March 26, 2009

 

 

Dear Shareholder:

 

You are cordially invited to attend the 2009 Annual Meeting of Shareholders of Peabody Energy Corporation, which will be held on Thursday, May 7, 2009, at 10:00 A.M., Central Time, at the Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri 63105.

 

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

 

 

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

 

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

 

Thank you for your continued support of Peabody Energy. We look forward to seeing you on May 7.

 

Very truly yours,

 

 

Gregory H. Boyce

Chairman and Chief Executive Officer

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

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

Peabody Energy Corporation (the “Company”) will hold its Annual Meeting of Shareholders at the Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri, 63105 on Thursday, May 7, 2009, at 10:00 A.M., Central Time, to:

 

 

The Board of Directors has fixed March 13, 2009 as the record date for determining shareholders who will be entitled to receive notice of and vote at the Annual Meeting or any adjournment. Each share of Common Stock is entitled to one vote. As of the record date, there were 267,360,541 shares of Common Stock outstanding.

 

If you own shares of Common Stock as of March 13, 2009, you may vote those shares via the Internet, by telephone or by attending the Annual Meeting and voting in person. If you received your proxy materials by mail, you may also vote your shares by completing and mailing your proxy/voting instruction card.

 

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

 

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

 

Alexander C. Schoch

Executive Vice President Law, Chief Legal

Officer and Secretary

 

March 26, 2009

 

TABLE OF CONTENTS

 

 

PEABODY ENERGY CORPORATION
PROXY STATEMENT
FOR THE
2009 ANNUAL MEETING OF SHAREHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

Our Board of Directors currently consists of eleven members, who were previously divided into three classes. At the 2008 Annual Meeting of Shareholders, the shareholders voted to amend our Third Amended and Restated Certificate of Incorporation to eliminate the classification of the Board, beginning with the election of directors to occur at this Annual Meeting. The directors elected at the 2007 and 2008 Annual Meetings will serve out the remainder of their three-year terms before standing for re-election. Directors nominated for election at this Annual Meeting and at subsequent meetings will be elected for a one-year term. In addition, a director elected by the Board to fill a vacancy caused by the resignation, retirement or death of a director will serve until the expiration of the term of office of the director whom he or she replaced and a director elected to fill a vacancy caused by the creation of a new directorship will serve until the Annual Meeting held in the year of expiration of his or her term of office.

 

The Board of Directors has nominated Gregory H. Boyce, William E. James, Robert B. Karn III, M. Frances Keeth and Henry E. Lentz for election as directors, each to serve for a term of one year and until his or her successor is duly elected and qualified. Each nominee is currently serving as a director and has consented to serve for the new term. Should any of them become unavailable for election, your proxy authorizes us to vote for such other person, if any, as the Board may recommend.

 

The other current director whose term expires at the Annual Meeting, Dr. Blanche M. Touhill, will retire at the Annual Meeting pursuant to our mandatory retirement policy for directors. No person is being nominated at the Annual Meeting to fill the vacancy on the Board created by her departure.

 

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

 

GREGORY H. BOYCE, age 54, has been a director since March 2005. Mr. Boyce was named Chief Executive Officer Elect of the Company in March 2005, assumed the position of Chief Executive Officer in January 2006 and was elected Chairman by the Board of Directors in October 2007. He was President of the Company from October 2003 to December 2007 and was Chief Operating Officer of the Company from October 2003 to December 2005. He previously served as Chief Executive — Energy of Rio Tinto plc (an international natural resource company) from 2000 to 2003. Other prior positions include President and Chief Executive Officer of Kennecott Energy Company from 1994 to 1999 and President of Kennecott Minerals Company from 1993 to 1994. He has extensive engineering and operating experience with Kennecott and also served as Executive Assistant to the Vice Chairman of Standard Oil of Ohio from 1983 to 1984. Mr. Boyce serves on the board of directors of Marathon Oil Corporation. He is Vice Chairman of the World Coal Institute and the National Mining Association. He is a member of the National Coal Council (NCC) and the Coal Industry Advisory Board of the International Energy Agency. He is a Board member of the Business Roundtable and the American Coalition for Clean Coal Electricity (ACCCE). Mr. Boyce is a member of Civic Progress in St. Louis; the Board of Trustees of St. Louis Children’s Hospital; the School of Engineering and Applied Science National Council at Washington University in St. Louis; and the Advisory Council of the University of Arizona’s Department of Mining and Geological Engineering.

 

WILLIAM E. JAMES, age 63, has been a director since July 2001. Since July 2000, Mr. James has been Founding Partner of RockPort Capital Partners LLC, a venture fund specializing in energy and environmental technology and advanced materials. Prior to joining RockPort, Mr. James co-founded and served as Chairman and Chief Executive Officer of Citizens Power LLC, a leading power marketer. He also co-founded the non-profit Citizens Energy Corporation and served as the Chairman and Chief Executive Officer of Citizens Corporation, its for-profit subsidiary, from 1987 to 1996. From 2001 to

April 2008, Mr. James periodically provided consulting services to Lehman Brothers Inc., an investment banking firm (“Lehman Brothers”), on matters unrelated to the Company.

