UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

Schedule 14A Information

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One CityPlace Drive, Suite 300

St. Louis, Missouri 63141

(314) 994-2700

 

March 19, 2007

 

Dear fellow stockholder:

 

You are cordially invited to attend the annual meeting of stockholders of Arch Coal, Inc. on Thursday, April 26, 2007. We will hold the meeting at 10:00 a.m., St. Louis 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 2006 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

 

One CityPlace Drive, Suite 300

St. Louis, Missouri 63141

(314) 994-2700

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

DATE:   Thursday, April 26, 2007

 

TIME:   10:00 a.m., St. Louis time

 

CityPlace One

One CityPlace Drive

St. Louis, Missouri 63141

 

 

 

Stockholders of record at the close of business on March 1, 2007 may vote at the annual meeting and any adjournments. Your vote is important. Whether you plan to attend the annual meeting or not, please cast your vote by phone or on the Internet, or complete, date and sign your proxy card and return it in the envelope provided. If you attend the annual meeting and prefer to vote in person, you may do so even if you have previously voted by proxy. You can find maps with directions to our headquarters on page 45 of the enclosed proxy statement.

 

By order of the Board of Directors of Arch Coal, Inc.

 

Robert G. Jones

Vice President — Law, General Counsel and Secretary

St. Louis, Missouri

 

March 19, 2007

 

One CityPlace Drive, Suite 300

St. Louis, Missouri 63141

(314) 994-2700

 

PROXY STATEMENT

 

TABLE OF CONTENTS

 

 

 

Our board of directors is soliciting proxies to be voted at the 2007 annual meeting of stockholders. This proxy statement includes information about the issues to be voted upon at the meeting.

 

On March 19, 2007, we began mailing these proxy materials to all stockholders of record at the close of business on March 1, 2007, the record date. On the record date, there were 142,404,167 shares of our common stock outstanding. As required by Delaware law, we will make a list of stockholders entitled to vote at the annual meeting available at and for ten days prior to the meeting, during normal business hours, at our offices, CityPlace One, One CityPlace Drive, Suite 300, St. Louis, Missouri 63141.

 

 

The annual meeting will take place on April 26, 2007 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., St. Louis time. You can find maps with directions to our headquarters on page 45 of this proxy statement.

 

 

We are aware of the following items to be voted on by stockholders 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:

 

 

 

You can vote by proxy or in person.

 

 

If you are a stockholder of record, you may vote your proxy by telephone, Internet, or mail. Our telephone and Internet voting procedures are designed to authenticate stockholders by using individual control numbers. Voting by telephone or Internet will help us reduce costs.

 

 

In the U.S. and Canada, you can vote your shares by telephone 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. Easy-to-follow voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded. If you vote by telephone, you do not need to return your proxy card.

 

 

You can also choose to vote via the Internet. The web site for Internet voting is on your proxy card. Internet voting is also 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 vote by 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. 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.

 

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 that needed to be acted on at the annual meeting other than those discussed 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.

 

 

If you give a proxy, you may revoke it in any one of the following three ways:

 

 

 

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

 

 

You can submit voting instructions to your bank, broker 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 bank, broker 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 or the Mingo Logan Savings 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 one of these plans and you do not return your proxy by April 16, 2007, 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.

 

What vote is required to approve each proposal?

 

In order to have a valid stockholder vote, a stockholder quorum must exist at the annual meeting. A quorum will exist when stockholders holding a majority of the outstanding shares of our common stock are present at the meeting, either in person or by proxy.

 

Broker non-votes occur when brokers do not have discretionary voting authority to vote certain shares held in “street name” on particular proposals and the beneficial owner of those shares has not instructed the broker how to vote on those proposals. Under New York Stock Exchange rules, brokers who hold shares for the accounts of their clients and who have not received instructions from their clients do have discretion to vote in the election of directors. Accordingly, broker non-votes will have no effect on the election of directors.

 

 

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 2007, which we expect to file on or before May 10, 2007. 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 director’s 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 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 executive officers 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 executive officers 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 board of directors has established procedures to enable anyone who has a concern about our conduct, or any employee who has a concern about our accounting, internal accounting controls or auditing matters, to communicate that concern directly to the board of directors, to the non-employee directors or to the Audit Committee. Such communications may be confidential or anonymous, and may be reported by phone to our confidential hotline at 1-866-519-1881 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 our Director of Internal Audit and the chairman of the Audit Committee. It is our policy not to take any disciplinary or other retaliatory action against any employee for raising or helping to resolve an integrity concern.

