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