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
(Amendment No. )
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Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
MDU RESOURCES GROUP, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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| MDU Resources Group, Inc. Proxy Statement |
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| 2007 Notice of Annual Meeting |
| and Proxy Statement |
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|_____________________________________________________________________________|
[LOGO]
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1200 West Century Avenue Terry D. Hildestad
President and
Chief Executive Officer
Mailing Address:
P.O. Box 5650
Bismarck, ND 58506-5650
(701) 530-1000
March 8, 2007
To Our Stockholders:
Please join us for the 2007 Annual Meeting of Stockholders. The meeting
will be held on Tuesday, April 24, 2007, at 11:00 a.m., Central Daylight Savings
Time, at 909 Airport Road, Bismarck, North Dakota.
The formal matters are described in the accompanying Notice of Annual
Meeting of Stockholders and Proxy Statement. We also will have a brief report on
current matters of interest. Lunch will be served following the meeting.
We were pleased with the stockholder response for the 2006 Annual Meeting
at which 90 percent of the common stock was represented in person or by proxy.
We hope for an even greater representation at the 2007 meeting.
You may vote your shares by telephone, by the internet or by returning the
enclosed letter proxy. Representation of your shares at the meeting is very
important. We urge you to submit your proxy promptly by one of the three
methods.
I hope you will find it possible to attend the meeting.
Sincerely yours,
Terry D. Hildestad
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MDU RESOURCES GROUP, INC.
1200 West Century Avenue
Mailing Address:
P.O. Box 5650
Bismarck, ND 58506-5650
(701) 530-1000
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 24, 2007
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March 8, 2007
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of MDU
Resources Group, Inc. will be held at 909 Airport Road, Bismarck, North Dakota,
on Tuesday, April 24, 2007, at 11:00 a.m., Central Daylight Savings Time, for
the following purposes:
(1) To elect four directors to three year terms;
(2) To increase the authorized shares of common stock from 250,000,000 to
500,000,000;
(3) To declassify our board of directors;
(4) To ratify the appointment of Deloitte & Touche LLP as our independent
auditors for 2007;
(5) To act upon a stockholder proposal requesting a sustainability report;
and
(6) To transact any other business that may properly come before the
meeting or any adjournment or adjournments thereof.
The board of directors has fixed the close of business on February 26,
2007 as the record date for the determination of common stockholders who will be
entitled to notice of, and to vote at, the meeting.
All stockholders who find it convenient to do so are cordially invited and
urged to attend the meeting in person. Registered stockholders will receive a
request for admission ticket(s) with their proxy card that can be completed and
returned to us postage-free. Stockholders whose shares are held in the name of a
bank or broker will not receive a request for admission ticket(s). They should,
instead, (1) call (701) 530-1000 to request an admission ticket(s), (2) come to
the registration table at the annual meeting with a statement from their bank or
broker showing proof of stock ownership as of February 26, 2007 and (3) present
their admission ticket(s) and photo identification, such as a driver's license.
We look forward to seeing you.
By order of the Board of Directors,
Paul K. Sandness
Secretary
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TABLE OF CONTENTS
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Page
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Notice of Annual Meeting of Stockholders
Proxy Statement 1
Voting Information 1
Item 1. Election of Directors 4
Director Nominees for Three Year Term 4
Continuing Incumbent Directors 6
Director Terms Expiring in 2008 6
Director Terms Expiring in 2009 7
Item 2. Increase in Authorized Common Stock 9
Item 3. Declassification of Board of Directors 10
Item 4. Ratification of Independent Auditors 12
Accounting and Auditing Matters 12
Item 5. Stockholder Proposal Requesting Sustainability Report 14
Executive Compensation 18
Compensation Discussion and Analysis 18
Compensation Committee Report 42
Summary Compensation Table for 2006 43
Grants of Plan-Based Awards in 2006 45
Outstanding Equity Awards at Fiscal Year-End 2006 50
Option Exercises and Stock Vested during 2006 51
Pension Benefits for 2006 52
Nonqualified Deferred Compensation for 2006 57
Potential Payments upon Termination or Change of Control 58
Director Compensation for 2006 67
Information Concerning Executive Officers 69
Security Ownership 73
Related Person Disclosure 74
Corporate Governance 75
Audit Committee Report 79
Section 16(a) Beneficial Ownership Reporting Compliance 81
Other Business 82
Shared Address Stockholders 82
2008 Annual Meeting of Stockholders 82
Exhibit A - Resolution of Board of Directors on Increase A-1
in Authorized Common Stock
Exhibit B - Resolution of Board of Directors on Declassification of Board B-1
Exhibit C - Statement of Policy on Director Independence C-1
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PROXY STATEMENT
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The board of directors of MDU Resources Group, Inc. is furnishing this
proxy statement beginning March 8, 2007 to solicit your proxy for use at our
annual meeting of stockholders on April 24, 2007.
We will pay the cost of soliciting your proxy and reimburse brokers and
others for forwarding proxy material to you. Georgeson Inc. additionally will
solicit proxies for approximately $7,500 plus out-of-pocket expenses.
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VOTING INFORMATION
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Who may vote? You may vote if you owned shares of our common stock at the
close of business on February 26, 2007. You may vote each share that you owned
on that date on each matter presented at the meeting. As of February 26, 2007,
we had [ ] shares outstanding entitled to one vote per share.
What am I voting on? You are voting on:
o the election of four directors for three year terms each
o the increase in the number of authorized shares of common stock
from 250,000,000 to 500,000,000
o the declassification of our board of directors
o the ratification of Deloitte & Touche LLP as our independent
auditors for 2007
o a stockholder proposal requesting a sustainability report and
o any other business a stockholder properly brings before the
meeting.
What vote is required to pass an item of business? A majority of our
outstanding shares of common stock entitled to vote must be present in person or
represented by proxy to hold the meeting.
If you hold shares through an account with a bank or broker, the bank or
broker may vote your shares on certain matters even if you do not provide voting
instructions. Brokerage firms have the authority under the New York Stock
Exchange rules to vote shares on routine matters for which their customers do
not provide voting instructions. The election of directors and the
ratification of Deloitte & Touche LLP as the Company's independent auditors for
2007 are considered routine matters. When a proposal is not routine and the
brokerage firm has not received voting instructions from its customers, the
brokerage firm cannot vote the shares on that proposal. Those shares are
considered "broker non-votes."
Item 1 - Election of Directors
------ ---------------------
A plurality of votes of the common stock entitled to vote and present in
person or represented by proxy is required to elect a director. In the election
of directors, you may vote for the director or withhold your vote. Withheld
votes will be excluded from the vote and will have no effect on the outcome. If
any nominee becomes unavailable for any reason, or if a vacancy should occur
before the election, which we do not anticipate, the proxies will vote your
shares for another person in their discretion.
We amended our corporate governance guidelines in February 2006 in
connection with the election of directors. In an uncontested election of
directors, our corporate governance guidelines require any nominee for director
who receives a greater number of votes "withheld" from his or her election than
votes "for" his or her election to promptly tender his or her resignation to the
chairman of the board following certification of the stockholder vote. The
nominating and governance committee will then recommend to the board of
directors whether to accept or reject the tendered resignation.
Item 2 - Increase in Authorized Number of Shares of Common Stock
------ -------------------------------------------------------
In order to increase the number of authorized shares of common stock from
250,000,000 to 500,000,000, a majority of the outstanding shares of common stock
must vote "for" the increase. Abstentions and broker non-votes will count as
votes "against" the increase.
Item 3 - Declassification of Board of Directors
------ --------------------------------------
In order to declassify our board of directors, a majority of the
outstanding shares of common stock must vote "for" declassification. Abstentions
and broker non-votes will count as votes "against" declassification.
Item 4 - Ratification of Deloitte & Touche LLP as Independent Auditors for
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2007
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Ratification of the appointment of Deloitte & Touche LLP as our independent
auditors for 2007 requires the affirmative vote of a majority of our common
stock present in person or represented by proxy at the meeting and entitled to
vote on the proposal. Abstentions will count as votes "against" the proposal.
Item 5 - Stockholder Proposal Requesting Sustainability Report
------ -----------------------------------------------------
Approval of the stockholder proposal requesting a sustainability report
requires an affirmative vote of a majority of our common stock present in person
or represented by proxy at the meeting and entitled to vote on the proposal.
Abstentions will count as votes "against" the proposal, and broker non-votes
will have no effect on the outcome.
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Unless you specify otherwise when you submit your proxy, the proxies will
vote your shares of common stock "for" proposals 1, 2, 3 and 4 and "against"
proposal 5.
How do I vote? There are three ways to vote by proxy:
o by calling the toll free telephone number on the proxy
o by using the internet or
o by returning the enclosed letter proxy in the envelope provided.
You may be able to vote by telephone or the internet if your shares are
held in the name of a bank or broker. Follow their instructions.
You may have to pay electronic access charges for internet voting.
Can I revoke my proxy? Yes. You can revoke your proxy by:
o filing written revocation with the corporate secretary before the
meeting
o filing a proxy bearing a later date with the corporate secretary
before the meeting or
o revoking your proxy at the meeting and voting in person.
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ITEM 1. ELECTION OF DIRECTORS
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Martin A. White retired on August 17, 2006. He had served as chairman of
our board since February 15, 2001 and chief executive officer since April 1,
1998. Robert L. Nance also retired from our board on August 17, 2006. Mr. Nance
had been a director since 1993 and was the chairman of the finance committee.
You will be voting on four directors to serve for a term of three years
each until 2010 or until their respective successors are elected. All nominees
are incumbent directors and nominated for reelection, except Mr. Hildestad who
was elected by the board of directors in August 2006 and is a nominee for
election for the first time. Your proxy holder will vote your shares for the
board's nominees unless you instruct otherwise. If a nominee is unable to serve
as a director, your proxy holder may vote for any substitute nominee proposed by
the board. Unless we specifically note below, no corporation or organization
named below is a subsidiary or other affiliate of ours. Information concerning
the nominees, including their ages, years of service as directors and business
experience, which each nominee has furnished to us, is as follows:
DIRECTOR NOMINEES FOR THREE YEAR TERM
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Terry D. Hildestad Director Since 2006
Age 57 Nominated for Term Expiring in 2010
[PHOTO]
Mr. Hildestad was elected President and Chief Executive Officer
and a Director of the Company effective August 17, 2006. He had
served as President and Chief Operating Officer from May 1, 2005
until August 17, 2006. Prior to that, he served as President and
Chief Executive Officer of our subsidiary, Knife River
Corporation, from 1993 until May 1, 2005. He additionally serves
as an executive officer and as chairman of the Company's
principal subsidiaries and of the Managing Committees of
Montana-Dakota Utilities Co. and Great Plains Natural Gas Co.
Dennis W. Johnson Director Since 2001
Age 57 Nominated for Term Expiring in 2010
[PHOTO]
Mr. Johnson is Chairman, Chief Executive Officer and President of
TMI Corporation, and Chairman and Chief Executive Officer of TMI
Systems Design Corporation, TMI Transport Corporation and TMI
Storage Systems Corporation, all of Dickinson, North Dakota,
manufacturers of casework and architectural woodwork. He has been
employed at TMI since 1974 serving as President or Chief
Executive Officer since 1982 and majority stockholder since 1985.
Mr. Johnson serves as President of the Dickinson City Commission.
He previously was a Director of the Federal Reserve Bank of
Minneapolis. He currently serves on the Audit Committee.
4
John L. Olson Director Since 1985
Age 67 Nominated for Term Expiring in 2010
[PHOTO]
Mr. Olson has been President and Chief Executive Officer of Blue
Rock Products Company and of Blue Rock Distributing Company, a
beverage bottling company and a distributing company,
respectively, in Sidney, Montana since 1965. He also is Chairman
of Admiral Beverage Corporation, Worland, Wyoming, and Ogden,
Utah; former Chairman and Director of the Foundation for
Community Care, Sidney, Montana; past Chairman and a member of
the Executive Committee of the University of Montana Foundation;
a Director of BlueCross BlueShield of Montana; and trustee for
Blue Rock Products Company Profit Sharing Trust, Sidney, Montana.
He currently serves on the Audit and Nominating and Governance
Committees.
John K. Wilson Director Since 2003
Age 52 Nominated for Term Expiring in 2010
[PHOTO]
Mr. Wilson has been President of Durham Resources, LLC, a
privately held financial management company, in Omaha, Nebraska
since 1994. He also serves as President of the Durham Foundation
and is a Director of Bridges Investment Fund, a mutual fund, the
Greater Omaha Chamber of Commerce and the Durham Western Heritage
Museum, all in Omaha. He additionally serves on the community
relations board of US Bank NA Omaha and is a governor of the
Joslyn Art Museum in Omaha. He previously was President of Great
Plains Energy Corp., a public utility holding company and an
affiliate of Durham Resources, LLC, from 1994 to July 1, 2000. He
also was Vice President of Great Plains Natural Gas Co., an
affiliate company of Durham Resources, LLC, until July 1, 2000.
Great Plains Energy Corp. and Great Plains Natural Gas Co. were
sold to the Company on July 1, 2000. He currently serves on the
Audit Committee.
The board of directors recommends a vote "for" each nominee.
A plurality of votes of the common stock entitled to vote and present in
person or represented by proxy is required to elect a director. "Withheld" votes
do not count in determining whether a director nominee receives a plurality of
votes.
In an uncontested election, any nominee for director who receives a greater
number of votes "withheld" from his or her election than votes "for" his or her
election is required to promptly tender his or her resignation to the chairman
of the board following certification of the stockholder vote. The nominating and
governance committee will then recommend to the board of directors whether to
accept or reject the tendered resignation.
5
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CONTINUING INCUMBENT DIRECTORS
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Information concerning our continuing incumbent directors, whose terms
expire in 2008 or 2009, including their ages, years of service as directors and
business experience which each director has furnished to us, is as follows:
DIRECTOR TERMS EXPIRING IN 2008
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Thomas Everist Director Since 1995
Age 57 Term Expires in 2008
[PHOTO]
Mr. Everist has served as President and Chairman of The Everist
Company, Sioux Falls, South Dakota, an aggregate, concrete and
asphalt production company, since April 15, 2002. He previously
was President and Chairman of L.G. Everist, Inc., Sioux Falls,
South Dakota, an aggregate production company, from 1987 to April
15, 2002. He also is Managing Member of South Maryland Creek
Ranch, LLC, a land development company and President of SMCR,
Inc., an investment company. He is a Director of Showplace Wood
Products, Sioux Falls, South Dakota, a custom cabinets
manufacturer; and a Director of Raven Industries, Inc., Sioux
Falls, South Dakota, a general manufacturer of electronics, sewn
products, flow controls and engineered films. He currently serves
on the Compensation Committee.
Karen B. Fagg Director Since 2005
Age 53 Term Expires in 2008
[PHOTO]
Ms. Fagg has been President since April 1, 1995 and majority
owner since June 2000 of HKM Engineering, Inc., Billings,
Montana, an engineering and physical science services firm. She
was employed with Mountain States Energy, Inc., Butte, Montana,
an environmental technology research and development company, as
Business Development Director and Vice President of Operations
from June 1976 through December 1988. Ms. Fagg also served a
four-year term as Director of the Montana Department of Natural
Resources and Conservation, Helena, Montana, from January 1989
through December 1992. From January 1993 through March 1995, she
served as Corporate Development Director for Mountain States
Energy, Inc. She serves on the Montana Board of Investments and
the Board of ZooMontana. Ms. Fagg is a member of the Board of
Trustees for Carroll College and for St. Vincent's Healthcare.
Ms. Fagg currently serves on the Compensation and Nominating and
Governance Committees.
Patricia L. Moss Director Since 2003
Age 53 Term Expires in 2008
[PHOTO]
Ms. Moss has been President, Chief Executive Officer and a
Director of Cascade Bancorp, a financial holding company, and
Bank of the Cascades, Bend, Oregon, since 1998. She also serves
as a Director of North Pacific
6
Products, Inc., a distributor of wood products, building
materials and agricultural commodities, the Oregon Investment
Fund Advisory Council, a state sponsored program to encourage the
growth of small businesses within Oregon, and Clear Choice Health
Plans, a ten-county health insurance company. She currently
serves on the Compensation Committee.
DIRECTOR TERMS EXPIRING IN 2009
-------------------------------
Richard H. Lewis Director Since 2005
Age 57 Term Expires in 2009
[PHOTO]
Mr. Lewis has been the Managing General Partner of Brakemaka
LLLP, a private investment partnership for managing family
investments, and President of the Lewis Family Foundation since
August 2004. He founded Prima Energy Corporation, a natural gas
and oil exploration and production company, in 1980 and served as
Chairman, President and Chief Executive Officer of the company
until its sale in July 2004. Mr. Lewis serves as Chairman of the
Board of Entre Pure Industries, Inc., a privately held company
involved in the purified water and ice business. He is past
President and a current Board member of the Colorado Oil and Gas
Association and serves as a Director of Colorado State Bank and
Trust. He currently serves on the Audit and Nominating and
Governance Committees.
Harry J. Pearce Director Since 1997
Age 64 Term Expires in 2009
[PHOTO]
Mr. Pearce was elected Chairman of the Board of the Company on
August 17, 2006. Prior to that, he served as Lead Director
effective February 15, 2001 and was Vice Chairman of the Board
from November 16, 2000 until February 15, 2001. Mr. Pearce was
named Chairman of the Board of Nortel Networks Corporation, a
telecommunications equipment manufacturer, on June 29, 2005. He
retired on December 19, 2003, as Chairman of Hughes Electronics
Corporation, a General Motors Corporation subsidiary and provider
of digital television entertainment, broadband satellite network,
and global video and data broadcasting. He had served as Chairman
since June 1, 2001. Mr. Pearce formerly was Vice Chairman and a
Director of General Motors Corporation, the world's largest
vehicle manufacturer, from January 1, 1996 to May 31, 2001. He is
a Director of Marriott International, Inc., a major hotel chain,
and is Chairman of The Marrow Foundation. He is a Director of the
Leukemia & Lymphoma Society Research Foundation, a Fellow of the
American College of Trial Lawyers, and a member of the
International Society of Barristers. He also serves on the Board
of Trustees of Northwestern University.
7
Sister Thomas Welder, Director Since 1988
O.S.B. Term Expires in 2009
Age 66
[PHOTO]
Sister Welder has been the President of the University of Mary,
Bismarck, North Dakota since 1978. She is a Director of St.
Alexius Medical Center of Bismarck, the Bismarck-Mandan
Development Association and the Missouri Slope Areawide United
Way. She also is a member of the North Dakota Higher Education
Roundtable and the Theodore Roosevelt Medora Founder's Society
and is a past member of the Bismarck-Mandan Area Chamber of
Commerce Board and the Consultant-Evaluator Corps for the North
Central Association of Colleges and Schools. She currently serves
on the Nominating and Governance Committee.
8
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ITEM 2. INCREASE IN AUTHORIZED COMMON STOCK
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Our capital stock consists of 252,000,000 authorized shares divided into
four classes:
o 500,000 shares of preferred stock with a par value of $100 per
share
o 1,000,000 shares of preferred stock A without par value
o 500,000 shares of preference stock without par value and
o 250,000,000 shares of common stock with a par value of $1.00 per
share.
We split our common stock three-for-two effective July 26, 2006. As of
February 26, 2007, we had issued and outstanding [ ] shares of common stock, and
we had reserved [ ] additional shares for issuance under our director, executive
and employee stock plans, a potential earn-out in connection with a prior
acquisition and our dividend reinvestment plan. Because of the limited number of
shares available to issue, our board of directors has unanimously approved and
voted to recommend that you approve an amendment to our restated certificate of
incorporation to increase our authorized common stock from 250,000,000 to
500,000,000 shares. There would be no change in the par value of $1.00 per
share. The board resolution including the proposed amendment to our restated
certificate of incorporation is included in exhibit "A" to this proxy statement.
The additional authorized shares would enable us to issue common stock to
raise capital funds expeditiously and economically for our ongoing operational
needs. We could use the shares for our director, executive and employee stock
plans and our dividend reinvestment plan, for possible acquisitions, stock
distributions or splits, or other corporate purposes. We would be able to issue
common stock without the delay and expense involved in obtaining stockholder
approval when we believe that such issuance is appropriate; however, we would be
required to obtain all necessary regulatory approvals prior to issuance of any
additional common stock. We have no present plans for issuance or use of the
proposed additional authorized common stock.
All newly authorized shares of common stock when issued would have the same
rights as the presently authorized shares, including the right to cast one vote
per share and to receive dividends when and to the extent we declare and pay
them. Company stockholders would have no preemptive rights with respect to the
issuance of the additional common stock.
Any issuance of additional shares of common stock would increase the
outstanding number of shares of common stock and dilute the percentage ownership
of existing stockholders. The dilutive effect of an issuance could discourage a
change of control by making it more difficult or costly. We are not aware of any
specific effort to obtain control of us, and we have no present intention of
using the proposed increase in authorized common stock to deter a change of
control.
9
None of our directors or officers has any interest, direct or indirect, in
the adoption of the proposed amendment except as a holder of our common stock.
We are not furnishing financial statements as we do not believe that they
are material for the exercise of prudent judgment regarding this proposal.
The board of directors recommends a vote "for" the proposal to increase our
authorized shares of common stock.
Approval requires the affirmative vote of a majority of all outstanding
common stock. Abstentions and broker non-votes will count as votes against this
proposal.
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ITEM 3. DECLASSIFICATION OF BOARD OF DIRECTORS
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Article THIRTEENTH of our restated certificate of incorporation, as
amended, provides for a classified board of directors. This means that our board
of directors is divided into three classes, as nearly equal in number as
possible, with members of each class serving staggered three-year terms. We
adopted this system for electing directors in 1985.
Our board of directors has approved and voted to recommend that you approve
an amendment to our restated certificate of incorporation to provide for a
declassified board of directors. This means that all directors would be elected
annually and serve one-year terms.
The board of directors has set the current number of directors at ten, and
this proposal would not change the present number of directors. Directors will
retain the authority to change the number of directors and to fill any vacancies
or newly-created directorships. However, any director elected to fill a vacancy
or a newly-created directorship would serve for a term expiring at the next
annual meeting.
