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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Proxy Statement Pursuant to Section 14(a) of the Securities
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PATRIOT COAL CORPORATION

(Name of Registrant as Specified In Its Charter)

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April 1, 2011

 

Dear Stockholder:

 

You are cordially invited to attend the 2011 Annual Meeting of Stockholders of Patriot Coal Corporation (the “Company”), which will be held on Thursday, May 12, 2011, 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 three 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, 2011;

 

3. Approval of the compensation of the named executive officers as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K under Section 14(A)(a)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”);

 

4. Recommendation as to whether the stockholder vote to approve the compensation of the named executive officers as required by Section 14(A)(a)(2) of the Exchange Act should occur every one, two or three years; and

 

5. 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 and Chief Executive Officer

PATRIOT COAL CORPORATION
12312 Olive Boulevard
Saint Louis, Missouri 63141

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

Patriot Coal Corporation (“Patriot” or 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 Thursday, May 12, 2011, at 10:00 A.M., Central Time, to:

 

 

The Board of Directors has fixed March 18, 2011 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 91,285,503 shares of Common Stock outstanding.

 

If you own shares of the Company’s Common Stock as of March 18, 2011, 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.

 

Rashda M. Buttar
Vice President – Associate General Counsel
and Corporate Secretary

 

IMPORTANT NOTICE OF INTERNET AVAILABILITY
THIS PROXY STATEMENT FOR THE ANNUAL MEETING TO BE HELD ON MAY 12, 2011,
ALONG WITH OUR ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010,
ARE AVAILABLE FREE OF CHARGE AT
HTTP://WWW.AMSTOCK.COM/PROXYSERVICES/VIEWMATERIALS.ASP.

 

TABLE OF CONTENTS

 

PATRIOT COAL CORPORATION
PROXY STATEMENT
FOR THE
2011 ANNUAL MEETING OF STOCKHOLDERS

 

 

 

 

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 2012 and 2013, respectively.

 

The Board of Directors has nominated J. Joe Adorjan, Janiece M. Longoria and Michael M. Scharf for election as Class I Directors with terms expiring in 2014. 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 is responsible for recommending director nominees that have the experience, qualifications, attributes and skills that are important to an effective Board. In addition to the information presented below regarding each nominee’s specific experience, qualifications, attributes and skills that led our Board to the conclusion that the nominee should serve as a director, we also believe that all of our director nominees have characteristics common to all of our Board members, including integrity, strong professional reputation, a record of achievement and adherence to high ethical standards. Each Director has demonstrated business acumen and an ability to exercise sound judgment, as well as a proven commitment of service to the Company and our Board. We value our Directors’ significant experience on other public company boards of directors and board committees.

Information about the number of shares of Common Stock beneficially owned by each Director appears below under the heading “Ownership of Company Securities.” See also “Certain Relationships and Related Transactions.”

 

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

 

J. JOE ADORJAN, age 72, 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-listed 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 Bachelors and Masters degrees in Economics from Saint Louis University. Mr. Adorjan previously served as a Director of Rexel Corporation (2008-2011) and Thermadyne Holdings Corporation (2005-2010) where he served as lead Director and as a member of the Audit and Compensation Committees. Mr. Adorjan currently serves as chairman of Bates Sales Company, a distributor of industrial power transmission equipment and parts. 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.

 

We believe Mr. Adorjan’s qualifications to sit on our Board of Directors include his experience as an executive leader of complex organizations and experience as a director of other companies.

 

JANIECE M. LONGORIA, age 57, has been a Director of the Company since January 2011. Ms. Longoria has been a partner in the law firm of Ogden, Gibson, Broocks, Longoria & Hall L.L.P. in Houston since 1997.

 

Ms. Longoria has a Bachelors degree and a Juris Doctorate from the University of Texas. Ms. Longoria previously served as the Treasurer and Director of the Houston Convention Center Hotel Corporation from 1999-2004. Ms. Longoria currently serves as a commissioner of the Port of Houston Authority and serves on the Board of Directors of CenterPoint Energy, Inc. She previously served as a member of The University of Texas System Board of Regents.

 

We believe Ms. Longoria’s qualifications to sit on our Board of Directors include her significant legal experience and background as well as her experience as a director of other companies.

 

MICHAEL M. SCHARF, age 63, has been a Director of the Company since November 2007. Mr. Scharf is Executive Director, Global Financial Services for Bunge Limited, a global agribusiness and food company (“Bunge”). Previously he was Senior Vice President and CFO of Bunge North America and served in that position from 1990 through 2009. He also served as Bunge’s representative on the board of that company’s biofuels joint ventures. 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 Bachelors degree in Accounting from Wheeling Jesuit University and is a certified public accountant.

 

We believe Mr. Scharf’s qualifications to sit on our Board of Directors include his management experience with global companies, his financial expertise and his experience in the coal industry.

 

B. R. BROWN , age 78, 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 (“Peabody”) 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. and its parent, Freedom Group, Inc.

 

We believe Mr. Brown’s qualifications to sit on our Board of Directors include his experience in the coal industry, his executive leadership of complex organizations and his experience as a director of other companies.

 

JOHN E. LUSHEFSKI , age 55, has been a Director of the Company since October 2007. Since 2005, Mr. Lushefski has been a senior consultant providing strategic, business development and financial advice to public and private companies. 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 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).

 

We believe Mr. Lushefski’s qualifications to sit on our Board of Directors include his experience with the coal industry, his financial expertise and management expertise with other public companies.

