EX-13 15 c75152exv13.txt PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS For purposes of this Annual Report on Form 10-K, the page numbers of the Report of Independent Auditors and Audited Financial Statements included in Exhibit 13 do not correspond to the page numbers of the Company's December 31, 2002 Annual Report to Stockholders. For purposes of Exhibit 13 of this report, the Report of Independent Auditors and Audited Financial Statements are numbered F-1 through F-49.
PAGE ---- Report of Independent Auditors.............................. F-2 Audited Financial Statements: Consolidated Statements of Operations -- Year ended December 31, 2002, nine months ended December 31, 2001 and year ended March 31, 2001.................... F-3 Consolidated Balance Sheets -- December 31, 2002 and 2001.............................................. F-4 Consolidated Statements of Changes in Stockholders' Equity -- Year ended December 31, 2002, nine months ended December 31, 2001 and year ended March 31, 2001........................................ F-5 Consolidated Statements of Cash Flows -- Year ended December 31, 2002, nine months ended December 31, 2001 and year ended March 31, 2001.................... F-6 Notes to Financial Statements............................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Peabody Energy Corporation We have audited the accompanying consolidated balance sheets of Peabody Energy Corporation (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity and cash flows of the Company for the year ended December 31, 2002, the nine months ended December 31, 2001, and the year ended March 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peabody Energy Corporation as of December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for the year ended December 31, 2002, the nine months ended December 31, 2001, and the year ended March 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP St. Louis, Missouri January 18, 2003 F-2 PEABODY ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ ----------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) REVENUES Sales............................................... $ 2,630,371 $ 1,869,321 $ 2,534,964 Other revenues...................................... 86,727 68,619 93,164 ----------- ----------- ----------- Total revenues................................... 2,717,098 1,937,940 2,628,128 COSTS AND EXPENSES Operating costs and expenses........................ 2,225,344 1,588,596 2,123,526 Depreciation, depletion and amortization............ 232,413 174,587 240,968 Selling and administrative expenses................. 101,416 73,553 99,267 Gain on sale of Peabody Resources Limited operations....................................... -- -- (171,735) Net gain on property and equipment disposals........ (15,763) (14,327) (5,737) ----------- ----------- ----------- OPERATING PROFIT...................................... 173,688 115,531 341,839 Interest expense.................................... 102,458 88,686 197,686 Interest income..................................... (7,574) (2,155) (8,741) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS..... 78,804 29,000 152,894 Income tax provision (benefit)...................... (40,007) 2,465 42,690 Minority interests.................................. 13,292 7,248 7,524 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS..................... 105,519 19,287 102,680 Gain from disposal of discontinued operations, net of income tax provision of $4,240................ -- -- (12,925) ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEM...................... 105,519 19,287 115,605 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $9,658 and $2,480, respectively............................. -- 28,970 8,545 ----------- ----------- ----------- NET INCOME (LOSS)..................................... $ 105,519 $ (9,683) $ 107,060 =========== =========== =========== BASIC EARNINGS (LOSS) PER SHARE Income from continuing operations................... $ 2.02 $ 0.40 $ 2.97 Income from discontinued operations................. -- -- 0.38 Extraordinary loss from early extinguishment of debt............................................. -- (0.60) (0.25) ----------- ----------- ----------- Net income (loss)................................ $ 2.02 $ (0.20) $ 3.10 =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING................... 52,165,735 48,746,444 27,524,626 =========== =========== =========== DILUTED EARNINGS (LOSS) PER SHARE Income from continuing operations................... $ 1.96 $ 0.38 $ 2.97 Income from discontinued operations................. -- -- 0.38 Extraordinary loss from early extinguishment of debt............................................. -- (0.57) (0.25) ----------- ----------- ----------- Net income (loss)................................ $ 1.96 $ (0.19) $ 3.10 =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING................... 53,821,760 50,524,978 27,524,626 =========== =========== =========== DIVIDENDS DECLARED PER SHARE.......................... $ 0.40 $ 0.20 $ -- =========== =========== ===========
See accompanying notes to consolidated financial statements F-3 PEABODY ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets Cash and cash equivalents................................. $ 71,210 $ 38,622 Accounts receivable, less allowance of $1,331 and $1,496, respectively............................................ 153,212 178,076 Materials and supplies.................................... 39,416 38,734 Coal inventory............................................ 190,272 176,910 Assets from coal and emission allowance trading activities.............................................. 69,898 60,509 Deferred income taxes..................................... 10,361 14,380 Other current assets...................................... 15,554 20,223 ---------- ---------- Total current assets.................................... 549,923 527,454 Property, plant, equipment and mine development Land and coal interests................................... 3,827,682 3,844,238 Building and improvements................................. 566,300 517,973 Machinery and equipment................................... 737,247 659,744 Less accumulated depreciation, depletion and amortization............................................ (858,187) (684,557) ---------- ---------- Property, plant, equipment and mine development, net........ 4,273,042 4,337,398 Investments and other assets................................ 317,212 286,050 ---------- ---------- Total assets............................................ $5,140,177 $5,150,902 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt...................... $ 47,515 $ 46,499 Liabilities from coal and emission allowance trading activities.............................................. 37,008 45,691 Accounts payable and accrued expenses..................... 547,013 592,113 ---------- ---------- Total current liabilities............................... 631,536 684,303 Long-term debt, less current maturities..................... 981,696 984,568 Deferred income taxes....................................... 499,310 564,764 Accrued reclamation......................................... 386,777 396,868 Workers' compensation obligations........................... 209,798 207,720 Accrued postretirement benefit costs........................ 959,599 962,166 Obligation to industry fund................................. 49,760 49,710 Other noncurrent liabilities................................ 303,442 218,251 ---------- ---------- Total liabilities....................................... 4,021,918 4,068,350 Minority interests.......................................... 37,121 47,080 Stockholders' equity Preferred stock -- $0.01 per share par value; 10,000,000 shares authorized, no shares issued or outstanding as of December 31, 2002 or 2001............................... -- -- Series Common stock -- $0.01 per share par value; 40,000,000 shares authorized, no shares issued or outstanding as of December 31, 2002 or 2001............. -- -- Common stock -- $0.01 per share par value; 150,000,000 shares authorized, 52,417,483 shares issued and 52,400,278 shares outstanding as of December 31, 2002, and 150,000,000 shares authorized, 52,027,451 shares issued and 52,010,246 shares outstanding as of December 31, 2001................................................ 524 520 Additional paid-in capital................................ 958,567 951,528 Retained earnings......................................... 200,859 116,203 Employee stock loans...................................... (1,142) (2,391) Accumulated other comprehensive loss...................... (77,627) (30,345) Treasury stock, at cost: 17,205 shares as of December 31, 2002 and 2001, respectively............................. (43) (43) ---------- ---------- Total stockholders' equity.............................. 1,081,138 1,035,472 ---------- ---------- Total liabilities and stockholders' equity........... $5,140,177 $5,150,902 ========== ==========
See accompanying notes to consolidated financial statements F-4 PEABODY ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED ADDITIONAL EMPLOYEE OTHER TOTAL PREFERRED COMMON PAID-IN STOCK COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' STOCK STOCK CAPITAL LOANS INCOME (LOSS) EARNINGS STOCK EQUITY --------- ------ ---------- -------- ------------- -------- -------- ------------- (DOLLARS IN THOUSANDS) March 31, 2000................. $ 70 $276 $494,138 $(2,391) $(12,667) $ 29,219 $ (219) $ 508,426 Comprehensive income: Net income................. -- -- -- -- -- 107,060 -- 107,060 Foreign currency translation adjustment... -- -- -- -- (26,144) -- -- (26,144) Reclassification of foreign currency translation adjustment............... -- -- -- -- 38,811 -- -- 38,811 Minimum pension liability adjustment (net of $615 tax benefit)............. -- -- -- -- (862) -- -- (862) ---------- Comprehensive income......... 118,865 Stock grants to employees.... -- -- 3,962 (705) -- -- 1,260 4,517 Loan repayments.............. -- -- -- 543 -- -- -- 543 Shares repurchased........... -- -- -- -- -- -- (1,113) (1,113) ---- ---- -------- ------- -------- -------- ------- ---------- March 31, 2001................. 70 276 498,100 (2,553) (862) 136,279 (72) 631,238 Comprehensive loss: Net loss................... -- -- -- -- -- (9,683) -- (9,683) Minimum pension liability adjustment (net of $20,367 tax benefit)..... -- -- -- -- (29,483) -- -- (29,483) ---------- Comprehensive loss........... (39,166) Dividends paid............... -- -- -- -- -- (10,393) -- (10,393) Loan repayments.............. -- -- -- 193 -- -- -- 193 Conversion to common stock... (70) 70 -- -- -- -- -- -- Issuance of common stock in connection with initial public offering, net of expenses................... -- 173 449,659 -- -- -- -- 449,832 Stock options exercised...... -- 1 2,230 -- -- -- -- 2,231 Stock grants to non-employee directors.................. -- -- 200 -- -- -- -- 200 Employee stock purchases..... -- -- 1,339 (31) -- -- 29 1,337 ---- ---- -------- ------- -------- -------- ------- ---------- December 31, 2001.............. -- 520 951,528 (2,391) (30,345) 116,203 (43) 1,035,472 Comprehensive income: Net income................. -- -- -- -- -- 105,519 -- 105,519 Foreign currency translation adjustment... -- -- -- -- 15 -- -- 15 Minimum pension liability adjustment (net of $32,703 tax benefit)..... -- -- -- -- (47,297) -- -- (47,297) ---------- Comprehensive income......... 58,237 Dividends paid............... -- -- -- -- -- (20,863) -- (20,863) Loan repayments.............. -- -- -- 1,249 -- -- -- 1,249 Stock options exercised...... -- 5 5,249 -- -- -- -- 5,254 Stock grants to non-employee directors.................. -- -- 50 -- -- -- -- 50 Employee stock purchases..... -- 1 3,250 -- -- -- -- 3,251 Shares repurchased and retired.................... -- (2) (1,510) -- -- -- -- (1,512) ---- ---- -------- ------- -------- -------- ------- ---------- December 31, 2002.............. $ -- $524 $958,567 $(1,142) $(77,627) $200,859 $ (43) $1,081,138 ==== ==== ======== ======= ======== ======== ======= ==========
See accompanying notes to consolidated financial statements F-5 PEABODY ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................... $ 105,519 $ (9,683) $ 107,060 Gain from disposal of discontinued operations............. -- -- (12,925) Extraordinary loss from early extinguishment of debt...... -- 28,970 8,545 --------- --------- --------- Income from continuing operations....................... 105,519 19,287 102,680 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation, depletion and amortization.................. 232,413 174,587 215,450 Deferred income taxes..................................... (41,323) 1,902 31,795 Amortization of debt discount and debt issuance costs..... 9,768 8,986 16,709 Gain on sale of Peabody Resources Limited operations...... -- -- (171,735) Net gain on property and equipment disposals.............. (15,763) (14,327) (4,782) Minority interests........................................ 13,292 7,248 7,524 Stock compensation........................................ 230 1,204 3,961 Changes in current assets and liabilities, net of acquisitions: Sale of accounts receivable............................. -- -- 40,000 Accounts receivable, net of sale........................ 22,973 (30,065) (50,179) Materials and supplies.................................. (682) 60 5,677 Coal inventory.......................................... (12,191) (5,431) (15,749) Net assets from coal and emission allowance trading activities............................................ (18,072) (6,201) (5,805) Other current assets.................................... 6,589 4,433 6,912 Accounts payable and accrued expenses................... (48,928) (3,347) 48,249 Federal tax refund........................................ 2,420 22,757 -- Accrued reclamation....................................... (12,146) (10,837) (27,106) Workers' compensation obligations......................... (522) (3,560) (1,480) Accrued postretirement benefit costs...................... (2,567) (11,913) 2,893 Obligation to industry fund............................... (492) (2,462) (12,565) Other, net................................................ (9,314) (37,829) (20,345) Net cash used in assets sold -- Peabody Resources Limited operations.............................................. -- -- (20,124) --------- --------- --------- Net cash provided by operating activities............... 231,204 114,492 151,980 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant, equipment and mine development............................................... (208,562) (194,246) (151,358) Additions to advance mining royalties....................... (14,889) (11,305) (20,260) Acquisitions, net........................................... (46,012) -- (10,502) Proceeds from sale of Peabody Resources Limited operations................................................ -- -- 455,000 Proceeds from property and equipment disposals.............. 52,885 13,551 18,925 Proceeds from sale of coal reserves to Penn Virginia Resource Partners, L.P.................................... 72,500 -- -- Proceeds from sale-leaseback transactions................... -- 19,011 28,800 Net cash used in assets sold -- Peabody Resources Limited operations................................................ -- -- (34,684) Net cash provided by discontinued operations................ -- -- 102,541 --------- --------- --------- Net cash provided by (used in) investing activities....... (144,078) (172,989) 388,462 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings and long-term debt...... 16,462 40,995 65,302 Payments of short-term borrowings and long-term debt........ (47,749) (446,669) (633,905) Net proceeds from initial public offering................... -- 449,832 -- Proceeds from employee stock purchases...................... 3,251 1,306 -- Distributions to minority interests, net.................... (9,800) (1,626) (4,690) Dividends received.......................................... -- -- 19,916 Dividends paid.............................................. (20,863) (10,393) -- Repurchase of treasury stock................................ -- -- (1,113) Net cash provided by assets sold -- Peabody Resources Limited operations........................................ -- -- 10,591 Other....................................................... 3,901 951 562 --------- --------- --------- Net cash provided by (used in) financing activities....... (54,798) 34,396 (543,337) Effect of exchange rate changes on cash and cash equivalents............................................... 260 -- -- --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ 32,588 (24,101) (2,895) Cash and cash equivalents at beginning of period............ 38,622 62,723 65,618 --------- --------- --------- Cash and cash equivalents at end of period.................. $ 71,210 $ 38,622 $ 62,723 ========= ========= =========
See accompanying notes to consolidated financial statements F-6 PEABODY ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its controlled affiliates. All significant intercompany transactions, profits, and balances have been eliminated in consolidation. In July 2001, the Company changed its fiscal year-end from March 31 to December 31. This change was first effective with respect to the nine months ended December 31, 2001. In April 2001, the Company changed its name from P&L Coal Holdings Corporation to Peabody Energy Corporation. The consolidated results of operations and cash flows for the year ended March 31, 2001 include the results of the Company's Peabody Resources Limited operations, which were sold in January 2001 (see Note 7). In May 2000, the Company signed a purchase and sale agreement with Edison Mission Energy to sell Citizens Power LLC ("Citizens Power") (see Note 8). Results of operations and cash flows for the year ended March 31, 2001 reflect Citizens Power as a discontinued operation. DESCRIPTION OF BUSINESS The Company is engaged in the mining of coal for sale primarily to electric utilities. In addition to our mining operations, we market and trade coal and emission allowances. Finally, we are also involved in related energy businesses that include coalbed methane production, transportation-related services, third-party coal contract restructuring and participating in the development of coal-based generating plants. NEW PRONOUNCEMENTS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS Nos. 141 and 142 did not have a material effect on the Company's financial condition or results of operations. Effective December 31, 2002, the Company adopted the disclosure requirements of the Financial Accounting Standards Board's Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The disclosures required by FIN 45 are included in Note 22 to our consolidated financial statements. Also effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The provisions of this statement provide a single accounting model for measuring impairment of long-lived assets. The adoption of SFAS No. 144 did not have a material effect on the Company's financial condition or results of operations. JOINT VENTURES Joint ventures are accounted for using the equity method. Prior to the sale in January 2001, undivided interests in Peabody Resources Limited were reported using pro rata consolidation whereby the Company reported its proportionate share of assets, liabilities, income and expenses. All significant intercompany transactions have been eliminated in consolidation. F-7 The financial statements include the following operating amounts for Peabody Resources Limited entities utilizing pro rata consolidation (dollars in thousands):
YEAR ENDED MARCH 31, 2001 ---------- Total revenues.............................................. $144,481 Operating profit............................................ 21,111
SALES The Company recognizes revenue from coal sales when title passes to the customer. The Company incurs certain "add-on" taxes and fees on coal sales. Coal sales are reported including taxes and fees charged by various federal and state governmental bodies. OTHER REVENUES Other revenues include royalties related to coal lease agreements, earnings and losses from joint ventures, farm income, contract restructuring payments, coalbed methane extraction, net revenues from coal and emission allowance trading activities and revenues from contract mining services. Royalty income generally results from the lease or sub-lease of mineral rights to third parties, with payments based upon a percentage of the selling price or an amount per ton of coal produced. Certain agreements require minimum annual lease payments regardless of the extent to which minerals are produced from the leasehold. The terms of these agreements generally range from specified periods of five to 20 years, or can be for an unspecified period until all reserves are depleted. STOCK COMPENSATION The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its equity incentive plans. The Company recorded $0.2 million, $1.2 million and $3.9 million of compensation expense during the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively, for stock options granted. The following table reflects pro forma net income (loss) and diluted earnings (loss) per share had compensation cost been determined for the Company's non-qualified and incentive stock options based on the fair value at the grant dates consistent with the methodology set forth under SFAS No. 123, "Accounting for Stock-Based Compensation":
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 -------------- -------------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss): As reported.................................... $105,519 $(9,683) $107,060 Pro forma...................................... 100,639 (14,023) 105,117 Basic earnings (loss) per share: As reported.................................... $ 2.02 $ (0.20) $ 3.10 Pro forma...................................... 1.93 (0.29) 3.04 Diluted earnings (loss) per share: As reported.................................... $ 1.96 $ (0.19) $ 3.10 Pro forma...................................... 1.87 (0.28) 3.04
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. F-8 Compensation expense for awards with graded vesting provisions is recognized on a straight-line basis. CASH AND CASH EQUIVALENTS Cash and cash equivalents are stated at cost, which approximates fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less. INVENTORIES Materials and supplies and coal inventory are valued at the lower of average cost or market. Coal inventory costs include labor, supplies, equipment costs, operating overhead and other related costs. ASSETS AND LIABILITIES FROM COAL AND EMISSION ALLOWANCE TRADING ACTIVITIES Through October 25, 2002, the Company's coal and emission allowance trading activities were accounted for using the fair value method required by Emerging Issues Task Force ("EITF") Issue No. 98-10 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" ("EITF 98-10"). On October 25, 2002, the EITF reached a consensus in EITF Issue 02-3 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" ("EITF 02-3") to rescind EITF 98-10 for all energy trading contracts entered into after that date. As a result of the rescission, energy trading contracts entered into after October 25, 2002 were evaluated under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. Trading contracts entered into after October 25, 2002 that meet the SFAS No. 133 definition of a derivative were accounted for at fair value, while contracts that do not qualify as derivatives were accounted for under the accrual method. For contracts entered into prior to October 25, 2002, the rescission of EITF 98-10 is effective January 1, 2003. Accordingly, the effect of the rescission on non-derivative energy trading contracts entered into prior to October 25, 2002 will be recorded as a cumulative effect of a change in accounting principle in the first quarter of 2003. This accounting change will only affect the timing of the recognition of income or losses on contracts that do not meet the definition of a derivative, and will not change the underlying economics or cash flows of those transactions. The Company's trading contracts, which include contracts entered into prior to October 25, 2002 accounted for under EITF 98-10 and contracts entered into after October 25, 2002 that meet the definition of a derivative under SFAS No. 133, are reflected at fair value and are included in "Assets and liabilities from coal and emission allowance trading activities" in the consolidated balance sheets as of December 31, 2002 and 2001. EITF 98-10 previously permitted the reporting of gains or losses on energy trading contracts on a gross or net basis in the consolidated statement of operations. Under EITF 02-3, a new consensus was reached in June 2002 that all mark-to-market gains and losses on energy trading contracts should be shown net in the statement of operations, even if settled physically. This new consensus was effective for financial statements issued for periods ending after July 15, 2002 and required reclassification of amounts in all prior periods presented. Based on this consensus, all realized gains and losses on trading transactions, whether settled physically or financially, and unrealized mark-to-market gains and losses were reported on a net basis in "Other revenues" beginning with the quarter ended September 30, 2002. This accounting change had no effect on operating profit or net income. Had trading transactions been recorded on a gross basis, total revenues and operating costs would have been $161.9 million, $88.8 million and $41.6 million higher for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. The consensus reached in June 2002 regarding net presentation of trading gains and losses under EITF Issue No. 02-3 was superseded in October 2002 (upon the rescission of EITF 98-10 in EITF 02-3), and was replaced with a new requirement to present all gains and losses on energy trading derivatives on a net basis beginning in 2003. No definitive guidance was provided by the EITF regarding presentation of gains and losses on energy trading activities that were not derivatives pursuant to SFAS No. 133. The Company's F-9 consolidated statements of operations reflect revenues related to all trading contracts accounted for on a fair value basis, whether under EITF 98-10 or SFAS No. 133, on a net basis in "Other revenues." PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT Property, plant, equipment and mine development are recorded at cost. Interest costs applicable to major asset additions are capitalized during the construction period, including $2.8 million, $1.7 million and $0.3 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. Expenditures which extend the useful lives of existing plant and equipment are capitalized. Maintenance and repairs are charged to operating costs as incurred. Costs incurred to develop coal mines or to expand the capacity of operating mines are capitalized. Costs incurred to maintain current production capacity at a mine and exploration expenditures are charged to operating costs as incurred. Certain costs to acquire computer hardware and the development and/or purchase of software for internal use are capitalized and depreciated over the estimated useful lives. The fair value of coal reserves was established by an independent third party review and evaluation at the time of the Company's acquisition in May 1998. Reserves acquired subsequent to that date are recorded at cost. As of December 31, 2002, the net book value of coal reserves totaled $3.2 billion. This amount includes $1.5 billion attributable to properties where the Company is not currently engaged in mining operations or leasing to third parties and, therefore, the coal reserves are not currently being depleted. Depletion of coal interests is computed using the units-of-production method utilizing only proven and probable reserves in the depletion base. Mine development costs are principally amortized over the estimated lives of the mines using the straight-line method. Depreciation of plant and equipment (excluding life of mine assets) is computed using the straight-line method over the estimated useful lives as follows:
YEARS ------------- Building and improvements................................... 10 to 20 Machinery and equipment..................................... 3 to 30 Leasehold improvements...................................... Life of Lease
In addition, certain plant and equipment assets associated with mining are depreciated using the straight-line method over the estimated life of the mine, which varies from one to 25 years. GENERATION DEVELOPMENT COSTS Development costs, including expenditures for permitting and licensing, related to coal-based electricity generation are recorded at cost. Start-up costs, including feasibility studies, are expensed as incurred. Development costs of $13.4 million and $5.1 million were recorded as part of "Investments and other assets" in the consolidated balance sheets as of December 31, 2002 and 2001, respectively. ACCRUED RECLAMATION The Company records a liability for the estimated costs to reclaim land as the acreage is disturbed during the ongoing surface mining process. The estimated costs to reclaim support acreage and to perform other related functions at both surface and underground mines are recorded ratably over the lives of the mines. As of December 31, 2002, the Company had $622.6 million in surety bonds outstanding to secure reclamation obligations or activities. The amount of reclamation self-bonding in certain states in which the Company qualifies was $291.9 million as of December 31, 2002. F-10 ENVIRONMENTAL LIABILITIES Included in "Other noncurrent liabilities" are accruals for other environmental matters that are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties and are not discounted. In general, costs related to environmental remediation are charged to expense. INCOME TAXES Income taxes are accounted for using a balance sheet approach known as the liability method. The liability method accounts for deferred income taxes by applying statutory tax rates in effect at the date of the balance sheet to differences between the book and tax basis of assets and liabilities. POSTEMPLOYMENT BENEFITS The Company provides postemployment benefits to qualifying employees, former employees and dependents under the provisions of various benefit plans or as required by state or federal law. The Company accounts for workers' compensation obligations and other Company-provided postemployment benefits on the accrual basis of accounting. USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In particular, the Company has significant long-term liabilities relating to retiree health care, work-related injuries and illnesses and defined pension plans. Each of these liabilities is actuarially determined and the Company uses various actuarial assumptions, including the discount rate and future cost trends, to estimate the costs and obligations for these items. If these assumptions do not materialize as expected, actual cash expenditures and costs incurred could differ materially from current estimates. Moreover, regulatory changes could increase the obligation to satisfy these or additional obligations. IMPAIRMENT OF LONG-LIVED ASSETS The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets under various assumptions are less than the carrying amounts of those assets. Impairment losses are measured by comparing the estimated fair value of the impaired asset to its carrying amount. FOREIGN CURRENCY TRANSLATION The assets and liabilities of foreign affiliates are translated at current exchange rates, and related translation adjustments are reported as a component of comprehensive income. Statement of operations accounts are translated at an average rate for each period. RECLASSIFICATIONS Certain amounts in prior periods have been reclassified to conform with the report classifications of the year ended December 31, 2002, with no effect on previously reported net income or stockholders' equity. F-11 (2) INITIAL PUBLIC OFFERING On May 22, 2001, the Company completed an initial public offering of 17,250,000 shares of common stock. Net proceeds from the offering of $449.8 million were primarily used to repay debt. See further discussion of these debt repayments in Note 14. (3) RISK MANAGEMENT AND FINANCIAL INSTRUMENTS The Company is exposed to various types of risk in the normal course of business, including fluctuations in commodity prices, interest rates and foreign currency exchange rates. These risks are actively monitored to ensure compliance with the risk management policies of the Company. In most cases, commodity price risk (excluding coal and emission allowance trading activities) is mitigated through the use of fixed-price contracts rather than financial instruments, while interest rate and foreign currency exchange risk are managed through the use of forward contracts, swaps and other financial instruments. TRADING ACTIVITIES The Company performs a value at risk analysis of its trading portfolio, which includes over-the-counter and brokerage trading of coal and emission allowances. The use of value at risk allows management to quantify, in dollars, on a daily basis, the pricing risk inherent in its trading portfolio. The Company's value at risk model is based on the industry standard risk-metrics variance/co-variance approach, which captures exposure related to both option and forward positions. The value at risk model assumes a fifteen-day holding period and a 95% one-tailed confidence interval. The use of value at risk allows management to aggregate pricing risks across products in the portfolio, compare risk on a consistent basis and identify the drivers of risk. Due to the subjectivity in the choice of the liquidation period, reliance on historical data to calibrate the models and the inherent limitations in the value at risk methodology, including the use of delta/gamma adjustments related to options, the Company performs regular stress, back testing and scenario analyses to estimate the impacts of market changes on the value of the portfolio. The results of these analyses are used to supplement the value at risk methodology and identify additional market-related risks. During the year ended December 31, 2002, the low, high, and average values at risk for our coal trading portfolio were $0.3 million, $3.9 million, and $1.7 million, respectively. Our emission allowance value at risk during the year ended December 31, 2002 never exceeded $0.2 million. The Company also monitors other types of risk associated with its coal and emission allowance trading activities, including credit, market liquidity and counterparty nonperformance. FINANCIAL INSTRUMENTS Effective April 1, 2001, the Company adopted SFAS No. 133, which requires the recognition of all derivatives as assets or liabilities within the consolidated balance sheet at fair value. Gains or losses on derivative financial instruments designated as fair value hedges are recognized immediately in the consolidated statement of operations, along with the offsetting gain or loss related to the underlying hedged item. Since October 2001, the Company has designated interest rate swaps with notional amounts totaling $150.0 million as a fair value hedge of $150.0 million of its Senior Notes. Gains or losses on derivative financial instruments designated as cash flow hedges are recorded as a separate component of stockholders' equity until settlement (or until hedge ineffectiveness is determined), whereby gains or losses are reclassified to the consolidated statement of operations in conjunction with the recognition of the underlying hedged item. Hedge ineffectiveness had no effect on results of operations for the year ended December 31, 2002 or the nine months ended December 31, 2001. F-12 CREDIT RISK The Company's concentration of credit risk is substantially with energy producers and marketers and electric utilities. The Company's policy is to independently evaluate each customer's creditworthiness prior to entering into transactions and to constantly monitor the credit extended. In the event that the Company engages in a transaction with a counterparty that does not meet its credit standards, the Company will protect its position by requiring the counterparty to provide appropriate credit enhancement. During 2002, the creditworthiness of some of our customers or trading counterparties deteriorated. We have taken steps to reduce our credit exposure to customers or counterparties whose credit has deteriorated and who may pose a higher risk, as determined by our credit management function, of failure to perform under their contractual obligations. These steps include obtaining letters of credit or cash collateral, requiring prepayments for shipments or the creation of customer trust accounts held for our benefit to fund the payment for coal under existing coal supply agreements. To reduce the Company's credit exposure related to its trading and brokerage activities, the Company seeks to enter into netting agreements with counterparties that permit the Company to offset receivables and payables with such counterparties. Counterparty risk with respect to interest rate swap transactions is not considered to be significant based upon the creditworthiness of the participating financial institutions. OTHER Approximately 31% of the Company's U.S. coal employees are affiliated with organized labor unions, which accounted for approximately 19% of sales volume in the U.S. during the year ended December 31, 2002. Hourly workers at the Company's mines in Arizona, Colorado and Montana are represented by the United Mine Workers of America under the Western Surface Agreement, which was ratified in 2000 and is effective through September 1, 2005. Union labor east of the Mississippi is primarily represented by the United Mine Workers of America but is generally subject to the National Bituminous Coal Wage Agreement. The current five-year labor agreement, effective from January 1, 2002 to December 31, 2006, was ratified by the United Mine Workers of America in December 2001. (4) ASSETS AND LIABILITIES FROM COAL AND EMISSION ALLOWANCE TRADING ACTIVITIES The fair value of the financial instruments related to coal and emission allowance trading activities as of December 31, 2002, which include energy commodities, are set forth below:
FAIR VALUE ----------------------- ASSETS LIABILITIES -------- ------------ (DOLLARS IN THOUSANDS) Forward contracts........................................... $64,554 $33,540 Option contracts............................................ 5,344 3,468 ------- ------- Total.................................................. $69,898 $37,008 ======= =======
Approximately 89% of the Company's net coal and emission allowance trading portfolio value at December 31, 2002 was determined by over the counter market source prices. The remaining 11% of our contracts were valued based on over the counter market source prices adjusted for differences in coal quality and content, as well as contract duration. F-13 As of December 31, 2002, the timing of trading portfolio contract expirations is as follows:
PERCENTAGE OF YEAR OF EXPIRATION PORTFOLIO ------------------ ------------- 2003........................................................ 48% 2004........................................................ 43% 2005........................................................ 8% 2006........................................................ 1% --- 100% ===
At December 31, 2002, 50% of our credit exposure related to coal and emission allowance trading activities is with counterparties that are investment grade. Our coal trading operations traded 66.9 million tons, 39.4 million tons, and 55.8 million tons for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. (5) ACCOUNTS RECEIVABLE SECURITIZATION In March 2000, the Company and its wholly-owned, bankruptcy-remote subsidiary ("Seller") established an accounts receivable securitization program. Under the program, undivided interests in a pool of eligible trade receivables that have been contributed to the Seller are sold, without recourse, to a multi-seller, asset-backed commercial paper conduit ("Conduit"). Purchases by the Conduit are financed with the sale of highly rated commercial paper. The Company utilized proceeds from the sale of its accounts receivable to repay long-term debt, effectively reducing its overall borrowing costs. The funding cost of the securitization program was $3.3 million, $4.5 million and $8.7 million for the year ended December 31, 2002, the nine months ended December 31, 2001, and the year ended March 31, 2001, respectively. The securitization program is currently scheduled to expire in 2007. Under the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," the securitization transactions have been recorded as sales, with those accounts receivable sold to the Conduit removed from the consolidated balance sheet. The amount of undivided interests in accounts receivable sold to the Conduit was $136.4 million and $140.0 million as of December 31, 2002 and 2001, respectively. The Seller is a separate legal entity whose assets are available first and foremost to satisfy the claims of its creditors. Eligible receivables, as defined in the securitization agreement, consist of trade receivables from our domestic subsidiaries, excluding Black Beauty Coal Company ("Black Beauty"), and are reduced for certain items such as past due balances and concentration limits. Of the eligible pool of receivables contributed to the Seller, undivided interests in only a portion of the pool are sold to the Conduit. The Company's retained interest in receivables not sold to the Conduit remain an asset of the Seller ($35.1 million as of December 31, 2002). The Seller's interest in these receivables is subordinate to the Conduit's interest in the event of default under the securitization agreement. If the Company defaulted under the securitization agreement or if its pool of eligible trade receivables decreased significantly, the Company could be required to repurchase all or a portion of the receivables sold to the Conduit. (6) BUSINESS COMBINATIONS ARCLAR COMPANY, LLC On September 16, 2002, the Company purchased a 25% interest in Arclar Company, LLC ("Arclar"), for $14.9 million. The Company's 81.7%-owned Black Beauty Coal Company subsidiary owns the remaining 75% of Arclar. Arclar owns the Willow Lake and Cottage Grove mines in Southern Illinois and more than F-14 50 million tons of coal reserves. With the Arclar purchase, the Company also acquired controlling interest of an entity that resulted in the consolidation of $12.5 million of long-term debt and related assets. ALLIED QUEENSLAND COALFIELDS PARTY LIMITED On August 22, 2002, the Company purchased Allied Queensland Coalfields Party Limited ("AQC") and its controlled affiliates from Mirant Corporation for $21.2 million. As a result of the acquisition, the Company now controls the 1.4 million ton per year Wilkie Creek Coal Mine and coal reserves in Queensland, Australia. Evaluations are complete with respect to 147 million tons of proven and probable reserves acquired surrounding the Wilkie Creek Mine. The Company continues to evaluate other coal resources that were obtained in this acquisition to finalize the estimate of its total proven and probable reserves in Australia. The results of AQC's operations are included in the Company's Australian Mining Operations segment. BEAVER DAM COAL COMPANY On June 26, 2002, the Company purchased Beaver Dam Coal Company, located in Western Kentucky, for $17.7 million. Through the acquisition, the Company obtained ownership of more than 100 million tons of coal reserves and 22,000 surface acres. The results of operations for each of these entities are included in the Company's consolidated results of operations from the effective date of each acquisition. Had the acquired entities' results of operations been included in the Company's results of operations since January 1, 2002, there would have been no material effect on the Company's consolidated statement of operations, financial condition or cash flows. (7) SALE OF AUSTRALIAN OPERATIONS On January 29, 2001, the Company sold its Peabody Resources Limited operations to Coal & Allied, a subsidiary of Rio Tinto Limited. The selling price was $455.0 million, plus the assumption of all liabilities. The Company used the proceeds from the sale to repay long-term debt. The pretax gain on sale of $171.7 million was included in the consolidated statement of operations for the year ended March 31, 2001. The gain on sale was $124.2 million on an after-tax basis. (8) DISCONTINUED OPERATIONS On March 13, 2000, the Board of Directors authorized management to sell Citizens Power, its wholly-owned subsidiary that engaged in power trading and power contract restructuring transactions. Subsequent to March 31, 2000, the Company signed an agreement to sell Citizens Power to Edison Mission Energy. As of March 31, 2000, the Company estimated its loss on disposal of the entity to be $109.5 million on a pretax basis ($78.3 million after-tax), which included an $8.0 million pretax provision for expected operating losses through the expected disposal date. The Company completed the sale of operations and the monetization of non-trading assets held by Citizens Power in March 2001, resulting in an after-tax decrease to the loss on disposal of $12.9 million. (9) EARNINGS PER SHARE A reconciliation of weighted average shares outstanding follows:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ Weighted average shares outstanding -- basic................ 52,165,735 48,746,444 Dilutive impact of stock options............................ 1,656,025 1,778,534 ---------- ---------- Weighted average shares outstanding -- diluted.............. 53,821,760 50,524,978 ========== ==========
F-15 In connection with the Company's initial public offering in May 2001, all outstanding shares of preferred stock, Class A common stock and Class B common stock were converted into a single class of common stock on a one-for-one basis. Prior to its initial public offering, the Company applied the "two-class method" of computing earnings per share as prescribed in SFAS No. 128, "Earnings Per Share." In accordance with SFAS No. 128, income or loss was allocated to the then existing preferred stock, Class A common stock and Class B common stock on a pro-rata basis. Basic and diluted earnings per share were calculated by dividing income from continuing operations, income from discontinued operations, extraordinary loss from early extinguishment of debt and net income, respectively, that was attributable to the Company's Class A and Class B common stock by the weighted average number of common shares outstanding for each class of common stock. A reconciliation of income from continuing operations, income from discontinued operations, extraordinary loss from early extinguishment of debt and net income follows:
YEAR ENDED MARCH 31, 2001 ----------- (DOLLARS IN THOUSANDS) Income from continuing operations attributed to: Preferred stock........................................... $ 20,819 Class A common stock...................................... 79,111 Class B common stock...................................... 2,750 ----------- Total.................................................. $ 102,680 =========== Income from discontinued operations attributed to: Preferred stock........................................... $ 2,621 Class A common stock...................................... 9,958 Class B common stock...................................... 346 ----------- Total.................................................. $ 12,925 =========== Extraordinary loss from early extinguishment of debt attributed to: Preferred stock........................................... $ (1,733) Class A common stock...................................... (6,583) Class B common stock...................................... (229) ----------- Total.................................................. $ (8,545) =========== Net income attributed to: Preferred stock........................................... $ 21,707 Class A common stock...................................... 82,486 Class B common stock...................................... 2,867 ----------- Total.................................................. $ 107,060 =========== Weighted average shares outstanding: Class A common stock........................................ 26,600,000 Class B common stock........................................ 924,626 ----------- Total.................................................. 27,524,626 ===========
Any difference between basic and diluted earnings per share was attributable to stock options. For the years ended December 31, 2002 and March 31, 2001, options for 1.2 million and 5.2 million shares, respectively were excluded from the diluted earnings per share calculations for the Company's common stock F-16 because they were anti-dilutive. In addition, the Company granted 0.6 million options to purchase common stock on January 2, 2003. (10) COAL INVENTORY Coal inventory consisted of the following:
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) Raw coal.................................................... $ 18,076 $ 15,979 Work in process............................................. 143,963 137,808 Saleable coal............................................... 28,233 23,123 -------- -------- Total.................................................. $190,272 $176,910 ======== ========
Raw coal represents coal stockpiles that may be sold in current condition or may be further processed prior to shipment to a customer. Work in process consists of the costs to remove overburden above an unmined coal seam as part of the surface mining process. These costs include labor, supplies, equipment costs and operating overhead, and are charged to operations as coal from the seam is sold. (11) LEASES The Company leases equipment and facilities under various noncancelable lease agreements. Certain lease agreements require the maintenance of specified ratios and contain restrictive covenants which limit indebtedness, subsidiary dividends, investments, asset sales and other Company actions. Rental expense under operating leases was $116.3 million, $79.5 million and $93.4 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. The net book value of property, plant, equipment and mine development assets under capital leases was $5.8 million and $2.1 million as of December 31, 2002 and 2001, respectively. The Company also leases coal reserves under agreements that require royalties to be paid as the coal is mined. Certain agreements also require minimum annual royalties to be paid regardless of the amount of coal mined during the year. Total royalty expense was $181.1 million, $129.6 million and $165.8 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. A substantial amount of the coal mined by the Company is produced from reserves leased from the owner of the coal. One of the major lessors is the U.S. government, from which the Company leases substantially all of the coal it mines in Wyoming, Montana and Colorado under terms set by Congress and administered by the U.S. Bureau of Land Management. The terms of these leases are generally for an initial term of ten years but may be extended by diligent development and mining of the reserve until all economically recoverable reserves are depleted. The Company has met the diligent development requirements for substantially all of these federal leases either directly through production or by including the lease as a part of a logical mining unit with other leases upon which development has occurred. Annual production on these federal leases must total at least 1% of the original amount of coal in the entire logical mining unit. Royalties are payable monthly at a rate of 12.5% of the gross realization from the sale of the coal mined using surface mining methods and at a rate of 8.0% of the gross realization for coal produced using underground mining methods. The Company also leases the coal production at its Arizona mines from The Navajo Nation and the Hopi Tribe under leases that are administered by the U.S. Department of the Interior. These leases expire once mining activities cease. The royalty rates are also generally based upon a percentage of the gross realization from the sale of coal. These rates are subject to redetermination every ten years under the terms of the leases. The remainder of the leased coal is generally leased from state governments, land holding companies and various individuals. The duration of these leases varies greatly. Typically, the lease terms are automatically extended as long as active mining continues. Royalty payments are generally based upon a specified rate per ton or a percentage of the gross realization from the sale of the coal. F-17 On December 19, 2002, the Company formed an alliance with Penn Virginia Resource Partners, L.P. ("PVR") whereby the Company contributed 120 million tons of coal reserves in exchange for $72.5 million in cash and 2.76 million units, or 15%, of the PVR master limited partnership. The Company's subsidiaries leased back the coal and pay royalties as the coal is mined. No gain or loss was recorded at the inception of this transaction. A deferred gain of $31.5 million will be recognized as the leased coal is mined. The Company accounts for its investment in PVR under the equity method of accounting, under the provisions of Statement of Position No. 78-9 "Accounting for Investments in Real Estate Ventures." During the nine months ended December 31, 2001 and the year ended March 31, 2001, the Company sold certain assets for $19.0 million and $28.8 million, respectively, and those assets were leased back under operating lease agreements from the purchasers over a period of three to eight years. No gains or losses were recognized on these transactions. Each lease agreement contains renewal options at lease termination and purchase options at amounts approximating fair market value during the lease and at lease termination. No such transactions occurred during the year ended December 31, 2002. As of December 31, 2002 the Company's lease obligations were secured by outstanding surety bonds and letters of credit totaling $97.6 million. As of December 31, 2002, the restricted net assets applicable under certain lease agreements of the Company's consolidated subsidiaries were $500.0 million. Future minimum lease and royalty payments as of December 31, 2002 are as follows:
CAPITAL OPERATING COAL YEAR ENDED DECEMBER 31 LEASES LEASES RESERVES ---------------------- ------- --------- -------- (DOLLARS IN THOUSANDS) 2003................................................... $3,879 $100,526 $ 24,676 2004................................................... 348 88,768 25,398 2005................................................... 628 76,390 26,298 2006................................................... 335 57,802 25,732 2007................................................... 37 43,061 22,885 2008 and thereafter.................................... 16 87,505 66,027 ------ -------- -------- Total minimum lease payments........................... $5,243 $454,052 $191,016 ======== ======== Less interest.......................................... 203 ------ Present value of minimum capital lease payments........ $5,040 ======
F-18 (12) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following:
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) Trade accounts payable...................................... $167,892 $224,225 Accrued taxes other than income............................. 87,735 76,661 Accrued payroll and related benefits........................ 45,197 51,310 Accrued health care......................................... 80,273 78,005 Accrued interest............................................ 17,722 16,924 Workers' compensation obligations........................... 42,616 42,652 Accrued royalties........................................... 24,260 20,603 Accrued lease payments...................................... 9,152 10,029 Other accrued expenses...................................... 72,166 71,704 -------- -------- Total accounts payable and accrued expenses............ $547,013 $592,113 ======== ========
(13) INCOME TAXES Pretax income from continuing operations consisted of the following:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ ----------- (DOLLARS IN THOUSANDS) U.S. ........................................... $75,684 $28,707 $105,184 Non U.S. ....................................... 3,120 293 47,710 ------- ------- -------- Total...................................... $78,804 $29,000 $152,894 ======= ======= ========
Total income tax provision (benefit) from continuing operations consisted of the following:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Current: U.S. federal................................... $ -- $ 313 $ 170 Non U.S. ...................................... 1,066 -- 19,150 State.......................................... 250 250 100 -------- ------ ------- Total current.................................. 1,316 563 19,420 -------- ------ ------- Deferred: U.S. federal................................... (37,847) 2,883 29,284 Non U.S. ...................................... 12 -- (1,039) State.......................................... (3,488) (981) (4,975) -------- ------ ------- Total deferred................................. (41,323) 1,902 23,270 -------- ------ ------- Total provision (benefit)...................... $(40,007) $2,465 $42,690 ======== ====== =======
F-19 The income tax rate on income (loss) from continuing operations differed from the U.S. federal statutory rate as follows:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Federal statutory rate........................... $ 27,581 $ 10,150 $ 53,513 Changes in valuation allowance................... (26,865) 9,023 35,775 Foreign earnings and disposition gains........... (14) 103 (7,079) State income taxes, net of U.S. federal tax benefit........................................ (3,325) (818) (4,912) Depletion........................................ (38,136) (19,769) (37,369) Other, net....................................... 752 3,776 2,762 -------- -------- -------- Total....................................... $(40,007) $ 2,465 $ 42,690 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities consisted of the following:
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) Deferred tax assets: Accrued long-term reclamation and mine closing liabilities............................................ $ 81,748 $ 78,947 Accrued long-term workers' compensation liabilities....... 101,967 99,810 Postretirement benefit obligations........................ 413,730 422,830 Intangible tax asset and purchased contract rights........ 81,631 102,878 Tax credits and loss carryforwards........................ 270,585 299,369 Obligation to industry fund............................... 24,015 21,747 Additional minimum pension liability...................... 52,703 20,982 Others.................................................... 64,464 75,564 ---------- ---------- Total gross deferred tax assets........................... 1,090,843 1,122,127 ---------- ---------- Deferred tax liabilities: Property, plant, equipment and mine development principally due to differences in depreciation, depletion and asset writedowns......................... 1,191,567 1,273,926 Long-term debt............................................ 5,962 7,992 Others.................................................... 212,637 194,102 ---------- ---------- Total gross deferred tax liabilities...................... 1,410,166 1,476,020 Valuation allowance......................................... (169,626) (196,491) ---------- ---------- Net deferred tax liability................................ $ (488,949) $ (550,384) ========== ========== Deferred taxes consisted of the following: Current deferred income taxes............................. $ 10,361 $ 14,380 Noncurrent deferred income taxes.......................... (499,310) (564,764) ---------- ---------- Net deferred tax liability................................ $ (488,949) $ (550,384) ========== ==========
The Company's deferred tax assets include alternative minimum tax ("AMT") credits of $51.4 million and net operating loss ("NOL") carryforwards of $219.2 million as of December 31, 2002. The AMT credits have no expiration date and the majority of the NOL carryforwards expire beginning in the year 2019. Utilization of the majority of these AMT credits and NOL carryforwards is subject to various limitations F-20 because of previous changes in ownership (as defined in the Internal Revenue Code) of the Company and ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. The AMT credits and NOL carryforwards are offset by a valuation allowance of $169.6 million. The total amount of undistributed earnings of foreign subsidiaries for income tax purposes was approximately $2.6 million and $0.4 million at December 31, 2002 and 2001, respectively. It is the Company's intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or U.S. income taxes that may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to the Company. The Company made U.S. federal tax payments totaling $0.5 million and $0.2 million for the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. There were no U.S. federal tax payments in the year ended December 31, 2002. The Company paid state and local income taxes totaling $0.2 million, $0.3 million, and $0.1 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. There were no non-U.S. tax payments in the year ended December 31, 2002 or the nine months ended December 31, 2001. Non-U.S. tax payments were $19.1 million for the year ended March 31, 2001. (14) LONG-TERM DEBT Long-term debt consisted of the following:
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) 9.625% Senior Subordinated Notes ("Senior Subordinated Notes") due 2008.......................................... $ 391,490 $ 391,390 8.875% Senior Notes ("Senior Notes") due 2008............... 316,498 316,413 Unsecured revolving credit agreement of Black Beauty........ 116,584 96,790 5.0% Subordinated Note...................................... 85,055 90,026 Senior unsecured notes under various agreements............. 58,214 83,571 Other....................................................... 61,370 52,877 ---------- ---------- Total long-term debt................................... 1,029,211 1,031,067 Less current maturities..................................... (47,515) (46,499) ---------- ---------- Long-term debt, less current maturities................ $ 981,696 $ 984,568 ========== ==========
SENIOR SUBORDINATED NOTES AND SENIOR NOTES The Senior Subordinated Notes are general unsecured obligations of the Company and are subordinate in right of payment to all existing and future senior debt (as defined), including borrowings under the Senior Credit Facilities and the Senior Notes. The Senior Notes are general unsecured obligations of the Company, rank senior in right of payment to all subordinated indebtedness (as defined) and rank equally in right of payment with all current and future unsecured indebtedness of the Company. As of December 31, 2002, Lehman Brothers Inc. and its affiliates' share of the Company's Senior Subordinated Notes and Senior Notes outstanding was $3.5 million and $5.8 million, respectively. Affiliates of Lehman Brothers Inc. own a significant portion of the Company's outstanding common stock. The indentures governing the Senior Notes and Senior Subordinated Notes permit the Company and its Restricted Subsidiaries to incur additional indebtedness, including secured indebtedness, subject to certain limitations. In addition, among other customary restrictive covenants, the indentures prohibit the Company and its Restricted Subsidiaries from creating or otherwise causing any encumbrance or restriction on the F-21 ability of any Restricted Subsidiary that is not a Guarantor to pay dividends or to make certain other upstream payments to the Company or any of its Restricted Subsidiaries (subject to certain exceptions). The indentures permit us to pay annual dividends of up to the greater of 6% ($27.0 million) of the net proceeds from our initial public offering, or additional amounts based on, among other things, the sum of 50% of cumulative defined net income (since July 1, 1998) and 100% of the proceeds of our initial public offering. SENIOR CREDIT FACILITY The Senior Credit Facility is secured by a first priority lien on certain assets of the Company and its domestic subsidiaries. The Company amended its Senior Credit Facility effective May 22, 2001. The amendment permits the payment of cash dividends and other restricted payments subject to specified limitations and increases the amount available for borrowing under the Revolving Credit Facility from $200.0 million to $350.0 million. The Revolving Credit Facility also contains certain restrictions and limitations including, but not limited to, financial covenants that will require the Company to maintain and achieve certain levels of financial performance. The facility permits the payment of annual cash dividends of up to the greater of $25.0 million or 10% of consolidated EBITDA, as defined in the facility. In addition, the Senior Credit Facility prohibits the Company from allowing its Restricted Subsidiaries (which include all Guarantors) to create or otherwise cause any encumbrance or restriction on the ability of any such Restricted Subsidiary to pay any dividends or make certain other upstream payments subject to certain exceptions. UNSECURED REVOLVING CREDIT FACILITY The Company maintains a $480.0 million Revolving Credit Facility that has a borrowing sub-limit of $350.0 million and a letter of credit sub-limit of $330.0 million. The Company pays quarterly commitment fees at a 0.38% annual rate on the unused portion of its Revolving Credit Facility. Interest rates on the revolving loans under the Revolving Credit Facility are based on the Base Rate or LIBOR (as defined in the Senior Credit Facilities) at the Company's option. The applicable rate was 2.9% as of December 31, 2002. The Revolving Credit Facility commitment matures in June 2004. As of December 31, 2002, the Company had $186.8 million of letters of credit and no borrowings outstanding under the Revolving Credit Facility. Interest paid on the Revolving Credit Facility was $2.5 million, $0.5 million and $0.9 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. 5.0% SUBORDINATED NOTE The 5.0% Subordinated Note is recorded net of discount at an effective annual interest rate of 12.0%. Interest and principal are payable each March 1 and scheduled principal payments of $10.0 million per year are due from 2003 through 2006 with $60.0 million due March 1, 2007. The 5.0% Subordinated Note is expressly subordinated in right of payment to all prior indebtedness (as defined), including borrowings under the Senior Credit Facilities and the Senior Notes. OTHER The senior unsecured notes represent obligations of Black Beauty and include $15.7 million of Senior Notes and two series of notes with an aggregate principal amount of $42.5 million. The Senior Notes, due in December 2004, bear interest at 9.2%, payable quarterly, and are prepayable in whole or in part at any time, subject to certain make-whole provisions. The two series of notes include Series A and B Notes, totaling $37.5 million and $5.0 million, respectively. The Series A Notes bear interest at an annual rate of 7.5% and are due in 2007. The Series B Notes bear interest at an annual rate of 7.4% and are due in November 2003. Black Beauty maintains a $140.0 million revolving credit facility with several banks that matures on April 17, 2004. Black Beauty may elect one or a combination of interest rates on its borrowings; the effective annual interest rate was 3.0% as of December 31, 2002. Borrowings outstanding as of December 31, 2002 F-22 were $116.6 million. Black Beauty paid quarterly commitment fees on the unused portion of its revolving credit facility at a 0.35% average annual rate for the year ended December 31, 2002. Other long-term debt, which consists principally of notes payable, is due in installments through 2004. The weighted average effective interest rate of this debt was 3.8% as of December 31, 2002. The aggregate amounts of long-term debt maturities subsequent to December 31, 2002 are as follows (dollars in thousands):
YEAR OF MATURITY ---------------- 2003........................................................ $ 47,515 2004........................................................ 175,196 2005........................................................ 21,306 2006........................................................ 17,814 2007........................................................ 52,749 2008 and thereafter......................................... 714,631 ---------- Total.................................................. $1,029,211 ==========
Interest paid on long-term debt was $93.0 million, $100.8 million and $185.5 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT During the nine months ended December 31, 2001, the Company used substantially all of the $449.8 million of net proceeds from its initial public offering to repay debt. The Company repaid its remaining outstanding term loan under its Senior Credit Facilities of $125.0 million and used $100.0 million to repay borrowings under the revolving credit facility that were used to repay a portion of the Company's 5% Subordinated Note. The Company used $173.0 million of proceeds from the offering to repurchase $80.0 million in principal of the Senior Notes and $80.0 million in principal of the Senior Subordinated Notes pursuant to a tender offer. Finally, the Company used $3.1 million and $30.2 million of proceeds to repurchase an additional $2.9 million in principal of the Senior Notes and $27.8 million in principal of the Senior Subordinated Notes, respectively, in a private transaction. The repayments resulted in an extraordinary loss of $29.0 million, net of income taxes, which represented the excess of cash paid over the carrying value of the debt retired and the accelerated write-off of debt issuance costs related to the debt repaid. During the year ended March 31, 2001, the Company prepaid $565.0 million of term loans under its Senior Credit Facilities. As a result of the prepayments, the Company recorded an extraordinary loss on debt extinguishment of $8.5 million, net of income taxes. INTEREST RATE SWAPS The Company has designated interest rate swaps with notional amounts totaling $150.0 million as a fair value hedge of its Senior Notes. Under the swaps, the Company pays a floating rate based upon the six-month LIBOR rate for a period of six years ending May 15, 2008. The applicable rate was 5.41% as of December 31, 2002. During the year ended March 31, 2001, the Company had in place interest rate swap agreements to fix the rate on a portion of its variable rate debt. These swaps were terminated during the year ended March 31, 2001, and the Company realized a net gain of approximately $5.1 million, which was included as a component of interest expense for that year. F-23 (15) WORKERS' COMPENSATION OBLIGATIONS Certain subsidiaries of the Company are subject to the Federal Coal Mine Health and Safety Act of 1969, and the related workers' compensation laws in the states in which they operate. These laws require the subsidiaries to pay benefits for occupational disease resulting from coal workers' pneumoconiosis ("occupational disease"). Changes to the federal regulations became effective in August 2001. The revised regulations are expected to result in higher costs and have been incorporated into the provision for occupational disease as determined by independent actuaries. Provisions for occupational disease costs are based on determinations by independent actuaries or claims administrators. The Company provides income replacement and medical treatment for work related traumatic injury claims as required by applicable state law. Provisions for estimated claims incurred are recorded based on estimated loss rates applied to payroll and claim reserves determined by independent actuaries or claims administrators. Certain subsidiaries of the Company are required to contribute to state workers' compensation funds for second injury and other costs incurred by the state fund based on a payroll-based assessment by the applicable state. Provisions are recorded based on the payroll based assessment criteria. As of December 31, 2002, the Company had $156.2 million in surety bonds and letters of credit outstanding to secure workers' compensation obligations. Workers' compensation provision consists of the following components:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Occupational disease: Service cost................................... $ 2,942 $ 2,080 $ 1,602 Interest cost.................................. 12,049 9,330 12,180 Net amortization............................... 466 299 (1,882) ------- ------- ------- Total occupational disease....................... 15,457 11,709 11,900 Traumatic injury claims........................ 25,722 13,926 15,728 State assessment taxes......................... 14,204 10,934 13,731 ------- ------- ------- Total provision.................................. $55,383 $36,569 $41,359 ======= ======= =======
Workers' compensation obligations consist of amounts accrued or loss sensitive insurance premiums, uninsured claims, and related taxes and assessments under black lung and traumatic injury workers compensation programs. The workers' compensation obligations consisted of the following:
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) Occupational disease costs.................................. $167,270 $164,062 Traumatic injury claims..................................... 84,607 85,900 State assessment taxes...................................... 537 410 -------- -------- Total obligations......................................... 252,414 250,372 Less current portion........................................ (42,616) (42,652) -------- -------- Noncurrent obligations.................................... $209,798 $207,720 ======== ========
F-24 The reconciliation of changes in the benefit obligation of the occupational disease liability is as follows:
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) Beginning of year obligation................................ $172,886 $167,504 Less insured claims......................................... (6,513) (6,425) -------- -------- Net obligation......................................... 166,373 161,079 Service cost................................................ 2,942 2,080 Interest cost............................................... 12,049 9,330 Actuarial loss.............................................. 6,854 1,869 Benefit and administrative payments......................... (11,980) (7,985) -------- -------- Net obligation at end of year.......................... 176,238 166,373 Unamortized loss and prior service cost..................... (8,968) (2,311) -------- -------- Accrued cost................................................ $167,270 $164,062 ======== ========
The liability for occupational disease claims represents the actuarially-determined present value of known claims and an estimate of future claims that will be awarded to current and former employees. The projections for the year ended December 31, 2002 were based on a 7.4% per annum discount rate and a 3.5% estimate for the annual rate of inflation. The projections for the nine months ended December 31, 2001 were based on a 7.85% per annum discount rate and a 3.5% estimate for the annual rate of inflation. Traumatic injury workers' compensation obligations are estimated from both case reserves and actuarial determinations of historical trends, discounted at 7.4% and 7.85% for the year ended December 31, 2002 and the nine months ended December 31, 2001, respectively. Liability determinations were based on a discount rate of 7% and 7.4% at December 31, 2002 and December 31, 2001, respectively. FEDERAL BLACK LUNG EXCISE TAX REFUND CLAIMS In addition to the obligations discussed above, certain subsidiaries of the Company are required to pay black lung excise taxes to the Federal Black Lung Trust Fund. The trust fund pays occupational disease benefits to entitled former miners who worked prior to July 1, 1973. Excise taxes are based on the selling price of coal, up to a maximum per-ton amount. The Company recorded expense reductions of $6.8 million, $21.0 million and $13.7 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively, related to excise tax refund claims filed with the Internal Revenue Service. These refund claims covering the period from 1991-1999, were based on federal court actions that determined that excise taxes paid on export sales of coal are unconstitutional. In addition, related interest income of $3.7 million was recorded during the year ended March 31, 2001. During the year ended December 31, 2002, the Company received $26.8 million of excise tax refunds and recorded related interest income of $4.6 million. (16) PENSION AND SAVINGS PLANS One of the Company's subsidiaries, Peabody Holding Company, sponsors a defined benefit pension plan covering a significant portion of all salaried U.S. employees (the "Peabody Plan"). A Peabody Holding Company subsidiary also has a defined benefit pension plan covering eligible employees who are represented by the United Mine Workers of America under the Western Surface Agreement of 2000 (the "Western Plan"). Peabody Holding Company and the Company's Gold Fields Mining Corporation ("Gold Fields") subsidiary sponsor separate unfunded supplemental retirement plans to provide senior management with benefits in excess of limits under the federal tax law and increased benefits to reflect a service adjustment factor. F-25 Annual contributions to the plans are made as determined by consulting actuaries based upon the Employee Retirement Income Security Act of 1974 minimum funding standard. In May 1998, the Company entered into an agreement with the Pension Benefit Guaranty Corporation which requires the Company to maintain certain minimum funding requirements. Assets of the plans are primarily invested in various marketable securities, including U.S. government bonds, corporate obligations and listed stocks. Net periodic pension costs included the following components:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED 2002 2001 MARCH 31, 2001 ------------ ------------ -------------- (DOLLARS IN THOUSANDS) Service cost for benefits earned.............. $ 9,592 $ 6,361 $ 8,916 Interest cost on projected benefit obligation.................................. 39,919 30,087 37,484 Expected return on plan assets................ (45,512) (33,860) (43,932) Other amortizations and deferrals............. 831 399 (2,174) -------- -------- -------- Net periodic pension costs............... $ 4,830 $ 2,987 $ 294 ======== ======== ========
During the period ended March 31, 1999, the Company made an amendment to phase out the Peabody Plan beginning January 1, 2000. Effective January 1, 2001, certain employees no longer accrue future service under the plan while other employees accrue reduced service under the plan based on their age and years of service as of December 31, 2000. For plan benefit calculation purposes, employee earnings are also frozen as of December 31, 2000. The Company has adopted an enhanced savings plan contribution structure in lieu of benefits formerly accrued under the defined benefit pension plan. F-26 The following summarizes the change in benefit obligation, change in plan assets and funded status of the Company's plans:
DECEMBER 31, ---------------------- 2002 2001 ---------- --------- (DOLLARS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of period................. $ 565,821 $512,904 Service cost.............................................. 9,592 6,361 Interest cost............................................. 39,919 30,087 Plan amendments........................................... 1,342 57 Benefits paid............................................. (31,313) (22,612) Actuarial loss............................................ 16,565 39,024 --------- -------- Benefit obligation at end of period......................... 601,926 565,821 --------- -------- Change in plan assets: Fair value of plan assets at beginning of period.......... 488,517 478,854 Actual return on plan assets.............................. (14,887) 24,318 Employer contributions.................................... 14,305 7,957 Benefits paid............................................. (31,313) (22,612) --------- -------- Fair value of plan assets at end of period.................. 456,622 488,517 --------- -------- Funded status............................................. (145,304) (77,304) Unrecognized actuarial loss............................... 146,376 69,831 Unrecognized prior service cost........................... 2,712 1,782 --------- -------- Accrued pension asset (liability)........................... $ 3,784 $ (5,691) ========= ======== Amounts recognized in the consolidated balance sheets: Accrued benefit liability................................. $(132,961) $(63,112) Intangible asset.......................................... 5,418 6,094 Additional minimum pension liability...................... 131,327 51,327 --------- -------- Net amount recognized....................................... $ 3,784 $ (5,691) ========= ========
The projected benefit obligation applicable to pension plans with accumulated benefit obligations in excess of plan assets was $601.9 million and $565.8 million as of December 31, 2002 and 2001, respectively. The accumulated benefit obligation related to these plans was $589.6 million and $551.2 million as of December 31, 2002 and 2001, respectively. The fair value of plan assets related to these plans was $456.6 million and $488.5 million as of December 31, 2002 and 2001, respectively. The projected benefit obligation exceeded plan assets for all plans as of December 31, 2002 and 2001. The provisions of SFAS No. 87, "Employers' Accounting for Pensions," require the recognition of an additional minimum liability and related intangible asset to the extent that accumulated benefits exceed plan assets. As of December 31, 2002 and 2001, the Company has recorded $131.3 million and $51.3 million, respectively, to reflect the Company's minimum liability. The current portion of the Company's pension liability as reflected within "Accounts payable and accrued expenses" at December 31, 2002 and 2001 was $7.4 million and $16.1 million, respectively. The noncurrent portion of the Company's pension liability as reflected within "Other noncurrent liabilities" at December 31, 2002 and 2001 was $120.1 million and $40.9 million, respectively. F-27 The assumptions used to determine the above projected benefit obligation as of the end of each fiscal period were as follows:
DECEMBER 31, ------------- 2002 2001 ----- ----- Discount rate............................................... 7.0% 7.4% Rate of compensation increase............................... 3.75% 4.25% Expected rate of return on plan assets...................... 8.75% 9.0%
The Company amortizes actuarial gains and losses using a 5% corridor with a five-year amortization period. Certain subsidiaries make contributions to multi-employer pension plans, which provide defined benefits to substantially all hourly coal production workers represented by the United Mine Workers of America other than those covered by the Western Plan. Benefits under the United Mine Workers of America plans are computed based on service with the subsidiaries or other signatory employers. There were no contributions during the year ended December 31, 2002 or the nine months ended December 31, 2001. The amounts contributed to the plans and included in operating costs were $0.1 million for the year ended March 31, 2001. The Company sponsors employee retirement accounts under five 401(k) plans for eligible salaried U.S. employees. The Company matches voluntary contributions to each plan up to specified levels. A performance contribution feature allows for contributions based upon meeting specified Company performance targets. The expense for these plans was $8.1 million, $6.2 million and $6.4 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. (17) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company currently provides health care and life insurance benefits to qualifying salaried and hourly retirees and their dependents from defined benefit plans established by the Company. Employees of Gold Fields are only eligible for life insurance benefits as provided by the Company. Plan coverage for the health and life insurance benefits is provided to future hourly retirees in accordance with the applicable labor agreement. The Company accounts for postretirement benefits using the accrual method. Net periodic postretirement benefits costs included the following components:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Service cost for benefits earned................. $ 4,219 $ 2,400 $ 3,379 Interest cost on accumulated postretirement benefit obligation............................. 76,691 55,766 74,227 Amortization of prior service cost............... (14,698) (8,352) (2,610) Amortization of actuarial losses (gains)......... 8,180 -- (4,339) -------- ------- ------- Net periodic postretirement benefit costs... $ 74,392 $49,814 $70,657 ======== ======= =======
F-28 The following table sets forth the plans' combined funded status reconciled with the amounts shown in the consolidated balance sheets:
DECEMBER 31, -------------------------- 2002 2001 ----------- ------------ (DOLLARS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of period................ $ 1,027,124 $ 991,234 Service cost............................................. 4,219 2,400 Interest cost............................................ 76,691 55,766 Plan amendments.......................................... 6,013 (38,376) Benefits paid............................................ (74,431) (53,771) Actuarial loss........................................... 213,571 69,871 ----------- ----------- Benefit obligation at end of period........................ 1,253,187 1,027,124 ----------- ----------- Change in plan assets: Fair value of plan assets at beginning of period......... -- -- Employer contributions................................... 74,431 53,771 Benefits paid............................................ (74,431) (53,771) ----------- ----------- Fair value of plan assets at end of period................. -- -- ----------- ----------- Funded status............................................ (1,253,187) (1,027,124) Unrecognized actuarial loss.............................. 248,576 42,387 Unrecognized prior service cost.......................... (27,088) (47,796) ----------- ----------- Accrued postretirement benefit obligation.................. (1,031,699) (1,032,533) Less current portion....................................... 72,100 70,367 ----------- ----------- Noncurrent obligation.................................... $ (959,599) $ (962,166) =========== ===========
The assumptions used to determine the accumulated postretirement benefit obligation at the end of each fiscal period were as follows:
DECEMBER 31, --------------------------------------- 2002 2001 ------------------ ------------------ Discount rate.................................. 7.00% 7.40% Salary increase rate for life insurance benefit...................................... 3.75% 4.25% Health care trend rate......................... 8.00% down to 7.15% down to 4.75% over 5 years 4.75% over 5 years
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend would have the following effects:
ONE-PERCENTAGE- ONE-PERCENTAGE- POINT INCREASE POINT DECREASE --------------- --------------- (DOLLARS IN THOUSANDS) Effect on total service and interest cost components.... $ 11,500 $ (9,571) Effect on postretirement benefit obligation............. $162,219 $(135,323)
In July 2001, the Company adopted changes to the prescription drug program. Effective January 1, 2002, an incentive mail order and comprehensive utilization management program was added to the prescription drug program. The effect of the change on the retiree health care liability was $38.4 million. The Company is recognizing the effect of the plan amendment over three years beginning July 1, 2001. Net periodic postretirement benefits costs for the year ended December 31, 2002 and the nine months ended December 31, 2001 were reduced by $12.8 million and $6.4 million respectively, for this change. F-29 In January 1999, the Company adopted reductions to the salaried employee medical coverage levels for employees retiring before January 1, 2003, which was subsequently changed to January 1, 2005. For employees retiring on or after January 1, 2005, the current medical plan is replaced with a medical premium reimbursement plan. This plan change does not apply to Powder River or Lee Ranch salaried employees. The change in the retiree health care plan resulted in a $22.4 million reduction to the salaried retiree health care liability. The Company is recognizing the effect of the plan amendment over nine years beginning January 1, 1999. The effect was $2.5 million, $1.9 million and $2.5 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001. The Company amortizes actuarial gains and losses using a 5% corridor with an amortization period of three years. MULTI-EMPLOYER BENEFIT PLANS Retirees formerly employed by certain subsidiaries and their predecessors, who were members of the United Mine Workers of America, last worked before January 1, 1976 and were receiving health benefits on July 20, 1992, receive health benefits provided by the Combined Fund, a fund created by the Coal Industry Retiree Health Benefit Act of 1992 (the "Coal Act"). The Coal Act requires former employers (including certain subsidiaries of the Company) and their affiliates to contribute to the Combined Fund according to a formula. In addition, certain Federal Abandoned Mine Lands funds will be transferred to fund certain benefits. The Company has recorded an actuarially determined liability representing the amounts anticipated to be due to the Combined Fund. The noncurrent portion of "Obligation to industry fund" reflected in the consolidated balance sheets as of December 31, 2002 and 2001 was $49.8 million and $49.7 million, respectively. The current portion related to this obligation reflected in "Accounts payable and accrued expenses" in the consolidated balance sheets as of December 31, 2002 and 2001 was $17.5 million and $7.4 million, respectively. Expense of $16.7 million was recognized for the year ended December 31, 2002, which included a charge of $17.2 million related to an adverse U.S. Supreme Court ruling regarding health care beneficiaries previously assigned to the Company by the Social Security Administration. The ruling overturned a U.S. Court of Appeals decision in June 2001 that the Social Security Administration had improperly assigned the beneficiaries to the Company. Expense of $3.3 million was recognized for the nine months ended December 31, 2001 related to the interest discount accrual on the Company's obligation to the Combined Fund. A benefit of $8.0 million was recognized for the period ended March 31, 2001, which included interest discount of $4.6 million, net amortization of an actuarial gain of $1.1 million and a gain of $11.5 million related to beneficiaries formerly assigned to the Company by the Social Security Administration and withdrawn in the year ended March 31, 2001. The Coal Act also established a multi-employer benefit plan ("1992 Plan") which will provide medical and death benefits to persons who are not eligible for the Combined Fund, who retired prior to October 1, 1994 and whose employer and any affiliates are no longer in business. A prior labor agreement established the 1993 United Mine Workers of America Benefit Trust ("1993 Plan") to provide health benefits for retired miners not covered by the Coal Act. The 1992 Plan and the 1993 Plan qualify under SFAS No. 106 as multi-employer benefit plans, which allows the Company to recognize expense as contributions are made. The expense related to these funds was $4.1 million, $1.4 million and $2.0 million for the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. Pursuant to the provisions of the Coal Act and the 1992 Plan, the Company is required to provide security in an amount equal to three times the cost of providing health care benefits for one year for all individuals receiving benefits from the 1992 Plan who are attributable to the Company, plus all individuals receiving benefits from an individual employer plan maintained by the Company who are entitled to receive such benefits. In accordance with the Coal Act and the 1992 Plan, the Company has outstanding surety bonds and letters of credit as of December 31, 2002 of $105.7 million to secure the Company's obligation. F-30 (18) STOCKHOLDERS' EQUITY COMMON STOCK The Company has 150.0 million authorized shares of $0.01 par value common stock. Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. The holders of common stock do not have cumulative voting rights in the election of directors. Holders of common stock are entitled to ratably receive dividends if, as and when dividends are declared from time to time by the Board of Directors. Upon liquidation, dissolution or winding up, any business combination or a sale or disposition of all or substantially all of the assets, the holders of common stock are entitled to receive ratably the assets available for distribution to the stockholders after payment of liabilities and accrued but unpaid dividends and liquidation preferences on any outstanding preferred stock or series common stock. The common stock has no preemptive or conversion rights and is not subject to further calls or assessment by the Company. There are no redemption or sinking fund provisions applicable to the common stock. PREFERRED STOCK AND SERIES COMMON STOCK In addition to the common stock, the Board of Directors is authorized to issue up to 10.0 million shares of preferred stock and up to 40.0 million shares of series common stock. The Board of Directors is authorized to determine the terms and rights of each series, including the number of authorized shares, whether dividends (if any) will be cumulative or non-cumulative and the dividend rate of the series, redemption or sinking fund provisions, conversion terms, prices and rates, and amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Board of Directors may also determine restrictions on the issuance of shares of the same series or of any other class or series, and the voting rights (if any) of the holders of the series. There were no outstanding shares of preferred stock or series common stock as of December 31, 2002. CAPITALIZATION PRIOR TO INITIAL PUBLIC OFFERING On May 17, 2001, the Company effected a 1.4-for-one stock split of its then existing preferred and common stock. All references to number of shares, per share amounts and stock option data reflect the stock split. Prior to the initial public offering on May 22, 2001, the Company had 7.0 million shares of preferred stock, 26.6 million shares of Class A common stock and 1,010,509 shares of Class B common stock outstanding. All of these shares were converted on a one-for-one basis to shares of $0.01 par value common stock in May 2001 in conjunction with the initial public offering. The Company recognized compensation cost related to grants of common stock to management and non-employee directors of $0.1 million, $0.2 million and $3.9 million during the year ended December 31, 2002, the nine months ended December 31, 2001 and the year ended March 31, 2001, respectively. F-31 The following table summarizes preferred and common share activity from March 31, 2000 to December 31, 2002:
CLASS A CLASS B PREFERRED COMMON COMMON COMMON ---------- ----------- ---------- ---------- March 31, 2000....................... 7,000,000 26,600,000 958,263 -- Stock grants to employees.......... -- -- 284,362 -- Shares repurchased................. -- -- (232,116) -- ---------- ----------- ---------- ---------- March 31, 2001....................... 7,000,000 26,600,000 1,010,509 -- Conversion to common stock......... (7,000,000) (26,600,000) (1,010,509) 34,610,509 Issuance of common stock in connection with initial public offering........................ -- -- -- 17,250,000 Stock options exercised............ -- -- -- 67,066 Employee stock purchases........... -- -- -- 75,087 Stock grants to non-employee directors....................... -- -- -- 7,584 ---------- ----------- ---------- ---------- December 31, 2001.................... -- -- -- 52,010,246 Stock options exercised............ -- -- -- 291,203 Employee stock purchases........... -- -- -- 157,231 Stock grants to non-employee directors....................... -- -- -- 1,908 Shares repurchased and retired..... -- -- -- (60,310) ---------- ----------- ---------- ---------- December 31, 2002.................... -- -- -- 52,400,278 ========== =========== ========== ==========
(19) EQUITY COMPENSATION PLANS LONG-TERM EQUITY INCENTIVE PLAN In connection with the initial public offering, the Company adopted the "Long-Term Equity Incentive Plan," making 2.5 million shares of the Company's common stock available for grant. The Board of Directors may provide such grants in the form of stock appreciation rights, restricted stock, performance awards, incentive stock options, nonqualified stock options and stock units. The Company granted 0.7 million and 0.6 million non-qualified options to purchase common stock during the year ended December 31, 2002 and the nine months ended December 31, 2001, respectively. These options vest over three years and expire 10 years after date of grant. Performance units granted by the Company vest over, and are payable in cash subject to the achievement of performance goals at the conclusion of, the three year measurement period. The payout is based on the Company's performance compared to an industry peer group and the S&P Industrial Index. During the year ended December 31, 2002 and the nine months ended December 31, 2001, the Company granted 0.1 million performance units in each period. As a result of the Company's performance relative to the measurement group, the Company recognized compensation expense of $2.1 million in 2002. No compensation expense was recorded for the nine months ended December 31, 2001. STOCK PURCHASE AND OPTION PLAN Effective May 19, 1998, the Company adopted the "1998 Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings Corporation," making 5.6 million shares of the Company's common stock available for grant. The Board of Directors provided such grants in the form of stock, non-qualified options or incentive stock options. A portion of the options vest solely on the passage of time ("time options") to the extent permitted under the Internal Revenue Code. Additionally, a portion of the options vest at the end of nine and one-half years, whether or not the applicable performance targets are achieved, but become exercisable earlier with the F-32 achievement of performance goals determined by the Board of Directors ("performance options"). Time options become fully vested early upon death, disability, a change in control or a recapitalization event, as defined. Performance options become fully vested early upon a change in control, a recapitalization event or an initial public offering, as defined. During the year ended March 31, 2001, the Company granted 1.5 million options to purchase Class A common stock, 0.4 million of which were time options and 1.1 million of which were performance options. All options granted during the year ended March 31, 2001 have an exercise price of $14.29 per share and expire 10 years after date of grant. A summary of outstanding option activity is as follows:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, WEIGHTED AVERAGE DECEMBER 31, WEIGHTED AVERAGE MARCH 31, WEIGHTED AVERAGE 2002 EXERCISE PRICE 2001 EXERCISE PRICE 2001 EXERCISE PRICE ------------ ---------------- ------------ ---------------- ---------- ---------------- Beginning balance.... 5,678,343 $15.70 5,225,510 $14.29 5,165,538 $14.29 Granted............ 686,234 26.83 604,776 28.00 1,456,542 14.29 Exercised.......... (291,203) 14.29 (67,066) 14.29 -- 14.29 Forfeited.......... (299,545) 17.14 (84,877) 17.51 (1,396,570) 14.29 --------- --------- ---------- Outstanding.......... 5,773,829 $17.02 5,678,343 $15.70 5,225,510 $14.29 ========= ========= ========== Exercisable.......... 2,899,196 $15.17 2,761,793 $14.29 779,962 $14.29 ========= ========= ==========
A summary of options outstanding and exercisable as of December 31, 2002 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ---------------------------- WEIGHTED AVERAGE RANGE OF REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE --------------- --------- ---------------- ---------------- --------- ---------------- $14.29..... 4,568,000 6.0 $14.29 2,713,025 $14.29 $23.64 to $26.59..... 23,899 9.8 25.17 668 26.15 $26.60 to $29.55..... 1,181,930 8.7 27.41 185,503 28.01 --------- --------- 5,773,829 6.6 $17.02 2,899,196 $15.17 ========= =========
The weighted average fair values of the Company's stock options and the assumptions used in applying the Black-Scholes option pricing model (for grants during the year ended December 31, 2002 and the nine months ended December 31, 2001) and the minimum value method for the year ended March 31, 2001 were as follows:
DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ --------- Weighted average fair value....................... $13.18 $14.71 $5.97 Risk-free interest rate........................... 4.6% 5.3% 5.5% Expected option life.............................. 7 years 7 years 7 years Expected volatility............................... 49% 53% -- Dividend yield.................................... 1.4% 1.4% 0%
EMPLOYEE STOCK PURCHASE PLAN During the nine months ended December 31, 2001, the Company adopted an employee stock purchase plan. Total shares of common stock available for purchase under the plan are 1.5 million. Eligible full-time and part-time employees are able to contribute up to 15% of their base compensation into this plan, subject to a limit of $25,000 per year. Employees are able to purchase Company common stock at a 15% discount to the lower of the fair market value of the Company's common stock on the initial and ending dates of each offering period. F-33 NON-EMPLOYEE DIRECTOR EQUITY INCENTIVE PLAN During the nine months ended December 31, 2001, the Company also adopted the Equity Incentive Plan for Non-Employee Directors. Under that plan, members of the Company's Board of Directors who are not employees of the Company or one of its affiliates will be eligible to receive grants of restricted stock and stock options. Restricted stock will be granted to a director upon election or appointment to the Board of Directors, and will vest upon the third anniversary of the date of grant. Options to purchase stock will be granted to eligible directors each year at the annual meeting of the Board of Directors, and will vest ratably over three years. All options granted under the plan will expire after 10 years from the date of the grant, subject to earlier termination in connection with a director's termination of service. (20) COMPREHENSIVE INCOME The after-tax components of accumulated other comprehensive income (loss) are as follows:
TOTAL FOREIGN MINIMUM ACCUMULATED CURRENCY PENSION OTHER TRANSLATION LIABILITY COMPREHENSIVE ADJUSTMENT ADJUSTMENT INCOME (LOSS) ----------- ---------- ------------- (DOLLARS IN THOUSANDS) March 31, 2000................................... $(12,667) $ -- $(12,667) Current period change.......................... (26,144) (862) (27,006) Reclassification adjustment resulting from the sale of Peabody Resources Limited operations.................................. 38,811 -- 38,811 -------- -------- -------- March 31, 2001................................... -- (862) (862) Current period change.......................... -- (29,483) (29,483) -------- -------- -------- December 31, 2001................................ -- (30,345) (30,345) Current period change.......................... 15 (47,297) (47,282) -------- -------- -------- December 31, 2002................................ $ 15 $(77,642) $(77,627) ======== ======== ========
In conjunction with the sale of the Peabody Resources Limited operations, discussed in Note 7, the Company recorded a reduction of the foreign currency translation adjustment of the Company's Peabody Resources Limited operations. (21) RELATED PARTY TRANSACTIONS Lehman Brothers served as the lead underwriter in connection with a secondary public offering of Company Common Stock, which was completed in April 2002. Lehman Brothers Merchant Banking Fund also sold shares of Company Common Stock in that offering. The Company paid expenses customarily incurred by a registering company in connection with the secondary offering. Lehman Brothers sold, in the aggregate, 8,155,000 shares in the offering, and their beneficial ownership of the Company's outstanding common stock declined from 57% to 41% immediately following the offering. Lehman Brothers served as the Company's advisor in its search for a partner for the development of the Thoroughbred Energy Campus, a proposed 1,500 megawatt electricity generating plant in Western Kentucky. For the nine months ended December 31, 2001, the Company paid Lehman Brothers $0.5 million, plus reimbursement of expenses, for those services. Lehman Brothers served as the Company's financial advisor in connection with a public tender offer completed in June 2001 to repurchase $80.0 million of principal of the Company's Senior Notes and $80.0 million in principal of the Company's Senior Subordinated Notes. The Company paid Lehman Brothers a fee of $0.4 million for those services. F-34 Lehman Brothers served as the lead underwriter in connection with the initial public offering of the Company's common stock in May 2001. Lehman Brothers received customary fees, plus reimbursement of expenses, for those services. Lehman Commercial Paper Inc. is a participant in the Company's Senior Credit Facility, which was amended in April 2001. Lehman Commercial Paper Inc. received $0.06 million of the $1.4 million credit facility amendment fee. Lehman Brothers served as one of the Company's financial advisors in connection with the sale of the Company's Peabody Resources Limited operations, which was completed on January 29, 2001. The Company paid Lehman Brothers a fee of $2.7 million, plus reimbursement of expenses, for those services. Lehman Brothers served as the Company's financial advisor in connection with the sale of Citizens Power, which was completed in the year ended March 31, 2001. The Company paid Lehman Brothers a fee of approximately $1.5 million, plus reimbursement of expenses, for those services. (22) GUARANTEES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, the Company is a party to guarantees and financial instruments with off-balance-sheet risk, such as bank letters of credit, performance or surety bonds and other guarantees and indemnities, which are not reflected in the accompanying consolidated balance sheets. Such financial instruments are valued based on the amount of exposure under the instrument and the likelihood of performance being required. In the Company's past experience, virtually no claims have been made against these financial instruments. Management does not expect any material losses to result from these guarantees or off-balance-sheet instruments and, therefore, is of the opinion that their fair value is zero. In addition to the guarantees specifically discussed below, the amount of surety bonds currently outstanding related to the Company's reclamation, coal lease obligations, workers' compensation, and retiree healthcare are presented in Notes 1, 11, 15 and 17, respectively, to the consolidated financial statements. A discussion of our $140.0 million accounts receivable securitization is included in Note 5 to the consolidated financial statements. The Company owns a 30.0% interest in a partnership that leases a coal export terminal from the Peninsula Ports Authority of Virginia under a 30-year lease that permits the partnership to purchase the terminal at the end of the lease term for a nominal amount. The partners have severally (but not jointly) agreed to make payments under various agreements which in the aggregate provide the partnership with sufficient funds to pay rents and to cover the principal and interest payments on the floating-rate industrial revenue bonds issued by the Peninsula Ports Authority, and which are supported by letters of credit from a commercial bank. The Company's maximum reimbursement obligation to the commercial bank is in turn supported by a letter of credit totaling $42.8 million. The Company owns a 49.0% interest in a joint venture that operates an underground mine and prep plant facility in West Virginia. The partners have severally agreed to guarantee the debt of the joint venture, which consists of a $28.3 million loan facility with two commercial banks and other bank loans of $2.1 million. Monthly principal payments on the loan facility of approximately $0.5 million are due through December 2004, and a final principal payment of $17.7 million is due on December 31, 2004. Interest payments on the loan facility are due monthly and accrue at prime plus 1/2%, or 4.75% as of December 31, 2002. The total amount of the joint venture's debt guaranteed by the Company was $14.9 million as of December 31, 2002. The Company is the lessee under numerous equipment and property leases, as described in Note 11 to the consolidated financial statements. It is common in such commercial lease transactions for the Company, as the lessee, to agree to indemnify the lessor for the value of the property or equipment leased, should the property be damaged or lost during the course of the Company's operations. The Company expects that losses with respect to leased property would be covered by insurance (subject to deductibles). The Company and certain of its subsidiaries have guaranteed other subsidiaries' performance under their various lease obligations. Aside from indemnification of the lessor for the value of the property leased, the F-35 Company's maximum potential obligations under its leases are presented in Note 11 and assume that no amounts could be recovered from third parties. The Company has provided financial guarantees under certain long-term debt agreements entered into by its subsidiaries, and substantially all of the Company's subsidiaries provide financial guarantees under long-term debt agreements entered into by the Company. Descriptions of the Company's (and its subsidiaries') debt are included in Note 14 to the consolidated financial statements, and supplemental guarantor/non-guarantor financial information is provided in Note 27 to the consolidated financial statements. The maximum amounts payable under the Company's debt agreements are presented in Note 14 and assume that no amounts could be recovered from third parties. At December 31, 2002, the Company had an additional $19.6 million in letters of credit pledged as collateral in support of various surety bonds to secure workers' compensation obligations and post-retirement and life insurance benefits as discussed in Note 15 and Note 17, respectively, to the consolidated financial statements. The Company is party to an agreement with the Pension Benefit Guarantee Corporation, or the PBGC, and TXU Europe Limited, an affiliate of the Company's former parent corporation, under which the Company is required to make special contributions to three of the Company's defined benefit pension plans and to maintain a $37.0 million letter of credit in favor of the PBGC. If the Company or the PBGC gives notice of an intent to terminate one or more of the covered pension plans in which liabilities are not fully funded, or if the Company fails to maintain the letter of credit, the PBGC may draw down on the letter of credit and use the proceeds to satisfy liabilities under the Employee Retirement Income Security Act of 1974, as amended. The PBGC, however, is required to first apply amounts received from a $110.0 million guarantee in place from TXU Europe Limited in favor of the PBGC before it draws on the Company's letter of credit. On November 19, 2002 TXU Europe Limited was placed under the administration process in the United Kingdom (a process similar to bankruptcy proceedings in the United States). As a result of these proceedings, TXU Europe Limited may be liquidated or otherwise reorganized in such a way as to relieve it of its obligations under its guarantee. In addition to the letters of credit specifically discussed above, the Company has an additional $124.4 million of letters of credit in support of the Company's coal lease obligations, workers' compensation and retiree healthcare as presented in Notes 11, 15 and 17, respectively, to the consolidated financial statements. In connection with the sale of Citizens Power, the Company has indemnified the buyer from certain losses resulting from specified power contracts and guarantees. Should a party to one of these power contracts fail to perform under the contract, the Company would be required to reimburse the buyer for any losses incurred as a result of any non-performance that meet the requirements set forth in the indemnity. Due to the length and specific requirements of the contracts covered by the indemnity, we cannot reasonably estimate our future exposure, if any, under the indemnity. (23) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments as of December 31, 2002 and 2001: - Cash and cash equivalents, accounts receivable and accounts payable and accrued expenses have carrying values which approximate fair value due to the short maturity or the financial nature of these instruments. F-36 - Long-term debt fair value estimates are based on estimated borrowing rates to discount the cash flows to their present value. The 5.0% Subordinated Note carrying amount is net of unamortized note discount. - The fair value of interest rate swap contracts was based upon the costs that would be incurred to terminate those contracts in a loss position and the estimated consideration that would be received to terminate those contracts in a gain position. The Company could have received $6.6 million upon liquidation of interest rate swap contracts in place as of December 31, 2002, which expire May 15, 2008. - Other noncurrent liabilities include a deferred purchase obligation related to the prior purchase of a mine facility. The fair value estimate is based on the same assumption as long-term debt. The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001 ----------------------- ----------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Long-term debt....................... $1,029,211 $1,082,428 $1,031,067 $1,108,065 Deferred purchase obligation......... 16,171 16,100 21,790 20,543
