PCX Patriot Coal Corp.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(RULE 14A-101)

Information Required in Proxy Statement
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PATRIOT COAL CORPORATION

(Name of Registrant as Specified In Its Charter)

[COMPANY NAME]

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

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April 7, 2008

 

Dear Stockholder:

 

You are cordially invited to attend the 2008 Annual Meeting of Stockholders of Patriot Coal Corporation (the “Company”), which will be held on Monday, May 12, 2008, at 10:00 A.M., Central Time, at the Donald Danforth Plant Science Center at 975 North Warson Road, Saint Louis, Missouri 63132.

 

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

 

1. Election of two Class I Directors for three-year terms;

 

2. Ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008; and

 

3. To transact such other business, if any, as lawfully may be brought before the meeting.

 

The accompanying Notice of Annual Meeting of Stockholders 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 stockholder 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 stockholders.questions@patriotcoal.com.

 

Your 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 the enclosed 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 Patriot Coal.  We look forward to seeing you on May 12.

 

Very truly yours,

 

 

Richard M. Whiting

President & Chief Executive Officer

PATRIOT COAL CORPORATION
12312 Olive Boulevard
Saint Louis, Missouri 63141

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

Patriot Coal Corporation (the “Company”) will hold its Annual Meeting of Stockholders at the Donald Danforth Plant Science Center at 975 North Warson Road, Saint Louis, Missouri 63132 on Monday, May 12, 2008, at 10:00 A.M., Central Time, to:

 

 

The Board of Directors has fixed March 20, 2008 as the record date for determining stockholders 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 26,760,377 shares of Common Stock outstanding.

 

If you own shares of the Company’s Common Stock as of March 20, 2008, you can vote those shares by completing and mailing the enclosed proxy card or by attending the Annual Meeting and voting in person. Stockholders of record also may submit their proxies electronically or by telephone as follows:

 

 

An admittance card or other proof of ownership is required to attend the Annual Meeting. Please retain the top portion of 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 the enclosed 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.

 

Joseph W. Bean

Senior Vice President, General Counsel

& Corporate Secretary

TABLE OF CONTENTS

 

PATRIOT COAL CORPORATION
PROXY STATEMENT
FOR THE
2008 ANNUAL MEETING OF STOCKHOLDERS

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

 

 

 

 

ELECTION OF DIRECTORS (ITEM 1)

 

In accordance with the terms of the Company’s 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 J. Joe Adorjan and Michael M. Scharf for election as Class I Directors with terms expiring in 2011. Each of the nominees is currently serving as a director of the Company. All nominees have consented to serve for the new term. Should any one or more of the nominees become unavailable for election, your proxy authorizes us to vote for such other persons, if any, as the Board of Directors may recommend.

 

The Board of Directors recommends that you vote “For” each of the Class I director nominees named below.

 

J. JOE ADORJAN, age 69, has been a director of the Company since November 2007. Mr. Adorjan is currently chairman of Adven Capital, a private equity firm and is a partner of Stonington Partners Inc., a New York based private equity firm. He has served in these positions since February 2001. From 1995 through December 2000, Mr. Adorjan served as chairman and chief executive officer of Borg-Warner Security Corporation, a provider of security services. Prior to joining Borg-Warner, Mr. Adorjan served in a number of senior executive capacities with Emerson Electric Co. and ESCO Electronics Corporation, an independent NYSE corporation that was formed in 1990 with the spin-off of Emerson’s government and defense business. He was chairman and chief executive officer of ESCO from 1990 to 1992, when he rejoined Emerson as president. Mr. Adorjan originally joined Emerson in 1968 and served in a number of senior executive capacities, including executive vice president of finance, international, technology and corporate development.

 

Mr. Adorjan has a Bachelors and Masters degree in economics from Saint Louis University. Mr. Adorjan currently serves as a director for Goss Graphics Systems, Inc., a manufacturer of web offset newspaper press systems, and is chairman of Bates Sales Company, a distributor of industrial power transmission equipment and parts. He is also a member of the board of directors of Thermadyne Holdings Corporation, a marketer of cutting and welding products and accessories, where he serves as lead director and as a member of the audit and compensation committees. He also serves on the board of trustees of Saint Louis University and Ranken Technical College and is Chairman of The Hungarian — Missouri Educational Partnership.

 

MICHAEL M. SCHARF, age 60, has been a director of the Company since November 2007. Mr. Scharf is Senior Vice President & Chief Financial Officer of Bunge North America, the North American operating arm of Bunge Limited, a global supplier of agricultural commodities and food products. He has served in this capacity since joining Bunge in 1990. He was previously Senior Vice President and Chief Financial Officer of Peabody Holding Company, Inc. (1978-1990) and Tax Manager at Arthur Andersen & Co. (1969-1978).

 

Mr. Scharf has a degree in Accounting from Wheeling Jesuit University and is a certified public accountant. Mr. Scharf represents Bunge’s interests with multiple biofuels joint ventures, and is currently a director of Renewable Energy Group (biodiesel), Bunge-Ergon Vicksburg (ethanol), Biofuels Company of America (biodiesel), and Southwest Iowa Renewable Energy (ethanol).

 

B. R. BROWN, age 75, has been a director of the Company since October 2007. Mr. Brown is the retired Chairman, President and Chief Executive Officer of CONSOL Energy, Inc., a domestic coal and gas producer and energy services provider. He served as Chairman, President and Chief Executive Officer of CONSOL and

predecessor companies from 1978 to 1998. He also served as a Senior Vice President of E.I. du Pont de Nemours & Co., CONSOL’s controlling stockholder, from 1981 to 1991. Before joining CONSOL, Mr. Brown was a Senior Vice President at Conoco. From 1990 to 1995, he also was President and Chief Executive Officer of Remington Arms Company, Inc.

 

Mr. Brown has a degree in economics from the University of Arkansas. Mr. Brown has previously served as Director and Chairman of the Bituminous Coal Operators Association Negotiating Committee, Chairman of the National Mining Association, and Chairman of the Coal Industry Advisory Board of the International Energy Agency. Mr. Brown was a director of Peabody Energy Corporation from December 2003 until October 2007, when he resigned to join Patriot’s Board of Directors. He is also a director of Delta Trust & Bank and Remington Arms Company, Inc.

