UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

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Exchange Act of 1934 (Amendment No.  )

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March 21, 2008

 

Dear fellow stockholder:

 

You are cordially invited to attend the annual meeting of stockholders of Arch Coal, Inc. on Thursday, April 24, 2008. We will hold the meeting at 10:00 a.m., Central Time, in the lower level auditorium at our headquarters at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141. You can find maps with directions to our headquarters near the back of the proxy statement that accompanies this letter.

 

In connection with the annual meeting, we have enclosed a notice of the meeting, a proxy statement and a proxy card. We have also enclosed a copy of our annual report for 2007 which contains detailed information about us and our operating and financial performance.

 

I hope that you will be able to attend the meeting, but I know that not every stockholder will be able to do so. Whether or not you plan to attend, I encourage you to vote your shares. You may vote by telephone or on the Internet, or complete, sign and return the enclosed proxy card in the postage-prepaid envelope, also enclosed. The prompt execution of your proxy will be greatly appreciated.

 

Sincerely,

 

Steven F. Leer

Chairman of the Board and Chief Executive Officer

 

1 CityPlace Drive, Suite 300     St. Louis, Missouri 63141     t: (314) 994-2700

 

One CityPlace Drive, Suite 300

St. Louis, Missouri 63141

 

March 21, 2008

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

The annual meeting of stockholders of Arch Coal, Inc. will be held in the lower level auditorium at our headquarters at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141 on Thursday, April 24, 2008 at 10:00 a.m., Central Time. At the annual meeting, stockholders will consider the election of four nominees for director, ratification of the appointment of our independent public accounting firm and any other business properly introduced at the meeting.

 

By order of the Board of Directors

 

Robert G. Jones

Vice President-Law, General Counsel and Secretary

PROXY STATEMENT

 

TABLE OF CONTENTS

 

 

 

Our board of directors is soliciting proxies for the 2008 annual meeting of stockholders. On or about March 21, 2008, we expect to begin mailing these proxy materials to all stockholders at the close of business on February 25, 2008, the record date. On the record date, there were 143,954,798 shares of our common stock outstanding.

 

 

The annual meeting will take place on April 24, 2008 in the lower level auditorium at our headquarters, located at CityPlace One, One CityPlace Drive, St. Louis, Missouri 63141. The meeting will begin at 10:00 a.m., Central Time. You can find maps with directions to our headquarters on page 46 of this proxy statement.

 

 

At the annual meeting, stockholders will consider the election of four nominees for director — James R. Boyd, John W. Eaves, Douglas H. Hunt and A. Michael Perry — and ratification of the appointment of Ernst & Young LLP as our independent public accounting firm. The stockholders will also consider any other matter if properly introduced at the annual meeting.

 

 

You have one vote for each share of our common stock that you owned at the close of business on the record date. These shares include:

 

 

 

If your shares are registered directly in your name with our transfer agent, you are considered the “stockholder of record” with respect to those shares. We have sent these proxy materials directly to you.

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of the shares held in street name. Your broker, bank or other nominee who is considered the stockholder of record with respect to those shares has forwarded these proxy materials to you. As the beneficial owner, you have the right to direct your broker, bank or other nominee

on how to vote your shares by using the voting instruction card included in the mailing or by following their instructions for voting by telephone or the Internet.

 

 

You can vote by proxy or in person.

 

 

If you are a stockholder of record, you may vote by telephone, Internet, or mail. Our telephone and Internet voting procedures are designed to authenticate stockholders by using individual control numbers that can be found on the proxy card.

 

 

You can vote by calling the toll-free telephone number on your proxy card. Telephone voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on the day before the meeting. If you vote by telephone, you do not need to return your proxy card.

 

 

You can vote via the Internet. The web site for Internet voting is on your proxy card. Internet voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on the day before the meeting. If you vote via the Internet, you do not need to return your proxy card.

 

 

If you choose to vote by mail, simply mark your proxy card, date and sign it, and return it in the postage-paid envelope provided.

 

If you submit your proxy using any of these three methods, Steven F. Leer or Robert G. Jones will vote your shares in the manner you indicate. You may specify whether your shares should be voted for all, some, or none of the nominees for director and for or against any other proposals properly introduced at the annual meeting. If you vote by telephone or Internet and choose to vote with the recommendation of our board of directors, or if you vote by mail, sign your proxy card, and do not indicate specific choices, your shares will be voted “FOR” the election of all four nominees for director and “FOR” ratification of the appointment of our independent public accounting firm.

 

If any other matter is presented, your proxy will authorize Steven F. Leer or Robert G. Jones to vote in accordance with their best judgment. At the time this proxy statement was printed, we knew of no matters to be considered at the annual meeting other than those referenced in this proxy statement.

 

If you wish to give a proxy to someone other than Steven F. Leer or Robert G. Jones, you may strike out their names on the proxy card and write in the name of any other person, sign the proxy, and deliver it to the person whose name has been substituted.

 

You may revoke a proxy in any one of the following three ways:

 

 

 

If you are a stockholder of record, you may attend the annual meeting and cast your vote in person.

 

 

You can submit voting instructions to your broker, bank or other nominee. In most instances, you will be able to do this by telephone, over the Internet, or by mail. Please refer to the voting instruction card included with these materials by your broker, bank or other nominee.

 

 

If you participate in our dividend reinvestment plan or our direct stock purchase plan, your proxy will also serve as an instruction to vote the whole shares you hold under those plans in the manner indicated on the proxy. If your proxy is not received, the shares you hold in those plans will not be voted.

