non-employee Director with an annual grant of twelve hundred shares of common stock. Annual awards were made following the last day of each fiscal year, and only non-employee Directors who were members of our Board on such date and who had been members of the Board for at least six months were eligible. If the amendments to the Directors Plan are approved at the Annual Meeting, our Board will have the authority to make compensatory grants of stock, restricted stock and stock options to non-employee Directors at such times and in such amounts as the Board may determine. The plan also allows each non-employee Director to elect to have any part or all of the fees payable for services as a Director of the Company and its subsidiaries paid in shares of common stock. Awards under the Directors Plan are in addition to the payment of monthly cash retainers and meeting fees.

 

If the proposed amendments are approved, the Governance and Nominations Committee will become the administrator of the Directors Plan. Although the plan has no fixed duration, the Board of Directors or our shareholders may terminate the plan. Our Board of Directors also may amend the plan from time to time, but any amendment that materially increases the benefits accruing to participants, increases the number of shares

of common stock which may be issued or materially modifies eligibility requirements would require the approval of our shareholders.

 

Under the Company’s 1997 Deferred Compensation Plan, members of the Board of Directors may elect to defer part or all of their director compensation. The 1997 Deferred Compensation Plan is discussed below in greater detail under the caption “Compensation Discussion and Analysis-1997 Deferred Compensation Plan.”

 

Other.   Directors have family coverage under the Company’s membership in a medical emergency travel assistance program. The Company also reimburses directors for travel, lodging, and related expenses incurred in attending Board and Committee meetings. These reimbursements include the expenses incurred by the directors’ spouses in accompanying the directors at the invitation of the Company, along with taxes related to such payments. In addition, two directors use Company provided PDAs.

 

The Company has a Code of Ethics which is applicable to all of the Company’s employees, including the principal executive officer, the principal financial officer and the principal accounting officer. The Code of Ethics is also applicable to all of the Directors of the Company. The Code of Ethics is available on our website under the heading “Governance” ( www.energen.com ). We intend to post amendments to or waivers from the Code of Ethics which are applicable to the Company’s directors, principal executive officer, principal financial officer and principal accounting officer at this location on our website.

 

The Board of Directors is seeking the approval of the Company’s shareholders of an amendment to and restatement of the Company’s 1992 Directors Stock Plan (as heretofore amended, the “Directors Plan”), which was adopted, subject to shareholder approval, by the Board of Directors on January 27, 2010. Generally, the proposed amendments (i) expand the types of equity compensation which may be awarded under the Directors Plan, (ii) specify the authority of the Board of Directors, or a committee of the Board, to administer the Directors Plan and make grants of equity compensation thereunder, (iii) eliminate the annual grant of stock to non-employee Directors, instead allowing the Board to make compensatory grants of common stock in such form and at such times and amounts as the Board may determine, and (iv) allow the Board to make grants to former non-employee Directors who served during the period with respect to which a grant is made. The Directors Plan was adopted by the Board of Directors in 1991 and approved by the shareholders at the annual meeting held in January 1992. Shareholders approved a subsequent amendment to the Directors Plan at the annual meeting held in January 1996, and the Board of Directors previously approved amendments to the Directors Plan in April 1997 and December 2007.

 

The purpose of the Directors Plan is to provide equity based compensation to the Company’s non-employee Directors. The Directors Plan also permits such directors to elect to take all or a portion of their cash compensation in the form of the Company’s common stock.

 

The following summary of the Directors Plan does not contain all of the terms and conditions of the Directors Plan and is qualified in its entirety by the specific language of the Directors Plan, which was filed with the Securities and Exchange Commission as an appendix to this proxy statement and may be obtained through the Internet from the Securities and Exchange Commission’s website (http://www.sec.gov) or via the Company’s website (http://www.energen.com). The summary of the terms of the Directors Plan assumes adoption of the amendment and restatement by the shareholders. A copy of the Directors Plan as currently in effect is available via mail or e-mail by contacting the Company’s Investor Relations department at 800-654-3206.

Administration.   The Directors Plan is administrated by the Board of Directors or such committee of the Board of Directors as it may designate. The Board of Directors has designated the Governance and Nominations Committee as the Plan Administrator.

 

Eligibility.   Only those members of the Company’s Board of Directors who are not officers or employees of the Company or its subsidiaries (“non-employee Directors”) are eligible to participate in the Directors Plan. There are presently ten non-employee Directors on the Board of Directors. One such non-employee Director will retire from the Board during April, 2010.

 

Types of Awards.   The Board of Directors may award grants of unrestricted common stock, restricted stock or stock options. Grants of restricted stock and stock options shall be made subject to terms and conditions specified by the Board at the time of the grant. The exercise price of stock options shall not be less than the closing price of the Company’s common stock on the New York Stock Exchange on the date of grant.

 

Compensatory Grants.   The Board of Directors may from time to time grant common stock, restricted stock or stock options to non-employee Directors in such amounts as the Board determines. Grants may be made to former non-employee Directors who served during the period with respect to which the award is made.

 

Elective Grants.   Each non-employee Director may elect to have any part or all of the fees payable to such non-employee Director for services as a director of the Company and its subsidiaries paid in the form of common stock. Such election shall be delivered to the Company in writing specifying the portion of fees to be paid in stock. Any such election shall remain in effect and irrevocable until the effective date of a subsequent written election changing or terminating the prior election. The effective date of any election, including without limitation an election to change or terminate a prior election, shall be six months from the date of delivery to the Company. Common stock issued in lieu of director fees shall be issued as soon as reasonably practicable following the end of each calendar quarter and the number of shares will be based on a valuation equal to the average of the closing prices for the common stock on the New York Stock Exchange, Inc. for the last trading day of each month in such calendar quarter, provided that any fractional share shall be rounded up to a whole share.