(PROXY ITEM NO. 1)

 

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 twelve 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.

 

In February 2006, as part of its succession planning process and upon the recommendation of the Nominating and Corporate Governance Committee, our board of directors increased the size of our board of directors to eleven and elected John W. Eaves, our President and Chief Operating Officer, to fill the vacancy created by the increase.

 

In July 2006, our board of directors increased the size of our board of directors to twelve and added Brian J. Jennings to fill the vacancy created by the increase. In searching for a new director, the Nominating and Corporate Governance Committee retained an executive search firm to identify potential candidates meeting certain qualifications established by the committee. The executive search firm then prepared a list of potential candidates and reviewed that list with the Nominating and Corporate Governance Committee. After interviewing several candidates, including Mr. Jennings, the Nominating and Corporate Governance Committee recommended to the full board of directors that Mr. Jennings be invited to join. Mr. Boyd, the chairman of the Nominating and Corporate Governance Committee, then contacted Mr. Jennings to extend an invitation to join the board of directors.

 

Our board of directors has nominated four individuals for election as directors for a three-year term that will expire in 2010: Brian J. Jennings, Steven F. Leer, Robert G. Potter and Theodore D. Sands. All nominees are currently serving as directors. The board of directors is not aware that any nominee named in this proxy statement 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. Proxies may not be voted for a greater number of persons than the nominees identified below.

 

The following is a list of our directors, their ages as of February 26, 2007, their occupation during the last five years and certain other biographical information:

 

Brian J. Jennings, 46, has been a director of Arch Coal since July 2006. From March 2004 to December 2006, Mr. Jennings served as Senior Vice President — Corporate Finance and Development and Chief Financial Officer of Devon Energy Corporation. Mr. Jennings served as Senior Vice President — Corporate Finance and Development from 2001 to March 2004. Mr. Jennings joined Devon in March 2000 as Vice President — Corporate Finance.

 

Steven F. Leer, 54, has been Chief Executive Officer and a director of Arch Coal since 1992. From 1992 to April 2006, Mr. Leer also served as our president. In April 2006, Mr. Leer became chairman of the board of directors. Mr. Leer also serves on the boards of the Norfolk Southern Corporation, USG Corp., the Western Business Roundtable and the University of the Pacific and is chairman of the Coal Industry Advisory Board. Mr. Leer is past chairman and continues to serve on the boards of the Center for Energy and Economic Development, the National Coal Council and the National Mining Association.

 

Robert G. Potter, 67, has been a director of Arch Coal since April 2001. Mr. Potter was Chairman and Chief Executive Officer of Solutia Inc., a producer and marketer of a variety of high performance chemical-based materials, from 1997 to his retirement in 1999. Mr. Potter served for 32 years with Monsanto Company prior to its spin-off of Solutia in 1997, most recently as the Chief Executive of its chemical businesses. Mr. Potter is a private investor and director of Stepan Company.

 

Theodore D. Sands, 61, has been a director of Arch Coal since 1999 and, since February 1999, has served as President of HAAS Capital, LLC, a private consulting and investment company. Mr. Sands is also a director of Protein Sciences Corporation and Terra Nitrogen Corporation. Mr. Sands served as Managing Director, Investment Banking for the Global Metals/Mining Group of Merrill Lynch & Co. from 1982 until February 1999.

 

Your board of directors recommends a vote “For” these nominees.

 

James R. Boyd, 60, has been a director of Arch Coal since 1990. Mr. Boyd served as chairman of the board of directors from 1998 to April 2006, when he was appointed our lead director. Mr. Boyd served as Senior Vice President and Group Operating Officer of Ashland Inc., a multi-industry company with operations in chemicals, motor oil, car care products and highway construction, from 1989 until his retirement in January 2002. Mr. Boyd is also a director of Farmers Bancorp of Lynchburg, Tennessee and Halliburton Inc.