 

 

If you are both a registered stockholder and a participant in our employee thrift plan, you will receive a single proxy card that covers shares of our common stock credited to your plan account as well as shares of record registered in exactly the same name. Accordingly, your proxy card also serves as a voting instruction for the trustee of the plan. If your plan account is not carried in exactly the same name as your shares of record, you will receive separate proxy cards for individual and plan holdings. If you own shares through this plan and you do not return your proxy by April 14, 2008, the trustee will vote your shares in the same proportion as the shares that are voted by the other participants in the plan. The trustee will also vote unallocated shares of our common stock held in the plan in direct proportion to the voting of allocated shares in the plan for which voting instructions have been received unless doing so would be inconsistent with the trustee’s duties.

 

 

Yes. Voting tabulations are confidential except in extremely limited circumstances. Such limited circumstances include contested solicitation of proxies, when disclosure is required by law, to defend a claim against us or to assert a claim by us and when a stockholder’s written comments appear on a proxy or other voting material.

 

In order to have a valid stockholder vote, a quorum must exist at the annual meeting. For us, a quorum exists when stockholders holding a majority of the outstanding shares of our common stock are present or represented at a meeting. For these purposes, shares that are present or represented by proxy at the annual meeting will be counted toward a quorum, regardless of whether the holder of the shares or proxy fails to vote on a particular matter or whether a broker with discretionary voting authority fails to exercise such authority with respect to any particular matter.

 

 

 

If a broker indicates on its proxy that it does not have authority to vote certain shares held in “street name,” the shares not voted are referred to as “broker non-votes.” Broker non-votes occur when brokers do not have discretionary voting authority to vote certain shares held in “street name” on particular proposals under the rules of the New York Stock Exchange, and the “beneficial owner” of those shares has not instructed the broker how to vote on those proposals. If you are a beneficial owner, your broker, bank or other nominee is permitted to vote your shares on the election of directors and the ratification of the appointment of our independent public accounting firm, even if the holder does not receive voting instructions from you. Shares represented by proxies that are marked vote “withheld” with respect to the election of any nominee will not be considered in determining whether such nominee has received the affirmative vote of a plurality of the shares. Shares represented by proxies that are marked “abstain” will have the effect of a negative vote.

 

 

We intend to announce preliminary voting results at the annual meeting. We will publish the final results in our Quarterly Report on Form 10-Q for the first quarter of 2008, which we expect to file on or before May 10, 2008. You can obtain a copy of the Form 10-Q by logging on to our website at archcoal.com, by calling the Securities and Exchange Commission at 800-SEC-0330 for the location of the nearest public reference room, or through the EDGAR system at sec.gov. Information on our website does not constitute part of this proxy statement.

 

 

We are dedicated to being a market-driven global leader in the coal industry and to creating superior long-term stockholder value. It is our policy to conduct our business with integrity and an unrelenting passion for providing the best value to our customers. All of our corporate governance materials, including the corporate governance guidelines, our code of conduct and board committee charters, are published under “Corporate Governance” in the Investors section of our website at archcoal.com. These materials are also available in print to any stockholder upon request. The board of directors continually reviews these materials, Delaware law, the rules and listing standards of the New York Stock Exchange and SEC regulations, as well as best practices suggested by recognized governance authorities, and modifies the materials as warranted.

 

 

It is the board of directors’ objective to have an overwhelming majority of directors who are independent. We have adopted in our corporate governance guidelines the criteria established by the New York Stock Exchange for determining whether a director is independent. The board of directors has determined, in its judgment, that ten of the twelve members of the board of directors meet the New York Stock Exchange standards for independence. Other than Steven F. Leer and John W. Eaves, who are executive officers, each member of our board of directors satisfies the independence standards in the corporate governance guidelines. The independent members of the board of directors meet regularly without any members of management present. These sessions are normally held following or in conjunction with regular board meetings. Mr. James R. Boyd, chairman of the Nominating and Corporate Governance Committee and lead director, serves as the presiding director during executive sessions.

 

All members of our Audit, Nominating and Corporate Governance and Personnel and Compensation committees must be independent directors as defined by our corporate governance guidelines. Members of the Audit Committee must also satisfy a separate Securities and Exchange Commission independence requirement, which provides that they may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from us or any of our subsidiaries other than their directors’ compensation.

 

 

All of our employees, including our chief executive officer, our chief financial officer and each of the other executives named in this proxy statement, and directors must act ethically at all times and in accordance with the policies comprising our code of conduct, which is published under “Corporate Governance” in the Investors section of our website at archcoal.com and available in print to any stockholder upon request. We intend to post amendments to or waivers from (to the extent applicable to one of our directors or executive officers) the code on our website.

 

 

Our code of conduct reflects our policy that all of our employees, including the executives named in this proxy statement, and directors must avoid any activity that creates, or may create, a conflict of interest,

that might interfere with the proper performance of their duties or that might be hostile, adverse or competitive with our business. In addition, each of our directors and executive officers is encouraged to notify our board of directors when confronted with any situation that may be perceived as a conflict of interest, even if the person does not believe that the situation would violate our code of conduct or corporate governance guidelines. Our board of directors will then determine, after consultation with counsel, whether a conflict of interest exists. Directors who have a material personal interest in a particular issue may not vote on any matters with respect to that issue.

 

 

Our certificate of incorporation and bylaws provide for a board of directors that is divided into three classes as equal in size as possible. The classes have three-year terms, and the term of one class expires each year in rotation at that year’s annual meeting. The size of the board of directors can be changed by a two-thirds vote of its members and is currently set at 12 members. Vacancies on the board of directors may be filled by a majority of the remaining directors. A director elected to fill a vacancy, or a new directorship created by an increase in the size of the board of directors, serves for the remainder of the full term of the class of directors in which the vacancy or newly created directorship occurred. As a matter of policy, the board of directors will submit the nomination of a director elected to fill a vacancy to the vote of our stockholders at the next annual meeting.