 

RICHARD M. WHITING, age 56, has been a Director of the Company since October 2007. Mr. Whiting has served as Chief Executive Officer of the Company since October 31, 2007, when the Company was spun-off from Peabody and became a separate, publicly-traded company (the “spin-off”). He served as President from the time of the spin-off until July 23, 2008, when the Company consummated the acquisition (the “Merger”) of Magnum Coal Company (“Magnum”), and then again from September, 2010 until the present time.

 

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 holds a Bachelor of Science degree in Mining Engineering from West Virginia University. Mr. Whiting currently serves as a member of the Executive Committee of the National Mining Association (NMA), Chairman of the NMA’s Audit and Finance Committee, and COALPAC Chairman. He is the former Chairman of NMA’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 also currently a trustee of the Society of Mining Engineers Foundation.

 

We believe Mr. Whiting’s qualifications to sit on our Board of Directors include his over thirty years of experience in the coal industry, his leadership and knowledge of the Company and its former parent, as well as his extensive management experience.

 

IRL F. ENGELHARDT, age 64, has been a Director of the Company since October 2007. Mr Engelhardt has served as Chairman of the Board of Directors of the Company since the spin-off and served as Executive Advisor to the Company until December 31, 2010. Prior to the spin-off, Mr. Engelhardt served as Chairman and a Director of Peabody from 1993 until October 2007. Mr. Engelhardt also served as Chief Executive Officer of Peabody, our former parent, from 1990 through December 2005. After joining a predecessor of Peabody in 1979, he held various officer level positions in executive, sales, business development and administrative areas, including Chairman of Peabody Resources Ltd. (Australia) and Chairman of Citizens Power LLC.

 

He served as Co-Chief Executive Officer and executive director of The Energy Group from 1997 to 1998, Chairman of Suburban Propane Company from 1995 to 1996, Chairman of Cornerstone Construction & Materials from 1994 to 1995 and Director and Group Vice President of Hanson Industries from 1995 to 1996. Mr. Engelhardt previously served as Director on the Board of Directors of Valero Energy Corporation from 2006 to 2010, Chairman of the Federal Reserve Bank of St. Louis, Chairman of the National Mining Association, the Coal Industry Advisory Board of the International Energy Agency, the Center for Energy and Economic Development and the Coal Utilization Research Council, as well as Co-Chairman of the Coal Based Generation Stakeholders Group. He currently serves on the Board of Directors of The Williams Companies, Inc.

 

We believe Mr. Engelhardt’s qualifications to sit on our Board of Directors include his over thirty years of experience in the coal and energy industries, including as the former Chief Executive Officer of Peabody, his executive leadership of significant organizations, management experience with public companies and financial expertise.

 

MICHAEL P. JOHNSON, age 63, has been a Director of the Company since July 2008. Mr. Johnson is the President & Chief Executive Officer of J&A Group, a small business consulting and investment company, since 2008. He previously served as Senior Vice President and Chief Administrative Officer of The Williams Companies, Inc., a NYSE-listed natural gas producer, processor and transporter, from 1998 to 2008. Mr. Johnson was with The Williams Companies, Inc. from 1998 until his retirement in 2008. From 1991 to 1998, Mr. Johnson served in various officer-level positions for Amoco Corporation, including Vice President of Human Resources.

 

Mr. Johnson serves on the boards of several universities and charitable organizations. Mr. Johnson holds a bachelor’s degree from North Carolina Central University and is a graduate of the Advanced Executive Program from Kellogg School of Business at Northwestern University. Mr. Johnson currently serves on the Board of Directors of QuikTrip Corporation, Buffalo Wild Wings Inc. and CenterPoint Energy, Inc.

 

We believe Mr. Johnson’s qualifications to sit on our Board of Directors include his management experience in the energy industry and his experience with strategic development and human resources functions.

 

ROBERT O. VIETS, age 67, 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 Corporation. 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.

 

We believe Mr. Viets’s qualifications to sit on our Board of Directors include his experience with electric and gas utilities, his executive leadership of significant organizations and his financial expertise.

 

As required by the rules of the 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 a director’s independence or effectiveness (e.g., in connection with a change in employment status or other significant events). 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 and management, 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, either directly or as a partner, stockholder or officer of an organization that has a relationship 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 for the Company and the other organization 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 more than three years ago 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. Engelhardt and Whiting are independent. None of the directors, other than Mr. Whiting, receives any compensation from the Company other than customary director and committee fees. Mr. Engelhardt, Chairman of the Board, was Executive Advisor to the Company until December 31, 2010 and received salary and other compensation pursuant to his employment.

 

The Board of Directors has determined that Messrs. Adorjan, Brown, Lushefski, Johnson and Viets and Ms. Longoria have no relationship with the Company, other than serving as directors of the Company, and are therefore independent. The Board has also determined that Mr. Scharf is independent after evaluating Bunge’s relationship with the Company and concluding that such relationship is immaterial.

 

Mr. Scharf is the Executive Director, Global Financial Services for Bunge. During fiscal year 2010, Bunge paid the Company $898,871 pursuant to a coal supply agreement with the Company. The Board has concluded that this relationship is not material since the coal supply agreement was entered into between the Company and Bunge on the same general terms and conditions as other large, industrial customers. The Company’s directors did not solicit this commercial relationship and were not involved in any related discussions or deliberations.

 

The Board of Directors met eleven times in 2010. During that period each director attended at least 75% of the aggregate number of meetings of the Board and the committees on which such director served and all directors achieved an overall average attendance of 98%. Mr. Engelhardt serves as chairman at all meetings of the Board of Directors.

