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 March 31, 2002
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Commission File Number 1-16463
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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
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(Address of principal executive offices) (Zip Code)
(314) 342-3400
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(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
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of April 30, 2002: Common Stock, par value $0.01 per share, 52,115,114
shares outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
-------
Unaudited Condensed Consolidated Statements of Operations for the Quarters
Ended March 31, 2002 and 2001............................................. 2
Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001......................................................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Quarters
Ended March 31, 2002 and 2001............................................. 4
Notes to Unaudited Condensed Consolidated Financial Statements............ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................................... 22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share information)
Quarter Ended
March 31,
----------------------------
2002 2001
------------ ------------
REVENUES
Sales $ 688,411 $ 660,767
Other revenues 22,218 24,232
------------ ------------
Total revenues 710,629 684,999
COSTS AND EXPENSES
Operating costs and expenses 571,024 555,427
Depreciation, depletion and amortization 58,677 60,829
Selling and administrative expenses 26,283 32,352
Gain on sale of Australian operations -- (171,735)
Net gain on property and equipment disposals (305) (673)
------------ ------------
OPERATING PROFIT 54,950 208,799
Interest expense 24,903 44,240
Interest income (519) (1,748)
------------ ------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 30,566 166,307
Income tax provision 4,585 39,007
Minority interests 3,666 2,883
------------ ------------
INCOME FROM CONTINUING OPERATIONS 22,315 124,417
Gain from disposal of discontinued operations -- (1,165)
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 22,315 125,582
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $2,480 -- 8,545
------------ ------------
NET INCOME $ 22,315 $ 117,037
============ ============
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $ 0.43 $ 3.60
Gain from disposal of discontinued operations -- 0.03
Extraordinary loss from early extinguishment of debt -- (0.24)
------------ ------------
Net income $ 0.43 $ 3.39
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 52,018,238 27,541,242
============ ============
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $ 0.42 $ 3.60
Gain from disposal of discontinued operations -- 0.03
Extraordinary loss from early extinguishment of debt -- (0.24)
------------ ------------
Net income $ 0.42 $ 3.39
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53,731,426 27,541,242
============ ============
DIVIDENDS DECLARED PER SHARE $ 0.10 $ --
============ ============
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)
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 16,115 $ 38,622
Accounts receivable, less allowance for doubtful accounts of $1,515
at March 31, 2002 and $1,496 at December 31, 2001 192,724 178,076
Materials and supplies 40,421 38,734
Coal inventory 198,743 176,910
Assets from coal and emission allowance trading activities 75,634 60,509
Deferred income taxes 14,380 14,380
Other current assets 24,408 20,223
----------- -----------
Total current assets 562,425 527,454
Property, plant, equipment and mine development, net of accumulated depreciation,
depletion and amortization of $734,580 at March 31, 2002 and $684,707
at December 31, 2001 4,348,891 4,355,912
Investments and other assets 262,353 267,536
----------- -----------
Total assets $ 5,173,669 $ 5,150,902
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 72,293 $ 46,499
Liabilities from coal and emission allowance trading activities 51,679 45,691
Accounts payable and accrued expenses 574,263 592,113
----------- -----------
Total current liabilities 698,235 684,303
Long-term debt, less current maturities 972,734 984,568
Deferred income taxes 569,348 564,764
Accrued reclamation and other environmental liabilities 434,879 438,526
Workers' compensation obligations 209,082 207,720
Accrued postretirement benefit costs 962,643 962,166
Obligation to industry fund 48,949 49,710
Other noncurrent liabilities 176,970 176,593
----------- -----------
Total liabilities 4,072,840 4,068,350
Minority interests 47,921 47,080
Stockholders' equity
Preferred Stock - $0.01 per share par value; 10,000,000 shares authorized, no
shares issued or outstanding
as of March 31, 2002 or December 31, 2001 -- --
Series Common Stock - $0.01 per share par value; 40,000,000
shares authorized, no shares issued or outstanding
as of March 31, 2002 or December 31, 2001 -- --
Common Stock - $0.01 per share par value; 150,000,000 shares authorized,
52,037,480 shares issued and 52,020,275 shares outstanding as
of March 31, 2002 and 150,000,000 shares authorized, 52,027,451 shares
issued and 52,010,246 shares outstanding as of December 31, 2001 520 520
Additional paid-in capital 951,740 951,528
Retained earnings 133,316 116,203
Employee stock loans (2,280) (2,391)
Accumulated other comprehensive loss (30,345) (30,345)
Treasury shares, at cost: 17,205 shares as of March 31, 2002
and December 31, 2001 (43) (43)
----------- -----------
Total stockholders' equity 1,052,908 1,035,472
----------- -----------
Total liabilities and stockholders' equity $ 5,173,669 $ 5,150,902
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
3
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Quarter Ended
March 31,
----------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,315 $ 117,037
Gain from disposal of discontinued operations -- (1,165)
Extraordinary loss from early extinguishment of debt, net of taxes -- 8,545
--------- ---------
Income from continuing operations 22,315 124,417
Adjustments to reconcile income from continuing operations to
net cash provided by continuing operations:
Depreciation, depletion and amortization 58,677 58,565
Deferred income taxes 4,585 41,176
Amortization of debt discount and debt issuance costs 2,859 4,264
Gain on sale of Australian operations -- (171,735)
Net gain on property and equipment disposals (305) (673)
Minority interests 3,666 2,883
Changes in current assets and liabilities:
Sale of accounts receivable -- 15,000
Accounts receivable, net of sale (14,648) (47,550)
Materials and supplies (1,687) 2,751
Coal inventory (21,833) (17,152)
Net assets from coal and emission allowance trading activities (9,137) (4,918)
Other current assets (4,185) 8,411
Accounts payable and accrued expenses (17,851) 58,883
Accrued reclamation and other environmental liabilities (265) (6,428)
Workers' compensation obligations 1,362 (2,076)
Accrued postretirement benefit costs 477 (1,395)
Obligation to industry fund (761) (3,527)
Other, net (1,854) (3,941)
Net cash used in assets sold - Australian operations -- (4,251)
--------- ---------
Net cash provided by operating activities 21,415 52,704
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, equipment and mine development (47,064) (42,072)
Additions to advance mining royalties (2,104) (3,341)
Acquisition, net -- (7,450)
Investment in joint venture (475) --
Proceeds from sale of Australian operations -- 455,000
Proceeds from property and equipment disposals 833 1,119
--------- ---------
Net cash provided by (used in) continuing operations (48,810) 403,256
Net cash provided by discontinued operations -- 16,938
--------- ---------
Net cash provided by (used in) investing activities (48,810) 420,194
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings 25,000 --
Proceeds from long-term debt 2,375 38,382
Payments of long-term debt (14,687) (501,620)
Distributions to minority interests (2,825) (485)
Dividend received -- 19,916
Dividends paid (5,202) --
Other 227 538
--------- ---------
Net cash provided by (used in) financing activities 4,888 (443,269)
--------- ---------
Net increase (decrease) in cash and cash equivalents (22,507) 29,629
Cash and cash equivalents at beginning of year 38,622 33,094
--------- ---------
Cash and cash equivalents at end of period $ 16,115 $ 62,723
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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.
