March 27, 2008

 

 

Dear Shareholder:

 

You are cordially invited to attend the 2008 Annual Meeting of Shareholders of Peabody Energy Corporation (the “Company”), which will be held on Thursday, May 8, 2008, at 10:00 A.M., Central Time, at the Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri 63105.

 

During this meeting, shareholders will vote on the following items:

 

 

The accompanying Notice of Annual Meeting of Shareholders and Proxy Statement contain complete details on these items and other matters. We also will be reporting on the Company’s operations and responding to shareholder questions. If you have questions that you would like to raise at the meeting, we encourage you to submit written questions in advance (by mail or e-mail) to the Corporate Secretary. This will help us respond to your questions during the meeting. If you would like to e-mail your questions, please send them to stockholder.questions@peabodyenergy.com.

 

Your understanding of and participation in the Annual Meeting is important, regardless of the number of shares you hold. To ensure your representation, we encourage you to vote over the telephone or Internet or to complete and return a proxy card as soon as possible. If you attend the Annual Meeting, you may then revoke your proxy and vote in person if you so desire.

 

Thank you for your continued support of Peabody Energy. We look forward to seeing you on May 8.

 

Very truly yours,

 

 

Gregory H. Boyce

Chairman and Chief Executive Officer

PEABODY ENERGY CORPORATION
701 Market Street
St. Louis, Missouri 63101-1826

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

Peabody Energy Corporation (the “Company”) will hold its Annual Meeting of Shareholders at the Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri, 63105 on Thursday, May 8, 2008, at 10:00 A.M., Central Time, to:

 

 

The Board of Directors has fixed March 14, 2008 as the record date for determining shareholders who will be entitled to receive notice of and vote at the Annual Meeting or any adjournment. Each share of Common Stock is entitled to one vote. As of the record date, there were             shares of Common Stock outstanding.

 

If you own shares of the Company’s Common Stock as of March 14, 2008, you can vote those shares via the Internet, by telephone or by attending the Annual Meeting and voting in person. If you received your proxy materials by mail, you may also vote your shares by completing and mailing your proxy/voting instruction card.

 

An admittance card or other proof of ownership is required to attend the Annual Meeting. If you are a shareholder of record, please retain the admission card printed on your notice of internet availability of proxy materials or your proxy card for this purpose. Also, please indicate your intention to attend the Annual Meeting by checking the appropriate box on the proxy card, or, if voting by the Internet or by telephone, when prompted. If your shares are held by a bank or broker, you will need to ask them for an admission card in the form of a confirmation of beneficial ownership. If you do not receive a confirmation of beneficial ownership or other admittance card from your bank or broker, you must bring proof of share ownership (such as a copy of your brokerage statement) to the Annual Meeting.

 

Your vote is important. Whether or not you plan to attend the Annual Meeting, please cast your vote by telephone or the Internet, or complete, date and sign a proxy card and return it in the envelope provided. If you attend the meeting, you may withdraw your proxy and vote in person, if you so choose.

 

Jeffery L. Klinger

Vice President, General Counsel

and Corporate Secretary

 

March 27, 2008

 

TABLE OF CONTENTS

 

PEABODY ENERGY CORPORATION
PROXY STATEMENT
FOR THE
2008 ANNUAL MEETING OF SHAREHOLDERS

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

 

 

Most shareholders will not receive printed copies of the proxy materials unless they request them. Instead, a notice (the “Notice”) was mailed that will tell you how to access and review all of the proxy materials on the Internet. The Notice also tells you how to submit your proxy on the Internet or by telephone. If you would like to receive a paper or email copy of our proxy materials, you should follow the instructions for requesting such materials in the Notice.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In accordance with the terms of our certificate of incorporation, the Board of Directors is divided into three classes, with each class serving a staggered three-year term. At this year’s Annual Meeting, the terms of current Class I Directors will expire. The terms of Class II Directors and Class III Directors will expire at the Annual Meetings to be held in 2009 and 2010, respectively.

 

The Board of Directors has nominated Sandra Van Trease for election as a Class I Director with a term expiring in 2011. Ms. Van Trease currently is serving as a Class I Director and has consented to serve for the new term. Should Ms. Van Trease become unavailable for election, your proxy authorizes us to vote for such other person, if any, as the Board of Directors may recommend.

 

The other current Class I Directors, Dr. Henry Givens, Jr. and Dr. James R. Schlesinger, will retire at the Annual Meeting pursuant to our mandatory retirement policy for directors.

 

The Board of Directors recommends that you vote “For” the Class I Director nominee named below.

 

SANDRA VAN TREASE, age 47, has been a director of the Company since January 2003. Ms. Van Trease is Group President, BJC HealthCare, a position she has held since September 2004. BJC HealthCare is one of the nation’s largest nonprofit healthcare organizations, delivering services to residents in the greater St. Louis, southern Illinois and mid-Missouri regions. Prior to joining BJC HealthCare, Ms. Van Trease served as President and Chief Executive Officer of UNICARE, an operating affiliate of WellPoint Health Networks Inc., from 2002 to September 2004. Ms. Van Trease also served as President, Chief Financial Officer and Chief Operating Officer of RightCHOICE Managed Care, Inc. from 2000 to 2002, and as Executive Vice President, Chief Financial Officer and Chief Operating Officer from 1997 to 2000. Prior to joining RightCHOICE in 1994, she was a Senior Audit Manager with Price Waterhouse LLP. She is a Certified Public Accountant and Certified Management Accountant. Ms. Van Trease is also a director of Enterprise Financial Services Corporation.

 

GREGORY H. BOYCE, age 53, has been a director of the Company since March 2005. Mr. Boyce was named Chief Executive Officer Elect of the Company in March 2005, assumed the position of Chief Executive Officer in January 2006 and was elected Chairman by the Board of Directors in October 2007. He was President of the Company from October 2003 to December 2007 and was Chief Operating Officer of the Company from October 2003 to December 2005. He previously served as Chief Executive — Energy of Rio Tinto plc (an international natural resource company) from 2000 to 2003. Other prior positions include President and Chief Executive Officer of Kennecott Energy Company from 1994 to 1999 and President of Kennecott Minerals Company from 1993 to 1994. He has extensive engineering and operating experience with Kennecott and also served as Executive Assistant to the Vice Chairman of Standard Oil of Ohio from 1983 to 1984. Mr. Boyce is Co-Chairman of the Coal Based Generation Stakeholders Group, and a member of the Coal Industry Advisory Board of the International Energy Agency, the Advisory Council of the University of Arizona’s Department of Mining and Geological Engineering and the National Council of the School of Engineering and Applied Science at Washington University in St. Louis. He is a board member of the Center for Energy and Economic Development, the National Mining Association, the National Coal Council, Civic Progress and St. Louis Children’s Hospital Mr. Boyce has been elected to the Board of Directors of Marathon Oil Corporation effective April 1, 2008.

 

WILLIAM E. JAMES, age 62, has been a director of the Company since 2001. Since July 2000, Mr. James has been Founding Partner of RockPort Capital Partners LLC, a venture fund specializing in energy and environmental technology and advanced materials. Prior to joining RockPort, Mr. James co-founded and served as Chairman and Chief Executive Officer of Citizens Power LLC, a leading power marketer. He also co-founded the non-profit Citizens Energy Corporation and served as the Chairman and Chief Executive Officer of Citizens Corporation, its for-profit subsidiary, from 1987 to 1996. Mr. James periodically provides consulting services to Lehman Brothers Inc., an investment banking firm (“Lehman Brothers”) on matters unrelated to the Company.

 

ROBERT B. KARN III, age 66, has been a director of the Company since January 2003. Mr. Karn is a financial consultant and former managing partner in financial and economic consulting with Arthur Andersen LLP in St. Louis. Before retiring from Arthur Andersen in 1998, Mr. Karn served in a variety of accounting, audit and financial roles over a 33-year career, including Managing Partner in charge of the global coal mining practice from 1981 through 1998. He is a Certified Public Accountant and has served as a Panel Arbitrator with the American Arbitration Association. Mr. Karn is also a director of Natural Resource Partners L.P., a coal-oriented master limited partnership that is listed on the New York Stock Exchange, the Fiduciary/Claymore MLP Opportunity Fund, the Fiduciary/Claymore Dynamic Equity Fund and Kennedy Capital Management, Inc.

 

HENRY E. LENTZ, age 63, has been a director of the Company since 1998. Mr. Lentz is currently employed as an Advisory Director by Lehman Brothers. He joined Lehman Brothers in 1971 and became a Managing Director in 1976. He left the firm in 1988 to become Vice Chairman of Wasserstein Perella Group, Inc., an investment banking firm. In 1993, he returned to Lehman Brothers as a Managing Director and served as head of the firm’s worldwide energy practice. In 1996, he joined Lehman Brothers’ Merchant Banking Group as a Principal and in January 2003 became a consultant to the Merchant Banking Group. He assumed his current role with Lehman Brothers effective January 2004. Mr. Lentz is also a director of Rowan Companies, Inc. and CARBO Ceramics, Inc.

