e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___to ___
Commission File Number: 1-16463
PEABODY ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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13-4004153 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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701 Market Street, St. Louis, Missouri
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63101-1826 |
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(Address of principal executive offices)
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(Zip Code) |
(314) 342-3400
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
There were 263,814,300 shares of common stock with a par value of $0.01 per share outstanding at
October 27, 2006.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, except share and per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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REVENUES |
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Sales |
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$ |
1,223,274 |
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$ |
1,191,282 |
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$ |
3,805,838 |
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$ |
3,343,620 |
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Other revenues |
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41,714 |
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32,228 |
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87,348 |
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66,156 |
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Total revenues |
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1,264,988 |
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1,223,510 |
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3,893,186 |
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3,409,776 |
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COSTS AND EXPENSES |
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Operating costs and expenses |
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1,003,004 |
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986,093 |
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3,078,880 |
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2,778,078 |
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Depreciation, depletion and amortization |
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90,664 |
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77,159 |
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263,103 |
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232,421 |
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Asset retirement obligation expense |
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7,068 |
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7,394 |
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25,911 |
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23,751 |
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Selling and administrative expenses |
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31,488 |
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57,009 |
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118,793 |
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135,440 |
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Other operating income: |
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Net gain on disposal or exchange of assets |
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(35,040 |
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(47,577 |
) |
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(94,309 |
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(95,151 |
) |
Income from equity affiliates |
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(5,200 |
) |
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(7,453 |
) |
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(19,132 |
) |
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(25,760 |
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OPERATING PROFIT |
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173,004 |
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150,885 |
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519,940 |
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360,997 |
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Interest expense |
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26,392 |
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25,327 |
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79,130 |
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76,088 |
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Interest income |
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(1,886 |
) |
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(3,218 |
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(6,026 |
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(6,401 |
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INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS |
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148,498 |
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128,776 |
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446,836 |
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291,310 |
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Income tax provision |
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2,657 |
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14,714 |
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10,905 |
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29,300 |
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Minority interests |
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3,833 |
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722 |
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10,267 |
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1,526 |
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NET INCOME |
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$ |
142,008 |
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$ |
113,340 |
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$ |
425,664 |
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$ |
260,484 |
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EARNINGS PER SHARE: |
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Basic |
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$ |
0.54 |
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$ |
0.43 |
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$ |
1.61 |
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$ |
1.00 |
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Diluted |
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$ |
0.53 |
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$ |
0.42 |
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$ |
1.58 |
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$ |
0.97 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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263,444,254 |
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262,432,394 |
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263,631,134 |
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261,591,722 |
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Diluted |
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268,822,681 |
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268,521,976 |
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269,320,801 |
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267,711,408 |
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DIVIDENDS DECLARED PER SHARE |
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$ |
0.06 |
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$ |
0.0475 |
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$ |
0.18 |
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$ |
0.1225 |
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See accompanying notes to unaudited condensed consolidated financial statements.
2
PEABODY ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
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(Unaudited) |
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September 30, 2006 |
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December 31, 2005 |
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ASSETS |
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Current assets
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Cash and cash equivalents |
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$ |
317,405 |
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$ |
503,278 |
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Accounts receivable, net of allowance for doubtful accounts of
$11,164 at September 30, 2006 and $10,853 at December 31, 2005 |
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244,730 |
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221,541 |
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Inventories |
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181,444 |
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389,771 |
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Assets from coal trading activities |
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96,087 |
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146,596 |
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Deferred income taxes |
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94,124 |
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9,027 |
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Other current assets |
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84,409 |
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54,431 |
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Total current assets |
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1,018,199 |
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1,324,644 |
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Property, plant, equipment and mine development, net of accumulated
depreciation, depletion and amortization of $1,910,429 at September 30, 2006
and $1,627,856 at December 31, 2005 |
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5,565,540 |
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5,177,708 |
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Investments and other assets |
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644,798 |
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349,654 |
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Total assets |
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$ |
7,228,537 |
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$ |
6,852,006 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Current maturities of long-term debt |
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$ |
77,691 |
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$ |
22,585 |
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Liabilities from coal trading activities |
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80,695 |
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132,373 |
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Accounts payable and accrued expenses |
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853,003 |
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867,965 |
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Total current liabilities |
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1,011,389 |
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1,022,923 |
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Long-term debt, less current maturities |
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1,624,912 |
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1,382,921 |
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Deferred income taxes |
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254,387 |
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338,488 |
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Asset retirement obligations |
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407,365 |
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399,203 |
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Workers compensation obligations |
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240,312 |
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237,574 |
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Accrued postretirement benefit costs |
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975,413 |
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959,222 |
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Other noncurrent liabilities |
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329,621 |
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330,658 |
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Total liabilities |
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4,843,399 |
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4,670,989 |
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Minority interests |
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15,506 |
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2,550 |
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Stockholders equity |
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Preferred Stock $0.01 per share par value; 10,000,000 shares authorized,
no shares issued or outstanding as of September 30, 2006 or December 31, 2005 |
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Series A Junior Participating Preferred Stock - 1,500,000 shares authorized
as a subset of the preferred stock, no shares issued or outstanding as of
September 30, 2006 or
December 31, 2005 |
Series Common Stock $0.01 per share par value; 40,000,000 shares authorized,
no shares issued or outstanding as of September 30, 2006 or December 31, 2005 |
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Common Stock $0.01 per share par value; 800,000,000 shares authorized,
266,251,651 shares issued and 263,544,333 shares outstanding as
of September 30, 2006 and 400,000,000 shares authorized, 263,879,762 shares
issued and 263,357,402 shares outstanding as of December 31, 2005 |
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2,667 |
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2,638 |
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Additional paid-in capital |
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1,562,113 |
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1,497,454 |
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Retained earnings |
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956,790 |
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729,086 |
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Accumulated other comprehensive loss |
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(48,245 |
) |
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(46,795 |
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Treasury shares, at cost: 2,707,318 shares as of September 30, 2006 and 522,360
shares as of December 31, 2005 |
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(103,693 |
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(3,916 |
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Total stockholders equity |
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2,369,632 |
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2,178,467 |
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Total liabilities and stockholders equity |
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$ |
7,228,537 |
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$ |
6,852,006 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
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Nine Months Ended |
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September 30, |
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2006 |
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2005 |
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Cash Flows from Operating Activities |
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Net income |
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$ |
425,664 |
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$ |
260,484 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation, depletion and amortization |
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263,103 |
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232,421 |
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Deferred income taxes |
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(74,753 |
) |
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28,406 |
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Amortization of debt discount and debt issuance costs |
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5,146 |
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5,177 |
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Net gain on disposal or exchange of assets |
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(94,309 |
) |
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(95,151 |
) |
Income from equity affiliates |
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(19,132 |
) |
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(25,760 |
) |
Dividends received from equity affiliates |
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9,935 |
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|
6,082 |
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Stock-based compensation |
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12,687 |
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|
1,207 |
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Changes in current assets and liabilities, net of acquisitions: |
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Accounts receivable, net of sale |
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4,990 |
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(67,754 |
) |
Inventories |
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(36,312 |
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(46,204 |
) |
Net assets from coal trading activities |
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(1,169 |
) |
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|
7,444 |
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Other current assets |
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(26,458 |
) |
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(18,625 |
) |
Accounts payable and accrued expenses |
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(30,136 |
) |
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|
119,229 |
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Asset retirement obligations |
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(5,476 |
) |
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(4,082 |
) |
Workers compensation obligations |
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2,738 |
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|
6,943 |
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Accrued postretirement benefit costs |
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16,191 |
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|
6,167 |
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Other, net |
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(18,411 |
) |
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6,185 |
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Net cash provided by operating activities |
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434,298 |
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422,169 |
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Cash Flows from Investing Activities |
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Acquisitions, net (including acquisition of 19.99% of Excel Coal
Limited) |
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(352,367 |
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Additions to property, plant, equipment and mine development |
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(292,444 |
) |
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(228,339 |
) |
Federal coal lease expenditures |
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(178,193 |
) |
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(118,364 |
) |
Proceeds from disposal of assets |
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70,385 |
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|
71,185 |
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Purchase of mining assets |
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(56,500 |
) |
Increase in note receivable |
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(17,077 |
) |
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Additions to advance mining royalties |
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(6,650 |
) |
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(9,061 |
) |
Investment in joint venture |
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(1,471 |
) |
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(2,000 |
) |
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Net cash used in investing activities |
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(777,817 |
) |
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(343,079 |
) |
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Cash Flows from Financing Activities |
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Payments of long-term debt |
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(483,320 |
) |
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(15,621 |
) |
Proceeds from long-term debt |
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|
440,750 |
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|
11,459 |
|
Change in revolving line of credit |
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|
312,000 |
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Common stock repurchase |
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|
(99,775 |
) |
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Dividends paid |
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(47,628 |
) |
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|
(32,041 |
) |
Increase of securitized interests in accounts receivable |
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|
25,000 |
|
Excess tax benefit related to stock options exercised |
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|
30,775 |
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Proceeds from stock options exercised |
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|
12,834 |
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|
19,958 |
|
Payment of debt issuance costs |
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(8,621 |
) |
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|
Proceeds from employee stock purchases |
|
|
4,518 |
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|
|
3,010 |
|
Distributions to minority interests |
|
|
(3,887 |
) |
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|
(1,750 |
) |
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|
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|
Net cash provided by financing activities |
|
|
157,646 |
|
|
|
10,015 |
|
|
|
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|
Net increase (decrease) in cash and cash equivalents |
|
|
(185,873 |
) |
|
|
89,105 |
|
Cash and cash equivalents at beginning of period |
|
|
503,278 |
|
|
|
389,636 |
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|
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|
Cash and cash equivalents at end of period |
|
$ |
317,405 |
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|
$ |
478,741 |
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|
|
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|
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|
See accompanying notes to unaudited condensed consolidated financial statements.
4
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(dollars in thousands, except share data and where indicated)
(1) Basis of Presentation
The consolidated financial statements include the accounts of Peabody Energy Corporation (the
Company) and its controlled affiliates. All intercompany transactions, profits, and balances have
been eliminated in consolidation.
Effective February 22, 2006, the Company implemented a two-for-one stock split on all shares
of its common stock. The Company had a similar two-for-one stock split on March 30, 2005. All share
and per share amounts in these unaudited condensed consolidated financial statements and related
notes reflect the stock splits.
The accompanying condensed consolidated financial statements as of September 30, 2006 and for
the three and nine months ended September 30, 2006 and 2005, and the notes thereto, are unaudited.
However, in the opinion of management, these financial statements reflect all normal, recurring
adjustments necessary for a fair presentation of the results of the periods presented. The balance
sheet information as of December 31, 2005 has been derived from the Companys audited consolidated
balance sheet. The results of operations for the three and nine months ended September 30, 2006 are
not necessarily indicative of the results to be expected for future quarters or for the year ending
December 31, 2006. Certain amounts in prior periods have been reclassified to conform to the
report classifications as of September 30, 2006 and for the three and nine months ended September
30, 2006, with no effect on previously reported net income or stockholders equity.
(2) New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 requires recognition of the funded
status of pension and other postretirement benefit plans (an asset for overfunded status or a
liability for underfunded status) in a companys balance sheet. In addition, recognition of
actuarial gains and losses, prior service cost, and any remaining transition amounts from the
initial application of SFAS No. 87, Employers Accounting for Pensions (SFAS No. 87) and SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions (SFAS No. 106)
when determining a plans funded status is required, with the offset to accumulated other
comprehensive income. SFAS No. 158 also requires fiscal-year-end measurements of plan assets and
benefit obligations, eliminating the previously allowed use of earlier measurement dates.
The Company is required to recognize the funded status of its defined benefit postretirement
plans in its balance sheet for its fiscal year ending December 31, 2006. The requirement to
measure plan assets and benefit obligations on fiscal-year-end balance sheets is effective for
fiscal years ending December 31, 2008. The Company is currently evaluating the impact of this
standard on its financial statements.
In June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN No. 48). This interpretation prescribes
a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. This interpretation is effective for fiscal years beginning
after December 15, 2006 (January 1, 2007 for the Company). Any adjustments required upon the
adoption of this interpretation must be recorded directly to retained earnings in the year of
adoption and reported as a change in accounting principle. The Company is currently evaluating the
impact of this interpretation on its financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(3) Business Combinations and Acquisitions
On July 5, 2006, the Company signed a Merger Implementation Agreement (the Merger
Implementation Agreement) to acquire Excel Coal Limited (Excel), an independent coal company, by
means of a scheme of arrangement transaction under Australian law (the Transaction). The Merger
Implementation Agreement was amended on September 18, 2006, and the Company agreed to pay A$9.50
per share (US$7.16 as of the amendment date) for the outstanding shares of Excel. On September 20,
2006, as part of the amended agreement, the Company acquired 19.99% of the outstanding shares of
Excel at A$9.50 per share (the Advance Purchase), resulting in payment of A$408.3 million, or
US$307.8 million. The Company financed the Advance Purchase with borrowings under its new Senior
Unsecured Credit Facility (see Note 7). The Companys investment in Excel acquired under the
Advance Purchase was recorded using the equity method of accounting as of September 30, 2006, and
is included in Investments and other assets on the condensed consolidated balance sheet. On October
25, 2006, the Company acquired the remaining interest in Excel. See Note 15 for additional details
of the Transaction.
(4) Resource Management and Other Commercial Events
During the third quarter of 2006, the Company sold non-strategic coal reserves and surface
lands located in Kentucky and West Virginia for proceeds of $34.6 million and recognized a gain of
$30.0 million. Also, in June 2006, the Company exchanged with the Bureau of Land Management
approximately 63 million tons of leased coal reserves at its Caballo mining operation for
approximately 46 million tons of coal reserves contiguous with our North Antelope Rochelle mining
operation. Based on the fair value of the coal reserves exchanged, the Company recognized a gain on
assets exchanged totaling $39.2 million. This non-cash transaction is excluded from the statement
of cash flows. The gains from these transactions are included in Gains on disposal or exchange of
assets in the condensed consolidated income statements.
The Company recognized $24.3 million and $35.8 million in the three and nine months ended
September 30, 2006, respectively, in gains related to the settlement of commitments by a third
party coal producer following a contract restructuring. The gains are included in Other revenues in
the condensed consolidated income statements.
In September 2005, the Company exchanged certain idle steam coal reserves for steam and
metallurgical coal reserves as part of a contractual dispute settlement. Under the settlement, the
Company received $10.0 million in cash, a new coal supply agreement that partially replaced the
disputed coal supply agreement, and exchanged the idle steam coal reserves. As a result of the
final settlement and based on the fair values of the items exchanged in the overall settlement
transaction, the Company recorded net contract losses of $4.0 million and a gain on assets
exchanged of $37.4 million. Also, in March 2005, the Company sold its remaining 0.838 million Penn
Virginia Resource Partners, L.P. units for net proceeds of $41.9 million and recognized a $31.1
million gain on the sale. The gains from these transactions are included in Gains on disposal or
exchange of assets in the condensed consolidated income statements.
(5) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Saleable coal |
|
$ |
76,714 |
|
|
$ |
64,274 |
|
Materials and supplies |
|
|
82,180 |
|
|
|
65,942 |
|
Raw coal |
|
|
22,550 |
|
|
|
14,033 |
|
Advance stripping |
|
|
|
|
|
|
245,522 |
|
|
|
|
|
|
|
|
Total |
|
$ |
181,444 |
|
|
$ |
389,771 |
|
|
|
|
|
|
|
|
Advance stripping consisted of the costs to remove overburden above an unmined coal seam as
part of the surface mining process. In March 2005, the Emerging Issues Task Force (EITF) issued
EITF Issue No. 04-6, Accounting for Stripping Costs in the Mining Industry (EITF Issue No.
04-6). EITF Issue No. 04-6 and its interpretations require stripping costs incurred during a
period to be attributed only to the inventory costs of the coal that is extracted during that
same period. The Company adopted EITF Issue No. 04-6 on January 1, 2006 and utilized the
cumulative effect adjustment approach whereby the cumulative effect adjustment reduced retained
earnings by $150.3 million, net of tax. This non-cash
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
item is excluded from the statement of cash
flows. Advance stripping costs are no longer included as a component of inventory.
(6) Assets and Liabilities from Coal Trading Activities
The Companys coal trading portfolio included forward and swap contracts as of September 30,
2006 and forward contracts as of December 31, 2005. The fair value of coal trading derivatives and
related hedge contracts is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
Forward contracts |
|
$ |
90,187 |
|
|
$ |
71,449 |
|
|
$ |
146,596 |
|
|
$ |
131,988 |
|
Other |
|
|
5,900 |
|
|
|
9,246 |
|
|
|
|
|
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
96,087 |
|
|
$ |
80,695 |
|
|
$ |
146,596 |
|
|
$ |
132,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the contracts in the Companys trading portfolio as of September 30, 2006, 99.5% were
valued utilizing prices from over-the-counter market sources, adjusted for coal quality and traded
transportation differentials, and 0.5% of the Companys contracts were valued based on similar
market transactions.
As of September 30, 2006, the estimated future realization of the value of the Companys
trading portfolio was as follows:
|
|
|
|
|
Year of |
|
Percentage |
|
Expiration |
|
of Portfolio |
|
2006 |
|
|
19 |
% |
2007 |
|
|
31 |
% |
2008 |
|
|
40 |
% |
2009 |
|
|
10 |
% |
|
|
|
|
|
|
|
100 |
% |
|
|
|
|
At September 30, 2006, 72% of the Companys credit exposure related to marked-to-market coal
trading activities was with investment grade counterparties and 28% was with non-investment grade
counterparties, which were primarily other coal producers. The Companys coal trading operations
traded 19.8 million tons and 13.7 million tons for the three months ended September 30, 2006 and
2005, respectively, and 48.5 million tons and 31.4 million tons for the nine months ended September
30, 2006 and 2005, respectively.
(7) Long-Term Debt
The Companys total indebtedness as of September 30, 2006 and December 31, 2005, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Term Loan under Senior Unsecured Credit Facility |
|
$ |
440,000 |
|
|
$ |
|
|
Term Loan under Senior Secured Credit Facility |
|
|
|
|
|
|
442,500 |
|
Borrowings under Revolving Credit Facility |
|
|
312,000 |
|
|
|
|
|
6.875% Senior Notes due 2013 |
|
|
650,000 |
|
|
|
650,000 |
|
5.875% Senior Notes due 2016 |
|
|
231,845 |
|
|
|
239,525 |
|
Fair value of interest rate swaps |
|
|
(16,198 |
) |
|
|
(8,879 |
) |
5.0% Subordinated Note |
|
|
58,805 |
|
|
|
66,693 |
|
Other |
|
|
26,151 |
|
|
|
15,667 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,702,603 |
|
|
$ |
1,405,506 |
|
|
|
|
|
|
|
|
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Credit Facility
On September 15, 2006, the Company entered into a Third Amended and Restated Credit Agreement
(the Agreement), which established a $2.75 billion senior unsecured credit facility (the Senior
Unsecured Credit Facility) and which amended and restated in full the Companys then existing
$1.35 billion senior secured credit facility (the Senior Secured Credit Facility). The Senior
Unsecured Credit Facility provides a $1.8 billion Revolving Credit Facility (the Revolver) and a
$950.0 million Term Loan Facility (the Term Loan Facility).