 

Amendment.   Our Board of Directors may amend the plan from time to time, but any amendment that increases the aggregate number of shares of common stock which may be issued must be approved by our shareholders. Further, the Directors Plan shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Act, or the rules thereunder.

 

Term.   The Amended and Restated Directors Stock Plan shall become effective upon approval of the shareholders at the Annual Meeting. Once effective, the Directors Plan shall remain in effect until terminated by action of the Board or the shareholders of the Company.

 

Deferral Under 1997 Deferred Compensation Plan.   Notwithstanding the other provisions of the Directors Plan, a non-employee Director may elect pursuant to the Energen Corporation 1997 Deferred Compensation Plan to defer receipt of compensatory and/or elective grants of common stock otherwise payable under the Directors Plan and upon such deferral shall have no further right with respect to such deferred grant other than as provided under said Deferred Compensation Plan. In the event of such a deferral election, shares of common stock which would otherwise have been deliverable to such non-employee Director may at the discretion of the Company be delivered to the Trustee under such Deferred Compensation Plan and registered in the name of the Trustee or such other person as the Trustee may direct.

 

Number of Shares Available.   Upon adoption of the Directors Plan in 1992, 100,000 shares of common stock were reserved for issuance under the Directors Plan (the “Reserve”). In the event that the Company shall issue shares of common stock (i) in subdivision of outstanding shares of common stock, by reclassification or otherwise, or (ii) for a stock dividend, the Reserve shall be increased proportionately; and in like manner, reduced proportionately in the case of any combination of shares of common stock. As of January 31, 2010, as adjusted for stock splits, 178,724 shares remain in the Reserve. The number of shares issuable under the Directors Plan is limited to the Reserve.

 

The amendment and restatement of the Directors Plan was adopted, subject to shareholder approval, by the Board of Directors on January 27, 2010 to make the following changes.

 

Additional Types of Awards.   As originally adopted, the Directors Plan limited awards to unrestricted common stock. The amendments give the Board the authority to grant restricted stock and stock options, in addition to grants of unrestricted common stock. The addition of restricted stock and stock options is intended to give the Board greater flexibility in making awards to non-employee Directors and to allow the Board to tie the awards to the Company’s performance.

 

No Annual Grants.   The amendments eliminate the annual grants of common stock to non-employee Directors, replacing them with compensatory grants which the Board may make at such times and in such amounts as the Board determines. The Board believes the additional flexibility and the ability to specifically time certain awards will prove beneficial to the Company. This amendment also allows the Board to make such compensatory grants to former non-employee Directors for service during periods with respect to which grants are made.

 

Administration.   Due to the addition of new types of awards and the increased flexibility given the Board in the timing, amount and type of grants, the amendments provide that the Board, or a designated committee of the Board, has the authority and discretion to oversee the Directors Plan, including the authority to: (i) make grants; (ii) determine the persons to whom, and the times at which, grants should be made; (iii) determine the form and amounts of awards, and any terms and conditions thereof; (iv) interpret the Directors Plan or any grant thereunder; and (v) make any other determinations and interpretations necessary or advisable for the administration of the Directors Plan.

Plan Benefits and Number of Shares Awarded to Certain Individuals and Groups

 

Future benefits under the Directors Plan are not currently determinable. Our non-employee Directors have a financial interest in this proposal because they are potentially eligible to be awarded common stock under the Directors Plan. The following table indicates shares awarded under the Directors Plan during the fiscal year 2009 to the non-employee Directors:

 

 

 

 

Each non-employee Director received an annual grant of 1,200 shares in January 2010 with a market value of $46.76 per share on the date of grant. If the proposed amendment is approved, the Governance and Nominations Committee intends to recommend the grant of an additional 340 shares to each non-employee Director to bring the total aggregate market value of 2010 share awards to approximately $72,000 per Director based on the January 2010 market price.

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table summarizes information concerning securities authorized for issuance under equity compensation plans as of December 31, 2009:

 

 

 

 

The market value of our common stock is $45.46 per share based on the closing price of our common stock on February 26, 2010.

 

The following is a brief summary of certain federal income tax consequences relating to awards under the Directors Plan. This summary does not purport to address all aspects of federal income taxation and does not describe state, local or foreign tax consequences. This discussion is based upon provisions of the Code and the treasury regulations issued thereunder, and judicial and administrative interpretations under the Code and treasury regulations, all as in effect as of the date hereof, and all of which are subject to change (possibly on a retroactive basis) or different interpretation.

 

In 2004, Section 409A was added to the Code to regulate all types of deferred compensation. If the requirements of Section 409A are not satisfied, deferred compensation and earnings thereon will be subject to tax as it vests, plus an interest charge at the underpayment rate plus 1% and a 20% excise tax. Certain restricted stock and stock options are subject to Section 409A of the Code.

 

Non-qualified Stock Options.   A participant generally will not recognize income at the time a non-qualified option is granted. When a participant exercises a non-qualified option, the difference between the option price and any higher market value of the shares of common stock on the date of exercise will be treated as compensation taxable as ordinary income to the participant. The participant’s tax basis for shares of common stock acquired under a non-qualified option will be equal to the option price paid for the shares of common stock, plus any amounts included in the participant’s income as compensation. When a participant disposes of shares of common stock acquired by exercise of a non-qualified option, any amount received in excess of the participant’s tax basis for the shares will be treated as short-term or long-term capital gain, depending upon how long the participant has held the shares of common stock. If the amount received is less

than the participant’s tax basis for the shares, the loss will be treated as short-term or long-term capital loss, depending upon how long the participant has held the shares.