The consolidated statements of operations and cash flows for the quarter
ended March 31, 2001 include the results of the Company's Australian operations,
which were sold in January 2001.
The accompanying condensed consolidated financial statements as of March
31, 2002 and for the quarters ended March 31, 2002 and 2001, and the notes
thereto, are unaudited. However, in the opinion of management, these financial
statements reflect all adjustments necessary for a fair presentation of the
results of the periods presented. The results of operations for the quarter
ended March 31, 2002 are not necessarily indicative of the results to be
expected for the year ended December 31, 2002.
In July 2001, the Company changed its fiscal year-end from March 31 to
December 31. This change was first effective with respect to the nine months
ended December 31, 2001.
(2) SECONDARY OFFERING
On April 5, 2002, certain shareholders of the Company, including the
Company's largest shareholder, Lehman Brothers Merchant Banking Partners II L.P.
and affiliates ("Lehman Brothers") sold 9,000,000 shares of common stock.
Selling shareholders received all net proceeds. The Company did not sell any
shares through the offering. The underwriters of the secondary offering were
granted the right to purchase up to an additional 1,100,000 shares of common
stock to cover over-allotments. The underwriters exercised the over-allotment
option, and on May 8, 2002, purchased an additional 148,000 shares. Lehman
Brothers sold, in the aggregate, 8,155,000 shares in the offering, and their
beneficial ownership of the Company declined from 57% to 41%.
(3) EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
During the quarter ended March 31, 2001, the Company made optional
prepayments on its term loans under its Senior Credit Facility, which it applied
against mandatory payments in order of maturity. As a result of the prepayments,
the Company recorded an extraordinary loss on debt extinguishment of $8.5
million, net of income taxes. The prepayments were made using proceeds from the
sale of the Company's Australian operations.
(4) ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." The adoption of SFAS Nos. 141 and
142 did not have a material effect on the Company's financial condition or
results of operations.
Also effective January 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The provisions
of this statement provide a single accounting model for measuring impairment of
long-lived assets. The adoption of SFAS No. 144 did not have a material effect
on the Company's financial condition or results of operations.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(5) COAL INVENTORY
Inventories consist of the following (dollars in thousands):
March 31, 2002 December 31, 2001
-------------- -----------------
Raw coal $ 22,923 $ 15,979
Work in process 141,318 137,808
Saleable coal 34,502 23,123
-------- --------
Total $198,743 $176,910
======== ========
(6) ASSETS AND LIABILITIES FROM COAL AND EMISSION ALLOWANCE TRADING ACTIVITIES
The fair value of the financial instruments related to coal and emission
allowance trading activities as of March 31, 2002, are set forth below (dollars
in thousands):
Fair Value
----------------------
Assets Liabilities
------- -----------
Forward contracts $69,925 $48,790
Option contracts 5,709 2,889
------- -------
Total $75,634 $51,679
======= =======
Eighty-three percent of the contracts in the Company's trading portfolio
as of March 31, 2002 were valued utilizing prices from over-the-counter market
sources. The remaining 17% of our contracts were valued based on
over-the-counter market source prices adjusted for differences in coal quality
and content, as well as contract duration.
As of March 31, 2002, the timing of the realization of the value of the
Company's trading portfolio was as follows:
Year of Percentage
Expiration of portfolio
- ---------- ------------
2002 47%
2003 20%
2004 27%
2005 5%
2006 1%
----
100%
====
At March 31, 2002, 85% of the Company's credit exposure related to coal
and emission allowance trading activities was with counterparties that are
investment grade.
The Company's coal trading operations traded 28.2 million tons and 14.3
million tons for the quarters ended March 31, 2002 and 2001, respectively.
(7) EARNINGS PER SHARE
Quarter Ended March 31, 2001
Prior to its initial public offering in May 2001, the Company applied the
"two-class method" of computing earnings per share as prescribed in SFAS No.
128, "Earnings Per Share." In accordance with SFAS No. 128, income or loss is
allocated to preferred stock, Class A common stock and Class B common stock on a
pro-rata basis. Basic and diluted earnings per share is calculated by dividing
income from continuing operations, gain from disposal of discontinued
operations, extraordinary loss from early extinguishment of debt and net income,
respectively, that is attributed to the
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
Company's Class A and Class B common shares by the weighted average number of
common shares outstanding for each class of common stock.
A reconciliation of income from continuing operations, gain from disposal
of discontinued operations, extraordinary loss from early extinguishment of debt
and net income follows (dollars in thousands):
Quarter Ended
March 31, 2001
--------------
Income from continuing operations attributed to:
Preferred stock $ 25,257
Class A common stock 95,801
Class B common stock 3,359
---------
$ 124,417
=========
Gain from disposal of discontinued operations attributed to:
Preferred stock $ 236
Class A common stock 897
Class B common stock 32
---------
$ 1,165
=========
Extraordinary loss from early extinguishment of debt attributed to:
Preferred stock $ (1,735)
Class A common stock (6,580)
Class B common stock (230)
---------
$ (8,545)
=========
Net income attributed to:
Preferred stock $ 23,758
Class A common stock 90,118
Class B common stock 3,161
---------
$ 117,037
=========
Any potential difference between basic and diluted earnings per share is
solely attributable to stock options. For the quarter ended March 31, 2001, all
stock options outstanding were excluded from the diluted earnings per share
calculations for the Company's Class A common stock because they were
anti-dilutive.