 

BLANCHE M. TOUHILL, PhD, age 76, has been a director of the Company since 2001. Dr. Touhill is Chancellor Emeritus and Professor Emeritus at the University of Missouri — St. Louis. She previously served as Chancellor and Professor of History and Education at the University of Missouri — St. Louis from 1991 through 2002. Prior to her appointment as Chancellor, Dr. Touhill held the positions of Vice Chancellor for Academic Affairs and Interim Chancellor at the University of Missouri — St. Louis. Dr. Touhill also has served on the Boards of Directors of Trans World Airlines and Delta Dental. She holds bachelor’s and doctoral degrees in history and a master’s degree in geography from St. Louis University.

 

WILLIAM A. COLEY, age 64, has been a director of the Company since March 2004. Since March 2005, Mr. Coley has served as Chief Executive Officer and Director of British Energy Group plc, the U.K.’s largest electricity producer. He was previously a non-executive director of British Energy. Mr. Coley served as President of Duke Power, the U.S.-based global energy company, from 1997 until his retirement in February 2003. During his 37-year career at Duke Power, Mr. Coley held various officer level positions in the engineering, operations and senior management areas, including Vice President, Operations (1984-1986), Vice President, Central Division (1986-1988), Senior Vice President, Power Delivery (1988-1990), Senior Vice President, Customer Operations (1990-1991), Executive Vice President, Customer Group (1991-1994) and President, Associated Enterprises Group (1994-1997). Mr. Coley was elected to the board of Duke Power in 1990 and was named President following Duke Power’s acquisition of PanEnergy in 1997. Mr. Coley earned his B.S. in electrical engineering from Georgia Institute of Technology and is a registered professional engineer. He is also a director of E. R. Jahna Enterprises.

 

WILLIAM C. RUSNACK, age 63, has been a director of the Company since January 2002. Mr. Rusnack is the former President and Chief Executive Officer of Premcor Inc., one of the largest independent oil refiners in the United States prior to its acquisition by Valero Energy Corporation in 2005. He served as President, Chief Executive Officer and Director of Premcor from 1998 to February 2002. Prior to joining Premcor, Mr. Rusnack was President of ARCO Products Company, the refining and marketing division of Atlantic Richfield Company. During a 31-year career at ARCO, he was also President of ARCO Transportation Company and Vice President of Corporate Planning. He is also a director of Sempra Energy and Flowserve Corporation.

 

JOHN F. TURNER, age 66, has been a director of the Company since July 2005. Mr. Turner served as Assistant Secretary of State for the Bureau of Oceans and International Environmental and Scientific Affairs from November 2001 to July 2005. Mr. Turner was previously President and Chief Executive Officer of The Conservation Fund, a national nonprofit organization dedicated to public-private partnerships to protect land and water resources. He was director of the U.S. Fish and Wildlife Service from 1989 to 1993. Mr. Turner also served in the Wyoming state legislature for 19 years and is a past president of the Wyoming State Senate. He serves as a consultant to The Conservation Fund. Mr. Turner also serves as Chairman of the University of Wyoming, Ruckelshaus Institute of Environment and Natural Resources and as a Visiting Professor of Environment and Natural Resources at the University. He is also a director of International Paper Company and Ashland, Inc.

 

ALAN H. WASHKOWITZ, age 67, has been a director of the Company since 1998. Until July 2005, Mr. Washkowitz was a Managing Director of Lehman Brothers and part of the firm’s Merchant Banking Group, responsible for oversight of Lehman Brothers Merchant Banking Partners. He joined Kuhn Loeb & Co. in 1968 and became a general partner of Lehman Brothers in 1978 when it acquired Kuhn Loeb & Co. Prior to joining the Merchant Banking Group, he headed Lehman Brothers’ Financial Restructuring Group. Mr. Washkowitz is also a director of L-3 Communications Corporation.

 

Director Independence

 

As required by the rules of the New York Stock Exchange (“NYSE”), the Board of Directors evaluates the independence of its members at least annually, and at other appropriate times when a change in circumstances could potentially impact the independence or effectiveness of one or more directors (e.g., in connection with a change in employment status or other significant status changes). This process is administered by the Nominating & Corporate Governance Committee of the Board of Directors, which consists entirely of directors who are independent under applicable NYSE rules. After carefully considering all relevant relationships with the Company, the Nominating & Corporate Governance Committee submits its recommendations regarding independence to the full Board, which then makes an affirmative determination with respect to each director.

 

In making independence determinations, the Nominating & Corporate Governance Committee and the Board consider all relevant facts and circumstances, including (1) the nature of any relationships with the Company, (2) the significance of the relationship to the Company, the other organization and the individual director, (3) whether or not the relationship is solely a business relationship in the ordinary course of the Company’s and the other organization’s businesses and does not afford the director any special benefits, and (4) any commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships. For purposes of this determination, the Board deems any relationships that have expired for more than three years to be immaterial.

 

After considering the standards for independence adopted by the NYSE and various other factors as described herein, the Board has determined that all directors other than Mr. Boyce are independent. None

of the directors other than Mr. Boyce receives any compensation from us other than customary director and committee fees.

 

The Board has determined that directors Coley, Karn, Touhill and Turner are independent, based upon the fact that they have no relationships with the Company (other than serving as directors). The Board has also determined that directors Givens, James, Lentz, Rusnack, Schlesinger, Van Trease and Washkowitz are independent after evaluating their relationships with the Company and concluding that such relationships are immaterial. All such relationships are outlined below.

 

Dr. Givens serves on the board of directors of the United Way of Greater St. Louis, a non-profit organization which received a contribution of $220,000 from us in 2007. Dr. Givens also serves on the board of directors of the St. Louis Regional Chamber and Growth Association, which received a contribution of $100,000 from us in 2007 and to which we have pledged to contribute an additional $200,000 over the next two years. The Board has concluded that these relationships are not material, since our annual contributions represent less than 1% of each institution’s total annual contributions.

 

Dr. Givens and Mr. Rusnack serve on the board of trustees of the St. Louis Zoo, a non-profit organization which received a contribution of $20,000 from us in 2007. Dr. Givens and Ms. Van Trease serve on the board of directors of Forest Park Forever, Inc., a non-profit organization which received a contribution of $10,000 from us in 2007 and to which we have pledged to contribute an additional $100,000 over the next five years. The Board has concluded that these relationships are not material given the size of our annual contributions.

 

Dr. Givens serves on the regional advisory board of U.S. Bank, N.A. (St. Louis), which is a participating lender under our senior credit facility and provides various other commercial banking services to us. These banking services are offered to us on the same general terms and conditions as other large commercial customers. Our directors did not solicit these commercial relationships and were not involved in any related discussions or deliberations.

 

Messrs. James, Lentz, Schlesinger and Washkowitz have been employed by or served as consultants to Lehman Brothers within the past three years. The Board has determined that these employment and consulting relationships involve matters unrelated to the Company, and that these relationships are not material to the Company. Dr. Schlesinger currently serves as senior advisor to Lehman Brothers. The specific relationships of Messrs. James, Lentz and Washkowitz with Lehman Brothers are described in more detail in the biographies set forth on pages 7 and 8 of this Proxy Statement. When evaluating the materiality of these relationships to the Company, the Board considered the fact that Lehman Brothers Merchant Banking Partners II L.P. and other affiliates of Lehman Brothers (collectively, the “Merchant Banking Fund”) owned a significant percentage of the Company’s stock prior to completely selling its holdings in March 2004.¹ Lehman Brothers is a participating lender under our senior credit facility and from time to time provides investment banking and other ordinary course financial services to us. These services are provided to us on the same general terms and conditions as provided to other large commercial customers. The fees related to these services have not been significant to us or Lehman Brothers, and since March 2004 all such fees have been reviewed and approved in advance by our independent Audit Committee. Directors who are affiliated with Lehman Brothers do not participate in any decisions or discussions related to these services, and they do not receive any benefit from related fees. After careful consideration, the Board has determined that these relationships do not impair, or appear to impair, the directors’ independent judgment.

 

 

¹  Prior to May 2001, the Merchant Banking Fund owned in excess of 90% of the Company’s outstanding Common Stock. Over the ensuing three-year period, the Merchant Banking Fund sold all of its Company holdings through a series of registered public offerings, falling below a 50% controlling interest level in April 2002 and completing its exit in March 2004.