 

Special Rule if Option Price is Paid for in Shares of Common Stock.   If a participant pays the exercise price of a non-qualified option with previously owned shares of common stock and the transaction is not a disqualifying disposition of shares of common stock previously acquired under an incentive option, the shares of common stock received equal to the number of shares of common stock surrendered are treated as having been received in a tax-free exchange. The participant’s tax basis and holding period for the shares of common stock received will be equal to the participant’s tax basis and holding period for the shares of common stock surrendered. The number of shares of common stock received in excess of the number of shares of common stock surrendered will be treated as compensation taxable as ordinary income to the participant to the extent of their fair market value. The participant’s tax basis in these additional shares of common stock will be equal to their fair market value on the date of exercise, and the participant’s holding period for these shares will begin on the date of exercise.

 

Restricted Stock.   The recipient of restricted stock generally will recognize as ordinary income the excess, if any, of the fair market value of the shares of common stock granted as restricted stock at such time as the shares of common stock are no longer subject to forfeiture or restrictions, over the amount paid, if any, by the participant for such shares of common stock. However, a participant who receives restricted stock may make an election under Section 83(b) of the Code within 30 days of the date of transfer of the shares of common stock to recognize ordinary income on the date of transfer of the shares of common stock equal to the excess of the fair market value of such shares (determined without regard to the restrictions on such shares of common stock) over the purchase price, if any, of such shares. If a participant does not make an election under Section 83(b) of the Code, then the participant will recognize as ordinary income any dividends received with respect to shares of common stock. At the time of sale of such shares, any gain or loss realized by the participant will be treated as either short-term or long-term capital gain (or loss) depending on the holding period. For purposes of determining any gain or loss realized, the participant’s tax basis will be the amount previously taxable as ordinary income.

 

Unrestricted Stock.   The recipient of an award of unrestricted stock generally will recognize as ordinary income the excess, if any, of the fair market value of the shares of common stock at the time such shares are received over the amount paid, if any, by the participant for such shares of common stock. At the time of sale of such shares, any gain or loss realized by the participant will be treated as either short-term or long-term capital gain (or loss) depending on the holding period. For purposes of determining any gain or loss realized, the participant’s tax basis will be the amount previously taxable as ordinary income.

 

Tax Consequences to Us.   To the extent that a participant recognizes ordinary income with respect to an award, we will generally be entitled to a corresponding deduction.

 

Federal Tax Withholding.   Any amount realized by a participant as ordinary income is subject to withholding of federal, state and local income tax and to withholding of the participant’s share of tax under the Federal Insurance Contribution Act. Deferred compensation that is subject to Section 409A of the Code may be subject to certain federal income tax withholding and reporting requirements.

 

The affirmative vote of a majority of the votes cast at the Annual Meeting in person or by proxy by shareholders entitled to vote on the matter is required to approve the amendment and restatement of the Directors Plan.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE ADOPTION OF THE AMENDED AND RESTATED DIRECTORS STOCK PLAN.

 

In January 2002, the Company’s shareholders approved an Annual Incentive Compensation Plan (as heretofore amended, the “AICP”). The AICP provides for performance-based incentive compensation to be paid to the Company’s executive officers and key employees.

 

In January 2010, the Board of Directors adopted, subject to shareholder approval, an amendment to the AICP. The amendment raises the maximum incentive under the AICP. Under the current AICP, the maximum incentive for any individual for any one year is $1 million. The proposed amendment would raise the maximum incentive to $2.5 million.

 

In addition, the Company is required to resubmit the AICP for shareholder approval periodically so that the AICP may continue to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), which provides the Company with an exception from the $1 million limitation on its federal income tax deduction for certain compensation paid under the AICP (as described in more detail below) otherwise imposed by Section 162(m).

 

The Board of Directors believes that the approval of the amendment to the AICP is in the best interests of the Company and its shareholders. The AICP’s maximum incentive amount has not been raised since its inception, eight years ago. The proposed increase reflects the desire of the Board to motivate and reward the Company’s executive officers and key employees and to be competitive in the market in attracting and retaining these employees.

 

The following summary of the AICP does not contain all of the terms and conditions of the AICP and is qualified in its entirety by reference to the AICP, which was filed with the Securities and Exchange Commission as an appendix to this proxy statement and may be obtained through the Internet from the Securities and Exchange Commission’s website (http://www.sec.gov) or via the Company’s website (http://www.energen.com). The summary of the terms of the AICP assumes approval of the amendment by the shareholders. Interested shareholders may also obtain a copy of the AICP via mail or e-mail by contacting the Company’s Investor Relations department at 800-654-3206.

 

Purpose.   The purpose of the AICP is to increase shareholder value and the success of the Company by motivating key executives to perform to the best of their abilities and to achieve the Company’s objectives. The AICP is also designed so that awards under the AICP may qualify as “performance-based” compensation under Section 162(m) of the Code to the greatest extent practicable. Under Section 162(m), the Company may be denied a federal income tax deduction for compensation paid to the Company’s Chief Executive Officer or any of the four other most highly compensated executive officers to the extent that any of these persons receives more than $1 million of compensation from the Company in any one year. However, compensation paid by the Company that is “performance-based” under Section 162(m) may be excepted from the $1 million limitation. The AICP allows the Company to pay incentive compensation that under most circumstances will be performance-based and, therefore, fully deductible on the Company’s federal income tax return.