 

 

The following is a list of our directors, their ages as of February 25, 2008, their occupation during the last five years and certain other biographical information:

 

 

 

The board of directors has the following five committees: Nominating and Corporate Governance, Finance, Personnel and Compensation, Audit and Energy and Environmental Policy. The table below contains information concerning the membership of each of the committees and the number of times the board and each committee met during 2007. Each director attended at least 75% of the total number of meetings of the board and of the committees on which he or she serves. In addition, all directors are expected to attend the annual meeting of stockholders, and all of them attended last year’s annual meeting.

 

 

 

 

The Nominating and Corporate Governance Committee is responsible for the following items:

 

 

The board of directors has determined, in its judgment, that the Nominating and Corporate Governance Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and operates under a written charter adopted by the board of directors, a copy of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com and is available in print to any stockholder upon request.

 

 

The Finance Committee reviews and approves fiscal policies relating to our financial structure, including our debt, cash and risk management policies. The Finance Committee also reviews and recommends to the board appropriate action with respect to significant financial matters, including dividends on our capital stock, major capital expenditures and acquisitions, and funding policies of our employee benefit plans.

 

 

The Personnel and Compensation Committee is responsible for the following items:

 

 

The board has determined, in its judgment, that the Personnel and Compensation Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and operates under a written charter adopted by the entire board, a copy of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com and is available in print to any stockholder upon request. The report of the Personnel and Compensation Committee can be found on page 40 of this proxy statement.

 

The Audit Committee is responsible for the following items:

 

 

The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. The board of directors has determined, in its judgment, that the Audit Committee is composed entirely of independent directors as defined in the New York Stock Exchange listing standards and Rule 10A-3 of the Securities Exchange Act of 1934 and operates under a written charter adopted by the board of directors, a copy of which is published under “Corporate Governance” in the Investors section of our website at archcoal.com and is available in print to any stockholder upon request.

 

The board of directors has also determined, in its judgment, that Mr. Burke and Mr. Jennings are “audit committee financial experts” and that each member of the Audit Committee is “financially literate.” Our corporate governance guidelines do not currently restrict the number of audit committees of public companies on which members of our Audit Committee may serve. The board of directors has determined that none of the members of the Audit Committee currently serves on the audit committees of more than three public companies. The report of the Audit Committee can be found on page 41 of this proxy statement.

 

 

The Energy and Environmental Policy Committee reviews, assesses and provides advice to the board of directors on current and emerging energy and environmental policy trends and developments that affect or could affect us. In addition, the Energy and Environmental Policy Committee makes recommendations concerning whether and to what extent we should become involved in current and emerging energy and environmental policy issues.

 

 

None of the directors who served on the Personnel and Compensation Committee during 2007 has been an officer or employee of ours. None of our executives has served on the board of directors or compensation committee of any other entity that has or has had one or more executives serving as a member of our board of directors or compensation committee.

 

The Nominating and Corporate Governance Committee has responsibility for assessing the need for new directors to address specific requirements or to fill a vacancy. The committee initiates a search for a new candidate seeking input from our chairman and from other directors. The committee may retain an executive search firm to identify potential candidates. All candidates must meet the requirements specified in our corporate governance guidelines. Candidates who meet those requirements and otherwise qualify for membership on our board of directors are identified, and the committee initiates contact with preferred candidates. The committee regularly reports to the board of directors on the progress of the committee’s efforts. The committee meets to consider and approve final candidates who are then presented to the board of directors for consideration and approval. Our chairman or the chairman of the Nominating and Corporate Governance Committee may extend an invitation to join the board of directors.

 

Stockholder recommendations should be submitted in writing to Robert G. Jones, our secretary, and should include information regarding nominees required under our bylaws. Individuals recommended by stockholders will receive the same consideration received by individuals identified to the Nominating and Corporate Governance Committee through other means.

 

 

Our board of directors has established procedures intended to facilitate communication directly with the board of directors, the non-employee directors or the Audit Committee. Such communications may be confidential or anonymous, and may be reported by phone to our confidential hotline at 866-519-1881 or by writing to the individual directors or group in care of Arch Coal, Inc., One CityPlace Drive, Suite 300, St. Louis, Missouri 63141, Attention: Vice President-Law, General Counsel and Secretary. All such communications are promptly communicated to the chairman of the Audit Committee or our Director of Internal Audit, as appropriate.

 

 

The terms of four directors (Messrs. Boyd, Eaves, Hunt and Perry) will expire at the annual meeting. Our board of directors has nominated each of those individuals for re-election for a three-year term that will expire in 2011. The board of directors is not aware that any nominee will be unwilling or unable to serve as a director. All nominees have consented to be named in the proxy statement and to serve if elected. If, however, a nominee is unavailable for election, your proxy authorizes us to vote for a replacement nominee if the board of directors names one. As an alternative, the board of directors may reduce the number of directors to be elected at the meeting.

 

The board of directors recommends a vote “FOR” these nominees.

 

Ernst & Young LLP was our independent public accounting firm for 2007. The Audit Committee has appointed Ernst & Young LLP as our independent public accounting firm for 2008. The Audit Committee and the board of directors are requesting that stockholders ratify this appointment as a means of soliciting stockholders’ opinions and as a matter of good corporate governance. If the stockholders do not ratify the selection of Ernst & Young LLP, the Audit Committee will consider any information submitted by stockholders in connection with the selection of the independent public accounting firm for the next fiscal year. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent public accounting firm at any time during the year if the Audit Committee believes such a change would be in our best interests and the best interests of our stockholders.

 

Representatives of Ernst & Young LLP will attend the annual meeting and will have the opportunity to make a statement if they desire to do so.

 

During 2007 and 2006, Ernst & Young LLP charged fees for services rendered to us as follows:

 

 

 

The Audit Committee has adopted an audit and non-audit services pre-approval policy that requires the committee, or the chairman of the committee, to pre-approve services to be provided by our independent public accounting firm. The Audit Committee will consider whether the services to be provided by the independent public accounting firm are prohibited by the Securities and Exchange Commission’s rules on auditor independence and whether the independent public accounting firm is best positioned to provide the most effective and efficient service. The Audit Committee is mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve such services. The Audit Committee has delegated to the chairman of the committee pre-approval authority between committee meetings, and the chairman must report any pre-approval decisions to the committee at the next regularly scheduled committee meeting.