 

ROBERT B. KARN III, age 67, has been a director since January 2003. Mr. Karn is a financial consultant and former managing partner in financial and economic consulting with Arthur Andersen LLP in St. Louis. Before retiring from Arthur Andersen in 1998, Mr. Karn served in a variety of accounting, audit and financial roles over a 33-year career, including Managing Partner in charge of the global coal mining practice from 1981 through 1998. He is a Certified Public Accountant and has served as a Panel Arbitrator with the American Arbitration Association. Mr. Karn is also a director of Natural Resource Partners L.P., a coal-oriented master limited partnership that is listed on the New York Stock Exchange, the Fiduciary/Claymore MLP Opportunity Fund, the Fiduciary/Claymore Dynamic Equity Fund and Kennedy Capital Management, Inc.

 

M. FRANCES KEETH, age 62, has been a director since March 2009. She was Executive Vice President of Royal Dutch Shell, plc, and Chief Executive Officer and President of Shell Chemicals Limited, a services company responsible for Royal Dutch Shell’s global petrochemical businesses, from January 2005 to December 2006. She served as Executive Vice President of Customer Fulfillment and Product Business Units for Shell Chemicals Limited from July 2001 to January 2005 and was President and Chief Executive Officer of Shell Chemical LP, a U.S. petrochemical member of the Royal Dutch/Shell Group, from July 2001 to July 2006. Mrs. Keeth also serves as a director of Verizon Communications Inc. and Arrow Electronics Inc.

 

HENRY E. LENTZ, age 64, has been a director since February 1998. Mr. Lentz was a Managing Director of Barclays Capital, an investment banking firm and successor to Lehman Brothers, from September 2008 to March 2009. In March 2009, he accepted a position as Managing Director of Lazard Frères & Co, an investment banking firm, commencing in June 2009. From January 2004 to September 2008 he was employed as an Advisory Director by Lehman Brothers. He joined Lehman Brothers in 1971 and became a Managing Director in 1976. He left the firm in 1988 to become Vice Chairman of Wasserstein Perella Group, Inc., an investment banking firm. In 1993, he returned to Lehman Brothers as a Managing Director and served as head of the firm’s worldwide energy practice. In 1996, he joined Lehman Brothers’ Merchant Banking Group as a Principal and in January 2003 became a consultant to the Merchant Banking Group. Mr. Lentz is also the non-executive Chairman of Rowan Companies, Inc. and a director of CARBO Ceramics, Inc.

 

WILLIAM A. COLEY, age 65, has been a director since March 2004. Since March 2005, Mr. Coley has served as Chief Executive Officer and Director of British Energy Group plc, the U.K.’s largest electricity producer. He was previously a non-executive director of British Energy. Mr. Coley served as President of Duke Power, the U.S.-based global energy company, from 1997 until his retirement in February 2003. During his 37-year career at Duke Power, Mr. Coley held various officer level positions in the engineering, operations and senior management areas, including Vice President, Operations (1984-1986), Vice President, Central Division (1986-1988), Senior Vice President, Power Delivery (1988-1990), Senior Vice President, Customer Operations (1990-1991), Executive Vice President, Customer Group (1991-1994) and President, Associated Enterprises Group (1994-1997). Mr. Coley was elected to the board of Duke Power in 1990 and was named President following Duke Power’s acquisition of PanEnergy in 1997. Mr. Coley earned his B.S. in electrical engineering from Georgia Institute of Technology and is a registered professional engineer. He is also a director of E. R. Jahna Enterprises.

WILLIAM C. RUSNACK, age 64, has been a director since January 2002. Mr. Rusnack is the former President and Chief Executive Officer of Premcor Inc., one of the largest independent oil refiners in the United States prior to its acquisition by Valero Energy Corporation in 2005. He served as President, Chief Executive Officer and Director of Premcor from 1998 to February 2002. Prior to joining Premcor, Mr. Rusnack was President of ARCO Products Company, the refining and marketing division of Atlantic Richfield Company. During a 31-year career at ARCO, he was also President of ARCO Transportation Company and Vice President of Corporate Planning. He is also a director of Sempra Energy and Flowserve Corporation.

 

JOHN F. TURNER, age 67, has been a director since July 2005. Mr. Turner served as Assistant Secretary of State for the Bureau of Oceans and International Environmental and Scientific Affairs from November 2001 to July 2005. Mr. Turner was previously President and Chief Executive Officer of The Conservation Fund, a national nonprofit organization dedicated to public-private partnerships to protect land and water resources. He was director of the U.S. Fish and Wildlife Service from 1989 to 1993. Mr. Turner also served in the Wyoming state legislature for 19 years and is a past president of the Wyoming State Senate. He serves as a consultant to The Conservation Fund. Mr. Turner also serves as Chairman of the University of Wyoming, Ruckelshaus Institute of Environment and Natural Resources and as a Visiting Professor of Environment and Natural Resources at the University. He is also a director of International Paper Company, American Electric Power Company, Inc. and Ashland, Inc.

 

ALAN H. WASHKOWITZ, age 68, has been a director since May 1998. Until July 2005, Mr. Washkowitz was a Managing Director of Lehman Brothers and part of the firm’s Merchant Banking Group, responsible for oversight of Lehman Brothers Merchant Banking Partners. He joined Kuhn Loeb & Co. in 1968 and became a general partner of Lehman Brothers in 1978 when it acquired Kuhn Loeb & Co. Prior to joining the Merchant Banking Group, he headed Lehman Brothers’ Financial Restructuring Group. Mr. Washkowitz is also a director of L-3 Communications Corporation.

