exv10w3



 





Exhibit 10.3




EMPLOYEE MATTERS AGREEMENT




by and between




PEABODY ENERGY CORPORATION

and

PATRIOT COAL CORPORATION




Dated October 22, 2007




 









 





TABLE OF CONTENTS




	 	 	 	 	 
	 	 	Page	 
	 
	 	 	 	 
	ARTICLE 1 DEFINITIONS AND INTERPRETATION
	 	 	1	 
	Section 1.1 Definitions
	 	 	1	 
	Section 1.2 References; Interpretation
	 	 	5	 
	 
	 	 	 	 
	ARTICLE 2 GENERAL PRINCIPLES
	 	 	5	 
	Section 2.1 Assumption and Retention of Liabilities.
	 	 	5	 
	Section 2.2 Patriot Employee Participation in PEC Benefit Plans.
	 	 	6	 
	Section 2.3 Service Credit
	 	 	6	 
	Section 2.4 Approval of Patriot Plans by PEC as Sole Shareholder
	 	 	7	 
	 
	 	 	 	 
	ARTICLE 3 RETIREMENT PLANS
	 	 	7	 
	Section 3.1 PEC and Patriot 401(k) Plans.
	 	 	7	 
	Section 3.2 PEC and Patriot Supplemental Defined Contribution Plans.
	 	 	9	 
	Section 3.3 PEC Defined Benefit Retirement Plans
	 	 	9	 
	Section 3.4 PEC Notice to Patriot of Benefit Distributions
	 	 	10	 
	 
	 	 	 	 
	ARTICLE 4 HEALTH AND WELFARE PLANS
	 	 	10	 
	Section 4.1 Patriot Welfare Plans.
	 	 	10	 
	Section 4.2 Reimbursement Account Plan.
	 	 	10	 
	Section 4.3 Retiree Medical Benefits.
	 	 	11	 
	Section 4.4 COBRA and HIPAA
	 	 	12	 
	Section 4.5 Liabilities.
	 	 	13	 
	Section 4.6 Vacation and Other Time-Off Benefits
	 	 	13	 
	 
	 	 	 	 
	ARTICLE 5 LONG-TERM INCENTIVE AWARDS
	 	 	14	 
	Section 5.1 Treatment of Outstanding PEC Options.
	 	 	14	 
	Section 5.2 Treatment of Outstanding PEC Restricted Stock.
	 	 	15	 
	Section 5.3 Treatment of Outstanding PEC Performance Units Awards.
	 	 	17	 
	Section 5.4 PEC ESPP
	 	 	18	 
	Section 5.5 Cooperation
	 	 	18	 
	Section 5.6 SEC Registration
	 	 	18	 
	Section 5.7 Savings Clause
	 	 	19	 
	 
	 	 	 	 
	ARTICLE 6 ADDITIONAL COMPENSATION MATTERS
	 	 	19	 
	Section 6.1 Annual Incentive Awards.
	 	 	19	 
	Section 6.2 PEC Individual Arrangements.
	 	 	20	 
	Section 6.3 Severance Benefits
	 	 	20	 
	Section 6.4 Benefit Administration.
	 	 	20	 
	Section 6.5 Tax Matters
	 	 	21	 
	 
	 	 	 	 
	ARTICLE 7 INDEMNIFICATION
	 	 	21	 
	 
	 	 	 	 
	ARTICLE 8 GENERAL AND ADMINISTRATIVE
	 	 	22	 
	Section 8.1 Sharing of Information
	 	 	22	 
	Section 8.2 Reasonable Efforts/Cooperation
	 	 	22	 
	Section 8.3 Employer Rights
	 	 	22	 






 









 






	 	 	 	 	 
	 	 	Page	 
	 
	 	 	 	 
	Section 8.4 Effect on Employment
	 	 	22	 
	Section 8.5 Consent of Third Parties
	 	 	22	 
	Section 8.6 Access to Employees
	 	 	23	 
	Section 8.7 Beneficiary Designation/Release of Information/Right to Reimbursement
	 	 	23	 
	Section 8.8 Not a Change in Control
	 	 	23	 
	 
	 	 	 	 
	ARTICLE 9 MISCELLANEOUS
	 	 	23	 
	Section 9.1 Effect if Distribution Does not Occur
	 	 	23	 
	Section 9.2 Relationship of Parties
	 	 	23	 
	Section 9.3 Affiliates
	 	 	24	 
	Section 9.4 Notices
	 	 	24	 
	Section 9.5 Entire Agreement
	 	 	24	 
	Section 9.6 Waivers
	 	 	24	 
	Section 9.7 Amendments
	 	 	25	 
	Section 9.8 Termination.
	 	 	25	 
	Section 9.9 Governing Law
	 	 	25	 
	Section 9.10 Dispute Resolution
	 	 	25	 
	Section 9.11 Titles and Headings
	 	 	25	 
	Section 9.12 Counterparts
	 	 	25	 
	Section 9.13 Assignment
	 	 	25	 
	Section 9.14 Severability
	 	 	26	 
	Section 9.15 Exhibits and Schedules
	 	 	26	 
	Section 9.16 Specific Performance
	 	 	26	 
	Section 9.17 Waiver of Jury Trial
	 	 	26	 
	Section 9.18 Authorization
	 	 	27	 
	Section 9.19 No Third-Party Beneficiaries
	 	 	27	 
	Section 9.20 Construction
	 	 	27	 






ii









 






EMPLOYEE MATTERS AGREEMENT




     This EMPLOYEE MATTERS AGREEMENT (the “Agreement”) is entered into October 22, 2007, by
and between Peabody Energy Corporation, a Delaware corporation (“PEC”), and Patriot Coal
Corporation (“Patriot”), a Delaware corporation (“Patriot”) (each a “Party”
and together the “Parties”).



RECITALS




     WHEREAS, PEC, acting through its direct and indirect Subsidiaries, currently conducts several
businesses in the coal industry;



     WHEREAS, the Board of Directors of PEC has determined that it is appropriate, desirable and in
the best interests of PEC and its shareholders to separate PEC into two separate, independent,
publicly traded companies by creating Patriot and distributing a portion of PEC’s coal mining
business to Patriot. The remainder of the PEC businesses will continue to be owned and conducted,
directly or indirectly, by PEC;



     WHEREAS, to effectuate the distribution, the Parties entered into that certain Separation
Agreement, Plan of Reorganization and Distribution dated of even date herewith (the “Separation
Agreement”); and



     WHEREAS, pursuant to the Separation Agreement, PEC and Patriot have agreed to enter into this
Agreement for the purpose of allocating between and among them assets, liabilities and
responsibilities with respect to certain non-collectively-bargained employee compensation and
benefit plans and arrangements;



     NOW, THEREFORE, in consideration of the foregoing premises, the mutual promises and covenants
hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Parties, intending to be legally bound, agree as follows:



ARTICLE 1

DEFINITIONS AND INTERPRETATION




     Section 1.1 Definitions. Capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Separation Agreement. The following terms shall have the
following meanings:



     “Adjusted PEC Option” shall have the meaning assigned thereto in Section 5.1(a) of
this Agreement.



     “Adjusted PEC Performance Units” shall have the meaning assigned thereto in Section
5.3(a) of this Agreement.



     “Agreement” shall have the meaning assigned thereto in the preamble to this Agreement.



 









 





     “Benefit Plan” means, with respect to an entity, each plan, program, arrangement,
agreement or commitment that is an employment, consulting, non-competition or deferred compensation
agreement, or an executive compensation, incentive bonus or other bonus, employee pension,
profit-sharing, savings, retirement, supplemental retirement, stock option, stock purchase,
performance units, restricted stock, other equity-based compensation, severance pay, salary
continuation, life, health, hospitalization, sick leave, vacation pay, disability or accident
insurance plan, corporate-owned or key-person life insurance or other employee benefit plan,
program, arrangement, agreement or commitment that covers non-collectively-bargained employees,
including any “employee benefit plan” (as defined in ERISA Section 3(3)) sponsored or maintained by
such entity (or to which such entity contributes or is required to contribute).



     “COBRA” means the continuation coverage requirements for “group health plans” under
Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and as codified
in Code Section 4980B and ERISA Sections 601 through 608, together with all regulations in effect
thereunder.



     “Code” means the Internal Revenue Code of 1986, as amended.



     “Detrimental Conduct Provisions” means any provisions that proscribe conduct of PEC
Employees, Patriot Employees, or former PEC Employees in their capacity as such, whether set forth
in outstanding awards issued under the PEC Stock Plans or otherwise, in each case as in effect from
time to time.



     “Distribution” means the distribution to the holders of PEC Common Stock of all of the
outstanding shares of Patriot Common Stock at the rate of one share of Patriot Common Stock for
every ten shares of PEC Common Stock outstanding as of the Record Date.



     “Distribution Date” means the date upon which the distribution described in the
Separation Agreement shall be effective, as defined in the Separation Agreement.



     “DOL” means the United States Department of Labor.



     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.



     “HIPAA” means the Health Insurance Portability and Accountability Act of 1996, as
amended.



     “IRS” means the United States Internal Revenue Service.



     “Parties” shall have the meaning assigned thereto in the preamble to this Agreement.



     “Patriot” shall have the meaning assigned thereto in the preamble to this Agreement.



     “Patriot 401(k) Plan” shall have the meaning assigned thereto in Section 3.1(a) of
this Agreement.



     “Patriot Benefit Plan” means any Benefit Plan sponsored, maintained or contributed to
by any member of the Patriot Group as such Group is constituted on or after the Distribution Date.



2









 





     “Patriot Common Stock” means the outstanding shares of common stock, $0.01 par value,
of Patriot.



     “Patriot Employee” means any individual who is employed by or will be employed by
Patriot or any member of the Patriot Group, including active employees and employees on vacation
and approved leave of absence (including maternity, paternity, family, sick leave, qualified
military service under the Uniformed Services Employment and Reemployment Rights Act of 1994,
short- or long-term disability leave, leave under the Family Medical Leave Act and other approved
leave).



     “Patriot Participant” means any individual who, following the Distribution Date, is a
Patriot Employee or a beneficiary, dependent or alternate payee of a Patriot Employee.



     “Patriot Reimbursement Account Plan” shall have the meaning assigned thereto in
Section 4.2(a) of this Agreement.



     “Patriot Retiree Medical Program” shall have the meaning assigned thereto in Section
4.3(a) of this Agreement.



     “Patriot Senior Management Employee” means a member of the Patriot senior executive
team designated by PEC who transfers employment from PEC to Patriot as of the Distribution Date and
is party to a transition letter agreement with PEC; provided, however, that the Chairman of the
Patriot Board of Directors and Executive Advisor for Patriot shall not be a Patriot Senior
Management Employee.



     “Patriot Service Plans” means, collectively, the Patriot 401(k) Plan and the Patriot
Welfare Plans to the extent eligibility for or the level of benefits thereunder depends on length
of service, including the Patriot vacation, short-term disability and retiree medical programs.



     “Patriot Stock Plan” shall have the meaning assigned thereto in Section 2.4 of this
Agreement.



     “Patriot Supplemental Defined Contribution Plan” shall have the meaning assigned
thereto in Section 3.2(b) of this Agreement.



     “Patriot Welfare Plans” shall have the meaning assigned thereto in Section 4.1(a) of
this Agreement.



     “PEC” shall have the meaning assigned thereto in the preamble to this Agreement.



     “PEC 401(k) Plan” means the Peabody Investments Corp. Employee Retirement Account.



     “PEC Benefit Plan” means any Benefit Plan sponsored, maintained or contributed to by
any member of the PEC Group as such Group is constituted on or after the Distribution Date.



     “PEC Common Stock” means the outstanding shares of common stock, $0.01 par value, of
PEC.



3









 





     “PEC Employee” means any individual who is employed by or will be employed by PEC or
any member of the PEC Group, including active employees and employees on vacation and approved
leave of absence (including maternity, paternity, family, sick leave, qualified military service
under the Uniformed Services Employment and Reemployment Rights Act of 1994, short- or long-term
disability leave, leave under the Family Medical Leave Act and other approved leave).



     “PEC ESPP” means the Peabody Energy Corporation Employee Stock Purchase Plan.



     “PEC Option” means an option to purchase shares of PEC Common Stock granted pursuant
to one of the PEC Stock Plans.



     “PEC Participant” means any individual who, following the Distribution Date, is a PEC
Employee, a former PEC Employee or a beneficiary, dependent or alternate payee of any of the
foregoing.



     “PEC Performance Unit” means a unit granted by PEC or one of its affiliates pursuant
to one of the PEC Stock Plans representing a general unsecured promise by PEC or one of its
affiliates to deliver a share of PEC Common Stock (or the cash equivalent) upon the satisfaction of
one or more performance-based vesting requirements.



     “PEC Reimbursement Account Plan” shall have the meaning assigned thereto in Section
4.2(a) of this Agreement.



     “PEC Restricted Share” means a share of PEC Common Stock granted by PEC or one of its
affiliates pursuant to one of the PEC Stock Plans which is subject to a vesting requirement or
other restriction.



     “PEC Retiree Medical Allowance” shall have the meaning assigned thereto in Section
4.3(a) of this Agreement.



     “PEC Pension Plan” means the Peabody Investments Corp. Retirement Plan for Salaried
Employees.



     “PEC SERA” shall have the meaning assigned thereto in Section 3.2(a) of this
Agreement.



     “PEC Service Plans” means, collectively, the PEC Pension Plan, the PEC 401(k) Plan and
the PEC Welfare Plans to the extent eligibility for or the level of benefits thereunder depends on
length of service, including the PEC vacation, short-term disability and retiree medical programs.



     “PEC Stock Plans” means, collectively, the Peabody Energy Corporation 2004 Long-Term
Equity Incentive Plan, the Peabody Energy Corporation Long-Term Equity Incentive Plan, the 1998
Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings Corporation, the Peabody
Energy Corporation Equity Incentive Plan for Non-Employee Directors and any other stock option or
stock incentive compensation plan or arrangement



4









 







maintained before the Distribution Date for employees, officers, or non-employee directors of
PEC or its affiliates, as amended.



     “PEC Welfare Plans” shall have the meaning assigned thereto in Section 4.1(a) of this
Agreement.



     “Separation Agreement” shall have the meaning assigned thereto in the recitals to this
Agreement.



     “Service Crediting Date” means the date on which a PEC Employee who participates in
any of the PEC Service Plans becomes employed by a member of the Patriot Group (a) immediately
following employment with the PEC Group and (b) within one (1) year after the Distribution Date (or
such later date as mutually agreed to by the Parties), as further described in Section 2.3(a) of
this Agreement.



     “Subsequent Patriot Employee” means an individual who becomes employed by Patriot or
any member of the Patriot Group (a) later than the Distribution Date but within one (1) year after
the Distribution Date (or such later date as mutually agreed to by the parties) and (b) immediately
following employment with the PEC Group.



     Section 1.2 References; Interpretation. References in this Agreement to any gender
include references to all genders, and references to the singular include references to the plural
and vice versa. Unless the context otherwise requires, the words “include”, “includes” and
“including” when used in this Agreement shall be deemed to be followed by the phrase “without
limitation.” Unless the context otherwise requires, references in this Agreement to Articles,
Sections, Annexes, Exhibits and Schedules shall be deemed to be references to Articles and Sections
of, and Annexes, Exhibits and Schedules to, this Agreement. Unless the context otherwise requires,
the words “hereof”, “hereby” and “herein” and words of similar meaning when used in this Agreement
refer to this Agreement in its entirety and not to any particular Article, Section or provision of
this Agreement.



ARTICLE 2

GENERAL PRINCIPLES




     Section 2.1 Assumption and Retention of Liabilities.




     (a) As of the Effective Time, except as otherwise expressly provided for in this
Agreement, the Liability Assumption Agreements, or any other agreement by and between the
Parties and/or their affiliates, PEC shall, or shall cause one or more members of the PEC
Group to, retain and PEC hereby agrees to pay, perform, fulfill and discharge, in due course
in full: (i) all Liabilities under all PEC Benefit Plans; and (ii) any other Liabilities or
obligations expressly assigned to PEC or any of its affiliates under this Agreement.




     (b) As of the Effective Time, except as otherwise expressly provided for in this
Agreement, the Liability Assumption Agreements, or any other agreement by and between the Parties and/or their affiliates, Patriot shall, or shall cause one or more
members of the Patriot Group to, retain or assume and Patriot hereby agrees to pay,



5









 







perform,
fulfill and discharge, in due course in full: (i) all Liabilities under all Patriot Benefit
Plans; and (ii) any other Liabilities or obligations expressly assigned to Patriot or any of
its affiliates under this Agreement.




     (c) From time to time after the Distribution Date, Patriot shall promptly reimburse
PEC, upon PEC’s reasonable request and the presentation by PEC of such substantiating
documentation as Patriot shall reasonably request, for the cost of any obligations or
Liabilities satisfied or assumed by PEC or its affiliates that are, or that have been made
pursuant to this Agreement, the responsibility of Patriot or any of its affiliates. Except
as otherwise provided in this Agreement, any such request for reimbursement must be made by
PEC not later than the first anniversary of the Distribution Date.




     (d) From time to time after the Distribution Date, PEC shall promptly reimburse
Patriot, upon Patriot’s reasonable request and the presentation by Patriot of such
substantiating documentation as PEC shall reasonably request, for the cost of any
obligations or Liabilities satisfied or assumed by Patriot or its affiliates that are, or
that have been made pursuant to this Agreement, the responsibility of PEC or any of its
affiliates. Except as otherwise provided in this Agreement, any such request for
reimbursement must be made by Patriot not later than the first anniversary of the
Distribution Date.



     Section 2.2 Patriot Employee Participation in PEC Benefit Plans. Except as otherwise
expressly provided for in this Agreement or as otherwise expressly agreed to in writing between the
Parties, effective as of the Distribution Date (or a Patriot Employee’s later date of separation
from service with the PEC Group) each Patriot Employee and any other Patriot service provider
(including any individual who is an independent contractor, temporary employee, temporary service
worker, consultant, freelancer, agency employee, leased employee, on-call worker, incidental
worker, or non-payroll worker of any member of the Patriot Group or in any other employment,
non-employment, or retainer arrangement, or relationship with any member of the Patriot Group)
shall cease to participate in, be covered by, accrue benefits under, be eligible to contribute to
or have any rights (other than to benefits that have accrued and vested by the Distribution Date
or, if later, the Patriot Employee’s date of separation from service with the PEC Group) under any
PEC Benefit Plan, and PEC and Patriot shall take all necessary action to effectuate each such
cessation.



     Section 2.3 Service Credit. Except as otherwise expressly provided in this Agreement
or as otherwise expressly agreed to in writing between the Parties, Patriot (acting directly or
through its affiliates) shall cause the Patriot Service Plans to provide each PEC Employee who
becomes a Patriot Participant credit for purposes of eligibility, vesting, determination of benefit
levels, and, to the extent applicable, benefit accruals under the Patriot Service Plans for such
Patriot Participant’s service with any member of the PEC Group, in accordance with subsections (a)
and (b) below, to the same extent such service was recognized by the applicable PEC Service Plan;
provided that such service shall not be recognized to the extent that such
recognition would result in the duplication of benefits.




     (a) If a PEC Employee who participates in any of the PEC Service Plans (i) becomes
employed by a member of the Patriot Group within one (1) year after the Distribution Date
(or such later date as mutually agreed to by the Parties) (the “Service



6









 







Crediting
Date”), and (ii) such PEC Employee was continuously employed by the PEC Group from a
date before the Distribution Date until immediately before the date such PEC Employee
commences active employment with a member of the Patriot Group, then such PEC Employee’s
service with the PEC Group shall be recognized for purposes of eligibility, vesting and
level of benefits under the appropriate Patriot Service Plans, in each case to the same
extent as such PEC Employee’s service with the PEC Group was recognized under the
corresponding PEC Service Plans.




     (b) If a PEC Employee who participates in any of the PEC Service Plans becomes employed
by a member of the Patriot Group either (i) after the Service Crediting Date or (ii) without
having been continuously employed by the PEC Group from a date before the Distribution Date
until immediately before the date such PEC Employee commences active employment with a
member of the Patriot Group, then, except to the extent required by applicable Law, such
individual’s service with the PEC Group will not be recognized for any purpose under any
Patriot Service Plan.



     Section 2.4 Approval of Patriot Plans by PEC as Sole Shareholder. Effective before
the Distribution Date, Patriot shall adopt the Patriot Coal Corporation 2007 Long-Term Equity
Incentive Plan (the “Patriot Stock Plan”), which shall permit the issuance of long-term
incentive awards that have material terms and conditions substantially similar to the long-term
incentive awards issued under the Peabody Energy Corporation 2004 Long-Term Equity Incentive Plan.
The Patriot Stock Plan and the annual incentive plan adopted by Patriot in accordance with Section
6.1(b) of this Agreement shall be approved prior to the Distribution Date by a PEC affiliate as
Patriot’s sole shareholder.



ARTICLE 3

RETIREMENT PLANS




     Section 3.1 PEC and Patriot 401(k) Plans.




     (a) Patriot 401(k) Plan. Effective as of the Distribution Date, Patriot shall,
or shall cause one of its affiliates to, establish a defined contribution retirement plan
and trust for the benefit of Patriot Participants (the “Patriot 401(k) Plan”).
Patriot shall be responsible for taking all necessary, reasonable and appropriate action to
establish, maintain and administer the Patriot 401(k) Plan so that it is qualified under
Code Section 401(a) and the trust thereunder is exempt under Code Section 501(a). Patriot
(acting directly or through its affiliates) shall be responsible for any and all Liabilities
and other obligations with respect to the Patriot 401(k) Plan.




     (b) Transfer of PEC 401(k) Plan Assets. Not later than thirty (30) days after
the Distribution Date (or at such later time as mutually agreed in writing by the Parties),
PEC shall cause the accounts (including any outstanding loan balances and any employer
contribution accounts, vested or unvested) in the PEC 401(k) Plan attributable to Patriot
Participants who are employed as of the transfer date and all of the assets in the PEC
401(k) Plan related thereto to be transferred (based on the investments, including PEC Common Stock, in place on or as soon as administratively practicable before the
transfer date) to the Patriot 401(k) Plan, and Patriot shall cause the Patriot 401(k) Plan
to accept such transfer of accounts and underlying assets and, effective as of the date of such



7









 







transfer, to assume and to fully perform, pay and discharge all obligations of the PEC
401(k) Plan relating to the accounts of Patriot Participants as of the transfer date, to the
extent the assets related to those accounts are actually transferred from the PEC 401(k)
Plan to the Patriot 401(k) Plan. The transfer of assets shall be conducted in accordance
with Code Section 414(l), Treasury Regulation Section 1.414(1)-1, and ERISA Section 208.
The PEC 401(k) Plan accounts of individuals who become Patriot Participants after the
Distribution Date that are not transferred to the Patriot 401(k) Plan pursuant to the
procedure described above shall be governed by the regular terms of the PEC 401(k) Plan.




     (c) Continuation of Elections. As of the Distribution Date, Patriot (acting
directly or through its affiliates) shall cause the Patriot 401(k) Plan to recognize and
maintain PEC 401(k) Plan elections or designations, including participant deferral elections
(to the extent possible), investment elections, beneficiary designations, and the rights of
alternate payees under qualified domestic relations orders with respect to Patriot
Participants, to the extent such elections or designations are available under the Patriot
401(k) Plan and continued pursuant to procedures adopted under the Patriot 401(k) Plan.
With respect to Patriot Participant elections to invest in PEC Common Stock, the Patriot
401(k) Plan will invest new deferral amounts covered by such elections in the appropriate
default target retirement fund under the Patriot 401(k) Plan and Patriot Participants may
change the investment of such amounts in accordance with Patriot 401(k) Plan procedures.
The PEC Common Stock investment alternative shall remain available under the Patriot 401(k)
Plan for up to two years (as determined by the Patriot 401(k) Plan fiduciaries in their sole
discretion) only with respect to accounts transferred from the PEC 401(k) Plan as described
in paragraph (b) above and only to the extent that such accounts are invested in PEC Common
Stock at the time of the transfer. A Patriot Common Stock investment alternative may be
made available under the Patriot 401(k) Plan at a later date.




     (d) Form 5310-A. No later than thirty (30) days prior to the Distribution
Date, PEC shall, if necessary, file IRS Form 5310-A regarding the transfer of Assets and
Liabilities from the PEC 401(k) Plan to the Patriot 401(k) Plan as discussed in this Article
3.




     (e) Contributions through the Distribution Date; Performance Contributions.
All contributions payable to the PEC 401(k) Plan through the Distribution Date with respect
to employee deferrals and contributions for PEC Employees who become Patriot Employees as of
the Distribution Date, determined in accordance with the terms and provisions of the PEC
401(k) Plan, ERISA and the Code, shall be paid by PEC (or its affiliate) to the PEC 401(k)
Plan prior to the date of the asset transfer described in paragraph (b) above. With respect
to the performance contributions that could have been earned during calendar year 2007 by
PEC Employees (i) who become Patriot Employees in connection with the Distribution, (ii) for
whom the 2007 performance contribution liability resides with an entity that does not
operate the Patriot Business (as defined in the Separation Agreement), and (iii) who remain employed with
the Patriot Group on December 31, 2007, PEC shall determine, in accordance with regular plan
procedures, the performance contribution amount each such Patriot Employee could have
received



8









 







under the PEC 401(k) Plan, based on PEC’s performance and such individual’s
pro-rated PEC salary for the year, and shall remit that amount in cash to Patriot at the
same time performance contributions are deposited into the PEC 401(k) Plan. Patriot shall
deposit the corresponding amount into the Patriot 401(k) Plan account of the affected
Patriot Employee as soon as administratively feasible following receipt.




     The Patriot Group shall fund and deposit into the Patriot 401(k) Plan the 2007
performance contributions on behalf of PEC Employees who become Patriot Employees in
connection with the Distribution and for whom the performance contribution liability resides
with an entity that operates the Patriot Business (as listed in Exhibit A to the Separation
Agreement).



     Section 3.2 PEC and Patriot Supplemental Defined Contribution Plans.




     (a) PEC Supplemental Employee Retirement Account Plan. Following the
Distribution Date, the PEC Group shall retain all obligations and Liabilities under, or with
respect to, the Peabody Investments Corp. Supplemental Employee Retirement Account (the
“PEC SERA”). Any rights of Patriot Employees earned under the PEC SERA before the
Distribution Date or their later date of separation from service with the PEC Group shall
remain with the PEC SERA and shall be governed by the terms and conditions of the PEC SERA
documents. Individuals, including Patriot Employees, who separate from service with the PEC
Group become eligible for distribution of their benefits under the PEC SERA in accordance
with the plan terms and administrative procedures.




     (b) Patriot Supplemental Defined Contribution Plan. Effective on or about the
Distribution Date, Patriot shall, or shall cause one of its affiliates to, establish a
non-qualified defined contribution plan that is substantially comparable to the PEC SERA as
in effect immediately prior to the Distribution Date to benefit, on a prospective basis,
Patriot Participants who participated in the PEC SERA immediately prior to the Distribution
Date and other eligible Patriot Employees (the “Patriot Supplemental Defined
Contribution Plan”).



     Section 3.3 PEC Defined Benefit Retirement Plans. Following the Distribution Date,
the PEC Group shall retain all obligations and Liabilities under, or with respect to, any PEC or
PEC Group qualified or non-qualified defined benefit retirement plan. Any rights of Patriot
Employees earned under any such defined benefit retirement plan before the Distribution Date or
their later date of separation from service with the PEC Group shall remain with such defined
benefit retirement plan and shall be governed by the terms and conditions of the applicable plan
documents. Individuals, including Patriot Employees, who separate from service with the PEC Group
become eligible for distribution of their benefits under the PEC Group qualified and non-qualified
defined benefit retirement plans in accordance with the plan terms and administrative procedures.



     Section 3.4 PEC Notice to Patriot of Benefit Distributions. The PEC Group agrees to
notify the Patriot human resources department, unless otherwise prohibited by law, of benefit
distribution elections submitted by Patriot Employees under the PEC SERA or a PEC Group



9









 







qualified
or non-qualified defined benefit retirement plan within sixty (60) days after the PEC Group
receives such elections.



ARTICLE 4

HEALTH AND WELFARE PLANS




     Section 4.1 Patriot Welfare Plans.




     (a) Establishment of Patriot Welfare Plans. Effective as of the Distribution
Date, Patriot shall, or shall cause a Patriot affiliate to, establish health and welfare
benefit plans for the benefit of eligible Patriot Participants (the “Patriot Welfare
Plans”), the terms of which are substantially comparable to the applicable terms of the
PEC health and welfare benefit plans as in effect immediately prior to the Distribution Date
(the “PEC Welfare Plans”).




     (b) Terms of Participation in Patriot Welfare Plans. Patriot (acting directly
or through its affiliates) shall cause all Patriot Welfare Plans to (i) waive all
limitations as to preexisting conditions, exclusions, and service conditions with respect to
participation and coverage requirements applicable to Patriot Participants, other than
limitations that were in effect with respect to participants as of the Distribution Date
under the PEC Welfare Plans, and (ii) waive any waiting period limitation or evidence of
insurability requirement that would otherwise be applicable to a Patriot Participant
following the Distribution Date to the extent such Patriot Participant had satisfied any
similar limitation under the analogous PEC Welfare Plan.



     Section 4.2 Reimbursement Account Plan.




     (a) Patriot Reimbursement Account Plan. Effective as of the Distribution Date,
Patriot shall, or shall cause a Patriot affiliate to, establish a health and dependent care
reimbursement account plan (the “Patriot Reimbursement Account Plan”) with features
that are comparable to those contained in the health and dependent care reimbursement
account plan maintained by PEC (or its affiliate) immediately prior to the Distribution Date
(the “PEC Reimbursement Account Plan”). The account balance under the PEC
Reimbursement Account Plan of any PEC Participant who transfers to employment with the
Patriot Group directly from employment with the PEC Group during the period beginning on the
Distribution Date and ending on the Service Crediting Date shall be transferred within a
reasonable period to the Patriot Reimbursement Account Plan on behalf of that participant
and shall thereafter be administered in accordance with the terms of the Patriot
Reimbursement Account Plan. If a PEC Participant whose health reimbursement account is
transferred to the Patriot Reimbursement Account Plan has received health reimbursements
that exceed the amount he or she has contributed to the health reimbursement account as of
the transfer date, Patriot (or its affiliate) shall collect that Patriot Employee’s payroll
contributions in accordance with the Patriot Reimbursement Account Plan procedures and remit
them on a monthly basis to PEC until PEC has recouped the total health reimbursements paid
to or for that PEC Participant under the PEC Reimbursement Account Plan for the year;
provided that such contributions and remittances will cease upon the Patriot Employee’s
cessation of participation in the Patriot Reimbursement Account Plan. The PEC



10









 







Reimbursement
Account Plan balance of any PEC Participant who transfers to employment with the Patriot
Group after the Service Crediting Date shall be handled in accordance with the terms and
procedures of the PEC Reimbursement Account Plan.




     PEC shall administer the Patriot Reimbursement Account Plan from the Distribution Date
through December 31, 2007 (including the claims run-out period following the end of the plan
year) and shall submit a monthly written invoice to Patriot detailing the reimbursement
claims and administrative fees incurred on Patriot’s behalf under the Patriot Reimbursement
Account Plan during that period. Patriot shall be liable for such amounts and shall pay
such invoices within thirty (30) business days after receipt. Patriot shall have the right,
at its own expense and upon reasonable notice to PEC, to audit, or to cause an inspection
body selected by Patriot and composed of members with appropriate professional
qualifications to audit, such invoices in a commercially reasonable manner during normal PEC
business hours, not more frequently than once each calendar quarter.




     (b) PEC Reimbursement Account Plan. PEC shall retain the Liability for
administering under the PEC Reimbursement Account Plan all reimbursement claims of PEC
Participants (including PEC Participants who participate in the PEC Reimbursement Account
Plan before becoming Patriot Employees) arising through and after the Distribution Date,
within the timeframes applicable under the plan terms.



     Section 4.3 Retiree Medical Benefits.




     (a) Patriot Retiree Medical Program. Effective on or about the Distribution
Date, Patriot shall, or shall cause one of its affiliates to, establish a retiree medical
program (the “Patriot Retiree Medical Program”) that is substantially comparable to
the retiree medical allowance arrangement maintained by PEC immediately prior to the
Distribution Date (the “PEC Retiree Medical Allowance”) to benefit, on a prospective
basis, Patriot Employees who participated in the PEC Retiree Medical Allowance prior to the
Distribution Date and other eligible Patriot Employees and certain retirees. Patriot shall
be responsible for all obligations and Liabilities under, or with respect to, the Patriot
Retiree Medical Program. The retiree medical allowance under the Patriot Retiree Medical
Program shall be based in part on service with the Patriot Group in accordance with
paragraphs (i) and (ii) below, as applicable.




     (i) Patriot Employees with No Accrued Benefit under the PEC Retiree Medical
Allowance. Patriot Employees who are eligible to participate in the Patriot
Retiree Medical Program and are not eligible for a retiree medical allowance under
the PEC Retiree Medical Allowance as of the Distribution Date or their later date of
separation from service with the PEC Group will receive credit under the Patriot
Retiree Medical Program for all of their service with the Patriot Group and the PEC
Group.




     (ii) Patriot Employees with Accrued Benefit under the PEC Retiree Medical
Allowance. Patriot Employees who are eligible for a retiree medical allowance
under the PEC Retiree Medical Allowance and are actively employed and not on
long-term disability leave as of the Distribution Date and Subsequent



11









 







Patriot
Employees who are eligible for a retiree medical allowance under the PEC Retiree
Medical Allowance and are actively employed and not on long-term disability leave as
of their date of separation from service with the PEC Group will retain their
allowance accrued under the PEC Retiree Medical Allowance. Such employees will be
eligible to accrue an additional retiree medical allowance under the Patriot Retiree
Medical Program based on their service with the Patriot Group and will not be
required to satisfy the minimum years of service requirement under the Patriot
Retiree Medical Program. The Patriot Retiree Medical Program shall not recognize
the PEC Group service of any Patriot Employee or Subsequent Patriot Employee who
earned a benefit under the PEC Retiree Medical Allowance in such a manner that such
service recognition would result in duplication of the retiree medical allowance
benefits earned under the PEC Retiree Medical Allowance.




     For the avoidance of doubt, the Patriot Group shall be responsible for the retiree
medical allowances of individuals who are retired as of the Distribution Date and who, prior
to retirement, were employed by an entity that operates the Patriot Business (as listed in
Exhibit A to the Separation Agreement). The Patriot Group shall not be responsible for the
retiree medical allowances and healthcare benefits of former employees of Peabody Coal
Company, LLC under the Peabody Investments Corp. and Affiliates Welfare Benefit Plan that
are covered by the Salaried Employee Liabilities Assumption Agreement between the Parties
and certain of their affiliates.




     (b) PEC Retiree Medical Allowance. PEC shall retain all obligations and
Liabilities under, or with respect to, the PEC Retiree Medical Allowance for Patriot
Employees and Subsequent Patriot Employees covered by paragraph (a)(ii) above. Any rights
such Patriot Employees accrued under the PEC Retiree Medical Allowance before the
Distribution Date and rights such Subsequent Patriot Employees accrued under the PEC Retiree
Medical Allowance before their date of separation from service with the PEC Group shall
remain with the PEC Retiree Medical Allowance and shall be governed by the terms and
conditions of the PEC Retiree Medical Allowance arrangement.



     Section 4.4 COBRA and HIPAA. Effective as of the Distribution Date, Patriot (acting
directly or through its affiliates) shall assume, or shall cause the Patriot Welfare Plans to
assume, responsibility for compliance with the health care continuation coverage requirements of
COBRA with respect to Patriot Employees who, immediately prior to the Distribution Date, were
covered under a PEC Welfare Plan pursuant to COBRA. PEC (acting directly or through its
affiliates) shall be responsible for administering compliance with any certificate of creditable
coverage requirements of HIPAA or Medicare applicable to the PEC Welfare Plans with respect to
Patriot Employees incurred while they were participants in the PEC Welfare Plans. The Parties
hereto agree that neither the Distribution nor any transfers of employment directly from the PEC
Group to the Patriot Group that occur as of the Distribution Date shall constitute a COBRA
qualifying event for purposes of COBRA.



     Section 4.5 Liabilities.




     (a) Insured Benefits. With respect to employee welfare and fringe benefits
that are provided through the purchase of insurance, (i) PEC (acting directly or through



12









 







its
affiliates) shall cause the PEC Welfare Plans, through the appropriate insurers, to fully
perform, pay and discharge, within the timeframes applicable under the relevant plan, all
claims that are incurred under the PEC Welfare Plans through and after the Distribution
Date, and (ii) Patriot (acting directly or through its affiliates) shall cause the Patriot
Welfare Plans, through the appropriate insurers, to fully perform, pay and discharge, within
the timeframes applicable under the relevant plan, all claims that are incurred under the
Patriot Welfare Plans from and after the Distribution Date.




     (b) Self-Insured Benefits. With respect to employee welfare and fringe
benefits that are provided on a self-insured basis, (i) PEC (acting directly or through its
affiliates) shall fully perform, pay and discharge, within the timeframes applicable under
the relevant PEC Welfare Plans, all claims that are incurred under the PEC Welfare Plans
through and after the Distribution Date, and (ii) Patriot (acting directly or through its
affiliates) shall fully perform, pay and discharge, within the timeframes applicable under
the relevant Patriot Welfare Plans, all claims that are incurred under the Patriot Welfare
Plans from and after the Distribution Date.




     (c) Invoices. PEC shall administer the Patriot Welfare Plans from the
Distribution Date through December 31, 2007 (including the claims run-out period following
the end of the plan year) and shall submit a monthly written invoice to Patriot detailing
the self-insured health and welfare benefit claims, insured benefit premiums and
administrative fees incurred on Patriot’s behalf under the Patriot Welfare Plans during that
period. Patriot shall be liable for such amounts and shall pay such invoices within thirty
(30) business days after receipt. Patriot shall have the right, at its own expense and upon
reasonable notice to PEC, to audit, or to cause an inspection body selected by Patriot and
composed of members with appropriate professional qualifications to audit, such invoices in
a commercially reasonable manner during normal PEC business hours, not more frequently than
once each calendar quarter.




     (d) Incurred Claim Definition. For purposes of this Section 4.5, a claim or
Liability is deemed to be incurred (i) with respect to medical, dental, vision and/or
prescription drug benefits, upon the rendering of health services giving rise to such claim
or Liability; (ii) with respect to disability benefits, upon the date of an individual’s
disability, as determined by the disability benefit insurance carrier or claim
administrator, giving rise to such claim or Liability; and (iii) with respect to a period of
continuous hospitalization, upon the date of admission to the hospital.



     Section 4.6 Vacation and Other Time-Off Benefits. Patriot (or its affiliate) shall
credit each individual who becomes a Patriot Employee as of the Distribution Date and each
Subsequent Patriot Employee with the amount of accrued but unused vacation time (including banked
vacation time) and other time-off benefits as such Patriot Employee or Subsequent Patriot Employee
had with the PEC Group as of the Distribution Date or, if later, his or her date of transfer from
the PEC Group to the Patriot Group. The Patriot Employees and Subsequent Patriot Employees for
whom Patriot (or its affiliate) provides vacation and other time-off credits as described above shall not have a right to a cash payment for their accrued but unused
vacation time (including banked vacation time) or other time-off benefits upon their transfer from
the PEC Group to the Patriot Group as a result of the Distribution.



13









 





     Notwithstanding the foregoing, Patriot (or its affiliate) shall not be required to credit any
Patriot Employee or Subsequent Patriot Employee with any vacation or time-off accrual to the extent
that a benefit attributable to such accrual is retained and provided by the PEC Group. The accrued
but unused vacation time (including banked vacation time) and other time-off benefits of PEC
Employees who become Patriot Employees after the Service Crediting Date shall be handled in
accordance with the terms and procedures of the PEC vacation and time-off benefits plans and
policies.



ARTICLE 5

LONG-TERM INCENTIVE AWARDS




     Section 5.1 Treatment of Outstanding PEC Options.




     (a) Adjustment of All PEC Options. Except as otherwise provided herein or
otherwise agreed in writing by the Parties, each PEC Option that is outstanding immediately
prior to the Distribution Date shall, as of the PEC ex-dividend date, be converted into an
adjusted PEC Option (an “Adjusted PEC Option”) based on a formula determined by the
PEC Compensation Committee in accordance with the pertinent terms of the applicable PEC
Stock Plan and described in Exhibit A attached hereto. Such adjustment may involve an
adjustment of the PEC Option exercise price, the number of underlying shares, and/or other
adjustments permitted by the applicable PEC Stock Plan.




     (b) Adjusted PEC Options of Patriot Employees. Adjusted PEC Options held by
Patriot Employees who are not Patriot Senior Management Employees that have not been
exercised or forfeited shall remain in effect and continue to vest following the
Distribution Date based on the optionee’s service with the Patriot Group. An Adjusted PEC
Option shall remain subject to the terms and conditions (including the exercise provisions)
of the underlying PEC Option as in effect immediately prior to the Distribution Date,
subject to amendments to the PEC Stock Plan and/or the applicable award agreement.




     (c) PEC Options of Patriot Senior Management Employees.




     (i) Options Granted before 2006 and Scheduled to Vest on or Before January
3, 2008. Adjusted PEC Options held by a Patriot Senior Management Employee that
were granted before January 1, 2006, are scheduled to vest on or before January 3,
2008 and have not been forfeited by the Distribution Date shall continue to vest
based on the optionee’s service with the Patriot Group through the earlier of his or
her date of termination from Patriot or January 3, 2008. The Patriot Senior
Management Employee shall have six (6) months after the earlier of January 3, 2008
or his or her date of termination from the Patriot Group to exercise the vested
portion of his or her Adjusted PEC Options in accordance with the terms of the
applicable plan and option agreement. An Adjusted PEC Option shall remain subject
to the terms and conditions of the underlying PEC Option as in effect immediately prior to the Distribution Date, including any Detrimental
Conduct Provisions and terms relating to post-termination exercise periods provided
for in any option holder’s employment agreement, subject to amendments to the PEC
Stock Plan and/or the applicable award agreement.



14









 






     (ii) Options Granted before 2006 and Scheduled to Vest After January 3,
2008. Adjusted PEC Options held by a Patriot Senior Management Employee that
were granted before January 1, 2006, are scheduled to vest after January 3, 2008 and
have not been forfeited by the Distribution Date shall vest in full immediately
prior to the Distribution and shall be converted to a dollar value, determined by
subtracting the exercise price from the closing price of the PEC Common Stock on the
Distribution Date, and that value will be distributed to the Patriot Senior
Management Employee as soon as practicable on or after the Distribution Date in the
form of registered shares of PEC Common Stock based on the closing price of PEC
Common Stock on the Distribution Date.




     (iii) Options Granted During 2006 or 2007. PEC Options held by a
Patriot Senior Management Employee that were granted during 2006 or 2007 and have
not been exercised or forfeited by the Distribution Date shall continue pursuant to
the terms of PEC Option agreements.




     (d) Amendment of PEC Stock Plans. Prior to the Distribution Date, PEC shall
amend the applicable PEC Stock Plans as necessary, effective as of the Distribution Date, to
provide that for purposes of the Adjusted PEC Options (including the determination of
exercisability and the post-termination exercise period), a Patriot Employee’s service with
the Patriot Group following the Distribution Date shall be deemed to be continued service
with PEC.




     (e) Exercise of Adjusted PEC Options. Upon the exercise of an Adjusted PEC
Option, regardless of the holder thereof, the exercise price shall be paid (or otherwise
satisfied to the satisfaction of PEC) in accordance with the terms of the Adjusted PEC
Option. PEC shall administer the applicable PEC Stock Plan and award agreement in
accordance with their terms and, to the extent that any tax withholding or reporting is
required, PEC shall collect the withholding amount and remit it and the pertinent
information to the entity with the withholding and reporting obligation.



     Section 5.2 Treatment of Outstanding PEC Restricted Stock.




     (a) Rights of All PEC Restricted Stock Awards. Each holder of PEC Restricted
Shares that remain outstanding on the Record Date shall receive, as of the Distribution
Date, the dividend paid in connection with the Distribution with respect to his or her PEC
Restricted Shares in accordance with the terms of the applicable plan and award agreement
and on the same basis as other PEC shareholders.




     (b) PEC Restricted Shares of Patriot Employees. PEC Restricted Shares held by
Patriot Employees who are not Patriot Senior Management Employees that have not been
forfeited by the Distribution Date shall remain in effect and continue to vest following the
Distribution Date based on the holder’s service with the Patriot Group. The PEC Restricted Shares shall remain subject to the terms and conditions of the
underlying PEC Restricted Shares award as in effect immediately prior to the Distribution
Date, subject to amendments to the PEC Stock Plan and/or the applicable award agreement.



15









 






     (c) PEC Restricted Shares of Patriot Senior Management Employees. 




     (i) PEC Restricted Shares Scheduled to Vest on or Before January 3,
2008. PEC Restricted Shares held by Patriot Senior Management Employees that
have not been forfeited by the Distribution Date shall remain in effect and continue
to vest based on the holder’s service with the Patriot Group through the earlier of
his or her date of termination from Patriot or January 3, 2008. The PEC Restricted
Shares shall remain subject to the terms and conditions of the underlying PEC
Restricted Shares award as in effect immediately prior to the Distribution Date,
including any Detrimental Conduct Provisions provided for in any holder’s employment
agreement, subject to amendments to the PEC Stock Plan and/or the applicable award
agreement.




     (ii) Restricted Shares Scheduled to Vest After January 3, 2008. PEC
Restricted Shares held by Patriot Senior Management Employees that are scheduled to
vest later than January 3, 2008 and have not been forfeited by the Distribution Date
shall become fully vested immediately prior to the Distribution and shall be
distributed to the Patriot Senior Management Employees in the form of registered
            shares of PEC Common Stock as soon as practicable on or after the Distribution Date.




     (d) Amendment of PEC Stock Plans. Prior to the Distribution Date, PEC shall
amend the applicable PEC Stock Plans as necessary, effective as of the Distribution Date, to
provide that for purposes of continued vesting of PEC Restricted Shares, a Patriot
Employee’s service with the Patriot Group following the Distribution Date shall be deemed to
be continued service with PEC




     (e) Settlement of PEC Restricted Stock Awards. Upon the vesting of PEC
Restricted Shares, PEC shall be responsible for the settlement of such PEC Restricted
Shares. PEC shall administer the applicable PEC Stock Plan and award agreement in
accordance with their terms and, to the extent that any tax withholding or reporting is
required, PEC shall collect the withholding amount and remit it and the pertinent
information to the entity with the withholding and reporting obligation.




     (f) Grant of Restricted Stock. The Executive Vice President and Chief
Marketing Officer of PEC and the Group Vice President of Eastern Operations of PEC shall be
entitled to a grant of shares of restricted PEC Stock as soon as practicable following the
approval of this Employee Matters Agreement, but in no event any later than the Distribution
Date. Such shares of restricted PEC stock shall be subject to a substantial risk of
forfeiture and transfer restrictions which shall lapse if and when both the Executive Vice
President and Chief Marketing Officer of PEC and the Group Vice President of Eastern
Operations of PEC terminate their employment with PEC and immediately commence employment
with Patriot as the Chief Executive Officer of Patriot and the Chief Operating Officer of
Patriot respectively. Such shares of restricted PEC Stock shall be forfeited on December 31, 2007 if such termination of employment
with PEC and commencement of employment with Patriot does not occur prior to such date.



16









 





     Section 5.3 Treatment of Outstanding PEC Performance Units Awards.




     (a) Adjustment of all PEC Performance Unit Awards. Each PEC Performance Unit
that is outstanding immediately prior to the Distribution Date shall be converted, as of the
PEC ex-dividend date, into an adjusted PEC Performance Unit (an “Adjusted PEC
Performance Unit”) based on a formula determined by the PEC Compensation Committee in
accordance with the pertinent terms of the applicable PEC Stock Plan and described in
Exhibit A attached hereto. Such adjustment may involve an adjustment in the number of
underlying shares and/or other adjustments permitted by the applicable PEC Stock Plan.




     (b) Adjusted PEC Performance Units of Patriot Senior Management Employees.





     (i) Adjusted PEC Performance Units Scheduled to Vest on or Before December
31, 2007. Adjusted PEC Performance Units held by Patriot Senior Management
Employees that have not been forfeited by the Distribution Date shall remain in
effect and continue to vest based on the holder’s service with the Patriot Group
through the earlier of his or her date of termination from Patriot or December 31,
2007. The Adjusted PEC Performance Units shall remain subject to the terms and
conditions of the underlying PEC Performance Units award as in effect immediately
prior to the Distribution Date, including any Detrimental Conduct Provisions
provided for in the holder’s employment agreement.




     (ii) Adjusted PEC Performance Units Scheduled to Vest After December 31,
2007. Adjusted PEC Performance Units held by a Patriot Senior Management
Employee that are scheduled to vest after December 31, 2007 and have not been
forfeited by December 31, 2007 shall become payable at their full value (without
proration) based on PEC’s actual performance results as of December 31, 2007,
provided that the Patriot Senior Management Employee remains employed with Patriot
on December 31, 2007. PEC shall pay the value of such Adjusted PEC Performance
Units in the form of PEC Common Stock in accordance with regular PEC Stock Plan
administrative procedures as soon as practicable on or after December 31, 2007, but
no later than March 15, 2008. If a Patriot Senior Management Employee terminates
employment with Patriot before December 31, 2007, a pro rata portion of his or her
Adjusted PEC Performance Units may be payable based on the terms and conditions of
the underlying PEC Performance Units award. The Adjusted PEC Performance Units
shall remain subject to the terms and conditions of the underlying PEC Performance
Units award as in effect immediately prior to the Distribution Date, including any
Detrimental Conduct Provisions provided for in the holder’s employment agreement.




     (c) Amendment of PEC Stock Plans. Prior to the Distribution Date, PEC shall
amend the applicable PEC Stock Plans as necessary, effective as of the Distribution Date, to
provide that for purposes of continued vesting of the Adjusted PEC Performance Units, a
Patriot Employee’s service with the Patriot Group following the Distribution Date through
December 31, 2007 shall be deemed to be continued service with PEC.



17









 






     (d) Settlement of Adjusted PEC Performance Unit Awards. Upon the vesting and
payment of the Adjusted PEC Performance Units, PEC shall be responsible for the settlement
of all Adjusted PEC Performance Unit awards. PEC shall administer the applicable PEC Stock
Plan and award agreement in accordance with their terms and, to the extent that any tax
withholding or reporting is required, PEC shall collect the withholding amount and remit it
and the pertinent information to the entity with the withholding and reporting obligation.



     Section 5.4 PEC ESPP. A PEC Participant who (a) is contributing to the PEC ESPP for
the offering period in effect on the Distribution Date and (b) terminates employment with PEC and
transfers directly to employment with Patriot in connection with the Distribution shall be
permitted to purchase shares during that offering period with the cash credited to his or her PEC
ESPP option account as of his or her employment termination date, provided that
such PEC Participant’s employment termination date and transfer to Patriot occurs within three (3)
months before the end of the PEC ESPP offering period. If the employment termination and Patriot
transfer date is more than three (3) months before the end of the PEC ESPP offering period, the PEC
Participant shall not be permitted to purchase shares during the offering period in effect on the
Distribution Date and his or her contributions will be refunded in accordance with the terms of the
PEC ESPP. The payroll deductions of PEC Participants covered by this provision shall continue
through the last day on which such individuals are on the PEC payroll. PEC shall amend the PEC
ESPP on or before the Distribution Date to facilitate the share purchase described in the first
sentence of this section. The PEC ESPP otherwise shall operate in accordance with its current
terms, including, among other provisions, the 18-month stock holding period requirement.



     Section 5.5 Cooperation. Each of the Parties shall establish an appropriate
administration system to handle, in an orderly manner, exercises of Adjusted PEC Options and the
settlement of PEC Restricted Shares and Adjusted PEC Performance Units. The Parties will work
together to unify and consolidate all indicative data and payroll and employment information on
regular timetables and make certain that each applicable entity’s data and records in respect of
such awards are correct and updated on a timely basis. The foregoing shall include employment
status and information required for tax withholding/remittance, compliance with trading windows and
compliance with the requirements of the Exchange Act and other applicable Laws. In addition, the
Patriot Group agrees to notify the PEC human resources department of the termination of employment
of any Patriot Employee who previously was a PEC Employee and participated in a PEC Stock Plan as
soon as administratively feasible after such individual’s separation from service with the Patriot
Group.



     Section 5.6 SEC Registration. The Parties mutually agree to use commercially reasonable efforts to maintain effective
registration statements with the SEC with respect to the long-term incentive awards described in
this Article 5, to the extent any such registration statement is required by applicable Law. To
the extent that a registration requirement applies to a PEC Stock Plan, PEC shall be responsible
for SEC rule compliance. To the extent that a registration requirement applies to a Patriot Stock
Plan on or after the Distribution Date, Patriot shall be responsible for SEC rule compliance.




18











 





     Section 5.7 Savings Clause. The Parties hereby acknowledge that the provisions of this Article 5 are intended to
achieve certain tax, legal and accounting objectives and, in the event such objectives are not
achieved, the Parties agree to negotiate in good faith regarding such other actions that may be
necessary or appropriate to achieve such objectives.



ARTICLE 6

ADDITIONAL COMPENSATION MATTERS




     Section 6.1 Annual Incentive Awards.




     (a) PEC Employees who become Patriot Employees in connection with the Distribution
shall receive their annual incentive awards for the full 2007 calendar year, calculated as
described below.




     (i) Patriot Senior Management Employees. With respect to Patriot
Senior Management Employees, sixty percent (60%) of the annual incentive shall be
nondiscretionary and based on PEC’s performance in accordance with the terms of the
PEC annual incentive plan (using PEC’s twelve-month results) and forty percent (40%)
of the annual incentive will be discretionary and based on the Patriot Senior
Management Employee’s efforts related to the Distribution in accordance with
criteria established by the Patriot Board of Directors or the Compensation Committee
thereof. The annual incentive awards will be calculated and paid, in accordance
with paragraph (b) below and the existing guidelines used by PEC to calculate and
pay such bonuses, as soon as practicable on or after December 31, 2007, but no later
than March 15, 2008.




     (ii) Other Patriot Employees. With respect to Patriot Employees who
are not Patriot Senior Management Employees, the annual incentive shall be
determined based in part on the portion of the 2007 calendar year the Patriot
Employee is employed with the PEC Group and in part on the portion of the 2007
calendar year the Patriot Employee is employed with the Patriot Group. The portion
of the annual incentive attributable to employment with the PEC Group shall be based
on PEC’s performance (using PEC’s twelve-month results) and the terms of the PEC
annual incentive plan and shall be prorated to correspond with the period of 2007
employment with the PEC Group. The portion of the annual incentive attributable to
employment with the Patriot Group shall be based on criteria established by the
Patriot Board of Directors or the Compensation Committee thereof and shall be
prorated to correspond with the period of 2007 employment with the Patriot Group.
The annual incentive awards will be calculated and paid, in accordance with
paragraph (b) below and the existing guidelines used by PEC to calculate and pay
such bonuses, as soon as practicable on or after December 31, 2007, but no later
than March 15, 2008.




     (b) Annual Incentive Liability. Except as otherwise provided in this Section
6.1, PEC shall retain responsibility for all Liabilities and fully perform, pay and
discharge all obligations, when such obligations become due, relating to any 2007 annual
incentive awards under any PEC annual incentive plan. To the extent that any such obligations
relate to PEC Employees who become Patriot Employees in connection with the



19









 







Distribution and for whom the 2007 annual incentive award liability resides with an
entity that does not operate the Patriot Business (as defined in the Separation Agreement),
(i) the PEC Group shall pay to the applicable Patriot Employees the portion of their 2007
annual incentive, if any, that corresponds with their period of employment with the PEC
Group during the 2007 calendar year, and (ii) Patriot shall pay the portion of their 2007
annual incentive, if any, that corresponds with their period of employment with the Patriot
Group during the 2007 calendar year.




     The Patriot Group shall be responsible for and pay the 2007 annual incentive awards of
PEC Employees who become Patriot Employees in connection with the Distribution and for whom
the 2007 annual incentive award liability resides with an entity that operates the Patriot
Business (as listed in Exhibit A to the Separation Agreement).




     (c) Establishment of Patriot Annual Incentive Plan. Effective on or before
January 1, 2008, Patriot (or its affiliate) shall adopt an annual incentive plan that
permits the issuance of annual incentive awards on terms and conditions substantially
comparable to those under the PEC annual incentive plan, provided that the payment amounts
and individual performance criteria shall be established in the discretion of the Patriot
Board of Directors or the Compensation Committee thereof.



     Section 6.2 PEC Individual Arrangements. PEC acknowledges and agrees that, except as
otherwise provided herein, PEC (or its affiliate) shall have full responsibility with respect to
any Liabilities and the payment or performance of any obligations arising out of or relating to any
employment, consulting, non-competition, retention or other compensatory arrangement previously
provided by any member of the PEC Group to any PEC Participant, including life insurance policies
not held in any trust and covering any PEC Participant.



     Section 6.3 Severance Benefits. PEC and Patriot acknowledge and agree that the
transactions contemplated by the Separation Agreement will not constitute a termination of
employment for purposes of any policy, plan, program or agreement of PEC or any member of the PEC
Group that provides for the payment of severance, separation pay, salary continuation or similar
benefits in the event of a termination of employment.



     Section 6.4 Benefit Administration. In addition to the benefit plans and other
programs PEC (or its affiliate) is to administer on Patriot’s behalf in accordance with this
Agreement, PEC (or its affiliate) shall administer such other programs as agreed upon and
identified in writing by the Parties for the benefit of Patriot Employees from the Distribution
Date through December 31, 2007.



     Section 6.5 Tax Matters.




     (a) Tax Deductions in General. The Parties agree to take the actions that are
necessary or desirable to enable the Party responsible for any payment under this Agreement
to receive, to the extent possible, the benefit of any tax deduction related to such payment. If the Patriot Group receives a tax benefit as a result of any payment
or benefit funded by the PEC Group under this Agreement, the Patriot Group shall



20









 







reimburse the PEC Group for that tax benefit at the time and to the extent that such
tax benefit is realized.




     (b) Equity-Based Compensation Deductions. The Parties agree that, to the
extent permitted by law, tax deductions for equity-based compensation described in Sections
5.1, 5.2, and 5.3 shall be allocated to and claimed by the entity or entities that employed
the individual receiving the compensation during the relevant vesting period based on the
number of months of such individual’s employment with such entity or entities. Tax
withholding and reporting obligations will be the responsibility of the entity claiming the
deduction. To the extent deductions cannot be claimed in this manner or are disallowed or
adjusted on audit, the entity that receives the tax benefit shall reimburse the entity that
would have received such tax benefit pursuant to the preceding sentence as and when
realized. To the extent such reimbursement is treated as taxable income, the reimbursing
party shall gross-up the reimbursement amount for taxes.




     (c) Code Sections 162(m) and 409A. Notwithstanding anything in this Agreement
to the contrary (including the treatment of supplemental and deferred compensation plans,
outstanding long-term incentive awards and annual incentive awards as described herein), the
Parties agree to take the actions that are necessary or desirable to ensure that (a) a
federal income tax deduction for the payment of such supplemental or deferred compensation
or long-term incentive award, annual incentive award or other compensation is not limited by
reason of Code Section 162(m), and (b) the treatment of such supplemental or deferred
compensation or long-term incentive award, annual incentive award or other compensation does
not cause the imposition of a tax under Code Section 409A.



ARTICLE 7

INDEMNIFICATION



Any claim for indemnification under this Agreement shall be governed by, and be subject to, the
provisions of Article VI of the Separation Agreement, which provisions are hereby
incorporated by reference into this Agreement, and any references to “Agreement” in such
Article VI as incorporated herein shall be deemed to be references to this Agreement.




ARTICLE 8

GENERAL AND ADMINISTRATIVE




     Section 8.1 Sharing of Information. PEC and Patriot (acting directly or through their respective affiliates) shall provide to
the other and their respective agents and vendors all Information as the other may reasonably
request to enable the requesting Party to administer efficiently and accurately each of its Benefit
Plans and to determine the scope of, as well as fulfill, its obligations under this Agreement.
Such information shall, to the extent reasonably practicable, be provided in the format and at the
times and places requested, but in no event shall the Party providing such information be obligated
to incur any out-of-pocket expenses not reimbursed by the Party making such request or make such information available outside of its normal business hours and premises. Any information
shared or exchanged pursuant to this Agreement shall be subject to the confidentiality requirements
set forth in Section 13.04 of the Separation Agreement. The Parties also hereby agree to
enter into any business associate



21









 







agreements that may be required for the sharing of any Information pursuant to this Agreement
to comply with the requirements of HIPAA.



     Section 8.2 Reasonable Efforts/Cooperation. Each of the Parties hereto will use its commercially reasonable efforts to promptly take,
or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable Laws and regulations to consummate the transactions contemplated by this
Agreement, including adopting plans or plan amendments. Each of the Parties hereto shall cooperate
fully on any issue relating to the transactions contemplated by this Agreement for which the other
Party seeks a determination letter or private letter ruling from the IRS, an advisory opinion from
the DOL or any other filing, consent or approval with respect to or by a Governmental Entity.



     Section 8.3 Employer Rights. Nothing in this Agreement shall prohibit Patriot or any Patriot affiliate from amending,
modifying or terminating any Patriot Benefit Plan at any time within its sole discretion after the
Distribution Date. In addition, other than as provided in Article 3, Article 4, Article 5, or
Article 6, nothing in this Agreement shall prohibit PEC or any PEC affiliate from amending,
modifying or terminating any PEC Benefit Plan at any time within its sole discretion.



     Section 8.4 Effect on Employment. Except as expressly provided in this Agreement, the occurrence of the distribution alone
shall not cause any employee to be deemed to have incurred a termination of employment that
entitles such individual to the commencement of benefits under any of the PEC Benefit Plans.
Furthermore, nothing in this Agreement is intended to confer upon any employee or former employee
of PEC, Patriot or any of their respective affiliates any right to continued employment, or any
recall or similar rights to an individual on layoff or any type of approved leave.



     Section 8.5 Consent of Third Parties. If any provision of this Agreement depends on the consent of any third party and such
consent is withheld, the Parties shall use commercially reasonable efforts to implement the
applicable provisions of this Agreement to the fullest extent practicable. If any provision of
this Agreement cannot be implemented due to the failure of such third party to consent, the Parties
shall negotiate in good faith to implement the provision in a mutually satisfactory manner.



     Section 8.6 Access to Employees. Following the Distribution Date, PEC and Patriot shall, or shall cause their respective
affiliates to, make available to each other those of their employees who may reasonably be needed
in order to defend or prosecute any legal or administrative action (other than a legal action
between PEC and Patriot) to which any employee, director or Benefit Plan of the PEC Group or the
Patriot Group is a party and which relates to their respective Benefit Plans prior to the
Distribution Date. The Party to whom an employee is made available in accordance with this
Section 8.6 shall pay or reimburse the other Party for all reasonable expenses which may be
incurred by such employee in connection therewith, including all reasonable travel, lodging, and
meal expenses, but excluding any amount for such employee’s time spent in connection herewith.



     Section 8.7 Beneficiary Designation/Release of Information/Right to Reimbursement. To the extent permitted by applicable Law and except as otherwise provided for in this
Agreement, all beneficiary designations, authorizations for the release of information and rights



22









 







to reimbursement made by or relating to Patriot Employees under PEC Benefit Plans shall be
transferred to and be in full force and effect under the corresponding Patriot Benefit Plans until
such beneficiary designations, authorizations or rights are replaced or revoked by, or no longer
apply to, the relevant Patriot Employee.



     Section 8.8 Not a Change in Control. The Parties hereto acknowledge and agree that the transactions contemplated by the
Separation Agreement and this Agreement do not constitute a “change in control” for purposes of any
PEC Benefit Plan, PEC Stock Plan or Patriot Benefit Plan.



ARTICLE 9

MISCELLANEOUS




     Section 9.1 Effect if Distribution Does not Occur. Notwithstanding anything in this Agreement to the contrary, if the Separation Agreement is
not executed or if it terminates prior to the Effective Time, then all actions and events that are,
under this Agreement, to be taken or occur effective prior to, as of or following the Distribution
Date, or otherwise in connection with the distribution, shall not be taken or occur except to the
extent specifically agreed to in writing by PEC and Patriot and neither Party shall have any
Liability or further obligation to the other Party under this Agreement.



     Section 9.2 Relationship of Parties. Nothing in this Agreement shall be deemed or construed by the Parties or any third party as
creating the relationship of principal and agent, partnership or joint venture between the Parties,
it being understood and agreed that no provision contained herein, and no act of the Parties, shall
be deemed to create any relationship between the Parties other than the relationship set forth
herein.



     Section 9.3 Affiliates. Each of PEC and Patriot shall cause to be performed, and hereby guarantees the performance
of, all actions, agreements and obligations set forth in this Agreement to be performed by each of
their affiliates, respectively.



     Section 9.4 Notices. All notices and communications under this Agreement shall be in writing and shall be deemed
to have been given (a) when received, if such notice or communication is delivered by facsimile,
hand delivery or overnight courier, or (b) three (3) business days after mailing if such notice or
communication is sent by United States registered or certified mail, return receipt requested,
first class postage prepaid. All notices and communications, to be effective, must be properly
addressed to the party to whom they are directed at its address as follows:


To PEC:



Peabody Energy Corporation

701 Market Street

St. Louis, MO 63101

Attn: Alexander Schoch, Executive Vice President — Law

Facsimile: 314.342.3419



To Patriot:




23









 







Patriot Coal Corporation

12312 Olive Boulevard, Suite 400

St. Louis, MO 63141

Attn: Joseph W. Bean, Senior Vice President, General Counsel and
Corporate Secretary

Facsimile:



Either Party may, by written notice delivered to the other Party in accordance with this Section
9.4, change the address to which delivery of any notice shall thereafter be made.




     Section 9.5 Entire Agreement. This Agreement, the Separation Agreement, and each
other Ancillary Agreement, including any annexes, schedules and exhibits hereto and thereto, as
well as any other agreements and documents referred to herein and therein, shall constitute the
entire agreement between the Parties with respect to the subject matter hereof and shall supersede
all previous negotiations, commitments and writings with respect to such subject matter. In the
event of any inconsistency between this Agreement and any exhibit or schedule hereto, the exhibit
or schedule shall prevail.



     Section 9.6 Waivers. No waiver of any terms, provision or condition of or failure to exercise or delay in
exercising any rights or remedies under this Agreement, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of any such term, provision,
condition, right or remedy or as a waiver of any other term, provision or condition of this
Agreement.



     Section 9.7 Amendments. Subject to the terms of Section 9.8 of this Agreement, this Agreement may not be modified
or amended except by an instrument in writing signed by both of the Parties.



     Section 9.8 Termination. If permitted by the Separation Agreement, this Agreement (including Article 7 hereof
(Indemnification)) may be terminated and abandoned at any time prior to the Distribution Date by
and in the sole discretion of PEC without the approval of Patriot or the shareholders of PEC, and
it shall be deemed terminated if and when the Separation Agreement is terminated. In the event of
such termination, neither Party shall have any liability of any kind to the other Party or any
other Person, except as may be provided in transition letters issued by PEC to Patriot Senior
Management Employees. After the Distribution Date, this Agreement may not be terminated except by
an agreement in writing signed by both Parties; provided, however, that Article 7 shall not be
terminated after the Distribution Date in respect of any PEC Indemnitee or Patriot Indemnitee
without the consent of such Person.



     Section 9.9 Governing Law. This Agreement shall be governed by and construed in accordance with the internal Laws of
the State of Delaware, without regard to the conflicts of law rules of such state).



     Section 9.10 Dispute Resolution. The dispute resolution provisions in Section 15.15 of the Separation Agreement
shall apply to this Agreement.



     Section 9.11 Titles and Headings. Titles and headings to sections herein are inserted for the convenience of reference only
and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.



24









 





     Section 9.12 Counterparts. This Agreement may be executed in more than one counterpart, each of which shall be deemed
an original instrument and all of which together shall be considered one and the same agreement,
and shall become effective when one or more such counterparts have been signed by each of the
Parties and delivered to the other Parties.



     Section 9.13 Assignment. Neither of the Parties hereto may assign its rights or delegate any of its duties under this
Agreement without the prior written consent of the other Party or as otherwise provided in the
Separation Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the
Parties and their respective successors and permitted assigns. Nothing contained in this
Agreement, express or implied, is intended to confer any benefits, rights or remedies upon any
Person other than members of the PEC Group and the Patriot Group.



     Section 9.14 Severability. In the event that any one or more of the provisions contained in this Agreement is held
invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be affected or impaired
thereby. The Parties shall endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions, the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.



     Section 9.15 Exhibits and Schedules. The Exhibits and Schedules shall be construed with and as an integral part of this
Agreement to the same extent as if the same had been set forth verbatim herein.



     Section 9.16 Specific Performance. The Parties agree that irreparable damage would occur in the event that the provisions of
this Agreement were not performed in accordance with their specific terms. Accordingly, it is
hereby agreed that the Parties shall be entitled to (a) an injunction or injunctions to enforce
specifically the terms and provisions hereof in any arbitration in accordance with Section 9.10 of
this Agreement, (b) provisional or temporary injunctive relief in accordance therewith in any court
of the United States, and (c) enforcement of any such award of an arbitral tribunal or any court of
the United States, or any other any other tribunal sitting in any state of the United States or in
any foreign country that has jurisdiction, this being in addition to any other remedy or relief to
which they may be entitled.



     Section 9.17 Waiver of Jury Trial. SUBJECT TO SECTION 9.10 AND SECTION 9.16 OF THIS AGREEMENT, EACH OF THE PARTIES HEREBY
WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY
WITH RESPECT TO ANY COURT PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF AND PERMITTED UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. EACH OF THE PARTIES HEREBY (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (b) ACKNOWLEDGES THAT IT HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AS
APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.17.



25









 





     Section 9.18 Authorization. Each of the Parties hereby represents and warrants that it has the power and authority to
execute, deliver and perform this Agreement, that this Agreement has been duly authorized by all
necessary corporate action on the part of such Party, that this Agreement constitutes a legal,
valid and binding obligation of each such Party and that the execution, delivery and performance of
this Agreement by such Party does not contravene or conflict with any provision of law or of its
charter or bylaws or any material agreement, instrument or order binding on such Party.



     Section 9.19 No Third-Party Beneficiaries. This Agreement is solely for the benefit of the Parties and should not be deemed to confer
upon third parties any remedy, claim, liability, reimbursement, cause of action or other right in
excess of those existing without reference to this Agreement.



     Section 9.20 Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement.
This Agreement shall be construed without regard to any presumption or rule requiring construction
or interpretation against the party drafting or causing any instrument to be drafted.



[SIGNATURE PAGE FOLLOWS]




26









 








     IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed as of the day
and year first above written.



	 	 	 	 	 
	 	PEABODY ENERGY CORPORATION

 	 
	 	By:  	/s/ Sharon D. Fiehler
 	 
	 	 	Name:  	Sharon D. Fiehler 	 
	 	 	Title:  	Executive Vice President -- Human Resources and
Administration 	 
	 
	 	PATRIOT COAL CORPORATION

 	 
	 	By:  	/s/ Richard M. Whiting
 	 
	 	 	Name:  	Richard M. Whiting 	 
	 	 	Title:  	President and Chief Executive Officer 	 



27









 






	 	 	 	 	 



EXHIBIT A




ADJUSTMENT METHODOLOGY




Example of Methodology for Adjusting PEC Equity-Based Compensation Awards

in Connection with the Distribution



Certain adjustment factors will not be determinable until the PEC ex-dividend date, so the
following example illustrates the methodology to be used to adjust PEC equity-based compensation
awards in connection with the Distribution.





     Example of a Stock Options Adjustment:




Employee A holds an option to purchase 1,000 shares of PEC Common Stock at a strike
price of $3.00 per share. If the pre-Distribution value of PEC Common Stock is $40
per share, Employee A’s option has a pre-Distribution intrinsic value of $37,000.



	 	 	 	 	 
	A — Number of outstanding PEC options for Employee A
	 	 	1,000	 
	B — PEC option strike price
	 	$	3.00	 
	C — Price of PEC Common Stock immediately before Distribution
	 	$	40.00	 
	D — Intrinsic value of PEC options immediately before Distribution
[(A * C) — (A * B)]
	 	$	37,000	 






     Following the Distribution, PEC Common Stock is worth $36.00 per share.




#1 Adjustment of the Strike Price Post-Distribution: The adjusted strike price is
determined by multiplying the Ratio (shown below in E) by the price of the PEC
Common Stock post-Distribution which equals an adjusted strike price of $2.70. The
intrinsic value following the adjustment of the strike price is $33,300, which
leaves an intrinsic value shortfall of $3,700.



	 	 	 	 	 
	E — Ratio of PEC option strike price to pre-Distribution value of
PEC Common Stock
	 	 	0.075	 
	F —  Price of PEC Common Stock immediately after Distribution
	 	$	36.00	 
	G — Post-Distribution PEC option strike price
(D * E)
	 	$	2.70	 
	H —  Intrinsic value of PEC options immediately after Distribution
[(A * F) — (A * G)]
	 	$	33,300	 
	I — Intrinsic value shortfall
(D — H)
	 	$	3,700	 







#2 Adjustment of the Number of Stock Options Post Distribution: The adjusted number
of options is determined by taking the original number of options and adding an
additional number of options to them determined by dividing the intrinsic value
shortfall by the difference between the value of the post-



 









 






Distribution PEC Common Stock and the adjusted strike price (this formula is shown
below in J).




The intrinsic value following the adjustment of the strike price and the number of
options should equal the same intrinsic value of the options post-Distribution as
the options had pre-Distribution. The intrinsic value post-Distribution is
determined by taking the final number of options times the post-Distribution value
of PEC Common Stock minus the final number of options times the adjusted strike
price. Both before and after the distribution, the options have an intrinsic value
of $37,000.



	 	 	 	 	 
	J — Adjusted number of PEC options
[A + (I / (F — G))]

	 	 	1,111	 
	Intrinsic value of PEC options after Distribution
[(J * F) — (J * G)]

	 	$	37,000	 






 









 






     Example of Performance Units/Phantom Equity Adjustment:




Employee A holds 1,000 PEC performance units. If the pre-Distribution value of PEC
Common Stock is $40 per share, Employee A’s performance units have a pre-Distribution
intrinsic value of $40,000.



	 	 	 	 	 
	A — Number of outstanding PEC performance units for Employee A
	 	 	1,000	 
	B — Price of PEC Common Stock immediately before Distribution
	 	$	40.00	 
	C — Intrinsic value of PEC performance units immediately before
Distribution
(A * B)
	 	$	40,000	 







After the Distribution, PEC Common Stock is worth $36.00 which causes an intrinsic
value shortfall of $4,000 (as shown in E below).




To eliminate such shortfall, Employee A’s PEC performance units would be adjusted as
shown below by (i) dividing the intrinsic value shortfall, $4,000, by the
post-Distribution value of PEC Common stock, $36 per share, and adding the result to
the original number of outstanding PEC performance units. This calculation results
in a post-Distribution number of outstanding PEC performance units of 1,111. This
would result in a post-Distribution intrinsic value of $40,000, determined by
multiplying the adjusted number of PEC performance units by the value of the
post-Distribution Common Stock.



	 	 	 	 	 
	D — Price of PEC Common Stock immediately after Distribution
	 	$	36.00	 
	E — Intrinsic value shortfall [C — (A * D)]
	 	$	4,000	 
	F — Adjusted number of PEC performance units
[A + (E / D)]
	 	 	1,111	 
	Intrinsic value of PEC performance units after Distribution
(F * D)
	 	$	40,000