The Revolver replaced the Companys previous $900.0 million revolving credit facility, and the
increased capacity is intended to accommodate working capital needs, letters of credit, the funding
of capital expenditures and other general corporate purposes. The Revolver also includes a $50.0
million sub-facility available for same-day swingline loan borrowings. In September 2006, the
Company borrowed $312.0 million under the Revolver.
The Term Loan Facility consists of an unsecured $440.0 million portion (the Term Loan),
which was drawn at closing to replace the previous term loan ($437.5 million balance at time of
replacement; $442.5 million at December 31, 2005) issued under the Senior Secured Credit Facility.
The Term Loan Facility also includes a Delayed Draw Term Loan Sub-Facility of up to $510.0 million,
which is available only if used for the acquisition of Excel (see Note 15). The Company incurred
$8.6 million in financing costs, of which $5.6 million related to the Revolver and $3.0 million
related to the Term Loan. These debt issuance costs will be amortized to interest expense over five
years, the term of the Senior Unsecured Credit Facility.
Loans under the facility are available to the Company in U.S. dollars, with a sub-facility
under the Revolver available in Australian dollars, pounds sterling and Euros. Letters of credit
under the Revolver are available to the Company in U.S. dollars with a sub-facility available in
Australian dollars, pounds sterling and Euros. The interest rate payable on the Revolver and the
Term Loan under the Senior Unsecured Credit Facility is LIBOR plus 1.0% with step-downs to LIBOR
plus 0.50% based on improvement in the leverage ratio, as defined in the Agreement. The applicable
rates for the Revolver and the Term Loan were 6.33% and 6.39%, respectively, at September 30, 2006.
Under the Senior Unsecured Credit Facility, the Company must comply with certain financial
covenants on a quarterly basis including a minimum interest coverage ratio and a maximum leverage
ratio, as defined in the Agreement. The financial covenants also place limitations on the Companys
investments in joint ventures, unrestricted subsidiaries, indebtedness of non-loan parties, and the
imposition of liens on Company assets. The new facility is less restrictive with respect to
limitations on the Companys dividend payments, capital expenditures, asset sales or stock
repurchases. The Senior Unsecured Credit Facility matures on September 15, 2011.
Interest Rate Swaps
Prior to completion of the Senior Unsecured Credit Facility, the Company had two $400.0
million interest rate swaps. A $400.0 million notional amount floating-to-fixed interest rate swap
was designated as a hedge of changes in expected cash flows on the previous term loan under the
Senior Secured Credit Facility. Under this swap, the Company paid a fixed rate of 6.764% and
received a floating rate of LIBOR plus 2.5% that reset each March 15, June 15, September 15 and
December 15 based upon the three-month LIBOR rate. A $400.0 million notional amount
fixed-to-floating interest rate swap was designated as a hedge of the changes in the fair value of
the 6.875% Senior Notes due 2013. Under this swap, the Company paid a floating rate of LIBOR plus
1.97% that reset each March 15, June 15, September 15 and December 15 based upon the three-month
LIBOR rate and received a fixed rate of 6.875%.
In conjunction with the completion of the new Senior Unsecured Credit Facility, the $400.0
million notional amount floating-to-fixed interest rate swap was terminated and resulted in payment
to the Company of $5.2 million. The Company recorded the $5.2 million fair value of the swap in
Other comprehensive income (loss) on the condensed consolidated balance sheet and will amortize
this amount to interest expense over the remaining term of the forecasted interest payments
initially hedged. The Company then entered into a $120.0 million notional amount floating-to-fixed
interest rate swap with a fixed rate of 6.25% and a floating rate of LIBOR plus 1.0%. This interest
rate swap was designated as a hedge of the variable interest payments on the Term Loan under the
new Senior Unsecured Credit Facility.
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company also terminated $280.0 million of its $400.0 million notional amount
fixed-to-floating interest rate swap designated as a hedge of the changes in the fair value of the
6.875% Senior Notes due 2013. Reducing the notional amount of the interest rate swap to $120.0
million resulted in payment of $5.2 million to the counterparty. Reduction of the notional
amount of the swap did not affect its floating and fixed rates. The $5.2 million of fair value
associated with the termination of the $280.0 million portion of the swap was recorded as an
adjustment to the carrying value of long-term debt and will be amortized to interest expense
through the maturity of the 6.875% Senior Notes due 2013.
(8) Earnings Per Share and Share-based Compensation
Weighted Average Shares Outstanding
A reconciliation of weighted average shares outstanding follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Weighted average shares outstanding basic |
|
|
263,444,254 |
|
|
|
262,432,394 |
|
|
|
263,631,134 |
|
|
|
261,591,722 |
|
Dilutive impact of stock options |
|
|
5,378,427 |
|
|
|
6,089,582 |
|
|
|
5,689,667 |
|
|
|
6,119,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding -
diluted |
|
|
268,822,681 |
|
|
|
268,521,976 |
|
|
|
269,320,801 |
|
|
|
267,711,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Repurchase
In July 2005, the Companys Board of Directors authorized a share repurchase program of up to
5% of the then outstanding shares of its common stock, or approximately 13.1 million shares. The
repurchases may be made from time to time based on an evaluation of the Companys outlook and
general business conditions, as well as alternative investment and debt repayment options. During
the three and nine months ended September 30, 2006, the Company repurchased 1.9 million and 2.2
million of its common shares at a cost of $88.3 million and $99.8 million, respectively.
Adoption of SFAS No. 123 (revised 2004), Share-Based Payment
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123(R)), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (APB Opinion No. 25) and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach
described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees,
including employee stock options, to be recognized ratably over the service period in the income
statement based on their fair values at the grant date.
The Company adopted SFAS No. 123(R) on January 1, 2006 and used the modified prospective
method, in which compensation cost is recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted or modified after the
effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective
date. Prior to January 1, 2006, the Company had elected to apply APB Opinion No. 25 and related
interpretations in accounting for its stock option plans, as permitted under SFAS No. 123 and SFAS
No. 148 Accounting for Stock-Based Compensation-Transition and Disclosure. Beginning in 2006,
SFAS No. 123(R) also requires that excess income tax benefits from stock options exercised be
recorded as financing cash inflow on the statements of cash flows. The excess income tax benefit
from stock option exercises during 2005 is included in operating cash flows, netted in deferred tax
activity.
As part of its share-based compensation program, the Company utilizes restricted stock,
nonqualified stock options, an employee stock purchase plan and performance units (discussed
further below). The Company began utilizing restricted stock as part of its equity-based
compensation strategy in January 2005. Accounting for restricted stock awards was not changed by
the adoption of SFAS No. 123(R). The Company recognized $1.1 million and $0.2 million of expense,
net of taxes, for the three months ended September 30, 2006 and 2005, respectively, and $3.1
million and $0.7 million of expense, net of taxes, for the nine months ended September 30, 2006 and
2005, respectively, related to restricted stock. For share-based payment instruments excluding
restricted stock, the Company recognized a $1.4 million (or $0.01 per diluted share) reversal of
expense and $11.2 million (or $0.04 per diluted share) of expense, net of taxes, for the three
months ended September 30, 2006 and 2005, respectively, and $11.0 million (or $0.04 per diluted
share) and $17.8 million (or $0.07 per diluted share) of expense, net of taxes, for the nine months
ended September 30, 2006 and 2005, respectively. As a result of adopting SFAS No. 123(R), the
Companys net income for the three and nine months ended September 30, 2006 was $5.5
million (or $0.02 per diluted share) and $4.3 million (or $0.02 per diluted share) lower,
respectively, than if it had continued
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
to account for share-based compensation under APB Opinion
No. 25. Share-based compensation expense is recorded in Selling and administrative expenses in the
condensed consolidated income statements. The Company used the Black-Scholes option pricing model
to determine the fair value of stock options and employee stock purchase plan share-based payments
made before and after the adoption of SFAS No. 123(R). As of September 30, 2006, the total
unrecognized compensation cost related to nonvested awards was $28.1 million, net of taxes, which
is expected to be recognized over 5.0 years with a weighted-average period of 1.3 years.
Stock Options
Employee and director stock options granted since the Companys initial public offering
(IPO) of common stock in May 2001 generally vest ratably over three years and expire after 10
years from the date of the grant, subject to earlier termination upon discontinuation of an
employees service. Options granted prior to the IPO generally cliff vest between 2007 and 2010.
Of the 9.6 million options outstanding at September 30, 2006, 4.1 million options cliff vest in
November 2007. Option grants are typically made in January of each year. The Company granted 0.5
million options during the nine months ended September 30, 2006, with a fair value of approximately
$16.90 per option. These options were granted in the first quarter of 2006. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 2006 and 2005, respectively; dividend
yield of 0.8% and 1.0%; expected volatility (based on historical volatility) of 36% and 40%;
risk-free interest rate of 4.3% and 3.6%; and an expected life of 5.3 years and 5.7 years. The
Company recognized $1.2 million and $3.6 million of expense, net of taxes, for the three and nine
months ended September 30, 2006, related to stock options.
A summary of option activity under the plans as of September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Nine Months Ended |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
September 30, 2006 |
|
|
Price |
|
|
Life |
|
|
(in millions) |
|
Beginning balance |
|
|
10,783,786 |
|
|
$ |
6.37 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
530,848 |
|
|
|
43.10 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,693,233 |
) |
|
|
7.58 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(33,990 |
) |
|
|
5.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
9,587,411 |
|
|
$ |
8.19 |
|
|
|
4.3 |
|
|
$ |
277.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable |
|
|
2,717,122 |
|
|
$ |
8.65 |
|
|
|
6.2 |
|
|
$ |
76.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted Pre-IPO |
|
|
5,609,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted Post-IPO |
|
|
3,978,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,587,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted Pre-IPO |
|
|
237,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted Post-IPO |
|
|
2,479,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,717,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2006, the total intrinsic value of options exercised,
defined as the excess fair value of the underlying stock over the exercise price of the options,
was $76.9 million.
Employee Stock Purchase Plan
During 2001, the Company adopted an employee stock purchase plan. 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 person per year. Employees are able to purchase Company common
stock at a 15% discount to the lower of the fair market value of the
Companys common stock on the initial or ending dates of each six-month offering period.
Offering periods begin on January 1 and July 1 of each year. The fair value of the six-month
look-back option in the Companys employee stock purchase plan is estimated by adding the fair
value of 0.15 of one share of stock to the fair value of 0.85 of an option on one share of stock.
The Company recognized $0.3 million and $0.9 million of expense, net of taxes, for the three and
nine month periods ended September 30, 2006, respectively, related to its employee stock purchase
plan.
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Performance Units
Performance units, which are typically granted annually in January by the Company, vest over a
three year measurement period, subject to the achievement of performance goals and stock price
performance at the conclusion of the three years. Three performance unit grants were outstanding
during 2005 (the 2003, 2004 and 2005 grants) and 2006 (the 2004, 2005 and 2006 grants). The payout
related to the 2003 grant (which was settled in cash in February 2006) was based on the Companys
stock price performance compared to both an industry peer group and an S&P Index. The payouts
related to the 2004 grant (which will be settled in cash in February 2007) and 2005 and 2006 grants
(which will be settled in common stock in 2008 and 2009, respectively) are based 50% on stock price
performance compared to both an industry peer group and an S&P Index (a market condition under
SFAS No. 123(R)) and 50% on a return on capital target (a performance condition under SFAS No.
123(R)). The Company granted 0.2 million performance units during the nine months ended September
30, 2006. Under APB Opinion No. 25, all of the performance unit awards were accounted for as
variable awards. Under SFAS No. 123(R), the awards settled in cash are accounted for as liability
awards and adjusted to fair value at each period-end, and the awards settled in common stock are
accounted for based on their grant date fair value. The performance condition awards were valued
utilizing the grant date fair values of the Companys stock adjusted for dividends forgone during
the vesting period. The market condition awards were valued utilizing a Monte Carlo simulation
which incorporates the total shareholder return hurdles set for each grant. The assumptions used in
the valuations of the 2005 and 2006 grants, respectively, were as follows: dividend yield of 0.8%
and 1.0%; expected volatility of 36% and 40%; and risk-free interest rate of 4.25% and 3.25%. The
Company recognized a reversal of expense of $2.9 million and an expense of $11.2 million, net of
taxes, for the three months ended September 30, 2006 and 2005, respectively, and $6.5 million and
$17.8 million of expense, net of taxes, for the nine months ended September 30, 2006 and 2005,
respectively, related to performance units.
As noted above, prior to adopting SFAS No. 123(R), the Company applied APB Opinion No. 25 and
related interpretations to account for its equity incentive plans. The following table reflects
2005 pro forma net income and basic and diluted earnings per share had compensation cost been
determined for the Companys 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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2005 |
|
September 30, 2005 |
Net income: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
113,340 |
|
|
$ |
260,484 |
|
Pro forma |
|
|
112,041 |
|
|
|
256,500 |
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.43 |
|
|
$ |
1.00 |
|
Pro forma |
|
|
0.43 |
|
|
|
0.98 |
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.42 |
|
|
$ |
0.97 |
|
Pro forma |
|
|
0.42 |
|
|
|
0.96 |
|
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(9) Comprehensive Income
The following table sets forth the after-tax components of comprehensive income for the three
and nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
142,008 |
|
|
$ |
113,340 |
|
|
$ |
425,664 |
|
|
$ |
260,484 |
|
Increase (decrease) in fair value of cash flow hedges, net
of tax provision (benefit) of ($11,080) and $11,231 for
the
three months ended September 30, 2006 and 2005,
respectively, and ($967) and $24,303 for the nine months
ended September 30, 2006 and 2005, respectively |
|
|
(16,620 |
) |
|
|
16,757 |
|
|
|
(1,450 |
) |
|
|
36,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
125,388 |
|
|
$ |
130,097 |
|
|
$ |
424,214 |
|
|
$ |
296,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income differs from net income by the amount of unrealized gain or loss
resulting from valuation changes of the Companys cash flow hedges (which include fuel and natural
gas hedges, currency forwards and interest rate swaps) during the period. Changes in interest
rates, crude oil, heating oil and natural gas prices and the U.S. dollar/Australian dollar exchange
rate affect the valuation of these instruments.
(10) Pension and Postretirement Benefit Costs
Components of Net Periodic Pension Costs
Net periodic pension costs included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost for benefits earned |
|
$ |
3,058 |
|
|
$ |
2,964 |
|
|
$ |
9,175 |
|
|
$ |
8,890 |
|
Interest cost on projected
benefit obligation |
|
|
11,508 |
|
|
|
11,373 |
|
|
|
34,525 |
|
|
|
34,119 |
|
Expected return on plan assets |
|
|
(13,647 |
) |
|
|
(13,203 |
) |
|
|
(40,940 |
) |
|
|
(39,609 |
) |
Amortization of prior service cost |
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(24 |
) |
|
|
(12 |
) |
Amortization of net loss |
|
|
5,671 |
|
|
|
6,147 |
|
|
|
17,013 |
|
|
|
18,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension costs |
|
|
6,582 |
|
|
|
7,277 |
|
|
|
19,749 |
|
|
|
21,829 |
|
Curtailment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension costs |
|
$ |
6,582 |
|
|
$ |
7,277 |
|
|
$ |
19,749 |
|
|
$ |
31,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment
The curtailment loss occurring during the nine months ended September 30, 2005 resulted from
the termination of operations at two of the three operating mines that participate in the Western
Surface UMWA Pension Plan (the Plan) during 2005. The loss is actuarially determined and
consists of an increase in the actuarial liability, the accelerated recognition of previously
unamortized prior service cost and contractual termination benefits under the Plan resulting from
the termination of operations.
12
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Contributions
The Company previously disclosed in its financial statements for the year ended December 31,
2005 that it expected to contribute $6.6 million to its funded pension plans and make $1.3 million
in expected benefit payments attributable to its unfunded pension plans during 2006. As of
September 30, 2006, $0.8 million of expected benefit payments attributable to the unfunded pension
plans were made and $5.0 million in contributions were made to the funded pension plans.
Components of Net Periodic Postretirement Benefit Costs
Net periodic postretirement benefit costs included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost for benefits earned |
|
$ |
1,880 |
|
|
$ |
1,355 |
|
|
$ |
5,639 |
|
|
$ |
4,004 |
|
Interest cost on accumulated
postretirement benefit obligation |
|
|
18,465 |
|
|
|
18,154 |
|
|
|
55,391 |
|
|
|
54,505 |
|
Amortization of prior service cost |
|
|
(1,333 |
) |
|
|
(1,355 |
) |
|
|
(4,002 |
) |
|
|
(4,004 |
) |
Amortization of actuarial losses |
|
|
8,012 |
|
|
|
6,579 |
|
|
|
24,036 |
|
|
|
19,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement
benefit costs |
|
$ |
27,024 |
|
|
$ |
24,733 |
|
|
$ |
81,064 |
|
|
$ |
74,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
The Company expects to pay $86.2 million attributable to its postretirement benefit plans
during 2006, which reflects an increase of $11.2 million from its previously disclosed amount in
the financial statements for the year ended December 31, 2005. This increase in expected payments
includes approximately $3 million of refunds under a dispute resolution relating to payments made
by retirees over the last six years; and the remainder relates to higher than anticipated costs and
utilization. As of September 30, 2006, payments of $64.7 million attributable to the Companys
postretirement benefit plans were made.
(11) Segment Information
The Company reports its operations primarily through the following reportable operating
segments: Western U.S. Mining, Eastern U.S. Mining, Australian Mining and Trading and
Brokerage. Western U.S. Mining operations reflect the aggregation of the Powder River Basin,
Southwest and Colorado operating segments, and Eastern U.S. Mining operations reflect the
aggregation of the Appalachia and Midwest operating segments. The principal business of the
Western U.S. Mining, Eastern U.S. Mining and Australian Mining segments is the mining, preparation
and sale of steam coal, sold primarily to electric utilities, and metallurgical coal, sold to steel
and coke producers. Western U.S. Mining operations are characterized by predominantly surface
mining extraction processes, lower sulfur content and Btu of coal, and longer shipping distances
from the mine to the customer. Conversely, Eastern U.S. Mining operations are characterized by a
majority of underground mining extraction processes, higher sulfur content and Btu of coal, and
shorter shipping distances from the mine to the customer. Geologically, Western operations mine
bituminous and subbituminous coal deposits, and Eastern operations mine bituminous coal deposits.
Australian Mining operations are characterized by surface and underground extraction processes,
mining primarily low sulfur, high Btu coal sold to an international customer base. The Trading and
Brokerage segments principal business is the marketing, brokerage and trading of coal. Corporate
and Other includes selling and administrative expenses, net gains on property disposals, costs
associated with past mining obligations, joint venture earnings related to the Companys 25.5%
investment in a Venezuelan mine and revenues and expenses related to the Companys other commercial
activities such as coalbed methane, generation development and resource management.
The Companys chief operating decision maker uses Adjusted EBITDA as the primary measure of
segment profit and loss. Adjusted EBITDA is defined as income from operations before deducting net
interest expense, income taxes, minority interests, asset retirement obligation expense and
depreciation, depletion and amortization.