Classified or staggered boards have been widely adopted and have a long
history in corporate law. Proponents of classified boards assert they promote
the independence of directors because directors elected for multi-year terms are
less subject to outside influence. Proponents of a staggered system for the
election of directors also believe it provides continuity and stability in the
management of the business and affairs of a company because a majority of
directors always have prior experience as directors of the company. Proponents
further assert that classified boards may enhance stockholder value by forcing
an entity seeking control of a target company to initiate arms-length
discussions with the board of the target company because the entity is unable to
replace the entire board in a single election.
On the other hand, some investors view classified boards as having the
effect of reducing the accountability of directors to stockholders because
classified boards limit the ability of stockholders to evaluate and elect all
directors on an annual basis. The election of directors is a primary means for
stockholders to influence corporate governance policies and to hold management
accountable for implementing those policies. In addition, opponents of
classified boards assert that a staggered structure for the election of
directors may discourage proxy
10
contests in which stockholders have an opportunity to vote for a competing slate
of nominees and therefore may erode stockholder value. A number of major
corporations have determined that, regardless of the merits of a classified
board, principles of good corporate governance dictate that all directors of a
corporation be elected annually.
The board of directors has considered carefully the advantages and
disadvantages of maintaining a classified board structure, and in the past
concluded that it would be in the best interests of the company and its
stockholders to maintain the classified board. This year, the company received a
stockholder proposal on declassification, and the board again gave due
consideration to the various arguments for and against a classified board and
consulted with internal and outside advisors. After this review, the board of
directors decided that it is an appropriate time to propose declassifying the
board. This determination by the board is in furtherance of our goal of ensuring
that our corporate governance policies maximize our accountability to
stockholders and allow stockholders the opportunity each year to register their
views on the performance of the board of directors.
The board of directors has approved the proposed amendment declassifying
the board of directors. If approved by the stockholders, we will amend our
restated certificate of incorporation to provide for the annual election of all
directors.
If our stockholders approve the amendment, the directors elected at this
annual meeting of stockholders in 2007 will, along with the directors elected at
the annual meetings of stockholders held in 2005 and 2006, serve their full
three-year terms. Beginning with the annual meeting of stockholders to be held
in 2008, each director whose term is ending will be elected annually and serve
until the next following annual meeting or until his or her earlier resignation
or termination from the board.
The board resolution including the proposed amendment to our restated
certificate of incorporation is included in exhibit B to this proxy statement.
We have shown the changes to the relevant sections of Article THIRTEENTH of the
restated certificate of incorporation resulting from the amendment. If approved,
the amendment will become effective upon filing with the Secretary of State of
the State of Delaware, which filing we would make promptly after the annual
meeting.
The board of directors recommends a vote "for" the proposal to amend our
restated certificate of incorporation to declassify our board of directors.
Approval requires the affirmative vote of a majority of all outstanding
stock. Abstentions and broker non-votes will count as votes against this
proposal.
11
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ITEM 4. RATIFICATION OF INDEPENDENT AUDITORS
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The audit committee at its February 2007 meeting appointed Deloitte &
Touche LLP as our independent auditors for fiscal year 2007. The board of
directors concurred with the audit committee's decision. Deloitte & Touche LLP
has served as our independent auditors since fiscal year 2002.
Although your ratification vote will not affect the appointment or
retention of Deloitte & Touche LLP for 2007, the audit committee will consider
your vote in determining its appointment of our independent auditors for the
next fiscal year. The audit committee, in appointing our independent auditors,
reserves the right, in its sole discretion, to change an appointment at any time
during a fiscal year if it determines that such a change would be in our best
interests.
A representative of Deloitte & Touche LLP will be present at the annual
meeting and will be available to respond to appropriate questions. We do not
anticipate that the representative will make a prepared statement at the
meeting; however, he or she will be free to do so if he or she chooses.
The board of directors recommends a vote "for" the ratification of
Deloitte & Touche LLP as our independent auditors for 2007.
Ratification of the appointment of Deloitte & Touche LLP as our independent
auditors for 2007 requires the affirmative vote of a majority of our common
stock present in person or represented by proxy at the meeting and entitled to
vote on the proposal. Abstentions will count as votes against this proposal.
--------------------------------------------------------------------------------
ACCOUNTING AND AUDITING MATTERS
--------------------------------------------------------------------------------
Fees
The following table summarizes the aggregate fees that our independent
auditors, Deloitte & Touche LLP, billed or are expected to bill us for
professional services rendered for 2006 and 2005:
12
----------------------------------------------------------------------------
2006 2005*
----------------------------------------------------------------------------
Audit Fees(a) $2,244,835 $1,831,013
----------------------------------------------------------------------------
Audit-Related Fees(b) 168,926 224,152
----------------------------------------------------------------------------
Tax Fees(c) 6,380 74,720
----------------------------------------------------------------------------
All Other Fees(d) 0 0
----------------------------------------------------------------------------
Total Fees $2,420,141 $2,129,885
----------------------------------------------------------------------------
Ratio of Tax and All Other Fees to Audit and 0.26% 3.66%
Audit-Related Fees
----------------------------------------------------------------------------
* The 2005 amounts were adjusted from amounts shown in the 2006 proxy statement
to reflect actual amounts.
(a) Audit fees for both 2006 and 2005 consisted of services rendered for the
audit of our annual financial statements; reviews of our quarterly
financial statements; comfort letters; statutory and regulatory audits; and
consents and other services related to Securities and Exchange Commission
matters.
(b) Audit-related fees for 2006 and 2005 consisted of services rendered for the
audit of our employee benefit plans; due diligence associated with mergers
and acquisitions; and consultation on accounting issues.
(c) Tax fees for 2006 are associated with property tax consulting services; tax
fees for 2005 consisted of services related to tax credit filings.
(d) No all other fees were incurred during 2006 or 2005.
Pre-Approval Policy
The audit committee pre-approved all services Deloitte & Touche LLP
performed in 2006 in accordance with the pre-approval policy and procedures the
audit committee adopted at its August 12, 2003 meeting. This policy is designed
to achieve the continued independence of Deloitte & Touche LLP and to assist in
our compliance with Sections 201 and 202 of the Sarbanes-Oxley Act of 2002 and
related rules of the Securities and Exchange Commission.
The policy defines the permitted services in each of the audit, audit-
related, tax and all other services categories as well as prohibited services.
The pre-approval policy requires management to submit annually for approval to
the audit committee a service plan describing the scope of work and anticipated
cost associated with each category of service. At each regular audit committee
meeting, management reports on services performed by Deloitte & Touche LLP and
the fees paid or accrued through the end of the quarter preceding the meeting.
Management may submit additional services contemplated to be performed before
the next scheduled audit committee meeting to the designated member of the audit
committee, Dennis W. Johnson, for approval. The designated member updates the
audit committee at the next regularly scheduled meeting regarding any services
that he approved during the interim period. At each regular audit committee
meeting, management may submit to the audit committee for approval a supplement
to the service plan containing any request for additional permitted services.
13
In addition, prior to approving any request for audit-related, tax or all
other services of more than $50,000, Deloitte & Touche LLP will provide a
statement setting forth the reasons why the rendering of the proposed services
does not compromise Deloitte & Touche LLP's independence. This description and
statement by Deloitte & Touche LLP may be incorporated into the service plan or
as an exhibit thereto or may be delivered in a separate written statement.
--------------------------------------------------------------------------------
ITEM 5. STOCKHOLDER PROPOSAL REQUESTING SUSTAINABILITY REPORT
--------------------------------------------------------------------------------
Calvert Asset Management has notified us that it intends to submit the
proposal set forth below for consideration at the annual meeting.
Calvert Resolution and Supporting Statement
-------------------------------------------
SUSTAINABILITY REPORT RESOLUTION
Whereas:
Investors increasingly seek disclosure of companies' social and
environmental practices in the belief that they impact
shareholder value. Many investors believe companies that are good
employers, environmental stewards, and corporate citizens are
more likely to generate incremental financial returns, be more
stable in turbulent economic and political conditions, and enjoy
long-term business success.
Mainstream financial companies are seeking tools to understand
the links between sustainability performance and capital markets.
According to research consultant Innovest, major investment firms
including ABN-AMRO, Schroders, T. Rowe Price, and Legg Mason
subscribe to information on companies' social and environmental
practices to help make investment decisions.
Sustainability refers to endeavors that meet present needs
without impairing the ability of future generations to meet their
own needs. It includes "encouraging long lasting social well
being in communities where [companies] operate, interacting with
different stakeholders (e.g. clients, suppliers, employees,
government, local communities, and non-governmental
organizations), and responding to their specific and evolving
needs, thereby securing a long-term 'license to operate,'
superior customer and employee loyalty, and ultimately superior
financial returns" (Dow Jones Sustainability Group).
Globally, approximately 1,500 companies produce reports on
sustainability issues (Association of Chartered Certified
Accountants, www.corporateregister.com), including more than half
of the global
14
Fortune 500 (KPMG International Survey of Corporate Responsibility
Reporting 2005).
MDU Resources Group competes internationally, and global
expectations regarding sustainability reporting are increasing.
The European Commission recommends corporate sustainability
reporting, and listed companies in Australia, South Africa and
France are required to provide investors with information on
their social and environmental performance.
Companies increasingly recognize that transparency and dialogue
about sustainability are elements of business success. For
example, Unilever's Chairman stated in a 2003 speech, "So when we
talk about corporate social responsibility, we don't see it as
something business "does" to society but as something that is
fundamental to everything we do. Not just philanthropy or
community investment, important though that is, but the impact of
our operations and products as well as the interaction we have
with the societies we serve."
RESOLVED: Shareholders request that the Board of Directors issue
a sustainability report to shareholders, at reasonable cost, and
omitting proprietary information, by December 31, 2007.
SUPPORTING STATEMENT
The report should include the company's definition of
sustainability, as well as a company-wide review of company
policies, practices, and metrics related to long-term social and
environmental sustainability.
We recommend that MDU Resources Group use the Global Reporting
Initiative's Sustainability Reporting Guidelines ("The
Guidelines") to prepare the report. The Global Reporting
Initiative (www.globalreporting.org) is an international
organization developed with representatives from the business,
environmental, human rights and labor communities. The Guidelines
provide guidance on report content, including performance on
direct economic impacts, environmental, labor practices and
decent work conditions, human rights, society, and product
responsibility. The Guidelines provide a flexible reporting
system that allows the omission of content that is not relevant
to company operations. Over 700 companies use or consult the
Guidelines for sustainability reporting, including
Anheuser-Busch, Cadbury Schweppes, Diageo, PepsiCo, and
SABMiller.
---------------------
Company Response
----------------
The board of directors recommends a vote "against" this proposal.
15
While there are a number of different definitions of sustainability, we
believe that sustainability means our ability to meet the needs of the present
without compromising the ability of the future generations to meet their own
needs.
We are committed to the conduct of business according to the highest
ethical standards, as reflected in our code of conduct and our code of ethics,
which are posted on our website.
Our code of ethics includes the following provisions:
Introduction
Among the many objectives of MDU Resources Group, Inc.,
its utility division and its subsidiaries, stands the
constant goal of serving the long-term interests of the
owners - our shareholders. In fulfilling this objective we
must fully respect the legitimate claims and rights of
customers, employees, regulators, the general public, and
others whose interests touch upon ours.
No "Quick Fix"...
Our long-term profitability can only be achieved
through fair, honest and intelligent decisions with respect
to all those with whom we deal. Considering this position,
we will not accept a "quick fix" at the expense of our
future well-being.
A Step Beyond...
Our company has always maintained a strong commitment
to the concept of corporate citizenship including the view
that companies as well as individuals must contribute to the
well-being of society. We accomplish this contribution
through the important services we provide but it extends far
beyond our basic products and services. Our corporate
citizenship must include active interest in the quality of
life enjoyed by our fellow employees and the citizens of the
many cities, towns and states we serve. These contributions
are further enhanced by conducting our business with
integrity.
In addition to these provisions, the codes cover other sustainability
issues including equal opportunity, compliance with laws, workplace safety, fair
competition and fair dealing. Further, the codes illustrate our involvement in
community activities and professional organizations.
In 1983, we established the MDU Resources Foundation to support
institutions, organizations and programs within the geographic area in which we
conduct business. The MDU Resources Foundation considers requests from health
and human services organizations, educational institutions, civic and community
activity organizations, cultural organizations and environmental organizations.
Information about the MDU Resources Foundation is on our website.
16
Our commitment to conducting our business with integrity includes
responsibly developing our earth's natural resources. All of our operating
business units are subject to a number of laws, rules and regulations that have
been put in place to protect the environment and are regulated by federal, state
and local agencies and governments. A guiding principle of our corporation is
environmental responsibility. We are dedicated to fulfilling that tenet.
We are committed to:
o Minimizing waste and maximizing resources.
o Supporting environmental laws and regulations that are based on
sound science and cost-effective technology.
o Meeting or surpassing all applicable environmental laws,
regulations and permit requirements.
An environmental statement is included on our website.
As evidenced in our codes and through the MDU Resources Foundation, our
company has a commitment towards sustainability. Our board of directors respects
our stockholders' interest in sustainability. However, our board believes that
the investment of human and financial resources that would be required to
produce a sustainability report based on the Sustainability Reporting Guidelines
of the Global Reporting Initiative, as requested in the Calvert proposal, would
not represent a necessary or prudent use of the stockholders' assets.
Therefore, the board of directors recommends a vote "against" this
proposal.
Approval requires the affirmative vote of a majority of our common stock
present in person or represented by proxy at the meeting and entitled to vote on
the proposal. Abstentions and broker non-votes will count as votes against this
proposal.
17
--------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMPENSATION DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
Introduction
------------
In this compensation discussion and analysis, we discuss our compensation
objectives, our decisions and the rationale behind those decisions relating to
2006 compensation for our named executive officers.
Objectives of our Compensation Program
--------------------------------------
We have a written executive compensation policy, which was last amended in
November 2006, for our Section 16 officers, including all our named executive
officers whom we discuss later in this compensation discussion and analysis. Our
policy has the following stated objectives
o recruit, motivate, reward and retain the high performing executive
talent required to create superior long-term total stockholder return
in comparison to our peer group
o reward executives for short-term performance as well as the growth in
enterprise value over the long-term
o provide a competitive package relative to industry-specific and
general industry comparisons and internal pay equity, as appropriate
and
o ensure effective utilization and development of talent by working in
concert with other management processes - for example, performance
appraisal, succession planning and management development.
Determination of Compensation
-----------------------------
How we structure compensation
-----------------------------
We pay our Section 16 officers a combination of base salary, annual cash
incentive and long-term equity-based incentive, in addition to providing income
for their retirement and other benefits. We pay base salaries in order to
provide executive officers with sufficient, regularly-paid income and to
attract, recruit and retain executives with the knowledge, skills and abilities
necessary to successfully execute their job duties and responsibilities. We
grant executives the opportunity to earn annual incentives in order to be
competitive from a total remuneration standpoint and to ensure focus on annual
financial and operating results. We provide executives
18
the opportunity to earn long-term compensation in order to be competitive from a
total remuneration standpoint and to ensure focus on stockholder return.
Each year, the compensation committee sets overall compensation targets for
each Section 16 officer, as well as individual targets for the three components
of compensation - base salary, annual incentive and long-term incentive.
The compensation committee structures the target levels of compensation to
enable us to retain and reward the executive officers that we believe are
critical to our long-term success. The compensation committee also structures
compensation to ensure that a significant portion of our executive officers'
opportunity is directly related to our stock performance and other factors that
directly and indirectly influence stockholder value. This includes tying
incentive compensation to both (i) total stockholder return, which reflects our
corporate performance relative to our performance graph peer group and (ii)
business unit or other operational goals.
Because our executive officers recommend to the compensation committee the
levels of achievement for our annual incentive compensation awards, the
compensation committee and the board of directors review the recommended levels
carefully before approving them. This is to ensure that the goals are set
sufficiently high to provide our executive officers with true stretch
performance goals.
In addition, commencing in 2006, we now limit the aggregate amount of
annual incentive compensation we will pay to all our executive officers to 20
percent of after tax earnings in excess of planned earnings. The 20 percent
limitation is measured at the major business unit level for business unit
executives and at the corporate level for corporate executives. As we discuss
later, the committee also established a requirement for minimum improvement in
the return on invested capital measures for incentive purposes to ensure that
return on invested capital equals or exceeds the weighted average cost of
capital.
If earned, incentive compensation, which consists of annual cash incentive
awards and three-year performance share awards under our Long-Term
Performance-Based Incentive Plan, makes up the greatest portion of our named
executive officers' total compensation. The following table shows the allocation
of total targeted compensation for 2006 among the individual components of base
salary, annual incentive and long-term incentive:
19
--------------------------------------------------------------------------------
Name % of Total % of Total % of Total
Target Target Target
Compensation Compensation Compensation
Allocated to Allocated to Allocated to
Base Salary Annual Incentive Long-Term
Incentive
--------------------------------------------------------------------------------
Martin A. White 30.0% 30.0% 40.0%
(former CEO)
--------------------------------------------------------------------------------
Terry D. Hildestad(1) (CEO) 34.7% 34.7% 30.6%
-------------------------------------------------
(COO) 32.8% 32.8% 34.4%
--------------------------------------------------------------------------------
William E. Schneider 41.6% 20.9% 37.5%
--------------------------------------------------------------------------------
Warren L. Robinson(2) - - -
(former CFO)
--------------------------------------------------------------------------------
Vernon A. Raile (CFO) 41.6% 20.9% 37.5%
--------------------------------------------------------------------------------
John K. Castleberry(1) (WBI(3) CEO) 47.4% 23.7% 28.9%
--------------------------------------------
(EVP - Admin.) 44.4% 22.2% 33.4%
--------------------------------------------------------------------------------
John G. Harp 44.4% 22.2% 33.4%
--------------------------------------------------------------------------------
(1) Mr. Hildestad's and Mr. Castleberry's percentages are annualized.
(2) Mr. Robinson received no incentive awards during 2006 due to his retirement.
(3) WBI Holdings, Inc. is a subsidiary.
The compensation committee believes incentive compensation comprising 50%
to 70% of total target compensation for the named executive officers is
appropriate because:
o these executive officers are in positions to drive corporate
performance
o results beneficial to stockholders will trigger incentive compensation
payments to these executive officers
o this compensation is "at risk" and earned only if financial results
warrant any payments and
o tying the majority of total target compensation to incentive payments
helps ensure focus on the incentive goals.
In order to reward long-term growth as well as short-term results, the
compensation committee establishes incentive targets that emphasize long-term
compensation as much as or more than short-term for all officer positions. The
annual incentive targets range from 10% to 100% of base salary and the long-term
incentive targets range from 15% to 133% of base salary, depending on the
executive's salary grade. Generally, our approach is to allocate a higher
percentage of total target compensation to the long-term incentive than to the
short-term incentive for our higher level executives, since they are in a better
position to influence our long-term performance.
Additionally, the long-term incentive, if earned, is paid in company common
stock. These awards, combined with our stock ownership guidelines, which we
discuss later, promote ownership of our stock by the named executive officers.
The compensation committee believes
20
that, as stockholders, the named executive officers will be motivated to
consistently deliver financial results that build wealth for all stockholders
over the long-term.
How we determined 2006 compensation
-----------------------------------
The compensation committee, in conjunction with the board of directors,
determined all compensation for each named executive officer for 2006.
The compensation committee determines our named executive officers' annual
salaries and annual and long-term incentive targets by reference to salary
grades. Each salary grade has a minimum, median and maximum annual salary level
as well as annual and long-term incentive target levels, which are expressed as
a percentage of the individual's actual annual salary. Named executive officers
generally are placed into a salary grade based on historical classification of
their positions; however, the compensation committee may place an executive into
a different salary grade if it determines that the executive's position,
responsibilities or performance warrant the change. Also, the committee
considers, upon recommendation from the chief executive officer, a position's
relative value. A position's relative value is determined by considering
o participation on our management policy committee, which is the body
responsible for setting enterprise-wide operating and management
policies and procedures as well as the company's strategic direction
o the position's responsibilities relative to the company's total
earnings, use of invested capital, and the stable generation of
earnings and cash flows and
o the position's impact on key strategic initiatives.
Our historical classifications have been:
----------------------------------------------------------------------------
President and CEO Grade K Martin A. White
Terry D. Hildestad
----------------------------------------------------------------------------
Executive Vice President, Treasurer and CFO Vernon A. Raile
Warren L. Robinson
Grade J
President and CEO of
WBI Holdings, Inc. and John K. Castleberry
Knife River Corporation William E. Schneider
----------------------------------------------------------------------------
President and CEO of Grade I John G. Harp
MDU Construction Services Group, Inc.
----------------------------------------------------------------------------
For 2006, all our named executive officers were placed in their salary
grades based on historical classification of their positions. In addition, a new
position, executive vice president - administration, for Mr. Castleberry, was
assigned to a salary grade - "I".
21
At least every two years the compensation committee uses an outside
consulting firm to assess the competitive pay levels for base salary and
incentive compensation for each Section 16 officer position. The assessment
includes identifying material changes to Section 16 officer jobs, updating
compensation information, gathering and analyzing relevant general and
industry-specific survey data and updating the base salary structure. In 2005,
Towers Perrin, a nationally recognized consulting firm, assisted the committee
in establishing competitive 2006 compensation targets for our Section 16
officers. Towers Perrin assessed competitive pay levels for base salary, total
annual cash, which is base salary plus annual bonus, and total direct
compensation, which is the sum of total annual cash and the expected value of
long-term incentives. Towers Perrin also prepared an updated salary grade
structure based on the above competitive analyses.
Towers Perrin identified overall competitive compensation targets as well
as individual targets for salaries, annual incentives and long-term incentives
for each Section 16 officer position. They compared our Section 16 officer
positions to like positions contained in general industry salary surveys,
industry-specific salary surveys and, for our chief executive officer, the chief
executive officers in our performance graph peer group. The salary surveys used
by Towers Perrin were:
o Towers Perrin's Executive Compensation Database
o Towers Perrin's Energy Services Industry Executive Compensation
Database
o Effective Compensation, Inc.'s Oil & Gas Exploration and Production
Survey
o Mercer's Energy Compensation Survey
o Watson Wyatt's Report on Top Management Compensation
---------------------------------------------------------------------------
Survey* Number of Median Number Median
Companies Number of of Revenue
Participating Employees Publicly ($000s)
Traded
Companies
---------------------------------------------------------------------------
Towers Perrin's Executive 345 19,621 214 4,615,600
Compensation Database
---------------------------------------------------------------------------
Towers Perrin's Energy 87 3,460 63 2,472,400
Services Industry Executive
Compensation Database
---------------------------------------------------------------------------
Effective Compensation, 76 130 48 148,000
Inc.'s Oil & Gas
Exploration and Production
Survey
---------------------------------------------------------------------------
Mercer's Energy 199 288 140 351,550
Compensation Survey
---------------------------------------------------------------------------
Our revenues for 2005 were approximately $3.46 billion.