 

Eligibility.   The ORC selects the employees of the Company (and its affiliates) who will be eligible to receive awards under the AICP, including highly-paid executives such as the Company’s Chief Executive Officer, the Company’s Chief Financial Officer, the Company’s General Counsel, the President and Chief Operating Officer of Energen Resources Corporation and the President and Chief Operating Officer of Alabama Gas Corporation (the “Covered Employees”). The actual number of employees who will be eligible to receive an award during any particular year cannot be determined in advance because the ORC has discretion to select the participants. In 2009, 20 employees participated in the AICP. The projected number of participants for 2010 is 19.

 

Administration.   The AICP is administered by a committee which shall be either the ORC or any subcommittee thereof consisting of not less than two members of the Board of Directors each of whom is an

“outside director” within the meaning of Section 162(m). The ORC has the power to determine (i) which eligible employees will be participants, (ii) the performance objectives with respect to any awards made thereunder, (iii) subject to the limitations set forth in the AICP, the terms and conditions of all awards made thereunder, and (iv) subject to the maximum limitations set forth in the AICP, the amount of compensation that may be payable to any participant upon the attainment of the applicable performance objectives.

 

Target Awards and Performance Objectives.   Each performance period, the ORC assigns each participant a target award and performance objectives that must be achieved prior to an award actually being paid to a participant. The ORC may also specify a minimum acceptable level of achievement relative to the performance objectives, as well as one or more additional higher levels of achievement, and a formula to determine the percentage of the award earned by the participant upon the attainment of each level of achievement. The participant’s target award is expressed as either a cash amount or a percentage of the participant’s salary. The performance objectives may be based on one or more of the following criteria: (i) earnings per share; (ii) net income; (iii) operating income; (iv) operations and maintenance expenses; (v) capital expenditures; (vi) revenue; (vii) return on equity, capital or assets; (viii) cash flow; (ix) oil and/or gas production or reserve additions; (x) utility throughput, customer count, use per customer, burner tip count; (xi) customer satisfaction, customer compliant count; and (xii) safety (the “Performance Objectives”). The ORC may use criteria different from or supplemental to the Performance Objectives for participants who are not Covered Employees. As a result, if a participant who is not a Covered Employee at the time his or her Performance Objectives are established by the ORC becomes subject to Section 162(m) as of the last day of the year due to a promotion or pay increases, and such participant receives awards which were not based on the Performance Objectives, such awards may not qualify for the exception from Section 162(m) limitations on deductibility. The Performance Objectives selected by the ORC for each performance period will be established within 90 days of the commencement of each performance period (or at such later time as may be permitted under Section 162(m) of the Code).

 

Actual Awards.   After the performance period ends, the ORC shall determine and certify in writing the extent to which the pre-established Performance Objectives were actually achieved or exceeded. At its discretion, the ORC may reduce a participant’s earned incentive by up to 25%. The AICP limits actual awards to a maximum of $2.5 million per person in any performance period, even if the formula used otherwise indicates a larger award. Actual awards are paid in cash in a lump sum, except to the extent that all or a portion of such payments are deferred and credited to a participant’s account under the Company’s 1997 Deferred Compensation Plan. If, prior to the end of a performance period, a participant’s employment terminates due to the participant’s death, disability or retirement under the terms of any retirement plan maintained by the Company or any subsidiary, the participant shall receive an incentive equal to the amount the participant would have received as an incentive if the participant had remained an employee through the end of the performance period multiplied by a fraction which reduces the award in proportion to the amount of time remaining in the performance period. If a participant’s employment is terminated for any other reason during a performance period, the participant shall receive no incentive payment for such performance period unless the ORC, in its discretion, determines to pay such participant up to a pro rata incentive payment.

 

Amendment and Termination.   The Board of Directors of the Company or the ORC may amend, suspend, discontinue or terminate the AICP at any time; provided, however, that no such amendment, suspension, discontinuation or termination (i) shall adversely affect the rights of any participant in respect of any performance period which has already commenced or (ii) shall be effective without shareholder approval sufficient to continue to qualify amounts payable under the AICP to Covered Employees as performance-based compensation under Section 162(m) of the Code.

 

Payments made under the AICP will be taxable to the recipients thereof when paid, subject to income and wage tax withholding, and the Company or the affiliate of the Company which employs or employed the recipient will generally be entitled to a federal income tax deduction in the fiscal year for which the amount is paid.

 

Awards under the AICP are determined based on actual performance, so future actual awards (if any) cannot now be determined. The following table illustrates the amounts that were payable for the 2009 fiscal year under the AICP to each of the individuals and each of the groups listed below. Non-employee directors do not participate in the AICP.

2009 Plan Benefits

 

 

Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation of more than $1 million paid in any year (not including amounts deferred) to a corporation’s chief executive officer and to the four other most highly compensated executive officers (“covered employees”). However, compensation paid by the Company that is “qualified performance-based compensation” under Section 162(m) may be excepted from the $1 million limitation.

 

The affirmative vote of a majority of the votes cast at the Annual Meeting in person or by proxy by shareholders entitled to vote on the matter is required (i) to approve the amendment to the AICP and (ii) to approve the AICP for purposes of Section 162(m) of the Code.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE AMENDMENT TO THE COMPANY’S ANNUAL INCENTIVE COMPENSATION PLAN.

 

The Audit Committee of the Board of Directors of the Company has selected the accounting firm of PricewaterhouseCoopers LLP to serve as the independent registered public accounting firm of the Company with respect to its operations for the year 2010. While shareholder ratification of the appointment is not required, the Audit Committee has determined to seek input from the shareholders as part of the selection process. PricewaterhouseCoopers LLP has served as the Company’s independent registered public accounting firm for a number of years. If the appointment of PricewaterhouseCoopers LLP is not ratified by the shareholders, the matter of the appointment of an independent registered public accounting firm will be considered by the Audit Committee.