13
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Operating segment results for the three and nine months ended September 30, 2006 and 2005 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western U.S. Mining |
|
$ |
428,263 |
|
|
$ |
403,214 |
|
|
$ |
1,260,670 |
|
|
$ |
1,184,445 |
|
Eastern U.S. Mining |
|
|
505,603 |
|
|
|
452,825 |
|
|
|
1,537,561 |
|
|
|
1,315,480 |
|
Australian Mining |
|
|
191,517 |
|
|
|
146,146 |
|
|
|
562,408 |
|
|
|
390,314 |
|
Trading and Brokerage |
|
|
132,957 |
|
|
|
216,098 |
|
|
|
515,514 |
|
|
|
506,960 |
|
Corporate and Other |
|
|
6,648 |
|
|
|
5,227 |
|
|
|
17,033 |
|
|
|
12,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,264,988 |
|
|
$ |
1,223,510 |
|
|
$ |
3,893,186 |
|
|
$ |
3,409,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (1) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western U.S. Mining |
|
$ |
112,589 |
|
|
$ |
104,213 |
|
|
$ |
340,384 |
|
|
$ |
330,277 |
|
Eastern U.S. Mining |
|
|
68,397 |
|
|
|
96,865 |
|
|
|
309,053 |
|
|
|
287,569 |
|
Australian Mining |
|
|
75,248 |
|
|
|
39,780 |
|
|
|
188,932 |
|
|
|
101,345 |
|
Trading and Brokerage (2) |
|
|
39,347 |
|
|
|
26,132 |
|
|
|
76,725 |
|
|
|
19,703 |
|
Corporate and Other (3) |
|
|
(24,845 |
) |
|
|
(31,552 |
) |
|
|
(106,140 |
) |
|
|
(121,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
270,736 |
|
|
$ |
235,438 |
|
|
$ |
808,954 |
|
|
$ |
617,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted EBITDA is defined as income from operations before deducting net interest expense, income
taxes, minority interests, asset retirement obligation expense and depreciation, depletion and
amortization. |
|
(2) |
|
Trading and Brokerage results included a gain in the quarter and nine months ended September 30, 2006
related to a contract restructuring and a benefit for the quarter and a charge for the nine months ended
September 30, 2005, related to contract losses and a settlement agreement (see Note 4). |
|
(3) |
|
Corporate and Other results included the gains on the disposal or exchange of assets discussed in Note 4. |
A reconciliation of Adjusted EBITDA to consolidated income before income taxes and
minority interests follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Total Adjusted EBITDA |
|
$ |
270,736 |
|
|
$ |
235,438 |
|
|
$ |
808,954 |
|
|
$ |
617,169 |
|
Depreciation, depletion and amortization |
|
|
90,664 |
|
|
|
77,159 |
|
|
|
263,103 |
|
|
|
232,421 |
|
Asset retirement obligation expense |
|
|
7,068 |
|
|
|
7,394 |
|
|
|
25,911 |
|
|
|
23,751 |
|
Interest expense |
|
|
26,392 |
|
|
|
25,327 |
|
|
|
79,130 |
|
|
|
76,088 |
|
Interest income |
|
|
(1,886 |
) |
|
|
(3,218 |
) |
|
|
(6,026 |
) |
|
|
(6,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
$ |
148,498 |
|
|
$ |
128,776 |
|
|
$ |
446,836 |
|
|
$ |
291,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(12) Commitments and Contingencies
Commitments
As of September 30, 2006, purchase commitments for capital expenditures were $90.8 million and
federal coal reserve lease payments due over the next three years totaled $479.8 million.
Oklahoma Lead Litigation
Gold Fields Mining, LLC (Gold Fields), one of the Companys subsidiaries, is a dormant,
non-coal producing entity that was previously managed and owned by Hanson PLC, a predecessor owner
of the Company. In a February 1997 spin-off, Hanson PLC transferred ownership of Gold Fields to the
Company, despite the fact that Gold Fields had no ongoing operations and the Company had no prior
involvement in its past operations. The Company has agreed to indemnify a former affiliate of Gold
Fields for certain claims. A predecessor of Gold Fields formerly operated two lead mills near
Picher, Oklahoma prior to the 1950s and mined, in accordance with lease agreements and permits,
approximately 1.5% of the total amount of the ore mined in the county.
Gold Fields and two other companies are defendants in two class action lawsuits. The
plaintiffs have asserted claims predicated on allegations of intentional lead exposure by the
defendants and are seeking compensatory damages, punitive damages and the implementation of medical
monitoring and relocation programs for the affected individuals. Gold Fields is also a defendant,
along with other companies, in several personal injury lawsuits involving over 50 children, arising
out of the same lead mill operations. Plaintiffs in these actions are seeking compensatory and
punitive damages for alleged personal injuries from lead exposure. In December 2003, the Quapaw
Indian tribe and certain Quapaw land owners filed a class action lawsuit against Gold Fields and
five other companies. The plaintiffs are seeking compensatory and punitive damages based on a
variety of theories. Gold Fields has filed a third-party complaint against the United States, and
other parties. In February 2005, the state of Oklahoma on behalf of itself and several other
parties sent a notice to Gold Fields and other companies regarding a possible natural resources
damage claim. All of the lawsuits are pending in the U.S. District Court for the Northern District
of Oklahoma.
The outcome of litigation and these claims are subject to numerous uncertainties. Based on the
Companys evaluation of the issues and their potential impact, the amount of any future loss cannot
be reasonably estimated. However, the Company believes this matter is likely to be resolved without
a material adverse effect on the Companys financial condition, results of operations or cash
flows.
Navajo Nation
On June 18, 1999, the Navajo Nation served three of the Companys subsidiaries, including
Peabody Western Coal Company (Peabody Western), with a complaint that had been filed in the U.S.
District Court for the District of Columbia. The Navajo Nation has alleged 16 claims, including
Civil Racketeer Influenced and Corrupt Organizations Act (RICO) violations and fraud. The
complaint alleges that the defendants jointly participated in unlawful activity to obtain favorable
coal lease amendments. 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 Westerns two coal leases have terminated due to Peabody
Westerns breach of these leases and a reformation of these leases to adjust the royalty rate to
20%. Subsequently, the court allowed the Hopi Tribe to intervene in this lawsuit and the Hopi Tribe
is also seeking unspecified actual damages, punitive damages and reformation of its coal lease. On
March 4, 2003, the U.S. Supreme Court issued a ruling in a companion lawsuit involving the Navajo
Nation and the United States rejecting the Navajo Nations allegation that the United States
breached its trust responsibilities to the Tribe in approving the coal lease amendments.
On February 9, 2005, the U.S. District Court for the District of Columbia granted a consent
motion to stay the litigation until further order of the court. Peabody Western, the Navajo Nation,
the Hopi Tribe and the owners of the power plants served by the suspended Black Mesa mine and the
Kayenta mine are in mediation with respect to this litigation and other business issues.
The outcome of litigation, or the current mediation, is subject to numerous uncertainties.
Based on the Companys evaluation of the issues and their potential impact, the amount of any
future loss cannot be reasonably estimated. However, the Company believes this matter is likely to
be resolved without a material adverse effect on the Companys financial condition, results of
operations or cash flows.
15
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
The Future of the Mohave Generating Station and Black Mesa Mine
The Company had been supplying coal to the Mohave Generating Station pursuant to a long-term
coal supply agreement through its Black Mesa Mine. The mine terminated operations on December 31,
2005, and the coal supply agreement expired on that date. As a part of the alternate dispute
resolution referenced in the Navajo Nation litigation, Peabody Western has been participating in
mediation with the owners of the Mohave Generating Station and the Navajo Generating Station and
the two tribes to resolve the complex issues surrounding groundwater and other disputes involving
the two generating stations. On June 19, 2006, the owners of the Mohave Generating Station
announced that they were halting efforts to reopen the plant and that they would try to sell it.
On September 26, 2006, Salt River Project, one of the owners of the Mohave Generating Station,
announced that it was attempting to form a new ownership group to operate the plant. There is no
assurance that the Mohave Generating Station will resume operations. The Mohave plant was the sole
customer of the Black Mesa Mine, which sold 4.6 million tons of coal in 2005. During 2005, the mine
generated $29.8 million of Adjusted EBITDA, which represented 3.4% of the Companys total 2005
Adjusted EBITDA of $870.4 million.
Salt River Project Agricultural Improvement and Power District Mine Closing and Retiree Health
Care
Salt River Project 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
the Companys subsidiary, Peabody Western, under the terms of a coal supply agreement dated
February 18, 1977. The contract expires in 2011. The trial court subsequently ruled that the mine
decommissioning costs were subject to arbitration but that the retiree health care costs were not
subject to arbitration. The Company has recorded a receivable for mine decommissioning costs of
$76.3 million and $74.2 million included in Investments and other assets in the condensed
consolidated balance sheets as of September 30, 2006 and December 31, 2005, respectively.
The outcome of litigation and arbitration is subject to numerous uncertainties. Based on the
Companys evaluation of the issues and their potential impact, the amount of any future loss cannot
be reasonably estimated. However, the Company believes this matter is likely to be resolved without
a material adverse effect on its financial condition, results of operations or cash flows.
Gulf Power Company Litigation
On June 21, 2006, a Company subsidiary filed a complaint in the U.S. District Court, Southern
District of Illinois, seeking a declaratory judgment upholding its declaration of a permanent force
majeure under a coal supply agreement with Gulf Power Company. On June 22, 2006, Gulf Power
Company filed a breach of contract lawsuit against the Companys subsidiary in the U.S. District
Court, Northern District of Florida, contesting the force majeure declaration and seeking damages
for alleged past and future tonnage shortfalls of nearly 5 million tons under the coal supply
agreement, which would have expired on December 31, 2007. The parties have filed motions to
determine which court will hear the lawsuits. On October 6, 2006, the Florida District Court
stayed Gulf Powers lawsuit until the Illinois court decides whether it has jurisdiction.
The outcome of these lawsuits is subject to numerous uncertainties. Based on the Companys
evaluation of the issues and their potential impact, the amount of any future loss cannot
reasonably be estimated. However, the Company believes this matter is likely to be resolved
without a material adverse effect on its financial condition, results of operations or cash flows.
Environmental
The Company is subject to federal, state and local environmental laws and regulations,
including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (CERCLA or Superfund), the Superfund Amendments and Reauthorization Act of 1986, the
Clean Air Act, the Clean Water Act and the Conservation and Recovery Act. Superfund and similar
state laws create liability for investigation and remediation in response to releases of hazardous
substances in the environment and for damages to natural resources. Under that legislation and many
state Superfund statutes, joint and several liability may be imposed on waste generators, site
owners and operators and others regardless of fault. These regulations could require the Company to
do some or all of the following:
|
|
|
remove or mitigate the effects on the environment at various sites from the disposal or
release of certain substances; |
|
|
|
|
perform remediation work at such sites; and |
|
|
|
|
pay damages for loss of use and non-use values. |
16
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Environmental claims have been asserted against Gold Fields related to activities of Gold
Fields or its former affiliates. Gold Fields has been named a potentially responsible party (PRP)
based on CERCLA at five sites, and claims have been asserted at 18 other sites. The number of PRP
sites in and of itself is not a relevant measure of liability, because the nature and extent of
environmental concerns varies by site, as does Gold Fields estimated share of responsibility.
The Companys policy is to accrue environmental cleanup-related costs of a non-capital 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 the nature and extent of
contamination, the timing, extent and method of the remedial action, 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. The Company also assesses the financial
capability and proportional share of costs of other PRPs and, where allegations are based on
tentative findings, the reasonableness of the Companys apportionment. The Company has not
anticipated any recoveries from insurance carriers in the estimation of liabilities recorded in its
condensed consolidated balance sheets. Undiscounted liabilities for environmental cleanup-related
costs for all of the sites noted above totaled $40.2 million as of September 30, 2006 and $42.5
million as of December 31, 2005, $21.8 million and $23.6 million of which was reflected as a
current liability, respectively. These amounts represent those costs that the Company believes are
probable and reasonably estimable. In September 2005, Gold Fields and other PRPs received a letter
from the U.S. Department of Justice alleging that the PRPs mining operations caused the
Environmental Protection Agency (EPA) to incur approximately $125 million in residential yard
remediation costs at Picher, Oklahoma and will cause the EPA to incur additional remediation costs
relating to historic mining sites. Gold Fields has participated in the ongoing settlement
discussions. A predecessor of Gold Fields formerly operated two lead mills near Picher, Oklahoma
prior to the 1950s and mined, in accordance with lease agreements and permits, approximately 1.5%
of the total amount of the ore mined in the county. Gold Fields believes it has meritorious
defenses to these claims. Gold Fields is involved in other litigation in the Picher area, and the
Company has agreed to indemnify one of the defendants in this litigation as discussed under the
Oklahoma Lead Litigation caption above. Significant uncertainty exists as to whether claims will
be pursued against Gold Fields in all cases, and where they are pursued, the amount of the eventual
costs and liabilities, which could be greater or less than this provision.
Although waste substances generated by coal mining and processing are generally not regarded
as hazardous substances for the purposes of Superfund and similar legislation, some products used
by coal companies in operations, such as chemicals, and the disposal of these products are governed
by the statute. Thus, coal mines currently or previously owned or operated by the Company, and
sites to which the Company has sent waste materials, may be subject to liability under Superfund
and similar state laws.
Other
In addition, the Company at times becomes a party to other claims, lawsuits, arbitration
proceedings and administrative procedures in the ordinary course of business. Management believes
that the ultimate resolution of such other pending or threatened proceedings is not reasonably
likely to have a material effect on the financial position, results of operations or liquidity of
the Company.
(13) Guarantees
In the normal course of business, the Company is a party to the following guarantees:
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. As of September 30, 2006, the
Companys maximum reimbursement obligation to the commercial bank is in turn supported by a letter
of credit totaling $42.8 million.
17
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company has guaranteed the performance of Asset Management Group (AMG) under its coal
purchase contract with a third party, which has terms extending through December 31, 2006. Default
occurs if AMG does not deliver specified monthly tonnage amounts to the third party. In the event
of a default, the Company would assume AMGs obligation to ship coal at agreed prices for the
remaining term of the contract. As of September 30, 2006, the maximum potential future payments
under this guarantee are approximately $0.7 million, based on recent spot coal prices. As a matter
of recourse in the event of a default, the Company has access to cash held in escrow and the
ability to trigger an assignment of AMGs assets to the Company. Based on these recourse options
and the remote probability of non-performance by AMG due to its prior operating history, the
Company has valued the liability associated with the guarantee at zero.
As part of arrangements through which the Company obtains exclusive sales representation
agreements with small coal mining companies (the Counterparties), the Company issued financial
guarantees on behalf of the Counterparties. These guarantees facilitate the Counterparties efforts
to obtain bonding or financing. In July 2006, the Company issued $5.2 million of financial
guarantees, expiring at various dates through July 2013, on behalf of a certain Counterparty to
facilitate its efforts in obtaining financing. In the event of default, the Company has multiple
recourse options, including the ability to assume the loans and procure title and use of the
equipment purchased through the loans. If default occurs, the Company has the ability and intent to
exercise its recourse options, so the liability associated with the guarantee has been valued at
zero. The Company also guaranteed bonding for a partnership in which it formerly held an interest.
The aggregate amount guaranteed by the Company for all such Counterparties was $11.5 million, and
the fair value of the guarantees recognized as a liability was $0.4 million as of September 30,
2006. The Companys obligations under the guarantees extend to September 2015.
In March 2006, the Company issued a guarantee for certain equipment lease arrangements on
behalf of one of the sales representation parties with maximum potential future payments totaling
$2.9 million at September 30, 2006, and with lease terms that extend to April 2010. The Company has
multiple recourse options in the event of default, including the ability to assume the lease and
procure use of the equipment or to settle the lease and take title to the assets. If default
occurs, the Company has the ability and intent to exercise its recourse options, so the liability
associated with the guarantee has been valued at zero.
The Company is the lessee under numerous equipment and property leases. 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 Companys 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 Companys maximum potential
obligations under its leases are equal to the respective future minimum lease payments 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 Companys subsidiaries provide financial
guarantees under long-term debt agreements entered into by the Company. The maximum amounts
payable under the Companys debt agreements are equal to the respective principal and interest
payments. Supplemental guarantor/non-guarantor financial information is provided in Note 14.
18
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(14) Supplemental Guarantor/Non-Guarantor Financial Information
In accordance with the indentures governing the 6.875% Senior Notes due 2013 and the 5.875%
Senior Notes due 2016, certain wholly-owned U.S. subsidiaries of the Company have fully and
unconditionally guaranteed the 6.875% Senior Notes and the 5.875% Senior 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
the holders of the 6.875% Senior Notes and the 5.875% Senior Notes. The following unaudited
condensed historical financial statement information is provided for the Guarantor/Non-Guarantor
Subsidiaries.
Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
|
Parent |
|
Guarantor |
|
Non-Guarantor |
|
|
|
|
|
|
Company |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
Total revenues |
|
$ |
|
|
|
$ |
1,005,582 |
|
|
$ |
286,246 |
|
|
$ |
(26,840 |
) |
|
$ |
1,264,988 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
(2,416 |
) |
|
|
835,195 |
|
|
|
197,065 |
|
|
|
(26,840 |
) |
|
|
1,003,004 |
|
Depreciation, depletion and amortization |
|
|
|
|
|
|
76,181 |
|
|
|
14,483 |
|
|
|
|
|
|
|
90,664 |
|
Asset retirement obligation expense |
|
|
|
|
|
|
6,772 |
|
|
|
296 |
|
|
|
|
|
|
|
7,068 |
|
Selling and administrative expenses |
|
|
3,056 |
|
|
|
27,594 |
|
|
|
838 |
|
|
|
|
|
|
|
31,488 |
|
Other operating (income) loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal or exchange of assets |
|
|
|
|
|
|
(24,521 |
) |
|
|
(10,519 |
) |
|
|
|
|
|
|
(35,040 |
) |
(Income) loss from equity affiliates |
|
|
|
|
|
|
1,250 |
|
|
|
(6,450 |
) |
|
|
|
|
|
|
(5,200 |
) |
Interest expense |
|
|
41,109 |
|
|
|
13,688 |
|
|
|
3,286 |
|
|
|
(31,691 |
) |
|
|
26,392 |
|
Interest income |
|
|
(4,916 |
) |
|
|
(21,963 |
) |
|
|
(6,698 |
) |
|
|
31,691 |
|
|
|
(1,886 |
) |
|
|
|
Income (loss) before income taxes and
minority interests |
|
|
(36,833 |
) |
|
|
91,386 |
|
|
|
93,945 |
|
|
|
|
|
|
|
148,498 |
|
Income tax provision (benefit) |
|
|
(11,055 |
) |
|
|
(5,613 |
) |
|
|
19,325 |
|
|
|
|
|
|
|
2,657 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
3,833 |
|
|
|
|
|
|
|
3,833 |
|
|
|
|
Net income (loss) |
|
$ |
(25,778 |
) |
|
$ |
96,999 |
|
|
$ |
70,787 |
|
|
$ |
|
|
|
$ |
142,008 |
|
|
|
|
19
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
|
Parent |
|
Guarantor |
|
Non-Guarantor |
|
|
|
|
|
|
Company |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
Total revenues |
|
$ |
|
|
|
$ |
958,723 |
|
|
$ |
288,488 |
|
|
$ |
(23,701 |
) |
|
$ |
1,223,510 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
(12,025 |
) |
|
|
778,312 |
|
|
|
243,507 |
|
|
|
(23,701 |
) |
|
|
986,093 |
|
Depreciation, depletion and amortization |
|
|
|
|
|
|
68,482 |
|
|
|
8,677 |
|
|
|
|
|
|
|
77,159 |
|
Asset retirement obligation expense |
|
|
|
|
|
|
8,049 |
|
|
|
(655 |
) |
|
|
|
|
|
|
7,394 |
|
Selling and administrative expenses |
|
|
1,288 |
|
|
|
53,753 |
|
|
|
1,968 |
|
|
|
|
|
|
|
57,009 |
|
Other operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal or exchange of assets |
|
|
|
|
|
|
(47,516 |
) |
|
|
(61 |
) |
|
|
|
|
|
|
(47,577 |
) |
Income from equity affiliates |
|
|
|
|
|
|
(2,393 |
) |
|
|
(5,060 |
) |
|
|
|
|
|
|
(7,453 |
) |
Interest expense |
|
|
39,163 |
|
|
|
13,606 |
|
|
|
5,463 |
|
|
|
(32,905 |
) |
|
|
25,327 |
|
Interest income |
|
|
(6,255 |
) |
|
|
(22,941 |
) |
|
|
(6,927 |
) |
|
|
32,905 |
|
|
|
(3,218 |
) |
|
|
|
Income (loss) before income taxes and
minority interests |
|
|
(22,171 |
) |
|
|
109,371 |
|
|
|
41,576 |
|
|
|
|
|
|
|
128,776 |
|
Income tax provision (benefit) |
|
|
(5,694 |
) |
|
|
13,128 |
|
|
|
7,280 |
|
|
|
|
|
|
|
14,714 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
722 |
|
|
|
|
|
|
|
722 |
|
|
|
|
Net income (loss) |
|
$ |
(16,477 |
) |
|
$ |
96,243 |
|
|
$ |
33,574 |
|
|
$ |
|
|
|
$ |
113,340 |
|
|
|
|
20
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
Parent |
|
Guarantor |
|
Non-Guarantor |
|
|
|
|
|
|
Company |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
Total revenues |
|
$ |
|
|
|
$ |
2,994,463 |
|
|
$ |
978,810 |
|
|
$ |
(80,087 |
) |
|
$ |
3,893,186 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
(14,746 |
) |
|
|
2,434,734 |
|
|
|
738,979 |
|
|
|
(80,087 |
) |
|
|
3,078,880 |
|
Depreciation, depletion and amortization |
|
|
|
|
|
|
222,523 |
|
|
|
40,580 |
|
|
|
|
|
|
|
263,103 |
|
Asset retirement obligation expense |
|
|
|
|
|
|
25,249 |
|
|
|
662 |
|
|
|
|
|
|
|
25,911 |
|
Selling and administrative expenses |
|
|
12,525 |
|
|
|
104,577 |
|
|
|
1,691 |
|
|
|
|
|
|
|
118,793 |
|
Other operating (income) loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal or exchange of assets |
|
|
|
|
|
|
(83,822 |
) |
|
|
(10,487 |
) |
|
|
|
|
|
|
(94,309 |
) |
(Income) loss from equity affiliates |
|
|
|
|
|
|
2,882 |
|
|
|
(22,014 |
) |
|
|
|
|
|
|
(19,132 |
) |
Interest expense |
|
|
121,232 |
|
|
|
42,233 |
|
|
|
10,198 |
|
|
|
(94,533 |
) |
|
|
79,130 |
|
Interest income |
|
|
(15,624 |
) |
|
|
(63,834 |
) |
|
|
(21,101 |
) |
|
|
94,533 |
|
|
|
(6,026 |
) |
|
|
|
Income (loss) before income taxes and
minority interests |
|
|
(103,387 |
) |
|
|
309,921 |
|
|
|
240,302 |
|
|
|
|
|
|
|
446,836 |
|
Income tax provision (benefit) |
|
|
(30,288 |
) |
|
|
(2,951 |
) |
|
|
44,144 |
|
|
|
|
|
|
|
10,905 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
10,267 |
|
|
|
|
|
|
|
10,267 |
|
|
|
|
Net income (loss) |
|
$ |
(73,099 |
) |
|
$ |
312,872 |
|
|
$ |
185,891 |
|
|
$ |
|
|
|
$ |
425,664 |
|
|
|
|
21
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Total revenues |
|
$ |
|
|
|
$ |
2,723,479 |
|
|
$ |
751,058 |
|
|
$ |
(64,761 |
) |
|
$ |
3,409,776 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
(19,416 |
) |
|
|
2,225,082 |
|
|
|
637,173 |
|
|
|
(64,761 |
) |
|
|
2,778,078 |
|
Depreciation, depletion and amortization |
|
|
|
|
|
|
207,868 |
|
|
|
24,553 |
|
|
|
|
|
|
|
232,421 |
|
Asset retirement obligation expense |
|
|
|
|
|
|
23,251 |
|
|
|
500 |
|
|
|
|
|
|
|
23,751 |
|
Selling and administrative expenses |
|
|
2,836 |
|
|
|
128,109 |
|
|
|
4,495 |
|
|
|
|
|
|
|
135,440 |
|
Other operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal or exchange of assets |
|
|
|
|
|
|
(94,994 |
) |
|
|
(157 |
) |
|
|
|
|
|
|
(95,151 |
) |
Income from equity affiliates |
|
|
|
|
|
|
(9,664 |
) |
|
|
(16,096 |
) |
|
|
|
|
|
|
(25,760 |
) |
Interest expense |
|
|
114,939 |
|
|
|
41,336 |
|
|
|
16,824 |
|
|
|
(97,011 |
) |
|
|
76,088 |
|
Interest income |
|
|
(16,349 |
) |
|
|
(67,656 |
) |
|
|
(19,407 |
) |
|
|
97,011 |
|
|
|
(6,401 |
) |
|
|
|
Income (loss) before income taxes and
minority interests |
|
|
(82,010 |
) |
|
|
270,147 |
|
|
|
103,173 |
|
|
|
|
|
|
|
291,310 |
|
Income tax provision (benefit) |
|
|
(23,463 |
) |
|
|
37,715 |
|
|
|
15,048 |
|
|
|
|
|
|
|
29,300 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
1,526 |
|
|
|
|
|
|
|
1,526 |
|
|
|
|
Net income (loss) |
|
$ |
(58,547 |
) |
|
$ |
232,432 |
|
|
$ |
86,599 |
|
|
$ |
|
|
|
$ |
260,484 |
|
|
|
|
22
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
298,883 |
|
|
$ |
3,737 |
|
|
$ |
14,785 |
|
|
$ |
|
|
|
$ |
317,405 |
|
Accounts receivable, net |
|
|
1,153 |
|
|
|
20,636 |
|
|
|
222,941 |
|
|
|
|
|
|
|
244,730 |
|
Inventories |
|
|
|
|
|
|
145,564 |
|
|
|
35,880 |
|
|
|
|
|
|
|
181,444 |
|
Assets from coal trading activities |
|
|
|
|
|
|
96,087 |
|
|
|
|
|
|
|
|
|
|
|
96,087 |
|
Deferred income taxes |
|
|
|
|
|
|
94,124 |
|
|
|
|
|
|
|
|
|
|
|
94,124 |
|
Other current assets |
|
|
24,761 |
|
|
|
43,478 |
|
|
|
16,889 |
|
|
|
(719 |
) |
|
|
84,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
324,797 |
|
|
|
403,626 |
|
|
|
290,495 |
|
|
|
(719 |
) |
|
|
1,018,199 |
|
Property, plant, equipment
and mine development at cost |
|
|
|
|
|
|
6,894,262 |
|
|
|
581,707 |
|
|
|
|
|
|
|
7,475,969 |
|
Less accumulated depreciation, depletion
and amortization |
|
|
|
|
|
|
(1,748,431 |
) |
|
|
(161,998 |
) |
|
|
|
|
|
|
(1,910,429 |
) |
Investments and other assets |
|
|
5,483,638 |
|
|
|
96,637 |
|
|
|
393,832 |
|
|
|
(5,329,309 |
) |
|
|
644,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,808,435 |
|
|
$ |
5,646,094 |
|
|
$ |
1,104,036 |
|
|
$ |
(5,330,028 |
) |
|
$ |
7,228,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
16,500 |
|
|
$ |
60,019 |
|
|
$ |
1,172 |
|
|
$ |
|
|
|
$ |
77,691 |
|
Payables and notes payable to affiliates, net |
|
|
1,700,096 |
|
|
|
(2,124,830 |
) |
|
|
424,734 |
|
|
|
|
|
|
|
|
|
Liabilities from coal trading activities |
|
|
|
|
|
|
80,695 |
|
|
|
|
|
|
|
|
|
|
|
80,695 |
|
Accounts payable and accrued expenses |
|
|
19,621 |
|
|
|
697,167 |
|
|
|
136,934 |
|
|
|
(719 |
) |
|
|
853,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,736,217 |
|
|
|
(1,286,949 |
) |
|
|
562,840 |
|
|
|
(719 |
) |
|
|
1,011,389 |
|
Long-term debt, less current maturities |
|
|
1,601,148 |
|
|
|
12,274 |
|
|
|
11,490 |
|
|
|
|
|
|
|
1,624,912 |
|
Deferred income taxes |
|
|
14,055 |
|
|
|
224,960 |
|
|
|
15,372 |
|
|
|
|
|
|
|
254,387 |
|
Other noncurrent liabilities |
|
|
21,293 |
|
|
|
1,923,568 |
|
|
|
7,850 |
|
|
|
|
|
|
|
1,952,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,372,713 |
|
|
|
873,853 |
|
|
|
597,552 |
|
|
|
(719 |
) |
|
|
4,843,399 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
15,506 |
|
|
|
|
|
|
|
15,506 |
|
Stockholders equity |
|
|
2,435,722 |
|
|
|
4,772,241 |
|
|
|
490,978 |
|
|
|
(5,329,309 |
) |
|
|
2,369,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,808,435 |
|
|
$ |
5,646,094 |
|
|
$ |
1,104,036 |
|
|
$ |
(5,330,028 |
) |
|
$ |
7,228,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Peabody Energy Corporation
Supplemental Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
494,232 |
|
|
$ |
2,500 |
|
|
$ |
6,546 |
|
|
$ |
|
|
|
$ |
503,278 |
|
Accounts receivable, net |
|
|
4,260 |
|
|
|
78,544 |
|
|
|
138,737 |
|
|
|
|
|
|
|
221,541 |
|
Inventories |
|
|
|
|
|
|
329,116 |
|
|
|
60,655 |
|
|
|
|
|
|
|
389,771 |
|
Assets from coal trading activities |
|
|
|
|
|
|
146,596 |
|
|
|
|
|
|
|
|
|
|
|
146,596 |
|
Deferred income taxes |
|
|
|
|
|
|
9,027 |
|
|
|
|
|
|
|
|
|
|
|
9,027 |
|
Other current assets |
|
|
21,817 |
|
|
|
23,347 |
|
|
|
9,267 |
|
|
|
|
|
|
|
54,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
520,309 |
|
|
|
589,130 |
|
|
|
215,205 |
|
|
|
|
|
|
|
1,324,644 |
|
Property, plant, equipment
and mine development at cost |
|
|
|
|
|
|
6,081,631 |
|
|
|
723,933 |
|
|
|
|
|
|
|
6,805,564 |
|
Less accumulated depreciation, depletion
and amortization |
|
|
|
|
|
|
(1,541,834 |
) |
|
|
(86,022 |
) |
|
|
|
|
|
|
(1,627,856 |
) |
Investments and other assets |
|
|
4,971,500 |
|
|
|
292,105 |
|
|
|
63,432 |
|
|
|
(4,977,383 |
) |
|
|
349,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,491,809 |
|
|
$ |
5,421,032 |
|
|
$ |
916,548 |
|
|
$ |
(4,977,383 |
) |
|
$ |
6,852,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
10,625 |
|
|
$ |
11,034 |
|
|
$ |
926 |
|
|
$ |
|
|
|
$ |
22,585 |
|
Payables and notes payable to affiliates, net |
|
|
1,875,361 |
|
|
|
(2,355,653 |
) |
|
|
480,292 |
|
|
|
|
|
|
|
|
|
Liabilities from coal trading activities |
|
|
|
|
|
|
132,373 |
|
|
|
|
|
|
|
|
|
|
|
132,373 |
|
Accounts payable and accrued expenses |
|
|
24,560 |
|
|
|
732,317 |
|
|
|
111,088 |
|
|
|
|
|
|
|
867,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,910,546 |
|
|
|
(1,479,929 |
) |
|
|
592,306 |
|
|
|
|
|
|
|
1,022,923 |
|
Long-term debt, less current maturities |
|
|
1,312,521 |
|
|
|
69,014 |
|
|
|
1,386 |
|
|
|
|
|
|
|
1,382,921 |
|
Deferred income taxes |
|
|
12,903 |
|
|
|
304,740 |
|
|
|
20,845 |
|
|
|
|
|
|
|
338,488 |
|
Other noncurrent liabilities |
|
|
11,282 |
|
|
|
1,908,158 |
|
|
|
7,217 |
|
|
|
|
|
|
|
1,926,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,247,252 |
|
|
|
801,983 |
|
|
|
621,754 |
|
|
|
|
|
|
|
4,670,989 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
2,550 |
|
|
|
|
|
|
|
2,550 |
|
Stockholders equity |
|
|
2,244,557 |
|
|
|
4,619,049 |
|
|
|
292,244 |
|
|
|
(4,977,383 |
) |
|
|
2,178,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,491,809 |
|
|
$ |
5,421,032 |
|
|
$ |
916,548 |
|
|
$ |
(4,977,383 |
) |
|
$ |
6,852,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Consolidated |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(131,204 |
) |
|
$ |
364,200 |
|
|
$ |
201,302 |
|
|
$ |
434,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net (including acquisition
of 19.99% of Excel Coal Limited) |
|
|
|
|
|
|
|
|
|
|
(352,367 |
) |
|
|
(352,367 |
) |
Additions to property, plant, equipment and
mine development |
|
|
|
|
|
|
(236,941 |
) |
|
|
(55,503 |
) |
|
|
(292,444 |
) |
Federal coal lease expenditures |
|
|
|
|
|
|
(118,364 |
) |
|
|
(59,829 |
) |
|
|
(178,193 |
) |
Proceeds from disposal of assets |
|
|
|
|
|
|
69,904 |
|
|
|
481 |
|
|
|
70,385 |
|
Increase in note receivable |
|
|
|
|
|
|
(17,077 |
) |
|
|
|
|
|
|
(17,077 |
) |
Additions to advance mining royalties |
|
|
|
|
|
|
(4,761 |
) |
|
|
(1,889 |
) |
|
|
(6,650 |
) |
Investment in joint venture |
|
|
|
|
|
|
(1,471 |
) |
|
|
|
|
|
|
(1,471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(308,710 |
) |
|
|
(469,107 |
) |
|
|
(777,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt |
|
|
(450,180 |
) |
|
|
(10,591 |
) |
|
|
(22,549 |
) |
|
|
(483,320 |
) |
Proceeds from long-term debt |
|
|
440,000 |
|
|
|
|
|
|
|
750 |
|
|
|
440,750 |
|
Change in revolving line of credit |
|
|
312,000 |
|
|
|
|
|
|
|
|
|
|
|
312,000 |
|
Common stock repurchase |
|
|
(99,775 |
) |
|
|
|
|
|
|
|
|
|
|
(99,775 |
) |
Dividends paid |
|
|
(47,628 |
) |
|
|
|
|
|
|
|
|
|
|
(47,628 |
) |
Excess tax benefit related to stock options exercised |
|
|
30,775 |
|
|
|
|
|
|
|
|
|
|
|
30,775 |
|
Proceeds from stock options exercised |
|
|
12,834 |
|
|
|
|
|
|
|
|
|
|
|
12,834 |
|
Payment of debt issuance costs |
|
|
(8,621 |
) |
|
|
|
|
|
|
|
|
|
|
(8,621 |
) |
Proceeds from employee stock purchases |
|
|
4,518 |
|
|
|
|
|
|
|
|
|
|
|
4,518 |
|
Distributions to minority interests |
|
|
|
|
|
|
|
|
|
|
(3,887 |
) |
|
|
(3,887 |
) |
Transactions with affiliates, net |
|
|
(258,068 |
) |
|
|
(43,662 |
) |
|
|
301,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(64,145 |
) |
|
|
(54,253 |
) |
|
|
276,044 |
|
|
|
157,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(195,349 |
) |
|
|
1,237 |
|
|
|
8,239 |
|
|
|
(185,873 |
) |
Cash and cash equivalents at beginning of period |
|
|
494,232 |
|
|
|
2,500 |
|
|
|
6,546 |
|
|
|
503,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
298,883 |
|
|
$ |
3,737 |
|
|
$ |
14,785 |
|
|
$ |
317,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Consolidated |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(114,649 |
) |
|
$ |
468,334 |
|
|
$ |
68,484 |
|
|
$ |
422,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant, equipment and
mine development |
|
|
|
|
|
|
(173,109 |
) |
|
|
(55,230 |
) |
|
|
(228,339 |
) |
Federal coal lease expenditures |
|
|
|
|
|
|
|
|
|
|
(118,364 |
) |
|
|
(118,364 |
) |
Proceeds from disposal of assets |
|
|
|
|
|
|
69,353 |
|
|
|
1,832 |
|
|
|
71,185 |
|
Purchase of mining assets |
|
|
|
|
|
|
(56,500 |
) |
|
|
|
|
|
|
(56,500 |
) |
Additions to advance mining royalties |
|
|
|
|
|
|
(9,061 |
) |
|
|
|
|
|
|
(9,061 |
) |
Investment in joint venture |
|
|
|
|
|
|
(2,000 |
) |
|
|
|
|
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(171,317 |
) |
|
|
(171,762 |
) |
|
|
(343,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt |
|
|
(3,750 |
) |
|
|
(11,104 |
) |
|
|
(767 |
) |
|
|
(15,621 |
) |
Proceeds from long-term debt |
|
|
|
|
|
|
11,459 |
|
|
|
|
|
|
|
11,459 |
|
Dividends paid |
|
|
(32,041 |
) |
|
|
|
|
|
|
|
|
|
|
(32,041 |
) |
Increase of securitized interests in accounts receivable |
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
25,000 |
|
Proceeds from stock options exercised |
|
|
19,958 |
|
|
|
|
|
|
|
|
|
|
|
19,958 |
|
Proceeds from employee stock purchases |
|
|
3,010 |
|
|
|
|
|
|
|
|
|
|
|
3,010 |
|
Distributions to minority interests |
|
|
|
|
|
|
|
|
|
|
(1,750 |
) |
|
|
(1,750 |
) |
Transactions with affiliates, net |
|
|
225,069 |
|
|
|
(298,686 |
) |
|
|
73,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
212,246 |
|
|
|
(298,331 |
) |
|
|
96,100 |
|
|
|
10,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
97,597 |
|
|
|
(1,314 |
) |
|
|
(7,178 |
) |
|
|
89,105 |
|
Cash and cash equivalents at beginning of period |
|
|
373,066 |
|
|
|
3,496 |
|
|
|
13,074 |
|
|
|
389,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
470,663 |
|
|
$ |
2,182 |
|
|
$ |
5,896 |
|
|
$ |
478,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15) Subsequent Events
On October 12, 2006, the Company completed a $650 million offering of 7.375% 10-year Senior
Notes due 2016 and $250 million of 7.875% 20-year Senior Notes due 2026 (the Senior Notes). The
Senior Notes are general unsecured obligations of the Company and rank senior in right of payment to any subordinated
indebtedness of the Company; equally in right of payment with any senior indebtedness of the
Company; effectively junior in right of payment to the Companys existing and future secured
indebtedness, to the extent of the value of the collateral securing that indebtedness; and
effectively junior to all the indebtedness and other liabilities of the Companys subsidiaries that
do not guarantee the Senior Notes. Interest payments are scheduled to occur on May 1 and November
1 of each year, commencing on May 1, 2007.