 

Mr. Engelhardt chairs executive sessions of the Board of Directors when all directors are present. The independent directors also meet in executive session at each regularly scheduled Board meeting and at other times deemed appropriate by the Board of Directors. Executive sessions of independent directors are chaired by the chairpersons of the Audit Committee, the Compensation Committee, the Finance Committee and the Nominating & Governance Committee, on a rotating basis.

 

We separate the roles of Chief Executive Officer (“CEO”) and Chairman of the Board in recognition of the differences between the two roles. The CEO is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board provides guidance to the CEO and sets the agenda for Board meetings and presides over meetings of the full Board. Mr. Engelhardt, our Chairman, is a former employee of the Company and is therefore not deemed independent by the Board.

 

The Board has appointed five standing committees from among its members to assist it in carrying out its obligations. These committees are the Audit Committee, Compensation Committee, Executive Committee, Finance Committee and Nominating & Governance Committee. The Board is actively involved in oversight of risks that could affect the Company. The Board delegates oversight of specific risks through the committees of the Board, as disclosed in the descriptions of the committees below and further described in the charters of each committee. The Board satisfies its oversight responsibility by receiving full reports from each committee chair regarding the committee’s considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within the Company.

 

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:

 

Audit Committee

 

The members of the Audit Committee are Robert O. Viets (Chair), J. Joe Adorjan, John E. Lushefski and Michael M. Scharf. The Board of Directors has affirmatively determined that, in its judgment, all members of the Audit Committee are independent under NYSE and Securities and Exchange Commission (“SEC”) rules. The Board of Directors also has determined that each of Messrs. Viets, Adorjan, Lushefski and Scharf is an “audit committee financial expert” under SEC rules.

 

The Audit Committee met seven times during 2010. The Audit Committee’s primary purpose is to provide assistance to the Board of Directors in fulfilling its oversight responsibility relating to accounting matters, financial reporting and legal and regulatory compliance by overseeing:

 

 

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

 

 

 

Compensation Committee

 

The current members of the Compensation Committee are Michael P. Johnson (Chair), J. Joe Adorjan, B. R. Brown and Robert O. Viets. Mr. Viets was appointed to the Compensation Committee on January 27, 2011. The Board of Directors has affirmatively determined that, in its judgment, all members of the Compensation Committee are independent under rules established by the NYSE.

 

The Compensation Committee met seven times during 2010. The Compensation Committee’s primary purpose is to provide assistance to the Board of Directors in fulfilling its oversight responsibility relating to employment policies and the Company’s compensation and benefits systems. Some of the responsibilities of the Compensation Committee include the following:

 

 

Further information regarding the Company’s processes and procedures for the consideration and determination of executive and director compensation may be found in “Executive Compensation - Compensation Discussion and Analysis” and “Director Compensation.”

 

Executive Committee

 

The members of the Executive Committee are Richard M. Whiting (Chair), Irl F. Engelhardt and B. R. Brown. The Executive Committee met three times during 2010.

 

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:

 

 

Finance Committee

 

The current members of the Finance Committee are John E. Lushefski (Chair), B. R. Brown, Irl F. Engelhardt, Janiece M. Longoria and Michael M. Scharf. Between January 1, 2010 and January 27, 2011, the Finance Committee was comprised of three members, John E. Lushefski (Chair), Michael M. Scharf and a director who has since resigned.

 

The Finance Committee met ten times during 2010. The Finance Committee’s primary purpose is to provide assistance to the Board of Directors in fulfilling its oversight responsibility relating to corporate finance functions. Some of the responsibilities of the Finance Committee include the following:

 

 

Nominating & Governance Committee

 

The current members of the Nominating & Governance Committee are Michael M. Scharf (Chair), Michael P. Johnson, Janiece M. Longoria and John E. Lushefski. Between January 1, 2010 and January 27, 2011, the Nominating & Governance Committee also included Robert O. Viets instead of Ms. Longoria.

 

The Board of Directors has affirmatively determined that, in its judgment, all members of the Nominating & Governance Committee are independent under NYSE rules.

 

The Nominating & Governance Committee met five times during 2010. The Nominating & Governance Committee’s primary purpose is to provide assistance to the Board of Directors in fulfilling its oversight responsibility relating to corporate governance practices. Some of the responsibilities of the Nominating & Governance Committee include the following:

 

 

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 audited consolidated financial statements in the Annual Report 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, 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 PCAOB Rule 3526, Communication with Audit Committees Concerning Independence , and considered the compatibility of non-audit services with the independent registered public accounting firm’s independence.

 

The Committee also reviewed and discussed together with management and the independent registered public accounting firm the Company’s audited consolidated financial statements for the year ended December 31, 2010 and the results of management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the independent registered public accounting firm’s audit of internal control over financial reporting.

 

The Committee discussed with the Company’s internal auditors and independent registered public accounting firm the overall scope and plans for their respective audits. The Committee meets with the internal auditors and the independent registered public accounting firm, with and without management present, to discuss the results of their examinations; their evaluations of the Company’s internal control, including internal control over financial reporting; 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 and management’s assessment of the effectiveness of the Company’s internal control over financial reporting be included in the Annual Report on Form 10-K for the year ended December 31, 2010 filed by the Company with the Securities and Exchange Commission. The Audit Committee has selected Ernst & Young LLP as our independent registered public accounting firm for 2011.