 

John W. Eaves, 49, has been a director of Arch Coal since February 2006. Mr. Eaves has been President and Chief Operating Officer since April 2006. From December 2002 to April 2006, Mr. Eaves served as our Executive Vice President and Chief Operating Officer. From February 2000 to December

2002, Mr. Eaves served as our Senior Vice President — Marketing and from September 1995 to December 2002 as President of our Arch Coal Sales Company, Inc. subsidiary. Mr. Eaves also served as our Vice President — Marketing from July 1997 through February 2000. Mr. Eaves serves on the board of directors of ADA-ES, Inc.

 

Douglas H. Hunt, 54, has been a director of Arch Coal since 1995 and, since May 1995, has served as Director of Acquisitions of Petro-Hunt, LLC, a private oil and gas exploration and production company.

 

A. Michael Perry, 70, has been a director of Arch Coal since 1998. He served as Chairman of Bank One, West Virginia, N.A. from 1993 and as its Chief Executive Officer from 1983 to his retirement in June 2001. Mr. Perry is also a director of Champion Industries, Inc. and Portec Rail Products, Inc.

 

Frank M. Burke, 67, has been a director of Arch Coal since September 2000. He has served as Chairman, Chief Executive Officer and Managing General Partner of Burke, Mayborn Company, Ltd., a private investment and consulting company since 1984. Mr. Burke is also a director of Crosstex Energy GP, LLC (general partner of Crosstex Energy, L.P.), Crosstex Energy, Inc. and Corrigan Investments, Inc., and is a member of the National Petroleum Council.

 

Patricia F. Godley, 58, has been a director of Arch Coal since 2004. Since 1998, Ms. Godley has been a partner with the law firm of Van Ness Feldman in Washington, D.C., practicing in the areas of economic and environmental regulation of electric utilities and natural gas companies. From 1994 until 1998, Ms. Godley served as the Assistant Secretary for Fossil Energy at the U.S. Department of Energy. Ms. Godley is also a director of the United States Energy Association.

 

Thomas A. Lockhart, 71, has been a director of Arch Coal since February 2003 and a member of the Wyoming State House of Representatives since 2000. Mr. Lockhart worked for PacifiCorp, an electric utility, for over 30 years and retired in 1998 as a Vice President. Mr. Lockhart is also a director of First Interstate Bank of Casper, Wyoming and Blue Cross Blue Shield of Wyoming.

 

Wesley M. Taylor, 64, has been a director of Arch Coal since July 2005. Mr. Taylor was President of TXU Generation, a company engaged in electricity infrastructure ownership and management. Mr. Taylor served for 38 years at TXU prior to his retirement in 2004. Mr. Taylor is also a director of FirstEnergy Corporation.

 

The board of directors has the following four committees: Nominating and Corporate Governance, Finance, Personnel and Compensation and Audit. 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 2006. 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, except for Mr. Jennings who was elected after last year’s annual meeting, all of them attended last year’s annual meeting.

 

 

 

 

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 beginning on page 12 of this proxy statement.

 

Finance Committee

 

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.

 

Nominating and Corporate Governance Committee

 

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

 

 

The Nominating and Corporate Governance Committee regularly reviews the appropriate size and composition of the board of directors and anticipates future vacancies and needs of the board. In the event the Nominating and Corporate Governance Committee recommends an increase in the size of the board of directors or a vacancy occurs, the committee may consider nominees submitted by several sources, including current directors, management, director search firms and stockholders. A candidate for director should possess the highest personal and professional ethics, integrity and values and be committed to representing the long-term interests of our stockholders. In evaluating the suitability of individual nominees, the Nominating and Corporate Governance Committee will also take into account, among other things, the person’s strength of character, practical wisdom, mature judgment and ability to respect and maintain adherence to the corporate governance guidelines. In the past, the Nominating and Corporate Governance Committee has, from time to time, retained an executive search firm to identify potential candidates to fill vacancies on the board of directors or as part of the board of director’s succession planning. The Nominating and Corporate Governance Committee will consider candidates recommended by stockholders. Stockholder recommendations should be submitted in writing to Robert G. Jones, our secretary and should include the candidate’s name, home and business contact information, detailed biographical data, relevant qualifications for membership on the board of directors and any other information required under our bylaws. Individuals recommended by stockholders in accordance with these procedures will receive the same consideration received by individuals identified to the Nominating and Corporate Governance Committee through other means.

 

The Nominating and Corporate Governance Committee periodically reviews the compensation structure and amounts for our non-employee directors. Our human resources department supports the Nominating and Corporate Governance Committee by researching the structures and amounts of compensation programs sponsored by other similarly-sized public companies and compiling the results of that research for the committee. From time to time, the Nominating and Corporate Governance Committee may engage an independent compensation consultant to provide survey or proxy data on the structure and amount of director compensation for other companies.

 

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 Personnel and Compensation Committee is responsible for the following items:

 

 

Each year, the Personnel and Compensation Committee reviews the history of and proposals for total compensation of each of our executive officers, including the portions of total compensation comprised of cash and equity-based components. Our Chairman and Chief Executive Officer and Vice President — Human Resources assist the Personnel and Compensation Committee by recommending base salaries and targeted payout amounts under our annual cash incentive program and certain of our long-term incentive plans for each of the other executive officers based on the executive officer’s level of responsibility and ability to impact our future financial and operating performance. Neither our Chairman and Chief Executive Officer nor our Vice President — Human Resources recommends his or her own base salary or targeted payout amounts under our annual cash incentive program or our long-term incentive plans. The Personnel and Compensation Committee also uses survey and proxy data for our peer group provided by Watson Wyatt, an independent compensation consultant retained by the committee for those purposes. The compensation consultant is engaged by, and reports directly to, the Personnel and Compensation Committee.

 

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 13 of this proxy statement.

 

The Audit Committee oversees our financial reporting process on behalf of the board of directors. Management is primarily responsible for the financial statements and reporting process, including the systems of internal controls, while the independent registered public accounting firm is responsible for performing an independent audit of our financial statements in accordance with auditing standards generally accepted in the United States and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States.

 

In this context, the Audit Committee has reviewed our audited consolidated financial statements and has met with and held discussions with management, our internal auditors and with Ernst & Young, LLP, our independent registered public accounting firm, to discuss those financial statements and related matters. The Audit Committee reviewed with our internal and independent auditors the overall scope and plans for their respective audits. The Audit Committee also met, at least quarterly, with the auditors, with and without management present, to discuss the results of their examinations, their evaluations of our internal controls and the overall quality of our financial reporting. The Audit Committee also reviewed with the independent auditors their judgment as to the quality and the appropriateness of our accounting principles and financial controls and such other matters as are required to be discussed with the Audit Committee under auditing standards generally accepted in the United States.

 

Our independent registered public accounting firm also provided to the Audit Committee the written disclosures required by the Independence Standards Board Standards No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with the independent auditors that firm’s independence, including those matters required to be discussed by Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards No. 90. The Audit Committee considered whether the performance by Ernst & Young LLP of non-audit services was compatible with their independence.

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the board of directors, and the board of directors approved, including the audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the Securities and Exchange Commission. The Audit Committee has retained Ernst & Young LLP as our independent registered public accounting firm for 2007.

 

While the Audit Committee has the responsibilities and powers set forth in its charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that our financial statements are complete and accurate or are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditor.

 

AUDIT COMMITTEE

Frank M. Burke, Chairman

James R. Boyd

Patricia F. Godley

Brian J. Jennings

Thomas A. Lockhart

A. Michael Perry

 

The Personnel and Compensation Committee is comprised entirely of independent directors and has the responsibility for reviewing and recommending changes in our executive compensation policies and programs to the board of directors. The committee also reviews and makes recommendations for all compensation payments to our chief executive officer and other executive officers, which are approved by the board of directors as a whole.

 

The Personnel and Compensation Committee has reviewed and met with management to discuss the disclosures contained in the section entitled “Compensation Discussion and Analysis” beginning on page 19 of this proxy statement. Based on that review and discussions with management, the Personnel and Compensation Committee recommended to the board of directors, and the board of directors approved, including the disclosures contained in the section entitled “Compensation Discussion and Analysis” in this proxy statement and, by incorporating that section by reference, in the Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the Securities and Exchange Commission.

 

PERSONNEL AND COMPENSATION COMMITTEE

Robert G. Potter, Chairman

Frank M. Burke

Douglas H. Hunt

Thomas A. Lockhart

Theodore D. Sands

Wesley M. Taylor

 

None of the directors who served on the Personnel and Compensation Committee during 2006 has been an officer or employee of ours. None of our executive officers has served on the board of directors or compensation committee of any other entity that has or has had one or more executive officers serving as a member of our board of directors or compensation committee.

 

 

The following table sets forth compensation paid to each non-employee director during 2006. Messrs. Leer and Eaves do not receive separate retainers or attendance fees for their services as directors.

 

 

 

Director Compensation.  Our director compensation program is designed to compensate our non-employee directors, through a simple and understandable structure, for the amount of work required for a company of our size and scope and to align the interests of our non-employee directors with the long-term interests of our stockholders. The key elements of our director compensation program include the following:

 

 

 

Deferred Compensation Plan.  Our board of directors has adopted a deferred compensation plan for non-employee directors. Under the plan, non-employee directors may choose to defer receipt of any or all of the compensation paid to them in a cash account that mirrors the gains and/or losses of a number of different investment funds, one of which is a hypothetical investment in shares of our common stock. Under the plan, we credit each non-employee director’s account with the number of units equal to the number of shares or units that the non-employee director could purchase or receive with the amount of compensation deferred under the plan on the date we credit the non-employee director’s account, based upon the fair market value of the underlying investment on that date. When a director terminates his or her service as a director, we will pay the amount of compensation deferred under the plan to the director (or to his or her designated beneficiary in the event of death) in annual installments or in a lump sum, at the director’s election. The amount we pay will be based on the number of units credited to each director’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 director the amount of compensation deferred under the plan prior to the termination of a director’s service as a director if the board determines that the director has a demonstrated financial hardship.

 

Other Compensation Arrangements.  In addition to the annual retainers and meeting attendance fees described above, we sponsor a director matching gift program. Under our matching gift program, we donate $2.00 for each dollar contributed by a director to accredited institutions of higher education up to a maximum of $6,000 each year. We have included the matching gifts paid on behalf of each of our non-employee directors for 2006 in the table above. We have included the matching gifts paid on behalf of Mr. Leer in the table on page 27 of this proxy statement. During 2006, we did not pay any matching gifts on behalf of Mr. Eaves. We reimburse each director for their travel expenses incurred in connection with attendance at board and committee meetings and other matters related to service on our board and for the costs of attending continuing education seminars. We also pay the premiums for directors’ liability insurance and travel accident insurance for each director. These amounts are not included in the table above since they are deemed to be business-related payments and not perquisites. We do not maintain a directors’ retirement plan, and non-employee directors do not participate in our health, welfare or benefit plans.

 

Stock Ownership Guidelines.  In order to more closely align the interests of our non-employee directors with the long-term interests of our stockholders, our board of directors has adopted stock ownership guidelines for non-employee directors that establish a goal for each of our non-employee directors to own a number of shares of our common stock equal in value to five times the annual retainer for non-employee directors. Each non-employee director is expected to satisfy this goal by April 27, 2011 or, if elected after April 27, 2006, within five years of becoming a director. As of December 31, 2006, each of the non-employee directors who has been on our board of directors for at least five years satisfied the stock ownership goal adopted by the board of directors.

 

The following table sets forth, as of February 26, 2007, information concerning the beneficial ownership of our common stock by each director, each of the executive officers named in this proxy statement and all current directors and executive officers as a group. Under rules of the Securities and Exchange Commission, persons who have power to vote or dispose of securities, either alone or jointly with others, are deemed to be the beneficial owners of such securities. Each person reflected in the table below has both sole voting and investment power with respect to the shares included in the table, except as described in the footnotes below.

 

 

 

 

The following table shows all persons or entities that we know were “beneficial owners” of more than five percent of our common stock on February 26, 2007.

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and any persons beneficially holding more than ten percent of our common stock to report their ownership of

common stock and any changes in that ownership to the Securities and Exchange Commission and the New York Stock Exchange. The Securities and Exchange Commission has established specific due dates for these reports, and we are required to report in this proxy statement any failure to file by these dates. Based solely on a review of the copies of the reports furnished to us and written representations that no other such statements were required, we believe that all such reports of our directors and executive officers were filed on a timely basis, except that a Form 4 reporting one transaction was filed on behalf of Mr. Potter after the due date of the report and a Form 3 was filed on behalf of Mr. Jennings after the due date of the report.

 

 

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

 

Compensation should be competitive — We focus on attracting and retaining our executive officers by providing them with compensation that is competitive with other similarly-sized public companies. Our Personnel and Compensation Committee regularly reviews each element of compensation and compares those elements to similar elements collected from proxy disclosures and survey results for our peer group and for the S&P Midcap 400 Index provided by the independent compensation consultant retained by the committee. For 2006, our peer group consisted of several similarly-sized public companies, including several coal companies. The Personnel and Compensation Committee periodically reviews and updates the peer group used for these purposes to ensure that the companies included are the most representative for our business.

 

Compensation should be performance-based — We reinforce our strategic objective of being a leader in stockholder return, safety performance and environmental stewardship by tying executive compensation to the achievement of our financial and operating performance targets. We motivate our key employees, including the executive officers named in this proxy statement, by providing them with opportunities to receive payouts under short- and long-term incentive awards upon the achievement of these objectives. In general, performance below our targets results in lower total compensation, and performance above our targets results in greater total compensation.

 

Compensation should be stockholder-focused — We align the interests of our executive officers with those of our stockholders by requiring that a portion of total compensation paid to our executive officers consist of equity or otherwise be tied to long-term stock price appreciation. In addition, our board of directors has adopted stock ownership guidelines for our executive officers that require our executive officers to own specified amounts of our common stock determined as a multiple of base salary. The Personnel and Compensation Committee believes that these programs align the interests of our executive

officers with the long-term interests of our stockholders and provide an appropriate balance against the cash components of our compensation program.

 

Elements of Our Compensation Program

 

We use a variety of compensation elements to achieve our overall compensation objectives. These elements include the following:

 

 

Each of our executive officers, including the executive officers named in this proxy statement, 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 of our executive officers receives an employment agreement and is eligible to participate in our deferred compensation plan.

 

In general, a large percentage of total compensation depends on our performance in accordance with the compensation philosophy described above. There is no pre-established policy or target for the allocation between either cash and non-cash or short- and long-term incentive compensation. Instead, the Personnel and Compensation Committee considers data collected from proxy disclosures and survey results for our peer group provided by a compensation consultant to determine the appropriate level and mix of incentive compensation. The Personnel and Compensation Committee intends for the level and mix of compensation to provide a meaningful method by which to promote successful short- and long-term decision-making.

 

We generally seek to maximize the tax deductibility of all elements of compensation. When reviewing executive compensation and our compensation programs, our Personnel and Compensation Committee considers the anticipated tax treatment to our company and to our employees. The Personnel and Compensation Committee retains the ability to evaluate the performance of our employees and to recommend that the board of directors approve compensation, even if a portion of it may not be deductible. The Personnel and Compensation Committee retains discretion to recommend to the board of directors certain payouts that are above or below the performance levels for the relevant performance period. For purposes of determining the amount of a payout to recommend to the board of directors, the Personnel and Compensation 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 performance levels against the performance targets selected at the beginning of the performance period.

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

 

Base salary — We provide each of our executive officers with an annual base salary. With the recommendation of the Personnel and Compensation Committee, the board of directors sets base salaries for our executive officers at levels designed to attract and retain experienced management talent. The Personnel and Compensation Committee reviews base salaries for our executive officers annually. Base salaries for our executive officers 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 greater percentage of total compensation for those employees with the 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 a key employee increase, a greater percentage of that employee’s total compensation will be variable. As a result, the executive officers 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. The salaries of the executive officers named in this proxy statement for 2006 are shown in the table on page 27 of this proxy statement.

 

Annual cash incentive awards — Through an annual cash incentive program, we provide approximately 245 key employees, including the executive officers named in this proxy statement, an opportunity to earn additional cash compensation. Early each year, the Personnel and Compensation Committee considers whether an annual cash incentive program should be established for that year and, if so, recommends to the board of directors the group of employees eligible to participate in the plan for that year. The annual cash incentive program includes various incentive levels based on the participant’s accountability and impact on our financial and operating performance, with target opportunities established as a percentage of base salary. For 2006, the target opportunities available to the executive officers named in this proxy statement as a percentage of their base salaries ranged from 50% to 83%.

 

For 2006, payouts under the annual cash incentive program depended upon our earnings before interest, taxes, depreciation and amortization (EBITDA), our safety and environmental performance and, for some employees, our earnings per share or operating costs per ton. In general, we must achieve an acceptable level of EBITDA performance before any other portions of the annual cash incentive awards will be paid. Some or all of these performance measures may be used for our regional or other operational 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, compensation is more closely aligned with the achievement of those business objectives over which particular employees have the greatest impact.

 

In order to create an incentive for superior performance above the targets that it sets and to acknowledge certain levels of performance below the targets that it sets, the annual cash incentive program includes minimum, target and maximum levels for each performance measure. Payment of awards under the annual cash incentive plan depends upon the achievement of such objectives. For the executive officers

named in this proxy statement for 2006, the threshold performance level equaled 25% of the target, and the maximum performance level equaled 200% of the target. Payouts under the annual cash incentive awards may be prorated for performance levels that fall within these ranges.

 

The performance targets are based upon our annual financial budgets as reviewed and approved by the board of directors and, in some cases, on our prior performance history. In the past, the board of directors has approved performance targets that the Personnel and Compensation Committee considers challenging based on prevailing market conditions at the time and on our prior performance history. Over the past five years, we have paid amounts to the executive officers named in this proxy statement under the annual cash incentive plan above the target levels in only one year.

 

In early 2007, upon the recommendation of the Personnel and Compensation Committee, the board of directors approved payouts under the annual cash incentive plan for 2006 at levels that were slightly lower than the target levels based on our performance. Payouts under the annual cash incentive plan for 2006 for the executive officers named in this proxy statement are shown in the table on page 27 of this proxy statement. The threshold, target and maximum annual cash incentives awarded to the executive officers named in this proxy statement in 2006 are shown in the table on page 29 of this proxy statement.

 

Restricted stock — From time to time, upon the recommendation of the Personnel and Compensation Committee, the board of directors may grant restricted stock to certain of our executive officers. 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. 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.

 

Restricted stock units — In 2006, upon the recommendation of the Personnel and Compensation Committee, the board of directors granted restricted stock units to each of our executive officers to retain and motivate them, to promote long-term stock price appreciation and to reinforce stock ownership levels. The board of directors has generally used restricted stock units rather than restricted stock because the executive officers may elect to defer receipt of the restricted stock and the associated taxes upon vesting of restricted stock units. 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 number of shares of our common stock held by an executive officer has not been a factor considered by the Personnel and Compensation Committee in recommending subsequent awards of restricted stock units to the board of directors. We pay dividend equivalent amounts in cash to each of the executive officers based on the number of unvested restricted stock units held by the executive officers 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.

 

The number of restricted stock units and the grant date fair value of restricted stock units awarded to the executive officers named in this proxy statement for 2006 are shown in the table on page 29 of this

proxy statement. For 2007, the Personnel and Compensation Committee has determined to replace restricted stock units with stock options, which we discuss in greater detail below.

 

Performance units — In 2006, upon the recommendation of the Personnel and Compensation Committee, the board of directors awarded performance units to approximately 50 key employees, including the executive officers named in this proxy statement, to motivate them to focus on our performance over a longer period than our annual cash incentive award program. Performance units provide an opportunity for the executive officers named in this proxy statement to earn additional compensation ranging from 25% to 35% of their targeted total compensation depending upon the successful achievement of performance objectives over a three-year performance period. Each performance unit represents the right to receive $1.00 per unit, which may be paid in cash, stock or a combination of cash and stock.

 

For the 2006-2008 performance period, payouts under the performance units will 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, with a greater weight given to the achievement of the EBITDA objective. In order to create an incentive for superior performance above the targets that it sets and to acknowledge certain levels of performance below the targets that it sets, the performance units include threshold, target and maximum levels for each performance measure. For the executive officers named in this proxy statement for the performance units awarded in 2006, the threshold performance level for the achievement of EBITDA growth equals 25% of the target, and the maximum performance level equals 200% of the target. The threshold performance level for the achievement of the safety and environmental objectives equals 100% of the target, and the maximum performance level equals 200% of the target. Payouts within these ranges depend upon our performance relative to the targets.

 

The performance targets are based upon our long-term financial budgets as reviewed and approved by the board of directors and on our prior performance history. Because payouts under the performance units will depend upon our performance relative to a peer group, the Personnel and Compensation Committee considers the objectives used for performance units to be challenging since higher payouts require us to outperform our peer group over an extended period of time.