 

The Board of Directors met 11 times in 2007. During that period, each incumbent director attended 75% or more of the aggregate number of meetings of the Board and the committees on which he or she served, and average attendance was 94%. Pursuant to our Corporate Governance Guidelines, the non-management directors meet in executive session at least quarterly. The chair of each executive session rotates among the chairs of the Audit Committee, Compensation Committee and Nominating & Corporate Governance Committee. During 2007, our non-management directors met in executive session eight times.

 

The Board of Directors has appointed four standing committees from among its members to assist it in carrying out its obligations. These committees are the Audit Committee, Compensation Committee, Executive Committee and Nominating & Corporate Governance Committee. Each standing committee has adopted a formal charter that describes in more detail its purpose, organizational structure and responsibilities. A copy of each committee charter can be found on our website (www.peabodyenergy.com) by clicking on “Investors,” and then “Corporate Governance” and is available in print to any shareholder who requests it. Information on our website is not considered part of this Proxy Statement. A description of each committee and its current membership follows:

 

Compensation Committee

 

The members of the Compensation Committee are Robert B. Karn III (Chair), William A. Coley, Henry E. Lentz and John F. Turner. The Board of Directors has affirmatively determined that, in its judgment, all members of the Compensation Committee are independent under rules established by the New York Stock Exchange.

 

The Compensation Committee met 10 times during 2007. Some of the primary responsibilities of the Compensation Committee include the following:

 

 

Executive Committee

 

The members of the Executive Committee are Gregory H. Boyce (Chair), William A. Coley, Henry E. Lentz and William C. Rusnack. The Executive Committee met once during 2007.

 

When the Board of Directors is not in session, the Executive Committee has all of the power and authority as delegated by the Board, except with respect to:

 

 

Nominating & Corporate Governance Committee

 

The members of the Nominating & Corporate Governance Committee are Blanche M. Touhill (Chair), Henry Givens, Jr., William E. James, James R. Schlesinger, John F. Turner and Alan H. Washkowitz. The Board of Directors has affirmatively determined that, in its judgment, all members of the Nominating & Corporate Governance Committee are independent under New York Stock Exchange rules.

 

The Nominating & Corporate Governance Committee met six times during 2007. Some of the primary responsibilities of the Nominating & Corporate Governance Committee include the following:

 

 

Audit Committee

 

The members of the Audit Committee are William C. Rusnack (Chair), Robert B. Karn III, Sandra Van Trease and Alan H. Washkowitz. The Board of Directors has affirmatively determined that, in its judgment, all members of the Audit Committee are independent under New York Stock Exchange and SEC rules. The Board also has determined that each of Messrs. Rusnack, Karn and Washkowitz and Ms. Van Trease is an “audit committee financial expert” under SEC rules.

 

The Audit Committee met eight times during 2007. The Audit Committee’s primary purpose is to provide assistance to the Board in fulfilling its oversight responsibility with respect to:

 

 

Some of the primary responsibilities of the Audit Committee include the following:

 

 

The Audit Committee has reviewed and discussed the Company’s audited financial statements and management’s report on internal control over financial reporting as of and for the fiscal year ended December 31, 2007 with management and Ernst & Young LLP, the Company’s independent registered public accounting firm. Management is responsible for the Company’s financial statements and internal control over financial reporting, while Ernst & Young is responsible for conducting its audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) and expressing opinions on the Company’s financial statements in accordance with U.S. generally accepted accounting principles and the Company’s internal control over financial reporting.

 

The Audit Committee reviewed with Ernst & Young the overall scope and plans for their audit of the Company’s financial statements and internal control over financial reporting. The Audit Committee also discussed with Ernst & Young matters relating to the quality and acceptability of the Company’s accounting principles, as applied in its financial reporting processes, as required by Statement of Auditing Standards No. 61 as amended and adopted by the Public Company Accounting Oversight Board in Rule 3200T. In addition, the Audit Committee reviewed and discussed with Ernst & Young the auditor’s independence from management and the Company, as well as the matters included in written disclosures received from Ernst & Young as 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. As part of its review, the Audit Committee reviewed fees paid to Ernst & Young and considered whether Ernst & Young’s performance of non-audit services for the Company was compatible with the auditor’s independence.

 

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for filing with the Securities and Exchange Commission.

 

MEMBERS OF THE AUDIT COMMITTEE:

 

WILLIAM C. RUSNACK, CHAIR
ROBERT B. KARN III
SANDRA VAN TREASE
ALAN H. WASHKOWITZ

 

Ernst & Young LLP served as our independent registered public accounting firm for the fiscal years ended December 31, 2007 and 2006.

 

The following fees were paid to Ernst & Young for services rendered during our last two fiscal years:

 

 

Under procedures established by the Board of Directors, the Audit Committee is required to pre-approve all audit and non-audit services performed by our independent registered public accounting firm to ensure that the provisions of such services do not impair such firm’s independence. The Audit Committee may delegate its pre-approval authority to one or more of its members, but not to management. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

Each fiscal year, the Audit Committee reviews with management and the independent registered public accounting firm the types of services that are likely to be required throughout the year. Those services are comprised of four categories, including audit services, audit-related services, tax services and all other permissible services. At that time, the Audit Committee pre-approves a list of specific services that may be provided within each of these categories, and sets fee limits for each specific service or project. Management is then authorized to engage the independent registered public accounting firm to perform the pre-approved services as needed throughout the year, subject to providing the Audit Committee with regular updates. The Audit Committee reviews the amount of all billings submitted by the independent registered public accounting firm on a regular basis to ensure that their services do not exceed pre-defined limits. The Audit Committee must review and approve in advance, on a case-by-case basis, all other projects, services and fees to be performed by or paid to the independent registered public accounting firm. The Audit Committee also must approve in advance any fees for pre-approved services that exceed the pre-established limits, as described above.

 

Under Company policy and/or applicable rules and regulations, our independent registered public accounting firm is prohibited from providing the following types of services to us: (1) bookkeeping or other services related to our accounting records or financial statements, (2) financial information systems design and implementation, (3) appraisal or valuation services, fairness opinions or contribution-in-kind reports, (4) actuarial services, (5) internal audit outsourcing services, (6) management functions, (7) human resources, (8) broker-dealer, investment advisor or investment banking services, (9) legal services, (10) expert services unrelated to audit, (11) any services entailing a contingent fee or commission, and (12) tax services to an officer of the Company whose role is in a financial oversight capacity.

 

During the fiscal year ended December 31, 2007, all of the services described under the headings “Audit-Related Fees,” “Tax Fees” and “All Other Fees” were approved by the Audit Committee pursuant to the procedures described above.

 

Good corporate governance has been a priority at Peabody Energy for many years. Our key governance practices are outlined in our Corporate Governance Guidelines, committee charters, and Code of Business Conduct and Ethics. These documents can be found on our Corporate Governance webpage (www.peabodyenergy.com) by clicking on “Investors” and then “Corporate Governance,” and are available in print to any shareholder upon request. Information on our website is not considered part of this Proxy Statement. The Code of Business Conduct and Ethics applies to our directors, Chief Executive Officer, Chief Financial Officer, Controller and other Company personnel.

 

The Nominating & Corporate Governance Committee of the Board of Directors is responsible for reviewing the Corporate Governance Guidelines from time to time and reporting and making recommendations to the Board concerning corporate governance matters. Each year, the Nominating & Corporate Governance Committee, with the assistance of outside experts, reviews the Company’s corporate governance practices, not only to ensure that they comply with applicable laws and NYSE listing requirements, but also to ensure that they continue to reflect what the Committee believes are best practices and promote the best interests of the Company and its shareholders.

 

In July 2007, our Board of Directors amended our Bylaws to provide for majority voting in the election of directors. In the case of uncontested elections, in order to be elected the number of shares voted in favor of a nominee must exceed 50% of the number of votes cast with respect to that nominee’s election at any meeting of shareholders for the election of directors at which a quorum is present. Votes cast includes votes to withhold authority or votes cast against in each case as applicable and excludes abstentions with respect to that nominee’s election.

 

If a nominee is an incumbent director and receives a greater number of votes withheld from his or her election than votes in favor of his or her election, our Corporate Governance Guidelines require that such director promptly tender his or her resignation to the Chairman of the Board following certification of the shareholder vote. The Nominating and Corporate Governance Committee will promptly consider the resignation submitted by such director and will recommend to the Board whether to accept or reject the tendered resignation. In considering whether to accept or reject the tendered resignation, the Committee will consider all factors deemed relevant by its members. The Board will act on the Committee’s recommendation no later than 90 days following the date of the shareholders’ meeting where the election occurred. In considering the Committee’s recommendation, the Board will consider the factors considered by the Committee and such additional information and factors the Board deems to be relevant. Any director who tenders his or her resignation pursuant to our Corporate Governance Guidelines will not participate in the Committee recommendation or Board consideration regarding whether or not to accept the tendered resignation.