 

SANDRA VAN TREASE, age 48, has been a director since January 2003. Ms. Van Trease is Group President, BJC HealthCare, a position she has held since September 2004. BJC HealthCare is one of the nation’s largest nonprofit healthcare organizations, delivering services to residents in the greater St. Louis, southern Illinois and mid-Missouri regions. Prior to joining BJC HealthCare, Ms. Van Trease served as President and Chief Executive Officer of UNICARE, an operating affiliate of WellPoint Health Networks Inc., from 2002 to September 2004. Ms. Van Trease also served as President, Chief Financial Officer and Chief Operating Officer of RightCHOICE Managed Care, Inc. from 2000 to 2002, and as Executive Vice President, Chief Financial Officer and Chief Operating Officer from 1997 to 2000. Prior to joining RightCHOICE in 1994, she was a Senior Audit Manager with Price Waterhouse LLP. She is a Certified Public Accountant and Certified Management Accountant. Ms. Van Trease is also a director of Enterprise Financial Services Corporation.

 

As required by the rules of the New York Stock Exchange (“NYSE”), the Board of Directors evaluates the independence of its members at least annually, and at other appropriate times when a change in circumstances could potentially impact the independence or effectiveness of one or more directors (e.g., in connection with a change in employment status or other significant status changes). This process is administered by the Nominating & Corporate Governance Committee of the Board of Directors, which consists entirely of directors who are independent under applicable NYSE rules. After carefully

considering all relevant relationships with us, the Nominating & Corporate Governance Committee submits its recommendations regarding independence to the full Board, which then makes an affirmative determination with respect to each director.

 

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

 

After considering the standards for independence adopted by the NYSE and various other factors as described herein, the Board has determined that all directors other than Mr. Boyce are independent. None of the directors other than Mr. Boyce receives any compensation from us other than customary director and committee fees.

 

Mr. Rusnack, Dr. Touhill, Mr. Turner and Ms. Van Trease and/or their immediate family members serve as directors, officers or trustees of charitable organizations to which we made contributions in the usual course of our charitable contributions program. These contributions were not made at the request of any of these directors and our 2008 contribution to each organization was less than $60,000. After careful consideration, the Board determined that these contributions do not impair, or appear to impair, the independent judgment of these directors.

 

Mr. Turner currently serves as a member of the board of directors of American Electric Power, Inc. which is one of our customers. After careful consideration, the Board has determined that this relationship does not impair, or appear to impair, Mr. Turner’s independent judgment.

 

Prior to April 2008, Mr. James periodically provided consulting services to Lehman Brothers on matters unrelated to us. In addition, prior to September 2008, Mr. Lentz served as an Advisory Director to Lehman Brothers. From September 2008 to March 2009, he was a Managing Director of Barclays Capital, which does not currently provide any commercial or investment banking services to us.

 

Over the past several years, Lehman Brothers through one or more subsidiaries provided certain commercial and investment banking services to us. It was a participating lender under our senior credit facility, was a counterparty to an interest rate swap transaction with us and served as one of the appointed brokers for our 2008 share repurchase program. It also served as one of the lead underwriters on several of our securities offerings in 2006. Lehman Brothers did not provide any other commercial banking or investment banking services or any advisory services to us during the last three fiscal years. In each case these commercial and investment banking services were provided to us on the same general terms and conditions as provided to other large commercial customers. The fees related to these services were not significant to us or Lehman Brothers, and all such fees were reviewed and approved in advance by our independent Audit Committee. Directors who were affiliated with Lehman Brothers did not participate in any decisions or discussions related to these services, and they did not receive any benefit from related fees. Subsequent to the Lehman Brothers’ bankruptcy filing in September 2008, we terminated the interest rate swap and cancelled the brokerage arrangement for the share repurchase program. In addition, Lehman Brothers has stopped funding under its commitment under our senior credit facility. After careful consideration, the Board has determined that the relationships with Lehman Brothers did not impair, or appear to impair, the independent judgment of Mr. Lentz or Mr. James.

 

The Board of Directors met eight times in 2008. During that period, each incumbent director attended 75% or more of the aggregate number of meetings of the Board and the committees on which he or she served, and average attendance was 98%. Pursuant to our Corporate Governance Guidelines, the non-management directors meet in executive session at least quarterly. The chair of each executive session rotates among the chairs of the Audit Committee, Compensation Committee and Nominating & Corporate Governance Committee. During 2008, our non-management directors met in executive session seven times.

 

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

 

Compensation Committee

 

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

 

The Compensation Committee met eight times during 2008. Some of the primary responsibilities of the Compensation Committee include the following:

 

 

Executive Committee

 

The members of the Executive Committee are Gregory H. Boyce (Chair), William A. Coley, Henry E. Lentz and William C. Rusnack. The Executive Committee met three times during 2008.

 

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

 

 

Nominating & Corporate Governance Committee

 

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

 

The Nominating & Corporate Governance Committee met six times during 2008. Some of the primary responsibilities of the Nominating & Corporate Governance Committee include the following:

 

 

Audit Committee

 

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

 

The Audit Committee met nine times during 2008. The Audit Committee’s primary purpose is to provide assistance to the Board in fulfilling its oversight responsibility with respect to:

 

 

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

 

 

The Audit Committee has reviewed and discussed the Company’s audited financial statements and management’s report on internal control over financial reporting as of and for the fiscal year ended December 31, 2008 with management and Ernst & Young LLP, the Company’s independent registered public accounting firm. Management is responsible for the Company’s financial statements and internal control over financial reporting, while Ernst & Young is responsible for conducting its audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) and expressing opinions on the Company’s financial statements in accordance with U.S. generally accepted accounting principles and the Company’s internal control over financial reporting.