 

In early 2007, upon the recommendation of the Personnel and Compensation Committee, the board of directors approved a cash payout of the performance units awarded in 2004 above the target level. While the EBITDA growth objective fell slightly short of target, the board of directors considered our performance in several areas, including safety, environmental and financial performance and concluded that significant long-term financial and operating objectives had been accomplished. Payouts for performance units awarded to the executive officers named in this proxy statement in 2004 are shown in the table on page 27 of this proxy statement. The threshold, target and maximum payouts in future periods for performance units awarded to the executive officers named in this proxy statement in 2006 are shown in the table on page 29 of this proxy statement. For 2007, the Personnel and Compensation Committee has determined to replace performance unit awards with stock options, which we discuss in greater detail below.

 

Stock options — Prior to 2003, we used stock options as an element of compensation intended to align the interests of our key employees with the long-term interests of our stockholders by providing additional compensation for stock price appreciation. In 2002, upon the recommendation of the Personnel and Compensation Committee, the board of directors awarded stock options to certain employees, including the executive officers named in this proxy statement, that were intended to apply to 2002 and to 2003. From 2003 to 2006, we did not grant stock options to our executive officers.

 

In 2007, upon the recommendation of the Personnel and Compensation Committee, the board of directors determined to replace the value of restricted stock units and performance units with stock options. The Personnel and Compensation Committee believes that long-term stock price appreciation is reflective of our achievement of the long-term performance objectives established by our board of directors. 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.

 

Performance-contingent phantom stock — From time to time, upon the recommendation of the Personnel and Compensation Committee, our board of directors has awarded our executive officers with performance-contingent phantom stock in order to provide the executive officers 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 officer has the ability to impact our long-term financial performance. In order to align the interests of our executive officers 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. Because payouts under the performance-contingent phantom stock awards depend upon long-term stock price appreciation, the Personnel and Compensation Committee considers the objectives used for these awards to be challenging since higher payouts require 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 the 2005 performance-contingent phantom stock awards, our executive officers can 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 half of the performance-contingent phantom stock awards can 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.

 

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

officer elects to defer in shares of our common stock. We did not award any performance-contingent phantom stock to our executive officers in 2006.

 

Perquisites and other benefits — We provide some of our executive officers 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 executive officers:

 

 

The perquisites paid to the executive officers named in this proxy statement in 2006 are shown in the table on page 27 of this proxy statement.

 

Supplemental pension plan benefits — We sponsor a defined benefit pension plan covering all of our eligible employees, including our executive officers. 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 executive officers 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 executive officers named in this proxy statement, you should see “Pension Benefits” beginning on page 33 of this proxy statement.

 

Deferred compensation plan — We sponsor a tax-qualified defined contribution plan covering all of our eligible employees, including the executive officers 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 deferred compensation plan that allows eligible employees, including the executive officers named in this proxy statement, to defer receipt of a portion of their base salaries and annual cash and long-term incentive awards. 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 executive officers named in this proxy statement, you should see “Non-Qualified Deferred Compensation” beginning on page 34 of this proxy statement.

 

Employment agreements — In order to induce certain key employees, including the executive officers named in this proxy statement, to remain employed with us and to provide them with some financial security in the event their employment with us is terminated without cause, we provide those employees with employment agreements that provide for cash payments 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 financial and operating performance. For more information about the employment agreements with the executive officers named in this proxy statement, you should see “Potential Payments Upon Termination of Employment or Change-in-Control” beginning on page 35 of this proxy statement.

 

Stock ownership guidelines — Our board of directors has adopted stock ownership guidelines for our executive officers that are intended to link the interests of our executive officers with the long-term interests of our stockholders. 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 executive officers must accumulate by January 1, 2009 or, if elected after January 1, 2004, within five years of becoming an executive officer. 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 executive officers having the highest levels of responsibility. As of December 31, 2006, each of our executive officers who has been an executive officer for at least five years satisfied the stock ownership goal adopted by the board of directors.

 

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 executive officers for 2006:

 

 

 

 

We determined the aggregate incremental cost of financial planning services, social and professional club membership dues, annual physical examinations and spousal travel expenses by reference to our actual out-of-pocket costs for such benefits or a prorated portion of our actual out-of-pocket costs in the event such costs were not separately identifiable.

 

The following table shows information relating to the grants of certain equity and non-equity awards made to the executive officers named in this proxy statement during 2006:

 

 

 

The following table shows information relating to the equity awards previously made to the executive officers named in this proxy statement which remain outstanding at December 31, 2006. We have adjusted the amounts reported in prior years for the two-for-one stock split on May 15, 2006.