 

JOHN E. LUSHEFSKI, age 52, has been a director of the Company since October 2007. Mr. Lushefski has been a senior consultant providing strategic, business development and financial advice to public and private companies since July 2005. He has substantial coal industry experience and a global background in treasury, tax, accounting, strategic planning, information technology, human resources, investor relations and business development. From December 2004 until July 2005, Mr. Lushefski was engaged in the development of his current consulting business. From 1996 until December 2004, he served as Chief Financial Officer of Millennium Chemicals Inc., a NYSE-listed international chemicals manufacturer that was spun off from Hanson PLC. He also served as Senior Vice President & Chief Financial Officer of Hanson Industries Inc. from 1995 to 1996, and as Vice President & Chief Financial Officer of Peabody Holding Company, Inc. from 1991 to 1995. Prior to joining Hanson in 1985, he was an Audit Manager with Price Waterhouse LLP, New York.

 

Mr. Lushefski is a certified public accountant with a B.S. in Business Management/Accounting from Pennsylvania State University. He also has served as a director of Suburban Propane, LP (1996-1999) and Smith Corona Corporation (1995-1996).

 

RICHARD M. WHITING, age 53, has been a director of the Company since October 2007. Effective October 31, 2007, the Company was spun-off from Peabody Energy Corporation (“Peabody”) and became a separate, publicly-traded company (the “spin-off”). Mr. Whiting assumed the position of President & Chief Executive Officer in October 2007.

 

Mr. Whiting joined Peabody’s predecessor company in 1976 and held a number of operations, sales and engineering positions both at the corporate offices and at field locations. Prior to the spin-off, Mr. Whiting was Peabody’s Executive Vice President & Chief Marketing Officer from May 2006 to October 2007, with responsibility for all marketing, sales and coal trading operations, as well as Peabody’s joint venture relationships. He previously served as President & Chief Operating Officer and as a director of Peabody from 1998 to 2002. He also served as Executive Vice President — Sales, Marketing & Trading from 2002 to 2006, and as President of Peabody COALSALES Company from 1992 to 1998.

 

Mr. Whiting is the former Chairman of National Mining Association’s Safety and Health Committee, the former Chairman of the Bituminous Coal Operators’ Association, and a past board member of the National Coal Council. He is currently a director of the Society of Mining Engineers Foundation.

 

Mr. Whiting holds a Bachelor of Science degree in mining engineering from West Virginia University.

 

IRL F. ENGELHARDT, age 61, has served as Chairman of the Board of Directors and Executive Advisor of the Company since its October 31, 2007 spin-off. Mr. Engelhardt served as Chairman and Chief Executive Officer of Peabody from 1990 to December 2005 and its Chairman of the Board of Directors from 2006 through October 2007. He served as Co-Chief Executive Officer of The Energy Group from 1997 to 1998, Chairman of Suburban Propane Company from 1995 to 1996, Chairman of Cornerstone Construction and Materials from 1994 to 1995 and Director and Group Vice President of Hanson Industries from 1995 to 1996. Mr. Engelhardt is also a director of The Williams Companies, Inc., Valero Energy Corporation, Chairman of The Federal Reserve Bank of St. Louis and General Manager of White Walnut Farms LLC.

ROBERT O. VIETS, age 64, has been a director of the Company since November 2007. Mr. Viets is the former President, Chief Executive Officer and Director of CILCORP, a NYSE-listed holding company which owned a regulated electric and natural gas utility (CILCO) in central Illinois. Mr. Viets served in this capacity from 1988 until 1999, when CILCORP was acquired by AES. He also served as Chief Financial Officer during his 26-year career at CILCORP. Prior to joining CILCORP, Mr. Viets was an auditor with Arthur Andersen & Co. Following his career at CILCORP, Mr. Viets has provided consulting services to regulated energy and communication businesses.

 

Mr. Viets has a degree in economics from Washburn University (Topeka) and a law degree from Washington University School of Law. He is also a certified public accountant. He has served as a director of, among other companies, RLI Corp., a specialty property and casualty insurer (1993-present); Consumers Water Company, a Maine-based regulated water utility (1996-1998); and Philadelphia Suburban Corp., now Aqua America, Inc. (1998-2001); including serving as a member of the Audit Committees at RLI Corp. and Philadelphia Suburban Corp.

 

As required by the rules of the New York Stock Exchange (“NYSE”), the Board of Directors will evaluate 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 changes). This process is administered by the Nominating & Governance Committee which consists entirely of directors who are independent under applicable NYSE rules. After carefully considering all relevant relationships with the Company, the Nominating & Governance Committee submits its recommendations regarding independence to the full Board, which then makes a determination with respect to each director.

 

In making independence determinations, the Nominating & 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 of Directors has determined that all directors other than Messrs. Whiting and Engelhardt are independent. None of the directors, other than Messrs. Whiting and Engelhardt, receives any compensation from the Company other than customary director and committee fees.

 

The Board has determined that Directors Adorjan, Brown, Lushefski and Scharf 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 Mr. Viets is independent after evaluating his relationship with the Company and concluding that such relationship is immaterial. Such relationship is outlined below.

 

Mr. Viets serves as a director of RLI Corp., a specialty property and casualty insurer that provides marine excess liability insurance coverage to the Company for an annual premium of $8,400. The Board has concluded that this relationship is not material since this service is offered to the Company on the same general terms and conditions as other large commercial customers and was provided to the Company prior to Mr. Viets joining the Board. The Company’s directors did not solicit these commercial relationships and were not involved in any related discussions or deliberations.

 

The Board of Directors met three times in 2007. During that period, each incumbent director attended 100% of the meetings of the Board and the committees on which he served. Mr. Engelhardt serves as chairman at all meetings of the Board of Directors, including portions of meetings where all directors are present.

 

Non-management directors meet in executive session at least quarterly. If the Board determines that any non-management director is not independent in accordance with the Board’s standards for determining independence, an executive session comprised solely of independent directors will be held at least annually. Executive sessions are chaired by the chairpersons of the Audit Committee, the Compensation Committee, and the Nominating & Governance Committee, on a rotating basis.