 

The Audit Committee reviewed with Ernst & Young the overall scope and plans for their audit of the Company’s financial statements and internal control over financial reporting. The Audit Committee also discussed with Ernst & Young matters relating to the quality and acceptability of the Company’s accounting principles, as applied in its financial reporting processes, as required by Statement of Auditing Standards No. 61 as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. In addition, the Audit Committee has received the written disclosures and letter from Ernst & Young required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence, and has discussed with Ernst & Young its independence from management and the Company. As part of its review, the Audit Committee reviewed fees paid to Ernst & Young and considered whether Ernst & Young’s performance of non-audit services for the Company was compatible with the auditor’s independence.

 

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for filing with the Securities and Exchange Commission.

 

MEMBERS OF THE AUDIT COMMITTEE:

 

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

 

Ernst & Young LLP served as our independent registered public accounting firm for the fiscal years ended December 31, 2008 and 2007.

 

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

 

 

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

 

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

 

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

During the fiscal year ended December 31, 2008, all of the services described under the headings “Audit-Related Fees,” “Tax Fees” and “All Other Fees” were approved by the Audit Committee pursuant to the procedures described above.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Shareholders also have an opportunity to communicate with the Board at our Annual Meeting of Shareholders. Pursuant to Board policy, each director is expected to attend the Annual Meeting in person, subject to occasional excused absences due to illness or unavoidable conflicts. Each of our directors with the exception of Mr. Rusnack attended the last Annual Meeting of Shareholders in May 2008.

 

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

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

 

 

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

 

Shareholders may submit potential director candidates at any time pursuant to these procedures. The Committee will consider such candidates if a vacancy arises or if the Board decides to expand its membership, and at such other times as the Committee deems necessary or appropriate. Separate procedures apply if a shareholder wishes to nominate a director candidate at the 2010 Annual Meeting. Those procedures are described on page 60 under the heading “Information About Shareholder Proposals.”

 

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

 

 

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

 

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

 

The Committee believes this process has consistently produced highly qualified, independent Board members to date. However, the Committee may choose, from time to time, to use additional resources (including independent third-party search firms) after determining that such resources could enhance a particular director search. Mrs. Keeth, who was appointed to the Board in March 2009, was brought to the Committee’s attention by an independent third-party search firm.

 

The following table sets forth information as of March 1, 2009 with respect to persons or entities who are known to beneficially own more than 5% of our outstanding Common Stock, each director, each executive officer named in the Summary Compensation Table, below, and all directors and executive officers as a group.

 

 

 

 

 

Our executive officers and directors and persons beneficially holding more than ten percent of our Common Stock are required under the Securities Exchange Act of 1934 to file reports of ownership and changes in ownership of our Common Stock with the SEC and the NYSE. We file these reports of ownership and changes in ownership on behalf of our executive officers and directors.

 

To the best of our knowledge, based solely on our review of the copies of such reports furnished to us during the fiscal year ended December 31, 2008, 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, due to internal administrative errors, Ian Craig was late in filing a Form 4 to report the forfeiture of shares of performance-based restricted stock, Mr. Ford was late in filing a Form 4 to report the withholding of shares to pay withholding taxes upon vesting of a restricted stock award, and Roger Walcott, Kemal Williamson and Messrs. Boyce, Craig and Navarre and Ms. Fiehler were each one day late in filing a Form 4 to report the vesting of a performance unit award and the withholding of shares to pay withholding taxes on that award. In addition, due to an administrative error by his investment advisor, Mr. Ford was one day late in filing a Form 4 to report an open market purchase of common stock. The required reports were promptly filed when the errors were discovered.

 

Executive Summary

 

On the following pages, we discuss how our Chairman and Chief Executive Officer, Gregory H. Boyce, and our other executive officers listed on page 21 (“Named Executive Officers” or “NEOs”) were compensated for 2008 and how this compensation fits within our pay-for-performance philosophy. We also describe certain changes to our executive compensation program for 2009.

 

Focus of Our Executive Compensation Program

 

We design our compensation program with a focus on financial, operational and safety performance, while also recognizing the individual and team performance of each NEO in achieving our business objectives. A substantial majority of each NEO’s annual compensation is performance-based, tied to metrics which align with shareholder value. For 2008, the performance-based portion of NEO compensation consisted of performance units, stock options and annual cash incentive opportunity and was contingent on meeting certain goals for total shareholder return (relative to industry peers and to the Standard & Poor’s 500 Index), return on invested capital, EBITDA (as defined on page 26), operating profit, earnings per share (“EPS”), and safety. For 2008, our NEOs received payouts for performance units slightly below target, consistent with our three-year performance results, and received payouts for annual cash incentives above target, driven by record 2008 performance achievements.

 

The compensation reported in this Proxy Statement primarily reflects performance during two periods — calendar year 2008 and the three-year period ended December 31, 2008. Under our leadership team, we had an outstanding performance year in 2008, achieving record sales, EBITDA and safety performance. We focused on operational performance and undertook targeted production and safety initiatives as we advanced our sustainability efforts. In 2008, we returned nearly $265 million to

shareholders in the form of share repurchases and dividends. Over the three-year period ended in 2008, we performed well on cumulative measures of Return on Invested Capital and total shareholder return, achieving a goal slightly below target level. These accomplishments and other criteria were considered by the Compensation Committee when determining the compensation of our NEOs for 2008.

