Item 11. Executive Compensation
Compensation Discussion and Analysis
Overview
This
compensation discussion and analysis provides a description of the material elements of our executive compensation programs, as well as perspective and context for decisions made during 2012 regarding the compensation for our named executive
officers who were employed as of December 31, 2012, and are identified below:
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Mr. Stephen R. Brunner, Chief Executive Officer, Chief Operating Officer and President
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Mr. Charles C. Ward, Chief Financial Officer and Treasurer
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Ms. Lisa J. Mellencamp, General Counsel and Corporate Secretary
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Mr. Michael B. Hiney, Chief Accounting Officer and Controller
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Executive Summary
Our overall compensation structure is designed to
align our executives compensation with our business strategies and annual business plan that is approved by our board of managers. We maintain a compensation mix that includes a base salary, annual performance-based cash bonus awards, and
long-term incentives including unit-based compensation.
During 2012, our Companys performance achieved the majority of
the goals set forth in our 2012 business plan that was approved by our board of managers. We continue to successfully reduce our outstanding debt balance from a high of $220.0 million in 2009 to $84.0 million at December 31, 2012. We have also
increased our focus on reducing our structural general and administrative expenses. In early 2012, we set a goal to reduce these expenses by 25% over the next 12 to 18 months while continuing to reduce our outstanding debt and focusing our capital
program on oil opportunities in our existing asset base.
We have reduced our total executive compensation expenses by 28% in
2012 as compared to 2011 and our total board of managers compensation expenses by 36% in 2012 as compared to 2011. We also have frozen our
8
2013 executive compensation expenses at the same levels as in 2012 and we have not issued any long-term incentives to our named executive officers or non-employee board members for 2013.
Compensation Philosophy
Our compensation philosophy is founded on the guiding principles that the Companys compensation programs will be:
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aligned with the long-term interest of the companys unitholders;
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performance-based to motivate strong company and individual performance and reward management for achieving results;
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competitive with market practices to enable the company to attract and retain management and technical talent;
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flexible to optimize the value and efficiency of compensation programs; and
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transparent, straightforward, and well-communicated to facilitate a strong understanding by all stakeholders, both internally and externally.
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In developing our compensation program, we have considered: 1) the positioning of our Company in its life
cycle, 2) the current competitive environment for executive, managerial and technical talent in the oil and gas industry, 3) the Companys operational and financial performance, and 4) the intent to further reduce the Companys general and
administrative expenses and outstanding debt level.
Our compensation policies were also intended to focus the efforts of our
named executive officers and our employees on the achievement of our 2012 business plan which included both operational and financial targets. The actual compensation awarded to the executive officers is generally based on the Companys
achievement of its annual business plan that was reviewed and approved by our board of managers as well as each executive officers individual contribution toward meeting the plan.
Role of the Compensation Committee, Board of Managers, and Management
Our compensation committee consists of three managers who are all independent under the independence standards established by NYSE MKT and
SEC rules. The committee establishes and reviews general policies related to our compensation and benefits, and annually reviews and approves the compensation paid to our executive officers and non-employee managers. The committee also approves the
annual performance-based bonus award pool and long-term incentive equity awards for all employees.
Our Chief Executive
Officer makes recommendations to the compensation committee regarding the compensation for the executive officers, other than himself. Specific recommendations include base salary adjustments, targets and goals for the annual performance-based bonus
plan, and long-term incentive awards. The committee considers these recommendations in developing its own recommendations to our board of managers, which, in its sole discretion, determines compensation actions for the other executive officers. The
committee considers and, in its sole discretion, makes the final determination about compensation actions for the Chief Executive Officer.
When assessing compensation actions for the Chief Executive Officer and the other executive officers, the compensation committee considers several factors including comparative market data, the level of
achievement of our annual business plan, our performance against our peer group, individual executive officer performance, scope of job responsibilities, and the individuals industry experience, technical skills and tenure with the Company.
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Role of the Compensation Consultant
Our compensation committee is authorized to retain compensation consultants at Company expense and obtain any compensation surveys or
reports regarding the design and implementation of compensation programs that it may find necessary in designing, implementing or administering compensation programs. During 2012, the committee retained Meridian Compensation Partners, LLC
(Meridian). The committee confirmed the retention of Meridian after a review of the independence factors included in the Dodd-Frank Act for compensation consultants and considering Meridians independence based on such factors. The
amount paid to Meridian in 2012 was less than $50,000, for which Meridian prepared a competitive review of the compensation of our executive officers, advised the compensation committee regarding the design of our incentive plans, and assisted with
other related matters.
Benchmarking Compensation
In the fourth quarter of 2011, the compensation committee requested that Meridian conduct a competitive review of the compensation for our named executives. This review was used in determining the 2012
compensation for our named executives. As part of this review, Meridian assessed the overall competitiveness of the compensation of our named executives relative to a peer group of E&P companies selected based on several factors including
assets, revenues, reserves, standardized measure, market capitalization, enterprise value, and scope of operations. The resulting peer group used to benchmark compensation for the named executive officers consisted of the following
companies:
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Brigham Exploration Company;
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Carrizo Oil & Gas, Inc.;
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Crimson Exploration Inc.;
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Gastar Exploration Ltd.;
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PetroQuest Energy, Inc.;
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PostRock Energy Corporation;
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Rosetta Resources Inc.;
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Stone Energy Corporation; and
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Vanguard Natural Resources, LLC.
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The compensation committee believed the peer companies provided an overall fit with our geographic footprint and our strategic focus on unconventional natural gas resources.
In the fourth quarter of 2011, the compensation committee requested that Meridian conduct an updated competitive review of the
compensation for our named executives. This review was used in determining the 2012 compensation for our named executives. The analysis of base salary, target bonus opportunity, target cash compensation, annualized grant value of long-term
incentives, and target total compensation was based on public disclosures from their selected peer group used to benchmark 2011 compensation. The review was based on an assessment of these peer companies and included an analysis of total assets,
revenues, standardized measure, reserves, market capitalization, enterprise value, and scope of operations. Meridian determined that no changes to the peer group used for 2011 compensation benchmarking were necessary as the peer group provided an
effective working range of competitive compensation information.