 

In the case of contested elections, directors will be elected by a plurality of the votes of the shares present in person or by proxy and voting for nominees in the election of directors at any meeting of shareholders for the election of directors at which a quorum is present. For these purposes, a contested election is any election of directors in which the number of candidates for election as directors exceeds the number of directors to be elected.

 

The Board of Directors has adopted the following procedures for shareholders and other interested persons to send communications to the Board, individual directors and/or Committee Chairs (collectively, “Shareholder Communications”):

 

Shareholders and other interested persons seeking to communicate with the Board should submit their written comments to the Chairman, Peabody Energy Corporation, 701 Market Street, St. Louis, Missouri 63101. The Chairman will forward such Shareholder Communications to each Board member (excluding routine advertisements and business solicitations, as instructed by the Board), and provide a report on the disposition of matters stated in such communications at the next regular meeting of the Board. If a Shareholder Communication (excluding routine advertisements and business solicitations) is addressed to a specific individual director or Committee Chair, the Chairman will forward that communication to the named director, and will discuss with that director whether the full Board and/or one of its committees should address the subject matter.

 

If a Shareholder Communication raises concerns about the ethical conduct of management or the Company, it should be sent directly to our Chief Legal Officer at 701 Market Street, St. Louis, Missouri 63101. The Chief Legal Officer will promptly forward a copy of such Shareholder Communication to the Chairman of the Audit Committee and, if appropriate, the Chairman of the Board, and take such actions as they authorize to ensure that the subject matter is addressed by the appropriate Board committee, management and/or the full Board.

 

If a shareholder or other interested person seeks to communicate exclusively with the Company’s non-management directors, such Shareholder Communication should be sent directly to the Corporate Secretary who will forward any such communication directly to the Chair of the Nominating & Corporate Governance Committee. The Corporate Secretary will first consult with and receive the approval of the Chair of the Nominating & Corporate Governance Committee before disclosing or otherwise discussing the communication with members of management or directors who are members of management.

 

At the direction of the Board, we reserve the right to screen all materials sent to our directors for potential security risks and/or harassment purposes.

 

Shareholders also have an opportunity to communicate with the Board at our Annual Meeting of Shareholders. Pursuant to Board policy, each director is expected to attend the Annual Meeting in person, subject to occasional excused absences due to illness or unavoidable conflicts. Each of our directors attended the last Annual Meeting of Shareholders in May 2007.

 

The Board of Directors believes that one of its primary goals is to advise management on strategy and to monitor the Company’s performance. The Board also believes that the best way to accomplish this goal is by choosing directors who possess a diversity of experience, knowledge and skills that are particularly relevant and helpful to the Company. As such, current Board members possess a wide array of skills and experience in the coal industry, related energy industries and other important areas, including finance and accounting, operations, environmental management, education, governmental affairs and administration, and healthcare. When evaluating potential members, the Board seeks to enlist the services of candidates who possess high ethical standards and a combination of skills and experience which the Board determines are the most appropriate to meet its objectives. The Board believes all candidates should be committed to creating value over the long term and to serving the best interests of the Company and all of its shareholders.

 

The Nominating & Corporate Governance Committee (“Committee”) is responsible for identifying, evaluating and recommending qualified candidates for election to the Board. The Committee will consider director candidates submitted by shareholders. Any shareholder wishing to submit a candidate for consideration should send the following information to the Corporate Secretary, Peabody Energy Corporation, 701 Market Street, St. Louis, Missouri 63101:

 

 

The Corporate Secretary will promptly forward such materials to the Committee Chair and the Chairman of the Board. The Corporate Secretary also will maintain copies of such materials for future reference by the Committee when filling Board positions.

 

Shareholders may submit potential director candidates at any time pursuant to these procedures. The Committee will consider such candidates if a vacancy arises or if the Board decides to expand its membership, and at such other times as the Committee deems necessary or appropriate. Separate procedures apply if a shareholder wishes to nominate a director candidate at the 2009 Annual Meeting. Those procedures are described on page 66 of this Proxy Statement under the heading “Information About Shareholder Proposals.”

 

Pursuant to its charter, the Committee must review with the Board, at least annually, the requisite qualifications, independence, skills and characteristics of Board candidates, members and the Board as a whole. When assessing potential new directors, the Committee considers individuals from various and diverse backgrounds. While the selection of qualified directors is a complex and subjective process that requires consideration of many intangible factors, the Committee believes that candidates should generally meet the following criteria:

 

 

The Committee will consider candidates submitted by a variety of sources (including, without limit, incumbent directors, shareholders, Company management and third-party search firms) when filling vacancies and/or expanding the Board. If a vacancy arises or the Board decides to expand its membership, the Committee generally asks each director to submit a list of potential candidates for consideration. The Committee then evaluates each potential candidate’s educational background, employment history, outside commitments and other relevant factors to determine whether he/she is potentially qualified to serve on the Board. At that time, the Committee also will consider potential nominees submitted by shareholders in accordance with the procedures described above. The Committee seeks to identify and recruit the best available candidates, and it intends to evaluate qualified shareholder nominees on the same basis as those submitted by Board members or other sources.

 

After completing this process, the Committee will determine whether one or more candidates are sufficiently qualified to warrant further investigation. If the process yields one or more desirable candidates, the Committee will rank them by order of preference, depending on their respective qualifications and the Company’s needs. The Committee Chair, or another director designated by the Committee Chair, will then contact the preferred candidate(s) to evaluate their potential interest and to set up interviews with members of the Committee. All such interviews are held in person, and include only the candidate and the independent Committee members. Based upon interview results and appropriate background checks, the Committee then decides whether it will recommend the candidate’s nomination to the full Board.

 

The Committee believes this process has consistently produced highly qualified, independent Board members to date. However, the Committee may choose, from time to time, to use additional resources (including independent third-party search firms) after determining that such resources could enhance a particular director search. The Committee has not used third-party firms for prior searches.

 

The following table sets forth information as of March 1, 2008 with respect to persons or entities who are known to beneficially own more than 5% of our outstanding Common Stock, each director, each

current and former executive officer named in the Summary Compensation Table, below, and all directors and executive officers as a group (which includes the former executive officers included in this table).

 

 

 

 

Our executive officers and directors and persons beneficially holding more than ten percent of our Common Stock are required under the Securities Exchange Act of 1934 to file reports of ownership and changes in ownership of our Common Stock with the Securities and Exchange Commission and the New York Stock Exchange. We file these reports of ownership and changes in ownership on behalf of our executive officers and directors. To the best of our knowledge, based solely on our review of the copies of such reports furnished to us during the fiscal year ended December 31, 2007, filings with the Commission and written representations from certain reporting persons that no additional reports were required, all required reports were timely filed.

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview of Compensation Philosophy and Program

 

The objective of our executive compensation program is to attract, retain and motivate key executives to enhance long-term profitability and create shareholder value. Our compensation program is designed to align incentives for executives with achievement of our business strategies:

 

 

Our compensation program is based on the following policies and objectives:

 

 

 

 

With these policies and objectives in mind, the Compensation Committee has approved a compensation program for the named executive officers that incorporates four key components: base salary, annual incentive payments, long-term incentive compensation consisting of stock options and performance units, and retirement and other benefits.

Role of the Compensation Committee

 

The Compensation Committee is comprised entirely of independent directors and has overall responsibility for evaluating and approving our executive compensation plans, policies and programs, and for monitoring the performance of our executives and the compensation awarded to our executives excluding compensation for the Chairman and Chief Executive Officer. The Committee also reviews and approves executive participation in any company-wide benefit plans. In addition, the Committee oversees our annual and long-term incentive plans and programs and periodically assesses our director compensation program.

 

For 2007, a Special Committee, comprised of the independent members of the Board of Directors, after considering the recommendations of the Compensation Committee and its independent compensation consultant, determined the type (e.g., base salary, annual incentive and long-term incentive) and level of compensation awarded to our Chief Executive Officer. Effective October 10, 2007 our Chief Executive Officer assumed the additional responsibilities of the Chairman role. The Special Committee designed the type and level of compensation to be consistent with our compensation philosophy and to ensure that the Chairman and Chief Executive Officer’s total compensation was competitive with the compensation of chief executive officers at publicly-traded companies of similar size and complexity. As described below, in assessing the competitiveness of the Chairman and Chief Executive Officer’s compensation package, the Special Committee received advice from its independent compensation consultant and reviewed appropriate salary surveys, industry benchmarking data and proxy information.