 

The Committee is governed by a charter (refer to www.patriotcoal.com). The Committee held seven meetings during fiscal year 2010. The Committee is comprised solely of independent directors as defined by the New York Stock Exchange listing standards and Rule 10A-3 of the Securities Exchange Act of 1934.

 

MEMBERS OF THE AUDIT COMMITTEE:

 

ROBERT O. VIETS, AUDIT COMMITTEE CHAIRMAN
J. JOE ADORJAN, AUDIT COMMITTEE MEMBER
JOHN E. LUSHEFSKI, AUDIT COMMITTEE MEMBER
MICHAEL M. SCHARF, AUDIT COMMITTEE MEMBER

 

Ernst & Young LLP has served as the Company’s independent registered public accounting firm since the spin-off of the Company and for the fiscal year ended December 31, 2010 and 2009.

 

The following fees were paid to Ernst & Young for services rendered during the Company’s fiscal years, 2010 and 2009:

 

 

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 provision 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 website ( www.patriotcoal.com ) by clicking on “Investors,” and then “Corporate Governance,” and are available in print to any stockholder, without charge, 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, CEO, Chief Financial Officer, Controller and other Company personnel. Any updates or amendments to the Code of Business Conduct and Ethics, and any waiver that applies to a director or executive officer, will also be posted on the website.

 

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, who chair the executive sessions of the Board on a rotating basis (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. 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 & 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 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. Seven of our directors attended the 2010 Annual Meeting in person.

 

The Chairman shall be the spokesman for the Board except in circumstances where the inquiry or comment is about the Chairman. In such instances, the Chairman of the Nominating & Governance Committee shall become the spokesman.

 

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 and who are available for appropriate periods of continuous service, thereby enhancing their ability to thoroughly understand and oversee the Company’s business and long-term strategies. As such, current Board members possess 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.

 

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, ability to make analytical inquiries, understanding of our business environment, and willingness to devote adequate time to director duties, and diversity (although no formal policy exists, considered along with the aforementioned factors), 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. When appropriate, 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 table sets forth information as of March 22, 2011 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 SEC. 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, 2010, filings with the SEC and written representations from certain reporting persons that no additional reports were required, all required reports were timely filed, except that each of Messrs. Whiting, Ebetino and Bean inadvertently filed a late Form 4 on November 12, 2010 reporting shares withheld to satisfy tax liability upon the vesting of a stock award on November 1, 2010 and Mr. Ebetino inadvertently filed a late Form 4 on November 1, 2010 for restricted stock awarded by the Company on October 19, 2010.

EXECUTIVE COMPENSATION

 

Executive Summary

 

Overview

 

This section of the Proxy Statement provides an overview of Patriot’s compensation philosophy, programs and executive pay practices. Some of the key topics addressed include the following:

 

 

As outlined below, the primary objectives of our compensation program are to attract, retain and motivate key executives to enhance long-term profitability and stockholder value. To achieve these objectives, we provide our executives with competitive, market-based compensation that emphasizes pay for performance. All of our executive

compensation programs are reviewed and approved by the Compensation Committee of the Board of Directors, which is comprised entirely of independent Board members. In addition, our Compensation Committee reviews the competitiveness of the Company’s executive compensation programs and practices at least annually, with the assistance of an independent compensation consultant.

 

Key Considerations for 2010

 

In 2010, the Company performed well despite a challenging global economic environment and a myriad of new regulatory constraints and inconsistent enforcement activities affecting our industry. Our EBITDA for the year ended December 31, 2010 increased $31.1 million, or 28%, to $141.9 million as compared to $110.7 million for the corresponding period last year. We further strengthened our balance sheet, ending 2010 with just under $400 million of liquidity, including $193 million in cash compared to $27 million at December 31, 2009. 2010 was the safest year in our history, marking the fourth consecutive decline in our accident rate since becoming a public company in 2007. We believe this performance shows the value of our strategy of pursuing industry leading safety performance and stable operating results through this challenging period facing our business. Further, we believe that our performance-based executive compensation programs, as described in more detail below, provide incentives that are aligned with the best interests of our stockholders and have facilitated the Company’s performance.

 

Compensation Program Elements

 

The following summarizes certain key aspects of our compensation practices and philosophy, which are also described in more detail in this “Compensation Discussion and Analysis.”

 

 

 

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.

 

In order to meet our objectives, we design our executive compensation program to:

 

 

We also design our compensation programs to align incentives for executives with achievement of Patriot’s business strategies, including:

 

 

With these objectives in mind, Patriot’s compensation structure for its executive officers is currently comprised of four key components: base salary; an annual incentive plan; long-term incentive compensation consisting of performance-based restricted stock units, restricted stock and stock options; and retirement and other benefits (each as described further below).

 

Patriot’s Compensation Committee regularly reviews the objectives, philosophy and implementation of our executive compensation program in light of changing market and business conditions and retains the flexibility to adjust them in order to better align compensation with the interests of Patriot and its stockholders.

 

Roles of the Compensation Committee & the Compensation Consultant

 

The Compensation Committee is comprised entirely of independent directors and is responsible for the review and approval of the compensation of the Company’s executive officers. The Compensation 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, including equity compensation, deferred compensation, perquisites, 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 oversees the Company’s annual and long-term incentive plans and programs. For more information regarding the responsibilities of the Compensation Committee, see page 10 of this Proxy Statement.

 

With respect to the Chief Executive Officer, the Compensation Committee makes recommendations to the Board of Directors regarding the Chief Executive Officer’s compensation, including base salary, annual incentive and long-term incentive compensation and benefits, which recommendations are subject to the approval of the independent members of the Board of Directors. 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.