-------------------------
* The information in the table and on the Watson Wyatt report is based solely
upon information provided by the publishers of the surveys and is not deemed
filed or a part of this compensation discussion and analysis for certification
purposes.
22
A total of 2,305 organizations participated in Watson Wyatt's Report on Top
Management Compensation. There were 405 organizations with 2,000 to 4,999
employees; 304 organizations with 5,000 to 9,999 employees; 260 organizations
with 10,000 to 19,999 employees and 355 organizations with 20,000 or more
employees. Also, there were 539 organizations with sales of $2.0 billion or
more. Watson Wyatt did not report the number of publicly traded companies
participating in its survey.*
Executive officers also played an important part in determining 2006
compensation. Executive officers assessed performance for those officers
reporting to them. The chief executive officer assessed performance for all
named executive officers and then worked with the human resources department to
determine the recommended salary grades for the executive positions. The vice
president of human resources and other human resources personnel also supported
the chief executive officer and the compensation committee by
o working with the outside compensation consultants and the chief
executive officer on the determination of recommended salary grades,
which have associated annual base salaries and incentive targets
o reviewing recommended salary increases and incentive targets submitted
by executive officers for officers reporting to them for
reasonableness and alignment with company or business unit objectives
and to help ensure internal equity and
o designing annual and long-term incentive programs.
The following chart shows the median annual base salary and the approximate
target annual and long-term incentive levels for the relevant salary grades. As
shown in the following chart, our named executive officers were assigned to one
of three salary grades.
--------------------------------------------------------------------------------
Target
Median Target Long-
Base Annual Term Target
Salary Salary Incentive Incentive Total
Name Grade ($ 000s) ($ 000s) ($ 000s) ($ 000s)
--------------------------------------------------------------------------------
Martin A. White (former CEO) K $750 $750 $998 $2,498
--------------------------------------------------------------------------------
Terry D. Hildestad (CEO and (COO) K $750 $750 $998 $2,498
--------------------------------------------------------------------------------
William E. Schneider J $375 $187 $338 $900
--------------------------------------------------------------------------------
Warren L. Robinson (former CFO) J $375 $187 $338 $900
--------------------------------------------------------------------------------
Vernon A. Raile (CFO) J $375 $187 $338 $900
--------------------------------------------------------------------------------
John K. Castleberry (WBI CEO) J $375 $187 $338 $900
------------------------------------------------
(EVP - Admin.) I $310 $155 $233 $698
--------------------------------------------------------------------------------
John G. Harp I $310 $155 $233 $698
--------------------------------------------------------------------------------
After approving the salary grade assigned to each named executive officer,
the compensation committee determined where, within that salary grade, the
individual's base salary should be. This determination was based on
recommendations from our chief executive officer.
23
The compensation committee believes that having a range of possible
salaries within each salary grade is advantageous as it gives the committee the
flexibility to assign different salaries to individual executives within a
salary grade to reflect one or more of the following:
o the executive's performance on financial goals
o the executive's performance on non-financial goals, including the
results of the performance assessment program
o the executive's experience, tenure and future potential
o the position's relative value compared to other positions within the
company
o the relationship of the salary to the competitive salary market value
o internal pay equity with other executives and/or
o the economic environment of the corporation or executive's business
unit.
Our performance assessment program evaluates performance based on
behavioral and results-oriented competencies and objectives. The chief executive
officer assessed each named executive officer's performance under the
performance assessment program, and the compensation committee assessed the
chief executive officer's performance. Our performance assessment program rates
performance in different competencies, as follows:
o visionary leadership
o strategic thinking
o leading with integrity
o managing customer focus
o financial responsibility
o achievement focus
o judgment
o planning & organization
o leadership
o mentoring
o relationship building
o conflict resolution
o communications
o safety and
o great place to work
24
In the following discussion, we provide further explanation of why and how
the compensation committee determined each named executive officer's salary
grade and the executive's actual 2006 salary and annual and long-term
incentives.
2006 Salary Grades and Base Salaries for Named Executive Officers
-----------------------------------------------------------------
The compensation committee began its review of executive compensation data
at its August 2005 meeting. It assigned 2006 salary grades and determined 2006
individual base salaries and annual and long-term incentive targets under the
annual and long-term plans at the November 2005 meeting. Actual 2006 annual and
long-term incentive awards, along with the payouts based on performance from the
recently completed performance period for prior annual and long-term awards,
were determined at the February 2006 meetings of the compensation committee and
the board of directors. The February meetings occurred after the release of
earnings for the prior year.
The compensation committee also adjusted compensation, as necessary, at
other times during the year to reflect promotions or other changes in executive
officers' positions with the company.
Martin A. White
---------------
As we discussed above, the compensation committee used data provided by
Towers Perrin from five different salary surveys for compensation comparison. In
addition to these salary surveys described above, for the chief executive
officer comparison, Towers Perrin also used salary information for the chief
executive officers at the following companies, which comprised our performance
graph peer group:
---------------------------------------------------------------------------
Allegheny Energy, Inc. Oneok, Inc.
Allete Peoples Energy
Alliant Energy Corp. Pogo Producing Co.
Black Hills Corp. Quanta Services, Inc.
Comstock Resources, Inc. Questar Corp.
Equitable Resources, Inc. Scana Corp.
Florida Rock Industries Stone Energy Corp.
Keyspan Corp. Teco Energy, Inc.
Martin Marietta Materials UGI Corp.
Newfield Exploration Vectren
Nicor Vulcan Materials Corp.
OGE Energy Corp. XTO Energy, Inc.
---------------------------------------------------------------------------
Mr. White served as our chief executive officer from April 1, 1998 until
his retirement on August 17, 2006. In 2006, as chief executive officer, Mr.
White was assigned to our highest salary grade "K." Mr. White's salary grade
contained salary ranges from a minimum of $600,000 to a target of $750,000 and a
maximum of $900,000. In determining Mr. White's salary grade, the compensation
committee reviewed the performance graph peer group survey data and the
25
other market data discussed above. The performance graph peer group showed a
median base salary of $685,000, and the other market data showed a base salary
target of $830,000 for chief executive officers. The committee set Mr. White's
actual 2006 base salary at $750,000, which was his assigned salary grade's
midpoint and an increase of 7.14% from his 2005 base salary; this was above the
peer group median of $685,000 but below the target level based on the other
market data. The committee's decision was based on Mr. White's commendable
performance assessment rating, his outstanding leadership and his contribution
to our record financial results.
Terry D. Hildestad
------------------
Terry D. Hildestad was our chief operating officer until August 17, 2006
when he was elected as chief executive officer. Mr. Hildestad was assigned to a
salary grade "K." The base salary target for a president and chief operating
officer was $485,000, based on the survey data provided by Towers Perrin as a
part of their annual competitive analysis. The committee set Mr. Hildestad's
actual base salary at $525,000 because he received a commendable performance
assessment rating and Knife River Corporation's 2005 financial results were
above plan. Mr. Hildestad had been president and chief executive officer of
Knife River Corporation. The committee believed that this salary was appropriate
because Mr. Hildestad assumed additional responsibilities as our president and
chief operating officer and was making significant strides to successfully
assume our chief executive officer position in August 2006.
When Mr. Hildestad became our chief executive officer, the committee
increased his base salary to $625,000. While the "K" salary grade midpoint was
$750,000, the committee believed that setting Mr. Hildestad's salary at the
midpoint would have been premature given his short tenure in the position. The
committee looks to sustained performance and contribution over time before
setting a named executive officer's base salary at or above the salary grade
midpoint. The committee also decided that it would not give Mr. Hildestad a
salary increase on January 1, 2007 and took this into consideration when
increasing his salary to $625,000 in August 2006.
William E. Schneider
--------------------
William E. Schneider is president and chief executive officer of our
subsidiary, Knife River Corporation. Mr. Schneider's assigned salary grade of
"J" had a midpoint of $375,000, with a minimum of $300,000 and a maximum of
$450,000. Upon recommendation from the chief executive officer, the committee
chose the "J" salary grade because they believed Mr. Schneider should be in the
same salary grade as our chief financial officer and the chief executive officer
of WBI Holdings, Inc.
Mr. Schneider's actual 2006 base salary was $392,000, which was above the
2006 salary grade midpoint of $375,000, because Knife River Corporation's 2005
financial results were above plan, he assumed additional responsibilities as
business unit chief executive officer and he received a commendable performance
assessment rating. Also, the committee believed a salary above the salary grade
midpoint was appropriate given the fact that Mr. Schneider was successfully
spearheading a number of Knife River Corporation initiatives, such as a regional
operating structure to improve efficiencies and acceleration of Knife River
Corporation's migration to a common information systems platform.
26
Warren L. Robinson
------------------
Warren L. Robinson was our executive vice president and chief financial
officer until January 3, 2006 and an employee until he retired February 17,
2006. Because of his retirement, Mr. Robinson received no base salary increase
or incentive compensation for 2006. As we discussed in our 2006 proxy statement,
we entered into an agreement with Warren L. Robinson on November 23, 2005 in
connection with his retirement as executive vice president and chief financial
officer. Mr. Robinson received a severance payment of $1,000,000. The
compensation committee determined that this was an appropriate amount in light
of Mr. Robinson's years of service to the company, business acumen and timing in
the capital markets, which contributed to our six-fold increase in earnings from
1988 to 2004. Mr. Robinson also had long-term incentive awards which have been
or will be paid out based upon company performance in accordance with the terms
of the awards.
Vernon A. Raile
---------------
Vernon A. Raile was elected our chief financial officer effective January
3, 2006. The 2006 market data provided by Towers Perrin showed a targeted base
salary of $390,000. However, Mr. Raile was assigned to salary grade "J", the
historical classification for our chief financial officer. The salary grade had
a midpoint of $375,000, a minimum of $300,000 and a maximum of $450,000.
The committee determined Mr. Raile's actual 2006 base salary at $318,750,
which was an increase of 46.65% from his 2005 base salary. This reflected Mr.
Raile's assumption of additional responsibilities as executive vice president,
treasurer and chief financial officer, a desire to move his base salary closer
to the midpoint of $375,000, record financial results and his commendable
performance assessment rating. However, Mr. Raile's base salary was
significantly below the 2006 salary grade midpoint of $375,000 primarily because
of his short tenure as executive vice president, treasurer and chief financial
officer. The committee believes aligning compensation targets to competitive
benchmarks over time versus all at once is prudent because it gives them the
opportunity to assess the executive's performance and contribution in his new
role.
John K. Castleberry
-------------------
John K. Castleberry was president and chief executive officer of our
subsidiary, WBI Holdings, Inc., and had planned to retire in 2006. However,
effective March 4, 2006, Mr. Castleberry accepted our offer to become executive
vice president - administration of MDU Resources Group, Inc.
As president and chief executive officer of WBI Holdings, Inc., Mr.
Castleberry's assigned salary grade of "J" had a midpoint of $375,000, a minimum
of $300,000 and a maximum of $450,000. Mr. Castleberry's actual base salary for
2006 was $370,000, which was the same as 2005 due to his anticipated retirement
in early 2006.
As executive vice president - administration of MDU Resources Group, Inc.,
Mr. Castleberry was placed in a lower salary grade of "I", with a midpoint of
$310,000, a minimum of $248,000 and a maximum of $372,000. The compensation
committee approved the salary
27
grade assignment for the executive vice president - administration position
based on the chief executive officer's recommendation. The chief executive
officer's rationale for recommending this salary grade was:
o The position's importance in leading our initiative of moving certain
functions to a shared services environment. This initiative involves
placing duplicative functions across the organization, e.g., payroll,
information technology and purchasing, into a centralized organization
to leverage economies of scale and to leverage our purchasing power
with suppliers and vendors.
o Mr. Castleberry's past success in leading WBI Holdings, Inc. In
addition, his operational orientation and disciplined approach to
developing systems and processes were viewed as qualities necessary to
make the shared services initiative a success.
o The desire to have Mr. Castleberry in the same salary grade as the
president and chief executive officer of MDU Construction Services
Group, Inc.
Mr. Castleberry's actual salary was set at $300,000 per year, slightly
below the midpoint, because of his short tenure in this position. The committee
believes that aligning compensation targets to competitive benchmarks over time
versus all at once is prudent because it gives them the opportunity to assess
the executive's performance and contribution in his new role.
John G. Harp
------------
John G. Harp is president and chief executive officer of MDU Construction
Services Group, Inc. Mr. Harp was assigned to salary grade "I", which had a
midpoint of $310,000, a minimum of $248,000 and a maximum of $372,000. The
Towers Perrin competitive analysis showed a target base salary of $280,000 for
his position. Upon recommendation from the chief executive officer, the
committee chose a salary grade with targeted ranges higher than the Towers
Perrin data would indicate because the position manages a business unit that
until 2005 had poor operational and financial performance, requiring a greater
degree of leadership and problem solving than would otherwise have been called
for had the business unit been more stable.
Mr. Harp's actual 2006 base salary was set at $310,000, the salary grade
midpoint, because of the financial turn-around of MDU Construction Services
Group, Inc. from a loss in 2004 to a profit in 2005 and Mr. Harp's commendable
performance assessment rating.
The following table shows each named executive officer's base salary for
2005 and 2006 and the percentage change.
28
-----------------------------------------------------------------------------
Name Base Salary Base Salary % Change
for 2005 for 2006
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Martin A. White $700,000 $750,000 7.14%
-----------------------------------------------------------------------------
Terry D. Hildestad (CEO) $625,000 19.04%
effective August
18, 2006
-----------------------------------------------
(COO) $475,000 $525,000 10.52%
-----------------------------------------------------------------------------
William E. Schneider $350,000 $392,000 12.00%
-----------------------------------------------------------------------------
Warren L. Robinson $425,000 $425,000 0.00%
-----------------------------------------------------------------------------
Vernon A. Raile $217,360 $318,750 46.65%
-----------------------------------------------------------------------------
John K. Castleberry (WBI CEO) $370,000 $370,000 0.00%
-----------------------------------------------
$300,000 effective -18.9%
(EVP - Admin.) March 4, 2006
-----------------------------------------------------------------------------
John G. Harp $250,000 $310,000 24.00%
-----------------------------------------------------------------------------
2006 Annual Incentives
----------------------
Annual and long-term incentive targets were established by the compensation
committee for each salary grade as a percentage of the individual's actual base
salary.
The chief executive officer's and the chief operating officer's target
annual incentive was 100% of base salary, and the other named executive
officers' target annual incentives were 50% of their base salaries. These
incentive targets were derived in part from competitive data provided by Towers
Perrin and in part by the committee's judgment on internal equity of the
positions, their relative value to the company and the desire to maintain a
consistent annual incentive target for the chief executive officer and the chief
operating officer positions as well as for the president and chief executive
officers of the business units.
The compensation committee develops and reviews financial and other
corporate performance measures to help ensure that compensation to the
executives reflects the success of the respective business unit and/or the
corporation, as well as the value provided to our stockholders. For Messrs.
White, Hildestad, Robinson, Raile and Castleberry, as executive vice president -
administration, the performance measures for annual incentive awards are the
company's annual return on invested capital results compared to target and the
company's annual earnings per share results compared to target. For Messrs.
Schneider, Harp and Castleberry, as president and chief executive officer of WBI
Holdings, Inc., the performance measures for annual incentive awards are their
respective business unit's annual return on invested capital results compared to
target and their respective business unit's allocated earnings per share results
compared to target. During Mr. Castleberry's tenure as president and chief
executive officer of WBI Holdings, Inc., the safety record of that business unit
was also a performance measure for Mr. Castleberry.
29
Target results are generally developed through the company's annual
financial planning process, whereby we assess the future operating environment
and build projections of anticipated results. For 2006 the committee implemented
a change in how the return on investment capital targets are established for use
in our annual incentive plans. The change was implemented to emphasize the need
for each business unit and the company to generate, within a reasonable period
of time, a return on invested capital that is at least equal to the business
unit's or company's weighted average cost of capital. If a business unit's or
the company's return on invested capital, as determined by the annual financial
planning process, was below their weighted average cost of capital, the return
on invested capital target used for incentive plan purposes was increased.
The committee believes earnings per share and return on invested capital
are very good measurements in assessing how well or how poorly the company is
performing from a financial standpoint. The former is a generally accepted
accounting principle measurement and is a key driver of stockholder return over
the long-term. The latter measures how efficiently and effectively management
deploys its capital. Sustained returns on invested capital in excess of the
company's cost of capital create wealth for the company's stockholders.
Allocated earnings per share for a business unit is calculated by dividing
that business unit's earnings by the business unit's proportion of the total
company weighted average shares outstanding. Return on invested capital for the
company is calculated by dividing the company's net income before interest
expense, net of tax, and preferred dividends by the company's average
capitalization for a 12-month period. Return on invested capital for a business
unit is calculated by dividing the business unit's net income before interest
expense, net of tax, and preferred dividends by the business unit's average
capitalization for a 12-month period.
The committee determines the weighting of the goals each year based upon
recommendations from the chief executive officer. For 2006, the compensation
committee weighted the goals for annual return on invested capital compared to
planned results and allocated earnings per share compared to planned results
each at 50%. The equal weight given to these two goals represents a change from
prior years when the compensation committee weighted the goal for annual return
on invested capital at 25% and the goal for allocated earnings per share at 75%.
Upon recommendation from the chief executive officer, the committee changed the
weighting. The compensation committee determined that return on invested capital
is a key factor in determining how well a business unit, or the company,
generates returns for a given level of investment and should therefore comprise
a more significant portion of the annual incentive compensation of executives.
The named executive officers were eligible to earn from 0% to 200% of their
targeted annual incentive. The award opportunities available to each named
executive officer ranged from no payment if the goals were met below the 85%
level to a 200% payout if the goals were met at or above the 115% level. We
discuss the award opportunities in more detail later in this proxy statement.
30
The table below lists each named executive officer's 2006 base salary,
which was used to calculate the annual incentive, the officer's 2006 annual
incentive target, the 2006 financial results as a percentage of planned results
and the annual incentive earned for 2006.
-------------------------------------------------------------------------------
2006 Incentive
Name 2006 Plan 2006 Incentive
Annual Performance Plan Results 2006
2006 Base Incentive Targets Annual
Salary Target EPS ROIC EPS ROIC Incentive
($) (%) ($) (%) Earned
-------------------------------------------------------------------------------
Martin A. $468,750 100% 1.40 9.2 [ ] [ ] [ ]
White(1)
-------------------------------------------------------------------------------
Terry D. $562,500 100% 1.40 9.2 [ ] [ ] [ ]
Hildestad
-------------------------------------------------------------------------------
William E. $392,000 50% Please see discussion below [ ]
Schneider
-------------------------------------------------------------------------------
Warren L. $53,125 - - - - - -
Robinson(2)
-------------------------------------------------------------------------------
Vernon A. $318,750 50% 1.40 9.2 [ ] [ ] [ ]
Raile
-------------------------------------------------------------------------------
John K. $311,667 50% Please see discussion below [ ]
Castleberry 1.40 9.2 [ ] [ ]
-------------------------------------------------------------------------------
John G. Harp $310,000 50% Please see discussion below [ ]
-------------------------------------------------------------------------------
(1) Mr. White's annual incentive was prorated due to his retirement in August
2006.
(2) Mr. Robinson did not receive an annual incentive in 2006 due to his
retirement.
As president and chief executive officer of Knife River Corporation, Mr.
Schneider's 2006 incentive plan performance targets were based on allocated
earnings per share and return on invested capital for Knife River Corporation.
His targets were set at levels 18 percent and 8 percent, respectively, above the
2005 achievements for these performance measures. The committee believed that
these targets were sufficiently challenging for Mr. Schneider because, in order
to attain these financial targets, Mr. Schneider would be required, at a
minimum, to implement significant operational changes at certain underperforming
subsidiaries. With respect to the 2006 incentive plan results, Knife River
Corporation exceeded 2006 target earnings per share and return on invested
capital by 31 percent and 24 percent, respectively. Mr. Schneider achieved these
excellent results through a combination of operational improvements, changes in
market strategy and implementation of effective cost controls.
Mr. Castleberry's annual incentive was prorated to reflect his service as
president and chief executive officer of WBI Holdings, Inc. and executive vice
president - administration of MDU Resources Group, Inc. The goals shown in the
table are for MDU Resources Group, Inc. only. Mr. Castleberry's incentive plan
performance targets, during the portion of time he served as president and chief
executive officer of WBI Holdings, Inc., were based on allocated earnings per
share and return on invested capital for WBI Holdings, Inc. The targets were set
at levels 2 percent and 19 percent lower, respectively, than the 2005
achievement for these performance measures. The committee believed that the
incentive plan performance targets for WBI
31
Holdings, Inc. required sufficient stretch on Mr. Castleberry's part, given that
2005 financial results had benefited from the effects of a favorable regulatory
order, combined with expected lower natural gas commodity prices and increasing
operational costs for 2006. Furthermore, Mr. Castleberry's performance target
for return on invested capital would still be significantly above the cost of
capital for his business unit. With respect to the 2006 incentive plan results,
WBI Holdings, Inc. exceeded 2006 target earnings per share and return on
invested capital by 14 percent and 5 percent, respectively.
As president and chief executive officer of MDU Construction Services
Group, Inc., Mr. Harp's 2006 incentive plan performance targets were based on
allocated earnings per share and return on invested capital for MDU Construction
Services Group, Inc. His targets were set at levels 6 percent above the 2005
targets for these same performance measures. At the time Mr. Harp assumed the
presidency of this business unit in late 2004, he was confronted with
significant challenges in turning around a business unit that had incurred
significant losses in 2004. Although the compensation committee believed that
Mr. Harp had achieved commendable progress in 2005, significant efforts would be
required in 2006 to resolve a number of the issues remaining. Thus, the
committee believed that the incentive plan targets for 2006 were sufficiently
challenging but not so aggressive as to impede the orderly progress of Mr.
Harp's improvement plan. For 2006 incentive plan results, MDU Construction
Services Group, Inc. exceeded 2006 target earnings per share and return on
invested capital by 66 percent and 35 percent, respectively. This reflects the
outstanding efforts by Mr. Harp in improving 2006 financial results for this
business unit over those for the prior two years.
In addition to the annual incentive of $310,000 Mr. Harp earned under our
executive incentive compensation plan, he also earned an additional $500,000
one-time bonus payment. When Mr. Harp was hired in September 2004 to effectuate
a turn-around of the Utility Services Inc. business unit, now called MDU
Construction Services Group, Inc., he was offered one-time incentive
opportunities of (i) $250,000 if MDU Construction Services Group, Inc. reported
annual net income of $12.5 million in 2007 or sooner and in addition (ii)
$500,000 if MDU Construction Services Group, Inc. reported annual net income of
$18.6 million or more in fiscal year 2008 or sooner. The first goal was met in
2005, and in fiscal year 2006 MDU Construction Services Group, Inc. met the
second goal.
Deferred Compensation
---------------------
We provide executives the opportunity to defer receipt of earned annual
incentives. If an executive chooses to defer his/her annual incentive, the
company will credit the deferral with interest at prime rate plus one percentage
point. Messrs. Hildestad, Schneider and Raile deferred their annual incentives
for 2005.
Awards Granted in 2006 under the Long-Term Performance-Based Incentive Plan
---------------------------------------------------------------------------
We use the Long-Term Performance-Based Incentive Plan, which is an omnibus
plan and has been approved by our stockholders, for long-term incentive
compensation. We discontinued the use of stock options in 2003 and now use
performance shares as the only form of long-term incentive compensation.
32
The performance measures are our total stockholder return over a three-year
measurement period as compared to the total stockholder returns of the companies
in our performance graph peer group. The compensation committee selected this
goal because it believes executive pay under a long-term, capital accumulation
program such as this should mirror our long-term performance in stockholder
return as compared to other public companies in our industries. Payments are
made in company stock; dividend equivalents are paid in cash.
Similar to the annual incentive target, the long-term incentive target for
a given position is determined by reference to the salary grade. Mr. White's
target was 133% of base salary, although Mr. White was not granted performance
shares under the program in 2006 due to his retirement. Mr. Hildestad's target
was 105% of base salary. Messrs. Schneider's, Raile's and Robinson's targets
were 90% of base salary each, although Mr. Robinson was not granted performance
shares under the program in 2006 due to his retirement. Messrs. Castleberry's
and Harp's targets were 75% of base salary. These incentive targets were derived
in part from competitive data provided by Towers Perrin and in part by the
committee's judgment on the impact each position has on our total stockholder
return. The committee also believed consistency across positions in the same
salary grades was important from an internal equity standpoint.
On February 16, 2006, the board, upon recommendation of the compensation
committee, made long-term incentive grants to the named executive officers in
the form of performance shares. The committee determined the target number of
performance shares granted to each named executive officer by multiplying the
named executive officer's 2006 base salary by his long-term incentive target and
then dividing this product by the average of the closing prices of our stock
from January 1, 2006 through January 23, 2006.
------------------------------------------------------------------------------------
Performance
Average shares
2006 long- 2006-long closing Resulting granted
term term price of number of adjusted
2006 base incentive incentive our stock performance for July
salary to target % target $ from Jan. shares 26, 2006
determine at time at time 1 through granted on 3-for-2
Name target $ of grant of grant Jan. 23 Feb. 16 stock split
------------------------------------------------------------------------------------
Martin A. - - - - - -
White(1)
------------------------------------------------------------------------------------
Terry D. $525,000 105% $551,250 $34.62 15,922 23,883
Hildestad(2)
------------------------------------------------------------------------------------
William E. $392,000 90% $352,800 $34.62 10,190 15,285
Schneider
------------------------------------------------------------------------------------
Warren L. - - - - - -
Robinson(3)
------------------------------------------------------------------------------------
Vernon A. $318,750 90% $286,875 $34.62 8,286 12,429
Raile
------------------------------------------------------------------------------------
John K. $300,000 75% $225,000 $34.62 6,499 9,748
Castleberry
------------------------------------------------------------------------------------
John G. Harp $310,000 75% $232,500 $34.62 6,715 10,072
------------------------------------------------------------------------------------
(1) Mr. White was not granted performance shares in 2006 due to his retirement.
(2) Mr. Hildestad did not receive any additional performance shares when he
became president and chief executive officer in August 2006.
33
(3) Mr. Robinson was not granted performance shares in 2006 due to his
retirement.
From 0% to 200% of the target grant will be paid out in February 2009
depending on our three-year 2006-2008 total stockholder return compared to the
total three-year stockholder returns of companies in our performance graph peer
group. The payout percentage will be a function of our rank against our
performance graph peer group as follows:
---------------------------------------------------------------------------
The Company's Percentile Rank Payout Percentage of Feb. 16, 2006 Grant
---------------------------------------------------------------------------
100th 200%
---------------------------------------------------------------------------
75th 150%
---------------------------------------------------------------------------
50th 100%
---------------------------------------------------------------------------
40th 10%
---------------------------------------------------------------------------
Less than 40th 0%
---------------------------------------------------------------------------
Payouts for percentile ranks falling between the intervals will be
interpolated. We also will pay dividend equivalents in cash on the number of
shares actually earned for the performance period. The dividend equivalents will
be paid in 2009 at the same time as the performance awards are paid.
Awards Paid on February 16, 2006 under the Long-Term Performance-Based Incentive
--------------------------------------------------------------------------------
Plan
----
We granted performance shares to our named executive officers under the
Long-Term Performance-Based Incentive Plan on February 13, 2003 for the 2003
through 2005 performance period. As we reported in last year's proxy statement,
these performance shares vested at the 118% payout level. Our total stockholder
return for the 2003 through 2005 performance period was 106.56%, which
corresponded to a percentile rank of 59% against our performance graph peer
group. The percentile rank of 59% corresponded to a payout percentage of 118%,
meaning 118% of the target shares originally granted plus dividend equivalents
were paid to the named executive officers. The table below lists the shares
granted on February 13, 2003, the shares paid on February 16, 2006 based on the
payout percentage, and the dividend equivalents earned.
-------------------------------------------------------------------------
Shares
granted on Shares paid
February 13, Payount on February Dividend
Name 2003(2) percentage 16, 2006(2) Equivalents
-------------------------------------------------------------------------
Martin A. White 17,083 118% 20,158 $28,221.90
-------------------------------------------------------------------------
Terry D. Hildestad 5,809 118% 6,855 $9,597.00
-------------------------------------------------------------------------
William E. Schneider 4,324 118% 5,103 $7,144.20
-------------------------------------------------------------------------
Warren L. Robinson 5,809 118% 6,855 $9,597.00
-------------------------------------------------------------------------
Vernon A. Raile 2,134 118% 2,518 $3,525.90
-------------------------------------------------------------------------
John K. Castleberry 5,809 118% 6,855 $9,597.00
-------------------------------------------------------------------------
John G. Harp(1) - - - -
-------------------------------------------------------------------------
(1) Mr. Harp was not granted performance shares in 2003 because he was not then
an employee of the company.
34
(2) Shares are adjusted for the 3-for-2 stock split effective October 29, 2003
and the July 26, 2006 stock split.
Perquisites and Tax Gross-Ups
-----------------------------
Our named executive officers have limited perquisites, which may include
personal use of our plane, limited accompaniment of family members with
executives traveling for business purposes, reasonable vehicle allowances, home
office allowances and subsidized annual physical examinations.
In connection with Martin White's retirement in August 2006, we paid the
cost of travel for members of Mr. White's family to attend his retirement party
and also provided a tax gross-up to Mr. White on this amount. While the company
has rarely provided tax gross-ups, the board believed that it was appropriate in
recognition of Mr. White's very successful tenure as our chairman and chief
executive officer.
Pension Plan
------------
Effective 2006, we no longer offer pensions to new employees. Instead,
executives and other employees are offered increased company contributions to
our 401(k) plan. The pension plans continue in effect for all employees hired
before 2006.
We provide our executives and other employees hired before 2006 with income
for their retirement through our qualified defined benefit pension plans, where
benefits are determined by years of service and base salary. For benefits under
the pension plans, 35 years is the maximum number of years of service the
participants in these plans can accrue. Pension benefits are determined by the
step-rate formula that emphasizes the highest consecutive 60 months of base
salary within the last 10 years of service. Employees who retire early receive
reduced benefits under the pension plans. We discuss other material terms of the
pension plans later in this proxy statement. Because benefits under our pension
plan increase with an employee's period of service and earnings, we believe the
pension encourages our employees to make long-term commitments to the company,
and as such, serves as an important retention tool.
Supplemental Income Security Plan
---------------------------------
We also offer certain key managers and executives, including all of our
named executive officers, benefits under our nonqualified retirement plan, which
we refer to as the Supplemental Income Security Plan or SISP. The SISP was
adopted in 1982 to provide participants with additional retirement income and
death benefits.
The additional retirement income may take two forms:
o a supplemental retirement benefit payable for fifteen years beginning
at the later of age 65 or after employment ends and
o an additional retirement benefit to offset the Internal Revenue Code
limitations placed on benefits payable under our qualified defined
benefit pension plans. If eligible, the participants receive this
retirement benefit after they separate from the company and until they
reach age 65. In order to be eligible to receive the additional
retirement
35
benefit, they must vest in their pension benefit, which requires five
years of service, and their pension must be limited by the Internal
Revenue Code. Mr. Harp has an additional qualification in that he must
remain employed until age 60 in order to receive this additional
retirement benefit.
A death benefit is provided if SISP participants die before their
supplemental retirement benefits commence or if they elect to receive death
benefits in lieu of all or a part of their supplemental retirement benefits.
We discuss the other terms of the SISP later in the proxy statement.
In November 2006, we amended the SISP to give the compensation committee
the responsibility of selecting participants and establishing levels of
participation. The committee's selections are based on recommendations from the
chief executive officer. Previously, the chief executive officer selected
participants in the SISP and their level of participation. Participation, as
well as the level of participation, was solely at the discretion of the chief
executive officer and was intended to reward those who made significant
contributions to our success and profitability. In November 2005, certain named
executive officers received upgrades to their SISP levels that became effective
on January 1, 2006. The upgrades, along with the chief executive officer's
rationale for the upgrades, are summarized in the following table:
---------------------------------------------------------------------------------------
Name Pre January 1, 2006 Post January 1, 2006 Rationale for
Annual SISP Benefits Annual SISP Benefits upgrade
---------------------------------------------------------------------------------------
Survivors Retirement Survivors Retirement
---------------------------------------------------------------------------------------
Martin A. White(1) $1,025,040 $512,520 $1,025,040 $512,520 -
---------------------------------------------------------------------------------------
Terry D. Hildestad $386,640 $193,320 $548,400 $274,200 Assumption of
additional duties
of president and
chief operating
officer
---------------------------------------------------------------------------------------
William E. Schneider $251,400 $125,700 $386,640 $193,320 Assumption of
additional duties
of president and
chief executive
officer, Knife
River
Corporation
---------------------------------------------------------------------------------------
Warren L. Robinson $386,640 $193,320 $468,600 $234,300 Recognition of
past performance
and contribution
to our success
---------------------------------------------------------------------------------------
Vernon A. Raile $175,200 $87,600 $291,480 $145,750 Assumption of
additional duties
of executive vice
---------------------------------------------------------------------------------------
36
---------------------------------------------------------------------------------------
president,
treasurer and
chief financial
officer
----------------------------------------------------------------------------------------
John K. Castleberry $386,640 $193,320 $468,600 $234,300 Recognition of
past performance
and contribution
to our success.
----------------------------------------------------------------------------------------
John G. Harp $219,000 $109,500 $291,480 $145,750 Recognition of
past performance
and contribution
to our success.
---------------------------------------------------------------------------------------
(1) Mr. White did not receive an upgrade to his SISP level.
In 2003, we considered increasing the retirement benefits provided under
the SISP, and we engaged Towers Perrin to compare the retirement benefits
provided under the SISP to similar plans provided by companies in our
performance graph peer group. Towers Perrin's analysis showed that the
retirement benefits provided by the SISP were higher, as a percentage of final
annual compensation, than supplemental retirement benefits provided by most of
the companies in the performance graph peer group, assuming final annual
compensation of $200,000, $500,000 or $1,000,000 and length of service of 15,
20, 25 or 30 years. The extent to which the benefits under the SISP exceeded
benefits provided by the other companies depended on the level of final annual
compensation and years of service assumed. Based on Towers Perrin's findings, we
determined that the SISP benefits should not be increased; however, because of
the SISP's importance to our success in recruitment and retention of exceptional
executive talent, the SISP benefit levels were maintained.
To encourage Mr. Harp to remain with the company through 2007, on November
16, 2006, upon recommendation of our chief executive officer and the
compensation committee, our board of directors approved an additional retirement
benefit for Mr. Harp. The benefit provides for Mr. Harp to receive payments that
represent the equivalent of an additional three years of service under the
pension plan and the SISP if he does not resign or retire before January 2, 2008
and if he has acceptable successors in place prior to his departure. The
additional three years of service recognize Mr. Harp's previous employment with
a subsidiary of the company. If Mr. Harp were to retire or resign on January 2,
2008, and live to age 81, the equivalent of the additional three years of
service under the pension plan would yield total payments to Mr. Harp of
$421,462 over his lifetime. The equivalent of the additional three years of
service under the SISP would yield aggregate total payments over 15 years to Mr.
Harp of $874,440 beginning at age 65, assuming he does not die before age 65.
37
Post-Termination Compensation and Benefits
We have entered into change of control employment agreements with each of
our Section 16 officers, including our named executive officers. We believe it
is important to provide an inducement for our executive officers to continue
working for us during any change of control transition periods and to provide
severance benefits if employment is terminated in connection with a change of
control.
If a change of control should occur, each agreement provides for a
three-year employment period from the date of the change of control. During the
employment period, the executive officer receives guaranteed minimum levels of
compensation and benefits and severance benefits. In addition if the company or
a successor terminates the executive officer's employment without cause or if
the executive officer resigns for good reason, in either case, during the
employment period or prior to the employment period if the termination is deemed
to be related to the change of control, the executive officer is entitled to
receive three times base salary and bonus as well as other amounts.
The change of control employment agreements define "change of control" to
include:
o an individual, entity or group acquiring 20% or more of our voting
securities
o a turnover in a majority of our board of directors without the
approval of a majority of the directors who were members of the board
as of the agreement date or whose election was approved by such board
members
o consummation of a merger or consolidation, unless our stockholders
immediately prior to the merger beneficially own more than 60% of the
outstanding shares and voting power of the resulting corporation after
the merger or
o the stockholders approving liquidation or dissolution of the company.
Having the actual consummation of a merger or similar transaction rather
than the stockholder approval date is a conservative trigger and prevents
payouts from being made prematurely, in the event consummation were not to
occur.
The agreements contain what are commonly referred to as "13th month
triggers," which provide that a resignation for good reason includes resignation
for any reason during the 30 day period beginning on the first anniversary of
the change of control. The compensation committee believes that providing
severance benefits for terminations without cause or for good reason limits the
provision of severance benefits to situations where an executive officer's
employment is terminated due to the change of control and through no fault of
the executive. The compensation committee believes the 13th month trigger
encourages executive officers to remain with the company or a successor during
the critical year-long transition period following a transaction, which is
beneficial to the company and its stockholders, and protects executive officers
who choose to so continue employment.
The agreements also provide what is commonly referred to as a modified tax
gross-up. This provides for an additional payment to make an executive whole for
federal excise taxes on excess parachute payments, unless the excess parachute
payments are not more than 110% of the
38
safe harbor amount. In that case, the payments to the executive would be reduced
to the safe harbor amount.
The board of directors and the compensation committee reviewed the change
of control agreements in 2006. We compared the terms of our change of control
agreements to those of certain members of our performance graph peer group and
to the Frederic W. Cook & Co., Inc., 2005 Change-in-Control Report, Prevalence
and Design of Executive Change-in-Control Arrangements at Each of the Top 50
NYSE and NASDAQ Companies. The compensation committee determined that the terms
of the agreement were consistent with current practice and in the best interests
of the stockholders because the agreement provides an incentive for executives
to remain employed through any change of control.
In addition to these agreements, the terms of the Long-Term
Performance-Based Incentive Plan call for accelerated vesting of awards
previously granted but not yet vested at the time of a change of control and
payment of performance awards.
In the case of any termination of employment, the compensation committee
may also consider providing severance benefits on a case-by-case basis. The
compensation committee adopted a checklist of factors in February 2005 to
consider when determining whether any such severance benefits will be made upon
termination.
PEER4 analysi$: Comparison of Pay for Performance Ratios
Each year we compare our named executive officers' pay for performance
ratios to the pay for performance ratios of the named executive officers in the
performance graph peer group. This analysis looks at the relationship between
our compensation levels and our average annual total stockholder return in
comparison to the peer group over a five-year period. All data used in the
analysis, including the valuation of long-term incentives and calculation of
stockholder return, were compiled by Equilar, Inc., an independent service
provider, which uses each company's annual filings as a basis of their data
collection.
This analysis consisted of comparing what we paid our named executive
officers for the years 2001 through 2005 to our average annual total stockholder
return for the same five-year period. Our pay ratio was then compared to the pay
ratio of the companies in the performance graph peer group, which was calculated
by dividing total direct compensation for all the proxy group executives by the
sum of each company's average annual total stockholder return for the same
five-year period. The results are shown in the following chart.
5 Year Total Direct Compensation to 5 Year Stockholder Return*
---------------------------------------------------------------------------
MDU Resources Group, Performance Graph Peer
Inc. Group
---------------------------------------------------------------------------
Dollars of Total Direct $3,084,702 $5,777,577
Compensation(1) per point of
---------------------------------------------------------------------------
------------------
* The chart is not deemed filed or a part of this compensation discussion and
analysis for certification purposes.
39
---------------------------------------------------------------------------
Total Stockholder Return
---------------------------------------------------------------------------
(1) Total direct compensation is the sum of annual base salaries, annual
incentives, the value of long-term incentives at grant and other
compensation as reported in the proxy statements.
The results of the analysis showed that we paid our named executive
officers significantly less than what the peer group companies paid their named
executive officers for comparable levels of stockholder return over the
five-year period. Specifically, as indicated in the chart, the data shows that
we paid our named executives approximately $2.7 million less per point of
stockholder return than our performance graph peer group. The compensation
committee believes this comparison helps demonstrate that our stockholders
receive good value for our executive compensation expense.
Clawback
We implemented a guideline for repayment of incentives due to accounting
restatements, commonly referred to as a clawback policy, in November 2005
whereby the compensation committee may seek repayment of annual and long-term
incentives paid to executives if accounting restatements occur within three
years after the payment of incentives under the annual and long-term plans.
Under our clawback policy, the compensation committee may require employees to
forfeit awards and may rescind vesting, or the acceleration of vesting, of an
award.
Impact of Tax and Accounting Treatment
The compensation committee may consider the impact of tax and/or accounting
treatment in determining compensation. Generally, long-term incentive
compensation and annual incentive awards for our chief executive officer and
those executive officers whose overall compensation is likely to exceed
$1,000,000 are structured to be deductible for purposes of Section 162(m) of the
Internal Revenue Code, but we may pay compensation to an executive officer that
is not deductible. Approximately $120,000 paid to Mr. Harp in 2006 was not
deductible for purposes of Section 162(m).
Stock Ownership Guidelines
We instituted stock ownership guidelines on May 5, 1993, which we revised
in February 2003, to encourage executives to own a multiple of their base salary
in our common stock. All officers who participate in our Long-Term
Performance-Based Incentive Plan are subject to the guidelines. The guidelines
call for the executive to reach the multiple within five years. Unvested
performance shares and other unvested equity awards do not count towards the
guidelines. Each February the compensation committee receives a report on the
status of stock holdings by executives. The table shows the named executive
officers holdings as of December 31, 2006:
40
------------------------------------------------------------------
Name Guideline Actual Number of
multiple of holdings as years at
base salary a multiple guideline
of base multiple
salary
------------------------------------------------------------------
Martin A. White(1) - - -
------------------------------------------------------------------
Terry D. Hildestad 4 X 5.27 1.67
------------------------------------------------------------------
William E. Schneider 3 X 3.67 4.00
------------------------------------------------------------------
Warren L. Robinson(1) - - -
------------------------------------------------------------------
Vernon A. Raile 3 X 3.09 1.00
------------------------------------------------------------------
John K. Castleberry 3 X 1.40 4.00
------------------------------------------------------------------
John G. Harp 3 X 8.31 2.25
------------------------------------------------------------------
1 Retired.
The compensation committee may consider the guidelines and the executive's
stock ownership in determining compensation. The committee, however, did not do
so with respect to 2006 compensation.
Policy Regarding Hedging Stock Ownership
In our Executive Compensation Policy, we adopted a policy that prohibits
executives from hedging their ownership of company common stock. Executives may
not enter into transactions that allow the executive to benefit from devaluation
of our stock or otherwise own stock technically but without the full benefits
and risks of such ownership.
41
--------------------------------------------------------------------------------
COMPENSATION COMMITTEE REPORT
--------------------------------------------------------------------------------
The compensation committee has reviewed and discussed the Compensation
Discussion and Analysis required by Reg. S-K, Item 402(b) with management. Based
on the review and discussions referred to in the preceding sentence, the
compensation committee recommended to the board of directors that the
Compensation Discussion and Analysis be included in our proxy statement on
Schedule 14A.
