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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
Commission File Number 1-16463
PEABODY ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-4004153
- -------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 MARKET STREET, ST. LOUIS, MISSOURI 63101-1826
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 342-3400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of July 31, 2003: Common Stock, par value $0.01 per share, 54,179,785
shares outstanding.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Operations for the Quarters and
Six Months Ended June 30, 2003 and 2002............................................ 2
Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited) and
December 31, 2002.................................................................. 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002....................................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 29
Item 4. Controls and Procedures............................................................ 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 30
Item 4. Submission of Matters to a Vote of Security Holders................................ 31
Item 6. Exhibits and Reports on Form 8-K................................................... 31
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share information)
Quarter Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES
Sales $ 670,962 $ 626,295 $ 1,328,791 $ 1,278,575
Other revenues 22,283 30,645 45,748 54,131
------------ ------------ ------------ ------------
Total revenues 693,245 656,940 1,374,539 1,332,706
COSTS AND EXPENSES
Operating costs and expenses 580,003 525,059 1,146,623 1,061,220
Depreciation, depletion and amortization 59,518 58,640 115,565 117,317
Asset retirement obligation expense 6,601 - 13,091 -
Selling and administrative expenses 28,502 20,777 53,826 47,060
Net gain on property and equipment disposals (11,671) (2,781) (19,389) (3,086)
------------ ------------ ------------ ------------
OPERATING PROFIT 30,292 55,245 64,823 110,195
Interest expense 28,892 26,038 55,044 50,941
Early debt extinguishment costs 32,329 - 53,513 -
Interest income (1,506) (549) (2,178) (1,068)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS (29,423) 29,756 (41,556) 60,322
Income tax provision (benefit) (28,777) 1,448 (41,023) 6,033
Minority interests 658 3,811 1,708 7,477
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE ACCOUNTING CHANGES (1,304) 24,497 (2,241) 46,812
Cumulative effect of accounting changes, net of taxes - - (10,144) -
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,304) $ 24,497 $ (12,385) $ 46,812
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE:
Income (loss) before accounting changes $ (0.02) $ 0.47 $ (0.04) $ 0.90
Cumulative effect of accounting changes, net of taxes - - (0.20) -
------------ ------------ ------------ ------------
Net income (loss) $ (0.02) $ 0.47 $ (0.24) $ 0.90
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 52,751,999 52,122,455 52,583,953 52,070,634
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE:
Income (loss) before accounting changes $ (0.02) $ 0.45 $ (0.04) $ 0.87
Cumulative effect of accounting changes, net of taxes - - (0.20) -
------------ ------------ ------------ ------------
Net income (loss) $ (0.02) $ 0.45 $ (0.24) $ 0.87
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 52,751,999 53,859,275 52,583,953 53,767,371
============ ============ ============ ============
DIVIDENDS DECLARED PER SHARE $ 0.10 $ 0.10 $ 0.20 $ 0.20
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
PEABODY ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(Unaudited)
June 30, 2003 December 31, 2002
----------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 111,621 $ 71,210
Accounts receivable, less allowance for doubtful accounts of $1,309
at June 30, 2003 and $1,331 at December 31, 2002 125,529 153,212
Materials and supplies 42,205 39,416
Coal inventory 210,289 190,272
Assets from coal and emission allowance trading activities 47,165 69,898
Deferred income taxes 10,412 10,361
Other current assets 21,748 15,554
----------------- -----------------
Total current assets 568,969 549,923
Property, plant, equipment and mine development, net of accumulated depreciation,
depletion and amortization of $946,181 at June 30, 2003 and $858,187
at December 31, 2002 4,324,727 4,273,042
Investments and other assets 333,584 317,212
----------------- -----------------
Total assets $ 5,227,280 $ 5,140,177
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 31,867 $ 47,515
Liabilities from coal and emission allowance trading activities 28,583 37,008
Accounts payable and accrued expenses 543,047 547,013
----------------- -----------------
Total current liabilities 603,497 631,536
Long-term debt, less current maturities 1,171,778 981,696
Deferred income taxes 451,252 499,310
Asset retirement obligations 389,838 386,777
Workers' compensation obligations 214,705 209,798
Accrued postretirement benefit costs 961,368 959,599
Obligation to industry fund 46,580 49,760
Other noncurrent liabilities 307,939 303,442
----------------- -----------------
Total liabilities 4,146,957 4,021,918
Minority interests 1,581 37,121
Stockholders' equity
Preferred Stock - $0.01 per share par value; 10,000,000 shares
authorized, no shares issued or outstanding
as of June 30, 2003 or December 31, 2002 - -
Series Common Stock - $0.01 per share par value; 40,000,000
shares authorized, no shares issued or outstanding
as of June 30, 2003 or December 31, 2002 - -
Common Stock - $0.01 per share par value; 150,000,000 shares authorized,
53,468,186 shares issued and 53,348,041 shares outstanding as of
June 30, 2003 and 150,000,000 shares authorized, 52,417,483 shares
issued and 52,400,278 shares outstanding as of December 31, 2002 534 524
Additional paid-in capital 975,288 958,567
Retained earnings 177,984 200,859
Employee stock loans (27) (1,142)
Accumulated other comprehensive loss (71,527) (77,627)
Treasury shares, at cost: 120,145 shares and 17,205 shares as of June 30, 2003
and December 31, 2002, respectively (3,510) (43)
----------------- -----------------
Total stockholders' equity 1,078,742 1,081,138
----------------- -----------------
Total liabilities and stockholders' equity $ 5,227,280 $ 5,140,177
================= =================
See accompanying notes to unaudited condensed consolidated financial statements.
3
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
---------------------------
2003 2002
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (12,385) $ 46,812
Cumulative effect of accounting changes, net of taxes 10,144 -
------------ ------------
Income (loss) before accounting changes (2,241) 46,812
Adjustments to reconcile income (loss) before accounting changes to
net cash provided by operating activities:
Depreciation, depletion and amortization 115,565 117,317
Deferred income taxes (42,164) 3,582
Early debt extinguishment costs 53,513 -
Amortization of debt discount and debt issuance costs 4,079 5,100
Net gain on property and equipment disposals (19,389) (3,086)
Minority interests 1,708 7,477
Changes in current assets and liabilities:
Accounts receivable 33,825 (10,219)
Materials and supplies (2,789) (1,239)
Coal inventory (20,017) (27,697)
Net assets from coal and emission allowance trading activities (19,336) (17,700)
Other current assets (5,505) (6,115)
Accounts payable and accrued expenses 1,942 (48,645)
Asset retirement obligations (5,033) (1,460)
Workers' compensation obligations 4,907 3,548
Accrued postretirement benefit costs 3,262 (392)
Obligation to industry fund (3,180) (3,983)
Other, net (331) (2,761)
------------ ------------
Net cash provided by operating activities 98,816 60,539
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, equipment and mine development (91,942) (105,454)
Additions to advance mining royalties (5,868) (6,355)
Acquisition, net (90,000) (17,712)
Investment in joint venture - (475)
Proceeds from property and equipment disposals 29,054 7,796
------------ ------------
Net cash used in investing activities (158,756) (122,200)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in revolving lines of credit (121,584) 67,583
Proceeds from long-term debt 1,102,903 -
Payments of long-term debt (852,667) (21,377)
Reduction of securitized interests in accounts receivable (5,900) -
Payment of debt issuance costs (23,670) -
Distributions to minority interests (3,085) (5,402)
Dividends paid (10,490) (10,414)
Proceeds from stock options exercised 11,629 541
Other 2,318 923
------------ ------------
Net cash provided by financing activities 99,454 31,854
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 897 -
Net increase (decrease) in cash and cash equivalents 40,411 (29,807)
Cash and cash equivalents at beginning of year 71,210 38,622
------------ ------------
Cash and cash equivalents at end of period $ 111,621 $ 8,815
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
4
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Peabody Energy Corporation (the "Company") and its controlled affiliates. All
significant intercompany transactions, profits and balances have been eliminated
in consolidation. Certain prior year amounts have been reclassified to conform
with the current year presentation.
The accompanying condensed consolidated financial statements as of June
30, 2003 and for the quarters and six months ended June 30, 2003 and 2002, 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, 2002 has been derived from the Company's audited
consolidated balance sheet. The results of operations for the quarter and six
months ended June 30, 2003 are not necessarily indicative of the results to be
expected for the year ending December 31, 2003.
(2) DEBT REFINANCING
During March 2003, the Company entered into a series of transactions,
discussed in detail below, to refinance a substantial portion of its outstanding
indebtedness. The refinancing expanded the Company's revolving line of credit
capacity and will lower its overall borrowing costs. The Company's total
indebtedness (in thousands) consisted of the following at:
June 30, 2003 December 31, 2002
----------------- -----------------
Term Loan under Senior Secured Credit Facility $ 448,875 $ -
6.875% Senior Notes due 2013 650,000 -
9.625% Senior Subordinated Notes redeemed in 2003 - 391,490
8.875% Senior Notes redeemed in 2003 - 316,498
5.0% Subordinated Note 77,197 85,055
Senior unsecured notes under various agreements - 58,214
Unsecured revolving credit agreement - 116,584
Other 27,573 61,370
----------------- -----------------
$ 1,203,645 $ 1,029,211
================= =================
The following table shows the sources and uses (in thousands), through June 30,
2003, of cash related to the refinancing transactions:
Sources:
Revolving Credit Facility $ -
Term Loan under Senior Secured Credit Facility 450,000
6.875% Senior Notes due 2013 650,000
-----------
Total $ 1,100,000
===========
Uses:
Repayment of 9.625% Senior Subordinated Notes $ 392,219
Repayment of 8.875% Senior Notes 317,098
Repayment of Black Beauty indebtedness 203,215
Fees and prepayment premiums paid in connection with refinancing 63,667
Acquisition of 18.3% interest in Black Beauty Coal Company 90,000
Cash 33,801
-----------
$ 1,100,000
===========
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Use of Proceeds
The Company primarily used the $1.1 billion of proceeds from the $450.0
million term loan under its Senior Secured Credit Facility and the $650.0
million in 6.875% Senior Notes to repay and retire the following indebtedness:
- - All of its 9.625% Senior Subordinated Notes
- - All of its 8.875% Senior Notes
- - Substantially all of Black Beauty's indebtedness
During March 2003, the Company completed a tender offer to retire
$134.0 million of its 9.625% Senior Subordinated Notes and $109.1 million of its
8.875% Senior Notes. On May 15, 2003, the remaining $258.2 million of 9.625%
Senior Subordinated Notes and $208.0 million of 8.875% Senior Notes were
redeemed. Early prepayment premiums of $12.0 million were paid related to the
tender offer and early prepayment premiums of $21.7 million were paid in
connection with the May 15, 2003 redemption. Also during March 2003, $203.2
million of Black Beauty indebtedness was repaid, along with $6.3 million of
related early prepayment premiums.