 

Under its charter, which can be found on the Company’s website (www.patriotcoal.com), Patriot’s Compensation Committee has the sole authority to engage the services of outside advisors, experts and others to assist the Compensation Committee in fulfilling its duties. The Compensation Committee engaged Towers Watson, referred to herein as the “Consultant,” during 2010 to provide compensation consulting advice to the Compensation Committee. The Consultant, which is independent and reports directly to the Compensation Committee, provided the committee with advice concerning the types and levels of compensation to be paid to the Chief Executive Officer and the other executive officers of Patriot, including market compensation data on base pay and annual and long-term incentives. In addition, the Consultant analyzed the mix of pay elements, reviewed executive employment agreements and examined and reported on share usage and dilution, incentive plan design and metrics, and current executive compensation and regulatory trends that were relevant to Patriot. With the approval of the Compensation Committee, the Consultant also provided certain healthcare consulting services to the Company in 2010.

 

Benchmarking Process

 

In reviewing and comparing Patriot’s executive compensation programs, the Compensation Committee selected relevant peer groups of other publicly held companies of similar size (based on revenues) and in similar industries against which to compare compensation levels, elements, mix and trends in order to ensure that Patriot’s programs are competitive. Two peer groups were developed to help assess the market. The primary peer group consisted of nine publicly-traded coal companies: Alpha Natural Resources, Inc., Arch Coal, Inc., CONSOL Energy, Inc., International Coal Group, Inc., James River Coal Company, Massey Energy Company, Peabody Energy Corporation (“Peabody”), Walter Energy, Inc. and Westmoreland Coal Company. In addition to this group of direct industry competitors, another peer group was developed and is comprised of similarly sized companies (based on revenues), each of which extracts minerals or gas from the ground and has U.S. operations. This peer group is referred to as the secondary peer group and is comprised of the following companies: Cimarex Energy Company, Cleveland Cliffs, Inc., Compass Minerals International, Inc., Crosstex Energy, Inc., Martin Marietta Materials, Inc., Minerals Technologies, Inc., Newfield Exploration Company and Vulcan Materials Company.

 

For purposes of reviewing the competitiveness of Patriot’s executive compensation program, the Compensation Committee used a combination of proxy data from the above peer groups and survey data to determine the competitive market range of compensation for each executive officer. Because talent for certain key roles at Patriot can be acquired from a broader spectrum of companies, use of surveys was also considered appropriate. The surveys included the U.S. Mercer Benchmark Database Executive Survey Report, the Towers Watson Data Services Survey Report on Top Management Compensation, and the Towers Watson U.S. Compensation General Industry Executive Database. The data from the published surveys was increased by 3.0% from the published date of the surveys to the various subsequent dates when the Compensation Committee reviewed the data, reflecting the Consultant’s estimate of the expected pay increases in 2010 for executives in the energy industry, based on a compilation of major merit increase surveys.

 

The survey data, consisting of both mining/energy and general industry data for companies of comparable expected revenue size to Patriot, was examined in conjunction with the proxy data from both the primary and secondary peer groups, with the primary peer group being the principal reference point. The secondary peer group data was used to validate data from the primary peer group when the number of position matches was low. This analysis was done for base salary, total cash compensation (base salary and annual incentives) and total direct compensation (base salary, annual incentives, and long-term incentives). The competitive data was reviewed against

both the 50th and 75th percentiles. While the Compensation Committee takes market data into account in its determinations, it does not apply such data rigidly. Rather, it uses market data as one of several tools to reach compensation levels it considers to be appropriate, along with other factors such as experience, tenure, responsibility and performance. The Compensation Committee also takes into account the expanded roles and responsibilities that are required for leadership positions in a relatively young public company.

 

In establishing 2010 compensation for the executive officers included in the 2010 Summary Compensation Table on page 31 (the “named executive officers”), the Compensation Committee reviewed the following information for each named executive officer:

 

 

The Compensation Committee used this compensation data to understand the elements and amounts of compensation paid to each named executive officer. The equity award and stock ownership information were used to understand the amount of equity awarded to the named executive officer, the current value of such equity awards and the progress toward achieving compliance with Patriot’s stock ownership guidelines. Overall, the Compensation Committee determined that Patriot’s executive compensation programs, as structured, are consistent with the Compensation Committee’s objectives.

 

Employment Agreements

 

In connection with the spin-off from the Company’s former parent, on October 31, 2007, Patriot entered into employment agreements (“Employment Agreements”) with each of Messrs. Whiting, Schroeder, Ebetino and Bean, our named executive officers employed by Patriot at that time. The terms of those agreements were structured to attract and retain persons believed to be key to Patriot’s success and to be competitive with compensation practices for executives in similar positions at companies of similar size and complexity. In addition, when the Company acquired Magnum on July 23, 2008, Mr. Paul H. Vining entered into an employment agreement with Patriot. Mr. Vining resigned from the Company effective September 24, 2010. Pursuant to the terms of his employment agreement, Mr. Vining forfeited all outstanding unvested equity awards and was not paid any severance. For more information regarding the terms of these agreements, see the “Potential Payments Upon Termination or Change of Control” section in this Proxy Statement.