(24) COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL Environmental claims have been asserted against a subsidiary of the Company at 22 sites in the United States. Some of these claims are based on the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and on similar state statutes. The majority of these sites are related to activities of former subsidiaries of the Company. The Company's policy is to accrue environmental cleanup-related costs of a noncapital nature when those costs are believed to be probable and can be reasonably estimated. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. For certain sites, the Company also assesses the financial capability of other potentially responsible parties and, where allegations are based on tentative findings, the reasonableness of the Company's apportionment. The Company has not anticipated any recoveries from insurance carriers or other potentially responsible third parties in the estimation of liabilities recorded on its consolidated balance sheets. The undiscounted liabilities for environmental cleanup-related costs recorded as part of "Other noncurrent liabilities" were $42.1 million and $46.6 million at December 31, 2002 and 2001, respectively. This amount represents those costs that the Company believes are probable and reasonably estimable. NAVAJO NATION On June 18, 1999, the Navajo Nation served the Company's subsidiaries, Peabody Holding Company, Inc., Peabody Coal Company and Peabody Western Coal Company ("Peabody Western"), with a complaint that had been filed in the U.S. District Court for the District of Columbia. Other defendants in the litigation are one customer, one current employee and one former employee. The Navajo Nation has alleged 16 claims, including Civil Racketeer Influenced and Corrupt Organizations Act, or RICO, violations and fraud and tortious interference with contractual relationships. The complaint alleges that the defendants jointly participated in unlawful activity to obtain favorable coal lease amendments. Plaintiff also alleges that defendants interfered with the fiduciary relationship between the United States and the Navajo Nation. The plaintiff is seeking various remedies including actual damages of at least $600 million, which could be trebled under the RICO counts, punitive damages of at least $1 billion, a determination that Peabody Western's two F-37 coal leases for the Kayenta and Black Mesa mines have terminated due to a breach of these leases and a reformation of the two coal leases to adjust the royalty rate to 20%. On March 15, 2001, the court allowed the Hopi Tribe to intervene in this lawsuit. The Hopi Tribe has asserted seven claims including fraud and is seeking various remedies including unspecified actual damages, punitive damages and reformation of its coal lease. On February 21, 2002, the Company's subsidiaries commenced a lawsuit against the Navajo Nation in the U.S. District Court for the District of Arizona seeking enforcement of an arbitration award or, alternatively, to compel arbitration pursuant to the April 1, 1998 Arbitration Agreement with the Navajo Nation. On January 14, 2003, the Arizona District Court dismissed the lawsuit. Peabody Western has filed an appeal of this decision with the Ninth Circuit Court of Appeals. On February 22, 2002, the Company's subsidiaries filed in the U.S. District for the District of Columbia a motion for leave to file an amended answer and conditional counterclaim. The counterclaim is conditional because the Company's subsidiaries contend that the lease provisions the Navajo Nation seeks to invalidate have previously been upheld in an arbitration proceeding and are not subject to further litigation. On March 4, 2002, the Company's subsidiaries filed in the U.S. District Court for the District of Columbia a motion to transfer that case to Arizona or, alternatively, to stay the District of Columbia litigation. The U.S. District Court for the District of Columbia denied the Company's subsidiaries' motion to transfer and motion to stay and we appealed that decision with the District of Columbia Court of Appeals. Oral argument on our appeal is scheduled for April 14, 2003. Subsequent to year end, the U.S. Supreme Court issued a ruling in a companion lawsuit involving the Navajo Nation and the United States. The Court rejected the Navajo Nation's allegation that the U.S. breached its trust responsibility to the Navajo Nation in approving the coal lease amendments and was liable for money damages. While the outcome of litigation is subject to uncertainties, based on the Company's preliminary evaluation of the issues and the potential impact on us, we believe this matter will be resolved without a material adverse effect on the Company's financial condition or results of operations. SOUTHERN CALIFORNIA EDISON COMPANY -- MOHAVE GENERATING STATION In response to a demand for arbitration by one of our subsidiaries, Peabody Western, Southern California Edison Company and the other owners of the Mohave Generating Station filed a lawsuit on June 20, 1996 in the Superior Court of Maricopa County, Arizona. The lawsuit sought a declaratory judgment that mine decommissioning costs and retiree health care costs are not recoverable by Peabody Western under the terms of a coal supply agreement dated May 26, 1976. Peabody Western filed a motion to compel arbitration that was granted by the trial court. Southern California Edison appealed this order to the Arizona Court of Appeals, which denied its appeal. Southern California Edison then appealed the order to the Arizona Supreme Court, which remanded the case to the Arizona Court of Appeals and ordered the appellate court to determine whether the trial court was correct in determining that Peabody Western's claims are arbitrable. The Arizona Court of Appeals ruled that neither mine decommissioning costs nor retiree health care costs are to be arbitrated and that both issues should be resolved in litigation. The matter has been remanded to the Superior Court of Maricopa County, Arizona. Peabody Western answered the complaint and asserted counterclaims. The court then permitted Southern California Edison to amend its complaint to add a claim of overcharges of at least $19.2 million by Peabody Western. By order filed July 2, 2001, the court granted Peabody Western's motion for summary judgment on liability with respect to retiree healthcare costs. Southern California Edison filed a motion for reconsideration, which was denied by the court on October 16, 2001. Peabody Western filed a supplemental motion for summary judgment on liability with respect to mine decommissioning costs that was denied by the trial court on February 6, 2002. Peabody Western reached a mediated settlement with the owners of the Mohave Generating Station, which resulted in the recognition of $15.1 million in pre-tax earnings during the quarter ended September 30, F-38 2002. The settlement provides for customer reimbursement of mine decommissioning and certain other post-mining expenditures. The reimbursement commenced in January 2003 and continues on a monthly basis through December 2005. All of the owners except one exercised their option to prepay these reimbursements in 2002. CALIFORNIA PUBLIC UTILITIES COMMISSION PROCEEDINGS REGARDING THE FUTURE OF THE MOHAVE GENERATING STATION The Mohave coal supply agreement is scheduled to expire on December 31, 2005. In addition, there is a dispute with the Hopi Tribe regarding the use of groundwater in the transportation of the coal by pipeline to the Mohave plant. The plant's owners have sought permission from the California Public Utilities Commission for authorization to begin certain interim spending on air pollution controls if the coal supply and water issues were resolved by December 31, 2002. Although those issues were not resolved by that date, the plant's owners and the Company are in active discussions to resolve the complex issues critical to the continued operation of the Mohave plant and the renewal of the coal supply agreement after December 31, 2005. There is no assurance that the issues critical to the continued operation of the Mohave plant will be resolved. If these issues are not resolved in a timely manner, the operation of the Mohave plant will cease or be delayed beginning on December 31, 2005. The Mohave plant is the sole customer of the Black Mesa Mine, which produces and sells 4.5 to 5 million tons of coal per year. SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT -- NAVAJO GENERATING STATION In May 1997, Salt River Project Agricultural Improvement and Power District, or Salt River, acting for all owners of the Navajo Generating Station, exercised their contractual option to review certain cumulative cost changes during a five-year period from 1992 to 1996. Peabody Western sells approximately 7 to 8 million tons of coal per year to the owners of the Navajo Generation Station under a long-term contract. In July 1999, Salt River notified Peabody Western that it believed the owners were entitled to a price decrease of $1.92 per ton as a result of the review. Salt River also claimed entitlement to a retroactive price adjustment to January 1997 and that an overbilling of $50.5 million had occurred during the same five-year period. In October 1999, Peabody Western notified Salt River that it believed it was entitled to a $2.00 per ton price increase as a result of the review. The parties were unable to settle the dispute and Peabody Western filed a demand for arbitration in September 2000. The arbitration hearing was held in April of 2002. On July 20, 2002, Peabody Western received a favorable decision from the arbitrators. The decision increased the price of coal by approximately $0.50 per ton from 1997 through 2001 and thereafter. As a result of the decision, the Company received pre-tax earnings of approximately $22 million during the quarter ended September 30, 2002. The exact impact of the ruling on the pricing of coal sales from January 1, 2002 forward will not be determined until Salt River completes a review of the cumulative cost changes under the contract for the years 1997 through 2001. SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT -- MINE CLOSING AND RETIREE HEALTH CARE Salt River and the other owners of the Navajo Generating Station filed a lawsuit on September 27, 1996 in the Superior Court of Maricopa County in Arizona seeking a declaratory judgment that certain costs relating to final reclamation, environmental monitoring work and mine decommissioning and costs primarily relating to retiree health care benefits are not recoverable by our subsidiary, Peabody Western Coal Company, under the terms of a coal supply agreement dated February 18, 1977. The contract expires in 2011. Peabody Western filed a motion to compel arbitration of these claims, which was granted in part by the trial court. Specifically, the trial court ruled that the mine decommissioning costs were subject to arbitration but that the retiree health care costs were not subject to arbitration. This ruling was subsequently upheld on appeal. As a result, Peabody Western, Salt River and the other owners of the Navajo Generating Station will arbitrate the mine decommissioning costs issue and will litigate the retiree health care costs issue. F-39 While the outcome of litigation and arbitration is subject to uncertainties, based on the Company's preliminary evaluation of the issues and the potential impact on us, and based on outcomes in similar proceedings, we believe that the matter will be resolved without a material adverse effect on the Company's financial condition or results of operations. OTHER Accounts receivable in the consolidated balance sheet as of December 31, 2002 includes $8.6 million of receivables billed during 2002 and 2001 that have been disputed by two customers who have withheld payment. The Company believes these billings were made properly under the coal supply agreement with each customer. The Company is in arbitration and litigation with these customers to resolve this issue, and believes the receivables to be fully collectible. In addition, the Company at times becomes a party to claims, lawsuits, arbitration proceedings and administrative procedures in the ordinary course of business. Management believes that the ultimate resolution of pending or threatened proceedings will not have a material effect on the financial position, results of operations or liquidity of the Company. At December 31, 2002, purchase commitments for capital expenditures were approximately $56.8 million. (25) SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of the unaudited quarterly results of operations for the year ended December 31, 2002 and the nine months ended December 31, 2001, is presented below. Peabody Energy common stock is listed on the New York Stock Exchange under the symbol "BTU."
YEAR ENDED DECEMBER 31, 2002 --------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND STOCK PRICE DATA) Revenues.................. $675,766 $656,940 $714,611 $669,781 Operating profit.......... 54,950 55,245 51,320 12,173 Net income................ 22,315 24,497 29,036 29,671 Basic earnings per share from operations......... $0.43 $0.47 $0.56 $0.57 Diluted earnings per share from operations......... $0.42 $0.45 $0.54 $0.55 Weighted average shares used in calculating basic earnings per share................... 52,018,238 52,122,455 52,176,646 52,341,924 Weighted average shares used in calculating diluted earnings per share................... 53,731,426 53,859,275 53,649,383 53,879,044 Stock price - high and low closing prices.......... $29.76-$23.50 $30.39-$26.18 $28.00-$18.70 $29.23-$23.11 Dividends per share....... $0.10 $0.10 $0.10 $0.10
Operating profit for the third quarter includes $37.1 million due to the successful resolution of disputes related to the Navajo Station and Mohave Station coal supply agreements (discussed in Note 24). Net income for the fourth quarter includes an income tax benefit of $44.6 million. This benefit results primarily from significant tax benefits realized as a result of utilizing net operating loss carryforwards to offset taxable gains primarily recognized in connection with the PVR transaction as discussed in Note 11. Utilization of the loss carry-forwards required the reduction of a previously recorded valuation allowance that had reduced the book value of the loss carryforwards. F-40
NINE MONTHS ENDED DECEMBER 31, 2001 ---------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER ------------- -------------- ------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND STOCK PRICE DATA) Revenues................................. $636,291 $655,569 $646,080 Operating profit......................... 50,027 36,306 29,198 Income before extraordinary item......... 9,906 4,060 5,321 Net income (loss)........................ (17,698) 4,060 3,955 Basic earnings per share from operations............................. $0.23 $0.08 $0.10 Diluted earnings per share from operations............................. $0.22 $0.08 $0.10 Weighted average shares used in calculating basic earnings per share... 42,215,878 51,943,624 52,008,851 Weighted average shares used in calculating diluted earnings per share.................................. 44,213,833 53,653,950 53,753,645 Stock price -- high and low closing prices................................. $37.95-$26.45 $31.85-$23.25 $31.90-$23.35 Dividends per share...................... $-- $0.10 $0.10
Results of operations for the quarter ended June 30, 2001 included an after-tax extraordinary loss of $27.6 million related to debt extinguished utilizing proceeds from the Company's initial public offering. Results of operations for the quarter ended December 31, 2001 included an after-tax extraordinary loss from debt extinguishment of $1.4 million. (26) SEGMENT INFORMATION The Company reports its operations primarily through the following reportable operating segments: "U.S. Mining," "Trading and Brokerage," and "Australian Mining." The principal business of the U.S. Mining segment is mining, preparation and sale of steam coal, sold primarily to electric utilities, and metallurgical coal, sold to steel and coke producers. The Trading and Brokerage segment's principal business is the marketing and trading of coal and emission allowances. The Australian Mining segment for 2002 consists of the operations of Allied Queensland Coalfields Party Limited and in 2001 consisted of the operations of Peabody Resources Limited. This segment's principal business is the same as the U.S. Mining Segment. "Corporate and Other" consists primarily of corporate overhead not directly attributable to the U.S. Mining, Australian Mining or Trading and Brokerage operating segments, and resource management activities. The U.S. Mining segment results below also include costs related to past mining activities and a portion of consolidated net gains on property disposals. For the year ended December 31, 2002, 94% of the Company's sales were to U.S. electricity generators, 2% were to the U.S. industrial sector, and 4% were to customers outside the United States. Substantially all of the Company's physical assets are located in the United States. Operating segment results for the year ended December 31, 2002 were as follows:
TRADING AND AUSTRALIAN CORPORATE U.S. MINING BROKERAGE MINING AND OTHER CONSOLIDATED ----------- ----------- ---------- --------- ------------ (DOLLARS IN THOUSANDS) Revenues.................... $2,483,501 $204,944 $ 9,933 $ 18,720 $2,717,098 Operating profit............ 221,595 36,753 2,779 (87,439) 173,688 Total assets................ 4,705,876 88,107 46,036 300,158 5,140,177 Depreciation, depletion and amortization.............. 220,935 287 236 10,955 232,413 Capital expenditures........ 185,161 2,179 172 21,050 208,562
F-41 Operating segment results for the nine months ended December 31, 2001 were as follows:
TRADING AND CORPORATE U.S. MINING BROKERAGE AND OTHER CONSOLIDATED ----------- ----------- --------- ------------ (DOLLARS IN THOUSANDS) Revenues............................... $1,762,775 $150,988 $ 24,177 $1,937,940 Operating profit....................... 127,282 22,685 (34,436) 115,531 Total assets........................... 4,843,336 72,065 235,501 5,150,902 Depreciation, depletion and amortization......................... 162,165 1,675 10,747 174,587 Capital expenditures................... 180,333 1,129 12,784 194,246
Operating segment results for the year ended March 31, 2001 were as follows:
PEABODY RESOURCES TRADING AND LIMITED CORPORATE U.S. MINING BROKERAGE OPERATIONS AND OTHER CONSOLIDATED ----------- ----------- ---------- --------- ------------ (DOLLARS IN THOUSANDS) Revenues.................... $2,174,925 $194,766 $238,498 $ 19,939 $2,628,128 Operating profit............ 161,991 13,126 53,377 113,345(1) 341,839 Total assets................ 4,802,829 198,421 -- 208,237 5,209,487 Depreciation, depletion and amortization.............. 204,249 2,676 25,518 8,525 240,968 Capital expenditures........ 146,653 206 -- 4,499 151,358
--------------- (1) Includes the pretax gain on the sale of the Company's Peabody Resources Limited operations of $171.7 million. Reconciliation of segment operating profit to consolidated income before income taxes follows:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2002 2001 2001 ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Total segment operating profit................... $173,688 $115,531 $341,839 Interest expense............................... 102,458 88,686 197,686 Interest income................................ (7,574) (2,155) (8,741) Minority interests............................. 13,292 7,248 7,524 -------- -------- -------- Income before income taxes....................... $ 65,512 $ 21,752 $145,370 ======== ======== ========
F-42 (27) SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION In accordance with the indentures governing the Senior Notes and Senior Subordinated Notes, certain wholly-owned U.S. subsidiaries of the Company have fully and unconditionally guaranteed the Senior Notes and Senior Subordinated Notes on a joint and several basis. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to holders of the Senior Notes or the Senior Subordinated Notes. The following condensed historical financial statement information is provided for such Guarantor/Non-Guarantor Subsidiaries. SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2002
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ (DOLLARS IN THOUSANDS) Total revenues.................. $ -- $2,123,273 $665,445 $ (71,620) $2,717,098 Costs and expenses: Operating costs and expenses................... -- 1,764,062 532,902 (71,620) 2,225,344 Depreciation, depletion and amortization............... -- 183,065 49,348 -- 232,413 Selling and administrative expenses................... 443 82,249 18,724 -- 101,416 Net gain on property and equipment disposals........ -- (15,596) (167) -- (15,763) Interest expense.............. 137,821 99,265 15,494 (150,122) 102,458 Interest income............... (68,601) (73,656) (15,439) 150,122 (7,574) --------- ---------- -------- --------- ---------- Income (loss) before income taxes and minority interests..................... (69,663) 83,884 64,583 -- 78,804 Income tax provision (benefit).................. 37,687 (45,458) (32,236) -- (40,007) Minority interests............ -- -- 13,292 -- 13,292 --------- ---------- -------- --------- ---------- Net income (loss)............... $(107,350) $ 129,342 $ 83,527 $ -- $ 105,519 ========= ========== ======== ========= ==========
F-43 SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED DECEMBER 31, 2001
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ (DOLLARS IN THOUSANDS) Total revenues................... $ -- $1,529,986 $473,742 $(65,788) $1,937,940 Costs and expenses: Operating costs and expenses... -- 1,261,983 392,401 (65,788) 1,588,596 Depreciation, depletion and amortization................ -- 139,571 35,016 -- 174,587 Selling and administrative expenses.................... 1,297 60,266 11,990 -- 73,553 Net gain on property and equipment disposals......... -- (14,327) -- -- (14,327) Interest expense............... 86,618 76,352 14,278 (88,562) 88,686 Interest income................ (51,422) (28,558) (10,737) 88,562 (2,155) -------- ---------- -------- -------- ---------- Income (loss) before income taxes and minority interests......... (36,493) 34,699 30,794 -- 29,000 Income tax provision (benefit)................... (3,102) 2,950 2,617 -- 2,465 Minority interests............. -- -- 7,248 -- 7,248 -------- ---------- -------- -------- ---------- Income (loss) before extraordinary item............. (33,391) 31,749 20,929 -- 19,287 Extraordinary loss from early extinguishment of debt, net of income taxes............. 17,940 11,030 -- -- 28,970 -------- ---------- -------- -------- ---------- Net income (loss)................ $(51,331) $ 20,719 $ 20,929 $ -- $ (9,683) ======== ========== ======== ======== ==========
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED MARCH 31, 2001
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ (DOLLARS IN THOUSANDS) Total revenues................... $ -- $1,913,302 $772,343 $ (57,517) $2,628,128 Costs and expenses: Operating costs and expenses... -- 1,591,707 589,336 (57,517) 2,123,526 Depreciation, depletion and amortization................ -- 175,162 65,806 -- 240,968 Selling and administrative expenses.................... 4,058 77,190 18,019 -- 99,267 Gain on sale of Peabody Resources Limited operations.................. -- (171,735) -- -- (171,735) Net gain on property and equipment disposals......... -- (4,667) (1,070) -- (5,737) Interest expense............... 158,622 109,420 30,971 (101,327) 197,686 Interest income................ (68,655) (27,915) (13,498) 101,327 (8,741) -------- ---------- -------- --------- ---------- Income (loss) before income taxes and minority interests......... (94,025) 164,140 82,779 -- 152,894 Income tax provision (benefit)................... (33,608) 45,463 30,835 -- 42,690 Minority interests............. -- -- 7,524 -- 7,524 -------- ---------- -------- --------- ---------- Income (loss) from continuing operations..................... (60,417) 118,677 44,420 -- 102,680 Gain from disposal of discontinued operations, net of income taxes............. (88) (12,837) -- -- (12,925) -------- ---------- -------- --------- ---------- Income (loss) before extraordinary item............. (60,329) 131,514 44,420 -- 115,605 Extraordinary loss from early extinguishment of debt, net of income taxes............. 8,545 -- -- -- 8,545 -------- ---------- -------- --------- ---------- Net income (loss)................ $(68,874) $ 131,514 $ 44,420 $ -- $ 107,060 ======== ========== ======== ========= ==========
F-44 SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ------------ ------------- ------------ ------------ (DOLLARS IN THOUSANDS) ASSETS Current assets Cash and cash equivalents... $ 60,666 $ 420 $ 10,124 $ -- $ 71,210 Accounts receivable......... 836 62,214 90,162 -- 153,212 Inventories................. -- 211,291 18,397 -- 229,688 Assets from coal and emission allowance trading activities....... -- 65,153 4,745 -- 69,898 Deferred income taxes....... -- 10,101 260 -- 10,361 Other current assets........ 260 8,381 6,913 -- 15,554 ----------- ---------- --------- ----------- ---------- Total current assets..... 61,762 357,560 130,601 -- 549,923 Property, plant, equipment and mine development -- at cost........................ -- 4,591,811 539,418 -- 5,131,229 Less accumulated depreciation, depletion and amortization................ -- (751,627) (106,560) -- (858,187) ----------- ---------- --------- ----------- ---------- Property, plant, equipment and mine development, net....... -- 3,840,184 432,858 -- 4,273,042 Investments and other assets...................... 3,448,319 248,778 48,273 (3,428,158) 317,212 ----------- ---------- --------- ----------- ---------- Total assets............. $ 3,510,081 $4,446,522 $ 611,732 $(3,428,158) $5,140,177 =========== ========== ========= =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt........... $ -- $ 10,303 $ 37,212 $ -- $ 47,515 Payables and notes payable to affiliates, net....... 1,626,695 (1,643,593) 16,898 -- -- Liabilities from coal and emission allowance trading activities....... -- 37,008 -- -- 37,008 Accounts payable and accrued expenses................. 9,427 479,441 58,145 -- 547,013 ----------- ---------- --------- ----------- ---------- Total current liabilities............ 1,636,122 (1,116,841) 112,255 -- 631,536 Long-term debt, less current maturities.................. 714,571 75,975 191,150 -- 981,696 Deferred income taxes......... -- 495,284 4,026 -- 499,310 Other noncurrent liabilities................. 623 1,898,581 10,172 -- 1,909,376 ----------- ---------- --------- ----------- ---------- Total liabilities........ 2,351,316 1,352,999 317,603 -- 4,021,918 Minority interests............ -- -- 37,121 -- 37,121 Stockholders' equity.......... 1,158,765 3,093,523 257,008 (3,428,158) 1,081,138 ----------- ---------- --------- ----------- ---------- Total liabilities and stockholders' equity... $ 3,510,081 $4,446,522 $ 611,732 $(3,428,158) $5,140,177 =========== ========== ========= =========== ==========
F-45 SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ------------ ------------- ------------ ------------ (DOLLARS IN THOUSANDS) ASSETS Current assets Cash and cash equivalents... $ 28,121 $ 1,018 $ 9,483 $ -- $ 38,622 Accounts receivable......... 523 50,448 127,105 -- 178,076 Inventories................. -- 201,771 13,873 -- 215,644 Assets from coal and emission allowance trading activities....... -- 60,509 -- -- 60,509 Deferred income taxes....... -- 14,380 -- -- 14,380 Other current assets........ 1,222 10,704 8,297 -- 20,223 ----------- ---------- -------- ----------- ---------- Total current assets..... 29,866 338,830 158,758 -- 527,454 Property, plant, equipment and mine development -- at cost........................ -- 4,543,016 478,939 -- 5,021,955 Less accumulated depreciation, depletion and amortization................ -- (603,953) (80,604) -- (684,557) ----------- ---------- -------- ----------- ---------- Property, plant, equipment and mine development, net....... -- 3,939,063 398,335 -- 4,337,398 Investments and other assets...................... 3,296,950 232,521 45,086 (3,288,507) 286,050 ----------- ---------- -------- ----------- ---------- Total assets............. $ 3,326,816 $4,510,414 $602,179 $(3,288,507) $5,150,902 =========== ========== ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt........... $ -- $ 10,400 $ 36,099 $ -- $ 46,499 Payables and notes payable to affiliates, net....... 1,544,519 (1,561,645) 17,126 -- -- Liabilities from coal and emission allowance trading activities....... -- 45,691 -- -- 45,691 Accounts payable and accrued expenses................. 8,676 528,157 55,280 -- 592,113 ----------- ---------- -------- ----------- ---------- Total current liabilities............ 1,553,195 (977,397) 108,505 -- 684,303 Long-term debt, less current maturities.................. 702,623 81,186 200,759 -- 984,568 Deferred income taxes......... -- 564,764 -- -- 564,764 Other noncurrent liabilities................. 5,181 1,820,580 8,954 -- 1,834,715 ----------- ---------- -------- ----------- ---------- Total liabilities........ 2,260,999 1,489,133 318,218 -- 4,068,350 Minority interests............ -- -- 47,080 -- 47,080 Stockholders' equity.......... 1,065,817 3,021,281 236,881 (3,288,507) 1,035,472 ----------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity... $ 3,326,816 $4,510,414 $602,179 $(3,288,507) $5,150,902 =========== ========== ======== =========== ==========
F-46 SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2002
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED -------- ------------ ------------- ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by (used in) operating activities................................. $(66,070) $176,133 $121,141 $231,204 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant, equipment and mine development........................ -- (152,010) (56,552) (208,562) Additions to advance mining royalties...... -- (10,183) (4,706) (14,889) Acquisitions, net.......................... -- (45,537) -- (45,537) Investment in joint venture................ -- (475) -- (475) Proceeds from property and equipment disposals............................... -- 115,604 9,781 125,385 -------- -------- -------- -------- Net cash used in investing activities........ -- (92,601) (51,477) (144,078) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings and long-term debt.......................... -- -- 16,462 16,462 Payments of long-term debt................. -- (10,332) (37,417) (47,749) Proceeds from employee stock purchases..... 3,250 -- -- 3,250 Distributions to minority interests........ -- -- (9,800) (9,800) Dividends paid............................. (20,863) -- -- (20,863) Transactions with affiliates............... 112,326 (73,798) (38,528) -- Other...................................... 3,902 -- -- 3,902 -------- -------- -------- -------- Net cash provided by (used in) financing activities................................. 98,615 (84,130) (69,283) (54,798) Effect of exchange rate changes on cash and equivalents................................ -- -- 260 260 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents................................ 32,545 (598) 641 32,588 Cash and cash equivalents at beginning of period..................................... 28,121 1,018 9,483 38,622 -------- -------- -------- -------- Cash and cash equivalents at end of period... $ 60,666 $ 420 $ 10,124 $ 71,210 ======== ======== ======== ========
F-47 SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED DECEMBER 31, 2001
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED --------- ------------ ------------- ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by (used in) operating activities................................ $ (25,520) $ 110,725 $ 29,287 $ 114,492 --------- --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant, equipment and mine development................... -- (117,876) (76,370) (194,246) Additions to advance mining royalties..... -- (7,253) (4,052) (11,305) Proceeds from property and equipment disposals.............................. -- 11,436 2,115 13,551 Proceeds from sale-leaseback transactions........................... -- -- 19,011 19,011 --------- --------- -------- --------- Net cash used in investing activities....... -- (113,693) (59,296) (172,989) --------- --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings and long-term debt......................... -- -- 40,995 40,995 Payments of long-term debt................ (331,341) (100,280) (15,048) (446,669) Proceeds from employee stock purchases.... 1,306 -- -- 1,306 Net proceeds from initial public offering............................... 449,832 -- -- 449,832 Distributions to minority interests....... -- -- (1,626) (1,626) Dividends paid............................ (10,393) -- -- (10,393) Transactions with affiliates, net......... (56,825) 47,010 9,815 -- Other..................................... 889 62 -- 951 --------- --------- -------- --------- Net cash provided by (used in) financing activities................................ 53,468 (53,208) 34,136 34,396 --------- --------- -------- --------- Net increase (decrease) in cash and cash equivalents............................... 27,948 (56,176) 4,127 (24,101) Cash and cash equivalents at beginning of period.................................... 173 57,194 5,356 62,723 --------- --------- -------- --------- Cash and cash equivalents at end of period.................................... $ 28,121 $ 1,018 $ 9,483 $ 38,622 ========= ========= ======== =========
F-48 SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED MARCH 31, 2001
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED --------- ------------ ------------- ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by (used in) operating activities................................ $ (20,172) $ 113,212 $ 58,940 $ 151,980 --------- --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant, equipment and mine development................... -- (94,577) (56,781) (151,358) Additions to advance mining royalties..... -- (8,785) (11,475) (20,260) Acquisitions, net......................... -- (10,502) -- (10,502) Proceeds from sale of Peabody Resources Limited operations..................... -- 455,000 -- 455,000 Proceeds from property and equipment disposals.............................. -- 7,711 11,214 18,925 Proceeds from sale-leaseback transactions........................... -- 28,800 -- 28,800 Net cash used in assets sold -- Peabody Resources Limited operations........... -- -- (34,684) (34,684) Net cash provided by discontinued operations............................. 604 101,937 -- 102,541 --------- --------- -------- --------- Net cash provided by (used in) investing activities................................ 604 479,584 (91,726) 388,462 --------- --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt.............. -- -- 65,302 65,302 Payments of long-term debt................ (565,000) (21,063) (47,842) (633,905) Distributions to minority interests....... -- -- (4,690) (4,690) Dividend received......................... -- 19,916 -- 19,916 Repurchase of treasury stock.............. -- (1,113) -- (1,113) Transactions with affiliates, net......... 584,394 (579,835) (4,559) -- Net cash provided by assets sold -- Peabody Resources Limited operations............................. -- -- 10,591 10,591 Other..................................... -- 562 -- 562 --------- --------- -------- --------- Net cash provided by (used in) financing activities................................ 19,394 (581,533) 18,802 (543,337) --------- --------- -------- --------- Net increase (decrease) in cash and cash equivalents............................... (174) 11,263 (13,984) (2,895) Cash and cash equivalents at beginning of year...................................... 347 45,931 19,340 65,618 --------- --------- -------- --------- Cash and cash equivalents at end of year.... $ 173 $ 57,194 $ 5,356 $ 62,723 ========= ========= ======== =========
F-49