In addition to the retirement of the debt described above, the Company
paid $23.7 million in fees associated with issuing the new debt instruments. On
April 7, 2003, the Company used $90.0 million to acquire the remaining 18.3% of
Black Beauty (see Note 4 to the unaudited condensed consolidated financial
statements). The remaining cash of $33.8 million was primarily used to pay
accrued interest on the debt instruments that were repaid. The Company's new
debt instruments are described in greater detail below.
Senior Secured Credit Facility
On March 21, 2003, the Company entered into a new Senior Secured Credit
Facility that consists of a $600.0 million revolving credit facility and a
$450.0 million term loan. The new revolving credit facility, which currently
bears interest at LIBOR plus 2.0% and expires in March 2008, provides for
maximum borrowings and/or letters of credit of $600.0 million. The Company had
letters of credit outstanding under the facility of $232.7 million at June 30,
2003, leaving $367.3 million available for borrowing. The new $450.0 million
term loan currently bears interest at LIBOR plus 2.5%. Principal of $4.5 million
per year, which is paid in quarterly installments, is due through March 31,
2009. The remaining principal of $423.0 million is due in quarterly installments
of $105.8 million to be paid from June 30, 2009 through March 31, 2010. The
facility is secured by the capital stock and certain assets of the Company's
"restricted subsidiaries" (as defined in the facility). These restricted
subsidiaries are guarantors of the facility. Under the facility, the Company
must comply with certain financial covenants on a quarterly basis. These
covenants include a minimum EBITDA (as defined in the facility) interest
coverage ratio, a maximum "total obligations" (as defined in the facility) to
EBITDA ratio and a maximum senior secured debt to EBITDA ratio. The Company was
in compliance with these covenants as of June 30, 2003.
6.875% Senior Notes due 2013
On March 21, 2003, the Company issued $650.0 million in senior notes,
which bear interest at 6.875% and are due in March 2013. The notes were
initially sold in accordance with Securities and Exchange Commission Rule 144A,
and the Company filed a registration statement in June 2003 with the Securities
and Exchange Commission that has enabled the holders of the notes to exchange
them for publicly registered notes with substantially the same terms. The notes,
which are unsecured, are guaranteed by the Company's "restricted subsidiaries"
as defined in the note indenture. The note indenture contains covenants which,
among other things, limit the Company's ability to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, make other
restricted payments and investments, create liens, sell assets and merge or
consolidate with other entities. The notes are redeemable prior to March 15,
2008 at a redemption price equal to 100% of the principal amount plus a
make-whole premium (as defined in the indenture) and on or after March 15, 2008
at fixed redemption prices as set forth in the indenture.
Early Debt Extinguishment Costs
In connection with the refinancing, the Company incurred early debt
extinguishment costs during the quarter and six months ended June 30, 2003 of
$32.3 million and $53.5 million, respectively. In the quarter ended June 30,
2003, these costs were comprised of the following:
- the excess of prepayment premiums over the carrying value of
the debt retired of $22.9 million; and
- a non-cash charge to write-off debt issuance costs associated
with the debt extinguished of $9.4 million.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
During the six months ended June 30, 2003 these costs were comprised of
the following:
- the excess of prepayment premiums over the carrying value of
the debt retired of $41.8 million;
- non-cash charges to write-off debt issuance costs associated
with the debt extinguished of $17.5 million; and
- a $5.8 million gain related to the termination and
monetization of interest rate swaps associated with the debt
extinguished.
As a result of the adoption on January 1, 2003 of Statement of
Financial Accounting Standards ("SFAS") No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," gains or losses on debt extinguishment are presented as a
component of results from continuing operations unless the extinguishment meets
the criteria for classification as an extraordinary item in Accounting
Principles Board Opinion No. 30. The effect of the adoption and application of
this new standard was to decrease pretax income for the quarter and six months
ended June 30, 2003 by $32.3 million and $53.5 million, respectively. Prior year
results of operations included no debt extinguishment costs.
(3) CUMULATIVE EFFECT OF ACCOUNTING CHANGES
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations," which addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs.
For the Company, asset retirement obligation expense represents the
systematic accretion and depreciation of future mine reclamation costs, which
includes the costs to reclaim the land disturbed during the mining process and
the removal of mine facilities, equipment, transportation and other support
facilities.
SFAS No. 143 requires the fair value of a liability for an asset's
retirement obligation to be recorded in the period in which it is incurred if a
reasonable estimate of fair value can be made, and that the corresponding cost
is capitalized as part of the carrying amount of the related long-lived asset.
The liability is accreted to its then present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. If
the liability is settled for an amount other than the recorded amount, a gain or
loss is recognized.
Under its previous accounting method, the Company accrued the estimated
future costs to reclaim the land as the acreage was disturbed at surface mine
operations and the estimated costs to reclaim support acreage and to perform
other related functions at both surface and underground mines ratably over the
lives of the mines.
Pursuant to the January 1, 2003 adoption of SFAS No. 143, the Company:
- recognized a credit to income during the first
quarter of 2003 of $9.1 million, net of tax, for the
cumulative effect of the accounting change;
- increased total liabilities by $0.5 million to record
the asset retirement obligations;
- increased property, plant and equipment by $18.6
million to add the asset retirement costs to the
carrying amount of our mine properties and reflect
the incremental amount of reclamation obligations
recoverable from third parties; and
- increased accumulated depreciation, depletion and
amortization by $2.9 million for the amount of
expense previously recognized.
Adopting SFAS No. 143 had no impact on the Company's reported cash
flows. The Company's reclamation liabilities are unfunded.
On October 25, 2002, the Emerging Issues Task Force (EITF) rescinded
EITF Issue No. 98-10 "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities." As a result of the rescission, trading contracts
entered into prior to October 25, 2002 that did not meet the definition of a
derivative under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (as amended) were no longer accounted for on a fair value
basis, effective January 1, 2003. In the first quarter of 2003, the Company
recorded a cumulative effect charge in the statement of
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
operations of $20.2 million, net of income taxes, to reverse the unrealized
gains and losses on non-derivative energy trading contracts recorded prior to
December 31, 2002.
Effective January 1, 2003, the Company changed its method of amortizing
actuarial gains and losses related to net periodic postretirement benefit costs.
The Company previously amortized actuarial gains and losses using a 5% corridor
with an amortization period of three years. Under the new method, the corridor
has been eliminated and all actuarial gains and losses are now amortized over
the average remaining service period of active plan participants, which is
currently estimated at 9.5 years. The Company considers this method preferable
in that the elimination of the corridor allows a closer approximation of the
fair value of the liability for postretirement benefit costs, and the
amortization of actuarial gains and losses over the average remaining service
period provides a better matching of the cost of the associated liability over
the working life of the active plan participants. As a result of this change,
the Company recognized a $0.9 million cumulative effect gain in the first
quarter of 2003.
The effect of the changes for the quarter and six months ended June 30,
2003 was to increase income before accounting changes by $6.6 million, or $0.13
per share, net of income taxes and $12.2 million, or $0.23 per share net of
income taxes, respectively. The cumulative effect charge of $10.1 million (net
of income tax benefit of $6.8 million) to apply retroactively the new methods
described above is included in results of operations for the six months ended
June 30, 2003. Below are pro forma net income and earnings per share results for
the Company assuming the new methods had been retroactively applied (dollars in
thousands, except per share data):
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss):
As reported $ (1,304) $ 24,497 $ (12,385) $ 46,812
Pro forma (1,304) 16,386 (2,241) 34,701
Basic earnings (loss) per share:
As reported $ (0.02) $ 0.47 $ (0.24) $ 0.90
Pro forma (0.02) 0.31 (0.04) 0.67
Diluted earnings (loss) per share:
As reported $ (0.02) $ 0.45 $ (0.24) $ 0.87
Pro forma (0.02) 0.30 (0.04) 0.65
(4) BUSINESS COMBINATIONS
On April 7, 2003, the Company purchased the remaining 18.3% of Black
Beauty Coal Company and affiliated entities not owned by it for $90.0 million
and contingent consideration. The additional consideration is contingent on
Black Beauty's achievement of certain levels of operating profit in 2003 and
2004, as set forth in the purchase and sale agreement. As a result of the
acquisition, the Company now owns 100% of Black Beauty Coal Company. The
acquisition was accounted for as a purchase.
(5) COAL INVENTORY
Inventories consisted of the following (dollars in thousands) at:
June 30, December 31,
2003 2002
------------ ------------
Raw coal $ 18,422 $ 18,076
Work in process 148,534 143,963
Saleable coal 43,333 28,233
------------ ------------
Total $ 210,289 $ 190,272
============ ============
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(6) ASSETS AND LIABILITIES FROM COAL AND EMISSION ALLOWANCE TRADING
ACTIVITIES
On October 25, 2002, the EITF rescinded EITF Issue No. 98-10
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." As a result of the rescission, trading contracts entered into prior
to October 25, 2002 that did not meet the definition of a derivative under SFAS
No. 133 (as amended) were no longer accounted for on a fair value basis
effective January 1, 2003. The Company recorded a cumulative effect charge of
$20.2 million, net of income taxes, effective January 1, 2003 to reverse the net
unrealized gains on non-derivative energy trading contracts recorded prior to
December 31, 2002. Substantially all of these non-derivative energy trading
contracts will settle in 2003 and 2004.
The fair value of coal trading derivatives as of June 30, 2003, are set
forth below (dollars in thousands):
Fair Value
-------------------------
Assets Liabilities
----------- -----------
Forward contracts $ 44,853 $ 27,224
Option contracts 2,312 1,359
----------- -----------
Total $ 47,165 $ 28,583
=========== ===========
All of the contracts in the Company's trading portfolio as of June 30,
2003 were valued utilizing prices from over-the-counter market sources, adjusted
for contract duration and coal quality.
As of June 30, 2003, the timing of the estimated future realization of
the value of the Company's trading portfolio was as follows:
Year of Percentage
Expiration of Portfolio
- ---------- ------------
2003 25%
2004 72%
2005 2%
2006 1%
---
100%
===
At June 30, 2003, 69% of the Company's credit exposure related to coal
and emission allowance trading activities was with counterparties that are
investment grade. Where practical, the Company takes steps to reduce its credit
exposure to customers or counterparties whose credit has deteriorated and who
may pose a higher risk, as determined by the Company's credit management
function, of failure to perform under their contractual obligations. These steps
include obtaining letters of credit or cash collateral, requiring prepayments
for shipments or the creation of customer trust accounts held for the Company's
benefit to fund the payments required under existing contracts. To further
reduce credit exposure in its trading business, the Company also seeks to enter
into netting agreements with counterparties that permit the Company to offset
receivables and payables with such counterparties.
The Company's coal trading operations traded 6.8 million tons and 17.0
million tons for the quarters ended June 30, 2003 and 2002, respectively, and
23.4 million tons and 45.3 million tons for the six months ended June 30, 2003
and 2002, respectively.
(7) EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
Weighted Average Shares Outstanding
A reconciliation of weighted average shares outstanding follows:
Quarter Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average shares outstanding - basic 52,751,999 52,122,455 52,583,953 52,070,634
Dilutive impact of stock options - 1,736,820 - 1,696,737
---------- ---------- ---------- ----------
Weighted average shares outstanding - diluted 52,751,999 53,859,275 52,583,953 53,767,371
========== ========== ========== ==========
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Stock Compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25
and related interpretations in accounting for its equity incentive plans. The
Company recorded $0.1 million of compensation expense for granted stock options
during each of the quarters ended June 30, 2003 and 2002, and $0.2 million and
$0.1 million of compensation expense for granted stock options during the six
months ended June 30, 2003 and 2002, respectively. The following table reflects
pro forma net income (loss) and basic and diluted earnings (loss) per share had
compensation cost been determined for the Company's non-qualified and incentive
stock options based on the fair value at the grant dates consistent with the
methodology set forth under SFAS No. 123, "Accounting for Stock-Based
Compensation"(in thousands, except per share data):
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss):
As reported $ (1,304) $ 24,497 $ (12,385) $ 46,812
Pro forma (2,836) 23,297 (15,497) 44,382
Basic earnings (loss) per share:
As reported $ (0.02) $ 0.47 $ (0.24) $ 0.90
Pro forma (0.05) 0.45 (0.29) 0.85
Diluted earnings (loss) per share:
As reported $ (0.02) $ 0.45 $ (0.24) $ 0.87
Pro forma (0.05) 0.43 (0.29) 0.83
Treasury Stock
During the quarter ended June 30, 2003, the Company received 102,940
shares of common stock as consideration for employees' exercise of stock
options. The value of the common stock tendered by employees to exercise stock
options was based upon the closing price on the date of the respective
transactions. The common stock tender was in accordance with the provisions of
the 1998 Stock Purchase and Option Plan, which was previously approved by the
Company's Board of Directors.
(8) COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income
(loss) for the quarters and six months ended June 30, 2003 and 2002 (in
thousands):
Quarter Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) $ (1,304) $ 24,497 $(12,385) $ 46,812
Foreign currency translation adjustment 6,096 - 6,100 -
-------- -------- -------- --------
Comprehensive income (loss) $ 4,792 $ 24,497 $ (6,285) $ 46,812
======== ======== ======== ========
(9) SEGMENT INFORMATION
The Company reports its operations primarily through the following
reportable operating segments: "U.S. Mining," "Trading and Brokerage," and
"Australian Mining Operations." The principal business of the U.S. Mining
segment is mining, preparation and sale of its steam coal, sold primarily to
electric utilities, and metallurgical coal, sold to steel and coke producers.
The Trading and Brokerage segment's principal business is the marketing and
trading of coal and emission allowances and contract restructuring activities.
The Australian Mining Operations segment consists of the operations of the
Wilkie Creek Mine. This segment's principal business is the same as the U.S.
Mining Segment. "Corporate and Other"
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
consists primarily of corporate overhead not directly attributable to the U.S.
Mining or Trading and Brokerage operating segments, and resource management
activities. In some cases, the Company's brokerage operation acts as the sales
agent for the U.S. and Australian Mining Operations. For purposes of the
presentation below, intercompany sales between the mining operations and Trading
and Brokerage Operations have been eliminated, and the third party sales are
reflected in the mining operations' revenues.
The U.S. Mining segment results below also include costs related to
past mining activities and a portion of consolidated net gains on property
disposals. Past mining activities and net gains on property disposals are
discussed separately from U.S. Mining results in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Operating segment results for the quarters and six months ended June
30, 2003 and 2002 are as follows (in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
U.S. Mining $ 600,100 $ 604,614 $ 1,170,588 $ 1,219,105
Trading and Brokerage 81,408 46,189 182,185 100,740
Australian Mining Operations 6,486 - 12,848 -
Corporate and Other 5,251 6,137 8,918 12,861
----------- ----------- ----------- -----------
Total $ 693,245 $ 656,940 $ 1,374,539 $ 1,332,706
=========== =========== =========== ===========
Operating Profit:
U.S. Mining $ 34,026 $ 55,045 $ 66,578 $ 123,165
Trading and Brokerage 13,976 17,013 30,942 28,260
Australian Mining Operations (2,533) - (821) -
Corporate and Other (15,177) (16,813) (31,876) (41,230)
----------- ----------- ----------- -----------
Total $ 30,292 $ 55,245 $ 64,823 $ 110,195
=========== =========== =========== ===========
A reconciliation of segment operating profit to consolidated income
(loss) before income taxes follows (in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Total segment operating profit $ 30,292 $ 55,245 $ 64,823 $ 110,195
Interest expense 28,892 26,038 55,044 50,941
Early debt extinguishment costs 32,329 - 53,513 -
Interest income (1,506) (549) (2,178) (1,068)
Minority interests 658 3,811 1,708 7,477
---------- ---------- ---------- ----------
Income (loss) before income taxes $ (30,081) $ 25,945 $ (43,264) $ 52,845
========== ========== ========== ==========
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(10) COMMITMENTS AND CONTINGENCIES
Environmental
Environmental claims have been asserted against a subsidiary of the
Company at 22 sites in the United States. Some of these claims are based on the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended, and on similar state statutes. The majority of these sites are related
to activities of former subsidiaries of the Company.
The Company's policy is to accrue environmental cleanup-related costs
of a noncapital nature when those costs are believed to be probable and can be
reasonably estimated. The quantification of environmental exposures requires an
assessment of many factors, including changing laws and regulations,
advancements in environmental technologies, the quality of information available
related to specific sites, the assessment stage of each site investigation,
preliminary findings and the length of time involved in remediation or
settlement. For certain sites, the Company also assesses the financial
capability of other potentially responsible parties and, where allegations are
based on tentative findings, the reasonableness of the Company's apportionment.
The Company has not anticipated any recoveries from insurance carriers or other
potentially responsible third parties in the estimation of liabilities recorded
on its consolidated balance sheets. The undiscounted liabilities for
environmental cleanup-related costs recorded as part of "Other noncurrent
liabilities" were $39.0 million and $42.1 million at June 30, 2003 and December
31, 2002, respectively. These amounts represent those costs that the Company
believes are probable and reasonably estimable.
Navajo Nation
On June 18, 1999, the Navajo Nation served the Company's subsidiaries,
Peabody Holding Company, Inc., Peabody Coal Company and Peabody Western Coal
Company ("Peabody Western"), with a complaint that had been filed in the U.S.
District Court for the District of Columbia. Other defendants in the litigation
are one customer, one current employee and one former employee. The Navajo
Nation has alleged 16 claims, including Civil Racketeer Influenced and Corrupt
Organizations Act, or RICO, violations and fraud and tortious interference with
contractual relationships. The complaint alleges that the defendants jointly
participated in unlawful activity to obtain favorable coal lease amendments.
Plaintiff also alleges that defendants interfered with the fiduciary
relationship between the United States and the Navajo Nation. The plaintiff is
seeking various remedies including actual damages of at least $600 million,
which could be trebled under the RICO counts, punitive damages of at least $1
billion, a determination that Peabody Western's two coal leases for the Kayenta
and Black Mesa mines have terminated due to Peabody Western's breach of these
leases and a reformation of the two coal leases to adjust the royalty rate to
20%. On March 15, 2001, the court allowed the Hopi Tribe to intervene in this
lawsuit. The Hopi Tribe has asserted seven claims including fraud and is seeking
various remedies including unspecified actual damages, punitive damages and
reformation of its coal lease.
On March 4, 2003, the U.S. Supreme Court issued a ruling in a companion
lawsuit involving the Navajo Nation and the United States. The Court rejected
the Navajo Nation's allegation that the U.S. breached its trust responsibilities
to the Tribe in approving the coal lease amendments and was liable for money
damages. On May 2, 2003, the Company's subsidiaries filed a renewed motion to
dismiss the Navajo Nation's lawsuit against them based on the Supreme Court's
decision.