 

The board of directors recommends a vote “FOR” ratification of the appointment of Ernst & Young LLP as our independent public accounting firm.

 

 

 

We believe that our success in creating long-term value for our stockholders depends on our ability to attract, motivate and retain highly talented executives. As a result, our executive compensation program is designed to offer competitive compensation in a manner that promotes our strategic objective of being a leader in safety performance, environmental stewardship and stockholder return. We motivate our executives by providing them with opportunities to receive payouts under incentive awards upon the achievement of these objectives.

 

At the beginning of 2007, the Personnel and Compensation Committee reviewed the design of our executive compensation program. As a result of that assessment, the board of directors, upon the recommendation of the committee, determined to replace the value of restricted stock units and performance units with stock options. In making its recommendation, the committee determined that long-term stock price appreciation is reflective of our achievement of the long-term performance objectives established by our board of directors. As a result and in an effort to simplify our long-term incentive compensation programs, the board of directors determined to use stock options as a way to encourage long-term performance. The committee continually reviews the use of stock options and other forms of long-term compensation in order to determine those forms that it believes will most effectively achieve its compensation objectives.

 

 

Our Personnel and Compensation Committee believes that an effective executive compensation program should encompass the following fundamental objectives:

 

 

We have designed our executive compensation program around these beliefs. We believe our executive compensation program achieves our goal of attracting, motivating and retaining highly talented executives.

 

 

The Personnel and Compensation Committee regularly reviews the design of our executive compensation program. In doing so, the committee analyzes competitive compensation data for a peer group and for the S&P Midcap 400 Index and other survey data for our industry provided by a compensation consultant. The consultant reports directly to the committee. For the past several years, Watson Wyatt has

assisted the committee in assessing the appropriateness of our peer group. For 2007, our peer group consisted of the following: Alpha Natural Resources, Inc., Cleveland-Cliffs, Inc., CONSOL Energy, Inc., Foundation Coal Holdings, Inc., International Coal Group, Inc., Martin Marietta Materials, Massey Energy Company, Minerals Technologies, Inc., Peabody Energy Corporation and Vulcan Materials Co. In addition, Watson Wyatt provided an assessment of our overall program design and compared total compensation for each of our executives to the corresponding amounts for the companies included in our peer group and other comparator groups.

 

Annually, the committee evaluates the performance of our chief executive officer and makes recommendations to the board of directors regarding his compensation. In doing so, the committee uses the information provided by the consultant and financial and operating performance data provided by management. The committee reviews the various elements of our chief executive officer’s compensation, including his salary, annual and long-term incentive awards and perquisites. Historically, the committee has not considered accrued pension benefits, deferred compensation, thrift plan amounts or existing stock ownership in making its recommendations. The committee believes that the compensation opportunities granted to our chief executive officer, while higher in the aggregate than compensation granted to our other executives, is appropriate relative to the compensation of our other executives taking into consideration the level of our chief executive officer’s responsibilities.

 

Our chief executive officer and Vice President-Human Resources assist the committee by recommending base salaries and targeted payout amounts under our annual and long-term incentive awards for each of the other executives. The committee considers the executive’s level of responsibility and ability to impact our future performance when evaluating those recommendations. Neither our chief executive officer nor the Vice President-Human Resources recommends his or her own base salary or targeted payout amounts under our annual or long-term incentive awards.

 

After the end of the performance period to which a particular incentive award applies, the committee reviews our performance relative to the applicable performance targets and recommends payouts based on that performance. The committee retains discretion to recommend payouts that are above or below actual performance levels for the applicable performance period. For purposes of determining the amount of a payout to recommend, the committee may also consider infrequent or non-recurring items that are not reflective of ongoing operations or the effects of major corporate transactions or other items that the committee determines, in its judgment, significantly distort the comparability of our actual performance against the performance targets.

 

 

In keeping with the philosophy established by our Personnel and Compensation Committee, we use the following compensation elements to achieve our objective of attracting, motivating and retaining highly talented executives:

 

 

 

Each executive is eligible to participate in the same health and welfare plans as our other eligible employees. These plans include medical and dental insurance, life, travel and accidental death and dismemberment insurance, short- and long-term disability coverage and participation in our qualified defined benefit pension plan, our supplemental retirement plan and our qualified defined contribution plan. In addition, each executive receives an employment agreement and is eligible to participate in our deferred compensation plan.

 

We have included a description of each key element of our compensation program below:

 

Base salary — We provide each executive with an annual base salary. Base salaries for our executives depend on the scope of their responsibilities, competitive market compensation paid by other companies for similar positions and salaries paid to the executives’ peers within the company. The Personnel and Compensation Committee believes that a higher percentage of total compensation for those executives with a greater ability to influence the achievement of our objectives should be variable and, therefore, subject to greater risk. In general, as the position and amount of responsibility for an executive increase, a greater percentage of that executive’s total compensation will be variable. As a result, executives with the highest level and amount of responsibility generally have the lowest percentage of their total compensation fixed as base salary and the highest percentage of their total compensation dependent upon short- or long-term incentive awards.

 

At the beginning of 2007, upon the recommendation of the Personnel and Compensation Committee, our board of directors approved increases in the annual base salaries for our executives ranging from 0% to 27%, with higher percentages attributable to executives receiving promotions or significant increases in the scope of their responsibilities. The salaries of the executives named in this proxy statement for 2007 and 2006 are shown in the table on page 22 of this proxy statement.