 

Deductibility of Compensation Expenses

 

Pursuant to Section 162(m) of the Internal Revenue Code, some compensation paid to executive officers in excess of $1 million is not tax deductible, except to the extent it constitutes performance-based compensation. The Compensation Committee has and will continue to consider the impact of Section 162(m) when establishing incentive compensation plans. As a result, a significant portion of our executive compensation satisfies the requirements for deductibility under Section 162(m). At the same time, the Committee considers its primary goal to design compensation strategies that further our best interests and those of our shareholders. In certain cases, it may determine that the amount of tax deductions lost is not significant when compared to the potential opportunity a compensation program provides for creating shareholder value. The Committee therefore retains the ability to evaluate the performance of our executive officers and to pay appropriate compensation, even if some of it may be non-deductible.

 

Role of the Compensation Consultant

 

The Compensation group in our Human Resources Department supports the Compensation Committee in its work. In addition, the Committee has the authority under its charter to engage the services of outside advisors, experts and others to assist it. Pursuant to this authority, the Committee engaged Mercer Human Resource Consulting for independent guidance on executive compensation issues in 2006 and early 2007. In April 2007, the Mercer partner with whom the Committee had been working became employed by Frederic W. Cook and Co, Inc. (“F.W. Cook”). After a thorough review, the Committee elected in June 2007 to continue working with this individual and change its independent compensation consultant to F.W. Cook.

 

In connection with its engagement, Mercer provided the Compensation Committee with independent advice concerning the types and levels of compensation to be paid to the Chairman and Chief Executive Officer and the other senior executives for 2007. Mercer assisted the Committee by providing market compensation data (e.g., industry compensation surveys and benchmarking data) on base pay, as

well as annual and long-term incentives. In addition, Mercer advised the Committee on plan design for each element of executive compensation, including helping to identify:

 

 

The Compensation Committee did not engage F.W. Cook until after executive compensation opportunities for 2007 had been approved. The Compensation Committee and the Special Committee sought and used F.W. Cook’s advice in determining annual incentive compensation with respect to performance in 2007. In addition, the Committee considered F.W. Cook’s advice in establishing the types and levels of compensation to be paid to the executives for 2008 and the Committee and the Special Committee considered F.W. Cook’s advice in establishing the types and levels of compensation to be paid to the Chairman and Chief Executive Officer for 2008. F.W. Cook’s role and duties in determining compensation opportunities for 2008 were similar to Mercer’s role and duties in determining compensation opportunities for 2007.

 

Review of External Data

 

Each year, the Compensation Committee commissions a compensation analysis conducted by its independent compensation consultant to determine whether our executive compensation program is consistent with those of other publicly-held companies of similar size and industry.

 

For mid-level management positions that require technical coal industry knowledge and experience, we use a mining comparator group for benchmarking purposes. These positions are generally operational in nature. None of the named executive officers held these positions during 2007. The mining comparator group comprises publicly-held coal companies from which we believe we are likely to recruit for these types of positions and is composed of CONSOL Energy, Inc., Arch Coal, Inc., Massey Energy Company, Alpha Natural Resources, Inc., Foundation Coal Holdings, Inc., International Coal Group, Inc., James River Coal Company, and Westmoreland Coal Company. This is the same comparator group as the Industry Peer Group used in connection with our performance unit program.

 

Talent for other senior-level management positions and key roles in the organization can be acquired across a broader spectrum of companies. As such, we use both the above-mentioned mining comparator group and a group of publicly-held companies of similar size and complexity to assess competitiveness. This group of companies is composed of Air Products & Chemicals, Inc., Barrick Gold Corporation, Eastman Chemical Company, Ecolab, Inc., Freeport-McMoRan Copper & Gold, Goodrich Corporation, ITT Corporation, Lubrizol Corporation, Monsanto Company, National Oilwell Varco, Inc., Newmont Mining Corporation, Praxair, Inc., Rockwell Automation, Rohm and Haas Company, Smith International, Inc., Southern Copper Corporation, SPX Corporation, Inc., Teck Cominco Ltd., and Timken Company. In addition, for international positions, we review international companies such as Anglo American, plc, Rio Tinto, plc, and BHP Billiton Limited when relevant compensation data is available.

 

Overall, the independent compensation consultants confirmed that our executive compensation program, as structured, is competitive. Based upon the review of the compensation plans discussed below, peer group compensation levels and assessments of individual and corporate performance, the Compensation Committee assisted by its independent compensation consultants determined that the value and design of our executive compensation program is appropriate.

2007 Executive Compensation Components

 

For the year ended December 31, 2007, the principal components of compensation for the named executive officers were:

 

 

Annual Base Salary

 

In general, base salary for each employee, including the named executive officers, is established based on the individual’s job responsibilities, performance and experience, our overall budget for merit increases and the competitive environment. In 2007, we provided a base pay increase to our employees but, in accordance with our philosophy of providing a strong link between pay and performance, the exact amount of the increase (if any) varied among employees based on their performance levels.

 

The Compensation Committee reviewed the 2007 base salaries of the Chairman and Chief Executive Officer and his direct reports to ensure competitiveness in the marketplace. Consistent with our philosophy, the Committee (and, in the case of the Chairman and Chief Executive Officer, the Special Committee), approved base salary adjustments based on market information and individual performance. The Committee will continue to review the base salaries of our executive officers to ensure they take into account performance, experience and retention value and that salary levels continue to be competitive with companies of similar size and complexity.

 

Annual Incentive Compensation

 

Our annual incentive compensation plan provides opportunities for key executives, including the named executive officers, to earn annual cash incentive payments tied to the successful achievement of pre-established objectives that support our business strategy.

 

Under the plan, participants are assigned threshold, target and maximum performance goal levels. If actual performance does not meet the threshold level, no incentive is earned under the plan. At threshold performance levels, the incentive that can be earned generally equals 50% of the target incentive. The target incentive is established through an analysis of compensation for comparable positions in industries of similar size and complexity and is intended to provide a competitive level of compensation when participants achieve their performance objectives.

 

Target incentive payouts generally are received for achieving budgeted financial and safety goals and meeting individual performance goals. Our philosophy is to set these budgeted goals at levels that represent high levels of performance. Maximum incentive payments generally are awarded when budgeted financial goals and individual performance goals are significantly exceeded. A participant’s annual incentive opportunity is based upon his or her level of participation in the plan and competitive market practices.

 

Awards for the named executive officers are based on achievement of corporate and individual goals. Achievement of corporate goals is determined by comparing our actual performance against objective goals, and achievement of individual goals is determined by evaluating a combination of both objective and subjective performance measures. All goals are established by us, and goals for the named executive officers, excluding the Chairman and Chief Executive Officer, are reviewed and approved by the Compensation Committee for each calendar year. The Special Committee of the Board of Directors reviews and approves the goals and payouts for each calendar year for the Chairman and Chief Executive Officer for each calendar year.

In determining final annual incentive awards, the Chairman and Chief Executive Officer has discretion for each of his direct reports up to the maximum allowable award, provided that such award is approved by the Compensation Committee; and the Special Committee of the Board has discretion for the Chairman and Chief Executive Officer up to the maximum allowable award.

 

The Compensation Committee reviews and approves annual incentive payouts to the named executive officers, excluding the Chairman and Chief Executive Officer. The Special Committee of the Board of Directors reviews and approves annual incentive payouts to the Chairman and Chief Executive Officer.

 

2007 Annual Incentive Measures

 

Based on input from management and information and advice from its independent compensation consultant, the Special Committee and the Compensation Committee established certain performance measures and weightings for determining the Chairman and Chief Executive Officer’s and each of the other named executive officer’s 2007 annual incentive opportunity, respectively.

 

For 2007, the performance measures for the named executive officers included goals for EBITDA, Earnings per Share, Leverage Ratio, Safety and Individual Goals.

 

EBITDA

 

The EBITDA performance measure used to determine the annual incentive is also one of the key metrics we use to measure our operating performance, as well as an indicator of our ability to meet debt service and capital expenditure requirements. EBITDA is defined as income from continuing operations before deducting early debt extinguishment costs, net interest expense, income taxes, minority interests, asset retirement obligation expense and depreciation, depletion and amortization.

 

Earnings per Share (EPS)

 

We use EPS in our annual incentive plan because it is a key metric used by outside investors to assess our profitability. EPS is calculated by dividing income from continuing operations by the number of total shares outstanding on a fully diluted basis.

 

Leverage Ratio

 

We use Leverage Ratio in our annual incentive plan to ensure our capital structure is not too heavily weighted toward debt. Leverage ratio is calculated by dividing total debt by the sum of total debt, total equity and minority interest.