The Senior Notes are guaranteed by the Companys Subsidiary Guarantors, as defined in the note
indenture. The note indenture contains covenants that, among other things, limit the Companys
ability to create liens and enter into sale and lease-back transactions. The Senior Notes are
redeemable at a redemption price equal to 100% of the principal amount of the Senior Notes being
redeemed plus a make-whole premium, if applicable, and any accrued unpaid interest to the
redemption date. Net proceeds from the offering, after deducting underwriting discounts and
expenses, were $886.1 million.
On October 25, 2006, the Company acquired the remaining interest in Excel not previously
acquired in the Advance Purchase for A$9.50 per share (US$7.07 per share), a total of A$1.63
billion or US$1.21 billion. The total acquisition price, including the Advance Purchase of A$408.3
million, or US$307.8 million, was US$1.52 billion plus assumed debt of US$277 million (net of
cash). The Excel acquisition includes three operating mines and three development-stage mines,
along with an estimated 500 million tons of proven and probable coal reserves.
26
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
The acquisition was funded from the Companys Senior Unsecured Credit Facility and Senior
Notes due 2016 and 2026. The Senior Notes offering was made under the Companys universal shelf
registration statement on Form S-3. The proceeds from the debt offering, as discussed above, along
with additional borrowings of $822.0 million under the Revolver and Delayed Draw Term Loan
Sub-Facility were used primarily to fund the acquisition of Excel.
27
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Notice Regarding Forward-Looking Statements
This report includes statements of our expectations, intentions, plans and beliefs that
constitute forward-looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the
safe harbor protection provided by those sections. These statements relate to future events or our
future financial performance, including, without limitation, the section captioned Outlook. We
use words such as anticipate, believe, expect, may, project, will or other similar
words to identify forward-looking statements.
Without limiting the foregoing, all statements relating to our future outlook, anticipated
capital expenditures, future cash flows and borrowings, and sources of funding are forward-looking
statements. These forward-looking statements are based on numerous assumptions that we believe are
reasonable, but are subject to a wide range of uncertainties and business risks and actual results
may differ materially from those discussed in these statements. Among the factors that could cause
actual results to differ materially are:
|
|
|
growth of domestic and international coal and power markets; |
|
|
|
|
coals market share of electricity generation; |
|
|
|
|
prices of fuels which compete with or impact coal usage, such as oil or natural gas; |
|
|
|
|
future worldwide economic conditions; |
|
|
|
|
economic strength and political stability of countries in which we have operations or serve customers; |
|
|
|
|
weather; |
|
|
|
|
transportation performance and costs, including demurrage; |
|
|
|
|
ability to renew sales contracts; |
|
|
|
|
successful implementation of business strategies; |
|
|
|
|
legislation, regulations and court decisions; |
|
|
|
|
new environmental requirements affecting the use of coal including mercury and carbon
dioxide related limitations; |
|
|
|
|
variation in revenues related to synthetic fuel production; |
|
|
|
|
changes in postretirement benefit and pension obligations; |
|
|
|
|
negotiation of labor contracts, employee relations and workforce availability; |
|
|
|
|
availability and costs of credit, surety bonds and letters of credit; |
|
|
|
|
the effects of changes in currency exchange rates, primarily the Australian dollar; |
|
|
|
|
price volatility and demand, particularly in higher-margin products and in our trading and brokerage businesses; |
|
|
|
|
risks associated with customer contracts, including credit and performance risk; |
|
|
|
|
availability and costs of key supplies or commodities such as diesel fuel, steel, explosives and tires; |
|
|
|
|
reductions of purchases by major customers; |
|
|
|
|
geology, equipment and other risks inherent to mining; |
|
|
|
|
terrorist attacks or threats; |
|
|
|
|
performance of contractors, third party coal suppliers or major suppliers of mining equipment or supplies; |
|
|
|
|
replacement of coal reserves; |
|
|
|
|
risks associated with our Btu conversion or generation development initiatives; |
|
|
|
|
implementation of new accounting standards and Medicare regulations; |
|
|
|
|
inflationary trends, including those impacting materials used in our business; |
|
|
|
|
the effect of interest rate changes; |
|
|
|
|
litigation, including claims not yet asserted; |
|
|
|
|
the effects of acquisitions or divestitures, including integration of new acquisitions; |
|
|
|
|
impacts of pandemic illness; |
|
|
|
|
changes to contribution requirements to multi-employer benefit funds; and |
|
|
|
|
other factors, including those discussed in Legal Proceedings. |
28
When considering these forward-looking statements, you should keep in mind the cautionary
statements in this document and in our other Securities and Exchange Commission (SEC) filings,
including the more detailed discussion of these factors, as well as other factors that could affect
our results, contained in Item 1A, Risk Factors of our 2005 Annual Report on Form 10-K. We do not
undertake any obligation to update these statements, except as required by federal securities laws.
Overview
We are the largest private sector coal company in the world, with majority interests in 34
active coal operations located throughout all major U.S. coal producing regions and internationally
in Australia. In the first nine months of 2006, we sold 182.9 million tons of coal. In 2005, we
sold 239.9 million tons of coal that accounted for an estimated 21.5% of all U.S. coal sales, and
were approximately 70% greater than the sales of our closest domestic competitor and 49% more than
our closest international competitor. Based on Energy Information Administration (EIA) estimates,
demand for coal in the United States was more than 1.1 billion tons in 2005, and domestic
consumption of coal is expected to grow at an average rate of 1.7% per year through 2030 when U.S.
coal demand is forecasted to be 1.8 billion tons. The EIA expects demand for coal use at
coal-to-liquids (CTL) plants to grow to 190 million tons by 2030. Coal-fueled generation is used
in most cases to meet baseload electricity requirements, and coal use generally grows at the
approximate rate of electricity growth, which is expected to average 1.6% annually through 2025.
Coal production located west of the Mississippi River is projected to provide most of the
incremental growth as Western production increases to an estimated 63% share of total production in
2030. In 2004, coals share of electricity generation was approximately 51%, a share that the EIA
projects will grow to 57% by 2030.
Our primary customers are U.S. utilities, which accounted for 87% of our sales in 2005. We
typically sell coal to utility customers under long-term contracts (those with terms longer than
one year). During 2005, approximately 90% of our sales were under long-term contracts. As of
September 30, 2006, we expect full year 2006 production of approximately 230 million tons and total
sales of approximately 255 million tons. As discussed more fully in Item 1A, Risk Factors, in our
2005 Annual Report on Form 10-K, our results of operations in the near term could be negatively
impacted by poor weather conditions, unforeseen geologic conditions or equipment problems at mining
locations, and by the availability of transportation for coal shipments. On a long-term basis, our
results of operations could be impacted by our ability to secure or acquire high-quality coal
reserves, find replacement buyers for coal under contracts with comparable terms to existing
contracts, or the passage of new or expanded regulations that could limit our ability to mine,
increase our mining costs, or limit our customers ability to utilize coal as fuel for electricity
generation. In the past, we have achieved production levels that are relatively consistent with
our projections.
We conduct business through four principal operating segments: Western U.S. Mining, Eastern
U.S. Mining, Australian Mining, and Trading and Brokerage. Our Western U.S. Mining operations
consist of our Powder River Basin, Southwest and Colorado operations, and our Eastern U.S. Mining
operations consist of our Appalachia and Midwest operations. The principal business of the Western
U.S. Mining segment is the mining, preparation and sale of steam coal, sold primarily to electric
utilities. The principal business of the Eastern U.S. Mining segment is the mining, preparation
and sale of steam coal, sold primarily to electric utilities, as well as the mining of some
metallurgical coal, sold to steel and coke producers.
Geologically, Western operations mine bituminous and subbituminous coal deposits and Eastern
operations mine bituminous coal deposits. Our Western U.S. Mining operations are characterized by
predominantly surface extraction processes, lower sulfur content and Btu of coal, and higher
customer transportation costs (due to longer shipping distances). Our Eastern U.S. Mining
operations are characterized by predominantly underground extraction processes, higher sulfur
content and Btu of coal, and lower customer transportation costs (due to shorter shipping
distances).
29
Australian Mining operations are characterized by both surface and underground extraction
processes, mining primarily low-sulfur, high Btu coal sold to an international customer base. On
July 5, 2006, we signed a merger implementation agreement to acquire Excel Coal Limited (Excel),
an independent coal company in Australia. On September 18, 2006, we amended the merger agreement
and agreed to pay A$9.50 per share (US$7.16 as of the amendment date) for all outstanding shares of
Excel, beginning with the purchase of a 19.99% interest in Excel for A$408.3 million or US$307.8
million on September 20, 2006, and finalizing the acquisition on October 25, 2006. The total
acquisition price was US$1.52 billion plus assumed debt of US$277 million (net of cash). The
acquisition was financed through the net proceeds of senior note offerings and borrowings under our
Senior Unsecured Credit Facility (see Liquidity and Capital Resources for more information on the
financing of the Excel transaction). Assets acquired include three operating mines and three
development-stage mines, along with an estimated 500 million tons of proven and probable coal
reserves. Excel produced approximately 5.6 million tons of coal in 2005.
We own a 25.5% interest in Carbones del Guasare, which owns and operates the Paso Diablo Mine
in Venezuela. The Paso Diablo Mine produces approximately 6 to 8 million tons of steam coal
annually for export to the United States and Europe. Our mining operations, excluding Excel, are
described in Item 1, Business, of our 2005 Annual Report on Form 10-K.
Metallurgical coal is produced primarily from two of our Australian mines and two of our U.S.
mines. Metallurgical coal is approximately 5% of our total sales volume and approximately 3% of
U.S. sales volume.
In addition to our mining operations, which comprised 85% of revenues in 2005, our trading and
brokerage operations (15% of revenues), transactions utilizing our vast natural resource position
(selling non-core land holdings and mineral interests) and other ventures generate revenues and
additional cash flows.
We continue to pursue the development of coal-fueled generating projects in areas of the U.S.
where electricity demand is strong and where there is access to land, water, transmission lines and
low-cost coal. The projects involve mine-mouth generating plants using our surface lands and coal
reserves. Our ultimate role in these projects could take numerous forms, including, but not
limited to, equity partner, contract miner or coal lessor. The projects we are currently pursuing
include the 1,500-megawatt Prairie State Energy Campus in Washington County, Illinois and the
1,500-megawatt Thoroughbred Energy Campus in Muhlenberg County, Kentucky. The plants, assuming all
necessary permits and financing are obtained and following selection of partners and sale of a
majority of the output of each plant, could be operational following a four-year construction
phase. In October 2006, we entered an agreement with CMS Enterprises to share equally an expected
30% equity interest in the Prairie State Energy Campus and to oversee development and operation of
the generating plant and coal mine. In the third quarter of 2006, the Prairie State Energy Campus
received affirmation of the air quality permit from the U.S. Environmental Protection Agency, and
in the fourth quarter of 2006, parties that had previously challenged the permit filed a new
appeal. In April 2006, we received a decision affirming the air permit for our Thoroughbred Energy
Campus. This milestone allows us to continue advancing the development of that campus. Certain
parties subsequently challenged the favorable decision in Kentucky state court.
The EIA projects that the high price of oil will lead to an increase in demand for
unconventional sources of transportation fuel, including Btu conversion technologies, and that coal
will increase its share as a fuel for generation of electricity. We are exploring several Btu
conversion projects, which are designed to expand the uses of coal through various technologies,
and we are continuing to explore options particularly as they relate to Btu conversion technologies
such as coal-to-liquids and coal gasification.
Effective February 22, 2006, we implemented a two-for-one stock split on all shares of our
common stock. All share and per share amounts in this quarterly report on Form 10-Q reflect this
split. In 2006, we repurchased 2.2 million of our common shares for $99.8 million under our
repurchase program. See Liquidity and Capital Resources for more details on the repurchase.
30
Results of Operations
Adjusted EBITDA
The discussion of our results of operations below includes references to, and analysis of our
segments Adjusted EBITDA results. Adjusted EBITDA is defined as income from operations before
deducting net interest expense, income taxes, minority interests, asset retirement obligation
expense and depreciation, depletion and amortization. Adjusted EBITDA is used by management
primarily as a measure of our segments operating performance. Because Adjusted EBITDA is not
calculated identically by all companies, our calculation may not be comparable to similarly titled
measures of other companies. Adjusted EBITDA is reconciled to its most comparable measure, under
generally accepted accounting principles, in Note 11 to our unaudited condensed consolidated
financial statements.
Three Months Ended September 30, 2006 Compared to the Three Months Ended September 30, 2005
Summary
Our third quarter 2006 revenues increased 3.4% to $1.26 billion compared to the prior year on
increased volumes and higher average revenue per ton in every region. Average revenues per ton
increased by 8.8% and 2.7% in our Eastern and Western U.S. Mining operations, respectively, and by
7.1% in our Australian Mining operations. Our U.S. and Australian mining operations combined
accounted for $256.2 million of segment Adjusted EBITDA, a 6.4% increase achieved while continuing
to manage issues that were restricting production at our Twentymile Mine and third party supply
challenges in our Eastern U.S. Mining operations. Results in Australia improved as our operations
recovered from longwall start-up issues encountered during the second quarter. Although prior year
results included contributions from two mines closed in late 2005 in our Western U.S. Mining
operations, our total segment Adjusted EBITDA increased 10.7% to $295.6 million, and net income
increased 25.3% to $142.0 million, or $0.53 per share, for the three months ended September 30,
2006.
Tons Sold
The following table presents tons sold by operating segment for the three months ended
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Increase (Decrease) |
|
(Tons in millions) |
|
2006 |
|
|
2005 |
|
|
Tons |
|
|
% |
|
Western U.S. Mining Operations |
|
|
40.4 |
|
|
|
39.1 |
|
|
|
1.3 |
|
|
|
3.3 |
% |
Eastern U.S. Mining Operations |
|
|
13.7 |
|
|
|
13.4 |
|
|
|
0.3 |
|
|
|
2.2 |
% |
Australian Mining Operations |
|
|
2.3 |
|
|
|
1.9 |
|
|
|
0.4 |
|
|
|
21.1 |
% |
Trading and Brokerage Operations |
|
|
4.4 |
|
|
|
7.2 |
|
|
|
(2.8 |
) |
|
|
(38.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tons sold |
|
|
60.8 |
|
|
|
61.6 |
|
|
|
(0.8 |
) |
|
|
(1.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The following table presents revenues for the three months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Increase to Revenues |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Sales |
|
$ |
1,223,274 |
|
|
$ |
1,191,282 |
|
|
$ |
31,992 |
|
|
|
2.7 |
% |
Other revenues |
|
|
41,714 |
|
|
|
32,228 |
|
|
|
9,486 |
|
|
|
29.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,264,988 |
|
|
$ |
1,223,510 |
|
|
$ |
41,478 |
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
In the third quarter of 2006, our total revenues were $1.26 billion, increasing by $41.5
million, or 3.4%, compared to prior year. This increase in total revenues was primarily caused by
demand-driven increases to sales prices in all regions. In the third quarter of 2006, sales prices
in our U.S. mining operations increased $0.94 per ton, or 5.8%, and sales prices in our Australian
operations increased $5.47 per ton, or 7.1%. We continued to see strong pricing in metallurgical
coal markets in our Eastern U.S. and Australian Mining regions as well as demand-driven increases
in sales volumes in the Powder River Basin, Midwest and Australian operations, partially offset by
late 2005 mine closures in our Western U.S. Mining operations and lower brokerage volumes.
Sales increased $32.0 million, or 2.7%, to $1.22 billion in 2006, which included increases of
$25.0 million in Western U.S. Mining sales, $61.6 million in Eastern U.S. Mining sales and $45.7
million in Australian Mining sales, all partially offset by a decrease of $100.3 million in our
brokerage operations. Sales increased in our Western U.S. Mining operations due to higher sales
prices and volumes at our Powder River Basin operations, partially offset by the termination of
operations at our Black Mesa and Seneca mines in late 2005. Increased prices and sales volumes at
our Powder River Basin operations resulted from strong demand for the mines low-sulfur products
and improved rail conditions compared to 2005, when the region was dealing with major railroad
maintenance. Despite rail performance improvements relative to 2005, constrained rail capacity
continues to limit growth in the region. The increase in Eastern U.S. Mining operations sales was
primarily due to improved pricing for both steam and metallurgical coal in the region and higher
sales volumes. On average, prices in our Eastern U.S. Mining operations increased $2.98 per ton
and, as discussed above, were mainly driven by increases in metallurgical coal prices. Sales
volumes increased mainly due to a newly developed mine that began operation in late 2005 and the
expansion of existing operations at certain mine locations. Equipment and geologic issues at
certain mines resulted in lower production at some of our Appalachia operations. Sales from our
Australian Mining operations increased $45.7 million, or 31.4%. The increase in Australian sales
was due to higher sales volumes as production improved following the second quarter installation of
a new longwall system at our North Goonyella Mine, which experienced poor roof conditions in the
prior year third quarter, and due to a 7.2% increase in per ton sales prices, which were largely
driven by higher international metallurgical coal prices. Brokerage sales decreased $100.3 million
in 2006 compared to prior year due to lower sales volumes.
Other revenues increased $9.5 million, or 29.4%, compared to prior year. The increase includes
proceeds of $24.3 million from settlement of commitments by a third party coal producer following a
contract restructuring. Offsetting this increase were lower trading results and lower sales to
synthetic fuel facilities as customers idled their synthetic fuel plants due to high crude oil
prices. The 2005 results included a gain recognized in relation to a contract dispute settlement.