 

Changes for 2009

 

During 2008, the Compensation Committee, in consultation with its independent compensation consultant, undertook a full review of our compensation program for NEOs and other company officers and concluded that the current compensation opportunities are competitive with the peer groups and the performance-based program is effective in driving results and delivering returns to shareholders. The Committee also reviewed the performance metrics used in our executive compensation program to ensure that they increase shareholder value and decided to measure performance for purposes of our 2009 performance unit awards entirely on relative total shareholder return for the 2009-2011 performance period, thereby eliminating the Return on Capital metric. The Committee concluded, based on the uncertain economic environment and in consultation with its independent compensation consultant, that this is the most appropriate way to align long-term equity award payouts with increases in shareholder value.

 

As discussed on page 24, the named executive officers have volunteered, with the agreement of the Compensation Committee, to forgo 2009 annual base salary merit increases.

 

Executive Compensation Overview

 

Our Named Executive Officers

 

 

Our Compensation Philosophy

 

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

 

 

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

 

 

 

 

 

Role of the Compensation Committee

 

The Compensation Committee is comprised entirely of independent directors and has overall responsibility for evaluating and approving our executive compensation plans, policies and programs, and for monitoring the performance of our executives and the compensation awarded to our executives excluding compensation for Mr. Boyce. In addition, the Committee oversees our annual and long-term incentive plans and programs and periodically assesses our director compensation program. The Compensation group in our Human Resources Department supports the Committee’s efforts.

 

A Special Committee, comprised of all the independent members of the Board of Directors, after considering the recommendations of the Committee and its independent compensation consultant, has responsibility for determining the type (e.g., base salary, annual incentive and long-term incentive) and level of compensation awarded to Mr. Boyce. The Special Committee ensures that the type and level of compensation is consistent with our compensation philosophy and that Mr. Boyce’s total compensation is competitive with the compensation of chief executive officers at publicly-traded companies of similar size and complexity.

 

As described below, in assessing the competitiveness of compensation opportunities for our named executive officers, the Committee and Special Committee receive advice from the Committee’s independent compensation consultant and review appropriate salary surveys, industry benchmarking data and proxy information.

 

Role of the Compensation Consultant

 

The Compensation Committee has the authority under its charter to directly engage the services of outside advisors, experts and others to assist it. Pursuant to this authority, the Committee engaged Frederic W. Cook & Co, Inc. (“F.W. Cook”) for independent guidance on executive compensation issues in 2008. F.W. Cook does not provide any other services to us.

 

In connection with its engagement, F.W. Cook provided the Committee with independent advice concerning the types and levels of compensation to be paid to Mr. Boyce and the other senior executives for 2008. F.W. Cook assisted the Committee by providing market compensation data (e.g., industry compensation surveys and benchmarking data) on base pay, as well as annual and long-term incentives.

In addition, F.W. Cook advised the Committee on plan design for each element of executive compensation, including helping to identify:

 

 

The Committee and the Special Committee sought and used F.W. Cook’s advice in determining annual incentive compensation with respect to performance in 2008. In addition, the Committee considered F.W. Cook’s advice in establishing the types and levels of compensation to be paid to the executives for 2009, and the Special Committee considered F.W. Cook’s advice in establishing the types and levels of compensation to be paid to Mr. Boyce for 2009. The Committee and the Special Committee retain authority for compensation decisions, which may deviate from the consultant’s recommendation.

 

Review of External Data

 

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

 

Talent for senior-level management positions and key roles in the organization can be acquired across a broad spectrum of companies. As such, we rely on a group of publicly-held companies of similar size and/or complexity to assess competitiveness. The Industrial comparator group is comprised of the following companies:

 

 

 

We also review the compensation practices and performance of eight publicly-held coal mining companies as a secondary comparison. Because these companies are much smaller than us, we rely more on the Industrial comparator group for individual executive compensation benchmarking. The

composition of this group of companies did not change from 2007 to 2008. The Coal comparator group is comprised of the following companies:

 

 

In addition, we review international companies such as Anglo American, plc, Rio Tinto, plc, and BHP Billiton Limited when relevant compensation data are available.

 

Overall, F.W. Cook confirmed that our executive compensation program, as structured, is competitive with our peers. Based upon the review of the compensation plans discussed below, peer group compensation levels and assessments of individual and corporate performance, the Committee, with the assistance of F.W. Cook, determined that the value and design of our executive compensation program is appropriate.

 

2008 Executive Compensation Components

 

For the year ended December 31, 2008, the principal components of compensation for the named executive officers were:

 

 

Annual Base Salary

 

In general, base salary for each employee, including the named executive officers, is established based on the individual’s job responsibilities, performance and experience, our overall budget for merit increases and the competitive environment. In 2008, we provided a base pay increase to our executives but, in accordance with our philosophy of providing a strong link between pay and performance, the exact amount of the increase (if any) varied among executives based on their performance levels. For 2009, the named executive officers have volunteered, with the agreement of the Compensation Committee, to forgo 2009 annual base salary merit increases. Any market-based compensation adjustments will be made if warranted.

 

The Committee reviewed the 2008 base salaries of Mr. Boyce and the executives who report directly to Mr. Boyce to ensure competitiveness in the marketplace. Consistent with our philosophy, the Committee (and, in the case of Mr. Boyce, the Special Committee), approved base salary adjustments based on market information, individual performance and any change in role or promotion. On an ongoing basis, the Committee will review the base salaries of our executive officers to ensure they take into account performance, experience and retention value and that salary levels are competitive with companies of similar size and complexity.