Thomas Everist, Chairman
Karen B. Fagg
Patricia L. Moss
42
Summary Compensation Table for 2006
--------------------------------------------------------------------------------------------------------
Name and Year Salary Bonus Stock Option Non-Equity Change in All Other Total
Principal ----- ($) ($) Awards Awards Incentive Plan Pension Compensation ($)
Position ($) ($) Compensation Value and ($)
($) Nonqualified
Deferred
Compensation
Earnings ($)
(a) (b) (c) (d) (e)(1) (f)(1) (g) (h)(2) (i) (j)
--------------------------------------------------------------------------------------------------------
Terry D. 2006 562,500 - 376,394 25,084 [ ] [ ] 6,876 [ ]
Hildestad
President and
CEO(3)
--------------------------------------------------------------------------------------------------------
Martin A. 2006 468,750 - 218,206(5) - [ ] [ ] 25,110(6) [ ]
White
Former
Chairman and
CEO(4)
--------------------------------------------------------------------------------------------------------
Vernon A. 2006 318,750 - 161,690 - [ ] [ ] 6,876 [ ]
Raile
Executive
Vice
President,
Treasurer and
CFO
-------------------------------------------------------------------------------------------------------
Warren L. 2006 53,125 - 93,142(8) - [ ] [ ] 1,001,685(9) [ ]
Robinson
Former
Executive
Vice
President and
CFO(7)
--------------------------------------------------------------------------------------------------------
William E. 2006 392,000 - 248,217 20,729 [ ] [ ] 6,876 [ ]
Schneider
President and
CEO of Knife
River
Corporation
--------------------------------------------------------------------------------------------------------
John K. 2006 311,667 - 323,641 - [ ] [ ] 6,876 [ ]
Castleberry
Executive
Vice
President -
Administration(10)
--------------------------------------------------------------------------------------------------------
John G. Harp 2006 310,000 - 150,566 - [ ](11) [ ](12) 31,323(13) [ ]
President and
CEO of MDU
Construction
Services
Group, Inc.
--------------------------------------------------------------------------------------------------------
(1) Please refer to Note 13 to our audited financial statements in our Annual
Report on Form 10-K for the year ended December 31, 2006. Assumptions used
in the valuation of the stock awards and option awards in this table are
the same as used in the valuation of compensation expense for our audited
financial statements, except for the effect of estimated forfeitures.
Statement of Financial Accounting Standard No. 123 (revised), "Share-Based
Payment (revised 2004)" requires us to estimate forfeitures when awards are
granted and reduce estimated compensation expense accordingly. This table
was prepared assuming that none of the awards will be forfeited. However,
for both this table and our audited financial statements, compensation
expense is adjusted for actual forfeitures.
(2) Amounts shown represent the change in the actuarial present value of the
named executive officers' accumulated benefit under the pension plan and
the Supplemental Income Security Plan (SISP), collectively referred to as
"accumulated pension change," plus above market earnings on deferred annual
incentives. The specific amounts are:
43
---------------------------------------------------------
Accumulated Above Market
Pension Change Earnings
---------------------------------------------------------
Mr. Hildestad [ ] 15,919
---------------------------------------------------------
Mr. White [ ] -
---------------------------------------------------------
Mr. Raile [ ] 27,061
---------------------------------------------------------
Mr. Robinson [ ] 13,360
---------------------------------------------------------
Mr. Schneider [ ] 16,096
---------------------------------------------------------
Mr. Castleberry [ ] -
---------------------------------------------------------
See footnote 12 regarding Mr. Harp.
(3) Elected president and chief executive officer effective August 17, 2006.
(4) Retired effective August 17, 2006.
(5) Mr. White forfeited 14,850 shares of restricted stock and 23,762
performance shares upon his retirement.
(6) Includes a company contribution to Mr. White's 401(k) account, a tax
gross-up for airplane travel cost of $1,978, his spouse's personal travel
on commercial aircraft, payment of a life insurance premium, an additional
payment for Mr. White's long-term disability insurance and the aggregate
incremental cost of Mr. White's personal travel on our aircraft.
(7) Resigned as Executive Vice President and CFO effective January 3, 2006 and
as an employee effective February 17, 2006.
(8) Mr. Robinson forfeited 3,712 shares of restricted stock and 11,686
performance shares upon his retirement.
(9) Includes a $1,000,000 severance payment in connection with his retirement
and a company contribution to Mr. Robinson's 401(k) account.
(10) Mr. Castleberry was president and chief executive officer of WBI Holdings,
Inc. until March 3, 2006, when he became executive vice president -
administration of MDU Resources Group, Inc.
(11) Includes one-time incentive payment of $500,000 in addition to his
executive incentive compensation plan payment.
(12) Comprised of:
Change in pension - [ ]
Above market interest - -
Present value of additional - [ ]
years of service
for pension plan
Present value of additional
years of service
for SISP - [ ]
In addition to accumulated pension under the pension plan and SISP and
incentive deferral earnings on deferred annual incentives, this amount is
the present value of the equivalent of additional years of service credit
for purposes of Mr. Harp's pension and SISP. In November 2006, the
compensation committee approved Mr. Harp receiving the equivalent of an
additional three years of service credit for purposes of his pension and
SISP if he remains an employee of the company through January 2, 2008 and
has a succession plan in place by such time. The December 31, 2006 present
value of the equivalent of the additional three years of vesting for
pension purposes was calculated by assuming [ ]. The December 31, 2006
present value the equivalent of of the additional three years of vesting
for SISP purposes was calculated by assuming [ ].
(13) Includes a company contribution to Mr. Harp's 401(k) account, payment of a
life insurance premium, an additional premium for Mr. Harp's long-term
disability insurance and Mr. Harp's office and automobile allowance.
44
Grants of Plan-Based Awards in 2006
-----------------------------------------------------------------------------------------------------------------------------------
Name Grant Estimated Future Payouts Under Estimated Future Payouts Under All All Other Exercise Grant
Date Non-Equity Incentive Plan Awards Equity Incentive Plan Awards Other Option or Base Date
---------- ---------- ----------- ---------- ------- ------------ Stock Awards: Price of Fair
Thresh- Target Maxi- Thresh- Target Maxi- Awards: Number Option Value of
old ($) mum old (#) mum Number of Awards Stock
($) ($) (#) (#) of Securities ($/Sh) and
Shares Under- Option
of Stock lying Awards
or Units Options
(#) (#)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)
------------ ---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
Terry D. 2/16/06(1) 82,031 328,125 656,250 - - - - - - -
Hildestad
---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
2/16/06(2) - - - 2,388 23,883 47,766 - - - 602,330
---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
8/16/06(1) 58,594 234,375 468,750 - - - - - - -
------------ ---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
Martin A. 2/16/06(3) 187,500 750,000 1,500,000 - - - - - - -
White
------------ ---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
Vernon A. 2/16/06(4) 39,844 159,375 318,750 - - - - - - -
Raile
---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
2/16/06(2) - - - 1,243 12,429 24,858 - - - 313,460
------------ ---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
Warren L. - - - - - - - - - - -
Robinson
------------ ---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
William E. 2/16/06(5) 49,000 196,000 392,000 - - - - - - -
Schneider
---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
2/16/06(2) - - - 1,529 15,285 30,570 - - - 385,488
------------ ---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
John K. 2/16/06(6) 7,708 30,833 61,667 - - - - - - -
Castleberry
---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
3/04/06(7) 31,250 125,000 250,000 - - - - - - -
---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
2/16/06(2) - - - 975 9,748 19,496 - - - 245,845
---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
John G. Harp 2/16/06(8) 38,750 155,000 310,000 - - - - - - -
---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
2/16/06(2) - - - 1,007 10,072 20,144 - - - 254,016
------------ ---------- ---------- ---------- ----------- ---------- ------- ------------ --------- ---------- ---------- ---------
(1) Annual incentive for 2006 granted pursuant to the Long-Term
Performance-Based Incentive Plan. Mr. Hildestad's grants are prorated to
reflect his 7.5 months as COO and his 4.5 months as CEO.
(2) Performance shares for the 2006-2008 performance period granted pursuant to
the Long-Term Performance-Based Incentive Plan.
45
(3) Annual incentive for 2006 granted pursuant to the Long-Term
Performance-Based Incentive Plan.
(4) Annual incentive for 2006 granted pursuant to the MDU Resources Group, Inc.
Executive Incentive Compensation Plan.
(5) Annual incentive for 2006 granted pursuant to the Knife River Corporation
Executive Incentive Compensation Plan.
(6) Annual incentive for 2006 granted pursuant to the WBI Holdings, Inc.
Executive Incentive Compensation Plan. Mr. Castleberry's awards are
prorated to reflect his two months as CEO of WBI Holdings and his ten
months as Executive Vice President - Administration of MDU Resources Group,
Inc.
(7) Annual incentive for 2006 granted pursuant to the MDU Resources Group, Inc.
Executive Incentive Compensation Plan. Mr. Castleberry's awards are
prorated to reflect his two months as CEO of WBI Holdings and his ten
months as Executive Vice President - Administration of MDU Resources Group,
Inc.
(8) Annual incentive for 2006 granted pursuant to the MDU Construction Services
Group, Inc. Executive Incentive Compensation Plan.
46
Narrative Discussion Relating to the Summary Compensation Table
and Grants of Plan-Based Awards Table
Incentive Awards
Annual Incentive
----------------
On February 14, 2006, the compensation committee recommended 2006 annual
award opportunities for our named executive officers, and the board approved
these opportunities at its meeting on February 16, 2006. These award
opportunities are reflected in the Grants of Plan-Based Awards table at grant on
February 16, 2006 in columns (c), (d) and (e) and in the Summary Compensation
Table as earned with respect to 2006 in column (g).
Executive officers may receive annual cash incentive awards based upon
achievement of annual performance measures with a threshold, target and maximum
level. A target incentive award is established based upon a percent of the
executive's base salary. Actual payment may range from zero to 200% of the
target based upon achievement of corporate goals.
Participants who retire, die or become disabled during the year remain
eligible to receive an award. Subject to the compensation committee's
discretion, executives who terminate employment for other reasons are not
eligible for an award. The committee has full discretion to determine the extent
to which goals have been achieved, the payment level, whether any final payment
will be made and whether to adjust awards downward.
For Messrs. White, Hildestad, Robinson and Raile and for Mr. Castleberry,
as executive vice president - administration, the performance measures for
annual incentive awards are our annual return on invested capital compared to
target and our annual earnings per share compared to target. For Messrs.
Schneider and Harp and for Mr. Castleberry, as president and chief executive
officer of WBI Holdings, Inc., the performance measures for annual incentive
awards are their respective business unit's annual return on invested capital
compared to target and their respective business unit's allocated earnings per
share compared to target. During Mr. Castleberry's tenure as president and chief
executive officer of WBI Holdings, Inc., the safety record of that business unit
also was a performance measure for Mr. Castleberry.
For 2006, the compensation committee weighted the goals for annual return
on invested capital compared to planned results and allocated earnings per share
compared to planned results each at 50%.
We limit the aggregate amount of annual incentive compensation we will pay
to all our executive officers to 20 percent of after tax earnings in excess of
planned earnings. The 20 percent limitation is measured at the major business
unit level for business unit executives and at the corporate level for corporate
executives.
47
The award opportunities available to each named executive officer were:
2006 earnings per share Corresponding payment of earnings
results as a % of 2006 plan per share annual incentive target
--------------------------- ---------------------------------
less than 85% 0%
85% 25%
90% 50%
95% 75%
100% 100%
103% 120%
106% 140%
109% 160%
112% 180%
115% or more 200%
2006 return on invested capital Corresponding payment of return on
results as a % of 2006 plan invested capital annual incentive target
--------------------------- ----------------------------------------
less than 85% 0%
85% 25%
90% 50%
95% 75%
100% 100%
103% 120%
106% 140%
109% 160%
112% 180%
115% or more 200%
For discussion of the specific incentive plan performance targets and
results, please see the compensation discussion and analysis.
Mr. Harp
--------
In addition to the annual incentive Mr. Harp earned under our executive
incentive compensation plan, he also earned an additional $500,000 one-time
bonus payment. When Mr. Harp was hired in September 2004 to effectuate a
turn-around of MDU Construction Services Group, Inc., he was offered incentive
opportunities of (i) $250,000 if MDU Construction Services Group, Inc. reported
annual net income of $12.5 million in 2007 or sooner and in addition (ii)
$500,000 if MDU Construction Services Group, Inc. reported annual net income of
$18.6 million or more in fiscal year 2008 or sooner. The first goal was met in
2005, and in fiscal year 2006 MDU Construction Services Group, Inc. met the
second goal.
Long-Term Incentive
-------------------
On February 14, 2006, the compensation committee recommended long-term
incentive grants to the named executive officers in the form of performance
shares, and the board approved
48
these grants at its meeting on February 16, 2006. These grants are reflected in
columns (f), (g), (h) and (l) of the Grants of Plan-Based Awards table.
From 0% to 200% of the target grant will be paid out in February 2009
depending on our 2006-2008 total stockholder return compared to the total
three-year stockholder returns of companies in our performance graph peer group.
The payout percentage is determined as follows:
--------------------------------------------------------------------------------
The Company's Percentile Rank Payout Percentage of Feb. 16, 2006
Grant
--------------------------------------------------------------------------------
100th 200%
--------------------------------------------------------------------------------
75th 150%
--------------------------------------------------------------------------------
50th 100%
--------------------------------------------------------------------------------
40th 10%
--------------------------------------------------------------------------------
Less than 40th 0%
--------------------------------------------------------------------------------
Payouts for percentile ranks falling between the intervals will be
interpolated. We also will pay dividend equivalents in cash on the number of
shares actually earned for the performance period. The dividend equivalents will
be paid in 2009 at the same time as the performance awards are paid.
Mr. Robinson
Warren L. Robinson was our executive vice president and chief financial
officer until January 3, 2006 and an employee until he retired February 17,
2006. Because of his retirement, Mr. Robinson received no base salary increase
or incentive compensation for 2006. We entered into an agreement with Warren L.
Robinson on November 23, 2005 in connection with his retirement as executive
vice president and chief financial officer. Mr. Robinson received a severance
payment of $1,000,000.
Salary and Bonus in Proportion to Total Compensation
The following table shows the proportion of salary to total compensation.
We paid no bonuses in 2006.
--------------------------------------------------------------------------------
Name Salary Total Compensation Salary as % of
($) ($) Total Compensation
--------------------------------------------------------------------------------
Terry D. Hildestad 562,500
--------------------------------------------------------------------------------
Martin A. White 468,750
--------------------------------------------------------------------------------
Vernon A. Raile 318,750
--------------------------------------------------------------------------------
Warren L. Robinson 53,125
--------------------------------------------------------------------------------
William E. Schneider 392,000
--------------------------------------------------------------------------------
John K. Castleberry 311,667
--------------------------------------------------------------------------------
John G. Harp 310,000
--------------------------------------------------------------------------------
49
Outstanding Equity Awards at Fiscal Year-End 2006
--------------- ------------------------------------------------------------------ --------------------------------------------
Option Awards Stock Awards
--------------- ------------------------------------------------------------------ --------------------------------------------
Name Number Number of Equity
of Securities Incentive Option Option Number of Market Equity Equity
Securities Underlying Plan Exercise Expiration Shares Value Incentive Incentive
Underlying Unexercised Awards: Price Date or Units of Plan Plan Awards:
Unexercised Options Number of ($) of Stock Shares Awards: Market or
Options (#) Securities That or Units Number of Payout Value
(#) Unexercisable Underlying Have of Stock Unearned of Unearned
Exercisable Unexercised Not That Shares, Shares, Units
Unearned Vested Have Units or Other
Options (#) Not or Other Rights That
(#) Vested Rights Have Not
($) That Have Vested
Not Vested ($)
(#)
(a) (b) (c)1, (2) (d) (e) (1) (f) (g)(1)(3) (h) (i)(4) (j)(5)
--------------- -------------- ---------------- ----------- --------- ------------ --------- -------- ---------- --------------
Terry D. - 68,995 - 13.2178 2/15/2011 3,712 95,176 62,650 1,606,346
Hildestad
--------------- -------------- ---------------- ----------- --------- ------------ --------- -------- ---------- --------------
Martin A. - - - - - - - 104,702 2,684,559
White
--------------- -------------- ---------------- ----------- --------- ------------ --------- -------- ---------- --------------
Vernon A. - - - - - 1,114 28,563 25,155 644,974
Raile
--------------- -------------- ---------------- ----------- --------- ------------ --------- -------- ---------- --------------
Warren L. - - - - - - - 27,081 694,357
Robinson
--------------- -------------- ---------------- ----------- --------- ------------ --------- -------- ---------- --------------
William E. - 57,015 - 13.2178 2/15/2011 2,970 76,151 41,353 1,060,291
Schneider
--------------- -------------- ---------------- ----------- --------- ------------ --------- -------- ---------- --------------
John K. - - - - - 2,970 76,151 48,515 1,243,925
Castleberry
--------------- -------------- ---------------- ----------- --------- ------------ --------- -------- ---------- --------------
John G. Harp - - - - - - - 20,839 534,312
--------------- -------------- ---------------- ----------- --------- ------------ --------- -------- ---------- --------------
(1) Adjusted for the 3-for-2 stock split effective July 26, 2006.
(2) These options were granted in 2001 and vest on February 15, 2010. Vesting
of some or all options may be accelerated upon change of control or upon
attainment of performance goals during three-year performance cycles:
2001-2003, 2004-2006 and 2007-2009. Dividend equivalents were granted with
the options and may be earned from 0% to 200% at the end of the performance
cycles to the extent options vest.
(3) These shares of restricted stock were granted in 2001 and vest on February
15, 2010. Vesting of some or all shares may be accelerated upon change of
control or if the total stockholder return equals or exceeds the 50th
percentile of the performance graph peer group during three-year
performance cycles: 2001-2003, 2004-2006 and 2007-2009. Non-preferential
dividends are paid on these shares.
(4) Consists of performance shares for the 2004-2006, 2005-2007 and 2006-2008
performance periods, shown at the target level, based on 2006 performance
above the threshold level but below target.
(5) Value based on the number of performance shares at target multiplied by
$25.64, the year-end closing price.
50
Option Exercises and Stock Vested during 2006
------------------------------------------------------------------------------------
Option Awards Stock Awards
------------------------------------------------------------------------------------
Name Number of Value Realized Number of Shares Value Realized
Shares Acquired on Exercise Acquired on on Vesting
on Exercise ($) Vesting ($)
(#) (#)
(a) (b) (c) (d)(1)(2) (e)(3)
------------------------------------------------------------------------------------
Terry D. - - 12,030 287,490
Hildestad
------------------------------------------------------------------------------------
Martin A. - - 30,508 732,968
White
------------------------------------------------------------------------------------
Vernon A. - - 5,105 121,475
Raile
------------------------------------------------------------------------------------
Warren L. - - 10,995 263,582
Robinson
------------------------------------------------------------------------------------
William E. - - 9,243 220,658
Schneider
------------------------------------------------------------------------------------
John K. - - 10,995 263,582
Castleberry
------------------------------------------------------------------------------------
John G. Harp - - - -
------------------------------------------------------------------------------------
(1) Adjusted for the 3-for-2 stock split effective July 26, 2006.
(2) Reflects performance shares for the 2003-2005 performance period that
vested on February 16, 2006.
(3) Reflects the value of performance shares based on our stock price of $23.10
(split adjusted) on February 16, 2006 and the dividend equivalents that
were paid on the vested shares.
51
Pension Benefits for 2006
------------------------------------------------------------------------------------
Name Plan Name Number of Present Value Payments
Years Credited of Accumulated During Last
Service Benefit Fiscal Year
(#) ($) ($)
(a) (b) (c) (d) (e)
------------------------------------------------------------------------------------
Terry D.
Hildestad Pension Plan 33
----------------------------------------------------------------------
SISP I(1) 24
----------------------------------------------------------------------
SISP II(2) 24
----------------------------------------------------------------------
SISP Excess 24
------------------------------------------------------------------------------------
Martin A.
White Pension Plan 14 $13,318
----------------------------------------------------------------------
SISP I(1) 14 $146,000
----------------------------------------------------------------------
SISP II(2) 14
----------------------------------------------------------------------
SISP Excess 0
------------------------------------------------------------------------------------
Vernon A.
Raile Pension Plan 27
----------------------------------------------------------------------
SISP I(1) 24
----------------------------------------------------------------------
SISP II(2) 24
----------------------------------------------------------------------
SISP Excess 24
------------------------------------------------------------------------------------
Warren L.
Robinson Pension Plan 17 $36,168
----------------------------------------------------------------------
SISP I(1) 17
----------------------------------------------------------------------
SISP II(2) 17
----------------------------------------------------------------------
SISP Excess 17 $32,245
------------------------------------------------------------------------------------
William E.
Schneider Pension Plan 13
----------------------------------------------------------------------
SISP I(1) 12
----------------------------------------------------------------------
SISP II(2) 12
----------------------------------------------------------------------
SISP Excess 12
------------------------------------------------------------------------------------
John K.
Castleberry Pension Plan 25
----------------------------------------------------------------------
SISP I(1) 18
----------------------------------------------------------------------
SISP II(2) 18
------------------------------------------------------------------------------------
52
------------------------------------------------------------------------------------
SISP Excess 18
------------------------------------------------------------------------------------
John G. Harp Pension Plan 2
----------------------------------------------------------------------
SISP I(1) 1
----------------------------------------------------------------------
SISP II(2) 1
----------------------------------------------------------------------
SISP Excess 1
----------------------------------------------------------------------
Harp Additional
Retirement Benefit [ ]
------------------------------------------------------------------------------------
(1) Grandfathered under Section 409A.
(2) Not grandfathered under Section 409A.
[Valuation method and all material assumptions used in quantifying
present value to be provided.]
Pension Plan
------------
Messrs. Hildestad, White, Raile, Robinson, Castleberry and Harp participate
in the MDU Resources Group, Inc. Pension Plan for Non-Bargaining Unit Employees,
which we refer to as our pension plan. Mr. Schneider participates in the Knife
River Corporation Salaried Employees' Pension Plan, which we refer to as the KR
pension plan. Pension benefits under our plan are based upon the participant's
average annual salary over the 60 consecutive month period in which the
participant received the highest annual salary during the participant's final 10
years of service. For this purpose, only a participant's salary is considered;
bonuses and other forms of compensation are not included. Benefits are
determined by multiplying (1) the participant's years of credited service by (2)
the sum of (a) the average annual salary up to the social security integration
level times 1.1% and (b) the average annual salary over the social security
integration level times 1.45%. The KR pension plan uses the same formula except
that 1.2% and 1.6% are used instead of 1.1% and 1.45%. The maximum years of
service recognized when determining benefits under the pension plans is 35.
Pension plan benefits are not reduced for social security benefits.