Segment Adjusted EBITDA
Our total segment Adjusted EBITDA was $295.6 million for the third quarter of 2006, compared
with $267.0 million in the prior year, detailed as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) to |
|
|
|
Three Months Ended September 30, |
|
|
Segment Adjusted EBITDA |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Western U.S. Mining Operations |
|
$ |
112,589 |
|
|
$ |
104,213 |
|
|
$ |
8,376 |
|
|
|
8.0 |
% |
Eastern U.S. Mining Operations |
|
|
68,397 |
|
|
|
96,865 |
|
|
|
(28,468 |
) |
|
|
(29.4 |
%) |
Australian Mining Operations |
|
|
75,248 |
|
|
|
39,780 |
|
|
|
35,468 |
|
|
|
89.2 |
% |
Trading and Brokerage Operations |
|
|
39,347 |
|
|
|
26,132 |
|
|
|
13,215 |
|
|
|
50.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment Adjusted EBITDA |
|
$ |
295,581 |
|
|
$ |
266,990 |
|
|
$ |
28,591 |
|
|
|
10.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Adjusted EBITDA from our Western U.S. Mining operations increased $8.4 million, or 8.0%,
during 2006 reflecting an average margin per ton increase of $0.12 and an increase in sales volume
of 1.3 million tons. The increase in Adjusted EBITDA was primarily due to improved sales prices
and volumes at our Powder River Basin operations. Although transportation issues continued to
hamper Powder River Basin coal shipments in 2006, higher sales volumes of 2.6 million tons compared
to 2005 were due to higher demand and better rail performance, which was restricted in 2005 by
major rail line maintenance. The Western U.S. Mining operations experienced increased per ton costs
from higher fuel costs, the timing of major repairs, and an increase in revenue-based royalties and
production taxes, partially offset by lower costs per ton due to the closure of the Seneca and
Black Mesa mines.
Eastern U.S. Mining operations Adjusted EBITDA decreased $28.5 million, or 29.4%, compared to
prior year primarily due to a decrease in margin per ton of $2.26, or 31.2%, partially offset by
the benefits of higher prices, product mix and higher volumes. Costs per ton increased due to
higher costs associated with fuel, contract miners, revenue-based royalties and production taxes,
repairs and maintenance, and the loss of a coal supplier. Geological and equipment issues at one of
our higher margin metallurgical coal mines resulted in reduced production and higher costs. Also
impacting our Eastern U.S. Mining results were lower margins related to the idling of synthetic
fuel plants.
Our Australian Mining operations Adjusted EBITDA increased $35.5 million in the current year,
an 89.2% increase compared to prior year due to an increase of $11.39, or 54.7%, in margin per ton
and an increase in tons sold. Our Australian operations benefited from increased sales volumes
following the second quarter installation of a new longwall system at our North Goonyella
underground mine, which improved production, coupled with increased sales prices and lower costs
per ton.
Trading and Brokerage operations Adjusted EBITDA increased $13.2 million from the prior year
due to proceeds from the contract restructuring mentioned above, partially offset by lower trading
results in 2006. The 2005 results included a gain related to a contract dispute settlement.
Income Before Income Taxes and Minority Interests
The following table presents income before income taxes and minority interests for the three
months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Three Months Ended September 30, |
|
|
to Income |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Total segment Adjusted EBITDA |
|
$ |
295,581 |
|
|
$ |
266,990 |
|
|
$ |
28,591 |
|
|
|
10.7 |
% |
Corporate and Other Adjusted EBITDA |
|
|
(24,845 |
) |
|
|
(31,552 |
) |
|
|
6,707 |
|
|
|
21.3 |
% |
Depreciation, depletion and amortization |
|
|
(90,664 |
) |
|
|
(77,159 |
) |
|
|
(13,505 |
) |
|
|
(17.5 |
%) |
Asset retirement obligation expense |
|
|
(7,068 |
) |
|
|
(7,394 |
) |
|
|
326 |
|
|
|
4.4 |
% |
Interest expense |
|
|
(26,392 |
) |
|
|
(25,327 |
) |
|
|
(1,065 |
) |
|
|
(4.2 |
%) |
Interest income |
|
|
1,886 |
|
|
|
3,218 |
|
|
|
(1,332 |
) |
|
|
(41.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority
interests |
|
$ |
148,498 |
|
|
$ |
128,776 |
|
|
$ |
19,722 |
|
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests of $148.5 million for the quarter is $19.7
million, or 15.3%, higher than prior year primarily due to improved segment Adjusted EBITDA as
discussed above.
Corporate and Other Adjusted EBITDA results include selling and administrative expenses,
equity income from our joint ventures, net gains on asset disposals or exchanges, costs associated
with past mining obligations and revenues and expenses related to our other commercial activities
such as coalbed methane, generation development, Btu conversion, and resource management. The $6.7
million improvement in Corporate and Other Adjusted EBITDA (net expense) in 2006 compared to 2005
includes a $23.5 million decrease in selling and administrative expenses driven by the impact of
lower stock price appreciation than in the prior year on performance-based incentives. The
executive incentive plan is a long-term plan that is driven by shareholder return, and the decrease
in expense in the third quarter of 2006 as compared to 2005 reflects a 28% decrease in our share
price over the third quarter of 2006 whereas the 2005 expense reflected share price appreciation.
This
improvement in our Corporate and Other results was partially offset by $12.6 million in lower
gains on the disposal or
33
exchange of assets in 2006. In the third quarter of 2006, we recognized
$35.0 million in gains, $33.8 million of which related to the sale of non-strategic coal reserves
and surface lands. In the third quarter of 2005, we recognized gains on the disposal or exchange of
assets of $47.6 million.
Depreciation, depletion and amortization increased $13.5 million in 2006 due to higher capital
expenditures and production in 2006. Also, 2005 depreciation, depletion and amortization included
higher amortization (a credit) of acquired contract liabilities related to business combinations in
2004.
Net Income
The following table presents net income for the three months ended September 30, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Three Months Ended September 30, |
|
|
to Income |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Income before income
taxes and minority
interests |
|
$ |
148,498 |
|
|
$ |
128,776 |
|
|
$ |
19,722 |
|
|
|
15.3 |
% |
Income tax provision |
|
|
(2,657 |
) |
|
|
(14,714 |
) |
|
|
12,057 |
|
|
|
81.9 |
% |
Minority interests |
|
|
(3,833 |
) |
|
|
(722 |
) |
|
|
(3,111 |
) |
|
|
(430.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
142,008 |
|
|
$ |
113,340 |
|
|
$ |
28,668 |
|
|
|
25.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income increased $28.7 million compared to the third quarter of 2005 due to the increase
in income before income taxes and minority interests discussed above and a lower income tax
provision. The decrease in the income tax provision for the third quarter of 2006 related
primarily to a reduction in tax reserves no longer required due to the finalization of various
federal and state returns and expiration of applicable statute of limitations. Minority interests
increased as a result of acquiring additional interest in a joint venture near the end of the first
quarter of 2006.
Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005
Summary
Higher average sales prices and increased volume in all segments of our mining operations
contributed to a 14.2% increase in revenues to $3.89 billion compared to the first nine months of
2005. Average revenues per ton increased 7.4% in our domestic operations and increased 30.9% in our
Australian Mining operations. Segment Adjusted EBITDA from our mining operations increased 16.6% to
$838.4 million primarily on growth in international sales prices and volumes from our Australian
operations. Partially offsetting these increases were operational challenges experienced during the
period such as geologic and equipment related problems at new longwalls in Australia and in our
Western U.S Mining operations, ongoing shipping constraints from lack of rail capacity in the
Powder River Basin, mine development costs and third party supply issues in our Eastern U.S. Mining
operations, and mine closures in our Western U.S. mining operations in late 2005. Trading and
Brokerage segment Adjusted EBITDA increased 289.4% compared to prior year due to favorable margins,
settlement of a supplier contract and contributions from our recently opened international trading
operations. Net income was $425.7 million for the nine months ended September 30, 2006, or $1.58
per share, an increase of 63.4% over 2005 net income of $260.5 million, or $0.97 per share.
34
Tons Sold
The following table presents tons sold by operating segment for the nine months ended
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Increase (Decrease) |
|
(Tons in millions) |
|
2006 |
|
|
2005 |
|
|
Tons |
|
|
% |
|
Western U.S. Mining Operations |
|
|
119.0 |
|
|
|
114.5 |
|
|
|
4.5 |
|
|
|
3.9 |
% |
Eastern U.S. Mining Operations |
|
|
41.5 |
|
|
|
39.5 |
|
|
|
2.0 |
|
|
|
5.1 |
% |
Australian Mining Operations |
|
|
6.6 |
|
|
|
6.0 |
|
|
|
0.6 |
|
|
|
10.0 |
% |
Trading and Brokerage Operations |
|
|
15.8 |
|
|
|
18.4 |
|
|
|
(2.6 |
) |
|
|
(14.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tons sold |
|
|
182.9 |
|
|
|
178.4 |
|
|
|
4.5 |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The following table presents revenues for the nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Increase to Revenues |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Sales |
|
$ |
3,805,838 |
|
|
$ |
3,343,620 |
|
|
$ |
462,218 |
|
|
|
13.8 |
% |
Other revenues |
|
|
87,348 |
|
|
|
66,156 |
|
|
|
21,192 |
|
|
|
32.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
3,893,186 |
|
|
$ |
3,409,776 |
|
|
$ |
483,410 |
|
|
|
14.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first nine months of 2006, our total revenues were $3.89 billion, an increase of $483.4
million, or 14.2%, compared to prior year. This increase in total revenues was primarily caused by
increases to sales prices in all regions, particularly in our Eastern and Australian operations.
In the first nine months of 2006, our average U.S. mining sales price per ton increased $1.20, or
7.4%, and sales prices in our Australian operations increased $20.11 per ton, or 30.9%. We
continued to see strong pricing in metallurgical coal markets in our Eastern U.S. and Australian
Mining regions as well as demand-driven increases in sales volumes in the Powder River Basin,
Midwest and Australia, partially offset by late 2005 mine closures in the Western U.S. Mining
operations and lower brokerage volumes.
Sales increased $462.2 million, or 13.8%, to $3.81 billion in 2006, which included increases
of $76.1 million in Western U.S. Mining sales, $240.5 million in Eastern U.S. Mining sales and
$172.6 million in Australian Mining sales, all partially offset by a decrease of $27.0 million in
our brokerage operations. Overall, prices in our Western U.S. Mining operations increased $0.26 per
ton, or 2.5%, and volumes increased by 4.5 million tons. Sales increased in the Powder River Basin,
reflecting increased sales prices and volumes. Powder River Basin production and sales volumes were
up as a result of strong demand for the mines low-sulfur product and improved rail conditions
compared to 2005, although constrained rail capacity continues to limit growth in the region.
Offsetting this increase was lower production due to the closure of our Seneca and Black Mesa mines
in late 2005 and unfavorable geologic conditions and equipment issues at our Twentymile Mine. On
average, prices in our Eastern U.S. Mining operations increased $3.73 per ton, or 11.2%, driven by
increases in metallurgical and steam coal prices. Sales volumes increased due to a newly developed
mine, which began operation in late 2005, and the expansion of several existing mines, partially
offset by lower production at one of our mines and at contract miner operations, as both managed
geologic and equipment issues. Sales from our Australian Mining operations were $172.6 million, or
44.4%, higher than in 2005. The increase in Australian Mining sales was due primarily to a $20.11
per ton, or 30.9%, increase in sales prices, largely due to higher international metallurgical coal
prices. The increase in sales price per ton compared to 2005 also reflects the slower realization
of metallurgical coal price increases in 2005 when we operated under lower priced carry-over
contracts from 2004 through most of the first nine months of 2005. Brokerage operations sales
decreased $27.0 million in 2006 compared to prior year due to lower sales volumes, partially offset
by higher sales prices.
35
Other revenues increased $21.2 million, or 32.0%, compared to prior year primarily due to
proceeds of $35.8 million received from settlement of commitments by a third party coal producer
following a contract restructuring. This gain was partially offset by $11.5 million in lower sales
to synthetic fuel facilities as customers idled their synthetic fuel plants, which became
uneconomical as crude oil prices rose above certain levels.
Segment Adjusted EBITDA
Our total segment Adjusted EBITDA was $915.1 million for the nine months ended September 30,
2006, compared with $738.9 million in the prior year, detailed as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase to Segment |
|
|
|
Nine Months Ended September 30, |
|
|
Adjusted EBITDA |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Western U.S. Mining Operations |
|
$ |
340,384 |
|
|
$ |
330,277 |
|
|
$ |
10,107 |
|
|
|
3.1 |
% |
Eastern U.S. Mining Operations |
|
|
309,053 |
|
|
|
287,569 |
|
|
|
21,484 |
|
|
|
7.5 |
% |
Australian Mining Operations |
|
|
188,932 |
|
|
|
101,345 |
|
|
|
87,587 |
|
|
|
86.4 |
% |
Trading and Brokerage Operations |
|
|
76,725 |
|
|
|
19,703 |
|
|
|
57,022 |
|
|
|
289.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment Adjusted EBITDA |
|
$ |
915,094 |
|
|
$ |
738,894 |
|
|
$ |
176,200 |
|
|
|
23.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from our Western U.S. Mining operations increased $10.1 million during 2006
reflecting an increase in sales volume of 9.8 million in our Powder River Basin operations,
partially offset by unfavorable geologic conditions and equipment issues related to the new
longwall system at our Twentymile mine. Margin per ton in 2006 was similar to 2005, reflecting
moderate increases to both sales and costs per ton. The Powder River Basin operations experienced
increased sales prices and costs per ton. Increases in unit costs resulted from higher fuel costs,
lower than anticipated volume due to rail and weather-related difficulties, and an increase in
revenue-based royalties and production taxes. The Western U.S. Mining operations were also impacted
by the termination of operations at the Black Mesa mine in late 2005 offset by lower costs due to a
$16.2 million charge in 2005 to provide an allowance for disputed receivables.
Eastern U.S. Mining operations Adjusted EBITDA increased $21.5 million, or 7.5%, compared to
prior year primarily due to higher sales volumes and a $0.16 increase in margin per ton. Appalachia
operations results increased as a result of sales price increases and improved production at one
mine that had experienced unfavorable geologic conditions in the prior year, partially offset by
lower production and higher costs at another mine due to geologic and equipment issues and longwall
moves. Results in our Midwest operations improved compared to prior year as benefits of higher
volumes, product mix and prices were partially offset by higher costs due to fuel costs,
revenue-based royalties and production taxes and maintenance and repair costs. The 2006 results
also included $8.9 million of income from a settlement related to customer billings regarding coal
quality, but were negatively impacted by lower sales to synthetic fuel facilities as customers
idled their synthetic fuel plants.
Our Australian Mining operations Adjusted EBITDA increased $87.6 million in the current year,
an 86.4% increase compared to prior year due to an increase of $11.72, or 69.5%, in margin per ton
and an increase in tons sold. Our Australian operations produce mostly (75% to 85%) high margin
metallurgical coal, and strong metallurgical coal sales prices led to improvements in our
Australian results. A $20.11 per ton increase in the 2006 sales prices compared to 2005 reflected
the slower realization of metallurgical coal price increases in 2005, as mentioned above. In 2006,
production was impacted in the first half of the year as our underground mine worked to manage
geologic issues and experienced a delay in the installation and start-up of new longwall equipment.
Trading and Brokerage operations Adjusted EBITDA increased $57.0 million from the prior year,
as 2006 results included proceeds from the contract restructuring mentioned above, improved
brokerage margins and improved trading results compared to 2005, which included a loss on a
contract dispute. Trading results included new international activity as we began international
trading in the second quarter of 2006.
36
Income Before Income Taxes and Minority Interests
The following table presents income before income taxes and minority interests for the nine
months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Nine Months Ended September 30, |
|
|
to Income |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Total segment Adjusted EBITDA |
|
$ |
915,094 |
|
|
$ |
738,894 |
|
|
$ |
176,200 |
|
|
|
23.8 |
% |
Corporate and Other Adjusted EBITDA |
|
|
(106,140 |
) |
|
|
(121,725 |
) |
|
|
15,585 |
|
|
|
12.8 |
% |
Depreciation, depletion and amortization |
|
|
(263,103 |
) |
|
|
(232,421 |
) |
|
|
(30,682 |
) |
|
|
(13.2 |
%) |
Asset retirement obligation expense |
|
|
(25,911 |
) |
|
|
(23,751 |
) |
|
|
(2,160 |
) |
|
|
(9.1 |
%) |
Interest expense |
|
|
(79,130 |
) |
|
|
(76,088 |
) |
|
|
(3,042 |
) |
|
|
(4.0 |
%) |
Interest income |
|
|
6,026 |
|
|
|
6,401 |
|
|
|
(375 |
) |
|
|
(5.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
$ |
446,836 |
|
|
$ |
291,310 |
|
|
$ |
155,526 |
|
|
|
53.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests of $446.8 million for the first nine months
of 2006 is $155.5 million, or 53.4%, higher than prior year primarily due to improved segment
Adjusted EBITDA as discussed above.
Corporate and Other Adjusted EBITDA results include selling and administrative expenses,
equity income from our joint ventures, net gains on asset disposals or exchanges, costs associated
with past mining obligations and revenues and expenses related to our other commercial activities
such as coalbed methane, generation development, Btu conversion, and resource management. The
$15.6 million improvement in Corporate and Other primarily reflected lower selling and
administrative expense of $16.6 million resulting from lower cost related to equity-based
performance plans in 2006.
Depreciation, depletion and amortization increased $30.7 million in 2006 due to higher
production and capital expenditures. Also, 2005 depreciation, depletion and amortization included
higher amortization (a credit) of purchased contract liabilities related to business combinations
in 2004.
Net Income
The following table presents net income for the nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Nine Months Ended September 30, |
|
|
to Income |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Income before income
taxes and minority
interests |
|
$ |
446,836 |
|
|
$ |
291,310 |
|
|
$ |
155,526 |
|
|
|
53.4 |
% |
Income tax provision |
|
|
(10,905 |
) |
|
|
(29,300 |
) |
|
|
18,395 |
|
|
|
62.8 |
% |
Minority interests |
|
|
(10,267 |
) |
|
|
(1,526 |
) |
|
|
(8,741 |
) |
|
|
(572.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
425,664 |
|
|
$ |
260,484 |
|
|
$ |
165,180 |
|
|
|
63.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income increased $165.2 million compared to the first nine months of 2005 due to the
increase in income before income taxes and minority interests discussed above and a lower income
tax provision, partially offset by an increase in minority interests. The lower income tax
provision resulted from increased percentage depletion and a reduction in tax reserves resulting
from the favorable finalization of former parent companies federal tax audits, the finalization of
various federal and state returns, and the expiration of applicable statute of limitations,
partially offset by higher pre-tax income. Minority interests increased due to acquisition of a
controlling interest in a joint venture during 2006.
37
Outlook
Events Impacting Near-Term Operations
During the third quarter of 2006, following the second quarter installation of a new longwall
system at our Twentymile mine, we continued to manage issues that were restricting production. We
expect that the Twentymile longwall system will allow for expanded capacity; however, near-term
results may be negatively impacted as we work toward optimizing the benefits of this new equipment.
Additionally, a longwall move originally planned for the third quarter of 2006 was delayed due to
lower than expected production.
Shipments from our Powder River Basin mines have been impacted in 2006 by rail service
disruptions related to ongoing operating constraints even though these impacts were significantly
less than the 2005 impacts of train derailments and maintenance. Rail carriers are expected to
continue extensive track maintenance throughout 2006. We expect higher shipment levels from our
Powder River Basin operations in 2006 compared with 2005, but are cautious about our ability to
reach targeted shipment levels.