 

Annual Base Salary

 

Base salary represents the major fixed component of compensation for the named executive officers. In January 2010, the Compensation Committee approved an increase effective April 1, 2010 of the base salaries of each named executive officer as follows: Mr Whiting from $750,000 to $772,500; Mr. Vining from $600,000 to $618,000; Mr. Schroeder from $450,000 to $463,500; Mr. Ebetino from $400,000 to $425,000; Mr. Bean from $350,000 to $360,500; and Mr. Bennett from $330,000 to $340,000; In August, upon his promotion to Senior Vice President & Chief Operating Officer, Mr. Ebetino’s salary was increased to $525,000. In December, Mr. Bennett’s salary was increased to $385,000 to reflect increased responsibilities following Mr. Vining’s resignation. None of the executives (other than Mr. Schroeder and Mr. Bean) had received salary increases in 2009, and the April 2010 increases of 3% per executive (except for Mr. Ebetino’s 6.25% increase) were consistent with those provided the rest of the Patriot workforce.

 

Patriot’s Compensation Committee will continue to review the base salaries of the named executive officers at least annually and may adjust such salaries to ensure that they are competitive with those of peer executives at the

peer companies. 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 named executive officers and other designated key employees participate in an annual incentive compensation plan. In general, our annual incentive plan provides opportunities for such executives and employees to earn annual cash incentive payments tied to the successful achievement of pre-established company and individual objectives that support our business strategy.

 

Named executive officers are assigned threshold, target and maximum incentive payouts. If Patriot’s performance as measured against specified financial, safety and environmental objectives does not meet the threshold level established by the Compensation Committee, no incentive bonus is earned with respect to those objectives. The incentive bonus that can be earned equals 50% of the target payout at threshold levels and is capped at 200% of the target payout for performance at or above maximum levels.. Under the plan, the target payouts for the named executive officers were established through an analysis of compensation for comparable positions at our peer companies, in order to provide a competitive level of compensation when participants, including the named executive officers, achieve their performance objectives with respect to Patriot’s performance.

 

2010 Annual Incentive Measures and Payouts

 

For 2010, the annual incentive plan metrics were comprised of earnings before interest, taxes, depreciation, and amortization or EBITDA (40% of the award), clean cost per ton (10% of the award), safety performance (5% of the award), environmental (5% of the award) and individual objectives (40% of the award). The EBITDA portion of the award was based on achieving certain levels of EBITDA (see chart below). The clean cost per ton portion of the award was based on actual costs compared to budgeted costs, weighted 75% for Appalachia and 25% for the Illinois Basin. The safety portion of the award was based on achievement of a budgeted safety incidence rate, set at a level which required a 5% improvement versus the Company’s 2009 safety performance in order to earn the targeted payout. The environmental portion of the award was based on the Company’s overall environmental incidence rate under SMCRA, expressed in terms of violations per inspection day (VPID).

 

Annual incentive awards for 2010 were earned based on achievement of maximum performance levels for EBITDA and environmental metrics and partial achievement of the safety metric. Neither clean cost per ton goals were met. See the Non-Equity Incentive Plan Compensation column of the 2010 Summary Compensation table on page 31 in this Proxy Statement for the total bonus payment. The charts below set forth the percentage of each component earned (excluding individual performance, which is discussed separately below).

 

The threshold, target and maximum performance levels for each metric under the 2010 annual incentive plan, as well as 2010 actual results, were as follows:

 

 

 

 

Factors considered in determining the amount of the individual objectives portion of the award for each named executive officer related primarily to achievement of functional goals established at the beginning of year. Individual objectives varied significantly by functional area, and the emphasis on and importance of the goals varied among each named executive officer. Performance against these individual objectives was assessed by Patriot’s Compensation Committee in December 2010 and January 2011. In determining the individual objectives

portion of the award for 2010, 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.

 

In Mr. Ebetino’s case, the Compensation Committee considered the following key factors in determining the individual objectives portion of his 2010 annual incentive: increasing joint venture EBITDA contributions and initial dividends; increasing EBITDA through enhanced utilization of facilities, sale or monetization of coal resources and surface properties; acquiring additional coal resources, surface lands, and real property rights; and improving safety. In Mr. Schroeder’s case, the following key factors were considered: completion of a $125 million accounts receivable securitization program, as well as substantially reducing the Company’s letter of credit balance; increasing capacity under the Company’s revolving credit facility to enhance liquidity and completion of $250 million bond offering; leadership in managing and optimizing material and cost supply reductions; and leadership and decision-making abilities related to banking relationships, capital market activities, capital and purchasing decisions, legacy liabilities and customer issues. In Mr. Bean’s case, the following key factors were considered: development and execution of effective legal strategies to support favorable commercial settlements and capital restructuring efforts; implementation of improvements in human resources, benefits administration, and succession planning processes throughout the organization; overseeing all governance matters and improving the Company’s cost structure regarding retiree healthcare costs and pension liabilities. In Mr. Bennett’s case, the following key factors were considered: realized sales per ton exceeding budget; additional revenue obtained through brokerage and trading activities; expansion of sales of metallurgical products; optimization of shipments, quality and blending to maximize coal recovery; and assistance to operations in lowering overall mining costs. Mr. Vining was not awarded any bonus under the 2010 annual incentive plan because he resigned from the Company prior to year-end.

 

Patriot’s Compensation Committee, together with the other independent members of the Board of Directors, determined and approved in January 2011 the individual objectives portion of the Chief Executive Officer’s 2010 incentive award for the year ending December 31, 2010. In determining the Chief Executive Officer’s 2010 incentive, the Compensation Committee and Board considered the following key factors: improvement in compliance and operating results through better planning, engineering and management changes; strengthening of the Company’s finances through the $125 million accounts receivable securitization program, extending the revolving credit facility and overseeing $250 million bond offering with maturity in 2018; assumption of additional responsibilities as President following Mr. Vining’s resignation; serving as the company’s principal liaison with state and federal government officials, as well as the investment community; advancing the interests of the company, its employees and stockholders; responsibility for all M&A decisions, including whether or not to pursue a particular transaction; and ensuring that a top-to-bottom succession planning project was conducted for the company to identify future requirements for leadership and labor and to evaluate current employees and their potential.