Participants must remain employed until age 60 or defer election of the
benefit until age 62 to receive unreduced retirement benefits under our plan and
until age 62 under the KR pension plan. Mr. Raile is currently eligible for
unreduced retirement benefits under our pension plan. Mr. White, who retired in
August 2006, is receiving unreduced retirement benefits. Participants whose
employment terminates between the ages of 55 and 60, with 5 years of service, in
our plan and between the ages of 55 and 62, with 5 years of service, in the KR
pension plan are eligible for early retirement benefits. Early retirement
benefits are determined by reducing the normal retirement benefit by .25% per
month for each month before age 60 in our plan and age 62 in the KR pension
plan. If a participant's employment terminates before age 55, the same reduction
applies for each month the termination occurs before age 62, with the reduction
capped at 21%. Messrs. Hildestad, Schneider and Robinson are currently eligible
for early retirement benefits.
Benefits for single participants under the pension plans are paid as
straight life amounts and benefits for married participants are paid as
actuarially reduced pensions with a survivorship
53
benefit for spouses, unless participants choose otherwise. Participants who
terminate employment before age 55 may elect to receive their benefits in a lump
sum.
The Internal Revenue Code places limitations on benefit amounts that may be
paid under the pension plans and on the amount of compensation that may be
recognized when determining benefits. In 2006, the maximum annual benefit
payable under the pension plans was $175,000 and the maximum amount of
compensation that could be recognized when determining benefits was $220,000.
Supplemental Income Security Plan
---------------------------------
We also offer key managers and executives, including all of our named
executive officers, benefits under our nonqualified retirement plan, which we
refer to as the Supplemental Income Security Plan or SISP. Benefits under the
SISP consist of
o a supplemental retirement benefit intended to supplement the
retirement income provided under our qualified pension plans - we
refer to this benefit as the regular SISP benefit
o an excess retirement benefit relating to Internal Revenue Code
limitations on retirement benefits provided under our qualified
pension plans - we refer to this benefit as the excess SISP benefit
and
o death benefits - we refer to this benefit as the SISP death benefit.
Regular SISP Benefits and Death Benefits
Regular SISP benefits and death benefits are determined by reference to a
schedule. Our compensation committee, after receiving recommendations from our
chief executive officer, determines the level at which participants are placed
in the schedule. A participant's placement is generally, but not always,
determined by reference to the participant's annual base salary.
Participants can elect to receive (1) the regular SISP benefit only, (2)
the SISP death benefit only or (3) a combination of both. Regardless of the
participant's election, if the participant dies before the regular SISP benefit
would commence, only the SISP death benefit is provided. If the participant
elects to receive both a regular SISP benefit and a SISP death benefit, each of
the benefits is reduced proportionately.
The regular SISP benefits reflected in the table above are based on the
assumption that the participant elects to receive only the regular SISP benefit.
The present values of the SISP death benefits that would be provided if the
named executive officers were to die prior to the commencement of regular SISP
benefits are reflected in the table that appears in the section entitled
"Potential Payments Upon Termination or Change of Control."
We amended the SISP in 2005 to address changes in applicable tax laws
resulting from the enactment of section 409A of the Internal Revenue Code. As
amended, regular SISP benefits that were vested as of December 31, 2004 and were
thereby grandfathered under section 409A remain subject to SISP provisions then
in effect. We refer to these benefits as SISP I benefits. Regular SISP benefits
that are subject to section 409A, which we refer to as SISP II benefits, are
54
governed by amended provisions intended to comply with section 409A.
Participants generally have more discretion with respect to the distributions of
their SISP I benefits.
The time and manner in which the regular SISP benefits are paid depend on a
variety of factors, including the time and form of benefit elected by the
participant and whether the benefits are SISP I benefits or SISP II benefits.
Unless the participant elects otherwise, the SISP I benefits are paid over 180
months, with benefits commencing when the participant attains age 65 or, if
later, when the participant retires. Distribution of SISP II benefits generally
is deferred for six months and the benefits are paid over 173 months. If the
participant dies after the regular SISP benefits have begun but before receipt
of all of the regular SISP benefits, the remaining payments are made to the
participant's designated beneficiary. The regular SISP benefits reflected in the
table above are based on the assumption that the participants' SISP I and SISP
II benefits commenced at age 65.
Rather than receiving their regular SISP benefits in equal monthly
installments over 15 years commencing at age 65, participants can elect a
different form and time of commencement of their SISP I benefits. Participants
can elect to defer commencement of the regular SISP benefits - if this is
elected, the participant retains the right to receive a monthly SISP death
benefit if death occurs prior to the commencement of the regular SISP benefit.
Alternatively, participants can elect to receive both a regular SISP benefit and
a SISP death benefit. A similar, one-time election may be made with respect to
SISP II benefits, provided the election is made sufficiently in advance of the
date SISP retirement benefits start.
Participants also can elect to receive their SISP I benefits in one of
three actuarially equivalent forms - a life annuity, one hundred percent joint
and survivor annuity or a joint and two-thirds joint and survivor annuity,
provided that the cost of providing these actuarial equivalent forms of benefits
does not exceed the cost of providing the normal form of benefit. Additionally,
the SISP's administrator may choose to pay the SISP I benefits in the form of an
actuarial equivalent lump sum. Neither the election to receive an actuarial
equivalent benefit nor the administrator's right to pay the regular SISP benefit
in the form of an actuarially equivalent lump sum are available with respect to
SISP II benefits.
To promote retention, the regular SISP benefits are subject to the
following ten-year vesting schedule:
o 0% vesting for less than 3 years of participation
o 20% vesting for 3 years of participation
o 40% vesting for 4 years of participation and
o an additional 10% vesting for each additional year of participation up
to 100% vesting for 10 years of participation.
SISP death benefits become fully vested if the participant dies while
actively employed. Otherwise, the SISP death benefits are subject to the same
vesting schedule as the regular SISP benefits.
55
Excess SISP Benefits
Excess SISP benefits are equal to the difference between (1) the monthly
retirement benefits that would have been payable to the participant under our
qualified pension plan absent the limitations under the Internal Revenue Code
and (2) the actual benefits payable to the participant under the qualified
pension plan. Participants are only eligible for the excess SISP benefits if (1)
the participant is fully vested under his qualified pension plan, (2) the
participant's employment terminates prior to age 65 and (3) benefits under the
qualified pension plan are reduced due to limitations under the Internal Revenue
Code on plan compensation. With the exception of Mr. Harp, each of the named
executive officers would be entitled to the excess SISP benefits if they were to
terminate employment prior to age 65. Mr. Harp must remain employed until age 60
to become entitled to his excess SISP benefit.
Benefits generally commence six months after the participant's employment
terminates and continue up to age 65 or until the death of the participant, if
prior to age 65. If a participant who dies prior to age 65 elected a joint and
survivor benefit, the survivor's excess SISP benefits are paid until the date
the participant would have attained age 65.
The amounts reflected in the table above were determined by assuming
benefits commenced at age 60 for Messrs. Hildestad, Castleberry and Harp and age
62 for Mr. Schneider. These are the earliest ages at which the executives could
begin receiving unreduced benefits. For Mr. Raile, who is age 61, the amount
reflects an assumption of an immediate retirement. For Messrs. White and
Robinson, the amounts reflect the fact that they are retired and in payment.
To encourage Mr. Harp to remain with the company through 2007, on November
16, 2006, our board of directors approved an additional retirement benefit for
Mr. Harp. The benefit provides for Mr. Harp to receive payments that represent
the equivalent of an additional three years of service under the pension plan
and the SISP if he remains employed through January 2, 2008 and if he has a
succession plan in place prior to his departure. The additional three years of
service recognize Mr. Harp's previous employment with a subsidiary of the
company. If Mr. Harp were to retire or resign on January 2, 2008, and live to
age 81, the equivalent of the additional three years of service under the
pension plan would yield total payments to Mr. Harp of $421,462 over his
lifetime. The equivalent of the additional three years of service under the SISP
would yield total payments to Mr. Harp of $874,440 beginning at age 65 and
lasting for 15 years, assuming he does not die before age 65.
The SISP also provides that if a participant becomes totally disabled, the
participant will continue to receive credit for up to two additional years under
the SISP as long as the participant is totally disabled during such time. Since
the named executive officers other than Mr. Harp are fully vested in their SISP
benefits, this would not result in any incremental benefit for the named
executive officers other than Mr. Harp. The present value of these two
additional years of service for Mr. Harp is reflected in the table that appears
in the section entitled "Potential Payments Upon Termination or Change of
Control."
56
Nonqualified Deferred Compensation for 2006
-----------------------------------------------------------------------------------
Name Executive Registrant Aggregate Aggregate Aggregate
Contributions Contributions Earnings in Withdrawals/ Balance
in in Last Distributions at Last
Last FY Last FY FY ($) FYE
($) ($) ($) ($)
(a) (b)(1) (c) (d) (e) (f)
-----------------------------------------------------------------------------------
Terry D. 20,597 - 49,367 - 664,805
Hildestad
-----------------------------------------------------------------------------------
Martin A. - - - - -
White
-----------------------------------------------------------------------------------
Vernon A. 195,624 - 87,475 - 1,201,243
Raile
-----------------------------------------------------------------------------------
Warren L. - - 43,698 - 589,860
Robinson
-----------------------------------------------------------------------------------
William 166,667 - 49,180 - 677,952
E.
Schneider
-----------------------------------------------------------------------------------
John K. - - - - -
Castleberry
-----------------------------------------------------------------------------------
John G. - - - - -
Harp
-----------------------------------------------------------------------------------
(1) Amounts reported were reflected in the Summary Compensation Table for 2005
but not in the Summary Compensation Table for 2006. Amounts reported in the
Summary Compensation Table for 2006 in column (g) that our named executive
officers have elected to defer are credited in 2007 and will be reflected
in this table for 2007.
Participants in the executive incentive compensation plans may elect to
defer up to 100% of their annual incentive awards. Deferred amounts will accrue
interest at a rate determined annually by the compensation committee. The
committee has established the interest rate at prime plus one percent as
reported on the last Friday in January of each year. The interest rate in effect
for 2006, commencing January 27, 2006 was 8.25%. The deferred amount will be
paid in accordance with the participant's election, following termination of
employment or beginning in the fifth year following the year the award was
granted. The amounts will be paid in accordance with the participant's election
in monthly installments not to exceed 120 months. In the event of a change of
control, all amounts become immediately payable.
57
Potential Payments upon Termination or Change of Control
Terry D. Hildestad
------------------
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Not for
Cause or
Executive Benefits and Change of Good
Payments Upon Not for Control Reason
Termination or Voluntary Early Normal Cause For Cause (without Termination
Change of Control Termination Retirement Retirement Termination Termination Death Disability termination) (CoC)
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Compensation:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Base Salary
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Short-term incentive
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2004-2006
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2005-2007
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2006-2008
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Stock Options
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Restricted Stock
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Benefits and
Perquisites:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Pension*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Regular SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Excess SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Post-Retirement
Health Care
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Life Insurance
Proceeds
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Disability
Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Employee Assistance
Program
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Continuation of
Welfare Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Outplacement
Services
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Tax Gross-up on
Perquisites
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
280G Tax Gross-up
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Total:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
* Executive is also entitled to all benefits reflected on the Pension
Benefits for 2006 table and the Nonqualified Deferred Compensation for 2006
table. Amounts shown here represent the additional benefits to which the
executive would be entitled.
58
Martin A. White**
---------------
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Not for
Cause or
Executive Benefits and Change of Good
Payments Upon Not for Control Reason
Termination or Voluntary Early Normal Cause For Cause (without Termination
Change of Control Termination Retirement Retirement Termination Termination Death Disability termination) (CoC)
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Compensation:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Base Salary
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Short-term incentive
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2004-2006
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2005-2007
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2006-2008
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Stock Options
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Restricted Stock
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Benefits and
Perquisites:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Pension*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Regular SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Excess SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Post-Retirement
Health Care
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Life Insurance
Proceeds
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Disability
Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Employee Assistance
Program
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Continuation of
Welfare Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Outplacement
Services
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Tax Gross-up on
Perquisites
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
280G Tax Gross-up
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Total:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
* Executive is also entitled to all benefits reflected on the Pension
Benefits for 2006 table and the Nonqualified Deferred Compensation for 2006
table. Amounts shown here represent the additional benefits to which the
executive would be entitled.
** Mr. White retired on August 17, 2006.
59
Vernon A. Raile
---------------
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Not for
Cause or
Executive Benefits and Change of Good
Payments Upon Not for Control Reason
Termination or Voluntary Early Normal Cause For Cause (without Termination
Change of Control Termination Retirement Retirement Termination Termination Death Disability termination) (CoC)
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Compensation:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Base Salary
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Short-term incentive
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2004-2006
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2005-2007
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2006-2008
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Stock Options
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Restricted Stock
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Benefits and
Perquisites:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Pension*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Regular SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Excess SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Post-Retirement
Health Care
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Life Insurance
Proceeds
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Disability
Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Employee Assistance
Program
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Continuation of
Welfare Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Outplacement
Services
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Tax Gross-up on
Perquisites
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
280G Tax Gross-up
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Total:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
* Executive is also entitled to all benefits reflected on the Pension
Benefits for 2006 table and the Nonqualified Deferred Compensation for 2006
table. Amounts shown here represent the additional benefits to which the
executive would be entitled.
60
Warren L. Robinson**
------------------
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Not for
Cause or
Executive Benefits and Change of Good
Payments Upon Not for Control Reason
Termination or Voluntary Early Normal Cause For Cause (without Termination
Change of Control Termination Retirement Retirement Termination Termination Death Disability termination) (CoC)
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Compensation:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Base Salary
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Severance
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Short-term incentive
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2004-2006
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2005-2007
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2006-2008
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Stock Options
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Restricted Stock
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Benefits and
Perquisites:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Pension*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Regular SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Excess SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Post-Retirement
Health Care
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Life Insurance
Proceeds
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Disability
Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Employee Assistance
Program
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Continuation of
Welfare Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Outplacement
Services
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Tax Gross-up on
Perquisites
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
280G Tax Gross-up
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Total:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
* Executive is also entitled to all benefits reflected on the Pension
Benefits for 2006 table and the Nonqualified Deferred Compensation for 2006
table. Amounts shown here represent the additional benefits to which the
executive would be entitled.
** Mr. Robinson retired on February 17, 2006
61
William E. Schneider
--------------------
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Not for
Cause or
Executive Benefits and Change of Good
Payments Upon Not for Control Reason
Termination or Voluntary Early Normal Cause For Cause (without Termination
Change of Control Termination Retirement Retirement Termination Termination Death Disability termination) (CoC)
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Compensation:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Base Salary
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Short-term incentive
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2004-2006
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2005-2007
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2006-2008
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Stock Options
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Restricted Stock
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Benefits and
Perquisites:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Pension*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Regular SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Excess SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Post-Retirement
Health Care
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Life Insurance
Proceeds
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Disability
Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Employee Assistance
Program
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Continuation of
Welfare Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Outplacement
Services
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Tax Gross-up on
Perquisites
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
280G Tax Gross-up
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Total:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
* Executive is also entitled to all benefits reflected on the Pension
Benefits for 2006 table and the Nonqualified Deferred Compensation for 2006
table. Amounts shown here represent the additional benefits to which the
executive would be entitled.
62
John K. Castleberry
-------------------
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Not for
Cause or
Executive Benefits and Change of Good
Payments Upon Not for Control Reason
Termination or Voluntary Early Normal Cause For Cause (without Termination
Change of Control Termination Retirement Retirement Termination Termination Death Disability termination) (CoC)
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Compensation:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Base Salary
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Short-term incentive
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2004-2006
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2005-2007
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2006-2008
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Stock Options
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Restricted Stock
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Benefits and
Perquisites:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Pension*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Regular SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Excess SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Post-Retirement
Health Care
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Life Insurance
Proceeds
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Disability
Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Employee Assistance
Program
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Continuation of
Welfare Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Outplacement
Services
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Tax Gross-up on
Perquisites
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
280G Tax Gross-up
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Total:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
* Executive is also entitled to all benefits reflected on the Pension
Benefits for 2006 table and the Nonqualified Deferred Compensation for 2006
table. Amounts shown here represent the additional benefits to which the
executive would be entitled.
63
John G. Harp
------------
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Not for
Cause or
Executive Benefits and Change of Good
Payments Upon Not for Control Reason
Termination or Voluntary Early Normal Cause For Cause (without Termination
Change of Control Termination Retirement Retirement Termination Termination Death Disability termination) (CoC)
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Compensation:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Base Salary
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Short-term incentive
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2004-2006
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2005-2007
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
2006-2008
Performance Shares
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Stock Options
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Restricted Stock
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Benefits and
Perquisites:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Pension*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Regular SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Incremental
Excess SISP*
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Additional
Retirement
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Post-Retirement
Health Care
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Life Insurance
Proceeds
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Disability
Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Employee Assistance
Program
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Continuation of
Welfare Benefits
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Outplacement
Services
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Tax Gross-up on
Perquisites
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
280G Tax Gross-up
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
Total:
------------------------ ------------ ---------- ---------- ------------ ----------- ------ ---------- ------------ ------------
* Executive is also entitled to all benefits reflected on the Pension
Benefits for 2006 table and the Nonqualified Deferred Compensation for 2006
table. Amounts shown here represent the additional benefits to which the
executive would be entitled.
64
Discussion of Potential Payments upon Termination or Change of Control
We have change of control employment agreements with our named executive
officers and other executives, which provide certain protections to the
executives in the event there is a change of control of the company.
We define "change of control" as
o the acquisition by an individual, entity or group of 20% or more
of our voting securities
o a turnover in a majority of our board of directors without the
approval of a majority of the members of the board who were
members of the board as of the agreement date or whose election
was approved by such board members
o consummation of a merger or consolidation, unless our
stockholders immediately prior to the merger beneficially own
more than 60% of the outstanding shares and voting power of the
resulting corporation after the merger or
o stockholder approval of our liquidation or dissolution.
If a change of control occurs, the agreements provide for a three-year
employment period from the date of the change of control, during which the named
executive officer is entitled to receive
o a base salary not less than the highest amount paid within the
preceding twelve months
o annual bonuses not less than the highest bonus paid within the
three years before the change of control and
o participation in our incentive, savings, retirement and welfare
benefit plans.
The agreements also provide that severance payments and benefits will be
provided
o if the named executive officer's employment is terminated during
the employment period, other than for cause or disability
o if the named executive officer's employment is terminated prior
to the change of control, if connected to the change of control,
other than for cause or disability or
65
o the named executive officer resigns for good reason, which
includes for any reason during the 30-day period beginning on the
first anniversary of the change of control.
"Cause" means the named executive officer's willful and continued failure
to substantially perform his duties or willfully engaging in illegal conduct or
gross misconduct materially injurious to the company. "Good reason" includes
o the diminution of the named executive officer's position,
authority, duties or responsibilities
o the reduction of the named executive officer's pay or benefits
and
o relocation or increased travel obligations.
In such event, the named executive officer would receive
o three times his highest annual base pay within the last twelve
months
o three times his highest annual bonus, as defined
o an immediate pro-rated cash-out of his bonus for the year of
termination based on the highest annual bonus
o an amount equal to the excess of (a) the actuarial equivalent of
the benefit under our qualified and nonqualified retirement plans
that he would receive if he continued employment with the company
for an additional three years over (b) the actual benefit paid or
payable under these plans
o welfare benefit plan coverage for the executive and his family
for three years
o outplacement benefits and
o a modified tax gross-up. This is an additional payment to make
the executive whole for any federal excise tax on excess
parachute payments, unless the total parachute payments were not
more than 110% of the safe harbor amount for that tax, in which
case the named executive officer's payments would be reduced to
the safe harbor amount.
Any compensation previously deferred will be distributed upon a termination
in connection with a change of control. In addition, any awards granted under
the Long-Term Performance-Based Incentive Plan vest upon a change of control;
performance awards that are not share-based are paid out in cash.
In case of any termination of employment, the compensation committee may
also consider providing severance benefits on a case-by-case basis. The
compensation committee adopted a checklist of factors in February 2005 to
consider when determining whether any such severance benefits will be made upon
termination.
66
Director Compensation for 2006
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Name Fees Stock Option Non-Equity Change in All Other Total
Earned Awards Awards Incentive Pension Compensation ($)
or ($) ($) Plan Value and ($)
Paid in Compensation Nonqualified
Cash ($) Deferred
($) Compensation
Earnings
(a) (b) (c)(1) (d) (e) (f) (g)(2) (h)
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Thomas 51,250 100,208 -(3) - - 276 151,734
Everist
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Karen B. Fagg 54,333 100,208 - - - 276 154,817
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Dennis W. 65,000 100,208 - - - 276 165,484
Johnson
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Richard H. 58,833 100,208 - - - 276 159,317
Lewis
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Patricia L. 52,833 100,208 - - - 276 153,317
Moss
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Robert L. 39,000 100,208 -(5) - - 910,394(6) 1,049,602
Nance(4)
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
John L. Olson 60,417 100,208 -(7) - - 276 164,901
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Harry J. 86,306 118,756(8) -(9) - - 276 205,339
Pearce
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
Sister 54,333 100,208 -(10) - - 276 154,817
Thomas
Welder,
O.S.B.
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
John K. 55,833 100,208 - - - 276 156,317
Wilson
-------------- ---------- ----------- ------------ ---------------- ---------------- ---------------- ----------------
(1) Valued based on $37.11, the purchase price of the stock on the date of
grant, April 28, 2006.
(2) Group life insurance premium, except for Mr. Nance.
(3) Mr. Everist had 28,686 stock options outstanding as of December 31, 2006,
which are adjusted for the 3-for-2 stock split effective July 26, 2006.
(4) Retired effective August 17, 2006.
(5) Mr. Nance had 33,748 stock options outstanding as of December 31, 2006,
which are adjusted for the 3-for-2 stock split effective July 26, 2006.
(6) Comprised of a group life insurance premium of $184 and the value of Mr.
Nance's deferred compensation at December 31, 2006, which became payable
over five years in accordance with his election after his retirement.
67
(7) Mr. Olson had 28,686 stock options outstanding as of December 31, 2006,
which are adjusted for the 3-for-2 stock split effective July 26, 2006.
(8) Includes $100,208 for the April 28, 2006 stock grant and $18,546 of stock
as part of Mr. Pearce's retainer as chairman of the board.
(9) Mr. Pearce had 13,500 stock options outstanding as of December 31, 2006,
which are adjusted for the 3-for-2 stock split effective July 26, 2006.