Following the second quarter installation of a new longwall system at our North Goonyella mine
in Australia, we have seen improved production. We expect that the North Goonyella system will
assist in stabilizing some adverse geologic conditions; however, near-term results may be
negatively impacted as we work toward optimizing the benefits of this new equipment. Also, in 2005
our Australian Mining operations experienced delayed shipments and high demurrage costs due to port
congestion and unpredictable vessel loading schedules. These shipping issues were aggravated by
two cyclones in Eastern Australia in early 2006. Although port congestion has been reduced,
demurrage costs and unpredictable timing of vessel loading could impact future results. Our fourth
quarter results will include Excel operations from the acquisition date. Any fourth quarter 2006
benefits from Excel operations are expected to be substantially offset by acquisition and financing
charges.
Long-term Outlook
We believe long-term coal market fundamentals are strong worldwide, as the U.S., China, India
and other nations increase coal demand for electricity generation and steelmaking.
The U.S. economy grew at an annual rate of 3.5% in 2005 and an annualized rate of 1.6% in the
third quarter of 2006 as reported by the U.S. Commerce Department. We expect that demand for coal
and coal-based electricity generation in the United States will be driven by the growing economy,
capacity constraints of nuclear generation and high natural gas and oil prices. The EIA projects
that the high price of oil will lead to an increase in demand for unconventional sources of
transportation fuel, including Btu conversion technologies such as coal-to-liquids and coal
gasification, and that coal will increase its share as a fuel for generation of electricity.
Demand for Powder River Basin coal has increased, particularly for our ultra-low sulfur
products. The Powder River Basin represents more than half of our production. We control
approximately 3.5 billion tons of proven and probable reserves in the Southern Powder River Basin
and we sold 102.7 million tons of coal from this region in the first nine months of 2006, an
increase of 10.5% over the prior year.
Global coal markets continued to grow, also driven by increased demand from growing economies.
Chinas economy grew 10.9% in the second quarter of 2006 as published by the National Bureau of
Statistics of China. Metallurgical coal continued to sell at a significant premium to steam coal,
and metallurgical markets remained strong as global steel production grew more than 10% through
August 2006. We expect to capitalize on the strong global market for metallurgical coal primarily
through production and sales of metallurgical coal from our Appalachia and Australian operations.
In response to growing international markets, we are establishing a European trading desk.
We are targeting 2006 production of approximately 230 million tons and total sales volume of
approximately 255 million tons, including 12 to 14 million tons of metallurgical coal. As of
September 30, 2006, our uncommitted volumes for planned U.S. produced tonnage were 14 million tons
for 2007, with an additional 12 million tons of coal available for repricing. We have
approximately 60 to 65 million tons of planned U.S. production uncommitted for 2008, with an
additional 37 million tons available for repricing.
38
Management expects strong market conditions and operating performance to overcome external
cost pressures, geologic conditions and uncertain port and rail performance. We are experiencing
increases in operating costs related to fuel, explosives, steel, tires, contract mining and
healthcare, and have taken measures to mitigate the increases in these costs. In addition,
historically low long-term interest rates also have a negative impact on expenses related to our
actuarially determined, employee-related liabilities. We may also encounter poor geologic
conditions, lower third party contract miner or brokerage source performance or unforeseen
equipment problems that limit our ability to produce at forecasted levels. To the extent upward
pressure on costs exceeds our ability to realize sales increases, or if we experience unanticipated
operating or transportation difficulties, our operating margins would be negatively impacted. See
Cautionary Notice Regarding Forward-Looking Statements for additional considerations regarding our
outlook.
Liquidity and Capital Resources
Our primary sources of cash include sales of our coal production to customers, cash generated
from our trading and brokerage activities, sales of non-core assets and financing transactions,
including the sale of our accounts receivable (through our securitization program). Our primary
uses of cash include our cash costs of coal production, capital expenditures, interest costs and
costs related to past mining obligations as well as planned acquisitions. Our ability to pay
dividends, service our debt (interest and principal) and acquire new productive assets or
businesses is dependent upon our ability to continue to generate cash from the primary sources
noted above in excess of the primary uses. Future dividends, among other things, are subject to
limitations imposed by our 6.875% Senior Notes and 5.875% Senior Notes covenants. We expect to fund
all of our capital expenditure requirements with cash generated from operations.
Net cash provided by operating activities was $434.3 million for the nine months ended
September 30, 2006, an improvement of $12.1 million, compared to $422.2 million provided by
operating activities in the prior year. The increase was primarily related to stronger operational
performance in 2006, partially offset by the timing of working capital needs. The improvement in
cash provided by operating activities would have been $23.7 million higher had 2006 and 2005
operating cash flows been shown on a comparable basis. The 2006 operating cash flows include a
required reclassification of the excess tax benefit related to stock option exercises from
operating to financing activities.
Net cash used in investing activities was $777.8 million for the nine months ended September
30, 2006 compared to $343.1 million used in the prior year. The increase reflects the acquisition
of 19.99% of Excel for $307.8 million, the acquisition of an additional interest in a joint venture
for $44.5 million, higher capital expenditures of $7.6 million, higher federal coal lease
expenditures of $59.8 million, and the receipt of a note for sale of assets of $17.1 million.
Capital expenditures included longwall equipment and mine development at our Australian mines, the
opening of new mines and upgrading of existing mines in the Powder River Basin and Appalachia, and
the purchase of equipment for expansion. Many of these projects began in the fourth quarter of
2005. In the nine months ended September 30, 2005, we acquired mining assets, including 70 million
tons of Illinois and Indiana coal reserves, surface properties and equipment from Lexington Coal
Company for $61.0 million, of which $56.5 million related to reserves and equipment. Proceeds from
disposal of assets in 2005 primarily reflects the sale of our remaining 0.838 million Penn Virginia
Resource Partners, L.P. units for proceeds of $41.9 million.
Net cash provided by financing activities was $157.6 million during the nine months ended
September 30, 2006, an increase of $147.6 million, compared to cash provided by financing
activities of $10.0 million in the prior year. In September 2006, we entered into a $2.75 billion
Senior Unsecured Credit Facility, which consists of a $1.8 billion Revolving Credit Facility and a
$950.0 million Term Loan Facility. In September 2006, we borrowed $312.0 million under the
Revolving Credit Facility primarily for the purchase of a 19.99% interest in Excel. We incurred
and paid $8.6 million in financing costs, of which $5.6 million related to the Revolving Credit
Facility and $3.0 million related to the Term Loan Facility. In addition to the replacement of our
$437.5 million term loan under the new credit facility, results for 2006 include $45.8 million in
long-term debt repayments, including a $19.2 million repayment of bank notes held by a
majority-owned joint venture and the $7.7 million purchase of a portion of our 5.875% Senior Notes
in the open market. A detailed discussion of our debt instruments and refinancing activities is
set forth below.
The 2006 activity compared to 2005 also reflects payments for common stock repurchases and
dividends. During the nine months ended September 30, 2006, we repurchased 2.2 million of our
common shares at a cost of $99.8 million under our share repurchase program as authorized by the
Board of Directors. Dividends paid in 2006 increased by $15.6 million compared to 2005 due to a
26% increase in our dividend, to $0.06 per share, as authorized by our Board of Directors in
January 2006. The 2005 activity included an increase in the usage of our accounts receivable
securitization program by
39
$25.0 million. The 2006 activity compared to 2005 also reflects $7.1 million lower proceeds
from the exercise of stock options as well as a $30.8 million tax benefit related to stock option
exercises included in financing activity based on the newly adopted accounting standard for
share-based compensation (see Newly Adopted Accounting Pronouncements below for more discussion
about the adoption of this standard). In 2005, the tax benefit related to stock option exercises
(totaling $23.7 million) was included in operating activities.
The Companys total indebtedness as of September 30, 2006 and December 31, 2005, consisted of
the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Term Loan under Senior Unsecured Credit Facility |
|
$ |
440,000 |
|
|
$ |
|
|
Term Loan under Senior Secured Credit Facility |
|
|
|
|
|
|
442,500 |
|
Borrowings under Revolving Credit Facility |
|
|
312,000 |
|
|
|
|
|
6.875% Senior Notes due 2013 |
|
|
650,000 |
|
|
|
650,000 |
|
5.875% Senior Notes due 2016 |
|
|
231,845 |
|
|
|
239,525 |
|
Fair value of interest rate swaps |
|
|
(16,198 |
) |
|
|
(8,879 |
) |
5.0% Subordinated Note |
|
|
58,805 |
|
|
|
66,693 |
|
Other |
|
|
26,151 |
|
|
|
15,667 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,702,603 |
|
|
$ |
1,405,506 |
|
|
|
|
|
|
|
|
Credit Facility
In September 2006, we entered into a Third Amended and Restated Credit Agreement, which
established a $2.75 billion Senior Unsecured Credit Facility and which amended and restated in full
our then existing $1.35 billion Senior Secured Credit Facility. The Senior Unsecured Credit
Facility provides a $1.8 billion Revolving Credit Facility and a $950.0 million Term Loan Facility.
The Revolving Credit Facility replaced our previous $900.0 million revolving credit facility and
the increased capacity is intended to accommodate working capital needs, letters of credit, the
funding of capital expenditures and other general corporate purposes. The Revolving Credit
Facility also includes a $50.0 million sub-facility available for same-day swingline loan
borrowings.
The Term Loan Facility consists of an unsecured $440.0 million portion, which was drawn at
closing to replace the previous term loan ($437.5 million balance at time of replacement; $442.5
million at December 31, 2005) issued under the Senior Secured Credit Facility. The Term Loan
Facility also includes a Delayed Draw Term Loan Sub-Facility of up to $510.0 million, which was
drawn on October 20, 2006 in conjunction with the Excel acquisition. We incurred $8.6 million in
financing costs, of which $5.6 million related to the Revolving Credit Facility and $3.0 million
related to the Term Loan Facility. These debt issuance costs will be amortized to interest expense
over five years, the term of the Senior Unsecured Credit Facility.
Loans under the facility are available to us in U.S. dollars, with a sub-facility under the
Revolving Credit Facility available in Australian dollars, pounds sterling and Euros. Letters of
credit under the Revolving Credit Facility are available to us in U.S. dollars with a sub-facility
available in Australian dollars, pounds sterling and Euros. The interest rate payable on the
Revolving Credit Facility and the Term Loan Facility under the Senior Unsecured Credit Facility is
LIBOR plus 1.0% with step-downs to LIBOR plus 0.50% based on improvement in the leverage ratio, as
defined in the Third Amended and Restated Credit Agreement. The applicable rates for the Revolving
Credit Facility and the Term Loan Facility were 6.33% and 6.39%, respectively, at September 30,
2006.
Under the Senior Unsecured Credit Facility, we must comply with certain financial covenants on
a quarterly basis including a minimum interest coverage ratio and a maximum leverage ratio, as
defined in the Third Amended and Restated Credit Agreement. The financial covenants also place
limitations on our investments in joint ventures, unrestricted subsidiaries, indebtedness of
non-loan parties, and the imposition of liens on our assets. The new facility is less restrictive
with respect to limitations on our dividend payments, capital expenditures, asset sales or
stock repurchases. The Senior Unsecured Credit Facility matures on September 15, 2011.
40
As of September 30, 2006, outstanding borrowings under our Revolving Credit Facility were
$312.0 million. Our revolving line of credit was primarily used for standby letters of credit
until September 2006, when we also used the revolving line of credit to facilitate the purchase of
a 19.99% interest in Excel. The remaining available borrowing capacity ($1.1 billion as of
September 30, 2006) will be used to fund strategic acquisitions or meet other financing needs,
including standby letters of credit. During 2005, we had no borrowings outstanding under our
previous $900.0 million revolving line of credit, which we used primarily for standby letters of
credit. We were in compliance with all of the covenants of the Senior Unsecured Credit Facility,
the 6.875% Senior Notes and the 5.875% Senior Notes as of September 30, 2006.
Interest Rate Swaps
Prior to the completion of the Senior Unsecured Credit Facility, we had two $400.0 million
interest rate swaps. A $400.0 million notional amount floating-to-fixed interest rate swap was
designated as a hedge of changes in expected cash flows on the previous term loan under the Senior
Secured Credit Facility. Under this swap, we paid a fixed rate of 6.764% and received a floating
rate of LIBOR plus 2.5% that reset each March 15, June 15, September 15 and December 15 based upon
the three-month LIBOR rate. A $400.0 million notional amount fixed-to-floating interest rate swap
was designated as a hedge of the changes in the fair value of the 6.875% Senior Notes due 2013.
Under this swap, we paid a floating rate of LIBOR plus 1.97% that reset each March 15, June 15,
September 15 and December 15 based upon the three-month LIBOR rate and received a fixed rate of
6.875%.
In conjunction with the completion of the new Senior Unsecured Credit Facility, the $400.0
million notional amount floating-to-fixed interest rate swap was terminated and resulted in payment
to us of $5.2 million. We recorded the $5.2 million fair value of the swap in Other
comprehensive income (loss) on the condensed consolidated balance sheet and will amortize this
amount to interest expense over the remaining term of the forecasted interest payments initially
hedged. We then entered into a $120.0 million notional amount floating-to-fixed interest rate swap
with a fixed rate of 6.25% and a floating rate of LIBOR plus 1.0%. This interest rate swap was
designated as a hedge of the variable interest payments on the Term Loan under the new Senior
Unsecured Credit Facility.
We also terminated $280.0 million of our $400.0 million notional amount fixed-to-floating
interest rate swap designated as a hedge of the changes in the fair value of the 6.875% Senior
Notes due 2013. Reducing the notional amount of the interest rate swap to $120.0 million resulted
in payment of $5.2 million to the counterparty. Reduction of the notional amount of the swap did
not affect our floating and fixed rates. The $5.2 million of fair value associated with the
termination of the $280.0 million portion of the swap was recorded as an adjustment to the carrying
value of long-term debt and will be amortized to interest expense through the maturity of the
6.875% Senior Notes due 2013.
The following is a summary of specified types of commercial commitments available to us as of
September 30, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration Per Year |
|
|
|
Total Amounts |
|
|
Within |
|
|
|
|
|
|
|
|
|
|
Over |
|
|
|
Committed |
|
|
1 Year |
|
|
2 - 3 Years |
|
|
4 - 5 Years |
|
|
5 Years |
|
Lines of credit and / or
standby letters of credit |
|
$ |
1,800,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,800,000 |
|
|
$ |
|
|
Delayed Draw Term Loan
Sub-Facility |
|
|
510,000 |
|
|
|
|
|
|
|
|
|
|
|
510,000 |
|
|
|
|
|
In the third quarter of 2006, third-party rating agencies performed a comprehensive review of
our securities ratings based on our entrance into the new Senior Unsecured Credit Facility and the
issuance of additional debt securities to facilitate the Excel acquisition. The ratings for our
Senior Unsecured Credit Facility, our 7.375% Senior Notes due 2016 and 7.875% Senior Notes due 2026
(issued to facilitate Excel acquisition), and our existing senior unsecured notes are as follows:
Moodys issued a
Ba1 rating, Standard & Poors issued a BB rating and Fitch issued a BB+ rating. These security
ratings reflect the views of the rating agency only. An explanation of the significance of these
ratings may be obtained from the rating agency. Such ratings are not a recommendation to buy, sell
or hold securities, but rather an indication of creditworthiness. Any rating can be revised
41
upward
or downward or withdrawn at any time by a rating agency if it decides that the circumstances
warrant the change. Each rating should be evaluated independently of any other rating.
Excel Transaction and Related Financing
On July 5, 2006, we signed a merger implementation agreement to acquire Excel, an independent
coal company, by means of a scheme of arrangement transaction under Australian law. The merger
implementation agreement was amended on September 18, 2006, and we agreed to pay A$9.50 per share
(US$7.16 as of the amendment date) for the outstanding shares of Excel. On September 20, 2006, as
part of the amended agreement, we acquired 19.99% of the outstanding shares of Excel at A$9.50 per
share, resulting in payment of A$408.3 million, or US$307.8 million. Our investment in Excel
acquired under the advance purchase was recorded using the equity method of accounting as of
September 30, 2006, and is included in Investments and other assets on the condensed consolidated
balance sheet.
On October 25, 2006, we acquired the remaining interest in Excel for A$9.50 per share (US$7.07
per share), a total of A$1.63 billion or US$1.21 billion. The total acquisition price, including
the advance purchase of 19.99%, was US$1.52 billion plus assumed debt of US$277 million (net of
cash) and was financed with borrowings under our new Senior Unsecured Credit Facility and Senior
Notes due 2016 and 2026 (discussed below). The Excel acquisition includes three operating mines and
three development stage mines, along with an estimated 500 million tons of proven and probable coal
reserves. Excel produced approximately 5.6 million tons of coal in 2005. We currently produce
approximately 9 million tons per year in Australia.
On October 12, 2006, we completed a $650 million offering of 7.375% 10-year Senior Notes due
2016 and $250 million of 7.875% 20-year Senior Notes due 2026. The Senior Notes are general
unsecured obligations and rank senior in right of payment to any of our subordinated indebtedness;
equally in right of payment with any of our senior indebtedness; effectively junior in right of
payment to our existing and future secured indebtedness, to the extent of the value of the
collateral securing that indebtedness; and effectively junior to all the indebtedness and other
liabilities of our subsidiaries that do not guarantee the Senior Notes. Interest payments are
scheduled to occur on May 1 and November 1 of each year, commencing on May 1, 2007.
The Senior Notes are guaranteed by our Subsidiary Guarantors, as defined in the note
indenture. The note indenture contains covenants that, among other things, limit our ability to
create liens and enter into sale and lease-back transactions. The Senior Notes are redeemable at a
redemption price equal to 100% of the principal amount of the Senior Notes being redeemed plus a
make-whole premium, if applicable, and any accrued unpaid interest to the redemption date. Net
proceeds from the offering, after deducting underwriting discounts and expenses, were $886.1
million.
The Senior Notes offering was made under our universal shelf registration statement on Form
S-3. The proceeds from the debt offering, as discussed above, along with additional borrowings of
$822.0 million under the Revolving Credit Facility and Delayed Draw Term Loan Sub-Facility were
used primarily to fund the acquisition of Excel.
Contractual Obligations
The following table sets forth our contractual obligations for long-term debt based on
significant changes resulting from the borrowing under our Revolving Credit Facility (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Year |
|
|
Within |
|
2 - 3 |
|
4 - 5 |
|
After |
|
|
1 Year |
|
Years |
|
Years |
|
5 Years |
Long-term debt
(principal and
interest)
|
|
$ |
190,162 |
|
|
$ |
271,310 |
|
|
$ |
901,863 |
|
|
$ |
1,012,249 |
|
At September 30, 2006, we had $90.8 million of purchase obligations for capital expenditures
and $479.8 million of obligations related to federal coal reserve lease payments due over the next
three years. At September 30, 2006, total capital expenditures for 2006 are expected to range from
$450 million to $500 million, excluding federal coal reserve lease payments. The projected 2006
capital expenditures relate to replacement, improvement, or expansion of existing mines,
42
particularly in Appalachia and the Midwest, and growth initiatives such as increasing capacity in
the Powder River Basin. Approximately $10 million of the expenditures relate to safety equipment
that will be utilized to comply with recently issued federal and state regulations. We anticipate
funding these capital expenditures primarily through operating cash flow.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements.