 

The named executive officers’ threshold, target and maximum incentive opportunities and payouts, as a percent of their salaries, based on achievement of relevant Patriot performance objectives, were as follows for 2010:

 

 

 

 

Clawback Policy

 

On January 27, 2010, the Compensation Committee adopted a policy authorizing Patriot to recover cash bonuses paid to executive officers under certain circumstances. The policy provides that if Patriot restates its financial results under the securities laws as a result of deliberate misconduct or fraud by an executive officer, then to the extent permitted under applicable law Patriot will be entitled to recover any cash bonus paid to that executive officer that (i) was paid in the 12 months prior to the first filing of the restated financial measures, and (ii) was higher than it would have been had the original financial statements not been affected by the misconduct or fraud. The policy authorizes the Board of Directors to exercise its business judgment to determine the appropriate amount and most cost-effective method of any such recovery, including direct repayment of the cash bonus by the executive officer, or an offset against other amounts owed to or to be paid the executive officer by Patriot.

 

Long-Term Incentives

 

In 2007, in connection with the spin-off of the Company, Patriot’s Board of Directors adopted Patriot’s long-term incentive plan, which was approved by Patriot’s sole stockholder. In 2009, the Company’s stockholders approved the long-term incentive plan. Awards under the long-term incentive plan provide opportunities for the named executive officers and other key employees to earn payments based upon successful achievement of pre-established long-term (i.e., greater than one-year) objectives, increase in Patriot’s stock price, continued service with Patriot or any combination of these factors.

 

Extended Long-Term Incentive Awards

 

At the time of the spin-off, a one-time long-term incentive award (the “Extended Long-Term Incentive Award”) intended to promote long-term employee retention and achievement of certain financial objectives was made to the named executive officers employed by Patriot at the time, as well as other key employees. Upon joining the company in July 2008, Messrs. Vining and Bennett each received an Extended Long-Term Incentive Award subject to the same terms and conditions as the awards made to the other named executive officers at the time of the spin-off. Other than on death, disability or a change of control of Patriot, the service-based component of the Extended Long-Term Incentive Awards will not vest prior to November 1, 2012. In addition, the performance-based component of the Extended Long-Term Incentive Awards vests only if certain performance metrics are achieved, otherwise they are forfeited. The performance-based component of the Extended Long-Term Incentive Awards is forfeited in the event of termination of employment for any reason prior to vesting. These vesting schedules were designed to reinforce the recipients’ long-term commitment to Patriot as a stand-alone public company.

 

The purposes of the Extended Long-Term Incentive Awards were to:

 

 

Annual Long-Term Incentive Awards

 

Through Patriot’s annual awards, a competitive long-term incentive opportunity is available to each of our named executive officers and certain other key employees. Subject to the terms of employment agreements with key executives, the timing, form and amount of such annual awards are determined by Patriot’s Compensation Committee and, with respect to the Chief Executive Officer, the independent members of the Board of Directors.

The named executive officers receive annual long-term incentive awards with a value at least equal to the percentage of their base salaries set forth below:

 

 

 

 

In order to maintain the emphasis on performance-based pay, the Compensation Committee, as it has done in prior years, adopted a portfolio, performance-oriented approach when granting 2010 annual long-term incentive awards to the named executive officers. On January 4, 2010, each named executive officer received an annual equity award comprised of 33 1 / 3 percent non-qualified stock options, 33 1 / 3 percent restricted stock and 33 1 / 3 percent performance-based restricted stock units. (See also the discussion below under “Policy on Grant of Equity-Based Compensation”.) The restricted stock and stock options are scheduled to vest in three equal installments on each of January 4 of 2011, 2012 and 2013. The restricted stock units will vest based on the Company achieving specified levels of total stockholder return (“TSR”) compared to the primary peer group (as constituted on January 4, 2010), during a three-year performance period ending December 31, 2012, as shown in the following table:

 

 

 

 

Notwithstanding the foregoing,

 

(i) If a change of control occurs prior to December 31 , 2012, then the TSR Multiplier shall be no less than one, without regard to the TSR of the Company relative to the TSR of the peer companies;

 

(ii) If TSR of the Company is greater than 25% per year compounded annually, then the TSR Multiplier shall be no less than one, without regard to the TSR of the Company relative to the TSR of the peer companies; and

 

(iii) If TSR of the Company is negative, then the TSR Multiplier shall be one if the TSR of the Company relative to the TSR of the peer companies is at or above the 55 ^th percentile, otherwise the TSR Multiplier shall be zero.

 

Each type of award promotes executive retention, aligns executive and stockholder interest, provides executives with stock ownership in Patriot, and motivates executives to increase the price of Patriot’s shares. As a result of Mr. Ebetino’s promotion, he received an additional long-term incentive award in October 2010 comprised of restricted shares with a three year ratable vesting schedule. This award represents the difference between his current and previous LTIP opportunities, pro-rated to reflect four months of service in 2010 as Chief

Operating Officer. These equity awards are subject to accelerated vesting in the event of death, disability, change of control or other circumstances as described in footnotes 2 and 4 on page 32 this Proxy Statement.