The firm of PricewaterhouseCoopers LLP audited our financial statements for the fiscal year ended December 31, 2009, and the Audit Committee plans to continue the services of this firm for the fiscal year ending December 31, 2010. A representative of PricewaterhouseCoopers LLP will be present at the Annual Meeting, will have an opportunity to make a statement if he or she desires to do so and will be available to respond to appropriate questions.

Fee Disclosure

 

The following table presents fees billed or expected to be billed for professional audit services rendered by PricewaterhouseCoopers LLP for the audit of the Company’s annual financial statements for the years ended December 31, 2009 and December 31, 2008, and fees billed for other services rendered by PricewaterhouseCoopers LLP during those periods.

 

 

 

 

Our Audit Committee approved, directly or through our pre-approval process, one hundred percent (100%) of the services provided by PricewaterhouseCoopers LLP during 2009, and concluded that the provision of such services by PricewaterhouseCoopers LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.

 

In April 2009 our Audit Committee pre-approved the engagement through June 30, 2010 of the independent auditors with respect to the following services: (i) services necessary to perform the audit or review of the Company’s financial statements; (ii) audit-related services such as employee benefit plan audits, due diligence related to mergers and acquisitions, accounting assistance and internal control reviews; and (iii) tax services including preparation and/or review of, and consultation and advice with respect to tax returns and reports; claims for tax refund; tax payment planning services; tax implications of changes in accounting methods and applications for approval of such changes; tax basis studies; tax implications of mergers and acquisitions; tax issues relating to payroll; tax issues relating to employee benefit plans; requests for technical advice from tax authorities and tax audits and appeals (not including representation before a tax court, district court or federal court of claims or a comparable state or local court). In addition, the Chairman of the Audit Committee has been delegated the authority by the Audit Committee to pre-approve the engagement of the independent auditors for services not covered by the above authority. All such pre-approvals must be reported to the Audit Committee at the next committee meeting.

 

The affirmative vote of a majority of the votes cast at the Annual Meeting in person or by proxy by shareholders entitled to vote on the matter is required to ratify the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm of the Company.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.

 

In compliance with the requirements of the New York Stock Exchange (NYSE), the Audit Committee has a formal written charter approved by the Board of Directors, a copy of which is available on our website under the heading “Governance” ( www.energen.com ). In connection with the performance of its responsibility under its charter, the Audit Committee has:

 

 

The Audit Committee has also considered whether the independent public accountants’ provision of non-audit services to the Company is compatible with maintaining their independence.

 

 

 

 

As of February 26, 2010, our Directors and executive officers beneficially owned shares of our common stock as described in the table below. Beneficial ownership includes shares that each person has the right to acquire within sixty (60) days of February 26, 2010. Except as we have noted below, each individual listed below has sole voting power and sole investment power with respect to shares they beneficially own. The final

column indicates common stock share equivalents held under the Energen Corporation Deferred Compensation Plan as of February 26, 2010.

 

 

 

 

The Officers Review Committee (“ORC”) of the Board of Directors oversees and administers the Company’s executive compensation program. The ORC establishes the salaries and other compensation of the executive officers of the Company, including the Chairman and CEO, the CFO, and other executive officers named in the Summary Compensation Table (sometimes referred to as the “named executive officers”). Each member of the ORC is an independent director.

 

The Company’s executive compensation program is designed to serve the Company and its shareholders by aligning executive compensation with shareholder interests and by encouraging and rewarding management initiatives that will benefit the Company and its shareholders, customers, and employees over the long-term. Specifically, the executive compensation program seeks to:

 

 

The Company’s executive compensation program includes salary, annual cash incentive awards, long-term equity based incentive opportunities, retirement benefits and change in control related severance compensation. The ORC believes that each of these components is a factor in the attraction, retention and motivation of qualified executives. The annual cash and long-term equity incentives link each executive’s compensation to corporate performance, with the annual cash incentives keyed to short-term financial and operational objectives and the long-term equity incentives providing alignment with shareholder returns.

 

The combination of salary, short-term cash and long-term equity incentives is intended to compensate Company executives at approximately the 50th percentile of the market when the Company performs at a target level, to provide additional compensation for superior Company performance, and less compensation for below target Company performance. The ORC considers compensation that approximates the market’s 50th percentile to be a competitive level of compensation. Target performance represents the performance expectations of the Committee as measured by the performance metrics set by the Committee for the Annual Incentive Compensation Plan. The allocation between the various elements of the compensation package is intended to emphasize incentive compensation while remaining in line with market allocations for similar positions in comparable companies. At target performance levels, a majority of the compensation package is represented by incentive compensation and a majority of the incentive compensation is represented by long-term equity incentive compensation. The allocation to incentive compensation increases with position seniority.

 

In evaluating compensation, the ORC receives and considers information and recommendations from the CEO and the Vice President of Human Resources. On an annual basis the ORC meets with the CEO to discuss his performance and the CEO provides the ORC with his evaluation of the performance of the other executive officers in connection with the annual compensation review of those officers.

 

The ORC also reviews and considers reports and analysis provided by its executive compensation consultant, Towers Perrin. Towers Perrin is engaged by the Company at the direction of the ORC. Management meets with Towers Perrin representatives and participates in most meetings between Towers Perrin and the ORC.

 

Towers Perrin provides a range of services to the ORC, including competitive assessments of the Company’s executive compensation levels and practices relative to relevant executive labor markets and other assignments as requested by the ORC. Specifically, with respect to 2009 executive compensation, Towers Perrin assisted the ORC and the Company in the following areas:

 

 

Towers Perrin does not make specific recommendations on individual pay levels, but rather provides competitive data for review and use by the ORC and Company. The Company’s CEO and Vice President — Human Resources play a significant role in providing input and recommendations to the ORC in evaluating and discussing data and analysis prepared by Towers Perrin.

 

The Committee uses the Towers Perrin provided data and analysis for general reference purposes. The Towers Perrin energy services data base includes approximately 100 companies and its general industry data base includes over 800 companies. During fall 2009 in preparation for the Committee’s 2010 compensation review, Towers Perrin utilized compensation data and analysis from five data bases: (1) Custom Peer Group — 29 companies representing a mix of oil and gas, diversified companies with regulated gas operations, and pure-play gas utility companies selected to approximate Energen’s current business mix; (2) Utility Industry — 57 utility focused companies from Towers Perrin’s 2009 Energy Services data base; (3) Oil & Gas — 18 companies from Towers Perrin’s 2009 Oil & Gas Compensation Survey; (4) Energy Sector — 84 companies from Mercer’s 2009 Energy Sector total compensation Survey; and (5) Broader General Industry — general industry data from the 2009 Towers Perrin Executive Compensation data base. Companies included in the Custom Peer Group data base, Utility Industry data base, Oil & Gas data base, and the Energy Sector data base are listed on Appendix A. The ORC has not requested a listing of the companies in the Towers Perrin Executive Compensation data base.

 

Ownership Guidelines.   The Company has the following suggested stock ownership guidelines for officers: CEO and Chairman (McManus) -5 times base salary; CFO (Porter), COOs (Richardson and Reynolds) and General Counsel (Woodruff) — 3 times base salary. The Company’s other officers have ownership guidelines of 1 or 2 times base salary depending on position. For purposes of the guidelines, stock ownership includes (1) shares owned directly by the executive and immediate family members, (2) share holdings in the Company’s 401(k) plan, (3) deferred compensation shares and (4) unvested restricted stock. As of December 31, 2009, each of our named executive officers, except for Mr. Porter, maintained ownership exceeding these suggested levels. Mr. Porter’s ownership equaled 2.8 times base salary as of December 31, 2009. The guidelines have not been a factor in the ORC’s recent compensation decisions.

 

Company Performance.   The Company’s above target 2009 financial and operational results were significant factors in the ORC’s evaluation and review of the Company’s leadership and compensation program. During 2009, the Company generated net income of $256 million and earnings per diluted share of $3.57. The Company also declared its twenty-seventh consecutive annual dividend increase with 2009 dividends reflecting a 4.2% increase over the prior year. The January 2010 payouts of cash bonuses earned during 2009 under the Annual Incentive Compensation Plan reflect the Company’s earnings per share results and the performance of its subsidiaries as described below. The January 2010 payouts of performance shares under the 1997 Stock Incentive Plan earned during the award period January 1, 2006 to December 31, 2009 reflect the Company’s slightly below target annualized four year total shareholder return performance of 6.3% per year, as described below.

 

Salary.   As discussed above, the ORC attempts to provide competitive salaries. With respect to 2010 salaries, the ORC reviewed competitive salary data for each position. Competitive salary data was intended to approximate the median salary of similar positions with comparable companies. In approving salary adjustments, the ORC considered the competitive salary data, recommendations from the CEO and the Vice President of Human Resources, internal comparability considerations and the executive’s years of experience.

 

The differences in amounts of compensation awarded to the named executive officers reflect differences in the competitive market data for the positions held by the executives as well as internal comparability. From an internal comparability perspective, Mr. McManus holds the position with the greatest corporate responsibility, thus resulting in greater compensation as compared to the other named officers. Each of the named officers has many years of service with the Company, although Mr. McManus and Mr. Porter are relatively new to their positions, resulting in lower 2009 salaries than would likely have been paid to them if they had been in their respective positions for several years.

Mr. McManus has served as the Company’s President and Chief Executive officer since July 2007. Effective January 1, 2010, Mr. McManus’s salary was increased to $693,000 reflecting a market adjustment consistent with the policies discussed above.

 

Annual Incentive Compensation.   In order to link compensation to the Company’s annual objectives, officers are eligible each year for cash incentive awards under the Annual Incentive Compensation Plan. Awards are based upon attaining performance objectives approved by the ORC. Assuming the performance objectives are met, the incentive award is based upon a percentage of the salary earned by the participant during the performance year. The ORC authorizes target awards and performance objectives for each performance period. The Annual Incentive Compensation Plan is designed so that all annual incentive compensation paid to executive officers will be deductible by us for federal income tax purposes.

 

For 2009, determination of earned annual cash incentives was calculated by applying company performance factors to target incentive opportunities. The target incentive opportunities are set each year as a percentage of base salaries. For 2009, Mr. McManus had an incentive opportunity at target of 100% of base salary; Mr. Porter, 50%; Mr. Richardson 70%; Mr. Reynolds and Mr. Woodruff 45%.

 

The applicable portions of target incentive opportunities subject to the various performance factors were as follows:

 

 

The Energen, Energen Resources and Alabama Gas performance factors as well as actual 2009 results were as follows:

 

 

If Energen had failed to meet threshold performance, no incentives would have been paid. If Energen Resources or Alabama Gas had failed to meet net income threshold performance, then no incentive would have been paid for that portion of the incentive opportunity applicable to its respective performance.

The performance criteria and 2009 actual results were as follows:

 

 

 

 

Long-Term Incentive Compensation.   The 1997 Stock Incentive Plan is intended to provide officer compensation aligned with long-term company performance and increases in shareholder value. It provides for the grant of stock options, restricted stock and performance shares. The ORC routinely makes awards in January, although it retains the authority to make awards at other times of the year. During summer 2009 it made a Restricted Stock grant to a newly hired officer.

 

Stock Options.   The ORC uses stock options as the primary vehicle for delivering long-term incentives. The stock option provisions of the plan provide for the grant of non-qualified stock options and stock appreciation rights or a combination thereof to officers and key employees, all as determined by the ORC. The Company’s stock options typically vest ratably over three years and expire after 10 years. The ORC has not placed performance conditions, other than employment vesting periods, on grants of stock options as it believes that the option itself is performance based. If an option includes stock appreciation rights, then the optionee may elect to cancel all or any portion of the option then subject to exercise, in which event our obligation in respect of such option may be discharged by payment of an amount in cash equal to the excess, if any, of the fair market value of the shares of common stock subject to such cancellation over the option exercise price for such shares.

 

Restricted Stock.   The plan also provides for the grant of restricted stock. No shares of restricted stock may be sold or pledged until the restrictions on such shares have lapsed or have been removed. The ORC establishes as to each award of restricted stock the terms and conditions upon which the restrictions shall lapse, which terms and conditions may include a required period of service or individual or corporate performance conditions. As noted above, during 2009 the ORC made one grant of restricted shares to a newly hired officer.

 

Performance Shares.   A performance share is the value equivalent of one share of our common stock. An award of performance shares becomes payable if the ORC determines that all conditions of payment have been satisfied at the end of the applicable award period. The 2006 grant for a four-year performance award period ending December 31, 2009 paid out in January 2010 as described below. There are currently no outstanding performance share grants.

The performance condition applicable to the 2006 grant provided for payment of the award based on the Company’s percentile ranking with respect to total shareholder return among a comparison group of companies (listed on Appendix A to this proxy statement) as measured for the award period. For purposes of calculating “total shareholder return,” the stock prices for the Company and the peer group were based on the average of the daily closing prices for a share of stock for 20 trading days. The beginning price was determined based on the 20 trading days ending on the last trading day prior to commencement of the award period. The ending price was determined based on the 20 trading days ending on the last day of the award period. The following schedule indicates threshold, target and maximum performance objectives and payouts for the 2006 performance share award grant.

 

Four Year Award Period ending December 31, 2009
(Actual Result for the January 1, 2006 — December 31, 2009 Award Period was 49.5 percentile with a
97% of target payout)

 

 

Discretionary Authority Applicable to Incentive Awards.   The Annual Incentive Compensation Plan provides the ORC with the discretion to decrease, but not increase, an earned incentive by up to 25%. This allows the ORC to reduce an individual payout for any reason including poor individual performance. The ORC’s negative discretion does not apply to plans other than the Annual Incentive Compensation Plan. Such discretion was not utilized with respect to 2009 payments.

 

In addition to bonuses paid under the Annual Incentive Compensation Plan, the Board of Directors has the inherent authority to, in its absolute discretion, award cash bonuses to such employees and in such amounts as it determines. Such discretion has not been exercised in recent years. The deductibility of individual bonuses paid outside of the Annual Incentive Compensation Plan will depend on the specific circumstances.

 

Under the 1997 Stock Incentive plan, the ORC has the discretion to accelerate the vesting of stock options and restricted stock and may also exercise discretion to allow a terminating employee to remain eligible for payout of previously granted performance shares. Such discretion has not been exercised in recent years.

 

1997 Deferred Compensation Plan.   The Company also provides a program which allows our directors and officers to defer receipt of compensation. Amounts deferred by a participant under the Deferred Compensation Plan are credited to one of two separate accounts maintained for a participant, a Company stock account or an investment account. The value of a participant’s Company stock account tracks the performance of our common stock, including reinvestment of dividends. At distribution, the participant’s Company stock account is payable in the form of shares of Company common stock. The value of a participant’s investment account tracks the performance of selected mutual funds offered by The Vanguard Group, Inc. At distribution, the participant’s investment account is payable in cash. The Deferred Compensation Plan is primarily designed as a financial planning and savings tool for participants. It does, however, include a Company contribution provision for officers which mirrors the Company’s match and ESOP contribution provisions of the Company’s generally available Employee Savings Plan. The Company has established trusts and has funded the trusts, and presently plans to continue funding the trusts, in a manner that generally tracks participants’ accounts under the Deferred Compensation Plan. Although there is generally no requirement that the trusts be so funded or invested, if a change in control of the Company occurs, the trusts must be funded in an amount equal to the aggregate value of the participants’ accounts at the time of the change of control. While intended for payment of benefits under the Deferred Compensation Plan, the trusts’ assets remain subject to the claims of our creditors.

Retirement Income Plan and Retirement Supplement Agreements.   The Energen Corporation Retirement Income Plan, a defined benefit plan, covers our officers along with substantially all of our salaried employees and members of two of our three bargaining units. Our officers receive benefits under the plan based on years of service at retirement and on “Final Earnings,” the average base compensation for the highest sixty consecutive months out of the final 120 months of employment. (Average base compensation includes base salary only, and does not include bonus payments, payments in the form of contributions to other benefit plans or any other form of payment such as annual or long-term incentives.) Normal or delayed retirement benefits are payable upon retirement on the first day of any month following attainment of age 65 and continuing for life, subject to an annual cost-of-living increase of up to three percent. Section 415 of the Internal Revenue Code imposes limits on benefits payable to an employee under the plan.

 

We have entered into Executive Retirement Supplement Agreements (“Supplemental Agreements”) with certain officers, including each of the named executive officers. Each Supplemental Agreement provides that the employee will receive a supplemental retirement benefit equal to the difference between 60% of the employee’s monthly compensation and the employee’s monthly retirement benefit under the Retirement Income Plan (including social security benefit). An officer’s compensation will be determined based on a formula taking into account the average of the highest 36 consecutive months of base salary during the five years prior to retirement plus the average of the three highest annual incentive awards for the ten full fiscal years prior to the earlier of (1) retirement or (2) the officer’s 61st birthday.

 

Each of our named executive officers has sufficient service with the Company to have earned vested benefits under the Retirement Income Plan and the Supplemental Agreements, and the benefits do not increase or accelerate upon a change in control. Both the Retirement Income Plan and the Supplemental Agreements provide annuity and lump sum payment options.

 

Severance Compensation Agreements and Change in Control.   We have entered into Severance Compensation Agreements with certain officers and key employees including Messrs. McManus, Porter, Richardson, Reynolds, and Woodruff. We designed the agreements to retain the executives and provide continuity of management in the event of any actual or threatened change in control of the Company. Each such agreement provides that if, during a base period following the occurrence of a change in control of the Company the employee’s employment is terminated in a qualified termination, then we will pay the employee an amount equal to a percentage of the employee’s (a) annual base salary in effect immediately prior to the change in control, plus (b) the employee’s highest annual cash bonus compensation for the three fiscal years immediately prior to the fiscal year during which the change in control occurs.

 

Our Severance Compensation Agreements define a “change in control” as any of the following events:

 

 

 

 

In addition, transactions involving the transfer of 80 percent or more of the voting securities or substantially all the assets of a subsidiary would constitute a change in control for the officers of that subsidiary. If the subsidiary is the Company’s largest subsidiary (currently Energen Resources Corporation), then such a transaction is also a change in control for the officers of Energen Corporation.

 

For purposes of the agreements, (1) the term “qualified termination” means a termination (a) by the Company other than for cause, (b) by the employee for good reason or (c) by written agreement to such effect

between the employee and the Company, (2) the term “cause” generally means failure to substantially perform duties, misconduct injurious to the Company or conviction of a felony, and (3) the term “good reason” generally means a material reduction in the position, duties, responsibilities, status or benefits of the employee’s job.

 

Continuity of management and retention during transition periods is encouraged by providing severance benefits in the event of loss of employment following a change in control. The percentage payable and base period varies by executive and ranges from 100% with a one year base period to 300% with a three year base period. The 100%, 200% and 300% multiples reflect consideration of the executive’s level of corporate responsibility, specialized skills, and availability of other job opportunities. A higher multiple reflects a higher importance of retention. Thus, officers with higher levels of corporate responsibility or specialized skill or knowledge have higher multiples. Officers who, due to senior responsibilities or specialized skills, may have fewer alternative employment opportunities also have higher multiples to provide compensation during a longer job search. All named officers have a 300% multiple. The severance compensation agreements cover a three-year base period and also provide the continuance of certain insurance and other employee benefits for a period of twenty-four months following any such termination of employment. Agreements entered into in 2007 and earlier, which include the agreements with Messrs. McManus, Porter, Richardson, Reynolds and Woodruff, include a tax gross up provision that provides that if the executive receives compensation that would be subject to the tax imposed by Section 4999 of the Internal Revenue Code, the executive shall be entitled to receive an additional payment in an amount necessary to put the executive in the same after-tax position as if such tax had not been imposed unless the tax would not apply if the payments under the severance compensation agreement were reduced by up to 10% of the amount subject to the tax, in which case such a reduction is made. The only new agreement that has been entered into since 2007 does not include a tax gross up provision and the ORC does not expect to include such a provision in future agreements.

 

The Company’s 1997 Stock Incentive Plan also includes change in control provisions. In most instances of a change in control, in the case of awards granted prior to 2010, unvested stock options vest, restrictions on restricted shares lapse and performance measurement and payment of performance shares are accelerated. The change in control provisions are not applicable to awards granted in 2010 and later and a change in control will not result in accelerated vesting unless it results in an involuntary termination of employment.

COMPENSATION COMMITTEE REPORT

 

The Officers Review Committee has reviewed and discussed the Compensation Discussion and Analysis with management and based on that review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

Officers Review Committee:
Julian W. Banton, Chair
James S. M. French
T. Michael Goodrich
Stephen A. Snider

 

The following table sets forth the information required by Item 402 of Regulation S-K promulgated by the Securities and Exchange Commission. The amounts shown represent the compensation paid to our named executive officers for each fiscal year noted in the table, for services rendered to us. For a more complete discussion of the elements of compensation included in this table, please refer to the discussion reflected in “Compensation Discussion and Analysis” beginning on page 24 of this proxy statement.

 

 

 

 

 

 

 

The following table sets forth information with respect to plan-based stock option grants under the 1997 Stock Incentive Plan and incentive compensation awards under the Annual Incentive Compensation Plan, in each case to our named executive officers. For a more complete discussion of the awards under the 1997 Stock Incentive Plan and the Annual Incentive Compensation Plan, please refer to the discussion of these plans contained in “Compensation Discussion and Analysis,” beginning on page 24 of this proxy statement.

 

 

 

 

The following table sets forth information with respect to outstanding equity awards held by our named executive officers as of December 31, 2009. This table includes unexercised and unvested option awards, unvested restricted stock awards and performance shares with performance conditions that have not yet been satisfied. Each equity grant is shown separately for each named executive officer. The vesting schedule for each grant is shown following this table. The market value of the stock awards is based on the closing market price of Company common stock as of December 31, 2009, which was $46.80 per share. For additional information about the outstanding equity awards, see the description of long-term incentive compensation in “Compensation Discussion & Analysis” beginning on page 24.