 

Annual Cash Incentive Compensation

 

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

Under the plan, participants are assigned threshold, target and maximum earnings opportunities. The target incentive opportunity is established through an analysis of compensation for comparable positions in industries of similar size and complexity and is intended to provide a competitive level of compensation when participants achieve their performance objectives. If actual performance does not meet the threshold level, no incentive is earned under the plan for that particular performance goal. At threshold performance levels, the incentive that can be earned generally equals 50% of the target incentive, and at maximum, the incentive that can be earned generally equals 200% of the target incentive.

 

Participants generally earn target incentive payouts for achieving budgeted financial and safety goals and meeting individual performance goals. Our philosophy is to set these budgeted goals at high levels of performance. Maximum incentive payments generally are awarded when budgeted financial goals and individual performance goals are significantly exceeded. Goals for the named executive officers, excluding Mr. Boyce, are reviewed and approved by the Compensation Committee for each calendar year. The Special Committee reviews and approves the goals and payouts for Mr. Boyce for each calendar year.

 

Awards for the named executive officers are based on achievement of corporate and individual goals. Achievement of corporate goals is determined by comparing our actual performance against objective goals, and achievement of individual goals is determined by evaluating a combination of achievement of both objective and discretionary performance measures. Goals for the named executive officers, excluding Mr. Boyce, are reviewed and approved by the Committee for each calendar year. The Special Committee reviews and approves the goals and payouts for Mr. Boyce for each calendar year.

 

The Committee recommends, for approval by the Special Committee of the Board, Mr. Boyce’s annual incentive award. Mr. Boyce recommends, for approval by the Committee, annual incentive awards for the other named executive officers.

 

2008 Annual Incentive Performance Measures

 

Based on input from management and information and advice from F.W. Cook, the Special Committee and the Compensation Committee established certain performance measures and weightings for determining the 2008 annual incentive opportunity for Mr. Boyce and each of the other named executive officers.

 

 

Individual Goals

 

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

 

 

The Special Committee and the Committee periodically review market conditions to ensure the appropriateness of established financial performance measures and individual goals for the annual incentive plan for Mr. Boyce and the other named executive officers, respectively.

 

Annual Cash Incentive Payouts for 2008 Performance

 

The table below summarizes the actual results for these performance goals for 2008.

 

 

For their 2008 performance, the named executive officers earned payouts under our annual incentive plan, as reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 35. Other eligible executives received payouts under the same annual incentive plan. Annual incentive payouts for 2008 were based on our achievement of quantitative goals and individual goals shown in the table above.

 

The Special Committee evaluated Mr. Boyce’s performance in relation to these goals, and approved the level of his 2008 payout under our annual incentive plan accordingly. The Compensation Committee, with Mr. Boyce, evaluated the performance of each of the other named executive officers in relation to these goals, and approved the level of their 2008 payouts under our annual incentive plan accordingly.

 

The following table shows the target annual incentive payout and the applicable payout range (each shown as a percentage of base salary) for each of the named executive officers, his or her actual award under our annual incentive plan received for 2008, as a percentage of salary earned in 2008. The target payout and payout range for each executive are based on his or her level of participation in the plan and competitive market practices.

 

2008 Annual Incentive Awards — Named Executive Officers

 

 

 

Long-Term Equity Incentive Compensation

 

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

 

The named executive officers receive long-term incentive compensation through awards of stock options and performance units. In approving the long-term incentive target awards, the Special Committee and the Compensation Committee considered the advice of F.W. Cook, as well as available benchmarking data and retention considerations. These awards are structured to provide competitive long-term equity incentive opportunities where earned values are based on our actual performance.

The targeted value of these awards, shown in the table below as a percentage of each executive’s base salary, is split evenly between stock options and performance units.

 

The Committee approves long-term equity incentive opportunities for each of the other named executive officers through awards of stock options and performance units. The targeted value of these awards, shown in the table below, is split evenly between stock options and performance units. The actual number of stock options and performance units awarded is determined as discussed below. When evaluating awards to be granted, the Committee and the Special Committee considered competitive market data and the perceived retention value of the awards.

 

2008 Long-Term Incentive Awards — Named Executive Officers

 

 

Stock Options

 

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

 

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

 

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

Performance Units

 

Similar to the stock option program, our performance unit program is a long-term plan designed to create a direct link between executive compensation and increased shareholder value, and maintain competitive levels of total compensation. In addition, our 2008 performance unit program is designed in part to reward executives for the achievement of strong financial returns on investment and total shareholder return. Certain key executives are eligible to receive long-term incentive awards in the form of performance units.

 

Performance units granted in 2008 will be payable, if earned, in shares of our Common Stock. The percentage of the performance units earned is based on our total shareholder return (“TSR”) over a period beginning January 2, 2008 and ending December 31, 2010 relative to an industry comparator group (the Industry Peer Group) and the S&P 500 Index (together weighted as 50% of the total award) and Return on Capital (weighted as 50% of the total award) over the same performance period.

 

TSR measures cumulative stock price appreciation plus dividends. The Industry Peer group is generally perceived to face market conditions and investor reactions similar to us. For purposes of the 2008 award the Industry Peer Group is identical to the Coal comparator group listed on page 24. At the time of the 2008 performance unit award, we were included in the S&P 500 Index. Our TSR performance compared to the Industry Peer Group is weighted at 30% of the total award, while our TSR performance compared to the S&P 500 Index is weighted at 20% of the total award.