These arrangements include guarantees, indemnifications, financial instruments with off-balance
sheet risk, such as bank letters of credit and performance or surety bonds and our accounts
receivable securitization. Liabilities related to these arrangements are not reflected in our
condensed consolidated balance sheets, and we do not expect any material adverse effects on our
financial condition, results of operations or cash flows to result from these off-balance sheet
arrangements.
In March 2000, we established an accounts receivable securitization program. Under the
program, undivided interests in a pool of eligible trade receivables that have been contributed to
our wholly-owned, bankruptcy-remote subsidiary 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. We used proceeds from the sale of the accounts receivable
to repay long-term debt, effectively reducing our overall borrowing costs. The securitization
program is scheduled to expire in September 2009, and the maximum amount of undivided interests in
accounts receivable that may be sold to the Conduit is $225.0 million. The securitization
transactions have been recorded as sales, with those accounts receivable sold to the Conduit
removed from the condensed consolidated balance sheet. The amount of undivided interests in
accounts receivable sold to the Conduit was $225.0 million as of September 30, 2006 and December
31, 2005.
In March 2006, we issued a guarantee for certain equipment lease arrangements with maximum
potential future payments totaling $2.9 million at September 30, 2006 and with lease terms that
extend to April 2010. In July 2006, we issued $5.2 million of financial guarantees, expiring
through July 2013, on behalf of a small coal producer to facilitate its efforts in obtaining
financing. No liability is recorded for these guarantees as the contractual provision in the event
of default provides us with adequate protection against loss. There were no other material changes
to our off-balance sheet arrangements during the nine months ended September 30, 2006. See Note 13
to our unaudited condensed consolidated financial statements included in this report for a
discussion of our guarantees. All off-balance sheet arrangements are also discussed in
Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2005
Annual Report on Form 10-K.
Newly Adopted Accounting Pronouncements
We adopted Emerging Issues Task Force (EITF) Issue No. 04-6, Accounting for Stripping Costs
in the Mining Industry (EITF Issue No. 04-6) on January 1, 2006 and utilized the cumulative
effect adjustment approach whereby a cumulative effect adjustment reduced retained earnings by
$150.3 million, net of tax. EITF Issue No. 04-6 states that stripping costs incurred during the
production phase of a mine are variable production costs that should be included in the costs of
the inventory produced during the period that the stripping costs are incurred. Advance stripping
costs include those costs necessary to remove overburden above an unmined coal seam as part of the
surface mining process and prior to the adoption were included as the work-in-process component
of Inventories in the condensed consolidated balance sheet. EITF Issue No. 04-6 and its
interpretations require stripping costs incurred during a period to be attributed only to the
inventory costs of the coal that is extracted during that same period, and therefore, advance
stripping costs are no longer included as a separate component of inventory.
On January 1, 2006, we adopted Statement of Financial Accounting Standard (SFAS) No. 123
(revised 2004), Share-Based Payment (SFAS No. 123(R)), which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123(R) supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion
No. 25) and amends SFAS No. 95, Statement of Cash Flows. Prior to January 1, 2006, we applied
APB Opinion No. 25 and related interpretations in accounting for our stock option plans, as
permitted under SFAS No. 123 and SFAS No. 148 Accounting for Stock-Based Compensation-Transition
and Disclosure. We applied SFAS No. 123(R) through use of the modified prospective method, in
which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all
share-based payments granted or modified after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R)
that remain unvested on the effective date. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement
43
based on their fair values. SFAS No. 123(R) also requires that the excess income tax benefits from
stock options exercised be recorded as financing cash inflow on the statements of cash flows. The
excess income tax benefit from stock option exercises during 2005 is included in operating cash
flows, netted in deferred tax activity.
For share-based payment instruments excluding restricted stock, we recognized a $1.4 million
(or $0.01 per diluted share) reversal of expense and $11.2 million (or $0.04 per diluted share) of
expense, net of taxes, for the three months ended September 30, 2006 and 2005, respectively, and
$11.0 million (or $0.04 per diluted share) and $17.8 million (or $0.07 per diluted share) of
expense, net of taxes, for the nine months ended September 30, 2006 and 2005, respectively. As a
result of adopting SFAS No. 123(R), our net income for the three and nine months ended September
30, 2006 was $5.5 million (or $0.02 per diluted share) and $4.3 million (or $0.02 per diluted
share) lower, respectively, than if we had continued to account for share-based compensation under
APB Opinion No. 25. We used the Black-Scholes option pricing model to determine the fair value of
stock options and employee stock purchase plan share-based payments made before and after the
adoption of SFAS No. 123(R). We began utilizing restricted stock as part of our equity-based
compensation strategy in January 2005. Accounting for restricted stock awards was not changed by
the adoption of SFAS No. 123(R). As of September 30, 2006, the total unrecognized compensation cost
related to nonvested awards was $28.1 million, net of taxes, which is expected to be recognized
over 5.0 years with a weighted-average period of 1.3 years. See Note 8 to our unaudited condensed
consolidated financial statements for further discussion of our share-based compensation plans.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The potential for changes in the market value of our coal trading, interest rate and currency
portfolios is referred to as market risk. Market risk related to our coal trading portfolio is
evaluated using a value at risk analysis (described below). Value at risk analysis is not used to
evaluate our non-trading interest rate and currency portfolios. A description of each market risk
category is set forth below. We attempt to manage market risks through diversification,
controlling position sizes, and executing hedging strategies. Due to lack of quoted market prices
and the long term, illiquid nature of the positions, we have not quantified market risk related to
our non-trading, long-term coal supply agreement portfolio.
Coal Trading Activities and Related Commodity Price Risk
We engage in over-the-counter and direct trading of coal. These activities give rise to
commodity price risk, which represents the potential loss that can be caused by an adverse change
in the market value of a particular commitment. We actively measure, monitor and adjust traded
position levels to remain within risk limits prescribed by management. For example, we have
policies in place that limit the amount of total exposure, in value at risk terms, that we may
assume at any point in time.
We account for coal trading using the fair value method, which requires us to reflect
financial instruments with third parties, such as forwards, options and swaps, at market value in
our condensed consolidated financial statements. Our trading portfolio included forwards and swaps
as of September 30, 2006 and forwards as of December 31, 2005.
We perform a value at risk analysis on our coal trading portfolio, which includes
over-the-counter and brokerage trading of coal. The use of value at risk allows us to quantify in
dollars, on a daily basis, the price risk inherent in our trading portfolio. Value at risk
represents the potential loss in value of our marked-to-market portfolio due to adverse market
movements over a defined time horizon (liquidation period) within a specified confidence level.
Our value at risk model is based on the industry standard variance/co-variance approach. This
captures our exposure related to both option and forward positions. Our value at risk model
assumes a 15-day holding period and a 95% one-tailed confidence interval. This means that there is
a one in 20 statistical chance that the portfolio would lose more than the value at risk estimates
during the liquidation period.
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, we perform regular stress and
scenario analysis 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.
44
We use historical data to estimate our value at risk and to better reflect current asset and
liability volatilities. Given our reliance on historical data, value at risk is effective in
estimating risk exposures in markets in which there are not sudden fundamental changes or shifts in
market conditions. An inherent limitation of value at risk is that past changes in market risk
factors may not produce accurate predictions of future market risk. Value at risk should be
evaluated in light of this limitation.
During the nine months ended September 30, 2006, the actual low, high, and average values at
risk for our coal trading portfolio were $0.7 million, $2.3 million, and $1.3 million,
respectively. As of September 30, 2006, the timing of the estimated future realization of the
value of our trading portfolio was as follows:
|
|
|
|
|
Year of |
|
Percentage |
|
Expiration |
|
of Portfolio |
|
2006 |
|
|
19 |
% |
2007 |
|
|
31 |
% |
2008 |
|
|
40 |
% |
2009 |
|
|
10 |
% |
|
|
|
|
|
|
|
100 |
% |
|
|
|
|
We also monitor other types of risk associated with our coal trading activities, including
credit, market liquidity and counterparty nonperformance.
Credit Risk
Our concentration of credit risk is substantially with energy producers and marketers and
electric utilities. Our policy is to independently evaluate each customers creditworthiness prior
to entering into transactions and to constantly monitor the credit extended. In the event that we
engage in a transaction with a counterparty that does not meet our credit standards, we will
protect our position by requiring the counterparty to provide appropriate credit enhancement. When
appropriate (as determined by our credit management function), we have taken steps to reduce our
credit exposure to customers or counterparties whose credit has deteriorated and who may pose a
higher risk 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 serve as collateral in the event of a failure to
pay. To reduce our credit exposure related to trading and brokerage activities, we seek to enter
into netting agreements with counterparties that permit us to offset receivables and payables with
such counterparties. Counterparty risk with respect to interest rate swap and foreign currency
forwards and options transactions is not considered to be significant based upon the
creditworthiness of the participating financial institutions.
Foreign Currency Risk
We utilize currency forwards to hedge currency risk associated with anticipated Australian
dollar expenditures. Our currency hedging program for 2006 involves hedging approximately 70% of
our anticipated, non-capital Australian dollar-denominated expenditures. As of September 30, 2006,
we had in place forward contracts designated as cash flow hedges with notional amounts outstanding
totaling A$818.5 million of which A$105.0 million, A$402.5 million, A$221.0 million and A$90.0
million will expire in 2006, 2007, 2008, and 2009, respectively. Our current expectation for the
remaining 2006 non-capital, Australian dollar-denominated cash expenditures is approximately $160
million. A change in the Australian dollar/U.S. dollar exchange rate of US$0.01 (ignoring the
effects of hedging) would result in an increase or decrease in our Operating costs and expenses of
$6.3 million per year.
Interest Rate Risk
Our objectives in managing exposure to interest rate changes are to limit the impact of
interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve
these objectives, we manage fixed rate debt as a percent of net debt through the use of various
hedging instruments. As of September 30, 2006, after taking into consideration the effects of
interest rate swaps, we had $848.3 million of fixed-rate borrowings and $854.3 million of
variable-rate borrowings outstanding. A one percentage point increase in interest rates would
result in an annualized increase to interest expense of $8.5 million on
45
our variable-rate
borrowings. With respect to our fixed-rate borrowings, a one percentage point increase in interest
rates would result in a $47.4 million decrease in the estimated fair value of these borrowings.
Other Non-trading Activities
We manage our commodity price risk for our non-trading, long-term coal contract portfolio
through the use of long-term coal supply agreements, rather than through the use of derivative
instruments. We sold 90% of our sales volume under long-term coal supply agreements during 2005
and 2004. As of September 30, 2006, we had 14 million tons of planned U.S. production uncommitted
for 2007, the vast majority of which is bituminous coal, with an additional 12 million tons of coal
available for repricing. We have approximately 60 to 65 million tons of planned U.S. production
uncommitted for 2008, with an additional 37 million tons available for repricing.
Some of the products used in our mining activities, such as diesel fuel and explosives, are
subject to commodity price risk. To manage this risk, we use a combination of forward contracts
with our suppliers and financial derivative contracts, primarily swap contracts with financial
institutions. In addition, we utilize derivative contracts to hedge our commodity price exposure.
As of September 30, 2006, we had derivative contracts outstanding that are designated as cash flow
hedges of anticipated purchases of fuel and explosives.
Notional amounts outstanding under fuel-related contracts were 19.2 million gallons of heating
oil scheduled to expire through 2007 and 32.6 million gallons of crude oil scheduled to expire
through 2009. In addition, we have previously secured fixed price contracts for 2.5 million
gallons of fuel. At September 30, 2006, we had outstanding option contracts with notional amounts
outstanding of 14.6 million gallons of crude oil, expiring through December 2006, to hedge 90% of
the remaining unhedged 2006 volumes. Additionally, at September 30, 2006, we had outstanding option
contracts with notional amounts outstanding of 72.1 million gallons of crude oil, expiring through
December 2007, to hedge 90% of the remaining unhedged 2007 volumes. We expect to consume 95 to 100
million gallons of fuel per year. On a per gallon basis, based on this usage, a change in fuel
prices of one cent per gallon (ignoring the effects of hedging) would result in an increase or
decrease in our operating costs of approximately $1 million per year. Alternatively, a one dollar
per barrel change in the price of crude oil would increase or decrease our annual fuel costs
(ignoring the effects of hedging) by approximately $2.3 million.
Notional amounts outstanding under explosives-related swap contracts, scheduled to expire
through 2009, were 6.2 million mmbtu of natural gas. We expect to consume 280,000 to 290,000 tons
of explosives per year. Through our natural gas hedge contracts, we have fixed prices for
approximately 42% of our anticipated explosives requirements for the remainder of 2006. Based on
our expected usage, a change in natural gas prices of ten cents per mmbtu (ignoring the effects of
hedging) would result in an increase or decrease in our operating costs of approximately $0.5
million per year.
Item 4. Controls and Procedures.
Our disclosure controls and procedures are designed to, among other things, provide reasonable
assurance that material information, both financial and non-financial, and other information
required under the securities laws to be disclosed is identified and communicated to senior
management on a timely basis. Under the direction of the Chief Executive Officer and Chief
Financial Officer, management has evaluated our disclosure controls and procedures as of September
30, 2006 and has concluded that the disclosure controls and procedures were adequate and effective.
Additionally, during the most recent fiscal quarter, there have been no changes to our
internal control over financial reporting that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
46
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 12 to the unaudited condensed consolidated financial statements included in Part I,
Item 1 of this report relating to certain legal proceedings, which information is incorporated by
reference herein.
Item 1A. Risk Factors.
On October 25, 2006, we completed the transactions to acquire 100% of Excel Coal Limited
(Excel), an independent coal company in Australia. The acquisition includes three operating coal
mines and three development-stage mines, along with an estimated 500 million tons of proven and
probable coal reserves. Listed below are risk factors associated with the acquisition and
integration of Excel:
We may be unable to successfully integrate the acquired operations and realize the full cost
savings we anticipate.
The process of integrating the operations of the Excel coal mines could cause an interruption
of, or loss of momentum in, the activities of the business or the development of new mines. Among
the factors considered by our board of directors in approving the Excel acquisition were
anticipated cost savings and synergies that could result from such transaction. We cannot give any
assurance that these savings will be realized within the time periods contemplated or at the
expected costs or that they will be realized at all.
There may be unknown environmental or other risks inherent in the Excel Acquisition.
We may not be aware of all of the risks associated with the Excel acquisition. Any discovery
of adverse information concerning the coal mines after the closing of the Excel acquisition could
have a material adverse effect on our business, financial condition and results of operations. We
will need to make capital expenditures that may be significant to maintain the assets we acquired
and to comply with regulatory requirements, including environmental laws.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In July 2005, our Board of Directors authorized a share repurchase program of up to 5% of the
then outstanding shares of our common stock, approximately 13.1 million shares. The repurchases
may be made from time to time based on an evaluation of our outlook and general business
conditions, as well as alternative investment and debt repayment options. The table below sets
forth information for share repurchases made by the Company for the three months ended September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Shares Purchased |
|
|
Maximum Number |
|
|
|
Number of |
|
|
Average |
|
|
as Part of Publicly |
|
|
of Shares that May |
|
|
|
Shares |
|
|
Price per |
|
|
Announced |
|
|
Yet Be Purchased |
|
Period |
|
Purchased |
|
|
Share |
|
|
Program |
|
|
Under the Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,855,563 |
|
July 1 through July 31, 2006 |
|
|
978,069 |
|
|
$ |
46.02 |
|
|
|
978,069 |
|
|
|
11,877,494 |
|
August 1 through August 31, 2006 |
|
|
956,889 |
|
|
$ |
45.30 |
|
|
|
956,889 |
|
|
|
10,920,605 |
|
September 1 through September
30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,920,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,934,958 |
|
|
$ |
45.66 |
|
|
|
1,934,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6. Exhibits.
See Exhibit Index at page 49 of this report.
47
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
PEABODY ENERGY CORPORATION |
|
|
|
|
|
Date: November 7, 2006
|
|
By:
|
|
/s/ RICHARD A. NAVARRE |
|
|
|
|
|
|
|
|
|
Richard A. Navarre |
|
|
|
|
Chief Financial Officer and |
|
|
Executive Vice President of Corporate Development
|
|
|
(On behalf of the registrant and as Principal Financial Officer)
|
48
EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
2.1
|
|
Merger Implementation Agreement, dated as of July 5, 2006, between
Peabody Energy Corporation and Excel Coal Limited (Incorporated by
reference to Exhibit 2.1 of the Registrants Current Report on
Form 8-K, filed on July 7, 2006). |
|
|
|
2.2*
|
|
Deed of Variation Merger Implementation Agreement, dated as of
September 18, 2006 between Peabody Energy Corporation and Excel
Coal Limited. |
|
|
|
3.1
|
|
Third Amended and Restated Certificate of Incorporation of the
Registrant, as amended (Incorporated by reference to Exhibit 3.1
of the Registrants Quarterly Report on Form 10-Q for the period
ended June 30, 2006). |
|
|
|
3.2
|
|
Amended and Restated By-Laws of the Registrant (Incorporated by
reference to Exhibit 3.2 of the Registrants Annual Report on Form
10-K for the year ended December 31, 2004, filed on March 16,
2005). |
|
|
|
4.1*
|
|
5 7/8% Senior Notes Due 2016 Ninth Supplemental Indenture, dated as
of September 29, 2006, among the Registrant, the Guaranteeing
Subsidiaries (as defined therein), and US Bank National
Association, as trustee. |
|
|
|
4.2*
|
|
6 7/8% Senior Notes Due 2013 Eleventh Supplemental Indenture, dated
as of September 29, 2006, among the Registrant, the Guaranteeing
Subsidiaries (as defined therein), and US Bank National
Association, as trustee. |
|
|
|
10.1
|
|
Third Amended and Restated Credit Agreement, dated as of September
15, 2006 among Peabody Energy Corporation, Bank of America, N.A.,
as administrative agent, Citibank, N.A., as syndication agent, and
the lenders named therein (Incorporated by reference to Exhibit
10.1 of the Registrants Current Report on Form 8-K, filed on
September 18, 2006). |
|
|
|
10.2
|
|
Amended and Restated Guarantee, dated as of September 15, 2006, by
several subsidiaries of Peabody Energy Corporation in favor of
Bank of America, N.A., as administrative agent under the Third
Amended and Restated Credit Agreement dated of even date therewith
among Peabody Energy Corporation, Bank of America, N.A., as
administrative agent, Citibank, N.A., as syndication agent, and
the lenders named therein (Incorporated by reference to Exhibit
10.2 of the Registrants Current Report on Form 8-K, filed on
September 18, 2006). |
|
|
|
10.3*
|
|
Amendment No. 1 to Third Amended and Restated Credit Agreement,
dated as of September 27, 2006, among Peabody Energy Corporation,
the lenders named therein, and Bank of America, N.A., as
administrative agent. |
|
|
|
31.1*
|
|
Certification of periodic financial report by Peabody Energy
Corporations Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of periodic financial report by Peabody Energy
Corporations Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1*
|
|
Certification of periodic financial report pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Peabody Energy Corporations Chief
Executive Officer. |
|
|
|
32.2*
|
|
Certification of periodic financial report pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Peabody Energy Corporations Chief
Financial Officer. |
49