The E&P industry surveys and data from Meridian continue
to indicate that the compensation levels for our named executive officers have been below median levels of comparable companies since 2009. However, we
10
have not taken actions that would significantly narrow the gap between our compensation levels and the benchmark median. Our fourth quarter 2011 review indicated that the aggregate total
compensation for our named executives was 24% below our peer benchmark median levels and was generally aligned with the
25
th
percentile of peer companies. Our target total cash
compensation was also positioned 26% below median levels. Competitive positioning of our targeted long-term incentive award values varied by named executive but in the aggregate was positioned between the 25
th
percentile and the median of market levels.
As discussed below, the compensation committee increased the 2012 base salaries for our named executive officers by three percent and
granted unit-based awards under our 2009 Omnibus Incentive Compensation Plan to our named executive officers. These actions were necessary in order to make our compensation more comparable with market practices and to enable the Company to retain
management and operational and technical talent needed to operate the business.
Elements of Compensation
With Meridians assistance, we have developed a compensation mix that includes 1) a base salary, 2) annual performance-based cash
bonus awards, and 3) long-term incentives including unit-based compensation.
The following is a discussion of the major
components of our compensation program.
Base Salary
Our base salaries are intended to provide a market-competitive level of cash compensation to recognize the skills and experience of our named executives. Base salaries are reviewed annually with
adjustments made based on market conditions, individual performance, and internal equity considerations.
In light of market
conditions and our desire to reduce general and administrative expenses and to provide for additional funds to reduce our outstanding debt level, the compensation committee has maintained the base salaries for our named executive officers somewhat
below comparable market levels. For 2012, the compensation committee approved a three percent increase to the base salaries for our named executive officers to improve their overall competitive positioning; specifically, the 2012 base salaries for
the named executives were as follows:
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Ms. Mellencamp$226,600
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Following these increases, the base salaries for our named executive officers remain positioned approximately 17% below aggregate benchmark peer group median levels and target total cash compensation
(after considering the bonus awards described below) is positioned 10.4% below aggregate benchmark peer group median levels. The benchmark peer group data was provided to the compensation committee by Meridian, the compensation consultant to the
committee.
Annual Performance-Based Bonus Awards
We maintain a annual performance-based bonus award program covering all of our employees, including our named executive officers. The goal of our performance-based bonus award program is to motivate and
reward both financial and operational contributions for the achievement of our annual business plan. Our annual business plan is reviewed and approved by our board of managers. Our compensation committee establishes the annual performance-based
bonus award pool at the end of the year after reviewing the Companys performance
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during the year. The target and maximum bonus opportunities specified for our named executive officers were set by the committee and the board of managers based on Meridians input and
market data. The target bonus opportunities (as a percentage of base salary) were generally set at the median of the respective peer group benchmarks. Target bonus opportunities in 2012 for each of the named executives were specified as a percentage
of his or her base salary, pursuant to their employment agreements, as follows:
The target bonus opportunities generally approximated the median of each named executives respective peer group benchmark levels and, when applied to base salaries, were intended to target total
cash compensation near median peer group benchmark levels. The named executives may earn up to two times their target bonus opportunity based on the Companys performance. Earned cash performance-based awards are paid in March of the following
year. Prior to payment of any awards, the compensation committee is required to review and confirm the Companys performance against our annual business plan to determine and approve the recommended level of performance-based awards for the
Chief Executive Officer. The full board of managers is required to perform the same review to determine and approve the recommended level of performance-based awards for the named executive officers other than our Chief Executive Officer.
For 2012 the compensation committee reviewed the Companys operational and financial performance and approved the payout
of bonus awards at 50% of their target levels for each of our named executive officers who remained employed with the Company as of March 29, 2013, as follows:
These payouts were based on the compensation committees and board of managers sole discretion and business judgment. The decision was also based upon the achievement of the majority of our
2012 business plan goals, including the Companys efforts to reduce general and administrative expenses, goals relating to operating expenses, drilling capital efficiency, natural gas and oil production, debt reduction, and the Companys
corporate strategy to reduce its debt level while developing an inventory of oil opportunities in the Cherokee Basin. The compensation committee and the board of managers also considered the individual performance of each named executive. Specific
individual performance considerations were as follows:
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Mr. BrunnerImplementation of our Company strategy, capital efficiency and effectiveness of targeting oil opportunities in the Cherokee
Basin, risk management and financial performance, and ability to manage the organization to focus on personnel safety, environmental stewardship and regulatory compliance;
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Mr. WardThe continued reduction in the Companys outstanding debt balance, leadership of the Companys acquisition and divestiture
activities, and execution of our risk management plans;
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Ms. MellencampNo annual performance-based bonus was awarded to Ms. Mellencamp as her employment with the Company ended on
January 18, 2013; and
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Mr. HineyLeadership of the Companys administrative, accounting and tax functions, efforts to consolidate the Companys accounting
outsource providers, and the continued reduction of costs for administrative and overhead functions.
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Long-term Incentives
Our long-term incentive program is intended to encourage our named executive officers and other key employees to focus on our long-term performance and to align their interests with the interests of our
unitholders. The program also provides an opportunity for increased equity ownership, which fosters retention, and assists in maintaining competitive levels of total compensation. Long-term incentive awards are made pursuant to the 2009 Omnibus
Incentive Compensation Plan or the Long-Term Incentive Plan, as applicable. The plans provide for a variety of unit-based and performance-based awards, including unit options, restricted units, unit grants, notional units, unit appreciation rights,
performance awards and other unit-based awards. Awards under these plans may be paid in cash, units, or any combinations thereof as determined by the compensation committee.
In 2012, the compensation committee approved grants of performance-based unit and cash awards to each of the named executive officers that would be paid out in 2013 and 2014, based on the achievement of
pre-established performance goals which were developed with input from Meridian. These awards were originally intended to be paid in cash but were amended to include a unit-based component to reduce cash compensation expenses for our 2012
performance-based awards and to further align our officers with our unitholders interests. Any awards earned would be paid in 2013 and 2014, which encourages the officers to remain with the Company. The target level, performance-based unit and
cash awards established for the named executive officers in 2012 were:
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Mr. Brunner190,114 units and $500,000 cash
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Mr. Ward95,057 units and $250,000 cash
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Ms. Mellencamp76,046 units and $200,000 cash
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Mr. Hiney38,023 units and $100,000 cash
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Unit-Based Awards
The unit-based awards contained threshold and target
payout levels. No award payouts were to be made for actual performance below the threshold level. For performance within the target range, award payouts were to be made at 100%. For actual performance between the threshold and target levels, award
payouts were to be determined using a linear interpolation. The target awards of these unit-based grants are part of the target-level bonuses of the named executive officers under their employment agreements.
The pre-determined 2012 performance levels required for a unit-based payout on January 2, 2013, were:
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Performance Level
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Payout %
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Natural Gas Production
(weighted 50%)
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Oil/NGL Production
(weighted 50%)
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Target
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100
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%
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from 11.4 Bcf to 14.0 Bcf*
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from 144 Mbbls to 176 Mbbls*
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Threshold
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50
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%
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at least 10.2 Bcf
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at least 128 Mbbls
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*
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Achievement of the performance metric anywhere within this range was to result in a payout of 100% of the target Class B common units, with a linear interpolation
between the threshold performance level and the low end of the target range performance level.
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For the year
ended December 31, 2012, the Company reported natural gas production of 11.9 Bcf and oil production of 121 Mbbls. As a result, the unit grants earned for the named executive officers based on 2012 performance were as follows:
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Mr. Brunner95,057 common units
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Mr. Ward47,529 common units
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Ms. Mellencamp38,023 common units
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Mr. Hiney19,012 common units
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The number of target units under these awards was calculated based on the 20-day simple
average of the Companys closing common unit price on NYSE MKT through April 5, 2012, or $2.63.
Cash-Based
Awards
Similar to the unit-based awards, the cash-based awards contained threshold, target and maximum payout levels. No
award payouts were to be made for actual performance below the threshold level. For performance within the target range, award payouts were to be made at 100%. For actual performance at or above the maximum level, award payouts were to be made at
200%. For actual performance between the threshold and target level and between the target and maximum levels, award payouts were to be determined using a linear interpolation between the low and high ends of the target levels, respectively. The
target cash values of the grants are part of the target-level bonuses of the named executive officers under their employment agreements.
The pre-determined 2012 performance levels required for a cash payout on January 2, 2014, were:
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Performance
Level
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Payout %
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Natural Gas Production
(weighted 50%)
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Oil/NGL Production
(weighted 50%)
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Maximum
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200
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%
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at least 15.2 Bcf
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at least 192 Mbbls
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Target
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100
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%
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from 11.4 Bcf to 14.0 Bcf*
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from 144 Mbbls to 176 Mbbls*
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Threshold
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50
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%
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at least 10.2 Bcf
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at least 128 Mbbls
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*
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Achievement of the performance metric anywhere within this range was to result in a payout of 100% of the cash value, with a linear interpolation between the threshold
performance level and the low end of the target range performance level and between the high end of the target range performance level and the maximum performance level, respectively.
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For the year ended December 31, 2012, the Company reported natural gas production of 11.9 Bcf and oil production of 121 Mbbls. As a
result, the cash payouts earned for the named executive officers based on 2012 performance were as follows:
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Ms. Mellencamp$100,000
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Earned awards were 100% vested as of December 31, 2012, and payment of such awards will be made on January 2, 2014, except in the case of death, disability, involuntary termination or certain
change of control events, which may accelerate payment.
Company Benefits
Our named executive officers are eligible to participate in Company benefit plans such as medical, dental, life, and disability insurance,
401k and flexible spending accounts on the same terms as all our employees.
Perquisites
We do not provide any perquisites for our named executive officers.
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Other Compensation Policies
Unit Ownership Requirements
We do not require specific unit ownership
targets for our named executive officers or managers. However, each of the named executive officers currently maintains significant ownership in the Company.
Hedging Policies
We have a policy that does not allow speculative or
proprietary trading of derivatives that create incentives to engage in risky activities that fall outside of our annual business plan. We also have a policy that prohibits employees or managers from purchasing any financial instruments that are
designed to hedge or offset any decease in the market value of our units granted to them as compensation or otherwise held directly or indirectly by them.
Compensation Risk Assessment
Our compensation committee has a risk
assessment process for compensation programs and found no policies or practices that would rise to the level of being reasonably likely to have a material adverse effect on the Company. We believe our compensation programs do not encourage our
employees to take excessive risks to achieve larger performance-based bonus awards or additional unit-based compensation above their individual targets.
Clawback Provisions
The employment contracts with our four named executive
officers contain clawback provisions. In the event of a restatement of our financial statements that are filed with the SEC, our executives must refund the amounts actually paid by us for the performance-based bonus award for the two years
immediately prior to such restatement that exceed the amounts that the committee determines, in its discretion, should have been paid for those two years based on the financial results reflected in the restated financial statements. In the event
there has been a final and non-appealable judgment entered by a court of competent jurisdiction that found willful misconduct by an executive in the performance of his or her duties prior to the termination of his or her employment, all payments
made in the event of a voluntary or involuntary termination must be refunded.
2013 Compensation Actions
During 2013, we have not taken any compensation actions to improve the overall competitive positioning of our named executive officers
relative to a benchmark peer group. The base salaries and annual performance-based bonus awards for our named executive officers remain frozen at 2012 levels.
Base Salaries
For 2013, the 2013 base salaries for our named executives
who remained employed with the Company are as follows:
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Annual Performance-Based Bonus Awards
The 2013 annual performance-based target bonus opportunities as a percentage of base salary for each of our named executives who remained
employed with the Company are as follows:
Long-term Incentives
No long-term incentives, bonus programs or grants
under our unit-based compensation programs have been established in 2013 for our named executive officers.
Summary Compensation Table
The following table sets forth the compensation of our named executive officers for 2012, 2011 and 2010:
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Name and Principal Position
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Year
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Salary
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Cash
Bonus
(a)
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Unit
Awards
(b)
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All
Other
Compensation
(c)
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Total
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Stephen R. Brunner
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2012
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$
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339,900
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$
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169,950
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$
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169,201
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$
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273,637
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$
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952,688
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Chief Executive Officer, Chief Operating Officer, and President
(d)
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2011
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$
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330,000
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$
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429,000
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$
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262,100
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$
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248,095
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$
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1,269,195
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2010
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$
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300,000
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$
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300,000
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$
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808,176
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$
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248,260
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$
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1,656,436
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Michael B. Hiney
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2012
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$
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198,275
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$
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54,526
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$
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33,841
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$
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61,144
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$
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347,786
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Chief Accounting Officer and Controller
(d)
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2011
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$
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192,500
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$
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137,638
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$
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39,315
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$
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141,904
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$
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511,357
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2010
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$
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175,000
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$
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96,250
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$
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88,396
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$
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141,916
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$
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501,562
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Lisa J. Mellencamp
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2012
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$
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226,600
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$
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0
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$
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67,681
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$
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115,605
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$
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409,886
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General Counsel and Secretary
(e)
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2011
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$
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220,000
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$
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185,900
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$
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78,630
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$
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165,916
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$
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650,446
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2010
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$
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200,000
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$
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130,000
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$
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202,047
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$
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167,340
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$
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699,387
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Charles C. Ward
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2012
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$
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254,925
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$
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95,597
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$
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84,602
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$
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143,187
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$
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578,311
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Chief Financial Officer and Treasurer
(d)
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2011
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$
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247,500
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$
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241,313
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$
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91,735
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$
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184,847
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$
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765,395
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2010
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$
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225,000
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$
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168,750
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$
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269,392
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$
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187,015
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$
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850,157
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(a)
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The amount in this column reflects each named employees annual cash incentive bonus earned for 2012, 2011 and 2010 performance. The annual cash incentive bonuses
were determined by our compensation committee based on assessments of both Company and individual performance. The amounts for each of Messrs. Brunner, Hiney, and Ward and Ms. Mellencamp were awarded in recognition of the achievement of overall
performance at a target level in 2010, at an above target level in 2011, and below target level in 2012.
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(b)
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The amount in this column reflects the grant date fair value of all unit awards in 2012, 2011, and 2010 calculated in accordance with FASB ASC Topic 718. These unit
awards vest between 2013 and 2015. See Part IV. Exhibits and Financial Statements SchedulesNotes to Consolidated Financial Statements-12. Unit-Based Compensation of the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2012 for further information.
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(c)
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The amount in this column reflects the vested amount of the cash portion of the cash-based performance award earned during 2012, the amount of matching contributions
made to each employee under our 401k plan and the cost of life insurance equal to the executive officers salary for 2012, 2011, and 2010, and the one-time inducement sign-on bonus during 2011 and 2010. The 2012 cash-based performance award was
for Messrs. Brunner, Ward and Hiney and Ms. Mellencamp was $250,000, $125,000, $100,000, and $50,000, respectively. The 401k plan portion for Messrs. Brunner, Ward and Hiney and Ms. Mellencamp was $22,500, $10,479, $15,146 and $17,334,
respectively. The cost of life insurance for Messrs. Brunner, Ward and Hiney and Ms. Mellencamp was $1,137, $665, $759, and $852, respectively. The cash portion of the one-time inducement sign-on bonus for Messrs. Brunner, Ward and Hiney and
Ms. Mellencamp was $225,000, $168,750, $131,250, and $150,000, respectively.
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(d)
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Our named executive officers are eligible to participate in Company benefit plans such as medical, dental, life, and disability insurance, 401k and flexible spending
accounts on the same terms as all our employees.
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(e)
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Ms. Mellencamps employment with the Company ended on January 18, 2013.
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Grants of Plan-Based Awards for 2012
The following table sets forth the grants of performance-based unit awards to our named executive officers for 2012:
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Estimated Cash Payout Under
Incentive Plan Award
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Estimated Unit Payout Under
Incentive Plan Award
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Name
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Grant
Date
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Compensation
Committee
Approval
Date
(a)
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Threshold
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Target
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Maximum
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Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Grant
date fair
value of
units (b)
|
|
Stephen R. Brunner
|
|
|
6/4/2012
|
|
|
|
6/4/2012
|
|
|
$
|
250,000
|
|
|
$
|
500,000
|
|
|
$
|
1,000,000
|
|
|
|
95,057
|
|
|
|
190,114
|
|
|
|
190,114
|
|
|
$
|
169,201
|
|
Michael B. Hiney
|
|
|
6/4/2012
|
|
|
|
6/4/2012
|
|
|
$
|
50,000
|
|
|
$
|
100,000
|
|
|
$
|
200,000
|
|
|
|
19,012
|
|
|
|
38,023
|
|
|
|
38,023
|
|
|
$
|
33,841
|
|
Lisa J. Mellencamp
|
|
|
6/4/2012
|
|
|
|
6/4/2012
|
|
|
$
|
100,000
|
|
|
$
|
200,000
|
|
|
$
|
400,000
|
|
|
|
38,023
|
|
|
|
76,046
|
|
|
|
76,046
|
|
|
$
|
67,681
|
|
Charles C. Ward
|
|
|
6/4/2012
|
|
|
|
6/4/2012
|
|
|
$
|
125,000
|
|
|
$
|
250,000
|
|
|
$
|
500,000
|
|
|
|
47,529
|
|
|
|
95,057
|
|
|
|
95,057
|
|
|
$
|
84,602
|
|
(a)
|
These are cash-based and unit-based awards issued under our 2009 Omnibus Incentive Compensation Plan.
|
(b)
|
The amount in this column reflects the grant date fair value of the unit awards calculated in accordance with FASB ASC Topic 718. These units were issued
January 2, 2013.
|
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth the outstanding equity awards and their market value using the closing price of our common units on NYSE
MKT at December 31, 2012 for our named executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Equity Awards at December 31, 2012
|
Name
|
|
Number of
Restricted
Units Not
Vested
|
|
|
Number of
Unit-
Based
Awards
Not
Vested
|
|
|
Fair
Market Value of Units
Not Vested
|
|
|
Vesting Dates
|
Stephen R. Brunner
|
|
|
231,095
|
|
|
|
|
|
|
$
|
272,692
|
|
|
2013
|
|
|
|
136,042
|
|
|
|
|
|
|
$
|
160,530
|
|
|
2014
|
|
|
|
46,717
|
|
|
|
|
|
|
$
|
55,126
|
|
|
2015
|
|
|
|
|
|
|
|
10,000
|
|
|
$
|
5,200
|
|
|
12/31/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
413,854
|
|
|
|
10,000
|
|
|
$
|
493,548
|
|
|
|
Michael B. Hiney
|
|
|
33,894
|
|
|
|
|
|
|
$
|
39,995
|
|
|
2013
|
|
|
|
14,884
|
|
|
|
|
|
|
$
|
17,563
|
|
|
2014
|
|
|
|
5,112
|
|
|
|
|
|
|
$
|
6,032
|
|
|
2015
|
|
|
|
|
|
|
|
1,500
|
|
|
$
|
780
|
|
|
12/31/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,890
|
|
|
|
1,500
|
|
|
$
|
64,370
|
|
|
|
Lisa J. Mellencamp
|
|
|
72,032
|
|
|
|
|
|
|
$
|
84,998
|
|
|
2013
|
|
|
|
34,014
|
|
|
|
|
|
|
$
|
40,137
|
|
|
2014
|
|
|
|
11,680
|
|
|
|
|
|
|
$
|
13,782
|
|
|
2015
|
|
|
|
|
|
|
|
3,000
|
|
|
$
|
1,560
|
|
|
12/31/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,726
|
|
|
|
3,000
|
|
|
$
|
140,477
|
|
|
|
Charles C. Ward
|
|
|
96,596
|
|
|
|
|
|
|
$
|
113,983
|
|
|
2013
|
|
|
|
49,070
|
|
|
|
|
|
|
$
|
57,903
|
|
|
2014
|
|
|
|
15,575
|
|
|
|
|
|
|
$
|
18,379
|
|
|
2015
|
|
|
|
|
|
|
|
3,500
|
|
|
$
|
1,820
|
|
|
12/31/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,241
|
|
|
|
3,500
|
|
|
$
|
192,085
|
|
|
|
17
Vested Equity Awards for the Fiscal Year
The following table sets forth the outstanding equity awards and their market value using the closing price of our common units on the
vesting date for our named executive officers that were realized by each named executive officer in 2012:
|
|
|
|
|
|
|
|
|
|
|
Number of
Common
Units Acquired on Vesting
(a)
|
|
|
Value Realized on Vesting
|
|
Stephen R. Brunner
|
|
|
136,038
|
|
|
$
|
310,218
|
|
Michael B. Hiney
|
|
|
14,882
|
|
|
$
|
33,936
|
|
Lisa J. Mellencamp
|
|
|
34,009
|
|
|
$
|
77,554
|
|
Charles C. Ward
|
|
|
49,067
|
|
|
$
|
110,996
|
|
(a)
|
Does not include any long-term equity incentives earned in 2012, which were granted on January 2, 2013.
|
Employment Agreements
We have entered into definitive employment agreements with each of our named executive officers. Pursuant to the terms of the employment agreements, each named executive officer received compensation with
respect to performance for 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Base
Salary
|
|
|
Bonus
Target
|
|
|
Maximum
Bonus
|
|
|
UnitBased
Awards
(a)
|
|
|
Cash-Based
Performance
Award
(a)
|
|
Stephen R. Brunner.
|
|
$
|
339,900
|
|
|
|
100
|
%
|
|
|
200
|
%
|
|
|
95,057 units
|
|
|
$
|
250,000 cash
|
|
Michael B. Hiney
|
|
$
|
198,275
|
|
|
|
55
|
%
|
|
|
80
|
%
|
|
|
19,012 units
|
|
|
$
|
50,000 cash
|
|
Lisa J. Mellencamp
|
|
$
|
226,600
|
|
|
|
65
|
%
|
|
|
130
|
%
|
|
|
38,023 units
|
|
|
$
|
100,000 cash
|
|
Charles C. Ward
|
|
$
|
254,925
|
|
|
|
75
|
%
|
|
|
150
|
%
|
|
|
47,529 units
|
|
|
$
|
125,000 cash
|
|
(a)
|
Each of our named executive officers employment agreement includes the right to participate in the 2009 Omnibus Incentive Compensation Plan. Any annual grants of
unit-based compensation under the plan are determined by the compensation committee and the board of managers.
|
Termination
of Employment
Each executives employment may be terminated at any time and for any reason by either or both of the
Company and the executive. Except as described below, if the executive terminates his or her employment, all unvested or unearned awards will be forfeited. If the executives employment is terminated in connection with an Involuntary
Termination at any time prior to a change of control of the Company or after two years have elapsed following a change of control, the Company will, pursuant to the terms of the employment agreements, make payments and take actions as follows
(such payments and actions, the Severance Amount):
|
|
|
make a cash payment of (i) one and one-half times the executives then-current annual compensation, which includes (A) the target-level
bonus plus (B) the greater of the annual base salary in effect on the date of the Involuntary Termination or the annual base salary in effect 180 days prior to the Involuntary Termination;
|
|
|
|
cause any unvested awards granted under the Plan to become immediately vested and cause any and all nonqualified deferred compensation to become
immediately nonforfeitable; and
|
|
|
|
cause a continuation of medical and dental benefits for one year following the Involuntary Termination.
|
If the executives employment is terminated (i) by the executive through the exercise of the Special Termination Option
(described below) or (ii) in connection with an Involuntary Termination during the two-year period following a change of control of the Company, the Company will, pursuant to the terms of his or her
18
Employment Agreement, make payments and take actions as follows (such payments and actions, the Enhanced Severance Amount);
|
|
|
make a cash payment of (i) two times the executives then-current annual compensation, which includes (A) the target level bonus plus
(B) the greater of the annual base salary in effect on the date of the Involuntary Termination, the annual base salary in effect 180 days prior to the Involuntary Termination, or the annual base salary in effect immediately prior to the change
of control, plus (iii) the performance award and target-based grants payable under the Plan for the then-current year, paid as if the target-level performance was achieved for the entire year, prorated based on the number of whole or partial
months completed at the time of the Involuntary Termination;
|
|
|
|
cause any unvested awards granted under the Plan to become immediately vested and cause any and all nonqualified deferred compensation to become
immediately nonforfeitable;
|
|
|
|
cause a continuation of medical and dental benefits for one year following the change of control; and
|
|
|
|
provide for a full tax gross-up in connection with any excise tax levied on the items described in the preceding three bullets.
|
The Special Termination Option permits each executive to terminate his or her employment at any
time within the one-year period following the acquisition by PostRock or its affiliates of at least 49% of our outstanding common units.
The Severance Amount and Enhanced Severance Amount are contingent on the execution of a release of any claims the terminated executive may have against us and our affiliates. In addition, any such amounts
must be repaid if a final and non-appealable judgment is entered by a court of competent jurisdiction finding that the executives conduct in performance of his or her duties under the employment agreement constituted willful misconduct.
The initial term of the employment agreements will expire in 2014 unless sooner terminated in accordance with the employment
agreement. If the agreements have not otherwise been terminated prior to the expiration of the initial term, the employment agreements will automatically be extended for an additional one-year period unless either party to such employment agreement
delivers written notice 180 days prior to the expiration of the initial term. We guaranteed the obligations of CEP Services Company, Inc. under the employment agreements.
Potential Payments Upon Voluntary Termination, Involuntary Termination or Change In Control
As of December 31, 2012, we had employment agreements in place that provide for payments to the named executive officers in connection with certain voluntary or involuntary terminations of the
individual or a change in control of the Company. The following table summarizes the value of these provisions of these employment agreements if the named executive officer is entitled to a severance amount because of an involuntary termination
(including a resignation by the officer for an event of good reason thereunder) other than during a change of control as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Amount
|
|
Name
|
|
Cash Value of
Salary and Target
Bonuses
(a)
|
|
|
Market Value of
Units To Be Vested
(b)
|
|
|
All
Other
Compensation
(b)
|
|
|
Total Severance
|
|
Stephen R. Brunner
|
|
$
|
1,769,700
|
|
|
$
|
488,348
|
|
|
$
|
271,543
|
|
|
$
|
2,529,591
|
|
Michael B. Hiney
|
|
$
|
610,989
|
|
|
$
|
63,590
|
|
|
$
|
57,262
|
|
|
$
|
731,841
|
|
Lisa J. Mellencamp
|
|
$
|
860,835
|
|
|
$
|
138,917
|
|
|
$
|
121,543
|
|
|
$
|
1,121,295
|
|
Charles C. Ward
|
|
$
|
1,044,178
|
|
|
$
|
190,264
|
|
|
$
|
146,543
|
|
|
$
|
1,380,985
|
|
(a)
|
The cash value of the salary and target bonuses is based on the named executive officers base salary plus the officers target annual performance bonus award
plus the officers long-term target bonus issued under the 2009 Omnibus Incentive Compensation Plan for the year in which the termination occurs multiplied by 1.5.
|
19
(b)
|
The market value of the unit-based awards granted in 2011 is $0 assuming a change of control occurred on December 31, 2012. The companys unit price closed at
$1.18 per unit on the nearest trading date, which is below the minimum price of $3.50 per unit for a cash payout award.
|
(c)
|
All Other Compensation represents the value of medical and dental insurance for one year and the value of the 2012 cash-based performance award whose payment would be
accelerated from January 2, 2014, to the termination date.
|
The following table summarizes the value of
these provisions of these employment agreements if the named executive officer is entitled to an enhanced severance amount because of an involuntary termination (including a resignation by the officer for an event of good reason thereunder) during a
change of control period or the named executive terminates his or her employment within a one year period following the acquisition by PostRock or its affiliates of at least 49% of our outstanding common units as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enhanced Severance Amount
|
|
Name
|
|
Cash Value of
Salary and Target
Bonuses
(a)
|
|
|
Market Value of
Units To Be Vested
(b)
|
|
|
All
Other
Compensation
(c)
|
|
|
Excise
Tax
(c)
|
|
|
Total Enhanced
Severance
|
|
Stephen R. Brunner
|
|
$
|
2,609,600
|
|
|
$
|
488,348
|
|
|
$
|
271,543
|
|
|
$
|
|
|
|
$
|
3,369,491
|
|
Michael B. Hiney
|
|
$
|
864,653
|
|
|
$
|
63,590
|
|
|
$
|
57,262
|
|
|
$
|
|
|
|
$
|
985,505
|
|
Lisa J. Mellencamp
|
|
$
|
1,247,780
|
|
|
$
|
138,917
|
|
|
$
|
121,543
|
|
|
$
|
|
|
|
$
|
1,508,240
|
|
Charles C. Ward
|
|
$
|
1,517,238
|
|
|
$
|
190,264
|
|
|
$
|
146,543
|
|
|
$
|
|
|
|
$
|
1,854,045
|
|
(a)
|
The cash value of the salary and target bonuses is based on the named executive officers base salary plus the officers target annual performance bonus award
plus the officers long-term target bonus issued under the 2009 Omnibus Incentive Compensation Plan for the year in which the termination occurs multiplied by 2.0 plus the value of the long-term target bonus issued under the 2009 Omnibus
Incentive Compensation Plan for the year in which the termination occurs.
|
(b)
|
The market value of the unit-based awards granted in 2011 is $0 assuming a change of control occurred on December 31, 2012. The companys unit price closed at
$1.18 per unit on the nearest trading date, which is below the minimum price of $3.50 per unit for a cash payout award.
|
(c)
|
All Other Compensation represents the value of medical and dental insurance for one year and the value of the 2012 cash-based performance award whose payment would be
accelerated from January 2, 2014, to the termination date.