 

Safety

 

Safety is a core value that is integrated into all areas of our business. In line with that philosophy, the named executive officers’ annual incentive opportunity depends not only on their contribution to promoting a culture of continuous improvement in safety (as referenced by the Safety Discretionary goal in the table below), but also our achievement of quantitative safety goals. For 2007, our quantitative safety goal was set at a 15% improvement over 2005’s actual record results.

 

Individual Goals

 

The Individual Goals established for the named executive officers were designed to further our business strategies and increase shareholder value. The individual goals for each of the named executive officers were reviewed and approved in advance by the Compensation Committee, and the individual goals for the Chairman and Chief Executive Officer were then reviewed and approved in advance by the Special Committee. These goals and objectives centered on:

 

 

 

2007 Annual Incentive Payouts

 

The table below summarizes the actual results for these performance goals for 2007. Actual results for EBITDA and EPS for 2007 include the ten months of Patriot prior to the spin-off and therefore are not comparable to similarly named measures included in our consolidated financial statements. In 2007, we had EBITDA of $1,026.1 million and a Leverage Ratio of 56.53%, both of which were in excess of the threshold performance level but below the target for those goals. In 2007, we had EPS of $1.52, which was at the threshold performance level for this goal. However, the safety incidence rate of 3.04 was below the threshold performance level for this goal.

 

 

For their 2007 performance, the Chairman and Chief Executive Officer, the Chief Financial Officer and the other named executive officers earned payouts under our annual incentive plan, as reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Tables on pages 36 and 37 of this Proxy Statement. Other eligible executives received payouts under the same annual incentive plan. Annual incentive payouts for 2007 were based on our achievement of quantitative goals and individual goals shown in the table above.

 

The Special Committee evaluated the Chairman and Chief Executive Officer’s performance in relation to these goals, and approved the level of his 2007 payout under our annual incentive plan accordingly. The Compensation Committee, with the Chairman and Chief Executive Officer, evaluated the performance of each of the other named executive officers in relation to these goals, and approved the level of their 2007 payouts under our annual incentive plan accordingly.

 

In 2007, additional special annual incentive awards were earned by the Chairman and Chief Executive Officer, the Chief Financial Officer, two of the three named executive officers who continue to serve as executive officers, and several other non-executive employees for significant accomplishments during 2007 that were not factored into the performance measures at the beginning of the year, but which will help us execute our strategic plan. These accomplishments included, but were not limited to, the successful spin-off of Patriot Coal Corporation, the implementation in the U.S. of a new integrated information technology system provided by SAP AG, and completion of the financial closing with our equity partners for the Prairie State Energy Campus. These special award amounts are reflected in the “Bonus” column of the Summary Compensation Table on page 36 of this Proxy Statement.

 

The following table shows the target annual incentive payout and the applicable payout range (each shown as a percentage of base salary) for each of the named executive officers who continues to serve as an executive officer, his or her actual award under our annual incentive plan, any special annual incentive

award received for 2007, and the combined actual and special incentive awards as a percentage of salary earned in 2007. The target payout and payout range for each executive is based upon his or her level of participation in the plan and competitive market practices.

 

2007 Annual Incentives — Current Executive Officers

 

 

The following table shows the target annual incentive payout and the applicable payout range (each shown as a percentage of base salary) for each of the named executive officers who no longer serves as an executive officer, his actual award under our annual incentive plan, and the actual award as a percentage of salary earned in 2007. The actual awards earned for these former executives were prorated for the portion of 2007 during which they were employed by us. The target payout and payout range for each executive is based upon his level of participation in the plan and competitive market practices.

 

2007 Annual Incentives — Former Executive Officers

 

 

Long-Term Incentive Compensation

 

Our long-term incentive compensation plan provides opportunities for key executives to earn equity interests if certain pre-established long-term (greater than one year) objectives are successfully achieved.

 

The Chairman and Chief Executive Officer and other named executive officers receive long-term incentive compensation through annual awards of stock options and performance units. The targeted value of these awards is split evenly between stock options and performance units.

 

For 2007, the Special Committee awarded stock options and performance units to the Chairman and Chief Executive Officer with a total grant date fair value of 350% of his base salary. In approving this award, the Special Committee considered the advice of its independent compensation consultant, as well as available benchmarking data and the perceived retention value of the award.

 

The Compensation Committee approved a long-term incentive opportunity for each of the named executive officers through annual awards of stock options and performance units. The targeted value of these awards, shown in the tables below, is split evenly between stock options and performance units. The Committee intends that these long-term incentive opportunities be competitive and based on our actual performance. When evaluating awards to be granted, the Compensation Committee and the Special Committee considered competitive market data and the perceived retention value of the award.

2007 Long-Term Incentive Awards — Current Executive Officers

 

 

2007 Long-Term Incentive Awards — Former Executive Officers

 

 

Stock Options

 

Our stock option program is a long-term plan designed to create a direct link between executive compensation and increased shareholder value, provide an opportunity for increased equity ownership by executives, and maintain competitive levels of total compensation opportunity.

 

The Compensation Committee and Special Committee meet in December of each year to evaluate, review and approve the annual stock option award design and level of award for each named executive officer and the Chairman and Chief Executive Officer. The Committees approve stock option awards prospectively. For example, the annual stock option awards are approved in early December for granting on the first business day in January at our closing market price per share on the grant date. The Compensation Committee and/or the Special Committee may occasionally approve stock option awards other than on the first business day of the year, due to promotions or new hires. In these cases the Compensation Committee or the Special Committee approves the award in advance of the grant date, and the stock option grant is awarded on the determined date with an exercise price equal to our closing market price per share on such date. We use a Black-Scholes valuation model to establish the grant-date fair value of all stock option grants.

 

All stock options are granted at an exercise price equal to the closing market price of our Common Stock on the date of grant. Accordingly, those stock options will have intrinsic value to employees only if the market price of our Common Stock increases after that date. Stock options generally vest in one-third increments over a period of three years or cliff vest after three years; however, options will immediately vest upon a change of control or a recapitalization event or upon the holder’s death or disability. If the holder terminates employment without good reason (as defined in his or her employment agreement), all unvested stock options are forfeited. Stock options expire ten years from the date of grant.

 

Performance Units

 

Similar to the stock option program, our performance unit program is a long-term plan designed to create a direct link between executive compensation and increased shareholder value, and maintain competitive levels of total compensation. In addition, our performance unit program is designed in part to reward executives for the achievement of strong financial returns on investment. Certain key executives are eligible to receive long-term incentive awards in the form of performance units.

 

Performance units granted in 2007 will be payable, if earned, in shares of our Common Stock. The percentage of the performance units earned is based on our total shareholder return (“TSR”) over a period

beginning January 3, 2007 and ending December 31, 2009 relative to an industry comparator group (the Industry Peer Group) and the S&P 500 Index (together weighted as 50% of the total award) and EBITDA Return on Invested Capital (weighted as 50% of the total award) over the same performance period.

 

TSR measures cumulative stock price appreciation plus dividends. The Industry Peer Group is generally perceived to be subject to similar market conditions and investor reactions as the Company and for purposes of the 2007 award consisted of Alpha Natural Resources, Inc., Arch Coal, Inc., CONSOL Energy Inc., Foundation Coal Holdings, Inc., International Coal Group, James River Coal Company, Massey Energy Company and Westmoreland Coal Company. At the time of the 2007 award, we were included in the S&P 500 Index. The Industry Peer Group is weighted at 30% of the total award, while the S&P 500 Index is weighted at 20% of the total award.

 

For purposes of the performance units granted in 2007, EBITDA Return on Invested Capital is defined as:

 

 

Performance unit payout formulas are as follows:

 

 

The number of target performance units granted is determined using a price that equals the average closing market price per share of our Common Stock during the four weeks of trading immediately following the date of grant.

 

Our TSR over the performance period is based on the average closing price during the first four weeks compared to the average closing price during the last four weeks of trading in the performance cycle. Units vest monthly over, and are payable subject to the achievement of performance goals at the conclusion of, the measurement period. Upon a change of control, a recapitalization event or the holder’s retirement or termination without cause, the holder would receive payment from us in proportion to the number of vested performance units based upon performance as of the date the event occurs. Upon the holder’s death or disability, the holder would receive payment from us for 100% of performance units

outstanding as of the date the event occurs. If the holder terminates employment without good reason (as defined in his or her employment agreement), all performance units are forfeited.

 

Retirement Benefits

 

Defined Contribution Plan

 

We maintain a defined contribution retirement plan and other health and welfare benefit plans for our employees. Named executive officers participate in these plans on the same terms as other eligible employees, subject to any legal limits on the amount that may be contributed by or paid to executives under the plans.