 

Annual cash incentive awards — We provide approximately 225 key employees, including the executives named in this proxy statement, an opportunity to earn additional cash compensation through annual cash incentive awards. Early each year, the Personnel and Compensation Committee considers whether annual cash incentives should be awarded for that year. If so, the committee recommends to the board of directors the group of employees eligible to receive an award for that year. Annual cash incentive awards contain various incentive levels based on the participant’s accountability and impact on our performance, with target opportunities established as a percentage of base salary. For 2007, the target opportunities available to the executives named in this proxy statement as a percentage of their base salaries ranged from 50% to 100%, with higher percentages attributable to those executives who are more likely to influence our annual performance.

 

Payouts under the annual cash incentive awards depend upon our earnings before interest, taxes, depreciation and amortization (EBITDA), earnings per share, safety and environmental performance and, for some employees, our production costs per ton. Some or all of these performance measures may be used

for our other key employees, and the performance measures may differ for various groups or classifications of employees. By identifying meaningful performance measures and by assigning certain measures greater weight, we are able to more closely align compensation to the achievement of those business objectives over which particular employees have the greatest impact.

 

In order to inspire performance above the targets that we set and to acknowledge certain levels of performance below the targets that we set, annual cash incentive awards contain minimum, target and maximum levels for each performance measure. Payouts under the awards depend upon the achievement of our objectives. The table below shows the threshold and maximum performance levels for the executives named in this proxy statement for 2007. We may prorate payouts under the annual cash incentive awards for performance levels that fall within these ranges.

 

 

We base our EBITDA, earnings per share and production costs per ton performance targets on the annual budget reviewed and approved by the board of directors. We base our safety and environmental performance targets on our prior performance history. The Personnel and Compensation Committee considers the performance targets approved by the board of directors to be challenging given conditions prevailing within the coal industry at the time and, with respect to the safety and environmental performance targets, given the strength of our performance in those areas in recent periods. Over the past five years, we have paid amounts to the executives named in this proxy statement under annual cash incentive awards above the target levels in only one year.

 

In early 2008, upon the recommendation of the Personnel and Compensation Committee, the board of directors approved payouts under the annual cash incentive awards at levels slightly below target based on our performance relative to the performance targets approved by the board of directors at the beginning of 2007. Payouts under annual cash incentive awards for 2007 and 2006 for the executives named in this proxy statement are shown in the table on page 22 of this proxy statement. The threshold, target and maximum annual cash incentives awarded to the executives named in this proxy statement in 2007 are shown in the table on page 24 of this proxy statement.

 

Restricted stock and restricted stock units — From time to time, we may grant restricted stock or restricted stock units to our executives. In the past, the board of directors has used restricted stock and restricted stock unit awards as a retention incentive. Restricted stock and restricted stock units can provide a significant retention incentive since they have real, current value that an executive may forfeit if his or her employment terminates before the awards vest. Additionally, restricted stock and restricted stock units help achieve the Personnel and Compensation Committee’s goal of compensating our executives for long-term stock price appreciation. In the past, the board of directors has used restricted stock units rather than

restricted stock because the executives could elect to defer receipt of the common stock and the corresponding tax obligations upon vesting.

 

Restricted stock awards generally cliff vest at the end of a specified period or, in some cases, may vest ratably over a specified period of time, subject to the executive’s continued employment. Restricted stock unit awards generally vest over a three-year period, with one-third vesting on each anniversary of the grant date, subject to the executive’s continued employment. The Personnel and Compensation Committee has not considered the number of shares of our common stock held by an executive in recommending subsequent awards of restricted stock or restricted stock units.

 

Holders of unvested restricted stock receive dividends in the same amounts and on the same record dates established by our board of directors for payment of common stock dividends. We pay dividend equivalent amounts in cash to the executives based on the number of unvested restricted stock units held by the executives on the record dates established by our board of directors for payment of common stock dividends. Dividend equivalents are paid on unvested restricted stock units at the same rate as the cash dividends we pay on our outstanding common stock.

 

We did not award restricted stock or restricted stock units to any of the executives named in this proxy statement during 2007. Unvested restricted stock or restricted stock units awarded to the executives named in this proxy statement in prior years are shown in the table on page 25 of this proxy statement.

 

In February 2008, upon the recommendation of the Personnel and Compensation Committee, the board of directors approved one-time awards of restricted stock units to Messrs. Leer and Eaves. In keeping with the philosophy established by our Personnel and Compensation Committee, the board of directors intend for these awards, together with the one-time stock option awards discussed below, to provide a significant retention incentive for these key executives. As such, one-half of the restricted stock units vests at the end of three years and the other half vests at the end of four years, subject to each executive’s continued employment.

 

Performance units — From time to time, we may award performance units to key employees, including the executives named in this proxy statement, to motivate them to focus on our performance over a multi-year period. Performance units provide an opportunity for key employees to earn additional compensation upon the successful achievement of our objectives over a three-year performance period. Each performance unit represents the right to receive $1.00 per unit, which we may pay in cash, stock or a combination of cash and stock.

 

Payouts under the performance units generally depend upon the relationship of the compound annual growth rate of our EBITDA to that of a peer group and the percentage improvement in our safety and environmental performance. In the past, we have assigned greater weight to EBITDA performance and equal weight to our safety and environmental performance. In order to inspire performance above the targets we set, the performance units include target and maximum levels for each performance measure. In addition, in order to acknowledge certain levels of performance below the targets we set, the performance units include a threshold level for EBITDA. Payouts within these ranges depend upon our performance relative to the targets.

We base our EBITDA performance targets on the long-term forecast reviewed by the board of directors and on the recent growth in EBITDA for certain companies within our peer group. We base our safety and environmental performance targets on our prior performance history. The Personnel and Compensation Committee considers the performance targets approved by the board of directors to be challenging since higher payouts require us to outperform our peer group over an extended period of time.