 

Each of the awards made to Mr. Vining in 2010, as well as all other unvested awards from prior years, were forfeited upon his resignation.

 

Retirement Benefits

 

Defined Contribution Plan

 

Patriot maintains a tax-qualified defined contribution retirement plan (“401(k) Plan”) 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 a nontax-qualified excess defined contribution plan (“Supplemental 401(k) Plan”) that provides retirement benefits to executives (including the named executive officers) whose pay exceeds legislative limits for qualified benefit plans.

 

Other Benefits Provided by the Company

 

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

 

Perquisites

 

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

 

Policy on Grant of Equity-Based Compensation

 

In January 2008, the Compensation Committee approved a general policy for granting equity-based compensation (“Regular Grant Policy”), which policy was subject to modification from time to time as deemed appropriate by the Compensation Committee. The Compensation 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, as set forth in the Regular Grant Policy.

 

At the regularly scheduled meeting of the Compensation Committee of the Board of Directors to be held in December of each year, the Compensation Committee will review the performance of the Company and senior management during the fiscal year. Based upon that review and such other factors as the Compensation Committee determines are relevant, including the recommendations of the Compensation Committee’s Consultant, the Compensation Committee will grant 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. Under the Regular Grant Policy, such grants will be 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 evaluates the above policy from time to time and retains the flexibility to deviate from the policy in order to respond to changing market conditions or other considerations

 

The Compensation Committee approves all grants of equity-based compensation to eligible newly-hired or promoted employees, or made under or in connection with retention agreements or for other valid business purposes. Such grants must be approved at a regular or special meeting of the Compensation 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 of the stock on the grant date. The grant date of any award is the date of the meeting of the Compensation Committee approving the grant or, if so approved by the Compensation Committee and reflected in the minutes of such meeting, any later date the Compensation Committee approves.

 

Stock Ownership Guidelines

 

Patriot’s management and the Board of Directors believe the Company’s executives should acquire and retain a significant amount of Patriot stock in order to further align their interests with those of stockholders.

 

Under the Company’s stock ownership guidelines, the Chief Executive Officer is encouraged to acquire and retain Patriot 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 Patriot 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 Patriot stock as of February 11, 2011.

 

Named Executive Officer Stock Ownership

 

 

 

 

Deductibility of Compensation Expenses

 

Pursuant to Internal Revenue Code Section 162(m), compensation paid to named executive officers in excess of $1 million is not tax deductible, except to the extent such excess constitutes performance-based compensation. One requirement for establishing performance-based compensation under Section 162(m) is that the compensation plans be approved by stockholders. At the 2009 stockholders’ meeting, the Company’s stockholders approved both the annual incentive plan and the long-term incentive plan. The Compensation Committee carefully considers the impact of Section 162(m) when establishing incentive compensation plans and making awards, and the Compensation 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.

 

The Compensation Committee has reviewed and discussed with management the Company’s disclosures under “Compensation Discussion and Analysis,” beginning on page 19 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, 2010 for filing with the Securities and Exchange Commission.

 

MEMBERS OF THE COMPENSATION COMMITTEE:

 

MICHAEL P. JOHNSON, CHAIR
J. JOE ADORJAN
B. R. BROWN
ROBERT O. VIETS

2010 SUMMARY COMPENSATION TABLE

 

The following table summarizes the total compensation paid to the Chief Executive Officer, the Chief Financial Officer and the four other most highly compensated executive officers (where required) for their service to the Company for the period January 1, 2010 through December 31, 2010 and for the two preceding fiscal years.

 

 

 

GRANTS OF PLAN-BASED AWARDS IN 2010

 

The following table sets forth information concerning the grant of awards to each of the Company’s named executive officers for the period January 1, 2010 through December 31, 2010.

 

 

 

The Company has entered into employment agreements with certain of the named executive officers. Pursuant to the terms of those agreements, the named executive officers who have entered into employment agreements are entitled to receive specified levels of base salary, annual incentive opportunities and long-term incentive opportunities. The compensation levels for each such officer as of December 31, 2010 are shown under the captions “Annual Base Salary,” “Annual Incentive Plan” and “Annual Long-Term Incentive Awards” on pages 23, 24 and 26, this Proxy Statement. Other terms of the employment agreements are described under the caption “Potential Payments Upon Termination or Change of Control” on pages 37 through 41 of this Proxy Statement.

 

Pursuant to a letter agreement entered into with certain former Magnum stockholders, Mr. Vining was entitled to receive specified portions of Patriot Common Stock that such stockholders received as a result of Patriot’s acquisition of Magnum. The agreement provided for the relevant stockholders to deliver to Mr. Vining, within ten days of January 22, 2010, shares of Patriot Common Stock with a value, determined at that time, of $3,000,000. In accordance with the agreement, such shares were delivered to Mr. Vining by the relevant stockholders in January 2010.

 

The following table sets forth detail about the outstanding equity awards for each of the named executive officers as of December 31, 2010. 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.

Unexercisable options and unvested restricted shares or time-based restricted stock units reflected in the table below would vest in full upon death, disability or change of control of the Company. Except as noted in footnotes 10, 13 and 15 below, all unexercisable options and unvested restricted shares or time-based restricted stock units reflected in the table below are subject to forfeiture by the holder if the holder terminates employment for any reason other than death or disability. Except as noted in footnote 12 and 14 below, unvested performance-based restricted stock units are subject to forfeiture by the holder if the holder terminates employment for any reason.