Quarter Ended March 31, 2002
In connection with the Company's initial public offering, all outstanding
shares of preferred stock, Class A common stock and Class B common stock were
converted into a single class of common stock on a one-for-one basis. A
reconciliation of the weighted average shares outstanding as of March 31, 2002
follows:
Quarter Ended
March 31, 2002
--------------
Weighted average shares outstanding - basic 52,018,238
Dilutive impact of stock options 1,713,188
----------
Weighted average shares outstanding - diluted 53,731,426
==========
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(8) COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income
(dollars in thousands):
Quarter Ended
March 31,
------------------------
2002 2001
--------- ---------
Net income $ 22,315 $ 117,037
Reclassification adjustment resulting from
the sale of Australian operations -- 38,811
Minimum pension liability adjustment -- (862)
--------- ---------
Comprehensive income $ 22,315 $ 154,986
========= =========
As a result of the sale of its Australian operations, the Company recorded
a reduction of the foreign currency translation adjustment account during the
quarter ended March 31, 2001.
(9) SEGMENT INFORMATION
The Company reports its operations through two reportable operating
segments: U.S. Mining and Trading and Brokerage. 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. "Other" consists
primarily of corporate overhead not directly attributable to the U.S. Mining or
Trading and Brokerage operating segments, and resource management activities.
Operating segment results for the quarters ended March 31, 2002 and March
31, 2001 are as follows (dollars in thousands):
Quarter Ended
March 31,
-------------------------
2002 2001
--------- ---------
Revenues:
U.S. Mining $ 614,491 $ 578,292
Trading and Brokerage 89,540 77,138
Australian Operations -- 20,529
Corporate and Other 6,598 9,040
--------- ---------
Total $ 710,629 $ 684,999
========= =========
Operating Profit:
U.S. Mining $ 64,225 $ 52,582
Trading and Brokerage 11,247 6,823
Australian Operations -- 4,326
Corporate and Other (20,522) 145,068(1)
--------- ---------
Total $ 54,950 $ 208,799
========= =========
(1) Includes the pretax gain on the sale of the Company's Australian operations
of $171.7 million.
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
A reconciliation of segment operating profit to consolidated income before
income taxes follows (dollars in thousands):
Quarter Ended
March 31,
-------------------------
2002 2001
--------- ---------
Total segment operating profit $ 54,950 $ 208,799
Interest expense 24,903 44,240
Interest income (519) (1,748)
Minority interests 3,666 2,883
--------- ---------
Income before income taxes $ 26,900 $ 163,424
========= =========
(10) COMMITMENTS AND CONTINGENCIES
Environmental claims have been asserted against a subsidiary of the
Company at 18 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 "Accrued reclamation and
other environmental liabilities" were $46.1 million and $46.6 million at March
31, 2002 and December 31, 2001, respectively. This amount represents those costs
that the Company believes are probable and reasonably estimable.
Navajo Nation
On June 18, 1999, the Navajo Nation served the Company's subsidiaries,
Peabody Holding Company, Inc., Peabody Coal Company and Peabody Western Coal
Company, 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 Coal Company's two coal leases for the Kayenta and Black Mesa
mines have terminated due to a breach of these leases and a reformation of the
two coal leases to adjust the royalty rate to 20%. All defendants have filed
motions to dismiss the complaint. On March 15, 2001, the court denied the
Peabody defendants' motions to dismiss. Discovery for this litigation has
commenced.
In March 2000, the Hopi Tribe filed a motion to intervene in this lawsuit.
The Hopi Tribe has alleged seven claims, including fraud. The Hopi Tribe is
seeking various remedies, including unspecified actual and punitive damages and
reformation of its coal lease. On March 15, 2001, the court granted the Hopi
Tribe's motion. On April 17, 2001, the Company filed a motion to dismiss the
Hopi complaint. On October 31, 2001, the court denied the Company's motion to
dismiss the Hopi complaint.
On February 21, 2002, the Company's subsidiaries commenced a lawsuit
against the Navajo Nation in the U.S. District Court for the District of Arizona
seeking enforcement of an arbitration award or, alternatively, to compel
arbitration
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
pursuant to the April 1, 1998 Arbitration Agreement with the Navajo Nation. On
February 22, 2002, the Company's subsidiaries filed in the U.S. District for the
District of Columbia a motion for leave to file an amended answer and
conditional counterclaim. The counterclaim is conditional because the Company's
subsidiaries contend that the lease provisions the Navajo Nation seeks to
invalidate have previously been upheld in an arbitration proceeding and are not
subject to further litigation. On March 4, 2002, the Company's subsidiaries
filed in the U.S. District Court for the District of Columbia a motion to
transfer that case to Arizona or, alternatively, to stay the District of
Columbia litigation. On March 29, 2002, the Navajo Nation filed a motion to
dismiss the Arizona litigation and an alternative motion to transfer the Arizona
litigation to the District of Columbia.
Salt River Project Agricultural Improvement and Power District--Price Review
In May 1997, Salt River Project Agricultural Improvement and Power
District, or Salt River, acting for all owners of the Navajo Generating Station,
exercised their contractual option to review certain cumulative cost changes
during a five-year period from 1992 to 1996. Peabody Western sells approximately
7 to 8 million tons of coal per year to the owners of the Navajo Generation
Station under a long-term contract. In July 1999, Salt River notified Peabody
Western that it believed the owners were entitled to a price decrease of $1.92
per ton as a result of the review. Salt River also claimed entitlement to a
retroactive price adjustment to January 1997 and that an overbilling of $50.5
million had occurred during the same five-year period. In October 1999, Peabody
Western notified Salt River that it believed it was entitled to a $2.00 per ton
price increase as a result of the review. The parties were unable to settle the
dispute and Peabody Western filed a demand for arbitration in September 2000.
The arbitration hearing was held from April 8 to April 12, 2002. The parties
will be filing post-hearing briefs with the arbitrators.
On February 12, 2001 in a related action, Salt River, again acting for all
owners of the Navajo Generating Station, filed a lawsuit against Peabody Western
in the Superior Court in Maricopa County in Arizona. This lawsuit seeks to
compel arbitration of issues that Peabody Western does not believe are subject
to arbitration, namely, (1) the effective date of any price change resulting
from the resolution of the price review arbitration discussed above and (2) the
validity of Salt River's $50.5 million claim for alleged overcharges by Peabody
Western for the period from 1992 through 1996 (the five-year period that was the
subject of the price review). If the court declines to compel arbitration of
these issues, the lawsuit alternatively requests that the court find in favor of
Salt River on these issues. We have removed this matter to the U.S. District
Court for the District of Arizona.
On October 3, 2001, the U.S. District Court issued an order compelling
arbitration with respect to the effective date of any price change and
conditionally compelling arbitration with respect to the validity of Salt
River's $50.5 million claim. Although we have filed an appeal of this decision
with the U.S. Ninth Circuit Court of Appeals, the arbitrators received testimony
on these claims during the April hearing. We expect a decision from the
arbitrators during the third quarter of 2002.
While the outcome of litigation is subject to uncertainties, based on the
Company's preliminary evaluation of the issues and the potential impact on us,
we believe this matter will be resolved without a material adverse effect on the
Company's financial condition or results of operations.
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 March 31, 2002, purchase commitments for capital expenditures were
approximately $98.4 million.
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(11) SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
In accordance with the indentures governing the Senior Notes and Senior
Subordinated Notes, certain wholly owned U.S. subsidiaries of the Company have
fully and unconditionally guaranteed the Senior Notes and Senior Subordinated
Notes on a joint and several basis. Separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not presented because
management believes that such information is not material to the holders of the
Senior Notes and Senior Subordinated Notes. The following unaudited condensed
historical financial statement information is provided for such
Guarantor/Non-Guarantor Subsidiaries.
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2002
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Total revenues $ -- $ 558,534 $ 167,686 $ (15,591) $ 710,629
Costs and expenses
Operating costs and expenses -- 453,098 133,517 (15,591) 571,024
Depreciation, depletion and amortization -- 46,364 12,313 -- 58,677
Selling and administrative expenses 161 21,436 4,686 -- 26,283
Net gain on property and equipment
disposals -- (180) (125) -- (305)
Interest expense 33,862 24,525 3,821 (37,305) 24,903
Interest income (17,158) (16,870) (3,796) 37,305 (519)
---------- --------- --------- --------- ---------
Income (loss) before income taxes and
minority interests (16,865) 30,161 17,270 -- 30,566
Income tax provision (benefit) (2,530) 4,453 2,662 -- 4,585
Minority interests -- -- 3,666 -- 3,666
---------- --------- --------- --------- ---------
Net income (loss) $ (14,335) $ 25,708 $ 10,942 $ -- $ 22,315
========= ========= ========= ========= =========
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2001
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Total revenues $ -- $ 541,490 $ 168,382 $ (24,873) $ 684,999
Costs and expenses
Operating costs and expenses -- 451,072 129,228 (24,873) 555,427
Depreciation, depletion and amortization -- 45,956 14,873 -- 60,829
Selling and administrative expenses 2,673 24,545 5,134 -- 32,352
Gain on sale of Australian operations -- (171,735) -- -- (171,735)
Net gain on property and equipment
disposals -- (163) (510) -- (673)
Interest expense 36,046 26,887 6,909 (25,602) 44,240
Interest income (17,345) (6,547) (3,458) 25,602 (1,748)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
minority interests (21,374) 171,475 16,206 -- 166,307
Income tax provision (benefit) (15,720) 47,010 7,717 -- 39,007
Minority interests -- -- 2,883 -- 2,883
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (5,654) 124,465 5,606 -- 124,417
Gain from disposal of discontinued
operations -- (1,165) -- -- (1,165)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item (5,654) 125,630 5,606 -- 125,582
Extraordinary loss from early
extinguishment of debt, net of income
taxes 8,545 -- -- -- 8,545
--------- --------- --------- --------- ---------
Net income (loss) $ (14,199) $ 125,630 $ 5,606 $ -- $ 117,037
========= ========= ========= ========= =========
12
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 11,448 $ 728 $ 3,939 $ -- $ 16,115
Accounts receivable 1,625 61,941 129,158 -- 192,724
Inventories -- 222,872 16,292 -- 239,164
Assets from coal and emission
allowance trading activities -- 75,183 451 -- 75,634
Deferred income taxes -- 14,380 -- -- 14,380
Other current assets 1,222 15,643 7,543 -- 24,408
----------- ----------- ----------- ----------- -----------
Total current assets 14,295 390,747 157,383 -- 562,425
Property, plant, equipment and mine
development - at cost -- 4,585,012 498,459 -- 5,083,471
Less accumulated depreciation,
depletion and amortization -- (645,716) (88,864) -- (734,580)
----------- ----------- ----------- ----------- -----------
Property, plant, equipment and
mine development, net -- 3,939,296 409,595 -- 4,348,891
Investments and other assets 3,325,723 225,792 45,718 (3,334,880) 262,353
----------- ----------- ----------- ----------- -----------
Total assets $ 3,340,018 $ 4,555,835 $ 612,696 $(3,334,880) $ 5,173,669
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ 25,000 $ 10,400 $ 36,893 $ -- $ 72,293
Payables and notes payable to
affiliates, net 1,498,227 (1,512,775) 14,548 -- --
Liabilities from coal and emission
allowance trading activities -- 51,679 -- -- 51,679
Accounts payable and accrued expenses 25,091 482,056 67,116 -- 574,263
----------- ----------- ----------- ----------- -----------
Total current liabilities 1,548,318 (968,640) 118,557 -- 698,235
Long-term debt, less current
maturities 702,220 72,837 197,677 -- 972,734
Deferred income taxes -- 569,348 -- -- 569,348
Other noncurrent liabilities 6,224 1,817,197 9,102 -- 1,832,523
----------- ----------- ----------- ----------- -----------
Total liabilities 2,256,762 1,490,742 325,336 -- 4,072,840
Minority interests -- -- 47,921 -- 47,921
Stockholders' equity 1,083,256 3,065,093 239,439 (3,334,880) 1,052,908
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity $ 3,340,018 $ 4,555,835 $ 612,696 $(3,334,880) $ 5,173,669
=========== =========== =========== =========== ===========
13
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED
BALANCE SHEETS DECEMBER 31, 2001
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 28,121 $ 1,018 $ 9,483 $ -- $ 38,622
Accounts receivable 523 50,448 127,105 -- 178,076
Inventories -- 201,771 13,873 -- 215,644
Assets from coal and emission
allowance trading activities -- 60,509 -- -- 60,509
Deferred income taxes -- 14,380 -- -- 14,380
Other current assets 1,222 10,704 8,297 -- 20,223
----------- ----------- ----------- ----------- -----------
Total current assets 29,866 338,830 158,758 -- 527,454
Property, plant, equipment and mine
development - at cost -- 4,561,680 478,939 -- 5,040,619
Less accumulated depreciation,
depletion and amortization -- (604,103) (80,604) -- (684,707)
----------- ----------- ----------- ----------- -----------
Property, plant, equipment and mine
development, net -- 3,957,577 398,335 -- 4,355,912
Investments and other assets 3,296,950 214,007 45,086 (3,288,507) 267,536
----------- ----------- ----------- ----------- -----------
Total assets $ 3,326,816 $ 4,510,414 $ 602,179 $(3,288,507) $ 5,150,902
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ -- $ 10,400 $ 36,099 $ -- $ 46,499
Payables and notes payable to
affiliates, net 1,544,519 (1,561,645) 17,126 -- --
Liabilities from coal and emission
allowance trading activities -- 45,691 -- -- 45,691
Accounts payable and accrued expenses 8,676 528,157 55,280 -- 592,113
----------- ----------- ----------- ----------- -----------
Total current liabilities 1,553,195 (977,397) 108,505 -- 684,303
Long-term debt, less current
maturities 702,623 81,186 200,759 -- 984,568
Deferred income taxes -- 564,764 -- -- 564,764
Other noncurrent liabilities 5,181 1,820,580 8,954 -- 1,834,715
----------- ----------- ----------- ----------- -----------
Total liabilities 2,260,999 1,489,133 318,218 -- 4,068,350
Minority interests -- -- 47,080 -- 47,080
Stockholders' equity 1,065,817 3,021,281 236,881 (3,288,507) 1,035,472
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity $ 3,326,816 $ 4,510,414 $ 602,179 $(3,288,507) $ 5,150,902
=========== =========== =========== =========== ===========
14
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED MARCH 31, 2002
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
Net cash provided by (used in) operating activities $ (317) $(12,954) $ 34,686 $ 21,415
-------- -------- -------- --------
Additions to property, plant, equipment and
mine development -- (24,622) (22,442) (47,064)
Additions to advance mining royalties -- (1,268) (836) (2,104)
Investment in joint venture -- (475) -- (475)
Proceeds from property and equipment disposals -- 182 651 833
-------- -------- -------- --------
Net cash used in investing activities -- (26,183) (22,627) (48,810)
-------- -------- -------- --------
Net change in short-term borrowings 25,000 -- -- 25,000
Proceeds from long-term debt -- 1,153 1,222 2,375
Payments of long-term debt -- (11,177) (3,510) (14,687)
Distributions to minority interests -- -- (2,825) (2,825)
Dividends paid (5,202) -- -- (5,202)
Transactions with affiliates, net (36,381) 48,871 (12,490) --
Other 227 -- -- 227
-------- -------- -------- --------
Net cash provided by (used in) financing activities (16,356) 38,847 (17,603) 4,888
-------- -------- -------- --------
Net decrease in cash and cash equivalents (16,673) (290) (5,544) (22,507)
Cash and cash equivalents at beginning of period 28,121 1,018 9,483 38,622
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 11,448 $ 728 $ 3,939 $ 16,115
======== ======== ======== ========
15
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
PEABODY ENERGY CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED MARCH 31, 2001
(In thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Consolidated
--------- ------------ ------------- ------------
Net cash provided by (used in) operating activities $ 2,754 $ 103,196 $ (53,246) $ 52,704
--------- --------- --------- ---------
Additions to property, plant, equipment and
mine development -- (26,699) (15,373) (42,072)
Additions to advance mining royalties -- (3,919) 578 (3,341)
Acquisition, net -- (7,450) -- (7,450)
Proceeds from sale of Australian operations -- 455,000 -- 455,000
Proceeds from property and equipment disposals -- 944 175 1,119
--------- --------- --------- ---------
Net cash provided by (used in) continuing operations -- 417,876 (14,620) 403,256
Net cash provided by (used in) discontinued operations (384) 13,114 4,208 16,938
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (384) 430,990 (10,412) 420,194
--------- --------- --------- ---------
Proceeds from long-term debt -- -- 38,382 38,382
Payments of long-term debt (455,000) (20,147) (26,473) (501,620)
Distributions to minority interests -- -- (485) (485)
Dividend received -- 19,916 -- 19,916
Transactions with affiliates, net 452,798 (504,739) 51,941 --
Other -- 538 -- 538
--------- --------- --------- ---------
Net cash provided by (used in) financing activities (2,202) (504,432) 63,365 (443,269)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 168 29,754 (293) 29,629
Cash and cash equivalents at beginning of period 5 27,440 5,649 33,094
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 173 $ 57,194 $ 5,356 $ 62,723
========= ========= ========= =========
16
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:
o general economic conditions;
o milder than normal summer weather;
o credit, market and performance risk associated with our customers;
o modification or termination of our long-term coal supply agreements;
o reduction of purchases by major customers;
o transportation performance and costs;
o risks inherent to mining, including geologic conditions;
o government regulation of the mining industry;
o replacement of recoverable reserves;
o implementation of new accounting standards;
o inflationary trends and interest rates; and
o other factors, including those discussed in "Legal Proceedings."
When considering these forward-looking statements, you should keep in mind
the cautionary statements in this document and all documents incorporated by
reference. We will not update these statements unless the securities laws
require us to do so.
FISCAL YEAR CHANGE
In July 2001, we changed our fiscal year end from March 31 to December 31.
The change was first effective with respect to the nine months ended December
31, 2001.
FACTORS AFFECTING COMPARABILITY
Sale of Australian Operations
In December 2000, we signed a share purchase agreement for the transfer of
the stock in two U.K. holding companies which, in turn, owned our Australian
subsidiaries, to a subsidiary of Rio Tinto Limited. Our Australian operations
consisted of interests in six coal mines, as well as mining services in
Brisbane, Australia. The final sale price was $446.8 million in cash, plus the
assumption of all liabilities. During the quarter ended March 31, 2001, we
received $455.0 million related to the sale, which closed on January 29, 2001.
17
Discontinued Operations
In August 2000, we sold Citizens Power, our subsidiary that marketed and
traded electric power and energy-related commodity risk management products, to
Edison Mission Energy. We classified Citizens Power as a discontinued operation
as of March 31, 2000, and recorded an estimated loss on the sale of $78.3
million, net of income taxes. During the year ended March 31, 2001, we reduced
our loss on the sale by $12.9 million; $1.2 million of the loss reduction was
recorded in the quarter ended March 31, 2001.
QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH 31, 2001
Sales. Sales for the quarter ended March 31, 2002 for the U.S. operations
(which represents all of our operations, except for Australian operations sold
in January 2001) increased $43.7 million, to $688.4 million, a 6.8% increase
from the prior year quarter. The sales increase was driven by pricing increases
in all regions, largely due to multi-year contracts signed in 2001. The U.S.
operations' average sales price was 2.7% higher than the prior year quarter. The
average pricing increase was slightly mitigated by sales mix, as higher priced
tons in the Appalachia and Midwest regions represented a lower percentage of
overall sales in the current quarter compared to the prior year quarter.
Sales volume for the U.S. operations was 49.8 million tons for the current
quarter, compared to 47.9 million tons for the prior quarter, an increase of
4.0%. Higher sales volume at our Powder River Basin and trading and brokerage
operations led the increase, while volume at our Appalachia, Midwest, and
Southwest operations was at or slightly below prior year levels.
Total sales for the quarter increased $27.6 million, or 4.2%, from the
prior year quarter. Sales from Australian operations included in the prior year
quarter were $16.0 million, from sales volume of 1.0 million tons.
Powder River Basin sales increased $42.4 million, due to improved pricing
and volume from strong customer demand. Appalachian sales increased $2.3
million, as a result of improved pricing. Sales in the Southwest region were
flat, as pricing improvement was offset by lower volume due to two outages of
our coal transportation pipeline during the quarter that delayed customer
deliveries. Midwest region sales decreased $5.8 million, as higher prices were
offset by lower volume due to a delay in the startup of two new mines in the
region. Finally, sales from brokerage and trading activities increased $3.6
million due to increased sales volume.
Other Revenues. Other revenues for the quarter decreased $2.0 million from
the prior year quarter. U.S. operations' other revenue increased $2.5 million,
as $8.6 million in higher revenues from trading and brokerage operations were
partially offset by lower coalbed methane and coal royalty revenues. In
addition, prior year other revenues included $4.5 million of mining services
revenues from our Australian operations.
Depreciation, Depletion and Amortization. Total depreciation, depletion and
amortization expense decreased $2.1 million to $58.7 million in the current
quarter. Depreciation, depletion and amortization expense from Australian
operations of $2.2 million was included in the quarter ended March 31, 2001.
Selling and Administrative Expenses. Selling and administrative expenses of
$26.3 million were $6.1 million lower than the prior year quarter, mainly due to
stock compensation charges recorded in the prior year quarter related in part to
the Company's initial public offering. In addition, selling and administrative
expenses from Australian operations of $0.3 million were included in the quarter
ended March 31, 2001.
Gain on Sale of Australian Operations. On January 29, 2001, we sold our
Australian operations to Coal & Allied, a 71%-owned subsidiary of Rio Tinto
Limited. The selling price was $446.8 million, plus the assumption of all
liabilities. We recorded a pre-tax gain of $171.7 million on the sale. The gain
on sale was $124.2 million after taxes, or $3.59 per diluted common share.
Operating Profit. Operating profit from U.S. operations increased $22.2
million, or 67.8%, for the quarter ended March 31, 2002. Overall, operating
profit decreased $153.8 million compared to the prior year quarter, as the prior
year quarter included operating profit of $4.3 million from Australian
operations and the $171.7 million pre-tax gain on the sale of Australian
operations discussed above. The increase at the U.S. operations was driven by
higher operating profit of $18.9 million from mining operations (excluding
operating costs related to past mining activities, which are discussed below) as
a result of higher prices combined with strong cost containment efforts.
18
In the west, the Powder River Basin region's operating profit increased
$9.8 million as higher volume and improved prices overcame higher royalties and
taxes associated with improved prices, explosives costs, and repair and
maintenance costs. The Southwest region's operating profit decreased $7.7
million. Two outages of its coal transportation pipeline contributed to
decreased sales volume in the quarter, and maintenance and repairs were
accelerated to coincide with the outages.
In the east, the Appalachia region's operating profit increased $13.7
million due to strong sales price improvement and per ton mining costs that,
excluding the effect of higher royalty and tax expenses associated with higher
prices, were lower than the prior year quarter. Operating profit in the Midwest
region increased $3.1 million compared to the prior year quarter, as slightly
lower sales levels were more than offset by lower fuel and maintenance and
repair costs.
Operating profit from trading and brokerage operations increased $4.4
million over the prior year quarter, as volume nearly doubled from 14.3 million
traded tons in the prior year quarter to 28.2 million in the current year
quarter.
Operating costs related to past mining activities were $4.7 million higher
in the current quarter, primarily due to higher closed and suspended mine costs
and workers' compensation charges. Lower selling and administrative costs
improved operating profit by $6.6 million, as discussed above.
Interest Expense. Interest expense for the quarter was $24.9 million, a
$19.3 million decrease, or 43.7%, from the prior year quarter. The decrease in
borrowing cost was due to the significant long-term debt repayments made since
December 31, 2000. Utilizing proceeds from the sale of our Australian
operations, combined with proceeds from our initial public offering in May 2001,
we reduced long-term debt by $822 million from December 31, 2000 to March 31,
2002.
Interest Income. Interest income decreased $1.2 million, to $0.5 million,
for the quarter ended March 31, 2002. The prior year quarter included interest
earned on cash received from the sale of our Australian operations in January
2001.
Income Taxes. For the quarter ended March 31, 2002, income tax expense was
$4.6 million on income before income taxes and minority interests of $30.6
million, compared to income tax expense of $39.0 million on income before income
taxes and minority interests of $166.3 million in the prior year quarter. Our
effective income tax rate was 15.0% for the quarter ended March 31, 2002. Our
consolidated tax position is impacted by the percentage depletion tax deduction
utilized by us and our subsidiaries that creates an alternative minimum tax
situation, and in the prior year by the sale of our Australian operations.
Gain from Disposal of Discontinued Operations. During the quarter ended
March 31, 2001, we reduced our loss on the sale of Citizens Power by $1.2
million.
Extraordinary Loss from Early Extinguishment of Debt. During the quarter
ended March 31, 2001, we repaid debt using proceeds from the sale of our
Australian operations. We recorded an extraordinary loss of $8.5 million, net of
income taxes, which represented the excess of cash paid over the carrying value
of the debt retired and the write-off of debt issuance costs associated with the
debt retired.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $21.4 million for the quarter
ended March 31, 2002, a decrease of $31.3 million from the prior year quarter.
Current quarter income from continuing operations, excluding the after-tax
effect of the gain on sale of Australian operations, was $22.1 million higher
than the prior year quarter. Cash flow in the prior year quarter benefited from
$15.0 million of proceeds received related to the expansion of our accounts
receivable securitization program, and working capital cash flow in the prior
year quarter of $0.4 million decreased to a working capital cash usage of $69.3
million in the current quarter, primarily due to a lower accounts payable
position at March 31, 2002.
Net cash used in investing activities was $48.8 million for the quarter
ended March 31, 2002, compared to cash provided by investing activities of
$420.2 million in the prior year quarter. The prior year quarter included $455.0
million of proceeds from the sale of our Australian operations, and $16.9
million of proceeds related to the sale of Citizens Power. Capital expenditures
increased $5.0 million, to $47.1 million, in the current quarter. These 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. Finally, the prior year quarter included $7.5 million in
expenditures related to the acquisition of coalbed methane assets.
19
Net cash provided by financing activities was $4.9 million for the quarter
ended March 31, 2002, compared with cash used in financing activities of $443.3
million in the prior year quarter. Net debt repayments were $475.9 million
higher in the prior year quarter, principally as a result of the usage of
proceeds received from the sale of our Australian operations. The prior year
quarter also included a $19.9 million dividend received from our Australian
operations. We paid dividends to our shareholders of $5.2 million in the current
year quarter.
As of March 31, 2002, our total indebtedness consisted of the following
(dollars in thousands):
9.625% Senior Subordinated Notes ("Senior Subordinated Notes") due 2008 $ 391,415
8.875% Senior Notes ("Senior Notes") due 2008 316,434
5.0% Subordinated Note 81,708
Senior unsecured notes under various agreements 83,571
Unsecured revolving credit agreement 98,012
Revolving Credit Facility under Senior Credit Facility 25,000
Other 48,887
----------
$1,045,027
==========
As of March 31, 2002, our revolving credit and letter of credit borrowing
facilities included the $480.0 million Revolving Credit Facility under our
Senior Credit Facility and Black Beauty's $120.0 million revolving credit
facility. The Revolving Credit Facility has a borrowing sub-limit of $350.0
million and a letter of credit sub-limit of $330.0 million. Together, these
facilities total $600.0 million, and have a total of $470.0 million available
for borrowing.
As of March 31, 2002, outstanding borrowings under the Revolving Credit
Facility were $25.0 million. Black Beauty's revolving credit facility borrowings
totaled $98.0 million. We were in compliance with the restrictive covenants of
all of our and our subsidiaries' debt agreements as of March 31, 2002.
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 the Seller are sold, without recourse,
to a multi-seller, asset-backed commercial paper conduit ("Conduit"). Purchases
by the Conduit are financed with the sale of highly rated commercial paper. We
used proceeds from the sale of its accounts receivable to repay long-term debt,
effectively reducing its overall borrowing costs. The securitization program is
currently scheduled to expire in 2007. Under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," (as amended
by SFAS No. 140) 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 were $140.0 million as of March 31, 2002 and December 31, 2001.
We have designated interest rate swaps with notional amounts totaling
$150.0 million as a fair value hedge of our Senior Notes. Under the swaps, we
pay a floating rate based upon the six-month LIBOR rate for a period of seven
years ending May 15, 2008. The applicable rate was 6.03% as of March 31, 2002.
We realized interest savings of $1.0 million during the quarter ended March 31,
2002.
We had $98.4 million of commitments for capital expenditures at March 31,
2002, that are primarily related to acquiring additional coal reserves and
mining equipment in 2002. Total capital expenditures for calendar year 2002 are
expected to range from $165 million to $195 million, and have been and will be
primarily used to acquire additional low sulfur coal reserves, develop existing
reserves, replace or add equipment and fund cost reduction initiatives. We
anticipate funding these capital expenditures primarily through operating cash
flow. We believe the risk of generating lower than anticipated operating cash
flow in 2002 is reduced by our high level of sales commitments (97% of 2002
planned production) and lower borrowing costs as a result of our significant
debt reductions.
OTHER
Recent Accounting Pronouncements. In June 2001, the FASB issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement is effective for fiscal years beginning after June 15, 2002 (effective
January 1, 2003 for the Company). We are currently assessing the impact of this
new statement.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Trading Activities
We market and trade coal and emission allowances. These activities give
rise to market 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 market 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 and emission allowance trading using the fair value
method, which requires us to reflect financial instruments with third parties,
such as forwards, futures, options and swaps, at market value in the
consolidated financial statements.
We perform a value at risk analysis on our trading portfolio, which
includes over-the-counter and brokerage trading of coal and emission allowances.
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 fifteen-day holding
period and a 95% confidence interval.
The use of value at risk allows management to aggregate market 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 quarter ended March 31, 2002, the low, high and average values
at risk for our coal trading portfolio were $0.3 million, $3.9 million and $1.5
million, respectively. Our emission allowance value at risk averaged $0.1
million during the quarter ended March 31, 2002, and did not exceed $0.1 million
during that period. Sixty-seven percent of the value of our trading portfolio
will be realized by the end of calendar 2003.
We also monitor other types of risk associated with our coal and emission
allowance trading activities, including market liquidity, counterparty
nonperformance and position valuation.
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. We currently have sales commitments for 97% of our planned calendar
2002 production.
Some of the products used in our mining activities, such as diesel fuel,
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 March 31, 2002, after taking into consideration the effects
of interest rate swaps, we had $720.1 million of fixed-rate borrowings and
$324.9 million of variable-rate borrowings outstanding. A one percentage point
increase in interest rates would result in an annualized increase to interest
expense of $3.2 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 $39.5 million decrease in the fair value of these borrowings.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Salt River Project Agricultural Improvement and Power District-Price Review
In May 1997, Salt River Project Agricultural Improvement and Power
District, or Salt River, acting for all owners of the Navajo Generating Station,
exercised their contractual option to review certain cumulative cost changes
during a five-year period from 1992 to 1996. Peabody Western sells approximately
7 to 8 million tons of coal per year to the owners of the Navajo Generation
Station under a long-term contract. In July 1999, Salt River notified Peabody
Western that it believed the owners were entitled to a price decrease of $1.92
per ton as a result of the review. Salt River also claimed entitlement to a
retroactive price adjustment to January 1997 and that an overbilling of $50.5
million had occurred during the same five-year period. In October 1999, Peabody
Western notified Salt River that it believed it was entitled to a $2.00 per ton
price increase as a result of the review. The parties were unable to settle the
dispute and Peabody Western filed a demand for arbitration in September 2000.
The arbitration hearing was held from April 8 to April 12, 2002. The parties
will be filing post-hearing briefs with the arbitrators.
On February 12, 2001 in a related action, Salt River, again acting for all
owners of the Navajo Generating Station, filed a lawsuit against Peabody Western
in the Superior Court in Maricopa County in Arizona. This lawsuit seeks to
compel arbitration of issues that Peabody Western does not believe are subject
to arbitration, namely, (1) the effective date of any price change resulting
from the resolution of the price review arbitration discussed above and (2) the
validity of Salt River's $50.5 million claim for alleged overcharges by Peabody
Western for the period from 1992 through 1996 (the five-year period that was the
subject of the price review). If the court declines to compel arbitration of
these issues, the lawsuit alternatively requests that the court find in favor of
Salt River on these issues. We have removed this matter to the U.S. District
Court for the District of Arizona.
On October 3, 2001, the U.S. District Court issued an order compelling
arbitration with respect to the effective date of any price change and
conditionally compelling arbitration with respect to the validity of Salt
River's $50.5 million claim. Although we have filed an appeal of this decision
with the U.S. Ninth Circuit Court of Appeals, the arbitrators received testimony
on these claims during the April hearing. We expect a decision from the
arbitrators during the third quarter of 2002.
While the outcome of arbitration and litigation is subject to
uncertainties, based on our preliminary evaluation of the issues and the
potential impact on us, we believe that the matter will be resolved without a
material adverse effect on our financial condition or results of operations.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See Exhibit Index at page 24 of this report.
(b) Reports on Form 8-K
None filed during the period covered by this report.
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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: May 13, 2002 By: RICHARD A. NAVARRE
--------------------------------
Richard A. Navarre
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
23
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 Company (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 Company (Incorporated by reference to Exhibit 3.2 of the Company's Form S-1
Registration Statement No. 333-55412).
4.17 Form of Fourth Supplemental Senior Note Indenture dated as of February 16, 2000 among the Guaranteeing Subsidiary
(as defined therein), the Registrant, the other Senior Note Guarantors (as defined in the Senior Note Indenture)
and State Street Bank and Trust Company, as Senior Note Trustee
4.18 Form of Fourth Supplemental Senior Subordinated Note Indenture dated as of February 16, 2000 among the
Guaranteeing Subsidiary (as defined therein), the Registrant, the other Senior Subordinated Note Guarantors (as
defined in the Senior Subordinated Note Indenture) and State Street Bank and Trust Company, as Senior
Subordinated Note Trustee
4.19 Fifth Supplemental Senior Note Indenture dated as of March 27, 2000 among the Registrant, each Senior Note
Guarantor (as defined in the Senior Note Indenture) and State Street Bank and Trust Company, as Senior Note
Trustee
4.20 Fifth Supplemental Senior Subordinated Note Indenture dated as of March 27, 2000 among the Registrant, each
Senior Subordinated Note Guarantor (as defined in the Senior Subordinated Note Indenture) and State Street Bank
and Trust Company, as Senior Subordinated Note Trustee
4.21 Form of Sixth Supplemental Senior Note Indenture dated as of February 11, 2002 among the Guaranteeing Subsidiary
(as defined therein), the Registrant, the other Senior Note Guarantors (as defined in the Senior Note Indenture)
and State Street Bank and Trust Company, as Senior Note Trustee
4.22 Form of Sixth Supplemental Senior Subordinated Note Indenture dated as of February 11, 2002 among the
Guaranteeing Subsidiary (as defined therein), the Registrant, the other Senior Subordinated Note Guarantors (as
defined in the Senior Subordinated Note Indenture) and State Street Bank and Trust Company, as Senior
Subordinated Note Trustee
24