 

In early 2008, upon the recommendation of the Personnel and Compensation Committee, the board of directors approved payouts under the performance units awarded in 2005 at levels slightly below target based on our safety and environmental performance over a three-year period relative to the performance targets approved by the board of directors at the beginning of 2005. Payouts for 2007 and 2006 under performance units awarded to the executives named in this proxy statement in prior years are shown in the table on page 22 of this proxy statement. We did not award performance units to any of the executives named in this proxy statement during 2007.

 

Stock options — From time to time, we may grant stock options to our executives. In the past, the board of directors has used stock options as a retention incentive. Stock options help achieve the Personnel and Compensation Committee’s goal of compensating our executives for long-term stock price appreciation. Stock options represent the opportunity to buy shares of our common stock at a fixed price at a future date. Under the terms of our stock incentive plan, the exercise price of stock options cannot be less than the fair market value of a share of our common stock on the date the options are granted. As such, stock options have value for our executives only if the price of our common stock increases after the date the options are granted.

 

In general, the board of directors approves stock option grants annually in connection with our annual performance assessment and evaluation process. Our policy is to issue stock options on the dates on which the awards are approved and to set the exercise prices of these stock option awards equal to the closing market price of our common stock on the dates on which the awards are approved. Our stock options vest over stated vesting periods measured from the date of grant. In general, options are not fully exercisable until three years after the date of grant and expire after ten years, except in certain limited circumstances.

 

Upon the recommendation of the Personnel and Compensation Committee, the board of directors approved stock option awards to our executives during 2007. The grant date fair values of the stock options awarded to the executives named in this proxy statement as a percentage of their base salaries ranged from 150% to 214%, with higher percentages attributable to those executives who are most likely to influence our long-term performance. Certain information about the stock options awarded to the executives named in this proxy statement in 2007 is shown in the table on page 24 of this proxy statement. Unvested stock options awarded to the executives named in this proxy statement in 2007 are shown in the table on page 25 of this proxy statement. We did not award stock options to any of the executives named in this proxy statement during 2006.

 

In February 2008, upon the recommendation of the Personnel and Compensation Committee, the board of directors approved one-time awards of stock options to Messrs. Leer and Eaves. In keeping with the philosophy established by our Personnel and Compensation Committee, the board of directors intend

for these awards, together with the one-time restricted stock unit awards discussed above, to provide a significant retention incentive for these key executives. As such, one-half of the stock options vests at the end of three years and the other half vests at the end of four years, subject to each executive’s continued employment.

 

Performance-contingent phantom stock — In 2005, we awarded performance-contingent phantom stock to our executives. The board of directors used performance-contingent phantom stock in order to provide executives with an opportunity to receive additional compensation ranging from 15% to 40% of their targeted total compensation for exceptional long-term financial performance. Target payouts under the performance-contingent phantom stock awards are based on the extent to which each executive has the ability to impact our long-term financial performance. In order to align the interests of our executives with the long-term interests of our stockholders, payouts under the performance-contingent phantom stock awards depend upon the attainment of a sustained average closing price of our common stock and the achievement of a minimum EBITDA over the trailing 12-month period. The Personnel and Compensation Committee considers the objectives used for these awards to be challenging since higher payouts require long-term stock price appreciation to be attributable, in part, to our achievement of specified levels of EBITDA instead of appreciation in the broader equity market or coal industry generally.

 

Under these awards, our executives could earn one-half of the performance-contingent phantom stock awards if the average closing price of our common stock for a period of 20 consecutive trading days meets or exceeds $35.00, subject to the achievement of the EBITDA component of the award. The other one-half of the 2005 performance-contingent phantom stock awards could be earned if the average closing price of our common stock for a period of 20 consecutive trading days meets or exceeds $40.00, subject to the achievement of the EBITDA component of the award. Payouts under the performance-contingent phantom stock awards depend on the extent to which the compound annual growth rate of our EBITDA for the preceding 12 months, with a starting value equal to a target EBITDA established at the time the award was granted, falls within certain ranges.

 

Under these awards, one-half of any payout amount that an executive elects not to defer is paid in the form of cash and the other one-half is paid in shares of our common stock. We will pay the amount that an executive elects to defer in shares of our common stock.

 

In early 2007, our board of directors determined that the performance conditions associated with one-half of the 2005 performance-contingent phantom stock awards had been satisfied, and, as a result, we paid out that portion of the award. In addition, in early 2008, our board of directors determined that the performance conditions associated with the remainder of the 2005 performance-contingent phantom stock awards had been satisfied, and, as a result, we paid that portion of the award in 2008. We did not award any performance-contingent phantom stock to our executives during 2007 or 2006.

 

Perquisites and other benefits — We provide some of our executives with other benefits that are not tied to any formal performance objectives. In particular, we pay for the cost of the following items for certain of our executives:

 

 

 

In limited circumstances approved by our chief executive officer, our president or our chief financial officer, some of our executives are permitted to use our corporate aircraft for personal travel. On occasion, we pay for the cost of spousal travel to out-of-town board meetings. The perquisites paid to the executives named in this proxy statement in 2007 and 2006 are shown in the table on page 23 of this proxy statement.

 

Supplemental pension plan benefits — We sponsor a tax-qualified defined benefit pension plan covering all of our eligible employees, including our executives. The Internal Revenue Code limits the amount of qualified retirement benefits we may provide for certain employees. As a result, we sponsor a supplemental retirement plan that provides eligible employees, including the executives named in this proxy statement, with additional retirement benefits that would otherwise be available under our defined benefit pension plan but for the limitations contained in the Internal Revenue Code. For more information about our defined benefit pension plan and our supplemental retirement plan, including the accumulated benefits attributable to the executives named in this proxy statement, you should see “Pension Benefits” beginning on page 27 of this proxy statement.