|
(d)
|
Excise tax is calculated in accordance with IRS Regulation 1.280G-1 and using 2012 Form W-2 income from CEP Services Company, Inc.
|
Compensation of Managers
Our board of managers, based on recommendations from our compensation committee, input from Meridian, and a 2007 Towers Perrin report for
the compensation committee, approved the following individual non-employee manager annual cash compensation program:
|
|
|
$40,000 annual retainer for each manager;
|
|
|
|
the chairman of the board of managers will receive a $50,000 annual retainer and the chairman of the audit committee will receive a $10,000 annual
retainer;
|
|
|
|
$2,500 fee for each meeting of the board of managers and each committee meeting attended by a member thereof that occurs on a day when there is no
board meeting; and
|
|
|
|
reasonable travel expenses to attend meetings.
|
Our board of managers, based on recommendations from our compensation committee, input from Meridian, and a 2007 Towers Perrin report for the compensation committee, also approved the following
non-employee manager unit-based compensation program:
|
|
|
Each non-employee manager will receive an annual restricted common unit award with a value of $75,000, to be granted as of March 1 of each year,
such award to have a one-year vesting period and to be forfeited on a pro-rata basis if service as a manager terminates prior to the one-year vesting period. The managers may also elect to pay this award in cash as opposed to granting restricted
common units.
|
20
The number of any restricted common units granted to each non-employee manager is computed
based on the date of the grant as determined by the compensation committee, rounded to the nearest unit. Cash distributions on any restricted common units are made at the time such distributions are made to other holders of common units.
For 2012, due to the limited number of units remaining under our Long-Term Incentive Plan and our 2009 Omnibus Incentive Compensation
Plan and in order to reduce the structural general and administrative expenses of the Company, the managers elected to not be paid the $75,000 in restricted common units or in cash on March 1, 2013.
The following table sets forth a summary of the 2012 non-employee manager compensation, as determined by our board of managers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manager Compensation
|
|
Name
|
|
Fees Earned or Paid
in Cash
|
|
|
Unit
Awards
(a)
|
|
|
All
Other
Compensation
(a)
|
|
|
Total
|
|
Richard H. Bachmann
|
|
$
|
72,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
72,500
|
|
John R. Collins
|
|
$
|
67,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
67,500
|
|
Richard S. Langdon
|
|
$
|
132,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
132,500
|
|
Gary M. Pitman
(b)
|
|
$
|
30,974
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,974
|
|
John N. Seitz
|
|
$
|
72,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
72,500
|
|
(a)
|
No annual restricted common unit award (or cash equivalent) of $75,000 was granted for 2012.
|
(b)
|
Mr. Pittman joined the board of managers effective August 30, 2012.
|
Compensation Committee Interlocks and Insider Participation
During 2012,
none of our named executive officers served as a member of the board of directors or compensation committee of any entity that had one or more of its named executive officers serving as a member of our board of managers or compensation committee.
Compensation Committee Report
The compensation committee of the board of managers has reviewed and discussed the
Compensation Discussion and Analysis
with management. Based on such review and discussions, the compensation
committee recommended to the board of managers that the
Compensation Discussion and Analysis
be included in this Form 10-K/A.
John N. Seitz, Chairman
Richard H. Bachmann
Richard S. Langdon
Item 13. Certain Relationships and Related Transactions, and Manager Independence
Both PostRock and Exelon, through subsidiaries, own a number of our units. As of December 31, 2012, CEPM, a subsidiary of PostRock,
owns all of our Class A units and 5,918,894 Class B common units. Constellation Energy Partners Holdings, LLC, or CEPH, a subsidiary of Exelon, owns all of our Class C management incentive interests and all of our Class D interests.
As discussed in
Item 10. Managers, Executive Officers and Corporate Governance-Corporate Governance-Committees of the Board
of ManagersConflicts Committee, either our board of managers or the boards conflicts committee reviews all related person transactions.
Our board of managers has established a conflicts committee to review specific matters that the board believes may involve conflicts of interest, including transactions with related persons such as
PostRock and Exelon, or their affiliates, including CEPM and CEPH. The conflicts committee determines if the resolution of the conflict of interest is fair and reasonable to our Company. Our operating agreement provides that members of the conflicts
committee may not be officers or employees of our Company, or directors, officers or employees of any of our affiliates, and must meet the independence standards for service on an audit committee of a board of directors as established by NYSE MKT
and SEC rules. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to our Company and approved by all of our unitholders. Our board is not required by the terms of our operating agreement to submit
the resolution of a potential conflict of interest to the conflicts committee, and may itself resolve such conflict of interest if the board determines that (i) the terms of the related person transaction are no less favorable to us than those
generally being provided to or available from unrelated third parties or (ii) the transaction is fair and reasonable to us, taking into account the totality of the relationships between the parties involved. Any matters approved by the board in
this manner will be deemed approved by all of our unitholders. For 2011 and 2012, there were no related party transactions with PostRock, Exelon or their affiliates that were reviewed or required to be reviewed by the conflicts committee.
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PostRock as an Interested Unitholder
In 2011, PostRock acquired certain of our Class A units and Class B common units in two separate transactions which now represents a
26.4% ownership interest in us as of April 15, 2013. Approval of the purchase of these units was neither required nor given by our board of managers or conflicts committee. We believe PostRock is now an interested unitholder under
Section 203 of the Delaware General Corporation Law, which is applicable to us pursuant to our operating agreement. Section 203, as it applies to us, prohibits an interested unitholder, defined as a person who owns 15% or more of our
outstanding common units, from engaging in business combinations with us for three years following the time such person becomes an interested unitholder without the approval of our board of managers and the vote of 66 2/3% of our outstanding Class B
common units, excluding those held by the interested unitholder. Section 203 broadly defines business combination to encompass a wide variety of transactions with or caused by an interested unitholder, including mergers, asset sales
and other transactions in which the interested unitholder receives a benefit on other than a pro rata basis with other unitholders. In addition to limiting our ability to enter into transactions with PostRock or its affiliates, this provision of our
operating agreement could have an anti-takeover effect with respect to transactions not approved in advance by our board of managers, including discouraging takeover attempts that might result in a premium over the market price for our common units.
We believe the Section 203 restrictions related to these unit purchases expire in 2014.
Distributions and Payments to
PostRock Entities
The following summarizes the distributions and payments made or to be made by us to PostRock and its
subsidiaries, including CEPM, in connection with our ongoing operations and any liquidation of us.
Distributions of available cash to CEPM
We generally make any cash distributions 98% to common unitholders, including CEPM, and 2% to CEPM in respect of its
Class A units. During 2012 and 2011, CEPM received no distributions on its Class A units or on its Class B common units.
Conversion of Class A units
Generally, if the common unitholders vote to eliminate the special voting rights of the holder of our Class A units, the Class A units will be converted into Class B common units on a
one-for-one basis. Should CEPMs Class A units convert into Class B common units, CEPM will receive any cash distributions on its Class B common units.
Liquidation
Upon our liquidation, the unitholders, including CEPM, as a
common unitholder and as the holder of the Class A units that are then outstanding, will be entitled to receive liquidating distributions according to its respective capital account balances.
Distributions and Payments to Exelon Entities
The following summarizes the distributions and payments made or to be made by us to Exelon and its subsidiaries, including CCG and CEPH, in connection with our ongoing operations and any liquidation of
us.
Distributions of Class C management incentive interests to CEPH
CEPH, a subsidiary of Exelon, holds all of our Class C management incentive interests. These management incentive interests represent the
right to receive 15% of quarterly distributions of available cash from operating
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surplus after the Target Distribution (as defined in our operating agreement) has been achieved and certain other tests have been met. None of these applicable tests have yet to be met and CEPH
has not been entitled to receive any management incentive interest distributions.
Conversion of Class C management incentive interests
Generally, if the common unitholders vote to eliminate the special voting rights of the holder of our Class A units,
the Class A units will be converted into Class B common units on a one-for-one basis, and CEPH will have the right to elect to convert its Class C management incentive interests into Class B common units at fair market value. Should CEPHs
Class C management incentive interests convert into Class B common units, CEPH will receive any cash distributions on its Class B common units.
Liquidation
Upon our
liquidation, the unitholders, including CEPH as the holder of the Class C management incentive interests and Class D interests that are then outstanding, will be entitled to receive liquidating distributions according to its respective capital
account balances.
Omnibus Agreement
At the closing of our initial public offering in November 2006, we entered into an omnibus agreement with CCG, a subsidiary of Exelon. Under the omnibus agreement, CCG agreed to indemnify us against
certain liabilities relating to:
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for a period of six years and 30 days after our initial public offering, any of our income tax liabilities, or any income tax liability attributable to
our operation of our properties, in each case relating to periods prior to the closing of our initial public offering;
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legal actions pending against Constellation or us at the time of our initial public offering;
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events and conditions associated with the ownership by Constellation or its affiliates of the undivided mineral interest in certain of our properties
in the Robinsons Bend Field for depths generally below 100 feet below the base of the lowest producing coal seam; and
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for a period of one year after our initial public offering, any miscalculation in the amount payable to the Trust in respect of the NPI for any period
prior to the initial public offering, provided that (i) such miscalculation relates to amount(s) payable no more than four years prior to our initial public offering and (ii) the aggregate amount payable by CCG pursuant to this bullet
point does not exceed $0.5 million.
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We have no outstanding claims under the Omnibus Agreement to CCG as of
April 15, 2013.
Trademark License
In connection with our initial public offering, we were granted a limited license to us by Constellation for the use of certain trademarks in connection with our business. The license will terminate upon
the elimination of the right of the holder or holders of our Class A units to elect the Class A managers pursuant to our operating agreement. The license did not terminate upon the sale by Constellation of our Class A units to
PostRock. Exelon will indemnify us from any third-party claims alleging trademark infringement that may arise out of our use of the Constellation trademarks under the license. No amounts were paid under this agreement during 2012 or 2011.
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Board Independence
A majority of our managers are required to be independent in accordance with NYSE MKT listing standards. For a manager to be considered independent, the board of managers must affirmatively determine that
such manager has no material relationship with us. When assessing the materiality of a managers relationship with us, the board of managers considers the issue from both the standpoint of the manager and from that of persons and organizations
with whom or with which the manager has an affiliation. The board of managers has adopted standards to assist it in determining if a manager is independent. A manager will be deemed to have a material relationship with us and will not be deemed to
be an independent manager if;
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the manager has been an employee (other than as an interim executive officer for less than one year), or an immediate family member of the manager has
been an executive officer, of us at any time during the past three years:
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the manager has received, or an immediate family member of the manager has received, more than $120,000 in any twelve-month period in direct
compensation from us, other than manager and committee fees or other forms of deferred compensation for priors service (provided such compensation is not contingent in any way on continued service), at any time during the past three years;
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the manager has been a partner of or employed by, or an immediate family member of the manager has been a partner of or employed by, our internal or
external auditor at any time during the past three years;
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the manager has been employed, or an immediate family member of the manager has been employed, as an executive officer of another company where any of
our present executives serve on that companys compensation committee at any time during the past three years; or
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the manager has been an executive officer or an employee, or an immediate family member of the manager has been an executive officer, of a company that
makes payments to, or receives payments from us.
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An immediate family member includes a
persons 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 resides in said persons home.
The board of managers has determined that each of Messrs. Bachmann, Langdon and Seitz is independent under the NYSE MKT listing
standards. In addition, the audit, compensation and nominating and corporate governance committees are composed entirely of independent managers in accordance with NYSE MKT listing standards, SEC requirements and other applicable laws, rules and
regulations. Other than as set forth below, there are no transactions, relationships or other arrangements between us and our independent managers that need to be considered under the NYSE MKT listing standards in determining that such managers are
independent. We sold natural gas from the Black Warrior Basin to an affiliate of EPCO Inc. in 2011. Mr. Bachman is an executive officer of EPCO Inc. As the sales did not exceed 2% of the consolidated gross revenues of EPCO Inc. at any time
during 2011, the board of managers determined that the relationship was immaterial and did not impair Mr. Bachmanns independence.