(10) Sister Thomas Welder is a member of the Benedictine Sisters of the
Annunciation, B.M.V., which had 5,500 stock options outstanding as of
December 31, 2006, as adjusted for the 3-for-2 stock split effective July
26, 2006.
We increased compensation for our directors effective June 1, 2006.
Each non-employee director, other than the lead director, if any, and the
non-executive chairman of the board, receives $30,000, an increase of $10,000,
and 4,050 shares of our common stock as an annual retainer for board service.
The lead director, if any, receives $63,000 and 4,050 shares of our common stock
as an annual retainer. The non-executive chairman, which is a new position,
receives $100,000, one-half in cash and one-half in stock, and 4,050 shares of
our common stock as an annual retainer. We make the grants of our common stock
on or about the fifteenth business day following the annual meeting of
stockholders pursuant to the 1997 Non-Employee Director Long-Term Incentive
Plan.
The audit committee chairman receives an additional $10,000 annual
retainer, an increase of $2,500. The nominating and governance and compensation
committee chairmen each receive an additional $5,000 annual retainer, an
increase of $1,000.
Each non-employee director also receives $1,500 for each board meeting
attended and each committee member receives $1,500 for each committee meeting
attended.
In addition to liability insurance, we maintain group life insurance in the
amount of $100,000 on each non-employee director for the benefit of each
director's beneficiaries during the time each director serves on the board. The
annual cost per director is $276.
Directors may defer all or any portion of the annual cash retainer, meeting
fees and any other cash compensation paid for service as a director pursuant to
the Deferred Compensation Plan for Directors. Deferred amounts are held as
phantom stock with dividend accruals and are paid out in cash over a five-year
period after the director leaves the board.
Directors are reimbursed for all reasonable travel expenses including
spousal expenses in connection with attendance at meetings of the board and its
committees. All amounts together with any other perquisites were below the
disclosure threshold for 2006.
Our post-retirement income plan for directors was terminated in May 2001
for current and future directors. The net present value of each director's
benefit was calculated and converted into phantom stock. Payment is deferred
pursuant to the Deferred Compensation Plan for Directors and will be made in
cash over a five-year period after the director's retirement from the board.
The board adopted stock ownership guidelines for directors in November
2005. Each director is expected to own our common stock equal in value to five
times the director's annual cash retainer. A director, with good cause and with
the knowledge of the board, may donate or assign all of the director's company
common stock to a charitable, religious or non-profit
68
organization in lieu of ownership. Shares acquired through purchases on the open
market and participation in our director stock plans will be considered in
ownership calculations as will ownership of our common stock by a spouse. A
director is allowed five years commencing January 1 of the year following the
year of that director's initial election to the board to meet the guideline
requirements. The level of common stock ownership is monitored with an annual
report made to the compensation committee of the board at the February meeting.
--------------------------------------------------------------------------------
INFORMATION CONCERNING EXECUTIVE OFFICERS
--------------------------------------------------------------------------------
Our board of directors elects our executive officers, who serve until the
next annual meeting of the board. A majority of our board of directors may
remove any executive officer at any time. Information concerning our executive
officers, including their ages, present corporate positions and business
experience, is as follows:
Name Age Present Corporate Position
and Business Experience
------------------------ ----- --------------------------------------------
Terry D. Hildestad 57 President and Chief Executive Officer.
For information about Mr. Hildestad,
see "Election of Directors."
Steven L. Bietz 48 Mr. Bietz was elected President and
Chief Executive Officer of WBI
Holdings, Inc. effective March 4,
2006; President effective January 2,
2006; Executive Vice President and
Chief Operating Officer effective
September 1, 2002;
Vice President-Administration and
Chief Accounting Officer effective
November 3, 1999;
Vice-President-Administration
effective February 1997; and
Controller effective January 1994.
John K. Castleberry 52 Mr. Castleberry was elected Executive
Vice President - Administration
effective March 4, 2006; President and
Chief Executive Officer of WBI
Holdings, Inc. and Williston Basin
Interstate Pipeline Company effective
November 1998; and President of WBI
Holdings, Inc. effective January 1995.
Paul Gatzemeier 56 Mr. Gatzemeier was elected President
and Chief Executive Officer of
Centennial Energy Resources LLC
effective November 11, 2004; Vice
President and General Manager of
Centennial Energy Resources LLC
effective January 31, 2003; and Vice
President and General Manager of
Centennial Holdings Capital Corp.
effective June 2001.
69
John G. Harp 54 Mr. Harp was elected President and
Chief Executive Officer of Utility
Services Inc., which is now MDU
Construction Services Group, Inc.,
effective September 29, 2004. From May
2004 to September 29, 2004, Mr. Harp
was Vice President of Ledcor Technical
Services Inc., a provider of fiber
optic cable maintenance services.
From April 2001 to May 2004, he was
President of JODE CORP., a broadband
maintenance company. Mr. Harp sold
JODE CORP. to Ledcor Construction in
May 2004. Prior to that, he was
President of Harp Line Constructors
and Harp Engineering, Inc. from July
1998, when they were bought by Utility
Services Inc., to April 2001.
Bruce T. Imsdahl 58 Mr. Imsdahl was elected President and
Chief Executive Officer of
Montana-Dakota Utilities Co. and Great
Plains Natural Gas Co., divisions of
the Company, effective November 11,
2004. He previously was President of
these two divisions effective July 4,
2003. Prior to that, he was Executive
Vice President of these divisions
effective February 5, 2003, Vice
President-Energy Supply of
Montana-Dakota Utilities Co. effective
November 1, 1992 and Vice
President-Power Supply of
Montana-Dakota Utilities Co. effective
May 4, 1989.
Nicole A. Kivisto 33 Ms. Kivisto was elected Controller
effective December 1, 2005. Prior to
that she was a Financial Analyst IV in
the Corporate Planning Department
effective May 2003; a Financial and
Investor Relations Analyst in the
Investor Relations Department
effective May 2000; and a Financial
Analyst in the Corporate Accounting
Department effective July 1995.
Vernon A. Raile 61 Mr. Raile was elected Executive Vice
President, Treasurer and Chief
Financial Officer effective March 1,
2006; Executive Vice President and
Chief Financial Officer effective
January 3, 2006; and Senior Vice
President, Controller and Chief
Accounting Officer effective November
2002. He served as Controller until
May 2003. He was Vice President,
Controller and Chief Accounting
Officer from August 1992 until
November 2002.
Cindy C. Redding 48 Ms. Redding was elected Vice
President-Human Resources effective
July 2003 and was Director of Human
Resources from December 2002 until
70
July 2003. Before joining the Company,
she served from July 1998 until
December 2002 in the positions of
Director, Human Resources, Molded
Plastics Division, as Corporate
Benefits Planning & Delivery Manager,
and as Manager, Strategic Staffing
Services, for Sonoco Products Company,
a global packaging company. Prior to
that, Ms. Redding worked for Abbott
Laboratories, a global health care
company, as Manager, Human Resources,
Abbott International Division, from
1997 to July 1998. From 1980 to 1997,
she worked in various business
administration and human resources
roles, domestic and international, for
Amoco Corporation, a worldwide
integrated energy company.
Paul K. Sandness 52 Mr. Sandness was elected General
Counsel and Secretary of the Company,
its divisions and major subsidiaries
effective April 6, 2004. He also was
elected a Director of the Company's
principal subsidiaries and was
appointed to the Managing Committees
of Montana-Dakota Utilities Co. and
Great Plains Natural Gas Co. Prior to
that he served as a Senior Attorney
effective 1987 and as an Assistant
Secretary of several subsidiary
companies.
William E. Schneider 58 Mr. Schneider was elected President
and Chief Executive Officer of Knife
River Corporation effective May 1,
2005; and Senior Vice
President-Construction Materials
effective from September 15, 1999 to
April 30, 2005.
Doran N. Schwartz 37 Mr. Schwartz was elected Vice
President and Chief Accounting Officer
effective March 1, 2006; and Assistant
Vice President-Special Projects
effective September 6, 2005. Prior to
that, he was Director of
Controllership for American Express, a
financial services company, from
November 2004 to August 2005; Audit
Manager for Deloitte & Touche, an
audit and professional services
company, from June 2002 to November
2004; and Audit Manager/Senior for
Arthur Andersen, an audit and
professional services company, from
December 1997 to June 2002.
John P. Stumpf 47 Mr. Stumpf was elected Vice President
- Strategic Planning effective
December 1, 2006. Mr. Stumpf was Vice
President - Corporate Development for
Knife River Corporation from July 1, 2002 to
71
November 30, 2006 and Director
of Corporate Development of Knife
River Corporation from January 14,
2002 to June 30, 2002. Prior to that,
he was Special Projects Manager for
Knife River Corporation from May 1,
2000 to January 13, 2002.
72
--------------------------------------------------------------------------------
SECURITY OWNERSHIP
--------------------------------------------------------------------------------
The table below sets forth the number of shares of our capital stock that
each director and each nominee for director, each named executive officer and
all directors and executive officers as a group owned beneficially as of
December 31, 2006.
----------------------------------------------------------------------------------------
Common Shares Beneficially
Owned Include:
------------------------------
Shares
Individuals
Have Rights to
Common Shares Acquire Shares Held By
Beneficially Within 60 Family Percent
Name Owned(1) Days(2) Members(3) of Class
------------------------------------------------------------------------------------------
John K. Castleberry 16,980(7) *
Thomas Everist 3,458,473(4) 28,686 1.9
Karen B. Fagg 4,550 *
John G. Harp 100,516(7) *
Terry D. Hildestad 115,625(7) *
Dennis W. Johnson 46,365(5) 4,560 *
Richard H. Lewis 4,050 *
Patricia L. Moss 23,572 *
John L. Olson 111,148 28,686 *
Harry J. Pearce 141,186 13,500 *
Vernon A. Raile 38,449(7) *
Warren L. Robinson 14,111(6) 5,505 *
William E. Schneider 56,092(7) *
Sister Thomas Welder 60,260(8) 5,500 *
Martin A. White 304,431(9) 83,283 *
John K. Wilson 41,942 *
All directors and executive
officers as a group (24 in
number) 4,709,398 76,822 94,885 2.6
------------------------------------------------------------------------------------------
* Less than one percent of the class.
(1) "Beneficial ownership" means the sole or shared power to vote, or to direct
the voting of, a security, or investment power with respect to a security.
(2) Indicates shares of our stock that executive officers and directors have
the right to acquire within 60 days pursuant to stock options. These shares
are included in the "Common Shares Beneficially Owned" column.
(3) These shares are included in the "Common Shares Beneficially Owned" column.
73
(4) Includes 3,420,000 shares of common stock acquired through the sale of
Connolly-Pacific to us.
(5) Mr. Johnson disclaims all beneficial ownership of the 4,560 shares owned by
his wife.
(6) Mr. Robinson resigned from his position as an officer on January 3, 2006
and retired effective February 17, 2006.
(7) Includes full shares allocated to the officer's account in our 401(k)
retirement plan.
(8) The total includes shares held by the Annunciation Monastery, of which
community Sister Welder is a member, and by the University of Mary, of
which Sister Welder is the president. The monastery owns 42,873 shares, and
it may acquire 5,500 shares within 60 days pursuant to stock options. The
university owns 11,887 shares. Sister Welder disclaims all beneficial
ownership of the shares owned by the monastery and the university.
(9) Includes full shares allocated to the officer's account in our 401(k)
retirement plan. Mr. White retired on August 17, 2006.
The table below sets forth information with respect to any person we know
to be the beneficial owner of more than five percent of any class of our voting
securities.
-------------------------------------------------------------------
Title of Class Amount and
Nature Percent
Name and Address of Beneficial of
of Beneficial Owner Ownership Class
-------------------------------------------------------------------
Common Stock New York Life Trust 7,916,227 6.6%
Company (1)(2)
51 Madison Avenue
New York, NY 10010
-------------------------------------------------------------------
(1) In a Schedule 13G/A, Amendment No. 6, filed on February 13, 2006, New York
Life Trust Company indicates that it holds these shares as directed trustee
of our 401(k) plan and has sole voting and dispositive power with respect
to all shares.
(2) Not adjusted for the 3-for-2 stock split effective July 26, 2006.
--------------------------------------------------------------------------------
RELATED PERSON DISCLOSURE
--------------------------------------------------------------------------------
The board of directors has adopted a policy for the review of related
person transactions. This policy is contained in our corporate governance
guidelines, which are posted on our website at www.mdu.com.
74
The audit committee reviews related person transactions in which we are or
will be a participant to determine if they are in the best interests of our
stockholders and the company. Financial transactions, arrangements,
relationships or any series of similar transactions, arrangements or
relationships in which a related person had or will have a material interest and
that exceed $120,000 are subject to the committee's review.
Related persons are directors, director nominees, executive officers,
holders of 5% or more of our voting stock and their immediate family members.
Immediate family members are spouses, parents, stepparents, mothers-in-law,
fathers-in-law, siblings, brothers-in-law, sisters-in-law, children,
stepchildren, daughters-in-law, sons-in-law and any person, other than a tenant
or domestic employee, who shares in the household of a director, director
nominee, executive officer or holder of 5% or more of our voting stock.
After its review, the committee makes a recommendation to the board, which
ultimately decides whether to approve or ratify a related person transaction.
The board's decision may be based on the committee's recommendation or on its
independent evaluation of whether the transaction is in the best interests of
our stockholders and the company.
--------------------------------------------------------------------------------
CORPORATE GOVERNANCE
--------------------------------------------------------------------------------
Director Independence
---------------------
The board of directors has adopted a statement of policy on director
independence that includes categorical standards for director independence. We
have posted this statement of policy to our website at www.mdu.com and attached
the policy to our proxy statement as exhibit "C". The board of directors has
determined that all current members of the board and all members of the board
during 2006
o have or had no material relationship with us and
o are or were independent in accordance with our statement of
policy on director independence standards, the New York Stock
Exchange listing standards and the Sarbanes-Oxley Act of 2002,
except Terry D. Hildestad, our president and chief executive officer, and Martin
A. White, our former chairman and chief executive officer, who retired August
17, 2006.
In determining director independence for 2006, the board of directors
considered the following transactions or relationships:
o Mr. Everist's ownership of approximately 3.5 million shares of
our common stock
o charitable contributions to the City of Dickinson and the
Theodore Roosevelt Medora Foundation - Mr. Johnson is president
of the City of Dickinson board of commissioners and was director
of the foundation
75
o business relationships that we describe in the notes to our
financial statements in our Annual Report on Form 10-K for the
year ended December 31, 2006 between subsidiaries of MDU
Resources Group, Inc. and companies with which Mr. Nance, our
director who retired in August 2006, is affiliated and
o the provision of electric service and charitable contributions to
the University of Mary and St. Alexius Medical Center - Sister
Welder is president of the University of Mary and a director of
St. Alexius.
Code of Conduct
---------------
We have a code of conduct applicable to directors, officers, managerial
employees and all employees involved in financial activities on our behalf. We
also have a code of ethics that applies generally to our employees.
We intend to satisfy our disclosure obligations regarding
o amendments to, or waivers of, any provision of the code of
conduct that applies to our principal executive officer,
principal financial officer and principal accounting officer and
that relates to any element of the code of ethics definition in
Regulation S-K, Item 406(b) and
o waivers of the code of conduct for our directors or executive
officers, as required by New York Stock Exchange listing
standards,
by posting such information on our website at www.mdu.com.
Board Meetings and Committees
-----------------------------
During 2006, the board of directors held eight meetings. Each incumbent
director attended at least 75 percent of the combined total meetings of the
board and the committees on which the director served during 2006. Director
attendance at our annual meeting of stockholders is left to the discretion of
each director. Two directors attended our 2006 annual meeting of stockholders.
Harry J. Pearce served as lead director until August 17, 2006, when he was
elected non-employee chairman of the board. He presides at the executive session
of the non-employee directors held in connection with each regularly scheduled
quarterly board of directors meeting. The non-employee directors also meet in
executive session with the chief executive officer at each regularly scheduled
quarterly board of directors meeting.
The board has a standing audit committee, compensation committee and
nominating and governance committee. These committees are composed entirely of
independent directors under the applicable New York Stock Exchange listing
standards.
The audit, compensation and nominating and governance committees have
charters which are available for review, along with our corporate governance
guidelines, code of conduct,
76
and code of ethics, on our website at www.mdu.com. You may obtain copies of any
of these documents by writing to the secretary, MDU Resources Group, Inc., P.O.
Box 5650, Bismarck, ND 58506-5650.
Nominating and Governance Committee
-----------------------------------
The nominating and governance committee met four times during 2006. The
committee members are John L. Olson, chairman, Karen B. Fagg, Richard H. Lewis
and Sister Thomas Welder. Robert L. Nance served as a member of the committee
until his retirement from the board on August 17, 2006. Thomas Everist, Harry J.
Pearce and John K. Wilson served as members of the committee until August 17,
2006.
The nominating and governance committee provides recommendations to the
board with respect to
o board organization, membership and function
o committee structure and membership
o succession planning for our executive management and
o corporate governance guidelines applicable to us.
The committee identifies individuals qualified to become directors and
recommends to the board the nominees for director for the next annual meeting of
stockholders. The committee also identifies and recommends to the board
individuals qualified to become our principal officers and the nominees for
membership on each board committee. The committee oversees the evaluation of the
board and management.
In identifying nominees for director, the committee consults with board
members, our management consultants and other individuals likely to possess an
understanding of our business and knowledge concerning suitable director
candidates.
We have a policy on consideration of director candidates recommended to us
and will consider candidates that our stockholders recommend. Stockholders may
submit director recommendations to the nominating and governance committee
chairman in care of the secretary at MDU Resources Group, Inc., P.O. Box 5650,
Bismarck, ND 58506-5650. Please include the following information:
o the candidate's name, age, business address and telephone number
o the candidate's principal occupation and
o any other information you believe is relevant with respect to the
recommendation.
You should submit such information at least 120 days prior to the anniversary of
the mail date of last year's proxy statement, or for next year, no later than
November 9, 2007.
77
There are no differences in the manner by which the committee evaluates
director candidates recommended by stockholders and those recommended by other
sources.
In evaluating director candidates, the committee considers an individual's
o background, character and experience
o skills and experience which complement the skills and experience
of current board members
o success in the individual's chosen field of endeavor
o skill in the areas of accounting and financial management,
banking, general management, human resources, marketing,
operations, public affairs, law and operations abroad
o background in publicly traded companies
o geographic area of residence and
o affiliations or relationships with other groups, organizations or
entities.
The committee generally will hire an outside firm to perform a background check
on potential nominees.
Audit Committee
---------------
The audit committee is a separately-designated standing committee
established in accordance with section 3(a)(58)(A) of the Securities Exchange
Act of 1934.
The audit committee met seven times during 2006. The audit committee
members are Dennis W. Johnson, chairman, Richard H. Lewis, John L. Olson and
John K. Wilson. Robert L. Nance served as a member of the committee until his
retirement from the board on August 17, 2006. Patricia L. Moss and Sister Thomas
Welder served as members of the committee until August 17, 2006.
The board of directors has determined that Messrs. Johnson, Olson and
Wilson are "audit committee financial experts" as defined by Securities and
Exchange Commission regulations and are all independent under the applicable New
York Stock Exchange listing standards.
The audit committee assists the board of directors in fulfilling its
oversight responsibilities to the stockholders and serves as a communication
link among the board, management, the independent auditors and the internal
auditors. The audit committee:
o assists the board's oversight of
- the integrity of our financial statements
- our compliance with legal and regulatory requirements
78
- the independent auditors' qualifications and independence
and
- the performance of our internal audit function and
independent auditors and
o prepares the report that Securities and Exchange Commission rules
require we include in our annual proxy statement.
--------------------------------------------------------------------------------
AUDIT COMMITTEE REPORT
--------------------------------------------------------------------------------
In connection with our financial statements for the year ended
December 31, 2006, the audit committee has (1) reviewed and discussed the
audited financial statements with management; (2) discussed with the
independent auditors the matters required to be discussed by statement on
Auditing Standards No. 61, as amended, AICPA, Professional Standards, Vol.
1, AU section 380, as adopted by the Public Company Accounting Oversight
Board in Rule 3200T; (3) received the written disclosures and the letter
from the independent accountants required by Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees, as adopted
by the Public Company Accounting Oversight Board in Rule 3600T, and
discussed with the independent accountant the independent accountant's
independence.
Based on the review and discussions referred to in items (1) through
(3) of the above paragraph, the audit committee recommended to the board
of directors that the audited financial statements be included in our
Annual Report on Form 10-K for the year ended December 31, 2006 for filing
with the Securities and Exchange Commission.
Dennis W. Johnson, Chairman
Richard H. Lewis
John L. Olson
John K. Wilson
-------------------
Compensation Committee
----------------------
The compensation committee met four times during 2006. The compensation
committee members are Thomas Everist, chairman, Karen B. Fagg and Patricia L.
Moss. Dennis W. Johnson, Richard H. Lewis and Harry J. Pearce served as members
of the committee until August 17, 2006. Mr. Pearce served as chairman of the
committee until June 1, 2006.
The compensation committee's responsibilities, as set forth in its charter,
include:
o review and recommend changes to the board regarding our executive
compensation policies for directors and executives
79
o evaluate the chief executive officer's performance and, either as
a committee or together with other independent directors as
directed by the board, determine his compensation
o recommend to the board the compensation of our other Section 16
officers and directors
o establish goals, make awards, review performance and determine,
or recommend to the board, awards earned under our annual and
long-term incentive compensation plans
o review and discuss with management the compensation discussion
and analysis and based upon such review and discussion, determine
whether to recommend to the board that the compensation
discussion and analysis be included in our proxy statement or our
Annual Report on Form 10-K
o arrange for the preparation of and approve the compensation
committee report to be included in our proxy statement or Annual
Report on Form 10-K and
o sole authority to retain and discharge and approve fees for
compensation consultants.
The compensation committee and the board of directors have sole and direct
responsibility for determining compensation of our Section 16 officers and
directors. They may not delegate this authority. They may, however, use
recommendations from outside consultants, the chief executive officer and the
human resources department. The chief executive officer, the vice president -
human resources and general counsel regularly attend compensation committee
meetings. The committee meets in executive session as needed.
The compensation committee makes recommendations to the board regarding
compensation of all Section 16 officers, and the board then approves the
recommendations.