 

For purposes of the performance units granted in 2008, Return on Capital is defined as:

 

 

Performance unit payout formulas are as follows:

 

 

 

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

Our TSR over the three-year performance period is based on the average closing market price per share of our Common Stock during the first four weeks of trading in the performance cycle compared to the average closing market price per share of our Common Stock during the last four weeks of trading in the performance cycle. Units vest monthly and are payable in Common Stock at the conclusion of the measurement period, subject to the achievement of performance goals. Upon a change of control, a recapitalization event or the holder’s retirement or termination without cause, the holder would receive payment from us in proportion to the number of vested performance units based upon performance as of the date the event occurs. Upon the holder’s death or disability, the holder would receive payment from us for 100% of performance units outstanding as of the date the event occurs. If the holder terminates employment without good reason (as defined in his or her employment agreement), all performance units are forfeited.

 

Share Ownership Guidelines

 

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

 

Under our share ownership guidelines, Mr. Boyce is encouraged to acquire and retain Common Stock having a value equal to at least five times his base salary. Each other named executive officer is encouraged to acquire and retain Common Stock having a value equal to at least three times his or her base salary. Executives are encouraged to meet these ownership levels within five years after assuming their executive positions.

 

The following table summarizes the ownership of Common Stock as of June 30, 2008, December 31, 2008 and January 30, 2009 by our named executive officers.

 

 

 

Stock ownership relative to guidelines varies from time to time due to changes in our stock price. Our stock price (and therefore our stock ownership relative to guidelines) has been significantly affected by the current global economic downturn and disruptions in the financial markets.

 

Broad-based Benefits

 

Our named executive officers are eligible to receive benefits generally available to our employees. These benefits include:

 

 

 

Perquisites

 

We provide a limited number of perquisites to senior management that are related to business purposes. We provided the following perquisites to senior management in 2008.

 

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

 

 

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

 

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

 

Deductibility of Compensation Expenses

 

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

Employment Agreements

 

The Compensation Committee approved the terms of all senior executive employment agreements. The Special Committee approved the employment agreement for Mr. Boyce. The terms of those agreements, including the provision of post-termination benefits, were structured to attract and retain persons believed to be key to our success, as well as to be competitive with compensation practices for executives in similar positions at companies of similar size and complexity. In assessing whether the terms of the employment agreements were competitive, the Committee received advice from F.W. Cook and reviewed appropriate surveys and industry benchmarking data. During 2008, all senior executive employment agreements were amended and restated as necessary to comply with Internal Revenue Code Section 409A.

 

Mr. Boyce’s employment agreement is similar to the employment agreements of the other named executive officers. However, some amounts payable to him under his agreement are intended to compensate him for amounts he forfeited in leaving his former employer. Mr. Ford’s employment agreement also includes amounts payable that are intended to compensate him for amounts he forfeited in leaving his former employer. These additional amounts payable to these two executives are not applicable to the other named executive officers.

 

Mr. Boyce’s employment agreement provides for a three-year term that extends day-to-day so that there is at all times a remaining term of three years. Following a termination other than for cause or resignation for good reason, Mr. Boyce would be entitled to the following cash severance benefits equal to the sum of: (1) three times base salary (2) three times the average of the actual annual incentive paid in the three prior years, and (3) three times six percent of base salary (to compensate for Company contributions he otherwise might have received under our retirement plan). One-half of these benefits would be paid in a lump sum payment on the earlier to occur of his death or the first business day immediately following the six-month anniversary of his termination, and the remaining one-half of these benefits would be paid in six substantially equal monthly payments beginning on the first day of the month next following the initial lump sum payment. In addition, he would be entitled to a one-time prorated annual incentive for the year of termination (based on our actual performance multiplied by a fraction, the numerator of which is the number of business days he was employed during the year of termination, and the denominator of which is the total number of business days during that year), payable when annual incentives, if any, are paid to other executives. He would also be entitled to receive continued life insurance, medical and other benefits coverage for three years. In addition, following a termination other than for cause or resignation for good reason (as defined in the employment agreement), he would be paid a lump sum of $800,000. If Mr. Boyce were to terminate his employment for any reason on or after age 55 or die or became disabled, the lump sum of $800,000 would also be paid. Upon termination other than for cause, resignation for good reason, death, disability, or termination for any reason after reaching age 55, he would be entitled to deferred compensation payable in cash in one of the following amounts: if termination occurred (a) prior to age 55, the greater of (1) the cash equivalent of the fair market value of 86,602 shares of Common Stock on October 1, 2003 plus interest or (2) an amount equal to the fair market value of 86,602 shares of Common Stock on the date of termination; (b) on or after age 55 but prior to age 62, the greater of (1) the amount referenced in (a) on the date of termination, (2) $1.6 million, reduced by 0.333% for each month that termination occurs before reaching age 62, or (3) the fair market value of 86,602 shares of Common Stock on the date of termination; (c) on or after age 62, the greater of the amount referenced in (b) on the date of termination or $1.6 million. If he were to terminate for any other reason prior to reaching age 55, the deferred compensation amount would be forfeited.

 

The employment agreement for Mr. Crews has an initial three-year term which automatically renews for a one-year period at the end of the initial term and, if applicable, any renewal period, unless

written notice is given by either party at least 90 days before the end of the applicable period. All other named executive officers’ employment agreements have two-year terms which extend day-to-day so that there is at all times a remaining term of two years, except Mr. Schoch, whose agreement has a one-year term which extends day-to-day so that there is at all times a remaining term of one year.