 

Pension Plan

 

Our Salaried Employees Retirement Plan, or pension plan, is a “defined benefit” plan. The pension plan provides a monthly annuity to eligible salaried employees when they retire. An employee must have at least five years of service to be vested in the pension plan. A full benefit is available to a retiree at age 62. A retiree can begin receiving a benefit as early as age 55; however, a 4% reduction factor applies for each year a retiree receives a benefit prior to age 62.

 

We announced in February 1999 that the pension plan would be phased out beginning January 1, 2001. Certain transition benefits were introduced based on the age and service of the employee at December 31, 2000: (1) employees age 50 or older continue to accrue service at 100%; (2) employees between the ages of 45 and 49 or under age 45 with 20 years or more of service continue to accrue service at the rate of 50% for each year of service worked after December 31, 2000; and (3) employees under age 45 with less than 20 years of service have had their pension benefits frozen. In all cases, final average earnings for retirement purposes are capped at December 31, 2000 levels.

 

Excess Defined Benefit and Excess Defined Contribution Retirement Plan

 

We maintain one excess defined benefit retirement plan and one excess defined contribution plan that provide retirement benefits to executives, which include the named executive officers, whose pay exceeds legislative limits for qualified defined contribution and pension plans.

 

Other Benefits Provided by the Company

 

The following benefits are provided by us to the named executive officers and all other employees.

 

Medical Benefits.  Employees have a choice of three coverage options. Each option covers the same services and supplies, but differs in the amount of its deductibles, co-payments and out-of-pocket limits. Employees located in St. Louis can also elect coverage through an HMO. Employees pay on average 20% of the monthly cost.

 

Dental Benefits.  The plan covers preventive, basic and major services for employees and their dependents. Orthodontia care is also provided for eligible dependents. Preventive care is covered at 100%. Basic services are covered at 80% and major and orthodontia services at 60% after the applicable deductibles are met. The plan has an annual maximum of $1,000 for preventive, basic and major care and a lifetime maximum of $1,000 for orthodontia. Employees pay on average 20% of the monthly cost.

 

Vision Benefits.  Employees can elect optional vision coverage, and pay the entire cost. If this coverage is elected, benefits are provided for eye examinations once every 12 months. Vision care benefits also include coverage for eyeglass lenses and frames, or contact lenses, once every 24 months.

 

Employee Retirement Account.  Employees can elect to put 1% to 60% of their salary into the plan, up to limits determined by the Internal Revenue Service using before-tax money, after-tax money, or both. We match 100% of contributions up to 6% of base salary. Employees may also be eligible for an additional annual performance contribution equal to as much as 6% of base salary, based on our

performance for the fiscal year. Amounts that exceed the IRS limits are placed in a supplemental plan, if the executive makes such an election.

 

Employee Stock Purchase Plan (ESPP).  Through the ESPP, employees have the opportunity to purchase our Common Stock at a discount. Employees can choose to participate in the plan at any rate between 1% and 15% of base salary for the offering period and can purchase up to $25,000 of shares at fair market value in a calendar year. At the end of the offering period, contributions are used to buy shares of our Common Stock at a discounted price. The price for the shares is 85% of the closing market price on the first or last day of the offering period, whichever is lower. Employees are required to hold any shares acquired under the ESPP for a minimum of 18 months after the purchase date.

 

Life Insurance.  Employees receive a basic benefit equal to one times annual base salary. In addition, employees may choose additional coverage, from one to four times annual base salary, through the supplemental life insurance program. Coverage is also available for a spouse in the amount of $10,000 or $20,000 and/or eligible children in the amounts of $5,000 or $10,000 per child.

 

Business Travel Accident.  For accidental death, paralysis, or loss of hands, feet, hearing or sight due to an accident while traveling for us, the plan pays all or part of a “principal sum” depending on the loss. This principal sum is equal to five times base annual salary, with a $500,000 maximum and $150,000 minimum.

 

Accidental Death and Dismemberment (AD&D).  We provide a benefit equal to three times annual base salary. All or a portion of the coverage amount is paid for the loss of hands, feet, sight, speech, hearing or paralysis. In addition, through the optional AD&D program, employees may choose supplemental coverage in any amount from $10,000 to $500,000, in multiples of $10,000. Employees may also choose optional AD&D coverage for their family. Coverage for their spouse and eligible dependent children will be based on a percentage of their own optional coverage amount.

 

Short-Term Disability.  If an employee becomes disabled, we provide a short-term disability benefit for up to 180 days. For employees with less than five years service, the plan pays 100% of monthly basic salary for the first 30 days of disability and 60% for 150 additional days of disability. For employees with five or more years of service, the plan pays 100% of basic monthly salary for up to 180 days of disability.

 

Long-Term Disability (LTD).  If an employee is disabled for longer than 180 days, the LTD plan begins to pay a monthly benefit equal to 60% of basic monthly salary.

 

Health Care Flexible Spending Account.  Employees can deposit before-tax money from $120 to $5,000 per year into an account through payroll deductions to pay for a wide range of health care expenses not covered by the medical, dental or vision plan, including some over-the-counter drugs, deductibles and co-payments.

 

Dependent Care Flexible Spending Account.  Employees can deposit before-tax money from $120 to $5,000 per year into an account through payroll deductions to pay for day care for a child or dependent disabled adult.

 

Vacation.  All employees are eligible for vacation based on years of service. Each of the named executive officers who currently serves as an executive officer is eligible for 25 days of vacation each year.

 

Holidays.  We provide 12 paid holidays each year.

 

Perquisites

 

We provided certain perquisites to senior management in 2007.

Company Aircraft.  Our aircraft may be used in the following situations:

 

 

Relocation.  We generally provide relocation benefits to newly-hired officers or officers that have been asked by us to relocate to a new location. These benefits typically include payment for the costs of relocation, temporary housing, additional personal leave and associated tax gross-ups.

 

Other Perquisites.  We do not provide or reimburse the cost of country club memberships or the purchase or lease of a vehicle for any officer.

 

Share Ownership Guidelines

 

Both management and the Board of Directors believe our executives and directors should acquire and retain a significant amount of our Common Stock in order to further align their interests with those of shareholders.

 

Under our share ownership guidelines, the Chairman and Chief Executive Officer is encouraged to acquire and retain Common Stock having a value equal to at least five times his base salary. Other named executive officers are encouraged to acquire and retain Common Stock having a value equal to at least three times their base salary. All such executives are encouraged to meet these ownership levels within five years after assuming their executive positions.

 

The following table summarizes the ownership of Company Common Stock as of December 31, 2007 by the named executive officers who currently serve as executive officers.

 

 

 

Also under our share ownership guidelines for directors, directors are encouraged to acquire and retain Common Stock having a value equal to at least three times their base annual retainer. Directors are encouraged to meet these ownership levels by the later of December 31, 2007 or three years after joining the Board.

The following table summarizes the ownership of our Common Stock as of December 31, 2007 by each of our current non-employee directors.

 

 

 

Employment Agreements

 

The Compensation Committee, in consultation with a prior independent compensation consultant, approved the terms of all senior executive employment agreements, including the agreement for the Chairman and Chief Executive Officer. The terms of those agreements, including the provision of post-termination benefits, were structured to attract and retain persons believed to be key to our success, as well as to be competitive with compensation practices for executives in similar positions at companies of similar size and complexity. In assessing whether the terms of the employment agreements were competitive, the Committee received advice from its independent compensation consultant(s) and reviewed appropriate salary surveys and industry benchmarking data. During 2008, all senior executive employment agreements will be reviewed and amended as necessary to comply with Internal Revenue Code Section 409A.

 

The Chairman and Chief Executive Officer’s employment agreement has a structure similar to the employment agreements of the other named executive officers. However, some amounts payable to him under his agreement were intended to compensate him for amounts he forfeited in leaving his former employer. Our Executive Vice President and Chief Operating Officer’s employment agreement also includes amounts payable that were intended to compensate him for amounts he forfeited in leaving his former employer. These additional amounts payable to these two executives are not applicable to the other named executive officers.

 

The Chairman and Chief Executive Officer’s employment agreement provides for a three-year term that extends day-to-day so that there is at all times remaining a term of three years. Following a termination other than for cause or resignation for good reason, the Chairman and Chief Executive Officer would be entitled to the following benefits, payable in either (a) equal installments over three years or (b) a lump sum, as determined by the Board of Directors: (1) three times base salary and (2) three

times the higher of (A) the target annual incentive or (B) the average of the actual annual incentive paid in the three prior years. In addition, he would be entitled to a one-time prorated annual incentive for the year of termination (based on our actual performance multiplied by a fraction, the numerator of which is the number of business days he was employed during the year of termination, and the denominator of which is the total number of business days during that year), payable when annual incentives, if any, are paid to other executives. He would also be entitled to receive qualified and nonqualified retirement, life insurance, medical and other benefits for three years. In addition, following a termination other than for cause or resignation for good reason (as defined in the employment agreement), he would be paid a lump sum of $800,000. If the Chairman and Chief Executive Officer were to terminate his employment for any reason on or after age 55 or die or became disabled, the lump sum of $800,000 would also be paid. Upon termination other than for cause, resignation for good reason, death, disability, or termination for any reason after reaching age 55, he would be entitled to deferred compensation payable in cash in one of the following amounts: if termination occurred (a) prior to age 55, the greater of (1) the cash equivalent of the fair market value of 86,602 shares of Common Stock on October 1, 2003 plus interest or (2) an amount equal to the fair market value of 86,602 shares of Common Stock on the date of termination; (b) on or after age 55 but prior to age 62, the greater of (1) the amount referenced in (a) on the date of termination, (2) $1.6 million, reduced by 0.333% for each month that termination occurs before reaching age 62, or (3) the fair market value of 86,602 shares of Common Stock on the date of termination; (c) on or after age 62, the greater of the amount referenced in (b) on the date of termination or $1.6 million. If he were to terminate for any other reason prior to reaching age 55, the deferred compensation amount would be forfeited.

 

Other named executive officers’ employment agreements have two-year terms which extend day-to-day so that there is at all times a remaining term of two years. Following termination other than for cause or resignation for good reason (as defined in the employment agreements), the other current named executive officers would be entitled to the following benefits, payable in either (a) equal installments over two years or (b) a lump sum, as determined by the Chairman and Chief Executive Officer and the Board of Directors: (1) two times base salary and (2) two times the higher of (A) the target annual incentive or (B) the average of the actual annual incentive paid in the three prior years. In addition, the other current named executive officers would be entitled to (1) a one-time prorated annual incentive for the year of termination (based on our actual performance multiplied by a fraction, the numerator of which is the number of business days the executive officer was employed during the year of termination, and the denominator of which is the total number of business days during that year), payable when annual incentives, if any, are paid to our other executives, and (2) qualified and nonqualified retirement, pension (if applicable), life insurance, medical and other benefits for the two-year period following termination.

 

In addition, if our Executive Vice President and Chief Operating Officer’s employment with us were to terminate for any reason on or after age 55 or if he should die or became disabled, a lump sum of $800,000 would be paid to him. If his employment were to terminate for any reason other than death or disability prior to reaching age 55, the lump sum payment of $800,000 would be forfeited.

 

Under all executives’ employment agreements, we are not obligated to provide any benefits under tax qualified plans that are not permitted by the terms of each plan or by applicable law or that could jeopardize the plan’s tax status. Continuing benefit coverage will terminate to the extent an executive is offered or obtains comparable coverage from any other employer. The employment agreements provide for confidentiality during and following employment, and include a noncompetition and nonsolicitation agreement that is effective during and for one year following employment. If an executive breaches any of his or her confidentiality, noncompetition or nonsolicitation agreements, the executive will forfeit any unpaid amounts or benefits. To the extent that excise taxes are incurred by an executive as a result of “excess parachute payments,” as defined by IRS regulations, we will pay additional amounts so that the executives would be in the same financial position as if the excise taxes were not incurred.

Named Former Executive Officers

 

On October 31, 2007, we completed the spin-off of our wholly owned subsidiary, Patriot Coal Corporation (“Patriot”), which was accomplished through a special dividend of all outstanding shares of Patriot to our shareholders. On that same date, Richard M. Whiting elected to resign from his position as our Executive Vice President and Chief Marketing Officer so that he could become Patriot’s President and Chief Executive Officer, and Jiri Nemec elected to resign from his position as our Group Vice President Eastern Operations so that he could become Patriot’s Senior Vice President and Chief Operating Officer.

 

Even though Messrs. Whiting and Nemec terminated their employment with us in October 2007, their compensation information is included in this Proxy Statement as required by SEC rules. To avoid confusion on the part of investors, we have included separate executive compensation tables for these former executive officers, which in each case immediately follow the executive compensation tables for the named executive officers who currently serve as executive officers. This is consistent with our treatment of the Patriot business as a discontinued operation for financial reporting purposes wherein Patriot’s operating results and financial condition are clearly segmented in our financial statements.

 

Pursuant to their termination arrangements with us, Messrs. Whiting and Nemec received special grants of restricted stock and Common Stock to compensate them for unvested stock options that were forfeited upon leaving us to join Patriot. Our 2007 compensation expense related to these awards is included in the “Stock Awards” column of the Summary Compensation Table on page 37. Messrs. Whiting and Nemec also received pro-rata annual incentive plan awards for 2007, which are included in the “Non-Equity Incentive Plan Compensation” column in the Summary Compensation Table on page 37. Additional information regarding these termination agreements can be found under the caption “Termination Arrangements with Former Executive Officers” beginning on page 56 of this Proxy Statement.

 

The Compensation Committee has reviewed and discussed with management the Company’s disclosures under “Compensation Discussion and Analysis” beginning on page 20 of this Proxy Statement.

 

Based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2007 for filing with the Securities and Exchange Commission.

 

MEMBERS OF THE COMPENSATION COMMITTEE:

 

ROBERT B. KARN III, CHAIR
WILLIAM A. COLEY
HENRY E. LENTZ
JOHN F. TURNER

 

The following table summarizes the total compensation paid to the Chairman and Chief Executive Officer, the Chief Financial Officer and the three other most highly compensated executive officers currently employed by us for their service to us during the fiscal years ended December 31, 2007 and 2006. Long-term incentive awards to these officers include both performance units (reflected in the “Stock Award” column below) and stock options (reflected in the “Option Awards” column below). The value reflected in each of these columns is the compensation expense associated with equity awards for each executive, recognized for financial statement reporting purposes in accordance with FAS 123R.

 

 

 

 

The following table summarizes the total compensation paid by us to two former executive officers who were no longer serving as executive officers at the end of 2007 as a result of the spin-off of our wholly-owned subsidiary Patriot Coal Corporation (“Patriot”) on October 31, 2007, which was accomplished through a special dividend of all outstanding shares of Patriot to our shareholders. On that same date, Richard M. Whiting elected to resign from his position as our Executive Vice President and Chief Marketing Officer so that he could become Patriot’s President and Chief Executive Officer, and Jiri Nemec elected to resign from his position as our Group Vice President — Eastern Operations so that he

could become Patriot’s Senior Vice President and Chief Operating Officer. Their compensation information for their service to us is included in this Proxy Statement as required by SEC rules.

 

 

 

All Other Compensation

 

The following table sets forth detail of the amounts reported in the All Other Compensation column of the Summary Compensation Table for named executive officers who currently serve as executive officers.

 

 

 

The following table sets forth detail of the amounts reported in the All Other Compensation column of the Summary Compensation Table for named executive officers who no longer serve as executive officers.

 

 

 

The following table sets forth information concerning grants of plan-based awards during the year ended December 31, 2007 to named executive officers who currently serve as executive officers.

 

																																		All Other				All Other
																																		Stock				Option
																																		Awards:				Awards:
										Estimated Possible Payouts												Estimated Future Payouts												Number of				Number of				Exercise of				Total Grant
										Under Non-Equity Incentive												Under Equity Incentive Plan												Shares of				Securities				Base Price				Date Fair
										Plan Awards												Awards (1)(2)												Stock or				Underlying				or Option				Value: All
						Approval				Threshold				Target				Maximum				Threshold				Target				Maximum				Units				Options				Awards				Awards
Name		Grant Date				Date				($)				($)				($)				(#)				(#)				(#)				(#)				(#)(2)(3)				($/Sh)(2)				($)(4)
Current Officers
Gregory H. Boyce											495,000				990,000				1,980,000
			1/3/2007				12/5/2006																25,087				50,174				100,348																2,123,865
			1/3/2007				12/5/2006																																120,314				34.96				1,768,836
Richard A. Navarre											266,000				532,000				997,500
			1/3/2007				12/4/2006																11,790				23,579				47,158																998,099
			1/3/2007				12/4/2006																																56,540				34.96				831,230
Eric Ford											260,000				520,000				975,000
			1/3/2007				12/4/2006																12,261				24,522				49,044																1,038,016
			03/06/07				12/19/2006																												54,198(5	)											2,091,501
			03/06/07				12/19/2006																																57,658				35.65				858,690
Sharon D. Fiehler											174,000				348,000				652,500
			1/3/2007				12/4/2006																6,278				12,556				25,112																531,495
			1/3/2007				12/4/2006																																30,107				34.96				442,615
Roger B. Walcott, Jr.											192,000				384,000				720,000
			1/3/2007				12/4/2006																6,942				13,883				27,766																587,667
			1/3/2007				12/4/2006																																33,290				34.96				489,421