While the outcome of litigation is subject to uncertainties, based on
the Company's preliminary evaluation of the issues and their potential impact on
the Company, the Company believes this matter will be resolved without a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
Mohave Generating Station
Peabody Western has a long-term coal supply agreement with the owners
of the Mohave Generating Station that expires on December 31, 2005. There is a
dispute with the Hopi Tribe regarding the use of groundwater in the
transportation of the coal by pipeline to the Mohave plant. Southern California
Edison (the majority owner and operator of the plant) is involved in a
California Public Utilities Commission proceeding related to recovery of future
capital expenditures for new pollution abatement equipment for the station.
Alternatively, Southern California Edison has asked for authorization to spend
money for the shutdown of the Mohave plant. In a July 2003 filing with the
California Public Utilities Commission, the operator affirmed that the Mohave
plant is not forecast to return to service as a coal-fired resource until
mid-2009 at the earliest. The Company is in active discussions to resolve the
complex issues critical to the continuation of the operation of the Mohave
Generating Station and the renewal of the coal supply agreement after December
31, 2005. There is no assurance that the issues critical to the continued
operation of the Mohave plant will be resolved. If these issues are not
12
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
resolved in a timely manner, the operation of the Mohave plant will cease or be
suspended on December 31, 2005. The Mohave plant is the sole customer of the
Black Mesa Mine, which sold 4.6 million tons of coal in 2002.
Citizens Power
In connection with the August 2000 sale of the Company's former
subsidiary, Citizens Power LLC (Citizens Power), the Company has indemnified the
buyer, Edison Mission Energy, from certain losses resulting from specified power
contracts and guarantees. Other than those discussed below, there are no known
issues with any of the specified power contracts and guarantees.
During the period that Citizens Power was owned by the Company,
Citizens Power guaranteed the obligations of two affiliates to make payments to
third parties for power delivered under fixed-priced power sales agreements with
terms that extend through 2008. Edison Mission Energy has stated and the Company
believes there will be sufficient cash flow to pay the power suppliers, assuming
timely payment by the power purchasers. The power purchasers have made timely
payments to the Citizens Power affiliates and Edison Mission Energy has not made
a claim against the Company under the indemnity.
Also during the ownership period, a Citizens Power subsidiary (now
called Edison Mission Marketing & Trading) entered into a power purchase
agreement to sell power in connection with a restructured power supply agreement
that runs through 2016. The Citizens Power subsidiary (now called Edison Mission
Marketing & Trading) subsequently entered into a power purchase agreement with
NRG Power Marketing Inc. (NRG Power Marketing) for the same term. In May 2003,
NRG Power Marketing filed a Chapter 11 bankruptcy petition. On August 6, 2003,
NRG Power Marketing obtained bankruptcy court approval to reject the power
purchase agreement. The bankruptcy court also rejected Edison Mission Marketing
& Trading's request to file a complaint with FERC seeking an order that would
require NRG Power Marketing to continue to deliver power unless NRG Power
Marketing obtains FERC approval to cease deliveries under the contract. We
believe that Edison Mission Marketing & Trading will appeal the bankruptcy
court's decision regarding the filing of the FERC complaint and that the appeal
will be resolved in the near term. The NRG Power Marketing power sales contract
is one of the contracts covered by the indemnity provision, but the Company
indemnity does not apply to losses caused by the negligent act or omission of
Edison Mission Marketing & Trading, Edison Mission Energy or its affiliates. The
Company authorized Edison Mission Marketing & Trading to purchase power through
March 31, 2004 to cap the exposure, if any, of the Company during that time. NRG
Power Marketing is no longer delivering power to Edison Mission Marketing &
Trading and the power is being supplied by Edison Mission Marketing & Trading as
discussed above. The Company is responsible for the incremental costs incurred
by Edison Mission Marketing & Trading related to the authorized power purchases;
however, the Company does not believe its exposure under the authorized power
purchase agreement is material and has reserved its rights against Edison
Mission Marketing & Trading and Edison Mission Energy. Other steps are being
taken to solve the problem on a long-term basis.
Due to the length and specific requirements of the contracts covered by
the indemnity, the impact of the power purchase transactions and the uncertainty
surrounding the NRG Power Marketing situation, the Company cannot reasonably
estimate its exposure under the indemnity beyond March 31, 2004.
Other
Accounts receivable in the consolidated balance sheets as of June 30,
2003 and December 31, 2002 includes $11.2 million and $8.6 million of
receivables billed during 2001 through 2003 that have been disputed by two
customers who have withheld payment. The Company believes these billings were
made properly under the coal supply agreement with each customer. The Company is
in arbitration with one of these customers to resolve this issue, and believes
the receivables to be fully collectible.
In addition, the Company at times becomes a party to claims, lawsuits,
arbitration proceedings and administrative procedures in the ordinary course of
business. Management believes that the ultimate resolution of pending or
threatened proceedings will not have a material effect on the financial
position, results of operations or liquidity of the Company.
At June 30, 2003, purchase commitments for capital expenditures were
approximately $78.3 million.
(11) SECONDARY OFFERING
On May 7, 2003, certain shareholders of the Company, including the
Company's largest shareholder, Lehman Brothers Merchant Banking Partners II L.P.
and affiliates sold 5,750,000 shares of common stock, including an
over-allotment option of 750,000 shares. The selling shareholders received all
net proceeds. The Company did not sell any shares through the offering. Lehman
Brothers Merchant Banking Partners II L.P. and affiliates sold, in the
aggregate, 5,617,825 shares in the offering, and their beneficial ownership of
the Company declined from 41% to 29%.
13
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(12) RELATED PARTY TRANSACTIONS
Lehman Brothers Inc. is the parent company of Lehman Brothers Merchant
Banking Partners II L.P. As discussed in Note 2 to the unaudited condensed
consolidated financial statements, the Company refinanced a substantial portion
of its indebtedness by entering into a new Senior Secured Credit Facility and
issuing new Senior Notes. Based upon a competitive bidding process conducted by
members of management and reviewed by members of the Company's Board of
Directors not affiliated with Lehman Brothers Inc., the Company appointed
Wachovia Securities, Inc., Fleet Securities, Inc. and Lehman Brothers Inc. as
lead arrangers for the Senior Secured Credit Facility, and Lehman Brothers Inc.
and Morgan Stanley as joint book running managers for the Senior Notes. Lehman
Brothers Inc. received total fees of $7.4 million for their services in
connection with the refinancing; such fees were consistent with the fees paid to
other parties to the transaction for their respective services.
In May 2003 and July 2003, Lehman Brothers Inc. served as the lead
underwriter in connection with the secondary offerings discussed in Note 11
above and Note 13 below, and fees for their services were paid by the selling
shareholders and not by the Company. The Company paid incidental expenses
customarily incurred by a registering company in connection with the secondary
offerings.
As discussed in the "Liquidity and Capital Resources" section of Part
I, Item 2 of this report, in May 2003 the Company entered into four $25.0
million fixed to floating interest rate swaps as a hedge of the changes in fair
value of the 6.875% Senior Notes due 2013. Lehman Brothers Inc. was chosen as
one of the swap counterparties as part of a competitive bidding process among
eight financial institutions.
(13) SUBSEQUENT EVENT
On August 4, 2003, the Company's largest shareholder, Lehman Brothers
Merchant Banking Partners II L.P. and affiliates, sold 5,400,000 shares of
common stock. Lehman Brothers Merchant Banking Partners II L.P. and affiliates
received all net proceeds. The Company did not sell any shares through the
offering. Lehman Brothers Merchant Banking Partners II L.P. and affiliates'
beneficial ownership of the Company declined from to 29% to 19%. The
underwriters of the offering were also granted an over-allotment option to
purchase an additional 810,000 shares. If the underwriters exercise their option
and Lehman Brothers Merchant Banking Partners II L.P. and affiliates sell the
additional 810,000 shares, their beneficial ownership of the Company will
decline to 17.5%.
14
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,
certain wholly-owned U.S. subsidiaries of the Company have fully and
unconditionally guaranteed the 6.875% 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. The
following unaudited condensed historical financial statement information is
provided for such Guarantor/Non-Guarantor Subsidiaries. After the Company's
acquisition on April 7, 2003 of the remaining 18.3% of Black Beauty, this
subsidiary became a Guarantor subsidiary of the 6.875% Senior Notes. Prior year
amounts have been reclassified to conform with the current year presentation.
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2003
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
Total revenues $ - $ 672,629 $ 34,828 $ (14,212) $ 693,245
Costs and expenses
Operating costs and expenses - 561,193 33,022 (14,212) 580,003
Depreciation, depletion and amortization - 58,596 922 - 59,518
Asset retirement obligation expense - 6,539 62 - 6,601
Selling and administrative expenses 197 27,655 650 - 28,502
Net (gain) loss on property and equipment
disposals - (11,686) 15 - (11,671)
Interest expense 39,182 30,811 713 (41,814) 28,892
Debt extinguishment costs 32,329 - - - 32,329
Interest income (21,995) (17,462) (3,863) 41,814 (1,506)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and
minority interests (49,713) 16,983 3,307 - (29,423)
Income tax provision (benefit) (28,213) (813) 249 - (28,777)
Minority interests - 658 - - 658
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (21,500) $ 17,138 $ 3,058 $ - $ (1,304)
============= ============= ============= ============= =============
15
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
Total revenues $ - $ 644,375 $ 27,890 $ (15,325) $ 656,940
Costs and expenses
Operating costs and expenses - 518,023 22,361 (15,325) 525,059
Depreciation, depletion and amortization - 57,911 729 - 58,640
Selling and administrative expenses 108 20,134 535 - 20,777
Net gain on property and equipment
disposals - (2,765) (16) - (2,781)
Interest expense 34,854 27,525 990 (37,331) 26,038
Interest income (17,140) (17,249) (3,491) 37,331 (549)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and
minority interests (17,822) 40,796 6,782 - 29,756
Income tax provision (benefit) (939) 2,035 352 - 1,448
Minority interests - 3,811 - - 3,811
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (16,883) $ 34,950 $ 6,430 $ - $ 24,497
============= ============= ============= ============= =============
16
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
Total revenues $ - $ 1,317,096 $ 87,266 $ (29,823) $ 1,374,539
Costs and expenses
Operating costs and expenses - 1,096,468 79,978 (29,823) 1,146,623
Depreciation, depletion and amortization - 113,737 1,828 - 115,565
Asset retirement obligation expense - 12,967 124 - 13,091
Selling and administrative expenses 362 52,309 1,155 - 53,826
Net (gain) loss on property and equipment
disposals - (19,400) 11 - (19,389)
Interest expense 74,456 58,170 1,460 (79,042) 55,044
Debt extinguishment costs 46,164 7,349 - - 53,513
Interest income (39,215) (34,911) (7,094) 79,042 (2,178)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and
minority interests (81,767) 30,407 9,804 - (41,556)
Income tax provision (benefit) (41,371) (1,679) 2,027 - (41,023)
Minority interests - 1,708 - - 1,708
Cumulative effect of accounting changes,
net of taxes 6,762 (16,349) (557) - (10,144)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (33,634) $ 14,029 $ 7,220 $ - $ (12,385)
============= ============= ============= ============= =============
17
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
Total revenues $ - $ 1,296,387 $ 66,703 $ (30,384) $ 1,332,706
Costs and expenses
Operating costs and expenses - 1,034,852 56,752 (30,384) 1,061,220
Depreciation, depletion and amortization - 115,893 1,424 - 117,317
Selling and administrative expenses 269 45,742 1,049 - 47,060
Net (gain) loss on property and equipment
disposals - (3,098) 12 - (3,086)
Interest expense 68,716 55,013 1,848 (74,636) 50,941
Interest income (34,298) (34,181) (7,225) 74,636 (1,068)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and
minority interests (34,687) 82,166 12,843 - 60,322
Income tax provision (benefit) (3,469) 8,169 1,333 - 6,033
Minority interests - 7,477 - - 7,477
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (31,218) $ 66,520 $ 11,510 $ - $ 46,812
============= ============= ============= ============= =============
18
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 106,374 $ 1,624 $ 3,623 $ - $ 111,621
Accounts receivable 211 102,597 22,721 - 125,529
Inventories - 250,010 2,484 - 252,494
Assets from coal and emission allowance
trading activities - 47,165 - - 47,165
Deferred income taxes - 10,101 311 - 10,412
Other current assets - 15,347 6,401 - 21,748
------------- ------------- ------------- ------------- -------------
Total current assets 106,585 426,844 35,540 - 568,969
Property, plant, equipment and mine
development - at cost - 5,213,023 57,885 - 5,270,908
Less accumulated depreciation,
depletion and amortization - (927,926) (18,255) - (946,181)
------------- ------------- ------------- ------------- -------------
Property, plant, equipment and
mine development, net - 4,285,097 39,630 - 4,324,727
Investments and other assets 3,503,958 266,451 31,775 (3,468,600) 333,584
------------- ------------- ------------- ------------- -------------
Total assets $ 3,610,543 $ 4,978,392 $ 106,945 $ (3,468,600) $ 5,227,280
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ 4,500 $ 25,163 $ 2,204 $ - $ 31,867
Payables and notes payable to affiliates, net 1,345,175 (1,359,675) 14,500 - -
Liabilities from coal and emission allowance
trading activities - 28,199 384 - 28,583
Accounts payable and accrued expenses 15,481 519,751 7,815 - 543,047
------------- ------------- ------------- ------------- -------------
Total current liabilities 1,365,156 (786,562) 24,903 - 603,497
Long-term debt, less current maturities 1,092,187 75,563 4,028 - 1,171,778
Deferred income taxes - 446,436 4,816 - 451,252
Other noncurrent liabilities 2,931 1,912,325 5,174 - 1,920,430
------------- ------------- ------------- ------------- -------------
Total liabilities 2,460,274 1,647,762 38,921 - 4,146,957
Minority interests - 1,581 - - 1,581
Stockholders' equity 1,150,269 3,329,049 68,024 (3,468,600) 1,078,742
------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity $ 3,610,543 $ 4,978,392 $ 106,945 $ (3,468,600) $ 5,227,280
============= ============= ============= ============= =============
19
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------ -------------
ASSETS
Current assets
Cash and cash equivalents $ 60,666 $ 5,365 $ 5,179 $ - $ 71,210
Accounts receivable 836 102,917 49,459 - 153,212
Inventories - 227,075 2,613 - 229,688
Assets from coal and emission
allowance trading activities - 69,898 - - 69,898
Deferred income taxes - 10,101 260 - 10,361
Other current assets 260 12,039 3,255 - 15,554
------------- ------------- ------------- ------------- -------------
Total current assets 61,762 427,395 60,766 - 549,923
Property, plant, equipment and mine
development - at cost - 5,079,997 51,232 - 5,131,229
Less accumulated depreciation, depletion
and amortization - (841,781) (16,406) - (858,187)
------------- ------------- ------------- ------------- -------------
Property, plant, equipment and mine
development, net - 4,238,216 34,826 - 4,273,042
Investments and other assets 3,448,319 279,216 17,835 (3,428,158) 317,212
------------- ------------- ------------- ------------- -------------
Total assets $ 3,510,081 $ 4,944,827 $ 113,427 $ (3,428,158) $ 5,140,177
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ - $ 44,441 $ 3,074 $ - $ 47,515
Payables and notes payable to affiliates, net 1,626,695 (1,643,593) 16,898 - -
Liabilities from coal and emission
allowance trading activities - 37,008 - - 37,008
Accounts payable and accrued expenses 9,427 521,917 15,669 - 547,013
------------- ------------- ------------- ------------- -------------
Total current liabilities 1,636,122 (1,040,227) 35,641 - 631,536
Long-term debt, less current maturities 714,571 263,826 3,299 - 981,696
Deferred income taxes - 495,284 4,026 - 499,310
Other noncurrent liabilities 623 1,906,050 2,703 - 1,909,376
------------- ------------- ------------- ------------- -------------
Total liabilities 2,351,316 1,624,933 45,669 - 4,021,918
Minority interests - 37,121 - - 37,121
Stockholders' equity 1,158,765 3,282,773 67,758 (3,428,158) 1,081,138
------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity $ 3,510,081 $ 4,944,827 $ 113,427 $ (3,428,158) $ 5,140,177
============= ============= ============= ============= =============
20
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Consolidated
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities $ (29,889) $ 119,201 $ 9,504 $ 98,816
------------- ------------- ------------- -------------
Additions to property, plant, equipment and
mine development - (89,113) (2,829) (91,942)
Additions to advance mining royalties - (5,868) - (5,868)
Acquisitions, net - (90,000) - (90,000)
Proceeds from property and equipment disposals - 28,707 347 29,054
------------- ------------- ------------- -------------
Net cash used in investing activities - (156,274) (2,482) (158,756)
------------- ------------- ------------- -------------
Net change in revolving lines of credit - (121,584) - (121,584)
Proceeds from long-term debt 1,100,000 2,717 186 1,102,903
Payments of long-term debt (744,133) (108,534) - (852,667)
Reduction of securitized interests in accounts receivable - - (5,900) (5,900)
Payment of debt issuance costs (23,670) - - (23,670)
Distributions to minority interests - (3,085) - (3,085)
Dividends paid (10,490) - - (10,490)
Proceeds from stock options exercised 11,629 - - 11,629
Transactions with affiliates, net (260,057) 263,818 (3,761) -
Other 2,318 - - 2,318
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities 75,597 33,332 (9,475) 99,454
------------- ------------- ------------- -------------
Effect of exchange rate changes on cash and equivalents - - 897 897
Net increase (decrease) in cash and cash equivalents 45,708 (3,741) (1,556) 40,411
Cash and cash equivalents at beginning of period 60,666 5,365 5,179 71,210
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 106,374 $ 1,624 $ 3,623 $ 111,621
============= ============= ============= =============
21
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Consolidated
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities $ (27,189) $ 79,792 $ 7,936 $ 60,539
------------- ------------- ------------- -------------
Additions to property, plant, equipment and
mine development - (104,261) (1,193) (105,454)
Additions to advance mining royalties - (6,355) - (6,355)
Acquisition, net - (17,712) - (17,712)
Investment in joint venture - (475) - (475)
Proceeds from property and equipment disposals - 7,606 190 7,796
------------- ------------- ------------- -------------
Net cash used in investing activities - (121,197) (1,003) (122,200)
------------- ------------- ------------- -------------
Net change in revolving line of credit 74,599 (7,016) - 67,583
Payments of long-term debt - (19,477) (1,900) (21,377)
Distributions to minority interests - (5,402) - (5,402)
Dividends paid (10,414) - - (10,414)
Proceeds from stock options exercised 541 - - 541
Transactions with affiliates, net (59,494) 68,400 (8,906) -
Other 923 - - 923
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities 6,155 36,505 (10,806) 31,854
------------- ------------- ------------- -------------
Net decrease in cash and cash equivalents (21,034) (4,900) (3,873) (29,807)
Cash and cash equivalents at beginning of period 28,121 6,501 4,000 38,622
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 7,087 $ 1,601 $ 127 $ 8,815
============= ============= ============= =============
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly 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. 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
they are open 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 in coal and power markets;
- coal's market share of electricity generation;
- the pace and extent of the economic recovery;
- lower than normal heating and cooling degree days;
- railroad and other transportation performance and costs;
- the ability to renew sales contracts upon expiration or
renegotiation;
- the ability to successfully implement operating strategies;
- the effectiveness of our cost-cutting measures;
- regulatory and court decisions, including changes in Internal
Revenue Service interpretations related to synfuel activities;
- future legislation;
- changes in postretirement benefit and pension obligations;
- credit, market and performance risk associated with our
customers;
- modification or termination of our long-term coal supply
agreements;
- reductions of purchases by major customers;
- risks inherent to mining, including geologic conditions or
unforeseen equipment problems;
- terrorist attacks or threats affecting our or our customers'
operations;
- replacement of recoverable reserves;
- implementation of new accounting standards;
- inflationary trends and interest rates;
- the effects of acquisitions or divestitures; and
- other factors, including those discussed in "Legal
Proceedings."
23
When considering these forward-looking statements, you should keep in
mind the cautionary statements in this document, the "Risks Relating to Our
Company" section of Item 7 of our 2002 Annual Report on Form 10-K filed with the
Securities and Exchange Commission and all documents incorporated by reference
in this quarterly report. We will not update these statements unless the
securities laws require us to do so.
QUARTER ENDED JUNE 30, 2003 COMPARED TO QUARTER ENDED JUNE 30, 2002
Sales. Sales for the quarter ended June 30, 2003 of $671.0 million were
$44.7 million above the corresponding prior year quarter, as higher pricing in
our western regions and higher broker sales volume overcame reduced production
related to customer repairs and milder weather. Heavy rains in Appalachia also
reduced shipments and disrupted production.
U.S. mining and broker operations' sales volume totaled 47.7 million
tons for the current year quarter, a 7.4% increase over the prior year level of
44.4 million tons. Higher volume from our brokerage operations more than offset
lower volume at our U.S. mining operations. Our average sales price decreased
0.4% from the prior year quarter. The pricing decrease was primarily due to
sales mix, as higher priced tons in the Appalachia and Midwest regions
represented a lower percentage of overall sales in the current year compared to
prior year.
U.S. mining operations' sales were $2.4 million below the prior year
quarter, primarily as a result of lower sales volume in the Appalachia region,
which were nearly offset by higher pricing and volume in the Powder River Basin
region. Sales in the Appalachian region were $17.9 million lower than the prior
year quarter, as lower production resulted from heavy rains at several
operations, geologic difficulties at our Harris Mine and the completion of a
longwall move to a new reserve area at our Federal Mine. The Midwest region's
sales were comparable with the prior year quarter as Black Beauty mines
increased their production, while the new 4.5 million ton per year Highland
Mine's production has not yet reached levels comparable with production in the
prior year quarter at the predecessor Camp No. 11 mine, which ceased operations
during the fourth quarter of 2002.
In the west, sales in the Powder River Basin operations increased $19.8
million from improved pricing and volume in the second quarter, including a
record 20.2 million tons from the North Antelope Rochelle Mine. Sales in the
Southwest region decreased $4.1 million on slightly lower volume, primarily
related to customer repairs in the current year quarter.
Sales from broker operations increased $40.6 million over the prior
year quarter due to higher U.S. broker sales and Australian broker export sales.
Our Australian Mining Operations, which were acquired in the third quarter of
2002, contributed sales of $6.4 million for the current year quarter.
Other Revenues. Other revenues decreased $8.4 million from the prior
year quarter primarily due to lower unrealized revenues from trading operations.
Asset Retirement Obligation Expense. We recognized asset retirement
obligation expense of $6.6 million during the current year quarter, comprised of
the accretion of the asset retirement obligation liability and the amortization
of the asset retirement obligation asset recognized in accordance with SFAS No.
143. Expense in the prior year related to reclamation activities was $4.1
million and was included in "operating costs and expenses" in the statement of
operations for the quarter ended June 30, 2002. The adoption of SFAS No. 143 is
discussed in Note 3 to the unaudited condensed consolidated financial
statements.
Selling and Administrative Expenses. Selling and administrative
expenses increased $7.7 million due to the impact of our rising common stock
price on incentive plans, higher costs incurred to control health care spending
and costs associated with Sarbanes-Oxley compliance. Lower headcount in 2003
helped offset some of these cost increases.
Net Gain on Property and Equipment Disposals. Net gain on property and
equipment disposals related to our resource management business increased $8.9
million due to the sale of land and coal reserves in Appalachia in the current
quarter.
Operating Profit. Operating profit decreased $24.9 million to $30.3
million for the quarter ended June 30, 2003. Operating profit related to U.S.
mining operations, which excludes operating costs related to past mining
activities and net gains on property disposals, decreased $7.6 million. The
decrease was driven by the effects of lower production levels in our Appalachia
operations and higher fuel, explosives and insurance costs.
24
In the west, the Powder River Basin region's operating profit increased
$9.9 million as improved prices and volume reflected strong customer demand. The
Southwest region's operating profit approximated prior year levels, despite
slightly lower sales volume.
In the east, the Appalachia region's operating profit decreased $11.3
million due to the impact of lower production related to geologic difficulties
and weather disruptions at the Harris Mine, lower shipments from contract mines
and the longwall move at the Federal Mine in the current year quarter. The Big
Mountain Mine, which was reopened late in the first quarter, performed well and
helped offset some of the other issues in the region. Operating profit in the
Midwest region decreased $5.3 million compared to the prior year quarter due to
higher explosives and fuel costs, lower production at Black Beauty's Vermilion
Grove and Willow Lake mines and lower volume due to the ramp-up of the new
Highland Mine, which has not reached its full production capacity.
Operating profit from trading and brokerage operations decreased $3.0
million, as higher trading profits in the prior year more than offset higher
profit from brokerage activities and the impact of adopting EITF Issue 02-3
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." Current quarter trading and brokerage results included $6.8 million
in unrealized profit related to contract restructuring activities. The new
contract's terms and conditions required it to be classified as a derivative and
marked to market for accounting purposes. The unrealized profit related to this
contract will be converted to cash by the end of 2005. An additional $1.6
million of unrealized profit, which will be converted to cash by the end of
2004, related to another contract modification.
Operating profit for the current year period was also affected by the
following items discussed above: higher net gains on property and equipment
disposals of $8.9 million; asset retirement obligation expense of $6.6 million;
and higher selling and administrative expenses of $7.7 million. Finally,
operating costs related to past mining activities were $4.1 million higher in
the current quarter, primarily due to $2.4 million in excise tax refunds
included in the prior year.
Interest Expense. Interest expense increased $2.9 million over the
prior year quarter, to $28.9 million. The increase in interest expense included
$5.3 million in interest costs for the $466 million of notes not extinguished in
the tender offer in March 2003 (see complete discussion in Note 2 to the
unaudited condensed consolidated financial statements) that were subsequently
redeemed on May 15, 2003. In addition, we incurred $1.9 million in higher costs
in the current quarter related to surety bonds and letters of credit used to
secure our obligations for reclamation, workers' compensation and lease
commitments. These increases were partially offset by lower interest on $650
million of new 6.875% Senior Notes.
Early Debt Extinguishment Costs. Pursuant to our debt refinancing
transactions discussed in Note 2 to the unaudited condensed consolidated
financial statements, we incurred early debt extinguishment costs of $32.3
million during the quarter, comprised of $22.9 million of early prepayment
premiums and $9.4 million of debt issuance costs that were written off in
conjunction with the early extinguishment of debt.
Income Taxes. For the quarter ended June 30, 2003, there was an income
tax benefit of $28.8 million on a loss before income taxes and minority
interests of $29.4 million, compared to income tax expense of $1.4 million on
income before income taxes and minority interests of $29.8 million in the prior
year quarter. The tax benefit recorded in the second quarter of 2003 as a
percentage of pre-tax income (or loss) is greater than the tax expense recorded
in the same quarter for the prior year primarily as a result of the magnitude of
the percentage depletion deduction (which is a permanent difference) relative to
pre-tax income. The income tax benefit for the current year quarter results
primarily from the magnitude of the percentage depletion deduction and a $10.0
million adjustment to our tax reserves.
Minority Interests. For the quarter ended June 30, 2003, minority
interests expense decreased $3.2 million to $0.7 million. The reduction was due
to the purchase of the remaining 25% of Arclar Coal Company in September 2002
and the acquisition in April 2003 of the remaining 18.3% of Black Beauty Coal
Company.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Sales. Sales for the six months ended June 30, 2003 of $1,328.8 million
were $50.2 million, or 3.9%, above the corresponding prior year period, as
higher pricing in the Powder River Basin, higher broker volume and higher
Australian export volume overcame reduced production related to customer repairs
and weather disruptions.
U.S. mining and broker operations' sales volume totaled 93.7 million
tons for the current year period, a 3.1% increase over the prior year level of
90.9 million tons. Higher volume from our brokerage operations more than offset
lower volume at our U.S. mining operations. Our average sales price increased
0.2% over the prior year period, mainly due to pricing increases in our western
regions, combined with a change in sales mix that included more brokerage tons
in the current year
25
period. The pricing increase was partially mitigated by sales mix, as higher
priced tons in the Appalachia and Midwest regions represented a lower percentage
of overall sales in the current year compared to the prior year period.
U.S. mining operations sales were $48.0 million below the prior year
period, primarily as a result of lower volume in Appalachia and the Midwest,
which more than offset higher prices in the Powder River Basin and Southwest.
Sales in the Appalachian region were $50.4 million lower than the prior year
period, as production was reduced by snow in the first quarter and rain in the
second quarter, along with the installation of new longwall equipment and
development of a new reserve area at the Federal Mine. Midwest sales decreased
$8.8 million, as the new Highland mine's production has not yet reached levels
comparable with production in the prior year period at the predecessor Camp No.
11 mine, which ceased operations during the fourth quarter of 2002. In addition,
lower volume resulted from customer repairs in the first half of 2003.
Sales in the Powder River Basin increased $18.0 million as improved
pricing for the current year period and record volume in the second quarter more
than offset lower volume in the first quarter as a result of heavy snowfall.
Sales in the Southwest region decreased $6.8 million as improved pricing was
more than offset by lower demand due to two customers performing major repairs
in the current year.
Sales from broker operations increased $85.5 million over the prior
year period due to higher U.S. broker sales and Australian broker export sales.
Our Australian Mining Operations, which were acquired in the third quarter of
2002, contributed sales of $12.8 million for the current year.
Other Revenues. Other revenues decreased $8.4 million from the prior
year period due to revenues recognized in the prior year from a royalty
agreement that expired in 2002, combined with slightly lower revenues from
trading operations.
Asset Retirement Obligation Expense. We recognized asset retirement
obligation expense of $13.1 million during the current year, comprised of the
accretion of the asset retirement obligation liability and the amortization of
the asset retirement obligation asset recognized in accordance with SFAS No.
143. Expense in the prior year related to reclamation activities was $8.7
million and was included in "operating costs and expenses" in the statement of
operations for the six months ended June 30, 2002. The adoption of SFAS No. 143
is discussed in Note 3 to the unaudited condensed consolidated financial
statements.
Selling and Administrative Expenses. Selling and administrative
expenses increased $6.8 million due to the impact of our rising common stock
price on incentive plans, higher costs incurred to control health care spending
and costs associated with Sarbanes-Oxley compliance. Lower headcount in 2003
helped offset some of these cost increases.
Net Gain on Property and Equipment Disposals. Net gain on property and
equipment disposals related to our resource management business increased $16.3
million primarily due to a sale of land and coal reserves in Appalachia in the
second quarter of 2003 and the sale of oil and gas rights in Appalachia in the
first quarter of 2003.
Operating Profit. Operating profit decreased $45.4 million to $64.8
million for the six months ended June 30, 2003. Operating profit from U.S.
mining operations, which excludes operating costs related to past mining
activities and net gains on property disposals, decreased $28.4 million. The
decrease was mainly caused by operating below optimal levels as a result of
customer repairs and weather disruptions, discussed in more detail below.
In the west, the Powder River Basin region's operating profit increased
$13.3 million as improved prices and quality premiums offset lower sales and
production due to heavy snowfall in the first quarter. The Southwest region's
operating profit decreased $4.5 million, on lower volume from outages at two
customer plants in the current year period.
In the east, the Appalachia region's operating profit decreased $27.8
million due to lower volume from the factors mentioned above, geologic
difficulties and weather disruptions at the Harris Mine and lower shipments from
contract mines. Operating profit in the Midwest region decreased $9.4 million
compared to the prior year period due to higher fuel and explosives costs at our
Black Beauty operations and lower volume due to customer repairs and the ramp-up
of the new Highland Mine, which has not reached its full production capacity.
Operating profit from trading and brokerage operations increased $2.7
million over the prior year, primarily due to higher profit from higher
brokerage volume and the impact of adopting EITF Issue 02-3 "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities." Current
year trading and brokerage results include profits related to contract
restructuring activities and a contract modification described above in the
analysis of results for the quarter ended June 30, 2003.
26
Operating profit for the current year period was also affected by the
following items discussed above: higher net gains on property and equipment
disposals of $16.3 million; asset retirement obligation expense of $13.1
million; and higher selling and administrative expenses of $6.8 million.
Operating costs related to past mining activities were $11.3 million
higher in the current six months, due to $5.7 million of higher retiree
healthcare costs in the current year, driven by lower interest discount rate and
higher trend rate assumptions, combined with $5.5 million in excise tax refunds
included in the prior year. Finally, prior year results included royalty income
of $4.0 million related to a royalty agreement that expired in 2002.
Interest Expense. Interest expense increased $4.1 million over the
prior year six months, to $55.0 million. The increase included $5.3 million in
interest costs for the $466 million of notes not extinguished in the tender
offer in March 2003 that were subsequently redeemed on May 15, 2003. In
addition, we incurred $3.9 million in higher costs in the six months ended June
30, 2003 related to surety bonds and letters of credit used to secure our
obligations for reclamation, workers' compensation and lease commitments. These
increases were partially offset by lower interest on $650 million of new 6.875%
Senior Notes.
Early Debt Extinguishment Costs. Pursuant to our debt refinancing
transactions discussed in Note 2 to the unaudited condensed consolidated
financial statements, we incurred early debt extinguishment costs of $53.5
million during the six months ended June 30, 2003, comprised of $41.8 million of
early prepayment premiums and fees paid to retire debt, $17.5 million of debt
issuance costs that were written off in conjunction with the early
extinguishment of debt, partially offset by a gain on the termination of related
interest rate swaps of approximately $5.8 million.
Income Taxes. For the six months ended June 30, 2003, there was an
income tax benefit of $41.0 million on a loss before income taxes and minority
interests of $41.6 million, compared to income tax expense of $6.0 million on
income before income taxes and minority interests of $60.3 million in the prior
year period. The tax benefit recorded in the first six months of 2003 as a
percentage of pre-tax income (or loss) is greater than the tax expense recorded
in the same six month period for the prior year primarily as a result of the
magnitude of the percentage depletion deduction (which is a permanent
difference) relative to pre-tax income. The income tax benefit for the current
year period results primarily from the magnitude of the percentage depletion
deduction and the adjustment to our tax reserves discussed above.
Minority Interests. For the six months ended June 30, 2003, minority
interests expense decreased $5.8 million to $1.7 million. The reduction was due
to the purchase of the remaining 25% of Arclar Coal Company in September 2002,
the impact of $7.3 million of early debt extinguishment charges incurred at
Black Beauty during 2003 and the acquisition in April 2003 of the remaining
18.3% of Black Beauty Coal Company.
Cumulative Effect of Accounting Changes, Net of Taxes. As of January 1,
2003, we recognized expense relating to the cumulative effect of accounting
changes, net of income taxes, of $10.1 million. This amount represents the
aggregate amount of the recognition of accounting changes pursuant to the
adoption of SFAS No. 143, the change in method of amortization of actuarial
gains and losses related to net periodic postretirement benefit costs and the
effect of the rescission of EITF No. 98-10, as discussed in Note 3 to the
unaudited condensed consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $98.8 million for the six
months ended June 30, 2003, an increase of $38.3 million from the corresponding
prior year period. The improvement was due to improved working capital cash
flows in the current year. Net cash flows from working capital improved $99.7
million, due primarily to favorable changes in accounts receivable and accounts
payable and accrued expenses balances in comparison with the prior year period.
Timing of accounts receivable collection and mix were favorable in the current
year, while the prior year's beginning accounts payable balance included several
large payables for capital purchases that were repaid in the first six months of
2002, reducing that period's cash flows. The remainder of the year-over-year
operating cash flow variance primarily related to current year income variances,
after excluding the effects of accounting changes, early debt extinguishment
costs and deferred income taxes.
Net cash used in investing activities was $158.8 million for the six
months ended June 30, 2003, $36.6 million higher than the corresponding prior
year period. Capital expenditures decreased $13.5 million, to $91.9 million, in
the current year period. Major expenditures incurred in the six months ended
June 30, 2003 related to the startup of the Highland Mine and the installation
of new longwall equipment and development of a new reserve area at our 5 million
ton per year Federal Mine. Other capital expenditures were primarily for the
replacement of mining equipment, the expansion of capacity at certain mines and
projects to improve the efficiency of mining operations. Acquisition
expenditures increased $72.3 million
27
in the current year, due to the current year $90.0 million acquisition of the
remaining 18.3% of Black Beauty Coal Company, discussed in Note 4 to the
unaudited condensed consolidated financial statements. The prior year included a
$17.7 million expenditure related to the acquisition of Beaver Dam Coal Company.
Finally, the current year period included $21.3 million higher proceeds from
property and equipment disposals as a result of sales of land, coal reserves and
oil and gas rights during the period.
Net cash provided by financing activities was $99.5 million for the six
months ended June 30, 2003, a $67.6 million increase over the corresponding
prior year period. The current year included proceeds from long-term debt of
$1.1 billion from the refinancing transactions. A detailed discussion of the
sources and uses of proceeds from the refinancing transactions is included in
Note 2 to the unaudited condensed consolidated financial statements. The
refinancing proceeds were used, among other things, to repay line of credit
borrowings of $121.6 million, long-term debt of $852.7 million and to pay $23.7
million in debt issuance costs in connection with the new debt issued. The prior
year includes net borrowings of $46.2 million. Financing cash flows in the
current and prior year periods reflect dividends paid of $10.5 million and $10.4
million, respectively. Finally, the current year period included $11.6 million
of proceeds from the exercise of stock options.
As of June 30, 2003 and December 31, 2002, our total indebtedness
consisted of the following (dollars in thousands):
June 30, 2003 December 31, 2002
----------------- -----------------
Term Loan under Senior Secured Credit Facility $ 448,875 $ -
6.875% Senior Notes due 2013 650,000 -
9.625% Senior Subordinated Notes redeemed in 2003 - 391,490
8.875% Senior Notes redeemed in 2003 - 316,498
5.0% Subordinated Note 77,197 85,055
Senior unsecured notes under various agreements - 58,214
Unsecured revolving credit agreement - 116,584
Other 27,573 61,370
----------------- -----------------
$ 1,203,645 $ 1,029,211
================= =================
During the six months ended June 30, 2003, we completed a comprehensive
debt refinancing to lower our borrowing costs, expand our borrowing capacity,
extend our debt maturities and simplify our capital structure. Our Senior
Secured Credit Facility and 6.875% Senior Notes have been rated Ba1 and BB-,
respectively, by Moody's Investors Service, BB+ and BB- by Standard & Poor's and
BB+ and BB by Fitch.
These security ratings reflect the views of the rating agencies only.
An explanation of the significance of these ratings may be obtained from each
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 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.
In May 2003, we entered into and designated interest rate swaps with
notional amounts totaling $100.0 million as a fair value hedge of our 6.875%
Senior Notes. Under the swaps, the Company pays a floating rate that resets each
March 15 and September 15, based upon the six-month LIBOR rate, for a period of
ten years ending March 15, 2013. The applicable rate was 4.32% as of June 30,
2003. At current LIBOR levels, the Company would realize annual savings of
approximately $2.5 million.
As of June 30, 2003, there were no outstanding borrowings under the new
Revolving Credit Facility. We had letters of credit outstanding under the
facility of $232.7 million, leaving $367.3 million available for borrowing. We
were in compliance with all of the covenants of the Senior Secured Credit
Facility as of June 30, 2003.
We had $78.3 million of commitments for capital expenditures at June
30, 2003, that are primarily related to acquiring additional coal reserves and
mining equipment. The majority of these commitments relate to spending targeted
for 2003. Total projected capital expenditures for calendar year 2003 are
approximately $200 million, and have been and will be primarily used to develop
existing reserves, replace or add equipment and fund cost reduction initiatives.
We anticipate funding capital expenditures primarily through operating cash
flow. We believe the risk of generating lower than anticipated operating cash
flow in 2003 is reduced by our high level of sales commitments (substantially
all of 2003 planned production is committed) and lower future borrowing costs as
a result of our recent debt refinancing.
28
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 currently scheduled to expire in
2007, and the maximum amount of undivided interests in accounts receivable that
may be sold to the Conduit is $140.0 million. Under the provisions of SFAS No.
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the securitization transactions have been
recorded as sales, with those accounts receivable sold to the Conduit removed
from the consolidated balance sheet. The amount of undivided interests in
accounts receivable sold to the Conduit was $130.5 million and $136.4 million as
of June 30, 2003 and December 31, 2002, respectively.
There were no other material changes to our off-balance sheet
arrangements during the six months ended June 30, 2003. All off-balance sheet
arrangements are discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Form 10-K for the year ended
December 31, 2002.
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock Based Compensation" and provides alternative
methods for accounting for a change by registrants to the fair value method of
accounting for stock-based compensation. Additionally, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent disclosures in financial statements about the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of the
statement became effective as of December 31, 2002 and interim disclosure
provisions are effective for interim financial reports starting in 2003 and are
included in the Note 7 to the unaudited condensed consolidated financial
statements included in this report.
OTHER
Mohave Generating Station
See Note 10 to the unaudited condensed consolidated financial
statements included in this report relating to the potential cessation or
suspension of the operations of the Mohave Generating Station on December 31,
2005. The Mohave Generating Station is the sole customer of our Black Mesa Mine,
which sold 4.6 million tons of coal in 2002.
Big Sky Mine
Our Big Sky Mine, which is located in the northern Powder River Basin
near Colstrip, Montana, sold 2.8 million tons of medium sulfur coal during 2002.
As disclosed in our Form 10-K for the year ended December 31, 2002, the mine is
near the exhaustion of its economically recoverable reserves. The mine's current
sales contract expires on December 31, 2003, and we anticipate that we will
close the mine after that sales contract expires. The mine's closure will not
have a material adverse effect on our financial condition, results of operations
or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Trading Activities
We market and trade coal and emission allowances. These activities give
rise to commodity price risk, which represents the potential loss that can be
caused by a 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 we may assume at any point in time.
We account for coal trading derivatives under SFAS No. 133, which
requires us to reflect derivatives, such as forwards, futures, options and
swaps, at market value in the consolidated financial statements.
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We perform a value at risk analysis on our trading portfolio, which
includes over-the-counter and brokerage trading of coal and emission allowances.
The use of value at risk allows us to quantify in dollars, on a daily basis, the
price risk inherent in our trading portfolio. Our value at risk model is based
on the industry standard risk-metrics 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.
The use of value at risk allows management to aggregate pricing risks
across products in the portfolio, compare risk on a consistent basis and
identify the drivers of risk. Due to the subjectivity in the choice of the
liquidation period, reliance on historical data to calibrate the models and the
inherent limitations in the value at risk methodology, including the use of
delta/gamma adjustments related to options, we perform regular stress, back
testing 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.
During the six months ended June 30, 2003, the low, high and average
values at risk for our coal trading portfolio were $0.4 million, $1.3 million
and $0.9 million, respectively. As of June 30, 2003, 25% of the value of our
trading portfolio was scheduled to be realized by the end of calendar year 2003,
and 97% of the value of our trading portfolio was scheduled to be realized by
the end of calendar year 2004.
We also monitor other types of risk associated with our coal and
emission allowance trading activities, including credit, market liquidity and
counterparty nonperformance.
Non-trading Activities
We manage our commodity price risk for non-trading purposes through the
use of long-term coal supply agreements, rather than through the use of
derivative instruments. As of June 30, 2003, we had sales commitments for
substantially all of our planned calendar 2003 production.
Some of the products used in our mining activities, such as diesel fuel
and explosives, are subject to price volatility. We, through our suppliers,
utilize forward contracts to manage the exposure related to this volatility.
We have exposure to changes in interest rates due to our existing level
of indebtedness. As of June 30, 2003, after taking into consideration the
effects of interest rate swaps, we had $648.5 million of fixed-rate borrowings
and $555.1 million of variable-rate borrowings outstanding. A one percentage
point increase in interest rates would result in an annualized increase to
interest expense of $5.6 million on our variable-rate borrowings. With respect
to our fixed-rate borrowings, a one percentage point increase in interest rates
would result in a $49.8 million decrease in the fair value of these borrowings.
ITEM 4. CONTROLS AND PROCEDURES.
The Chief Executive Officer and Executive Vice President and Chief
Financial Officer have evaluated our disclosure controls and procedures as of
June 30, 2003 and have concluded that the disclosure controls and procedures are
effective and that there are no significant deficiencies or material weaknesses.
Our disclosure controls and procedures are designed to 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.
Additionally, during the most recent fiscal quarter, there have been no
changes to our internal control over financial reporting that could materially
affect, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Navajo Nation
See Note 10 to the unaudited condensed consolidated financial
statements included in Part I, Item 1 of this report relating to certain legal
proceedings brought against us by the Navajo Nation and Hopi Tribe.
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Oklahoma Lead Litigation
One of our subsidiaries, Gold Fields Mining Corporation, was named in
June 2003 as a defendant, along with five other companies, in a class action
lawsuit filed in the U.S. District Court for the Northern District of Oklahoma.
The plaintiffs have asserted nuisance and trespass claims predicated on
allegations of intentional lead exposure by the defendants, including Gold
Fields, and are seeking compensatory damages for diminution of property value,
punitive damages and the implementation of medical monitoring and relocation
programs for the affected individuals. A predecessor of Gold Fields formerly
operated two lead mills near Picher, Oklahoma prior to the 1950's. The plaintiff
classes include all persons who have lived in the vicinity of Picher within a
specified time period. Gold Fields has agreed to indemnify one of the other
defendants, which is a former subsidiary of our company. Gold Fields is also a
defendant, along with other companies, in 17 individual lawsuits arising out of
the same lead mill operations involved in the class action. Plaintiffs in these
actions are seeking compensatory and punitive damages for alleged personal
injuries from lead exposure. Two of those lawsuits have been consolidated for a
trial set for November 17, 2003 in the U.S. District Court for the Northern
District of Oklahoma.
While the outcome of litigation is subject to uncertainties, based on
the Company's preliminary evaluation of the issues and their potential impact on
the Company, the Company believes this matter will be resolved without a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on May 6, 2003. The sole
item voted upon by stockholders at the meeting was the election of four Class II
Directors to serve for three-year terms expiring in 2006. The following persons
were elected to serve as directors for terms expiring in 2006 and received the
number of votes set forth opposite their respective names:
For Withheld
---------- ----------
Willam E. James 46,182,905 501,940
Robert B. Karn III 45,069,075 1,615,770
Henry E. Lentz 37,496,692 9,188,153
Blanche M. Touhill 46,178,890 505,955
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See Exhibit Index at page 33 of this report.
(b) Reports on Form 8-K
On April 10, 2003, we filed a Form 8-K under Item 5, Other
Events and Regulation FD Disclosure, announcing our issuance of a press
release announcing the acquisition of the remaining 18.3 percent of
Black Beauty Coal Company for approximately $90 million and other
contingent consideration as discussed in Note 4 to the unaudited
condensed consolidated financial statements. The press release was
included as an exhibit under Item 7, Financial Statements, Pro Forma
Financial Information and Exhibits.
On April 18 2003, we furnished a Form 8-K under Item 9,
Regulation FD Disclosure and Item 12, Disclosure of Results of
Operations and Financial Condition announcing our issuance of a press
release setting forth Peabody's first quarter 2003 earnings, and
providing guidance on Peabody's second quarter and full year 2003
forecasted results. The press release was included as an exhibit under
Item 7, Financial Statements, Pro Forma Financial Information and
Exhibits.
On May 5, 2003, we filed a Form 8-K under Item 5, Other Events
and Regulation FD Disclosure, announcing an underwriting agreement
between the Company, certain stockholders and certain named
underwriters, pursuant to the secondary offering as discussed in Note
11 to the unaudited condensed consolidated financial statements. The
underwriting agreement was included as an exhibit under Item 7,
Financial Statements, Pro Forma Financial Information and Exhibits.
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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: August 13, 2003 By: /s/ RICHARD A. NAVARRE
-------------------------------------------------
Richard A. Navarre
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
32
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
- ------- ----------------------
3.1 Third Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated by reference to Exhibit 3.1 of the
Company's Form S-1 Registration Statement No. 333-55412).
3.2 Amended and Restated By-Laws of the Registrant (Incorporated
by reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002 filed on
November 14, 2002.
4.28 First Supplemental Indenture dated as of May 8, 2003 among the
Registrant, each Subsidiary Guarantor and US Bank National
Association, as Trustee (Incorporated by reference to Exhibit
4.3 of the Company's Form S-4 Registration Statement No.
333-106208 filed on June 17, 2003).
10.46* Amendment No. 1 to Second Amended and Restated Credit
Agreement, dated as of May 8, 2003, among Peabody Energy
Corporation, the Lenders named therein, and Fleet National
Bank, as administrative agent.
31.1* Certification of periodic financial report by Peabody Energy
Corporation's 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
Corporation's Executive Vice President and 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 Corporation's
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 Corporation's
Executive Vice President and Chief Financial Officer.
* Filed herewith.
33