 

Following termination other than for cause or resignation for good reason (as defined in the employment agreement), other named executive officers, except for Mr. Schoch, are entitled to the following cash severance benefits equal to the sum of: (1) two times base salary, (2) two times the average of the actual annual incentive awards paid to the executive for the three prior years, and (3) two times six percent of base salary (to compensate for Company contributions the executive otherwise might have received under the Company’s retirement plan). Mr. Schoch is entitled to the following cash severance benefits: (1) one times base salary, (2) one times the annual average of the actual incentive paid to him for the three prior years, and (3) one times six percent of base salary (to compensate for Company contributions he otherwise might have received under the Company’s retirement plan). One-half of these benefits would be paid in a lump sum payment on the earlier to occur of the executive’s death or the first business day immediately following the six-month anniversary of his termination, and the remaining one-half of these benefits would be paid in six substantially equal monthly payments beginning on the first day of the month next following the initial lump sum payment. In addition, they would be entitled to (1) a one-time prorated annual incentive for the year of termination (based on our actual performance multiplied by a fraction, the numerator of which is the number of business days the executive was employed during the year of termination, and the denominator of which is the total number of business days during that year), payable when annual incentives, if any, are paid to our other executives, and (2) qualified and nonqualified retirement, pension (if applicable), life insurance, medical and other benefits for the two-year period following termination (a one-year period following termination in the case of Mr. Schoch).

 

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

 

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

 

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

 

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, 2008 for filing with the Securities and Exchange Commission.

 

MEMBERS OF THE COMPENSATION COMMITTEE:

 

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

 

The following table summarizes the total compensation paid to or accrued by our Chairman and Chief Executive Officer, the two executives who served as our Chief Financial Officer during 2008 and our three other most highly compensated executive officers for their service to us during the fiscal years ended December 31, 2008, 2007 and 2006. Long-term equity incentive awards to these executives include both performance units (reflected in the “Stock Award” column below) and stock options (reflected in the “Option Awards” column below). The value reflected in each of these columns is the annual compensation expense associated with equity awards for each executive, recognized for financial statement reporting purposes in accordance with Statement of Financial Accounting Standard No. 123 (Revised) (FAS 123R).

 

 

 

 

All Other Compensation

 

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

 

 

 

The following table sets forth information concerning grants of plan-based awards during the year ended December 31, 2008 to the named executive officers.

 

																														All Other				All Other
																														Stock				Option
																														Awards:				Awards:								Grant Date
						Estimated Future Payouts																								Number of				Number of				Exercise or				Fair Value of
						Under Non-Equity Incentive												Estimated Future Payouts Under Equity Incentive												Shares of				Securities				Base Price				Stock and
						Plan Awards												Plan Awards(1)												Stock or				Underlying				of Option				Option
						Threshold				Target				Maximum				Threshold				Target				Maximum				Units				Options				Awards				Awards
Name		Grant Date				($)				($)				($)				(#)				(#)				(#)				(#)				(#)(2)				($/Sh)(2)				($)(3)
Gregory H. Boyce							591,250				1,182,500				2,365,000
			1/2/2008																16,826				33,652				67,304																2,368,091
			1/2/2008																																77,761				62.72				1,843,993
Richard A. Navarre							328,500				657,000				1,314,000
			1/2/2008																9,099				18,197				36,394																1,280,523
			1/2/2008																																42,049				62.72				997,133
Eric Ford							270,000				540,000				1,080,000
			1/2/2008																7,365				14,730				29,460																1,036,550
			1/2/2008																																34,037				62.72				807,140
Sharon D. Fiehler							180,000				360,000				720,000
			1/2/2008																3,943				7,886				15,772																554,938
			1/2/2008																																18,223				62.72				432,133
Alexander C. Schoch							152,000				304,000				608,000
			1/2/2008																2,495				4,990				9,980																351,146
			1/2/2008																																11,531				62.72				273,442
Michael C. Crews							160,000				320,000				640,000
			1/2/2008																												1,406												88,184
			7/14/2008																3,626				7,252				14,504																621,678
			7/14/2008																																12,579				79.28				400,780

 

 

The following table sets forth detail about the outstanding equity awards for each of the named executive officers as of December 31, 2008. We caution that the amount ultimately realized from the outstanding equity awards will likely vary based on a number of factors, including our actual operating performance, stock price fluctuations and the timing of exercises and sales. In the case of equity incentive awards, the amount ultimately realized will also likely vary with our stock performance relative to the

Coal comparator group, the S&P MidCap 400 Index or the S&P 500 Index, and our Return on Invested Capital or Return on Capital, based on the year of grant.

 

A portion of the outstanding equity awards for Messrs. Navarre and Crews and Ms. Fiehler is attributable to stock options granted to them prior to our May 2001 initial public offering (“IPO”). These options were granted in connection with a leveraged buyout transaction or “LBO” involving Peabody Energy’s acquisition of Peabody Holding Company. The size and terms of the pre-IPO stock options or “LBO grants” were determined according to standard practices at that time for private companies. The LBO grants, a portion of which remain unexercised, were designed to be competitive in the industry marketplace for top executives, to compensate the management group on a basis commensurate with the risks associated with a highly leveraged transaction, to reward performance and to align their interests with our owners. A portion of the LBO grants vested in November 2007 and expired in May 2008. The remaining outstanding LBO grants vest in either July 2009 or July 2010 and expire in January 2010 or January 2011.

 

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