 

The Board 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 & 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 the Company’s website ( www.patriotcoal.com ) by clicking on “Investors,” then “Corporate Governance,” and then “Committee Charters” and is available in print to any stockholder 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:

 

Executive Committee

 

The members of the Executive Committee are Richard M. Whiting (Chair), Irl F. Engelhardt and B. R. Brown. The Executive Committee did not meet 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 of Directors, except with respect to:

 

 

Compensation Committee

 

The members of the Compensation Committee are John E. Lushefski (Chair), B. R. Brown and J. Joe Adorjan. 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 once during 2007. Some of the primary responsibilities of the Compensation Committee include the following:

 

 

 

Nominating & Governance Committee

 

The members of the Nominating & Governance Committee are Michael M. Scharf (Chair), J. Joe Adorjan and Robert O. Viets. The Board of Directors has affirmatively determined that, in its judgment, all members of the Nominating & Governance Committee are independent under New York Stock Exchange rules.

 

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

 

 

Audit Committee

 

The members of the Audit Committee are Robert O. Viets (Chair), Michael M. Scharf and John E. Lushefski. 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 of Directors also has determined that each of Messrs. Viets, Scharf and Lushefski is an “audit committee financial expert” under SEC rules.

 

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

 

 

 

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

 

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. The Company’s management has the primary responsibility for the financial statements, for maintaining effective internal control over financial reporting, and for assessing the effectiveness of internal control over financial reporting. In fulfilling its oversight responsibilities, the Committee reviewed and discussed the consolidated financial statements in the 2007 Annual Report on Form 10-K with Company management, including a discussion of the quality, not just the acceptability, of the accounting principles; the reasonableness of significant judgments; and the clarity of disclosures in the financial statements.

 

The Committee reviewed with the independent registered public accounting firm, Ernst & Young, which is responsible for expressing an opinion on the conformity of those audited consolidated financial statements with U.S. generally accepted accounting principles, its judgments as to the quality, not just the acceptability, of the Company’s accounting principles and such other matters as are required to be discussed with the Committee by Statement on Auditing Standards No. 61, Communication With Audit Committees , (as amended), other standards of the Public Company Accounting Oversight Board (United States), rules of the Securities and Exchange Commission, and other applicable regulations. In addition, the Committee has discussed with the independent registered public accounting firm the firm’s independence from Company management and the Company, including the matters in the letter from the firm required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees , and considered the compatibility of non-audit services with the independent registered public accounting firm’s independence.

 

The Committee discussed with Ernst & Young the overall scope and plans for their respective audits. The Committee meets with Ernst & Young, with and without management present, to discuss the results of their

examinations; their evaluations of the Company’s internal control; and the overall quality of the Company’s financial reporting.

 

In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board has approved, that the audited consolidated financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2007 filed by the Company with the Securities and Exchange Commission. The Committee and the Board also have recommended, subject to stockholder approval, the selection of the Company’s independent registered public accounting firm.

 

The Committee is governed by a charter (refer to www.patriotcoal.com). The Committee held six meetings in relation to fiscal year 2007. The Committee is comprised solely of independent directors as defined by the New York Securities Exchange listing standards and Rule 10A-3 of the Securities Exchange Act of 1934.

 

MEMBERS OF THE AUDIT COMMITTEE:

 

ROBERT O. VIETS, CHAIR

MICHAEL M. SCHARF

JOHN E. LUSHEFSKI

 

Ernst & Young LLP has served as the Company’s independent registered public accounting firm since October 31, 2007, the effective date of the spin-off from Peabody, and served as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2007.

 

The following fees were paid to Ernst & Young for services rendered during the Company’s last fiscal year:

 

 

Under procedures established by the Board of Directors, the Audit Committee is required to pre-approve all audit and non-audit services performed by the Company’s 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, the Company’s independent registered public accounting firm is prohibited from providing the following types of services to the Company: (1) bookkeeping or other services related to the Company’s 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.

 

Good corporate governance is a priority at Patriot Coal Corporation. The Company’s key governance practices are outlined in its Corporate Governance Guidelines, committee charters, and Code of Business Conduct and Ethics. These documents can be found on the Company’s webpage ( www.patriotcoal.com on the Internet) by clicking on “Investors,” and then “Corporate Governance” and are available in print to any stockholder upon request. Information on our website is not considered part of this Proxy Statement. The Code of Business Conduct and Ethics applies to the Company’s directors, Chief Executive Officer, Chief Financial Officer, Controller and other Company personnel.

 

The Nominating & Governance Committee of the Board of Directors is responsible for reviewing the Corporate Governance Guidelines annually and reporting and making recommendations to the Board concerning corporate governance matters.

 

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

 

Stockholders and other interested persons seeking to communicate with the Board should submit their written comments to the Chairman, Patriot Coal Corporation, 12312 Olive Boulevard, Saint Louis, Missouri 63141. The Chairman will forward such Stockholder Communications to each member of the Board (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 of Directors. If a Stockholder Communication is addressed to a specific individual director or Committee Chair (excluding routine advertisements and business solicitations), 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 Stockholder Communication raises concerns about the ethical conduct of management or the Company, it should be sent directly to the Corporate Secretary at 12312 Olive Boulevard, Suite 400, Saint Louis, Missouri 63141. The Corporate Secretary will promptly forward a copy of such Stockholder Communication to the Chairman of the Audit Committee and, if appropriate, the Company’s Chairman, and take such actions as they authorize to ensure that the subject matter is addressed by the appropriate Board committee, management and/or by the full Board.

 

If a stockholder or other interested person seeks to communicate exclusively with the Company’s non-management directors, such Stockholder Communication should be sent directly to the Corporate Secretary who will forward any such communications directly to the Chair of the Nominating & Governance Committee. The

Corporate Secretary will first consult with and receive the approval of the Chair of the Nominating and 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, the Company reserves the right to screen all materials sent to its directors for potential security risks, harassment purposes or routine solicitations.

 

Stockholders have an opportunity to communicate with the Board of Directors at the Company’s Annual Meeting of Stockholders. 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.

 

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 posses a wide array of skills and experience in the coal industry, related energy industries and other important areas. 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 stockholders.

 

The Nominating & Governance Committee (“Committee”) is responsible for identifying, evaluating and recommending qualified candidates for election to the Board of Directors. The Committee will consider director candidates submitted by stockholders. In accordance with the Company’s Bylaws, any stockholder wishing to submit a candidate for consideration should send the following information to the Secretary of the Company at 12312 Olive Boulevard, Suite 400, Saint Louis, Missouri 63141:

 

 

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.

 

Stockholders 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.

 

General criteria for the nomination of director candidates include experience and successful track record, integrity, skills, diversity, ability to make analytical inquiries, understanding of our business environment, and willingness to devote adequate time to director duties, all in the context of the perceived needs of the Board at that time.

Pursuant to its charter, the Committee must review with the Board of Directors, 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, stockholders, 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, and 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 stockholders in accordance with the procedures described above. The Committee seeks to identify and recruit the best available candidates, and it intends to evaluate qualified stockholder 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 candidates 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 will produce highly qualified, independent Board members. 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 following tables sets forth information as of March 5, 2008 with respect to persons or entities who are known to beneficially own more than 5% of the Company’s outstanding Common Stock, each director, each executive officer named in the Summary Compensation Table below, and all directors and executive officers as a group.

Beneficial Owners of More Than Five Percent, Directors and Management

 

 

 

 

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

EXECUTIVE COMPENSATION

 

Role of Peabody

 

The following is a discussion of the executive compensation programs adopted by Patriot in connection with our spin-off from Peabody on October 31, 2007.

 

 

Executive Compensation Program Objectives

 

The objectives of Patriot’s executive compensation program are to attract, retain and motivate key executives to enhance long-term profitability and stockholder value. Compensation programs are designed to align incentives for executives with achievement of Patriot’s business strategies, including:

 

 

In order to meet our objectives, our executive compensation program is designed to:

 

 

With these objectives in mind, Peabody’s Compensation Committee approved a compensation structure for our executive officers that incorporates four key components: base salary; an annual incentive plan; long-term incentive compensation consisting of restricted stock, stock options and restricted stock units; and retirement and other benefits.

Roles of the Compensation Committee & the Compensation Consultant

 

In anticipation of the spin-off, Peabody’s Compensation Committee engaged Mercer Human Resource Consulting (“Mercer”), an outside compensation consultant, to provide guidance with respect to the development and implementation of Patriot’s compensation programs. In its engagement, Mercer provided Peabody’s Compensation Committee with advice concerning the types and levels of compensation to be paid to the Chief Executive Officer and the other senior executives. Mercer assisted by providing market compensation data on base pay, as well as annual and long-term incentives. In addition, Mercer advised Peabody’s Compensation Committee on plan design for each element of executive compensation, including helping to identify: the appropriate mix of base salary and annual and long-term incentive compensation; the appropriate mix of long-term incentive compensation to be granted as restricted stock, stock options and restricted stock units; and the relevant industry comparator group. Since the spin-off, these matters fall within the responsibility of Patriot’s Compensation Committee, as described below. Under its charter, Patriot’s Compensation Committee has authority to engage the services of outside advisors, experts and others to assist the Compensation Committee in fulfilling these duties.

 

The Compensation Committee is comprised entirely of independent directors and has the ultimate responsibility for review and approval of the compensation of the Company’s executive officers, excluding the Chief Executive Officer. The Committee has overall responsibility for monitoring the performance of the Company’s executives and evaluating and approving the Company’s executive compensation plans, policies and programs. The Committee also reviews and approves executive participation in any company-wide benefit plans. In addition, the Committee oversees the Company’s annual and long-term incentive plans and programs.

 

With respect to the Chief Executive Officer, the Compensation Committee together with the other independent members of the Board of Directors, reviews and approves the Chief Executive Officer’s compensation, including base salary, annual incentive and long-term incentive compensation, deferred compensation, perquisites, equity compensation, employment agreements, severance arrangements, retirement and other post-employment benefits and change-in-control benefits (in each case, as and when appropriate). In addition, the Compensation Committee and the other independent members of the Board of Directors review and approve corporate goals and objectives relevant to such compensation and evaluate the Chief Executive Officer’s performance in light of those goals and objectives.

 

Benchmarking Process

 

In developing Patriot’s executive compensation programs in connection with the spin-off, Peabody’s Compensation Committee commissioned a compensation analysis conducted by its independent compensation consultant to ensure that Patriot’s programs are competitive with those of other publicly held companies of similar size and in similar industries. For positions that require specific industry knowledge and experience, Peabody’s Compensation Committee used both a mining comparator group and Mercer’s general industry database for benchmarking purposes. This approach was designed to ensure that Patriot’s executive compensation levels are competitive relative to the companies with which Patriot competes for industry-specific talent. The mining comparator group is composed of Peabody, 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. Talent for other key roles in the organization can be acquired across a broader spectrum of companies. As such, Mercer also utilized published compensation surveys from companies based on similar size and scope.

 

For purposes of reviewing the competitiveness of Patriot’s executive compensation program, Mercer used a combination of proxy data from the above peers and survey data to benchmark compensation for executive officers. Mercer utilized two published surveys which included the 2006 Mercer Benchmark Database and the 2006/2007 Watson Wyatt Survey on Top Management Compensation. The data from the published surveys was updated by 3.9%, the expected pay increase in 2007 for executives in the energy industry based on the Mercer 2006/2007 U.S. Compensation Planning Survey anticipating that the spin-off would occur in 2007.

 

The survey data consisted of general industry references for companies of comparable expected revenue size to Patriot and were averaged with the available proxy data to provide an overall market composite. Base salaries were determined by reference to both peer survey data and annual incentive opportunities by reference to broad industry

survey data, and the resulting Patriot total cash opportunities were compared to the market total cash opportunities. For purposes of determining an executive’s total direct compensation (i.e. base salary, annual bonus and annual long-term incentive), the Compensation Committee generally targeted the 50 ^th  percentile and then adjusted the executive’s targeted compensation levels for factors such as experience, retention and responsibility.

 

With respect to the long-term incentive awards granted in connection with the spin-off, Peabody’s Compensation Committee also reviewed data, provided by Mercer, regarding types and levels of initial grants of long-term incentive awards provided to executives who lead companies through initial public offerings, spin-offs and similar transactions.

 

Overall, Mercer determined that Patriot’s executive compensation programs, as structured, are competitive relative to our peers and other companies who have engaged in similar transactions. Based upon the review of the compensation plans discussed below, peer group compensation levels, and general industry compensation levels, Peabody’s Compensation Committee, assisted by its outside consultant, believed that the value and design of Patriot’s executive compensation programs were appropriate for a spun-off company of its size, structure and business.

 

Employment Agreements

 

In connection with the spin-off and in consultation with Mercer, the Company entered into employment agreements with each of our named executive officers and with certain other key executives. The terms of those agreements, including the provision of post-termination benefits, as described in detail in the “Potential Payments Upon Termination or Change of Control” section, were structured to attract and retain persons believed to be key to Patriot’s success as well as 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, Peabody’s Compensation Committee received advice from its compensation consultant and reviewed salary surveys and industry benchmarking data, as discussed above. For more information regarding the terms of these agreements, see the “Potential Termination Upon Termination or Change of Control” section.

 

Annual Base Salary

 

Base salary represents the major fixed component of compensation for the named executive officers. Peabody’s Compensation Committee reviewed the base salaries of the Chief Executive Officer and the executives who report directly to the Chief Executive Officer to ensure competitiveness in the marketplace. Mr. Whiting’s employment agreement sets his base salary at $700,000.

 

Base salaries for the other named executive officers were determined based on a review for officers in their positions at peer companies and by reference to broad industry survey data discussed in the “Benchmarking Process” section and the individual executive’s experience. Pursuant to the terms of their respective employment agreements entered into at the time of the spin-off, base salaries are as follows: Mr. Nemec, $375,000, Mr. Schroeder, $375,000, Mr. Ebetino, $375,000, and Mr. Bean, $275,000.

 

Patriot’s Compensation Committee will continue to review the base salaries of the named executive officers at least annually to ensure that their salaries are competitive with companies of similar size and complexity. Any further salary increases may also be based on factors such as assessment of individual performance, experience, promotions and changes in level of responsibility.

 

Annual Incentive Plan

 

Patriot’s executive officers and other designated key employees participate in an annual incentive compensation plan, which was approved by Peabody, in its capacity as our sole stockholder, prior to the spin-off. In general, our annual incentive plan provides opportunities for key executives to earn annual cash incentive payments tied to the successful achievement of pre-established objectives that support our business strategy.

 

Named executive officers are assigned threshold, target and maximum incentive payouts. If Patriot’s performance does not meet the threshold level established by the Compensation Committee, no incentive bonus is earned. At threshold levels of Patriot performance, the incentive bonus that can be earned generally equals 50% of the target

payout. Under the plan, the target payouts for the named executive officers were established through an analysis of compensation for comparable positions in industries of similar size and complexity, in order to provide a competitive level of compensation when participants, including the named executive officers, achieve their performance objectives with respect to Patriot performance.

 

Pursuant to the terms of their respective employment agreements, the named executive officer’s threshold, target and maximum incentive payouts, as a percent of their salaries, based on achievement of relevant Patriot performance objectives, are as follows:

 

 

2007 Annual Incentive Payouts

 

Prior to the spin-off, Peabody’s Compensation Committee approved an incentive plan design for Patriot’s named executive officers with respect to the 2007 fiscal year with the following terms: 60% of the annual bonus would be nondiscretionary and based on Peabody’s performance in accordance with the terms of Peabody’s annual incentive plan, and 40% of the annual bonus would be discretionary based on successful achievement of individual performance objectives including, but not limited to, the successful completion of the spin-off of Patriot and its transition to a stand alone company.

 

In 2007, the Chief Executive Officer, the Chief Financial Officer and the other named executive officers earned annual incentive payouts, as reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table on page 24 of this Proxy Statement.

 

For 2007, the nondiscretionary performance measures (60% of the award) included (i) goals for Peabody’s Adjusted EBITDA (ii) Peabody’s earnings per share, (iii) Peabody’s leverage ratio and (iv) a measure for safety. Those results were certified by Peabody’s Compensation Committee and provided to Patriot and corresponding bonus amounts were paid by Patriot for the period November 1, 2007 to December 31, 2007. Factors considered in determining the amount of the discretionary portion of the award (40% of the award) to each named executive officer related primarily to the spin-off and included (i) maintenance of normal course of business with regard to safety and productivity at coal mining operations, (ii) effective communication and transition activities with customers, vendors, regulators, lenders and other stakeholders, (iii) securing appropriate levels of staffing for the new organization and successful relocation to the new corporate headquarters and (iv) maintaining effective communications and relations with employees throughout the transition. Performance against these discretionary goals was assessed by Patriot’s Compensation Committee in January 2008. In determining the discretionary portion of the award for 2007, Patriot’s Chief Executive Officer made recommendations to the Compensation Committee for the other named executive officers, but final determinations were made by the Compensation Committee in its discretion. Patriot’s Compensation Committee, together with the other independent members of the Board of Directors, determined and approved the discretionary portion of the Chief Executive Officer’s 2007 incentive award for the two months ended December 31, 2007.

 

Long-Term Incentives

 

Prior to the spin-off, Peabody, as Patriot’s sole stockholder, approved and Patriot’s Board of Directors adopted, Patriot’s long-term incentive plan. The long-term incentive plan provides opportunities for key executives to earn payments based upon successful achievement of pre-established long-term (greater than one year) objectives, increase in Patriot’s stock price and service with Patriot. The one-time long-term incentive awards awarded in connection with the spin-off have terms specifically aimed at long-term retention, in addition to achievement of certain financial objectives discussed on page 19 of this Proxy Statement. Other than on death, disability or a change of control of Patriot, the time-based equity components of the one-time long-term incentive awards granted

in connection with the spin-off will not vest prior to the fifth-year anniversary of their date of grant. In addition, the performance-based component of the one-time long-term incentive awards only vest if performance metrics are achieved and are otherwise forfeited, including for terminations of employment as a result of death, disability or a change of control. These vesting schedules are not commonplace and were designed to reinforce the commitment of the named executive officers to Patriot as a stand-alone public company.

 

One-Time Long-Term Incentive Awards

 

Upon consummation of the spin-off, a long-term incentive opportunity was granted to each of the named executive officers through a one-time award of stock options and restricted stock units. The targeted value of these awards was split evenly between stock options and restricted stock units.

 

The purpose of the initial long-term incentive grants is to:

 

 

Stock Options

 

Initial awards were made as of November 1, 2007 in the form of nonqualified stock options. The stock options were granted at an exercise price equal to the closing market price of our common stock as reported on the New York Stock Exchange on the date of grant. Accordingly, those stock options will have intrinsic value to employees only if the market price of Patriot’s common stock increases after that date. The Company uses a Black-Scholes valuation model to establish the expected value of all stock option grants.

 

The initial grant of stock options vest 50% on the fifth anniversary of the grant date, 25% on the sixth anniversary of the grant date and 25% on the seventh anniversary of the grant date. The options will immediately vest upon a change of control of Patriot or upon the holder’s death or disability. If the holder’s employment terminates for reasons other than death or disability, all unvested stock options will be forfeited. Stock options will expire ten years from the date of grant or following specified periods upon termination of employment, if earlier.

 

Restricted Stock Units

 

In connection with the spin-off, initial awards of time-vested restricted stock units were granted, on November 1, 2007, each representing one share of Patriot common stock. If certain super-performance metrics (described below) are met, additional restricted stock units may be earned. The award will time vest as follows and will be payable in shares of our common stock: 50% on the fifth anniversary of the grant date, 25% on the sixth anniversary of the grant date and 25% on the seventh anniversary of the grant date. Any additional restricted stock units will be payable subject to the achievement of performance goals at the conclusion of the vesting periods ended December 31, 2012, December 31, 2013 and December 31, 2014. Upon a change of control of Patriot or the holder’s death, or disability, the vesting of the time-vested restricted stock units will accelerate. If the holder’s employment terminates for any other reason, all unvested restricted stock units will be forfeited. The restricted stock units subject to the super-performance conditions do not accelerate vest for any reason, including change of control, or the holder’s death or disability.

 

If the following performance metrics are met on each of the vesting dates, additional restricted stock units may be earned as follows:

 

 

 

The super-performance metrics are designed to balance Patriot’s growth goals with financial stability and capital efficiency. The metrics used to measure these objectives are: Adjusted EBITDA, Return on Invested Capital and a Leverage ratio. Each is equally weighted in determining payouts, if any.

 

The percentage of achievement as of the vesting dates for each year is determined as follows and is based on the targets outlined in the chart below:

 

 

One-Time Long-Term Incentive Award

 

Super-Performance Grid

 

 

Achievement between the 25% and 100% levels illustrated above will be interpolated, but achievement less than the 25% level for any goal will result in 0% vesting for that goal. Additionally, 100% achievement is the maximum level of vesting (i.e. achievement in excess of 100% does not result in vesting greater than 100%).

 

Peabody determined that the grant levels for the spin-off were in line with typical market practices for similar transactions, and they provide a significant equity stake in Patriot to key executives. Pursuant to their respective employment agreements, the named executive officers received, in connection with the spin-off, a one-time long-term incentive grant as follows:

 

 

The Cumulative Adjusted EBITDA performance measure is a key metric in assessing operating performance and is also an indicator of Patriot’s ability to meet debt service and capital expenditure requirements. Adjusted EBITDA is defined as net income (loss) before deducting net interest expense, income taxes, minority interests, asset retirement obligation expense and depreciation, depletion and amortization.

The Return on Invested Capital is intended to measure financial stability over the five, six and seven year periods and will be calculated as follows:

 

 

 

 

The Leverage ratio will be calculated as debt divided by EBITDA and will be measured as of December 31, 2012, December 31, 2013 and December 31, 2014.

 

Annual Long-Term Incentive Grants

 

A long-term incentive opportunity is available to each of our named executive officers and certain other key employees through annual awards and is designed to be competitive and based on actual Patriot performance. The first of these annual awards was granted to the named executive officers in the form of restricted shares that will cliff vest three years from November 1, 2007. Restricted stock is designed to attract and retain the executive team, align executive and stockholder interests, and provide executives with stock ownership in Patriot. The timing, form and amount of future annual awards will be determined by Patriot’s Compensation Committee and, with respect to the Chief Executive Officer, the independent members of the Board of Directors. Under the terms of their respective employment agreements, the named executive officers received annual long-term incentive awards with a value at least equal to the percentage of their base salaries set forth below:

 

 

The shares will immediately vest upon a change of control of Patriot or upon the holder’s death or disability. If the holder’s employment is terminated for reasons other than death or disability, all unvested restricted shares will be forfeited.

 

Retirement Benefits

 

Defined Contribution Plan

 

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

 

Excess Defined Contribution Retirement Plan

 

The Company maintains one excess defined contribution plan that provides retirement benefits to executives whose pay exceeds legislative limits for qualified benefit plans, which includes the named executive officers.

 

Other Benefits Provided by the Company

 

The named executive officers receive the same welfare and fringe benefits as all other employees of Patriot.

 

Perquisites

 

Patriot does not provide any perquisites in excess of $10,000 per individual per year to its named executive officers or other senior executives.

Policy on Grant of Equity-Based Compensation

 

In January 2008, the Committee approved a policy for granting equity-based compensation. The Committee makes grants of equity-based compensation to attract, motivate, compensate and retain executives and other key employees and to align their interests with the interests of stockholders. The timing of grants of equity-based compensation is designed to achieve these purposes. The following describes the regular process for making grants.

 

At the regularly scheduled meeting of the Compensation Committee of the Board of Directors held in December of each year, the Committee reviews the performance of the Company and senior management during the fiscal year. Based upon that review and such other factors as the Committee determines are relevant, including the recommendations of the Committee’s compensation consultant, the Committee grants equity-based compensation to senior management by approving either (i) the terms of specific grants or (ii) a specific formula for determination of the terms of the grants. Such grants are made effective the first business day in January of the following year and may be determined based on the closing price of the Company’s common stock as reported on the New York Stock Exchange (or the principal stock exchange or market on which the Common Stock is then traded) on such day or the last preceding day on which a sale was reported (“the fair market value”).

 

The Compensation Committee also approves all grants of equity-based compensation to newly-hired or promoted eligible employees, or made under or in connection with retention agreements or for other valid business purposes, that were not made at the foregoing scheduled meeting of the Committee. Such grants must be approved at a regular or special meeting of the Committee that occurs on or prior to the date on which the award is considered to be granted.

 

All stock options must be granted at an option price not less than the fair market value. The grant date of any award is the date of the meeting of the Committee approving the grant or, if so approved by the Committee and reflected in the minutes of such meeting, any later date the Committee approves.

 

Stock Ownership Guidelines

 

Stock Ownership Guidelines

 

Both Management and the Board of Directors believe the Company’s executives should acquire and retain a significant amount of Company Common Stock in order to further align their interests with those of stockholders.

 

Under the Company’s share ownership guidelines, the Chief Executive Officer is encouraged to acquire and retain Company stock having a value equal to at least five times his or her base salary. Other named executive officers are encouraged to acquire and retain Company 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 named executive officers’ ownership of Company Common Stock as of December 31, 2007.

 

Named Executive Officer Stock Ownership

 

 

 

 

 

Deductibility of Compensation Expenses

 

Pursuant to Section 162(m) under the Internal Revenue Code, certain compensation paid to executive officers in excess of $1 million is not tax deductible, except to the extent such excess constitutes performance-based compensation. While Patriot is operating under transition rules under Section 162(m) until its 2009 annual meeting, our Committee has and will continue to carefully consider the impact of Section 162(m) when establishing incentive compensation plans and making awards. At the same time, the Committee considers its primary goal to design compensation strategies that further the economic interests of the Company and its stockholders. In certain cases, the Compensation Committee may determine that the amount of tax deductions lost is insignificant when compared to the potential opportunity a compensation program provides for creating stockholder value. The Compensation Committee therefore retains the ability to evaluate the performance of the Company’s executive officers and to pay appropriate compensation, even if it may result in the non-deductibility of certain compensation.

REPORT OF THE COMPENSATION COMMITTEE

 

The Compensation Committee has reviewed and discussed with management the Company’s disclosures under “Compensation Discussion and Analysis” on page 15 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:

 

JOHN E. LUSHEFSKI, CHAIR
J. JOE ADORJAN

B. R. BROWN

SUMMARY COMPENSATION TABLE

 

The following table summarizes the total compensation paid to the Chief Executive Officer, the Chief Financial Officer and the three other most highly compensated executive officers for their service to the Company for the period November 1, 2007 through December 31, 2007.

 

 

 

 

All Other Compensation

 

The following table sets forth detail of the amounts reported in the All Other Compensation column of the Summary Compensation Table.

 

GRANTS OF PLAN-BASED AWARDS IN 2007

 

The following table sets forth information concerning the grant of plan-based awards to each of the Company’s named executive officers for the period November 1, 2007 through December 31, 2007. Each named executive officer received restricted stock, restricted stock units and stock option awards on November 1, 2007.

 

 

 

 

The following table sets forth detail about the outstanding equity awards for each of the named executive officers as of December 31, 2007. The Company cautions that the amount ultimately realized by the named executive officers from the outstanding equity awards will likely vary based on a number of factors, including the Company’s actual operating performance, stock price fluctuations and the timing of exercises and sales.

 

All unexercisable options and unvested shares or units of stock reflected in the table below are subject to forfeiture by the holder if the holder terminates employment without good reason (as defined in the holder’s employment agreement).

 

 

 

 

 

None of the named executive officers exercised any stock options or had any stock awards that vested during 2007.

 

In connection with the spin-off and in consultation with Mercer, the Company entered into employment agreements with each of our named executive officers and with certain other key executives. The terms of those agreements, including the provision of post-termination benefits, as described in detail below, were structured to attract and retain persons believed to be key to Patriot’s success as well as be competitive with compensation practices for executives in similar positions at companies of similar size and complexity.

 

The Chief Executive Officer’s employment agreement will extend from day-to-day so that there is at all times remaining a term of three years. Following a termination without cause or resignation for good reason, the Chief Executive Officer would be entitled to a payment equal to three years’ base salary and three times the higher of (1) the target annual bonus for the year of termination or (2) the average of the actual annual bonuses we paid in respect of the three prior years. One-third of this severance payment would be payable in twelve equal monthly installments commencing on the date of termination, with the remainder payable in a lump sum on the first anniversary of termination. Upon termination, the CEO would also be entitled to a one-time prorated bonus for the year of termination (based on our actual performance for that year multiplied by a fraction, the numerator of which is the number of calendar days he was employed during the year of termination, and the denominator of which is the total number of calendar days during that year), payable when bonuses, 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 following termination. If the CEO is terminated without cause or resigns for good reason following a change of control, he would be entitled to all benefits described above, and all outstanding equity awards would accelerate as a result of the change of control and would not be forfeited upon subsequent termination of the CEO’s employment. If the CEO is terminated without cause or resigns for good reason absent a change of control, he would be entitled to all benefits described above, but all outstanding unvested equity awards would not accelerate and would be forfeited.

 

The employment agreements for the Senior Vice President & Chief Operating Officer and the Senior Vice President & Chief Financial Officer will extend from day-to-day so that there is at all times a remaining term of one year. Following a termination without cause or resignation for good reason, each would be entitled to a payment equal to one year of base salary plus (1) the target annual bonus for the year of termination or (2) the average of the actual annual bonuses we paid in respect of the three prior years. This amount would be payable in twelve equal monthly installments commencing on the date of termination. In addition, each would be entitled to a one-time prorated bonus for the year of termination (based on our actual performance for that year multiplied by a fraction, the numerator of which is the number of calendar days the executive officer was employed during the year of

termination, and the denominator of which is the total number of calendar days during that year), payable when bonuses, if any, are paid to our other executives. Each of these officers would also be entitled to receive qualified and nonqualified retirement, life insurance, medical and other benefits for one year following termination. If any of these officers is terminated without cause or resigns for good reason following a change of control, he would be entitled to all benefits described above, and all outstanding equity awards would accelerate as a result of the change of control and would not be forfeited upon subsequent termination of any of these officer’s employment. If any of these officers is terminated without cause or resigns for good reason absent a change of control, he would be entitled to all benefits described above, but all outstanding unvested equity awards would not accelerate and would be forfeited.

 

The employment agreements for the other named executive officers will have an initial two-year term. During the initial two-year term, following a termination without cause or resignation for good reason, each would be entitled to a payment equal to the product of (1) one year of base salary plus the greater of (a) the target annual bonus for the year of termination or (b) the average of the actual annual bonuses we paid in respect of the three prior years, multiplied by (2) the greater of (a) one or (b) the number of calendar days following the termination date remaining in the initial two-year term divided by 365. In addition, the other named executive officers would be entitled to a one-time prorated bonus for the year of termination (based on our actual performance for that year multiplied by a fraction, the numerator of which is the number of calendar days the executive officer was employed during the year of termination, and the denominator of which is the total number of calendar days during that year), payable when bonuses, if any, are paid to our other executives. Each other named executive officer would also be entitled to receive qualified and nonqualified retirement, life insurance, medical and other benefits for the greater of one year following the date of termination or the remainder of the agreement’s initial two-year term. If the other named executive officer is terminated without cause or resigns for good reason following a change of control during the term of the employment agreement, he would be entitled to all benefits described above, and all outstanding equity awards would accelerate as a result of the change of control and would not be forfeited upon subsequent termination of any of these named executive officer’s employment. If any of these other named executive officers is terminated without cause or resigns for good reason absent a change of control, he would be entitled to all benefits described above, but all outstanding unvested equity awards would not accelerate and would be forfeited.

 

If an employment agreement for any of the other named executive officers is not extended by mutual consent of the parties, the executive will no longer be entitled to receive any special termination benefits; provided, however , if that executive is thereafter terminated by Patriot other than for cause, disability or death, he would be entitled to receive a one-year severance payment, pro-rated bonus and continuation benefits for one year as described above.

 

If any of the named executive officers is terminated for cause or resigns without good reason, the compensation due to that officer would only include accrued but unpaid salary and payment of accrued and vested benefits and unused vacation time. If that officer is terminated due to death or disability, he would be entitled to receive accrued but unpaid salary and payment of accrued and vested benefits and unused vacation time. He also would receive a pro-rated bonus for the year of termination, as described above.

 

Under all executives’ employment agreements, Patriot would not be 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 would terminate to the extent an executive is offered or obtains comparable coverage from any other employer. The employment agreements will provide for confidentiality during and following employment, and will include noncompetition and nonsolicitation covenants that will be effective during and for one year following employment. If an executive breaches any of his or her confidentiality, noncompetition or nonsolicitation covenants, 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, Patriot will pay additional amounts so that the executive would be in the same financial position as if the excise taxes were not incurred.

 

Under the executives’ employment agreements, “Good reason” is defined as (i) a reduction by Patriot in the executive’s base salary, (ii) a material reduction in the aggregate program of employee benefits and perquisites to which the executive is entitled (other than a reduction that generally affects all executives), (iii) a material decline in the executive’s bonus or long-term incentive award opportunities, (iv) relocation of the executive’s primary office

by more than 50 miles from the location of the executive’s primary office in Saint Louis, Missouri or (v) any material diminution or material adverse change in the executive’s title, duties, responsibilities or reporting relationships. Resignation “without good reason” is not only voluntary termination by the employee, but also any other reason that is not included in the definition of good reason.

 

Under the executives’ employment agreements, a “change of control” is defined as (a) a person (with certain exceptions) becoming the direct or indirect beneficial owner of securities of the Company representing 50% or more of the combined voting power of the Company, (b) if, during any period of twelve months, the constitution of Patriot’s Board of Directors changes such that individuals who were directors at the beginning of that period, and new directors (other than directors nominated by a person who has entered into an agreement with Patriot that would constitute a “change of control” or by any person who has announced an intention to take or to consider taking actions which if consummated would constitute a “change of control”) whose election by Patriot’s Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of the Company’s stockholders or at least three-fourths of Patriot’s directors who were either directors at the beginning of such period or whose election or nomination for election was previously so approved, cease to constitute a majority of Patriot’s Board of Directors, (c) the consummation of any merger, consolidation, plan of amalgamation, reorganization or similar transaction or series of transactions in which the Company is involved, unless the stockholders of the Company immediately prior thereto continue to own more than 50% of the combined voting power of the Company or the surviving entity in substantially the same proportions or (d) the consummation of a sale or disposition by the Company of all or substantially all of its assets (with certain exceptions).

 

In connection with the spin-off, the Company also entered into an employment agreement with Irl F. Engelhardt to serve as Chairman of the Board and Executive Advisor at a base salary of $250,000 per year and a target annual bonus of 50 percent of base salary. He also received a one time grant of restricted shares valued at $650,000 based on the fair market value of Company’s common stock on the date of the spin-off. The restricted stock cliff vests three years from the date of the grant and will accelerate vest upon death, disability or a change of control (as defined above). Mr. Engelhardt’s agreement has a term expiring December 31, 2010, which may be extended by mutual agreement. The Company may only terminate his employment as Executive Advisor for cause, disability or death. The Board of Directors may terminate his service as Chairman of the Board at any time for any reason. Mr. Engelhardt may terminate his employment at any time; however, if he terminated employment for good reason, he would be entitled to his base salary through December 31, 2010, a one-time prorated bonus for the year of termination (based on the Company’s 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 bonuses, if any, are paid to other executives. He would also receive qualified and nonqualified retirement, life insurance, medical and other benefits through December 31, 2010.

 

For purposes of Mr. Engelhardt’s agreement, “good reason” is defined as (i) reduction by Patriot in the executive’s base salary, (ii) a material reduction in the aggregate program of employee benefits and perquisites to which the executive is entitled (other than a reduction that generally affects all executives), or (iii) any material diminution or material adverse change in the executive’s title, duties, responsibilities or reporting relationship as Executive Advisor. The removal of Mr. Engelhardt as Chairman of the Board will not constitute good reason. If Mr. Engelhardt is terminated for cause or resigns without good reason, the compensation due would only include accrued but unpaid salary and payment of accrued and vested benefits and unused vacation time. If Mr. Engelhardt is terminated due to death or disability, he would be entitled to receive accrued but unpaid salary and payment of accrued and vested benefits and unused vacation time. He also would receive a pro-rated bonus for the year of termination, as described above. Resignation “without good reason” is not only voluntary termination by Mr. Engelhardt, but also any other reason that is not included in the definition of good reason.

 

In structuring the terms of Mr. Engelhardt’s employment agreement, Peabody’s Compensation Committee considered his extensive experience and relationships in the coal industry, and designed a compensation package it believed necessary to retain his services for the benefit of Patriot and its stockholders. In consultation with the independent compensation consultant and based on its assessment of Mr. Engelhardt’s future contributions to Patriot, the Committee deemed the magnitude and structure of Mr. Engelhardt’s employment agreement to be appropriate and recommended it to Peabody’s Board of Directors (acting as Patriot’s Board of Directors prior to the

spin-off) for approval. Peabody’s Board of Directors, excluding Mr. Engelhardt, who was Chairman at the time, approved Mr. Engelhardt’s employment agreement based on the Compensation Committee’s recommendation.

 

The tables below reflect the amount of compensation that would have been payable to each of the named executive officers in the event of termination of such executives’ employment, per the terms of their employment agreements and long-term incentive agreements. The amount of compensation payable to each named executive officer upon Retirement, “For Cause” Termination, Death or Disability, Voluntary Termination, Involuntary Termination “Without Cause” or “For Good Reason”, and Involuntary Termination as a Result of Change of control is shown below. The amounts shown assume that termination was effective as of December 31, 2007, and are estimates of the amounts that would have been paid to the executives upon their termination. The actual amounts that would be payable can be determined only at the time of the executives’ termination.

 

Estimated Incremental Value Upon Termination