 

Deferred compensation plan — We sponsor a tax-qualified defined contribution plan covering all of our eligible employees, including the executives named in this proxy statement. Under this plan, eligible employees may contribute up to 50% of their base salaries to the plan, subject to certain limitations contained in the Internal Revenue Code. We contribute one dollar for each dollar contributed by our employees, up to a maximum of 6% of employees’ base salaries. The Internal Revenue Code limits the amount certain of our employees may contribute to our defined contribution plan in any tax year. As a result, we sponsor a non-qualified deferred compensation plan that allows eligible employees, including the executives named in this proxy statement, to defer receipt of a portion of their base salaries and annual cash and long-term incentive awards not subject to these limits. The deferred compensation plan provides higher-paid employees with the full company matching contribution to which they would otherwise be entitled under our defined contribution plan but for the limitations contained in the Internal Revenue Code. For more information about our deferred compensation plan, including information about amounts attributable to the executives named in this proxy statement, you should see “Non-Qualified Deferred Compensation” beginning on page 28 of this proxy statement.

 

Employment agreements — In order to provide certain key employees, including the executives named in this proxy statement, with some financial security in the event their employment with us is terminated without cause or under certain circumstances following a change of control, we provide those employees with employment agreements. Those agreements provide for cash payments to the key employees in the event their employment with us is terminated under certain circumstances. The Personnel and Compensation Committee believes that the employment agreements we maintain with our key employees provide a meaningful mechanism by which to retain those individuals who are most capable of affecting our future

performance. For more information about the employment agreements with the executives named in this proxy statement, you should see “Potential Payments Upon Termination of Employment or Change-in-Control” beginning on page 29 of this proxy statement.

 

Stock ownership guidelines — Our board of directors has adopted stock ownership guidelines that are intended to promote meaningful stock ownership by our executives. These guidelines specify a number of shares of our common stock, including unvested restricted stock, unvested restricted stock units, shares held through our defined contribution plan and hypothetical shares of our common stock held through the deferred compensation plan described above, that our executives must accumulate by January 1, 2009 or, if elected after January 1, 2004, within five years of becoming an executive. The specific share holding requirements are determined based on a multiple of base salary ranging from one to three times, with the higher multiples applicable to the executives having the highest levels of responsibility. As of December 31, 2007, each of the executives satisfied the stock ownership goal adopted by the board of directors.

 

 

The Internal Revenue Code limits the amount of the tax deduction we are entitled to take for compensation paid to the executives named in this proxy statement for a particular year unless the compensation meets specific standards. We may deduct compensation in excess of $1 million if compensation is “performance-based” and is paid pursuant to a plan that meets certain requirements. In developing, implementing and administering our executive compensation program, our Personnel and Compensation Committee considers the impact of these limits and balances the desire to maximize the deductibility of compensation with the goal of attracting, motivating and retaining highly talented executives.

 

We generally seek to maximize the tax deductibility of all elements of compensation. However, in light of the need to maintain flexibility in administering our executive compensation program, the committee retains discretion to recommend that the board of directors approve compensation in excess of the limits, even if a portion of it may not be deductible.

 

The following table is a summary of compensation information for our chief executive officer, our chief financial officer and each of the other three most highly compensated executives for 2007 and 2006:

 

 

 

 

 

 

 

 

The following table shows information relating to the grants of certain equity and non-equity awards made to the executives named in this proxy statement during 2007:

 

 

 

 

The following table shows information relating to the equity awards previously made to the executives named in this proxy statement which remain outstanding at December 31, 2007.

 

 

 

 

 

The following table shows information relating to the exercise or vesting of certain equity awards previously made to the executives named in this proxy statement during 2007.

 

 

 

 

Defined Benefit Pension Plan.  We sponsor a defined benefit pension plan covering all of our eligible employees, including our executives. Employees become eligible to participate in the plan after working 1,000 hours. We credit each participant in the plan with a cash balance account. Participants become vested in their cash balance accounts after serving three years with us. Upon retirement or upon termination of employment following three years of service with us, participants or their beneficiaries may elect to receive benefits in a lump sum, in installments over a period of time or at a later date. Under the terms of the plan, normal retirement occurs on the first day of the month following the date a participant turns 65.

 

We credit each participant’s cash balance account with a monthly interest amount based on the U.S. Treasury rate, subject to a minimum rate of 4.25% and a maximum rate of 10%. In addition, we may provide transition credits to employees who participated in certain predecessor plans for a period up to the number of years of credited service with the predecessor plan, subject to certain maximum amounts depending upon the particular plan. The transition contribution rates range from 1% to 4% of compensation, depending upon the participant’s age at the end of the year. Annually, we also credit each participant’s cash balance account with an amount, reflected as a percentage of compensation, based on the participant’s age at the end of the year. For purposes of determining the contribution amount, compensation includes salary, regular wages, overtime pay, earned vacation pay, short-term incentive compensation payments and amounts contributed by the participant to a qualified profit-sharing or cafeteria plan maintained by us, subject to certain limits imposed under the Internal Revenue Code. The following table shows the percentages of compensation we contribute to each participant’s account, based on the participant’s age at the end of the year:

 

 

Supplemental Retirement Plan.  We sponsor a supplemental retirement plan covering all of our eligible employees, including our executives, whose retirement benefits under our defined benefit pension plan are limited by the Internal Revenue Code. Under our supplemental retirement plan, each eligible employee is entitled to receive a lump sum amount equal to the difference between the amount that would have been paid under our defined benefit pension plan but for the limitations contained in the Internal Revenue Code and the actual amount that the employee is entitled to receive under our defined benefit pension plan after taking into account the limitations imposed by the Internal Revenue Code. Subject to the limitations contained in the Internal Revenue Code, benefits under the supplemental retirement plan commence on the same date an eligible employee is entitled to begin receiving benefits under the defined benefit pension plan.