We discuss our processes and procedures for consideration and determination
of compensation of our Section 16 officers in the compensation discussion and
analysis. We also discuss in the compensation discussion and analysis the role
of our executive officers and compensation consultants in determining or
recommending compensation for our Section 16 officers.
The board of directors determines compensation for our non-employee
directors based upon recommendations from the compensation committee. The
committee reviewed and made recommendations with respect to director
compensation at its May 2006 meeting. At that meeting, the committee reviewed a
survey on director compensation prepared by Towers Perrin at the direction of
the compensation committee. The Towers Perrin survey used market data from our
performance graph peer group companies gathered from their 2006 proxy filings.
The committee compared this survey data to our
80
o annual cash retainer to non-employee directors and to the
non-executive chairman of the board
o stock awards to all non-employee directors
o board meeting fees to all non-employee directors
o committee meeting fees and
o committee chairperson fees.
Our chief executive officer reported to the committee on the portion of the
survey regarding non-executive chairman compensation. After review and
discussion of the market data, the compensation committee made recommendations
to increase director compensation to the 61st percentile of the market data in
the Towers Perrin survey. The board approved the recommendations.
At its May and August 2006 meetings, the committee also reviewed a report
prepared by the National Association of Corporate Directors on best practices on
director compensation. The committee noted that, of the six best practices
identified in the report, five of the policies, regarding director compensation
programs, director stock ownership and the use of independent professional or
financial service providers, have been adopted.
Stockholder Communications
--------------------------
Stockholders and other interested parties who wish to contact the board of
directors or an individual director, including our non-employee chairman or
non-employee directors as a group, should address a communication in care of the
secretary at MDU Resources Group, Inc., P.O. Box 5650, Bismarck, ND 58506-5650.
The secretary will forward all communications.
--------------------------------------------------------------------------------
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
--------------------------------------------------------------------------------
Section 16 of the Securities Exchange Act of 1934, as amended, requires
that officers, directors and holders of more than 10% of our common stock file
reports of their trading in our equity securities with the Securities and
Exchange Commission. Based solely on a review of Forms 3, 4 and 5 furnished to
us during and with respect to 2006 or written representations that no Forms 5
were required, we believe that all such reports were timely filed.
81
--------------------------------------------------------------------------------
OTHER BUSINESS
--------------------------------------------------------------------------------
Our management knows of no other matters to come before the meeting.
However, if any matter requiring a vote of the stockholders should arise, the
persons named in the enclosed proxy will vote in accordance with their best
judgment.
--------------------------------------------------------------------------------
SHARED ADDRESS STOCKHOLDERS
--------------------------------------------------------------------------------
In accordance with a notice sent to eligible stockholders who share a
single address, we are sending only one annual report and proxy statement to
that address unless we received instructions to the contrary from any
stockholder at that address. This practice, known as "householding," is designed
to reduce our printing and postage costs. However, if a stockholder of record
wishes to receive a separate annual report or proxy statement in the future, he
or she may contact the office of the treasurer at MDU Resources Group, Inc.,
P.O. Box 5650, Bismarck, ND 58506-5650. Eligible stockholders of record who
receive multiple copies of our annual report and proxy statement can request
householding by contacting us in the same manner. Stockholders who own shares
through a bank, broker or other nominee can request householding by contacting
the nominee.
We hereby undertake to deliver promptly, upon written or oral request, a
separate copy of the annual report to stockholders, or proxy statement, as
applicable, to a stockholder at a shared address to which a single copy of the
document was delivered.
--------------------------------------------------------------------------------
2008 ANNUAL MEETING OF STOCKHOLDERS
--------------------------------------------------------------------------------
Director Nominations: Our bylaws provide that director nominations may be
made only by the board or the nominating committee or by a stockholder entitled
to vote who has delivered written notice to the corporate secretary. The written
notice must contain certain information specified in the bylaws and must be
received at least 120 days prior to the anniversary date on which we first
mailed our proxy materials for the prior year's annual stockholders' meeting.
Other Meeting Business: Our bylaws also provide that no business may be
brought before an annual stockholders' meeting except as specified in the
meeting notice or as otherwise properly brought before the meeting by the board
or by a stockholder entitled to vote who has delivered written notice to the
company secretary. The written notice must contain certain information specified
in the bylaws and must be received at least 120 days prior to the anniversary
date on which we first mailed our proxy materials for the prior year's annual
stockholders' meeting.
82
Discretionary Voting: Rule 14a-4 of the Securities and Exchange
Commission's proxy rules allows us to use discretionary voting authority to vote
on matters coming before an annual stockholders' meeting if we do not have
notice of the matter at least 45 days before the anniversary date on which we
first mailed our proxy materials for the prior year's annual stockholders'
meeting or the date specified by an advance notice provision in our bylaws. Our
bylaws contain an advance notice provision that we have described above. For our
annual meeting of stockholders expected to be held on April 22, 2008,
stockholders must submit such written notice to the corporate secretary on or
before November 9, 2007.
Stockholder Proposals: The requirements we describe above are separate from
and in addition to the Securities and Exchange Commission's requirements that a
stockholder must meet to have a stockholder proposal included in our proxy
statement under Rule 14a-8 of the Exchange Act. For purposes of our annual
meeting of stockholders expected to be held on April 22, 2008, any stockholder
who wishes to submit a proposal for inclusion in our proxy materials must submit
such proposal to the corporate secretary on or before November 9, 2007.
Bylaw Copies: You may obtain a copy of the full text of the bylaw
provisions discussed above by writing to the corporate secretary.
We will make available to our stockholders to whom we mail this proxy
statement a copy of our Annual Report on Form 10-K, excluding exhibits, for the
year ended December 31, 2006, which is required to be filed with the Securities
and Exchange Commission. You may obtain a copy, without charge, upon written or
oral request to the Office of the Treasurer of MDU Resources Group, Inc., 1200
West Century Avenue, Mailing Address: P.O. Box 5650, Bismarck, ND 58506-5650,
Telephone Number: (701) 530-1000. You may also access our Annual Report on Form
10-K through our website at www.mdu.com.
By order of the Board of Directors,
Paul K. Sandness
Secretary
March 8, 2007
83
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EXHIBIT A
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RESOLVED, that the Board of Directors of MDU Resources Group, Inc. hereby
declares it advisable:
(A) That the number of shares of Common Stock which the Company is
authorized to issue be increased from 250,000,000 shares of Common Stock with
the par value of $1.00 per share, to 500,000,000 shares with the par value of
$1.00 per share, effective at the close of business on the date on which the
appropriate Certificate of Amendment to the Company's Restated Certificate of
Incorporation is filed in the office of the Secretary of State of the State of
Delaware;
(B) That, in order to effect the foregoing, the Restated Certificate of
Incorporation of the Company, as heretofore amended, be further amended by
deleting the first paragraph of Article FOURTH, and by inserting in place
thereof a new first paragraph of said Article FOURTH to read as follows:
FOURTH. The total number of shares of stock which the
Corporation shall have authority to issue is TwoFive Hundred
Fifty-Two Million (252,000,000502,000,000) divided into four
classes, namely, Preferred Stock, Preferred Stock A, Preference
Stock, and Common Stock. The total number of shares of such
Preferred Stock authorized is Five Hundred Thousand (500,000) shares
of the par value of One Hundred Dollars ($100) per share
(hereinafter called the "Preferred Stock") amounting in the
aggregate to Fifty Million Dollars ($50,000,000). The total number
of shares of such Preferred Stock A authorized is One Million
(1,000,000) shares without par value (hereinafter called the
"Preferred Stock A"). The total number of shares of such Preference
Stock authorized is Five Hundred Thousand (500,000) shares without
par value (hereinafter called the "Preference Stock"). The total
number of shares of such Common Stock authorized is TwoFive Hundred
Fifty Million (250,000,000500,000,000) of the par value of One and
no/100 Dollars ($1.00) per share (hereinafter called the "Common
Stock"), amounting in the aggregate to TwoFive Hundred Fifty Million
Dollars ($250,000,000). 500,000,000).
FURTHER RESOLVED, that the Board of Directors hereby directs that this
resolution and above proposed amendment be attached as an exhibit to the proxy
statement for the Company's next Annual or Special Meeting of Stockholders for
consideration by the Stockholders entitled to vote in respect thereof.
A-1
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EXHIBIT B
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RESOLVED, that the Board of Directors of MDU Resources Group, Inc. hereby
declares it advisable:
(A) That the Board of Directors of the Company be declassified and the
members of the Board of Directors be elected annually, effective at the close of
business on the date on which the appropriate Certificate of Amendment to the
Company's Restated Certificate of Incorporation is filed in the office of the
Secretary of State of the State of Delaware;
(B) That, in order to effect the foregoing, the Restated Certificate of
Incorporation of the Company, as heretofore amended, be further amended by
amending Article THIRTEENTH to read as follows:
THIRTEENTH. (a) The business and affairs of the Corporation
shall be managed by the Board of Directors consisting of not less
than six nor more than fifteen persons. The exact number of
directors within the limitations specified in the preceding sentence
shall be fixed from time to time by the Board of Directors pursuant
to a resolution adopted by two-thirds of the Continuing Directors.
The directors need not be elected by ballot unless required by the
By-Laws of the Corporation.
The Board of Directors shall be divided into three classes as
nearly equal in number as may be. The initial term of office of each
director in the first class shall expire at the annual meeting of
stockholders in 1986; the initial term of office of each director in
the second class shall expire at the annual meeting of stockholders
in 1987; and the initial term of office of each director in the
third class shall expire at the annual meeting of stockholders in
1988. At each annual election commencing at theAt each annual
meeting of stockholders of 1986,, the successors to the class of
directors whose term expires at that time shall be elected to hold
office for a term of three years to succeed those whose term
expires, so that the term of one class of directors shall expire
each year.for terms expiring at the next annual meeting of
stockholders; provided, however, that each director elected at the
annual meetings of stockholders held in 2005, 2006 and 2007 shall
serve for the full three-year term to which such director was
elected. Each director shall hold office for the term for which he
is elected or appointed and until his successor shall be elected and
qualified or until his death, or until he shall resign or be
removed.
In the event of any increase or decrease in the authorized
number of directors, (i) each director then serving as such shall
B-1
nevertheless continue as a director of the class of which he is a
member until the expiration of his current term, or his earlier
resignation, removal from office or death, and (ii) the newly
created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to maintain such classes as nearly
equal in number as may be. .
(b) Newly created directorships resulting from any increase in
the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall be filled
by a two-thirds vote of the Continuing Directors then in office, or
a sole remaining director, although less than a quorum, and
directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders at which the term of the class
to which they have been elected expires. If one or more directors
shall resign from the Board effective as of a future date, such
vacancy or vacancies shall be filled pursuant to the provisions
hereof, and such new directorship(s) shall become effective when
such resignation or resignations shall become effective, and each
director so chosen shall hold office as herein provided in the
filling of other vacancies. for a term expiring at the next annual
meeting of stockholders.
(c) Any director or the entire Board of Directors may be
removed; however, such removal must be for cause and must be
approved as set forth in this Section. Except as may otherwise be
provided by law, cause for removal shall be construed to exist only
if: (i) the director whose removal is proposed has been convicted,
or where a director was granted immunity to testify where another
has been convicted, of a felony by a court of competent jurisdiction
and such conviction is no longer subject to direct appeal; (ii) such
director has been grossly negligent in the performance of his duties
to the Corporation; or (iii) such director has been adjudicated by a
court of competent jurisdiction to be mentally incompetent, which
mental incompetency directly affects his ability as a director of
the Corporation, and such adjudication is no longer subject to
direct appeal.
Removal for cause, as cause is defined above, must be approved
by at least a majority vote of the shares of the Corporation then
entitled to be voted at an election for that director, and the
action for removal must be brought within three months of such
conviction or adjudication.
B-2
Notwithstanding the foregoing, and except as otherwise
provided by law, in the event that Preferred Stock of the
Corporation is issued and holders of any one or more series of such
Preferred Stock are entitled, voting separately as a class, to elect
one or more directors of the Corporation to serve for such terms as
set forth in the Certificate of Incorporation, the provisions of
this Article THIRTEENTH, Section (c), shall also apply, in respect
to the removal of a director or directors so elected to the vote of
the holders of the outstanding shares of that class and not to the
vote of the outstanding shares as a whole.
(d) Any directors elected pursuant to special voting rights of
one or more series of Preferred Stock, voting as a class, shall be
excluded from, and for no purpose be counted in, the scope and
operation of the foregoing provisions, unless expressly stated.
FURTHER RESOLVED, that the Board of Directors hereby directs that this
resolution and above proposed amendment be attached as an exhibit to the proxy
statement for the Company's next Annual or Special Meeting of Stockholders for
consideration by the stockholders entitled to vote in respect thereof.
B-3
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EXHIBIT C
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MDU Resources Group, Inc.
Statement of Policy
Director Independence Standards
I.
Policy
It is the sense of this Board that the expertise and perspective of
independent directors is of great value and benefit to MDU Resources Group, Inc.
("MDU") and its stockholders. Accordingly, and in keeping with the other high
standards of corporate governance which this Board has established for itself,
the listing standards of the New York Stock Exchange, and laws and regulations
applicable to MDU, this Board establishes the following guidelines on director
independence and for determining whether its members are independent.
II.
Director Independence - General
The Board believes that a substantial majority of its members should
satisfy these standards for independence.
No director may be deemed independent unless the Board affirmatively
determines, after due deliberation, that the director has no material
relationship with MDU either directly or as a partner, shareholder or officer of
an organization that has a relationship with MDU. In each case, the Board shall
broadly consider all the relevant facts and circumstances and shall apply these
standards. Trivial or de minimis affiliations or connections to MDU by a
director or his or her immediate family will not generally be cause for the
Board to determine that the director is not independent. In addition a director
is not independent if:
(1) The director is, or has been within the last three years, an employee, or
has an immediately family member who is, or has been within the last three
years, an executive officer, of MDU.
(2) The director has received, or has an immediate family member who has
received, during any twelve month period within the last three years, more
than $100,000 in direct compensation from MDU, other than director and
committee fees and pension or other forms of deferred compensation for
prior service (provided such compensation is not contingent in any way on
continued service).
C-1
(3) (A) The director or an immediate family member of the director is a
current partner of a firm that is MDU's internal or external auditor; (B)
the director is a current employee of such a firm; (C) the director has an
immediate family member who is a current employee of such a firm and who
participates in the firm's audit, assurance or tax compliance (but not tax
planning) practice; or (D) the director or an immediate family member of
the director was within the last three years (but is no longer) a partner
or employee of such a firm and personally worked on MDU's audit within
that time.
(4) The director or an immediate family member of the director is, or has been
within the last three years, employed as an executive officer of another
company where any of MDU's present executive officers at the same time
serves or served on that company's compensation committee.
(5) The director is a current employee, or an immediate family member is a
current executive officer, of a company that has made payments to, or
received payments from, MDU for property or services in an amount which in
any of the last three fiscal years exceeds the greater of $1 million, or
2% of such other company's consolidated gross revenues. In applying the
foregoing, both the payments and the consolidated gross revenues to be
measured will be those reported in the last completed fiscal year.
Contributions to tax exempt organizations are not considered "payments"
for purposes of this paragraph 5.
Relationships involving a director's affiliation with another company that
account for lesser amounts than those specified in this paragraph 5 will
not be considered to be material relationships that would impair the
director's independence, provided that the related payments for goods and
services or in connection with other contractual arrangements (i) are made
in the ordinary course of business and on substantially the same terms as
those prevailing at the time for comparable transactions with
non-affiliated parties, or (ii) involve the rendering of services as a
public utility at rates or charges fixed in conformity with law or
governmental authority.
(6) The director (or an immediate family member of the director) serves as an
officer, director or trustee for a not-for-profit organization, and,
within the organization's preceding three fiscal years, MDU's
discretionary contributions in any single year to the organization exceed
2% of that organization's consolidated gross revenues, or $1 million,
whichever is greater. MDU's automatic matching of employee charitable
contributions will not be included in the amount of MDU's contributions
for purposes of this paragraph (6).
(7) The director is (or is affiliated with an organization that is) a
significant advisor, counsel or consultant to MDU.
(8) The ownership of stock of MDU by directors is encouraged and substantial
stock ownership (not involving control) will not affect the independence
status of a director.
For purposes of Section II(3) of this policy only, "immediate family
member" means a director's spouse, minor child or stepchild, or an adult child
or stepchild sharing a home with the director. As used elsewhere in this policy,
the term "immediate family member" includes a
C-2
person's spouse, parents, children, siblings, mothers and fathers-in-law, sons
and daughters-in-law, brothers and sisters-in-law, and anyone (other than
domestic employees) who shares such person's home.
The Board will annually review the commercial, industrial, banking,
consulting, legal, accounting and charitable (and other non-profit)
relationships between MDU's directors and the organizations with which they and
the members of their immediate families have material interests. For
relationships that are either not covered by or do not satisfy these guidelines,
the determination of whether the relationship is material or not, and therefore
whether the director would be independent or not, shall be made by the directors
satisfying the independence guidelines.
III.
Director Independence - Audit Committee Members
No director who is a member of the Audit Committee of the Board may accept
any consulting, advisory or compensatory fee from MDU, or from any of its
subsidiary companies, other than in that director's capacity as a member of the
Board or any of the Board's several committees.
In addition, no director who is a member of the Audit Committee may be an
affiliated person of MDU or any of its subsidiary companies apart from
affiliation occasioned by the director's service as a member of the Board or any
of the Board's several committees. A director would be deemed an affiliated
person of MDU if that director directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with
MDU.
IV.
Approval, Adoption, Amendment and Restatement
This Statement of Policy of the Board of Directors of MDU was approved and
adopted by resolution of the Board of Directors of MDU at a meeting thereof held
the 13th day of August, 2003, and was amended and restated the 17th day of
February, 2005.
C-3
[LOGO]
MDU RESOURCES GROUP, INC.
ANNUAL MEETING OF STOCKHOLDERS
Tuesday, April 24, 2007
11:00 a.m. Central Daylight Savings Time
909 Airport Road
Bismarck, ND
If you consented to access the Annual Report to Stockholders and
Proxy Statement via the Internet, these documents may be viewed
by going to the MDU Resources Group, Inc. website.
The website address is: www.mdu.com/2007-proxy.html
If you would like to access the proxy materials electronically next year
go to the following Consent site address: www.econsent.com/mdu/
[MDU RESOURCES LOGO]
1200 WEST CENTURY AVENUE
MAILING ADDRESS:
P.O. BOX 5650 BISMARCK, ND 58506-5650
(701) 530-1000
PROXY
================================================================================
This proxy is solicited on behalf of the Board of Directors for the
Annual Meeting of Stockholders on April 24, 2007.
This proxy will also be used to provide voting instructions to New York Life
Trust Company, as Trustee of the MDU Resources Group, Inc. 401(k) Retirement
Plan, for any shares of Company common stock held in the plan.
The undersigned hereby appoints Harry J. Pearce and Paul K. Sandness and each of
them, proxies, with full power of substitution, to vote all Common Stock of the
undersigned at the Annual Meeting of Stockholders to be held at 11:00 a.m.,
Central Daylight Savings Time, April 24, 2007, at 909 Airport Road, Bismarck,
ND, and at any adjournment(s) thereof, upon all subjects that may properly come
before the meeting, including the matters described in the Proxy Statement
furnished herewith, subject to any directions indicated on the reverse side.
Your vote is important! Ensure that your shares are represented at the meeting.
Either (1) submit your proxy by touch-tone telephone, (2) submit your proxy by
Internet or (3) mark, date, sign and return this letter proxy in the envelope
provided (no postage is necessary if mailed in the United States). If no
directions are given, the proxies will vote in accordance with the Directors'
recommendation on all matters listed on this proxy, and at their discretion on
any other matters that may properly come before the meeting.
See reverse for voting instructions.
==================
COMPANY #
==================
There are three ways to vote your Proxy
Your telephone or Internet vote authorizes the Named Proxies to vote your shares
in the same manner as if you marked, dated, signed and returned your proxy card.
VOTE BY PHONE - - TOLL FREE - - 1-800-560-1965 - - QUICK*** EASY*** IMMEDIATE
- Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 12:00 noon (CDT) on Monday, April 23, 2007.
- Please have your proxy card and the last four digits of your Social Security
Number or Tax Payer Identification Number available.
- Follow the simple instructions the Voice provides you.
VOTE BY INTERNET - - www.eproxy.com/mdu/ - - QUICK*** EASY*** IMMEDIATE
- Use the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 noon (CDT) on Monday, April 23, 2007.
- Please have your proxy card and the last four digits of your Social Security
Number or Tax Payer Identification Number available. Follow the simple
instructions to obtain your records and create an electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to MDU Resources Group, Inc., c/o Shareowner
Services (SM), P.O. Box 64873, St. Paul, MN 55164-0873.
If you vote by Phone or Internet, please do not mail your Proxy Card.
v Please detach here v
The Board of Directors Recommends a Vote "FOR" all Nominees,
"FOR" Items 2, 3 and 4 and "AGAINST" Item 5.
1. Election of 01 Terry D. Hildestad 03 John L. Olson [ ] Vote FOR [ ] Vote
directors: all WITHHELD
02 Dennis W. Johnson 04 John K. Wilson nominees from all
(except as nominees
indicated
below)
==============================
(Instructions: To withhold authority to vote for any indicated nominee,
write the number(s) of the nominee(s) in the box provided to the right.)
==============================
2. Amend Article FOURTH of our restated certificate of [ ] For [ ] Against [ ] Abstain
incorporation to increase our authorized shares of common stock
3. Amend Article THIRTEENTH of our restated certificate of [ ] For [ ] Against [ ] Abstain
incorporation to declassify our board of directors
4. Ratification of Deloitte & Touche LLP as our independent [ ] For [ ] Against [ ] Abstain
auditors for 2007
5. Stockholder proposal requesting sustainability report [ ] For [ ] Against [ ] Abstain
This Proxy when properly executed will be voted as directed or, if no direction
is given, will be voted FOR each Director, FOR Items 2, 3 and 4 and AGAINST Item
5.
Address Change? Mark Box [ ] Indicate changes below:
Date _________________________
_______________________________
_______________________________
Signatures(s) in box
Please sign exactly as your name(s) appear
on Proxy. If held in joint tenancy, all
persons must sign. Trustees, administrators,
etc., should include title and authority.
Corporations should provide full name of
corporation and title of authorized officer
signing the proxy.