The following table shows information relating to the accumulated benefits to which the executives named in this proxy statement are entitled under our defined benefit pension plans at December 31, 2007:

 

 

 

 

We maintain a deferred compensation plan that allows an eligible employee to defer receipt of his or her base salary and/or annual incentive payment until the date or dates elected by the participant. The amounts deferred are invested in cash accounts that mirror the gains and/or losses of a number of different investment funds, including a hypothetical investment in shares of our common stock. The deferred compensation plan offers participants a wide-range of publicly-available investment funds, including international, U.S. equity, bond and money market funds. These investment funds are substantively similar to the investment alternatives offered to participants of our defined contribution plan. The plan does not offer any above-market rates of return to our executives.

 

Participants in the plan may defer up to 85% of their base salaries and up to 100% of their annual incentive awards. The plan also allows participants to defer receipt of up to 100% of the shares issuable under any restricted stock units or performance-contingent phantom stock awards granted to executives under our long-term incentive program. Participants are always vested in their deferrals to the plan and any related earnings. We contribute one dollar for each dollar of base salary deferred by participants in the plan, up to a maximum of 6% of the participant’s base salaries. We have established a grantor trust to fund our obligations under the deferred compensation plan. The trust has purchased corporate-owned life

insurance to offset these obligations. Participants have an unsecured contractual commitment by us to pay the amounts due under the deferred compensation plan.

 

Under the plan, we credit each participant’s account with the number of units equal to the number of shares or units that the participant could purchase or receive with the amount of compensation deferred under the plan on the date we credit the participant’s account, based upon the fair market value of the underlying investment on that date. We will pay the amount of compensation deferred under the plan to the participant (or to his or her designated beneficiary in the event of death) in annual installments or in a lump sum, at the participant’s election, following the participant’s termination of employment or on the date or dates specified by the participant in his or her payment election. The amount we pay will be based on the number of units credited to each participant’s account, valued on the basis of the fair market value of an equivalent number of shares or units of the underlying investment on the date payment occurs. We may also pay a participant the amount of compensation deferred under the plan prior to the date the participant initially elected to receive payment if we determine that the employee has a demonstrated financial hardship.

 

The following table shows information relating to the activity in the deferred compensation plan accounts for the executives named in this proxy statement during 2007:

 

 

 

 

We maintain certain agreements or arrangements with each of the executives named in this proxy statement that provide for the payment or acceleration of certain benefits in the event that such executive’s employment is terminated without cause or following a change-in-control. In addition to the benefits described below, the executives named in this proxy statement would also be entitled to receive certain benefits under our defined benefit pension plan, supplemental retirement plan and deferred compensation plan. You should see the section entitled “Pension Benefits” beginning on page 27 of this proxy statement for more information on the benefits accumulated under our defined benefit pension plan and our supplemental retirement plan that are attributable to each of the executives named in this proxy statement and the section entitled “Non-Qualified Deferred Compensation” beginning on page 28 of this proxy

statement for more information on the aggregate balance maintained under our deferred compensation plan by each of the executives named in this proxy statement.

 

 

We maintain employment agreements with each of our executives, including the executives named in this proxy statement, and certain other key employees. Each of the employment agreements has a term of one year that is automatically extended for successive one-year periods unless either party terminates the agreement upon at least one year notice prior to the end of any one-year term. Under the employment agreements and certain other arrangements we have with the executives named in this proxy statement, we may be required to provide compensation in the event of a termination of employment or a change in control of the company. As a condition to each executive’s entitlement to receive payments under the employment agreements, the executive is required to execute a waiver of claims against us and to abide by certain non-disclosure, non-competition and non-solicitation requirements. These restrictions prohibit executives from engaging in any business that competes with any of our business operations for a period of six months following the date of termination and from soliciting for employment, hiring or retaining any of our employees for a period of one year following the date of termination.

 

Voluntary termination and termination for cause — Each of the executives named in this proxy statement may terminate his or her employment at any time. In addition, we may terminate the employment of the executives named in this proxy statement for cause at any time. Under the terms of the employment agreements with the executives named in this proxy statement, a termination is for cause if it is for any of the following reasons:

 

 

If we terminate an executive’s employment for cause or if an executive terminates his or her employment for any reason prior to a change of control or for other than good reason following a change of control, then we will pay the executive an amount equal to the executive’s accrued and unpaid base salary and unused vacation time. If we terminate an executive’s employment for cause or if the executive terminates his or her employment for any reason without our consent, then all of the unexpired, unvested restricted stock, restricted stock units, performance units, stock options, performance-contingent phantom stock or other awards granted to the executive under our stock incentive plan that remain outstanding on the date of termination shall automatically be forfeited. If we terminated each of the executives named in this proxy statement for cause or if each of the executives named in this proxy statement terminated his employment on December 31, 2007, then the executives would not have been entitled to receive any amounts from us.

 

Termination without cause prior to a change of control — Each of the executives named in this proxy statement may be entitled to certain benefits if we terminate the executive’s employment for reasons other

than cause. If we terminate an executive without cause prior to a change of control, then under the terms of the employment agreement we will pay the executive a lump sum cash amount equal to the following:

 

 

In addition, if we terminate an executive for reasons other than for cause prior to a change of control, all unexpired stock options held by the executive on the date of termination will immediately vest and become exercisable by the executive in accordance with the terms of our stock incentive plan and related stock option award agreements. Also, we have agreed to reimburse the executives named in this proxy statement for the cost of financial counseling services (up to a maximum of $5,000) for a period of 12 months (24 months for Mr. Leer), the cost of reasonable outplacement services for a period of 12 months (24 months for Mr. Leer) and the amount of any excise taxes imposed on the executive under the Internal Revenue Code.

The following table shows the amounts each of the executives named in this proxy statement would receive if we terminated his employment for reasons other than for cause prior to a change of control on December 31, 2007: